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

Current Business Trends – COVID-19

In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries. On March 11, 2020, the WHO characterized COVID-19 as a pandemic.

During the second quarter of 2020, the Company implemented remote work arrangements for non-production personnel, adopted robust safety, social distancing and temperature screening protocols throughout its manufacturing sites and enacted other measures to be able to deliver products to meet customer orders on a timely basis. While the pandemic has had varying levels of impact to demand trends, to date it has not materially affected our ability to maintain business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. The Company has enacted various return-to-work protocols for non-production personnel.

During April 2020 and through the first part of May 2020, the majority of the United States, the Company’s primary commercial market, was subject to various levels of government shelter-in-place or other lockdown orders. During this time, we experienced some customer order delays and intermittent manufacturing interruptions. As the lock-downs were lifted and customers adapted to remote work and field safety protocols, order demand gradually improved. Our operations returned to a more normalized level of output as the lockdowns lifted at the end of the second quarter and into the third quarter of 2020. Municipal water order trends have been more resilient in their sequential performance while flow instrumentation orders showed less resiliency and will likely be negatively affected for a longer period, albeit flow instrumentation orders were improved slightly over the second quarter of 2020.

As a result of COVID-19, the Company implemented certain cost contingency actions, including travel restrictions, a hiring freeze, reductions in discretionary spending, short-term reduced work hour furloughs globally and executive salary reductions. The temporary actions generally lasted nine weeks, ending in mid-June 2020. The Company continues to manage hiring and discretionary spending actions in light of continuing market uncertainty. Our Board of Directors and Company management continues to monitor the rapidly changing implications of COVID-19 and is prepared to take additional cost actions if warranted.

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In accordance with the CARES Act the Company delayed federal tax installment payments to the third quarter of 2020. The CARES Act is not expected to have a material impact on the Company’s consolidated financial statements.

It remains difficult to estimate the severity and duration of the impact of the COVID-19 pandemic on the Company’s business, financial position or results of operations. The magnitude of the impact will be determined by the duration and span of the pandemic, operational disruptions including those resulting from government actions, delivery interruptions due to component supply availability or logistical challenges, the timeline of an effective and broadly available vaccine and the overall impact on the economy. The Company has contingency plans in place to adequately respond to a wide range of potential economic scenarios and our Board of Directors continues to monitor and evaluate the ongoing situation.

Long Term Business Trends

Across the globe, increasing regulations and a focus on sustainability are driving companies and utilities to better manage critical resources like water, 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 including those associated with process and discharge water quality monitoring. The Company provides flow measurement technology to measure water, oil, chemicals and other fluids, gases and steams. This technology is critical to provide baseline usage data and to quantify reductions as customers attempt to reduce consumption. For example, once water usage metrics are better understood, a strategy for water-use reduction can be developed with specific water-reduction initiatives targeted to those areas where it 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.

Increasingly, customers in the utility water market are interested in more frequent and diverse data collection and the use of water metering and quality analytics to evaluate water distribution activity. Specifically, AMI technology enables water utilities to capture readings from each meter at more frequent and variable intervals. There are more than 50,000 water utilities in the United States and the Company estimates that approximately 65% of them have converted to a radio solution. The Company believes it is well positioned to meet this continuing conversion trend with its comprehensive radio and software solutions.

In addition, certain water utilities are converting from mechanical to static meters. Ultrasonic water metering maintains a high level of measurement accuracy over the life of the meter, reducing a utility’s non-revenue water. The Company has over a decade of proven reliability in the market with its ultrasonic meters and has recently launched its next generation of ultrasonic metering with its D-Flow technology, which the Company believes increases its competitive differentiation. While the introduction of ultrasonic technology into North America may increase competition, it also opens up further geographic penetration opportunities for the Company as previously described.

For over 115 years, the Company has offered innovative flow metering and control solutions for smart water management, smart buildings and smart industrial processes. The acquisition of s::can GmbH and subsidiaries (“s::can”), a leading provider of online water quality monitoring solutions, adds real-time water quality parameters to our capabilities and enhances the scope of actionable data for our customers to help measure and protect resources for a smarter world. The combined solutions from Badger Meter and s::can offer technology that measures both the quantity and quality of liquids.

Finally, the concept of “Smart Cities” is one avenue to affect efficient city operations, conserve resources and improve service and delivery. Smart water solutions (“Smart Water”) are those that provide actionable information through data analytics from an interconnected and interoperable network of sensors and devices that help people and organizations efficiently use and conserve one of the world’s most precious resources. Badger Meter is well positioned to benefit from the advancement of Smart Water applications within the Smart Cities framework. Cities have a keen interest in Smart Water as it provides both a revenue base, quality monitoring and conservation outcome. Badger Meter is one of approximately a dozen firms, and the only smart water company, that participates in the AT&T Smart City Alliance. By leveraging this alliance, the Company has been able to gain access and sell its broad smart water solutions to higher level decision makers within a city such as the mayor’s office. In addition, it allows Badger Meter to keep abreast of emerging cellular technology changes which the Company believes is the premier infrastructure-free AMI solution.

