Certain statements contained in this Quarterly Report on Form 10-Q, as well as other information provided from time to time by Badger Meter, Inc. (the “Company”) or its employees, may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “think,” “should,” “could” and “objective” or similar expressions are intended to identify forward looking statements. All such forward looking statements are based on the Company’s then current views and assumptions and involve risks and uncertainties. Some risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements include those described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 that include, among other things:

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

In the opinion of management, the accompanying unaudited consolidated condensed financial statements of Badger Meter, Inc. (the “Company” or “Badger Meter”) contain all adjustments (consisting only of normal recurring accruals except as otherwise discussed) necessary to present fairly the Company’s consolidated condensed financial position at September 30, 2017,March 31, 2018, results of operations for the three- and nine-monththree-month periods ended September 30,March 31, 2018 and 2017, and 2016, comprehensive income for the three- and nine-monththree-month periods ended September 30,March 31, 2018 and 2017, and 2016, and cash flows for the nine-monththree-month periods ended September 30, 2017March 31, 2018 and 2016.2017. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

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

The consolidated condensed balance sheet at December 31, 20162017 was derived from amounts included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017. Refer to the footnotes to the financial statements included in that report for a description of the Company’s accounting policies and for additional details of the Company’s financial condition. The details in those notes have not changed except as discussed below and as a result of normal adjustments in the interim.

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

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 individuals,plans, levels of compensation. The Company plans to terminate the pension plan in 2018, but there will be no accounting recognition until the final disposition of assets occurs.

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 additionally 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.

The following table sets forth the components of net periodic benefit (income) cost for the three months ended September 30,March 31, 2018 and 2017 and 2016 based on December 31, 20162017 and 20152016 actuarial measurement dates, respectively:

The Company disclosed in its financial statements for the year ended December 31, 20162017 that it was not required to make a minimum contribution to the defined benefit pension plan for the 20172018 calendar year. However, a payment of $825,000 was made in September 2017 related to the 2016 plan year. The Company believes that no additional contributions will be required during 2017.2018.

Components of and changes in accumulated other comprehensive loss at September 30, 2017March 31, 2018 are as follows: 

On May 1, 2017, the Company acquired 100% of the outstanding common stock of D-Flow Technology AB ("D-Flow") of Luleå, Sweden. The D-Flow acquisition facilitates the continued advancement of the existing E-Series® Ultrasonicultrasonic product line while also adding a technology center for the Company. Sales of D-Flow products were approximately $1.5 million at September 30, 2017.

The purchase price was approximately $23.2 million in cash, plus a small working capital adjustment. The purchase price included $5.1$5.4 million in payments that are anticipated to be made within eighteen months of the purchase date, ofin 2018 which $4.1 million wasare recorded in payables and other current liabilities on the Consolidated Balance Sheets at June 30, 2017 and $1.0 million was recorded in long-term liabilities.March 31, 2018. The Company's preliminary allocation of the purchase price included approximately $0.3 million in receivables, $0.6 million in inventory, $0.2 million in machineryproperty, plant and equipment, $10.9 million of intangibles and $11.8$16.1 million of goodwill. The majority of the intangible assets acquired related to ultrasonic technology. The Company also assumed $0.6$4.9 million of liabilities as part of the acquisition. As of September 30, 2017,March 31, 2018, the Company had nothas completed its analysis for estimating the fair value of the assets acquired.acquired with no additional adjustments.

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

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 more significant legal proceedings are discussed below.

The Company is subject to contingencies related to environmental laws and regulations. The Company is named as one of many potentially responsible parties in two landfill lawsuits. The landfill sites are impacted by the Federal Comprehensive Environmental Response, Compensation and Liability Act and other environmental laws and regulations. At this time, the Company does not believe the ultimate resolution of these matters will 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. This belief is based on the Company’s assessment of its limited past involvement with these landfill sites as well as the substantial involvement of and government focus on other named third parties with these landfill sites. However, due to the inherent uncertainties of such proceedings, the Company cannot predict the ultimate outcome of any of these matters. 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 20162017 and the first three quartersquarter of 20172018 were not material.

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

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

    

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

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 condensed financial statements and the notes to these financial statements, the Company evaluated subsequent events through the date the accompanying financial statements were issued,issued.

