The original research report written by myself and a team of Marquette AIM students for the CFA Global Investment Research Challange. This report was judged at the local level by the CFA Societies of Milwaukee and Madison, WI.

1. Badger Meter, Inc. Hold
BMI : NYSE CFA Institute Global Investment Research Challenge
January 30, 2009 Marquette University
Price: (1/30/09) 23.99 Rating: Hold FY Dec 2007A 2008E 2009E
52WK H-L: 17.58-62.74 Price Target: $23 Revenue (mil) 234.8 260.4 240.5
Market Cap (mil): 354.8 Institutional Holdings: 76.2% Net Income (mil) 16.5 22.3 17.7
Shares Out (mil): 14.8 Insider Holdings: 5.4% EPS 1.26A 1.51E 1.20E
Float (mil): 13.8 Return on Equity: 20.1% P/E 23.0x 15.9x 20.0x
Avg. Daily Volume: 229,178 Debt to Assets: 17.0%
Dividend (ttm): 0.40 Dividend Yield (ttm): 1.67%
Recommendation
A five year discounted cash flow model in conjunction with various valuation multiples yielded a price target
of $23 per share for the common equity of Badger Meter Inc., resulting in a hold recommendation.
Investment Thesis
 Substantial Growth Opportunities – The threat of water shortages has led to the increased
monitoring of previously unmetered building units. Increased water connections and the conversion
to Automatic Meter Reading (AMR) has created a $7.35 billion market opportunity.
 Solid Market Position – Badger Meter maintains a stable 28% share of the $5.8 B North American
basic water meter industry. BMI’s proprietary ORION technology presents an opportunity to grow
their 20% share of the higher margin AMR industry.
 Strong Balance Sheet – Total debt makes up just 17% of BMI’s balance sheet. Net Debt to
EBITDA of 0.62 compares favorably to their larger competitors, Itron (3.88) and Roper (2.14). This
gives Badger Meter the flexibility to buy back shares, increase its dividend, or make strategic
acquisitions.
 Municipal Funding Pressure – A slowdown in utility capex due to reduced municipal budgets will
hinder the trend towards AMR, restricting near-term growth in the water meter industry.
 Delayed Replacement Cycle – Two thirds of unit shipments at Badger Meter are replacement
units. Our independent survey found that utilities are temporarily lengthening the 15 year
replacement cycle, negatively impacting sales volumes for meter manufacturers.
 Global Industrial Slowdown – 20% of BMI’s revenue is derived from worldwide industrial
manufacturing. Limited economic expansion will confine growth in this segment to less than 2%
CAGR over the next three years.
1

2. Company Background
Founded in 1905, Badger Meter, Inc. (BMI) produces flow measurement devices, specializing in residential
and commercial water meters (79.2% of 2007 sales). The company manufactures manual-read meters as well
as automatic meter reading (AMR) and advanced metering infrastructure (AMI) technologies. Through its
industrial segment (20.8% of 2007 sales), BMI sells a variety of flow measurement devices ranging from
precision valves to industrial non-water flow meters. Badger Meter operates in the United States, Mexico, and
the Czech Republic, with sales concentrated in the US (88% of FY2007), Latin America (7%), and Europe
(5%). Currently, Richard Meeusen (54) serves as President, Chief Executive Officer, and Chairman of the
Board of Directors, while Richard Johnson (54) serves as Sr. Vice President, Chief Financial Officer, and
Treasurer.
Water Meter Industry
Badger Meter operates in the $5.8 billion water meter industry.1 Utilities use meters to monitor water usage
of their residential, commercial, and industrial customers. According to the American Water Works
Association (AWWA), the 53,000 U.S. water utilities serve 75 million metered connections including 68
million residential and seven million commercial/industrial. In addition, there are about 13 million
unmetered connections as well as 21 million unconnected private wells (US Census Bureau).
The market is highly concentrated, with the top 400 utilities serving over 40% of the U.S. connections. The
next 4,000 utilities serve 40%, while the remaining 48,000+ utilities serve 20% of water service connections.
Water meter manufacturers sell to utilities through both a direct sales force and third party distributors.
Competitive Economics Figure 1:
As seen in Figure 1, the water meter industry is
Water Meter Market Share
oligopolistic in nature; the top four manufacturers Other
control 92% of the market and have competed for over 8% Badger
100 years. Because of its highly concentrated nature, the Elster 28%
industry maintains high barriers to entry from both a 14%
capital and technological perspective. The capital
intensive manufacturing process lends itself to
Neptune
economies of scale, making it unlikely for new entrants Sensus
30%
20%
to profitably compete in the existing market. The water
Source: BMI Data
meter industry is not susceptible to substitute products
as there is no alternative way to measure water usage. The commodity-like nature of basic water meters
results in price being “90% of the decision,” according to BMI’s CFO, Richard Johnson.
Badger Meter’s largest competitors include:
 Elster Metering (private) – As a subsidiary of Elster Group, a 170 year-old conglomerate, the
company produces residential and bulk meters along with AMR metering systems.
 Neptune Technologies (ROP) – This competitor is a part of the Industrial Technology Segment
of Roper Industries, Inc, which designs, manufactures, and distributes industrial equipment and
components. Specifically, water made up 16% of ROP’s 2007 end-market revenue.
 Sensus Metering Systems (private) – Sensus Metering Systems provide water, gas, heat, and
electric meters in addition to both AMR and AMI meter reading solutions. Metering made up 83% of
2007 net sales.
Assuming all current metered connections (75 million) incorporate AMR technology, the industry opportunity is
1
approximately $9.375 billion.
2

