Badger Meter, Inc. Marquette University

Appendix

Table of Contents

Relative Valuation 2

DCF Summary 2

Porter’s Five Forces Analysis 3

SWOT Analysis 3

Management Discussion 4

Marquette Proprietary Survey, January 2009 5

Marquette Proprietary Survey, February 2009 6

Recent Municipal Happenings 7

Competitors 7

Water Meter Market Share 8

Water Utilities by Percent of total US Water Connections 8

Water AMR Market Share 8

Utility Segment Revenue Computation 8

Financial Statements:

Income Statement 9

Balance Sheet 10

Statement of Cash Flows 11

BMI Price History 12

Spot Copper Price History 12

2

Relative Valuation

BMI 2009E Five Year Industry Average Price Target

Price/Earnings 19.28x 19.63x $23.58

Price/Book 2.93x 3.04x $24.02

Price/Sales 1.43x 1.98x $31.94

EV/EBITDA 9.23x 10.23x $26.57

DCF Summary

2008 2009 2010 2011 2012 2013

Revenue $279,552 $258,192 $259,283 $306,801 $322,517 $338,610

y/y Change 19.05% -7.64% 0.42% 18.33% 5.12% 4.99%

Operating Profit $40,902 $32,274 $32,410 $41,418 $45,152 $49,099

% Margin 14.63% 12.50% 12.50% 13.50% 14.00% 14.50%

Taxes $14,471 $11,557 $11,905 $15,333 $16,734 $18,214

Net Income $25,084 $19,261 $19,482 $25,556 $27,890 $30,356

Less: W/C Change $10,213 ($11,804) $4,064 $12,918 $2,986 $3,058

Less: CapEx $13,237 $10,328 $10,371 $12,272 $12,901 $13,544

Add: Depreciation/ Amortization $9,042 $9,231 $9,368 $9,755 $10,174 $10,624

Net Cash Flow $10,676 $29,951 $14,775 $10,121 $22,177 $24,378

PV Factor 1.08 1.17 1.27 1.37 1.48

PV Cash Flow $27,689 $12,627 $7,997 $16,199 $16,461

Valuation WACC Calculation

Terminal EBITDA Multiple 7.5x Cost Of Equity:

Projected EBITDA, 2013 $59,722 Risk-Free Rate 4.50%

Terminal Value $447,917 Expected Market Return 10%

Discounted TV $302,457 x Beta 1.10

k: 10.55%

Sum Of PV FCF $80,972 Cost Of Debt:

PV Of Terminal Value $302,457 Expected Future Cost: 6.00%

Net Debt $18,957 Tax Rate: 37.50%

Value Of Equity $364,472 After-Tax Cost of Debt: 3.75%

Shares Outstanding (Ths) 14,808 Cost Of Capital:

Target Price $24.61 Debt 35% 3.75%

Current Price $28.92 Equity 65% 10.55%

Implied Return -14.89% WACC: 8.17%

3

Porter’s Five Forces Analysis

SWOT Analysis

Strengths Weaknesses

•Strong reputation for high quality meters and service •Exposure to commodity prices

· Hydraulic flow lab • Low growth, slow adoption market

• Consistent 1st/2

nd place water meter market share(20-25%) • Late entrance to the AMI market

• Solid 34% gross margin (5-yr average) • Meter pricing final determinant for utility orders

• Pit Sealant Technology • Low free cash flow conversion

• Proprietary ORION and GALAXY advanced metering systems technology

Opportunities Threats

•Water Shortages - 36 states face shortage in next 5 years •Utility funding

•Conversion to AMR/AMI - $5.4B opportunity · Decreased operating budgets

•Unmetered Housing Units (13 million) - $1.95B opportunity · Challenging capital markets fundraising environment

•Completion of ORION deployment - $650M unbooked backlog • Utilities able to length meter replacement cycles

•Replace Remaining Trace Customers - $100M opportunity • Delayed AMR/AMI technology adoption

• Macroeconomic weakness

Buyer Power: Medium

• Customers are water utilities.

• Sales contracts create sticky buying practices.

• Reluctance to switch meters

• AMR/AMI technology vs basic manual-read meters.

Threat of New Entrants: High

• Regulated by AWWA

• Extremely accurate measurement technology and strong sealant.

• Capital-intensive manufacturing due to the quality testing process.

• Oligopoly (4 major manufacturers)

Supplier Power: Low

• Price-takers in the commodity markets.

• Major inputs: copper (80% of a basic meter), lead and plastic

• Union labor WI facility.

