Badger Meter Inc (BMI) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter Badger Meter earnings conference call.

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

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

(Operator Instructions) We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Mr.

Rick Johnson, Senior Vice President Finance and CFO.

Please proceed, sir.

Thank you very much, Ann.

Good morning, everyone.

Welcome to Badger Meter's first 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 risk and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

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

Let me reiterate some of our guidelines.

For competitive reasons, we do not comment on 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 interests of our shareholders.

Before I talk about the first quarter results, I do want to remind you that our acquisition of Racine Federated was completed on January 31 and their results for February and March are included in our quarterly results.

Just to recap, Racine Federated brings us additional flow meter technologies operating under various brand names into markets such as oil and gas, energy and resource management, global diagnostics, petrochemical, construction, and the like.

As a result of purchasing Racine Federated, we have also decided to discuss and present our product line sales in a slightly different format.

In the past, we referred to water applications and specialty applications, with the former including any meters associated with water measurement.

Going forward, we will refer to sales of meters to municipal water utilities as municipal sales.

This includes residential and commercial water meters and related technologies.

Other non-utility water meters, as well as meters used for measurement of other liquids and gases, will be referred to as industrial flow.

Finally, sales of valves, concrete vibrators, and radios for the natural gas industry will be referred to as specialty products.

Now on to the first quarter results.

Yesterday, after the market closed, we released our first-quarter 2012 results.

I am pleased to tell you that total sales for the first quarter of 2012 increased nearly $18.8 million or 32.8% to $76.2 million compared to $57.4 million during the same period last year.

Obviously, some of this increase was due to the inclusion of Racine Federated sales for February and March, which totaled $7.4 million.

The remainder of the increase was due to higher municipal water sales and higher sales of industrial flow products offset by lower sales of specialty products due to fuel radios sold to natural gas utilities.

Let's explore each of these categories.

Municipal water sales increased $13.4 million or 34.4%.

From $38.9 million in the first quarter of last year to $52.3 million in the first quarter of this year.

This increase was due principally to higher sales of residential meters sold with technology and higher sales of commercial meters.

Sales of our ORION AMR technology products increased 36.1% while sales of Itron related products increased 18.3%.

In this most recent quarter, ORION related products outsold Itron related products by a ratio of 3.1 to 1.

The revenue increases were driven by higher volumes of product sold.

While manual residential meters were down slightly, commercial meter sales increased more than 50% in the first quarter over last year's first quarter.

Sales of the GALAXY fixed network related products increased 80% on significantly higher volume.

We believe the overall volume increases represent a return to more normal buying patterns following periods last year when there was considerable uncertainty in the market about a number of factors, including municipal spending and slower housing starts.

I think what we have seen so far this year is some stability returning to the overall economy and hence the resumption of normal buying patterns.

Sales of industrial flow products increased $8.1 million or 84.6% to $17.7 million from $9.6 million in the same period last year.

Racine Federated sales represented $5.9 million of the $8.1 million increase this year.

The remainder of the sales increase for this group was due to higher sales and higher volumes in nearly all product lines due to higher volumes of product sold.

Specialty product sales decreased $2.7 million in the first quarter to $6.2 million from $8.9 million in the same period last year.

This category includes sales of concrete vibrators from Racine Federated, whose sales were $1.5 million.

This category also includes our valve sales, which did see an increase.

However, the category as a whole was significantly affected by lower sales of radios to natural gas utilities.

We have referred to this over the past several years.

We had a significant order from one particular customer, which was substantially completed last year.

While we hope to have some additional sales to this customer in the future, we did not see anything of substance in the first quarter.

The gross margin percent for the quarter was 37.9% higher than the 35.6% in last year's first quarter.

The addition of Racine Federated' s products, which carry slightly higher margins, as well as the overall volume increase, helped push the margin percentage higher.

Material costs for castings were also slightly lower this year as a result of lower metal costs.

Selling, engineering, and administration are so-called SMEGA expenses for the first three months of this year increased $3.5 million to 22.9%.

Most of the increase was attributable to the addition of Racine Federated.

In addition to the regular SMEGA expenses assumed with the acquisition, we also have amortization of certain intangibles that were identified and capitalized as part of the acquisition.

Interest expense for the quarter was slightly higher than last year as a result of borrowing funds to pay for the acquisition.

We are currently utilizing our short-term line of credit and hope to have a new financing package in place sometime during the second quarter.

Provision for income taxes for the quarter was 37.4%, slightly higher than the 36.4% last year.

As a result of all of this, net earnings from continuing operations were $6.2 million compared to $3.3 million last year.

On a per-share basis, this equates to $0.42 per diluted share compared to $0.22 last year.

Just a quick note on our stock repurchase plan.

If you recall, in November, the Board of Directors approved a stock buyback program for up to $30 million over the next two years.

This program commenced in February of this year, and through March 31, the Company has repurchased 520,000 shares at a total cost of approximately $17 million.

Because the program did not start until mid- February, the impact on earnings per share was less than $0.005 for the current quarter.

A quick review of our balance sheet shows increased receivables, inventories, and property planning equipment due primarily to the inclusion of Racine Federated.

