Badger Meter, Inc. (BMI) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Second Quarter Badger Meter Earnings Conference Call. My name is Philip, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Richard Johnson, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Thank you very much, Philip. Good morning, everyone, and welcome to Badger Meter's Second Quarter Conference Call. I want to thank all of you for joining us. As usual, I will begin by stating that we will make a number of forward-looking statements on our call today. Certain statements contained in this presentation, as well as other information provided from time to time by the company or its employees may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Please see yesterday's earnings release for a list of words or expressions that identify such statements and the associated risk factors. Let me reiterate some of our guidelines. For competitive reasons, we do not comment on specific individual product line profitability other than in general terms, nor do we disclose components of cost of sales, for example, copper. More importantly, we continue our practice of not providing specific guidance on future earnings. We believe specific guidance does not serve the long-term interest of our shareholders. Now on to the second quarter results. Yesterday afternoon, after the market closed, we released our second quarter 2013 results. I'm very pleased to report that second-quarter sales, as compared to the second quarter of last year, increased $6.3 million or 7.8%, to a record $88.3 million. This compares to $82 million during the same period last year. This increase was due to higher sales of municipal water products, as well as higher sales of industrial flow products, offset slightly by lower specialty product sales. Municipal water sales increased $6.6 million or 12.5%, to $59.6 million in the second quarter of 2013, from $53 million in the second quarter of last year. These sales represented 67.4% of total Badger Meter sales in the second quarter. The increase was due to higher sales of residential meters, both with and without technology, as well as higher commercial meter sales. Sales of residential meters increased 12% due primarily to higher volumes, offset somewhat by lower prices on select product lines. The slight decline in prices was more a function of the particular product mix in this quarter as overall prices have not declined. Commercial meter sales increased 14.4% in the second quarter of 2013 due to higher volumes of products sold and slightly higher prices. As we look at the quarter, we believe the increase in municipal water sales was due to return to normal buying patterns after the impact of weather on our first quarter sales. Industrial flow products represented 28.9% of sales in the second quarter this year, compared to 30.4% in the same period last year. These sales increased $600,000 or 2.4%, to $25.5 million from $24.9 million last year. While volume declines resulted in lower sales for electromagnetic and impeller meters, most other product lines within this group saw sales increases that range from flat to 5% higher quarter-to-quarter. Specialty application products represented 3.7% of sales in the second quarter. These sales decreased nearly $1 million or 21.8% in the second quarter, to $3.2 million from $4.1 million last year. The decrease is due to lower volume, lower sales of gas radios and concrete vibrators. The gross margin as a percent of sales was 33.8% in the second quarter compared to 36.8% in the second quarter last year. The decline was due in part to a greater percentage of municipal water sales, which have lower margins than our industrial sales. Slightly lower prices and some foreign exchange impacts on the euro source radio board also had a negative effect on the margin for the second quarter. Selling, engineering and administration expenses for the second quarter increased $800,000 or 4.5% over the same period last year. While expenses for employee incentives are somewhat lower due to the cumulative financial results so far this year, we do have a number of unique charges in this particular quarter. We've taken a charge of $350,000 associated with settlement of a litigation issue, and we have absorbed the $750,000 noncash pension charge in this quarter, similar to the charge we took in the fourth quarter last year. This pension charge is due to the withdrawals from our pension plan occurring faster than the assumed withdrawal rate. Again, I will remind you that this so-called charge is already reflected on the company's balance sheet as part of other comprehensive income, which is a component of our net equity. We are simply required to pull this charge out of equity, put it through the profit and loss statement, and put it back into equity. Together, the litigation and pension charges had almost a $0.05 per share negative effect on our earnings this quarter. Also included in our selling and marketing, engineering and administration expenses was the amortization of the intangibles associated with the purchase of Aquacue which occurred on April 1. The provision for income taxes as a percentage of earnings before taxes was 36.1% this year compared to 33.1% last year. I will remind you that last year's tax provision included nearly $400,000 of credits associated with favorable audit results of prior year tax returns. The full year estimated effective tax rate for 2013 is approximately 36.5%. The cumulative year-to-date amount also includes a recognition in the first quarter of an approximately $100,000 credit as a result of the R&D tax law that was signed at the first of the year. As a result of all of this, net earnings for the second quarter were nearly $6.3 million or $0.44 per diluted share compared to $7.4 million or $0.52 per diluted share last year. A quick look at the balance sheet reveals no significant variances other than normal seasonality, with the exception of the preliminary valuation of Aquacue, which added approximately $5.6 million to intangibles and $10.7 million to goodwill, while increasing our deferred tax liability by $2.1 million. Cash generated from operations was $15.7 million on a year-to-date basis, helped by reduced inventory levels. Our debt was substantially unchanged in the quarter, even with the acquisition of Aquacue. With that, I will turn the call over to Rich Meeusen, Badger Meter's Chairman, President and CEO, who will have some additional comments. Rich?

