Badger Meter, Inc. 2026 Q3 Earnings Call

Good morning. Thank you for joining the Badger Meter third quarter 2026 earnings conference call. I am here today with Ken Bockhorst, our Chairman, President, and Chief Executive Officer, and Bob Wrocklage, our Executive Vice President of North America Municipal Utility. This morning, we posted the earnings release and related slide presentation on our website. As a reminder, any forward-looking statements made on this call are subject to various risks and uncertainties, the most important of which are outlined in our news release and SEC filings. On today's call, we may refer to certain non-GAAP financial metrics, including base results, which exclude the impact of UDlive, acquired May 1, 2026. Our release and earnings presentation provide a reconciliation between the most directly comparable GAAP measure and any non-GAAP financial measures discussed. With that, I will turn the call over to Ken.

Thanks, Dan, and good morning. We were pleased with the sales and operating profit performance in the quarter. Excluding the solid revenue contribution of the UDlive acquisition, third quarter base sales increased 5% sequentially from the second quarter. This was largely in line with our expectations and the result of the ongoing ramp of previously disclosed awarded projects and solid underlying market demand in the quarter. As noted in the release, we continue to anticipate both sequential and year-over-year improvement in revenue in the fourth quarter and expect to sustain this growth momentum into 2027, which I will discuss further in the outlook. The team executed well on the profitability front as we continued operating cost management actions to mitigate the uneven 2026 sales cadence, while also addressing ongoing material cost pressures related to broad electronic supply chain dynamics as we described last quarter.

I will turn the call over to Dan to walk through the specifics of the quarter, and then Bob will provide an update on commercial activity, including our formal launch of OneNetwork. I will then come back to cover the outlook and take your questions. Go ahead, Dan. Thanks, Ken.

Turning to slide three, total sales in Q3 were $235.9 million, in line with the third quarter of 2025. Excluding the benefit of UDlive sales of $5.6 million, base sales were down 2% year-over-year. Sequentially, base sales were 5% higher than the second quarter levels, with a number of the previously disclosed awarded projects ramping, including another quarter of process shipments. Utility water sales were flat year-over-year and, excluding the acquisition, were down 3%, reflecting the same project pacing dynamics mentioned earlier. Lower AMI-related product sales were partially offset by higher software revenue. It is important to note that base utility sales improved 5% sequentially. Sales of the flow instrumentation product line were up 2% year-over-year against the prior year's most difficult comparison, as we experienced broad-based water application demand.

We continued to see increasing demand in data center applications for our flow instrumentation products, albeit from a relatively small revenue base. We were pleased with operating profitability this quarter, largely the result of higher sales, ongoing structural mix benefit to gross margins, and effective price cost management. On a year-over-year basis, operating earnings increased 4%, with margins up 60 basis points to 20.2%. Base operating profit margins, excluding UDlive, were 20.9%, up 130 basis points from last year's third quarter. Gross margin was 41.9%, up 120 basis points from the third quarter of 2025, reflecting structural mix improvements primarily from higher ultrasonic meter sales and continued growth of our software-as-a-service revenue, partially offset by the dilutive impact of UDlive's inventory fair value step-up amortization in the quarter.

Base gross margin was 42.1% at the top end of our normalized range, indicative of the resiliency of our overall structural mix and pricing discipline. Last quarter, I called out the increasing level of electronic component cost and availability pressures to gross margins, which are a byproduct of the AI and data center build-out demand. As demonstrated by our margin performance, we have thus far been able to adequately mitigate these impacts. However, the challenges posed by these pressures have not abated. Turning to selling, engineering, and administrative expenses, the third quarter's $51.1 million was $1.3 million higher year-over-year, including $2.3 million from the addition of UDlive, inclusive of the intangible asset amortization. This was partially offset by lower incentive compensation and the benefit of appropriate cost controls. As a reminder, our preliminary expectation for UDlive intangible asset amortization is approximately $5 million annually.

