BMI Q1 Earnings Highlight Margin Gains, But Tariff Clouds Linger

Badger Meter (BMI) delivered a strong first-quarter performance, with operating margins surging to a record 22.2% as favorable sales dynamics and strategic moves bolstered profitability. Yet, the company’s outlook remains shadowed by escalating tariff pressures and supply chain risks, particularly tied to rare earth materials. Here’s what investors need to know.

Margin Expansion: A Triumph of Mix and M&A

BMI’s Q1 results were driven by a trifecta of factors: an ideal sales mix, software growth, and the recent acquisition of SmartCover.

The operating margin jumped 360 basis points year-over-year, fueled by a surge in high-margin software sales, which rose 25% in 2025. Management emphasized that the “favorable combination of customer and product mix” — including strong demand for advanced metering infrastructure (AMI) and BlueEdge software solutions — played a pivotal role.

The SmartCover acquisition, completed in January 2025, added $6 million in revenue in just two months, while also expanding BMI’s capabilities in sewer and lift station monitoring. This move not only diversified revenue streams but also created operational efficiencies that supported margins.

Cost discipline also shone: the Nogales, Mexico, assembly facility, shielded from tariffs under USMCA, helped limit input cost pressures.

Tariff Headwinds: A Balancing Act

Despite these gains, management cautioned that margin sustainability faces near-term hurdles. The biggest threat? Tariffs and China’s export controls on bismuth, a critical component in brass ingots used for meters.

Bismuth prices have risen nearly tenfold since early 2025 due to China’s restrictions, while copper prices remain elevated. CFO Robert Wrocklage warned that these cost pressures could compress margins if not offset by pricing adjustments.

BMI is fighting back:
- Price hikes: The company plans to implement targeted increases for affected products, a strategy CEO Ken Bockhorst argues levels the playing field as competitors face similar cost spikes.
- Supply chain tweaks: The Nogales facility and strategic sourcing efforts aim to reduce tariff exposure, though bismuth and other restricted materials remain vulnerabilities.

Analysts and Management: Praise with a Pinch of Caution

During the call, analysts pressed management on margin durability. Deutsche Bank’s Andrew Krill asked whether the 22.2% margin could last. The answer? Likely not. CFO Wrocklage acknowledged that some Q1 tailwinds — like the “especially favorable” sales mix and one-time SmartCover gains — were episodic.

Yet, BMI’s replacement-driven business model (water meters are essential infrastructure with long lifespans) provides stability. Stifel’s Nathan Jones noted utilities continue prioritizing metering investments, with no pullback in orders despite broader economic uncertainty.

The Path Ahead: Software as the North Star

Looking forward, BMI’s long-term success hinges on two pillars:
1. Software dominance: The AMI and BlueEdge software segments are structural growth engines. Their recurring revenue and margin profiles (software typically carries higher margins than hardware) should sustain profitability over time.
2. Tariff mitigation execution: Success in passing costs to customers and navigating supply chain shifts will determine near-term margin resilience.

Conclusion: A Strong Start, But Risks Remain

BMI’s Q1 results underscore its ability to capitalize on strategic moves and demand for smart infrastructure. The 22.2% operating margin and 26% adjusted EBITDA margin are impressive, especially with free cash flow up 60% year-over-year. However, the company’s future hinges on resolving tariff volatility and sustaining software growth.

Investors should monitor two key metrics:
- Bismuth prices: A tenfold spike in this critical input highlights BMI’s vulnerability to geopolitical supply chains.
- Software revenue: A 25% jump in Q1 suggests momentum, but sustained growth here is vital to offsetting cost pressures.

While BMI’s long-term targets of 38–40% gross margins remain intact, near-term margin moderation is probable. For now, the company’s focus on software and operational agility positions it to weather storms — but the clouds on tariffs aren’t going away anytime soon.

In a sector reliant on essential infrastructure, BMI’s technology leadership and diversified revenue streams provide a solid foundation. Yet, investors must weigh its Q1 triumphs against the looming risks of a global supply chain in flux.