In addition, on a preliminary basis, we have identified approximately $30 million worth of intangible assets and approximately $25 million of goodwill associated with this transaction.

On the liability side of the balance sheet, we recorded deferred income taxes of about $12 million as a result of the purchase price allocation write-off.

And because of the acquisition and stock repurchase program, we have debt on the balance sheet again.

Our debt to total capitalization ratio as at March 31 was approximately 28%.

Cash generated from operations for the first three months of 2012 was approximately $10 million compared to $5.2 million for the first three months of last year.

Increases in receivables and inventories were more than offset by the increase in earnings and higher income tax and accounts payable balances.

With that, I will turn it over to Rich for his comments.

Rich?

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

I'm going to be brief.

Obviously, we are very pleased to see our markets return to normal levels after a rough second half of last year.

As you may recall, we mentioned on both our second and third quarter calls last year, that we were seeing weakness in the markets for the second half of 2011.

We also said these situations tend to last about two quarters in our industry, which is exactly what happened.

Then, on our most recent call in February, we stated that we were seeing some strength as we entered 2012.

As we had hoped, that strength continued through the first quarter.

Since we are taking some credit for being right on past calls, I also have to confess that we were wrong about something else.

On the last call, we said that we expected the Racine Federated acquisition to be accretive in 2012, but that we did not expect to see any benefit until the second quarter due to the inventory write-up.

As it turns out, the inventory write-up was much smaller than we had expected and Racine Federated actually contributed about $0.03 per diluted share to the first quarter.

We have been very pleased with the many synergies that we have found in the manufacturing, sales, marketing, engineering, and administrative functions.

As we move through 2012, we expect to achieve more integration benefits and for Racine Federated to continue to be accretive to our earnings.

Regarding our municipal water business, we are continuing to invest in research and development projects to maintain our technological advantage in the marketplace.

Our new advanced metering analytics product, including the ORION SE two-way radio, have good market acceptance and are providing our municipal customers with systems and information they need to maximize their utility operations.

In our E-Series, ultrasonic water meter continues to perform well for our customers.

We expect these products to continue to drive higher sales in future quarters.

Looking to the rest of 2012, after a solid first quarter, we expect to see continued strength in the coming periods.

I will, however, remind you that the second quarter of 2011 was a record quarter for us making it a difficult comparison against the upcoming quarter.

Nonetheless, we now believe that our municipal water markets have returned to normal buying patterns and, assuming the economy continues to improve, we are optimistic about the balance of the year.

And as I said, I'd keep my comments brief so with that, we will take any questions.

(Operator Instructions) John Quealy, Canaccord Genuity.

Good morning, guys.

Can you hear me?

Yes, John.

Good morning.

Congratulations on the quarter.

A couple quick housekeeping questions.

Why no step-up charge for Racine's inventory or why smaller than expected?

It's interesting.

When we got in there, when we looked at the place, their inventory looked very familiar to ours.

In other words, a lot of components, the components come together, and you put a finished product out the door.

Unlike us though, they purchase all those components so they are considered raw materials, whereas we make most of our components ourselves.

So while we were expecting a big step-up, when we actually looked at it, most of the inventory is considered raw material and you don't write that off.

And they had very little work in process because they turn orders out in a matter of days and so virtually no finished goods, very little work in process.

That's why the step-up was so small.

Okay.

Thank you.

And in terms of the gross margin improvement, that was pretty much all driven by absorption and mix on the muni business for the quarter?

Is that right?

I'd say absorption, mixed lower metal costs, and then the addition of Racine Federated products.

Those products, like our legacy industrial products if you want to call them that, do carry higher margins.

So it's a combination of all of that.

Rick, can you at least point us in the right direction of the margin profile of Racine?

Where should we be thinking about it?

Above this number that we reported?

Oh yes.

Absolutely.

So in terms of Rich, your comments about a return to a normal buying pattern in the market, when we did our channel checks this quarter, we got a lot of warm weather types of comments as well as even so much so some folks were considering it a pull forward to Q2.

A.

Do you see that happening?

B.

Why do you think this isn't just sort of a one-off blip and we're still volatile as ever but this time to the up side?

I do think that the warm weather probably helps a little bit compared to a year ago when there were more storms that slowed some installations.

But that's not what we are hearing from the field.

What we are hearing from the field is that there is just a lot -- people are a lot more comfortable with the fact that there is not going to be some kind of national budget crisis or the states aren't going to come in and grab all the water utility money and use it for pensions and other things.

We are getting more customers who are saying we were concerned, we wanted to hold off, now we are moving forward.

I can say that coming into the second quarter, we are continuing to see strength.

We've got a stronger backlog than we had a year ago.

We don't disclose backlog during the year, but it's obviously up pretty significantly, and we like what we see coming into the quarter.

Let me just add, last year we said a lot of these municipalities used a lot of their internal funds for snowplowing and that actually when we said it was a municipal spending problem, we didn't know it's because they didn't have money because they spent it for snowplowing or whether there was also the crisis, well this year they didn't spend any.

