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 the education, healthcare, government, commercial office and single and multi-family residential markets. Our leading brands include CISA, Interflex, LCN, Schlage, SimonsVoss and Von Duprin.

Trends and Economic Events

The security products industry has benefited from accelerated growth in institutional, commercial and residential end-markets in recent years. 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 mechanical products, and we expect growth in the global electronic product categories we serve to continue to outperform growth in mechanical products, as end-users adopt newer technologies in their facilities and homes. 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 Part I, Item 1A, "Risk Factors."

2018 and 2017 Significant Events

Acquisitions

We completed six business acquisitions in 2018 and one business acquisition in 2017:

Business		Date
Republic Doors & Frames, LLC ("Republic")		January 2017
Technical Glass Products, Inc. ("TGP")		January 2018
Hammond Enterprises, Inc. ("Hammond")		January 2018
Qatar Metal Industries LLC ("QMI")		February 2018
AD Systems, Inc. ("AD Systems")		March 2018
Gainsborough Hardware and API Locksmiths ("Door and Access Systems")		July 2018
ISONAS Security Systems, Inc. ("ISONAS")		July 2018

Republic provides hollow metal doors and frames throughout the U.S. and in select non-U.S. markets, complementing our Steelcraft® brand and core business in the Americas segment. Republic has been integrated into our Americas segment.

TGP provides fire-rated architectural glass and framing solutions for commercial buildings, as well as non-fire rated architectural glass and framing, including channel glass systems and curtain walls throughout the U.S., Canada and select markets in the Middle East. TGP has been integrated into our Americas and EMEIA segments.

We acquired 100% of the machinery, equipment and intellectual property of a division of Hammond. The assets acquired have been integrated into our existing production facilities and are specific to our Schlage-branded products.

QMI specializes in fire rated and non-fire rated steel and wooden doors, acoustic doors, wooden cabinets and access panels in the Middle East and Africa. QMI has been integrated into our EMEIA segment.

AD Systems designs and manufactures high-performance interior and storefront door systems, specializing in sliding and acoustic solutions for the U.S. market. AD Systems' portfolio includes sliding and swinging doors, perimeter frames, door hardware, gasketing, seals and sidelite panels. AD Systems has been integrated into our Americas segment.

Door and Access Systems, based in Australia, includes the brands Gainsborough Hardware, the market-leading residential door hardware brand in Australia, and API Locksmiths, which serves the Australian market with its keying, installation and access control services. Door and Access Systems has been integrated into our Asia Pacific segment.

ISONAS designs and manufactures edge-computing technology that produces Power over Ethernet access control solutions for non-residential end-markets in the U.S. ISONAS has been integrated into our Americas segment.

The incremental impact of the 2018 acquisitions for the twelve months ended December 31, 2018 was an increase in Net revenues of approximately $160.2 million and an increase to Operating income of approximately $2.8 million. The incremental impact of acquisitions for the twelve months ended December 31, 2017 was an increase in Net revenues of approximately $32.3 million and a decrease to Operating income of approximately $0.6 million.

During the years ended December 31, 2018 and 2017, we incurred $10.0 million and $4.7 million of acquisition and integration related expenses, respectively.

2018 Dividends

We paid quarterly dividends of $0.21 per ordinary share to shareholders on record as of March 15, 2018, June 15, 2018, September 17, 2018, and December 17, 2018. We paid a total of $79.4 million in cash for dividends to ordinary shareholders during the year ended December 31, 2018.

Restructuring charges

We incurred charges of $4.9 million and $12.3 million for the years ended December 31, 2018 and 2017, respectively, in conjunction with ongoing restructuring actions. We also incurred other non-qualified restructuring charges of $1.6 million and $1.5 million for the years ended December 31, 2018 and 2017, respectively, related to costs directly attributable to restructuring activities but that do not fall into the severance, exit or disposal category.

Financing activities

In 2017, 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”), and repaid in full our previously outstanding secured credit facility, the Second Amended and Restated Credit Agreement, dated as of September 30, 2015.

Also in 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”). We used a portion of the net proceeds from the Notes to redeem in full our previously outstanding $300.0 million Senior Notes due 2021 and $300.0 million Senior Notes due 2023.

Results of Operations - For the years ended December 31

Dollar amounts in millions, except per share amounts		2018				% of Net Revenues			2017				% of Net Revenues			2016				% of Net Revenues
Net revenues		$	2,731.7						$	2,408.2						$	2,238.0
Cost of goods sold		1,558.4				57.0	%		1,335.3				55.4	%		1,248.3				55.8	%
Selling and administrative expenses		647.5				23.7	%		580.4				24.1	%		555.4				24.8	%
Operating income		525.8				19.2	%		492.5				20.5	%		434.3				19.4	%
Interest expense		54.0							105.7							64.3
Loss on divestitures		—							—							84.4
Other income, net		(3.4		)					(8.9		)					(9.4		)
Earnings before income taxes		475.2							395.7							295.0
Provision for income taxes		39.8							119.0							63.8
Net earnings		435.4							276.7							231.2
Less: Net earnings attributable to noncontrolling interests		0.5							3.4							2.1
Net earnings attributable to Allegion plc		$	434.9						$	273.3						$	229.1
Diluted net earnings per ordinary share attributable to Allegion plc ordinary shareholders:		$	4.54						$	2.85						$	2.36

Net Revenues

Net revenues for the year ended December 31, 2018 increased by 13.4%, or $323.5 million, compared to the same period in 2017 due to the following:

Pricing	1.6	%
Volume	4.4	%
Acquisitions	6.6	%
Currency exchange rates	0.8	%
Total	13.4	%

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

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 Net revenues from acquisitions and favorable foreign currency exchange rate movements relative to the U.S. Dollar.

