Badger Meter Inc (BMI) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the Badger Meter First Quarter 2017 Earnings Conference.

(Operator Instructions) And as a reminder, this conference is being recorded.

Now I would like to welcome and turn the call to our Senior Vice President of Finance, Chief Financial Officer, Mr. Rick Johnson.

Thank you very much, Carmen.

Good morning, everyone, and welcome to Badger Meter's first 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 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 interest of our shareholders.

Now let's discuss what happened in the first quarter.

Yesterday, after the market closed, we released our first quarter 2017 results.

I am pleased to tell you that sales, earnings and earnings per share were all first quarter records.

Overall sales for the most recent 3 months increased to $101.6 million compared to $100.6 million in the first quarter of 2016.

Municipal water sales represented 77.3% of sales in the first quarter this year compared to 76.9% in the first quarter of last year.

These sales increased $1.1 million or 1.4% to $78.5 million from $77.4 million last year.

Municipal water sales were driven by substantially higher sales of commercial meters, as several cities were completing projects during the first quarter.

Overall, residential sales were down slightly.

However, if you look at the details, you'll find that we had a significant order for the Middle East in the first quarter of 2016 that did not recur this year.

Overall, domestic residential sales did increase quarter-over-quarter.

We often describe our domestic water business as lumpy, simply because it is difficult to predict the timing of orders.

I would characterize sales from the Middle East as sporadic in nature.

However, we are continuing to respond to opportunities there.

Flow instrumentation products represented 22.7% of sales for the most recent quarter compared to 23.1% for the first quarter of last year.

These sales decreased just $60,000 to $23.1 million from $23.2 million last year.

As we indicated during our last call, we believe that we have seen the bottom of the sales decline in the oil and gas business.

That was borne out by this quarter's increases.

Unfortunately, several large flow instrumentation product sales that occurred in the first quarter of 2016 did not recur in the first quarter of 2017.

We believe these are simply a function of timing, and that overall, our flow instrumentation business will show modest increases for the year as a whole.

Gross margin as a percent of sales was 38% in the first quarter of 2017 compared to 38.8% in the first quarter of 2016.

Increased material costs, in our case, brass, were higher in the first quarter of this year compared to last year.

However, higher capacity utilization and product mix helped to offset some of that impact.

As we move forward, we hope that pricing will enable us to hold margins against the increasing material cost.

There was no significant pricing impact in the first quarter.

Selling, engineering and administration expense declined $1 million from the first quarter of last year to $25.2 million from $26.2 million.

The decrease was driven principally by lower employee compensation-related expenses, including staffing levels, offset somewhat by a $450,000 write-down in an investment in an emerging technology company.

The provision for income taxes as a percent of earnings before taxes for the first quarter of 2017 was 34.2% compared to 36.3% in the first quarter of 2016.

This quarter's tax expense is net of certain discrete credits that were recognized during the quarter.

Without those credits, our effective tax rate would have been 35.6%, which is still slightly lower than last year's rate.

Our estimates, at this time, suggest slightly higher foreign earnings in 2017, resulting in an overall lower tax rate.

As a result of all these factors, net earnings increased to $8.7 million or $0.30 per diluted share for the first quarter of 2017 compared to $8 million or $0.28 per diluted share for the same period last year.

Our balance sheet changes since the end of the year generally reflect seasonal factors; for instance, higher receivable balances.

Cash generated from operations for the first 3 months of the year declined to $12.4 million from $18.2 million in the same period last year.

This was due to payments made in the first quarter of this year for incentives earned in the prior year.

At the end of this first quarter, our debt as a percentage of total capitalization was 12.8%.

With that, I will turn the call over to Rich Meeusen, Badger Meter's Chairman, President and CEO, who'll have some additional comments.

Rich?

Thanks, Rick, and thank all of you for joining us today.

My comments are going to be brief.

We were pleased with our first quarter record results, and we believe that we are positioned for a good year.

While the 1% top line growth was less than what we had expected due to the lower Middle East sales, the 9.5% bottom line growth was very strong and we believe indicative of both our strong market position and our ongoing cost containment efforts.

As Rick mentioned, domestic water meter sales increased, driven by strong increases in our 2 flagship products, our E-Series Ultrasonic water meters and our ORION Cellular radios.

We are continuing to invest in the development of these 2 products as the market acceptance of solid-state metering and cellular technology grows.