We didn't even spend much here in Wisconsin.

Right.

The very mild winter I'd say did help but I think it helped financially also a lot of the municipalities.

My final two questions.

First, good to see some material movement in GALAXY.

Can you talk about the number of RFPs, or opportunities you are trying to touch with GALAXY?

Is it getting pitched more or how should we think about GALAXY now?

We are seeing an increase in GALAXY and I would say that compared to a year or two years ago, we are seeing more RFPs coming in.

However, you also have to remember that to some extent, GALAXY serves a certain market niche where they say I want a fixed network, I'm certain of that, give me GALAXY, and give me what the features it has.

But we also offer ORION SE.

And ORION SE also works as a network.

So going forward, we are going to have some utilities that may opt for the ORION network over the GALAXY network and that may have some impact on it, but right now, yes, we are seeing increased interest in GALAXY.

They both serve an interesting market need.

And then lastly, with that 10-tier Tyco industrial flow, clearly it consolidates that channel a little bit more.

I know you guys are little more targeted but do you see any channel conflict as a result of that or is that impacting your business at all as you can tell vis-a-vis Racine?

No, Pentair, they do a lot of pumps and valves and things of that sort.

Not at all in our area and we haven't run into them at all.

Great.

Good luck, guys.

Okay, John.

Richard Eastman, Robert W.

Baird.

Yes.

Good morning.

Rick, could you just really quickly, these three new segments now, well three new product categories that we are going to talk to, (multiple speakers ) could you just give the comparison number?

I think I got your split on the first quarter here.

But, what was the muni water like first quarter of '11?

You went through that a little too quick for me.

Oh.

You want the same number here.

It's up.

Muni water is up 34.4%.

It's up $13.4 million.

Okay.

All right.

And obviously that is not a pro forma, right?

No.

It is not a pro forma.

So Racine Federated is not in those?

Racine Federated, no impact on muni water.

(multiple speakers)

At all.

That's our old water meter business.

Your other comps, non-utility and specialty products do not include any RFI.

That's not pro forma?

The industrial flow does include RFI.

But for the first quarter of '11?

For the first quarter of '11, okay, when I said it's up $8.1 million, nothing in there last year for Racine.

Okay.

That's what I'm saying.

Racine was $5.9 million of that.

(multiple speakers)

Okay.

By split.

Okay.

And then I know you're not going to want to do this going forward but we were trying to just get at the gross margin for RFI in the quarter.

There was some step-up and if I look at the 8-K you've filed, was RFI's gross margin contribution maybe 50%?

A number like that?

It was comparable to what you saw in the 8-K.

Yes.

Okay.

All right.

So we will be close there.

And then, was there -- the Duke gas shipments in the first quarter of last year, I think was a pretty heavy number like $7.5 million or so?

Is that in the ballpark?

That's a little high.

It was probably more in the $5 million, $5.5 million range.

It was.

Okay.

All right.

And then, just maybe last question, how does that gas module ORION gas market, how does that pipeline look?

Are there any meaningful projects that have just moved further down in the pipeline here?

There are two opportunities, significant opportunities in gas.

We've got about 100 customers out there but there are a lot of small ones.

But the significant opportunities, obviously there is an opportunity for us if Duke decides to continue to install and expand what they are doing.

That, we recognize, is a very significant potential.

Duke has not started it up yet but there is a lot of service territory that they have that they are interested in using our system on and they like the way our system is performing and we think we've got an opportunity there.

There is also another large utility that we have not named that we have a bid in and we are pursuing it.

So that could come along although I wouldn't necessarily bank on that for this year.

A Duke expansion is possible this year.

The other one is more of a 2013 opportunity.

Okay.

All right.

And then one last question.

When I look at maybe the core growth, you pull out Racine Federated and I look at the core growth in the business sequentially.

Typically from Q1 to Q2, you do see a bit of a double-digit increase.

Maybe be typical, it's a seasonal increase.

Would that be a reasonable assumption given you're commentary about the tone of business, about weather maybe, maybe not being favorable, but is that kind of where you'd feel comfortable saying if you just look at historic seasonal patterns at this point in time, it feels like we've returned to those?

Well Rick, you wouldn't be trying to trick me into giving you a forecast, would you?

It's well phrased.

You know we don't comment on Europe.

(laughter)

I think the weather thing is interesting because, obviously, the fourth quarter was quite a disappointment in volumes and weather has impacted the business historically.

And again you are suggesting that maybe the marketplace is back to traditional buying patterns so that's the way we should think of the business progressing through this year?

That's how I feel, Rick.

Traditionally, the second and third quarter are stronger quarters.

One of the reasons they are stronger quarters is because the northern utilities are impacted by the weather.

Although we have had some years where the southern utilities were impacted by weather too but generally it's the northern utilities that are impacted and they slow down their buying in the fourth and first quarter.

Yes, I am optimistic about what's going to happen in the second quarter.

Everything I'm looking at says we should have a pretty decent second quarter.

Yes.

Okay, very good, thank you.

Carter Shoop, KeyBanc Capital Markets.

Hi guys.

