Badger Meter Inc (BMI) 2014 Q3 法說會逐字稿

Thank you for joining us today. As usual, I 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 these forward-looking statements. Please see yesterday's earnings release for a list of words or expressions that identify such statements and the associated risk factors.

Let me reiterate some of our guidelines. For competitive reasons we do not comment on specific individual product line profitability other than in general terms, nor do we disclose components of cost of sales, for example, copper. More importantly, we continue our practice of not providing specific guidance on future earnings. We believe specific guidance does not serve the long-term interests of our shareholders.

Now on to the third-quarter results. Yesterday afternoon after the market close we've released our third-quarter 2014 results. We are very happy to report that we had record sales, earnings, and diluted earnings per share for the third quarter. In fact, not only did these numbers break previous third-quarter records but they were the highest of any quarter in our history.

Sales for the three months ended September 30 were $96.3 million compared to $93 million during the third quarter last year. The $3.3 million or 3.5% increase was the net result of higher sales of municipal water and flow instrumentation products, offset slightly by lower specialty product sales. Let's look at each of these groups.

Municipal water sales increased $2.7 million or 4% to $69.9 million in the third quarter of 2014 from $67.2 million in the third quarter of 2013. These sales represented 72.6% of total Badger Meter sales for the last three months compared to 72.2% in the same period last year. The increase in municipal water was due to higher sales of residential meters both with and without radio technology, offset by slightly lower sales of commercial meters and related technology.

Sales of residential meters increased 6.5%, due primarily to higher volumes of products sold.

Commercial meter sales decreased 5.6% over the same period in 2013. However, it should be noted that in the third quarter of 2013 commercial sales were up 33% over the same period in 2012. This is an example of the lumpiness we sometimes refer to and how our sales fall within the particular quarters.

Overall, our customers have continued their normal buying patterns. We are seeing efforts to sell products in other parts of the world, and we continue to be favorably impacted by sales to customers of a former competitor.

Flow instrumentation products represented 24.3% of sales for the last three months compared to 23.9% last year. These sales increased $1.2 million or 5.4% to $23.4 million from $22.2 million in the same period last year. Most products within this group saw increases in total sales due to higher volumes on relatively consistent pricing. Specialty application products represented 3.1% of sales for the last three months compared to 3.9% in the same period last year. These sales declined $600,000 or 16.7% from Q3 to Q3, to $3 million from $3.6 million last year. The decrease was due to lower sales of gas radios, offset slightly by an increase in sales of concrete vibrators.

Gross margin as a percent of sales was 37.9% in the third quarter of 2014 compared to 35.6% in the third quarter of 2013. The increase was due in part to lower brass costs, favorable exchange rates on parts sourced from Europe, and a lower cost associated with slow-moving and obsolete inventory. Shifts in the product mix also contributed to the higher margin percentage.

Selling, engineering, and administration expenses for the last three months increased $1.3 million or 6.8% over the third quarter of 2013. The increase was due primarily to higher employee incentives due to better financial results to date, higher professional fees associated with an acquisition that was completed on October 1, and increased amortization expenses associated with recently installed software.

The effective tax rate for the quarter was 34.9% compared to 33.5% last year. The latest estimate of the effective tax rate for the year as a whole is 36.6% on all incremental dollars. The actual rate shown on the financial statements also includes some unique tax benefits that flow through the tax provision.

I also want to note that the overall results include a non-cash pension settlement charge of $680,000 or $0.03 per diluted share. As result of all of this, net earnings for the quarter were $10.2 million or $0.71 per diluted share compared to $9 million or $0.63 per diluted share for the same period in 2013.

The balance sheet remains stable. We generated $28.2 million of cash from operations during the nine months ended September 30, 2014, compared to $28.7 million in the same period in 2013.

In the third quarter we continued to reduce our overall debt. At September 30, debt as a percentage of total capitalization was under 23%. Rich will comment on this further. But on October 1, subsequent to the end of the quarter, we closed on our purchase of National Meter and Automation. As a result, we will see higher debt balances in the fourth quarter.

