Badger Meter Inc (BMI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2008 Fourth Quarter and Year-end Badger Meter Earnings Conference Call.

My name is Michelle and I will be your coordinator for today.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Rick Johnson, Senior Vice President Finance and Chief Financial Officer.

Please proceed, sir.

Thank you very much and good morning, everyone.

Welcome to this conference call where we will discuss the fourth quarter results for Badger Meter.

As usual, I will begin by making--by stating that we will make a number of forward-looking statements on our call today.

Certain statements contained in this presentation, as well as other information provided from time to time by the Company or its employees may contain forward-looking statements that involve risk and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

Please see yesterday's earnings release for a list of words or expressions that identify such statements and the associated risk factors.

Let me reiterate some of our guidelines.

For competitive reasons, we do not comment on the specific individual product line profitability, other than in general terms, nor do we disclose components of costs of sales, for example, copper.

More importantly, we will continue our practice of not providing specific guidance on future earnings.

We believe guidance does not serve the long-term interests of our shareholders.

Now, on to the fourth quarter results.

Yesterday afternoon, after the market closed, we released our fourth quarter 2008 results.

Now those of you who listen regularly recall that we always mention that quarterly results can vary.

In fact, the word we use to describe this is "lumpy." The fourth quarter demonstrates that lumpiness in a positive way.

We are very pleased to report that our sales, earnings and earnings per share from continuing operations were all fourth quarter records.

Sales increased to $67.6 million, an 18.3% increase over sales of $57.2 million in 2007.

This increase was the net impact of a nearly 28% increase in utility sales, offset by a decline by 16% in industrial sales, due to the effects of the current economy.

When we break sales down, we find that utility sales were 84.8% of the quarter's sales, compared to 78.6% in the fourth quarter of 2007.

These sales were nearly $57.4 million, or a 27.6% increase over the $45 million in last year's fourth quarter.

This increase driven by a number of factors.

First and foremost, we continued to see increases in our residential AMR products.

Both the ORION and Itron products showed increases.

Itron-related sales increased 29% over the fourth quarter of 2007, while ORION-related sales increased 30.4%.

ORION continued to outsell Itron by a ratio of more than 2.5 to 1.

Commercial sales increased over 30%, driven by higher volumes.

Normally, our sales are not at these levels in the fourth quarter.

In addition to what I've just noted, we were fortunate enough to benefit from increased sales in Mexico, as governmental agencies there faced the December 31st deadline for certain allocation of funds.

Sales to Mexico alone were up over $1 million from the same period last year.

Industrial products represented 15.2% of sales for the quarter, down from 21.4% last year.

These sales were nearly $10.3 million, down 16% from last year's level of $12.2 million.

In this quarter, we saw declines in all of the products due to lower volumes as a result of the economy.

Gross margins for the quarter were 35.7%, up slightly from the 34.9% last year.

The cost of sales number includes a $994,000 one-time pretax gain from the sale of our facility in Rio Rico, Arizona.

You will recall that we had closed that facility in 2006 and opened a new facility in Nogales, Mexico.

That asset had been held for resale and the sale was completed in the fourth quarter.

This had a favorable impact on margins.

Strong sales obviously helped our margins, but the mix of product had a dampening effect on the margin percentage.

Because industrial sales generally have higher margins, their lower sales affected margins.

We also had several more turnkey or installation projects that were included in the mix this quarter that did not exist in the fourth quarter of 2007.

The most significant example of these is the City of Chicago.

And before you ask the question, I will disclose to you that sales for Chicago in the fourth quarter of 2008 were nearly $4.2 million, compared to $1.2 million in the fourth quarter of 2007, when we had just completed the pilot and begun installation on this project.

Sales for Chicago for all of calendar 2008 were nearly $14.5 million.

The project is on track and continuing.

Our selling, engineering and administrative costs for the fourth quarter, as a percentage of sales, were 20.8%, compared to 22.3% last year.

The percentage decrease is more a reflection of the increased sales, as these expenses actually increased 10% due to higher bad debt expense, higher incentives and increased money spent on research and development.

Our effective tax rate for the quarter is 36.2%, compared to 39.3% last year.

This rate is just slightly lower than what we had been estimating and is due to the higher manufacturing volume in the fourth quarter, which will allow us to take a higher manufacturing tax credit than we had originally estimated.

Overall, the effective tax rate for the year is 36.6%.