Congratulations on a good quarter.

Thanks, Carter.

So, when we think about the orders, I know you guys don't like to talk a lot about backlog and order trends, but you talked about January last quarter being up 20% year-over-year.

I was hoping you could give us a little bit of color on how thus far in April the order trends are going.

Are you seeing that strong continuation?

Yes, the problem, Carter, is that at our last call, we did the call in the middle of February so we pretty much had January under our belt and I was comfortable commenting.

And even though I don't normally comment on the first month of the quarter or how the quarter is coming in, I thought last quarter that we were seeing such a strong turnaround that I needed to signal something even though I don't do forecasts.

I'm a little uncomfortable getting back into that again where every quarter I'm going to be saying oh yes thus far this quarter we are seeing something, because now I'm not a month and a half into the quarter, I'm two weeks into the quarter.

It's just not enough to really even determine a trend.

All I can say is my backlog is up and I feel pretty good about what I see.

Fair point.

When you think about commercial, I think you said it's up 50%, GALAXY up 80% year-over-year.

Were there any large orders in that or is that more of a broad-based pickup?

I'd say more of a broad-based pick-up against a very weak first quarter last year, which I want to constantly remind you of.

Got it.

On the large gas contract, I just want to confirm that you did not see any shipments or orders in the first quarter of 2012?

Of substance, no.

Nothing of substance.

Okay.

And then the debt to cap ratio at 28%, the highest level it's been in a while, if not ever.

Oh no, it's been higher.

We've had it north of 45%.

Okay.

I guess my model doesn't go back that far.

You are a young guy.

(laughter) The 28%.

Do you feel comfortable taking that a little bit higher if the right opportunity emerges or --?

Absolutely.

Our Board of Directors has stated that they are comfortable for a company like ours, they are very comfortable in the 30% to 40% range.

When we start getting over 40%, they are going to start -- and we've gone over 40% in the past, but then they start saying well, what is the plan to get it back down again.

So we do feel there is still some room to move up for the right opportunities.

And Carter, I think it's important that you understand we think we have spent over the past 5 to 10 years, we have used cash going from leased facilities to owned facilities.

We've got a pension plan that's virtually fully funded and our anticipation is that we will continue to generate cash.

Therefore, even if we found the right opportunity and took the debt ratio up, as Rich said, north of 40%, I think we can demonstrate cash flow would bring it down fairly quickly.

With all that said, can you talk about how the pipeline looks right now for potential deals?

Yes.

We are not a company that is out there churning an acquisition every six months or even every year.

We are very selective in what we do.

We don't necessarily like to get into bidding situations.

Racine Federated was not a bidding situation.

It was a relationship that we had built over the years with a very good Wisconsin company.

They respected us, we respected them, and we were able to come together on what I thought was a very good deal for both sides.

Similar situation when we bought Remag in Switzerland.

So we have other relationships with companies where the owners have said, you know, when the time comes to sell, I really would like to talk to Badger.

I think you guys will treat my employees right, you'll treat my community right, you'll treat my customers right, and it's usually a seller who's interested in more than just the dollar.

They have got some other interests.

As an example, the family that owned Racine, the Erskine family, was very interested in their other stakeholders in making sure they were treated fairly.

We are not out there participating in a in a lot of RFPs and in our industry, in the metering industry, there aren't a lot of RFPs to participate in.

We found the better strategy is to build these relationships over the long term.

We have three or four companies that we have relationships with and the day may come when there is a good play there.

But we are not pushing it and if they're not ready, that's fine with us, but when the time is right we will try to make an acquisition.

We are always open, we are always looking, but to be able to say I've got two or three in the pipeline and I am going to close one before the end of the year, there's just no way I can say that.

Got it.

Last question.

Cleveland project.

Can you give us an update there?

We just looked at it.

I don't think we have substantial shipments in the first quarter.

We don't expect it to ramp up until sometime later this year.

May not see a lot in the second quarter either.

I thought we saw some orders come in for Q2.

Yes.

They are signaling to me that we did.

We did have some orders that came in for Q2 so we should start seeing some shipping in the second quarter.

Okay.

And maybe getting to that full volume level towards the end of the year?

It depends on how quickly Cleveland ramps up, but that yes, that's a potential.

Great.

Thanks a lot guys.

Ryan Connors with Janney Capital Markets.

Good morning Rick and Rich.

Good morning, Ryan.

How are you?

Well, thanks.

I wanted to explore this notion of normalization in the end market a little bit and wondered if you could talk about which types of customers.

Is it the larger cities that you are seeing come back in?

Is it the smaller one?

Is it across the board?

I'd be interested in your thoughts of what you are seeing in that regard.

And then also on the types of projects.

Is it upgrades and AMR/AMI rollouts that have come back or is it more of your book ship type of repair or replacement business that's driven the kind of normalization?

I would say first of all, on the first part of your question, I'd say it is more broad-based.

It's the regular sized cities, it's small ones, the occasional big ones.

There's no -- it's the standard pattern from what we've seen in the past.

In terms of AMR and AMI, a lot of it is replacement but it's replacement where they are also upgrading to technology at the same time.

