My pleasure to turn the conference over to Dan Weltzien, Chief Financial Officer and Treasurer. Please go ahead, Mr. Weltzien.
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 1st, 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 i n 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 Bob.
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.
We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one 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 Nathan Jones with Stifel. Nathan, your line is now open.
Good morning, everyone.
Morning, Nathan.
I guess, Ken, I'm going to start off with the 4Q guidance. You guys have talked about full-year revenue being flat-ish. The 4Q guide being sequentially and year-over-year better would be a pretty wide range to get into something that would be flat-ish. I'm hoping you can put a finer point on what you think 4Q revenue is likely to be, and what's the upper and lower bound for you on flat-ish?
Yeah. Thanks, Nathan. When we put that term out there earlier in the year, you'll recall that at Investor Day, when we were asked on flat-ish, I called out, "Don't expect upside." On a year-over-year basis, I was pretty vocal on the best case would be flat year- over- year. The way things have played out, we're really proud of where we're headed going into Q4, looking at year- over- year growth. We said we'd exit the year with momentum. We're doing that. When we talk about modest growth in the quarter, that keeps in mind the 5% fewer workdays in the quarter, but we expect to be up. So if you needed to peg me on something at this point, I would say that I would expect modest growth in the quarter sequentially and perhaps low single digits on a year- over- year full- year basis.
Okay. That's helpful. Thank you. I guess my follow-up question's on gross margins, which were much better than I expected them to be in the quarter, given some of the pressures that you were facing from lower gross margins on some of the projects that are ramping up. Obviously, there's inflation that's passing through. So maybe you can just talk a little bit about the dynamics there, what led to those gross margins being as strong as they were, and how you're thinking about those in the fourth quarter and as we head into next year. Thanks.
Yeah, sure. First thing I want to clarify, I'm sure you understood what I meant, but I didn't say the word down. We expect to be down year-over-year low single digits, just to be clear. In terms of-
Up low single digits year-over-year.
Full year versus quarter.
Full year, down low single digits.
Up low single digits. Full year down low single digits, 4Q up low single digits, or was that not what you said?
I'm not providing a digits on the up for Q4.
Okay.
Modestly up.
Down low single digits full year. Got it.
Correct. Got it. Perfect. When it comes to margins—
Thank you.
—Yeah, sure thing. When it comes to margins, I will just reiterate what we have said for several years now. We have this really positive structural mix that regardless of operating conditions, it does tend to get incrementally better every year when we have really nice growth in software that is higher- margin. Beyond the meter is all higher- margin. So the structural mix remains greatly intact, which helps us with a really strong floor on margins. Also our hallmark, I think for the last five or six years is when challenged, we have performed in a really operationally excellent way. So we understood what the challenges are, and I am really proud of our team, how we handled it. I will turn it to Dan here for some more specifics, but just generally, I feel really good of how we have navigated the quarter.
Yeah. Nathan, if I look at the quarter specifically and go back to the remarks that I had in the script, the biggest two drivers within the quarter were what I called out, which was ultrasonic meter mix, generally across the residential space, and then continued software growth. As we move throughout the year and as you know, the resiliency of our software growth is in the install base. Despite the unevenness that we have experienced throughout the year, that software growth has continued. All the other things that I have called out in prior quarters are the same drivers that we are paying attention to, both on the positive side from the structural mix perspective, but also on the downside risk perspective from turnkey mix and electronic component availability and supply, and cost. So it is really all of the same drivers.
It's just how does that particular quarter play out?
No one time is like tariff refunds or anything in the quarter?
Nothing meaningful.
Great. Thank you.
Your next question comes from the line of Quinn Fredrickson with Baird. Your line is now open.
Hey, good morning everyone. Recognize you have these larger AMI projects kicking off, but the release mentioned solid underlying demand trends in the third quarter. I know you don't break it out, but even qualitatively, does the underlying day-to-day replacement business feel like it's getting a little healthier or more normal? Just any commentary there?
Yeah, if we circle back to how we talked about this in Q1, we were pointing out that on that shorter visibility window, there is inherent unevenness, can be up, can be down, and certainly we were surprised to how far down in Q1, but Q2 and Q3 have been perfectly normal. Obviously to get to the result that we did, Q2 was better than Q1. Q3 was better than Q1, so structurally, demand feels good to us. While Q1 was down, the year has really been pretty normal other than that one outlier.