So when we look at this in total for the quarter, we find that earnings from continuing operations were nearly $6.2 million, a $2 million increase from the nearly $4.2 million in the fourth quarter of 2007.

On a diluted basis, earnings per share from continuing operations was $0.42, compared to $0.28 in the fourth quarter of 2007.

Obviously, we are very pleased with these results.

Since it is also the end of the year, I will also just make a few comments about the year as a whole.

As you know, the first and second quarters of 2008 were record quarters for net earnings and earnings per share, and we just missed setting another record in the third quarter.

To finish the year on this note is very gratifying for us, particularly in these troubling economic times.

For the year as a whole, sales, earnings and earnings per share were all records for Badger Meter.

Sales were $279.6 million, an increase of 19.1% over 2007's $234.8 million.

The Company's earnings from continuing operations were $25.1 million in 2008, a $6.7 million increase over last year's amount of $18.4 million.

On a diluted basis, earnings per share from continuing operations was $1.69 compared to $1.26 last year.

Our balance sheet remains solid, with the biggest change being the addition of the GALAXY technology in the second quarter.

This is now reflected as an intangible asset.

I have received some questions about our defined benefit pension plan.

Like everyone else, our pension assets have been affected by the economy and we were required to increase the pension liability on our books, with an offsetting amount, net of tax, charged against an account that gets netted in equity.

We will, in all likelihood, have to make a contribution to our pension plan in 2009 that will exceed the expense for this year.

If we had to estimate it today, this contribution would be $5 million, although the final amount will not be determined until later this year.

We do not view this as an issue, given our low debt-to-capitalization ratio of 18% and our available lines of credit.

In addition, we anticipate that we will continue to generate cash from operations.

Capital expenditures in 2008 were $12.6 million, which include the completion of our new plant in Mexico.

We would anticipate spending substantially less in 2009.

With that, I will now turn the call over to our CEO, Rich Meeusen, who will have additional comments.

Rich?

Thanks, Rick.

I'd also like to thank all of you for joining us today.

As Rick said, we're very pleased with the fourth quarter and the full year 2008 results that we've just issued.

We recognize that these results go against the current trend of negative economic news and poor business results.

It's certainly refreshing to be in a good market position with strong products that, even in this past difficult year, have enabled us to generate record sales and profits.

But as I've reminded you in the past, our business tends to be difficult to predict on a quarter-to-quarter basis.

Whereas the fourth quarter has historically been our weakest quarter of the year, the fourth quarter of 2008 was unusually strong.

This is why we have been and will continue to be focused on long-term results as opposed to being focused on quarterly expectations.

In 2008, our industrial products, which represented 17% of our business, were negatively affected by the economy.

However, we continue to benefit from the three basic drivers in our water utility products and services, which are 1) the regular replacement of water meters and the related reading systems; 2) the increasing need for water conservation in North America; and 3) the continuing trend toward advanced metering technologies.

Many of our customers fund their metering replacement programs through water rates.

Even as the economy weakens, most households continue to pay their water bills, generating a fairly reliable stream of revenue for our customers and our Company.

This tends to support the replacement portion of our business, which is estimated at about two-thirds of our water business.

The demand for our metering products is also driven by water shortages and the focus of communities on environmental sustainability.

There are an estimated 13 million residences in the United States that purchase their water from a public water system at a flat rate, without the water-saving incentives provided by metering.

This continues to represent a major opportunity for Badger Meter.

In addition, the demand for our metering technologies continues to be driven by our customers' needs for better data and greater operating efficiency.

With less than 30% of the water meters in the US converted to advanced metering technologies, we still have a significant market potential that has driven and should continue to drive sales and profits for our Company.

These three secular trends have thus far carried us through a very difficult economic environment.

Although we do not offer earnings guidance, we have in the past identified the various factors that could positively or negatively affect our future performance.

We then leave it to our shareholders and the market to estimate for themselves the significance and severity of those factors.

Let me remind you that one year ago, in February of 2008, the US economy was seeing some strong recessionary indications, led by a very weak housing market.

At that time, I stated in our press release, and I quote, "While a significant slowdown in the US economy could affect our business in 2008, we are not seeing an impact from the current economic uncertainties.

We remain confident of our strategies and long-term growth potential."

We are now in a position where the secular trends in our water business have carried us through 2008 with record sales and earnings.

However, I have to continue to warn you that we are not totally immune to the impacts of the economy.

We have seen some project delays by a few small customers, notably municipalities that are heavily dependent on the automotive industry.