• Continual transfer of jobs to Nogales,

Mexico facility.

Rivalry: Moderately Competitive

• Meters are a commodity product

• Competitive bidding process to win new contracts/maintain expiring agreements.

• Rivals could undercut price, but historically has not occurred.

Threat of Substitute Products: Low

• No alternate way to measure usage.

• Only substitute is to not meter

• Once building is metered, does not make sense to stop replacement

• Encourages water conservation by improving consumption-based billing

4

Company Management Review

Key Executives Age Years at BMI Richard A. Meeusen 54 13 Ronald H. Dix 64 27 Richard E. Johnson 54 8 Mr. Meeusen has served as CEO since 2002. Before coming to Badger Meter, Mr. Meeusen worked in public

accounting, focusing on audit. Mr. Johnson has served as CFO for more than 5 years. He previously served in

an executive role for the Wisconsin Electric Power Company. Mr. Dix has served in his current position since

2003, and is also a member of the board of directors.

There are eight members of the board of directors, each elected to three year terms. Six of the eight directors

are considered independent—insiders are Mr. Meeusen and Mr. Dix. The remaining board members are all

male executives of Milwaukee, WI-based firms, which may lead to shortsightedness in decision-making and

preparing for the future. In June of 2008, the directors adopted a set of Principles of Corporate Governance,

to complement the already existing Code of Conduct. Each director serves on two of the three committees,

except for Mr. Dix and Mr. Meeusen. The board has been recognized by Socrates Corporate Social Ratings

for prudent compensation of executives. Combined, directors and executives hold 7.8% of Badger Meter’s

common stock, including 1.4% held by Meeusen and 1.5% held by Dix.

Through listening to conference calls, attending an investor presentation, and touring BMI’s Brown Deer, WI

facility, we were impressed with management’s knowledge and experience in the water meter industry. Mr.

Johnson and Mr. Meeusen are lifelong friends, which has created a great working relationship but they may

also hesitate to challenge each other. Management is very shareholder-friendly, carefully guarding their

contact with analysts as they believe giving detailed guidance is not in the best interest of long-term

stockholders. Management has also had a disciplined acquisition strategy, designed to prevent overpayment

and create value for shareholders. BMI’s Corporate Governance Quotient (CGQ®) exceeds that of 79.8% of

Russell 3000 companies.

5

Marquette Proprietary Survey, January 2009

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.

Survey Responses

• Varying meter replacement cycles – 15-30

years

• AMR payback period – 12 years

• Case Study: Springfield, MO

∙ Meter purchases

∙ 2008 – 2,000 meters

∙ 2009 – expect 1,000 meters

∙ AMR pilot program budget

∙ 2008 – $100,000

∙ 2009 - $0

∙ 2010/2011 - $15,000

0%

10%

20%

30%

40%

50%

Manually AMR AMI

How do you read the majority of your water meters?

AMI54%

AMR14%

No interest

32%

Which other means of reading your water meters would you consider?

Municipal Bonds43%

Operating budget57%

How do you fund your purchases of water meters?

6

Follow-up Survey Question, February 2009

Dear Mr. xxx,

Thank you for your response to the water meter survey I sent out in early January. With your help, Marquette

University has advanced to the America's Region of the CFA Global Investment Research Challenge. We are

grateful for your first response and would greatly appreciate your response to one additional question below:

Since the early January survey, the American Recovery and Reinvestment Act of 2009 has been passed. Do

you anticipate the passing of the act will change your purchases of water meters or meter reading technology

for 2009 and 2010? If so, how do you expect it to change your purchases?

Thank you in advance for your response.

Follow-up Responses

• Additional funding will accelerate the adoption of advanced metering systems according to

∙ Raleigh, NC

∙ San Antonio, TX

∙ Topeka, KS

• Water conservation efforts drive the adoption of advanced metering systems

Do you anticipate the passing of the act will change your purchases of water meters or meter reading

technology for 2009 and 2010?

No81%

Yes19%

7

Recent Municipal Happenings – Bloomberg News, March 13, 2009 Legislation

House of Representative lawmakers are drafting legislation to support municipal bond

issuances.

This legislation may include:

o Optional federal backstops or guarantees of new bond issues.

o Issuers buying private bond insurance can pay ―a little extra‖ to get federal backing.

Recent Municipal Turmoil

Municipalities drawing from debt reserve account or unable to pay full interest since March

1st

o 3 government sponsored entities

o 2 counties and 2 cities

Competitors

Sensus Private Water, gas, heat, electric meters (83% revenue)

AMR/AMI

Neptune NYSE: ROP Industrial Technology Segment of Roper Industries, Inc.

