Badger Meter Inc (BMI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 Badger Meter earnings conference call.

My name is Regina and I will be your operator for today.

At this time, all participants are in listen-only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, today's conference is being recorded for replay purposes.

I would now like to the conference over to your host for today, Mr.

Rick Johnson, Senior Vice President and CFO.

You may proceed, Sir.

Thank you, and Regina.

Good morning, everyone.

We apologize for the delays we were having some technical difficulties, but I think we are set to go.

Welcome to Badger Meter second-quarter conference call.

I want to thank all of you for joining us.

As usual, I begin by stating that 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 risks 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 specific individual product line profitability other than in general terms, nor do we disclose components of the cost of sales, for example, for.

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

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

As you know, on April 1 we purchased Cox Instruments and its wholly owned subsidiary, Flow Dynamics, merged the two entities and renamed them Cox Flow Measurement.

We are treating Cox as one of our specialty application product lines.

And while it is, and will continue to be, our policy of not discussing specific product line detail, we will share with you that Cox's sales were approximately $1.4 million for the quarter.

Their results didn't have any effect on our earnings, but that was only because of the accounting rules that required us to increase the opening inventory balances by capitalizing the potential profit on that inventory.

Excluding that adjustment, Cox generated the profit for the quarter that we had anticipated when we purchased them.

Now on to the overall results.

Yesterday afternoon after the market closed, we released our second quarter 2010 results.

Recall on the last conference call, we indicated that uncertainties surrounding the allocation of the stimulus fund appeared to have been resolved in mid-February and we were seeing a strengthening of orders.

This resulted in second-quarter sales of $74.3 million, an increase of $6.5 million -- which includes the $1.4 million for Cox -- or 9.6% from sales in the second quarter of 2009.

The increase is due to higher sales in most of the Company's product lines.

Water Application products represented 87.2% of sales for the second quarter this year, compared with 90% in the same period last year.

These sales increased $3.8 million or 6.3% to $64.8 million, compared with the $61 million last year.

The higher sales were due to higher volumes of meters sold in technology, higher volumes of commercial meters and higher prices, offset somewhat by lower sales of manual read meters.

We saw our ORION-related sales increase 18.1% from the second quarter of last year while sales of Itron-related products increased 5.8%.

In the most recent quarter, ORION-related sales outsold Itron by a ratio of 2.6 to 1.

Commercial meters sales increased 7.7%.

The decline in manual read meters does not surprise us as this is due to more customers migrating towards technology solutions.

Specialty Application products represented 12.8% of sales for the second quarter, compared with 10% last year.

These sales increased $2.7 million or 39.7% to $9.5 million from $6.8 million last year.

I have already noted that $1.4 million of the increase is due to the addition of the Cox product line.

The remainder was driven by higher sales volume in most of the Specialty Application product lines over the second-quarter 2009 levels which were lower last year, due to economic conditions.

The gross margin percentage for the quarter was 36.4% compared with 39.3% in the second quarter last year.

If you recall, last year's percentage was unusually high and was due to very low copper costs.

Between the second quarter of last year and the second quarter of this year, the margin percentage declined 2.9%, most of which could be attributed to the cost of copper and other commodities.

Higher volumes, product mix and higher prices help soften the impact of the higher copper costs.

In addition, margins were impacted by favorable exchange rates on foreign source electronic components.

As you know, our ORION radio boards are sourced from Europe and paid in euros.

Selling, engineering, and administrative expenses for the second quarter of 2010 increased slightly from last year.

This was the net effect of adding Cox's selling, engineering and administrative expenses into the mix which were, for the most part, offset by a one-time gain of $740,000, representing the fair value of land received and settlement of claims against our Mexican building contractor.

Interest expense continues to decline as we continue to pay down debt.

The tax rate for the quarter was 37.8% compared to 37.2% used in the second quarter of last year.

The increase is driven primarily by higher state income taxes.

Our annual estimated rate is now 37.9%.

Results for the quarter are net income of $8 million compared to $7.8 million in the second quarter of last year.

On a diluted per share basis, earnings were $0.53 compared to $0.52 last year.

A quick review of the balance sheet indicates that receivables [and] inventories have increased from their lower year end values.

Receivables have increased because of the higher sales.

We continue to believe we have no significant collection problems with any of our receivables.

Inventory balances were up as we meet increased demand.

Also, lead times for certain electronic components have increased, requiring additional safety [stats].

I mentioned the Cox acquisition that happened earlier in the quarter.

You should also be aware that we made a $1.5 million investment to acquire a small ownership position in a company called American Micro Detection Systems or AMDS, a privately owned technology company.

Rich will have additional comments on this.

Overall, the balance sheet remains solid.

