Badger Meter Inc.‘s (BMI) third quarter EPS slumped 23% to 46 cents reflecting continued weakness in its municipal water business. The EPS also fell short of the Zacks Consensus Estimate of 55 cents.
Total revenue also dropped 8% on a year-over-year basis to $69.7 million in the quarter, hurt by the continued slowdown in spending and new projects by a number of customers in the municipal water market. However, lower sales to the municipal water market were slightly offset by higher sales of specialty products.
The company witnessed double-digit increases in sales of electromagnetic and industrial flowmeters, as well as Research Control valves, in the quarter. Third quarter sales included sales of Remag AG, acquired in January 2011.
Costs and Margins
Cost of sales improved 2% to $46.9 million in the reported quarter. However, gross profit dipped to $22.8 million in the quarter from $27.9 million in the prior-year quarter. Gross margin declined 420 basis points year over year to 32.7% as a result of reduced capacity utilization on lower volumes and higher copper prices compared with last year.
Selling, engineering and administration expenses increased 2% to $14.8 million in the quarter. Operating income declined 41% to $8 million from $13.4 million in the year-earlier quarter, thereby contracting operating margins by 620 basis points year over year to 11.5%.
Financial Position
As of September 30, 2011 cash and cash equivalents amounted to $2.8 million compared with $4.3 million as of June 30, 2011. Receivables as of September 30, 2011, dropped to $43.2 million from $45.6 million as of June 30, 2011. Inventories increased slightly to $47.7 million as of September 30, 2011, from $47.2 million as of June 30, 2010.
Earlier, in August, Badger Meter increased its quarterly common stock dividend by 14.3% to 16 cents per share.
Our Take
The slowdown in municipal spending began early in 2011 as customers lengthened their decision-making process because of concerns about the economy. However, the increase in specialty products sales is a positive sign, indicative of an improving economy.
The global focus on water conservation along with water meter reading technology is still very under-penetrated, at less than 30%, and suggests opportunities for growth both organically and via acquisitions. The company possesses a well-established customer base, a comprehensive product line and the new ORION SE technology, which position the company favorably for the future.
On the flipside, Badger Meter is over-dependent on single suppliers for most of its products, though we admit that there are an adequate number of suppliers in the market. However, this strategy could expose the company to supply-side risks even when economic conditions stabilize.
Another point of concern for the company is the fluctuating foreign exchange market and other regulations imposed by governments from time to time. Badger Meter is also facing rising costs due to increased manufacturing of more technical products.
Badger Meter competes with Itron Inc. (ITRI) and Roper Industries Inc. (ROP). Both the companies are yet to release their results. Badger Meter retains a Zacks #4 Rank (short-term Sell recommendation).
Milwaukee, Wisconsin-based Badger Meter provides liquid flow measurement products and control technologies to utilities and industrial customers. Presently, Badger Meter’s product lines fall into two broad categories – water applications and specialty applications.