Water Revenue (16% revenue)

Itron NASDAQ: ITRI Water, gas, heat, electric meters, AMR technology

AMR radios also sold under contract by Badger Meter, Inc.

Elster Private Residential/bulk meters

AMR metering systems

Hexagram Private AMR technology

Industry leader due to long history in utility AMR

8

Badger20%

Sensus15%

Neptune29%

Itron14%

Elster5%

Master11%

Hexagram3%

Other3%

Badger28%

Sensus20%

Neptune30%

Elster14%

Other8%

Water Meter Market Share Water AMR Market Share

Water Utilities by Percent of Total U.S. Water Connections

Utility Segment Revenue Computation

400 Largest Utilities

4,000 Medium Utilities

4,800 Smallest Utilities

40% US Water

Connections

40% US Water

Connections

20% US Water

Connections

Total Metered Connections 75 million units

BMI Market Share 28%

BMI Metered Connections 21 million units

BMI 2007 Meters Sold 2.1 million units

% of Shipments w/Radios 50%

Meter + Radio 1.05 million units

Price $150

Radio Revenue $157,500

% Utitlity Revenue 86%

+% of Meter-Only Shipments 50%

Meter Only 1.05 million units

Price $25

Meter Revenue $26,250

% Utility Revenue 14%

2007 Utility Revenue $183,750

% Total Revenue 78.2%

Source: BMI Data/ Team Estimates (revenue in $000)

Utility Segment Revenue $183,750 100%

Water Meters $52,500 28.57%

AMR/AMI $131,250 71.43%

Orion $82,571 44.94%

Itron $41,286 22.47%

Galaxy $9,323 5.07%

Source: BMI Data/ Team F Estimates (revenue in $000)

9

Financial Statements

Income Statement

US GAAP

Thousands Of USD FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

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 183,989 205,010 203,637 229,754 234,816 279,552 258,192 259,283 306,801 322,517 338,610

Cost Of Goods Sold (123,470) (137,532) (130,218) (153,126) (153,418) (181,094) (166,534) (167,238) (196,352) (206,411) (216,711)

Gross Profit 60,519 67,478 73,419 76,628 81,398 98,458 91,658 92,045 110,448 116,106 121,900

Selling, General & Administrative (46,419) (47,281) (46,263) (47,840) (50,782) (57,556) (59,384) (59,635) (69,030) (70,954) (72,801)

Operating Income 14,100 20,197 27,156 28,788 30,616 40,902 32,274 32,410 41,418 45,152 49,099

Interest Expense (1,737) (1,607) (1,492) (1,299) (1,291) (1,347) (1,457) (662) (529) (529) (529)

Other Expense (Income), Net 988 (610) 0 0 0 0 0 0 0 0 0

Earning From Operations, Before Tax 13,351 17,980 25,664 27,489 29,325 39,555 30,817 31,748 40,889 44,623 48,569

Income Taxes (5,774) (8,347) (9,500) (10,921) (10,939) (14,471) (11,557) (11,905) (15,333) (16,734) (18,214)

Earning From Operations 7,577 9,633 16,164 16,568 18,386 25,084 19,261 19,482 25,556 27,890 30,356

Loss From Discontinued Ops 0 0 (2,911) (9,020) (1,929) 0 0 0 0 0 0

Net Income 7,577 9,633 13,253 7,548 16,457 25,084 19,261 19,482 25,556 27,890 30,356

Shares Outstanding 12,900 13,190 13,490 13,870 14,211 14,808 14,808 14,808 14,808 14,808 14,808

EPS From Continuing Operations $0.59 $0.73 $0.98 $1.19 $1.29 $1.69 $1.30 $1.34 $1.73 $1.88 $2.05

Consensus EPS $1.54 $1.58 $1.65

Revenue Growth 19.05% -7.64% 0.42% 18.33% 5.12% 4.99%

EPS Growth 30.93% -23.21% 3.02% 28.79% 9.13% 8.84%

EPS Growth

Common Size:

Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Cost Of Goods Sold -67.11% -67.09% -63.95% -66.65% -65.34% -64.78% -64.50% -64.50% -64.00% -64.00% -64.00%

Gross Profit 32.89% 32.91% 36.05% 33.35% 34.66% 35.22% 35.50% -35.50% -36.00% -36.00% 36.00%

Selling, General & Administrative -25.23% -23.06% -22.72% -20.82% -21.63% -20.59% -23.00% -23.00% -22.50% -22.00% -21.50%