Revenue and Product Mix

As the industry continues to evolve, the Company has been at the forefront of innovation across metering, radio and software technologies in order to meet its customers’ increasing expectations for accurate and actionable data. As technologies such as ORION Cellular and BEACON AMA managed solutions have become more readily adopted, the Company’s revenue from Software as a Service (SaaS) has increased significantly, albeit from a small base, and is margin accretive.

In addition, the Company has expanded its smart water offering with the addition of online water quality monitoring solutions, adding real-time water quality parameters to augment the scope of actionable data for water utility and industrial customers to optimize their operations.

The Company also seeks opportunities for additional revenue enhancement. For instance, the Company has made inroads into the Middle East market with its ultrasonic meter technology and is pursuing other geographic expansion opportunities. Additionally, the Company is periodically asked to oversee and perform field installation of its products for certain customers. In these cases, the Company assumes the role of general contractor and either performs the installation or hires installation subcontractors and supervises their work.

Acquisitions

On November 2, 2020, the Company acquired 100% of the outstanding stock of s::can headquartered in Vienna, Austria. s::can specializes in optical water quality sensing solutions that provide real-time measurement of a variety of parameters in water and wastewater utilizing in-line monitoring systems.

The total purchase consideration for s::can was $30.6 million, which included $29.1 million in cash and $1.5 million in payments that are anticipated to be made in the first quarter of 2021, which are recorded in payables on the Consolidated Balance Sheet at December 31, 2020. The Company's preliminary allocation of the purchase price at December 31, 2020 included $3.1 million of receivables, $4.3 million of inventory, $1.2 million of other assets, $12.7 million of intangibles and $17.4 million of goodwill that is not deductible for tax purposes. The intangible assets acquired are primarily customer relationships and developed technology with an estimated average useful life of 12 years. The Company also assumed $3.6 million of accounts payable, $3.2 million of deferred tax liabilities and $1.3 million of other liabilities as part of the acquisition. 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, 2020, 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 toConsolidatedFinancial Statements.

On April 2, 2018, the Company acquired 100% of the outstanding stock of Innovative Metering Solutions, Inc. (“IMS”) of Odessa, Florida, which was one of the Company's distributors serving Florida.

The total purchase consideration was approximately $12.0 million, which included $7.7 million in cash, a $0.3 million working capital adjustment, a balance sheet holdback of $0.7 million and a $3.3 million settlement of pre-existing Company receivables. The working capital adjustment was settled in the second quarter of 2018 and the balance sheet holdback was paid in the second quarter of 2019. As of March 31, 2019, the Company had 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.

In the first quarter of 2019 and the fourth quarter of 2020, the Company made separate payments of contingent acquisition consideration of $1.0 million related to the May 1, 2017 acquisition of 100% of the outstanding common stock of D-Flow Technology AB (“D-Flow”) of Lulea, Sweden. These were the final payments associated with the acquisition.

RESULTS OF OPERATIONS

Net Sales

Net sales in 2020 increased $0.9 million, or less than 1%, to $425.5 million from $424.6 million in 2019. Sales into the utility water market were $344.3 million, an increase of 4% over the prior year’s $330.7 million. The increase was attributable to higher sales of advanced technology products including ORION Cellular LTE-M endpoints, E-Series Ultrasonic water meters as well as increased BEACON SaaS revenue associated with data collection and software analytics. It also included approximately $2.5 million of sales related to s::can, acquired on November 2, 2020. These favorable trends more than offset the short term decline in orders that occurred in April and May 2020 from the stay-at-home orders throughout much of the United States in response to COVID-19. Sales of products into the global flow instrumentation end markets were $81.2 million, 13.6% lower than the prior year’s $94.0 million due to significantly reduced activity across the array of industrial end markets served and also the result of widespread COVID-19 shelter-in-place and lockdown restrictions.

Net sales in 2019 decreased $9.1 million, or 2%, to $424.6 million from $433.7 million in 2018. Sales into the utility water market were $330.7 million, a decrease of 1% compared to the prior year’s $334.7 million, while sales into the flow instrumentation end markets were $93.9 million, a 5% decrease from 2018 sales of $99.0 million. Utility water sales benefitted from higher sales of smart water solutions in North America where sales increased 1% year-over-year, however, sales into international markets, primarily the Middle East, declined significantly as a $5.5 million sale from 2018 did not repeat. While the Company continued to benefit from favorable market demand, it experienced a mid-year pause in certain order activity as a result of new product launches, most notably commercial ultrasonic meters and next generation cellular radio offerings. Sales of products into the global flow instrumentation end markets declined due to sluggish global industrial activity across multiple end markets served.