I will now 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 thank all of you for joining us today. First, let me say that we are obviously very pleased with the strength of our business in the recent quarter. Our customers continue to see the value in our product offerings, especially our newest products, and we continue to manage the Company for future growth and profitability.

Let me provide a few specifics on those new products. We are seeing strong growth in our E-Series Ultrasonic residential water meter we introduced several years ago in stainless steel and most recently in a polymer version. Unit sales of these products doubled in the quarter compared to one year ago. The ORION SE radio, which provides simultaneous drive-by and fixed network meter reading capability, also continues to drive higher sales. And the BEACON Advanced Metering Analytics system, with its cellular-based radio introduced earlier this year, continues to see strong market acceptance. We have sold over 150 starter kits and now have numerous utilities that have already committed to this newest technology offering. These three new products, E-Series, ORION SE, and the BEACON AMA system, are all driving sales growth and strong margins for Badger Meter.

On the first day of this month we were also very pleased to close on the purchase of National Meter & Automation, our largest distributor. We paid $20.7 million for this company, which we estimate to be about seven times normalized EBITDA. Since a significant portion of National Meter's sales were from the resale of Badger Meter products, this acquisition is only expected to add to our consolidated revenues by approximately $15 million annually. This represents National Meter's sales of non-Badger Meter products plus their markup on Badger Meter products. However, this acquisition will add significantly to both our gross margin and our bottom line. More importantly, the acquisition will bring us closer to our customers and enable us to serve the market more efficiently. We are very pleased to have National Meter & Automation as part of the Badger Meter family.

We continue to invest in our R&D efforts for meters, radios, and software. We recently introduced the new EyeOnWater consumer app, which enables our utility customers that have implemented the BEACON AMA system to give their customers, the end water consumers, access to valuable information about their water usage. This free app is now available on home computers, iPads, iPhones, and androids. Utilities in water-stressed areas are particularly interested in providing this information to their customers to encourage conservation efforts.

Looking forward, we feel that we are in a strong position to drive continued growth in both sales and earnings. Although the fourth quarter tends to be a weaker quarter, due to the seasonality of our business, and in October we are already seeing some of that weakness, we are optimistic about our long-term prospects.

With that, we will take your questions.

(Operator Instructions) Richard Eastman.

Rich, could you just -- I just want to make sure I heard this right. On National Meter, you guys paid $20.7 million?

Correct.

And could you just give us a sense of the kind of, quote, Badger maybe pass-through revenue? We talk about $15 million of being third-party revenue, but --

Well, the $15 million is third-party revenue plus some markup on our products. But they were doing about $25 million to $30 million of Badger Meter products, which obviously doesn't double up on our sales. We're not counting that twice. But you can see that at $21 million purchase price with seven times EBITDA, we're expecting to generate about $3 million of additional EBITDA from this purchase in 2015, for sure.

Okay. So $3 million of EBITDA, incremental, from this purchase for all of next year?

Right. And to help you with your model I will also say that they will probably add about $6 million to our sales, engineering, general and administrative costs. So that will fall in there. And the difference, the plug number you are going to come after, is improved margins. We should get over 100 basis points on our margin.

Okay, excellent, excellent. And then just -- could you just talk for a minute about the seasonality? Just your last comment there -- typically, your sales sequentially into the fourth quarter are down maybe 10%, 12%. So your comment about seeing that softness -- you are really talking about that typical seasonal softness versus something that would be more year over year?

I'm seeing the seasonal softness. But Rick, I purposefully made that comment about October because I'm seeing October starting out a little softer than I have in the past, in past October's.

Okay. So year over year it's a little bit softer?

(Multiple speakers) even against what we thought we would have a month ago. Right, right. We have had now to great quarters in a row. And in fact, even the first quarter, if you adjust back to $0.07 for the acquisition, we've had three great quarters in a row here. And long-term I don't see any issue in our business. But as you know, the utilities react to a lot of different things. There's a lot of factors that come into play. Even the election can come into play on utility buying habits. We are just seeing some softness in our October order entry, which -- we're only halfway through October.

