Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A. Risk Factors in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, including our consolidated financial statements and the notes thereto, which appears elsewhere in this Annual Report.

Overview

Organization

We are a leading global provider of security products and solutions operating in three geographic regions: Americas, EMEIA, and Asia Pacific. We sell a wide range of security products and solutions for end-users in commercial, institutional and residential markets worldwide, including into the education, healthcare, government, commercial office and single and multi-family residential markets. Our corporate brands include Schlage, Von Duprin, LCN, CISA, SimonsVoss and Interflex.

Trends and Economic Events

Current market conditions have improved over the past few years, and we believe the security products industry will also benefit from continued growth in institutional, commercial, and residential end-markets. We also expect the security products industry will benefit from favorable long-term demographic trends such as continued urbanization of the global population, increased concerns about safety and security and technology-driven innovation.

In recent years, growth in electronic security products and solutions continues to outperform the industry, and we expect growth in the global electronic product categories we serve to continue to outperform the security products industry as a whole as end-users adopt newer technologies in their facilities. Our recent acquisitions have been made to capitalize on this trend.

The economic conditions discussed above and a number of other challenges and uncertainties that could affect our business are described under "Risk Factors."

2017 and 2016 Significant Events

Acquisitions

We completed one business acquisition in both 2017 and 2016:

Acquisitions
Business	Month
Trelock	June 2016
Republic	January 2017

The incremental impact of the acquisitions for the twelve months ended December 31, 2017 was a net increase in revenues of approximately $32.3 million and a net decrease to operating income of approximately $0.6 million compared to the same period in the prior year. The incremental impact of the acquisitions and divestitures for the twelve months ended December 31, 2016 was a net increase in revenues of approximately $63.6 million and a net increase in operating income of approximately $7.3 million compared to the same period in the prior year.

During the year ended December 31, 2017, we incurred $4.7 million of due diligence and acquisition and integration costs. Acquisition related costs were not material to the 2016 Consolidated Statement of Comprehensive Income.

2017 Dividends

We paid quarterly dividends of $0.16 per ordinary share to shareholders on record as of March 13, 2017, June 13, 2017, September 15, 2017, and December 15, 2017. We paid a total of $60.9 million in cash for dividends to ordinary shareholders during the year ended December 31, 2017.

Restructuring charges

In conjunction with ongoing restructuring actions throughout the year primarily related to workforce reductions and the closure and consolidation of manufacturing facilities in an effort to increase efficiencies, we incurred charges of $12.3 million for the year ended December 31, 2017.

We also incurred $1.5 million of other non-qualified restructuring charges during the year ended December 31, 2017 related to costs directly attributable to restructuring activities, but do not fall into the severance, exit, or disposal category.

Financing activities

We entered into a new $1.2 billion unsecured credit agreement (the "Credit Agreement"), consisting of a $700.0 million term loan facility (the “Term Facility”) and a $500.0 million revolving credit facility (the “Revolving Facility”, and together with the Term Facility, the “Credit Facilities”). The initial proceeds of $700.0 million from the Term Facility, along with initial borrowings of $165.0 million under the Revolving Facility, were used primarily to repay in full our previously outstanding secured credit facility, the Second Amended and Restated Credit Agreement, dated as of September 30, 2015. All obligations under the Second Amended and Restated Credit Agreement were satisfied, all commitments thereunder were terminated, and all guarantees and security interests that had been granted in connection therewith were released.

On October 2, 2017, we issued $400.0 million of 3.200% Senior Notes due 2024 (the “3.200% Senior Notes”) and $400.0 million of 3.550% Senior Notes due 2027 (the “3.550% Senior Notes” and, together with the 3.200% Senior Notes, the “Notes”). On October 3, 2017 we used the net proceeds from the Notes to redeem in full the $300.0 million Senior Notes due 2021 and the $300.0 million Senior Notes due 2023, as well as to repay in full the $165.0 million of borrowings under the Revolving Facility and other costs associated with the refinancing.

Results of Operations - For the years ended December 31

Dollar amounts in millions, except per share data		2017				% of Revenues			2016				% of Revenues			2015				% of Revenues
Net revenues		$	2,408.2						$	2,238.0						$	2,068.1
Cost of goods sold		1,337.5				55.5	%		1,252.7				56.0	%		1,199.0				58.0	%
Selling and administrative expenses		582.5				24.2	%		559.8				25.0	%		510.5				24.7	%
Operating income		488.2				20.3	%		425.5				19.0	%		358.6				17.3	%
Interest expense		105.7							64.3							52.9
Loss on divestitures		—							84.4							104.2
Other income, net		(13.2		)					(18.2		)					(7.8		)
Earnings before income taxes		395.7							295.0							209.3
Provision for income taxes		119.0							63.8							54.6
Earnings from continuing operations		276.7							231.2							154.7
Discontinued operations, net of tax		—							—							(0.4		)
Net earnings		276.7							231.2							154.3
Less: Net earnings attributable to noncontrolling interests		3.4							2.1							0.4
Net earnings attributable to Allegion plc		$	273.3						$	229.1						$	153.9
Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders:
Continuing operations		$	2.85						$	2.36						$	1.59
Discontinued operations		—							—							—
Net earnings		$	2.85						$	2.36						$	1.59

Net Revenues

Net revenues for the year ended December 31, 2017 increased by 7.6%, or $170.2 million, compared to the same period in 2016 due to the following:

Pricing	1.8	%
Volume	3.9	%
Acquisitions	1.4	%
Currency exchange rates	0.5	%
Total	7.6	%

The increase in net revenues was primarily driven by higher volumes and improved pricing in all segments, incremental revenue from the acquisitions discussed above, and favorable foreign currency exchange rate movements relative to the US Dollar.

Net revenues for the year ended December 31, 2016 increased by 8.2%, or $169.9 million, compared to the same period in 2015 due to the following:

Pricing	1.0	%
Volume	4.8	%
Acquisitions / divestitures	3.0	%
Currency exchange rates	(0.6	)%
Total	8.2	%

The increase in net revenues was primarily driven by higher volumes and improved pricing in all segments and incremental revenue from acquisitions in our EMEIA segment, offset by unfavorable foreign currency exchange rate movements due to the strengthening of the US dollar against currencies in EMEIA, primarily the British pound.

