BMI Q2 2023: Utility Water Sales Surge 32%, Driving Durable Margin Expansion
Badger Meter’s utility water business delivered a 32% YoY sales increase, underscoring the strength of smart water adoption and recurring software revenue. Margin leverage was achieved despite elevated SG&A, as structural mix shifts to higher-value offerings gained traction. Management signaled ongoing secular tailwinds and operational discipline, positioning BMI for continued growth and cash generation into the back half of the year.
Summary
- Smart Water Adoption Accelerates: Utility AMI and software solutions continue to drive mix and recurring revenue.
- Margin Expansion Sustained: Positive sales mix and SG&A leverage offset inflation and investment in growth.
- Secular Tailwinds Intact: Long-term demand visibility and strong order funnel support ongoing growth trajectory.
Business Overview
Badger Meter (BMI) provides flow measurement, control, and communications solutions for water utilities and industrial customers. The company’s core business is utility water metering, with revenue generated from the sale of mechanical and ultrasonic meters, radio endpoints (Orion), and recurring software-as-a-service (SaaS) through its Beacon platform. Its major segments include Utility Water, which accounts for the vast majority of revenue, and Flow Instrumentation, which serves water-related and industrial markets.
Performance Analysis
BMI delivered a record revenue quarter, with total sales reaching $175.9 million, up 28% YoY, propelled by a 32% increase in utility water sales. This growth was broad-based across the smart water portfolio, driven by increased shipments of Orion cellular endpoints and Beacon SaaS, as well as higher volumes of both mechanical and E-Series ultrasonic meters. Flow Instrumentation sales grew 6% YoY, benefiting from water market demand and improved supply chain dynamics, even as general industrial demand remained muted.
Operating margin expanded by 80 basis points to 16.8%, with gross margin at 39.5%, reflecting favorable sales mix and value-based pricing actions. SG&A expenses rose due to headcount, compensation, and the integration of the Cyrenix acquisition, but declined as a percentage of sales, demonstrating continued leverage. Free cash flow improved to $20.1 million, and working capital levels remained stable despite elevated inventories supporting growth.
- Utility Water Outperformance: Utility water’s 32% growth underscores the accelerating adoption of AMI, advanced metering infrastructure, and recurring software revenue.
- Sales Mix Shift: Higher average selling prices (ASPs) from bundled meters, radios, and SaaS are structurally lifting margins and recurring revenue streams.
- SG&A Leverage: Despite increased investment in personnel and M&A, SG&A as a percentage of sales fell, reflecting operational discipline.
No outsized one-time projects or backlog drawdown contributed to results; order intake remained above sales, supporting sustained growth momentum.
Executive Commentary
"We were very pleased with our second quarter performance, delivering an all-time record revenue quarter, strong operating profit margin improvement, and 33% EPS growth year over year. Demand levels remain resilient, with a book-to-bill again above 1%."
Ken Bockhorst, Chairman, President, and CEO
"Gross profit dollars increased $14.7 million year over year, and as a percent of sales were 39.5% at the higher end of our normalized range and just shy of last year's 39.7%. ... We remain on track for 100% plus free cash flow conversion of net earnings for the full year."
Bob Rockledge, Chief Financial Officer
Strategic Positioning
1. Smart Water Portfolio Differentiation
BMI’s competitive edge is anchored in its expanding suite of smart water solutions, including Orion cellular endpoints and Beacon SaaS, which enable utilities to optimize water usage, reduce loss, and improve asset management. The acquisition of Cyrenix, water quality monitoring, further broadens the offering and increases participation in larger utility projects.
2. Structural Sales Mix and Recurring Revenue
Management highlighted a durable shift toward higher ASPs as utilities adopt bundled solutions (meters, radios, SaaS), increasing software attachment rates and recurring revenue. This mix shift is expected to remain a long-term margin driver as adoption of AMI and cellular solutions accelerates.
3. Operational Leverage and Capital Allocation
SG&A leverage is a central theme, with costs scaling below sales growth despite increased investment in talent and M&A integration. BMI’s debt-free balance sheet and robust free cash flow support continued investment in R&D, acquisitions, and shareholder returns, including a focus on maintaining dividend aristocrat status.
4. Secular Demand and Bid Funnel Strength
Secular trends such as aging infrastructure, workforce shortages, and water conservation are driving multi-year demand visibility. The order funnel remains robust, with no evidence of backlog depletion or reliance on one-time projects, supporting continued growth across utility sizes and geographies.
Key Considerations
BMI’s Q2 results highlight the company’s ability to capitalize on secular water infrastructure trends while maintaining operational discipline. Investors should focus on the sustainability of margin expansion, the durability of recurring SaaS revenue, and the company’s capacity to deploy capital for growth and shareholder returns.
Key Considerations:
- Recurring Revenue Growth: Increasing attachment rates for Beacon SaaS and cellular endpoints are strengthening BMI’s recurring revenue base.
- Margin Structure: Positive sales mix and pricing actions are offsetting inflation and supporting expansion at both gross and operating levels.
- Order Book Visibility: A book-to-bill ratio above 1% and a robust bid funnel indicate sustained demand and limited risk of near-term slowdown.
- Capital Allocation Flexibility: A debt-free balance sheet and strong cash generation provide ample runway for R&D, strategic M&A, and shareholder distributions.
Risks
Potential risks include macroeconomic uncertainty, rising interest rates impacting utility budgets, and ongoing inflationary pressures. While BMI’s exposure to secular water trends provides resilience, a prolonged downturn in municipal spending or delayed infrastructure projects could temper growth. Integration risks from acquisitions and execution on new product rollouts also warrant monitoring.
Forward Outlook
For Q3 2023, BMI did not provide formal guidance but emphasized:
- Continued YoY sales growth, building on first-half momentum
- Gradual margin expansion with gross margins within normalized range
For full-year 2023, management maintained a positive outlook, expecting:
- Solid sales growth and 100%+ free cash flow conversion of net earnings
Management noted that secular drivers, improving supply chain, and inflation moderation will support ongoing performance, while cautioning that higher interest rates and macro uncertainty remain watchpoints.
- Order and bid funnel activity remains strong across utility sizes
- Structural sales mix and recurring revenue are expected to drive durable margin leverage
Takeaways
BMI’s Q2 results reinforce its position as a leader in smart water solutions, with secular tailwinds, robust demand visibility, and disciplined execution supporting a multi-year growth trajectory.
- Smart Water Adoption: Utility customers are increasingly shifting to bundled AMI and SaaS solutions, driving higher ASPs and recurring revenue.
- Margin and Cash Generation: Operational leverage and strategic mix shifts are delivering sustainable margin expansion and strong free cash flow.
- Future Watchpoints: Track continued SaaS penetration, bid funnel conversion, and management’s discipline in capital deployment as key forward drivers.
Conclusion
BMI’s strong Q2 performance demonstrates the power of secular water infrastructure trends, disciplined execution, and a robust product portfolio. With durable demand, expanding recurring revenue, and a flexible balance sheet, BMI is well positioned to extend its growth and margin trajectory into the second half and beyond.
Industry Read-Through
BMI’s results provide a clear read-through for the broader water infrastructure and smart metering sector. Secular drivers such as aging infrastructure, workforce shortages, and water conservation are accelerating adoption of AMI and SaaS platforms across utilities of all sizes. Recurring revenue models and software attachment rates are becoming increasingly important for margin stability and valuation across the sector. Competitors and suppliers in the water technology space should expect continued pricing power, robust demand visibility, and a strategic focus on recurring solutions as utilities modernize their asset base.