No, I understand.

So it's possible that it's just timing.

And so maybe the question is, from a -- we talk about order patterns return to normal, we would get some seasonality. Maybe we are a little bit softer than we would like year over year in the early part of October. But there's nothing structurally? Because, again, revenue at the municipal-state level still seems to be working higher. There's nothing structurally here that would suggest any caution in the buying pattern, is there, that I don't see?

That's absolutely correct. We are not hearing anything from the field or anything like that.

And with National Meter, again, we got $15 million of incremental third-party revenue here to build into a model on an annual basis. I presume that their fourth quarter would be a little bit weaker seasonally as well?

Correct. They will follow our seasonality.

And because of the accounting rules and the write-up of the inventory in the acquisition price, we don't expect to see much profit in the fourth quarter on the gross margin line.

Right, Rick. There will be much that with the bottom line from National Meter because we have to write up all of their inventory in the acquisition.

Sure, yes. And they wouldn't carry more than a quarter's worth, would they?

Yes, they've got like four turns a year. So anything we sell in the fourth quarter is going to be written up, is going to be -- result in write-up.

And just one last question, sorry. But ORION SE -- I'm just curious. When you look at ORION SE sales relative to -- are you still selling any ORION product? And also, for that matter, GALAXY? Or has most of the product now transitioned over to ORION SE?

Know. We are still selling a lot of GALAXY and a lot of that what we call ORION CE, which is a Classic Endpoint. We are still selling a lot of that. In fact, that's the majority of the sales. But we are on track to probably do about $100,000 ORION SE this year. And you are racking that up --

Units.

Units. And you are racking that up against about 1 million radios we sell each year. So we are pleased with where it is. But as you know, we introduced this thing basically about a year and a half ago. And a lot of utilities say send me 10, send me 20, we'll see how it works and we'll place orders. I'm pleased that we are now selling tens of thousands a month. But we're not replacing all the ORION CE's with them.

Yes, I understand. Okay, great, thank you. And a very nice quarter, nice quarter. Thank you.

Ryan Connors.

A further question, guys, on just if you could expand on the National Meter deal, particularly on the strategic rationale behind the deal, Rich. I know typically you have not owned distributors in a big way. So does this indicate any kind of a shift in channel strategy on your part? Or was this more of just an opportunistic type situation?

Yes, and it is a good question because historically I've said that as a manufacturer I'm a little uncomfortable owning a distributor, and that it's difficult to operate that way. Well, first off, the opportunity came along in National Meter. National Meter is not only our largest distributor, they are kind of the gold standard of distributors in our industry. They have done just an incredible job. They have great systems, great procedures, highly talented people.

So this opportunity allowed us to start down a new strategy path where we said let's acquire National Meter. And we don't view this as a one-off acquisition. We think the real opportunity with National Meter is that down the road, as other territories become available in our distribution network or other distributors become available we are going to look at them pretty aggressively as to whether we want to make some acquisitions or assign additional open territory to National Meter to allow them to grow, and basically grow our own distribution network, if you will. So, we are definitely going to look at this as a new strategy and a new opportunity going forward.

Now, if I'm not mistaken, National Meter is largely kind of a Southwest part of the country; is that correct?

That's correct. They really have Colorado, Arizona, and California -- a little bit of other states but that's basically what they've got.

Okay. And that's one of the areas where BEACON has been most popular early on because of the water concentration management aspects of the system and that sort of thing?

Absolutely. I would probably throw Texas in there. The Texas utilities are also very interested in BEACON. But to tell you the truth, we've had interest all across the United States. We've got Eastern utilities that have picked it up. And the starter kits have gone everywhere. But there's no question that this idea of EyeOnWater and allowing people to see what they are using to drive conservation -- that's going to be a big selling point with the utilities in stressed water areas. So that would focus California, Arizona, Texas, Nevada, areas like that.