These have not to date been significant, and we continue to see solid order entry and backlog.

And, in fact, what I'll say is that those projects that we've seen delayed probably total a few hundred thousand dollars--nothing really significant.

In addition to these factors, we also have the favorable impacts of decreasing copper prices and the stronger dollar, both of which will continue to reduce our product costs in the near term.

We have not yet seen any significant customer push-back or competitive actions that would cause us to materially decrease our pricing.

So to sum it up, we recognize that 2009 will be a challenging year, not only because of the economy but also the tough comparables we've set with our 2008 results.

We'll continue to watch for the potential negative impact of the economy and our business.

We expect to continue to see weakness in our industrial business.

However, the secular trends for water and our technologies, combined with favorable commodity and exchange pricing, could continue to drive our business forward, even in the face of this difficult economy.

Based on what we know today, and based on our solid balance sheet and our business fundamentals, we currently have cause for an optimistic outlook for 2009.

And at this point, we'll take your questions.

(Operator Instructions).

Your first question comes from the line of Steve Sanders with Stephens, Incorporated.

Please proceed.

This is actually Trey in for Steve, but congratulations on the quarter.

Thank you.

Thank you.

First question, I think at the end of your comments, Rich, you mentioned that there was a few small project delays, but outside of that, then, you're not really seeing any significant lengthening in the sales cycle?

None at all.

Okay.

And Chicago, $4.2 million in the quarter.

Should we look at this as kind of a run rate quarter going forward?

Maybe you can provide an update on how you see the project timeline now versus when the deal was originally announced?

Well, Chicago, being a $39 million project done over three years, we should see a run rate of a little over $3 million a quarter, somewhere between $3 million and $4 million.

We'll have some quarters where we get more done and some quarters where we get less done.

But we should always be in the $3.5 million to $4 million range as we move forward on this.

Is that weather-affected, too, on the amount that you can get out there?

It--we saw last year with the really heavy snow in the first quarter in Chicago, we did see some delays.

Although this time, in the fourth quarter, we didn't see that much.

So I think it depends upon what areas of the city they're working in and how the weather works.

But I think in terms of comparables for 2009, over 2008, it'll probably be about the same run rate on an annual basis.

Okay.

It might vary by quarter.

Okay.

That's helpful.

And then, as far as GALAXY, can you talk a little bit about how significant that is to the revenue line and maybe comment about how margins look versus your ORION offering?

The margins on GALAXY are a little bit lower than the margins on our ORION product.

When you're selling a new product, like a fixed network, things are getting a little more price competitive out there than with the drive-by, and also our volumes aren't up that high that we can spread our costs over the larger volume.

Rick, as far as the--

The sales number for all of calendar 2008 were a little less than $3 million for the year.

Okay.

We bought the technology in the second quarter.

I'd say we're ramping up and we expect that to continue to grow.

All right.

And then on the gas advanced metering side, could you talk a little bit about pilot activity and how material you think that that business can be for you over the next few years?

Yes, we have a few pilots going on that.

With gas, unlike water, the average customer size is much larger.

So you're either going to hit a big one or you're not.

Gas is a lot like the electric AMR business.

Water is spread over a much larger number of customers that are out there.

So we have several pilots going.

If we hit one, it could be a big impact on us.

If we don't, we won't have it.

So it's going to be kind of a feast or famine as we go through the year.

But if we don't, we'll have no stranded assets because, essentially, it didn't cost us much to get into that business.

Right.

I mean, once we developed ORION for water, it was very easy to port it over to gas, so we have nothing on our balance sheet.

Anything we spent doing that was expensed as R&D.

So we look at it as an incremental opportunity.

We think it's a very substantial incremental opportunity, but we don't have a lot of it built into our basic plan.

Okay.

And then one last housekeeping question.

Could you talk a little bit about what you're seeing in pricing for scrap relative to the spot market for copper?

The scrap rates tend to follow the spot market with copper.

I mean, they tend to be cheaper than the virgin copper alloy that we buy, sometimes up to $1 a pound cheaper, but then sometimes it can contract down to $0.50 a pound cheaper.

So the scrap will move with the price of copper.

I don't know if that's what you were looking for or something else.

Yes.

No, that was helpful.

Okay.

Thanks, guys.

Okay.

Your next question comes from the line of Carter Shoop with Deutsche Bank.

Please proceed.

Hi.