Thank you, Rick, and thanks all of you for joining us today. We were pleased to see a return to normal buying patterns this quarter after negative weather impact to the first quarter. The record second quarter sales demonstrate the strength of our business, and we expect to see this strength continuing in coming quarters. While our sales were a record, earnings were relatively flat compared to a very strong second quarter last year after factoring out the unusual items Rick discussed. On an overall basis though, we were pleased with our performance this quarter. Last quarter we discussed the recent acquisition of Aquacue, a small Silicon Valley software technology company. We mentioned that Aquacue has developed a patented unique technology that will significantly enhance our product offerings. Over the past several months, we've successfully integrated the Aquacue operations into our product development function and are currently developing new products that use their technology. As we indicated in the news release, we expect to release these products early next year. Last year, we also discussed -- last quarter, I'm sorry, we also discussed the announcement by Elster AMCO Water LLC, of their decision to stop producing and selling mechanical water meters in North America effective June 30 of this year. We developed a working relationship with Elster that enabled us to make joint calls on their customers and offer our assistance in their transition to Badger Meter mechanical water meters. I'm pleased to report that this process has gone very well, and we have successfully transitioned a number of Elster customers to our products. Although second quarter sales to these customers were less than $0.5 million, we expect to see continuing sales in the coming quarters as Elster has now stopped all production. We also released several new products during the quarter, including a polymer version of our popular E-Series ultrasonic residential water meter. We believe that this lower-cost version of our solid-state meter will drive growth in coming quarters. We also released an updated version of our ReadCenter Analytics software, which allows municipal water utilities to gather significant amounts of metering data and perform detailed analysis to improve their operations and customer service. New product development is a key element of our growth strategy, and we will continue to invest in additional new products and product enhancements that meet evolving customer needs. With those brief comments, I'd be happy to take your questions.

[Operator Instructions] Your next question comes from the line of John Quealy from Canaccord Genuity.

So just to pick apart the gross margins for a minute, so the 300 basis point deviation year-on-year, can you talk about relative proportions of the difference, like how much was the Muni side of it? On the ASP pressure -- or not pressure, but just mix, on the ASP mix, was it manual meters or was it a big volume deal or some of the Elster meters you're winning at a lower price? And how much was the euro impact on the radio board? Just if you could just tease it out a little bit about the relative impacts on the 300 bps.

Well, part of it is just the fact that, recall in the first quarter, our volumes were down substantially and we had absorb some of those higher cost. Our inventory turned less than 4x a year, some of that just turned, that inefficiency turned in the second quarter. So we're seeing some of that in terms of some of the cost pressure internally. It's not really our cost didn't increase, it's just -- it's that absorption factor which did turn. The FX component, probably we could be talking $0.5 million somewhere effect on the quarter. In terms of pricing, there was no unique thing that stood out. It just happened to be the particular product mix or customer mix this quarter. We did not reduce prices, but obviously, depending upon which customers we have in terms of volumes, there's certain discounts. So there's nothing that we really point in and say that's the big elephant that drove it in this particular quarter.

And John, let me comment that, for internal purposes here, we group our products into maybe 30 or 40 different product lines. The margins on those product lines can range from a low of maybe 25% to a high of 60%. And so, from quarter-to-quarter, it can cause lumpiness in the margins just by how many we sell of one type or another.