We are also seeing some improvement in certain areas of our flow instrumentation business, although the overall business was still flat.

In particular, our meters sold into the oil and gas markets reflected strong growth this quarter over last year, confirming our reports from the field that the long-awaited rebound is starting to appear.

With the continued strength of our core water meter business led by our newest products and some recovery in the flow instrumentation business, we are optimistic about our prospects for 2017 and beyond.

And with those very brief comments, we would love to take your questions.

(Operator Instructions) And our first question is from the line of Tate Sullivan with Sidoti.

Rick, can you help me?

I don't think you touched on it in your comments, how you manage inventory traditionally.

And is there any seasonality in the first quarter?

And is the lower inventory one way you avoided higher copper price impact, too?

Well, I think it was just more a function of the sales.

I mean, it's a function of the timing of our purchases more than anything else.

We generally don't talk specifics about any individual month, but the strongest month of this quarter was March.

We really dipped into some of the safety stock of the inventories and actually exceeded our plan in the particular month of March.

In particular, castings, for instance, is probably one of our fastest-turning items.

But overall, I think you'll see inventories come up later in the year, but we did very well.

This is Rich.

I'll also add that, that drop did bring us down below where we are comfortable.

So as Rick said, we will be adding.

Also when you ask about how we manage inventories, we don't try to manage inventories for the cost of copper.

In other words, we didn't stock up while copper was cheap and then try to take it down now that copper is more expensive.

We -- that was not what was driving that.

Our inventories are more managed to the needs of the business and to the expectations of the customers and being able to achieve the on-time delivery targets that we have.

I will also say that as we look at 2017 and some of the new products we're looking at and other products we're phasing out, we may have some increases in inventory, just to provide safety stock as we phase from one version of a product into another.

So that's going to happen, too.

Because we have certain customers that will say, "I know you're introducing a new product, but I kind of like the old one better.

Could you continue to provide me the old one while I finish out my implementation?" And in those cases, we will generally go by the inventory and stock it so that it's there for that customer as a customer service.

So you can, I think, expect inventories to come back up in future quarters.

And I just hope our VP of Manufacturing is not listening to this conversation.

Yes, yes, I don't particularly want the VP of Manufacturing...

If we can keep it down, we prefer to keep it down.

And our next question is from the line of Richard Eastman with Robert W. Baird.

Rich, could you maybe just comment with your commentary there or Rick's comment about March being the strongest quarter, I would kind of presume that might be the case normally with normal seasonality.

But does the business -- as a track to the first quarter and here into the second quarter, does it feel as though it's tracking seasonally, just the municipal side of the business?

Or is there any inflection there, uptick, downtick, softness?

Doesn't sound like it, but maybe give us your thought there.

This is Rick.

Let me just comment first.

For those who live in Wisconsin area, I hope you enjoyed our Kentucky winter.

So your question is, is the weather playing any impact?

Did we pull anything forward from Q2?

That question remains unanswered right now because it's too early into the second quarter to really make that determination.

It's a possibility.

But also I think we're seeing strong orders continue into the second quarter, but it's still early.

Right.

And I'll also say, Rick, we did not make any effort to pull orders up from the second quarter into the first.

As Rick says, you may have had customers who, and we've seen this cycle before, started meter replacements, northern customers starting meter replacements a little early because the weather was pretty nice.

And that -- and so we -- there may have been some of that impact.

But I'll also say, he mentioned the March as a very -- as an unusually strong month in relation to inventory coming way down, lower than what we expected.

Part of that was because we did have some supply interruption in February from a plastics supplier, in fact, from one of the world's largest plastics suppliers, who shall remain nameless.

But you can probably do some research and find out they shut down some automotives.

So it did have some impact on us.

We got completely caught up by the end of March.

So there were some February sales that were delayed into March.

But I think that impact did draw down safety stock a little more than what we wanted to, and that's really what he was referring to.

And it was a brief interruption.

It was about a 1 week interruption.

Sure, I understand.

And Rich, were the -- are these BEACON deployment issues, has that normalized?

I know it's been more on the customer side, but has it been kind of normalized?

Yes, it has normalized.

We feel we're now at a backlog level that is manageable, and it's where it should be.

It's where the -- when the customers say, please install BEACON, they know there's going to be a period of time for us to integrate it to their billing provider.

But we've caught up with a lot of the customers who were grossly delayed, and we're now down to the normal 4 to 8 weeks it might take to get somebody on to the system, assuming their software supplier is -- their billing supplier is cooperative.

