Badger Meter, Inc. (BMI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Second Quarter 2026 Badger Meter Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the conference call over to Dan Weltzien, Chief Financial Officer and Treasurer. Please go ahead, Mr. Weltzien.

Good morning. Thank you for joining the Badger Meter Second Quarter 2026 Earnings Conference Call. I'm 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 quick 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'll turn the call over to Ken.

Thanks, Dan, and good morning. As expected, we delivered sequentially improved sales in the second quarter as a number of our previously awarded AMI projects began initial ramping of shipments. We also saw a modest increase in our short-term order rates and within flow instrumentation. Importantly, we are reaffirming our outlook for improving sequential top line results for the balance of the year with full year 2026 organic revenue still expected to be roughly flattish with 2025 levels. The team executed well on the margin front as we continue to manage operating cost controls as we described in detail last quarter. I'll turn the call over to Dan to walk through the specifics of the quarter, and then Bob will provide an update on commercial activity and collective customer feedback from our recent annual AWWA ACE trade show. I'll then come back to cover the outlook and take your questions. Go ahead, Dan.

Thank you, Ken. Turning to Slide 3. Total sales in Q2 were $222.3 million, representing a 7% decline year-over-year. Excluding the 2-month benefit of UDlive sales of approximately $2 million, base sales were down 7.5% year-over-year. Importantly, base sales were 9% higher than first quarter levels as we anticipated, with a number of awarded projects in the pipeline beginning their initial ramp in shipments. Note that we will not be providing individual project level detail from the anonymized subset of awarded but not yet started projects list that we shared last quarter. But as we mentioned during Investor Day back in May, product shipments for the PRASA project have begun. Utility water sales declined 8% year-over-year and excluding the acquisition, were down 9%, reflecting the project pacing dynamics we have been discussing for some time. Lower AMI-related product revenue was partially offset by higher software as well as collective beyond the meter growth. It is important to note that utility sales improved 8% sequentially on an organic basis. Sales for the flow instrumentation product line were up 6% year-over-year as we experienced broad-based water application demand. Turning to profitability. Overall, we delivered improved operating leverage versus the first quarter, the result of sequentially higher sales and the favorable impact of cost actions put into place earlier in the year. On a year-over-year basis, operating earnings declined 12% with margins down 110 basis points to 17.7%. Base operating profit margins, excluding UDlive were 18.4%, down 40 basis points from last year's second quarter. Gross margin was 40.8%, down 30 basis points from the second quarter of 2025, primarily reflecting lower sales volumes and project mix. Gross margins remained solidly in the upper half of our normalized range, indicative of the resiliency of our overall structural mix and pricing discipline. One item I want to call out is the increasing level of electronic component cost and availability pressures, which are a byproduct of the AI and data center build-out demand. While we have been able to adequately mitigate these impacts to date, the challenges posed by these pressures are not easing. Turning to selling, engineering and administrative expenses. The second quarter's $51.4 million was $1.6 million lower year-over-year due to the benefit of spending controls, lower incentive compensation and specific cost containment actions. These more than offset $1.8 million from the addition of UDlive for 2 months, including related intangible asset amortization, along with the final $1.2 million of transaction-related costs, which combined added approximately $3 million to year-over-year spending. For your ongoing modeling, our preliminary expectation for UDlive intangible asset amortization is approximately $5 million annually. The effective income tax rate was 25.2% compared to 24.5% last year. Finally, diluted earnings per share were $1.02, down 13% from $1.17 in the prior year period. Primary working capital as a percentage of sales was 22.9%, up from 20.0% at the prior quarter end. The receivable increase simply relates to revenue timing, and we anticipate working down the above-average inventory levels resulting from the revenue pacing dynamics throughout the fiscal year. Free cash flow was $21.9 million, down from $40.6 million in the prior year comparable quarter, given lower earnings, the temporary increases in working capital. As always, we remain focused on delivering full year cash flow conversion in excess of 100% of net earnings. In the second quarter of 2026, we repurchased 204,000 shares for a total of $25.3 million and have approximately $90 million remaining on our current share repurchase authorization. Over the past 3 quarters, we have deployed roughly $80 million in share repurchases. Finally, as noted in the release, we did finalize a 5-year renewal of our $150 million credit facility in the quarter. This facility remains undrawn and provides us with ample financial flexibility under attractive terms, including its expansion feature. With that, I'll turn the call over to Bob.