And let me, without -- I'm not telegraphing anything and I'm not violating our own guidelines, but even within the industrial products, okay, the 9 or 10 different products that we track within their grouping, the margins can vary. So I made a comment that impeller meters are down. Impeller meters happen to be one of our highest-margin businesses, okay, and the fact that some of those volumes are down had an impact on the quarter.

Okay. That's helpful. The second question, back to the Elster AMCO opportunity, is this more of a sort of you're picking up the standard, I call it depreciation sale where installed municipalities with an Elster footprint, they want one-sies, two-sies and you're helping to fill it? Or what's the opportunity for all that sort of stranded trade stuff that Elster really didn't have in AMR product to go to market? So can you tease out the opportunity between what sort of just repair-ish type of sales and what's the actual automation opportunity? My feeling is there's a good potential automation opportunity there.

Well, you're right. Let's back up to your comment about TRACE. Elster had originally developed a product called TRACE back about 20 years ago but never really sold much of it, even in water. Badger primarily sold it and Elster didn't. Elster, historically, has sold more Itron product on their meters than TRACE or anything else. So there isn't a big TRACE replacement out there like Badger has seen for all the TRACE that we sold. There will obviously be opportunity to replace, as we pick up these accounts, to replace Itron with Badger products, and certainly, to -- if not to do that, just to sell the Badger meters again with the Itron radio because we do both. But these are not one-sie, two-sie replacements. Elster had won some very major accounts. And if you go back in their history and look at some of their releases and stuff, you can see some of those accounts. But these were large cities. These were some of the 400 -- we already see in our industry, there's 52,000 water utilities, but 400 of them make up about 40% of the meters out there. And these were some of those large utilities that have now transferred their contracts over to Badger Meter. And we are fulfilling the contracts. Now the pricing isn't where we'd like it to be. In many cases, Elster had gone in with very low pricing, and that was probably one of the reasons why they decided to shut down their operations. But we believe that if we work with those customers, provide them good service, good products, as those contracts come up to an end, we'll have an opportunity to rebid at a higher price and we'll be the incumbent and have a good shot at it. So that's kind of our strategy. So I would think, in the second half, you're going to see incremental sales from Elster. I'm not sure it's going to put a lot to the bottom line, but you're definitely going to see some incremental sales.

Okay. That's very helpful. Then the last question, maybe to the last part of your question answer there. Aquacue, when you roll out new products and functionalities, this feels like the first true data acquisition or product line that Badger's sort of introducing. Is this more going to be greenfield installations or are existing Badger users going to be able to use some of this functionality?

Aquacue brings us 2 things. One is an ability to significantly upgrade our existing data services, analytics software and the software we sell. One is to significantly upgrade it with new features, new functionality, and basically, we had a technology roadmap that said, over the next couple of years, we're going to do a lot of these things. The acquisition of Aquacue jumps us ahead on that technology roadmap. So the first thing it does is it allows us to significantly upgrade our current offering. The other thing is Aquacue had some customers. They had a lot of people who were very interested in the Aquacue software, how the Aquacue system work, and we are now able to get into those customers. Those customers are very happy to work with Badger, because obviously, a larger company with little more strength behind it. And we still got the principals of Aquacue involved. So it gives us opportunities on both sides.

Your next question comes from the line of Richard Eastman from Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Rich, could you just follow on, on Aquacue there. A couple of things. One is, is there -- did they have any revenue and are they -- is there software ready for prime time? I mean, can we see things now, with your ownership, can we see their revenue, whatever that number is, start to accelerate fairly rapidly?

The answer is no and no. The answer is no, they did not have any significant revenue. All of their products were -- I mean, they had significant customers, but all of their products were in beta. They were at the customers in small volumes where the customers were trying them out and the information we got when we went through our due diligence was that the customers were very pleased with what they saw. But Aquacue was still in the position of building out their product and finalizing it and working through all the beta sites. So they did not come with significant revenue, but they did come with significant potential. And the other thing is, as far as can we immediately take their software and go out and start selling it? We determined no. We felt that we needed about 6 to 9 months to get it ready for prime time, if you will, and that's why we're seeing, in early next year, we should be able to roll out some very compelling products. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then, maybe, Rick, could you just give us a sense of what's the quarterly amortization number here?