Great. Thanks, Ken. Second, just on PRASA. There's been some headlines about drought and water supply pressures in Puerto Rico. Has the urgency around the AMI rollout changed at all with that? Or, does that create any more urgency to create a faster deployment schedule? Just any commentary on how that impacts the project there?
Yeah, so it wouldn't be appropriate for me to comment on their ability or desire to go faster or not. The challenges you read about are certainly real, and that's why they're looking to adopt our AMI system. What I can tell you is, we've begun shipping product this year. We had mentioned that we began in Q2 and Q3 because they're ramping up to get started with installations. They've hired the installation contractors. They're in planning, and they're expecting to start installations in Q4. Yeah, I think ideally, if they could go faster, they'd love to, but the way these projects are, I should probably point out that just because the projects are ramping, they will also be inherently uneven. Some go faster, some go slower from quarter to quarter as you run into manpower challenges or weather issues.
The project starting inclusive of PRASA and the others, feels great for the long term, but I do always want to remind people quarter to quarter, there can be variation even though these projects are in flight.
Thank you.
The next question comes from the line of Jeff Reive with RBC Capital Markets. Jeff, your line is now open.
Thank you. Good morning. Given the nine projects ramping UDlive annualizing midyear next year and easier comps across all four quarters, is it fair to expect a return to high single-digit organics next year? Or could that ramp dynamic actually push you above that range?
Yeah, I think the math equation of that sounds correct. As we head into Q4, that's an easier year-over-year comp, and the first couple of quarters are certainly easier than the back half will be. I'm not going to peg a year because of all the inherent unevenness I just talked about when short cycles can be and how projects can ramp or not, but we feel really good about the year in general in terms of our ability to get back on our strategic growth horizon of high single digits. But to peg the year is probably not great at the moment, but we feel good about it.
Fair enough. Last quarter, you flagged the increasing electronic component cost and availability pressures tied to AI and data center demand. Have those pressures escalated further, and have you needed to take any incremental pricing or sourcing actions?
Yeah. They have escalated. We do continue to see some price escalation. We do continue to see availability challenges. Again, I want to point out our team has been excellent this time and the last time we faced a similar situation. We understand the challenge in front of us. Our team is working hard on it. Fortunately for us, our portfolio is highly valued by our customers. They understand what we do for them, and we are able to extract the value that we deserve. I would rather talk about that than pricing. But yes, we can balance price-cost dynamics pretty effectively.
Got it. Thanks.
The next question comes from the line of James Ko with Jefferies. James, your line is now open.
Good morning. Thanks for taking questions here. Just one quick clarification question. When you say low single-digit decline for the full year, is that organic or inclusive of all UDlive here?
That is organic.
Awesome. Thanks for that. Can we talk about the non-metering businesses like UDlive and SmartCover, how they are doing, whether those are growing above the company average, and whether those are trending in line with your deal case?
Yeah. As you know, those are also in our utility bucket that we talk about more broadly. UDlive is still very public. We are really excited about the opportunities as we were when we acquired both of these companies. It is an absolute need that every utility customer deals with. It is an innovative product. We have got the right sales channels. So feel good about the progress on UDlive, feel equally as good about SmartCover, and that will continue to be a part of this high single-digit growth story that we talk about for years to come.
Awesome. Thanks so much.
Sure.
The next question comes from the line of Scott Graham with Seaport. Scott, your line is now open.
Hey. Good morning. Thanks for taking the question. I have two questions for you. First is, I know you talked about underlying demand in a previous question. I am just wondering, the other two of the big three, so to speak, are talking about the category having been fairly sluggish all year. It is hard to say if they are parsing out their software businesses. But certainly the metering units seems to be an issue this year. Could you talk about that a little bit, and why that weakness has pervaded all year? And perhaps what you are thinking that the category looks like in units, meter units next year?
Yeah. So that is a great question. So with 50,000 utilities of different sizes and shapes and geographies, it is hard for me to tell you across the board a cookie-cutter answer that the market is down X percent. I do not know what the other big two have in terms of projects like we detailed for you. They may have different unevenness in their business that. Well, actually, I am certain they have it. I just do not know what their particular mix is. So it would not be appropriate for me to comment on what their issue is.
But what I see, and when we talk to customers and as Bob pointed out, we saw customers at WEFTEC, we saw customers this week in Milwaukee, and I get all the noise that is out there about the market and all the things that people have talked about in the past around funding, but our customers are looking forward to the future to deal with the issues that they have to deal with. They have to upgrade their infrastructure. They have to be better informed about what decisions to make with their limited resources, and we are just really happy that they are choosing our portfolio. So I should not comment on the other guys.