Cost of Goods Sold

For the year ended December 31, 2018, Cost of goods sold as a percentage of Net revenues increased to 57.0% from 55.4% due to the following:

Inflation in excess of pricing and productivity	0.1	%
Volume / product mix	(0.1	)%
Acquisitions	1.5	%
Investment spending	0.3	%
Currency exchange rates	(0.1	)%
Restructuring / acquisition costs	(0.1	)%
Total	1.6	%

Costs of goods sold as a percentage of Net revenues for the year ended December 31, 2018 increased primarily due to inflation in excess of pricing and productivity, the impact of acquisitions and increased investment spending. These increases were partially offset by favorable currency exchange rate movements, favorable product mix and volume and decreased restructuring and acquisition costs.

For the year ended December 31, 2017, Cost of goods sold as a percentage of Net revenues decreased to 55.4% from 55.8% due to the following:

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

Costs of goods sold as a percentage of Net revenues 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 2016 and decreased restructuring and acquisition costs. These decreases were partially offset by unfavorable product mix and volume and the impact of acquisitions.

Selling and Administrative Expenses

For the year ended December 31, 2018, Selling and administrative expenses as a percentage of Net revenues decreased to 23.7% from 24.1% due to the following:

Inflation in excess of productivity	0.5	%
Volume leverage	(0.8	)%
Acquisitions	(0.4	)%
Investment spending	0.3	%
Total	(0.4	)%

Selling and administrative expenses as a percentage of Net revenues for the year ended December 31, 2018 decreased primarily due to favorable leverage due to increased volume and the impact of acquisitions. These decreases were partially offset by inflation in excess of productivity benefits and increased investment spending.

For the year ended December 31, 2017, Selling and administrative expenses as a percentage of Net revenues decreased to 24.1% from 24.8% due to the following:

Productivity in excess of inflation	(0.6	)%
Volume leverage	(0.9	)%
Acquisitions	(0.2	)%
Investment spending	0.7	%
Restructuring / acquisition costs	0.3	%
Total	(0.7	)%

Selling and administrative expenses as a percentage of Net revenues 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.

Operating Income/Margin

Operating income for the year ended December 31, 2018 increased $33.3 million from the same period in 2017 and Operating margin decreased to 19.2% from 20.5% for the same period in 2017 due to the following:

In millions	Operating Income				Operating Margin
December 31, 2017	$	492.5			20.5	%
Inflation in excess of pricing and productivity	(6.4		)		(0.6	)%
Volume / product mix	45.3				0.9	%
Currency exchange rates	3.1				—	%
Investment spending	(13.5		)		(0.5	)%
Acquisitions	2.8				(1.2	)%
Restructuring / acquisition costs	2.0				0.1	%
December 31, 2018	$	525.8			19.2	%

Operating income increased due to favorable volume/product mix in all segments, foreign currency exchange rate movements, the impact of acquisitions and lower restructuring and acquisition costs. These increases were partially offset by inflation in excess of pricing and productivity and increased investment spending.

Operating margin decreased primarily due to inflation in excess of pricing and productivity, increased investment spending and lower margins from acquisitions during the current year. These decreases were partially offset by favorable volume/product mix and lower restructuring and acquisition costs.

Operating income for the year ended December 31, 2017 increased $58.2 million and Operating margin increased to 20.5% from 19.4% for the same period in 2016 due to the following:

In millions	Operating Income				Operating Margin
December 31, 2016	$	434.3			19.4	%
Pricing and productivity in excess of inflation	30.7				1.0	%
Volume / product mix	29.4				0.5	%
Currency exchange rates	4.2				0.1	%
Investment spending	(15.4		)		(0.7	)%
Acquisitions	(0.6		)		(0.3	)%
Environmental remediation charge	15.0				0.7	%
Restructuring / acquisition costs	(5.1		)		(0.2	)%
December 31, 2017	$	492.5			20.5	%

Operating income and Operating margin both increased due to favorable volume/product mix in all segments, pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements and lower environmental remediation charges in 2017 due to a charge in 2016 for a change in approach for environmental remediation related to two sites in the Americas. These increases were partially offset by increased investment spending, the impact of acquisitions and higher restructuring and acquisition costs.

