Badger Meter, Inc. (BMI) Q2 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the second quarter 26 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. Mister Weltzien.

Good morning. Thank you for joining the Badger Meter Second Quarter 26 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 C. Bockhorst. 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 sub 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 25, 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. 1 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 26, 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 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 $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 26 in Washington DC. For those not able to visit in person, we showcased our AMI and beyond the meter app 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 smart cover 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 A. Wrocklage. 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 A. Wrocklage 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.

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. 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?

Hey, Jeffrey Reeve. So, yeah, so as we talked about last quarter, we fully expected as the year progressed it would become, you know, a little more clear to us how things would play out. Given the 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 will always note that there can be possible unevenness but the total cohort of 9 projects feels like it is it is 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 the guide?

Yeah. So just keep in mind, it is not like they are all starting at the beginning Q3. So there is multiple phase ins and pieces. So it is a whole collection of. We are expecting, you know, 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, yeah, in Q2, we had a higher you know, daily turn rate of orders than we had in Q1. So those numbers of factors give us the confidence to remain, you know, on this flattish for the remainder of the year stance.

Got it. And if I could sneak in 1 more. On UDLive, 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?

Yeah. Definitely just the timing issue. So, you know, as with any acquisition, particularly sometimes with small companies, you get just certain distractions and things. But yep, certainly understand that question, 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.

Yeah. Good morning, guys. 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 is any additional room for a short cycle recovery in the back half?

Yeah. So, you know, as we did expect, you know, Q1 was the outlier in terms of in terms of short order cycle rates as you called it. So, you know, we would just say it was more normal-ish in Q2, and typical of the operating environment. So we certainly do not 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 are really not gonna get into that from quarter to quarter because that portion of the business is always somewhat uneven by nature.

Okay. Thanks, Kenneth C. Bockhorst. And then, Daniel, 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?

Yeah. Okay. Can I just go first? Yeah. Sure. Yeah. So, Quinn, I think it is important context here. So we have 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 is not a badger meter challenge at the moment, but we are positioned to continue to manage 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, you know, just like all the other puts and takes structurally, we certainly feel fine within our range, but just wanted to call this out. So you know, Daniel, any other color if you would like?

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

Thank you both.

Your next question comes from the line of James Coe with Jefferies. Your line is now open. Please go ahead.

Good morning. Thanks for taking questions here. I wanted to touch on the awarded project kind of ramp up timeline. I mean, looking at the historical revenue profile of the cohort 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?

Yeah. So there is that is 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 is nothing in the base and then initial implementation begins. So product shipments and a supply only case begin or even in a turnkey solution. Then that is married up with the installation activity. So there is-- there is a ramp concept. I do not 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 are describing in terms of a ramp a scale of deployment for a period of time, and then as projects begin to wind down, 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. Thanks for the color. And I think you guys talked about other, like, opportunities outside of this, like, 9 or projects, can you kind of provide more color on opportunities on outside of those awarded projects that you guys shared?

Yeah. 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 is important to note that was chosen very purposefully to illustrate those factors. But those are not the only projects. Whether we are selling direct or whether we are 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 is 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 Kenneth as Kenneth indicated, that rate of activity improved versus Q1 levels or increased versus Q1 levels. that is what is happening here in Q2, and that is what we are forecasting forward in our full year outlook of getting to flattish on an organic basis.

Great. Thanks for taking questions.

Your next question comes from Nathan Jones with Stifel. Your line is open. Please go ahead.

Good morning, everyone. Yes. I will follow-up on the project ramp ups to begin with. We have 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.

Yeah. So the 1 thing that, as Robert A. Wrocklage pointed out, it is hard to, you know, compare 1 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 you know, some of them will be at full run rate end of year. Some of them will not. But that also does not 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 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 have 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. So 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 there, are there contractual pass through of increased costs, or do you have some exposure to increased cost there? Thanks for taking the questions.

