Badger Meter Inc (BMI) 2010 Q4 法說會逐字稿

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  • Operator

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

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

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

  • We will be facilitating a question-and-answer session towards the end of this conference.

  • (Operator Instructions).

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

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

  • Please proceed.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Thank you very much, Erica.

  • Good morning, everyone, and welcome to Badger Meter's fourth quarter conference call.

  • I want to thank all of you for joining us.

  • As usual, I will begin 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 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 cost of sales, for example, copper.

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

  • We believe specific guidance does not serve the long-term interest of our shareholders.

  • Now on to the fourth quarter results.

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

  • In our last conference call, we told you that sales levels should be returning to a more seasonal-type pattern.

  • Sales in the fourth quarter of 2010 were $64.8 million, a 14.9% increase over sales in the fourth quarter of last year of $56.4 million.

  • The increase was due to increased volume in most of our product lines, as well as the inclusion of the Cox Flow Measurement product line, which we acquired in the second quarter of 2010.

  • Water applications represented 80.6% of sales for the fourth quarter, compared to 88.5% last year.

  • Sales of water application products increased $2.3 million, or 4.6%, to $52.2 million in the fourth quarter, compared to $49.9 million in the fourth quarter of last year.

  • The increase is due to higher volumes of meters sold, particularly ITRON-related products.

  • This fourth quarter was unusually weighted towards ITRON-related products, which increased nearly a third over levels from last year.

  • ORION sales for water declined approximately 13% for the fourth quarter, compared to the fourth quarter of last year.

  • Despite this quarter-over-quarter decline, ORION-related products continue to outsell ITRON-related products by a ratio of 1.6 to 1 for the quarter.

  • We are not reading too much into the decline in ORION, other than this is a quarter in which we had an unusually higher amount of ITRON-related orders.

  • Although we have no new significant ITRON accounts, the fourth quarter orders were related to existing customers that are accelerating their purchases of ITRON products from us.

  • Regarding the decrease in ORION sales, we believe that some of our ORION customers may be delaying purchases pending the introduction of the new ORION two-way fixed network technology.

  • Rich will have something to say about this in a moment.

  • Manual read meters increased by approximately 14.5%.

  • Sales of commercial water meters, like last quarter, were relatively flat when compared to the fourth quarter of last year.

  • Specialty application products represented 19.4% of sales in the fourth quarter, compared to 11.5% last year.

  • These sales increased nearly $6.1 million, or nearly 94% to $12.6 million from $6.5 million in the fourth quarter of last year.

  • As I noted before, this includes sales from the Cox Flow Measurement product line of approximately $1.8 million for the quarter.

  • In addition, we continue to see increases in sales of ORION radials into the natural gas industry.

  • All specialty product lines saw increases in sales due to higher volumes as the economy continues its slow recovery.

  • The gross margin as a percent of sales was 38% in the fourth quarter of this year, compared to 36.4% in the fourth quarter of last year.

  • The impact of the higher copper prices, which obviously affects the price of our castings, was more than offset by the higher margins earned on the increase in sales of specialty products, higher prices for our products and continuing efforts to control costs.

  • Note that we will not see the effects of some of the higher copper prices from the fourth quarter of last year until the inventory is sold sometime in the first quarter of 2011.

  • I should also point out that we implemented a price increase as of January 1, 2011, to help offset the higher copper component costs.

  • Our selling, engineering and administrative expenses were up about $1.9 million or 14.6%.

  • The increase was due to expenses associated with Cox Flow Measurement being included in the fourth quarter of 2010, whereas it was not part of our operations in 2009.

  • In addition, we had higher expenses associated with employee incentives resulting from the higher sales, additional personnel as we strengthen our customer support functions, and costs associated with acquisitions.

  • And as you know, expenses are also affected by normal inflationary increases, but we continue to control them wherever possible.

  • Interest expense continued to decrease as rates remain low and the average debt balance has continued to decline.

  • Debt is slightly higher at year end than it was at the prior year end.

  • Nevertheless, our debt as a percentage of total capitalization is still less than 10%.

  • The effective income tax rate for the quarter was 34.5%, compared to 30.2% last year in the fourth quarter.

  • Our overall rate for all of 2010 was 35.5%, compared to 36.7% last year.

  • The fourth quarter rate is simply the math necessary to adjust to the actual tax rate for the year.

  • The rate for 2010 was a little lower than 2009 due to lower state taxes and an increased federal benefit for domestic production activities.

  • As a result of all this, net earnings from continuing operations were nearly $6.3 million, a 23.1% increase from the nearly $5.1 million in earnings in the fourth quarter of 2009.

  • On a diluted per share basis, earnings from continuing operations were $0.42, compared to $0.34 last year.

  • There are several items of note on the balance sheet.

  • Both receivables and inventories have increased compared to their levels at December 31, 2009.

  • Receivables at year end were $40.4 million compared to $35.8 million at the end of 2009.

  • I will note that receivables are down significantly from where they were at September 30th when they were at $53.4 million.

  • For the most part, the change between years is due to the higher sales and extended terms from 30 to 45 days that we have given to certain top-level distributors.

  • Inventories have also grown year-over-year, and have continued to grow since the end of the third quarter.

  • There are a number of reasons for the higher levels of inventory.

  • We have been talking all year about the price of commodities, particularly copper, and this obviously has an impact on us as we have higher carrying values for the inventory.