Going back to the gas question, can you quantify the size of some of the pilots that you're working with?

Are these 100,000-point pilots, or are they 1 million-plus-point pilots?

We have pilots of all sizes out there.

So there are some smaller ones and there are some larger ones, but I really don't want to go into much detail, because I don't necessarily want to point the way for my competitors.

Okay.

Fair enough to say that there are some 1 million-point-plus pilots out there?

Yes, there are.

Okay.

In regards to GALAXY versus ORION, I wanted to ask a question about Badger, but also about the overall industry.

When you look at 4Q shipments for automated water meters, excluding Chicago, do you have a rough sense on what percent were fixed versus drive-by, either ORION or by Itron?

Well, we don't disclose the difference between ORION and Itron, other than in the general terms we already have, where ORION continues to sell Itron by about 2.5 to 1.

Gas is just in--or, I'm sorry--GALAXY is just in its initial stages.

The sales were relatively small in the fourth quarter.

Right.

Then when you look at the overall industry and the competitive landscape, if you look at the total amount of automated water meters shipped, do you have a sense on what percentage of those were fixed versus drive-by?

Yes.

As of 12/31 of '07, which was the most recent report that we saw from the Scott Report, it indicated that to date in the life of AMR, about 7% of all water units shipped were fixed network, and 93% were drive-by.

Now in 2008 that's probably grown a little bit, but--

I'd say just a little.

I think the move to fixed networks is happening faster in the electric industry than it is in the water.

Right.

Just as a general statement.

So you think that in 2008 it's probably less than 20% fixed?

Oh, yes.

I think it's definitely less than 20%.

I mean, if it was 7% a year ago--

That was to date, though, right?

Right.

That was life to date.

So was it just--

Oh, you mean as far as what was shipped during 2008?

Yes, just for the year.

I don't--I won't know that until we see the Scott Report.

I really don't--I'd be guessing.

Okay.

That's all I have.

Thank you.

Okay.

Your next question comes from the line of Ryan Connors with Boenning Scattergood.

Please proceed.

Good morning, Rick and Rich, and congratulations to you and your employees on a great performance.

Thanks, Ryan.

A few things this morning.

First off, interesting, Rick, on the Mexico thing that you mentioned, it seems you mentioned they have until April to get some of those orders in?

It stands to reason, then, that that could continue to be a tailwind?

No, Ryan--

No?

It--the delivery had to be by December 31st.

That's why we had the strong fourth quarter.

Okay.

I thought you mentioned April.

No, I don't think we said April at all.

I don't think we said April.

Oh, okay.

Fair enough.

And then just from a bigger picture perspective, obviously the business mix has changed from the last economic downturn, I guess, in particular being that AMR is a bigger and more important piece of the pie now.

So I wondered if you could just talk about how you would characterize the performance of that business, the utility business, in the last recession and then how you think that business will perform differently or whether it will perform the same way in this downturn, given that AMR and ORION are a much more important piece of your business this time around?

Ryan, I think that's a very good question.

And the fact is that I think we're differently positioned now, in several ways, than we were during the last recession.

You're right.

One is that the higher mix of electronics in our business does insulate us a little bit, because if the recession deepens and if we do have to start making cutbacks, we are now--we have a higher percentage of purchased electronics in our cost of sales that are easier to cut back, whereas in the last recession we had a higher percentage of product that we actually manufactured here that was harder to cut back.

The other thing that's happened in the last decade or so is that we've shifted more work down into our Mexico plant, and our Mexican work force is much easier to flex than our American work force.

So as I look forward to 2009 and say, okay, if we were to start seeing the impacts of the economy, if we were to start to see the slowdown, how would we react, we are much better positioned to react than we were during the last recession.

Okay.

That's helpful.

And then I wanted to revisit a topic that has not been discussed in a while on many of these calls, and that's housing.

I mean, you all have been pretty sanguine on the impact of the housing market on your business and that's proven to be 100% correct.

But if I understand it correctly, one of the things you have said is that as long as housing starts stay at a reasonable level that you should be, it shouldn't be a big impact.

But now, based on the indicators we're looking at, we're seeing just extremely low levels of new home builds, 300,000 to 400,000 versus closer to 2 million.

I just wonder if you could just revisit that issue for us and whether you still have that same idea that that's really not an impact, or have we finally reached a level where the starts are so low that it finally will have an impact?

Right.

Well, Ryan, first off, I think housing starts do impact us.

I don't think we ever said that they don't impact us at all.

