BMI Q3 2026 Earnings Call - BADGER METER INC

Financial Performance:

• Total sales for Q3 2026 were $235.9 million, flat year-over-year (YoY) but in line with Q3 2025; excluding the $5.6 million contribution from the UDLive acquisition (acquired May 1, 2026), base sales were down 2% YoY but up 5% sequentially.
• Operating earnings increased 4% YoY, with operating margins expanding 60 basis points to 20.2%; base operating margins (excluding UDLive) reached 20.9%, up 130 basis points YoY.
• Gross margin came in at 41.9%, up 120 basis points YoY, driven by structural mix improvements (higher ultrasonic meter and software revenue) and offset by UDLive inventory fair value amortization; base gross margin was 42.1%, sitting at the top of the normalized 39-42% range.
• Diluted earnings per share (EPS) were $1.24, a 4% increase from $1.19 in the prior year period.
• Free cash flow was $40.3 million, down from $48.2 million in the prior year comparable quarter; the company targets free cash flow conversion exceeding 100% of net earnings.
• Selling, general, and administrative (SG&A) expenses were $51.1 million, $1.3 million higher YoY, partially attributed to $2.3 million from UDLive integration and intangible amortization, offset by lower incentive compensation.
• Primary working capital as a percentage of sales was 23.6%, up from 22.9% at the prior quarter end, with management anticipating a reduction in inventory levels by year-end.
• The company repurchased 423,000 shares for approximately $55 million in Q3; roughly $35 million remains on the current share repurchase authorization.

Guidance and Future Outlook:

• Management anticipates sequential and YoY revenue growth in Q4 2026, expecting low single-digit YoY growth despite fewer operating days due to holidays.
• Full-year 2026 organic revenue is expected to decline in the low single digits; Q4 specifically is expected to show modest sequential growth.
• The company is optimistic about sustaining growth momentum into 2027, targeting a return to high single-digit organic growth rates as new projects ramp and UDLive annualizes.
• Management reaffirmed a long-term gross margin range of 39% to 42%, citing structural mix and operational excellence as key drivers for resiliency against cost pressures.
• Strategic focus remains on customer-centric innovation, "beyond-the-meter" growth, and operational excellence to drive long-term value.

Business Segments and Product Lines:

• Utility water sales were flat YoY; excluding the acquisition, utility sales declined 3% due to project pacing dynamics, though base utility sales improved 5% sequentially.
• AMI-related product sales decreased but were partially offset by higher software revenue, reflecting the growth of the software-as-a-service (SaaS) model.
• Flow instrumentation sales grew 2% YoY, fueled by broad-based water application demand and increasing demand for data center applications.
• Launched "One Network," a new real-time network monitoring and analysis platform integrating AMI, network monitoring, and water quality data to unify disconnected utility data.
• Hosted "Engage Live" in Milwaukee to gather customer feedback and showcase product innovations, highlighting strong customer interest in tailorable solutions.
• Smart Cover and UDLive are integrated into the utility bucket and are expected to contribute to the high-single-digit growth story, with UDLive expected to annualize in 2027.

Market and Competitive Landscape:

• Management noted "solid underlying market demand" and described the Q1 sales dip as an outlier, with Q2 and Q3 performing at normal structural levels.
• Demand drivers include the need for infrastructure upgrades, improved operational decision-making, and water quality management across a diverse utility base (50,000+ utilities).
• Competitive differentiation is maintained through a focus on value-driven water technology, innovative portfolio construction, and a sole focus on the water industry.
• Management declined to provide specific commentary on competitors' performance but acknowledged that other industry players face similar cyclical project unevenness.
• Data center build-out and AI-related demand are driving increased demand for flow instrumentation products, despite starting from a small revenue base.

Risks and Challenges:

• Ongoing electronic supply chain dynamics and component cost pressures driven by AI and data center build-outs remain a key headwind to gross margins.
• Inherent unevenness in project pacing and ramp-up cycles creates quarter-to-quarter revenue volatility, particularly for large AMI projects.
• The integration of UDLive includes dilutive impacts from inventory fair value step-up amortization.
• External factors such as manpower challenges, weather issues, and regional drought conditions (e.g., Puerto Rico) can impact project deployment schedules.

Management Commentary and Tone:

• Management tone was confident and optimistic, emphasizing successful execution on profitability and the ability to navigate cost pressures through pricing discipline and operational excellence.
• Ken Bockhorst (CEO) highlighted the "resiliency" of the structural mix and the successful navigation of supply chain challenges without compromising long-term margin targets.
• Bob Rockledge (EVP) emphasized the strategic value of the new One Network platform and strong customer engagement.
• The company remains committed to its capital allocation strategy, including reinvestment in R&D and consistent shareholder returns (34th consecutive year of dividend increases).

Analyst Questions and Answers:

• Q4 & 2027 Outlook: Asked if Q4 could reach high single-digit growth; management confirmed low single-digit YoY growth for the quarter and anticipation of returning to high single-digit organic growth in 2027 as comps improve and projects ramp.
• Margin Dynamics: Analysts queried the drivers of the strong gross margin; management attributed it to ultrasonic meter mix and software growth, while noting that supply chain pressures have escalated but are being managed effectively.
• Project Specifics: Regarding the PRASA (Puerto Rico) project, management confirmed product shipments have begun with installations expected to start in Q4, noting potential quarter-to-quarter unevenness.
• Competitive Context: Analysts asked about market weakness and competitors; management avoided direct comparisons but validated that overall utility demand remains robust and their portfolio is preferred by customers.
• Capital Allocation: Regarding buybacks, management stated the $35 million remaining authorization will be used, supported by strong cash generation, alongside ongoing dividend increases.
• Backlog Visibility: Confirmed that the backlog and award pipeline remain robust, with visibility into the five-year horizon comparable to prior years.

Other Key Points:

• UDLive intangible asset amortization is expected to be approximately $5 million annually.
• The year-end 2026 earnings release is tentatively scheduled for January 28, 2027.
• The company raised its annual dividend rate by 10% in August.
• Trailing four-quarter share repurchases totaled over $130 million.
• Process shipments are ramping up as part of previously awarded projects, contributing to the sequential growth trend.