Badger Meter Inc. Q4 2008 Earnings Call Transcript

Feb. 5.09 | About: Badger Meter, (BMI)

Badger Meter Inc. (NYSE:BMI)

Q4 2008 Earnings Call

February 05, 2009, 11:00 am ET

Executives

Rich Meeusen - Chairman and CEO

Rick Johnson - SV, Finance and CFO

Analysts

[Graham - Stephens Inc.]

[Carter Shut - Deutsche Bank]

Ryan Connors - Boenning & Scattergood

Rob Mason - Robert W. Baird

John Quealy - Canaccord Adams

Richard Eastman - Robert Baird

Richard Birdy - Servant & Company

Kelly Bradley - Gold Coast Securities

Eric Stine - Northland Securities

Operator

Good day ladies and gentlemen, and welcome to the 2008 Fourth Quarter and Year-End Badger Meter Earnings Conference Call. My name is Michelle and I will be your coordinator for today. (Operator Instructions).

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, sir.

Rick Johnson

Thank you very much, and good morning, everyone. Welcome to this conference call, where we will discuss the fourth quarter results for Badger Meter. As usual, I will begin by making my 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 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 will continue our practice of not providing specific guidance on future earnings. We believe guidance have not served the long-term interest of our shareholders.

Now unto the fourth quarter results, yesterday afternoon after the market closed we released our fourth quarter 2008 results. Now those of you who listen regularly, recall that we always mentioned that quarterly results can vary, in fact the word we used to describe this is lumpy. The fourth quarter demonstrates that lumpiness in a positive way. We are very pleased to report that our sales earnings and earnings per share from continuing operations were all fourth quarter records.

Sales increased to $67.6 million an 18.3% increase over sales of $57.2 million in 2007, this increase was the net impact of a nearly 28% increase in utility sales offset by a decline of 16% in industrial sales due to the effect of the current economy.

When the break fails down, we find that utility sales were 84.8% of the quarter sales compared to 78.6% in the fourth quarter of 2007. These sales were nearly $57.4 million or a 27.6% increase over the $45 million in last years fourth quarter. This increase was driven by a number of factors. First and foremost we continue to see increases in our residential AMI products.

Both the Orion and Itron products showed increases. Itron related sales increased 29% over the fourth quarter of 2007, while Orion related sales increased 30.4%. Orion continued to outsell Itron by ratio more than 2.5 to 1. Commercial sales increased over 30% driven by higher volumes. Normally, our sales are not of these levels in the fourth quarter.

In addition, to what I have just noted were fortunate enough to benefit from increased sales in Mexico as governmental agencies there face the December 31 deadline for certain allocation of fund. Sales to Mexico alone were up over $1 million from the same period last year.

Industrial products represented 15.2% of sales for the quarter down from 21.4% last year. These sales were nearly $10.3 million down 16% from last year's level of $12.2 million. In this quarter, we saw declines in all of the products due to lower volumes as a result of the economy.

Gross margins for the quarter were 35.7%, up slightly from the 34.9% last year. The cost of sales number includes a 994,000 one-time pre-tax gain from the sale of our facility in Rio Rico, Arizona. You will recall that we had pulled that facility in 2006 and opened a new facility in Nogales, Mexico. That asset has been held for resale and the sale was completed in the fourth quarter. This had a favorable impact on margins.

Strong sales obviously helped our margin, but the mix of products had a dampening effect on the margin percentage, because industrial sales generally of higher margins there were lower sales effected margins. We also had several more turnkey or installation projects that were included in the mix this quarter that did not exist in the fourth quarter of 2007.

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

Sales for Chicago for all of calendar 2008 were nearly $14.5 million. The project is on-track and continuing.

Our selling, engineering and administrative costs for the fourth quarter as a percentage of sales were 20.8% compared to 22.3% of last year. The percentage decrease is more a reflection of the increased sales as these expenses actually increased 10% due to higher bad debt expense, higher incentives and increased money spent on research and development.

Our effective tax rate for the quarter is 36.2% compared to 39.3% of last year. This rate is just slightly lower than what we had been estimating and is due to the higher manufacturing volume in the fourth quarter which will allow us to take a higher manufacturing tax credit than we had originally estimated.

Overall the effective tax rate for the year is 36.6%. so when we look at this in total for the quarter we find that earnings from continuing operations were nearly $6.2 million, a $2 million increase from the nearly $4.2 million in the fourth quarter of 2007.

