Prepared remarks
Ladies and gentlemen, welcome to the second quarter 2026 Badger Meter earnings conference call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star-1 to raise your hand. To withdraw your question, press star-1 again. It is now my pleasure to turn the conference call over to Daniel R. 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 am here today with Kenneth C. Bockhorst, our Chairman, President, and Chief Executive Officer, and Robert A. Wrocklage, our Executive Vice President of North America Municipal. 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 05/01/2026. Our release and earnings presentation provide a reconciliation between the most directly comparable GAAP measure and any non-GAAP financial measures. With that, I will turn the call over to Kenneth C. Bockhorst.
Thanks, Daniel, 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 within flow 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 will turn the call over to Daniel to walk through the specifics of the quarter and then Bobby will provide an update on commercial activity and collective customer feedback from our recent annual AWWA ACE trade show. I will then come back to cover the outlook and take your questions. Go ahead, Daniel.
Thank you, Kenneth. Turning to slide 3, total sales in Q2 were $222.3 million, representing a 7% decline year over year. Excluding the two-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 as a 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 two 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 and 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 thousand shares for a total of $25.3 million and have approximately $90 million remaining on our current share repurchase authorization. Over the past three quarters, we have deployed roughly $80 million in share repurchases. Finally, as noted in the release, we did finalize a five-year renewal of a $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 will turn the call over to Robert A. Wrocklage.
Thanks, Daniel. 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 were 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 hardware and software components of our network-as-a-service, or NAS, solutions. Of particular focus were advancements to network resiliency and flexibility in communication devices such as dynamic multi-SIM technology and our enhanced ORION LENS endpoint solution for metal pit lids. From a software standpoint, iON Water Premium, our BEACON Field App, and, of course, our embedded AI functionality Cobalt garnered strong interest. Collective feedback reinforced our NAS leadership position and an AMI hardware and software set that provides value to all utility stakeholders and their customers. Finally, we continued 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 will turn the call back to Kenneth C. Bockhorst.
Thanks, Robert. 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 Robert 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 Daniel 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 would 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.
Questions and answers
We will now begin the question-and-answer session. If you would like to ask a question, please press star-1 to raise your hand. To withdraw your question, press star-1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jeffrey Reeve with RBC Capital Markets. Your line is now open. Please go ahead.
Thank you, and good morning, everyone. 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?
Hey, Jeffrey. As we talked about last quarter, we fully expected as the year progressed it would become clearer how things would play out given how important the nine projects are to the rest of the year and, frankly, the positivity they have for the next several years. As you know, PRASA has begun and a few of the other projects have begun. We will always note that there can be possible unevenness, but the total cohort of nine projects feels pretty solid at this point.
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 the guide?
Just keep in mind, they are not all starting at the beginning of Q3. There are multiple phase-ins and pieces. It is a whole collection. We expect certain positivity around these projects. We also have a robust funnel of near-term projects that are in negotiation and other opportunities not part of that nine-project cohort. In Q2, we had a higher daily turn rate of orders than in Q1. Those factors give us the confidence to remain on this flattish stance for the remainder of the year.
Got it. And if I could sneak in one more: on UDLive, revenues seem lower than I would have expected on the trailing revenue. Is that just a timing issue maybe related to the May close? Or is there anything else driving that?
Yes, definitely a timing issue. As with any acquisition, particularly with smaller companies, you get certain distractions and things. But not concerned at all.
Great. Thank you.
Your next question comes from the line of Quinn Fredrickson with Baird. Your line is now open. Please go ahead.
Good morning. On the short-cycle portion of the business, could you put a finer point on what you saw in the quarter, maybe in context of the $15 million to $20 million shortfall in the first quarter? How did the second quarter compare to what you would expect seasonally? Is there any additional room for a short-cycle recovery in the back half?
As we expected, Q1 was an outlier in terms of short order cycle rates. Q2 was more normal and typical of the operating environment. We do not intend to size this every quarter because that portion of the business is always somewhat uneven by nature.
Okay, thanks, Kenneth.
Your next question comes from the line of James Coe with Jefferies. Your line is now open. Please go ahead.
Good morning. I wanted to touch on the awarded project ramp-up timeline. Looking at the historical revenue profile of the cohort you shared, deployment tends to peak one to two years after award. Should we expect a similar dynamic for the nine awarded projects you shared?
There is a lot to unpack because every AMI project is different. You pace from a state of nothing in the base to initial implementation: product shipments in a supply-only case begin or, even in turnkey solutions, shipments begin and are married up with installation activity. There is a ramp concept. I do not think you can pinpoint the average project to a particular year because some projects will be three years in nature, some five. The curve you described—a ramp up to scale deployment and then as projects wind down a decline—is accurate, but precise pinpoints are difficult in this industry.
Great. Thanks for the color. You mentioned other opportunities outside the nine projects. Can you provide more color on opportunities outside of those awarded projects?