The effective income tax rate in the quarter was 25.1%, compared to 26.1% last year. Finally, diluted earnings per share were $1.24, an increase of 4% from $1.19 in the prior year period. Primary working capital as a percentage of sales was 23.6%, up slightly from 22.9% at the prior quarter end. We anticipate continuing to work down the above-average inventory levels resulting from revenue pacing dynamics and electronic safety stock levels as the year concludes. Free cash flow was $40.3 million, down from $48.2 million in the prior year comparable quarter. As always, we remain focused on delivering free cash flow conversion In excess of 100% of net earnings.

In the third quarter of 2026, we repurchased 423,000 shares for a total of approximately $55 million and have roughly $35 million remaining on our current share repurchase authorization. With that, I'll turn the call over to Dan.

Thanks, Dan. A few weeks ago, we had the opportunity to connect with customers, engineering consulting firms, and investors at WEFTEC in New Orleans. During the show, we formally launched OneNetwork, our real-time network monitoring and analysis platform for water and wastewater utilities. For those that attended our Investor Day back in May of this year, you heard an early preview of OneNetwork. In short, OneNetwork brings AMI, network monitoring, and water quality data together in one platform, enabling customers to identify issues sooner, coordinate responses faster, and make more informed operational decisions. Why is this important? Utilities today have an immense amount of data from online sensors to SCADA and GIS information. OneNetwork provides a unified real-time view of this disconnected data to make it usable.

By moving from fragmented data to a single operational view, OneNetwork empowers utilities through alerts, advanced analytics, and workflows to better manage issues such as pressure events, water quality changes, and non-revenue water spikes. This saves utilities both time and money while increasing their capability to respond faster and act with purpose. WEFTEC visitors were able to view OneNetwork demonstrations, and customer and consultant interest was high. It serves as another example of our competitive differentiation through innovation, portfolio constructions, and the benefits derived by customers from our sole focus on value-driven water technology. One important way we gain critical feedback and inform our innovation is through our ENGAGE customer community, which encompasses in-person and virtual discussions throughout the year.

This week, we had the signature event, ENGAGE Live, hosted in our hometown of Milwaukee, where current and prospective customers interacted with our leadership, product management, and sales and customer support teams. Among other outcomes, the event has served to share best practices for implementations, outcomes, and funding sources, as well as gain insight and share feedback on our future product and software plans. It is clear from talking to customers that utility needs for and interest in our tailorable solutions to meet their increasing challenges remains high, and we are well positioned to capitalize on these opportunities to improve customer outcomes. With that, I'll turn the call back to Ken.

Thanks, Bob. Looking ahead to the fourth quarter, I will reiterate here what we said in the release, which is consistent with our discussions over the past few quarters. We continue to anticipate further ramping of awarded utility projects, noting as always, the inherent unevenness typical of the business. We expect both year-over-year and sequential quarterly base sales growth in the fourth quarter of 2026, despite fewer total operating days given the holidays, which is a standard annual dynamic. While I will not delve into 2027 specifics at this point, I will note that our conviction in sustaining this growth momentum into 2027, as well as the long-term growth profile for Badger Meter, remains intact as we continue to manage usual quarter-to-quarter dynamics. We remain committed to the strategic formula that has driven our prolonged success, focusing on our customers, offering innovative and differentiated technologies, and driving operational excellence.

You heard Bob speak to advancements in software outcomes and customer engagement, which reinforce our multi-year opportunities in both metering and beyond-the-meter growth. Our longstanding capital allocation approach of investing in growth while also returning cash to shareholders also supports this long-term growth strategy. For example, in August, we increased our annual dividend rate by 10%, marking the 34th consecutive year of increases, and we repurchased $55 million of our outstanding shares, bringing the trailing four quarters to over $130 million. In summary, I remain optimistic about our team's ability to deliver value creation opportunities for our customers and shareholders alike. With that, operator, please open the line for questions.