On a diluted basis, earnings per share from continuing operations was $0.42 compared to $0.28 in the fourth quarter of 2007. Obviously we're very pleased with these results. Since it also the end of the year I will also just make a few comments about the year as a whole. As you know the first and second quarters of 2008 were record quarters for net earnings and earnings per share and we just missed setting another record in the third quarter. To finish the year on this note is very gratifying for us particularly in this troubling economic times.

For the year as a whole, sales, earnings and earnings per share were all records fro Badger Meter. Sales were $279.6%, an increase of 19.1% over the 2007 $234.8 million. The company’s earnings from continuing operations were $25.1 million in 2008, a $6.7 million increase over the last year’s amount of $18.4 million.

On a diluted basis, earnings per share from continuing operations, was $1.69 compared to $1.26 last year. Our balance sheet remains solid with the biggest change being the addition of the GALAXY technology in the second quarter. This is now reflected an intangible asset. I have received some questions about a defined a benefit pension plan, like everyone else our pension efforts have been effected by the economy and we were required to increase the pension liability on our books with an outstanding amount net of tax charge against an account that gives net at an equity.

We will in all likelihood have to make a contribution to our pension plan in 2009 that will exceed the expense for this year. If we had to estimate it today the contribution would be $5 million, although that final amount will not be determined until later this year. We did not use this an issue given our loan debt to capitalization ratio of 18% and our available lines of credit.

In addition, we anticipate that we will continue to generate cash from operations. Capital expenditures in 2008 were $12.6 million which includes the completion of our new plans in Mexico, we would anticipate spending substantially less in 2009.

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

Rich Meeusen

Thanks Rick. I would also like to thank all of you for joining us today. As Rick said we are very pleased with the fourth quarter and the full-year 2008 results that we have just issued. We recognized that these results go against the current trends of negative economic news and poor business results. It's certainly refreshing to be in a good market position with strong products that even in this past difficult year have enabled us to generate record sales and profits.

But as I reminded you in the past our business tends to be difficult to predict on a quarter to quarter basis. Whereas the fourth quarter has historically been our weakest quarter of the year, the fourth quarter of 2008 was unusually strong. This is why we have been and we will continue to be focused on long-term results as opposed to being focused on quarterly expectations.

In 2008 our industrial products which represented 17% of our business were negatively effected by the economy. However we continue to benefit from the three basic drivers in our water utility products and services. Which are one, the regular replacement of water meters and the related reading systems. Two, the increasing need for water conservation in North America. And three the continuing trend toward advanced metering technologies.

Many of customers fund their metering replacement programs through water rates. Even as the economy weakens most households continue to pay their water bills generating a fairly reliable stream of revenue for our customers and our company. This intensive support and replacement portion of our business which is estimated at about two-thirds of our water business.

The demand for our metering products is also driven by water shortages and the focus of communities on environmental sustainability. There are an estimated 13 million residence in the United States have purchased their water from a public water system at a flat rate. Without the water saving incentives provided by metering. This continues to represent a major opportunity for Badger Meter.

In additional the demand for our metering technologies continues to be driven by our customers needs for better data and greater operating efficiency. With less than 30% of the water meters in the U.S. converted to advanced metering technologies. We still have a significant market potential that has driven and should continue to drive sales and profits for our company.

These three secular trends have thus far carried us through a very difficult economic environment. Although we do not offer earnings guidance we have in the past identified the various factors that could positively or negatively affect our future performance. We then give it our shareholders in the market to estimate for themselves the significance and severity of both factors.

Let me remind you that one year ago in February of 2008, the US economy was seeing some strong recessionary indications led by a very weak imposing market. At that time, I stated in our press release and "while a significant slowdown in US economy could have affect our business in 2008, we are not seeing a impact from the current economic uncertainties. We remain confident of our strategies and long-term growth potential".

We are now in a position where the secular trends in our water business have carried us through 2008, with record sales and earnings. However, I have to continue to warn you that we're not totally immune to the impacts of the economy. We have seen some project delays by a few small customers, notably municipalities that are heavily dependent on the automotive industry. These have not to date significant and we continue to see solid order and interim backlog. In effect what I would say is that those projects that we've seen delayed probably totaled a few hundred thousand dollars. Nothing really significant.

In addition to these factors we also have the favorable impacts of decreasing copper prices and the stronger dollar, both of which will continue to reduce our product cost in the near term. We have not yet seen any significant customer pushbacks or competitive actions that would cause us to materially decrease our pricing.