Operating Earnings

Operating earnings in 2020 were $65.2 million, or 15.3% of sales, compared to $62.1 million, or 14.6% of sales, in 2019. Gross margin increased $4.7 million, and as a percent of sales increased from 38.5% in 2019 to 39.5% in 2020. The improvement was due to higher volumes and improved sales mix as noted above, along with favorable pricing actions. These benefits were modestly offset by a net increase in warranty provisions year-over-year, including a $3.5 million cellular network sunset provision recorded in the fourth quarter of 2020. Selling, engineering and administration (“SEA”) expenses were $103.1 million or 24.2% of sales compared to $101.4 million or 23.9% of sales in the comparable prior year period. The increase was primarily due to higher personnel, research and development and business optimization investments, as well as the inclusion of s::can. These increases were partially offset by the net benefit of COVID-19 cost reduction actions and lower pandemic-impacted expenses such as travel and convention costs.

Operating earnings in 2019 were $62.1 million or 14.6% of sales, compared to $56.9 million, or 13.1% of sales, in 2018. Gross margin increased $1.2 million, despite lower sales volumes, and increased as a percent of sales from 37.4% in 2018 to 38.5% in 2019. This was largely the result of improved utility sales mix attributed to selling more meters with radios, SaaS revenues, and favorable regional sales mix. In addition, gross margins benefitted from positive price/cost dynamics due primarily to lower commodity costs in 2019, particularly brass. SEA expenses declined $4.1 million year-over-year, which included $2.6 million of executive retirement charges incurred in the prior year which did not repeat. The remaining decrease in SEA was associated with tighter discretionary spending controls that more than offset normal inflation for employee salaries and benefits as well as higher engineering expenses to support product innovation and development.

Interest Expense, Net

Net interest expense was less than $0.1 million in 2020 compared to $0.3 million in 2019 and $1.2 million in 2018. The decreases were due to the repayment of borrowings using cash from operations.

Income Taxes

There were no significant variations in income taxes as a percentage of earnings before income taxes which were 24.1%, 23.4% and 22.5% for 2020, 2019 and 2018, respectively.

Earnings and Diluted Earnings per Share

For 2020, the increase in operating earnings and lower interest expense resulted in net earnings of $49.3 million compared to $47.2 million in 2019. On a diluted basis, earnings per share were $1.69 in 2020 compared to $1.61 in 2019.

For 2019, the increase in operating earnings and lower interest expense, along with the non-recurring pension termination charges in 2018, resulted in net earnings of $47.2 million compared to $27.8 million in 2018. On a diluted basis, earnings per share were $1.61 in 2019 compared to $0.95 in 2018.

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.

Primary Working Capital

We use primary working capital (PWC) as a percentage of sales as a key metric for working capital efficiency. We define this metric as the sum of receivables and inventories less payables, divided by annual net sales. The following table shows the components of our PWC (in millions):

$ PWC% $ PWC%

Overall PWC decreased $3.4 million as the Company undertook several working capital improvement actions during the year, reducing PWC by $8.8 million, which was partially offset by the acquisition of s::can which added $5.4 million of PWC. Receivables at December 31, 2020 were $61.7 million compared to $61.4 million at the end of 2019. Excluding s::can, a decrease of $3.0 million was due to robust collection efforts and active monitoring processes instituted during the year. The Company believes its receivables balance is fully collectible. Inventories at December 31, 2020 were $81.6 million, a modest decrease from $81.9 million at December 31, 2019, with the acquisition of s::can offsetting a core inventory reduction of $4.6 million resulting from improved inventory planning actions. Payables at December 31, 2020 were $34.9 million, up from $31.5 million at the end of 2019 with the majority of the increase due to the acquisition of s::can.

Cash Provided by Operations

Cash provided by operations in 2020 was $89.6 million compared to $80.7 million in 2019. The increase from 2019 was driven primarily by improved working capital management as well as higher operating earnings. Operating cash flow was more than adequate to fund the acquisition of s::can ($29.1 million, net of cash acquired), capital expenditures of $9.1 million along with dividends of $20.3 million and $3.1 million in share repurchases to partially offset equity compensation dilution. The remaining cash flow was used to reduce short term borrowings and add to cash balances.

Cash provided by operations in 2019 was $80.7 million compared to $60.4 million in 2018. The increase from 2018 was driven primarily by improved working capital management as well as higher operating earnings (excluding the non-cash pension termination settlement charges). Operating cash flow was more than adequate to fund capital expenditures of $7.5 million along with dividends of $18.6 million and $5.2 million in share repurchases to offset equity compensation dilution. The remaining cash flow was used to reduce short term borrowings and add to cash balances.