3. Types of Meters
Name Purpose Main Customers Special Features
Magnetized measuring tool physically rotates Residential Most popular for
Disc Rotations recorded on register, conveted to usage Small Commercial single family residential
Low to moderate flow rates housing
Measure water velocity through known capacity Large Commercial Best for high velocity,
Velocity
Convert flow into usage unobstructed water flow
A velocity meter that measures high flow rates Large Commercial Much larger in diameter
Turbine Straight-through meter with no internal measuring element Fire Protection to better accommodate
Master Meters high flow rates
Magnetic Flow Meter with no internal measurement device; Water Treatment
Measures unclean water
(quot;mag metersquot;) Electromagnetic properties measure water flow Sewage Facilities
Reading Meters
The water meter industry has experienced a structural shift in data collection, from manual reading to
technology-based solutions. (Figure 2) Figure 2:
2007 Meter Reading Breakdown
Manual Reading
A manually read meter has an odometer that converts rotations within the AMR/
meter to usage increments. This number is then physically collected and AMI
42% Manual
recorded by a meter reader on a monthly basis. 58%
Automatic Meter Reading (AMR)
AMR technology uses a radio signal to electronically transmit data to a mobile receiver. AMR systems allow
utilities to collect more accurate data in a more timely and efficient manner, resulting in cost savings.
The adoption of AMR technology is attractive for meter manufacturers due to:
 High Margin Product - The conversion to AMR has been the driving force behind increased
profitability within the industry. AMR is a higher margin business because the price point on a basic
meter is $25-$30, whereas the AMR package (meter and radio) is around $150 with minimal
additional manufacturing costs.
 Differentiation Opportunity - The manual read water meter business is highly commoditized with
price being the primary consideration. AMR provides meter manufacturers the chance to
differentiate themselves through heightened accuracy of transmission signals, ease of use, or pit
sealant technologies. These provide an opportunity for manufacturers to capture market share from
competitors in an industry where customers have traditionally been reluctant to switch products.
Of the 75 million installed basic water meters, 31.3 million have been converted to AMR (~42%). Market
share by unit is as follows in Figure 3:
Figure 3:
Water AMR Market Share
Hexagram Other
3%
Master 3% Badger
11% 20%
Elster
5%
Sensus
Itron 15%
14%
Neptune
29%
Source: BMI Data
3

4. There are, however, two negative factors about the conversion to AMR systems from the water meter
manufacturer’s perspective:
 Low Barriers to Entry - Radio manufacturing has very low barriers to entry relative to water meter
manufacturing. The trend towards AMR opens up the market to manufacturers who provide radios
to other industries which makes the AMR business much more competitive than the basic meter
business.
 Declining Price Point – Pricing on electronics declines faster than that of other manufactured
goods, making future pricing and profitability much more difficult to project.
Advanced Metering Infrastructure (AMI)
AMI incorporates radio data transmission via a fixed network of stationary transmitters that intermittently
sends data to a computer system maintained by the utility. This technology is in the early adopter phase for
water utilities. AMI systems are most useful to water utilities in difficult-to-access areas such as industrial
parks, airports, military bases, and gated communities.
The primary benefit of an AMI system is the real time interval data, which allows a utility to more closely
monitor usage of water, gas, or electricity. This system is more prevalent in the gas and electric industry due
to the option to control devices within the customers’ premises, an unnecessary feature in the water industry.
AMI does not necessarily cannibalize AMR because many cities will utilize a hybrid system incorporating
AMR for their residential customers and AMI for their heavy usage industrial customers.
Because of the following factors, it is believed that AMR systems, not AMI will be the primary growth driver
for the water meter industry going forward:
 Industrial connections make up less than 10% of the industry
 AMI costs utilities 10-25% more per unit than AMR
 The necessity of the incremental data for water utilities is questionable
Badger Meter, Inc.
Utility Segment
Description
The Utility segment provides residential and commercial water meters and meter reading technologies to
water utilities throughout North America. The segment constituted 79.2% of 2007 company revenue versus
80.9% of 2006 revenue.
Meters
The company offers the following water meters in its Utility segment:
 Disc Series Meters – Utilized in residential settings
 Turbo Series Meters – Ideal for high volume commercial locations
 Fire Hydrant Meters – Allow utilities to generate revenue from open fire hydrants
 Compound Series Meters – Designed for varying flow levels from highly populated buildings
 Mag Meters – Measure liquids non-intrusively using a micro-processor; can be used in a wide
variety of locations with less maintenance and decreased risk of clogging
 Fire Series Meters – High-performance meters used in fire service protection
4

5. Meter Reading Solutions
The company provides proprietary and non-proprietary meter reading and data management solutions for its
water meters. Approximately 50% of water meter shipments include radios. Meter reading solutions include:
 ORION Mobile AMR – Transmits meter data up to 1000 feet to drive by receivers. With 60% of
the nation’s water meters located in harsh underground pit environments, Badger’s ORION pit unit
utilizes its superior sealant technology to prevent leakage.
 Itron Mobile RF System – Presently, Badger Meter offers Itron’s Mobile RF System through a
licensing agreement terminating in 2011. Notably, ORION radios outsell Itron radios by a 2 to 1
margin (800,000 vs. 400,000 ttm 3Q08).
 ORION Hybrid AMI – Utilizes both AMI and AMR technologies to provide better customer
service and increased data availability along with AMR’s lower cost.
 GALAXY Fixed Network AMI – Transmits data up to one mile away over power lines, broadband,
or WiFi. Management anticipates continued AMI growth of 7% over the next few years. Last year
Badger Meter acquired full rights to the GALAXY technology. The company differentiates its
GALAXY pit unit with Badger Meter’s superior sealant technology.
Utility End Markets
Badger Meter’s primary customer base is the middle 4,000 utilities (40% of connections) because of low
margins on the largest municipal projects and low volume on the smallest projects. However, BMI will, on
occasion, pursue large municipal projects if pricing is not compromised. For example, in 2007 Badger Meter
won a contract with the City of Chicago to install ORION Mobile AMR technology on 162,000 presently
installed water meters and to replace 82,000 water meters. The contract was worth approximately $40 million
over a 3 year period, making the City of Chicago the largest customer of BMI at 5% of total sales.
Breakdown Figure 5:
Badger Meter charges $25-$30 per meter and $125-150 per Total Metered Connections 75 million units
meter-radio combination. There is an additional 10-25% BMI Market Share 28%
premium for its GALAXY fixed network AMI radios. BMI BMI Metered Connections 21 million units
generates approximately 40% margins for ORION and BMI 2007 Meters Sold 2.1 million units
GALAXY sales, while Itron margins are less than the % of Shipments w/Radios 50%
aggregate company margin. Revenue breakdown of the Meter + Radio 1.05 million units
segment is detailed in Figure 4 based assumptions shown in Price $150
Figure 5. Radio Revenue $157,500
% Utitlity Revenue 86%
+
Figure 4:
% of Meter-Only Shipments 50%
Utility Segment Revenue $183,750 100%
Meter Only 1.05 million units
Water Meters $52,500 28.57%
Price $25
AMR/AMI $131,250 71.43%
Meter Revenue $26,250
Orion $82,571 44.94%
% Utility Revenue 14%
Itron $41,286 22.47%
2007 Utility Revenue $183,750
Galaxy $9,323 5.07%
% Total Revenue 78.2%
Source: BMI Data/ Team Estimates (revenue in $000)
Source: BMI Data/ Team Estimates (revenue in $000)
5

