BMI Q3 2026 Earnings Call - BADGER METER INC

Financial Performance:

• Total Q3 2026 sales were $235.9 million, flat year-over-year (YoY) to Q3 2025; excluding UDLive acquisition sales ($5.6M), base sales were down 2% YoY but up 5% sequentially.
• Operating earnings increased 4% YoY; operating margins expanded 60 basis points to 20.2%, with base operating margins (ex-Udlive) at 20.9% (up 130 bps YoY).
• Gross margin reached 41.9%, up 120 bps YoY, driven by structural mix improvements (ultrasonic meters, SaaS) despite inventory fair value amortization from UDLive; base gross margin was 42.1%.
• Diluted EPS was $1.24, a 4% increase from $1.19 in the prior year period; effective tax rate was 25.1%.
• Free cash flow was $40.3 million, down from $48.2 million YoY; primary working capital was 23.6% of sales.
• Share repurchases totaled approximately $55 million (423,000 shares) in Q3, with $35 million remaining on the current authorization; dividend rate increased by 10% in August (34th consecutive year of increases).
• Selling, General, and Administrative (SG&A) expenses were $51.1 million, up $1.3 million YoY (including $2.3M from UDLive), partially offset by lower incentive compensation.

Guidance and Future Outlook:

• Management anticipates sequential and YoY revenue growth in Q4 2026, expecting modest sequential growth and low single-digit YoY growth for the full year, despite five fewer operating days.
• Full-year 2026 organic revenue is expected to decline in the low single digits; Q4 is expected to close the year with momentum.
• Long-term growth profile remains intact with conviction to sustain momentum into 2027, targeting a return to high single-digit organic growth rates in 2027.
• Management expects to remain within the long-term normalized gross margin range of 39% to 42% through 2027, leveraging structural mix and operational excellence.
• Annualized UDLive intangible asset amortization is estimated at approximately $5 million.

Business Segments and Product Lines:

• Utility Water Sales: Flat YoY; excluding acquisition, down 3% due to project pacing, though base utility sales improved 5% sequentially as awarded projects ramp.
• Flow Instrumentation: Up 2% YoY, driven by broad-based water application demand and increasing interest in data center applications.
• Software Revenue: Growth in SaaS partially offset lower AMI product sales, contributing to structural mix improvements.
• New Product Launches: Formally launched "One Network," a real-time network monitoring and analysis platform integrating AMI, network monitoring, and water quality data.
• Customer Engagement: Hosted "Engage Live" in Milwaukee to gather feedback on product plans and implementation best practices.
• Acquisition Integration: UDLive sales contributed $5.6M in Q3; annualization expected by mid-2027.

Market and Competitive Landscape:

• Underlying demand remains solid; Q1 was an outlier due to uneven project pacing, while Q2 and Q3 returned to normal trends.
• Competition: Management declined to comment on specific peer performance but emphasized customer preference for Badger Meter's differentiated portfolio and value-driven technology.
• Market Trends: Increasing demand for data centers driving flow instrumentation sales; utilities seeking to consolidate fragmented data sources (SCADA, GIS, sensors) into unified views.
• Project Pipeline: Backlog and project awards remain robust compared to previous years, with multiple large-scale utility projects transitioning to "in-flight" status.

Risks and Challenges:

• Supply Chain: Ongoing electronic component cost escalation and availability pressures driven by AI and data center build-out demand, though currently being mitigated.
• Project Pacing: Inherent unevenness in large utility project ramps and installation timing (e.g., PRASA project starting installations in Q4).
• Acquisition Integration: Dilutive impact from UDLive inventory fair value step-up amortization affecting gross margins temporarily.
• Macro/External: Broad material cost pressures and inflation passing through to costs.

Management Commentary and Tone:

• Tone was confident and optimistic regarding long-term growth despite short-term cyclical headwinds.
• Management emphasized resilience in structural mix and operational discipline to maintain margins amidst supply chain challenges.
• Ken Bockhorst highlighted the "strategic formula" of customer focus, innovation, and operational excellence as drivers for future success.
• Dan Weltsing expressed pride in the team's ability to navigate cost pressures and deliver strong profitability.

Analyst Questions and Answers:

• Q4 Guidance: Clarified that while full-year is expected down low single digits, Q4 should see modest sequential growth and potentially low single-digit YoY growth.
• Margins: Confirmed Q3 margins were strong due to ultrasonic mix and software growth; noted that electronic cost pressures have escalated but are being managed via pricing and mix.
• PRASA Project: Confirmed product shipments have begun for Puerto Rico with installations expected to start in Q4; noted project timing is uneven.
• 2027 Outlook: Expressed high confidence in returning to high single-digit organic growth in 2027, though specific quarterly pegs were avoided due to inherent variability.
• Non-Metering Units: UDLive and Smart Cover are viewed as integral to the high-digit growth story and are performing in line with expectations.
• Capital Allocation: Reaffirmed commitment to R&D investment, dividend growth, and share buybacks; $35M buyback authorization remains available.

Other Key Points:

• The next earnings release is tentatively scheduled for January 28, 2027.
• UDLive is expected to fully annualize in mid-2027, contributing to easier year-over-year comparisons in 2027.
• Badger Meter continues to focus on "beyond the meter" opportunities, leveraging software and data analytics to enhance utility operational efficiency.
• The company remains focused on reducing above-average inventory levels as the year concludes to normalize working capital.