Capital expenditures were $9.1 million, $7.5 million and$8.6 millionin fiscal 2020, 2019 and2018, respectively. Capital expenditures for fiscal 2021 are expected to be in the $10-12 million range, but could vary depending on timing of R&D projects, growth opportunities and the amount of assets purchased.

Short-term debt decreased to $0 from $4.5 million at December 31, 2019 due to the strong cash flow from operations. At the end of 2020, the Company was in a net cash position of $72.3 million.

The Company’s financial condition remains strong. In June 2018, the Company amended its May 2012 credit agreement with its primary lender and extended its term until September 2021. The credit agreement includes a $125.0 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, 2020. The Company intends to enter into a new credit facility in 2021, prior to the expiration of existing agreement. 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 had $133.5 million of unused credit lines available at December 31, 2020.

OFF-BALANCE SHEET ARRANGEMENTS

The Company had no off-balance sheet arrangements at December 31, 2020.

CONTRACTUAL OBLIGATIONS

The following table includes the Company's significant contractual obligations as of December 31, 2020. There are no material undisclosed guarantees.

Payments due by period

Total Less than 1 year 1-3 years 3-5 years More than 5 years

(In thousands)

Other than items included in the preceding table, as of December 31, 2020, 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 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 2020 Annual Report on Form 10-K. Postretirement medical claims are paid by the Company as they are submitted, and they are anticipated to be $0.4 million in 2021 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 2020 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 these 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 is reviewed in conjunction with applying historical write-off ratios. The calculation for the obsolete and excess 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 warranty issues on past sales as well as historical claim experience and current warranty trends. The changes in the balances of these reserves at December 31, 2020 compared to the prior year were due to normal business conditions and developments. While the Company continually strives to improve its estimates, no significant changes in the underlying processes are expected for 2021.

The Company also uses estimates in four other significant areas: (i) stock-based compensation, (ii) acquisitions,(iii) income taxes, and (iv) evaluating goodwill, at least annually, for impairment.

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.

The Company records assets and liabilities acquired in a business combination at fair value. The excess of the purchase price over the estimated fair value is recorded as goodwill. Acquired intangible assets, excluding goodwill, are valued using a discounted cash flow methodology which is based on future cash flows that are specific to the type of intangible asset purchased.

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 uncertain income tax positions 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 2020, 2019 and 2018 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, 2020 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 strong. 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. As the global water metering market begins to shift to adopt static metering technology, the number of competitors may increase. We believe new static metering market entrants lack brand recognition and product breadth and do not have the appropriate utility sales channels to meaningfully compete in the North American market. 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 conditions 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 annual federal funding and periodic 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.

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. The Company does not hold significant amounts of precious metals. The price and availability of raw materials is influenced by economic and industry conditions, including supply and demand factors that are difficult to anticipate and cannot be controlled by the Company. Commodity risk is managed by keeping abreast of economic conditions and locking in purchase prices for quantities that correspond to the Company's forecasted usage.

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, 2020 and 2019, 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.

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 2020 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, 2020 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, 2020, 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.

INDEX TO FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm 24

Consolidated Financial Statements:

Consolidated Balance Sheets 27

Consolidated Statements of Operations 28

Consolidated Statements of Comprehensive Income 29

Consolidated Statements of Cash Flows 30

Consolidated Statements of Shareholders’ Equity 31

Notes to Consolidated Financial Statements 32

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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes and our report dated February 24, 2021, 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 24, 2021

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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 24, 2021 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters do not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Warranty and After-Sale Costs Reserve

Accounting for Acquisitions – Valuation of s::can Messtechnik GmbH Intangible Assets

/s/ Ernst & Young LLP

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

Milwaukee, Wisconsin

February 24, 2021

BADGER METER, INC.

Consolidated Balance Sheets

December 31,

(Dollars in thousands)

Assets

Current assets:

Inventories:

Prepaid expenses and other current assets 5,303 7,910

Property, plant and equipment, at cost:

Intangible assets, at cost less accumulated amortization 53,598 48,163

Liabilities and Shareholders’ Equity

Current liabilities:

Short-term debt $ - $ 4,480

Accrued compensation and employee benefits 14,617 12,754

Accrued non-pension postretirement benefits 5,789 5,711

Other accrued employee benefits 5,154 4,011

Commitments and contingencies (Note 6)

Shareholders’ equity:

Accumulated other comprehensive income 1,313 425

Less: Employee benefit stock - (154 )

Total liabilities and shareholders’ equity $ 468,380 $ 421,893

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Operations

Years ended December 31,

(In thousands except per share amounts)

Earnings per share:

Shares used in computation of earnings per share:

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Comprehensive Income

Years ended December 31,

(Dollars in thousands)

Other comprehensive income :