6. Industrial Segment
Description
The Industrial segment, 20.8% of 2007 revenue versus 19.1% in 2006, consists of niche flow measurement
applications for use across a wide variety of industries.
Meters
The industrial segment provides a variety of enhanced meters for industrial use including: (Figure 6)
 Turbine Meters – Measure wide flows of water in water treatment and conditioning facilities.
 Positive Displacement Meters – Measure water and other liquid flows for inventory and process
control of food and beverage, chemical, and petrochemical applications.
 Electromagnetic Inductive Flow Meters – Non-intrusive meters that use a micro-processor
allowing for use in a wide variety of locations with less maintenance and decreased risk of clogging.
 Impeller Flow Meters – Installed into piping for irrigation, building automation, and energy
management. Monitors and transmitters can be added to enhance data acquisition and management.
 Precision Valve Meters – Used for fluid control and measurement in medical research,
pharmaceutical production, food and beverage, petroleum, and heating and air conditioning.
 Automotive Fluid Meters – Measure engine oil, grease, and transmission fluids and provide a Fluid
Management System to monitor and control fluid consumption and inventory.
Figure 6:
Impellers
Valves 3.6% Industrial
4.8% 2.9%
Concrete
1.8%
Automotive
4.4% Mag Meters
3.2%
Industrial Product Breakdown
(as % of BMI Total Revenue)
Source: BMI Data
Industrial End Markets
Industrial products are sold to companies in North America, Europe and Latin America. Latin American
sales consist largely of electromagnetic meters; European sales are mainly small valves, electromagnetic
meters, and automotive fluid meters. Industrial meters are sold in the petroleum, food and beverage,
pharmaceutical, petrochemical, water processing, waste water treatment, textiles, and the power industries.
Breakdown
As industrial flow measurement systems are installed by clients on a project basis, sales can be quite volatile.
Though 2007 Industrial revenue grew at 11.5% y/y, management’s estimated industrial segment growth is 5-
6% annually. Due to the specialty nature of the segment, industrial products typically carry a higher gross
margin than basic water meters (2007 Group gross margin was 35%).
6

7. Cost Structure
The following are ongoing expenses for BMI’s operations:
 Raw Materials – Badger Meter manufactures the majority of its product casings out of bronze
(81% copper, 7% lead); the remaining 12% is comprised of aluminum, stainless steel, and cast
iron. BMI’s smaller residential meters contain plastic resins in the inner chambers.
 Labor – As of 3Q08, the company employed 1,100 people, of which 200 were covered by a
collective bargaining agreement. The 200 union workers, employed in the Brown Deer, WI plant,
earn $30/hr. In contrast, the Nogales, Mexico plant workers earn $5/hr.
 Manufacturing – Since 1919 the company has invested heavily in state-of-the art, stainless steel
machinery at its WI headquarters, which houses R&D, as well as production for all segments.
Plant capacity is 6,000 residential or 300-350 commercial water meters per day. The company
also operates in Tulsa, OK, Stuttgart, Germany, and Brno, Czech Republic.
 Mexican Transition – In 2008, the company completed construction of a 120,000 sq foot
facility in Nogales housing both AMR/AMI electronic radio manufacturing and the production
of BMI’s proprietary pit sealant. BMI plans to transfer other manufacturing processes to the
Nogales factory to capture significant labor cost savings.
Pricing
BMI does not hedge copper, its largest material input cost. Instead, it purchases copper on the spot market.
Historically, BMI implements price increases/decreases based on the copper spot price. Additionally, copper
price escalators are built into contracts longer than 90 days. Although there is a two quarter lag in permanent
price adjustments, this method is preferred to temporary, fluctuating surcharges.
Margins
Badger Meter's gross margin averaged 34% over the past five years (Figure 7 below); it remained relatively
stable despite pressure from rising commodity prices. These cost increases were largely offset by a beneficial
shift in sales mix towards higher margin AMR/AMI and Industrial segment products. During the same time
period, operating margin (Figure 8 below) steadily improved, from 7.7% in 2003 to 13.0% in 2007. The
improvement resulted from corporate cost cutting as the company grew and gained economies of scale.
Figure 7: Figure 8:
Quarterly Gross Margin vs. Spot Copper Prices
Historical Margins
50% $30,000
45%
USD/ metric tonne
$25,000
40%
35%
$20,000
30%
25% $15,000
20%
$10,000
15%
10% $5,000
5%
0% $-
Copper (grade A cathode, LME spot price)
Gross Profit Margin Operating Margin BMI Gross Margin
7