Yep. So, Nathan, I guess I will I will take that in 2 parts. You know, first, just talking about, you know, price cost dynamics. that is an ongoing discussion that we are having internally and with customers as we are looking at RFP opportunities and working with customers on pricing individual projects. And we feel good about our ability to continue to, you know, recapture cost increases that we see, you know, within the market through our, you know, pricing excellence programs and really how we look at each individual opportunity. I will also just remind you again, you know, 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 will say, the ability to pass along escalations throughout the 3, 4, 5-year deployments that we might have. So while not maybe a 100% in all of our contracts, that is certainly a common term that we are negotiating with our 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. Think I saw that you renewed your credit facility It seems like also relative to the pace you were repurchasing shares at the Investor Day versus the end of the quarter that may have decelerated a little bit? Is there anything to read into that in terms of what you will be doing with your excess capital? Does that imply that you are gonna be doing more deals versus repurchasing shares?

Yeah. So, yeah, so, Bobby, it is just, you know, a continued balanced approach to our capital allocation priorities. So you know, continuing to invest in the business and make sure that we are super focused on our R&D innovation growth runways. Returning cash to shareholders, obviously, and know, for 3 consecutive quarters, we have been buying shares. We still have $90 million left on the authorization. So that is obviously something we have been doing recently. And we still are every bit as excited about M&A as we were. So nothing has really changed from when we saw you in May.

And, Bobby, I will just add. The renewal of that credit facility was largely driven by the fact that was due to expire in July of this year. So you know, we enjoy having that financial flexibility of having that facility place.

Alright. I appreciate it. Thank you. And then in terms of swing factors to get to flattish, for the year, I know there is this letter floating around about the process of project from, I think, it is the resident commissioner of Puerto Rico. Since that was published in early June, has that I guess, changed your opinion of the likelihood of the process of project hitting your expectations for the year?

Yeah. So, Bobby, the normal disclaimer of we do not talk about legal issues and things publicly, but nothing has changed on our view on the process project. And this has been, you know, it is been public that there have been several reviews over the years. it is gone to appeals courts, and it is been to other things. And nothing has changed the fact that from our view, they ran a fair and open process, and we won it.

I think it is just important to while your question is, very PRASA-specific, the idea of challenging a procurement process or appealing the application of a procurement process is very common to our industry.

This is all government bidding, government contracting. The things that you are mentioning here are commonplace in The United States as well. Obviously, sometimes those can be more or less supercharged depending upon the political environment. But the point is, this is a common thing that we deal with and anticipate in the normal course all day every day.

Alright. I 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.

Hi. Thanks. Good morning, everyone. Kenneth, I think in the prepared remarks, you noted 4Q organic sales heavily weighted, the growth of the heavily weighted to that quarter. So for Q3, can you grow organically? Or is there a chance sales are still down year over year on that tough comp? Thanks.

So not getting into specific quarterly I will tell you, though, we do expect sequential growth again in Q3 over Q2 Not gonna size up what that growth is, but I think just wanted to be you know, pointing out of the fact that the obviously, the comp in Q4 is easier than the comp in Q3. So just wanted to point out that the growth rate will be more heavily skewed to Q4 than Q3.

Okay. Fair enough. And then flow instrumentation, I did not get a ton of airtime, but the growth there very impressive and pretty sudden. So just could you unpack you know, what drove that? Is this sustainable, or was it more of, you know, onetime large order? I think that can happen here. You know? So can we extrapolate that looking forward, or does this revert back to the kind of low single digit area that product line tends to grow at? Thanks.

Yeah. So 2 things. So I just wanna call out again the law of small numbers. So I will point that out even when the growth rate is higher than when it is lower. You know, it is we still view this product line as GDP like in growth over the over the 5 year strategic horizon. We have kinda downplayed in the past some of our role and what we sell into data centers. We get asked that a lot. And, frankly, as a whole, it is not a big percentage of Badger Meter revenue. But within that, that flow instrumentation product line, we have 2 particular products that do well in data centers. it is our clamp on meters that are that are really flexible to use and finding a lot of headway in data centers. Mag meters for cooling towers and monitoring flow. So we do have a couple of products that do really well there. And in this particular quarter, we had orders that came through and drove it a little higher. I am talking about data centers, we also have good opportunities there within water quality. But I would caution you to stick with the with the GDP like low single digits growth. On average.