So, to sum it up, we recognize that 2009 will be a challenging year, not only because of the economy but also the tough comparables we set with our 2008 results. We'll continue to watch where the potential negative impacts of the economy in our business. We expect to continue to see weakness in our industrial business. However, the secular trends for water in our technologies combined with favorable commodity and exchange pricing could continue to drive our business forward even in the face of this difficult economy.

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

And at this point we will take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Steve Sanders, Stephens Inc., please proceed.

[Graham - Stephens Inc.]

This is actually Graham for Steve, congratulations on the quarter.

Rich Meeusen

Thank you.

[Graham - Stephens Inc.]

First question, I think at the end of your comment Rich, you mentioned that there was few small project delays, then outside of that then you are not really seeing any significantly if any in the sales cycle?

Rich Meeusen

None at all.

[Graham - Stephens Inc.]

Okay, and Chicago $4.2 million in the quarter, should we look at this is kind of a run rate quarter going forward, maybe provide an update on how you see the project timeline now versus when the dealer recently announce this.

Rich Meeusen

Well, Chicago being a $39 million project done over three years, we should see a run rate of a little over $3 million a quarter, somewhere between three and four, we’ll have some quarters when we get more done and some quarter when we get less done but we should always be in the $3.5 million to $4 million as move forward on this.

[Graham - Stephens Inc.]

Is that weather affected to on the amount that you can get out there?

Rich Meeusen

We saw last year with the really heavy snow in the first quarter in Chicago we did see some delays, although this time in the fourth quarter, we didn’t see that much. So, I think it depends upon what areas of city they are working in and how the weather works.

Rick Johnson

But I think in terms of comparable for 2009 over 2008 probably be about the same run rate on an annual basis, it might vary by quarter.

[Graham - Stephens Inc.]

Okay, that’s helpful, and then as far as guarantee can you talk a little bit about how significant that is to the revenue line and maybe comment about how margins look versus Orion offering?

Rich Meeusen

The margins on Galaxy are a little bit lower than the margins on our Orion product. When you are selling a new product like the fix network, things are getting a little more price competitive out there, then with the drive by and also our volumes are not up that high that we can spread our cost over the larger volume. Rick, as far as the sale.

Rick Johnson

The sales number for all our calendar 2008 we are little less than $3 million for the year.

[Graham - Stephens Inc.]

Okay.

Rick Johnson

But the technology in the second quarter, I would say we were ramping up and we expect that to continue to grow.

[Graham - Stephens Inc.]

Alright and then on gas in Badger Meter side could you talk a little bit about following activity and how material do you think that business can be for you over the next few years?

Rich Meeusen

We have a few pilots scoring on that. With gas unlike water the average customer size is much larger. So either going to hit a big one or you are not. Gas is a lot like the electric AMR business, water is spread over a much larger number of customers that are out there. So have several pilots going. If we hit one it could be big impact on us, if we do not we won't have it. So it's going to be kind of feast or famine as we go through the year.

[Graham - Stephens Inc.]

But if we don’t we will no standard efforts because essentially been cost as much to get into that business.

Rich Meeusen

Right. Once we develop Orion for water was very easy to put it over the gas. So we have nothing on our balance sheet. Anything we have spent we know that was expense R&D. So we look at it as an incremental opportunity. We think it's a very substantial incremental opportunity, but we do not have a lot of built into our basic plan.

[Graham - Stephens Inc.]

Okay and then one last kind of housekeeping question. Just talk a little bit about what you are seeing in pricing for scrap relative to stock market for copper?

Rick Johnson

The scrap rates tend to follow the spot market with copper. I mean they tend to be cheaper then the virgin copper alloy that we buy sometimes up to $1 a pound cheaper but then sometimes you contract down to $0.50 pounds cheaper. So if the scrap will move with the price of copper, I do not know if that's what you are looking for or something else?

[Graham - Stephens Inc.]

Yeah no that was helpful. Okay, thank you guys.

Operator

Your next question comes from the line of Carter Shut (ph) with Deutsche Bank. Please proceed.

[Carter Shut - Deutsche Bank]

Hi, going back to the gas question, can you quantify the size of some of the pilots that you are working with. Are these a 100 or 1000 point pilots or are they million plus point pilots?

Rick Johnson

We have pilots of all sizes out there. So there are some smaller once and there are some larger once but I really don't want to go into much detail because I do not necessarily want to point away for my competitors.

[Carter Shut - Deutsche Bank]

Okay fare enough to say that there are some 1 million point plus, pilots out there?

Rick Johnson

Yes, there are.