And you have talked about this technology double leap, Rich. Is part of this the fact that you own distribution -- does that enable you to better dictate how your channel partners are pushing, how aggressively they are getting the word out and the message out and making a sale and some of the new technologies rather than being complacent and selling some of the legacy stuff? Is that part of the rationale here or no?

Well, I think there may be a little of that, but I wouldn't say that's the driving rationale because pretty much all of our distributors sell primarily Badger products. So we got a pretty close relationship with all of our distributors now. But what this will do is bring us closer to our customers. It's going to let us get out into the field and spend more time with the customers. We are going to know more with the customers' needs are. And yes, to some extent, it is going to allow us to focus sales efforts in areas where we feel that it's best for building shareholder value.

Okay, and then one last question just on the BEACON system. It's been a great story, obviously not material yet in terms of the numbers. How soon out or how far out do you think it will be until that's really a needle-moving part of the business? Is that a two-year story, a five-year story? What do you think?

I think one way to gauge that is to look at ORION SE. So we really introduced ORION SE in the second quarter of last year and we started selling thousands a month, which were primarily for people who were looking at starter packages and testing it. Okay? Here we are a year later and we are selling tens of thousands a month. I think we are going to see the same thing with BEACON. We released it pretty much in the second quarter of this year. We sold over 150 starter packages where the utilities actually buy, they are making a commitment. The starter packages come with 10 radios and four free months of service. After four months they have to decide whether they want to commit to this or not.

And we are seeing a lot of utilities commit. But I think it's going to be somewhere around the third quarter of next year when we are going to start seeing significant sales on this.

Got it. Well, that's very helpful. Thanks for your time.

Chip Moore.

Wondering if we could touch on pricing environment a little here. Signs of some softness in October, copper touching under $3. Presumably you got a little cushion. Are you willing to compete a little more? And then what are you seeing from competitors there?

I think we are competing a little bit. I didn't mention this in terms of the municipal water business because it was primarily volume driven, the increase. We saw, I mean just a smidgen of price decline, and I mean less than 1%. That could have just been mix, so we really are not attributing that to anything. But there is a little bit of -- there's heavy competition on price out there right now.

We've used -- we've said forever built into our prices was $4 copper. You are right; copper is low right now. But we've used that to absorb other price increases over time. So, we think we are properly priced for the market right now. And we will have to see what our competitors do.

Okay, that's fair. And maybe you can bring us up to date on the Elster business, where we stand there.

The Elster business -- we think now it's to the point where, since it was our business last year, it's actually just being built into the normal results. But we feel, we estimate that we have conservatively captured at least half of the Elster sales, the former Elster sales. We know there are customers out there that Elster had contracts with that basically stock piled and we still haven't seen some orders from them. And so we are hoping that we still have a little bit more potential in the future. But I'd say that's built into our base now in 2014, going forward into 2015 and beyond.

We are fairly confident that we got over [50%] of the Elster business. We also feel that that Elster business is priced probably about 15% below market rates. What we were able to do on the renewals this year is, I feel, and this is just a gut feel from the renewals that I saw, that we probably picked up a third of it this year. So, we are maybe 10% below market rates on a package of all the customers, and we are going to try and pick up a third of it each year. We can't go in and say to a customer we are raising the rates 15% in one year. They were used to these low prices from Elster. We got to get them back up to market, but it's going to take a few years to do it.

Okay, that's helpful. And just lastly on me, back to Q4 trends, language in the press release seems to suggest may be Q1 levels are lower. And then just triangulate that with the addition of National Meter. Thanks.

Well, Q4 -- I always say Q4 is the weakest quarter of the year by far. And Q1 can compete for Q4 for the bottom or it can compete with Q's 2 and 3. It all depends on how the year starts in the weather. We've had that conversation. But if I were a betting person I always say Q4 is the weakest. There is seasonality. You are heading into winter, you are heading into the end of the year. Some utilities --

There's also a lot more holidays in Q4.

