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#I think the first thing is, probably the biggest thing that affected our margin in our minds, was lower obsolescence costs this quarter.
Last year, we had a significant charge in there.
I think we wrote down some gas radials.
This year, we didn't have that.
And, in addition, just normal obsolescence, I think we are doing a much better job, and we haven't really controlled that cost.
So I think that is in there.
I agree with you, material costs are down, but not as significant, I think, as some people think because, actually, copper has ---+ is in the same general neighborhood to where it was last year.
Much of that was behind us last year at this time, so you have got that in there.
And we don't comment, but product mix is always a factor.
When you are selling more products with radials, you tend to get higher gross margins.
No.
It is <UNK>.
I think it is two things.
One is that it is some mix, but, also, we have had a stronger focus on pricing discipline, and we probably could have jacked some more sales in there to make the top line work a little bit better.
But we are trying not to chase after really low margin business, and we are seeing some of our competitors chase that low-margin business as they are concerned about filling their factory.
But we have tried to maintain a more disciplined approach.
So I can just say that, from my point of view, and I review all of the large bids that we do, I can say that, over the last six months, I have noticed that on our last bids, we are maintaining a better discipline at going after higher margin business.
<UNK>, industrial flow is off about 5% of last year, both for the quarter and year to date.
So I don't see ---+ there isn't a big impact there.
Okay.
Clearly, we did not have some of the Middle East stuff in the third quarter.
The Middle East, a lot of that is getting pushed out, and we are very hopeful we are going to see some of it in the fourth quarter, but it may even be pushed off into 2017.
That is a very lumpy business because it is all contracts that occasionally come up, and you either get them or you don't.
So when you are talking about sequential quarter to quarter, I feel like August was a normal month and September was a strong month, but July was an unusually weak month.
And so, you're right.
We did make up some of it, but coming into July ---+ and I mentioned this on the last conference call ---+ we were seeing a slowdown, and a lot of that slowdown was distributed to just this backlog in getting the BEACON connections done.
We threw more people at that, we have gotten that approved, and as the quarter went on, we saw that improve.
The answer is yes.
When we had Hurricane Sandy, it affected a lot of our Northeast utility purchases to date.
So now, we are looking at what the impact ---+ and we haven't seen it yet.
It is going to be a fourth-quarter impact.
What the impact will be on the southwest.
I don't expect it to be as significant ---+ I mean Southeast.
Did I say Southwest.
I meant Southeast.
I don't expect it to be as significant ---+ and now I am speculating ---+ but I don't expect it to be as significant as what we saw with Hurricane Sandy or with Katrina because we are later in the year.
And a lot of the utilities are wrapping up their meter replacement programs as they are heading into winter.
So we might not see as severe an impact as we have seen in the past.
But, as you always know with these, it doesn't result in any lost sales.
What happens is, the utilities said, well, we were going to have our crews spend the next month or so replacing meters, but with this hurricane that came through, we need them to be cleaning out catch basins and helping us with other issues.
And so they divert the crews.
Once they are done with that, meters still need to be replaced, and so then they come back for meter replacement.
<UNK>, there is definitely a lag, from what we have seen in the past.
When we had the great recession of 2008, 2009, we didn't see an impact until we got into 2010 and 2011.
So there is definitely a lag.
On the water.
On the water ---+ we are talking the water side of our business.
The water utilities, they tend to lag, and then they lag getting back up again.
So that is what we saw last time.
If we do hit another recession, we would expect to see that.
We don't see it yet.
On our flow instrumentation side, that is a broader economy.
And so, yes, if there is a recession, it does hurt flow instrumentation.
Right.
Yes, <UNK>, for those who don't know, we did some remodeling this year ---+ last year and this year at our Milwaukee facility to create a customer experience center.
We do bring a large number of customers to Milwaukee for training.
Pretty much every week we are running some sort of event here for training customers or bringing in potential customers, and we felt that our facility here was getting older and was not showing well.
And we were not using some of the modern technology to give the customer the experience that they would expect from a higher tech company.
So we made the investment.
We remodeled a section of our plant to make this center.
The response from the customers has been extremely positive.
When we are dealing with somebody who has never dealt with Badger before and we are talking about our large multimillion dollar contract, bringing the key players to Milwaukee, giving them a tour of the factory, showing them how we test our meters, how we do our R&D, and then showing them our entire breadth of metering products is very important.
It is very important to their decision-making process.
And I will even say, with the Middle East, when we make sales in the Middle East, very often they will fly teams over here to inspect our factories, expect inspect our facilities.
And so all of that is an important part of the sale process.
So we feel good.
We opened it a couple of months ago, and thus far, all the feedback we have gotten has been very positive.
No.
You know, we don't get ---+ after a hurricane, a large number of sales of replacement meters because of damage.
The meters tend to be pretty robust.
You can have a lot of damage to collection towers, if they have a fixed network system.
That is why a lot of our customers are starting to prefer looking at a cellular option because one of the things we know is that when there is a hurricane or a natural disaster, one of the first things that happens is the cellular system gets high priority for being brought back on line.
