BADGER METER INC - Annual Report: 2017 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2017

BADGER METER, INC.

4545 W. Brown Deer Road

Milwaukee, Wisconsin 53223

(414) 355-0400

A Wisconsin Corporation

IRS Employer Identification No. 39-0143280

Commission File No. 001-06706

The Company has the following classes of securities registered pursuant to Section 12(b) of the Act:



Title of class:		Name of each exchange on which registered:
Common Stock		New York Stock Exchange
Common Share Purchase Rights		New York Stock Exchange

The Company does not have any securities registered pursuant to Section 12(g) of the Act.

Indicate by check mark if the Company is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨

Indicate by check mark if the Company is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No ý

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	¨

Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The aggregate market value of the Common Stock held by non-affiliates of the Company as of June 30, 2017 was $1,007,047,037. For purposes of this calculation only, (i) shares of Common Stock are deemed to have a market value of $39.85 per share, the closing price of the Common Stock as reported on the New York Stock Exchange on June 30, 2017, and (ii) each of the Company's executive officers and directors is deemed to be an affiliate of the Company.

As of February 9, 2018, there were 29,111,654 shares of Common Stock outstanding with a par value of $1 per share.

Portions of the Company's Proxy Statement for the 2018 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year, are incorporated by reference from the definitive Proxy Statement into Part III of this Annual Report on Form 10-K.

Special Note Regarding Forward Looking Statements

Certain statements contained in this Annual Report on Form 10-K, as well as other information provided from time to time by Badger Meter, Inc. (the “Company”) or its employees, may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “think,” “should,” “could” and “objective” or similar expressions are intended to identify forward looking statements. All such forward looking statements are based on the Company’s then current views and assumptions and involve risks and uncertainties. Some risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements include those described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 that include, among other things:


•	the continued shift in the Company’s business from lower cost, manually read meters toward more expensive, value-added automatic meter reading (AMR) systems, advanced metering infrastructure (AMI) systems and advanced metering analytics (AMA) systems that offer more comprehensive solutions to customers’ metering needs;


•	the success or failure of newer Company products;


•	changes in competitive pricing and bids in both the domestic and foreign marketplaces, and particularly in continued intense price competition on government bid contracts for lower cost, manually read meters;


•	the actions (or lack thereof) of the Company’s competitors;


•	changes in the Company’s relationships with its alliance partners, primarily its alliance partners that provide radio solutions, and particularly those that sell products that do or may compete with the Company’s products;

•

changes in the general health of the United States and foreign economies, including to some extent such things as the length and severity of global economic downturns, international or civil conflicts that affect international trade, the ability of municipal water utility customers to authorize and finance purchases of the Company’s products, the Company’s ability to obtain financing, housing starts in the United States, and overall industrial activity;


•	unusual weather, weather patterns or other natural phenomena, including related economic and other ancillary effects of any such events;


•	economic policy changes, including but not limited to, trade policy and corporate taxation;


•	the timing and impact of government funding programs that stimulate national and global economies, as well as the impact of government budget cuts or partial shutdowns of governmental operations;

•

changes in the cost and/or availability of needed raw materials and parts, such as volatility in the cost of brass castings as a result of fluctuations in commodity prices, particularly for copper and scrap metal at the supplier level, foreign-sourced electronic components as a result of currency exchange fluctuations and/or lead times, and plastic resin as a result of changes in petroleum and natural gas prices;


•	the Company’s ability to successfully integrate acquired businesses or products;


•	changes in foreign economic conditions, particularly currency fluctuations in the United States dollar, the Euro and the Mexican peso;


•	the inability to develop technologically advanced products;


•	the failure of the Company’s products to operate as intended;


•	the inability to protect the Company’s proprietary rights to its products;

•

the Company’s expanded role as a prime contractor for providing complete technology systems to governmental entities, which brings with it added risks, including but not limited to, the Company’s responsibility for subcontractor performance, additional costs and expenses if the Company and its subcontractors fail to meet the timetable agreed to with the governmental entity, and the Company’s expanded warranty and performance obligations;


•	disruptions and other damages to information technology and other networks and operations due to breaches in data security or any other cybersecurity attack;


•	transportation delays or interruptions;


•	violations or alleged violations of the U.S. Foreign Corrupt Practices Act (FCPA) or other anti-corruption laws and the Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (referred to as FATCA);


•	the loss of or disruption in certain single-source suppliers; and


•	changes in laws and regulations, particularly laws dealing with the content or handling of materials used in the Company's products.

All of these factors are beyond the Company's control to varying degrees. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward looking statements contained in this Annual Report on Form 10-K and are cautioned not to place undue reliance on such forward looking statements. The forward looking statements made in this document are made only as of the date of this document and the Company assumes no obligation, and disclaims any obligation, to update any such forward looking statements to reflect subsequent events or circumstances.

PART I

ITEM 1. BUSINESS

Badger Meter, Inc. (the “Company”) is a leading innovator, manufacturer and marketer of products incorporating flow measurement, control and communication solutions serving markets worldwide. The Company was incorporated in 1905.

Throughout this 2017 Annual Report on Form 10-K, the words “we,” “us” and “our” refer to the Company.

Available Information

The Company's internet address is http://www.badgermeter.com. The Company makes available free of charge (other than an investor's own internet access charges) through its Internet website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, on the same day they are electronically filed with, or furnished to, the Securities and Exchange Commission. The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.

Market Overview, Products, Systems and Solutions

Badger Meter is an innovator in flow measurement, control and communication solutions, serving water utilities, municipalities, and commercial and industrial customers worldwide. The Company’s products measure water, oil, chemicals and other fluids, and are known for accuracy, long-lasting durability and for providing and communicating valuable and timely measurement data. The Company’s product lines fall into two categories: sales of water meters and related technologies to municipal water utilities (municipal water) and sales of meters to various industries for water and other fluids (flow instrumentation). The Company estimates that over 85% of its products are used in water applications when both categories are grouped together.

Municipal water, the largest category by sales volume, includes mechanical and ultrasonic (electronic) water meters and related technologies and services used by municipal water utilities as the basis for generating water and wastewater revenues. The key market for the Company’s municipal water meter products is North America, primarily the United States, because most of the Company's meters are designed and manufactured to conform to standards promulgated by the American Water Works Association. The majority of water meters sold by the Company continues to be mechanical in nature. In recent years, the Company has made inroads in selling ultrasonic water meters. The development of smaller diameter ultrasonic water meters combined with advanced radio technology now provides the Company with the opportunity to sell into other geographical markets, for example Europe, the Middle East and South America. In the municipal water category, sales of water meters and

related technologies and services are also commonly referred to as residential or commercial water meter sales, the latter referring to larger sizes of water meters.

Flow instrumentation includes meters and valves sold worldwide to measure and control materials flowing through a pipe or pipeline including water, air, steam, oil, and other liquids and gases. These products are used in a variety of applications, primarily into the following industries: water/wastewater; heating, ventilating and air conditioning (HVAC); oil and gas; chemical and petrochemical; test and measurement; automotive aftermarket; and the concrete construction process. Furthermore, the Company’s flow instrumentation technologies are sold to original equipment manufacturers as the primary flow measurement device within a product or system.

Residential and commercial water meters are generally classified as either manually read meters or remotely read meters via radio technology. A manually read meter consists of a water meter and a register that provides a visual totalized meter reading. Meters equipped with radio technology (endpoints) receive flow measurement data from encoder registers attached to the water meter, which is encrypted and transmitted via radio frequency to a receiver that collects and formats the data appropriately for water utility billing systems. These remotely read, or mobile, systems are either automatic meter reading (AMR) systems, where a vehicle equipped for meter reading purposes, including a radio receiver, computer and reading software, collects the data from utilities’ meters; or fixed network advanced metering infrastructure (AMI) systems, where data is gathered utilizing a cellular network, which is a network of permanent data collectors or gateway receivers that are always active or listening for the radio transmission from the utilities’ meters. AMI systems eliminate the need for utility personnel to drive through service territories to collect data from the meters. These systems provide the utilities with more frequent and diverse data from their meters at specified intervals.

The ORION® family of radio endpoints provides water utilities with a range of industry-leading options for meter reading. These include ORION Migratable (ME) for mobile meter reading, ORION (SE) for traditional fixed network applications, and ORION Cellular for infrastructure-free fixed network meter reading. ORION Migratable makes the migration to fixed network easier for utilities that prefer to start with mobile reading and later adopt fixed network communications, allowing utilities to choose a solution for their current needs and be positioned for their future operational changes. ORION Cellular eliminates the need for utility-owned fixed network infrastructure, allows for rapid deployment and decreases ongoing maintenance.

Critical to the water metering ecosystem is information and analytics. The Company’s BEACON® Advanced Metering Analytics (AMA) managed solution is the latest in metering technology. BEACON AMA combines the BEACON analytical software suite with proven ORION technologies using two-way cellular-based fixed networks in a managed solution, improving utilities’ visibility of their water consumption and eliminating the need for costly utility-managed infrastructure.

The BEACON AMA secure, cloud-hosted software suite includes a customizable dashboard, the ability to establish alerts for specific conditions, and consumer engagement tools that allow end water customers to view and manage their water usage activity. Benefits to the utility include improved customer service, increased visibility through faster leak detection, the ability to promote and quantify the effects of its water conservation efforts, and easier compliance reporting.

The Company’s net sales and corresponding net earnings depend on unit volume and product mix, with the Company generally earning higher margins on meters equipped with radio technology. The Company’s proprietary radio products generally result in higher margins than the remarketed, non-proprietary technology products. The Company also sells registers and endpoints separately to customers who wish to upgrade their existing meters in the field.

Water meter replacement and the adoption and deployment of new technology comprise the majority of water meter product sales, including radio products. To a much lesser extent, housing starts also contribute to the new product sales base. Over the last decade, there has been a growing trend in the conversion from manually read water meters to radio technology. This conversion rate is accelerating and contributes to an increased water meter and radio solutions base of business. The Company estimates that approximately 55% to 60% of water meters installed in the United States have been converted to a radio solutions technology. The Company’s strategy is to fulfill customers’ metering expectations and requirements with its proprietary meter reading systems or other systems available through its alliance partners in the marketplace.

Flow instrumentation products serve flow measurement and control applications across a broad industrial spectrum, occasionally leveraging the same technologies used in the municipal water category. Specialized communication protocols that control the entire flow measurement process and mandatory certifications drive these markets. The Company’s specific flow measurement and control applications and technologies serve the flow measurement market through both customized and standard flow instrumentation solutions.

Industries today face accelerating demands to contain costs, reduce product variability, and meet ever-changing safety, regulatory and sustainability requirements. To address these challenges, customers must reap more value from every component in their systems. This system-wide scrutiny has heightened the focus on flow instrumentation in industrial process, manufacturing, commercial fluid, building automation and precision engineering applications where flow measurement and control are critical.

An industry leader in both mechanical and electronic flow metering technologies, the Company offers one of the broadest flow measurement, control and communication portfolios in the market. This portfolio carries respected brand names including Recordall®, E-Series®, ORION, Hedland®, Dynasonics®, Blancett®, and Research Control®, and includes eight of the ten major flow meter technologies. Customers rely on the Company for application-specific solutions that deliver accurate, timely and dependable flow data and control essential for product quality, cost control, safer operations, regulatory compliance and more sustainable operations.

The Company's products are sold throughout the world through employees, resellers and representatives. Depending on the customer mix, there can be a moderate seasonal impact on sales, primarily relating to higher sales of certain municipal water products during the spring and summer months. No single customer accounts for more than 10% of the Company's sales.

Competition

There are competitors in each category in which the Company sells its products, and the competition varies from moderate to intense. Major competitors for utility water meters include Xylem, Inc. ("Sensus"), Neptune Technology Group Inc., a subsidiary of Roper Technologies, Inc. ("Neptune"), Master Meter, Inc. and Mueller Water Products, Inc. Together with Badger Meter, it is estimated that these companies sell in excess of 90% of the water meters in the North American market, which has been somewhat insulated from other competitors due to the nature of the mechanical technology used and the standards promulgated by the American Water Works Association. In recent years, the Company, as well as some of its competitors, have introduced various forms of electronic meters, which have no moving parts, and have seen sales of those products begin to grow. As the global water metering market, including the North American market, begins to adopt these technologies, Kamstrup A/S, Diehl Metering GmbH and Itron, Inc. are also potential competitors.

The Company's primary competitors for water utility radio products in North America are Itron, Inc., Neptune and Sensus. Outside of North America, the primary competitors include Itron, Inc., Sensus, Diehl Metering GmbH and Elster GmbH, a subsidiary of Honeywell International Inc. While the Company sells its own proprietary radio systems (ORION and GALAXY®), it is also a reseller of the Itron® products. A number of the Company's competitors in certain markets have greater financial resources than the Company. The Company, however, believes it currently provides the leading technologies in water meters and radio water systems. As a result of significant research and development activities, the Company enjoys favorable patent positions and trade secret protections for several of its technologies, products and processes.

There are many competitors in the flow instrumentation markets due to the various markets and applications being served. For example, major competitors in the flow instrumentation markets include Emerson Electric Company, Krohne Messtechnik GmbH, Endress+Hauser AG and Yokogawa Electric Corporation. In the HVAC market, the key competitor is Onicon Incorporated. In upstream oil and gas, Cameron International Corporation is the primary competitor. The Company competes with AW-Lake Company in the measurement of on-machine hydraulic fluids. With a portfolio consisting of products utilizing eight of the ten major flow meter technologies, the Company is well positioned to compete in these markets.

Backlog

The Company's total backlog of unshipped orders at December 31, 2017 and 2016 was $28.9 million and $40.5 million, respectively. The backlog is comprised of firm orders and signed contractual commitments, or portions of such commitments that call for shipment within 12 months. Backlog can be significantly affected by the timing of orders for large projects and the amounts can vary due to the timing of work performed.

Raw Materials and Components

Raw materials used in the manufacture of the Company's products include purchased castings made of metal or alloys (such as brass, which uses copper as its main component, aluminum, stainless steel and cast iron), plastic resins, glass, microprocessors and other electronic subassemblies, and components. There are multiple sources for these raw materials and components, but the Company relies on single suppliers for certain brass castings, certain resins and certain electronic subassemblies. The Company believes these items would be available from other sources, but that the loss of certain suppliers would result in a higher cost of materials, delivery delays, short-term increases in inventory and higher quality control costs in the short term. The Company carries business interruption insurance on key suppliers. The Company's purchases of raw materials are based on production schedules, and as a result, inventory on hand is generally not exposed to price fluctuations. World commodity markets and currency exchange rates may also affect the prices of material purchased in the future. The Company does not hold significant amounts of precious metals.

Research and Development

Expenditures for research and development activities relating to the development of new products, the improvement of existing products and manufacturing process improvements were $10.6 million in 2017, 2016 and 2015. Research and development activities are primarily sponsored by the Company. The Company also engages in some joint research and development with other companies.

Intangible Assets

The Company owns or controls several trade secrets and many patents, trademarks and trade names in the United States and other countries that relate to its products and technologies. No single patent, trademark, trade name or trade secret is material to the Company's business as a whole.

Environmental Protection

The Company is subject to contingencies related to environmental laws and regulations. A future change in circumstances with respect to these specific matters or with respect to sites formerly or currently owned or operated by the Company, off-site disposal locations used by the Company, and property owned by third parties that is near such sites, could result in future costs to the Company and such amounts could be material. Expenditures for compliance control provisions and regulations during 2017, 2016 and 2015 were not material.