8. Financial Statement Summary
For a detailed list of financial comparables, please see “Industry Peers” in the appendix. Below is a summary
of key takeaways of this analysis.
 Flexible Financial Position – Badger Meter is in a better fiscal position than their larger
competitors due to management’s disciplined approach to capital allocation. As a result, 2007 Net
Debt/EBITDA is 0.62 vs. 3.88 at Itron and 2.14 at Roper. This gives BMI the flexibility to buy back
shares, increase its dividend, or make strategic acquisitions.
 Uncertain Capital Structure – While management has targeted a capital structure of 30-40% debt,
short and long term borrowings make up only 17% of BMI’s balance sheet. Interest coverage of
greater than 30x outpaces the industry average of 14x by a wide margin. This flexibility can be
viewed as a positive in the current business environment.
 Consistent Cash Flow Generation – While generating strong returns, BMI has consistently
produced cash flow in excess of operating requirements. Free cash flow has grown at a 10.8%
CAGR over the last 8 years. Therefore, Badger Meter is able to fully invest in the emerging
technologies that are reshaping the competitive landscape of the water meter industry.
 Low Free Cash Flow Conversion – Although cash flow generation is consistent, Badger Meter has
historically converted less than 25% of EBITDA to free cash flow. This dramatically underperforms
the industry average of 51%. All other competitors convert at a 40+% rate. BMI generates less
revenue in favorable tax environments, resulting in a higher corporate tax rate. This contributes to
the lower conversion rate relative to peers.
 High Asset Turnover – Badger Meter has an asset turnover rate of 1.39, much higher than the
industry average of 0.98. This contributes to an above average return on equity (19.52% vs. industry
average of 16.88%) despite the lack of leverage relative to peers. BMI’s high asset turnover is
attributed to the recent shift in revenue mix towards higher price point radio equipment.
 Lean Manufacturing Process – BMI’s working capital requirements average 11.5% of sales. This
compares favorably with the industry average of 24.0%, due in large part to BMI’s focused product
offerings relative to their more diversified peers.
Growth Opportunities
 Water Shortage – According to a study by the Government Accountability Office, at least 36 states
face water shortages within the next five years. It is estimated that consumption declines up to 25%
when water usage is monitored. This shortage and subsequent conservation efforts drive the need
for more metered units as well as a more accurate and efficient reads on existing units.
 Manual Read Meter Conversion to AMR/AMI – Of the 75 million unit market, there are only
31.3 million AMR units, representing a 42% conversion rate. If all existing water meters were
converted to AMR/AMI, this would amount to a $5.4 billion expansion of the market.
 Unmetered Housing Units – Assuming utilities will begin to meter the 13 million unmetered
connections (12 million residential and one million commercial/industrial), suppliers like Badger
Meter would have a $1.95 billion market opportunity.
 Completion of ORION Deployment – Of contracted ORION projects, Badger Meter estimates
that only 25% are completed. The remaining 75% of projects translates into an unbooked backlog of
$650 million for BMI.
 Replacement of Trace Technology – Of the 2.5 million customers who originally purchased the
Trace system, approximately one million have not converted to the new ORION system. Complete
conversion of these units represents an additional $100 million opportunity.
8

9. Risks
 Utility Funding – According to BMI Management, water meters are funded through utility
operating budgets and municipal revenue bonds. Based on our proprietary survey, two thirds of
purchases are funded through operating budgets, while the remaining are funded by municipal bonds
(see appendix). Municipalities face declining tax revenues from decreasing home values (Figure 10:
Nov. 2008 y/y Composite 20 Case Schiller Index: -18.2%) and increased costs of raising funds in the
capital markets (Figure 9: AAA-rated, 10-year general obligation municipal bond yielding 120% of
the present 10-year treasury yield). This will pressure water meter spending.2
Figure 9: Figure 10:
Source: Bianco Research Source: Standard & Poor’s
 Replacements – Badger water meters typically have a lifespan of 15-20 years, as shorter replacement
cycle ensures higher accuracy. Due to the current economic condition, customers may elect to
postpone replacing their meters. Our survey found replacement cycles ranging between 12- 30 years.
 AMR/AMI Technology Adoption – BMI’s strength is clearly in AMR. Should AMI technology
become the industry standard, the company may not be positioned as an industry leader.
Furthermore, due to current funding pressure, utilities may postpone technological upgrades. This
could affect BMI’s unbooked backlog as well as new business.
 Macroeconomic Weakness – The International Monetary Fund (IMF) anticipates 2009 North
American GDP growth to be 0.3% (averaging 2.75% from 2010-2013), although economists have
more pessimistic forecasts. With over 75% of sales generated in economies of near zero GDP
growth, 2009 will be a challenging year (Figure 11). BMI’s conservative industrial position is
somewhat recession-resistant; management considers negative EBIT growth to be a bad year.
Figure 11:
Regional GDP Projections
Country 2009 2010
United States -1.6% 1.6%
European Union -1.8% 0.5%
Brazil 1.8% 3.5%
Mexico -0.3% 2.1%
Source: International Monetary Fund
Obama Stimulus Package – Congress is considering the American Recovery and Reinvestment Act of 2009. The Jan.
2
29, 2009 draft of this plan includes $6B designated for the Clean Water State Revolving Funds. Of these funds, 80% can
be used for municipality projects. Also, $2B is allocated for the Drinking Water State Revolving Funds, part of which is
designated for the assistance of municipalities. While this stimulus creates potential upside BMI, both the timing and
allocation of these monies is unclear and cannot be currently incorporated into financial projections.
9