And that is because that is a system used by first responders.
So when they have our cellular option, there is no utility owned infrastructure up in the air.
When they are using fixed networks, sold by Badger and by our competitors, there is a lot of fixed infrastructure that has to be repaired, and it takes them longer to get up and running again.
But, as far as the meters themselves, these meters are mostly underground.
They are very robust.
We really don't see a big uptick in meter sales.
Well, I think we've talked about it.
We see a lot of interest in the BEACON software.
However, until we get this interface issue behind us, that is what is holding back and delaying some of these sales right now.
And then, once the interface issue is resolved, oftentimes, utilities just want to buy, and they will test 100 meters.
And so we are working through those issues.
In fact, I think <UNK> on the last call said maybe we had about 140 customers.
Right.
Put some numbers around it.
On our system, I would say, absolutely not, <UNK>.
We design our systems with the water utility in mind, and you have to understand that the average water utility in the United States has about 1.5 employees.
So we are talking about very small utilities.
And when we designed it that way, we understand they are not going to have an IT department.
In fact, in most cases, we are not working with utilities' IT department.
We are working with a small vendor that wrote the billings system for the utility.
Usually, local to that utility.
And so those are the guys that we have to spend our time working with on the interface.
But we designed BEACON to be very much a plug and play.
Once you get past this billing interface and they shouldn't need additional IT support.
Now, I have to say, that is in contrast to the approach some of our competitors have taken.
Some of our competitors where they are making a software package that they expect to be used by electric, gas and water utilities, obviously, that package is going to be much more complex and need a lot more support.
But, in our case, we are making it just for the water utilities.
We are making a very simple package.
Well, obviously, every year ---+ and, in fact, we have got our November board meeting coming up.
So every year in November, we prepare our strategic plan for the next year and a four-year outlook beyond that.
So it is a five-year plan that we present to the board.
And then, occasionally, and it is episodic, I would say maybe it is every four years or so, the board says, let's do a deeper dive into options, and that is what happened last November.
Now, the last time that happened, about four years before that, what the end result was, we borrowed about $100 million.
We bought back about $30 million in stock, and we bought a company called Racine Federated.
So this time, we have done it again, and the end result of it this time was the stock split, a dividend increase and a continued focus on our current strategies.
But, there is no doubt that, at some point down the road, the board will want to do it again.
But it is episodic, not annual.
Well, I would love to find him, but in reality, we will never know, <UNK>.
Sure.
And, right now, when we say we are going back through our ---+ we are sticking to our core strategies.
When it comes to acquisitions, it falls into three groups.
First off, we are going to continue to look at our distributor network and make acquisitions within that network as appropriate.
And I will say, we have another one in the pipeline, and we are keying up what would be the fourth distributor acquisitions.
These are all relatively small.
They are all less than $20 million.
So they are not huge acquisitions, but in the case of our distributors, we've always had a very close relationship with our distributors.
The majority of what they sell is Badger Meter product, and so it is a fairly easy acquisition for us to make and integrate, and we found it brings a lot of value both to us and to our customers by having those under Badge Meter.
The second group of acquisitions is in the flow instrumentation side.
We kind of put that on hold as we are going through our strategic review, but we are firing those up again.
And, again, we are looking for the small, strategic acquisitions like the ones we made in the past.
These could be ---+ now, Racine Federated was an exception.
It was about a $60 million acquisition.
But, normally, these are $10 million type acquisitions also.
So we are continuing to look for those.
And then, the third group I would put out there is where we look for a unique, new up-and-coming technology that, perhaps, somebody has done work on developing, much like when we bought Aquacue, and we are able to go in there and modify it for our industry.
Very often, we look at it and say, should we buy the technology, should we license the technology, or should we buy the whole company.
In the case of Aquacue, we decided to buy the company because we wanted to use their capabilities to make the BEACON product and the ORION cellular.
So those are the three groups of normal acquisitions.
Beyond that, our board is still open to larger acquisitions, to major game changers, and this will be something we will be talking about in November as to whether or not there are other opportunities out there we should be looking at.
And, like any company, we are always looking at things like that.
I hope that helps.
No, <UNK>, we didn't lose any sales at all.
But, I even have a video of a competitor's sales person standing up at a town council meeting and saying, you know, you are about to sign a contract with Badger Meter.
You might want to hold off because there is a rumor that they are for sale and they might stop making water meters.
So, honest to God, he said that, and I have got it on video.
And as bizarre as that seems, very often, council members of a small town who don't really understand how these things work would hesitate and say, well, let's just put it off for a month or two and take a look at it.
So we saw some delays, but we didn't lose anything.
Nobody said, well, we're going to go with another company because Badger is for sale.
I mean, obviously, Sensus recently got sold.
Before that, Elster got sold.
A lot of companies get sold, and none of them are going to stop making the products that drive their company.
So it is just a disruption, it is a confusion factor, and it causes a little bit of a delay, and I think that is what we saw.