I mean, we have a few that have gone way out because they're buying their billing software from a 2-person shop, and the 2 people took an extended vacation.

So I was shocked to find out how many billing software vendors there are in the water meter space, in the water utility space.

I was just surprised that there's a huge number of very small ones.

And we're chipping away at them.

We obviously triaged.

We went at the largest ones first.

We got a lot of those on board, but I would not say -- I would say that we are not seeing a holdup in our BEACON rollouts due to this issue anymore.

It's now part of our ongoing process.

Okay, I understand.

And then, Rich, I wanted to ask you, we've talked about ORION Cellular now for a number of quarters, about how -- fast grower.

There's some other vendors in the space that at least speak to offering or will offer a cellular radio.

And just -- can you just give us a quick picture of how this is impacting the marketplace?

I mean, are AMI deployments now, from an endpoint standpoint, has the cost come down since you don't need a dedicated backhaul?

Or how is it impacting the industry?

Well, so let's back up just a second for the sake of everybody who might not be as knowledgeable about this as you.

Obviously, we and all of our competitors offer the drive-by meter reading technology that we've been offering for decades.

We all offer a fixed network technology.

There's a lot of variety in that.

Some of them have, like a Sensus, where it is one very powerful expensive device put way up on a tower in the middle of the city and it can read the whole city.

Other approaches like Badger and some of our other competitors are numerous smaller devices that are put up on telephone poles or buildings that read the city.

So different approaches to fixed network, but we've all got fixed network solutions.

There are also mesh solutions out there.

We chose not to offer a mesh solution.

We chose not to go that way because we don't think mesh is the right solution for water.

Mesh is very popular in electric because electric meters are located above ground.

And therefore, to have one electric meter talk to another is pretty simple.

When you get into water, having one water meter talk to another, you're going out from a pit or a basement, across a lawn and back down into a pit or a basement, and it becomes very difficult.

So we chose not to go mesh, and there are some competitors out there with mesh technology.

Finally, the technology that we introduced that we're seeing very strong growth on, in fact, it was over 30% growth this quarter over first quarter of last year on our ORION technology, is the ORION Cellular.

We are the only ones out there really with a reasonable residential solution, okay?

We have some small competitors who have commercial solutions for the commercial applications, but we're talking about a 20-year residential meter, a cellular radio that can go in a basement or a pit and for 20 years transmit its reading.

We like that solution because there's no infrastructure.

When you say, has cost come down?

The answer is no because, frankly, the radios cost the same, whether you're using a fixed network or a cellular.

However, with fixed network, you've got the cost of all the towers and the collectors; with cellular, you've got some monthly fees.

So there are -- the costs are very competitive across this.

It's really a matter of performance and what you're looking for.

And a lot of water utilities don't like maintaining devices up on towers.

Cellular eliminates all of that headache.

Now let's go on to -- and I know I'm going long-winded here.

But...

I'm glad I asked for short answers.

This is good stuff, Rick.

So now let's go on to another thing you mentioned, which is we always knew, when we came out with cellular several years ago, that our competitors would not just sit by and watch us take a segment of the market without competing.

We also believed we had a several year leap on our competitors, and we are now hearing that some competitors are planning to introduce cellular possibly yet this year, okay?

So we know they're coming.

We're going to be very interested to see what kind of battery life they have.

We're going to be interested to see how often they're able to transmit and how well their system works.

But we do feel like we've been in the market -- we've been the only ones in the market with this technology for several years.

It's very proven for us, and that gives us a very strong first-mover advantage on that.

I will also say that one of our competitors has used an argument to try and sell against us by saying Badger is selling 3G networks, and we will be coming out with an LTE network.

So what you really want to do is wait for our LTE when we eventually come out with that.

Now our answer is, well, of course, we're also going to be coming out with LTE.

We're working on that.

And we will be introducing that shortly.

That is just a normal evolution of cellular products.

As the towers evolve, this evolves.

And we have no indication that the 3G networks are going to be ripped down anytime soon.

Yes, for voice they're going away but not necessarily for data.

So we believe that we're going to be able to continue to support those customers and to offer the LTE product that our competitors are touting as that's the new solution.

To me, it's just the next generation.

It's not that radical.

So that's a long answer to your question, but I hope that addressed it.