In May 2017,February 2018, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("ASU") No.2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220)." Under existing U.S. generally accepted accounting principles, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in this ASU also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption in any period is permitted. The Company’s provisional adjustments recorded in 2017 to account for the impact of the Tax Cuts and Jobs Act resulted in stranded tax effects. The Company is currently evaluating the timing and impact of adopting ASU 2018-02.

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

In March 2017, the FASB issued ASU No. 2017-07 “Compensation –- Retirement Benefits (Topic 715),”, which changes the presentation of defined benefit and post-retirement benefit plan expense on the income statement by requiring separation between operating and non-operating expense. Under the ASU, the service cost of net periodic benefit expense is an operating expense that will be reported with similar compensation costs. The non-operating components, which include all other components of net periodic benefit expense, are reported outside of operating income. The ASU also stipulates that only the service cost component of pension and postretirement benefit(benefits) costs is eligible for capitalization. The ASU is effective for annual periods beginning after December 15, 2017 and interim periods within that annual period.was adopted by the Company on January 1, 2018. Application is retrospectivewas done retrospectively for the presentation of the components of these benefit(benefits) costs. In the Consolidated Statements of Operations, the Company previously recorded service and other (benefits) costs in operating cost and prospectiveexpense accounts along with compensation costs. The adoption of the standard resulted in reclassification of those (benefits) costs to the other pension and postretirement (benefits) costs line in the Consolidated Statements of Operations. Adoption of the standard reduced operating earnings for the capitalizationfirst quarter of service2018 by $19,000 and established that amount in other pension and postretirement (benefits) costs. In the first quarter of 2017, operating earnings were increased by $0.1 million and a corresponding amount was reclassified to other pension and postretirement (benefits) costs. The Company'sspecific net periodic benefit cost components are disclosed in Note 3 "Employee Benefit Plans".Plans."

In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill: Simplifying the Test for Goodwill Impairment.and Other (Topic 350)." The update requires

In February 2016, the FASB issued ASU No. 2016-02 "Leases (Topic 842)," which requires lessees to record most leases on their balance sheets. Lessees initially recognize a lease liability (measured at the present value of the lease payments over the lease term) and a right-of-use ("ROU") asset (measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee's initial direct costs). Lessees can make an accounting policy election not to recognize ROU assets and lease liabilities for leases with a lease term of 12 months or less as long as the leases do not include options to purchase the underlying assets that the lessee is reasonably certain to exercise. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The ASU is effective for the Company beginning on January 1, 2019 and early adoption is permitted. The standard requires the use of a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is continuing to evaluate the impact that the adoption of this guidance will have on its financial condition, results of operations and the presentation of its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 “Revenue"Revenue from Contracts with Customers.”Customers (Topic 606)." ASU No. 2014-09 provides a single principles-based, five-step model to be applied to all contracts with customers. The five steps are to identify the contract(s) with the customer, to identify the performance obligations in the contract, to determine the transaction price, to allocate the transaction price to the performance obligations in the contract and to recognize revenue when each performance obligation

On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method applied to those contracts that were not completed or substantially complete as of January 1, 2018. Results for the reporting period beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605. The Company recorded a net reduction to opening retained earnings of $0.1 million as of January 1, 2018 as a result of the cumulative impact of adopting Topic 606. The impact to revenues as a result of applying Topic 606 for intellectual property licenses, principal versus agent considerationsthe quarter ended March 31, 2018 was a decrease of $41,000.

Revenue for sales of products and identifying performance obligations.services is derived from contracts with customers. The products and services promised in contracts include the sale of municipal and flow instrumentation products, such as flow meters and radios, software access and other ancillary services. Contracts with each customer generally state the terms of the sale, including the description, quantity and price of each product or service. Payment terms are stated in the contract. Since the customer typically agrees to a stated rate and price in the contract that does not vary over the life of the contract, the majority of the Company's contracts do not contain variable consideration. The Company establishes a provision for estimated warranty and returns as well as certain after sale costs as discussed in Note 2 "Additional Financial Information Disclosures."