Operating Income 7.66% 9.85% 13.34% 12.53% 13.04% 14.63% 12.50% 12.50% 13.50% 14.00% 14.50%

Interest Expense -0.94% -0.78% -0.73% -0.57% -0.55% -0.48% -0.56% -0.26% -0.17% -0.16% -0.16%

Other Expense (Income), Net 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 7.26% 8.77% 12.60% 11.96% 12.49% 14.15% 11.94% 12.24% 13.33% 13.84% 14.34%

Tax Rate -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) -3.14% -4.07% -4.67% -4.75% -4.66% -4.99% -4.48% -4.59% -5.00% -5.19% -5.38%

Earning From Operations 4.12% 4.70% 7.94% 7.21% 7.83% 8.97% 7.46% 7.51% 8.33% 8.65% 8.96%

Loss From Discontinued Ops 0.00% 0.00% -1.43% -3.93% -0.82% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net Income 4.12% 4.70% 6.51% 3.29% 7.01% 8.97% 7.46% 7.51% 8.33% 8.65% 8.96%

Interest Expense 1,737 1,607 1,492 1,299 1,291 1,333 1,457 662 529 529 529

Total Debt 39,634 36,103 32,911 29,687 19,239 25,174 27,513 12,513 9,995 9,995 9,995

Interest Expense % Of Total Debt 4.38% 4.45% 4.53% 4.38% 6.71% 5.30% 5.30% 5.29% 5.29% 5.29% 5.29%

ProjectedActual

10

Balance Sheet

US GAAP

Thousands Of USD FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008

12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08

Current Assets

Cash 2,089 2,834 4,403 3,002 8,670 6,217

Receivables 26,304 26,879 30,450 29,276 30,638 35,767

Total Inventory 29,654 35,646 31,970 33,290 34,094 39,315

Finished Goods 8,010 14,121 11,875 9,122 8,225 13,484

Work in Process 8,494 9,054 9,048 10,302 10,660 10,990

Raw Materials 13,150 12,471 11,047 13,866 15,209 14,841

Prepaid Expense & Other Current Assets 1,193 2,016 2,309 3,179 3,450 2,316

Deferred Tax Assets 3,758 4,007 3,432 3,737 3,082 2,914

Assets of Discontinued Operations 0 0 0 6,875 0 0

Total Current Assets 62,998 71,382 72,564 79,359 79,934 86,529

Property, Plant, & Equipment (At Cost) 104,081 107,295 109,810 113,249 125,678 133,934

Land & Improvements 3,360 3,487 7,416 6,337 7,177 7,097

Buildings & Improvements 28,069 28,252 27,867 29,922 39,448 45,522

Machinery & Equipment 72,652 75,556 74,527 76,990 79,053 81,315

Less Accumulated Depreciation (61,243) (65,279) (65,940) (68,540) (71,100) (72,111)

