Badger Meter, Inc. Q2 FY2025 earnings call

• Ken Bockhorst reported record sales and solid financial results, with sales growing 10% YOY (5% excluding SmartCover acquisition) despite trade-related cost headwinds, gross margins above normalized range, and robust free cash flow. • Bob Wrocklage detailed total sales of $238 million, utility water product line sales growth, flow instrumentation sales flat, profitability details including operating earnings and margins, and gross margin trends. • Ken discussed progress since BlueEdge launch in June, highlighting booth at ACE tradeshow, new Field App, Cobalt, and momentum in BlueEdge portfolio. • Mentioned outlook with expected sequential sales decline in Q3 2025 but long-term growth underpinned by industry fundamentals, customer trends, and competitive positioning. • Progress on SmartCover acquisition integration and 2024 Sustainability Report achievements.

Total sales in the second quarter of 2025 were $238 million, an increase of 10% year-over-year or 5% excluding the SmartCover acquisition. Utility water product line sales increased 11% year-over-year or 6% excluding SmartCover. Flow instrumentation product line sales were essentially flat year-over-year. Gross margin in the second quarter of 2025 was 41.1%, which expanded 170 basis points from 39.4% in the prior year quarter but declined sequentially from 42.9% in the first quarter. Operating earnings increased 8% year-over-year to $44.9 million with operating margins down 40 basis points to 18.8%. Primary working capital as a percent of sales at June 30, 2025 was 21.8%, consistent with the prior quarter end and about 200 basis points better than a year ago. Free cash flow increased 19% year-over-year to $40.6 million.

• Anticipated absolute sales to decline sequentially in Q3 2025. • Still expects sales growth year-over-year excluding SmartCover. • Long-term high single-digit revenue growth underpinned by enduring industry fundamentals, customer order and demand trends, etc. • On track to deliver SmartCover acquisition sales and cost synergies.

• Trade environment uncertainty, e.g., copper prices spiking on tariff concerns and ripple effects on secondary markets. • Ongoing tariff-related uncertainties and their lag impact on mitigation actions.

Q: On the SG&A expense line, sequentially up about $7 million, with extra quarter of SmartCover and one-time deferred comp. Talk about other investments to support future growth and if $52 million is new SG&A level going forward?

A: Yes, full 3 months of SmartCover's SEA run rate and intangible amortization contributed to the uptick, plus unique $1 million deferred comp expense. Absent those, SEA growth year-over-year up $2 - $3 million. Investment in evolving software offering, innovative product development, and driving technology adoption.

Q: Regarding the $1.6 million intangible amortization, is it continuing level?

A: That is entirely the intangible asset amortization, inventory step-up from acquisition passed out in first quarter, and continuing run rate for life of intangibles disclosed.

Q: Similar to Nathan's question, on SEA, with $1 million variable deferred comp unique to quarter, infer if it goes away next quarter?

A: Not in its entirety, oversized impact unique to second quarter due to stock price change affecting deferred comp liabilities.

Q: Strip out outliers, $3 million core increase in SEA, connects to sales increase?

A: Comparing to abnormally low SEA as percent of sales in prior quarter, stripping out noise, SEA as percent of sales was 20.7%, 50 basis point increase but indicative of leveraging SEA over time.

Q: Strategic price increases mitigated certain tariff impacts, suggesting price/cost negative in quarter, should be price/cost neutral rest of year?

A: Book of business varies in go to market, pricing actions in mid-April not effective on all shipped in quarter. Uncertainty in tariff costs makes it hard to say cost neutral, as cost and price sides can change.

Q: AMI projects in funnel, unclear start time, change or normal course of business; comment on muni activity?

A: Business can be uneven quarter-to-quarter, some projects rolled off but funnel remains robust, not a concern for long term, customer demand side unchanged.

Q: Sales down quarter-over-quarter into 3Q, total sales or core?

A: Core comment, excluding SmartCover.

Q: SmartCover sales in quarter, above last calendar year run rate, seasonality or organic growth?

A: Excited about SmartCover acquisition, positive momentum from market and integration, long-term growth outlook for SmartCover in sewer line monitoring which is greenfield.

Q: Contribution from SmartCover at EPS level, dilutive in quarter?

A: Around $0.06 - $0.07 dilutive in quarter, about market adoption, sales growth, and leveraging SEA business.

Q: Tariff around copper and influence on adoption rate between mechanical and solid-state meters?

A: Have strong ultrasonic line, buying people from mechanical to ultrasonic, still have reasons utilities want mechanical meters, able to mitigate cost issues and sell mechanical meters, ultrasonic also an option.

Q: Progress on SmartCover integration, cost synergy opportunity, where today and remaining upside? Mostly SEA cost-out?

A: Didn't size cost-out opportunity publicly, most dramatic synergies are commercial, accelerating revenue growth by advancing technology connectivity, primary synergy is commercial synergies, cost synergies secondary.

Q: Potential cuts to EPA budget, impact on metering demand, breakdown of customer project funding?

A: Utilities have multiple funding ways, state revolving funds, municipal bonds, rate raises, direct sales model allows talking to utilities about plans, well positioned to not be affected much by EPA budget cuts.