The Company has substantially completedperforms its obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the assessment phase for ASU No. 2014-09 and is finalizing the documentation of formal policies in anticipation of adopting the standard on January 1, 2018.customer. The Company has identifiedtypically invoices its customers as soon as control of an asset is transferred and a subset of contracts with customers where services are provided that are both uniquely beneficial and separately identifiable from product sales and thus are considered separate performance obligations underreceivable for the new guidance. Each of these individual service activities has been documented in scenario development and processes are being established to recognize revenue for each unique performance obligation in accordance with the guidance, when effective.Company is established. The Company, continues to proactively address all potential areas of impact related to ASU No. 2014-09. To date,however, recognizes a contract liability when a customer prepays for goods and/or services and the Company has not identified any specific aspecttransferred control of the new standard that it believes would significantly change the Company’s consolidated financial statements beyond adding the expanded disclosure that is required to comply with the ASU.goods and/or services.

The guidance permits two methodsopening and closing balances of adoption: retrospectivelythe Company's contract liabilites and receivables are as follows:

The transaction price for a contract is allocated to each prior reportingdistinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. For contracts with multiple performance obligations, the Company allocates the contract's transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in a contract. The primary method used to estimate standalone selling price is the observable price when the good or service is sold separately in similar circumstances and to similar customers. If standalone selling price is not directly observable, it is estimated using either a market adjustment or cost plus margin approach.

The recording of assets recognized from the costs to obtain and fulfill customer contracts primarily relate to the deferral of sales commissions on the Company's BEACON AMA software arrangements. The Company's costs incurred to obtain or fulfill a contract with a customer are amortized over the period presented (full retrospective method),of benefit of the related revenue. The Company expenses any costs incurred immediately when the amortization period would be one year or retrospectivelyless. These costs are recorded within selling, engineering and administration expenses.

In accordance with Subtopic 340-40 "Other Assets and Deferred Costs - Contracts with Customers," the cumulative effectCompany elected to expense the incremental costs of initially applyingobtaining a contract when the guidance recognizedamortization period for such contracts would have been one year or less. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less and contracts for which we recognize revenue at the date of initial application (modified retrospective method). amount to which we have the right to invoice for services performed.

The Company currently anticipates adoptinghas made an accounting policy election to exclude all taxes by governmental authorities from the standard usingmeasurement of the modified retrospective method.transaction price.

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

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

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

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

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

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

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

The Company’s net sales and corresponding net earnings depend on unit volume and product mix, with the Company generally earning higher margins on meters equipped with radio technology. The Company’s proprietary radio products generally

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

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

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

An industry leader in both mechanical and electrical flow metering technologies, the Company offers one of the broadest flow measurement, control and communication portfolios in the market. The portfolio carries respected brand names including Recordall®, E-Series, ORION, Hedland®, Dynasonics®, Blancett®, and Research Control®, and includes eight of

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

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

    

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

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

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

On May 1, 2017, the Company acquired 100% of the outstanding common stock of D-Flow Technology AB ("D-Flow") of Luleå, Sweden. The D-Flow acquisition facilitates the continued advancement of the existing E-Series UltrasonicE-Series® ultrasonic product line while also adding a technology center for the Company. Sales of D-Flow products were approximately $1.5 million at September 30, 2017.

The purchase price was approximately $23.2 million in cash, plus a small working capital adjustment. The purchase price included $5.1$5.4 million in payments that are anticipated to be made within eighteen months of the purchase date, ofin 2018 which $4.1 million wasare recorded in payables and other current liabilities on the Consolidated Balance Sheets at June 30, 2017 and $1.0 million was recorded in long-term liabilities.March 31, 2018. The Company's preliminary allocation of the purchase price included approximately $0.3 million in receivables, $0.6 million in inventory, $0.2 million in machinery and equipment, $10.9 million of intangibles and $11.8$16.1 million of goodwill. The majority of the intangible assets acquired related to ultrasonic technology. The Company also assumed $0.6$4.9 million of liabilities as part of the acquisition. As of September 30, 2017,March 31, 2018, the Company had nothas completed its analysis for estimating the fair value of the assets acquired. This acquisition is further described in Note 5 “Acquisitions” in the Notes to Consolidated Condensed Financial Statements.

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

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

The Company’s net sales for the three months ended September 30, 2017March 31, 2018 increased $3.7$3.4 million, or 3.9%3.3%, to $100.0$105.0 million compared to $96.3$101.6 million during the same period in 2016.2017.