Thanks, Dan. Last month, we had the opportunity to connect with multiple customers, engineering consulting firms and investors at ACE 2026 in Washington, D.C. For those not able to visit in person, we showcased our AMI and beyond the meter applications in a way that conveys our ability to deliver critical outcomes our customers are seeking across the full water cycle from source water to wastewater treatment. From the many customer conversations, it is clear that the market remains constructive about our solutions as utilities continue to prioritize modernization, efficiency and visibility across their water and wastewater networks. These long-term secular drivers remain intact. In fact, our meetings with consultants during the show who are looking to gain further insight into our water cycle spanning solutions were booked solid. Given the role these consultants play in the early part of the opportunity funnel, it bodes well for the long-term durability of the multi-decade transformation of the water sector and for our competitive position. Consultant and customer discussions were heavily focused on both the hardware and software components of our Network as a Service or NaaS solutions. Of particular focus were advancements to network resiliency and flexibility in communication devices such as dynamic multi-carrier [ E-SIM ] technology and our enhanced ORION Lens endpoint solution for metal pit leds. From a software standpoint, EyeOnWater Premium, our BEACON Field app and, of course, our embedded AI functionality, Cobalt garnered strong interest. Collective feedback reinforced our NaaS leadership position and an AMI hardware and software set that provides value to all utility stakeholders and their customers. Finally, we continue to educate utilities on stormwater and sewer line applications with the broad solution portfolios from both SmartCover and now UDlive. As Dan noted, we are starting to see early ramp activity at PRASA and several other awarded projects beginning deployment, which will continue to advance as the year progresses. I will remind you that these include both turnkey and supply-only projects and that implementations will continue to be uneven, the result of numerous external factors inherent in the industry. With that, I'll turn the call back to Ken.

Thanks, Bob. Looking ahead, as we noted in the release, we continue to anticipate sequential improvement in base quarterly revenue dollars as each quarter progresses, resulting in full year 2026 revenue, excluding UDlive, flattish with 2025. As we noted last quarter and as Bob just reiterated, you should read that not as flat but flattish with variability and unevenness in project ramping and short-term order patterns. Given the fourth quarter represents the easiest year-over-year comparison, you should expect the year-over-year base sales growth rate to be heavily weighted to Q4. As noted last quarter, we implemented certain cost reduction actions and have been maintaining spending discipline to protect margin integrity as we navigate revenue pacing throughout the year. And as Dan mentioned, we are actively managing the electronics availability and cost dynamics. While we continue to navigate quarter-to-quarter factors, our confidence in the long-term outlook for the business has not wavered. To reinforce what you heard from our team at our recent Investor Day, we have multiple enduring revenue and profitability drivers underpinned by the ongoing digital transformation of the water sector, which we believe will positively drive shareholder value. These include the long-term durable growth foundation of replacement demand, which is bolstered by AMI adoption and hardware-enabled recurring software. The extension of our offerings across the full water cycle with our beyond the meter technologies, leveraging core innovation excellence as well as acquisitions to continue to strengthen our competitive position; and finally, building on our disciplined execution, which we believe will extend the profitable growth runway into the future. Finally, I'd like to call out our recently published 2025 sustainability report, which highlights our progress across the key pillars of our solutions, operations and people. It remains clear that by managing sustainability as a business process, it enables us to both provide industry-leading water solutions to grow our business while also reducing our environmental footprint. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Jeff Reive with RBC Capital Markets.

So now that we are about at the halfway point of the year and certain projects have commenced initial deployment, how has your visibility into the second half ramp changed versus 90 days ago? And are any at risk of slipping into 2027?

Jeff, so yes, so as we talked about last quarter, we fully expected as the year progressed, it would become a little more clear to us how things would play out given how important the 9 projects are to the rest of the year and frankly, the positivity they have for the next several years. So as you know, we talked about PRASA has begun and a few of the other projects have begun. We'll always note that there can be possible unevenness, but the total cohort of 9 projects feels like it's pretty solid at this point.

Okay. Got it. And to hit that flattish organic revenue target for the year, do all of the projects need to start shipping in the back half? Or is there ample cushion in that guide?

Yes. So just keep in mind, it's not like they're all starting at the beginning of Q3. So there's multiple phase-ins and pieces. So it is a whole collection of we're expecting some certain positivity around these projects. We also have a robust funnel around just near-term projects that are in negotiation and other things that are not part of that. And yes, in Q2, we had a higher daily turn rate of orders than we had in Q1. So those numbers of factors give us the confidence to remain on this flattish for the remainder of the year stance.

Got it. And if I could just sneak in one more on UDlive, it seems like the revenues were a bit lower than I would have expected on kind of the trailing revenue. Is that just a timing issue maybe related to the May close? Or is there anything else driving that?

Yes, definitely just a timing issue. So as with any acquisition, particularly sometimes with small companies, you get just certain distractions and things. But yes, certainly understand that question, but not concerned at all.

Your next question comes from the line of Quinn Fredrickson with Baird.

On the short-cycle portion of the business, could you put a finer point there on what you saw in the quarter, maybe in context of the $15 million to $20 million shortfall in the first quarter, how second quarter compared to what you would expect seasonally, if there's any additional room for short-cycle recovery in the back half?

Yes. So as we did expect, Q1 was the outlier in terms of short order cycle rates, as you called it. So we would just say it was more normal-ish in Q2 and typical of the operating environment. So we certainly don't intend to get into sizing every quarter. I think in Q1, it was outsized enough that we did that just to provide some more clarity for investors to understand what happened. But we're really not going to get into that from quarter-to-quarter because that portion of the business is always somewhat uneven by nature.

Okay. And then, Dan, just given your comments on electronic component costs, any additional color on how to think about price/cost or gross margin in the back half, perhaps any details you can share on your memory exposure as well would be helpful.