Foreign currency translation adjustment 1,096 (58 ) (484 )

Pension and postretirement benefits, net of tax (208 ) (97 ) 13,657

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Cash Flows

Years ended December 31,

(Dollars in thousands)

Operating activities:

Adjustments to reconcile net earnings to net cash provided by operations:

Pension termination settlement charges — — 19,900

Contributions to pension plan — — (2,860 )

Noncurrent employee benefits 206 (40 ) 464

Changes in:

Prepaid expenses and other current assets (3,522 ) (7,732 ) (5,062 )

Investing activities:

Property, plant and equipment additions (9,059 ) (7,496 ) (8,643 )

Acquisitions, net of cash acquired (29,134 ) — (8,048 )

Financing activities:

Payment of contingent acquisition consideration (1,001 ) (2,555 ) (2,034 )

Purchase of common stock for treasury stock (3,116 ) (5,207 ) (4,795 )

Effect of foreign exchange rates on cash (164 ) 276 403

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Non cash transactions:

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Shareholders’ Equity

Years ended December 31,

(In thousands except per share amounts)

Foreign currency translation — — — (484 ) — — (484 )

ESSOP transactions — (78 ) — — 154 — 76

Stock-based compensation — 4,174 — — — — 4,174

Purchase of common stock for treasury stock — — — — — (4,795 ) (4,795 )

Issuance of treasury stock (40 shares) — 394 — — — 129 523

Foreign currency translation — — — (58 ) — — (58 )

Stock-based compensation — 1,214 — — — — 1,214

Purchase of common stock for treasury stock — — — — — (5,207 ) (5,207 )

Issuance of treasury stock (72 shares) — 551 — — — 82 633

Foreign currency translation — — — 1,096 — — 1,096

Stock-based compensation — 1,415 — — — — 1,415

Purchase of common stock for treasury stock — — — — — (3,116 ) (3,116 )

Issuance of treasury stock (22 shares) — 436 — — — 105 541

See accompanying notes.

BADGER METER, INC.

Notes to Consolidated Financial Statements

Note 1 Summary of Significant Accounting Policies

Profile

With more than a century of water technology innovation, Badger Meter is a global provider of industry leading water solutions encompassing flow measurement, quality and other system parameters. These offerings provide customers with the data and analytics essential to optimize their operations and contribute to the sustainable use and protection of the world’s most precious resource. The Company’s flow measurement products measure water and other fluids and are known for accuracy, long-lasting durability and for providing valuable and timely measurement data through various methods. The Company’s water quality monitoring solutions include optical sensing and electrochemical instruments that provide real-time, on-demand data parameters. The Company’s product lines fall into two categories: sales of water meters, radios and related technologies, and water quality monitoring solutions to water utilities (utility water) and sales of meters and other sensing instruments, valves and other products for industrial applications in water, wastewater, and other industries (flow instrumentation). The Company estimates that approximately 90% of its products are used in water related applications.

Utility water, the largest sales category, is comprised of either mechanical or static (ultrasonic) water meters along with the related radio and software technologies and services used by water utilities as the basis for generating their water and wastewater revenues. It further comprises other sensor technology used in the water distribution system to ensure the safe and efficient delivery of clean water. These sensors are used to detect leaks in the distribution piping system and to monitor various water quality parameters throughout the distribution system. The largest geographic market for the Company’s utility water 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 continue to be mechanical in nature; however, ultrasonic meters are an increasing percentage of the water meters sold by the Company and in the industry, due to a variety of factors, including their ability to maintain measurement accuracy over their useful life. Providing ultrasonic water meter technology, combined with advanced radio technology, provides the Company with the opportunity to sell into other geographical markets, for example the Middle East, Europe and Southeast Asia.

The flow instrumentation product line primarily serves water applications throughout the broader industrial markets. This product line includes meters, valves and other sensing instruments sold worldwide to measure and control the quantity of fluids going through a pipe or pipeline including water, air, steam, oil, and other liquids and gases. These products are used in a variety of industries and applications, with the Company’s primary market focus being water/wastewater; heating, ventilating and air conditioning (HVAC) and corporate sustainability. Flow instrumentation products are generally sold to original equipment manufacturers as the primary flow measurement device within a product or system, as well as through manufacturers’ representatives.

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:

(In thousands)

Inventories

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

(In thousands)

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 $5.7 million at December 31, 2020 and 2019, 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, 2020, 2019 and 2018 was $3.7 million, $3.1 million and $3.2 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.