Cost of Goods Sold

For the year ended December 31, 2017, cost of goods sold as a percentage of revenue decreased to 55.5% from 56.0% due to the following:

Pricing and productivity in excess of inflation	(0.5	)%
Volume/product mix	0.4	%
Acquisitions	0.5	%
Currency exchange rates	(0.1	)%
Environmental remediation charge	(0.7	)%
Restructuring / acquisition costs	(0.1	)%
Total	(0.5	)%

Costs of goods sold as a percentage of revenue for the year ended December 31, 2017 decreased primarily due to pricing and productivity benefits in excess of inflation, favorable foreign currency exchange rate movements, a decrease related to an environmental remediation charge in the prior year, and decreased restructuring costs. These decreases were offset by unfavorable product mix and volume and the impact of acquisitions.

For the year ended December 31, 2016, cost of goods sold as a percentage of revenue decreased to 56.0% from 58.0% due to the following:

Pricing and productivity in excess of inflation	(1.3	)%
Acquisitions / divestitures	(0.5	)%
Investment spending	0.2	%
Currency exchange rates	(0.3	)%
Non-cash inventory impairment	(0.2	)%
Environmental remediation charge	0.7	%
Restructuring / acquisition costs	(0.6	)%
Total	(2.0	)%

Costs of goods sold as a percentage of revenue for the year ended December 31, 2016 decreased primarily due to productivity benefits in excess of inflation, the impact of the acquisitions discussed above, favorable foreign currency exchange rate movements and decreased restructuring costs primarily in our EMEIA segment. These decreases were offset by increased investment spending and a charge for a change in approach for environmental remediation related to two sites in the Americas.

Selling and Administrative Expenses

For the year ended December 31, 2017, selling and administrative expenses as a percentage of revenue decreased to 24.2% from 25.0% due to the following:

Productivity in excess of inflation	(0.7	)%
Volume leverage	(0.9	)%
Acquisitions	(0.2	)%
Investment spending	0.7	%
Restructuring / acquisition costs	0.3	%
Total	(0.8	)%

Selling and administrative expenses as a percentage of revenue for the year ended December 31, 2017 decreased primarily due to favorable leverage due to increased volume, productivity benefits in excess of inflation, and acquisitions. These decreases were partially offset due to increased investment spending and higher restructuring and acquisition costs.

For the year ended December 31, 2016, selling and administrative expenses as a percentage of revenue increased to 25.0% from 24.7% due to the following:

Other inflation in excess of productivity	0.8	%
Volume leverage	(1.2	)%
Acquisitions / divestitures	0.7	%
Investment spending	0.4	%
Restructuring / acquisition costs	(0.4	)%
Total	0.3	%

Selling and administrative expenses as a percentage of revenue for the year ended December 31, 2016 increased primarily due to acquisitions, increased investment spending and inflation in excess of productivity. These increases were offset by favorable leverage due to increased volume and lower restructuring and acquisition costs.

Operating Income/Margin

Operating income for the year ended December 31, 2017 increased $62.7 million from the same period in 2016 and operating margin increased to 20.3% from 19.0% for the same period in 2016 due to the following:

in millions	Operating Income				Operating Margin
December 31, 2016	$	425.5			19.0	%
Pricing and productivity in excess of inflation	35.0				1.2	%
Volume/product mix	29.4				0.5	%
Currency exchange rates	4.3				0.1	%
Investment spending	(15.3		)		(0.7	)%
Acquisitions	(0.6		)		(0.3	)%
Environmental remediation charge	15.0				0.7	%
Restructuring / acquisition costs	(5.1		)		(0.2	)%
December 31, 2017	$	488.2			20.3	%

Operating income and operating margin both increased due to favorable volume/product mix in all of our segments, pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements, and lower environmental remediation charges in the current year due to a charge in the prior year for a change in approach for environmental remediation related to two sites in the Americas. These increases were partially offset by investment spending and the impact of acquisitions and higher restructuring and acquisition costs.

Operating income for the year ended December 31, 2016 increased $66.9 million and operating margin increased to 19.0% from 17.3% for the same period in 2015 due to the following:

in millions	Operating Income				Operating Margin
December 31, 2015	$	358.6			17.3	%
Pricing and productivity in excess of inflation	13.6				0.5	%
Volume/product mix	44.0				1.2	%
Non-cash inventory impairment	4.2				0.2	%
Currency exchange rates	4.6				0.3	%
Investment spending	(12.3		)		(0.6	)%
Acquisitions / divestitures	7.3				(0.2	)%
Environmental remediation charge	(15.0		)		(0.7	)%
Restructuring / acquisition costs	20.5				1.0	%
December 31, 2016	$	425.5			19.0	%

Operating income increased primarily due to favorable volume/product mix in all of our segments, pricing improvements and productivity in excess of inflation, lower restructuring and acquisition costs, the impact of acquisitions and divestitures, inventory impairment charges in Venezuela in the prior year that did not occur in the current year and favorable foreign currency exchange rate movements. These increases were partially offset by investment spending and a charge for a change in approach for environmental remediation related to two sites in the Americas.

Operating margin increased primarily due to favorable volume/product mix in all of our segments, pricing improvements and productivity in excess of inflation, lower restructuring and acquisition costs, inventory impairment charges in Venezuela in the prior year and favorable foreign currency exchange rate movements. These increases were partially offset by investment spending, the impact of acquisitions and divestitures, and a charge for a change in approach for environmental remediation related to two sites in the Americas.

Interest Expense

Interest expense for the year ended December 31, 2017 increased $41.4 million compared to the same period in 2016. Interest expense increased primarily due to $44.7 million of costs associated with the refinancing of our Credit Facilities, issuance of our new 3.200% and 3.550% Senior Notes, and redemption of our previously outstanding Senior Notes due 2021 and 2023.

Interest expense for the year ended December 31, 2016 increased $11.4 million compared with the same period of 2015. Interest expense increased primarily due to increased debt balances from the September 2015 issuance of the Senior Notes due 2023.