Well, I think the Xylem acquisition of Sensus is going to be very interesting because, from what I understand, they have some very aggressive synergy targets, cost reduction targets associated with that acquisition.
But Xylem obviously didn't make water meters before, so you don't have channel synergies.
You don't have manufacturing synergies.
So I think there's going to be some challenges in getting the synergies that they want to get, and it will be interesting to see how they do that without having any real operations that they can integrate.
There is also the question as to whether or not somehow any of the current Sensus products can integrate with any of the current Xylem products.
I think that is going to be challenging, too, because, obviously, the water meters are sold to the water utilities, and many of the Xylem products are sold into other channels.
So that is going to be a challenge, too.
As far as pricing, Sensus has always been a very disciplined company when it comes to pricing.
I really don't see that changing dramatically, and I think they are going to continue to compete with us as they have in the past.
I don't see a big change there.
Now, I am talking here ---+ when I talk about pricing, I am talking about North America.
I am not that familiar with Sensus's pricing in other markets.
But I know in North America, they have always been very disciplined.
And, <UNK>, some of the delays are not necessarily because of us.
It is simply getting access to those IP vendors of the various water utilities, and really that has almost been more of an issue than anything else.
It is just it takes them ---+ a lot of these are mom-and-pop shops.
So you're looking at, yeah, we will get to it in about two months.
Once you devote the resources, some of these issues are resolved in a week.
It is just a matter of getting their time and getting it on their calendar.
Right.
<UNK>, we had one vendor who ---+ one software vendor who had provided the software to three utilities that all wanted to move on to BEACON.
And the answer was, well, it is August.
The guys who handle this are on vacation.
They will be back in a few weeks so they won't be able to do anything.
And so we actually run into that kind of thing.
From quarter to quarter, it was still relatively flat.
The American Meter sales have not achieved what we had hoped for this year, and the main reason was the thing we were just talking about.
American Meter had a software vendor that we needed to work with to map all of the fields to get onto BEACON.
That vendor took a long time to get back to us with anything and to start a project where they would focus on this.
They are now on this now, and I am being told it should be completely done in about three weeks.
Once we achieve that, we should be able to see increased sales opportunities.
Yes, I was ready for that.
We actually (multiple speakers) 70 of the utilities in the backlog.
So we cut it in half, but we got 60 more in.
So I am right back up around 130 or so because of the new ones coming in.
So they are still pouring in almost as fast as we are clearing it, but we are now starting to get ahead of it.
On the other hand, <UNK>, frankly, nothing would make me happier than if we continue to clear 20 or 30 a month and 20 or 30 continue to come in.
Because it means that the demand for BEACON has far outstripped anything we had planned.
I think at some point, the new ones are going to slow down, but I am certainly not going to tell my sales force to back off on convincing people to move over to BEACON.
It is a great opportunity for our Company.
Every time we do one of these, it represents future sales.
So we certainly want to keep charging at it.
We have expanded the territories.
We had unassigned territories where distributors have fallen off, and we have actually ---+ for instance, you said United Utilities is small.
We have added two states to that.
So we've picked up those sales.
So, on a comp basis, I mean, that is now a company sale that (multiple speakers) sold through distribution.
(multiple speakers) <UNK>, without doing acquisitions of distributors, we are increasing the amount of sales going through our Company on distributor.
Yes.
Well, first off, we probably shouldn't give as much attention to the Texas warehouse as we are.
It is not a huge cost, and it is not a huge drag ---+ it is not a drag at all in any way.
It is just going to allow us to get more inventory closer to our customers and respond a little more quickly to our customers.
Again, this is part of expanding National Meter's territory, giving them additional territory; they need some additional facilities and warehousing capability.
We only cited that as an example of how we are expanding company-owned distribution and giving them the assets that they need to do that.
There is not a particular large customer.
It is there to support our Texas customers, and we will be able to provide them a higher level of service with that warehouse.
Yes, there is some inventory for the Mideast.
We thought a lot of that might have gone this quarter, but it is sitting over in Dubai or in Stuttgart, Germany, waiting to be shipped.
So there is some of that inventory.
But, also, it is the continued idea that we wanted to have a little more inventory in the field, respond a little more quickly to our customers, and provide this higher level of customer service that our distributors ---+ that our distribution network usually does.
That is why they are able to get a higher margin is because of that fast response.
But with low interest rates and with low carrying costs for inventory, it just makes good business sense to do it.
Yes and I will just say again that I was a little concerned coming into the quarter.
I was pleased with the way the quarter ended, especially considering we did the $0.30 after that unusual $740,000 or $0.02 charge from pension that really comes out of equity, goes to expense, and right back into equity.
So it has no impact on cash, no impact on the balance sheet.
So when I look at it, I kind of have to discount that and say, we really did have a pretty good quarter taking that effect out.
Yes, sales were flat, but we've maintained very good pricing discipline as we talked about on the call to achieve very strong margins and still get growth on the bottom line.
So in all, we are pleased about that, and we are optimistic about where the rest of the year goes.
And, with that, I will thank you for joining us.