Yes. Some utilities are a calendar year. We estimate maybe a third of the utilities have calendar year ends. Whether they have to spend money to get it done by the end of the year -- which, by the way, has not been a problem in recent years -- or whether they just wait till the new year to start, all of those are factors. Very hard to get a read on.

I think all Rich was referring to was just, as we start the first couple weeks in October, we updated our forecast about a month ago and we are seeing a little softness even on that.

And National Meter -- I think the message there is don't expect any great shakes in the fourth quarter where National Meter is going to add a specified amount of money on the bottom line, just simply because we go through the opening entries and that inventory has to turn. And we don't make a lot on that. But after that we are very confident.

Okay, great. Appreciate it, guys.

Glenn Wortman.

You explain the year-over-year gross margin improvement but it was also up 150 basis points sequentially on essentially flat sales. Can you help us understand the move there?

I think -- I have a theory on that. Because our inventory turns four times a year, if you look at what we sold in the second quarter, a lot of it had to do with costs basically incurred in the first quarter, when we didn't have as much volume. If you look at what we sold in the third quarter, a lot of that has to do with product basically produced in the second quarter, when we were really basically cranking and we were more efficient. We have a lot of fixed costs. It's a fixed-cost environment on a lot of the production costs. And as we get the volume, we absorb it better and it helps drive down costs.

Okay. And then just on the gross margin going forward 37.9% is toward the upper end of your range, but it sounds like you are going to get higher margins from the National sales, maybe some improved pricing from Elster. Any thoughts on where gross margin shakes out going forward.

My answer is we always regressed to a norm. Okay? Because we start hitting a little bit too high, eventually pricing then from the competition creeps back in and forces us to take some actions. You are right on all of those factors. They can all play a role. But we can go into a little bit of softness. And again, I point back to that fixed-cost environment. Certain fixed costs and also the margin can decline a little bit.

Okay, thanks for taking my questions.

Brian Rafn.

Give me a sense, Rich, how many -- when you look your National wholesale distributors, what size universe of that is being that National is maybe the gold standard, how many different distributors are we talking? Tens, hundreds?

We have about 33 distributors that represent about 50% of our utility sales. The other 50% is done direct. And so National Meter represented -- was the largest of those 33 distributors.

Okay. Does that at all -- does that create any encroachment with some of the other distributors maybe competitively looking at maybe adding competitive product to that, given the fact if you are doing a little bit of vertical integration?

No. First off, all of our distributors under contract have exclusive territory. So they don't compete with each other, so we don't have that issue. We also under our distributor contracts have pretty tight control over what else our competitors can sell. So it's very -- I'm sorry, what else our distributors can sell. I'd love to control what our competitors can sell, but I can't do that.

We have pretty good control through the distribution contracts of what our distributors can sell. So, for example, most of our distributors sell meter pits, pit lids, connectors, things like that that go with -- that are sold with the meter. So, I don't see a problem with other distributors trying to encroach or bringing in other product lines. I don't think that's going to happen.

Okay, okay. Give me a sense -- and you've talked, Rich, in the past, maybe over the last year or so and you said that given what's going on with Elster and Neptune, some of the other competitors, that for the first time since Jesus walked the Earth there might be a shift in some of this legacy market share. Are you seeing any of that?

Well, clearly the decision by Elster to pull out of North America, which after 100 years was the first time we've had a major shift like that -- that was significant and that was a significant opportunity for us. And I'm very proud of our team. We did great job and being able to capitalize on that opportunity. And I was very pleased that Elster was willing to work with us on that to transfer over a lot of their accounts. So that was just a huge opportunity and that was great.

We've seen our other competitors -- some of them are owned by private equity and are for sale. Others are not. We hear a lot of rumors out there about who's going to buy what and what's going to happen out there. But from what I see now, it's pretty stable. There is some market shift causing some competitors to have excess capacity and other competitors to not have much capacity. So that always impacts pricing and what's going on in the market, too. But I would say the biggest thing was the Elster change.