Certainly housing starts impact us, and we probably saw some impact in 2008, but it was--but that impact may have been buried by all of those secular tailwinds that I mentioned--the demand for metering where there haven't been meters, the move to AMR, the replacement business.

All of that has kind of carried us through the housing downturn thus far.

And you have to remember that, first off, a large percentage of new homes are built out in suburbs and areas where they don't have municipal water, where they're on private wells and we don't sell a meter, anyway.

And then later, when the city brings city sewer and city water to that suburb, that's when we might start seeing our meter sales.

So when you take the drop in new housing and you back away the houses that would not have bought a meter anyway, you've got a smaller number that we, then, have maybe a third of that market and you can kind of estimate as to what the impact might be.

So the impact of a drop in housing of even 1 million housing units or 1.5 million housing units might turn into 600,000 meters or something like that, and that might affect us by a couple hundred thousand meters, and we do about 1.6 million meters a year.

So in theory, yes, you could say that there was a drop there.

But on the other hand, we didn't see it in our volumes, which either tells you that some of these other factors are offsetting it or that maybe it's just not as severe as we had thought.

Okay, that's great perspective.

Thanks for your time this morning, guys.

Sure.

Your next question comes from the line of Rob Mason with Robert W.

Baird.

Please proceed.

Yes.

Rich, I just wanted to clarify.

You said that you have not seen customers really push back regarding the price increases you've implemented over the last couple of years?

Correct.

Did Badger see any positive impact from price in the fourth quarter, just a year-over-year impact?

Yes.

Yes, because we did a price increase again in the summer of 2008, which was our third in three years.

Okay.

And so certainly that impact--and when we do the increase, it takes a few months for it to filter its way through--but certainly that came into the fourth quarter.

Okay, very good.

And then, Rick, you mentioned bad debt expense picked up.

How much did that go up?

Well, we don't disclose amounts.

It wasn't that significant, but it was more noticeable.

Primarily it was focused on one or two accounts.

Would this be in your utility business?

Yes.

Okay.

And then maybe the last question.

Rich, I'm sure you've thought, perhaps, about the various stimulus proposals out there regarding water infrastructure.

Could you just walk us through how you think that might impact your business should something that's on the table now come to pass?

Yes.

You mean the government Christmas package for everybody.

Certainly, there's money being talked about in the stimulus program.

Certainly, the states and our customers have put in their requests to the government and said, "We really need money for mains and distribution systems," in addition to the wastewater side of the business.

There really aren't any requests in there specifically for metering or for advanced metering like there are on the electric grid side for smart metering.

So we don't have that direct amount.

But if stimulus money comes to the utilities for spending on the distribution system or even on the wastewater side, that should free up more money within the utilities for metering projects.

So I do think there could be a trickle-down effect that could benefit Badger Meter if that were to come through.

We are, however, certainly not building it into our plans for 2009.

Rob, did I lose you?

I heard a beep while I was talking.

No, that's very good.

Thank you.

Okay.

Your next question comes from the line of John Quealy with Canaccord Adams.

Please proceed.

Hey, good morning, folks.

Good morning.

Just one housekeeping on Mexico.

What was the total contribution for that in the quarter?

You talking total sales?

Yes, whatever you can give us.

If I had to guess, I'd say it was maybe $4 million last year-- I'm sorry, $3 million in 2007, $4 million this year, in sales.

Okay, thanks.

And then, Rich, can we go back, I mean your comments earlier that you have an optimistic outlook looking into '09?

We have chatted about this in the past.

A lot of your municipal customers are working off budgets that were formed in different times.

A lot of them are going to be revamping that cycle.

What is--and, obviously, we've seen a lot of other different players in the water value chain report very inconsistent, in some cases, terrible results.

What is it, as you look out at the municipal market in the next 12 months and the budgets that roll off and will roll on, that helps you give us that optimistic outlook comment?

Sure, John.

I was recently informed by a fairly knowledgeable person that two-thirds of the municipalities have their year end at 12/31 and one-third at June 30th.

So those municipalities that had their year end at 12/31 have already reset their budgets for 2009.

They probably put those budgets together in October-November and so they must have had a better look at the economy.

And as we're getting into the early part of this quarter, we're not seeing a big dropoff in our order entry or in our backlog.

So that tells me that two-thirds of our customers have not made the significant cutbacks that we might have been waiting for in an economy like this.

