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.

Amounts included in accumulated other comprehensive loss, net of tax, at December 31, 2016 that have not yet been recognized in net periodic benefit cost are as follows:



	Pension plans		Other postretirement benefits
	(In thousands)
Prior service cost	$	—	$	(23	)
Net actuarial loss	$	10,398	$	(339	)

Amounts included in accumulated other comprehensive loss, net of tax, at December 31, 2016 expected to be recognized in net periodic benefit cost during the fiscal year ending December 31, 2017 are as follows:



	Pension plans		Other postretirement benefits
	(In thousands)
Prior service credit	$	—	$	(16	)
Net actuarial loss	$	350	$	—

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, 2016, 2015 and 2014 based on a December 31 measurement date:



	2016			2015			2014
	(In thousands)
Service cost — benefits earned during the year	$	3		$	4		$	4
Interest cost on projected benefit obligations	1,711			1,769			1,888
Expected return on plan assets	(2,199		)	(2,151		)	(2,806		)
Amortization of net loss	575			656			606
Settlement expense	1,510			762			858
Net periodic pension cost	$	1,600		$	1,040		$	550

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



	2016		2015		2014
Discount rate	4.14	%	3.81	%	4.47	%
Expected long-term return on plan assets	5.25	%	5.00	%	6.50	%
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:



	2016			2015
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of plan year	$	45,471		$	48,200
Service cost	3			4
Interest cost	1,711			1,769
Actuarial loss/(gain)	537			(906		)
Benefits paid	(5,692		)	(3,596		)
Projected benefit obligation at measurement date	$	42,030		$	45,471

Change in plan assets:
Fair value of plan assets at beginning of plan year	$	43,603		$	48,656
Actual return on plan assets	3,150			(1,457		)
Company contribution	1,000			—
Benefits paid	(5,692		)	(3,596		)
Fair value of plan assets at measurement date	$	42,061		$	43,603

Funded status of the plan:
Benefit plan assets in excess of benefit obligation	31			—
Benefit obligation in excess of plan assets	—			(1,868		)
Prepaid pension asset (accrued pension liability)	$	31		$	(1,868	)

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



	2016		2015
Discount rate	3.94	%	4.14	%

The fair value of the qualified pension plan assets was $42.1 million at December 31, 2016 and $43.6 million at December 31, 2015. 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. Estimated future benefit payments expected to be paid in each of the next five years beginning with 2017 are $4.7 million, $4.2 million, $3.7 million, $4.0 million and $3.1 million, with an aggregate of $13.7 million for the five years thereafter. A voluntary contribution of $1.0 million was made in September 2016 related to the 2015 plan year. As of the most recent actuarial measurement date, the Company is not required to make a minimum contribution for the 2017 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. At year end, the Company was in the process of implementing this investment policy to meet its target portfolio. 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 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 as of and for the years ended December 31:



	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	$	—



	2015
	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)	$	5,614	$	—	$	5,614	$	—
Fixed income funds (b)	36,954		—		36,954		—
Cash/cash equivalents (c)	1,035		1,035		—		—
Total	$	43,603	$	1,035	$	42,568	$	—


(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 $42.0 million at December 31, 2016 and $45.5 million at December 31, 2015.

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 the year ended 2016, $0.2 million for the year ended 2015, and $0.3 million for the year ended 2014. The amount accrued was $1.9 million and $1.6 million as of December 31, 2016 and 2015, respectively. Amounts were determined based on similar assumptions as the qualified pension plan as of the December 31 measurement date for 2016 and 2015.

Other Postretirement Benefits

The Company has a postretirement plan that provides medical benefits for certain U.S. retirees and eligible dependents hired prior to November 1, 2004. The following table sets forth the components of net periodic postretirement benefit cost for the years ended December 31, 2016, 2015 and 2014:



	2016			2015		2014
	(In thousands)
Service cost, benefits attributed for service of active employees for the period	$	137		$	147	$	130
Interest cost on the accumulated postretirement benefit obligation	257			251		269
Amortization of prior service (credit) cost	(25		)	53		161
Net periodic postretirement benefit cost	$	369		$	451	$	560

The discount rate used to measure the net periodic postretirement benefit cost was 4.39% for 2016, 4.01% for 2015 and 4.73% for 2014. It is the Company's policy to fund healthcare benefits on a cash basis. Because the plan is 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:



	2016			2015
	(In thousands)
Benefit obligation at beginning of year	$	6,100		$	6,767
Service cost	137			147
Interest cost	257			251
Actuarial gain	(249		)	(812		)
Plan participants' contributions	604			628
Benefits paid	(718		)	(881		)
Benefit obligation and funded status at end of year	$	6,131		$	6,100

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



	2016		2015
	(In thousands)
Accrued compensation and employee benefits	$	378	$	391
Accrued non-pension postretirement benefits	5,753		5,709
Amounts recognized at December 31	$	6,131	$	6,100

The discount rate used to measure the accumulated postretirement benefit obligation was 4.15% for 2016 and 4.39% for 2015. 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 2017 are $0.4 million through 2021, with an aggregate of $2.2 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 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, 2016 and 2015. The terms of the loan call for equal payments of principal with the final payment due on December 31, 2020, and prepayments are allowed under the plan terms. At December 31, 2016, $0.6 million of the loan balance remained.

The Company made principal payments of $154,000 in each of 2016, 2015 and 2014. The associated commitments released shares of Common Stock (11,583 shares in 2016 for the 2015 obligation, 10,157 shares in 2015 for the 2014 obligation, and 11,077 shares in 2014 for the 2013 obligation) for allocation to participants in the ESSOP. The ESSOP held unreleased shares of 101,244, 124,410 and 144,724 as of December 31, 2016, 2015 and 2014, respectively, with a fair value of $3.7 million, $3.6 million and $4.3 million as of December 31, 2016, 2015 and 2014, 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 $0.4 million was recognized for the match for 2016 and 2015 compared to $0.3 million in 2014.

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 2016, compensation expense under the defined contribution feature totaled $2.8 million compared to $2.3 million in 2015.