Employees

The Company and its subsidiaries employed 1,632 persons at December 31, 2017, 111 of whom are covered by a collective bargaining agreement with District 10 of the International Association of Machinists. The Company is currently operating under a three-year contract with the union, which expires on October 31, 2019. The Company believes it has good relations with the union and all of its employees.

The following table sets forth certain information regarding the Executive Officers of the Registrant.



Name	Position	Age at 2/28/2018
Richard A. Meeusen	Chairman, President and Chief Executive Officer	63
Kenneth C. Bockhorst	Senior Vice President — Chief Operating Officer	45
Richard E. Johnson	Senior Vice President — Finance, Chief Financial Officer and Treasurer	63
Fred J. Begale	Vice President — Engineering	53
William R. A. Bergum	Vice President — General Counsel and Secretary	53
Gregory M. Gomez	Vice President — Business Development and Flow Instrumentation	53
Horst E. Gras	Vice President — International Operations	62
Trina L. Jashinsky	Vice President — Human Resources	55
Raymond G. Serdynski	Vice President — Manufacturing	61
Beverly L. P. Smiley	Vice President — Controller	68
Kimberly K. Stoll	Vice President — Sales and Marketing	51

There are no family relationships between any of the executive officers. Officers are elected annually at the first meeting of the Board of Directors held after each annual meeting of the shareholders. Each officer holds office until his or her successor has been elected or until his or her death, resignation or removal. There is no arrangement or understanding between any executive officer and any other person pursuant to which he or she was elected as an officer.

Mr. Meeusen has served as Chairman, President and Chief Executive Officer for more than five years.

Mr. Bockhorst was elected Senior Vice President - Chief Operating Office in October 2017. Prior to joining the Company, Mr. Bockhorst was Executive Vice President of the Energy segment, preceded by President of Hydratight and Global Vice President Operations of Enerpac, all within Actuant Corporation from March 2011 to October 2017.

Mr. Johnson has served as Senior Vice President - Finance, Chief Financial Officer and Treasurer for more than five years.

Mr. Begale has served as Vice President - Engineering for more than five years.

Mr. Bergum has served as Vice President - General Counsel and Secretary for more than five years.

Ms. Jashinsky was elected Vice President - Human Resources in October 2016. Prior to joining the Company, Ms. Jashinsky was Vice President of Human Resources at Gannett Company, Inc. from February 2015 to July 2016, Senior Vice President Human Resources at Fiserv, Inc. from March 2014 to February 2015, and Vice President Global Corporate Human Resources at Johnson Controls, Inc. from May 2010 to February 2014.

Mr. Gomez was elected Vice President - Business Development and Flow Instrumentation in April 2017. Mr. Gomez served as Vice President - Flow Instrumentation from September 2014 to April 2017, and Vice President - Business Development from December 2010 to September 2014.

Mr. Gras has served as Vice President - International Operations for more than five years.

Mr. Serdynski has served as Vice President - Manufacturing for more than five years.

Ms. Smiley has served as Vice President - Controller for more than five years.

Ms. Stoll has served as Vice President - Sales and Marketing for more than five years.

Foreign Operations and Export Sales

The Company distributes its products through employees, resellers and representatives throughout the world. Additionally, the Company has a sales, distribution and manufacturing facility in Neuffen, Germany; sales and customer service offices in Mexico, Singapore, China, United Arab Emirates and Slovakia; manufacturing facilities in Nogales, Mexico, Brno,

Czech Republic and Bern, Switzerland; and a development facility in Luleå, Sweden. The Company exports products from the United States that are manufactured in Milwaukee, Wisconsin; Racine, Wisconsin; Tulsa, Oklahoma; and Scottsdale, Arizona.

Information about the Company's foreign operations and export sales is included in Note 10 “Industry Segment and Geographic Areas” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2017 Annual Report on Form 10-K.

Financial Information about Industry Segments

The Company operates in one industry segment as an innovator, manufacturer and marketer of products incorporating flow measurement, control and communication solutions. Information about the Company's sales, operating earnings and assets is included in the Consolidated Financial Statements and in Note 10 “Industry Segment and Geographic Areas” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2017 Annual Report on Form 10-K.

ITEM 1A. RISK FACTORS

Shareholders, potential investors and other readers are urged to consider the significant business risks described below in addition to the other information set forth or incorporated by reference in this 2017 Annual Report on Form 10-K, including the “Special Note Regarding Forward Looking Statements” at the front of this 2017 Annual Report on Form 10-K. If any of the events contemplated by the following risks actually occur, our financial condition or results of operations could be materially adversely affected. The following list of risk factors may not be exhaustive. We operate in a continually changing business, economic and geopolitical environment, and new risk factors may emerge from time to time. We can neither predict these new risk factors with certainty nor assess the precise impact, if any, on our business, or the extent to which any factor, or combination of factors, may adversely impact our results of operations. While there is much uncertainty, we do analyze the risks we face, perform a probability assessment of their impacts and attempt to soften their potential impact when and if possible.

Competitive pressures in the marketplace could decrease our revenues and profits.

Competitive pressures in the marketplace for our products could adversely affect our competitive position, leading to a possible loss of market share or a decrease in prices, either of which could result in decreased revenues and profits. We operate in an environment where competition varies from moderate to intense and a number of our competitors have greater financial resources. Our competitors also include alliance partners that sell products that do or may compete with our products, particularly those that provide radio solutions. The principal elements of competition for our most significant product applications, residential and commercial water meters for the municipal water utility market (with various radio technology systems), are price, product technology, quality and service. The competitive environment is also affected by the movement toward radio technologies and away from manually read meters, the demand for replacement units and, to some extent, such things as global economic conditions, the timing and size of governmental programs such as stimulus fund programs, the ability of municipal water utility customers to authorize and finance purchases of our products, our ability to obtain financing, housing starts in the United States, and overall economic activity. For our flow instrumentation products, the competitive environment is affected by the general economic health of various industrial sectors particularly in the United States and Europe.

The inability to develop technologically advanced products could harm our future success.

We believe that our future success depends, in part, on our ability to develop technologically advanced products that meet or exceed appropriate industry standards. Although we believe that we currently have a competitive advantage in this area, maintaining such advantage will require continued investment in research and development, sales, marketing and manufacturing capabilities. There can be no assurance that we will have sufficient resources to make such investments or that we will be able to make the technological advances necessary to maintain such competitive advantage. If we are unable to maintain our competitive advantage, our future financial performance may be adversely affected. We are not currently aware of any emerging standards, technologies or new products that could render our existing products obsolete in the near term. The water utility industry is beginning to see the adoption of ultrasonic (electronic) water meters. Electronic water metering has lower barriers to entry that could affect the competitive landscape in North America. We believe we have a competitive product if the adoption rate for electronic meters were to accelerate.

The inability to obtain adequate supplies of raw materials and component parts at favorable prices could decrease our profit margins and negatively impact timely delivery to customers.

We are affected by the availability and prices for raw materials and component parts, including purchased castings made of metal or alloys (such as brass, which uses copper as its main component, aluminum, stainless steel and cast iron), plastic resins, glass, microprocessors and other electronic subassemblies, and components that are used in the manufacturing process. The inability to obtain adequate supplies of raw materials and component parts for our products at favorable prices could have a material adverse effect on our business, financial condition or results of operations by decreasing profit margins and by negatively impacting timely deliveries to customers. In the past, we have been able to offset increases in raw materials and component parts by increased sales prices, active materials management, product engineering programs and the diversity of materials used in the production processes. However, we cannot be certain that we will be able to accomplish this in the future. Since we do not control the actual production of these raw materials and component parts, there may be delays caused by an interruption in the production or transportation of these materials for reasons that are beyond our control. World commodity markets and inflation may also affect raw material and component part prices.

Regulations related to conflict minerals may force us to incur additional expenses.

The Securities and Exchange Commission has adopted disclosure requirements related to certain minerals sourced from the Democratic Republic of Congo and surrounding countries, or “conflict minerals,” that are necessary to the functionality of a product manufactured, or contracted to be manufactured, by a Securities and Exchange Commission reporting company. The minerals that the rules cover are commonly referred to as “3TG” and include tin, tantalum, tungsten and gold. Implementation of the disclosure requirements could affect the sourcing and availability of some of the materials that we use in the manufacture of our products. Our supply chain is complex, and if we are not able to determine the origins for all conflict minerals used in our products or that our products are “conflict free,” then we may face reputational challenges with customers or investors.

Economic conditions could cause a material adverse impact on our sales and operating results.

As a supplier of products, the majority of which are to water utilities, we may be adversely affected by global economic conditions, delays in governmental programs created to stimulate the economy, and the impact of government budget cuts or partial shutdowns of governmental operations that affect our customers, including independent distributors, large city utilities, private water companies and numerous smaller municipal water utilities. These customers may delay capital projects, including non-critical maintenance and upgrades, or may not have the ability to authorize and finance purchases during economic downturns or instability in world markets. We also sell products for other applications to reduce our dependency on the municipal water market. A significant downturn in this market could cause a material adverse impact on sales and operating results. Therefore, a downturn in general economic conditions, as well as in the municipal water market, and delays in the timing or amounts of possible economic stimulus fund programs, government budget cuts or partial shutdowns of governmental operations, or the availability of funds to municipalities could result in a reduction in demand for our products and services and could harm the business.

Economic impacts due to leadership or policy changes in the countries where we do business could negatively affect our profitability.

We may be affected by adjustments to economic and trade policies, such as taxation, changes to or withdrawal from international trade agreements, or the like, when countries where we produce or sell our products change leadership or economic policies. These types of changes, as well as any related regulatory changes, could significantly increase our costs and adversely affect our profitability and financial condition.

Unusual weather and other natural phenomena could adversely affect our business.

Our sales may be adversely affected by unusual weather, weather patterns or other natural phenomena that could have an impact on the timing of orders in given periods, depending on the particular mix of customers being served by us at the time.

Failure to manufacture quality products could have a material adverse effect on our business.

If we fail to maintain and enforce quality control and testing procedures, our products will not meet required performance standards. Product quality and performance are a priority for us since our products are used in various applications where precise control of fluids is essential. Although we believe we have a very good reputation for product quality, any future production and/or sale of substandard products would seriously harm our reputation, resulting in both a loss of current customers to competitors and damage to our ability to attract new customers. In addition, if any of our products prove to be defective, we may be required to participate in a recall involving such products. A successful claim brought against us with respect to a defective product in excess of available insurance coverage, if any, or a requirement to participate in a major product recall, could have a material adverse effect on our business, results of operations or financial condition.

Litigation against us could be costly, time consuming to defend and could adversely affect our profitability.

From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business. For example, we may be subject to workers' compensation claims, employment/labor disputes, customer and supplier disputes, product liability claims, intellectual property disputes and contractual disputes related to warranties arising out of the conduct of our business. Litigation may result in substantial costs and may divert management's attention and resources, which could adversely affect our profitability or financial condition.

If our technology products do not operate as intended, our business could be materially and adversely affected.

We sell and install software products, including some that are provided in "the cloud," that may contain unexpected design defects or may encounter unexpected complications during installation or when used with other technologies utilized by the customer. A failure of our technology products to operate as intended and in a seamless fashion with other products or a failure of a cloud network could materially and adversely affect our results of operations, financial position and cash flows.

Our expanded role as a prime contractor brings certain risks that could have a material adverse effect to our business.

The Company periodically assumes the role as a prime contractor for providing complete technology systems to governmental entities, which brings with it added risks, including but not limited to, our responsibility for managing subcontractor performance and the potential for expanded warranty and performance obligations. While we have managed a limited number of these types of arrangements, it is possible to encounter a situation where we may not be able to perform up to the expectations of the governmental entity, and thus incur additional costs that could affect our profitability or harm our reputation.

Disruptions and other damages to our information technology and other networks and operations, and breaches in data security or cybersecurity attacks could have a negative financial impact and damage our reputation.

Our ability to serve customers, as well as increase revenues and control costs, depends in part on the reliability of our sophisticated technologies, system networks and cloud-based software. We use information technology and other systems to manage our business in order to maximize our revenue, effectiveness and efficiency. Unauthorized parties gaining access to digital systems and networks for purposes of misappropriating assets or sensitive financial, personal or business information, corrupting data, causing operational disruptions and other cyber-related risks could adversely impact our customer relationships, business plans and our reputation. In some cases, we are dependent on third-party technologies and service providers for which there is no certainty of uninterrupted availability or through which hackers could gain access to sensitive and/or personal information. These potential disruptions and cyber-attacks could negatively affect revenues, costs, customer demand, system availability and our reputation.

If we are not able to protect our proprietary rights to our software and related products, our ability to market our software products could be hindered and our results of operations, financial position and cash flows could be materially and adversely affected.

We rely on our agreements with customers, confidentiality agreements with employees, and our trademarks, trade secrets, copyrights and patents to protect our proprietary rights. These legal protections and precautions may not prevent misappropriation of our proprietary information. In addition, substantial litigation regarding intellectual property rights exists in the software industry, and software products may increasingly be subject to third-party infringement claims. Such litigation and misappropriation of our proprietary information could hinder our ability to market and sell products and services and our results of operations, financial position and cash flows could be materially and adversely affected.

Changes in environmental or regulatory requirements could entail additional expenses that could decrease our profitability.

We are subject to a variety of laws in various countries and markets, such as those regulating lead or other material content in certain of our products, the handling and disposal of certain electronic materials, the use and/or licensing of radio frequencies necessary for radio products, data privacy and protection, as well as customs and trade practices. We cannot predict the nature, scope or effect of future environmental or regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. Currently, the cost of complying with existing laws is included as part of our on-going expenses and does not have a material effect on our business or financial position, but a change in the future could adversely affect our profitability.

Risks related to foreign markets could decrease our profitability.

Since we sell products worldwide as well as manufacture products in several countries, we are subject to risks associated with doing business internationally. These risks include such things as changes in foreign currency exchange rates, changes in political or economic conditions of specific countries or regions, potentially negative consequences from changes in tax laws or regulatory requirements, differing labor regulations, and the difficulty of managing widespread operations.

An inability to attract and retain skilled employees could negatively impact our growth and decrease our profitability.

Our success depends on our continued ability to identify, attract, develop and retain skilled personnel throughout our organization. Current and future compensation arrangements, including benefits, may not be sufficient to attract new employees or retain existing employees, which may hinder our growth.

Rising healthcare and retirement benefit costs could increase cost pressures and decrease our profitability.

We estimate liabilities and expenses for retirement plans and other postretirement benefits that require the use of assumptions relating to the rates used to discount the future estimated liability, rate of return on any assets and various assumptions related to the age and cost of the workforce. Actual results may differ from the estimates and have a material adverse effect on future results of operations or on the financial statements as a whole. Rising healthcare and retirement benefit costs in the United States may also add to cost pressures and decrease our profitability.

A failure to maintain good corporate governance practices could damage our reputation and adversely affect our future success.

We have a history of good corporate governance, including procedures and processes that are required by the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act of 2010, and related statutes, rules and regulations, such as board committee charters, principles of corporate governance, a code of business conduct and applicable exchange listing standards. Failure to maintain these corporate governance practices could harm our reputation and have a material adverse effect on our business and results of operations.

Violations or alleged violations of laws that impose requirements for the conduct of our overseas operations, including the FCPA or other anti-corruption laws, sanctioned parties restrictions and FATCA could adversely affect our business.