If you notice, I commented that our manual-read meter sales were down a little bit.

That does not disturb us because all that signals to us is that there's more of them that are adopting technology when they do order the replacements.

I would say that's right.

Okay.

Good.

On the competitive dynamics in pricing and so forth.

Obviously, 2011 was a pretty tumultuous year in the industry so have you seen any of the players change their behavior in the marketplace, whether it be on pricing, whether it's how often they are showing up and where they are showing up.

Are there any changes that you would perceive in the competitive environment?

No.

We have not seen anything and I don't think market share shifted dramatically in 2011 either from what I can tell.

Obviously, some of our competitors, one of our competitors went public and I think another one is on the verge of doing something and whenever that happens it causes a little disruption in their operations.

But we really didn't see any big change in the competitive environment in 2011.

Okay.

Same thing goes with pricing?

You haven't seen any notable downward pressure or anything like that?

No, and even with copper having come down a little bit, I think a lot of us didn't have the copper fully priced into our products so when it was over $4 we were hurting a little and now that it's come down under $4 and knock wood, seems to be hanging there for a while, we're not seeing pressure from the customers because we didn't raise prices equivalent to the increase to begin with.

Got it.

That's helpful.

Thanks for your time.

Zach Larkin, Stephens.

Good afternoon, guys.

This is Chris Godby in for Zach Larkin.

Thanks for taking my call.

First and foremost, obviously, we've touched on this a little bit and gross margins were very strong in the quarter and I guess a bit of that is attributed to Racine.

Do you view these levels sustainable?

How should we think about that going forward?

I guess I think they could be sustainable.

Depending upon the mix staying where it is.

If we continue to have the strong mix of industrial and technology over the local read.

But where our margins can swing around, obviously they are impacted by volume, so assuming sales stay strong like we expect, but where they can jump around a little bit is, all of a sudden we would get a very large order for manual-read meters which obviously carry a lower margin.

Sometimes those come out of Mexico and we will take them if we've got the space in the factory and it makes sense, and it's just incremental business.

That can actually cause somewhat downward pressure on the margin and that is a more likely scenario than any kind of significant price decrease or something like that.

Okay.

That makes sense.

Another question I have for you.

Given the acquisition, how should we think about SMEGA going forward?

Is there a certain target you are looking to hit or is there a certain percentage sales number we should have in mind?

I think obviously SMEGA is going to go up.

I talked a little bit about it.

We have amortization of intangibles, we've identified $30 million of intangibles.

Assuming a 15-year life, there's an additional $2 million charge a year.

I would say that we haven't gotten all of the synergies out, and that we will be hopefully getting some of those later in the year but they'll also be the one-time charge of getting those out as we make those decisions.

The real question is, is how much and I'd say right now we haven't really determined that.

But there probably is some available.

Okay.

Obviously since SMEGA is really overhead, we'd like to keep it as low as possible but on the other hand since my salary is in there, I don't want to keep it too low.

(laughter)

Okay.

That's great guys.

Thank you very much.

Brian Rafn, Morgan Dempsey.

Good morning, guys.

Maybe a comment, Rich, and we are going to beat this horse to death but I'll ask it again, when you look at the reflation in demand and you look at normalized traditional buying patterns, is there any historical evidence that you have maybe in the first couple of quarters as you come out of the reflation some pent-up or layered-in demand or is it just restart and they're really isn't any pent-up demand?

I think there is some pent-up demand.

I do think some of the utilities last year maybe anecdotally I know some of them extended their change-up programs.

I talked to some of the larger utilities and there are certain ones that say look, we buy a policy change out all our meters every 12 years, other ones say every 15 years, the other ones say every 18 years.

When they get into a period where municipal budgets are tight and they are a little worried about things, they can stretch that out.

They can not change out those meters for a year or if there's blizzards or there's snowplowing or whatever, they can actually stretch that out maybe for a year.

There's very few utilities that normally change out their meters at 15 years that will go much beyond 16.

They might go to 16, but they won't go much beyond.

It's possible that some of the utilities last year said we are just going to hold off on changing out meters for a while and we will start up again next year.

So I do think you are right.

There could be some pent-up demand that we are benefiting from this year.

I don't think it's huge.

I don't think it's what's driving our strength now.

I really think our strength is more of a return to normal.

Okay.

All right.

And in some of these discussions, have you been able anecdotally sense, you talked a little bit about we are assuming there is not going to be a state budget crisis or funding.

Are you getting any sense that there -- or are you hearing anything from municipalities that you are starting to see a little resuscitation in tax revenue flow?

Well, yes.

Most of the utilities don't depend on tax revenue flow.

They depend only on their own revenue.

But even those utilities get a little nervous when there are budget crunches and layoffs in the city and all that stuff.

What our utilities do depend on is the state safe drinking water revolving funds.

Those are funds that every state gets from the federal government and then they use that to make interest-free loans to the utilities or grants to the utilities to help them with metering programs and other upgrades to their systems.

When those funds are in jeopardy, if the federal government starts talking about well, we don't know what we're going to be able to fund, that's when our utilities get a little nervous and I think that's what happened last year.