[Carter Shut - Deutsche Bank]

In regards to Galaxy versus Orian wanted to ask a question about Badger also about the overall industry. When you look at 4Q, shipments for automated water meters excluding Chicago do have a rough sense on what percent were fixed versus drive by either Orion or by Itron.

Rich Meeusen

Well, we don't disclose the difference between Orion and Itron other then in the general terms we already have or Orion continues to sell Itron by about 2.5 to 1. Gas is just gas is just, I am sorry, Galaxy is just in its initial stages, the sales are relatively small in the fourth quarter.

[Carter Shut - Deutsche Bank]

Okay than when you look at the overall industry and the competitive landscape, if you look at the total amount of automated water meter shift, give a sense on what percentage of those were fixed versus drive-by?

Rick Johnson

As of 12/31 of '07 which was the most recent report that we saw from the Scott report. It indicated that to-date on the life of AMR about 7% of all water unit shift were fixed network and 93% were drive-by. Now in 2008, that's probably grown a little bit but --

Rich Meeusen

I said just a little I think the move to fixed network is happening faster in the electric industry than it is in the water.

Rick Johnson

Right.

Rich Meeusen

Just as a general statement.

[Carter Shut - Deutsche Bank]

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

Rick Johnson

Yes, I think they have been less than 20%. I mean it was 7% a year ago.

[Carter Shut - Deutsche Bank]

Does total to date they are right.

Rick Johnson

Right, that was life to-date.

Rich Meeusen

Do you mean what we shift during 2008.

[Carter Shut - Deutsche Bank]

Yes.

Rick Johnson

I won't know that till we see the Scott report, I would be guessing.

[Carter Shut - Deutsche Bank]

Okay. That's all I have. Thank you.

Rich Meeusen

Okay.

Operator

The next question comes from the line of Ryan Connors with Boenning & Scattergood. Please proceed.

Ryan Connors - Boenning & Scattergood

Good morning, Rick and Rich and congratulations to employee on a great performance.

Rick Johnson

Thanks Ryan.

Ryan Connors - Boenning & Scattergood

Few things. First of all interesting Rick on the Mexico, thing that you mentioned. It seems you mentioned they have until April, so you get some of those orders it stands to reason then that could continue to be tailwind?

Rich Meeusen

No Ryan. The delivery had to be by December 31st that's why we had strong fourth quarter.

Ryan Connors - Boenning & Scattergood

Okay. I thought you mentioned April.

Rick Johnson

No, I don’t know it was April or not.

Ryan Connors - Boenning & Scattergood

Okay. Fair enough. And then just from bigger picture perspective obviously the business mix has changed from the last economic downturn and I guess in particular being that AMR is a bigger and more important piece of pie now. So I wondered if you could just talk about how you would characterize the performance of that business, the utility business in the last recession and then how you think that business will perform differently or whether it will perform the same way in this downturn given that AMR and Orion are much more important pieces of business this time around?

Rick Johnson

Ryan I think that’s a very good question and the fact is that I think we're differently positioned now in several ways than we were during the last recession. You're right, one is that the higher mix of the electronics in our business does insulate us a little bit because if the recession deepens and if we do have to start making cut backs. We are now, we have a higher percentage of purchased electronics in our cost of sales that are easier to cut back whereas in the last recession we had a higher percentage of product that we actually manufactured here that was harder to cut back.

The other thing that’s happened in the last decade or so is that we shifted more work down into our Mexico plant and our Mexican workforce is much easier to flex than our American workforce. So, as I look forward to 2009 and say okay if we were to start seeing the impacts of the economy. If we just see the slowdown how would we react. We are much better positioned to react than we were during the last recession.

Ryan Connors - Boenning & Scattergood

Okay that’s helpful and then I wanted to revisit a topic that has not been discussed in the while and maybe in this call and that’s housing. You all have been in the pretty sanguine on the impact of housing market on your business and that’s proven to be 100% correct but if I understand it correctly one of the things you have said is that as long as housing starts to stay at reasonable level that it shouldn’t be a big impact. But now based on the indicators we are looking at, we are seeing just extremely low levels of new home builds, 300,000 to 400,000 versus closer to 2 million. I just wondered if you could just revisit that issue for us and whether you still have that same idea that's really not an impact or have we finally reached a level where the starts are so slow that it finally will have an impact.

Rick Johnson

Well first of all I think housing starts do impact us I don’t think that we ever said that they don’t impact us at all. Certainly housing starts impact us and we probably saw some impact in 2008 but that impact may have been buried by all those secular tailwinds that I mentioned. The demand for metering, where there haven't been meters, the move to AMR the replacement business all of that is kind of carried us through the housing downturn thus far.