10. Valuation
A five-year DCF with a weighted average cost of capital of 8.17% and a terminal EBITDA multiple of 7.5x
yielded an intrinsic value of $23 per share.
DCF Summary
2008 2009 2010 2011 2012 2013
Revenue $260,420 $240,522 $241,538 $285,804 $300,445 $315,437
y/y change 10.90% -7.64% 0.42% 18.33% 5.12% 4.99%
Operating Profit $36,506 $30,065 $30,192 $38,584 $42,062 $45,738
% margin 14.02% 12.50% 12.50% 13.50% 14.00% 14.50%
Taxes $12,998 $10,619 $10,964 $14,161 $15,466 $16,844
Net Income $22,300 $17,698 $18,274 $23,602 $25,776 $28,074
Less: W/C Change $6,578 ($10,996) $3,786 $12,034 $2,782 $2,848
Less: CapEx $13,021 $9,621 $9,662 $11,432 $12,018 $12,617
Add: Depreciation/ Amortization $9,013 $9,094 $9,170 $9,472 $9,811 $10,185
Net Cash Flow $11,714 $28,168 $13,997 $9,608 $20,787 $22,793
PV Factor 1.08 1.17 1.27 1.37 1.48
PV Cash Flow $26,040 $11,962 $7,591 $15,184 $15,391
Valuation WACC Calculation
Terminal EBITDA Multiple 7.5x Cost of Equity:
Projected EBITDA, 2013 $55,924 Risk-Free Rate 4.50%
Terminal Value $419,426 Expected Market Return 10%
Discounted TV $283,218 x Beta 1.10
k: 10.55%
Sum of PV FCF $76,168 Cost of Debt:
PV of Terminal Value $283,218 Expected Future Cost: 6.00%
Net Debt $21,397 Tax Rate: 37.50%
Value of Equity $337,990 After-Tax Cost of Debt: 3.75%
Shares Outstanding (Ths) 14,788 Cost of Capital:
Target Price $22.86 Debt 35% 3.75%
Current Price $23.99 Equity 65% 10.55%
Implied Return -4.73% WACC: 8.17%
Key Assumptions
 A downturn in utility capex for the next two years, stagnating growth in new metered units as well as
delaying replacement units. We expect the market to rebound in FY2011 and to normalize
thereafter. An economic recovery prior to 2010 could compromise the accuracy of our forecast.
 BMI maintains a constant market share of 28% throughout our forecast period. We believe this is
valid based on the stickiness of the customer base and the undifferentiated core offerings.
 Constant real pricing for water meters and radios; any material deviation would pressure margins.
Therefore revenue growth is solely a function of volume.
 Badger’s increased radio shipments proxy as an industry-wide trend. Our assumptions imply an AMR
conversion rate of 59% by 2013 from the current 42%. Accelerating AMI adoption or prolonged
delay in AMR conversion would affect our forecast.
 While discussing acquisition strategy, management stated that they would pay 7-8x EBITDA for an
industrial flow measurement company. Valuing BMI at this terminal multiple is consistent with the
current industry EV/EBITDA average of 7.73.
Sensitivity Analysis
WACC WACC
7.00% 7.50% 8.00% 8.50% 7.00% 7.50% 8.00% 8.50%
2009 y/y
Terminal
Revenue -20% $21.50 $21.03 $20.57 $20.12 7.0x $22.73 $22.23 $21.74 $21.26
EBITDA
Growth -10% $23.59 $23.07 $22.56 $22.06 7.5x $24.08 $23.55 $23.03 $22.52
Multiple
Rate 0% $25.68 $25.11 $24.55 $24.01 8.0x $25.43 $24.87 $24.32 $23.78
10

11. Appendix
Income Statement for Badger Meter (Including Projections)
US GAAP Actual Projected
Thousands of USD FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13
Revenue 167,317 183,989 205,010 203,637 229,754 234,816 260,420 240,522 241,538 285,804 300,445 315,437
Cost of Goods Sold (111,317) (123,470) (137,532) (130,218) (153,126) (153,418) (169,741) (155,137) (155,792) (182,914) (192,285) (201,879)
Gross Profit 56,000 60,519 67,478 73,419 76,628 81,398 90,679 85,385 85,746 102,889 108,160 113,557
Selling, General & Admin (42,805) (46,419) (47,281) (46,263) (47,840) (50,782) (54,173) (55,320) (55,554) (64,306) (66,098) (67,819)
Operating Income 13,195 14,100 20,197 27,156 28,788 30,616 36,506 30,065 30,192 38,584 42,062 45,738
Interest Expense (1,849) (1,737) (1,607) (1,492) (1,299) (1,291) (1,209) (1,748) (954) (821) (821) (821)
Other Expense (Income), Net 91 988 (610) 0 0 0 0 0 0 0 0 0
Earning from Operations, Before Tax 11,437 13,351 17,980 25,664 27,489 29,325 35,298 28,317 29,238 37,763 41,242 44,918
Income Taxes (4,166) (5,774) (8,347) (9,500) (10,921) (10,939) (12,998) (10,619) (10,964) (14,161) (15,466) (16,844)
Earning from Operations 7,271 7,577 9,633 16,164 16,568 18,386 22,300 17,698 18,274 23,602 25,776 28,074
Loss from Discontinued Ops 0 0 0 (2,911) (9,020) (1,929) 0 0 0 0 0 0
Net income 7,271 7,577 9,633 13,253 7,548 16,457 22,300 17,698 18,274 23,602 25,776 28,074
Shares Outstanding 12,882 13,170 13,444 13,696 14,154 14,519 14,788 14,788 14,788 14,788 14,788 14,788
EPS from Continuing Operations $0.55 $0.57 $0.71 $0.94 $1.15 $1.26 $1.51 $1.20 $1.24 $1.60 $1.74 $1.90
Consensus EPS $0.95 $1.21 $1.54 $1.58
Revenue Growth 20.77% 9.96% 11.43% -0.67% 12.83% 2.20% 10.90% -7.64% 0.42% 18.33% 5.12% 4.99%
Common Size:
Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of Goods Sold -66.53% -67.11% -67.09% -63.95% -66.65% -65.34% -65.18% -64.50% -64.50% -64.00% -64.00% -64.00%
Gross Profit 33.47% 32.89% 32.91% 36.05% 33.35% 34.66% 34.82% 35.50% 35.50% 36.00% 36.00% 36.00%
Selling, General & Admin -25.58% -25.23% -23.06% -22.72% -20.82% -21.63% -20.80% -23.00% -23.00% -22.50% -22.00% -21.50%
Operating Income 7.89% 7.66% 9.85% 13.34% 12.53% 13.04% 14.02% 12.50% 12.50% 13.50% 14.00% 14.50%
Interest Expense -1.11% -0.94% -0.78% -0.73% -0.57% -0.55% -0.46% -0.50% -0.50% -0.50% -0.50% -0.50%
Other Expense (Income), Net 0.05% 0.54% -0.30% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Earning from Operations, Before Tax 6.84% 7.26% 8.77% 12.60% 11.96% 12.49% 13.55% 12.00% 12.00% 13.00% 13.50% 14.00%
Tax Rate -36.43% -43.25% -46.42% -37.02% -39.73% -37.30% -36.82% -37.50% -37.50% -37.50% -37.50% -37.50%
Tax (as a % of Sales) -2.49% -3.14% -4.07% -4.67% -4.75% -4.66% -4.99% -4.41% -4.54% -4.95% -5.15% -5.34%
Earning from Operations 4.35% 4.12% 4.70% 7.94% 7.21% 7.83% 8.56% 7.59% 7.46% 8.05% 8.35% 8.66%
Loss from Discontinued Ops 0.00% 0.00% 0.00% -1.43% -3.93% -0.82% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Net Income 4.35% 4.12% 4.70% 6.51% 3.29% 7.01% 8.56% 7.59% 7.46% 8.05% 8.35% 8.66%
Interest Expense 1,849 1,737 1,607 1,492 1,299 1,291 1,748 1,748 954 821 821 821
Total Debt 35,701 39,634 36,103 32,911 29,687 19,239 33,017 33,017 18,017 15,499 15,499 15,499
Interest Expense % of Total Debt -5.18% -4.38% -4.45% -4.53% -4.38% -6.71% -5.29% -5.29% -5.29% -5.29% -5.29% -5.29%
11