Cash generated from operations for the first half of the year was $11.2 million, down from $15.9 million last year, due primarily to the increases in receivables and inventories, offset by higher payables and accrued taxes.

And finally, capital expenditures year to date are $4.9 million, the same amount as in 2009 at this time.

With that, I will now turn it over to Rich.

Rich?

Thanks, Rick, and thank all of you for joining us here today.

We were obviously pleased with the quarter's results.

The rebound in orders and sales that were reported at the first-quarter conference call continued at its expected, giving us a significant quarter-over-quarter gains and even an increase over 2009's record quarter.

All other companies struggled through 2009 with depressed earnings or even losses.

We booked some of the strongest quarterly results in our history in 2009 and ended that year with record earnings.

Now, as the economy recovers in 2010, we are continuing to see growth in our sales and earnings, even in excess of those great 2009 results.

Generally the water side of our business, which is about 90% of our sales has held relatively steady throughout the economic downturns, when you exclude the short-term impact of the confusion caused by the government stimulus program in Q4 of last year and Q1 of this year.

It is good to see that left on its own, the water market has returned to its normal growth pattern.

Meanwhile, our Specialty products are seeing the same rebound that many other companies are seeing as the economy slowly improves.

We are excited about the opportunities that have been generated by the addition of the Cox products to our Specialty product lines.

The precision flow meters and test equipment manufactured by Cox provide us with both new technologies and new markets.

The integration of this small acquisition is moving along on schedule.

As Rick mentioned, we also made a small $1.5 million investment in a start-up company called American Micro Detection Systems or AMDS.

This company has developed some leading edge technology for detecting water contamination in a continuous flow stream.

We believe that the AMDS technology could help solve many water quality issues for manufacturing companies and municipalities around the world.

Our investment will give us the opportunity to work closely with the AMDS as they industrialize this technology and bring it to market.

While we do not give guidance, let me make a few comments about the outlook for the balance of the year.

First, we continue to see strong order levels as we move into the third quarter.

We are not seeing any weakness in our water markets and our Specialty products continue to strengthen as the economy improves.

Second, we are watching commodity costs, particularly copper, and euro rates very closely.

At current levels, along with the recent price increases, we would continue -- we could continue to see solid margins for the rest of the year.

Therefore, if the current sales levels and the current commodity and exchange rate levels continue through the end of the year, we would expect to see strong second-half results.

We are also continuing to invest significant amounts into our research and development projects.

We are working on new versions of both meters and meter reading systems to maintain our market-leading position.

We believe that our strong balance sheet and the cash flow being generated from operations will enable us to maintain or even increase our dividends in the future, while still allowing us to pursue strategic acquisitions.

While we are pursuing small strategic acquisition candidates in both water and non-water flow measurement space, we are also being careful not to overpay for these companies.

We believe that we can find high-quality companies like Cox that will bring significant synergies to Badger.

We are also moving forward with the shift in manufacturing functions to our Mexican facility, which will provide us with a stable, long-term source of high-quality and low-cost products.

Most of this shift, as we have said in the past, will be completed in the first quarter of 2011.

With that, we will be glad to take any of your questions.

And we are hoping that Regina is still there.

Regina, are you still there?

Sorry, gentlemen.

I am having a little bit of lag here.

(Operator Instructions).

Michael Cox with Piper Jaffray.

My first question is on the accounts receivable.

You had mentioned that you've -- that the increase in sales was a driver there, but as we look at the year-over-year increase, it was quite a bit higher on a rate change basis.

I was just wondering if there is anything else you could add around the accounts receivable line?

The only thing I can add is for -- that we did offer distributors a one-time program where we [rescinded] terms to 45 days.

So we have seen a slight increase in day sales outstanding, but other than that there is nothing to indicate any concerns on our part.

Let me also add, this is Rich, that again we don't normally talk about the months within the year, within the quarter.

But the June month was the strongest of the three months.

And that also caused a tick up in accounts receivable.

(technical difficulties) million roughly.

Is that a reasonable SG&A run rate as we look out through the balance of the year?

Yes.

Yes.

Very good.

And then on the one question on the gross margin.

I understand that these are sensitive, but just from our perspective (technical difficulties).

We just lost you.

And we are not hearing the question, Regina.

We are having some difficulty with Mr.

Cox's line.

I am actually going to remove him from the queue and we are going to go to the next question.

That question comes from the line of Steve Sanders.

I'll try to get them in quickly just in case.

Maybe first, just on the bid activity on the water side, could you talk a little bit about the percent of customers that are now asking for a two-way system in the bid?

And then it seems like the price difference between the drive-by and the two-way is starting to come down.