Okay. Thank you. I wanted to just also ask about the gross margin in the backlog, and I know the backlog has been burned down a lot in the last couple of years with supply chain getting better. I am just wondering, you have a little bit more visibility now on these projects, which are now starting to ship. I was just sort of hoping if you can just tell us that the gross margin backlog, how much of that is linked to CPI and for the rest of it, h ow are you handling price increases?
Yeah. I would just reiterate that even though we have been operating at the higher end, just given all the mixed things that can happen and some of the lack of visibility on short term, as you pointed out, we feel really good about our ability to operate within the 39%-42% gross margin range that we talked about. We feel great as we resume growth, being able to get back to that really good leverage of SE&A that we have talked about before. All in, it feels manageable to us to stay within the margin ranges that we have consistently communicated.
Thank you, Ken.
Sure.
Your next question comes from the line of William Grippin with Barclays. William, your line is now open.
All right. Thanks very much. Appreciate the time and the opportunity here. Apologies to come back to the margin question again, but your commentary last quarter when you called out some of the supply chain cost pressures, it felt to me like maybe you were trying to signal something, right? Then here with third quarter result, clearly margin was quite good at the high end of your long-term target range. Are you trying to signal something in terms of how we should expect margin to trend in the fourth quarter or even into next year as some of these larger projects start to ramp and perhaps, I don't know if there's any notable differences in your contract structures we should be aware of there?
Yeah. When I signal those things, I'm trying to signal the whole of all of the components that go into our gross margin picture. Again, I always remind people, structural mix is the biggest driver. When we call out in the quarter what's happening with ultrasonic meter mix and what's happening with software mix, maybe that's masking some of what's happening on the electronic side. But we're also managing that dynamic as well. So, me calling that out as a particular risk isn't trying to, in the next quarter, tell you what's going to happen. It's just trying to show you that there's multiple levers that contribute to what our margin performance is in any given quarter or year. At the time where we are right now, we started to talk about that pressure here in the second quarter.
As of the end of the third quarter, I would say the challenges still exist. We've been able to manage it. We feel over the long term, we'll be able to continue to manage it. But quarter to quarter, there can be leading and lagging impacts of that.
Appreciate that color. Then, maybe a bit of a long shot here. Are you able to share how much PRASA contributed in the third quarter to top line?
No, we're not going to get into that. I think the other thing, William, that's important to notice too is throughout the year, we have won other projects, too. The year has gone on and been normal. I know there's a lot of focus on PRASA, and rightfully so, because it's very large. But the year has played out really well and really, I guess, normalized for us. So we're not going to get into quarter by quarter any project on what it is. But we're happy that we've seen these projects beginning to start, and what that does is, quarter- to- quarter can be uneven, but how we look at the business over the five-year horizon, we feel fantastic that these are all now moving to in-flight status.
All right. That's all for me. Thanks for the time.
Sure.
The next question comes from Michael Fairbanks with JP Morgan. Your line is now open.
Hey, good morning. On one of those last points you made, Ken, beyond the cohort of projects that you've talked about extensively, how would you say the pipeline and awards or even backlog beyond that are trending compared to this time last year?
Yeah. So throughout the past several years, when we look at the universe of utilities that are currently working with consultants to scope out doing metering projects, which are revenue later in our five-year horizon, or the people that are currently in RFP that are going through the selection processes up to and including in-flight projects, that whole piece feels as robust as it has over the past several years.
Okay, great. Then, we saw share buybacks accelerate this quarter. How are we thinking about capital allocation from here?
Yes, our capital allocation priorities remain the same. We're going to continue to invest in the business and extend our lead in R&D and innovation. We're going to continue to return cash to shareholders in 34 years of increased dividends. We're certainly in position to continue on that trend. In terms of share buybacks, we still have $35 million on the authorization. Even before this period when we weren't buying shares, we've always had an authorization open. I would imagine as long as we feel great about our superior position of being a cash generator, we'll be able to do that. This year, we also did a really exciting acquisition. Regardless of this being a pretty challenging year for us, we've been able to navigate through this, execute on all three of our important capital allocation priorities, and we'll continue to do that going forward.
Thank you.
You are welcome.
We have now reached the end of the Q&A session. I will now turn the call back to Dan Weltzien for closing remarks.
Thank you, operator. Just a quick note for your planning purposes that our year-end 2026 earnings release is tentatively scheduled for January 28th, 2027. Feel free to reach out to me if you have any follow-ups at investors@badgermeter.com. Have a great day.