  • In addition, our lead times for certain electronic components have gone from approximately 16 weeks to as much as 38 weeks, which has resulted in us carrying additional stock levels.

  • We have also told you that we are in the midst of transitioning jobs from our Milwaukee location to our Mexican facility.

  • At year-end, we are about 50% of the way there.

  • We need to carry some additional inventory during this transition period.

  • We also built some inventory ahead for certain sales to Mexico that did not materialize by year end.

  • This inventory will either be used for pending Mexico orders or used for other orders.

  • Finally, the inventory balance now includes the inventory for Cox, which was not in our books in 2009.

  • There are really no other significant changes in our balance sheet, which overall continues to remain solid.

  • In reviewing cash flow, cash generated from operations was $18.4 million in 2010, compared to $36.6 million in 2009.

  • The increases in receivables and inventories were the primary reasons for less cash being generated this year.

  • For the year as a whole, our sales increased 10.5% to $276.6 million, that is just short of our all-time record in 2008 of $279.6 million, and suggests that recovery in our business is underway.

  • We are very pleased that earnings for the year are another record, despite continuing headwinds from commodity costs.

  • While we will likely have some continuing headwinds from those costs in early 2011, our long-term focus and story remains the same.

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

  • Rich?

  • Richard Meeusen - Chairman, President & CEO

  • Thanks, Rick.

  • Thanks to all of you for joining us on today's call.

  • As Rick indicated, sales in the fourth quarter trended back to more seasonable levels.

  • You will recall from our last conference call that we were hoping to receive some year-end orders from Mexico, many of which did not materialize due to Mexican municipalities deciding to delay spending into 2011.

  • In spite of this, we were still able to post solid earnings for what is normally our slowest quarter of the year.

  • In fact, while Rick mentioned that the net earnings and earnings per share for all of calendar 2010 were records, he did not mention that earnings for the fourth quarter were a fourth quarter record, while earnings per share tied the record.

  • So we ended the year on a solid basis and I am very pleased about that.

  • About two weeks ago, we purchased a small Swiss company, Remag.

  • The purchase price was slightly less than $5 million.

  • While not significant, I did want to mention it as it indicates that we continue to try to grow our specialty products business via bolt-on acquisitions.

  • With the addition of Remag and Cox earlier in the year, plus the rebound of our specialty application business as the economy improves, we believe that specialty products can continue to add to our shareholder value.

  • As we head into 2011, we are particularly excited about our long-term opportunities.

  • Yes, we have some headwinds, such as copper prices and the like, and we will deal with those in the short-term, but the long-term outlook is still strong.

  • I am also excited about the introduction of a new family of ORION products.

  • Last week at the DistribuTECH Conference in San Diego, we introduced our new analytics-based software with next-generation two-way fixed network technology, and we introduced a new term for the industry, Advanced Metering Analytics or AMA.

  • For years, there has been a great deal of confusion over the applicability of the terms AMR and AMI between electric, gas, and water applications.

  • More importantly, we believe that there is a fundamental difference between the technology needs of the water and gas utilities that we serve, as compared to the large electric utilities.

  • For example, the technology exists to provide hourly meter readings to a medium-sized water utility with 15,000 customers.

  • However, this means the utility will receive 10 million pieces of data every month.

  • Many of our customers simply do not have the capability to review and react to that volume of data, whereas the larger electric utilities may have the staff and systems to handle it.

  • For water and gas utilities, there was a need to move beyond AMR and AMI to a new model that provides expanded data handling capabilities that help the utilities to not just read the meters, but to better manage their systems.

  • That is why we developed Advanced Metering Analytics or AMA.

  • This system consists of a new advanced two-way ORION radial, which we call ORION SE, the SE stands for smart end point, as well as an integrated software system for data analysis.

  • The radio can be switched between a drive-by mode and a fixed-network mode by simply transmitting a command to the meter, which gives our customers flexibility and true migration capability.

  • The software not only analyzes the metering data to identify unusual conditions, but automatically executes work orders, emails, or text messages to notify utility personnel about potential problems in the water or gas distribution system.

  • We believe that the new AMA system will enable utilities to improve operational efficiency, enhance revenues, and improve customer satisfaction.

  • As we move forward with this new AMA platform, we will continue to sell our original ORION and GALAXY products to customers that prefer a one-way system.

  • We are also pleased to report that we have executed a new five-year agreement with ITRON to continue to sell their products to our water utility customers that prefer the ITRON system.

  • Our shift of production work from Milwaukee to Mexico also continues.

  • As Rick noted, by year-end, nearly half of our residential water meter products were being produced in Mexico, and it is anticipated that we will be completely transitioned by the second quarter of this year.

  • This will help us control costs and improve efficiency.

  • So I feel very good as we head into 2011 about Badger's long-term prospects.

  • The underlying fundamentals that drive the need for our products, water shortages, sustainability and conservation have not changed and will not change in the near future.

  • This bodes well as we move forward.

  • With that, we will gladly take your questions.

  • Operator

  • (Operator Instructions).

  • And our first question comes from the line of Mike Cox with Piper Jaffray.

  • Please proceed.

  • Michael Cox - Analyst

  • Thanks for taking my questions.

  • Congratulations on a nice quarter, guys.

  • Richard Meeusen - Chairman, President & CEO

  • Thank you.

  • Michael Cox - Analyst

  • My first question is on the inventory rise.

  • I know you called out a few different factors.

  • I was wondering if you could provide perhaps a bit of a breakdown between those different factors of the percentage increase.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Yeah.