Yes. Can I just go first.

Yes, sure.

Yes. So Quinn, I think it's an important context here. So we've been here before, right? So if you go back to 2021 with supply chain shocks and electronics availability and inflation. So we know that the entire world is going through this, not just if this isn't a Badger Meter challenge at the moment. But we are positioned to continue to manage this accordingly to work our way through it, but we wanted to call out the potential supply issues there. And from a margin point of view, just like all the other puts and takes structurally, we certainly feel fine within our range, but just wanted to call this out. So Dan, any other color, if you'd like?

Yes. I think you hit on the 2 relevant points here. And there really are 2 things that we're managing through right now. It is a cost component dynamic that we're dealing with, but then also availability. And so as Ken mentioned, we're managing through both.

Your next question comes from the line of James Ko with Jefferies.

I wanted to touch on the awarded project kind of ramp-up timeline. I mean, looking at the historical revenue profile of the cohorts that you guys shared, it seems like deployment tends to peak like 1 or 2 years after deployment. Should we expect kind of similar dynamic for the like 9 kind of awarded projects that you guys shared?

Yes. So there's -- that's a lot to unpack because just like every acquisition is different, every AMI project is different. But absolutely, you pace from this arrangement of there's nothing in the base and then initial implementation begins. So product shipments in a supply-only case begin or even in a turnkey solution, and then that is married up with the installation activity. So there is a ramp concept. I don't know that you could pinpoint the average project to a particular year or time duration because some projects will be 3 years in nature, some will be 5. But I think the curve that you're describing in terms of a ramp, a scale of deployment for a period of time and then as projects begin to wind down that, that other side of the curve begins to decline. But trying to pinpoint precisely an average project is a very difficult thing to do in this industry.

Great. And I think you guys talked about like other like opportunities outside of this like 9 awarded projects. Can you kind of provide more color on opportunities outside of those awarded projects that you guys shared?

Yes. I mean I think your point is perfect because I think sometimes when you publish a list of a cohort, particularly of the scope and scale that we did, that almost implies that those are the key projects and only projects, and that is absolutely not the case. That was a representative sample of projects that spanned everything from utility projects to investor-owned projects from competitive conversions to incumbency experiences and then a dynamic of both supply and turnkey type projects. So it's important to note that was chosen very purposefully to illustrate those factors, but those are not the only projects. whether we're selling direct or whether we're going through distribution, there are absolutely lots of opportunities. And sometimes those opportunities come through as turnkey or projects that we would have disclosed like that. And in other cases, that's coming through that short-cycle order rate that I think has now been coined as a term. Really, that, in my mind, is implied to be those things that we have limited visibility to in terms of direct ordering behavior. But those are taking place all day, every day in the natural course. And as Ken indicated, that rate of activity improved versus Q1 levels or increased versus Q1 levels. That's what's happening here in Q2, and that's what we're forecasting forward in our full year outlook of getting to flattish on an organic basis.

Your next question comes from Nathan Jones with Stifel.

I'll follow up on the project ramp-ups to begin with. We've been focused on how they ramp up in the back half of the year. But I guess the question is, are they at full run rate as we exit the end of the year? Or is there further for them to go to hit kind of a full run rate as we get into 2027 and you should continue to see that sequential improvement as we get into early next year just from those specific projects?

Yes. So the one thing that, as Bob pointed out, it's hard to compare one project to another and what a ramp rate looks like and how long it goes for. But I think we did provide a little bit more detail at Investor Day that showed some of the actual projects of how they flow and some of the unevenness. But some of them will be at full run rate end of year. Some of them will not, but that also doesn't mean that they might slow down or speed up in any particular quarter. So the main thing to think about that makes us feel good about it is that it is a large cohort as well as the other pieces going forward, and it gives us more air cover to deal with some of that unevenness than we've dealt with in the past few quarters.

Okay. I guess second question then is going to be on price and costs. You talked about increasing electronics costs. I know copper has become a bit less important over the years, but it has increased significantly throughout transportation costs and all that kind of stuff. Can you talk about where you are in terms of price/cost? Are you able to pass this through to customers? And then within these projects, are the contractual pass-through of increased costs? Or do you have some exposure to increased costs there?

Yes. So Nathan, I guess I'll take that in 2 parts. First, just talking about price/cost dynamics. That's an ongoing discussion that we're having internally and with customers as we're looking at RFP opportunities and working with customers on pricing individual projects. And we feel good about our ability to continue to recapture cost increases that we see within the market through our pricing excellence programs and really how we look at each individual opportunity. I'll also just remind you, again, the biggest driver of our overall gross margins is the structural mix benefits that we continue to see. So as we move from mechanical to static metering, more cellular AMI deployments and then the beyond the meter and software solutions that come along with that are really the main drivers toward that gross margin performance that we see over time. In terms of specifically within our contracts, we negotiate in most contracts, I'll say, the ability to pass along escalations throughout the 3-, 4-, 5-year deployments that we might have. So while not maybe 100% in all of our contracts, that's certainly a common term that we're negotiating with our customers.

Your next question comes from the line of Bobby Zolper with Raymond James.