Okay, all right. And then you talked a little bit about the BEACON technology, the EyeOnWater. As you see this rollout, Rich, what is your sense of some of these starter kits? Do you see the consumer picking up on that and pulling some of that demand through, or do you see water utilities more in the gospel discipleship (technical difficulty) you should have? How do you see that playing out over the next couple of years?

You know, I think we are a ways away from the consumer demanding EyeOnWater with the utility. But what does happen is a utility in an area will decide to go with BEACON and will provide their consumers with this information. That word then starts spreading to the other utilities around them and the question starts being asked by common councils or public service commissions or the like that, utility boards, saying, well, what are we doing? Why aren't we using some of this latest technology? Why aren't we providing this?

In fact, in Texas one utility said we are going to be using Badger Meter's new BEACON system and providing this wonderful information to our consumers. And the intrepid reporter called a neighboring utility and said, what are you doing? And I got a kick out of the neighboring utility's answer. They said our consumers can see their water usage on a daily basis. All they have to do is call the water utility every day and we will read it to them.

So that's kind of a different level of consumer engagement than what we're offering here. We're offering real-time online information to the consumers. And I do think there's going to be pressure on utilities. I'm not sure if it's going to come from the utilities. But it might come from the governance boards in the surrounding utilities.

Yes, okay, okay. Given that I think you talked a little bit about your sense of business visibility. And in the past you've talked about tax revenues and budgets and municipal water budgets. Some of the nonsense going on, whether it be IRS, Tea Party, and drones and NSA hacking and border issues and Ebola -- are these things that are really tertiary and really not affecting your core business? Or are there potentially some of these political crises that could have some impact?

We talk about this all the time. I always go back to the first quarter of 2003, when the newly formed Department of Homeland Security told all the water utilities to -- 2003. Yes, that's why I can talk about it; it's 10 years old.

Okay, that's right.

Statute of limitations expired. When the newly formed Department of Homeland Security told all water utilities to inspect their facilities because we were going to warn Iraq, okay, it has a huge impact on our sales in that first quarter. Okay? So yes, I would say -- we always talk about this. The municipal water utility -- they are government employees. They are impacted by what they see going on out there. And sometimes these things give them pause.

Because right now we see the market -- yesterday was on a roller coaster ride. People see that and go, maybe I should hold off in making the decision about converting my sale in case this is the start of another 2008 again. So they are impacted there. Long-term, they are not impacted because what happens is all of a sudden this will be old news, two or three weeks from now, hopefully. All right? And everything just resumes and it goes on as normal. All right?

So we see that day to day. Brian, we'll give you one more question because we've got people waiting in queue.

Okay, one just on the comment on the ORION SE -- at what point -- are there any benefits that the GALAXY system, the fixed network, provides that the ORION SE does not?

No. Galaxy provides the reading. It's pretty much a one-way system where it provides the reading back to utility, through a fixed network device on a water tower or on a dedicated tower. And when you look at the BEACON system you are talking about using the cellular infrastructure and a two-way system where the utility can communicate back to the meter.

All right, thanks, guys.

(Operator Instructions) Hasan Doza.

A couple of questions -- the first one is, when you talked about fourth-quarter looking more like the first quarter at a high level, I just want to make sure, when we think about the base, you guys reported $0.32 in the first quarter of this year. So is that -- I know you don't give guidance. But is that the base we should think about when we think about the structure and shape of the fourth quarter?

Well, first off, we didn't say the fourth quarter is going to look like the first quarter. One of the people asking a question said that. Okay? And we didn't respond to it.

Secondly, the first quarter was $0.32 but there was a $0.07 unusual item in their which was acquisition cost for an acquisition we didn't complete. So on a normalized basis it was a $0.39 quarter.

And thirdly, I'm not going to answer your question because we don't give guidance (laughs).