Could you comment on that as well?

Sure.

You are right that there is (sic) more requests for a two-way system and Badger right -- our system right now is one-way.

But we will be shortly introducing two-way.

Although most customers are asking for two-way because they hear about it, they hear about it and electric.

People are talking about it.

But when you ask them what they are going to do with the two-way system in the water industry they are kind of hard-pressed to explain exactly why they want a two-way system.

Generally, you aren't doing the kind of time of day building or turning down water heaters or doing things of that sort that the load management that electric is doing in the water area.

So it is hard for them to explain why they want it.

But more are asking for it and we have that in development and we will be adding that feature shortly.

The other part of your question, I'm trying to remember what it was now.

The other part was historically there has been a pretty big price difference between the two-way and the one-way and it seems like that gap is closing.

And I wanted your thoughts on that.

I think they're working on the market to give you the perception that the gap is closing, and quite frankly, the endpoints probably almost cost the same whether it is a mobile system or a network system.

And, especially if you don't have a good mobile system and you are selling networks, that is an important feature.

You say why -- for the same amount of money why wouldn't you want to buy a network product?

What they fail to explain though is that the infrastructure is the cost over and above that, not on a per point basis.

Kind of on a per installation basis.

And until you factor in that costs over the number of units, you can't get an accurate comparison.

And what we found is that once you take the infrastructure cost of a network into consideration, networks are more expensive than drive-by.

And again, it depends upon the city, but it can be anywhere from 10% to 30% more expensive because of the infrastructure cost.

And then could -- on the Industrial side, could you just give us an updated overview of what the primary pieces are now that you have got Cox in there?

And then maybe talk a little more specifically now that you have owned it for a few months about the sales synergies on the Cox deal?

Our Industrial products line includes some high precision valves that we make.

Some oval gear meters that are primarily used in the lubrication business.

Also the ORION gas product is in there and the Cox product is in there.

And I think those are the major ones.

Yes and we talked about Cox.

We have gas applications in there.

I know in the first quarter, the increase in what we call Specialty Application products now, was driven primarily by gas.

But we are also seeing increases all of last year's volumes and our automotive fluid meters, our valve meters.

I mean, in many cases we are seeing double-digit increases.

Okay.

Okay.

And the -- just the final two and I don't think you are going to have much to say about the second one and I will get out of the way.

On the AMDS, what is your understanding of the commercialization timeline for their technology?

And then the second question was, Rich, I think you made some comments about if things hold in terms of order patterns, commodities, [Forex], etc.

that you were set up for a pretty strong second half.

Can you put a little finer point on that one?

Let's start with AMDS.

They are ready to now industrialize their product.

They have markets for it.

They have customers for it.

And probably between now and the end of the year, they will be working through the industrialization of the product and the start-up.

As far as putting a finer point on some guidance for the rest of the year, no, I probably won't do that.

What I simply will say is that, first off, we do have some easier comparative quarters.

The second half of last year was a little bit easier than the first half and like I said, if the orders and the prices stay where they are, we are anticipating a good second half.

Okay.

Thanks very much.

Good quarter.

John Quealy with Canaccord.

It's actually Chip Moore for John.

Wondering if you could characterize mixed a little bit, plastic, ultrasonic versus traditional meters, whether that's as usual or if there are any changes there?

No, that's pretty been -- that's been pretty much standard.

Right now the American water meter market, the North American water meter market continues to be primarily a mechanical market.

We are selling both ultrasonic and magnetic meters into the market and you are seeing some customers adapting those and moving ahead, but it is still relatively small.

The bulk of the market is still the mechanical meters.

Yes and in terms of our own experience in this quarter, you know, we -- and I think historically we've commented in the past that anywhere from 10% to 15% of the meters that we sell are plastic.

And that has been the case for probably the past 2.5 years.

That has been primarily driven by Chicago.

Because Chicago is taking plastic meters.

You know, that may drop a little bit and we haven't seen any big uptick on that.

Okay, that's helpful.

And then you mentioned some of your R&D efforts, new versions to come.

When should we expect to see some announcements, some introductions?

We are always working on the next version of both ORION and GALAXY.

And every -- about every year or 18 months, we introduce a newer version which might have some additional features.

And so, we will probably be having some newer versions coming out towards the end of this year, early next year.

Great.

Thanks.

Richard Eastman with Robert W.

Baird.

Good morning.

Rich, could you just talk for a second or two about pricing, the price increase that we know was planned and went into effect June 1?

And given maybe a little bit of the receivables bump you said you saw, is some of that receivables bump perhaps associated with any even modest advance purchases by the distribution chain to beat the price increase?

Yes.

There was probably a small impact of that.

