BMI — Q3 2026 Financial Report Analysis

Flat sales, wider margins: Badger Meter's Q3 2026 profit growth came from mix and fewer shares, not volume

Badger Meter, which makes water meters, the radios that transmit their readings, and the software utilities use to read them, sold $235.9 million of goods and services in the third quarter of 2026 (July to September), up 0.1% from $235.7 million a year earlier. Without the UK sewer-monitoring business it bought in May (UDlive, which added $5.6 million), sales would have fallen by about 2%. Profit still rose: net earnings were $35.9 million (+2.4%) and diluted earnings per share were $1.24 (+4.2%), because each dollar of sales carried more margin and the company bought back about 2.4% of its shares.

Key figures

Operating margin is the share of revenue left after running the business (production costs plus selling, engineering and administration), before interest and tax.

What drove the quarter

Utility water: projects arriving unevenly. Most of Badger Meter's sales come from water utilities replacing old meters and moving to AMI, "advanced metering infrastructure," where meters send readings over a network automatically instead of someone driving past to collect them. The company estimates only about 40% of US water meters have been converted, and the filing describes the problem as timing rather than lost demand. These are large, multi-year utility contracts, and when several of them slow down or finish at once, quarterly sales stall. The 10-Q attributes the flat quarter to "uneven AMI project pacing partially offset by increased BEACON SaaS revenue" plus the $5.6 million from UDlive.

Software keeps growing underneath. Revenue the company recognizes over time, which the filing says is mostly SaaS (software as a service: utilities pay a recurring fee for the BEACON cloud platform and monitoring services rather than buying a one-off product), rose to $26.0 million from $24.2 million, or 11.0% of sales versus 10.3%. Over nine months it was $75.5 million, up from $67.6 million. Part of this increase is acquired: UDlive and last year's SmartCover deal both sell monitoring subscriptions. The filing calls SaaS revenue "margin accretive," meaning it earns more than the company's average margin, which is why gross margin rose while sales did not.

Flow instrumentation steady. The smaller line, meters and valves sold to industrial and commercial customers, grew 2.1% to $27.0 million, "driven by strong demand across the water-focused end markets."

Costs held mostly in check. Selling, engineering and administration expenses rose $1.4 million to $51.1 million (21.7% of sales versus 21.1%). The filing says the increase was "mainly the result of the inclusion of UDlive, inclusive of the acquired intangible asset amortization, partially offset by lower incentive compensation and other appropriate cost controls." Lower incentive pay usually reflects results running below internal targets, which fits the nine-month decline below.

The nine-month picture is weaker than the quarter

The third quarter looks stable because the year-earlier comparison was also soft. Over nine months, sales fell 5.1% to $660.5 million, utility water fell 5.9% to $582.3 million, operating margin dropped to 18.5% from 20.2%, and diluted EPS fell to $3.19 from $3.65 (-12.6%). Gross margin held at 41.5% for the nine months, so the decline came from lower volume spread over higher fixed costs, not from pricing. Third-quarter net earnings rose $0.8 million while nine-month net earnings fell $15.1 million, so the first half of 2026 carried the whole decline: the quarter is an improvement, not yet a recovery.

What the headline numbers hide

• About half of EPS growth came from the buyback. Net earnings rose 2.4% but EPS rose 4.2%, because the diluted share count fell 2.4% to 28.87 million. The company bought 422,931 shares in the quarter at an average of about $130 ($55.5 million), and $119.0 million over nine months. Only $34.7 million is left on its $150 million authorization.
• Spending cash on buybacks cost interest income. Net interest income fell to $0.2 million from $1.3 million as cash went from $226.0 million to $67.9 million. That is why pre-tax earnings rose only 1.1% while operating earnings rose 3.6%. A lower tax rate (25.1% versus 26.1%) recovered part of the gap.
• No GAAP vs adjusted gap in the filing. The 10-Q reports only GAAP figures, with no one-off charges or gains in either year's quarter. One item rising underneath: amortization of acquired intangible assets (an accounting charge that spreads the cost of an acquired company's technology and customer lists over 10 to 20 years) was $20.8 million over nine months, up from $17.5 million, because of UDlive and SmartCover. It reduces reported profit without using cash.
• Cash conversion is still above 1x but slipping. Operating cash flow for nine months was $103.9 million against net earnings of $93.0 million (1.12x), down from $128.9 million against $108.1 million (1.19x) a year earlier. The filing blames "lower net earnings and working capital differentials."
• Inventory is building while sales fall. Inventories rose $14.5 million since December to $166.4 million (+9.5%) while nine-month sales fell 5.1%. The filing attributes this to "strategic purchasing initiatives and timing of inventory receipts." Elsewhere it explains why: demand for electronic components from AI data-center construction has caused "longer lead times, reduced component availability, and increased procurement costs for certain critical electronic components," and the company is stockpiling to protect supply. Receivables, by contrast, were flat at $111.8 million, so customers are paying on time.
• Tariffs are a possible small tailwind. The filing notes a February 2026 Supreme Court ruling invalidating certain tariffs and says the company "has reviewed and applied for tariff refunds, as applicable." No amount is disclosed or recognized in these numbers.

Takeaway: Badger Meter grew quarterly EPS 4.2% on flat sales by earning more per sale, from software and ultrasonic meters, and by shrinking its share count. Both levers have limits: the buyback program is nearly used up and cash is down to $67.9 million, so further EPS growth now depends on utility AMI projects picking back up, which the core business has not yet shown.

Outlook

The 10-Q gives no numeric guidance. What it does flag points in two directions:

• Supports margins: recurring software revenue is now 11% of sales and still growing, a full quarter of UDlive will be included from here on, and the $103.7 million of contracted-but-not-yet-delivered revenue (mostly multi-year service contracts) gives some visibility, with $9.7 million of it expected in the rest of 2026 and $18.6 million in 2027.
• Pressures margins: component costs are rising because of AI-driven demand for electronics, which the company says it will try to offset with price increases "where possible"; the UDlive earn-out (up to $50 million, currently valued at $12.0 million) is a liability that could rise if the unit beats its profit targets; and with cash at $67.9 million, the company has less room for buybacks or deals without borrowing from its $154.5 million of unused credit lines.

Our read: the margin gain looks durable because it comes from mix rather than one-offs, but the business needs volume to grow from here. The thing to watch in the fourth quarter is whether utility water sales, excluding UDlive, return to year-over-year growth. Another decline would point to a longer pause in utility meter projects, not just uneven timing.