Municipal water sales represented 74.7%76.7% of sales in the thirdfirst quarter of 20172018 compared to 77.4%77.3% in the thirdfirst quarter of 2016.2017. These sales increased $0.2$2.0 million, or 0.3%2.5%, to $74.7$80.5 million in the thirdfirst quarter of 20172018 from $74.5$78.5 million in the thirdfirst quarter of 2016.2017. The slight increase isbetween years was the net impact of higher commercial water meterpricing, higher sales to the Middle East, higher service revenue due to increases in BEACON radio sales and the inclusion of $0.8 million ofhigher sales from D-Flow, which wasrecently acquired earlier in 2017,companies, offset somewhat by lower salesvolumes of residentialdomestic meters and related technologies. A portion ofradios sold. The company attributes the decrease in residential sales was duedomestic volumes to lower international sales,timing of orders and a slower start at the beginning of the year. Weather may have played a role in the timing of orders, particularly in the Middle East, where sales tend to be sporadic.a number of key markets.

Gross margin as a percentage of sales was 37.0%35.0% in the thirdfirst quarter of 20172018 compared to 40.1%38.0% in the thirdfirst quarter of 2016.2017. The decline was caused by the lower percentage was duevolumes impact on capacity utilization, higher brass costs and expenses associated with the move of the Company’s Scottsdale, Arizona operations, which closed on March 31, 2018, to the Company's Racine, Wisconsin facility. These factors were offset somewhat by higher material costs, primarily brass, as well as higher warranty, obsolescence and after-sales costs.prices on products sold.

Selling, engineering and administration expenses for the three months ended September 30, 2017 decreased slightlyMarch 31, 2018 increased $1.7 million, or 6.8%, to $24.6 million compared to $24.7$26.8 from $25.1 million in the third quarter of 2016, which included a $0.7 million non-cash pension settlement charge that did not recur in the thirdfirst quarter of 2017. Also impactingThe main reasons for the net change was the addition of expensesincrease were additional staff associated with D-Flow in 2017.the 2017 acquisitions, which occurred after the first quarter of that year, and normal inflationary increases.

Operating earnings for the thirdfirst quarter of 20172018 decreased $1.5$3.6 million, or 10.8%26.5%, to $12.4$10.0 million compared to $13.9$13.6 million in the same period in 2016.2017. The decrease was driven bythe net impact of the lower gross margins and higher material, warranty, obsolescenceselling, engineering and after-sales costs.administration expenses.

The provision for income taxes as a percentage of earnings before income taxes for the thirdfirst quarter of 20172018 was 34.5%22.2% compared to 36.0%34.2% in the thirdfirst quarter of 2016.2017. Interim provisions are tied to an estimate of the overall annual rate that can vary due to state taxes, the relationship of foreign and domestic earnings and production and other credits available. The decrease between years was due almost entirely to the lower Federal tax rate, which declined from 35% in 2017 to 21% in 2018.

    

As a result of the above-mentioned items, net earnings for the three months ended September 30, 2017March 31, 2018 were $8.0$7.5 million, or $0.27$0.26 per diluted share, compared to $8.8$8.7 million, or $0.30 per diluted share, for the same period in 2016.

The main sources of liquidity for the Company are cash from operations and borrowing capacity. Cash provided by operations was $45.9$6.8 million for the first ninethree months of 20172018 compared to $40.2$12.4 million through the first ninethree months of 2016. The increase2017. Last year’s amount was due tofavorably impacted by a decrease in inventory balances which did not recur this year. These, along with lower net income, were the higher earnings and efforts to control inventory balances. The September 30, 2017primary reasons for the decrease in cash amount includes approximately $4.7 million of cash denominated in Swedish krona, which is anticipated to be used within the next eighteen months to satisfy an equal amount of Swedish denominated liabilities that aroseprovided from the acquisition of D-Flow.operations.

Receivables increased from $59.8$58.2 million at December 31, 20162017 to $68.9$63.4 million at September 30, 2017. The higher receivables balance was due to increased sales in the third quarter of 2017 compared to the fourth quarter of 2016.March 31, 2018. Generally, the receivables balance isreceivable balances are lower at year-end than at other times of the year.year due to seasonality in the Company’s business. The Company believes its net receivables balance is fully collectible.