12. Balance Sheet for Badger Meter
Actual
US GAAP
thousands of USD FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
12/31/03 12/31/04 12/31/05 12/31/06 12/31/07
Current Assets:
Cash 2,089 2,834 4,403 3,002 8,670
Receivables 26,304 26,879 30,450 29,276 30,638
Total Inventory 29,654 35,646 31,970 33,290 34,094
Finished Goods 8,010 14,121 11,875 9,122 8,225
Work in Process 8,494 9,054 9,048 10,302 10,660
Raw Materials 13,150 12,471 11,047 13,866 15,209
Prepaid Expense & Other Current Assets 1,193 2,016 2,309 3,179 3,450
Deferred Tax Assets 3,758 4,007 3,432 3,737 3,082
Assets of Discontinued Operations 0 0 0 6,875 0
Total Current Assets 62,998 71,382 72,564 79,359 79,934
Property, Plant, and Equipment (at cost) 104,081 107,295 109,810 113,249 125,678
land & improvements 3,360 3,487 7,416 6,337 7,177
buildings & improvements 28,069 28,252 27,867 29,922 39,448
machinery & equipment 72,652 75,556 74,527 76,990 79,053
less accumulated depreciation (61,243) (65,279) (65,940) (68,540) (71,100)
Net PP&E 42,838 42,016 43,870 44,709 54,578
Intangible Assets (at cost, net amortization) 1,336 1,160 1,026 636 477
Other Assets 16,236 4,009 4,101 4,211 4,919
Deferred Tax Assets 3,354 0 0 3,510 3,435
Prepaid Pension 0 17,290 17,726
Goodwill 7,089 7,104 6,580 6,958 6,958
Total Assets 133,851 142,961 145,867 139,383 150,301
Current Liabilities
Short-Term Debt 3,543 17,539 8,847 15,093 10,844
Current Portion of Long-Term Debt 5,645 5,348 7,431 1,944 2,738
Accounts Payable 14,895 11,069 11,484 10,597 11,363
Accrued Compensation & Benefits 6,619 6,166 6,436 6,181 5,988
Warranty & After-Sale Costs 3,767 3,817 3,610 2,954 1,917
Income & Other Taxes Payable 2,583 982 1,778 621 8,359
Liabilities of Discontinued Operations 0 0 0 8,321 0
Total Current Liabilities 37,052 44,921 39,586 45,711 41,209
Noncurrent Liabilities:
Other Long-Term Liabilities 0 326 634 557 627
Deferred Tax Liabilities 5,699 7,437 6,584 199 244
Accured Nonpension Retirement Benefits 5,069 4,490 3,955 6,903 6,083
Other Accrued Employee Benefits 6,410 6,902 6,332 8,266 7,040
Long-Term Debt 24,450 14,819 15,360 5,928 3,129
Commitments & Contingencies 0 0 0 see note
Total Long-Term Liabilities 41,628 33,974 32,865 21,853 17,123
Total Liabilities 78,680 78,895 72,451 67,564 58,332
Shareholder's Equity
Common Stock 4,846 9,872 10,056 20,553 20,902
Class B Common Stock 0 0 0 0 0
Capital in Excess of Par Value 20,079 18,313 23,376 19,428 24,655
Reinvested Earnings 58,928 64,928 74,258 77,479 89,061
Accum. Other Comprehensive Loss (Income) 1,280 2,024 1 (12,041) (9,191)
Employee Benefits & Restricted Stock (1,285) (1,065) (1,357) (744) (682)
Treasury Stock (28,677) (30,006) (32,918) (32,856) (32,776)
Total Shareholder's Equity 55,171 64,066 73,416 71,819 91,969
Total Liabilities & Shareholder's Equity 133,851 142,961 145,867 139,383 150,301
12

13. Cash Flow Statement for Badger Meter
Acutal
US GAAP
thousands of USD FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
12/31/03 12/31/04 12/31/05 12/31/06 12/31/07
CFs from operating
Net Income 7,577 9,633 13,253 7,548 16,457
Changes in Working Capital:
Receivables (3,846) (823) (4,335) 1,373 301
Inventories (4,152) (5,622) 2,691 (1,531) 241
Prepaid Expenses & Other Current Assets 26 (862) (343) 302 (58)
Current Liabilities 3,719 (6,697) (1,341) (1,384) 2,142
Total Change in Working Capital (4,253) (14,004) (3,328) (1,240) 2,626
Total Non-Working Capital Adjustments: 10,759 9,869 8,436 10,442 9,192
Depreciation 7,683 7,033 6,164 6,589 6,308
Amortization 149 212 195 418 159
Tax Benefit on Stock Options 585 877 1,370 0 0
Deferred Income Taxes 323 1,483 (318) (2,081) (1,149)
Long-Lived Asset Impairment 0 0 0 1,369 0
Gain on Disposal of Long-Term Assets 0 0 0 0 (495)
Noncurrent Employee Benefits 1,317 2,264 2,758 3,116 3,167
Contributions to Pension Plan 702 (2,000) (2,000) 0 0
Stock-Based Compensation Expense 0 0 267 1,031 1,202
NET CASH FROM OPERATIONS 14,083 5,498 18,361 16,750 28,275
Free Cash Flow 7,030 (74) 9,273 5,690 12,304
EBITDA 15,409 16,878 19,612 14,555 22,924
Capex for Property, Plant, & Equipment (7,053) (5,572) (9,088) (11,060) (15,971)
Capex as a % of Sales -3.83% -2.72% -4.46% -4.81% -6.80%
Proceeds on Disposal of Long-Lived Assets 0 0 0 0 3,194
Other (Net) (301) (655) (271) (516) (341)
NET CASH FROM INVESTING (7,354) (6,227) (9,359) (11,576) (13,118)
Net Increase (Decrease) in Short-Term Debt (16,812) 13,996 (8,230) 8,971 (7,957)
Issuance of Long-Term Debt 27,970 0 10,000 0 0
Repayment of Long-Term Debt (16,900) (9,943) (7,376) (14,919) (1,943)
Dividends Paid (3,425) (3,633) (3,923) (4,327) (4,866)
Proceeds from the Exercise of Stock Options 1,207 1,949 2,434 3,057 1,517
Tax Benefit on Stock Options 0 0 0 2,935 1,997
Treasury Stock Purchases (1,066) (1,711) (3,323) 0 0
Issuance of Treasury Stock 607 816 1,286 579 170
NET CASH FROM FINANCING (8,419) 1,474 (9,132) (3,704) (11,082)
Net Change in Cash Balance (1,690) 745 (130) 1,470 4,075
13