Our major distributors are usually on a monthly plan that they submit at the beginning of the year, saying what they want for each month and how they stock their shelves.

But generally, because most of the products are configured specifically for our customer, the distributors don't carry a lot of inventory.

So even with that price increase, we don't think there was much of an impact from the distributors ordering ahead, trying to beat the price increase.

And the price increase itself didn't have a big impact because, as you know, it takes several months for price increase to really filter its [weight] -- several quarters for a price increase to really filter its weight all the way through our system.

Right, no.

I understand.

And then your comment about one of the areas of strength was, I think you phrased it kind of funny in the press release, but I think it was Commercial Water products.

Is that commercial water meters for that market or is that kind of that little sub niche that you kind of moved over into the water category?

Like the [mag meters] and stuff.

No, we are looking at the press release now.

We meant commercial water meters.

If we wrote it that way, that was our error, but it's just commercial (multiple speakers).

Yes I don't think Rick was really trying to be funny.

He doesn't have much of a sense of humor.

Yes, it wasn't all that funny.

And then I know you don't want to give color on specific projects, but can you -- Duke, the gas project there, was that a couple million bucks in the quarter?

Is that billing and shipping straight line which would be maybe $2 million for the quarter?

Is that just a good guess?

No.

Okay, it's not shipping or it's a bad guess?

It was substantially less than that.

I think we pointed out in the first quarter, what we did is we shipped I think for the -- I want to say it is either infrastructure or [enough] units for the initial pilot.

There was a big push in the first quarter.

And now it's going to slowly ramp up over time.

Okay.

And I think you did comment that by Q3 we start to hit a little bit better, more of a straight line number?

Yes, (multiple speakers).

Then I guess I just want to ask the same thing on Chicago.

Everybody I think knows where that project was and is.

Is that pretty much ground down to zero at this point in the quarter?

I wouldn't -- well, no.

And I will comment on Chicago and it will be the last customer I comment on, how's that?

Because we made a policy we will not comment on specific ones.

Chicago, we have done all [along].

We have about $3.2 million in the quarter for Chicago versus probably about $4.2 million last year at this time.

Something along those lines.

It is, for the most part, done.

We will wind up and clean up in the third quarter and look for the completion.

We will probably continue to work with Chicago on an ad hoc basis until they decide where they want to go in the future.

To date, we have got $33 million in of that originally anticipated $39 million contract.

I think we said last time, we estimated it'd be at that $32 million, $33 million level.

And Rick, bear in mind that Chicago bought from us prior to this contract.

And every indication is that Chicago intends to continue to buy from us after this contract is over.

But it's lumpy, it's periodic, and so it is not something we want to be talking about every quarter.

I understand.

I understand what that is.

And then, Rich, there was also at the AWWA Show, as you kind of made her way around the floor, one of the key theme -- and again this is all but marketing, but a little bit of maybe a new product strategy for many of the players in the meter markets.

Was this theme of migration where some of the competitors are going into these municipalities and basically saying, look, buy our mobile system now because it's cheaper, but our mobile signal can migrate to the fixed network with only the incremental infrastructure costs.

And how do market against that?

Well frankly, people -- competitors have been saying that for years.

And obviously if you put a drive-by radio in a basement that, or in a pit, that transmits a few thousand feet and broadcast every 4 seconds or every 8 seconds so that a car driving down the street can read it, to be able to say that, well, now this signal will be able to be read by collectors out on water towers and telephone poles, that is absolutely true if you want to put a collector on every telephone pole on every block of the city.

And generally, you are talking about an infrastructure cost that is just not feasible.

Now what we have done is our current system, our current reading system supports hybrid.

In other words you could have a mixture of GALAXY and Itron in your city and the same reading equipment will read it and the same building system will process it and everything will work the same.

And from the utility's point of view how they collect the reading won't matter.

They will have those readings.

We are seeing more people talk about the fact that, well, you can put a radio in there and five years later, when you decide to go to networks, you just stop driving by.

That is a pretty tall order when you are talking about something that only broadcasts a few thousand feet.

So it is a much more difficult proposition.

Want to make a technical -- it's GALAXY and ORION that are hybrid associates.

Then I say GALAXY and -- oh I'm sorry I said (multiple speakers).

Well, yes.

I mean did you (multiple speakers) does your ORION signal -- I realize the limitation on the distance, but would your -- can your ORION signal get picked up by the GALAXY infrastructure?

Yes it can.

Okay so, but you are saying you would have to have --

But realistically you would have to have a lot of infrastructure there (multiple speakers)

A lot of collectors.

No, I understand.

And you know, obviously there's physics involved here.

You are talking about one radio that broadcasts every 4 seconds a few thousand feet.