Thank you.

Your next call comes from the line of Scott Graham with Seaport. Your line is now open. Please go ahead.

Hey. Good morning. Nice to there was a pause there. Maybe that she meant to put a drum roll. Do not know. So all things you know, aside from the other questions, which were all good ones, the UDLive loss, are you saying that it includes transact so you are you are saying intangibles are $5 million for the year. so $1.25 million for a quarter, and I know less than that because it is a partial quarter. Are you saying the difference between the intangibles and the and the losses made up by these transaction costs is the in other words, is the $3 million that you referred to inclusive of the $1.25 million, or is that separate?

Yeah. So, Scott, what we were trying to point out there in the dollars in the quarter is there is 2 pieces. there is the $1.8 million which is just the ongoing run rate of S, E and A that you should see coming from UDLIVE. And we did a reconciliation this quarter to break apart the consolidated business from the base business so that you can specifically see that. In that breakout reconciliation, that does not include the other piece, which is the transaction cost of $1.2 million that were the remaining transaction costs, yeah, within the quarter. So ongoing run rate is that $1.8 million which includes the intangible asset amortization, and the transaction costs are separate from that.

Very clear. Thank you. The other question I had was you know, Bobby, you referred to successes and talking at the recent trade show with meetings with consultants, and you brought in digital Could you give us more color on what you mean there? You know, you know, you guys have a lot of things going on in digital and you know, the use of consultants I was maybe just not clear what you were trying to say there.

Yeah. So, I mean, that trade show in and of itself is, of course, designed to reach many an audience. And the comments in the script were very specific to the engineering consulting community. And so that is an opportunity for us to meet with those consultants, understand what opportunities they are working on, but also to then sometimes talk about things that have been launched already that they may not be aware of in many cases foreshadow what is forthcoming for hardware and software. And so in those meetings, we are able to provide a whole view to both hardware and software solutions In that case, that was a trade show very much focused on the clean water side. So it was all about advanced metering infrastructure. And through those discussions, the combination of the evolution of our hardware set our network monitor or our NAS capabilities and then the software enablement reaching all constituents of the utility. No longer just you know, the billing read, but in large part workflows with utility efficiency and customer care. Enabling the field service crews to see the real time power of Beacon data and as they are doing work in the field and then ion water with consumers, the collective feedback was you know, your leadership in cellular, which started as a differentiated form of AMI, has evolved now into NAS capabilities, that is fully encompassing all stakeholders and even, importantly, the customer of those utilities who are the citizenry using water in every city and state. And so the collective feedback was this is no longer just a discussion about cellular versus fixed network. it is a discussion about Badger Meter's cellular leadership, NAS capabilities, and that is become the industry standard. And your leadership position is evident not only in your financial results, but in the products that you bring to market and our ability to provide customers with those outcomes and consulting firms recognize that.

it is very helpful. Thanks, Robert A. Wrocklage.

Your next question comes from the line of Ryan Connors with Northcoast Research. Your line is now open. Please go ahead.

Good morning. You have been very comprehensive, but I do have a couple things left on my list here. 1, I wanted to go back to the improvement in short cycle orders that you talked about, and I am wondering whether the exit by 1 of your competitors from the mechanical meter space has anything to do with that. Obviously, you also see static growing faster, but you are still in the mechanical business. And I know that is a big part of the installed base. So was that at all a factor there?

I would not say it was a factor that fast. It will be a factor because we are you know, the provider of the premier mechanical meter that much of the market still very much desires. So it there was no sizable impact at all within that quarter that we would call out, but we feel happy about that decision by that competitor.