They were a little worried about whether or not those funds would be there at the state level and whether or not they'd have access to them.

So that's what caused a little concern.

That whole talk settled down and I think that's why we are seeing this return to normal.

Okay.

All right.

Good.

Parallel to that, have you also seen a reflation of both large commercial and utility meters, some of the larger size meters?

Yes.

We've seen recovery on both the residential and on the commercial side.

Okay.

With Racine Federated, your association with them, do you guys get any leverage from maybe helping them as the parent with CapEx or sharing technology, utilizing manufacturing capacity at Badger Meter or are they strictly a stand-alone?

No.

In fact, I would say we are integrating Racine faster than we expected.

Both on the personnel side where we have actually moved some of their people up to our corporate level because they've got some real talent down there.

And where we have been able to provide support in areas that they have not had before.

So we are getting some synergy there.

But there are huge synergies on the technology in that we've got this large flow lab just 20 miles north of them in Milwaukee that they can now use where as before they would -- I'm sorry how many miles, 40 miles, I'm sorry.

I just shrunk the city of Milwaukee.

We're 40 miles north, which they can now use, they now have access to and our engineers are starting to talk to them.

Frankly, Racine was a family held business.

Family held businesses always have an issue of where they are going to get cash for CapEx.

Because there are family members who say no, I would like more liquidity in my ownership as opposed to reinvesting all of the money.

As with most family held companies, CapEx is a problem.

Now that they are part of Badger, we are able to provide them some of the capital they might not have invested in the past for good growth opportunities and we are certainly doing that.

Okay.

When you look at your deal pipeline, Rich, you talked about having three or four relationships that you guys have kind of built on organically.

Do you see the propensity from your standpoint in successful acquisitions that they are better with the ones you husband and grow organically or versus something where a banker's shopping you a deal.

Absolutely.

The ones that we do privately we get a better return on them and it's a better relationship all around.

Generally, it is a company that has sought us out because there's some cultural synergies there.

They like us.

They like how operate.

We like how they operate.

When you're buying something that a banker is selling, it's a little more of a gamble.

Okay.

Rick, the short-term debt, is that re-classed?

You mentioned earlier in your comments about banker relationship or tying up the financing.

Is that going to shift more toward long-term as we get out the next couple quarters?

Yes, but in my opinion, long-term is two to three years right now.

Just based upon our cash estimates, it's very possible that two or three years from now we're out of debt again.

Okay.

All right.

Do you got any CapEx budgets for Badger for the year?

We generally don't talk about the budgets for CapEx.

But we have said, and we can say it again, is that when you look at rolling three- to five-year periods over the next several years, Cap, one year it may be $1 million higher than depreciation in the next year.

If you add depreciation and amortization, CapEx should not exceed those totals on rolling three- to five-year periods.

So a lot of parity then basically?

Yes.

Okay.

And then maybe just finally, you talk about the old manual reads.

Is that -- you mentioned like a foreign order from Mexico as we go up the next five years, how much diminishment might we see that or might there be a day where that might just be discontinued product?

It's the same product.

It's a meter and it's just a matter of attaching a radio to it or not so it's the category you put it in but the underlying manufacturing is about the same.

But Brian, we are at about 55% to 60% of the meters we ship have radios on them and 40% to 45% are still manual read readers.

The question you're really asking is, okay, how far can that grow?

Ten years ago, about 30% of the meters we sold had radios and the rest were manual reads.

The market is slowly converting to technology.

Can we get to 70% or 80%?

Yes.

I think we definitely can.

Can we get to 100%?

I don't know.

There may always be some city out there that prefers to have a meter reader walking door-to-door.

But clearly the utilities recognize the benefit of technology and they are moving towards it.

And I also think if you look beyond that 5- to 10-year horizon, there may be a day when all the meters that we make have radios.

There was a day when television sets you paid extra for the remote control.

Now you buy a $50 one at WalMart, you expected it to have a remote control.

That took 40 or 50 years to happen.

Eventually, it may happen with us.

It may just be cheaper to manufacture them all with a radio built in, but that's really out there in the long-term horizon.

Okay.

Finally, some of the little niche industrial categories separate from your core municipal business, how do you see some of those small little niche businesses as the economy reflates?

Well I think -- we've always said this about our industrial product lines, the ebb and flow of the economy, and I think I said nearly all of them have shown increase Q1 over Q1 last year.

They are growing and coming back with the economy.

Brian, I will give you one more question because we got people in queue here.

That's fine.

I'll see you guys in a couple weeks at the meeting.

Richard Eastman, Robert W.

Baird.

Sorry, back.

Back in the queue.

Two things.

One is, are you seeing what you might term a significant uptake on this AMA product, ORION SE with AMA?

I'm curious because ORION sales up 36%.

I'm curious if it's a very meaningful uptake of the AMA product, the software content product?

Is it simply from a margin profile standpoint, is that helping you dramatically or is this a rebound in the more traditional ORION product line?

I would say the AMA is not helping us dramatically yet.