You are talking about another radio that broadcast four times a day for a mile.

They are two very different products and two very different applications.

To try and migrate one to another is not an easy task.

And we are obviously all looking at it, but the other thing I will say about migration is that other than our move away from trace, every version of ORION that we come up with, every version of GALAXY that we have come up with has been backward-compatible.

So that we have allowed the customers to go out and actually mix the systems and still have full support.

Okay.

And then just last question -- I am sorry, you might have given this.

But did you say that the local [read] business, did you say how much that was down?

I'm sorry.

No, but it is -- (multiple speakers) was probably down about 16%.

16?

One, six?

One, six.

Okay.

Great.

Well, thank you.

Brian Rafn.

Morgan Dempsey Capital.

Good morning.

Rick, could you talk a little bit about the potential size of the market for flow measurement and your, certainly your venture into Cox Instruments?

Is that something that could rival in size your meter business -- your legacy meter business?

Or is just the total size of that market much smaller?

No, actually the flow measure -- the total flow measure market which includes the water metering business is about a $5 billion worldwide market.

And that is just the meters.

That doesn't include radios and things that go on top of it.

And the water meter segment of that worldwide actually is a small (inaudible).

It is probably less than 20% of that market.

So there is a huge opportunity there.

A lot of these are high-end industrial meters.

Things like [coreolis] mass meters.

Things like vortex meters.

So there are a lot of high-end -- Badger does not intend to jump into this market and take on the likes of Siemens and ABB.

These are large companies that have firm positions in those markets.

On the other hand, we do believe there are a lot of niches within that market where we can play very well.

And Cox is a classic example of that.

We think there are a lot of other companies that are -- the size of Cox or even bigger that we could jump into and find the right synergies and do very well in that market.

Rich, how much of that top of the market does Simmons and ABB, from an oligopoly standpoint, how much do they control versus what's available marketsize-wise in the niche flow measurement?

You know what?

I don't have those numbers in front of me.

That's a hard one to say.

I'd have to do some research to be able to answer that.

Okay.

Sense of as you see a kind of reflation watermark getting back to normal, anything on headcount hiring or staffing, either domestically or down in Mexico?

Yes.

We did not during the -- what to us was a short downturn which was the fourth quarter of last year and the first quarter of this year, up until March, for us that was a relatively short downturn and caused more by all of the confusion generated by stimulus.

We suspected that that is what it was.

In fact that's what we spoke on the conference call [it was] about.

So as a result, we did not make the headcount reductions that some other companies may have made as they saw their businesses weaken.

So we didn't do any layoffs.

We kept everybody on board during that short downturn.

So as we came out of that, we've got a pretty good solid staffing basis.

We also used last year to make some strategic hiring of some real talented individuals that other companies were letting go of because of the downturn.

So we found ourselves in a very fortunate position that we were able to hire when everybody else was letting go.

So our headcounts are up a little bit over last year.

We've also got some temps in because we are pretty busy at this point.

And we think we are very well-positioned on headcount.

Would the strategic hiring the just tens of people, a couple of people, a --?

No.

It would be tens of people.

And that is in Milwaukee, or around here?

That's in Milwaukee and some down in our Mexico facility.

Okay.

Anything relative, we hear the border conflicts all the time, anything changing in Nogales?

Nogales is relatively stable when you compare it to a city like Juarez.

The military and the police have things under control.

And as we have said in the past, our plant is located very close to the border.

It is not anywhere -- you don't have to go through the city.

It is not near any of the rough areas of the city.

The employees seem very comfortable down there and we have great security.

So we feel pretty good.

We have had no problem getting our products across the border.

Okay.

Is your run rate on R&D, has that been pretty stable?

Are you ramping up at all?

Is (sic) there any fluctuations?

No, it has remained relatively stable.

We have been able to continue to invest in that $5 million to $7 million a year range for R&D and that's enough money to allow us to continue to develop the new versions of our products.

And then for Rick -- your CapEx budget for the year?

We have never disclosed the CapEx budget for the year.

But, Brian, we are $4.9 million for six months and that probably runs at a fairly even run rate.

So you can do the math.

Okay, and then, Rick, just your five-year forecast on copper?

Next.

Next question.

Thanks.

We have got to move on because we have other people waiting here.

Yes.

Thank you.

Scott Graham with Boeing.

Yes, now I'm with an airline I guess.

Scott Graham from Benning.

(multiple speakers).

I just wanted to -- I have several questions.

I know you are loathe to answer questions about specific customers, but you have also talked about Duke in the past and to try to get a handle on what that number was specifically, really goes a long way to understanding what happens in [Specialty] applications.

