Badger Meter Inc. (BMI) delivered a strong third quarter which ended September 30, 2010, with record EPS of 60 cents, up 28% from 47 cents in the year ago quarter and surpassing the Zacks Consensus Estimate of 52 cents. The strong results were driven by robust sales across all of its product lines as well as lower effective income tax rate compared with the year-ago quarter.
Revenue
Total revenue in the quarter jumped 25% year-over-year to $75.7 million, another record; surpassing the Zacks Consensus Estimate of $73 million. The removal of uncertainty of allocation of stimulus funds in mid February triggered the demand Badger Meter’s products, the benefits of which were felt in the second quarter as well as third quarter.
Sales of automatic meter reading (“AMR”) and advanced metering infrastructure (“AMI”) technology products were particularly strong, specialty products also contributed significantly, including the Badger® ORION® radio frequency AMR system for gas meters.
Operating Results
Cost of goods sold, as a percentage of revenue increased 200 basis points year over year to 63%, while selling, general, administrative and engineering expenses plunged by 200 basis points to 19.2%. Gross margin softened 200 basis points to 37%, while operating margin expanded 20 basis point to 18% in the quarter.
The dip in the gross margin was due to the rising prices of commodities. The company has decided to implement selective price increase if the price of commodities does not moderate by January 2011.
Financial Position
Badger Meter had cash and cash equivalents of $2.7 million as of September 30, 2010, up from $2.6 million as of June 30, 2010. The debt-to-capitalization ratio, however, increased to 7.4% as of September 30, 2010, from 1.7% as of June 30, 2010 and from 3.4% as of March 31, 2010.
The company’s strong financial position helped it acquire license for the manufacture and sale of a key component of its turbine meters for $8 million from its former supplier. Even after such a huge expenditure the company was able to restrict its debt-to-capitalization ratio within 10%.
Outlook
For the fourth quarter, which is usually the slowest, the company expects sales to rebound to more normal patterns. However, headwinds from commodity prices and the higher Euro are likely to continue.
Our Take
Badger Meter’s performance had been adversely affected by global macroeconomic headwinds as well as delayed purchasing decisions by certain customers. But given the stimulus funding, orders have lately shown an improvement as was evident in the second quarter performance, which extended even to the third quarter.
We see significant long-term growth opportunities for the company as water utility customers upgrade to advanced metering (AMR/AMI) systems from manual meters. Badger Meter, too, in its turn, continues to invest in new products and technologies to meet evolving customer needs. The company believes that its operating cash flows and its ability to raise capital will provide adequate resources to fund the ongoing operations and new product developments.
However, intense competition from other well-established players, heavy dependence on key suppliers and exposure to foreign currency fluctuations provide headwinds for the company’s future growth prospects and profitability. We currently have a Zacks #3 Rank (short-term Hold rating) on the stock.
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.
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