Is the cellular -- your cellular sale, the ORION Cellular sales today or in this first quarter, were they half of your ORION sales?

Were they that good?

Oh, wait a minute.

I am looking -- and I was just handed my little recap here.

The cellular sales were -- yes, when we talk about ORION for the quarter, they were not half, they were about 30% to 40%, in that range.

And our question comes from the line of Chip Moore with Canaccord.

You called out some momentum with the solid-state product in the press release.

Maybe you could talk a little bit about penetration trends there.

And then you think that's mostly with existing customers?

Or could you be taking some share versus competitors?

I believe on the cellular, we are taking some share.

There are customers -- I'm sorry, I thought your question was about the cellular.

I still have Rick Eastman's cellular question stuck in my head here.

With the E-Series, right now, there are really only 2 companies offering solid-state metering, and it is Badger Meter and Sensus.

My VP of Sales is making a really nasty face at me right now because obviously there must be somebody else out there with -- it's coming.

Okay.

All right.

Let me put it this way, for the past several years, there have only been 2 companies.

Okay, she's smiling now.

I'm speaking correctly.

We should really do these calls by videoconference.

You people would really enjoy this, watching how I get beat up in this room.

So for the last several years, there have been really only 2 companies in North America selling solid-state metering, and it's Badger Meter and Sensus.

We chose to go with an ultrasonic technology.

Sensus chose to go with a magnetic technology, okay?

Now we were told that a third company, Neptune, who is the third big player in our market, will be coming out with -- or has come out recently with their own ultrasonic product.

Now, frankly, we view that as kind of a positive because, first off, it does support our position that ultrasonic is a better technology since the other competitor has chosen ultrasonic and not magnetic.

So that's a good thing.

However, both Sensus and Badger do have a lead in the market.

We think -- we believe we've taken market share by being 1 of the 2 companies in that position, and that's been helping us.

And Kamstrup, it's a bit player.

Right.

There is a European company named Kamstrup that has started selling an ultrasonic meter into the U.S. also, although they really have a very small market share at this point, but they are out there trying to sell that.

So my point being, it does seem the ultrasonic is becoming more of the standard in our industry rather than Sensus' magnetic technology.

The other thing I'll say quite openly is that I'm excited to be in the ultrasonic business and not the magnetic business for that -- for these applications because, as I look out over the next 5 or 10 years, I make the point that ultrasonic meters are -- the cost of an ultrasonic meter is primarily related to electronic boards and components, whereas the cost of a magnetic meter is related to coils of copper wire and magnetic resonance material.

And when I think about what will probably happen with input costs over the next 5 or 10 years, if history has taught us anything, it's that electronic boards tend to decrease in value -- decrease in cost over time, whereas copper coils and resonance material, that's a harder thing to control the cost on.

So I think we've chosen a good horse here.

I think ultrasonic is working very well for us.

We've got hundreds of thousands in the field.

They are performing very, very well.

The customers like them.

And I think our first-mover in the ultrasonic space has not only gained us market share, but it's going to continue to do so in the future.

Okay, great.

And maybe if we move over to oil and gas.

Just how much were those sort of year-over-year headwinds?

And I guess, what are you seeing into April here?

It sounds like you're a little more confident in the outlook there.

Yes.

And I'm not going to go into the percentage increases in each product line.

I'll just say that the oil and gas for the first quarter of this year over the first quarter of last year, those products were up, and it was a low single-digit-type increase -- I mean a low double-digit-type increase, I'm sorry, low double-digits-type increase.

And thus far, I think we're still seeing the order input coming in.

So I think we're starting -- I feel like we're starting to finally see this long-awaited recovery in oil and gas.

Oil prices are not where they once were, but they're a little bit better than where they had bottomed out.

And I think a lot of the producers are getting back into action.

Okay, that's fair.

And just lastly, on the M&A pipeline.

I think you talked about being in talks with a few distributors last quarter, just any update there.

Yes, yes.

And obviously, you guys have gotten me in a talkative mood today, so this is really good for you.

But I'm getting a lot of dirty looks around the table here.

So on the M&A side, we do have a couple distributors that we are talking to that we are trying to bring those home, and we're pretty excited about that.

I think there's a good opportunity that we might be able to close a couple of those this year.

And we are also continuing to look at both small flow instrumentation acquisitions that we could do of different metering technologies or different market niches within those technologies and also of just technology acquisitions that we're always looking for that will give us some competitive advantage in the marketplace.

