Badger Meter, Inc. (BMI)

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Badger Meter Inc. (BMI)

Q3 2009 Earnings Call

October 20, 2009; 11:00 am ET


Rich Meeusen - Chief Executive Officer

Rick Johnson - Chief Financial Officer


Steve Sanders - Stevens Inc.

John Quealy - Canaccord Adams

Carter Shoop - Deutsche Bank

Ryan Connors - Boenning & Scattergood

Eric Stine - Northland Securities

Rob Mason - Robert W. Baird

David Woodburn - ThinkEquity

Brian Rafn - Morgan Dempsey Capital

Gary Lenhoff - Ironwork Capital

Glenn Wortmann - Sidoti & Company

Scott Graham - Ladenburg Thalmann & Co

Brian Bechmen - Lyon Street Capital

Sig Bowman - Divisor Capital


Good day ladies and gentlemen, and welcome to the third quarter 2009 Badger Meter earnings conference call. My name is Mariso and I’ll be your operator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session at the end of the conference. (Operator Instructions).

I would now like to turn the presentation over to Mr. Rick Johnson, CFO. Please proceed.

Rick Johnson

Thank you very much Mariso, and good morning everyone. Welcome to Badger Meter’s third 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 guidance does not serve the long-term interests of our shareholders.

Now, onto the results. Yesterday afternoon after the market close, we released our third quarter 2009 results. As you look at those results, you see that we’ve reintroduced the caption, discontinued operations, in the income statement.

The third quarter results include recognition of previously unrecognized tax benefits for certain deductions that were taken on prior tax returns related to the shutdown of the company’s front subsidiaries back in 2006. At the time the losses were incurred, there was uncertainty over whether the company would be able to sustain the deductions on the tax returns. The IRS has recently completed their audit and allowed those deductions.

As a result, the tax benefits associated with these, totaling nearly $7.4 million, were recognized as earnings from discontinued operations in the third quarter of this year. On a diluted basis, earnings per share from discontinued operations for the three months ended September 30 were $0.49.

Now, in addition, interest expense has been accruing on the potential liability, and with the completion of the audit, these amounts have also been reversed. Since the interest has been accruing as part of continuing operations since 2007, the reversal of interest expense is also shown as part of continuing operations. For the three months ended September 30, 2009, interest expense has a credit balance because it includes a reversal of nearly $1.2 million worth of interest expense.

On a net after tax basis, this equals approximately $0.05 per share. For the nine months ended September 30, 2009 interest expense as credit because it includes a net reversal of approximately $900,000. On a net after tax basis, this equals approximately $0.04 per share.

With that explanation behind us, let’s focus on the reminder of continuing operations. In the third quarter of 2009, we saw an 11.6% decline in sales over the third quarter of 2008 and yet we had record third quarter earnings and earnings per share.

The results for the third quarter was similar to those of the second quarter. The revenue decline was caused by lower sales volumes of our products. Total sales were $60.8 million, a decline of $8 million from $68.8 million last year. Utility sales declined $5.1 million or 9% from $56.9 million to $51.8 million this year.

Residential sales declined 7.7%, while commercial related sales declined 14.4%. Orion and Itron related sales declined 12.7% and 9.5% respectively compared to the third quarter of 2008. The Orion related products continued to outsell the Itron related products by a ratio of nearly 2:1 in the third quarter of 2009.

While current economic conditions may be contributing to this sales decline it is our belief that it’s more likely due to the delays associated with Federal Stimulus programs. We continue to hear stories of companies who are prepared to make a purchase from us, but not wanting to make a decision until they know for sure what the rules are for obtaining those funds.

In the quarter Chicago sales were $3.5 million compared to $4.4 million last year, while the sales are down from the same period last year, the project is still progressing. It is our understanding that decisions regarding the future phases of this project will more likely than not be deferred until 2010. Industrial sales for the quarter were $9 million, a decline of $2.9 million or 24% from sales of $11.9 million in the third quarter of 2008.

The product lines that make up the industrial area continue to struggle due to economic conditions. Gross margins increased in the third quarter, both on an actual dollar basis as well as the percentage basis. Margins for the third quarter were 39% compared to 34% in last year’s third quarter.

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