In foreign countries where we operate, a risk exists that our employees, third party partners or agents could engage in business practices prohibited by applicable laws and regulations, such as the Foreign Corrupt Practices Act (FCPA). Such anti-corruption laws generally prohibit companies from making improper payments to foreign officials and require companies to keep accurate books and records and maintain appropriate internal controls. Our policies mandate strict compliance with such laws and we devote resources to ensure compliance. However, we operate in some parts of the world that have experienced governmental corruption, and, in certain circumstances, local customs and practice might not be consistent with the requirements of anti-corruption laws. We remain subject to the risk that our employees, third party partners or agents will engage in business practices that are prohibited by our policies and violate such laws and regulations. Violations by us or a third party acting on our behalf could result in significant internal investigation costs and legal fees, civil and criminal penalties, including prohibitions on the conduct of our business, and reputational harm.

We may also be subject to legal liability and reputational damage if we violate U.S. trade sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the European Union and the United Nations, and trade sanction laws such as the Iran Threat Reduction and Syria Human Rights Act of 2012.

In addition, the Foreign Account Tax Compliance Act (FATCA) requires certain of our subsidiaries, affiliates and other entities to obtain valid FATCA documentation from payees prior to remitting certain payments to such payees. In the event we do not obtain valid FATCA documents, we may be obliged to withhold a portion of such payments. This obligation is shared with our customers and clients who may fail to comply, in whole or in part. In such circumstances, we may incur FATCA compliance costs including withholding taxes, interest and penalties. Regulatory initiatives and changes in the regulations and guidance promulgated under FATCA may increase our costs of operations, and could adversely affect the market for our services as intermediaries, which could negatively affect our results of operations and financial condition.

Failure to successfully identify, complete and integrate acquired businesses or products could adversely affect our operations.

As part of our business strategy, we continue to evaluate and may pursue selected business or product acquisition opportunities that we believe may provide us with certain operating and financial benefits. There can be no assurance that we will identify or complete transactions with suitable acquisition candidates in the future. If we complete any such acquisitions, they may require integration into our existing business with respect to administrative, financial, sales, marketing, manufacturing and other functions to realize these anticipated benefits. If we are unable to successfully integrate a business or product acquisition, we may not realize the benefits identified in our due diligence process, and our financial results may be negatively impacted. Additionally, significant unexpected liabilities may arise during or after completion of an acquisition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The principal facilities utilized by the Company at December 31, 2017 are listed below. The Company owns all such facilities in fee simple except as noted. The Company believes that its facilities are generally well maintained and have sufficient capacity for its current needs.



		Approximate area
Location	Principal use	(square feet)
Scottsdale, Arizona, USA	Manufacturing	32,000	(1	)
Los Gatos, California, USA	Software development	3,600	(2	)
Centennial, Colorado, USA	Distribution	12,000
Tulsa, Oklahoma, USA	Manufacturing	59,500
Milwaukee, Wisconsin, USA	Manufacturing and offices	324,200
Racine, Wisconsin, USA	Manufacturing and offices	134,300	(3	)
Brno, Czech Republic	Manufacturing	27,800
Neuffen, Germany	Manufacturing and offices	24,700
Nogales, Mexico	Manufacturing	181,300
Luleå, Sweden	Electronic development	7,000	(4	)
Bern, Switzerland	Manufacturing	1,100	(5	)

(1) Leased facility. Lease to be terminated effective March 31, 2018 and production moved to Racine, Wisconsin facility.

(2) Leased facility. Lease term expires November 30, 2021.

(3) Leased facility. Lease term expires December 31, 2025.

(4) Leased facility. Lease term expires June 30, 2025.

(5) Building is owned, but land is leased from the government, as required. Lease term expires October 18, 2021.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business, the Company is named in legal proceedings from time to time. There are currently no material legal proceedings pending with respect to the Company.

The Company is subject to contingencies related to environmental laws and regulations. Information about the Company's compliance with environmental regulations is included in Part I, Item 1 of this 2017 Annual Report on Form 10-K under the heading “Environmental Protection.”

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Information required by this Item is set forth in Note 11 “Unaudited: Quarterly Results of Operations, Common Stock Price and Dividends” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2017 Annual Report on Form 10-K.

The following information in Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically incorporates it by reference into such a filing.

The following graph compares on a cumulative basis the yearly percentage change since January 1, 2013 in (a) the total shareholder return on the Common Stock with (b) the total return on the Russell 2000 Index, and (c) the total return of the peer group made up of 15 companies, including the Company, in similar industries and with similar market capitalization.

The graph assumes $100 invested on December 31, 2012. It further assumes the reinvestment of dividends. The returns of each component company in the peer groups have been weighted based on such company's relative market capitalization.



December 31		2012	2013	2014	2015	2016	2017
Badger Meter, Inc.	Return %		16.66%	10.49%	0.03%	27.71%	30.94%
	Cumulative $	$100.00	$116.66	$128.91	$128.95	$164.68	$215.63
Russell 2000 Index	Return %		38.82%	4.89%	(4.41)%	21.31%	14.65%
	Cumulative $	$100.00	$138.82	$145.62	$139.19	$168.85	$193.58
Peer Group	Return %		40.14%	0.51%	(9.99)%	37.54%	16.97%
	Cumulative $	$100.00	$140.14	$140.87	$126.79	$174.39	$203.98

The Peer Group consists of A.O. Smith Corp. (AOS), Badger Meter, Inc. (BMI), CIRCOR International, Inc. (CIR), CLARCOR Inc. (CLC), ESCO Technologies Inc. (ESE), Franklin Electric Co, Inc. (FELE), Gorman-Rupp Company (GRC), Itron, Inc. (ITRI), Lindsay Corporation (LNN), Perma-Pipe International Holdings, Inc. (PPIH), Mueller Water Products (MWA), Northwest Pipe Company (NWPX) , Rexnord Corporation (RXN), Sun Hydraulics Corporation (SNHY) and Watts Water Technologies, Inc. (WTS).

The following table provides information about the Company's purchases during the quarter ended December 31, 2017 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.



	Total number of shares purchased	Average price paid per share	Total number of shares purchased as part of a publicly announced program	Maximum number of shares that may yet be purchased under the program
	(In thousands)
October 1, 2017 - October 31, 2017	13,971	$43.22	111,922	288,078
November 1, 2017 - November 30, 2017	—	—	111,922	288,078
December 1, 2017 - December 31, 2017	2,698	47.80	114,620	285,380
Total as of December 31, 2017	16,669		114,620	285,380

ITEM 6. SELECTED FINANCIAL DATA

BADGER METER, INC.

Ten Year Summary of Selected Consolidated Financial Data



	Years ended December 31,
(In thousands except per share data)	2017	2016	2015	2014	2013	2012	2011	2010	2009	2008
Operating results
Net sales	$402,440	393,761	377,698	364,768	334,122	319,660	262,915	276,634	250,337	279,552
Research and development	$10,596	10,597	10,645	9,496	10,504	9,567	8,086	7,164	6,910	7,136
Earnings from continuing operations before income taxes	$55,622	49,844	41,152	44,912	38,009	43,471	27,349	44,438	42,333	39,555
Earnings from continuing operations	$34,571	32,295	25,938	29,678	24,617	28,032	19,161	28,662	26,780	25,084
Earnings from discontinued operations (1)	$ n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	7,390	n/a
Net earnings	$34,571	32,295	25,938	29,678	24,617	28,032	19,161	28,662	34,170	25,084
Earnings from continuing operations to sales	8.6%	8.2%	6.9%	8.1%	7.4%	8.8%	7.3%	10.4%	10.7%	9.0%
Per Common share (2)
Basic earnings from continuing operations	$1.20	1.12	0.90	1.04	0.86	0.98	0.64	0.96	0.91	0.86
Basic earnings from discontinued operations (1)	$ n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	0.25	n/a
Total basic earnings	$1.20	1.12	0.90	1.04	0.86	0.98	0.64	0.96	1.16	0.86
Diluted earnings from continuing operations	$1.19	1.11	0.90	1.03	0.85	0.98	0.64	0.96	0.90	0.85
Diluted earnings from discontinued operations (1)	$ n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	0.25	n/a
Total diluted earnings	$1.19	1.11	0.90	1.03	0.85	0.98	0.64	0.96	1.14	0.85
Cash dividends declared: Common Stock	$0.49	0.43	0.39	0.37	0.35	0.33	0.30	0.26	0.23	0.20
Price range - high	$52.10	39.36	32.94	30.46	28.18	24.30	22.74	22.75	22.45	31.37
Price range - low	$34.40	26.40	25.82	23.24	20.94	14.65	13.43	16.29	11.25	8.79
Closing price	$47.80	36.95	29.30	29.68	27.25	23.71	14.72	22.11	19.91	14.51
Book value *	$9.53	8.80	8.00	7.41	6.82	5.98	5.93	5.60	4.82	3.75
Shares outstanding at year-end (2)
Common Stock	29,119	29,119	29,050	28,922	28,824	28,628	30,246	30,096	29,946	29,616
Financial position
Working capital *	$65,514	75,174	44,784	34,030	29,122	27,294	78,782	64.658	60,419	35,740
Current ratio *	1.7 to 1	2.0 to 1	1.4 to 1	1.3 to 1	1.3 to 1	1.3 to 1	4.5 to 1	3.0 to 1	3.3 to 1	1.7 to 1
Net cash provided by operations	$49,751	56,185	35,831	35,735	34,818	34,802	31,317	18,396	36,588	26,143
Capital expenditures	$15,069	10,596	19,766	12,332	14,311	8,202	5,336	9,238	7,750	13,237
Total assets	$391,727	349,699	355,480	341,158	316,058	290,453	218,910	215,864	191,016	195,358
Short-term and current portion of long-term debt	$44,550	37,950	71,360	75,927	70,045	66,730	1,790	12,878	8,003	19,670
Long-term debt	$ n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	5,504
Shareholders' equity	$277,452	256,209	232,275	214,331	196,563	171,247	179.281	168.383	144,461	111,023
Debt as a percent of total debt and equity *	13.8%	12.9%	23.5%	26.2%	26.3%	28.0%	1.0%	7.1%	5.2%	18.5%
Return on shareholders' equity *	12.5%	12.6%	11.2%	13.8%	12.5%	16.4%	10.7%	17.0%	18.5%	22.6%
Price/earnings ratio *	40.2	33.3	32.6	28.8	32.1	24.3	23.2	23.2	22.2	17.2

(1) In 2009, discontinued operations represented the recognition of previously unrecognized tax benefits for certain deductions that were taken on prior tax returns related to the shutdown of the Company's French operations.

(2) All per share amounts and number of shares outstanding have been restated to reflect the 2016 2-for-1 stock split for the periods presented.

*Description of calculations as of the applicable year end:

Book value per share equals total shareholders' equity at year-end divided by the number of common shares outstanding.

Working capital equals total current assets less total current liabilities.

Current ratio equals total current assets divided by total current liabilities.

Debt as a percent of total debt and equity equals total debt (the sum of short-term debt, current portion of long-term debt and long-term debt) divided by the sum of total debt and total shareholders' equity at year-end.

Return on shareholders' equity equals earnings from continuing operations divided by total shareholders' equity at year-end.

Price/earnings ratio equals the year-end closing stock price for common stock divided by diluted earnings per share from continuing operations.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS DESCRIPTION AND OVERVIEW

The ORION family of radio endpoints provides water utilities with a range of industry-leading options for meter reading. These include ORION Migratable (ME) for mobile meter reading, ORION (SE) for traditional fixed network applications, and ORION Cellular for infrastructure-free fixed network meter reading. ORION Migratable makes the migration to fixed network easier for utilities that prefer to start with mobile reading and later adopt fixed network communications, allowing utilities to choose a solution for their current needs and be positioned for their future operational changes. ORION

Cellular eliminates the need for utility-owned fixed network infrastructure, allows for rapid deployment and decreases ongoing maintenance.

Critical to the water metering ecosystem is information and analytics. The Company’s BEACON Advanced Metering Analytics (AMA) managed solution is the latest in metering technology. BEACON AMA combines the BEACON analytical software suite with proven ORION technologies using two-way cellular-based fixed networks in a managed solution, improving utilities’ visibility of their water consumption and eliminating the need for costly utility-managed infrastructure.

An industry leader in both mechanical and electronic flow metering technologies, the Company offers one of the broadest flow measurement, control and communication portfolios in the market. The portfolio carries respected brand names including Recordall, E-Series, ORION, Hedland, Dynasonics, Blancett, and Research Control, and includes eight of the ten major flow meter technologies. Customers rely on the Company for application-specific solutions that deliver accurate, timely and dependable flow data and control essential for product quality, cost control, safer operations, regulatory compliance and more sustainable operations.

Business Trends

Increasingly, the electric utility industry relies on AMI technology for two-way communication to monitor and control electrical devices at the customer's site. Although the Company does not sell products for electric market applications, the trend toward AMI affects the markets in which the Company does participate, particularly for those customers in the water utility market that are interested in more frequent and diverse data collection. Specifically, AMI and AMA technologies enable water utilities to capture readings from each meter at more frequent and variable intervals. Similar to the electric utility industry’s conversion to solid-state meters in recent years, the water utility industry is beginning the conversion from mechanical to ultrasonic (electronic) meters. Ultrasonic water metering has lower barriers to entry, which could affect the competitive landscape for the water meter market in North America.

The Company sells its technology solutions to meet customer requirements. Since the technology products have comparable margins, any change in the mix between AMR, AMI or AMA is not expected to have a significant impact on the Company's net sales related to meter reading technology.

There are approximately 52,000 water utilities in the United States and the Company estimates that approximately 55% to 60% of them have converted to a radio solutions technology. With the BEACON AMA managed solution and its wide breadth of water meters, the Company believes it is well positioned to meet customers' future needs.

In the global market, companies need to comply with increasing regulations requiring companies to better manage critical resources, monitor their use of hazardous materials, and reduce exhaust gases. Some customers measure fluids to identify leaks and/or misappropriation for cost control or add measurement points to help automate manufacturing. Other customers employ measurement to comply with government mandates and laws. The Company provides technology to measure water, hydrocarbon-based fluids, chemicals, gases and steams.

Flow measurements are critical to provide a baseline and quantify reductions as customers attempt to reduce consumption. Once water usage is better understood, a strategy for water-use reduction can be developed with specific water-reduction initiatives targeted to those areas where water reduction is most viable. With the Company’s technology, customers have found costly leaks, pinpointed equipment in need of repair, and identified areas for process improvements.

Acquisitions

On November 1, 2017, the Company acquired certain assets of Utility Metering Services, Inc.'s business Carolina Meter & Supply ("Carolina Meter") of Wilmington, North Carolina, which was one of the Company's distributors serving North Carolina, South Carolina and Virginia.

The total purchase consideration for the Carolina Meter assets was $6.2 million, which included $2.0 million in cash and settlement of $4.2 million of pre-existing Company receivables. The Company's preliminary allocation of the purchase price at December 31, 2017 included $0.6 million of receivables, $0.3 million of inventory, $3.3 million of intangibles and $2.0 million of goodwill. As of December 31, 2017, the Company had not completed its analysis for estimating the fair value of the assets acquired. This acquisition is further described in Note 3 “Acquisitions” in the Notes to Consolidated Financial Statements.

