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 will accrue in this plan. The Company also maintains supplemental non-qualified pension plans for certain officers and other key employees, and an ESSOP. For the frozen pension, benefits are based primarily on years of service and, for certain plans, levels of compensation.

The Company also has certain postretirement healthcare benefit plans that provide medical benefits for certain U.S. retirees and eligible dependents. Employees are eligible to receive postretirement healthcare benefits upon meeting certain age and service requirements. These plans require employee contributions to offset benefit costs.

Amounts included in accumulated other comprehensive loss, net of tax, at December 31, 2012 that have not yet been recognized in net periodic benefit cost are as follows:



	Pension plans		Other postretirement benefits
	(In thousands)
Prior service cost	$	—	$	—
Net actuarial loss	$	14,848	$	—

Amounts included in accumulated other comprehensive loss, net of tax, at December 31, 2012 expected to be recognized in net periodic benefit cost during the fiscal year ending December 31, 2013 are as follows:



	Pension plans		Other postretirement benefits
	(In thousands)
Prior service credit	$	—	$	99
Net actuarial loss	$	530	$	7

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.

The following table sets forth the components of net periodic pension cost for the years ended December 31, 2012, 2011 and 2010 based on a December 31 measurement date:



	2012			2011			2010
	(In thousands)
Service cost — benefits earned during the year	$	6		$	464		$	1,857
Interest cost on projected benefit obligations	2,205			2,415			2,473
Expected return on plan assets	(3,190		)	(3,767		)	(3,689		)
Amortization of prior service cost	—			196			66
Amortization of net loss	645			1,698			1,660
Curtailment expense (income)	—			984			(36		)
Settlement expense	1,075			—			—
Net periodic pension cost	$	741		$	1,990		$	2,331

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



	2012		2011		2010
Discount rate	4.69	%	5.05	%	5.55	%
Expected long-term return on plan assets	7.00	%	7.75	%	8.00	%
Rate of compensation increase	n/a		5.0	%	5.0	%

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:



	2012			2011
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of plan year	$	49,009		$	50,416
Service cost	6			464
Interest cost	2,205			2,415
Actuarial loss	3,565			1,021
Benefits paid	(4,085		)	(5,307		)
Projected benefit obligation at measurement date	$	50,700		$	49,009

Change in plan assets:
Fair value of plan assets at beginning of plan year	$	43,852		$	49,537
Actual return on plan assets	5,683			(378		)
Company contributions	1,097			—
Benefits paid	(4,085		)	(5,307		)
Fair value of plan assets at measurement date	$	46,547		$	43,852

Funded status of the plan:
Benefit obligation in excess of plan assets	(4,153		)	(5,157		)
Accrued pension liability	$	(4,153	)	$	(5,157	)

Actuarial assumptions used in the determination of the benefit obligation of the above data are:



	2012		2011
Discount rate	3.68	%	4.69	%
Rate of compensation increase	n/a		n/a

The fair value of the qualified pension plan assets was $46.5 million at December 31, 2012 and $43.9 million at December 31, 2011. The variation in the fair value of the assets between years was due to the change in the market value of the underlying investments, Company contributions and benefits paid. Estimated future benefit payments expected to be paid in each of the next five years beginning with 2013 are $5.0 million, $4.4 million, $4.1 million, $3.8 million and $3.9 million with an aggregate of $16.7 million for the five years thereafter. As of the most recent actuarial measurement date, the Company is not required to make a minimum contribution for the 2013 calendar year.

The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of short- and long-term plan liabilities, plan funded status and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across various stocks, as well as growth, value, and small and large capitalizations. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.

The expected role of plan equity investments is to maximize the long-term real growth of fund assets, while the role of fixed income investments is to generate current income, provide for more stable periodic returns and provide some protection against a prolonged decline in the market value of fund equity investments. The current target allocations for plan assets are 50%-70% for equity securities, 20%-50% for fixed income securities, and 0%-15% for cash and alternative investments. Equity securities include U.S. and international equities, while fixed income securities include long-duration and high-yield bond funds.

Accounting Standards Codification 820, “Fair Value Measurements and Disclosures,” 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 at December 31, 2012 are as follows:



	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)	$	26,067	$	26,067	$	—	$	—
Fixed income funds(b)	20,022		20,022		—		—
Cash/cash equivalents(c)	458		458		—		—
Total	$	46,547	$	46,547	$	—	$	—

(a)

This category includes investments in equity securities of large, small and medium sized companies, equity securities of foreign companies and equity funds, or 53.3%, 11.6%, 12.8%, 17.2% and 5.1% of total equity securities, respectively. Of the total equity amount, 11.6% was invested in common stocks in a wide variety of industries, 86.5% was invested in mutual funds and 1.9% was invested in exchange traded funds. The funds are valued using the closing market prices at December 31, 2012.


(b)	This category includes investments in investment-grade fixed-income instruments and corporate bonds. The funds are valued using the closing market prices at December 31, 2012.