Net PP&E 42,838 42,016 43,870 44,709 54,578 61,823

Intangible Assets (At Cost, Net Amortization) 1,336 1,160 1,026 636 477 25,030

Other Assets 16,236 4,009 4,101 4,211 4,919 5,713

Deferred Tax Assets 3,354 0 0 3,510 3,435 9,305

Prepaid Pension 0 17,290 17,726 0 0 0

Goodwill 7,089 7,104 6,580 6,958 6,958 6,958

Total Assets 133,851 142,961 145,867 139,383 150,301 195,358

Current Liabilities

Short-Term Debt 3,543 17,539 8,847 15,093 10,844 9,995

Current Portion Of Long-Term Debt 5,645 5,348 7,431 1,944 2,738 9,675

Accounts Payable 14,895 11,069 11,484 10,597 11,363 13,230

Accrued Compensation & Benefits 6,619 6,166 6,436 6,181 5,988 8,714

Warranty & After-Sale Costs 3,767 3,817 3,610 2,954 1,917 1,327

Income & Other Taxes Payable 2,583 982 1,778 621 8,359 7,848

Liabilities Of Discontinued Operations 0 0 0 8,321 0 0

Total Current Liabilities 37,052 44,921 39,586 45,711 41,209 50,789

Other Long-Term Liabilities 0 326 634 557 627 1,059

Deferred Tax Liabilities 5,699 7,437 6,584 199 244 133

Accrued Nonpension Retirement Benefits 5,069 4,490 3,955 6,903 6,083 5,585

Other Accrued Employee Benefits 6,410 6,902 6,332 8,266 7,040 21,625

Long-Term Debt 24,450 14,819 15,360 5,928 3,129 5,504

Commitments & Contingencies 0 0 0 0 0 0

Total Long-Term Liabilities 41,628 33,974 32,865 21,853 17,123 33,906

Total Liabilities 78,680 78,895 72,451 67,564 58,332 84,695

Shareholder's Equity

Common Stock 4,846 9,872 10,056 20,553 20,902 21,074

Class B Common Stock 0 0 0 0 0 0

Capital In Excess Of Par Value 20,079 18,313 23,376 19,428 24,655 31,563

Reinvested Earnings 58,928 64,928 74,258 77,479 89,061 107,887

Accum. Other Comprehensive Loss (Income) 1,280 2,024 1 (12,041) (9,191) (16,672)

Employee Benefits & Restricted Stock (1,285) (1,065) (1,357) (744) (682) (659)

Treasury Stock (28,677) (30,006) (32,918) (32,856) (32,776) (32,170)

Total Shareholder's Equity 55,171 64,066 73,416 71,819 91,969 111,023

Total Liabilities & Shareholder's Equity 133,851 142,961 145,867 139,383 150,301 195,358

Actual

11

Statement of Cash Flows

US GAAP

Thousands Of USD FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008

12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08

CFs From Operating

Net Income 7,577 9,633 13,253 7,548 16,457 25,084

Changes In Working Capital:

Receivables (3,846) (823) (4,335) 1,373 301 (6,028)

Inventories (4,152) (5,622) 2,691 (1,531) 241 (5,577)

Prepaid Expenses & Other Current Assets 26 (862) (343) 302 (58) 371

Current Liabilities 3,719 (6,697) (1,341) (1,384) 2,142 2,142

Total Change In Working Capital (4,253) (14,004) (3,328) (1,240) 2,626 2,142

Depreciation 7,683 7,033 6,164 6,589 6,308 5,954

Amortization 149 212 195 418 159 1,097

Tax Benefit On Stock Options 585 877 1,370 2,935 1,997 3,988

Deferred Income Taxes 323 1,483 (318) (2,081) (1,149) (1,489)

Long-Lived Asset Impairment 0 0 0 1,369 0 0

Gain on Disposal Of Long-Term Assets 0 0 0 0 (495) (994)

Noncurrent Employee Benefits 1,317 2,264 2,758 3,116 3,167 3,398

Contributions To Pension Plan 702 (2,000) (2,000) 0 0 0

Stock-Based Compensation Expense 0 0 267 1,031 1,202 1,272

Total Non-Working Capital Adjustments: 10,759 9,869 8,436 13,377 11,189 9,238

Net Cash From Operations 14,083 5,498 18,361 19,685 30,272 27,052

Free Cash Flow 7,030 (74) 9,273 8,625 14,301 10,676

EBITDA 15,409 16,878 19,612 14,555 22,924 49,944

CF's From Investing

CapEx For Property, Plant, & Equipment (7,053) (5,572) (9,088) (11,060) (15,971) (13,237)

Capex As A % Of Sales -3.83% -2.72% -4.46% -4.81% -6.80% -4.74%

Proceeds On Disposal Of Long-Lived Assets 0 0 0 0 3,194 1,632

Acquisition Of Intangible Assets 0 0 0 0 0 (25,650)

Other (Net) (301) (655) (271) (516) (341) (909)

Net Cash From Investing (7,354) (6,227) (9,359) (11,576) (13,118) (38,164)

CF's From Financing

Net Increase (Decrease) In Short-Term Debt (16,812) 13,996 (8,230) 8,971 (7,957) (755)

Issuance Of Long-Term Debt 27,970 0 10,000 0 0 1,500

Repayment Of Long-Term Debt (16,900) (9,943) (7,376) (14,919) (1,943) (5,688)

Dividends Paid (3,425) (3,633) (3,923) (4,327) (4,866) (5,851)

Proceeds From The Exercise Of Stock Options 1,207 1,949 2,434 3,057 1,517 2,045

Tax Benefit On Stock Options 0 0 0 2,935 1,997 3,988

Treasury Stock Purchases (1,066) (1,711) (3,323) 0 0 0

Issuance Of Treasury Stock 607 816 1,286 579 170 176

Net Cash From Financing (8,419) 1,474 (9,132) (3,704) (11,082) 8,915

Net Change In Cash Balance (1,690) 745 (130) 4,045 6,072 (2,453)

Actual

12

BMI Price History

Quarterly Spot Copper Prices Per Metric Ton

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