And you have to remember that first half a large percentage of new homes are built out in suburbs and areas where they do not have municipal water, we give them private wells and we don’t sell a meter anyway. And then later when the city brings, city store and city water to that suburb that's when we might start seeing our meter. So when you take that drop in new housing and you back away the house that would not have bought a meter anyway.

You got a smaller number that we then have may be a third of that market and you can kind of estimate as to what the impact might be. So the impact of a drop in housing of even 1 million housing units or a million and half units might turn into 600,000 meters or something like that and that might effect us by a couple hundred thousand meters.

And we do above 1.6 million meters a year. So in theory yeah you could say that there was a drop there. But on the other hand we did not see it in our volumes which either tells you that some of these other factors are offsetting it. Or that may be its just not as severe as we thought.

Ryan Connors - Boenning & Scattergood

Okay that’s great perspective thanks for your time this morning guys.

Operator

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

Rob Mason - Robert W. Baird

I guess Rich I just wanted to clarify you said that you have not seen customers really push back regarding the price increases you’ve implemented over the last couple of years.

Rich Meeusen

Correct.

Rob Mason - Robert W. Baird

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

Rick Johnson

Yes because we did a price increase again in the summer of 2008 which was our third in three years. And so certainly that, and when we do the increase it takes a few months for to filter its way through. But certainly that came into the fourth quarter.

Rob Mason - Robert W. Baird

Okay very good. And then Rick you mentioned bad debt expense ticked up. How much did that go up?

Rick Johnson

Well we don’t disclose amount, it was that significant but it was more noticeably it was and primarily we focused on one or two accounts.

Rob Mason - Robert W. Baird

Would this be in your utility business?

Rick Johnson

Yes.

Rob Mason - Robert W. Baird

Okay. And then may be last question Rich. I am sure you’ve thought perhaps about the very stimulus proposals out there regarding water infrastructure. Could you just walk us through how you think that might impact your business, should something that’s on the table now, come to past?

Rich Meeusen

Yeah you mean the government Christmas package for everybody. The certainly there is money being talked about in the stimulus program. Certainly, the states and our customers have put in their request to the government and said we really need money for mains and distribution systems in addition to the waste water side of the business. There really aren't any request specifically for metering or for advanced metering like there are on the electric grid side for smart metering.

So we don’t have that direct amount. But if stimulus money comes to the utilities or spending on the distribution system or even on the waste water side, that should free up more money within the utilities for metering projects. So, I do think there could be a trickle down effect. That could benefit Badger Meter, if that would have come through.

We are however certainly not building into the plans for 2009. Rob, did I lose you. I heard a beep.

Rob Mason - Robert W. Baird

No. that’s very good. Thank you.

Rick Johnson

Thank you.

Operator

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

John Quealy - Canaccord Adams

Hi. Good morning folks.

Rich Meeusen

Good morning.

John Quealy - Canaccord Adams

Just one house keeping on Mexico. What was the total contribution for that in the quarter?

Rich Meeusen

You're talking total sales?

John Quealy - Canaccord Adams

Yeah. Whatever you can give us.

Rich Meeusen

If I'd guess the sales maybe for $4 million last year and $3 million in 2007 and $4 million this year in sales.

John Quealy - Canaccord Adams

Okay. Thanks. And then, Rich, do we go back, your comments earlier that you have an optimistic outlook looking into '09, we have chatted about this in the past. What are your municipal customers are working of budgets that were formed in different times, a lot of them are going to be revamping that cycle, what is and obviously we have seen a lot of other different players in the water value chain report very inconsistent in some cases terrible results. What is it as you look out at the municipal market in the next 12 months in the budget that roll off and roll on, that helps you give us that optimistic outlook comment?

Rich Meeusen

Sure, John, I was recently informed by purely knowledgeable person, that two thirds of the municipalities have their year end at 12/31 and one third at June 30. So, those you did and the municipality did have their year ended 12/31 have already reset their budgets for 2009, they probably put those budgets together in October, November. And so they must have had a better look at the economy and as we are getting into the early part of this quarter, we are not seeing a big drop off in our order entry or in our backlog.

So that tells me that two thirds of our customers have not made this significant cutback that we might have been waiting for in the economy like this. Now the second shoot drop is that a-third of those customers who set their budgets back in April and May, for their June 30 year end. Are going to set new budgets this April and May, and could we see a drop off in the second half of the year.