  • I can give you -- I think inventory is up about $16 million.

  • And just based upon having inventory for what we call the missed orders, Rich and I both mentioned Mexico and a few others, that was probably a little north of $7.5 million of that increase, which means eventually we'll be able to use that on other orders.

  • You know, we probably are carrying an extra $2 million to $3 million for the transition of production between here and Mexico.

  • And probably copper is probably north of $2.5 million.

  • So I mean that's probably about $13 million of it right there, just those three items.

  • Michael Cox - Analyst

  • Okay.

  • That's very, very helpful.

  • And then on SG&A, as we move through the course of 2011, you have managed this very tightly over your career there.

  • I'd just be curious what your thoughts are on how that should trend as we move through the course of the year and are there any significant changes in the horizon?

  • Richard Meeusen - Chairman, President & CEO

  • Yeah.

  • This is Rich.

  • I think the impact of Cox is a little bit of an impact on SG&A.

  • You know, we'll be adding that on there.

  • But generally, we don't see our SG&A as having to ratchet up a lot.

  • We should see SG&A rising with inflation and a little bit better than that, but not much.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • And the only thing I'll add is we've spent probably -- we've been talking about this over the course of the past year where we have ratcheted up a little bit in our technical support and customer service functions as the industry kind of transitions more to networks.

  • You know, you have to have people who are familiar with topography and the like.

  • And so I think we have got a lot of that behind us right now, so we'll see similar comps year-over-year going forward.

  • Michael Cox - Analyst

  • Very good.

  • Thanks a lot.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Okay.

  • Operator

  • Our next question comes from the line of Richard Eastman with Robert W.

  • Baird.

  • Please proceed.

  • Richard Meeusen - Chairman, President & CEO

  • We're not hearing anything.

  • Maybe Richard (multiple speakers).

  • Richard Eastman - Analyst

  • -- project work that's kind of flowing through.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • There you are.

  • Richard (multiple speakers).

  • Richard Eastman - Analyst

  • -- like Fresno and Shreveport.

  • Are you comfortable that the larger projects, maybe including Duke, are, you know, are building at, you know, sustainable rates?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • This is Rick.

  • I didn't hear the first --

  • Richard Meeusen - Chairman, President & CEO

  • Yeah, you cut out, Richard.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • You cut out on us for the first part of the question.

  • Richard Eastman - Analyst

  • Sorry.

  • I was just kind of looking at some of the project works and I'm not necessarily looking for revenue numbers, but say Shreveport, Fresno, Duke, are these, you know, building at kind of sustainable rates at this point?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Shreveport really hasn't been in the results for a couple quarters so much because basically the pilot's installed and we're just waiting a go ahead to really start proceeding on that in 2011.

  • So there's not much there as a basis.

  • So we're anticipating that coming on.

  • Fresno and Duke are starting to run.

  • They've got run rates and we're early on in both those projects so we see no reason that those won't continue in the near term.

  • Richard Eastman - Analyst

  • Okay.

  • And then on the commercial meter side, I think that business was flat, and I would think some of your price increases maybe are skewed towards that commercial meter side.

  • I'm just trying to get a sense of how much price capture kind of protected your gross margins in the quarter, relative to what we might see in the first half of next year when material costs become a bigger factor.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Well, I think you're right in the sense that commercial meters by virtue of the fact that they're significantly larger than residential meters, significantly more weight, are a little bit more skewed in terms of the price increases.

  • And so we're trying to capture -- whether we've captured it all remains to be seen.

  • We think when we did the price increase on June 1, 2010, we think, and again these are all estimates, that at the time we were capturing copper at maybe about the $3.30 level.

  • And so obviously, we've got orders in-house; you know copper has gone up since then.

  • The price increase we put in place on January 1, if I had to guess right now, I'd say we've got about $4 copper.

  • And so obviously, I know everybody is interested will we be doing another price increase.

  • We're watching copper carefully.

  • You know if it -- we just were watching something this morning that suggests that copper may go even higher.

  • If it continues to go up along with other commodities, we'll have to raise prices again.

  • That's just something we have to do.

  • The only saving grace is we're all in this -- it's not just -- it's not like I'm competing against an aluminum meter somewhere else.

  • Everybody uses the same base raw materials, so this affects the industry as a whole.

  • Richard Eastman - Analyst

  • Sure.

  • Okay.

  • Richard Meeusen - Chairman, President & CEO

  • And, Rich, -- Rick, this is Rich.

  • I'm getting confused here.

  • Richard Eastman - Analyst

  • That's all right.

  • Richard Meeusen - Chairman, President & CEO

  • I think we've done pretty well on collecting those increases.

  • It's one thing to say we announced a price increase.

  • It's another thing to actually go out and get it in the field.

  • And our customers have been pretty understanding.

  • They can do the math, too.

  • They can see what copper costs.

  • They've been pretty understanding and we've been pretty successful in collecting it.

  • Richard Eastman - Analyst

  • Do you think that the announced January increase -- did I hear you say 20%?

  • Richard Meeusen - Chairman, President & CEO

  • No.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • No.

  • We don't give the percent of what we're increasing.

  • Richard Eastman - Analyst

  • No problem.

  • I made that up.

  • So -- but did I -- you know, we took the January price increase.

  • Was there any ascertainable pre-buy by some of the distributors?

  • It sounds like you gave terms, stretched out the terms a little bit for a few.