Loss on Divestitures

During the year ended December 31, 2015 we entered into an agreement to sell a majority stake in our systems integration business in China and recorded a pre-tax charge of $78.1 million ($82.4 million after tax charges) to write the carrying value of the assets and liabilities down to their estimated fair value less costs to complete the transaction. During the year ended December 31, 2016 we recorded an additional after tax charge of $84.4 million to further write-down the carrying value of consideration receivable related to this divestiture.

Other income, net

The components of Other income, net, for the year ended December 31 were as follows:

In millions		2017				2016				2015
Interest income		$	(1.2	)		$	(1.9	)		$	(1.5	)
Exchange loss		0.7				2.0				4.9
(Earnings) loss from and (gains) on the sale of equity investments		(5.4		)		(3.6		)		0.3
Other		(7.3		)		(14.7		)		(11.5		)
Other income, net		$	(13.2	)		$	(18.2	)		$	(7.8	)

For the year ended December 31, 2017, Other income, net decreased by $5.0 million compared to the same period in 2016. During the year ended December 31, 2017 we recorded a cumulative gain of $5.4 million from the sale of iDevices, LLC, and gains of $7.3 million related to legal entity liquidations in our Asia Pacific region, of which $2.2 million has been attributed to noncontrolling interests.

For the year ended December 31, 2016, Other income, net increased by $10.4 million compared with the same period in 2015. During the year ended December 31, 2016 we recorded gains from the sale of marketable securities of $12.4 million, which is included within Other in the table above. Additionally, earnings from equity method investments increased primarily due to a gain recognized by an investment in 2016.

Provision for Income Taxes

On December 22, 2017, the President of the United States signed comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act makes broad and complex changes to the U.S. tax code which will impact our year ended December 31, 2017 including, but not limited to (1) reducing the U.S. federal corporate tax rate, (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may electively be paid over eight years, and (3) requiring a review of the future realizability of deferred tax balances.

For the year ended December 31, 2017, our effective tax rate was 30.1% compared to 21.6% for the year ended December 31, 2016. The effective income tax rate for the year ended December 31, 2017 was negatively impacted by a $53.5 million tax charge related to the Tax Reform Act, which was partially offset by the release of $10.4 million of valuation allowances. The effective income tax rate for the year ended December 31, 2016 was negatively impacted by $84.4 million (before and after tax) of charges related to the divestiture of our systems integration business in China during 2015.

For the year ended December 31, 2016, our effective tax rate was 21.6% compared to 26.1% for the year ended December 31, 2015. The effective income tax rate for the year ended December 31, 2016 was negatively impacted by $84.4 million (before and after tax) of charges related to the divestiture of our systems integration business in China during 2015. The effective income tax rate for the ended December 31, 2015 was negatively impacted by $111.3 million ($115.0 million after tax) of charges related to the divestiture of our systems integration business in China, the divestiture of our business in Venezuela and the devaluation of the Venezuelan bolivar. Excluding these charges, the effective tax rate for the year ended December 31, 2016 increased primarily due to increases in uncertain tax positions in 2016 that were partially offset by favorable changes in the mix of income earned in lower rate jurisdictions and the continued execution of our tax strategies.

Review of Business Segments

We operate in and report financial results for three segments: Americas, EMEIA, and Asia Pacific. These segments represent the level at which our chief operating decision maker reviews company financial performance and makes operating decisions.

Segment operating income is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of the business and as the basis for resource allocation, performance reviews, and compensation. For these reasons, we believe that Segment operating income represents the most relevant measure of Segment profit and loss. Our chief operating decision maker may exclude certain charges or gains, such as corporate charges and other special charges, from operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss upon which to base our operating decisions. We define Segment operating margin as Segment operating income as a percentage of net revenues.

The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in continuing operations.

Segment Results of Operations - For the years ended December 31

in millions	2017				2016				% Change			2016				2015				% Change
Net revenues
Americas	$	1,767.5			$	1,645.7			7.4	%		$	1,645.7			$	1,558.4			5.6	%
EMEIA	523.5				485.9				7.7	%		485.9				386.3				25.8	%
Asia Pacific	117.2				106.4				10.2	%		106.4				123.4				(13.8	)%
Total	$	2,408.2			$	2,238.0						$	2,238.0			$	2,068.1
Segment operating income (loss)
Americas	$	503.3			$	448.1			12.3	%		$	448.1			$	418.0			7.2	%
EMEIA	45.2				35.9				25.9	%		35.9				8.6				317.4	%
Asia Pacific	9.5				6.1				55.7	%		6.1				(3.4		)		279.4	%
Total	$	558.0			$	490.1						$	490.1			$	423.2
Segment operating margin
Americas	28.5		%		27.2		%					27.2		%		26.8		%
EMEIA	8.6		%		7.4		%					7.4		%		2.2		%
Asia Pacific	8.1		%		5.7		%					5.7		%		(2.8		)%

Americas

Our Americas segment is a leading provider of security products and solutions in approximately 30 countries throughout North America, Central America, the Caribbean and South America. The segment sells a broad range of products and solutions including, locks, locksets, portable locks, key systems, door closers, exit devices, doors and door systems, electronic product and access control systems to end-users in commercial, institutional and residential facilities, including into the education, healthcare, government, commercial office and single and multi-family residential markets. This segment’s primary brands are Schlage, Von Duprin and LCN.

2017 vs 2016

Net revenues

Net revenues for the year ended December 31, 2017 increased by 7.4%, or $121.8 million, compared to the same period in 2016 due to the following:

Pricing	2.0	%
Volume	3.8	%
Acquisitions	1.4	%
Currency exchange rates	0.2	%
Total	7.4	%

The increase in revenues was due to higher volumes, improved pricing, the impact of an acquisition in January 2017, and favorable foreign currency exchange rate movements. Net revenues from non-residential products for the year ended December 31, 2017 increased high single digits compared to the same period in the prior year due to market growth, product launches and channel initiatives. Net revenues from residential products for the year ended December 31, 2017 increased mid-single digits compared to the same period in the prior year primarily due to domestic market growth.