In terms of the Aquacue intangibles? Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Just the new, yes.

Yes, probably $200,000, $300,000 dollars. $200,000, $300,000, within the quarter. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then, could you just give us a sense, within residential, and I know you do not want to strip this out, but the AMRP, I mean collectively, residential was up 12% with and without technology. But what was just the local read piece? And can you just give us a sense of that, was it better than 12% or less than 12%?

Hold on. They're trying to point me on the line right now. It was probably a little bit better than 12%. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then, just the last question and unfortunately, the operator kind of interrupted to get some information here when you're answering the question on gross margin. I think, I understand why that was low, but as you move forward, is the tone of business in the marketplace today, you're going to kind of maintain this level of gross margin going forward for 6 months, or is there anything in there that would suggest that gross margin can snap back fairly quickly?

Rick, this is Rich. A couple of comments on that. One is that I do -- I believe that, that gross margin could come back, back up. I think, I certainly don't see going lower. This was an unusual mix. I think, as we go back to a normal mix, it could come back up again. We just finished a meeting with our largest distributors over the last couple of days. They are very -- they have a very positive outlook towards the rest of the year, both on sales opportunities and on pricing. And then, when I look at our backlog, the average margin in the backlog and the average margin of orders coming in, which I was just looking at this morning because I anticipated you'd ask a question like this, it looks good, it looks stronger. So I'm fairly confident that we could see that margin come back.

And again, Rick, remember, we talked about the fact that the low production in the first quarter, some of those costs turned in the second quarter. So from that alone, assuming we continue with these normal buying patterns, we'll have that regular absorption of those overhead cost. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: That's a fair comment. But I mean, just realistically, the gross margin in the quarter had to surprise you as well?

It did. Well, I mean, we saw it as the quarter was going on because we saw what was happening to the mix. But your question about was the growth in local read more or less than the average 12% growth, and Rick said it was more, well, you understand that the local read meters carry a lower margin than the technology than meters with radios so [indiscernible] of where it hurts our margin. When I look at the mix of what's in our backlog and -- I'll grant you, our backlog only gives us about 1 month to 1.5 months outlook, but when I look at the mix of what's in there, it looks like it's the normal mix. So I'm fairly confident that we could see that thing come back. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And we've noticed this in the past, too, this absorption issue with the low volumes and that product turning in the second quarter is always -- there's always a bit of a surprise factor there?

Yes. It's one of the flukes of accounting that you get to capitalize your inefficiencies onto the balance sheet. So we had low production in the first quarter, the cost of producing the product was very high, well, that goes into the value of the inventory. And then, when you sell that product, it results in a lower margin. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Understood. And then, just lastly, just, I'm curious, the specialty piece of the business, the specialty meters business, I know that's kind of a catchall for everything that's not water. But is there any particular...

No, Rick, you're wrong. It's a catchall for anything that's really not pure flow measurement because industrial meters measure water also.

Industrial meters, Rick, measure water, oil, gas, chemicals, all of those things. So when we talk about specialty meters, we're really just talking about the concrete vibrator business that came with Racine Federated when we bought that. And we're talking about radios for gas meters. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Yes. And in that piece of the business, is there a strategy that we can focus in on growing that piece of the business? Or again, at some point, is this even a segment or...

Not -- it's not a major -- don't use the word segment. First off, the accountants hate it when you use the word segment. And secondly, I have to worry that I have people who work in those areas of the business who might get upset if I say it's not a focus. But I'll be honest with you, it's not a major focus for us. The gas radios were something that we kind of fell into because we had a really good radio and we had a gas index, we put the 2 together, it didn't cost us much, and lo and behold, we landed Duke and it was a great opportunity, and if there are more opportunities like that, we'll certainly take them. But are we investing substantial amounts into those businesses? Our major investments are in our core lines, which are the water meters and all of the various industrial meters.

Your next question comes from the line of Brian Rafn from Morgan Dempsey Capital Management.