  • But do you think there -- is there a few million bucks of revenue in the fourth quarter that maybe was a pre-buy ahead of that increase?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • No, not necessarily, Rick.

  • I think the key is when we disclose backlog, and you know we're required to do it once a year, you'll see that the backlog has increased at year end.

  • Richard Eastman - Analyst

  • Yeah.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • And it's really a couple things.

  • One is we talk about extending these terms for the top-level distributors.

  • We also required them to put some more orders in front end in terms of what was going to happen for 2011.

  • But if they've got the order in for delivery in 2011, they did get the prices that were in effect in 2010.

  • Richard Eastman - Analyst

  • Oh, I see.

  • Okay.

  • As long as the order is there, you guys honor that price at that time?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • We honor the price.

  • So I don't think we saw a lot in the fourth quarter where delivery was required in the fourth quarter because of that, but I suspect a little bit -- and again, we'll never know for sure.

  • But I suspect a little bit of the increase in the backlog due in part to requiring some of these guys to pre-order, but also due in part to let's lock in that price and take some of those orders in the first and second quarter.

  • Richard Eastman - Analyst

  • Okay.

  • Okay.

  • I got it.

  • Hey, and then just lastly, on the Mexico business.

  • Is that inventory plastic meters?

  • Is that what you built ahead?

  • Because my understanding that's what Mexico has been taking.

  • Richard Meeusen - Chairman, President & CEO

  • The majority of Mexico is plastic meters and that is what they take.

  • They're much more sensitive to the risk of vandalism down there and meters being stolen.

  • So they have a tendency to prefer the plastic.

  • The fourth quarter Mexico, we go through this every year because the Mexican municipalities, the way their budgets work, a lot of them end up with money at the end of the year and they have to spend it by the end of the year.

  • And so we literally get orders on December 15th, but only if we can deliver by December 31st.

  • So in order to respond to that, pretty much every year, we've had to build up inventories.

  • And then some cities will actually spend the money and some will find -- some will get permission to move it over into the next year.

  • So this year we just -- we built the inventory, we were ready for it, and a lot of them didn't come in.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • But having said that, make sure you understand, Rick, that what we're talking about is we build up all components.

  • But if it gets to the point where on the dial they wanted some Spanish words, that's the last step that we don't do until we have a confirmed order in-hand.

  • So having said that, if we don't use the components on Mexican orders, we can use those here for any other orders that we get in the United States.

  • It's the component that was really built up.

  • Richard Eastman - Analyst

  • I understand.

  • If you don't mind, I'm sorry, one last question.

  • On the ORION SE platform or the AMA platform, do we have any active pilots there?

  • And maybe how does this look -- how does a system like this look from an end point price standpoint?

  • Richard Meeusen - Chairman, President & CEO

  • First off, from an end point price, the end point itself is just a little bit higher than the GALAXY end point or the basic ORION end point.

  • However, the system is more costly because there's a bigger charge for the software.

  • This is a much more powerful suite of software.

  • This just does not just get a billing and process it through the billing system.

  • This provides the utility with a lot more value.

  • So there is a higher charge on the software.

  • So as a total system, it is going to be more expensive.

  • No question about that.

  • We have it running in several cities that agreed to do it as beta tests.

  • And those are coming to the end, the Beta cycles, and we expect to be releasing the product soon.

  • Richard Eastman - Analyst

  • Okay.

  • Excellent.

  • Thank you, Rich and Rick.

  • Operator

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

  • Please proceed.

  • Chip Moore - Analyst

  • Thanks, good morning.

  • It's Chip Moore for John.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Good morning.

  • Chip Moore - Analyst

  • On the specialty side, I was wondering if you could talk about growth, if you strip out Duke and Cox Flow?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • If we take those out, I'd say we're in the low double digits in terms of growth pretty much on all of the product lines.

  • Chip Moore - Analyst

  • Okay.

  • And then with the acquisition you announced, can you just talk about relative revenue contribution and profitability there?

  • Richard Meeusen - Chairman, President & CEO

  • We paid less than $5 million and it was about one-time sales, so that's about the revenue.

  • And so the contribution is going to be relatively small on the overall size.

  • The real idea here was that this business, this Remag business in Switzerland, it's a nice business, it has a good piece of the Swiss market.

  • We believe we can bring the product into other industries and other countries.

  • Their major product is a small plastic flow meter that's used a lot in HVAC systems, and it's almost a plastic version of the high-end stainless steel meter that Cox makes.

  • So there are some nice synergies there and that's why we were looking at it and we thought it would be a good acquisition.

  • Chip Moore - Analyst

  • Perfect.

  • And then just moving on to moving production down to Mexico, you mentioned you're about halfway there.

  • Can you give us a sense of how much that helped cost of sales this quarter?

  • And then as we look out to second half of the year, when you complete that, what kind of impact that should have?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Okay, we're pointing at each other.

  • Neither one of us wants to answer that question.

  • I don't have a firm number for you.

  • There's no doubt that there's some benefit, but the hard part for us is figuring out the difference between the real savings and how much -- there's some costs associated with what I call the learning curve.

  • And it's hard to separate those two right now.

  • So there probably is some type of benefit in the fourth quarter, I just can't give you a number.

  • Richard Meeusen - Chairman, President & CEO

  • And I don't really want to go into details as to what it costs us to make a product in the United States versus Mexico for competitive reasons.

  • Chip Moore - Analyst

  • Sure.

  • That's fair.

  • I guess lastly, just some housekeeping on taxes.