Operating income/margin

Segment operating income for the year ended December 31, 2017 increased $55.2 million and segment operating margin increased to 28.5% from 27.2% compared to the same period in 2016 due to the following:

in millions	Operating Income				Operating Margin
December 31, 2016	$	448.1			27.2	%
Pricing and productivity in excess of inflation	29.3				1.2	%
Volume / Product mix	22.2				0.3	%
Currency exchange rates	2.6				0.1	%
Investment spending	(10.7		)		(0.6	)%
Acquisitions	0.3				(0.4	)%
Environmental remediation charge	15.0				0.9	%
Restructuring / acquisition costs	(3.5		)		(0.2	)%
December 31, 2017	$	503.3			28.5	%

Operating income increased primarily due to pricing improvements and productivity in excess of inflation, favorable volume/product mix, favorable foreign currency exchange rate movements, lower environmental remediation charges in the current year due to a charge in the prior year for a change in approach for environmental remediation related to two sites in the U.S., and the impact of acquisitions. These increases were partially offset by increased investment spending primarily for new product development and channel development and restructuring and acquisition costs.

Operating margin increased primarily due to pricing improvements and productivity in excess of inflation, favorable volume/product mix, favorable foreign currency exchange rate movements, and lower environmental remediation charges in the current year due to a charge in the prior year for a change in approach for environmental remediation related to two sites in the U.S. These increases were partially offset by increased investment spending primarily for new product development and channel development, restructuring and acquisition costs, and the impact of acquisitions.

2016 vs 2015

Net revenues

Net revenues for the year ended December 31, 2016 increased by 5.6%, or $87.3 million, compared to the same period in 2015 due to the following:

Pricing	0.9	%
Volume	5.6	%
Acquisitions	(0.6	)%
Currency exchange rates	(0.3	)%
Total	5.6	%

The increase in revenues was primarily due to higher volumes and improved pricing. Net revenues from non-residential products for the year ended December 31, 2016 increased mid to high single digits compared to the same period in the prior year due to market growth, product launches, and channel initiatives. Net revenues from residential products for the year ended December 31, 2016 increased low single digits compared to the same period in the prior year primarily due to domestic market growth. These increases were partially offset by unfavorable foreign currency exchange movements and the 2015 divestiture of our Venezuelan operation.

Operating income/margin

Segment operating income for the year ended December 31, 2016 increased $30.1 million and segment operating margin increased to 27.2% from 26.8% compared to the same period in 2015 due to the following:

in millions	Operating Income				Operating Margin
December 31, 2015	$	418.0			26.8	%
Pricing and productivity in excess of inflation	9.9				0.4	%
Volume / Product mix	40.2				1.0	%
Non-cash inventory impairment	4.2				0.3	%
Currency exchange rates	6.5				0.5	%
Investment spending	(6.4		)		(0.4	)%
Acquisitions / divestitures	(7.4		)		(0.3	)%
Environmental remediation charge	(15.0		)		(1.0	)%
Restructuring / acquisition costs	(1.9		)		(0.1	)%
December 31, 2016	$	448.1			27.2	%

The increases were primarily due to favorable volume/product mix, inventory impairment charges year-over-year in Venezuela, pricing improvements and productivity in excess of inflation and favorable foreign currency exchange rate movements. These increases were partially offset by the divestiture of our Venezuelan operations, increased investment spending primarily for new product development and channel development, restructuring and acquisition costs and a charge for a change in approach for environmental remediation at two sites in the U.S.

EMEIA

Our EMEIA segment provides security products and solutions in approximately 85 countries throughout Europe, the Middle East, India and Africa. The segment offers end-users a broad range of products, services and solutions including, locks, locksets, portable locks, key systems, door closers, exit devices, doors and door systems, electronic product and access control systems, as well as time and attendance and workforce productivity solutions. This segment’s primary brands are AXA, Bricard, CISA, Interflex and SimonsVoss. This segment also resells Schlage, Von Duprin and LCN products, primarily in the Middle East.

2017 vs 2016

Net revenues

Net revenues for the year ended December 31, 2017 increased by 7.7%, or $37.6 million, compared to the same period in 2016 due to the following:

Pricing	1.6	%
Volume	3.1	%
Acquisitions	1.6	%
Currency exchange rates	1.4	%
Total	7.7	%

The increase in revenues was due to higher volumes, improved pricing, the impact of an acquisition made in the prior year, and favorable foreign currency exchange rate movements.

Operating income/margin

Segment operating income for the year ended December 31, 2017 increased $9.3 million and segment operating margin increased to 8.6% from 7.4% compared to the same period in 2016 due to the following:

in millions	Operating Income				Operating Margin
December 31, 2016	$	35.9			7.4	%
Pricing and productivity in excess of inflation	5.1				0.9	%
Volume / Product mix	5.2				0.8	%
Currency exchange rates	1.3				0.1	%
Investment spending	(2.4		)		(0.5	)%
Acquisitions	(0.9		)		(0.3	)%
Restructuring / acquisition costs	1.0				0.2	%
December 31, 2017	$	45.2			8.6	%

The increases were primarily due to pricing improvements and productivity in excess of inflation, improvements in volume/product mix, favorable foreign currency exchange rate movements, and year-over-year change in restructuring and acquisition costs. These increases were partially offset by increased investment spending and the impact from an acquisition in the prior year.

2016 vs 2015

Net revenue

Net revenues for the year ended December 31, 2016 increased by 25.8%, or $99.6 million, compared to the same period in 2015 due to following:

Pricing	1.2	%
Volume	1.0	%
Acquisitions / divestitures	25.4	%
Currency exchange rates	(1.8	)%
Total	25.8	%

The increase in revenues was primarily due to the full-year impact of acquisitions made in 2015, slightly higher volumes and improved pricing offset by unfavorable foreign currency exchange rate movements.

Operating income/margin

Segment operating income for the year ended December 31, 2016 increased $27.3 million and operating margin increased to 7.4% from 2.2% compared to the same period in 2015 due to the following:

in millions	Operating Income				Operating Margin
December 31, 2015	$	8.6			2.2	%
Pricing and productivity in excess of inflation	9.4				1.6	%
Volume / Product mix	0.2				—	%
Currency exchange rates	(1.9		)		(0.5	)%
Investment spending	(2.2		)		(0.6	)%
Acquisitions / divestitures	9.0				1.4	%
Restructuring / acquisition costs	12.8				3.3	%
December 31, 2016	$	35.9			7.4	%

The increases were primarily due to pricing improvements and productivity in excess of inflation, the impact of 2015 acquisitions, slight improvement in volume/product mix and year-over-year change in restructuring and acquisition costs. These increases were partially offset by unfavorable foreign currency exchange rate movements and increased investment spending.