On the business you guys talked about, you hinted a little bit around it about commercial meters. How is that business, if you segment that out, how is that doing?

Commercial meters are also up, we talked about that. And it follows, when we say commercial meters, the way we use that term is these are the larger meters that gets sold to municipalities for their largest customers, all right? And those were also up along with the residential.

Can you give us a delta of what, up double digits, single digits, higher, lower?

Hold on a second, I think, I did, but -- commercial meter sales increased 14.4%.

Okay. Up 14.4%. Do you see, with the larger commercial, these large meters for utilities, maybe more installations of larger pipes and is that in tandem as a conduit with the smaller meters? Or does that have a separate like installation lifespan, so to speak?

Occasionally, it can have a separate life onto its own. Generally, they move in tandem. When municipalities change out, they'll change out residential and commercial at the same time. There are cities -- well, let me finish Brian, there are cities that do residential separate from commercial. And again, it depends on the particular product mix or customer mix in a quarter and can go both ways.

Okay. On the -- you guys talked about the Elster AMCO, I missed some of the comments, they had me back off-line asking me questions, the moderator. The -- how much business from the standpoint of higher-end AMR business does that Elster AMCO line provide or how much opportunity potential from the old standard mechanical drive-by, local read touch stuff?

Brian, this is Rich. On its surface, the opportunity for Elster AMCO is fairly basic mechanical meters without radios. And the reason I say that is because that's the product line that Elster shut down. That's what they were selling. They weren't selling a lot of their own radios. They were selling Itron radios. So on its surface, that's what we're picking up. Now on the other hand, it represents huge opportunity for us to sell higher-end meters and to sell the radios, our radios, with the meters. So we view it as a good opportunity.

Okay. Is there also -- you mentioned a little bit lower end, you talked a little bit, I think, Rich, about an aptitude to discount. Is there also an opportunity for some of the lower-end polymer plastic versus, say, the brass-type meters?

You mean with Elster?

With Elster, yes.

Well, I mean, our polymer meters, our polymer mechanical meters are still relatively small, about 15% of the meters we sell, 15%, 20%, are poly meters and 80% are brass. Polymer does very well in Latin America, because they're concerned about theft of the brass. So we are able to sell quite a few there. But in the United States, they haven't historically been a strong seller. Where we do see an opportunity for polymer meters going forward is with our solid-state E-Series, because there, the polymer meter, the design of it, results in stronger spuds and a stronger body. So we believe that, that's going to be something that customers will be interested in.

Okay. And what's the -- Rich, the Aquacue, you talked about software analytics. What is Aquacue measuring? What software specifically does that address?

Aquacue software provides the utility with a very easy-to-use and smooth interface to get their data and analyze their data. And so by putting some of those interface features into our ReadCenter Analytics, we believe we can significantly enhance it. But then Aquacue goes beyond that, and we've talked about this for years that we provide data to the water utility, we generally don't provide data to the consumer, in other words, to the water utilities' customers. And many of the water utilities have an interest in wanting to provide data directly to their customers that will encourage the customers to use less water and conserve. A lot of the Aquacue software allows our utility customers to pass data down to their consumers in a very easy-to-use format that can be read on an iPhone, on a computer, on an iPad, whatever, and -- or with text messages telling them about their water usage perhaps to identify leaks, perhaps to encourage conservation. So those are the types of features we're looking at.

Okay. Is that primarily a regional geographic thing because here in the Great Lakes, we pour gallons of water on cars, it's not really a water issue. Is that like a California type issue with conservation?

Yes, Aquacue clearly started out in California because this is a big concern out there, water conservation. But frankly, water conservation is becoming an issue all across United States. And you're right, those of us in the 20% of Americans that live in the Great Lakes basin are blessed that we have a lot of water. But remember, that, that water that you pour on your car has to be pulled out of the Great Lakes, purified, dumped on the car, re-purified, and put back into Great Lakes, and that takes a lot of energy. so you're not just talking about your blue footprint, you're talking about your green footprint. We're finding that even...