  • At about 35.5% for the year, what should we be thinking about for 2011?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Well, that's a good question.

  • I mean, a lot of it depends upon what states that we sell to because the state rates obviously change depending upon the mix of products.

  • Our federal rate is 35%.

  • And the two biggest things that swing it off of 35% -- it goes up because of state taxes and it comes down a little bit because of this domestic -- what's called the Section 199 credit for domestic production activities.

  • Now, as we continue moving more and more production to Mexico, that production credit will probably decline.

  • So, you know, given that, you might see a little bit of an increase.

  • And then it just happens to be the mix of states.

  • And even that gets trued up over time.

  • So my guess is we're in that 36%, 37% tax rate.

  • But that's as good as a guess as you're going to get from me right now.

  • Chip Moore - Analyst

  • Great.

  • That's helpful.

  • Thanks.

  • Operator

  • Our next question comes from the line of Bob [Garneau] with RBC Capital.

  • Please proceed.

  • Bob Garneau - Analyst

  • Oh, yes.

  • I have two questions here.

  • First is can you comment on the merger between Duke and Progress and how this might affect the other meters that you're selling to Duke?

  • And secondly, have you been doing any thinking about a dashboard system for consumers of water as a way of having them control their usage?

  • Richard Meeusen - Chairman, President & CEO

  • Well, let me take the second one first, Bob.

  • And the new AMA system does provide some ability for utilities to give access to individuals on their water consumption.

  • And we see that as an area that's going to continue to grow.

  • People are going to want to be able to go into the Internet and see their water bills and see what their consumption has been like.

  • And it's going to help encourage them to conserve.

  • Even for customers that don't go with the ORION SE that just even have the one-way system, we do have something called an in-home monitor that we've been selling and it's pretty popular.

  • And that's a device that it's a small box and it just sits on the kitchen counter, or wherever, and will read your meter on an ongoing basis and tell you what your consumption is.

  • So we are moving that way.

  • I think the whole industry is moving that way to wanting to provide more information to the customers to help them conserve water and I think that's a good move.

  • On the Duke-Progress, I'll let Rick comment on that.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • That merger between Duke and Progress, Progress is primarily an electric utility.

  • Few, if any, gas customers.

  • In fact, I'm not aware that they have any.

  • More importantly to us through is there's still a possibility that we may get additional work from Duke at some point in the future.

  • So the progress merger is not going to help, but the fact that we continue to do well with Duke might help us in the future.

  • Bob Garneau - Analyst

  • Thank you.

  • Operator

  • Our next question comes from the line of Ryan Connors with Janney Montgomery Scott.

  • Please proceed.

  • Ryan Connors - Analyst

  • Good morning.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Good morning, Ryan.

  • Ryan Connors - Analyst

  • I had a few questions here.

  • First off, just on the input side.

  • I'm interested in your comments on the extended lead times for the radio boards.

  • Can you just kind of expand on that a little bit, to the extent you can tell us what exactly is going on there?

  • Richard Meeusen - Chairman, President & CEO

  • Yeah.

  • What happened is over the course of the last two years, a lot of the electric manufacturers cut way back on their production capacity in response to the economic slowdown.

  • As the economies have picked up, they've been slow to come back online.

  • And we've been seeing what used to be electronics lead times of eight or 12 weeks go out to 16 or 20, 24 weeks.

  • We've seen it get very long.

  • And it isn't a problem with our board manufacturers, it's really a problem with the component makers, the chip makers that provide to our board manufacturers.

  • And so those lead times are causing us to carry more inventory and stock up.

  • And I can't believe we're alone on that because I see a lot of other companies having to do the same thing.

  • Ryan Connors - Analyst

  • Okay.

  • That's helpful.

  • And then just on the kind of copper side.

  • My understanding is that you outsource your castings, whereas some of your competitors operate their own foundries.

  • Can you just talk about how much of the elevated commodity costs are being absorbed upstream by your own casting suppliers, if any?

  • And then if that is the case, does that give you a competitive edge in this inflationary environment?

  • Richard Meeusen - Chairman, President & CEO

  • Well, let me go a step further.

  • I believe the only water meter manufacturer that has their own foundry is Neptune.

  • And their foundry I also believe is only capable of making the bi-alloy, which is a little more expensive alloy.

  • And right now about half the market demands the bi-alloy and half the market demands 81 brass, which is the older brass.

  • And we're able to make both by having -- by buying from a foundry.

  • And I believe all of my other competitors, besides Neptune, are able to source both types.

  • So we have a little bit of a cost advantage, at least over them, on being able to provide this 81 brass.

  • We don't have to go entirely to bi-alloy.

  • The second thing you should be aware of is that we don't really buy copper.

  • All of our meters are made from scrap brass.

  • And I'm talking -- I've literally been to the foundry and they've shown me cases of rifle shells and old car radiators and bells and church bells and name plates, and then they pick it up and dump it into a big vat and melt it down and that's where our water meters come from.

  • So we are into scrap copper, and scrap copper does follow the copper prices.

  • There is a correlation.

  • It's not a perfect correlation, but it does follow.

  • So the ability to buy scrap and find that scrap on the market, and get it at a reasonable price is kind of a key.

  • It's not a business we're experts in.

  • So we have an ingot maker that we work with who does that.

  • And then that ingot maker provides the ingots to the foundry who makes the castings for us.

  • They've all been pretty good about being able to help us offset some of these cost increases and work with us.

  • We also have two foundries we work with, so we're able to work -- there's some price competition.