On May 1, 2017, the Company acquired 100% of the outstanding common stock of D-Flow Technology AB ("D-Flow") of Luleå, Sweden. The D-Flow acquisition facilitates the continued advancement of the existing E-Series® ultrasonic product line while also adding a technology center for the Company.

The purchase price was approximately $23.2 million in cash, plus a small working capital adjustment. The purchase price included $5.4 million in payments that are anticipated to be made in 2018 which are recorded in payables and other accrued liabilities on the Consolidated Balance Sheets at December 31, 2017. The Company's preliminary allocation of the purchase price included approximately $0.3 million of receivables, $0.6 million of inventory, $0.2 million of property, plant and equipment, $10.9 million of intangibles and $11.8 million of goodwill. The Company also assumed $0.6 million of liabilities as part of the acquisition. As of December 31, 2017, the Company had not completed its analysis for estimating the fair value of the assets acquired. This acquisition is further described in Note 3 “Acquisitions” in the Notes to Consolidated Financial Statements.

On October 20, 2016, the Company acquired certain assets of Precision Flow Measurement, Inc., doing business as Nice Instrumentation, of Manalapan Township, New Jersey. The acquisition adds a new technology for the measurement of steam to the Company's HVAC line of products.

The total purchase consideration for the Nice Instrumentation assets was $2.0 million, which included a $0.2 million payment after the first production run that occurred in January 2017. The Company's preliminary allocation of the purchase price at December 31, 2016 included approximately $15,000 of inventory and equipment, $0.7 million of intangibles and $1.3 million of goodwill. In 2017, the Company completed its analysis for estimating the fair value of the assets acquired with no additional adjustments. This acquisition is further described in Note 3 “Acquisitions” in the Notes to Consolidated Financial Statements.

On August 17, 2015, the Company acquired certain assets of United Utilities, Inc. of Smyrna, Tennessee, which was one of the Company's distributors serving Tennessee and Georgia.

equipment, $1.7 million of intangibles and $0.3 million of goodwill. In 2016, the Company completed its analysis for estimating the fair value of the assets acquired with no additional adjustments. This acquisition is further described in Note 3 “Acquisitions” in the Notes to Consolidated Financial Statements.

Revenue and Product Mix

As the industry continues to evolve, the Company has been vigilant in anticipating and exceeding customer expectations. In 2011, the Company introduced AMA as a hardware and software solution for water and gas utilities, and then in early 2014 launched its new BEACON AMA system, as a managed solution, which it believes will help maintain the Company's position as a market leader. Since its inception, sales of BEACON AMA have continued to grow with large cities and private water utilities selecting BEACON AMA and the Company’s industry-leading water meters.

The Company continues to seek opportunities for additional revenue enhancement. For instance, the Company is periodically asked to oversee and perform field installation of its products for certain customers. The Company assumes the role of general contractor, hiring installation subcontractors and supervising their work. The Company also supports its product and technology sales with the sale of extended service programs that provide additional services beyond the standard warranty. In recent years, the Company has sold ORION radio technology to natural gas utilities for installation on their gas meters. Most recently, the introduction of the BEACON AMA system opens the door to “software as a service” revenues. Revenues from such products and services are not yet significant and the Company is uncertain of the potential growth achievable for such products and services in future periods.

RESULTS OF OPERATIONS

Net Sales

Net sales in 2017 increased $8.6 million, or 2.2%, to $402.4 million from $393.8 million in 2016. The overall increase was the result of higher flow instrumentation sales and slightly higher municipal water sales.

Municipal water sales represented 76.3% of total sales in 2017. These sales increased $2.4 million, or 0.8%, to $306.9 million in 2017 compared to $304.5 million in 2016. The increase was primarily the result of higher commercial water meter sales. Sales of residential meters and related technologies were favorably impacted by the inclusion of sales from D-Flow and incremental sales from Carolina Meter, both of which were acquired in 2017. Sales of other residential related products decreased slightly between years due to delays of anticipated municipal projects. Overall, residential sales increased 0.4% while commercial sales increased 2.7%, the latter due to slightly higher volumes.

Flow instrumentation sales represented 23.7% of sales in 2017. These sales increased $6.2 million, or 6.9%, to $95.5 million from $89.3 million in 2016. The increase in sales was primarily due to a rebound in the oil and gas market as well as strengthening of industrial markets in general as the Company continues to broaden its distribution channels.

Net sales in 2016 increased $16.1 million, or 4.3%, to $393.8 million from $377.7 million in 2015. The overall increase was the result of higher sales of municipal water meter and related products, offset somewhat by lower sales of flow instrumentation products.

Municipal water sales represented 77.3% of total sales in 2016. These sales increased $21.4 million, or 7.6%, to $304.5 million in 2016 compared to $283.1 million in 2015. The increase was the result of higher sales of both residential and commercial water meters and related technologies. Overall, residential sales increased 5.1% while commercial sales increased 21.0%, both due to higher volumes of product sold.

Flow instrumentation sales represented 22.7% of sales in 2016. These sales declined $5.3 million, or 5.6%, to $89.3 million from $94.6 million in 2015. The decrease in sales was primarily due to lower sales of meters to oil and gas customers, the loss of two significant customers and general softness in markets served.

International sales for municipal water meters and related technologies are generally made to customers in Canada and Mexico, which use similar mechanical technology and standards as customers in the U.S. The recent introduction of ultrasonic meters allows the Company greater opportunities in other parts of the world, particularly in the Middle East. International sales for flow instrumentation are generally made throughout the world. In Europe, sales are made primarily in Euros. Other international sales are made in U.S. dollars or local currencies.

International sales increased 1.5% to $46.7 million in 2017 from $45.9 million in 2016. Higher sales in most parts of the world were offset somewhat by lower sales in Canada and the Middle East, the latter of which tends to be sporadic.

International sales decreased 16.8% to $45.9 million in 2016 from $55.2 million in 2015 due primarily to lower sales in Mexico and the Middle East.

Gross Margins

Gross margins as a percentage of sales were 38.7%, 38.2% and 35.9% for 2017, 2016 and 2015, respectively. The slight increase in the 2017 gross margin over the 2016 gross margin was due to better pricing and product mix, offset somewhat by higher commodity expenses, particularly brass costs.

The increase in the 2016 gross margin over the 2015 gross margin was due to better product mix, higher volumes and the resulting impact on capacity utilization, and lower brass costs.

Operating Expenses

Selling, engineering and administration expenses in 2017 were $100.1 million, or 0.3% higher than expenses of $99.8 million in 2016. The slight increase was the net impact of costs associated with added employees from acquisitions, the related amortization of the intangibles from those transactions and normal inflationary increases, offset somewhat by lower healthcare costs. Included in 2017 expenses was a pretax charge of $0.6 million for non-cash pension settlements compared to $1.5 million in 2016.

Selling, engineering and administration expenses in 2016 were $99.8 million, or 6.9% higher than expenses of $93.4 million in 2015. The increase was due primarily to higher employee incentive costs due to better financial results, higher software amortization charges and higher professional expenses. Included in 2016 expenses was a pretax charge of $1.5 million for non-cash pension settlements compared to $0.8 million in 2015.

Operating Earnings

Operating earnings in 2017 increased $4.8 million, or 9.6%, to $55.6 million from $50.8 million in 2016. The increase was the result of higher sales and gross margin, offset slightly by higher selling, engineering and administration expenses.

Operating earnings in 2016 increased $8.4 million, or 19.8%, to $50.8 million from $42.4 million in 2015. The increase was the result of higher sales and gross margin, offset somewhat by higher selling, engineering and administration expenses.

Interest Expense, Net

Interest expense, net was $0.8 million in 2017 compared to $0.9 million in 2016 and $1.2 million in 2015. The slight decrease from 2016 to 2017 was impacted by the timing of cash flows. The decline in 2016 from 2015 was due to lower average debt balances.

Income Taxes

Income taxes as a percentage of earnings before income taxes were 37.0%, 35.2% and 37.0% for 2017, 2016 and 2015, respectively. The variances in all three years presented were due primarily to the changes in both state taxes, which depend on each year’s sales mix, as well as the relationship between foreign and domestic income which are taxed at different rates. In addition, the 2017 percentage was impacted by the Tax Cuts and Jobs Act legislation that was signed into law in December 2017. This resulted in $0.8 million of expense associated with what is referred to as the transition tax on the Company's undistributed foreign earnings, offset by a credit of $0.8 million to recognize the federal rate change on the Company's net deferred tax liabilities. The Company believes that the Tax Cuts and Jobs Act legislation will have a favorable impact on future results due to the reduction of the stated federal tax rate from 35% to 21%. The federal tax rate is the main component of the Company’s overall effective tax rate.

Earnings and Diluted Earnings per Share

The increase in operating earnings was offset somewhat by the higher effective tax rate resulting in net earnings of $34.6 million in 2017 compared to $32.3 million in 2016. On a diluted basis, earnings per share were $1.19 in 2017 compared to $1.11 in 2016.

Because of the increased operating earnings and the lower effective tax rate, net earnings were $32.3 million in 2016 compared to $25.9 million in 2015. On a diluted basis, earnings per share were $1.11 in 2016 compared to $0.90 in 2015.

LIQUIDITY AND CAPITAL RESOURCES

The main sources of liquidity for the Company are cash from operations and borrowing capacity. In addition, depending on market conditions, the Company may access the capital markets to strengthen its capital position and to provide additional liquidity for general corporate purposes. Cash provided by operations in 2017 was $49.8 million compared to $56.2 million in 2016. The lower amount in 2017 was driven by higher inventory balances at the end of 2017, offset somewhat by higher net earnings.

Receivables at December 31, 2017 were $58.2 million compared to $59.8 million at the end of 2016. The decrease between years was due to a reduction in non-trade receivables. The December 31, 2016 balance included a large amount for income taxes receivable that does not exist at December 31, 2017. Trade receivables did increase slightly between years due to higher sales. The Company believes its net receivables balance is fully collectible.

Inventories at December 31, 2017 were $85.2 million compared to $77.7 million at December 31, 2016. The increase was a function of the timing of purchases and sales as well as the inclusion of the inventories of D-Flow and Carolina Meter, both acquired in 2017. Higher brass costs also contributed to the increase.

Property, plant and equipment increased primarily as a net result of capital expenditures, offset by depreciation expense. Capital expenditures totaled $15.1 million in 2017 compared to $10.6 million in 2016.

Intangible assets of $59.3 million at December 31, 2017 increased from $51.9 million at December 31, 2016. Goodwill increased from $49.3 million at December 31, 2016 to $67.4 million at December 31, 2017. The increases in both accounts were due to the acquisitions of D-Flow and the assets of Carolina Meter, with the change in intangible assets offset by normal amortization expense.

Short-term debt increased to $44.6 million at December 31, 2017 from $38.0 million at December 31, 2016 due to the acquisition of D-Flow and the asset purchase of Carolina Meter. At the end of 2017, debt represented 13.8% of the Company’s total capitalization. None of the debt is secured by the Company’s assets.

Payables and other short term liabilities increased at December 31, 2017 to $28.6 million compared to $18.4 million at December 31, 2016. The December 31, 2017 balance includes approximately $5.4 million of Swedish krona denominated liabilities expected to be paid in 2018. The Company’s cash balances include a similar amount denominated in Swedish krona. This account also includes amounts paid by customers for future services, which increased between years. The remainder of the change was due to the timing of purchases and payments.

Accrued compensation and employee benefits increased to $15.5 million at December 31, 2017 from $13.9 million at December 31, 2016. The increase was due to higher employee incentives earned as a result of improved financial results.

The overall increase in total shareholders’ equity to $277.5 million at December 31, 2017 from $256.2 million at December 31, 2016 was principally the result of net earnings and stock options exercised, offset by dividends paid.

The Company’s financial condition remains strong. In September 2016, the Company amended its May 2012 credit agreement with its primary lender to a three-year $120.0 million line of credit that supports commercial paper (up to $70.0 million) and includes $5.0 million of a Euro line of credit. While the facility is unsecured, there are a number of financial covenants with which the Company must comply, and the Company was in compliance as of December 31, 2017. The Company believes that its operating cash flows, available borrowing capacity, and its ability to raise capital provide adequate resources to fund ongoing operating requirements, future capital expenditures and the development of new products. The Company continues to take advantage of its local commercial paper market and carefully monitors the current borrowing market. The Company had $88.8 million of unused credit lines available at December 31, 2017.

OFF-BALANCE SHEET ARRANGEMENTS

The Company had no off-balance sheet arrangements at December 31, 2017.

CONTRACTUAL OBLIGATIONS

In 2010, the Company restructured the outstanding debt of its Employee Savings and Stock Option Plan (the “ESSOP”) by loaning the ESSOP $0.5 million to repay a loan to a third party and loaning the ESSOP an additional $1.0 million to purchase additional shares of the Company's Common Stock for future 401(k) savings plan matches under a program that will expire on December 31, 2020. Under this program, the Company agreed to pay the principal and interest on the new loan amount of $1.5 million. The receivable from the ESSOP and the related obligation were therefore netted to zero on the Company's Consolidated Balance Sheets at December 31, 2017 and 2016. The terms of the loan call for equal payments of principal with the final payment due on December 31, 2020. At December 31, 2017, $0.5 million of the loan balance remains.

The following table includes the Company's significant contractual obligations as of December 31, 2017. There are no material undisclosed guarantees.



	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		Beyond
	(In thousands)
Short-term debt	$	44,550	$	44,550	$	—	$	—	$	—
Operating leases	12,230		2,448		3,761		2,696		3,325
Total contractual obligations	$	56,780	$	46,998	$	3,761	$	2,696	$	3,325

Other than items included in the preceding table, as of December 31, 2017, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90 days. The Company also has long-term obligations related to its pension and postretirement plans which are discussed in detail in Note 7 “Employee Benefit Plans” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2017 Annual Report on Form 10-K. As of the most recent actuarial measurement date, the Company is not required to make a minimum contribution for its pension plan for the 2018 calendar year. Postretirement medical claims are paid by the Company as they are submitted, and they are anticipated to be $0.4 million in 2018 based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

The Company's accounting policies are more fully described in Note 1 “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2017 Annual Report on Form 10-K. As discussed in Note 1, the preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company's more significant estimates relate primarily to the following judgmental reserves: allowance for doubtful accounts, reserve for obsolete inventories, and warranty and after-sale costs reserve. Each of these reserves is evaluated quarterly and is reviewed with the Company's internal Disclosure Committee and the Audit and Compliance Committee of the Board of Directors. The basis for the reserve amounts is determined by analyzing the anticipated exposure for each account, and then selecting the most likely amount based upon historical experience and various other considerations that are believed to be reasonable under the circumstances. These methods have been used for all years in the presented financials and have been used consistently throughout each year. Actual results may differ from these estimates if actual experiences vary from the Company's assumptions.

The criteria used for calculating each of the reserve amounts vary by type of reserve. For the allowance for doubtful accounts reserve, significant past due balances are individually reviewed for collectability, while the balance of accounts are reviewed in conjunction with applying historical write-off ratios. The calculation for the obsolete inventories reserve is determined by analyzing the relationship between the age and quantity of items on hand versus estimated usage to determine if excess quantities exist. The calculation for warranty and after-sale costs reserve uses criteria that include known potential problems on past sales as well as historical claim experience and current warranty trends. The changes in the balances of these reserves at December 31, 2017 compared to the prior year were due to normal business conditions and are not deemed to be

significant. While the Company continually tries to improve its estimates, no significant changes in the underlying processes are expected for 2018.