When you publish a list of a cohort, particularly of the scope and scale we did, it might imply those are the key and only projects, but that is not the case. That cohort was a representative sample spanning utility and investor-owned projects, competitive conversions, incumbency experiences, and both supply and turnkey projects. Those were chosen to illustrate factors, but they are not the only projects. Whether selling direct or through distribution, there are many opportunities. Some come through as turnkey projects that we would have disclosed like that, and others come through as shorter-cycle order activity that we have limited visibility into. Those short-cycle orders occur regularly and, as Kenneth indicated, that rate of activity improved versus Q1 levels. That is what happened in Q2 and what we are forecasting forward to reach flattish organic revenue for the full year.
Great. Thanks for taking the questions.
Your next question comes from the line of Nathan Jones with Stifel. Your line is open. Please go ahead.
Good morning. On project ramp-ups: will the projects be at full run rate as you exit the year, or is there further to go to hit full run rates into 2027? Should we continue to see sequential improvement into early next year from these projects? Second question: on price and costs, you discussed increasing electronics costs and copper and transportation. Can you talk about where you are in terms of price-cost? Are you able to pass this through to customers? Are there contractual pass-throughs within these projects, or do you have exposure?
Some projects will be at full run rate by year-end, some will not. That does not mean they might not slow down or speed up in any particular quarter. The main thing that makes us feel good is that this is a large cohort and, combined with other opportunities, gives us more coverage to deal with unevenness than we've had in recent quarters.
On price-cost dynamics, it's an ongoing discussion both internally and with customers as we look at RFPs and price individual projects. We feel good about our ability to recapture market cost increases through our pricing programs and how we evaluate each opportunity. Remember, the biggest driver of our overall gross margins is structural mix benefits—shifting from mechanical to static metering, more cellular AMI deployments, and beyond-the-meter and software solutions. These are the main long-term drivers of gross margin performance. Regarding contracts, we negotiate the ability to pass along escalations in most contracts for three-, four-, or five-year deployments. While not 100% in all contracts, escalation clauses are a common term we negotiate with customers.
Thanks for taking the questions.
Your next question comes from the line of Bobby Zulper with Raymond James. Your line is open. Please go ahead.
Hi. Thanks for taking the question. I saw you renewed your credit facility. Relative to the pace you were repurchasing shares at Investor Day versus the end of the quarter, that may have decelerated a bit. Is there anything to read into that regarding what you will do with excess capital? Does that imply you will do more deals versus repurchasing shares?
It is a continued balanced approach to capital allocation priorities: investing in the business and R&D, returning cash to shareholders, and pursuing M&A. For three consecutive quarters we have been buying shares and still have $90 million left on the authorization. We remain excited about M&A as before.
I will add the renewal of the credit facility was largely driven by the fact it was due to expire in July of this year. We enjoy the financial flexibility of having that facility in place.
Appreciate it. One more: regarding PRASA, there's a letter floating around from the resident commissioner of Puerto Rico published in early June. Since that was published, has your view of PRASA changed in terms of likelihood of hitting expectations for the year?
The normal disclaimer applies that we don't discuss legal matters publicly, but nothing has changed in our view on the PRASA project. It has been public that there have been several reviews over the years; it has gone to appeals and other processes. From our view, they ran a fair and open process, and we won it.
Challenging a procurement process or appealing the application of a procurement process is common in our industry, including in the United States. Sometimes these issues can be more or less amplified depending on the political environment, but this is a common thing we deal with and anticipate in the normal course.
Appreciate it. Thank you.
Your next question comes from the line of Andrew Krill with Deutsche Bank. Your line is now open. Please go ahead.
Thanks. Kenneth, you noted that Q4 organic sales will be heavily weighted to growth. For Q3, can you grow organically, or is there a chance sales are still down year over year on a tough comp?
We expect sequential growth in Q3 over Q2, but we are not providing a specific percent. The comp in Q4 is easier than Q3, so the year-over-year growth rate will be more heavily skewed to Q4 than Q3.
Fair enough. On flow instrumentation, growth there was impressive and sudden. What drove that? Is it sustainable, or was it more of a one-time large order? Can we extrapolate that forward, or does it revert to low-single-digit growth?
Two points: keep the law of small numbers in mind. We view the product line as GDP-like growth over a five-year horizon, i.e., low single digits. We have products that do well in data centers—clamp-on meters for flexibility and mag meters for cooling towers and flow monitoring. In this quarter we had orders that drove higher growth related to those markets. There are also good opportunities in water quality. Caution toward extrapolating a single quarter; stick with low-single-digit growth on average.
Thank you.
Your next caller comes from the line of Scott Graham with Seaport. Your line is now open. Please go ahead.
Good morning. On UDLive, are you saying intangibles are $5 million for the year, so about $1.25 million per quarter, and I know this quarter is less since it was a partial quarter. Regarding the roughly $3 million you referred to, is that inclusive of the $1.25 million or separate?