  • We're not captive so that also helps.

  • Ryan Connors - Analyst

  • Okay.

  • And then kind of a longer-term issue.

  • If, in fact, copper is staying here and going north and we're going to $5 copper on a long-term basis, what about plastic meters, Rich?

  • I know in the past you've said there's resistance to that and maybe that's not entirely rational, but that resistance is there on the municipal side.

  • Could we finally see that start to get some real sustained traction if commodity prices stay this high?

  • Richard Meeusen - Chairman, President & CEO

  • Ryan, I tend to think we could because the plastic meters are a great alternative.

  • They have the same warranty, the same performance as the brass meters, and over time, they've been proven to be just as reliable.

  • You're right when you say there is some resistance and it may not be rational.

  • I remember my father was just certain that the plastic bumpers on cars were going to kill us all and it was going to be a disaster and we needed metal bumpers on cars.

  • And, of course, today everybody understands that the plastic bumpers on the cars work just great.

  • Some of our competitors won't even use the words plastics, they call them engineered polymers and they try to use all kinds of fancy terms, but the fact is it's a plastic meter and it's a good reliable product.

  • We're selling about 15% to 20% of our meters as plastic right now.

  • And that hasn't moved a lot over the last few years.

  • So I'm kind of surprised by that.

  • I would have thought by now that there would have been more.

  • But I do think there's an opportunity, because as copper goes up, that is an alternative that's a little more price insulated.

  • Understanding that the plastic is also made from oil and oil price is going to impact the plastics.

  • Ryan Connors - Analyst

  • Sure.

  • And then last question.

  • Just more on the demand environment, we recently did our own survey of muni water utilities and we found budgets were generally flat or up slightly.

  • And that AMR was a continued priority for some of the folks we talked to.

  • Can you talk about what you're seeing directionally in the RFP environment, especially on AMR for 2011?

  • Richard Meeusen - Chairman, President & CEO

  • Yeah.

  • We are -- there are certain areas of the country where they are still very concerned about the budgets, particularly some of the California municipalities.

  • Some of the municipalities that are in the automotive business and they haven't seen the rebound that they had hoped to see, are still very constrained.

  • But I would say in general, the attitude of the utilities we're talking to is that the money is there, they see this as an opportunity to improve efficiency and to save money in the future, and it is a priority for them.

  • So I don't think we're going to have the crunch on municipal spending that we've seen over the last couple of years.

  • Ryan Connors - Analyst

  • Okay.

  • That's helpful.

  • Thanks for your time today, guys.

  • Operator

  • Our next question comes from the line of Brian Rafn.

  • Please proceed.

  • Brian Rafn - Analyst

  • Good morning, guys.

  • Richard Meeusen - Chairman, President & CEO

  • Good morning, Brian.

  • You had a nice article in the local paper this morning.

  • Congratulations.

  • Brian Rafn - Analyst

  • Thanks.

  • Thanks.

  • You mentioned commercial meters somewhat flat.

  • What has been the trend?

  • Is there any -- we didn't get much out of the stimulus bill.

  • How do you see the recovery of that commercial, the larger meter side versus the residential?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • This is Rick.

  • I think part of it is we had a very strong 2008.

  • Okay.

  • And then we, obviously, last year we were down a little bit because of the economy.

  • And actually, I think we did pretty good in commercial last year.

  • So we've just been flat since 2008.

  • I don't read anything into it in terms of -- we really have strengthened our market position over the years.

  • Right now our market share of commercial meters is the same as residential.

  • Whereas, if you look back five, ten years ago, we were substantially behind.

  • So I think we've just had that.

  • And I just -- it just happens to be -- I'm not reading anything into the trends at this point.

  • Brian Rafn - Analyst

  • Sure.

  • Richard Meeusen - Chairman, President & CEO

  • And Brian, the majority of the municipalities will buy the commercial meters from the same company as the residential.

  • Brian Rafn - Analyst

  • Right.

  • Richard Meeusen - Chairman, President & CEO

  • There are a few, but it's pretty rare they would separate the two.

  • So generally, commercial meters are going to follow the residential.

  • And the only thing that's really going to impact them is commercial construction versus residential construction.

  • Well, over the last couple of years, both of them have been terrible.

  • We haven't seen much growth in either one.

  • So I don't see a big difference going forward.

  • Brian Rafn - Analyst

  • Would you say the demand for commercial meters is driven more by new construction of new water mains or is there a rehab, you know, renovation?

  • You know an obsolescence market?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Well, I think part of it is commercial meters as a rule are probably changed out more often than residential meters.

  • Brian Rafn - Analyst

  • Okay.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • That's simply because a typical city with 30,000 meters of which 500 commercial of them, commercial meters represents 60%, 70% of the usage.

  • They're more apt to change those out.

  • In fact, most cities have a greater recycling time for commercial meters than they do for residential.

  • Brian Rafn - Analyst

  • What would that life cycle be, just out of curiosity?

  • Richard Meeusen - Chairman, President & CEO

  • On residential meters, they average about 15 years.

  • They're warrantied for 20.

  • But there are some cities that convert as early as 12 years.

  • On commercial meters, the life is probably closer to 10 years.

  • You've got some cities that will change out as early as seven or eight years and others that will go 12 or 15.

  • Brian Rafn - Analyst

  • Okay.

  • Let me ask you another question.

  • You talked about certainly plastic meters and low-end and it's a theft, vandalism in some foreign countries, and there's a bit of a stigma here in the US.