The Company also uses estimates in four other significant areas: (i) pension and other postretirement obligations and costs, (ii) stock-based compensation, (iii) income taxes, and (iv) evaluating goodwill at least annually for impairment. The actuarial valuations of benefit obligations and net periodic benefit costs rely on key assumptions including discount rates and long-term expected returns on plan assets. As of December 31, 2017, we changed the approach utilized to estimate the service and interest cost components of net periodic benefit cost for our defined benefit pension and other postretirement benefit plans. Historically, we estimated the service and interest cost components using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. As of December 31, 2017, the Company utilized a spot rate approach for the estimation of service and interest cost for our plans by applying specific spot rates along the yield curve to the relevant projected cash flows, to provide a better estimate of future service and interest costs. This change does not affect the measurement of total benefit obligations. The change will be accounted for as a change in estimate that is inseparable from a change in accounting principle and, accordingly, will be accounted for prospectively starting in fiscal year 2018. Service and interest costs are expected to be $76,000 and $27,000 lower in 2018 for our defined benefit pension and other postretirement benefit plans, respectively, as a result of using the spot rate approach compared to the historical approach.

The assumptions for expected long-term rates of return on assets for its pension plan are based on historical experience and estimated future investment returns, taking into consideration anticipated asset allocations, investment strategies and the views of various investment professionals. The total cost of the Company's stock-based awards is equal to the grant date fair value per award multiplied by the number of awards granted, adjusted for forfeitures. Forfeitures are initially estimated based on historical Company information and subsequently updated over the life of the awards to ultimately reflect actual forfeitures, which could have an impact on the amount of stock compensation cost recognized from period to period. The grant date fair value of stock options relies on assumptions including the risk-free interest rate, dividend yield, market volatility and expected option life. In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted as appropriate based upon the actual results compared to those forecasted at the beginning of the fiscal year. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The reserve for uncertainty in income taxes is a matter of judgment based on an evaluation of the individual facts and circumstances of each tax position in light of all available evidence, including historic data and current trends. A tax benefit is recognized when it is “more likely than not” to be sustained based solely on the technical merits of each tax position. The Company evaluates and updates all of these assumptions quarterly. Goodwill impairment, if any, is determined by comparing the fair value of the reporting unit with its carrying value and is reviewed at least annually. Actual results may differ from these estimates.

OTHER MATTERS

The Company is subject to contingencies related to environmental laws and regulations. A future change in circumstances with respect to these specific matters or with respect to sites formerly or currently owned or operated by the Company, off-site disposal locations used by the Company, and property owned by third parties that is near such sites, could result in future costs to the Company and such amounts could be material. Expenditures for compliance with environmental control provisions and regulations during 2017, 2016 and 2015 were not material.

See the “Special Note Regarding Forward Looking Statements” at the front of this Annual Report on Form 10-K and Part I, Item 1A “Risk Factors” in this Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of risks and uncertainties that could impact the Company's financial performance and results of operations.

MARKET RISKS

In the ordinary course of business, the Company is exposed to various market risks. The Company operates in an environment where competition varies from moderate to intense. The Company believes it currently provides the leading technology in water meters and radio systems for water utilities. A number of the Company's competitors in certain markets have greater financial resources. Competitors also include alliance partners that sell products that do or may compete with our products, particularly those that provide radio solutions. As the global water metering market begins to shift to adopt ultrasonic (electronic) technology, the number of competitors may increase. In addition, the market's level of acceptance of the Company's newer product offerings, including the BEACON AMA system, may have a significant effect on the Company's results of operations. As a result of significant research and development activities, the Company enjoys favorable patent positions for several of its products.

The Company's ability to generate operating income and to increase profitability depends somewhat on the general health of the United States and foreign economies, including to some extent such things as the length and severity of global economic downturns; the timing and size of governmental programs such as stimulus fund programs, as well as the impact of government budget cuts or partial shutdowns of governmental operations; international or civil conflicts that affect international trade; the ability of municipal water utility customers to authorize and finance purchases of the Company's products; the Company's ability to obtain financing; housing starts in the United States; and overall industrial activity. In addition, changes in governmental laws and regulations, particularly laws dealing with the content or handling of materials, customs or trade practices, may impact the results of operations. These factors are largely beyond the Company's control and depend on the economic condition and regulatory environment of the geographic region of the Company's operations.

The Company relies on single suppliers for certain castings and components in several of its product lines. Although alternate sources of supply exist for these items, the loss of certain suppliers could temporarily disrupt operations in the short term. The Company attempts to mitigate these risks by working closely with key suppliers, purchasing minimal amounts from alternative suppliers and by purchasing business interruption insurance where appropriate.

The Company's foreign currency risk relates to the sales of products to foreign customers and purchases of material from foreign vendors. The Company uses lines of credit with U.S. and European banks to offset currency exposure related to European receivables and other monetary assets. As of December 31, 2017 and 2016, the Company's foreign currency net monetary assets were partially offset by comparable debt resulting in no material exposure to the results of operations. The Company believes the effect of a change in foreign currency rates will not have a material adverse effect on the Company's financial position or results of operations, either from a cash flow perspective or on the financial statements as a whole.

The Company typically does not hold or issue derivative instruments and has a policy specifically prohibiting the use of such instruments for trading purposes.

The Company's short-term debt on December 31, 2017 was floating rate debt with market values approximating carrying value. Future annual interest costs for short-term debt will fluctuate based upon short-term interest rates. For the short-term debt on hand on December 31, 2017, the effect of a 1% change in interest rates is approximately $0.4 million.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this Item is set forth in Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks” in this 2017 Annual Report on Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

BADGER METER, INC.

Management's Annual Report on Internal Control over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017 using the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on this assessment, the Company's management believes that, as of December 31, 2017, the Company's internal control over financial reporting was effective based on those criteria.

Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of the Company's internal control over financial reporting.

BADGER METER, INC.

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Badger Meter, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Badger Meter, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Badger Meter, Inc. ("the Company") maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated February 28, 2018, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Milwaukee, Wisconsin

February 28, 2018

BADGER METER, INC.

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Badger Meter, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Badger Meter, Inc. ("the Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as Badger Meter, Inc.’s auditor since 1927.

Milwaukee, Wisconsin

February 28, 2018

BADGER METER, INC.

Consolidated Balance Sheets



	December 31,
	2017			2016
Assets	(Dollars in thousands)
Current assets:
Cash	$	11,164		$	7,338
Receivables	58,210			59,818
Inventories:
Finished goods	23,125			18,087
Work in process	22,035			17,157
Raw materials	40,012			42,457
Total inventories	85,172			77,701
Prepaid expenses and other current assets	4,077			6,155
Total current assets	158,623			151,012
Property, plant and equipment, at cost:
Land and improvements	9,119			9,068
Buildings and improvements	67,604			65,230
Machinery and equipment	135,762			126,680
	212,485			200,978
Less accumulated depreciation	(118,884		)	(110,784		)
Net property, plant and equipment	93,601			90,194
Intangible assets, at cost less accumulated amortization	59,326			51,872
Other assets	9,897			6,607
Deferred income taxes	2,856			700
Goodwill	67,424			49,314
Total assets	$	391,727		$	349,699
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt	$	44,550		$	37,950
Payables and other current liabilities	28,601			18,350
Accrued compensation and employee benefits	15,509			13,861
Warranty and after-sale costs	3,367			2,779
Income and other taxes	1,082			2,898
Total current liabilities	93,109			75,838
Other long-term liabilities	4,073			4,019
Deferred income taxes	3,434			1,901
Accrued non-pension postretirement benefits	5,703			5,753
Other accrued employee benefits	7,956			5,979
Commitments and contingencies (Note 6)
Shareholders’ equity:
Common Stock, $1 par; authorized 40,000,000 shares; issued 37,164,698 shares in 2017 and 37,121,618 shares in 2016	37,165			37,122
Capital in excess of par value	32,182			28,022
Reinvested earnings	244,224			223,876
Accumulated other comprehensive loss	(10,893		)	(11,635		)
Less: Employee benefit stock	(460		)	(614		)
Treasury stock, at cost; 8,046,166 shares in 2017 and 8,003,086 shares in 2016	(24,766		)	(20,562		)
Total shareholders’ equity	277,452			256,209
Total liabilities and shareholders’ equity	$	391,727		$	349,699

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Operations



	Years ended December 31,
	2017		2016		2015
	(In thousands except per share amounts)
Net sales	$	402,440	$	393,761	$	377,698
Cost of sales	246,694		243,185		241,922
Gross margin	155,746		150,576		135,776
Selling, engineering and administration	100,124		99,811		93,407
Operating earnings	55,622		50,765		42,369
Interest expense, net	789		921		1,217
Earnings before income taxes	54,833		49,844		41,152
Provision for income taxes	20,262		17,549		15,214
Net earnings	$	34,571	$	32,295	$	25,938

Earnings per share:
Basic	$	1.20	$	1.12	$	0.90

Diluted	$	1.19	$	1.11	$	0.90

Shares used in computation of earnings per share:
Basic	28,927		28,887		28,759
Impact of dilutive securities	184		163		135
Diluted	29,111		29,050		28,894

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Comprehensive Income



	Years ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Net earnings	$	34,571		$	32,295		$	25,938
Other comprehensive income :
Foreign currency translation adjustment	1,844			(328		)	(847		)
Pension and postretirement benefits, net of tax	(1,102		)	1,473			(77		)
Comprehensive income	$	35,313		$	33,440		$	25,014

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Cash Flows



	Years ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Operating activities:
Net earnings	$	34,571		$	32,295		$	25,938
Adjustments to reconcile net earnings to net cash provided by operations:
Depreciation	12,056			10,715			9,993
Amortization	12,342			11,727			10,606
Deferred income taxes	(4,100		)	710			(3,023		)
Contributions to pension plan	(825		)	(1,000		)	—
Noncurrent employee benefits	714			660			1,261
Stock-based compensation expense	1,725			1,537			1,541
Changes in:
Receivables	(967		)	(3,561		)	(5,511		)
Inventories	(6,167		)	955			(7,116		)
Prepaid expenses and other current assets	(6,237		)	(961		)	(1,632		)
Liabilities other than debt	6,639			3,108			3,774
Total adjustments	15,180			23,890			9,893
Net cash provided by operations	49,751			56,185			35,831
Investing activities:
Property, plant and equipment additions	(15,069		)	(10,596		)	(19,766		)
Acquisitions, net of cash acquired	(20,376		)	(1,800		)	(1,907		)
Net cash used for investing activities	(35,445		)	(12,396		)	(21,673		)
Financing activities:
Net increase (decrease) in short-term debt	6,376			(33,096		)	(3,960		)
Dividends paid	(14,215		)	(12,461		)	(11,261		)
Proceeds from exercise of stock options	1,215			568			1,641
Tax benefit on stock options	—			—			141
Purchase of common stock for treasury stock	(4,402		)	—			—
Issuance of treasury stock	600			518			470
Net cash used for financing activities	(10,426		)	(44,471		)	(12,969		)
Effect of foreign exchange rates on cash	(54		)	(143		)	318
Increase (decrease) in cash	3,826			(825		)	1,507
Cash — beginning of year	7,338			8,163			6,656
Cash — end of year	$	11,164		$	7,338		$	8,163
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes	$	17,912		$	19,723		$	18,167
Interest	$	867		$	952		$	1,246
Non cash transaction:
Settlement of Carolina Meter & Supply payables prior to the acquisition	$	4,176		$	—		$	—
Settlement of United Utilities payables prior to the acquisition	$	—		$	—		$	2,866

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Shareholders’ Equity



	Years ended December 31,
	Common Stock at $1 par value*			Capital in excess of par value			Reinvested earnings			Accumulated other comprehensive income (loss)			Employee benefit stock			Treasury stock			Total
	(In thousands except per share amounts)
Balance, December 31, 2014	$	41,046		$	27,830		$	189,365		$	(11,856	)	$	(922	)	$	(31,132	)	$	214,331
Net earnings	—			—			25,938			—			—			—			25,938
Pension and postretirement benefits (net of $(122) tax effect)	—			—			—			(77		)	—			—			(77		)
Foreign currency translation	—			—			—			(847		)	—			—			(847		)
Cash dividends of $0.39 per share	—			—			(11,259		)	—			—			—			(11,259		)
Stock options exercised	57			1,517			—			—			—			67			1,641
Tax benefit on stock options and dividends	—			141			—			—			—			—			141
ESSOP transactions	—			242			—			—			154			—			396
Stock-based compensation	—			1,541			—			—			—			—			1,541
Issuance of treasury stock (70 shares)	—			355			—			—			—			115			470
Balance, December 31, 2015	41,103			31,626			204,044			(12,780		)	(768		)	(30,950		)	232,275
Net earnings	—			—			32,295			—			—			—			32,295
Pension and postretirement benefits (net of $1,019 tax effect)	—			—			—			1,473			—			—			1,473
Foreign currency translation	—			—			—			(328		)	—			—			(328		)
Cash dividends of $0.43 per share	—			—			(12,463		)	—			—			—			(12,463		)
Stock options exercised	19			528			—			—			—			22			569
Tax benefit on stock options and dividends	—			(110		)	—			—			—			—			(110		)
ESSOP transactions	—			289			—			—			154			—			443
Stock-based compensation	—			1,537			—			—			—			—			1,537
Retirement of treasury stock	(4,000		)	(6,260		)	—			—			—			10,260			—
Issuance of treasury stock (41 shares)	—			412			—			—			—			106			518
Balance, December 31, 2016	37,122			28,022			223,876			(11,635		)	(614		)	(20,562		)	256,209
Net earnings	—			—			34,571			—			—			—			34,571
Pension and postretirement benefits (net of $292 tax effect)	—			—			—			(1,102		)	—			—			(1,102		)
Foreign currency translation	—			—			—			1,844			—			—			1,844
Cash dividends of $0.49 per share	—			—			(14,223		)	—			—			—			(14,223		)
Stock options exercised	43			1,798			—			—			—			30			1,871
ESSOP transactions	—			205			—			—			154			—			359
Stock-based compensation	—			1,725			—			—			—			—			1,725
Purchase of common stock for treasury stock	—			—			—			—			—			(4,402		)	(4,402		)
Issuance of treasury stock (61 shares)	—			432			—			—			—			168			600
Balance, December 31, 2017	37,165			32,182			244,224			(10,893		)	(460		)	(24,766		)	277,452


*	Each common share of stock equals $1 par value; therefore, the number of common shares is the same as the dollar value.

See accompanying notes.

BADGER METER, INC.

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

Note 1 Summary of Significant Accounting Policies

Profile

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Receivables

Receivables consist primarily of trade receivables. The Company does not require collateral or other security and evaluates the collectability of its receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items and the customer's ability and likelihood to pay, as well as applying a historical write-off ratio to the remaining balances. Changes in the Company's allowance for doubtful accounts are as follows:



	Balance at beginning of year		Provision and reserve adjustments			Write-offs less recoveries			Balance at end of year
	(In thousands)
2017	$	425	$	285		$	(323	)	$	387
2016	$	477	$	2		$	(54	)	$	425
2015	$	811	$	(152	)	$	(182	)	$	477

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

Inventories

Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company estimates and records provisions for obsolete inventories. Changes to the Company's obsolete inventories reserve are as follows:



	Balance at beginning of year		Net additions charged to earnings		Disposals			Balance at end of year
	(In thousands)
2017	$	3,639	$	1,295	$	(1,053	)	$	3,881
2016	$	3,836	$	1,017	$	(1,214	)	$	3,639
2015	$	3,314	$	2,530	$	(2,008	)	$	3,836

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets by the straight-line method. The estimated useful lives of assets are: for land improvements, 15 years; for buildings and improvements, 10 to 39 years; and for machinery and equipment, 3 to 20 years.