Asia Pacific

Our Asia Pacific segment provides security products and solutions in approximately 15 countries throughout the Asia Pacific region. The segment offers end-users a broad range of products, services and solutions including, locks, locksets, portable locks, key systems, door closers, exit devices, electronic product and access control systems. This segment’s primary brands are Milre, Schlage, Legge, Brio and FSH.

2017 vs 2016

Net revenues

Net revenues for the year ended December 31, 2017 increased by 10.2%, or $10.8 million, compared to the same period in 2016, due to the following:

Pricing	0.4	%
Volume	7.3	%
Acquisitions	0.7	%
Currency exchange rates	1.8	%
Total	10.2	%

The increase in revenues was due to higher volumes, improved pricing, the impact of an acquisition made in the prior year, and favorable foreign currency exchange rate movements.

Operating income/margin

Segment operating income for the year ended December 31, 2017 increased $3.4 million and segment operating margin increased to 8.1% from 5.7% compared with the same period in 2016 due to the following:

in millions	Operating Income				Operating Margin
December 31, 2016	$	6.1			5.7	%
Pricing and productivity in excess of inflation	1.5				1.3	%
Volume / Product mix	2.0				1.3	%
Currency exchange rates	0.4				0.3	%
Investment spending	(0.4		)		(0.4	)%
Acquisitions	(0.1		)		(0.1	)%
December 31, 2017	$	9.5			8.1	%

The increases were primarily related to pricing improvements and productivity in excess of inflation, improved volume/product mix, and favorable foreign currency exchange rate movements. These increases were partially offset by increased investment spending and the impact of an acquisition in the prior year.

2016 vs 2015

Net revenues

Net revenues for the year ended December 31, 2016 decreased by 13.8%, or $17.0 million, compared with the same period of 2015, due to the following:

Pricing	0.4	%
Volume	7.1	%
Acquisitions / divestitures	(19.7	)%
Currency exchange rates	(1.6	)%
Total	(13.8	)%

The decrease in revenues was primarily due to the divestiture of our systems integration business in China in the fourth quarter of 2015, as well as unfavorable foreign currency exchange rate movements. These decreases were partially offset by higher volumes, acquisition revenue and slightly improved pricing in our remaining business.

Operating income/margin

Segment operating income for the year ended December 31, 2016 increased $9.5 million and segment operating margin increased to 5.7% from (2.8)% compared with the same period in 2015 due to the following:

in millions	Operating Income				Operating Margin
December 31, 2015	$	(3.4	)		(2.8	)%
Inflation in excess of pricing and productivity	(0.4		)		(0.1	)%
Volume / Product mix	3.5				2.8	%
Investment spending	(1.1		)		(0.9	)%
Acquisitions / divestitures	5.6				5.1	%
Restructuring / acquisition costs	1.9				1.6	%
December 31, 2016	$	6.1			5.7	%

The increases were primarily related to improved volume/product mix, the divestiture of our systems integration business in China in 2015, acquisitions and the year-over-year change in restructuring and acquisition costs. These increases were partially offset by increased investment spending and inflation in excess of pricing and productivity.

Liquidity and Capital Resources

Sources and uses of liquidity

Our primary source of liquidity is cash provided by operating activities. Cash provided by operating activities is used to invest in new product development, fund capital expenditures and fund working capital requirements and is expected to be adequate to service any future debt, pay any declared dividends and potentially fund acquisitions and share repurchases. Our ability to fund these capital needs depends on our ongoing ability to generate cash provided by operating activities, and to access our borrowing facilities (including unused availability under our Revolving Facility) and capital markets. We believe that our future cash provided by operating activities, availability under our Revolving Facility and access to funds on hand and capital markets, will provide adequate resources to fund our operating and financing needs.

The following table reflects the major categories of cash flows for the years ended December 31. For additional details, please see the Consolidated Statements of Cash Flows in the Consolidated Financial Statements.

In millions		2017				2016				2015
Cash provided by continuing operating activities		$	347.2			$	377.5			$	257.4
Cash used in investing activities		(50.2		)		(64.0		)		(533.8		)
Cash (used in) provided by financing activities		$	(150.9	)		$	(196.0	)		$	195.0

Operating activities

Net cash provided by continuing operating activities for the year ended December 31, 2017 decreased $30.3 million compared to the same period in 2016. Operating cash flows for 2017 reflect a discretionary $50.0 million contribution to the U.S. qualified defined benefit pension plan and increased cash paid for taxes, which were partially offset by higher net earnings compared to the same period in the prior year.

Net cash provided by continuing operating activities for the year ended December 31, 2016 increased $120.1 million compared to the same period in 2015. Operating cash flows for 2016 reflect higher net earnings compared to the same period in 2015.

Investing activities

Net cash used in investing activities for the year ended December 31, 2017 decreased $13.8 million compared to the same period in the prior year. The decrease in net cash used in investing activities is primarily due to $15.6 million in proceeds from the sale of an equity investment during 2017 that did not occur in the prior year and a $10.6 million decrease of cash payments related to acquisitions. These changes were partially offset by $14.1 million of cash received from the sale of marketable securities in 2016 that did not recur in the current year.

Net cash used in investing activities for the year ended December 31, 2016 decreased $469.8 million compared to the same period in the prior year. During the year ended December 31, 2016, cash used for acquisitions decreased $479.9 million compared to the year ended December 31, 2015. This was partially offset by an increase in capital expenditures of $7.3 million compared to 2015.

Financing activities

Net cash used in financing activities for the year ended December 31, 2017 decreased $45.1 million compared to the same period in the prior year. The decrease in cash used in financing activities is due to net proceeds from debt issuances over debt repayments of $10.1 million in 2017 versus net debt repayments of $64.4 million during 2016. Current year debt financing activity includes the redemption of the 2021 and 2023 Senior Notes for a total of $600.0 million and the settlement of the previously outstanding Term Loan A Facility of $856.3 million, offset by the issuance of the 3.200% and 3.550% Senior Notes in an aggregate amount of $800.0 million and a new term loan facility maturing on September 12, 2022 (the "Term Facility") in the amount of $700.0 million. Additionally, during the year ended December 31, 2017, we repurchased $60.0 million of common shares, compared to $85.1 million during 2016. We also made dividend payments to ordinary shareholders of $60.9 million during the current year, compared to $46.0 million in 2016.