Okay. You talked a little bit about the pension cost and I think a large set of withdrawal, does that at all look at an acceleration maybe in retirees in the labor pool?

Well, I think, that's what's driving it, basically, the withdrawals on the pension plan are exceeding the assumed rate of withdrawals. And so, yes, and we've had more than normal turnover in the past 6 months, and that's what's driving that. And I suspect, by the way, that those noncash charges will continue for the next couple of quarters at least. [indiscernible]

Okay. And then, it begs another question to Rich, you talked, I think, in the past about kind of headcount hiring, adding some engineers, adding some accountants. Is that still going forward into 2013, '14. Hear Washington talk about nobody's doing any hiring. But you guys have talked about looking at kind of high value-added design and engineers, is that still going forward?

Rick, did you want to finish your comment?

I forgot what I said.

Brian, we are strategically adding heads where we feel it's going to have a significant value to the company and be able to create some shareholder value. So yes, we have added some people in key areas. Frankly, it's a good time to be able to add because there are some really good people out there looking for jobs.

And Brian, let me go back to your pension question. One of the reasons that we're triggering this charge now, and it's convoluted but has to do with the accounting formula, but the fact that we froze the pension plan a couple of years ago, really reduced the threshold as to when these things get triggered in the accounting world more than anything else. By freezing it, we basically cut the threshold in half. And so, even if withdrawals were fairly normal, we'd have a better chance of doing this. But we're going to take this charge -- actually, we took this charge years ago, it's already part of equity. This is the accounting convention.

[Operator Instructions] And your next question comes from the line of Glenn Wortman from Sidoti. Glenn Wortman - Sidoti & Company, LLC: Yes, on the SG&A, I mean, if you strip out the pension charges and the onetime legal settlement charge, SG&A was down substantially sequentially. Should we kind of consider these levels going forward? How should we be thinking about modeling SG&A?

One of the reason it's down, as I mentioned in my comment, is that employee incentive is loosely translated as annual bonuses and the like. Okay. It's really been reduced. The effects of the first quarter suggest that maybe we won't be getting those incentives this year. So we not only reduce the charge in the quarter, Q2 over Q2, we probably also reversed some of what happened in the first quarter because of the results today. So you probably have to factor that back in on a going forward basis because it's always our intent to make more money than in the past, which would mean a return with those employee incentives. Glenn Wortman - Sidoti & Company, LLC: Okay. And then, at this point, I mean, do you think you can quantify what you see as your realistic revenue opportunity from Elster leaving the market or we're not quite there yet?

Glenn, it's Rich. That's a hard thing for us to quantify at this point. Elster's sale of mechanical meters only was probably a total of a $20 million business. But obviously, we have an -- we're optimistic about capturing a large piece of that, but then also putting radios on a lot of that. So it could be an even larger potential. Glenn Wortman - Sidoti & Company, LLC: Okay. And then, finally, you alluded to some better pricing perhaps in the back half there. Do you have price increases out there? Have you just recently implemented some price increases?

So I wasn't referring so much about pricing as I was returning to a mix returning to normal, which could result in a higher margin. Better pricing would be when a lot of these Elster contracts come up for renewal and we have an opportunity to renegotiate them.

[Operator Instructions] And your next question comes from the line of Richard Eastman from Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Just a follow-up. Rich, just as this Elster AMCO sales ramp up in the second half, and you have some visibility on that, it sounds like you're going to be supplying at Elster pricing. I know this is incremental for you, but this is not -- you're going to make money on these, right?

We are going to be providing--short answer is yes. Last time I answered you, no and no. This time it's yes, yes. On a contribution basis, we are clearly making money on these. And we have -- although the fully absorbed margin is not where we wanted to be, we are certainly making money. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. All right. But it does sound like, again, pace of ramp will be important, but this will keep some pressure on your gross margin.

Yes. But, Rick, we're not obligated to accept the Elster pricing, okay? To the extent we want to do it, and strategically, we want to do it, we will take that pricing, but we also have the opportunity to go in and say it's not enough, we need more, and here's why.