Capitalized Software and Hardware

Capitalized internal use software and hardware included in other assets in the Consolidated Balance Sheets were $6.0 million and $3.3 million at December 31, 2017 and 2016, respectively. These amounts are amortized on a straight-line basis over the estimated useful lives of the software and/or hardware, ranging from 1 to 5 years. Amortization expense recognized for the years ending December 31, 2017, 2016 and 2015 was $2.8 million, $3.1 million and $2.4 million, respectively.

Long-Lived Assets

Property, plant and equipment and identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. No adjustments were recorded as a result of these reviews during 2017, 2016 and 2015.

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

Intangible Assets

Intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 20 years. The Company does not have any intangible assets deemed to have indefinite lives. Amortization expense recognized for 2017 was $6.8 million compared to $6.1 million in 2016 and 2015. Amortization expense expected to be recognized is $7.2 million in 2018, $6.9 million in 2019, $6.7 million in 2020, $6.6 million in 2021, $5.6 million in 2022 and $26.4 million thereafter. The carrying value and accumulated amortization by major class of intangible assets are as follows:



	December 31, 2017				December 31, 2016
	Gross carrying amount		Accumulated amortization		Gross carrying amount		Accumulated amortization
	(In thousands)
Technologies	$	47,647	$	21,882	$	47,657	$	18,970
Intellectual property	10,000		333		—		—
Non-compete agreements	2,322		1,923		2,112		1,670
Licenses	650		475		650		458
Customer lists	8,023		2,011		4,923		1,698
Customer relationships	21,620		9,649		20,790		7,416
Trade names	9,595		4,258		9,475		3,523
Total intangibles	$	99,857	$	40,531	$	85,607	$	33,735

Goodwill

Goodwill is tested for impairment annually during the fourth fiscal quarter or more frequently if an event indicates that the goodwill might be impaired. Potential impairment is identified by comparing the fair value of a reporting unit with its carrying value. No adjustments were recorded to goodwill as a result of these reviews during 2017, 2016 and 2015.

Goodwill was $67.4 million and $49.3 million at December 31, 2017 and 2016, respectively. The increases resulted from the asset purchase of Carolina Meter & Supply of Wilmington, North Carolina in 2017 and the acquisition of D-Flow Technology AB of Luleå, Sweden in 2017. These acquisitions are further described in Note 3 “Acquisitions.”

Revenue Recognition

Revenues are generally recognized upon shipment of product, which corresponds with the transfer of title. The costs of shipping are generally billed to the customer upon shipment and are included in cost of sales. A small portion of the Company's sales includes shipments of products combined with services, such as meters sold with installation. The product and installation components of these multiple deliverable arrangements are considered separate units of accounting. The value of these separate units of accounting is determined based on their relative fair values determined on a stand-alone basis. Revenue is generally recognized when the last element of the multiple deliverable is delivered, which corresponds with installation and acceptance by the customer. The Company also sells a small number of extended support service agreements on certain products for the period subsequent to the normal support service provided with the original product sale. Revenue is recognized over the service agreement period, which is generally one year. In 2014, the Company began offering software as a service with its BEACON AMA product and revenue for this service is recognized on a monthly basis as the service is performed.

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

Warranty and After-Sale Costs

The Company estimates and records provisions for warranties and other after-sale costs in the period in which the sale is recorded, based on a lag factor and historical warranty claim experience. After-sale costs represent a variety of activities outside of the written warranty policy, such as investigation of unanticipated problems after the customer has installed the product, or analysis of water quality issues. Changes in the Company's warranty and after-sale costs reserve are as follows:



	Balance at beginning of year		Net additions charged to earnings		Adjustments to pre-existing warranties			Costs incurred			Balance at end of year
	(In thousands)
2017	$	2,779	$	4,520	$	(439	)	$	(3,493	)	$	3,367
2016	$	3,133	$	3,559	$	(554	)	$	(3,359	)	$	2,779
2015	$	1,739	$	1,559	$	1,278		$	(1,443	)	$	3,133

Research and Development

Research and development costs are charged to expense as incurred and amounted to $10.6 million in 2017, 2016 and 2015.

Stock-Based Compensation Plans

As of December 31, 2017, the Company has an Omnibus Incentive Plan under which 1,400,000 shares are reserved for restricted stock and stock option grants for employees as well as stock grants for directors as described in Note 5 “Stock Compensation.” The plan was originally approved in 2011 and replaced all prior stock-based plans except for shares and options previously issued under those plans.

The Company recognizes the cost of stock-based awards in net earnings for all of its stock-based compensation plans on a straight-line basis over the service period of the awards. The Company estimates the fair value of its option awards using the Black-Scholes option-pricing formula, and records compensation expense for stock options ratably over the stock option grant's vesting period. The Company values restricted stock and stock grants for directors on the closing price of the Company's stock on the day the grant was awarded. Total stock compensation expense recognized by the Company was $1.8 million for 2017, $1.6 million for 2016 and $1.5 million for 2015.

Healthcare

The Company estimates and records provisions for healthcare claims incurred but not reported, based on medical cost trend analysis, reviews of subsequent payments made and estimates of unbilled amounts.

Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss at December 31, 2017 are as follows:



	Pension and postretirement benefits			Foreign currency			Total
				(In thousands)
Balance at beginning of period	$	(10,495	)	$	(1,140	)	$	(11,635	)
Other comprehensive income before reclassifications	—			1,844			1,844
Amounts reclassified from accumulated other comprehensive loss, net of tax of $0.3 million	(1,102		)	—			(1,102		)
Net current period other comprehensive (loss) income, net	(1,102		)	1,844			742
Accumulated other comprehensive (loss) income	$	(11,597	)	$	704		$	(10,893	)

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

Details of reclassifications out of accumulated other comprehensive loss during 2017 are as follows:



	Amount reclassified from accumulated other comprehensive loss
	(In thousands)
Amortization of employee benefit plan items:
Prior service cost (1)	$	(25	)
Settlement expense (1)	641
Actuarial loss (1)	(2,010		)
Total before tax	(1,394		)
Income tax impact	292
Amount reclassified out of accumulated other comprehensive loss	$	(1,102	)


(1)	These accumulated other comprehensive loss components are included in the computation of benefit plan costs in Note 7 “Employee Benefit Plans.”

Components of accumulated other comprehensive loss at December 31, 2016 are as follows:



	Pension and postretirement benefits			Foreign currency			Total
	(In thousands)
Balance at beginning of period	$	(11,968	)	$	(812	)	$	(12,780	)
Other comprehensive income before reclassifications	—			(328		)	(328		)
Amounts reclassified from accumulated other comprehensive loss, net of tax of $(1.0) million	1,473			—			1,473
Net current period other comprehensive income (loss), net	1,473			(328		)	1,145
Accumulated other comprehensive loss	$	(10,495	)	$	(1,140	)	$	(11,635	)

Details of reclassifications out of accumulated other comprehensive loss during 2016 are as follows:



	Amount reclassified from accumulated other comprehensive loss
	(In thousands)
Amortization of employee benefit plan items:
Prior service cost (1)	$	(25	)
Settlement expense (1)	1,510
Actuarial loss (1)	1,007
Total before tax	2,492
Income tax impact	(1,019		)
Amount reclassified out of accumulated other comprehensive loss	$	1,473


(1)	These accumulated other comprehensive loss components are included in the computation of benefit plan costs in Note 7 “Employee Benefit Plans.”

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value Measurements of Financial Instruments

The carrying amounts of cash, receivables and payables in the financial statements approximate their fair values due to the short-term nature of these financial instruments. Short-term debt is comprised of notes payable drawn against the Company's lines of credit and commercial paper. Because of its short-term nature, the carrying amount of the short-term debt also approximates fair value. Included in other assets are insurance policies on various individuals who were associated with the Company. The carrying amounts of these insurance policies approximate their fair value.

Subsequent Events

The Company evaluates subsequent events at the date of the balance sheet as well as conditions that arise after the balance sheet date but before the financial statements are issued. The effects of conditions that existed at the balance sheet date are recognized in the financial statements. Events and conditions arising after the balance sheet date but before the financial statements are issued are evaluated to determine if disclosure is required to keep the financial statements from being misleading. To the extent such events and conditions exist, if any, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions. For purposes of preparing the accompanying consolidated financial statements and the notes to these financial statements, the Company evaluated subsequent events through the date the accompanying financial statements were issued.

New Pronouncements

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220)." Under existing U.S. generally accepted accounting principles, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in this ASU also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption in any period is permitted. The Company’s provisional adjustments recorded in 2017 to account for the impact of the Tax Cuts and Jobs Act resulted in stranded tax effects. The Company is currently evaluating the timing and impact of adopting ASU 2018-02.

In May 2017, the FASB issued ASU 2017-09 “Compensation - Stock Compensation (Topic 718),” which clarifies when a change to terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the vesting condition, fair value or the award classification is not the same both before and after a change to the terms and conditions of the award. The new guidance is effective on a prospective basis beginning on January 1, 2018 and early adoption is permitted. The Company does not expect the adoption of this standard to have an impact on its consolidated financial statements as it is not the Company’s practice to change the terms or conditions of share-based payment awards after they are granted.

In March 2017, the FASB issued ASU 2017-07 “Compensation - Retirement Benefits (Topic 715),” which changes the presentation of defined benefit and post-retirement benefit plan expense on the income statement by requiring separation between operating and non-operating expense. Under the ASU, the service cost of net periodic benefit expense is an operating expense that will be reported with similar compensation costs. The non-operating components, which include all other components of net periodic benefit expense, are reported outside of operating income. The ASU also stipulates that only the service cost component of pension and postretirement benefit costs is eligible for capitalization. The ASU is effective for the Company beginning on January 1, 2018. Application is retrospective for the presentation of the components of these benefit costs and prospective for the capitalization of service costs. The Company's net periodic benefit cost components are disclosed in Note 3 "Employee Benefit Plans."

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

In January 2017, the FASB issued ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350)." The update requires a single-step quantitative test to measure potential impairment based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment can still be completed first for an entity to determine if a quantitative impairment test is necessary. The ASU is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company anticipates that the adoption of this standard will have no impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)," which requires lessees to record most leases on their balance sheets. Lessees initially recognize a lease liability (measured at the present value of the lease payments over the lease term) and a right-of-use ("ROU") asset (measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee's initial direct costs). Lessees can make an accounting policy election not to recognize ROU assets and lease liabilities for leases with a lease term of 12 months or less as long as the leases do not include options to purchase the underlying assets that the lessee is reasonably certain to exercise. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The ASU is effective for the Company beginning on January 1, 2019 and early adoption is permitted. The standard requires the use of a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is continuing to evaluate the impact that the adoption of this guidance will have on its financial condition, results of operations and the presentation of its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11 "Inventory (Topic 330)," which requires entities to measure inventories at the lower of cost or net realizable value ("NRV"). This simplifies the evaluation from the current method of lower of cost or market, where market is based on one of three measures (i.e. replacement cost, net realizable value, or net realizable value less a normal profit margin). The ASU does not apply to inventories measured under the last-in, first-out method or the retail inventory method, and defines NRV as the "estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation." The ASU was adopted on a prospective basis by the Company on January 1, 2017. The adoption of this ASU did not have an impact on the Company's financial condition or results of operations.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” This ASU provides a single principles-based, five-step model to be applied to all contracts with customers. The five steps are to identify the contract(s) with the customer, to identify the performance obligations in the contract, to determine the transaction price, to allocate the transaction price to the performance obligations in the contract and to recognize revenue when each performance obligation is satisfied. Revenue will be recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. During 2016, the FASB issued additional ASU’s which enhanced the originally issued guidance. These ASU’s encompassed narrow scope improvements and practical expedients along with providing further clarification on the accounting for intellectual property licenses, principal versus agent considerations and identifying performance obligations.

In 2017, the Company addressed all significant areas of impact for ASU 2014-09 and finalized the documentation of formal policies in anticipation of adopting the standard on January 1, 2018. The adoption of this ASU will not have a significant impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date beyond the additional required disclosure. The Company has identified a subset of contracts with customers where services are provided that are both uniquely beneficial and separately identifiable from product sales and thus are considered separate performance obligations under the new guidance. Each of these individual service activities has been documented in scenario development and processes have been established to recognize revenue for each unique performance obligation in accordance with the guidance, when effective.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). In 2018, the Company anticipates adopting the new revenue standard using the modified retrospective method by recognizing the cumulative effect of applying the new revenue standard as an adjustment of less than $0.5 million in the opening balance of retained earnings. The transition adjustment will primarily be related to the deferral of revenue for a subset of the Company's service contracts. In 2018, the Company will also include the disclosures

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

required by ASU 2014-09 in all reporting periods. Comparative information will not be restated and will continue to be reported under the accounting standards in effect for the period presented.

Note 2 Common Stock

Common Stock and Rights Agreement

The Company has Common Stock and also Common Share Purchase Rights that trade with the Common Stock. The Common Share Purchase Rights were issued pursuant to the shareholder rights plan discussed below.

On February 15, 2008, the Board of Directors of the Company adopted a shareholder rights plan and declared a dividend of one Common Share Purchase Right for each outstanding share of Common Stock of the Company payable to the shareholders of record on May 26, 2008. The plan was effective as of May 27, 2008. Each right entitles the registered holder to purchase from the Company one share of Common Stock at a price of $100.00 per share, subject to adjustment. Subject to certain conditions, the rights are redeemable by the Company and are exchangeable for shares of Common Stock at a favorable price. The rights have no voting power and unless the rights are redeemed, exchanged or terminated earlier, they will expire on May 26, 2018. The rights are an embedded feature of the Company’s Common Stock and not a free-standing instrument, and therefore, do not require separate accounting treatment.

On August 12, 2016, the Company announced a 2-for-1 stock split in the form of a 100% stock dividend payable on September 15, 2016 to shareholders of record at the close of business on August 31, 2016. In this report, all per share amounts and number of shares have been restated to reflect the stock split for all periods presented except for the total authorized shares which was 40 million both before and after the stock split.

Stock Options

Stock options to purchase 55,223 shares of the Company's Stock in 2017, 91,330 shares in 2016 and 95,144 shares in 2015 were not included in the computation of dilutive securities because their inclusion would have been anti-dilutive.

Note 3 Acquisitions

The total purchase consideration for the Carolina Meter assets was $6.2 million, which included $2.0 million in cash and settlement of $4.2 million of pre-existing Company receivables. The Company's preliminary allocation of the purchase price at December 31, 2017 included $0.6 million of receivables, $0.3 million of inventory, $3.3 million of intangibles and $2.0 million of goodwill. The intangible assets acquired are primarily customer relationships with an estimated average useful life of 12 years. The preliminary allocation of the purchase price to the assets acquired was based upon the estimated fair values at the date of acquisition. As of December 31, 2017, the Company had not completed its analysis for estimating the fair value of the assets acquired.

The Carolina Meter acquisition was accounted for under the purchase method, and accordingly, the results of operations were included in the Company's financial statements from the date of acquisition. The acquisition did not have a material impact on the Company's consolidated financial statements or the notes thereto.