Net cash used in financing activities for the year ended December 31, 2016 increased $391.0 million compared to the same period in the prior year. Net repayments of debt totaled $64.4 million for the year ended December 31, 2016 primarily associated with required amortization payments from our previously outstanding Term Loan A Facility and repayments of other borrowings. Proceeds from long-term debt were $300.0 million for the year ended December 31, 2015. Cash used in other financing activities increased $48.3 million for the year ended December 31, 2016 compared to the prior year primarily due to higher dividend payments and increased repurchases of our ordinary shares partially offset by lower debt issuance costs, lower proceeds from shares issued under incentive plans and a reduction in dividends paid to noncontrolling interests.

Capitalization

Borrowings at December 31 consisted of the following:

In millions	2017				2016
Term Loan A Facility	$	—			$	879.8
Term Facility	691.3				—
Revolving Facility	—				—
5.750% Senior Notes due 2021	—				300.0
5.875% Senior Notes due 2023	—				300.0
3.200% Senior Notes due 2024	400.0				—
3.550% Senior Notes due 2027	400.0				—
Other debt	1.0				2.3
Total borrowings outstanding	1,492.3				1,482.1
Less discounts and debt issuance costs, net	(15.0		)		(18.3		)
Total debt	1,477.3				1,463.8
Less current portion of long term debt	35.0				48.2
Total long-term debt	$	1,442.3			$	1,415.6

As of December 31, 2017, we have a Credit Agreement in place that provides for up to $1,200.0 million in unsecured financing, consisting of a $700.0 million term loan facility (the “Term Facility”) and a $500.0 million revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Credit Facilities”). The Credit Facilities mature on September 12, 2022. The

Term Facility amortizes in quarterly installments at the following rates: 1.25% per quarter starting December 31, 2017 through December 31, 2020, 2.5% per quarter from March, 31, 2021 through June 30, 2022, with the balance due on September 12, 2022. The Revolving Facility provides aggregate commitments of up to $500.0 million, which includes up to $100.0 million for the issuance of letters of credit. At December 31, 2017, there were no borrowings outstanding on the Revolving Facility, and we had $17.4 million of letters of credit outstanding.

Outstanding borrowings under the Credit Facilities accrue interest, at our option of (i) a LIBOR rate plus the applicable margin or (ii) a base rate plus the applicable margin. The applicable margin ranges from 1.125% to 1.500% depending on our credit ratings. To manage our exposure to fluctuations in LIBOR rates, we have interest rate swaps to fix the interest rate for $250.0 million of the outstanding borrowings (see Note 10).

As of December 31, 2017, we also have $400.0 million outstanding of 3.200% Senior Notes due 2024 (the “3.200% Senior Notes”) and $400.0 million outstanding of 3.550% Senior Notes due 2027 (the “3.550% Senior Notes” and, together with the 3.200% Senior Notes, the “Notes”), both of which were issued on October 2, 2017. The Notes require semi-annual interest payments on April 1 and October 1 of each year, and will mature on October 1, 2024 and October 1, 2027, respectively.

Historically, the majority of our earnings were considered to be permanently reinvested in jurisdictions where we have made, and intend to continue to make, substantial investments to support the ongoing development and growth of our global operations. As a result of the Tax Reform Act transition tax, we are currently analyzing our global working capital requirements and the potential tax liabilities that would be incurred if certain non-U.S. subsidiaries made distributions, which include local country withholding tax and potential U.S. state taxation. We are not yet able to reasonably estimate the effect of this provision of the Tax Reform Act and have not recorded any withholding or state tax liabilities or any deferred taxes attributable to our investment in our non-U.S. subsidiaries.

At December 31, 2017, we had cash and cash equivalents of $466.2 million. Approximately 34% of our cash and cash equivalents were located outside the U.S.

Pension Plans

Our investment objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations are met as they come due. We seek to achieve this goal while trying to mitigate volatility in plan funded status, contribution and expense by better matching the characteristics of the plan assets to that of the plan liabilities. Global asset allocation decisions are based on a dynamic approach whereby a plan's allocation to fixed income assets increases as the funded status increases. We monitor plan funded status and asset allocation regularly in addition to investment manager performance.

We monitor the impact of market conditions on our defined benefit plans on a regular basis. In January 2017, we made a discretionary $50.0 million contribution to the U.S. qualified defined benefit pension plan. At December 31, 2017, the funded status of our qualified pension plan for U.S. employees increased to 93.3% from 73.6% at December 31, 2016, primarily as a result of this discretionary contribution. The funded status for our non-U.S. pension plans increased to 100.5% at December 31, 2017 from 92.9% at December 31, 2016. Funded status for all of our pension plans at December 31, 2017 increased to 95.5% from 83.3% at December 31, 2016. For further details on pension plan activity, see Note 11 to the Consolidated Financial Statements.

Contractual Obligations

The following table summarizes our contractual cash obligations by required payment periods, in millions:

		2018				2019-2020				2021-2022				Thereafter				Total
Long-term debt (including current maturities)		$	35.0			$	70.0			$	586.3			$	801.0			$	1,492.3
Interest payments on long-term debt		46.7				90.5				82.5				89.9				309.6
Purchase obligations		169.5				—				—				—				169.5
Operating leases		20.5				30.9				12.0				13.3				76.7
Total contractual cash obligations		$	271.7			$	191.4			$	680.8			$	904.2			$	2,048.1

Future expected obligations under our pension and postretirement benefit plans, income taxes, environmental and product liability matters have not been included in the contractual cash obligations table above.

Pensions

At December 31, 2017, we had net pension liabilities of $32.2 million, which consist of plan assets of $681.6 million and benefit obligations of $713.8 million. It is our objective to contribute to the pension plans to ensure adequate funds are available in the plans to make benefit payments to plan participants and beneficiaries when required. The funded status for all of our pension plans increased to 95.5% at December 31, 2017 from 83.3% at December 31, 2016. We currently project that an additional approximately $13.5 million will be contributed to our plans worldwide in 2018. Because the timing and amounts of long-term funding requirements for pension obligations are uncertain, they have been excluded from the preceding table. See Note 11 to the Consolidated Financial Statements for additional information.