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 2020 and 2019 was $7.2 million and $7.5 million in 2018. Amortization expense expected to be recognized is $8.2 million in 2021 and $7.1 in 2022, $6.4 million in 2023, $6.3 million in 2024, $6.0 million in 2025 and $19.6 million thereafter. The carrying value and accumulated amortization by major class of intangible assets are as follows:

(In thousands)

Goodwill

Goodwill is tested for impairment annually during the fourth 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 tests during 2020, 2019 and 2018. Goodwill was $88.7 and $71.3 million at December 31, 2020 and 2019, respectively. The increase resulted from the acquisition of s::can, headquartered in Vienna, Austria in 2020. This acquisition is further described in Note 3 “Acquisitions”.

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 issues 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:

(In thousands)

Research and Development

Research and development costs are charged to expense as incurred and amounted to $11.6 million in 2020, $11.9 million in 2019 and $11.1 million in 2018.

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 Income

Components of accumulated other comprehensive income at December 31, 2020 are as follows:

Pension and postretirement benefits Foreign currency Total

(In thousands)

Balance at beginning of period $ 263 $ 162 $ 425

Other comprehensive income before reclassifications — 1,096 1,096

Net current period other comprehensive (loss) income, net (208 ) 1,096 888

Accumulated other comprehensive income $ 55 $ 1,258 $ 1,313

Reclassifications out of accumulated other comprehensive income during 2020 are immaterial.

Pension and postretirement benefits Foreign currency Total

(In thousands)

Balance at beginning of period $ 360 $ 220 $ 580

Other comprehensive income (loss) before reclassifications — (58 ) (58 )

Net current period other comprehensive income (loss), net (97 ) (58 ) (155 )

Accumulated other comprehensive income $ 263 $ 162 $ 425

Reclassifications out of accumulated other comprehensive income during 2019 are as follows:

Amount reclassified from accumulated other comprehensive income

(In thousands)

Amortization of employee benefit plan items:

Actuarial gains and losses (1) $ (639 )

Plan settlement (2) 526

Total before tax (113 )

Income tax impact 16

Amount reclassified out of accumulated other comprehensive income $ (97 )

(1)These accumulated other comprehensive loss components are included in the computation of benefit plan costs in Note 7 “Employee Benefit Plans.” (2) This accumulated other comprehensive income component results from an international pension plan settlement.

Use of Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) 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. 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.

Effective January 1, 2021, the Company acquired 100% of the outstanding stock of Analytical Technology, LLC (“ATi”), headquartered in Collegeville, Pennsylvania, a provider of water quality monitoring systems. The purchase consideration, net of cash acquired, was approximately $44 million. The ATi acquisition will be accounted for under the purchase method, and accordingly, the results of operations will be included in the Company’s financial statements from the

date of acquisition. The acquisition is not expected to have a material impact on the Company’s consolidated financial statements and notes thereto.

New Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Simplifying the Accounting for Income Taxes” under ASC 740, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and modifies the existing guidance to enable more consistent application. This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year with early adoption being permitted. The Company adopted ASU No. 2019-12 on January 1, 2021 and noted no significant changes to the Company’s financial position or results of operations.

In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326),” which amends the accounting for credit losses on purchased financial assets and available-for-sale debt securities with credit deterioration. This ASU requires the measurement of all expected credit losses for financial assets, including accounts receivables, held at the reporting date based upon current conditions, historical experience and reasonable forecasts. This ASU is effective for annual reporting periods beginning after December 15, 2019. The Company adopted ASU No. 2016-13 on January 1, 2020 and noted no significant changes to the Company’s financial position or results of operations.

Note 2 Common Stock

Common Stock

The authorized common stock of the Company as of December 31, 2020 consisted of 40,000,000 shares of common stock, $1 par value, of which 37,221,098 and 37,200,698 were issued and outstanding as of December 31, 2020 and 2019, respectively.

Stock Options

There were no anti-dilutive options in 2020. Stock options to purchase 54,139 shares in 2019 and 21,887 shares in 2018 were not included in the computation of dilutive securities because their inclusion would have been anti-dilutive.

Note 3 Acquisitions

Acquisitions are 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 acquisitions did not have a material impact on the Company's consolidated financial statements or the notes thereto.

On November 2, 2020, the Company acquired 100% of the outstanding stock of s::can, headquartered in Vienna, Austria. s::can specializes in optical water quality sensing solutions that provide real-time measurement of a variety of parameters in water and wastewater utilizing in-line monitoring systems.

On April 2, 2018, the Company acquired 100% of the outstanding stock of IMS of Odessa, Florida, which was one of the Company's distributors serving Florida.

The total purchase consideration was approximately $12.0 million, which included $7.7 million in cash, a $0.3 million working capital adjustment, a balance sheet holdback of $0.7 million and a $3.3 million settlement of pre-existing Company receivables. The working capital adjustment was settled in the second quarter of 2018 and the balance sheet holdback was paid in the second quarter of 2019. The Company's allocation of the purchase price at March 31, 2019 included $3.8 million of receivables, $0.8 million of inventories, $0.1 million of machinery and equipment, $3.6 million of intangibles and $3.7 million of goodwill. The intangible assets acquired are customer relationships with an estimated average useful life of 10 years. As of

March 31, 2019, the Company had completed its analysis for estimating the fair value of the assets acquired with no additional adjustments.