The purchase price was approximately $23.2 million in cash, plus a small working capital adjustment. The purchase price included $5.4 million in payments that are anticipated to be made in 2018 which are recorded in payables and other accrued liabilities on the Consolidated Balance Sheets at December 31, 2017. The Company's preliminary allocation of the purchase price included approximately $0.3 million of receivables, $0.6 million of inventory, $0.2 million of property, plant and equipment, $10.9 million of intangibles and $11.8 million of goodwill. The majority of the intangible assets acquired related to

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

ultrasonic technology. The Company also assumed $0.6 million of liabilities as part of the acquisition. As of December 31, 2017, the Company had not completed its analysis for estimating the fair value of the assets and liabilities acquired.

The D-Flow acquisition was accounted for under the purchase method, and accordingly, the results of operations were included in the Company's financial statements from the date of acquisition. The acquisition did not have a material impact on the Company's consolidated condensed financial statements or the notes thereto.

The total purchase consideration for the Nice Instrumentation assets was $2.0 million, which included a $0.2 million payment after the first production run that occurred in January 2017. The Company's preliminary allocation of the purchase price at December 31, 2016 included approximately $15,000 of inventory and equipment, $0.7 million of intangibles and $1.3 million of goodwill. The intangible assets acquired are primarily customer technology with an estimated average useful life of 15 years. The preliminary allocation of the purchase price to the assets acquired was based upon the estimated fair values at the date of acquisition. In 2017, the Company completed its analysis for estimating the fair value of the assets acquired with no additional adjustments.

The Nice Instrumentation acquisition was accounted for under the purchase method, and accordingly, the results of operations were included in the Company's financial statements from the date of acquisition. The acquisition did not have a material impact on the Company's consolidated financial statements or the notes thereto.

On August 17, 2015, the Company acquired certain assets of United Utilities, Inc. of Smyrna, Tennessee, which was one of the Company's distributors serving Tennessee and Georgia.

The total purchase consideration for the United Utilities assets was $3.3 million, which included $0.4 million in cash and settlement of $2.9 million of pre-existing Company receivables. The Company's preliminary allocation of the purchase price at December 31, 2015 included $0.8 million of receivables, $0.4 million of inventory, $0.1 million of property, plant and equipment, $1.7 million of intangibles and $0.3 million of goodwill. The intangible assets acquired are primarily customer relationships with an estimated average useful life of 12 years. The preliminary allocation of the purchase price to the assets acquired was based upon the estimated fair values at the date of acquisition. In 2016, the Company completed its analysis for estimating the fair value of the assets acquired with no additional adjustments.

The United Utilities acquisition was accounted for under the purchase method, and accordingly, the results of operations were included in the Company's financial statements from the date of acquisition. The acquisition did not have a material impact on the Company's consolidated financial statements or the notes thereto.

Note 4 Short-term Debt and Credit Lines

Short-term debt at December 31, 2017 and 2016 consisted of:



	2017		2016
	(In thousands)
Notes payable to banks	$	8,300	$	8,200
Commercial paper	36,250		29,750
Total short-term debt	$	44,550	$	37,950

Included in notes payable to banks at December 31, 2017 was $4.8 million outstanding under a 4.0 million Euro-based revolving loan facility that does not expire, and which bore interest at 1.13%. Included in notes payable to banks at December 31, 2016 was $4.2 million outstanding under a 4.0 million Euro-based revolving loan facility that does not expire, and which bore interest at 1.13%.

In September 2016, the Company amended its May 2012 credit agreement with its primary lender to a three-year $120.0 million line of credit that supports commercial paper (up to $70.0 million) and includes $5.0 million of a Euro line of

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

credit. Borrowings of commercial paper bore interest at 2.10% in 2017 and 1.49% in 2016. Under the principal line of credit, the Company had $85.3 million of unused credit lines available out of the total of $88.8 million available short-term credit lines at December 31, 2017. While the facility is unsecured, there are a number of financial covenants with which the Company must comply, and the Company was in compliance as of December 31, 2017.

Note 5 Stock Compensation

As of December 31, 2017, the Company has an Omnibus Incentive Plan under which 1,400,000 shares are reserved for restricted stock and stock options grants for employees, as well as stock grants for directors. The plan was originally approved in 2011 and replaced all prior stock-based plans except for shares and options previously issued under those plans. As of December 31, 2017 and 2016, there were 629,615 shares and 741,396 shares, respectively, of the Company’s Common Stock available for grant under the 2011 Omnibus Incentive Plan. The Company recognizes the cost of stock-based awards in net earnings for all of its stock-based compensation plans on a straight-line basis over the service period of the awards. The following sections describe the three types of grants in more detail.

Stock Options

The Company estimates the fair value of its option awards using the Black-Scholes option-pricing formula, and records compensation expense for stock options ratably over the stock option grant’s vesting period. Stock option compensation expense recognized by the Company for the year ended December 31, 2017 related to stock options was $0.7 million in 2017 compared to $0.5 million in both 2016 and 2015.

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

The following table summarizes the transactions of the Company’s stock option plans for the three-year period ended December 31, 2017:



	Number of shares		Weighted-average exercise price
Options outstanding - December 31, 2014	406,640		$	20.90
Options granted	49,510		$	28.33
Options exercised	(86,538	)	$	18.98
Options forfeited	—		n/a
Options outstanding - December 31, 2015	369,612		$	22.35
Options granted	42,302		$	33.98
Options exercised	(27,656	)	$	20.59
Options forfeited	—		n/a
Options outstanding - December 31, 2016	384,258		$	23.75
Options granted	55,223		$	36.75
Options exercised	(53,198	)	$	22.83
Options forfeited	—		n/a
Options outstanding - December 31, 2017	386,283		$	25.74
Price range $ 18.08 — $ 18.30
(weighted-average contractual life of 4.0 years)	101,270		$	18.15
Price range $ 19.21 — $ 27.18
(weighted-average contractual life of 4.3 years)	140,322		$	23.54
Price range $ 28.33 — $ 38.55
(weighted-average contractual life of 8.2 years)	144,691		$	33.18
Options outstanding - December 31, 2017	386,283
Exercisable options —
December 31, 2015	210,940		$	20.48
December 31, 2016	242,522		$	21.01
December 31, 2017	239,043		$	21.59

The following assumptions were used for valuing options granted in the years ended December 31:



	2017		2016
Per share fair value of options granted during the period	$14.38		$13.58
Risk-free interest rate	2.06	%	1.42	%
Dividend yield	1.22	%	1.16	%
Volatility factor	46.6	%	48.3	%
Weighted-average expected life in years	5.3		5.3

The expected life is based on historical exercise behavior and the projected exercise of unexercised stock options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected life of the option. The expected dividend yield is based on the expected annual dividends divided by the grant date market value of the Company’s Common Stock. The expected volatility is based on the historical volatility of the Company’s Common Stock.

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

The following table summarizes the aggregate intrinsic value related to options exercised, outstanding and exercisable as of and for the years ended December 31:



	2017		2016
	(In thousands)
Exercised	$	814	$	379
Outstanding	$	7,966	$	4,288
Exercisable	$	5,921	$	3,370

As of December 31, 2017, the unrecognized compensation cost related to stock options was approximately $1.4 million, which will be recognized over a weighted average period of 1.9 years.

Director Stock Grant

Non-employee directors receive an annual award of $54,000 worth of shares of the Company’s Common Stock under the shareholder-approved 2011 Omnibus Incentive Plan. The Company values stock grants for directors on the closing price of the Company’s stock on the day the grant was awarded. The Company records compensation expense for this plan ratably over the annual service period beginning May 1. Director stock compensation expense recognized by the Company for the year ended December 31, 2017 was $0.5 million compared to $0.4 million in both 2016 and 2015. As of December 31, 2017, the unrecognized compensation cost related to the director stock award that is expected to be recognized over the remaining four months is estimated to be approximately $0.2 million.

Restricted Stock

The Company periodically issues nonvested shares of the Company's Common Stock to certain eligible employees, generally with a three-year cliff vesting period contingent on employment. The Company values restricted stock on the closing price of the Company's stock on the day the grant was awarded. The Company records compensation expense for this plan ratably over the vesting periods. Nonvested stock compensation expense recognized by the Company for the year ended December 31, 2017 was $1.1 million compared to $1.0 million in 2016 and $1.1 million in 2015.

The fair value of nonvested shares is determined based on the market price of the shares on the grant date.



	Shares		Fair value per share
Nonvested at December 31, 2014	136,912		$	23.16
Granted	38,386		$	28.33
Vested	(52,150	)	$	18.08
Forfeited	(2,900	)	$	24.44
Nonvested at December 31, 2015	120,248		$	26.99
Granted	29,268		$	33.98
Vested	(40,700	)	$	25.56
Forfeited	(3,500	)	$	29.18
Nonvested at December 31, 2016	105,316		$	29.41
Granted	50,519		$	40.69
Vested	(40,762	)	$	27.18
Forfeited	(3,600	)	$	33.37
Nonvested at December 31, 2017	111,473		$	35.21

As of December 31, 2017, there was $1.9 million of unrecognized compensation cost related to nonvested restricted stock that is expected to be recognized over a weighted average period of 1.7 years.

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

Note 6 Commitments and Contingencies

Commitments

The Company makes commitments in the normal course of business. The Company leases equipment and facilities under non-cancelable operating leases, some of which contain renewal options. Total future minimum lease payments consisted of the following at December 31, 2017:



	Total leases
	(In thousands)
2018	$	2,448
2019	1,979
2020	1,782
2021	1,570
2022	1,126
Thereafter	3,325
Total lease obligations	$	12,230

Total rental expense charged to operations under all operating leases was $3.6 million, $3.3 million and $3.2 million in 2017, 2016 and 2015, respectively.

Contingencies

In the normal course of business, the Company is named in legal proceedings. There are currently no material legal proceedings pending with respect to the Company.

The Company is subject to contingencies related to environmental laws and regulations. A future change in circumstances with respect to specific matters or with respect to sites formerly or currently owned or operated by the Company, off-site disposal locations used by the Company, and property owned by third parties that is near such sites, could result in future costs to the Company and such amounts could be material. Expenditures for compliance with environmental control provisions and regulations during 2017, 2016 and 2015 were not material.

The Company relies on single suppliers for most brass castings and certain resin and electronic subassemblies in several of its product lines. The Company believes these items would be available from other sources, but that the loss of certain suppliers would result in a higher cost of materials, delivery delays, short-term increases in inventory and higher quality control costs in the short term. The Company attempts to mitigate these risks by working closely with key suppliers, purchasing minimal amounts from alternative suppliers and by purchasing business interruption insurance where appropriate.

The Company reevaluates its exposures on a periodic basis and makes adjustments to reserves as appropriate.

Note 7 Employee Benefit Plans

The Company maintains a non-contributory defined benefit pension plan that covers substantially all U.S. employees who were employed at December 31, 2011. After that date, no further benefits are being accrued in this plan. For the frozen pension plan, benefits are based primarily on years of service and, for certain employees, levels of compensation.

The Company also maintains supplemental non-qualified plans for certain officers and other key employees, and an Employee Savings and Stock Option Plan (“ESSOP”) for the majority of the U.S. employees.

The Company also has a postretirement healthcare benefit plan that provides medical benefits for certain U.S. retirees and eligible dependents hired prior to November 1, 2004. Employees are eligible to receive postretirement healthcare benefits upon meeting certain age and service requirements. No employees hired after October 31, 2004 are eligible to receive these benefits. This plan requires employee contributions to offset benefit costs.

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

As of December 31, 2017, the Company changed the approach utilized to estimate the service and interest cost components of net periodic benefit cost for our defined benefit pension and other postretirement benefit plans. Historically, the Company estimated the service and interest cost components using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. As of December 31, 2017, the Company utilized a spot rate approach for the estimation of service and interest cost for our plans by applying specific spot rates along the yield curve to the relevant projected cash flows, to provide a better estimate of future service and interest costs. This change does not affect the measurement of total benefit obligations. The change will be accounted for as a change in estimate that is inseparable from a change in accounting principle and, accordingly, will be accounted for prospectively starting in fiscal year 2018. Service and interest costs are expected to be $76,000 and $27,000 lower in 2018 for our defined benefit pension and other postretirement benefit plans, respectively, as a result of using the spot rate approach compared to the historical approach.

Amounts included in accumulated other comprehensive loss, net of tax, at December 31, 2017 that have not yet been recognized in net periodic benefit cost are as follows:



	Pension plans		Other postretirement benefits
	(In thousands)
Prior service cost	$	—	$	(8	)
Net actuarial loss	$	11,517	$	(428	)

Amounts included in accumulated other comprehensive loss, net of tax, at December 31, 2017 expected to be recognized in net periodic benefit cost during the fiscal year ending December 31, 2018 are as follows:



	Pension plans		Other postretirement benefits
	(In thousands)
Prior service credit	$	—	$	(10	)
Net actuarial loss	$	277	$	(9	)

In 2017, the Company made the decision to terminate its pension plan and has applied for regulatory approvals to do so. Because the termination is contingent on receiving these regulatory approvals and the Company can still rescind its decision, no accounting recognition will be made for this transaction until the actual termination takes place.

Qualified Pension Plan

The Company maintains a non-contributory defined benefit pension plan (sometimes referred to as the “qualified pension plan”) for certain employees. On December 31, 2010, the Company froze the qualified pension plan for its non-union participants and formed a new defined contribution feature within the ESSOP plan in which each employee received a similar benefit. On December 31, 2011, the Company froze the qualified pension plan for its union participants and included them in the same defined contribution feature within the ESSOP. After December 31, 2011, employees receive no future benefits under the qualified pension benefit plan as benefits were frozen and the employees now receive a defined contribution in its place. Employees will continue to earn returns on their frozen balances.

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

The following table sets forth the components of net periodic pension cost for the years ended December 31, 2017, 2016 and 2015 based on a December 31 measurement date:



	2017			2016			2015
	(In thousands)
Service cost - benefits earned during the year	$	2		$	3		$	4
Interest cost on projected benefit obligations	1,228			1,711			1,769
Expected return on plan assets	(1,596		)	(2,199		)	(2,151		)
Amortization of net loss	525			575			656
Settlement expense	641			1,510			762
Net periodic pension cost	$	800		$	1,600		$	1,040

Actuarial assumptions used in the determination of the net periodic pension cost are:



	2017		2016		2015
Discount rate	3.90	%	4.14	%	3.81	%
Expected long-term return on plan assets	4.00	%	5.25	%	5.00	%
Rate of compensation increase	n/a		n/a		n/a

The Company's discount rate assumptions for the qualified pension plan are based on the average yield of a hypothetical high quality bond portfolio with maturities that approximately match the estimated cash flow needs of the plan. The assumptions for expected long-term rates of return on assets are based on historical experience and estimated future investment returns, taking into consideration anticipated asset allocations, investment strategies and the views of various investment professionals. The use of these assumptions can cause volatility if actual results differ from expected results.