  • Can you use, and I'll use the word engineered polymer meters for large commercial applications or does the rigidity and strength have to be brass?

  • Richard Meeusen - Chairman, President & CEO

  • It has to be brass.

  • We don't use them for large applications.

  • It really is only for the household meters.

  • It's just not practical on a large one because of the pressures involved.

  • Brian Rafn - Analyst

  • Okay.

  • Okay.

  • Anything, just out of curiosity, again you guys are down, certainly shifting more production down in Nogales.

  • With all of the narco, trafficking and drugs, I think the last comment was 39,000 people have been killed in Mexico over the last five years.

  • Is Nogales still fairly stable versus Juarez and some of the more difficult places?

  • Richard Meeusen - Chairman, President & CEO

  • Yeah.

  • Brian, I was just down there two weeks ago.

  • Nogales is probably the safest of the border towns, and, of course, I know that's relatively speaking.

  • Brian Rafn - Analyst

  • Right.

  • Richard Meeusen - Chairman, President & CEO

  • Juarez is, you know, they've lost I think 30% of their residents.

  • Nogales is very stable.

  • In fact, I walked through downtown.

  • Don't tell my wife that, but I walked through downtown.

  • Brian Rafn - Analyst

  • Okay.

  • Richard Meeusen - Chairman, President & CEO

  • And the people are shopping.

  • They're going to their soccer games.

  • The kids are going to school.

  • As one of our employees told me, she said there's areas of the town you avoid at night, but she pointed out there's areas of Washington, D.C.

  • you avoid at night.

  • Brian Rafn - Analyst

  • Right.

  • Exactly.

  • Sure.

  • Richard Meeusen - Chairman, President & CEO

  • So frankly, I did not see the level of concern there.

  • Our employees seemed very comfortable and feel very secure.

  • Brian Rafn - Analyst

  • Okay.

  • Good.

  • Good.

  • You talked, Rich, about shifting some of the -- more production down to Mexico.

  • Is there any corollary SG&A hype in maybe higher value-added positions here in Brown Deer, more engineering, more sales, more marketing, if you look at 2011 or 2012 or is your corporate headcount pretty stable?

  • Richard Meeusen - Chairman, President & CEO

  • No.

  • Well, there's a couple things.

  • There's a couple factors there happening there.

  • One is that we're in the middle of a project right now to define what we want to do in each of our locations.

  • And what we want to keep in Milwaukee.

  • We've always said that we intend to continue to produce in Milwaukee.

  • Certainly I think large meters make sense, the commercial meters make sense in Milwaukee.

  • Whereas the residential meters we're looking at shifting down to Mexico and we will have that completed this year.

  • Milwaukee will continue to be our corporate headquarters, our engineering, R&D, logistics, marketing, all of that will continue to be done here.

  • In fact, we recently moved some jobs from our Tulsa facility up to Milwaukee, recognizing that there's some talent in this region around water that we wanted to be able to tap into.

  • And so I don't -- I see us continuing to grow the headcount here in the non-manufacturing area, whereas we may be shrinking the manufacturing.

  • In total, our headcount may stay stable and it may go up a little bit.

  • Brian Rafn - Analyst

  • Okay.

  • Okay.

  • Anything on kind of the national sales account?

  • Any larger cities, if you look out over the next two, three years, are there any cities coming to the -- some type of a new installation or is it really the same participants?

  • Richard Meeusen - Chairman, President & CEO

  • I think the one that's out there right now is Cleveland.

  • They've made a technology decision to go with ITRON but they've not made a meter decision yet.

  • So we're all in talking to Cleveland right now, all the companies.

  • But I don't know of any other city, big cities that are out there right now that everybody is pursuing.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • But then I'll make an editorial comment about big cities because even when you get a big city now, odds are they're doing it over a long period of time.

  • And sometimes a big city is the equivalent of getting like an extra Janesville, Wisconsin, every year.

  • Because if you've got 300,000 meters but you're doing it over 10 years, that's only 30,000 meters a year.

  • Brian Rafn - Analyst

  • Sure.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • I appreciate the focus on the big cities sometimes, but because they stretch it out over long periods of time, it sometimes doesn't have the impact that's anticipated in the market.

  • And generally, the bigger cities, because of the volume, the commitments on their part, probably the margins are a little bit lower than normal.

  • Brian Rafn - Analyst

  • Okay.

  • And then just CapEx budget for 2011?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • You know, our standard shpeel, and you've probably heard this before, when you look at three- to five-year rolling periods, because I'm not saying every year CapEx will be less than depreciation and amortization, but over time when you average three- and five-year periods, we expect CapEx to equal depreciation and amortization.

  • One year it might be a little bit higher, one year it might be a little bit lower.

  • Brian Rafn - Analyst

  • So the accelerated depreciation credits, I think it's 100% in 2011, 50% in 2012.

  • Can Badger Meter use that or is that something that is really a nonevent.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • You're talking the tax credits, right?

  • Brian Rafn - Analyst

  • Tax credits.

  • Correct.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • We do not make -- I mean, we consider tax impacts when we make business decisions, but we won't necessarily act simply to get tax credits.

  • Brian Rafn - Analyst

  • Okay.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • So if we need something and it qualifies, fine, and if we can adjust the timing so that it qualifies, fine, but we're not going to actually jump ahead and try and work it, you know, buy something specifically to get a credit.

  • Brian Rafn - Analyst

  • Okay.