Inventories decreased to $77.0at March 31, 2018 were $85.1 million, at September 30, 2017only a slight change from $77.7$85.2 million at December 31, 20162017. These balances fluctuate from time to time due to higherthe level of sales and the timing of inventory purchases.

Net property, plant and equipment at September 30, 2017 increased to $93.1 millionMarch 31, 2018 decreased slightly from $90.2$93.6 million at December 31, 2016.2017 to $93.5 million at March 31, 2018. This increase was the net effect of $11.6depreciation expense, offset somewhat by $3.0 million of capital expenditures in the first three quartersmonths of 2017, which was offset somewhat by depreciation expense.2018.

Intangible assets increaseddecreased to $57.8$57.5 million at September 30, 2017March 31, 2018 from $51.9$59.3 million at December 31, 20162017 due to the acquisition of D-Flow, offset somewhat by normal amortization expense. The acquisition of D-Flow also accounted for the increase in goodwill from $49.3 million at December 31, 2016 to $61.2 million at September 30, 2017.

Short-term debt at September 30, 2017March 31, 2018 increased to $45.0$48.2 million from $38.0$44.6 million at December 31, 20162017 due primarily to the acquisitiontiming of D-Flow.cash needs.

Payables and other current liabilities of $27.1$24.3 million at September 30, 2017 increasedMarch 31, 2018 decreased from $18.4$28.6 million at December 31, 2016.2017. These balances were impacted by the timing of purchases and payments. The September 30, 2017 balance also includes approximately $4.7 million of Swedish krona denominated liabilities related to the acquisition of D-Flow.

Accrued compensation and employee benefits decreased to $13.8$9.4 million at September 30, 2017March 31, 2018 from $13.9$15.5 million at December 31, 20162017 due primarily to payments made in the first quarter of 2018 related to 2017 for prior year employeeearned incentives, offset somewhat by employee incentive compensationprovisions made for 2018 incentives earned to date indate.

Income and other taxes payable increased to $3.0 million at March 31, 2018 from $1.1 million at December 31, 2017. The change was the net impact of the lower Federal tax rate for 2018 and the timing of actual tax payments.

The overall increase in total shareholders’ equity from $256.2$277.5 million at December 31, 20162017 to $274.1$280.7 million at September 30, 2017March 31, 2018 was the net effect of net earnings and stock options exercised, offset by dividends paid and repurchased stock.

The Company’s financial condition remains strong. In September 2016, the Company amended its May 2012 credit agreement with its primary lender to a three-year $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 September 30, 2017.March 31, 2018. The Company believes that its operating cash flows, available borrowing capacity, and its ability to raise capital provide adequate resources to fund ongoing operating requirements, future capital expenditures and the development of new products. The Company continues to take advantage of its local commercial paper market and carefully monitors the current borrowing market. The Company had $88.2$85.4 million of unused credit lines available at September 30, 2017.March 31, 2018.

The Company is subject to contingencies related to environmental laws and regulations. The Company is named as one of many potentially responsible parties in two landfill lawsuits. The landfill sites are impacted by the Federal Comprehensive Environmental Response, Compensation and Liability Act and other environmental laws and regulations. At this time, the Company does not believe the ultimate resolution of these matters will 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. This belief is based on the Company’s assessment of its limited past involvement with these landfill sites as well as the substantial involvement of and government focus on other named third parties with these landfill sites. However, due to the inherent uncertainties of such proceedings, the Company cannot predict the ultimate outcome of any of these matters. 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 20162017 and the first three quartersquarter of 20172018 were not material.

See the “Special Note Regarding Forward Looking Statements” at the front of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 for a discussion of risks and uncertainties that could impact the Company’s financial performance and results of operations.

The Company’s off-balance sheet arrangements and contractual obligations are discussed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Off-Balance Sheet Arrangements” and “Contractual Obligations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 and have not materially changed since that report was filed unless otherwise indicated in this Form 10-Q.

The Company’s quantitative and qualitative disclosures about market risk are included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 and have not materially changed since that report was filed.

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 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 - Finance, Chief Financial Officer and Treasurer, 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 quarter ended September 30, 2017.March 31, 2018. 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 - Finance, Chief Financial Officer and Treasurer concluded that, as of the date of such evaluation, the Company’s disclosure controls and procedures were effective.

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2017March 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.