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

The fair value of the Company’s qualified pension plan assets by category at December 31, 2011 are as follows:



	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)	$	25,844	$	25,844	$	—	$	—
Fixed income funds(b)	17,439		17,439		—		—
Cash/cash equivalents(c)	569		569		—		—
Total	$	43,852	$	43,852	$	—	$	—

(a)

This category includes investments in equity securities of large, small and medium sized companies, equity securities of foreign companies and other, or 54.5%, 15.4%, 12.0%, 14.4% and 3.7% of total assets, respectively. Of the total equity amount, 15.5% was invested in common stocks in a wide variety of industries, 82.8% was invested in mutual funds and 1.7% was invested in exchange traded funds. The funds are valued using the closing market prices at December 31, 2011.


(b)	This category includes investments in investment-grade fixed-income instruments and corporate bonds. The funds are valued using the closing market prices at December 31, 2011.


(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 on 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 $50.7 million at December 31, 2012 and $49.0 million at December 31, 2011.

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 $0.3 million for each of the years ended 2012, 2011 and 2010, and the amount accrued was $1.6 million and $1.7 million as of December 31, 2012 and 2011, respectively. Amounts were determined based on similar assumptions as the qualified pension plan as of the December 31 measurement date for 2012 and 2011.

Other Postretirement Benefits

The Company has certain postretirement plans that provide medical benefits for certain U.S. retirees and eligible dependents. The following table sets forth the components of net periodic postretirement benefit cost for the years ended December 31, 2012, 2011 and 2010:



	2012		2011		2010
	(In thousands)
Service cost, benefits attributed for service of active employees for the period	$	143	$	148	$	139
Interest cost on the accumulated postretirement benefit obligation	295		313		337
Amortization of prior service cost	161		161		161
Net periodic postretirement benefit cost	$	599	$	622	$	637

The discount rate used to measure the net periodic postretirement benefit cost was 4.79% for 2012, 5.20% for 2011 and 5.65% for 2010. It is the Company's policy to fund healthcare benefits on a cash basis. Because the plans are unfunded, there are no plan assets. The following table provides a reconciliation of the projected benefit obligation at the Company's December 31 measurement date:



	2012			2011
	(In thousands)
Benefit obligation at beginning of year	$	6,542		$	6,459
Service cost	143			148
Interest cost	295			313
Actuarial (gain) loss	422			(1		)
Plan participants contributions	673			718
Benefits paid	(1,135		)	(1,095		)
Benefit obligation and funded status at end of year	$	6,940		$	6,542

The amounts recognized in the Consolidated Balance Sheets at December 31 are:



	2012		2011
	(In thousands)
Accrued compensation and employee benefits	$	451	$	439
Accrued non-pension postretirement benefits	6,489		6,103
Amounts recognized at December 31	$	6,940	$	6,542

The discount rate used to measure the accumulated postretirement benefit obligation was 3.92% for 2012 and 4.79% for 2011. The Company's discount rate assumptions for its postretirement benefit 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. Because the plan requires the Company to establish fixed Company contribution amounts for retiree healthcare benefits, future healthcare cost trends do not generally impact the Company's accruals or provisions.

Estimated future benefit payments of postretirement benefits, assuming increased cost sharing, expected to be paid in each of the next five years beginning with 2012 are $0.5 million in each year with an aggregate of $2.4 million for the five years thereafter. These amounts can vary significantly from year to year because the cost sharing estimates can vary from actual expenses as the Company is self-insured.

Badger Meter Employee Savings and Stock Ownership Plan

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, 2012 and 2011. The terms of the loan call for equal payments of principal with the final payment due on December 31, 2020. At December 31, 2012, $1.2 million of the loan balance remained.

The Company made principal payments of $256,000, $51,000 and $49,000 in 2012, 2011 and 2010, respectively. The associated commitments released shares of Common Stock (16,151 shares in 2012 for the 2011 obligation, 10,735 shares in 2011 for the 2010 obligation, and 12,309 shares in 2010 for the 2009 obligation) for allocation to participants in the ESSOP. The ESSOP held unreleased shares of 93,357, 111,145 and 121,880 as of December 31, 2012, 2011 and 2010, respectively, with a fair value of $4.4 million, $3.3 million and $5.4 million as of December 31, 2012, 2011 and 2010, respectively. Unreleased shares are not considered outstanding for purposes of computing earnings per share.

The ESSOP includes a voluntary 401(k) savings plan that allows certain employees to defer up to 20% of their income on a pretax basis subject to limits on maximum amounts. The Company matches 25% of each employee’s contribution, with the match percentage applying to a maximum of 7% of each employee's salary. The match is paid using the Company's Common Stock released through the ESSOP loan payments. For ESSOP shares purchased prior to 1993, compensation expense is recognized based on the original purchase price of the shares released and dividends on unreleased shares are charged to compensation expense. For shares purchased in or after 1993, expense is based on the market value of the shares on the date released and dividends on unreleased shares are charged to compensation expense. Compensation expense of $0.3 million was recognized for the match for 2012, $0.3 million was recognized for 2011 and $0.2 million for 2010.

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. For 2012, compensation expense under the defined contribution feature totaled $1.8 million.