Postretirement Benefits Other than Pensions

At December 31, 2017, we had postretirement benefit obligations of $9.3 million. We fund postretirement benefit costs principally on a pay-as-you-go basis as medical costs are incurred by covered retiree populations. Benefit payments, which are net of expected plan participant contributions and Medicare Part D subsidy, are expected to be approximately $0.9 million in 2018. Because the timing and amounts of long-term funding requirements for postretirement obligations are uncertain, they have been excluded from the preceding table. See Note 11 to the Consolidated Financial Statements for additional information.

Income Taxes

At December 31, 2017, we have total unrecognized tax benefits for uncertain tax positions of $29.0 million and $4.9 million of related accrued interest and penalties, net of tax. The liability has been excluded from the preceding table as we are unable to reasonably estimate the amount and period in which these liabilities might be paid. See Note 17 to the Consolidated Financial Statements for additional information regarding matters relating to income taxes, including unrecognized tax benefits and tax authority disputes.

Contingent Liabilities

We are involved in various litigations, claims and administrative proceedings, including those related to environmental, asbestos-related, and product liability matters. We believe that these liabilities are subject to the uncertainties inherent in estimating future costs for contingent liabilities, and will likely be resolved over an extended period of time. Because the timing and amounts of potential future cash flows are uncertain, they have been excluded from the preceding table. See Note 19 to the Consolidated Financial Statements for additional information.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with those accounting principles requires management to use judgment in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates. If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known.

The following is a summary of certain accounting estimates and assumptions made by management that we consider critical:

•	Allowance for doubtful accounts – We have provided an allowance for doubtful accounts receivable, which represents our best estimate of probable loss inherent in our accounts receivable portfolio. This estimate is based upon our policy, derived from our knowledge of our end markets, customer base and products.

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Goodwill and indefinite-lived intangible assets – We have significant goodwill and indefinite-lived intangible assets on our balance sheet related to acquisitions. Our goodwill and other indefinite-lived intangible assets are tested annually during the fourth quarter for impairment or when there is a significant change in events or circumstances that indicate that the fair value of an asset is more likely than not less than the carrying amount of the asset.

Recoverability of goodwill is measured at the reporting unit level and starts with a comparison of the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a goodwill impairment charge will be recognized for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill.

As quoted market prices are not available for our reporting units, the calculation of their estimated fair value is based on two valuation techniques, a discounted cash flow model (income approach) and a market adjusted multiple of earnings and revenues (market approach), with each method being weighted in the calculation. The income approach relies on the Company’s estimates of future cash flows and explicitly addresses factors such as timing, growth and margins, with due consideration given to forecasting risk. The market approach reflects the market’s expectations for future growth and risk, with adjustments to account for differences between the guideline publicly-traded companies and the subject reporting units.

The estimated fair values for each of our reporting units exceeded their carrying values by more than 15% for the 2017 goodwill impairment test. Additionally, a 1% increase in the discount rate used or a 1% decrease in the terminal growth rate would not result in the carrying value of any reporting unit exceeding its estimated fair value.

Assessing the fair value of our reporting units includes, among other things, making key assumptions for estimating future cash flows and appropriate market multiples. These assumptions are subject to a high degree of judgment and complexity. We make every effort to estimate future cash flows as accurately as possible with the information available at the time the forecast is developed. However, changes in assumptions and estimates may affect the estimated fair value of the reporting unit, and could result in impairment charges in future periods. Factors that have the potential to create variances in the estimated fair value of the reporting unit include but are not limited to the following:

•	Decreases in estimated market sizes or market growth rates due to greater-than-expected declines in volumes, pricing pressures or disruptive technology;

•	Declines in our market share and penetration assumptions due to increased competition or an inability to develop or launch new products;

•	The impacts of the market volatility, including greater-than-expected declines in pricing, reductions in volumes, or fluctuations in foreign exchange rates;

•	The level of success of on-going and future research and development efforts, including those related to recent acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and launch new products;

•	Increase in the price or decrease in the availability of key commodities and the impact of higher energy prices; and

•	Increases in our market-participant risk-adjusted weighted-average cost of capital.

Other Indefinite-lived intangible assets - We performed our annual indefinite-lived intangible asset impairment testing in 2017 and determined our indefinite-lived intangible assets were not impaired. Recoverability of intangible assets with indefinite useful lives is determined on a relief from royalty methodology (income approach), which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than owning the asset. The present value of the after-tax cost savings (i.e. royalty relief) indicates the estimated fair value of the asset. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.

A significant increase in the discount rate, decrease in the long-term growth rate, decrease in the royalty rate or substantial reductions in our end markets and volume assumptions could have a negative impact on the estimated fair values of any of our trade names. The estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about expected future cash flows.

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Long-lived assets and finite-lived intangibles – Long-lived assets and finite-lived intangibles are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. Assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows can be generated. Impairment in the carrying value of an asset could be recognized whenever anticipated future undiscounted cash flows from an asset are less than its carrying value. The impairment is measured as the amount by which the carrying value exceeds the fair value of the asset as determined by an estimate of discounted cash flows. We believe that our use of estimates and assumptions are reasonable and comply with generally accepted accounting principles. Changes in business conditions could potentially require future adjustments to these valuations.

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Loss contingencies – Liabilities are recorded for various contingencies arising in the normal course of business, including litigation and administrative proceedings, environmental and asbestos matters and product liability, product warranty, worker’s compensation and other claims. We have recorded reserves in the consolidated financial statements related to these matters, which are developed using input derived from actuarial estimates and historical and anticipated experience

data depending on the nature of the reserve, and in certain instances with consultation of legal counsel, internal and external consultants and engineers. Subject to the uncertainties inherent in estimating future costs for these types of liabilities, we believe our estimated reserves are reasonable and do not believe the final determination of the liabilities with respect to these matters would have a material effect on our financial condition, results of operations, liquidity or cash flows for any year.