In the first quarter of 2019 and the fourth quarter of 2020, the Company made separate payments of contingent acquisition consideration of $1.0 million each related to the May 1, 2017 acquisition of 100% of the outstanding common stock of D-Flow Technology AB (“D-Flow”) of Lulea, Sweden. These were the final payments associated with the acquisition.

Note 4 Short-term Debt and Credit Lines

The Company did not have short-term debt at December 31, 2020. Short-term debt at December 31, 2019 consisted of notes payable to banks of $4.5 million outstanding under a 4.0 million Euro-based revolving loan facility that does not expire, and which bore interest at 1.50%.

In June 2018, the Company amended its May 2012 credit agreement with its primary lender and extended its term until September 2021. The credit agreement includes a $125.0 million line of credit that supports commercial paper (up to $70.0 million) and includes $5.0 million of a Euro line of credit. Under the principal line of credit, the Company had $125.0 million of unused credit lines available out of the total of $133.5 million available short-term credit lines at December 31, 2020. 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, 2020.

Note 5 Stock Compensation

As of December 31, 2020, 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, 2020 and 2019, there were 443,370 shares and 502,839 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, 2020 was $0.4 million compared to $0.3 million in 2019 and $2.1 million in 2018.

The following table summarizes the transactions of the Company’s stock option plans for the three-year period ended December 31, 2020:

Number of shares Weighted- average exercise price

Options forfeited — n/a

(weighted-average contractual life of 2.1 years) 106,390 $ 22.53

(weighted-average contractual life of 5 years) 102,484 $ 33.30

(weighted-average contractual life of 8.2 years) 107,320 $ 57.09

Exercisable options —

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

Per share fair value of options granted during the period $ 17.49 $ 18.20

Risk-free interest rate 0.64 % 2.52 %

Volatility factor 30.0 % 32.4 %

Weighted-average expected life in years 7.0 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.

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

(In thousands)

As of December 31, 2020, the unrecognized compensation cost related to stock options was approximately $1.0 million, which will be recognized over a weighted average period of 3.4 years.

Director Stock Grant

Non-employee directors receive an annual award of $58,000 worth of restricted shares of the Company’s Common Stock under the shareholder-approved 2011 Omnibus Incentive Plan. The Company values stock grants for directors at 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 years ended December 31, 2020 was $0.4 million compared to $0.3 million in 2019 and $0.5 million in 2018. As of December 31, 2020, the unrecognized compensation cost related to the director stock award that is expected to be recognized over the remaining three months is estimated to be approximately $0.1 million.

Restricted Stock

The Company periodically issues nonvested shares of the Company's Common Stock to certain eligible employees. 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. Restricted stock compensation expense recognized by the Company for the year ended December 31, 2020 was $1.0 million compared to $0.9 million in 2019 and $2.1 million in 2018.

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

As of December 31, 2020, there was $1.8 million of unrecognized compensation cost related to nonvested restricted stock that is expected to be recognized over a weighted average period of 2.1 years.

Note 6 Commitments and Contingencies

Commitments

The Company makes commitments in the normal course of business. The Company rents equipment, vehicles and facilities under operating leases, some of which contain renewal options. Total rental expense charged to operations under all operating leases was $3.1 million, $3.4 million and $3.7 million in 2020, 2019 and 2018, respectively. The Company’s lease commitments and future minimum lease payments are discussed in Note 12 “Leases.”

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 2020, 2019 and 2018 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 could 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

Historically, the Company maintained a non-contributory defined benefit pension plan that covered substantially all U.S. employees who were employed at December 31, 2011. After that date, no further benefits were accrued in the plan. For the frozen pension plan, benefits were based primarily on years of service and, for certain employees, levels of compensation. In 2018, the Company completed the termination of the non-contributory defined benefit pension plan.

The Company 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 income, net of tax, at December 31, 2020 that have not yet been recognized in net periodic benefit cost are as follows:

Pension plans Other postretirement benefits

(In thousands)

Net actuarial loss (gain) $ 68 $ (123 )

Amounts included in accumulated other comprehensive income, net of tax, at December 31, 2020 expected to be recognized in net periodic benefit cost during the fiscal year ending December 31, 2021 are not expected to be material.

Qualified Pension Plan

The Company completed the termination of the non-contributory defined benefit pension plan in 2018 and therefore the tables below show no activity or actuarial assumptions for the years ended December 31, 2020 and 2019.