14. Industry Peers
BMI KTII SNHY ITRI ROP SPX (GBP) MLAB ESE Average
General Information
Price 23.99 72.77 16.09 66.25 42.03 8.50 19.05 35.69
Shares 14.79 2.78 16.66 34.47 89.71 75.97 3.18 26.11
Marketcap 354.77 201.91 268.02 2,283.92 3,770.59 645.76 62.01 932.00
Balance Sheet
Debt/Assets 17.01% 13.24% 0.32% 39.47% 33.05% 5.77% 0.00% 25.18% 16.75%
Net Debt (Cash) 28.08 (7.51) (32.73) 1,057.47 1,190.08 (15.31) (6.73) 204.98 302.29
Net Debt/EBITDA 0.62 (0.17) (0.67) 3.88 2.14 (0.17) (0.83) 1.89 0.84
Interest Coverage 30.38 29.37 - 0.92 9.31 5.55 - 8.25 10.47
Inventory Turnover 4.46 4.09 10.38 6.99 4.49 - 1.75 4.67 4.60
AR Turnover 7.78 6.58 8.99 5.61 5.96 4.42 5.74 5.59 6.33
AP Turnover 12.42 9.78 19.14 5.89 9.19 - 31.75 9.28 12.18
Operating Metrics
WC/Sales 11.52% 26.16% 27.44% -2.79% 9.93% 33.53% 70.00% 16.34% 24.02%
Gross Margin 35.02% 42.51% 34.43% 33.62% 51.36% - 63.94% 40.03% 37.61%
Operating Margin 14.11% 15.91% 22.38% 4.32% 19.94% 16.91% 34.88% 12.98% 17.68%
Net Margin 8.01% 10.94% 15.21% 1.42% 12.52% 12.16% 22.20% 7.49% 11.24%
Asset Turnover 1.39 1.22 1.44 0.64 0.56 1.12 0.78 0.67 0.98
ROA 11.11% 13.30% 21.97% 0.91% 7.04% 13.58% 17.28% 5.03% 11.28%
Financial Leverage 1.76 1.67 1.18 2.76 2.03 1.65 1.06 1.98 1.76
ROE 19.52% 22.18% 25.89% 2.51% 14.26% 22.40% 18.29% 9.98% 16.88%
FCF/EBITDA 18.95% 43.24% 55.29% 54.33% 70.46% 55.24% 46.12% 55.67% 49.91%
Inventory Days 81.89 89.13 35.15 52.25 81.23 - 208.49 78.17 78.29
AR Days 46.89 55.51 40.60 65.05 61.25 82.61 63.61 65.27 60.10
AP Days 29.38 37.33 19.07 61.93 39.71 - 11.50 39.31 29.78
CCC 99.39 107.31 56.68 55.37 102.76 - 260.60 104.13 98.28
Valuation
P/E ttm 15.38 8.09 9.41 19.43 13.60 11.67 13.64 16.30 13.44
P/B 3.21 1.73 2.44 2.06 1.88 2.64 2.42 1.99 2.30
P/S 1.35 0.84 1.43 1.09 1.64 1.42 2.92 1.48 1.52
EV/EBITDA ttm 8.33 4.67 4.85 11.47 8.88 6.61 6.64 10.36 7.73
Dividend Yield 1.58% 0.00% 2.72% 0.00% 1.98% 6.62% 2.11% 0.00% 1.88%
FCF Yield 2.44% 8.80% 9.85% 6.88% 10.21% 7.85% 6.18% 6.48% 7.34%
Company Key
BMI Badger Meter, Inc.
KTII K-Tron International, Inc.
SNHY Sun Hydraulics Corporation
ITRI Itron, Inc.
ROP Roper Industries, Inc.
SPX Spirax-Sarco Engineering plc
MLAB Mesa Laboratories, Inc.
ESE Esco Technologies, Inc.
14

15. Proprietary Survey
In early January, 2009 we sent out the following questionnaire to 75 members of the Association of
Metropolitan Water Agencies and received 25 responses from a variety of municipalities including Anchorage,
AK; Sioux Falls, SD; Topeka, KN; and Corpus Cristi, TX.
Hello,
I am a Marquette University senior participating in the Chartered Financial Analyst (CFA) Institute Global
Investment Research Challenge. As a part of the Challenge, I am researching Badger Meter and the water
meter industry and would greatly appreciate your response to a few questions below:
Who supplies your water meters?
What is the most influential factor in who supplies your water meters (price, service, quality, location, etc.)?
How do you read your water meters: manually, AMR (drive-by radio), fixed network AMI, or a combination?
If you read them via AMR or AMI, who supplies your radios?
Are you considering switching to reading your meters differently? Which method of reading the meters are
you considering and why?
Are you planning on ordering new water meters in the next year? If so, how are you planning on funding your
water meters (budget, bond offering, etc.)?
Thank you in advance for your response.
15