Okay. I tried.

That's okay, Hasan. We give you credit.

The same question I had is you had about an 18% increase in inventory level this quarter versus your sales up 3.5%. Would you mind giving a little bit more color as to the reason your inventory went up so much year over year?

Sure. First off, we are building some strategic inventory in certain product lines, especially products that are made in our facilities overseas, where we are seeing longer lead times, whether it's because of customs, Homeland Security, or whatever, we've had to build up some strategic inventory there.

Secondly, you are going to continue to see an inventory build between now and the end of the year because in the fourth quarter and into the first quarter, because since those are our slower months, we're going to be making some major production moves down in our Mexico facility. We've actually got to buildings down there, and we're going to be moving some production from one building to the other just to optimize and give us capacity for future growth. And so during those moves we want to have enough inventory built up to satisfy any customer demands. So not only did you see a build, now you are going to see even more of a build between now and the end of the year. After that I think in 2015 you are going to see it start coming down again.

Are you investing any incremental capital in this Mexican facility, first part of the question?

No, just the cost of moving the equipment between one facility and the other, which is just freeing up space. We are also expanding the parking lot because we are bringing in more employees. It's all just growth related.

Okay. And should there be any impact to your gross margins as you move around the Mexican facility during the fourth quarter?

No, we don't expect it at all. We are taking advantage of the fact that the fourth and the first quarters are very slow, or slower than the second and third quarter. And so this is the time to do it, get everything optimized. It's just that the production of the E-Series has grown faster than what we had originally planned. And so we need to put on an additional line, and we just can't do that in the facility where we have the E-Series. So it's going to be better to just move it up into our larger facility.

Okay. And the last question, on your working capital I know as of the end of the second quarter you had a $9 million negative drag on working capital because you also had the build-in in inventory. So can you give us a little bit of color as to your working capital and cash flow generation as of the end of the third quarter?

Well, cash flow for the -- cash flow, when we disclosed this in the SEC filings, cash flow gets measured on a nine-month basis. And I apologize, but I don't have the six-month sitting there. But for the nine months we generated $20.2 million compared to $28.7 million for the nine months ended September 30 of 2013. Clearly, the increased earnings are a factor. But then you are right; the inventory build dragged that down a little bit to make it even between years.

Thank you very much, gentlemen. Appreciate it.

Richard Eastman.

This is a quick follow-up, Rich. In the utility business, municipal business, the two initiatives that you had in the Middle East and also just this international initiative to sell ORION radios through a reseller in Europe -- any traction there or ability to expand distribution? Or have you? Or customer base? Just what's the status of those two pieces of business?

Well, a couple things. First off, we did win the Middle East contract, about $6 million. We had some pretty heavy shipments in the second quarter but not much in the third quarter. It's just the timing of how they take the product.

We also completed a deal earlier this year with a company in Europe that is private labeling and reselling our ORION radio. And we are starting to see -- we are shipping to them. We are seeing -- it's hundreds of thousands of dollars a quarter, it's not millions. So we are starting to see those shipments and we are still pursuing other deals. We did open an office, sales office in Dubai with three people. So it's a small sales office, but it's going to help us support those Middle East customers and also hopefully gain some more.

Okay. And again, just incremental traction there, nothing of note? No second contract win and, you know --

Right. It's going to be a lumpy thing because they tend to be pretty large sales. So it's going to be lumpy.

But there are potential customers in the pipeline. And again, it's a long sales cycle --

Correct.

-- More than anything else.

Yes, I got you. Okay, thank you.

Thank you. I would now like to turn the call back over to Rich Meeusen for closing remarks.

Well, thank you. Obviously, we are very pleased with this quarter. We feel we've racked up three pretty good quarters thus far this year. We are optimistic about where things can go. We like the traction our new products are getting, and we like the market and where the market is. So we feel we are well-positioned.

With that, I'll thank everybody for joining us.

Thank you. Thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect, and have a good day.