We have a lot of utilities that are ordering limited quantities, installing them and then, you know our utilities.

They'll run -- some will run for six months, some will run for a year before they will make any major commitment.

We are still in that phase where a lot of the utilities are buying and running them that way.

We are not looking at millions of dollars in sales of that.

On the other hand, we sold almost $1 million worth of ORION SE in this past quarter, so it's gaining some traction.

Right.

I will remind you that, I guess I'm mixing this up, it's the Easter week that we introduced the (multiple speakers.)

I think the ORION product line in the first quarter of last year was down about 30%, right?

Right.

So pretty easy comp.

Okay.

And then just on RFI.

Two things, one is, if I do the quick math on the contribution that it had for two quarters, the annualized revenue run rates around $44 million, would you -- is there any seasonality in that?

Do we expect a little better revenue out of that?

Yes.

I would say that if you are looking at the fourth quarter and the first quarter and you are saying do we expect an improvement, I would expect an improvement as we go in the second and third quarter.

Okay.

Synergies on that, I know this isn't a cost reduction exercise at RFI, I mean you've talked to that.

But I am curious, there's about four, if you look at their sales line and their sales contribution, there's 4% to 5% amortization that you now run through there on the cost side.

If I look at the 8-K that you filed, their EBIT margins were in the low teens and I'm trying to figure out what do we expect from their EBIT contribution as the year unfolds or even into next year?

Is there 300 to 500 basis points of leverage there?

I don't want to comment on how much leverage is there.

I think there is leverage and we are going to see it but the other thing is as we move through this year and we start taking some synergies, we're also going to start taking some costs because if we decide there are some redundant positions we want to eliminate, there's going to be some severance with that.

Frankly, we tend to be fairly generous with our severance here at Badger.

It's part of our culture.

So we are going to be incurring some costs.

I don't think you're going to see some significant pickup in those EBIT margin points yet this year.

I think it could be more significant in 2013.

Okay.

Where we really hope to get the synergies is to be able to take their products into our customers and our products into theirs.

Right.

It's the sales and the marketing channels where I think we've got a bigger opportunity.

Sales synergies versus costs.

Okay.

Great.

Thanks again.

Glenn Wortman, Sidoti.

Good morning, guys.

Can you just comment now on your normalized gross margin on a full-year basis with Racine and then maybe just a traditional mix between the automated and manual meters over a full year?

Historically, we have always said we operate in that 35% to 38% range.

And obviously, if we continue to sell more and more technology, those do carry higher margins and we hope to draw that margin up.

We said Racine carries higher margins.

You add that to the mix, that's a positive.

But again, I go back to something Rich said, this quarter was weighted heavily I mean we had big sales in ORION which carry higher margins, for instance, than Itron and obviously carry higher margins than local read meters.

All of those factors play in there as well as metal cost and capacity utilization.

That neighborhood of 35% and 40% is our neighborhood but a lot depends on all of these factors and how it influences us.

Okay.

I'm just trying to get a better sense of the SG&A run rate on a go-forward basis for the full quarter of Racine.

What would 1Q SG&A have been if you had Racine for the full quarter?

I'm not sure any of us can answer.

Glenn, I'm sorry I don't think any of us can just -- are willing to take a shot at that because we don't have the numbers in front of us right now.

But we should see a sequential uptake in SG&A given that you have the full quarter.

You are going to add one more month for Racine.

(multiple speakers.)

Finally, you talk about a return to more normalized buying patterns.

Historically, what would you say was your typical growth rate for the muni business in the more normalized environment?

I would say that our long-term expected growth rate, what we believe should be doable, is that the water side of our business with the technology should be growing at high single digits, low double digits each year.

And that our industrial side is going to grow a little closer with the economy.

So maybe as the economy goes, it's going to go, it could be mid single digits, in that range.

Okay.

Actually, just two more quick things here.

Depreciation and amortization for the year and then full-year tax rate, if you have it.

Whatever I estimate year-to-date for taxes is generally where we think it's going to wind up for the year.

I'll acknowledge it changes in the year but so do our estimates.

Depreciation, you can probably look at that, you have got to factor a little bit in there for the missing month for Racine, but that's probably not that significant so you can probably use what you see there and come up with a reasonable estimate.

Okay.

So then on the tax rate you are saying you are at 37% in the first quarter?

That's my estimate for the year.

Okay.

Thanks for taking my questions.

Eric Stine with Northland Securities.

Thanks for taking the questions.

You touched on many of my questions but on ORION could you just talk about some of the feedback you are getting from the field?

It sounds like it hasn't really impacted results much yet and I'm just curious when you think that starts to have a noticeable impact?

I think you must be referring to Orion SE?

Yes.

You are right.

ORION, obviously, is our flagship product.

It's been doing well.

Yes.

ORION SE, as I said, I think we've got a lot of customers that are still buying it and putting it out there for test.

I think it's going to take a while yet.

We might start seeing some significant sales of it later this year or early next year.

Got it.

I just wanted to clarify something, so the way you are breaking up the business segments now, so the municipal segment, I mean that --

They are not segments.

We are going to stop you.

It's not segments.