Scott, there are two pieces in the quarter. There is $1.8 million, which is the ongoing run rate of SG&A from UDLive that you should see coming through, and that includes intangible asset amortization. In the reconciliation this quarter, that breakout does not include the other piece, which is the transaction cost of $1.2 million, the remaining transaction costs in the quarter. So the ongoing run rate is the $1.8 million (which includes the intangible amortization), and the transaction costs are separate from that.
Very clear, thank you. One other question: you referred to successes talking to consultants at the recent trade show and brought up digital. Could you give more color on what you meant? You have a lot going on digitally; I wasn't clear what you were highlighting about consultants' reactions.
The trade show allowed us to meet with the engineering consulting community to understand what opportunities they are working on and to show things that have been launched or that are forthcoming for hardware and software. In those meetings, we provided a whole view of both hardware and software solutions. The trade show focused on clean water and AMI. Through those discussions, the evolution of our hardware set, our NAS capabilities, and software enablement reached all utility constituents. It is no longer just about billing reads; it's workflows for utility efficiency and customer care, enabling field crews to see real-time BEACON data while working in the field, and iON Water reaching consumers. The collective feedback was that our cellular leadership, which started as a differentiated form of AMI, has evolved into NAS capabilities that encompass stakeholders and customers. Consultants recognized our leadership position and the value we bring to market.
Very helpful, thanks Robert.
Your next question comes from the line of Ryan Connors with Northcoast Research. Your line is now open. Please go ahead.
Good morning. Two questions: first, regarding the improvement in short-cycle orders, did the exit of one competitor from the mechanical meter space have anything to do with that? You also see static growing faster but remain in the mechanical business. Was that a factor? Second: on ultrasonic versus mechanical, some peers say barriers to entry are lower for ultrasonic/static than for mechanical. Do you agree, and has that been a factor in competitive shifts?
I would not say it was a factor that fast. It will be a factor over time because we provide a premier mechanical meter that a large portion of the market still desires. There was no sizable impact in this quarter that we would call out, but we are pleased with that competitor's decision.
This reinforces our long-standing choice-matters approach to our portfolio. We continue to believe there is a place for both mechanical and ultrasonic meters in utility decision-making, whether for standard replacement cycles or technology adoption decisions. What Ken said is correct: it did not manifest immediately in the short term, but it is something we hope to capitalize on.
On barriers to entry: while ultrasonic and static have positives, some say barriers are lower. Would you agree that those technologies are easier for new entrants, and has that affected competitive shifts?
A large portion of the market still chooses mechanical by preference. If a new entrant offers only ultrasonic, a significant part of the market becomes unavailable to them. Even when entrants offer a me-too ultrasonic product, competing against entrenched companies like us, Sensus, and Neptune—who have strong incumbency and relationships—is very difficult. Technology parity is not sufficient alone to win in this market.
Got it. Thanks for your time.
Your next question comes from the line of Michael Fairbanks with JPMorgan. Your line is now open. Please go ahead.
On electronic component pressures, can you clarify what subcomponents are exactly affected and which products in the portfolio this would impact?
Michael, it is a broad-based industry issue. It could be certain capacitors used in various offerings, the bare boards circuit boards are made from, memory chips—components that are in demand due to AI and hyperscaling. It is a general macroeconomic comment affecting the electronics industry.
Tying products to that, any enabled product with electronics could be affected—ORION cellular, ultrasonic products, beyond-the-meter technologies. This is not intended to create fear; it's an industry-wide situation we've dealt with before. Everyone is managing the same challenge.
One advantage for us is our position from the last cycle: being on newer electronics platforms and our innovation edge position us well. The flexibility of our cellular offering versus fixed networks remains a positive differentiator.
Follow-up on working capital: you called out the increase this quarter. How should we think about working capital in the second half as you gear up for more projects?
Two things to focus on: receivables and inventory. The receivable increase had some timing impacts due to shipment timing in the quarter. On inventory, UDLive came with inventory which contributes to the increase and there are no trailing sales in the last 12 months for that inventory, so that will work through over time. Also, year-over-year cost pressures like higher copper increase the dollar value sitting on the balance sheet. Finally, due to revenue pacing earlier in the year, some supply showed up earlier than needed. We fully anticipate working through these factors in the back half. As sales grow sequentially in Q3 and Q4, the working capital as a percentage of sales should normalize as well.
Thank you.
We have now reached the end of the Q&A session. I will now turn the call back over to Daniel R. Weltzien for closing remarks.
Thank you, operator. Just a quick note for your planning that our third quarter 2026 earnings release is tentatively scheduled for October 21, 2026. As most of you know, Barbara is no longer with Badger Meter, so please do not hesitate to reach out to me if you have any follow-ups at investors@badgermeter.com. Have a great day.
This concludes today's call. Thank you for attending. You may now disconnect.