Also Rick, not everything we're taking is at Elster's pricing. We've had a few customers that immediately gave us price relief when we took it over. We also had a particular large customer where we had won a percentage of the contract and Elster had won a percentage. Elster's pricing was lower than ours. When the customer decided to give the entire contract to us, it's at our pricing. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: I see. Okay. And this new polymer meter that you have now, the E-Series with a polymer meter, what is the price, just again, list price, I'm not talking about discounting, but just what is the list price on that product look like relative to the typical brass E meter? Is there any cost advantage there?

Yes, there is. Because it is substantially lower, substantially like I'm probably talking 10% to 20% lower, than selling the same meter with a stainless steel body. So we offered the stainless steel, it's more expensive, some customers prefer the stainless steel. But we have competitors out there that are offering polymer and customers are saying, "For a lower price, I'll take a chance on the polymer." Now we designed our polymer, I think it's superior to what else is on the market because it has stronger spud strength, which is one of the concerns with polymer meters, but we are able to get down and match our competitors' prices on that and still maintain a good margin. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And that particular product now goes into the AWWA 3-year E valve process or is it out the back end of that?

No. The AWWA E valve process is over technology, not products. So when we introduced the ultrasonic technology, that's what went into the AWWA approval process, and it's a 5-year process, and we have, how many years...

We're 4 year in, we've got about another year to go.

So we have 1 more year to go where AWWA would certify the technology. Whether it's stainless steel or polymer or whatever, it still the same technology.

Your next question comes from the line of Brian Rafn from Morgan Dempsey Capital Management.

Rich, just kind of a follow-up. Given the kind of tepid recovery over the last few years, budgets, fiscal constraints, tax issues. As you start to ramp up, if we were to have the economy roll over again, there is kind of a core obsolescent replacement in your business. Is that enough perhaps to provide some defensive sustainability to business going forward that it has to be replaced for obsolescence and that you really have kind of used up that ability to retire that from utilities?

Yes, Brian, we have estimated, and there's no way to know for sure, but we have estimated that maybe 2/3 of our business, of our water meter business, is simply replacement. When the meter wears out, it has to be replaced. In some states, that's a law. In some states, it's a guideline. But most utilities, somewhere in the 15 to 20-year timeframe, will replace their meters. And it provides a good strong base of business for us. Now the problem is, when I ship a utility meters, I have no idea which ones go on new housing and which ones are used in replacements. So we have a hard time getting the exact number. But based on our surveys and our conversations with customers, we think it represents about 2/3 of our sales. So that's why I've always said in the past, we're not recession-proof as a company, but we are recession-resistant. Obviously, when housing starts dropped, that had a big impact on us and as housing starts to come back, that's going to be very helpful to us because that all represents new meters. But as far as the basic replacement business, we didn't see utilities stop replacing meters because of the economy slowing down.

What we saw maybe is a move back towards more manual in the short-term versus something with automation simply in the cost base, which again, that goes to that mix question that we talked about.

It may have slowed down the conversion to automation, but the meter replacement itself was still there.

Okay. And then, you talked, I think, in the past, and correct me if I'm wrong, Rich, you have 12 of the 16 types of meter flow measurement or 14 to 16, there's a number that's fairly up there. Are you still procuring? Are you still targeting or surveillancing from an M&A standpoint to build out the other line or are those other missing types of meters just not very large from $1.00 sales revenue standpoint?

Yes. We say that we have 12 of the 16 ways of measuring flow. Now when we talk about 16 ways, we're talking about the common ways. There's obviously sonar and laser and really exotic stuff. But I'm talking about the commercial ways of measuring flow. And we have 12 of those 16. The 4 we don't have, 3 of them are interesting. Well, one is a target meter that's an old technology. It is actually decreasing in its use and it's not something that's of a lot of interest. Thermal mass meters are very interesting. It's a growing area and it's something that we wouldn't mind getting into if we can find the right opportunity. But the big one that we don't have is the single jet multijet meter. And the single jet multijet meter is the way water is measured outside of North America. Most other countries use that type of technology. We don't have that and we'd be interested in getting it. Although we wouldn't need it for North America so much, we would need it if we move into other countries.