Now the second shoe to drop is that a third of those customers, who set their budgets back in April and May for their June 30th year end, are going to set new budgets this April and May, and could we see a dropoff in the second half of the year?

I think that's going to depend upon where the economy is.

If we get to April or May and we're starting to see the economy bottom out and there is some view in sight that things are going to start getting better, then those budgets might get beefed up.

On the other hand, if the economy is still deteriorating at that point, we could see some cutting of the budget.

So it works both ways.

But at this point, based on what I'm seeing from the bulk of our customers, we're just not seeing customers say, "Hey, we have to cut back our budgets, we can't go ahead with these programs," and we're not seeing the orders dropping off.

And all of the information we're getting from the field is that they're looking forward to a good 2009.

So that gives me the cause for optimism.

I mean, do you think you're gaining significant share or are you just--you have customers that are better positioned than other places?

I think we have two things.

One is that we've got customers--Badger tends to sell into that middle range of utilities, the mid-size utilities more so than the very large or the very small.

And I think those tend to be the healthier communities, the healthier cities, that are doing very well.

So I think that helps us.

And the second thing is I know we're gaining share because the numbers from our proprietary publishing numbers recently came out for 12/31, and in 2008 Badger Meter did pick up market share.

And the last, Rick, to just--on operating cash flow for the year, can you give us that?

Cash provided by operations was a little north of $22 million for the year.

And, if you don't mind, just the depreciation/amortization?

Depreciation is about [5954] and amortization is about $1.1 million.

And, John, this is Rich.

As long as you're asking the question, I'm going to use this as an opportunity to make another point about the strength of our balance sheet.

We had about $48 million of EBITDA last year and our debt is about $25 million.

So our debt-to-EBITDA is a factor of a little over 0.5.

There are a lot of companies that would really love to have a debt-to-EBITDA that low.

So we're in very strong financial position.

Thanks, guys.

Okay.

Your next question comes from the line of Richard Eastman with Robert Baird.

Please proceed.

Yes, hi, Rick and Rich.

I just had a quick question.

On the fourth quarter, when I look at this sales number and it's a record and I--my guess is that maybe you came in $4 million or $5 million above plan.

And if I look at the expense ratios, you got a lot of leverage there, which again suggests that maybe your revenue was $4 million or $5 million above plan.

And I guess it looks like maybe Chicago was $1 million, maybe Mexico was $1 million.

Did the Itron sales in the quarter surprise you?

Well, let me correct you first.

Chicago was about $3 million above '07's fourth quarter.

I know.

Above plan.

One would have thought it would have come in around--

You're saying above plan and we really don't like to comment on our--

We're not going to comment on plan.

Well, I commented on the plan.

But let me just zero in.

Did the Itron sales surprise you in the quarter?

We were a little surprised by the Itron sales in the second and third quarter.

We saw some continued strength in the fourth quarter, but we know now exactly what that is.

There are a few Itron--customers of ours, joint customers, Badger Itron customers, that were doing projects that decided to accelerate those projects into the summer and that had, that created an uptick in our Itron sales.

So that had surprised us.

We tracked it down.

Now we understand what those customers are doing and so, frankly, it really didn't surprise us in the fourth quarter.

We did expect a little stronger Itron sale in the fourth quarter.

And still shipping against--I think you had termed it at one point business that had been on the books that was delayed.

So that's accelerated, but is--I presume that that 30% growth rate in Itron sales is still somewhat of an anomaly?

We view it as that, yes.

Yes.

Okay.

So that settles down going forward?

Yes, we believe it will.

Because, frankly, most of our customers are opting for the ORION or the GALAXY product lines over the Itron.

So I would expect to see that settling down.

Yes.

And then, Rich, you had--you've said from time to time in the past that fixed networks on the water side, most quoted/least sold, are you feeling any different about that at this point in time?

Because we've seen some fairly high-profile projects be awarded and I'm not--I can't tell--I'm not sensing that the GALAXY product is necessarily ready for prime time in these really large bids or areas?

How do you feel about that?

Well, I do think, going forward, we're going to see a lot of--we're going to continue to see primarily a drive-by market for water.

I don't think fixed network--unlike in electric and gas, I don't think fixed network makes as much sense for water as it does for electric.

Electric has other needs--time-of-use information, being able to send information back into the house to turn down thermostats, things of that sort.

You just don't have that need in water.

It really doesn't make sense.