So we are working on all of those.

And our next question is from the line of Ryan Connors with Boenning and Scattergood.

So Rich, I thought I'd take advantage of your loquacious mood to kind of get your take on a couple bigger-picture issues as it relates to the competitive environment.

First off, you talked earlier...

Now I'm going to give you yes, no answers, you know.

Right.

So you talked earlier about some of the discrete product lines and so forth.

But if we look at bigger picture at innovation, a couple years ago, you talked a lot about your technology double leap, where you felt like you leapt ahead of the curve in terms of technology.

And now you're talking about other folks kind of playing catch-up, introducing cellular and so forth.

And also if you look at some of the talk from some of the big competitors, it seems like R&D budgets are sort of going to go higher industry-wide.

So what's your strategic view of how you're managing your R&D spend?

And just strategically thinking about innovation, how do you make the next technology double leap?

Or can it be done again?

Yes.

Next question.

No, I -- Ryan, first off, I think you painted a good picture there that we did get a technology leadership when we came out with the ORION Cellular, when we came out with the E-Series, and it is our goal to maintain that leadership.

And obviously, we have smart competitors.

They don't sit around and do nothing.

They have R&D budgets.

They're investing, and they're working on things.

And they're not going to want to play catch up forever.

They're going to want to try and leap ahead.

The way I look at our technology in the water metering space is in 3 groups.

I look at the meters, I look at the radios and I look at the software.

And when I -- when we talk about the radios, we have the cellular radio.

We -- I believe we are the technology leader there.

I believe our competitors may try to come out with cellular.

I think they're going to struggle to match our technology because our technology was many years in the making.

I mean, we bought Aquacue 5 years ago -- okay, 4 years ago.

And Aquacue had already been working on this technology for almost -- for over 5 years.

So that was about a decade of development work to get that cellular radio in place.

So for our competitors to jump -- try to jump ahead in only a couple of years, that's a tough one.

So I'm going to be very interested to see what they do come out with, what their cost structure is and what their performance on the product is.

So I think -- and besides that, we've continued to invest because Aquacue, which we now call Badger Meter's Silicon Valley, it's out in Los Gatos, has become our technology center.

We've added engineers there, and we've been able to continue to improve the product.

And we're coming out with a new LTE version, and I believe we're going to be able to stay ahead there.

On the software, there, again, the people out in -- our California subsidiary has all of the software programmers.

They've done an excellent job.

We believe the BEACON software is industry leading.

We are always adding to it.

We believe EyeOnWater is the best consumer interface that you can find in the market, but we are continually improving that free download app that the consumers use.

So I'm making this point that we're in a very strong position on the radios, and we're in a very strong position on the software.

That leaves the meters.

Now with the meters, we did introduce the E-Series 5 years ago, 6 years ago, whatever it was, 5 or 6 years ago.

And we have not done a lot with it since then.

We've migrated to the other sizes.

We've made some improvements.

We've been able to reduce costs on it, but we are looking at the development and the introduction of the next version of the E-Series.

Whether we do that with partners or with ourselves or how we do that is all being examined, but we are working on that.

And we are planning to introduce new versions that we believe will keep us ahead on the technology curve.

And that -- and so that's our focus.

Got it.

Now a separate kind of dynamic of the competitive situation, Rich.

You've traditionally been a player, largely North America.

My understanding of that has always been that because you specialize in positive displacement, which wasn't used elsewhere, that, that was -- that you were sort of maybe not walled off, but it had made international a more difficult market.

Now I know you're making some inroads in the Middle East, but a lot of the talk lately has been that the big project pipeline on some of these very large water deals will be outside North America.

So what's your view on -- is there a vision to maybe take Badger more aggressively into some of those international markets?

Or do you think you'll remain largely North America company with -- notwithstanding the Middle East penetration?

My -- I think you portrayed this correctly.

When -- in the world of mechanical meters, there was a technology barrier to entry for the foreign companies into the U.S. and there was a technology barrier of entry for us to leave North America.

Once we moved over to electronic metering, that barrier went down.

And so now you see companies like Kamstrup in Germany trying to sell electronic meters here in the U.S. You see Badger Meter pursuing electronic meters in the Middle East.

And there are other opportunities for us that we are looking at.

However, you have to realize that technology was 1 of 3 barriers to entry that existed.

The other 2 barriers to entry, I would say, were brand and channels.