However, that is the mechanical technology. And just like in this country where we use positive displacement and there might be a move to the E-Series over time to a solid-state type technology, it may also happen worldwide where that mechanical technology is replaced with some kind of solid-state technology.

Yes. Okay. And then, just one other, you guys mentioned Elster AMCO having very, very large giant kind of water utilities, large cities. Is there any opportunity for some of the large, like GALAXY systems, the major integrated systems for them beyond just the mix going from mechanical to radio, but actually going to the big kind of the grid system?

Well, I think, the Elster customers that are out there right now have already picked technologies. Elster was supplying the meter. And as Rich said, Itron in most cases was supplying the technology already, so they have made their technology decisions. So I don't see them switching. Now what it does, it gives us an opportunity to come in if they're still just buying pure mechanical Elster meters to introduce them to our ORION product, to our GALAXY products and the like. But I think the immediate source of opportunity is just replacing of the meters from Elster to Badger.

Your next question comes from the line of Matthew Dodson from JWest LLC.

I just have one quick question for you. You talked about how the wet weather in the first quarter kind of hampered your sales and then you talked about how the second quarter strengthened. Do you attribute that to pent-up demand or do you attribute that acceleration in your end markets?

I'll call it acceleration. What happens in our businesses, and it wasn't necessarily wet weather as much as it's snowy weather, I mean, you actually couldn't see the pits out there. And what happens in our business is when we have positives like that, business simply resumes, right. And it carries on. So what we are calling is a return to normal buying patterns.

One of the things about our business is that to install a meter, you still need somebody to go out with a wrench and turn pipes and install the meter. So this isn't like they would've normally installed 10,000 meters in the first quarter and because of the snow cover, they didn't install any. So now in the second quarter, they're going to do 20,000. There's a limit to how fast you can install meters depending upon how many people can get out in the field with wrenches. So we don't normally see a huge pickup after a slow quarter caused by catch up as much as we do a return to normal.

And then, based upon that, can you kind of talk about your distributors' inventory level relative to your sellout?

Yes. The distributors for the most part will carry meters that -- for the most part, most of our meters are custom-made to particular customers. And so our distributors will carry the supply they need to service their local customers. But most distributors don't carry significant amounts of inventory. They'll carry enough meters to cover them during the lead time for replacement by us. This is where the small cities need 5 meters real quick and the distributor will have them on the shelf and they'll be able to do that and then they'll order another 5 or 10 from us to replace it. So we've been accused in the past of stuffing the pipelines, but it's kind of hard when everything is mass customization to do that.

And my final question. Can you kind of talk about this lead-free act that's starting the first of this year? And how that's really going to affect the ASPs and then your overall margin structure?

Yes. That has been on our radar for several years. We and all of our competitors are fully ready for it. I don't think there's anybody out there who's going to have a big impact. We have already stopped making the leaded brass. We converted over to the non-leaded brass. All of our products are now in compliance -- are compliant with the January 1 requirement. So we don't even see it as an issue.

And so, have your distributors brought on this lead-free inventory or they're just running down the existing inventory? And when do you think that will be cleared in the channel?

I think, for the most part, most of it is cleared. Most of it has been going on almost for a couple of years now. There are still a handful of customers who intend to get meters installed yet this year who say, "Give me the standard brass." Well, what's happened from a cost and, I think, where your bonus is, the cost standpoint is the standard 81 metal, which was the leaded brass that's been used for years, as we've purchased less and less of it, those costs have come up, and the non-leaded the bi-alloy, the prices have pretty much evened out, okay. And so the point, well, pretty soon, the 81 brass will cost more simply because we're not using that much of it anymore. And so, as Rich said, for the most part, we've already transitioned now. The distributors are -- if they have any inventory, it will be gone and installed before year end. And again, we don't view it as an issue.

Ladies and gentlemen, this will conclude today's question-and-answer portion on today's call. I will now turn the call back over to Richard Meeusen for closing remarks.

Yes. I just want to comment again that we are pleased with the quarter's results. We do remain optimistic about the rest of the 2013 and beyond. And I want to thank everybody for joining us today. So thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, and you may now disconnect. Have a wonderful day.