They are product lines, categories.

(multiple speakers)

We should think about the municipal, that is basically the old water bucket.

It's water meters and the radios, Eric.

So your old specialty bucket.

You are breaking that into separate --?

What is happening is we are taking the old specialty bucket and we are splitting it in two.

One of it is the industrial flow which we've now added Racine to and the other one is specialty and what's left there is the gas radios, the valves, and Racine's concrete products.

And I'll also mention, Eric, is that we had certain categories in water like impeller meters used the golf courses that we're now also including in industrial.

I guess the point Rick's making is that our water business is not just municipal water.

There's a good piece of that industrial flow that measures water.

It doesn't just measure municipal water.

It measures water on golf courses, water in fire trucks, a lot of other things like that.

Okay.

That is helpful.

When people say well how much of Badger Meter's business is water, it isn't just a municipal number.

There's also another piece.

It's about 70% to 75%.

(multiple speakers) It's over 80%, I'm sorry.

It's over 80%.

Okay.

That's helpful.

Thanks.

(Operator Instructions) John Quealy with Canaccord.

Hi guys.

If we can go back to that tough Q2 comp, Rich and Rick, with another $10 million of Racine with what looks to be another $0.03 of accretion, that doesn't seem to be that insurmountable.

I know last year Q2 was strong but we should be in the ballpark anyway.

Rich and Rick, tell me exactly what were talking about when we're talking about a tough comp?

Well a tough comp, last year's second quarter was record sales and I think we just missed record earnings by less than $100,000 or something along those lines.

And last year's second quarter was greatly influenced by sales of gas radios if I recall, which as we talked, we don't see anything replacing that this year.

So that's part of the tough comp too.

It's probably not going to be hard to beat last year necessarily with Racine in there, but if you look at organic what would have happened.

That's a little bit tougher for us.

And then, I'm sorry Rick you may have said this, the amortization for Racine, what did you estimate?

$2 million a year but you still have to nail it down, is that right?

Our preliminary estimate of the value of what we acquired, and this is still going through all of the valuation and auditors and the like, but roughly about $30 million of intangibles were identified.

If you just assume, which we have, for the first quarter about a 15-year life, that's about $2 million a year amortization.

And you already included two-thirds of a quarter given --

Correct.

Two-thirds of a quarter.

We may have to tweak that in the future once we nailed down the exact amount of these things.

I don't think it's going to vary significantly from our original estimates but we always use those words just to protect ourselves going forward in case there's some minor adjustments going forward.

Lastly, buyback.

Is that going to stay ongoing or what you think about it?

I would say, and I can say this since this is a public call.

Though yesterday, we were already north of $22 million out of the $30 million and we probably purchased already 676,000 shares so we don't have much.

We've got a little more than $7.5 million to go under this program.

The stock is up this morning so the buyback may be slowing down for a while.

We will have to see what happens there.

I think we want to take some time and understand Racine Federated fully before we decide if we are going to do anything further in the future.

All right.

Thanks again.

Brian Rafn with Morgan Dempsey.

Just a couple more.

A question for you, Rich.

From the standpoint of an acquisition 50,000 for strategic, is there any possibility of Badger Meter looking at vertically integrating and getting into the manufacture of the radio boards or is Diehl such a big player out of Germany that that's just not something you could get into?

No.

It's not something that we are looking to get into and it's not because of Diehl, in fact we make a lot of our radio boards with a lot of other companies.

The fact is though the radio board business is a very specialized business.

It's not our core competence making boards, and frankly there is a lot of capacity in the board-making industry.

We're not finding it that hard to find people who want to make our boards and will give us very competitive quotes for our boards.

I don't think it's a business we have to get into to protect ourselves because there might be a capacity crunch and I don't think it's a business that we want to get into because we're particularly good at it.

I think we're better off outsourcing our radio boards.

Okay, good enough.

You guys have always talked about the transition in headcount at Brown Deer, the natural attrition from the factory floor.

Are you doing any hiring in the engineering, accountants in the corporate area?

Yes.

The short answer is yes.

The area where we have been consistently adding people is in the non-shopfloor area.

We have been adding people in the sales and marketing area, in the administrative areas, as we've been growing and we expect to continue to do that.

And continue to do that in the Milwaukee headquarters.

Okay.

Thanks guys.

With no further questions, this concludes today's question-and-answer session.

I would now like to turn the call back over to Mr.

Rick Meeusen, Chairman, President and CEO for closing remarks.

Thank you.

Rick says I should feel flattered that I was called Rick instead of Rich, but that's okay.

I want to say that we were obviously very pleased with the quarter.

We did view 2011 as an aberration.

We run into those every once in a while.

Where it's either the economy or other things that are affecting our business.

The municipals are very sensitive to that kind of thing and we felt that's why we had a weaker 2011.

We always believed that we would see the strength coming back in 2012.

I think the first quarter has proved that and we are very optimistic that we have now seen a return to normal buying patterns.

So with that I want to thank everybody for joining us and we will talk to you again on our next call.

Thank you.

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

This concludes this presentation and you may now disconnect.

Have a good day.