Yes, these companies can come over here, but they are an unknown brand in our market.

And for us to go over there, we are an unknown brand in their market.

And as I always say, you and I could develop a new cola in our basement tonight, but are we really going to take on Coke and Pepsi tomorrow?

It's very challenging to be a new brand when all of the other companies are over 100 years old in the market.

On the channels, the problem you have is channels are a little easier in Europe, the Middle East.

France has 4 water meter -- water utilities.

The Middle East, each of the Emirates, has a water utility.

And so they are large accounts that you can try to sell into.

You come to the United States, we have 52,000 water utilities.

That make -- that's a very big challenge from a channel point of view.

Are you really going to just start knocking on doors and believe you're going to make inroads into 52,000 water utilities against companies that have been in the market and doing this for 100 years?

So I believe we still have a barrier to entry for the companies coming here in trying to address the channels.

The other part of your question is, okay, as there are large cities around the world that are now open to electronic metering, will Badger Meter be a player there?

Yes, we want to.

We will attempt to.

We opened an office in the Middle East.

We have people there.

We've recently opened an office in Poland.

So we are selecting certain areas where we believe there's opportunities, and we're going to be going after them.

(Operator Instructions) And our next question is from the line of Tate Sullivan with Sidoti.

And I'm just referring back to some of your previous comments and to your last slide that I can -- slide deck on converting to connectivity being about 56% this year according to IHS.

Out of the connectivity meters, I mean, is most of it radio currently in terms of a guy in a truck driving by the meters and getting the signal by radio?

Much of what's in the ground now because, on average, it's 7, 8 years old, is still drive-by, okay?

Now more -- in recent years, more AMI and obviously more cellular has been sold.

I mean, we've been selling drive-by for over 2 decades.

We've only been selling fixed networks for about the last 8 years or so and cellular just recently.

So clearly, the bulk of what's in the ground is drive-by.

But also, I don't want you to miss the fact that over 40% of the meters in America are still read by somebody who's walking door to door.

You don't see that in electric because the electric utilities were much faster to adopt some sort of technology, but still the water utilities are very conservative and slower to change.

The sales cycle is very long with those people.

Particularly in North America, the other thing is when we talk about solid-state meters, the electronic meters, they are, what, 15% to 20% of sales right now.

So you still have the natural barriers to entry, where 80%-plus of our sales are still mechanical meters.

So that barrier to keep others out is still going to be around for a while.

How about longer term?

I mean, getting away from the quarterly considerations, I mean, where do you see the connectivity going for cellular as a percent of the total in 10 to 15 years?

Well, IHS had some projections.

Yes, IHS had some projections in their report.

They were looking at over the next 5 years a pretty strong double-digit growth among the cellular compared to lower single-digit growth among the mechanical.

And our next question is a follow-up from Richard Eastman with Robert W. Baird.

It's probably a key to cutting off the call when I get back in the queue.

But just a quick question, Rick...

I cannot believe that I didn't answer every possible question you had, with that long rambling explanation I gave you, but go ahead.

Just on the SMEGA expense, I just wanted to clarify maybe, Rick, you had made the comment, a couple of things, SMEGA was down $1 million year-over-year and I think you also suggested that, that absorbed a write-off, a tech write-off, so...

It was $450,000, right.

So the operating expense was actually down about $1.5 million?

Yes, correct.

And could you just maybe kind of talk to where the staffing reductions or which business or what's kind of triggered that?

We had an early retirement program last year in [ Nashville ] and Tulsa.

In our flow instrumentation.

In our flow instrumentation side of the business.

So it wasn't that anybody was terminated.

But obviously, when those people retired, we simply didn't replace them, okay?

But we've redesigned incentive plans and done a number of other things to help reduce the overall compensation cost.

Okay, I understand.

And that was all done at year-end, so now this is the carryforward savings?

Correct.

And ladies and gentlemen, this concludes our Q&A for today.

I would like to turn the call to our CEO, Rich Meeusen, for final remarks.

So they're all telling me I should be very short in my final -- very brief in my final remarks because they're very worried about how talkative I am today.

But I -- all I'll say is we were very pleased with the quarter.

It was a strong quarter.

And as we look forward to the rest of the year, we're pretty optimistic about what we see.

I think we're well positioned in a strong market, and we have great opportunities going forward.

So I really appreciate your listening today and being with us, and I want to thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program, and you may all disconnect.

Have a wonderful day.