The following table provides a reconciliation of benefit obligations, plan assets and funded status based on a December 31 measurement date:



	2017			2016
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of plan year	$	42,030		$	45,471
Service cost	2			3
Interest cost	1,228			1,711
Actuarial loss	2,940			537
Benefits paid	(3,302		)	(5,692		)
Projected benefit obligation at measurement date	$	42,898		$	42,030

Change in plan assets:
Fair value of plan assets at beginning of plan year	$	42,061		$	43,603
Actual return on plan assets	1,933			3,150
Company contribution	825			1,000
Benefits paid	(3,302		)	(5,692		)
Fair value of plan assets at measurement date	$	41,517		$	42,061

Funded status of the plan:
Benefit obligation in excess of plan assets	(1,381		)	—
Benefit plan assets in excess of benefit obligation	—			31
(Pension liability) prepaid pension asset	$	(1,381	)	$	31

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015

The actuarial assumption used in the determination of the benefit obligation of the above data is:



	2017		2016
Discount rate	2.00	%	3.94	%

The fair value of the qualified pension plan assets was $41.5 million at December 31, 2017 and $42.1 million at December 31, 2016. The variation in the fair value of the assets between years was due to the change in the market value of the underlying investments and benefits paid.

The Company intends to terminate the pension plan in 2018 subject to regulatory approval. Until regulatory approval is obtained, no accounting recognition will be made. However, given the Company's plan to terminate, the estimated benefit payments for lump sums expected to be paid out to participants and the amount expected to be paid for annuity contracts in anticipation of terminating the plan in 2018 totals $43.3 million. The underlying plan benefits provided to participants in future years is expected to be as follows: 2018 - $17.8 million, 2019 - $2.2 million, 2020 - $2.2 million, 2021 - $2.1 million, 2022 - $2.1 million and 2023 - 2027 - $9.0 million. A voluntary contribution of $0.8 million was made in September 2017 related to the 2016 plan year. As of the most recent actuarial measurement date, the Company is not required to make a minimum contribution for the 2018 calendar year.

Historically, the Company employed a total return on investment approach whereby a mix of equities and fixed income investments were used to maximize the long-term return of plan assets for a prudent level of risk. Because of volatility in market returns and the plan’s current funding status, the decision was made in 2014 to move towards a liability driven investing strategy whereby the assets are primarily fixed income investments. The fixed income investments that were chosen under this strategy, while not precisely the same, are meant to parallel the investments selected in determining the discount rate used to calculate the Company’s pension liability. In November 2016, the Company further modified the investment policy to attain a portfolio that consists of intermediate and short-duration investment grade bonds along with a mid-duration long credit fund. The objective of this strategy is to maintain the funding status of the plan by eliminating equity exposure and minimizing interest rate risk. The remaining equity securities at year-end were diversified across various investment categories. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.

Accounting Standards Update 2013-09 “Fair Value Measurement (Topic 820),” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels: Level 1 inputs consist of unadjusted quoted prices in active markets for identical assets and have the highest priority. Level 2 inputs consist of inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for determining the fair value of assets or liabilities that reflect assumptions that market participants would use in pricing assets or liabilities. The plan uses appropriate valuation techniques based on the available inputs to measure the fair value of its investments.

The fair value of the Company's qualified pension plan assets by category as of and for the years ended December 31 are as follows:



	2017
	Market value		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
Fixed income funds (b)	$	40,776	—		$	40,776	—
Cash/cash equivalents (c)	741		741		—		—
Total	$	41,517	$	741	$	40,776	$	—

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2017, 2016 and 2015



	2016
	Market value		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
Equity securities (a)	$	4,045	$	—	$	4,045	$	—
Fixed income funds (b)	37,527		—		37,527		—
Cash/cash equivalents (c)	489		489		—		—
Total	$	42,061	$	489	$	41,572	$	—


(a)	The Equity funds in aggregate are well diversified by market capitalization, investment style and geography. The funds seek to provide investment results approximating the aggregate price and dividend performance of securities included in the S&P 500 Index, Russell 2000 Index and MSCI All Country World ex-US Index.


(b)	The Fixed Income funds consist of bonds. In aggregate, the funds seek to provide investment results approximating the return of the Plan’s obligations. The funds consist of long credit bonds, intermediate credit bonds, short duration government credit bonds and bank loans.


(c)	This category comprises the cash held to pay beneficiaries. The fair value of cash equals its book value.

The pension plan has a separately determined accumulated benefit obligation that is the actuarial present value of benefits based upon service rendered and current and past compensation levels. Prior to December 31, 2012, this differed from the projected benefit obligation in that it included no assumption about future compensation levels. The accumulated benefit obligation was $42.9 million at December 31, 2017 and $42.0 million at December 31, 2016.

Supplemental Non-qualified Unfunded Plans

The Company also maintains supplemental non-qualified unfunded plans for certain officers and other key employees. Expense for these plans was $0.2 million for the year ended 2017, $0.3 million for the year ended 2016, and $0.2 million for the year ended 2015. The amount accrued was $2.1 million and $1.9 million as of December 31, 2017 and 2016, respectively. Amounts were determined based on similar assumptions as the qualified pension plan as of the December 31 measurement date for 2017 and 2016.



	2017			2016
	(In thousands)
Benefit obligation at beginning of year	$	6,131		$	6,100
Service cost	121			137
Interest cost	195			257
Actuarial gain	(180		)	(249		)
Plan participants' contributions	564			604
Benefits paid	(758		)	(718		)
Benefit obligation and funded status at end of year	$	6,073		$	6,131



	2017			2016			2015
	(In thousands)
Current:
Federal	$	20,553		$	14,435		$	15,324
State	2,933			1,275			2,227
Foreign	876			1,129			686
Deferred:
Federal	(3,051		)	922			(2,568		)
State	(915		)	151			(353		)
Foreign	(134		)	(363		)	(102		)
Total	$	20,262		$	17,549		$	15,214



	2017			2016			2015
	(In thousands)
Provision at statutory rate	$	19,192		$	17,445		$	14,403
State income taxes, net of federal tax benefit	1,292			923			1,242
Valuation allowance	564			—			—
Foreign - tax rate differential and other	29			(87		)	(13		)
Domestic production activities deduction	(721		)	(560		)	(521		)
Federal and state credits	(542		)	—			—
Other	448			(172		)	103
Actual provision	$	20,262		$	17,549		$	15,214



	2017			2016
	(In thousands)
Deferred tax assets:
Reserve for receivables and inventories	$	2,405		$	2,931
Accrued compensation	861			1,131
Payables	886			1,107
Non-pension postretirement benefits	1,561			2,344
Net operating loss and credit carryforwards	364			968
Accrued pension benefits	1,071			413
Accrued employee benefits	3,219			4,103
Deferred revenue	1,504			—
Other	450			487
Total gross deferred tax assets	12,321			13,484
Less: valuation allowance	(373		)	—
Total net deferred tax assets	11,948			13,484

Deferred tax liabilities:
Depreciation	3,778			5,126
Amortization	8,266			8,992
Prepaids	482			567
Total deferred tax liabilities	12,526			14,685
Net deferred tax liabilities	$	(578	)	$	(1,201	)



	2017		2016		2015
	(In thousands)
Revenues:
United States	$	355,768	$	347,853	$	322,535
Foreign:
Asia	9,133		6,539		8,299
Canada	10,407		12,587		9,095
Europe	15,718		15,299		17,036
Mexico	3,601		3,460		8,889
Middle East	4,904		5,520		9,672
Other	2,909		2,503		2,172
Total	$	402,440	$	393,761	$	377,698



	Quarter ended
	March 31		June 30		September 30		December 31
	(In thousands except per share data)
2017
Net sales	$	101,606	$	104,176	$	100,008	$	96,650
Gross margin	$	38,650	$	41,054	$	37,039	$	39,003
Net earnings	$	8,749	$	10,614	$	7,975	$	7,233
Earnings per share:
Basic	$	0.30	$	0.37	$	0.28	$	0.25
Diluted	$	0.30	$	0.36	$	0.27	$	0.25
Dividends declared	$	0.115	$	0.115	$	0.130	$	0.130
Stock price:
High	$	39.85	$	41.58	$	49.45	$	52.10
Low	$	34.40	$	35.15	$	39.10	$	42.00
Quarter-end close	$	36.75	$	39.85	$	49.00	$	47.80

2016
Net sales	$	100,570	$	103,820	$	96,273	$	93,098
Gross margin	$	39,011	$	39,396	$	38,647	$	33,522
Net earnings	$	7,990	$	9,400	$	8,792	$	6,113
Earnings per share:
Basic	$	0.28	$	0.33	$	0.30	$	0.21
Diluted	$	0.28	$	0.32	$	0.30	$	0.21
Dividends declared	$	0.100	$	0.100	$	0.115	$	0.115
Stock price:
High	$	34.74	$	39.36	$	37.80	$	39.15
Low	$	26.40	$	31.72	$	31.90	$	29.30
Quarter-end close	$	33.26	$	36.52	$	33.51	$	36.95


2.	Financial Statement Schedules. Financial statement schedules are omitted because the information required in these schedules is included in the Notes to Consolidated Financial Statements.


3.	Exhibits. The exhibits listed in the following Exhibit Index are filed as part of this 2017 Annual Report on Form 10-K that is incorporated herein by reference.



EXHIBIT NO.		EXHIBIT DESCRIPTION

(3)		Restated Articles of Incorporation (as in effect as of August 8, 2008).

		[Incorporated by reference to Exhibit (3.2) to Badger Meter, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2008 (Commission File No. 001-06706)].

(3.1)		Restated By-Laws (as amended and restated as of February 10, 2017).

		[Incorporated by reference from Exhibit (3.1) to Badger Meter, Inc.’s Current Report on Form 8-K filed on February 10, 2017 (Commission File No. 001-06706).]

(4)		Rights Agreement, dated February 15, 2008, between Badger Meter, Inc. and American Stock Transfer & Trust Company.

		[Incorporated by reference to Exhibit (4.1) to Badger Meter, Inc.’s Current Report on Form 8-K, dated February 22, 2008 (Commission File No. 001-06706)].

(4.1)		Loan Agreement dated May 23, 2012 between Badger Meter, Inc. and BMO Harris Bank relating to Badger Meter, Inc.'s revolving credit agreement.

		[Incorporated by reference from Exhibit (4.1) to Badger Meter, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2012 (Commission File No. 001-06706)].

(4.2)		First Amendment to Credit Agreement dated May 21, 2013, related to the Loan Agreement dated May 23, 2012 between Badger Meter, Inc. and BMO Harris Bank NA for Badger Meter, Inc.'s credit agreement.

		[Incorporated by reference from Exhibit (4.1) to Badger Meter, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2013 (Commission File No. 001-06706)].

(4.3)		Second Amendment to Credit Agreement dated May 21, 2014, related to the Loan Agreement dated May 23, 2012 between Badger Meter, Inc. and BMO Harris Bank NA for Badger Meter, Inc.'s credit agreement.

		[Incorporated by reference from Exhibit (4.1) to Badger Meter, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2014 (Commission File No. 001-06706)].

(4.4)		Third Amendment to Credit Agreement dated September 30, 2016, related to the Loan Agreement dated May 23, 2012 between Badger Meter, Inc. and BMO Harris Bank NA for Badger Meter, Inc.'s credit agreement.

		[Incorporated by reference from Exhibit (4.1) to Badger Meter, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2016 (Commission File No. 001-06706)].

(4.5)		Certificate of Adjustment relating to the rights agreement, dated as of February 15, 2008, between Badger Meter, Inc. and the American Stock Transfer & Trust Company.

		[Incorporated by reference from Exhibit (4.1) to Badger Meter, Inc.’s Current Report on Form 8-K filed on September 21, 2016 (Commission File No. 001-06706).]

(10.0)*		Badger Meter, Inc. Employee Savings and Stock Ownership Plan.

		[Incorporated by reference from Exhibit (4.1) to Badger Meter, Inc.’s Form S-8 Registration Statement (Registration No. 33-62241)].

(10.3)*		Badger Meter, Inc. 2003 Stock Option Plan.

		[Incorporated by reference from Exhibit (4.1) to Badger Meter, Inc.’s Form S-8 Registration Statement (Registration No. 333-107850)].

(10.4)*		Form of the Key Executive Employment and Severance Agreements between Badger Meter, Inc. and the applicable executive officers.

		[Incorporated by reference from Exhibit (10.12) to Badger Meter, Inc.’s Annual Report on Form 10-K for the period ended December 31, 2008 (Commission File No. 001-06706)].

(10.5)*		Amended and Restated Badger Meter, Inc. Executive Supplemental Plan.

		[Incorporated by reference from Exhibit (10.13) to Badger Meter, Inc.’s Annual Report on Form 10-K for the period ended December 31, 2008 (Commission File No. 001-06706)].



EXHIBIT NO.		EXHIBIT DESCRIPTION

(10.6)*		Amended and Restated Badger Meter, Inc. Deferred Compensation Plan.

		[Incorporated by reference from Exhibit (10.14) to Badger Meter, Inc.’s Annual Report on Form 10-K for the period ended December 31, 2008 (Commission File No. 001-06706)].

(10.7)*		Amended and Restated Deferred Compensation Plan for Certain Directors.

		[Incorporated by reference from Exhibit (10.15) to Badger Meter, Inc.’s Annual Report on Form 10-K for the period ended December 31, 2008 (Commission File No. 001-06706)].

(10.8)*		Amended and Restated Executive Supplemental Plan II.

		[Incorporated by reference from Exhibit (10.16) to Badger Meter, Inc.’s Annual Report on Form 10-K for the period ended December 31, 2008 (Commission File No. 001-06706)].

(10.9)*		Badger Meter, Inc. 2011 Omnibus Incentive Plan.

		[Incorporated by reference from Exhibit (4.1) to Badger Meter, Inc.’s Form S-8 Registration Statement (Registration No. 333-173966)].

(10.10)*		Form of Nonqualified Stock Option Agreement under Badger Meter, Inc. 2011 Omnibus Incentive Plan.

		[Incorporated by reference from Badger Meter, Inc.’s Form 8-K dated April 29, 2011 (Commission No. 001-06760)].

(10.11)*		Form of Restricted Stock Award Agreement under Badger Meter, Inc. 2011 Omnibus Incentive Plan.

		[Incorporated by reference from Badger Meter, Inc.’s Form 8-K dated April 29, 2011 (Commission No. 001-06760)].

(21)		Subsidiaries of the Registrant.

(23)		Consent of Ernst & Young LLP.

(31.1)		Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(31.2)		Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32)		Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(99)		Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 2018. To be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Registrant’s fiscal year. With the exception of the information incorporated by reference into Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K, the definitive Proxy Statement is not deemed filed as part of this report.

(101)		The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Shareholders' Equity, (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and (vii) document and entity information.



BADGER METER, INC.

By:		/s/ Richard A. Meeusen
		Richard A. Meeusen
		Chairman, President and Chief Executive Officer



Name		Title

/s/ Richard A. Meeusen		Chairman, President and Chief Executive Officer and Director (Principal executive officer)
Richard A. Meeusen

/s/ Richard E. Johnson		Senior Vice President — Finance, Chief Financial Officer and Treasurer (Principal financial officer)
Richard E. Johnson

/s/ Beverly L. P. Smiley		Vice President — Controller (Principal accounting officer)
Beverly L. P. Smiley		Vice President — Controller (Principal accounting officer)

/s/ Todd A. Adams		Director
Todd A. Adams		Director

/s/ Thomas J. Fischer		Director
Thomas J. Fischer		Director

/s/ Gale E. Klappa		Director
Gale E. Klappa		Director

/s/ Gail A. Lione		Director
Gail A. Lione		Director

/s/ Andrew J. Policano		Director
Andrew J. Policano		Director

/s/ James F. Stern		Director
James F. Stern		Director

/s/ Glen E. Tellock		Director
Glen E. Tellock		Director

/s/ Todd J. Teske		Director
Todd J. Teske		Director