So I am hoping you can -- you know, you know -- give us a little bit more than what you have given.

Is it a $1 million to $2 million ordeal?

I know the first quarter number was a good number.

Is it in that territory?

I will tell you it is less than $1 million for the quarter.

Less than $1 million.

So then really Specialty (multiple speakers).

I'm sorry.

But I am -- I am going to reiterate.

We are working to get away from talking about specific customers because quite frankly, you know even Chicago when you boil down to it, it was nice to have that order.

It was more important from a marketing standpoint and from a production standpoint than it was from a sales standpoint.

We are trying to get away from talking about what our perceived developments (inaudible).

I know that makes it harder on you, but also for the benefit of the customer sometimes.

We don't want -- we've had situations in the past where people have called the customer and say why are you buying less than that?

So we just want to get away from (multiple speakers).

The other point is, I mean the point to remember is that we still believe Duke is about a $20 million project ultimately that will be done over roughly 3 years.

That is kind of what we're looking at.

Where I'm trying to go though, actually, is on the other side.

The Specialty products sales, X Duke, X Cox, they had a terrific quarter then.

Yes.

They did.

They had a good quarter, yes.

But remember they are coming off of the (multiple speakers)

A low base.

They are up double digits off of very unusual lows from from last year.

Yes.

I know.

Agreed.

But still --.

Okay.

So that was one question.

Another question was, you guys have talked a lot about the opportunity in new hookups of buildings.

Things that are not metered right now.

With the market maybe getting back to some semblance of normal, do you see that as a theme starting to reemerge here?

Not yet.

I mean, that is really a question of housing starts and the fact that there's -- it's both housing starts for new metering and then there are 13 million homes tons out there that are still buying their meters from a municipal water department --.

Water.

Water.

Buying their water, I'm sorry, from a municipal water department and are not metered and, therefore, are paying a flat rate.

So that aspect is still moving forward.

For example, Fresno and Sacramento are not fully metered.

We have those contracts.

We see that moving forward.

We are hearing more and more, especially out of California, about cities that have to start metering and they recognize that.

So we expect that to continue on.

That's helpful.

Thank you.

And the last question is this.

I know you guys have kind of gotten back into the M&A fray a little bit here and I know that given the fairly --.

So I guess characterize it -- it's kind of an oligopoly of five or six players here in water meters in the US.

It strikes me that the M&A pipeline or the M&A desires could be more along the lines of a Cox.

But also maybe European velocity.

Are those fair statements?

Yes, they are.

You know, obviously, we are very interested in seeing as much and -- let me start over.

We are as interested in staying in the water space as we are interested in getting into the non-water space.

So that means when we talk about water, that could be irrigation water.

It could be processed water used in industry.

So those are the kinds of plays we are looking at.

And you are absolutely right, Badger Meter does not play in the water industry outside of North America.

And that would require velocity meters and we are looking at that.

Very good.

Thanks.

Glenn Wortman with Sidoti & Company.

Good morning.

In addition, some ongoing risk concerns out there about the fiscal conditions of [mini munis].

Now have you guys done any additional research on the percentage of water departments that are segregated from the general accounts of these munis and the potential for any negative effects going forward on your business?

Yes.

About a year ago, we did -- we asked all of our salespeople who are out in the field and dealing with these munis to give us a rough estimate as to how many of their utilities were treated as enterprise funds versus treated as departments of the city.

And for those of you who aren't familiar with this, the significance is that, in most cases when they are treated as an enterprise fund, the city cannot take the water utility's money and use it for road improvements or police and fire or tax abatement.

On the other hand, when they are treated as a department of the city, the city can take the money.

So for example in Wisconsin and in Pennsylvania and states like that, the cities cannot just grab the money.

Whereas in other places like California and Illinois, the city can take the money.

So we asked last year and our sales people came back and said well roughly it looks like it was 50-50.

About half the utilities in the United States were treated as enterprise funds and half were not.

But that was very rough, based on anecdotal evidence.

We are doing a survey that we are working on this summer that will try and get that narrowed down a little bit better.

Okay.

Thank you and then just, second, on your June 1 price increase, did that all stick?

And did you see any benefit from that increase in the second quarter?

We believe it is sticking, but we didn't see any real benefit in the quarter because for the most part we are working off of the existing backlog.

And as Rich said, generally, it can take two to three quarters before you start seeing the full impact of the price increase.

And so you will see it over time.

To the best of our knowledge it wasn't unexpected in the marketplace.

It is being accepted.

The fact that copper is up at [316] today supports the fact that we put the price increase in place.

So for the most part, we believe it is holding.

All right.

Thank you very much.

Christopher Purtill with Janney.

This is Christopher filling in for Ryan Connors.