And although a lot of utilities are looking at it--and that's why I say it's one of the most quoted but least used technologies--a lot of utilities are saying, "Give me a quote on fixed networks," and then when we get in there and start talking to them about it and they see the cost of it and, including the infrastructure and the ongoing maintenance costs, they realize they're better off with drive-by.

Now that doesn't mean fixed networks aren't good for some people, and certainly the hybrid systems are good because there are certain areas of the city that might benefit from fixed network, but generally I think for a long time we're going to see water being--drive-by being the predominant technology in water.

Now, as to one other thing you mentioned, Rick, about GALAXY not being ready for prime time, I have to take exception to that.

Our GALAXY product is a very good product.

That's why we bought it, bought the technology.

We've made the investments we have to, and at this point we think it can compete with any other fixed network technology out there for water.

And, in fact, it's one of the few fixed network technologies that was designed specifically for water, instead of being ported over from electric.

And, in fact, we have won a larger-size city, okay?

Not a city over 100,000 units, but certainly a city closer to 100,000 units, that we are not disclosing yet, because the city has chosen not to say anything.

But we did win that recently, and that project will probably begin in the mid of 2009.

Okay, very good.

Hey, and just one last question.

Have you extended any terms to your distributors in terms of payment terms or lengthening out terms or anything, either at year end or just given the economy?

No, we haven't, and we've had no requests from our distributors.

Obviously, with our sales, our distributors are doing pretty well.

Got you.

Okay, thanks.

Now I know that isn't true across the industry.

I know other areas of the industry are suffering, but in our case, our distributors are doing very well.

Okay.

Thank you.

Your next question comes from Richard Verdi with Sturdivant and Company.

Please proceed.

Good morning.

Thank you for you taking my call.

Good morning.

Just a quick question.

Was there any particular region of the United States where you saw particular--you saw strength in the quarter?

Or was it broad, was it across-the-board strong?

This is Rick.

I'd say generally it's across the country.

There was no one particular area that stood out for us.

Is there anything, is there any region you might be focusing on in 2009?

Well, I'd say, in general, we focus on certain areas--we always focus on--we focus on the entire country.

We're stronger in certain areas than others and so sometimes we'll put additional effort in an area, but we sell nationwide, as do our competitors.

Okay.

All right.

In this kind of market, do you feel that--I know you mentioned that you feel your price increases might stick, but do you feel that your customers might have more of a bargaining power now?

Maybe do you feel like you're a price taker in this kind of market?

Hi.

I don't think our customers are in any different position than they've been in the past.

Okay.

Obviously, we work with our customers to get them the best product at the best price and, on the other hand, we have a responsibility to our shareholders to earn a fair return.

So we're negotiating with our customers in good faith, but I don't see their position changing dramatically.

Okay.

Just one last question.

The tax rate going forward--what should we be thinking there?

Probably 37%, 37.5%.

All right.

Thanks a lot, guys.

I appreciate it.

Okay.

(Operator Instructions).

Your next question comes from the line of [Kelly Bradley] with Gold Coast Securities.

Please proceed.

Hey, guys.

Good morning.

Taking a look at the balance sheet, I know that you guys have addressed the operating cash flow, somewhere around $22 million, but there's an indication that levered free cash flow is actually a negative number.

Is there some debt that's going to be needing to be refinanced in the near future?

Generally all of our debt is short term.

The only long-term debt we have generally expires by mid-summer of 2010, but the reason we only went out to 2010 is that our internal projections suggest that we'd be out of debt by then, because we continue to generate cash from the business.

Okay.

So, then, the goal really is to be, to have a zero on the balance sheet, by--

No, actually, that's not the goal.

That's not the goal.

I mean, I would prefer to have a levered balance--leveraged balanced sheet.

Right.

And I would prefer to find, perhaps, some small acquisitions we could pick up that we would work well as tuck-in acquisitions to our business.

And in the past we've had difficulty doing that.

We've certainly pursued companies, and the companies we've pursued have all been in the $10 million to $50 million range--not large acquisitions, but strategic ones.

We've pursued them in the past and in the past we've always been outbid by private equity paying 14 times EBITDA.

I think those days might be behind us.

Private equity has had their checkbook taken away from them, so we may be more successful and, frankly, pricing on companies for sale may be more reasonable.

So we would like to continue to see leverage in our balance sheet.

We're not overly concerned about the credit market for us.

We're in a very strong position.

We continue to issue short-term debt in the unrated commercial paper market, and we're very successful in that, and our interest rates are relatively low.