I think that’s going to depend upon where the economy is, if we get to April and May and we are starting to see the economy bottom out. And there is some view insight that things are going to start getting better, then those budgets might get this stuff. On the other hand of the economy still deteriorating that point, we could see some cutting of the budget.

So it works both ways. But at this point based on what I am seeing from the bulk of our customers we are just not seeing customer say, we have to cut back our budgets, we can’t go ahead with these programs. And we are not seeing the orders dropping off and all of the information we are getting from the field is that they are looking forward to good 2009. So, that gives me the cost for optimism.

John Quealy - Canaccord Adams

Do you think you are gaining significant share or you just the customers that are better position in other places?

Rick Johnson

I think we have two things. One is that our, we have got customers. They had to change the shell into that middle range of utilities to mid sized utilities more so then the very large or the very small. And I think those tend to be healthier communities the healthier cities that are doing very well. So I think that helps us. And the second thing is I know we are gaining share because the numbers from our proprietary publishing numbers recently came out for 12/31 and in 2008 Badger Meter did pickup market share.

John Quealy - Canaccord Adams

And there is last Rick just on operating cash flow for the year can you give us that?

Rick Johnson

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

John Quealy - Canaccord Adams

And if using your mind just a depreciation and amortization?

Rick Johnson

Depreciation is about 59.54 and amortization is about $1.1 million.

Rich Meeusen

And John this is Rich, as long as you are asking the question I am going use this an opportunity to make another point about the strength of our balance sheet. We had about $48 million of EBITDA last year and our debt is about $25 million. So our debt to EBITDA is a factor of little over 0.5. There are a lot of companies that would really love to have debt to EBITDA that low. So we are in very strong financial position.

John Quealy - Canaccord Adams

Thanks, guys.

Rich Meeusen

Okay.

Operator

The next question comes from the line of Richard Eastman with Robert Baird. Please proceed.

Richard Eastman - Robert Baird

Hi, Rick and Rich. Just want to put question on the fourth quarter, when I look at the sales number and it's a record and my guess is that may be you came in $4 million or $5 million above plan and if I look at the expense ratios, you got a lot of leverage there which again, suggest that maybe your revenue was $4 million or $5 million above plan and I guess its looks like may be Chicago was the million may be Mexico was a Million. Did the Itron sales in the quarter surprised you?

Rick Johnson

When I cracked it for Chicago’s above 3 million above '07s fourth quarter.

Richard Eastman - Robert Baird

Because I know some plan one would have thought it would have come in.

Rick Johnson

And we really don’t like to comment on that. We are not going to on plan.

Richard Eastman - Robert Baird

Well I commented about the plan let me jus zero in and that the Itron sales surprised in the quarter?

Rick Johnson

We were little surprised by the Itron sales in the second or third quarter, we saw come continued strength in the fourth quarter but we now know exactly what that is. There are a few Itron customers or borrowers joint customers batch of Itron customers that we are doing projects that decided to accelerate those projects into the summer and that paid in, the created an uptake in our Itron sales. So that had surprised us, we track that now and now we understand what those customers are doing and so frankly really it inspires in the fourth quarter. We did expect a little stronger Itron sale in fourth quarter.

Richard Eastman - Robert Baird

And still, and still shipping against I think you had told me that one point business that have been on the books that was delayed so that’s accelerated but. I presume to that 30% growth rate Itron sales is still some what on annually?

Rick Johnson

We do it as that yes.

Richard Eastman - Robert Baird

Okay so that settles down to forward?

Rick Johnson

Yes believe it will.

Richard Eastman - Robert Baird

And than also.

Rick Johnson

You can frankly, if the most of our customers are opting for the Orion or the Galaxy product lines over the Itron, so I would expect and see that settling down.

Richard Eastman - Robert Baird

Yeah and than Rich, you had viewed these from time-to-time in the past that fixed networks on the water side, most quote at least sold. Are you feeling any different about that at this point in time, because we have seen some fairly high profile projects when you awarded. And I can't tell, I'm sensing that the Galaxy product is necessarily ready for prime time in these really large bids or how you feel about that?

Rich Meeusen

Well, I still going forward, we are going to continue to see primarily a drive by market for water. I don't think fixed network, unlike in electric and gas, I don't think fixed network makes as much sense for water as it does for electric.

Electric had other needs, time of use information, being able to send information back into the house to turn down. You just don't have that need in water. It really doesn't make sense.