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Revenue recognition – Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) the price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. Delivery generally occurs when the title and the risks and rewards of ownership have transferred to the customer. Both the persuasive evidence of a sales arrangement and fixed or determinable price criteria are deemed to be satisfied upon receipt of an executed and legally binding sales agreement or contract that clearly defines the terms and conditions of the transaction including the respective obligations of the parties. If the defined terms and conditions allow variability in all or a component of the price, revenue is not recognized until such time that the price becomes fixed or determinable. At the point of sale, we validate that existence of an enforceable claim that requires payment within a reasonable amount of time and assesses the collectability of that claim. If collectability is not deemed to be reasonably assured, then revenue recognition is deferred until such time that collectability becomes probable or cash is received. Delivery is not considered to have occurred until the customer has taken title and assumed the risks and rewards of ownership. Service and installation revenue are recognized when earned. In some instances, customer acceptance provisions are included in sales arrangements to give the buyer the ability to ensure the delivered product or service meets the criteria established in the order. In these instances, revenue recognition is deferred until the acceptance terms specified in the arrangement are fulfilled through customer acceptance or a demonstration that established criteria have been satisfied. If uncertainty exists about customer acceptance, revenue is not recognized until acceptance has occurred.

We offer various sales incentive programs to our customers, dealers, and distributors. Sales incentive programs do not preclude revenue recognition, but do require an accrual for our best estimate of expected activity. Examples of the sales incentives that are accrued for as a contra receivable and sales deduction at the point of sale include, but are not limited to, discounts (i.e. net 30 type), coupons, and rebates where the customer does not have to provide any additional requirements to receive the discount. Sales returns and customer disputes involving a question of quantity or price are also accounted for as a reduction in revenue and a contra receivable. At December 31, 2017 and 2016, we had a customer claim accrual (contra receivable) of $32.5 million and $29.0 million, respectively. All other incentives or incentive programs where the customer is required to reach a certain sales level, remain a customer for a certain period, provide a rebate form or is subject to additional requirements are accounted for as a reduction of revenue and establishment of a liability. At December 31, 2017 and 2016, we had a sales incentive accrual of $31.8 million and $29.6 million, respectively. Each of these accruals represents our best estimate we expect to pay related to previously sold units based on historical claim experience. These estimates are reviewed regularly for accuracy. If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material impact on our consolidated financial statements.

•

Income taxes – We account for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. We recognize future tax benefits, such as net operating losses and non-U.S. tax credits, to the extent that realizing these benefits is considered in our judgment to be more likely than not. We regularly review the recoverability of our deferred tax assets considering our historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the feasibility of our tax planning strategies. Where appropriate, we record a valuation allowance with respect to a future tax benefit.

The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which we operate. Future changes in applicable laws, projected levels of taxable income, and tax planning could change the effective tax rate and tax balances recorded by us. In addition, tax authorities periodically review income tax returns filed by us and can raise issues regarding our filing positions, timing and amount of income or deductions, and the allocation of income among the jurisdictions in which we operate. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. We believe that we have adequately provided for any reasonably foreseeable resolution of these matters. We will adjust our estimate if significant events so dictate. To the extent that the ultimate results differ from our original or adjusted estimates, the effect will be recorded in the provision for income taxes in the period that the matter is finally resolved.

The Tax Reform Act constitutes a major change to the U.S. tax system. The estimated impact of the Tax Reform Act is based on current interpretations and related assumptions. As discussed further in Note 17 to the Consolidated Financial

Statements, where applicable, we included provisional estimates in our consolidated financial statements for impacts of the new Tax Reform Act. The actual impact to us may be materially different from current estimates based on regulatory developments and our further analysis of the impacts of the Tax Reform Act. In future periods, our effective tax rate could be subject to additional uncertainty as a result of regulatory developments.

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Employee benefit plans – We provide a range of benefits to eligible employees and retirees, including pensions, postretirement and postemployment benefits. Determining the cost associated with such benefits is dependent on various actuarial assumptions including discount rates, expected return on plan assets, compensation increases, employee mortality, turnover rates and healthcare cost trend rates. Actuarial valuations are performed to determine expense in accordance with GAAP. Actual results may differ from the actuarial assumptions and are generally accumulated and amortized into earnings over future periods.

We review our actuarial assumptions at each measurement date and make modifications to the assumptions based on current rates and trends, if appropriate. The discount rate, the rate of compensation increase and the expected long-term rates of return on plan assets are determined as of each measurement date. Discount rates for all plans are established using hypothetical yield curves based on the yields of corporate bonds rated AA quality. Spot rates are developed from the yield curve and used to discount future benefit payments. The rate of compensation increase is dependent on expected future compensation levels. The expected long-term rate of return on plan assets reflects the average rate of returns expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected long-term rate of return on plan assets is based on what is achievable given the plan’s investment policy, the types of assets held and the target asset allocation. The expected long-term rate of return is determined as of each measurement date.

We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on input from our actuaries, outside investment advisors and information as to assumptions used by plan sponsors.

Changes in any of the assumptions can have an impact on the net periodic pension cost or postretirement benefit cost. Estimated sensitivities to the expected 2017 net periodic pension cost of a 0.25% rate decline in the two basic assumptions are as follows: the decline in the discount rate would increase expense by approximately $0.8 million and the decline in the estimated return on assets would increase expense by approximately $0.7 million. A 1.0% increase in the healthcare cost trend rate would have no impact on expense as we have capped the annual maximum amount we will pay for retiree healthcare costs, therefore any additional costs would be assumed by the retiree.

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Business combinations – The fair value of the consideration paid in a business combination is allocated to tangible assets and identifiable intangible assets, liabilities assumed and goodwill. The accounting for acquisitions involves a considerable amount of judgment and estimate, including the fair value of acquired intangible assets involving projections of future revenues and cash flows that are either discounted at an estimated discount rate or measured at an estimated royalty rate; fair value of other acquired assets and assumed liabilities, including potential contingencies; and the useful lives of the acquired assets. The assumptions used are determined at the time of the acquisition in accordance with accepted valuation models. Projections are developed using internal forecasts, available industry and market data and estimates of long-term growth rates. The impact of prior or future acquisitions on our financial condition or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included in Item 15 herein for a discussion of recently issued and adopted accounting pronouncements.