And, in fact, I'm looking at--

Less than 3%.

We're paying less than 3% for debt in that market, so we're able to leverage very well.

Yes, that's tremendous.

So, then, do you guys have a wish list now that the valuations of companies have come down so far that you're actually shopping again?

We are looking at one or two companies right now.

Okay.

And, again, these are small acquisitions.

Okay.

And then the--it looks like just about $5 million on the balance sheet or about $0.33 a share in cash, and then I know that last year's dividend was $0.44 a share.

So by the time, I guess, November rolls around again, the cash per share on hand will be enough to cover another dividend payment?

Yes.

We are not concerned.

Based on what we see today, we feel that our balance sheet is solid, our business is solid, and we don't see any concern about the dividend, going forward.

In fact, we've raised our dividend for 16 consecutive years and it's our desire to continue to do so.

Beautiful.

I appreciate it.

Thank you guys for your honesty and your candor this morning, and good luck this year.

Thank you.

Your next question comes from the line of Eric Stine with Northland Securities.

Please proceed.

Good morning, guys.

Nice quarter.

Thank you.

A lot of these questions have been answered, but just a few to clarify.

You said the ORION/Itron mix is about 2.5 to 1.

Is that right?

That's correct.

Okay.

And can you just talk about the Itron deployments?

Were those predominantly existing customers or were any of those new customers that went Itron?

Those were, they were all existing customers.

Okay.

I appreciate that.

I'm just curious about your outlook.

Last year--I mean last quarter--just talking about some projects, no current projects, but that in the pipeline things you were thinking that there may be some delays and challenges there.

And you've got a little bit of that this quarter.

Is there any noticeable difference or pretty much the same?

Just small--?

Right.

You're right, and there is no noticeable difference.

In fact, I know of two communities that have delayed projects.

One community is in California, and the other one is in Michigan.

And both of them are very heavy automotive communities, subject to the automotive market, and so it's very understandable why they decided to delay their projects.

But beyond that, we've seen nothing and we've heard nothing.

Okay.

Just going to the expense side, the operating expenses, you talked about that you do have some flexibility, you feel like, going forward.

Are there any things you're doing right now that could reduce that number?

Or is that pretty much a good number we should think about going forward?

No, you're absolutely right that we are doing some things right now.

Frankly, 17% of our business is in the industrial area.

We have to look at that as a separate business and say to ourselves, "How do we react to a major drop in sales in that business?" So we are looking at our discretionary expenses.

We're looking at the possibility of layoffs in that area.

That's the whole industrial side of the business and we have to look at that.

We'd be foolish not to.

Meanwhile, in the 84%--83%, 84% of our business that's utility, which is still strong and growing, we are not looking at anything like layoffs or cutbacks or anything, but we're watching the market very closely.

We're watching our order intake closely and we're getting ourselves in a position so that if we have to react, we can react quickly.

Okay.

Thanks a lot.

And just a last thing, could you just clarify--I know you mentioned it a while back--but just clarify the amount and timing of the pension expense that you might have to deal with?

The amount was about--right now, it's estimated about $5 million this year.

And that's--we haven't made a contribution for several years.

That, obviously, depends upon a number of factors that are still to be determined this year.

We'll look at the assumptions.

But if we have to do $5 million, it shouldn't have a significant impact on our capitalization ratio.

I mean, I believe our equity is over $100 million, so--

But I think it'll have to be paid by--in total--by September 30th.

There are some provisions for a payment in April, probably one again sometime in summer and then the last one would be by September 30th.

Okay.

Thanks a lot.

I appreciate it.

Okay.

Ladies and gentlemen, that concludes the question-and-answer session.

I will now turn the call back over to Mr.

Rich Meeusen, CEO, for any further remarks.

Please proceed.

Well, thank you, everybody, for joining us today.

Obviously, we are very pleased with the results.

We recognize that this is a little unusual in this economy.

All of the companies that we're seeing are usually reporting down quarters and weaker quarters.

We're fortunate to be in a very strong market, the water market, which is still driving us forward, and we're continuing to gain share, as we have over the past five, six years, and that's been helping us, too.

So we're excited about where we are, and we are optimistic about 2009 and, frankly, there aren't many companies that are saying that, either.

So, looking at 2009, we see some very positive things.

We're keeping our eye on what could go negative on us, but generally the tailwinds we have are still very strong at this point.

That's all I have to say.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a wonderful day.