And although a lot of utilities are looking at it, and that's why I say it's one of the most quoted, but least used technologies. A lot of utilities are saying, give me a quote on fixed networks, and then when we get in there, so I talked to them about it. And they see the cost of it. And including the infrastructure and the ongoing maintenance cost, they realize they are better off to driveby.

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

Now as to one other thing you mentioned, Rick about Galaxy not being ready for primetime, I have to take exception to that. Our Galaxy product is a very good product. That's why we bought that technology, we made the investments we have to. And at this point, we think it can compete with any other fixed network technology of the water.

And in fact it's one of the few fixed network technologies that were designed specifically for water, instead of being ported over from electric. And in fact, we have won a larger size city, okay?

Not a city over 100,000 units, but certainly it's been closer to 100,000 units that we are not closing yet, because the city has chosen not to say anything, but we did win that recently and that project will probably begin in mid of 2009.

Richard Eastman - Robert Baird

Okay, very good. And just one last question, have you extended any terms to your distributors in terms of payment terms or lengthening out terms or anything either year-end or just given the economy?

Rich Meeusen

No, we haven’t and we had no request from our distributors. Obviously, with our sales our distributors are doing pretty well.

Richard Eastman - Robert Baird

Okay

Rich Meeusen

I know that isn’t true across the industry. I know other areas of the industry are suffering, but in our case our distributors are doing very well.

Richard Eastman - Robert Baird

Okay thank you.

Operator

Your next question comes from Richard Birdy with Servant & Company. Please proceed.

Richard Birdy - Servant & Company

Good morning. Thank you for taking my call.

Rick Johnson

Good morning

Richard Birdy - Servant & Company

Just a quick question, was there any particular region in the United States where you saw strength in the quarter, was it across the Board strong?

Rick Johnson

This is Rick. I would say, general it is across the country. There wasn’t a one particular that stood out for us.

Richard Birdy - Servant & Company

Are there any region you might be focusing on in 2009?

Rick Johnson

Well, I would say in general, we focus on certain areas. We always focus on the entire country. We're stronger in certain areas than others, and so sometimes we put additional effort in an area, but we sell nationwide as do our competitors.

Richard Birdy - Servant & Company

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

Rick Johnson

All right, I don’t think our customers are in any different position than they have been in the past. Obviously we work with our customers to get them the best product at the best price. And on the other hand we have a responsibility to our shareholders to earn a fair return., so we are negotiating with our customers in good faith, but I don’t see their position changing dramatically.

Richard Birdy - Servant & Company

Okay, just one last question. Tax rate going forward what should we be thinking there?

Rick Johnson

Probably 37% to 37.5% .

Richard Birdy - Servant & Company

All right. Thanks a lot guys. I appreciate it.

Operator

(Operator Instructions). Your next question comes from the line of Kelly Bradley with Gold Coast Securities. Please proceed.

Kelly Bradley - Gold Coast Securities

Hey guys good morning. Taking a look at the balance sheet, I know that you guys have addressed the operating cash flow somewhere around $22 million, but there is an indication that levered free cash flow is actually a negative number. Is there some debt that’s going to be needed to be refinanced in there near future?

Rick Johnson

Generally, all of our debt is short-term. The only long-term debt generally expires by mid-summer 2010. But the reason, we only went out to 2010 is that our internal projections suggest that we would be out of debt by then, because we continue to generate cash from the business.

Kelly Bradley - Gold Coast Securities

Okay, so then the goal really is to have a zero on the balance sheet by.

Rich Meeusen

No. Actually that is not the goal. I mean I would prefer to have a leveraged balance sheet and I would prefer to find perhaps some small acquisitions we could pick up that would work as well as tuck-in acquisitions to our business.

In the past we’ve had difficulty doing that. We certainly pursued companies and the companies we have pursued they have all been in the $10 million to $15 million range, not large acquisitions, but strategic ones.

We pursued them in the past. And the past, we've always been outbid by private equity paying 14 times EBITDA. I think those days might be behind us. Private equities had their checkbook take away from them. So we may be more successful, and frankly pricing on companies for sale may be reasonable. So we would like to continue to see leverage on our balance sheet.

We are not overly concerned about the credit market for us. We are in a very strong position. We continue to issue short-term debt in the unrated commercial paper market. And we are very successful in that. And our interest rates relatively low. And in fact I am looking at that them.

Rick Johnson

Less than 3%.

Rich Meeusen

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

Kelly Bradley - Gold Coast Securities

Yeah that’s tremendous. So then do you guys have wish list now that the valuations of companies have come down so far that you are actually shopping again?