16. Survey Response
The subsequent responses gave us substantial insight into the ordering and funding process for meters in
addition to the rate of technological adoption (Figures 12 and 13). We also received anecdotal responses
about the effect the challenging macroeconomic environment is having upon various municipalities.
Figure 12: Figure 13:
How do you read the majority of your water meters?
Who Supplies Your Water Meters?
12
Combination
15% 10
Badger
25%
# of Respondents
Hersey 8
5%
6
Sensus
4
15%
2
Neptune
Elster 35%
0
AMCO
5% Manually AMR AMI
The typical municipality process for meter replacement projects proceeds as follows: develop technical
specifications, compile a list of acceptable manufacturers, open the contract for bidding, and finally choose a
manufacturer. Initially, it is most critical for the water meter manufacturers to meet the technical
specifications as that will allow them to bid on the contract. Many times the specifications may mandate that
a meter is compatible with a competitor’s meter reading system. In one instance, Anchorage, AK has
considered using Badger Meter water meters but has not purchased BMI’s meters because they are not
compatible with the city’s Neptune data collection system.
Additionally, it is important to have a strong reputation of quality meters and service in order to make it onto
the bidding list. Many of the utilities had long histories of purchasing water meters from a sole manufacturer.
For example, Raleigh, NC has had more than a 25 year track record of using Neptune’s meters. Importantly,
one respondent from the City of Springfield, MO Electric, Gas, and Water Utility noted that Badger Meter
has a very good reputation within the industry. However, once the contract is opened to bidding the primary
factor for the final choice is price. Once a manufacturer is deemed to provide acceptable meters, it is very
challenging to prevent them from bidding on contracts as it requires a very good reason and extensive paper
work.
Price becomes the final determinant because of the public nature of the majority of water utilities in which
they are mandated to provide the lowest cost, acceptable product to tax payers. Therefore, Badger Meter’s
greatest challenge is to provide competitive pricing within its mid-sized utility niche. For larger contracts,
Badger Meter may get priced out as Badger tries to maintain a healthy, 30-35% gross margin but in smaller
municipalities the contract size may not be large enough for Badger to be profitable.
16

17. Figure 14: Figure 15:
How do you fund your water meters purchases?
Municipal
Solely Bonds
Operating 43%
Budget
57%
Source: Bianco Research
The most common form of funding for meter purchases and replacements is through the budget established
for the municipality from city taxes (Figures 14 and 15). Notably, 57% of all respondents reported that they
purchased their replacement meters from budgeted funds. The remainder funded their meter purchases
through municipal bond issuances or a combination of bond issues and budgeted funds. Approximately 43%
of all responding municipalities access the public debt markets for funding meter purchases. With the present
turmoil in the capital markets, this could pose challenges for large meter orders. The municipal bond market
has been quite volatile as presently the AAA-rated, tax exempt, 10-year, general municipal bond is yielding
3.29%.
Figure 16:
We received a variety of responses as to how
Which other means of reading your municipalities read their water meters with nearly half of
water meters would you consider? all respondents reading their water meters manually.
However, over half of those reading them manually were
No
in the midst of a pilot program for AMR or were using
interest
32%
AMR for a portion of their routes. The other utilities
AMI
read their meters primarily through AMR (40%) or using
54%
fixed network AMI (10%). Just over half of all utilities
were in the midst of evaluating fixed network AMI
though others noted that presently it was not cost
efficient and the additional data provided did not offer
AMR
14%
significant worth for water utilities. (Figure 16) The
benefits that were noted included reduced routes, leak
detection, improved customer service, and assistance in water conservation. Interestingly, Denver Water
notes that it will take 12-15 years for their AMR system to pay for itself.
17

18. Anecdotal Responses
Residential Water Meter Life
We received varying responses about the length of time before a residential water meter would be replaced.
Minneapolis’ Supervisor of Meter Services remarked that their life testing of their Badger Meter residential
water meters indicted 25-30 years could be expected on a residential meter. Interestingly, Helix Water
District serving San Diego, CA suburbs currently changes out their residential water meters every 15 years.
Depending upon the conditions of the water, the location of the meter, and the city’s geographic location,
residential water meter life can vary quite substantially. Many utilities may be able to delay the purchase of
replacement meters for a few years until economic conditions improve.
Case Study: Springfield, MO
Springfield, MO, a city of approximately 150,000 citizens, provides a solid example of the effect of the
challenging macroeconomic environment upon an average municipality in an area of the country that largely
did not participate in the housing boom and subsequent bust. The city utility is constrained by budget cuts
from lower tax revenues and lower water revenues. Springfield is receiving lower water revenues as the
largest user of water from the utility, a private, commercial factory, was closed in 2008. In addition, the city
formerly received water revenues from opening taps in new homes but new housing developments have been
non-existent. Typically, the city would order 2,000 water meters annually with 1,200 for new homes and 800
for replacements. With so few new homes built over the past year, the maximum number of water meters
that the city will purchase in 2009 is 1,000. The decline in water meters purchased is a function of the utility’s
funding. In 2008, the utility was budgeted with $100,000 to institute a pilot test of AMR meters (able to
purchase 600-800 AMR meters). In early 2008, the utility was initially budgeted an additional $100,000 for
2009 to continue the pilot test. This past fall, the 2009 budget for the pilot test was cut to $15,000 (able to
purchase 100-150 AMR meters) before being eliminated completely in early December. Therefore, the AMR
pilot program is being put on hold with no expansion in 2009. The utility is expecting to have the 2010 and
2011 budget for the pilot program to be cut to $15,000. Springfield’s challenges with no new housing growth
and private, commercial companies that are struggling illustrate some of the universal challenges that
municipalities face across the country.
18

19. Disclaimer
This report reflects the personal views of analysts (Alison Bettonville, Christopher Cebula, Brian Finnie,
Margaret Hughes, Anna Toshach) about the subject security, Badger Meter, Inc. Marquette University does
not otherwise guarantee or provide assurance in respect to the obligations of any of the above entities. This
research has been prepared for the general use by the students of Marquette University. This research is based
on information obtained from reliable sources but accuracy is not assured. We accept no obligation to correct
or update this information or the opinions in it. No member of the team accepts liability whatsoever for any
direct, indirect, consequential or other loss arising from the use of this research and/or further
communication in relation to this research.
19