Most of my questions have been answered.

Just following up on the June 1 pricing increase.

Curious if you have any indication or if you have seen any competitors following suit, now that you guys have pushed forward, and if any of the other guys are doing the same thing?

Yes.

It is a little early for us to be able to tell.

It is a little early for us to be able to tell that.

So we generally don't get a feel on that for another quarter or so.

All right and just a housekeeping modeling question.

I believe in the formal comments you said you were looking for a tax rate of [37.9]% and that's an annual number?

Yes.

That is our current estimate of the annual number.

It always varies by 0.10 here and there, but that is our best estimate at this point.

Got it.

All right and just lastly and I think you kind of covered this, just hoping maybe you could share your thoughts a little bit more about the favorable sequential movement that we saw in both copper and the euro between the first quarter and the second quarter.

Would expect that to support gross margins' pricing increase, helping out as well in the back half of the year.

So do you think we could expect to see sequential gross margin improvement also as the second quarter base?

Again that is a good question.

I mean copper through most of the second quarter was down right around the $3 level.

Now today, it has jumped up to $3.16.

So it depends upon where that goes.

But you can look at the copper and the euro rates as well as I can and see what they were in the second quarter, compared to the first quarter, and there is about a three-month delay.

So from that point of view, you can kind of predict as to what is going to happen.

That's right.

Okay, but it is about a one quarter flowthrough on both copper and euro component?

Right.

Got it.

Right, great.

Don't forget product mix plays a big role in that too.

And if Specialty products can continue a nice slow comeback, remember that is generally the higher margin type product.

So we are hoping that will have an impact on us, also.

All right.

Great.

Thanks.

Eric Stine with Northland Capital Market.

Very nice quarter.

Well, I don't know if you'll comment on this, but I will give it a shot.

Could you just talk about on the water side progress in the Shreveport and the Fresno projects?

And then, progress you are making just overall with AMI?

Yes.

And I'll just say that Shreveport, Fresno, are all moving ahead as we expected and we are not giving any numbers, but we are just saying that those projects are all moving ahead as expected.

They all have pilot aspects to them where the city, at first, puts in a limited number and does some testing before they move ahead with the whole rollout.

The testing is more designed to make sure that the integration to their billing system is working well and that they have everything in place.

So we expect them to continue to move ahead without any problems.

Rick, do you want to take the second part of that?

What was the second part?

What was your second part?

It was just progress, overall, with AMI.

Oh, the overall progress with AMI?

Well, as we mentioned, we saw about a 50% drop in manual read meters.

So we continue to see that growth in AMI that we have been seeing over the past as it cannibalizes the manual read meters.

Right now, however, less than 30% of the meters installed in the ground have technology on them.

So we know that there's still a very good run rate on that and we are still moving forward on it.

And our sales of our GALAXY products are up.

It is still just not a big -- we have always said mobile continues to be the predominant technology purchased when technology decisions are made.

Okay.

Fair enough.

Maybe, I'll just turn to SG&A, and I think you did answer this earlier but the line cut out.

If we back out the one-time gain to operating expenses at the kind of run rate we should think about going forward?

Yes.

And then, just turning to the gas side, can you just characterize the conversations you are having with other customers?

And does it help to have Duke up and running?

Clearly it helps us to have Duke because that was a major project.

And we are out having conversations with more companies that are interested in that kind of solution.

So yes.

We are still -- we are still pursuing new opportunities and Duke gives us a great pedigree for that.

Okay.

That's helpful.

Thank you very much.

Carter Shoop with Deutsche Bank.

This is Bheeshm Chaudhary for Carter Shoop.

Thank you for taking my question.

Just following up on that last question here, one of your competitors launched a pretty large gas deal yesterday.

I was just wondering what -- first, I guess, what is your strategy for that market?

Do you plan to introduce a two-way network product for gas or a GALAXY product for gas?

And how do you see that market developing longer term?

I am assuming that the announcement that you are referring to, is that the ESCO announcement on PG&E?

On SoCal gas.

On SoCal gas, I mean.

Yes.

I was assuming that's what you were talking about.

You know, we are not -- we were not in that bidding process.

We were not involved in that.

Our approach to gas is more related to looking for the companies that are looking for a -- working with the companies that are looking more for a specific solution that we can fit the niche on.

Duke was a classic example of that.

They wanted a short hop radio and ORION is a very good short hop radio.

We are working on GALAXY for gas and we are working on two ways.

So we have all of that stuff on the drawing board.

But right now, that was not the kind of project that we want to even get involved in.

Because it gets pretty brutal as those companies compete for something that big.

Thank you.

Richard Eastman with Robert W.

Baird.