Rich Meeusen

We are looking at one or two companies right now.

Kelly Bradley - Gold Coast Securities

Okay.

Rich Meeusen

And again these are small acquisitions.

Kelly Bradley - Gold Coast Securities

Okay and then it looks like just about $5 million on the balance sheet or about $0.33 a share in cash. And then I know that last year's dividend was $0.44 a share. So by the time I guess November rolls around again, the cash per share on had will be enough to cover another dividend payment?

Rich Meeusen

Yeah. We are not concerned. Based on what we see today, we feel that our balance sheet is solid, our business is solid and we don't see any concern about dividend going forward. In fact we've raised our dividend for 16th consecutive years and it's our desire to continue to do so.

Kelly Bradley - Gold Coast Securities

Beautiful. I appreciate it. Thank guys for opinion this morning, and good luck this year.

Rich Meeusen

Thank you.

Operator

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

Eric Stine - Northland Securities

Good morning, guys. Nice quarter.

Rich Meeusen

Thank you.

Eric Stine - Northland Securities

A lot of these questions have been answered, but just a few to clarify. You said the Orion Itron mix was about 2.5 to 1, is that right?

Rich Meeusen

That’s correct.

Eric Stine - Northland Securities

Okay. And can you just talk about the Itron deployments for those predominantly existing customers or with any those new customers that were in Itron?

Rich Meeusen

They were all existing customers.

Eric Stine - Northland Securities

Okay. I appreciate that. Just curious about your outlook last quarter, just talking about some projects, no current projects, but that in the pipeline things you are thinking that there may be some delays and challenges there, and you got a little bit of that this quarter, is there any noticeable differences or pretty much the same, just small?

Rich Meeusen

Right. You were right. There is no noticeable difference. Is that I know of two communities that have delayed projects. One community is in California and the other one is in Michigan, and both of them are very heavy automotive communities, subject to automotive markets, and so it's very understandable why they decide to delay the projects, but beyond that we've seen nothing and we've heard nothing.

Eric Stine - Northland Securities

Okay. Just going to the expense side, the operating expenses you talked about that you do have some flexibility, you feel like going forward? Are there any things you're doing right now that could reduce that number? Is that pretty much a good number or should be think about going forward?

Rich Meeusen

No. You're absolutely right that we are doing some things right now. Frankly, 17% of our business is in the industrial area. We have to look at that as a separate business and say to ourselves how do we react to a major drop in sales in that business? So we are looking at our discretionary expenses, we are looking at the possibility of layoffs in that area. That’s the whole industrial side of the business and we have to look at that. We will be foolish not to.

Meanwhile in the 83%, 84% of our business at utility, which is still strong and growing we are not looking at anything like layoffs or cutbacks or anything. But we’re watching the market very closely, we are watching our order intake closely and we are getting ourselves in a position. So that if we have to react, we can’t react particularly.

Eric Stine - Northland Securities

Okay, thanks a lot. And just a last thing, could you just clarify, I know you mentioned that a while back. But just clarify the amount and timing of the pension expense that you might have to deal with?

Rick Johnson

The amount was about right now it's estimated about $5 million this year, and that we haven't made a contribution for several years. That obviously depends upon a number of factors that are still to be determine this year, we’ll look at the assumptions.

But if we have to do $5 million, it shouldn't have a significant impact on our capitalization ratio, I mean, I believe our equities over a $100 million, but I think, it will have to be paid by in total by September 30th. There are some provisions for our payment in April, probably one again sometime in summer and then the last one will be by September 30th.

Eric Stine - Northland Securities

Okay, thanks a lot, I appreciate it.

Rick Johnson

Okay.

Operator

Ladies and gentlemen that concludes the question-and-answer session, I will now turn the call back over to Mr. Rich Meeusen, CEO for any further remarks, please proceed.

Rich Meeusen

Well, thank you everybody for joining us today. Obviously, we are very pleased with the results. We recognize that this is a little unusual in this economy. All of the companies that we are seeing are usually reporting down quarters and weaker quarters. Well are fortunate to be in a very strong market, the water market which is still driving us forward, and we are continuing to gain shares as we have over the past five or six years, and that’s been helping us too.

So we are excited about where we are. And we are optimistic about 2009. And frankly, there are many companies that are seeing that either. So looking at 2009, we see some very positive things, we are keeping our eye on what could go negative on us, but generally the tailwinds we have are still very strong at this point. That's all I have to say. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.

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