  • Richard Meeusen - Chairman, President & CEO

  • Contrary to what some government officials might like (multiple speakers).

  • Brian Rafn - Analyst

  • Okay.

  • Thanks, guys.

  • Appreciate it.

  • Operator

  • (Operator Instructions).

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

  • Please proceed.

  • Bheeshm Chaudhary - Analyst

  • Hi, this is Bheeshm Chaudhary for Carter.

  • Good morning.

  • Just wanted to just get a quick update on the gas ORION product and if you could comment on how many small municipalities you have installed that product in, and if there's any other large utilities apart from Duke that you're talking to for that product?

  • Richard Meeusen - Chairman, President & CEO

  • Right.

  • We have -- in fact, I was just handed that before I came in here.

  • We have 47 gas utilities currently that we're selling the product to.

  • We've probably had about 50 or 60 that we've sold it to to date.

  • And many of those are smaller ones.

  • Obviously the large one is Duke that we've been working on.

  • We are talking to other large utilities.

  • We think we have other opportunities out there.

  • But at this point, we don't have anything firm.

  • Bheeshm Chaudhary - Analyst

  • Thank you.

  • That's helpful.

  • Richard Meeusen - Chairman, President & CEO

  • Okay.

  • Operator

  • Our next question comes from the line of Eric Stine with Northland Capital.

  • Please proceed.

  • Eric Stine - Analyst

  • Hey, guys.

  • Thanks for taking my questions.

  • Richard Meeusen - Chairman, President & CEO

  • Sure.

  • Eric Stine - Analyst

  • Most questions have been asked here, but maybe I'll just start with a two-part question on the price increases and margins.

  • Was fourth quarter really the first quarter that you got the benefits from the June 1st price increase, and was it a full benefit or should we see more to come?

  • And then second, how long until we see the impact of the January 1st?

  • Should we think of that more mid-2011?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Yes.

  • You know, our general rule of thumb is it can take -- you'll get -- in the first quarter after a price increase, you'll see a very modest effect, if any.

  • The second quarter you start seeing some.

  • All right.

  • The third quarter, you'll see more.

  • And by the fourth quarter, it's, for the most part, implemented.

  • And so that applies for the June 1st increase, as well as the January 1st increase (multiple speakers).

  • Eric Stine - Analyst

  • Okay.

  • So you definitely did not see a full impact?

  • I mean, there's more to come?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • (Multiple speakers).

  • No.

  • Not at all.

  • Correct.

  • Eric Stine - Analyst

  • Okay.

  • Okay.

  • That's helpful.

  • And then just two quick bookkeeping things here.

  • In case I missed it and I think I did.

  • Did you give the exact year-over-year increase for ITRON on a percentage basis?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Year-over year, no.

  • Richard Meeusen - Chairman, President & CEO

  • Now, you got everybody scrambling here.

  • Yeah.

  • We can.

  • I just got to find the -- move your finger so I can make sure I'm looking at the right thing -- year-over-year ITRON-related products dollars are up about 8.6%, ORION is up about 2.8%.

  • Eric Stine - Analyst

  • Okay.

  • Okay.

  • That helps.

  • And then just one clarification on SG&A.

  • It just sounds like this $15 million level, give or take, is a good way to think about saying this is on a quarterly basis in 2011?

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Yes.

  • I mean, we don't comment on models.

  • But you know there's a lot of variables in there.

  • But it's -- your assumption is not necessarily wrong.

  • Richard Meeusen - Chairman, President & CEO

  • There might be a few things in there, acquisition costs and stuff, that might not recur, but ---

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • But on the other hand they might.

  • Richard Meeusen - Chairman, President & CEO

  • But on the other hand they might, yes.

  • Eric Stine - Analyst

  • Okay.

  • Good enough.

  • Thanks, guys.

  • Rick Johnson - CFO, SVP Finance & Treasurer

  • Okay.

  • Operator

  • And our next question comes from the line of Glenn Wortman with Sidoti & Co.

  • Please proceed.

  • Glenn Wortman - Analyst

  • Yeah, good morning, guys.

  • I just had one question.

  • Richard Meeusen - Chairman, President & CEO

  • Good morning, Glenn.

  • Glenn Wortman - Analyst

  • On the Mexico orders that did not materialize, did you ship some of that during the first quarter?

  • Richard Meeusen - Chairman, President & CEO

  • Yes.

  • We do expect that we're going to see some of that in the first quarter, might even stretch into the second or third, but we do expect to see some of some of that in the first quarter.

  • Glenn Wortman - Analyst

  • Okay.

  • That's all I had.

  • Thanks a lot.

  • Richard Meeusen - Chairman, President & CEO

  • Great.

  • Operator

  • We have no further questions at this time.

  • I will now turn the call back over to CEO Rich Meeusen for any closing remarks.

  • Richard Meeusen - Chairman, President & CEO

  • Yeah, I want to thank everybody for joining us.

  • We were obviously very pleased with the results.

  • You know, 2010 continued to be a tough year for the economy, in general, and for our business.

  • We were very pleased that we were able to get the results we had to have a record year, again, and make it through what appeared to be a pretty tough economic downturn.

  • I think as the economy improves, looking over it the next few years, we're going to see continued growth and we're pretty excited about our prospects.

  • So with that, I'll thank everybody for joining us.

  • Operator

  • Thank you for your participation in today's conference.

  • This concludes the presentation.

  • Everyone may now disconnect and have a great day.