Richard Eastman Two real simple questions.

One is, Rick, did currency have -- what was the topline translation impact?

And then do you have a sense of what the EBIT impact was?

I have an idea.

I'm not going to disclose it.

I was just checking.

That was a nice try.

Actually the FX had the biggest impacts on margin because of the ORION boards.

It did have some impact on the topline, not as much as it's a much smaller impact on the sales number than it is on the margin number.

(multiple speakers)

Okay.

I figured that.

(multiple speakers).

I mean, would it be a percentage point of sales or something?

Not even that.

Not even.

Okay, so less than 1%.

That's fine.

And then, secondly, let me -- the payables number also up as well as the other liabilities number, you know collectively about $6 million just quarter to quarter?

Is that -- are those two up?

I mean, I think you alluded to one maybe being in taxes payable?

One is (multiple speakers).

First of all I think you are comparing.

If you are looking at the press release, you are comparing the December 31?

Richard Eastman No.

I looked at the first quarter and then look at the second, but --.

(technical difficulty)

Collectively the two are up about $6 million.

I can tell you one -- one is clearly income taxes.

We obviously -- we paid the minimum amounts that we have to and we take advantage of the things we can do to stretch out the payments.

And payables is, quite frankly, it is just a function of timing.

Richard Eastman Okay.

Okay.

I'll say it this way.

It is not that we are doing anything different.

We are still paying our bills on time.

All right.

I understand.

So it is just a timing of purchases basically.

And is copper --?

I mean, given that -- well, copper eroded in the quarter so that probably wouldn't be it.

All right.

I will follow up but thank you.

Steve Sanders.

Thanks for taking the follow-up.

First, a question on the pricing realization with distributor inventory typically fairly lean, can you just remind us why it might take as long as three quarters to see the pricing actually flow through?

Because first off, we usually carry anywhere from 1.5 to 2 months sales in our backlog.

And so those orders are all in there already.

So for the first couple of months, we are just filling orders that were already on the books at June 30.

And then, it starts kicking in after that.

We also have certain contracts that we've given where we will give fixed prices for 60 to 90 days.

And a lot of those take time, too, for it to filter through.

So it does take a while.

It does take a quarter or two before you start really seeing the impact of a price increase.

And then, did you take the increase across the Water Product line?

And did you do anything on the Industrial side?

Yes.

There was some of the increase on the industrial -- it was pretty much across the board.

Because a lot of our industrial products also have, if not copper, they have aluminum or steel or other metals in them.

And those have also been affected.

Okay.

And then is there anything to be concerned about in terms of some of the component shortages?

We have obviously heard other companies talk about that.

I mean, is there a piece of your business that that represents a concern for you or not?

It is a concern.

I am going to be honest with you.

It is a concern right now.

Our lead times are longer than what we want them to be.

There is some difficulty getting our hands on the electronic components that we need.

So that is causing some delays in shipments.

On the other hand, our customers understand that and our customers are willing to work with us on it.

So we have been able to support that.

It also has the financial impact in that we are paying premiums sometimes to accelerate some of the orders.

And so -- and Rich is right, in certain cases, even when we are willing to pay a premium we still have to wait.

So it is a problem right now.

I think the problem is everybody skinnied down so much that as we start to ramp up and it's not just our industry, cell phones and other industries are having trouble getting electronics.

Right.

Okay.

And then last question, Rick, where was the [LAN cell] gain in the P&L?

Selling, engineering and administrative.

Okay.

It was -- .

Part of the selling -- Yes, the SG&A expenses.

Okay.

Thanks.

(Operator Instructions).

Hearing no more questions I believe we'll call this conference call finished.

Do you want to say a few words?

Yes.

Let me just wrap up then as long as there are no more questions and thank everybody for calling.

Obviously, we were pleased with the quarter.

We do see this quarter as somewhat of a return to normal.

The fourth quarter of last year and the first quarter of this year were impacted by all of that uncertainty.

Things are now coming back to normal.

One question that wasn't asked, but I am going to throw this out anyway is that how much stimulus money really impacted this quarter.

And we don't disclose details on that, but I will say that in our total backlog less than 15% of the orders in the backlog have any stimulus money associated with it.

So we may have -- and even with that, it's a much smaller percent because somebody may have a $1 million order in there, but only $50,000 of it is funded by stimulus.

So the stimulus impact is less than 15% in our backlog.

We don't see stimulus as being a driving force going forward.

Rather, stimulus was a delaying force in the past and now we have gone back to normal.

So we feel pretty good about what we see.

And as I said, we are optimistic about the rest of the year.

So with that, I will thank everybody for joining us.

Ladies and gentlemen, thank you so much for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Have a wonderful day.