The following table sets forth the components of net periodic pension cost for the year ended December 31, 2018 based on a December 31 measurement date:

(In thousands)

Service cost - benefits earned during the year $ —

Interest cost on projected benefit obligations 305

Expected return on plan assets (835 )

Amortization of net loss 262

Net periodic pension cost $ 19,632

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

Discount rate 2.00 %

Expected long-term return on plan assets 3.00 %

Rate of compensation increase 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 fair value of the qualified pension plan assets was $0 at December 31, 2020 and 2019. As there were no benefit obligations, plan assets or pension liabilities at December 31, 2020, 2019 & 2018, no reconciliation as of those measurement dates are provided.

Supplemental Non-qualified Unfunded Plans

The Company also maintains supplemental non-qualified unfunded plans for certain officers and other key employees. The expense for these plans was not material for 2020, 2019 or 2018. The discount rate used to measure the net periodic pension cost was 2.87% for 2020, 2.86% for 2019 and 2.16% for 2018. The amount accrued was $0.4 million and $0.5 million as of December 31, 2020 and 2019, respectively.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, the Company's management evaluated, with the participation of the Company's Chairman, President and Chief Executive Officer and the Company's Senior Vice President - Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the year ended December 31, 2020. Based upon their evaluation of these disclosure controls and procedures, the Company's Chairman, President and Chief Executive Officer and the Company's Senior Vice President - Chief Financial Officer concluded that, as of the date of such evaluation, the Company's disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There was no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Management's Annual Report on Internal Control over Financial Reporting

The report of management required under this Item 9A is contained in Item 8 of this 2020 Annual Report on Form 10-K under the heading “Management's Annual Report on Internal Control over Financial Reporting.”

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

The attestation report required under this Item 9A is contained in Item 8 of this 2020 Annual Report on Form 10-K under the heading “Report of Independent Registered Public Accounting Firm.”

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this Item with respect to directors is included under the headings “Nomination and Election of Directors” and in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 30, 2021 and is incorporated herein by reference.

Information concerning the executive officers of the Company is included in Part I, Item 1 of this 2020 Annual Report on Form 10-K under the heading “Business - Employees.”

The Company has adopted the Badger Meter, Inc. Code of Conduct for Financial Executives that applies to the Company's Chairman, President and Chief Executive Officer, the Company's Senior Vice President - Chief Financial Officer and other persons performing similar functions. A copy of the Badger Meter, Inc. Code of Conduct for Financial Executives is posted on the Company's website at www.badgermeter.com. The Badger Meter, Inc. Code of Conduct for Financial Executives is also available in print to any shareholder who requests it in writing from the Secretary of the Company. The Company satisfies the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, the Badger Meter, Inc. Code of Conduct for Financial Executives by posting such information on the Company's website at www.badgermeter.com.

The Company is not including the information contained on its website as part of, or incorporating it by reference into, this 2020 Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item is included under the headings “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “CEO Pay Ratio” in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 30, 2021, and is incorporated herein by reference; provided, however, that the information under the subsection “Executive Compensation - Compensation Committee Report” 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 Exchange Act or to be the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent it is specifically incorporated by reference into such a filing.

Information required by this Item is included under the headings “Stock Ownership of Beneficial Owners,” “Stock Ownership of Management” and “Equity Compensation Plan Information” in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 30, 2021 and is incorporated herein by reference.

Information required by this Item is included under the headings “Related Person Transactions” and “Nomination and Election of Directors - Independence, Committees, Meetings and Attendance” in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 30, 2021, and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this Item is included under the heading “Principal Accounting Firm Fees” in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 30, 2021, and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this Annual Report on Form 10-K:

ITEM 16. FORM 10-K SUMMARY

None.

EXHIBIT INDEX

EXHIBIT NO. EXHIBIT DESCRIPTION

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

(3.1) Restated By-Laws (as amended and restated as of March 30, 2020).

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

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

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

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

EXHIBIT NO. EXHIBIT DESCRIPTION

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

(21) Subsidiaries of the Registrant.

(23) Consent of Ernst & Young LLP.

* A management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 24, 2021.

BADGER METER, INC.

By: /s/ Kenneth C. Bockhorst

Kenneth C. Bockhorst

Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 24, 2021.

Name Title

Kenneth C. Bockhorst

Robert A. Wrocklage

Daniel R. Weltzien

/s/ Todd A. Adams Director

Todd A. Adams

/s/ Gale E. Klappa Director

Gale E. Klappa

/s/ Gale A. Lione Director

Gale A. Lione

/s/ James W. McGill Director

James W. McGill

/s/ Tessa M. Myers Director

Tessa M. Myers

/s/ James F. Stern Director

James F. Stern

/s/ Glen E. Tellock Director

Glen E. Tellock

BMI US Equity

BMI · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 16. FORM 10-K SUMMARY

BMI US Equity☆

BMI · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 16. FORM 10-K SUMMARY

BMI US Equity