I think that is reinforcement of our long standing choice matters approach to our blue edge portfolio. And that we continue to believe that there is a place for both mechanical meters and ultrasonic meters. In the decision making that utilities undertake, whether it is upon standard replacement cycle or whether they are making technology adoption decisions. That Ken's exactly right. That did not manifest itself in the short term. But it is certainly something we hope to capitalize on.

Got it. Okay. And then sticking with that theme of ultrasonic versus mechanical, of the things we have heard from some of some of the peers, not necessarily from Badger Meter, but that although there is positives to the ultrasonic side for the customer and for the manufacturers as well. The barriers to entry on ultrasonic and static tend to be a little lower. Than in some of the traditional mechanical applications. Would you agree with that? Have you heard that? And do you think that is been a factor at all in the competitive shifts? And just curious your thoughts or your reaction to that.

Well, what I would tell you about that is if you if you look at we will just start with the question that you just asked. So a very large portion of the market still by choice, chooses mechanical. If anyone comes in with ultrasonic, obviously, there is a large portion of the market if that is their only offering, that they cannot participate in to begin with. Secondly, when you do come in with a me too product of ultrasonic and you are trying to compete with very large entrenched strong great competitors like us, Sensus and Neptune as the big 3 who all have that and have the relationships and really the incumbency position is so strong. it is still very hard to get over for new entrants. So I would agree with you that a technology for technology base, yes, they have a me too product, but I think there is a lot more to it than that to be successful in this market.

Got it. Fair enough. Thanks for your time. Sure.

Your next question comes from the line of Michael Fairbanks with JPMorgan. Your line is now open. Please go ahead.

Hey. Just on the electronic component, pressures, can you clarify what these subcomponents exactly are? And then maybe what products in the portfolio this would affect. Thank you.

Yeah. So, Michael, it is really a broad based thing. So as you can imagine, it is the electronics industry in total. So that could be certain capacitors that are used in different offerings. It could be right down to the bare boards that circuit boards are made from. So it is it is kind of across the across the way. Memory chips, obviously, are a big part of AI and hyperscaling. So it is kind of a general macroeconomic comment that us and everyone else out there is gonna be dealing with.

And then tying to specific products, it is obviously without you know, this is not intended to create fear in any way. I am just saying this as an obvious connection tie that all relates to any of the enabled products that have electronics. So it is Orion cellular. it is ultrasonic products. it is beyond the meter technologies. But as Kenneth alluded to in the prepared remarks and in his first answer, we have dealt with this before. Everyone's dealing with the same situation this is not a Badger unique challenge. This is a industry challenge.

Yeah. And 1 of the things that frankly in our industry positions us better than everybody else is the fact that last time this beared out that being on the newest electronics, being on the newest platforms, Our innovation edge was important last time, and the flexibility of our cellular offering versus fixed networks and all of those things that were that were positive factors for us the last time, still are true today.

Got it. And then maybe as a follow-up, you called out the working capital increase on the quarter. How should we think about working capital in the second half of this year? As you gear up for more of these projects?

Yeah. there is probably 2 things to focus on there. On the receivable side, you know, certainly, you know, there is some timing impacts within, you know, any given quarter in terms of, you know, when shipments are going out and those types of things. The other side is the inventory. And couple things to point out there. Number 1, you know, when we acquired UDLive, it came along with some inventory, so that contributes to the increase there. And, there is no know, sales in the trailing 12 months, so that is gonna work itself out over time. We mentioned some you know, cost pressures as you look at, you know, things from a year over year perspective, things like, you know, copper is more expensive. And so just naturally, the dollars that are sitting there on the balance sheet are higher. And then again, with some of the revenue pacing things throughout the first half of the year, there was just some supply that showed up a bit earlier than we needed it. So fully anticipate working through that in the back half. I think the other thing to just point out is, you know, as sales continue to grow, so sequentially here in the third and fourth quarter, the sales base in the calculation of primary working capital as a percentage of sales is gonna help that percentage to normalize as well. So those are those are all factors, I think, to what we are seeing right now.

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.

You, operator. Just a quick note for your planning that our third quarter 26 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.