Interest Expense

Interest expense for the year ended December 31, 2018 decreased $51.7 million compared to the same period of 2017 primarily due to $44.7 million of costs in the prior year associated with the refinancing of our Credit Facilities, issuance of our 3.200% and 3.550% Senior Notes and redemption of our previously outstanding Senior notes due 2021 and 2023 in the third and fourth quarters of 2017. Lower interest rates on our outstanding indebtedness also contributed to the decrease in Interest expense.

Interest expense for the year ended December 31, 2017 increased $41.4 million compared to the same period of 2016. Interest expense increased primarily due to $44.7 million of costs associated with the refinancing of our Credit Facilities, issuance of our

3.200% and 3.550% Senior Notes and redemption of our previously outstanding Senior notes due 2021 and 2023 in the third and fourth quarters of 2017, as discussed above.

Other income, net

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

In millions		2018				2017				2016
Interest income		$	(0.8	)		$	(1.2	)		$	(1.9	)
Foreign currency exchange loss		0.3				0.7				2.0
Earnings from and gains on the sale of equity investments		(0.4		)		(5.4		)		(3.6		)
Net periodic pension and postretirement benefit (income) cost, less service cost		(2.8		)		4.3				8.8
Other		0.3				(7.3		)		(14.7		)
Other income, net		$	(3.4	)		$	(8.9	)		$	(9.4	)

For the year ended December 31, 2018, Other income, net decreased by $5.5 million compared to the same period in 2017, due to 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 was attributed to noncontrolling interests, in 2017, neither of which were recurring in 2018. These decreases were partially offset by Net periodic pension and postretirement benefit income, less service cost of $2.8 million in 2018, compared to Net periodic pension and postretirement benefit cost, less service cost of $4.3 million in 2017.

For the year ended December 31, 2017, Other income, net decreased by $0.5 million compared with the same period in 2016. This decrease was due to gains from the sale of marketable securities of $12.4 million in 2016, which did not recur in 2017. This decrease is partially offset by the cumulative $5.4 million gain from the sale of iDevices, LLC and the gains of $7.3 million related to legal entity liquidations in our Asia Pacific region discussed above, as well as decreased Net periodic pension and postretirement benefit cost, less service cost in 2017 compared to 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 impacted our years ended December 31, 2018 and 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, and (3) requiring a review of the future realizability of deferred tax balances.

For the year ended December 31, 2018, our effective tax rate was 8.4% compared to 30.1% for the year ended December 31, 2017. The effective income tax rate for the year ended December 31, 2018 was positively impacted by a $21.9 million tax benefit related to the Tax Reform Act and the reduction in the US statutory tax rate from 35% to 21%. 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.

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.

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, 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 the segment's Net revenues.

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

Segment Results of Operations - For the years ended December 31

In millions	2018				2017				% Change			2017				2016				% Change
Net revenues
Americas	$	1,988.6			$	1,767.5			12.5	%		$	1,767.5			$	1,645.7			7.4	%
EMEIA	589.9				523.5				12.7	%		523.5				485.9				7.7	%
Asia Pacific	153.2				117.2				30.7	%		117.2				106.4				10.2	%
Total	$	2,731.7			$	2,408.2						$	2,408.2			$	2,238.0
Segment operating income
Americas	$	544.5			$	508.5			7.1	%		$	508.5			$	456.7			11.3	%
EMEIA	49.3				44.1				11.8	%		44.1				35.3				24.9	%
Asia Pacific	6.9				9.5				(27.4	)%		9.5				6.1				55.7	%
Total	$	600.7			$	562.1						$	562.1			$	498.1
Segment operating margin
Americas	27.4		%		28.8		%					28.8		%		27.8		%
EMEIA	8.4		%		8.4		%					8.4		%		7.3		%
Asia Pacific	4.5		%		8.1		%					8.1		%		5.7		%

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 products and access control systems to end-users in commercial, institutional and residential facilities, including the education, healthcare, government, commercial office and single and multi-family residential markets. This segment’s primary brands are LCN, Schlage, Steelcraft and Von Duprin.

2018 vs 2017

Net revenues

Net revenues for the year ended December 31, 2018 increased by 12.5%, or $221.1 million, compared to the same period in 2017 due to the following:

Pricing	1.7	%
Volume	5.1	%
Acquisitions	5.7	%
Total	12.5	%

The increase in Net revenues is due to higher volumes, improved pricing and acquisitions during the current year. Net revenues from non-residential products for the year ended December 31, 2018 increased mid-teens compared to the prior year, primarily driven by higher volumes, improved pricing and acquisitions in the current year. Net revenues from residential products for the year ended December 31, 2018 increased mid-single digits compared to the prior year.

Operating income/margin

Segment operating income for the year ended December 31, 2018 increased $36.0 million and Segment operating margin decreased to 27.4% from 28.8% compared to the same period in 2017 due to the following:

In millions	Operating Income				Operating Margin
December 31, 2017	$	508.5			28.8	%
Inflation in excess of pricing and productivity	(4.2		)		(0.8	)%
Volume / product mix	42.1				0.9	%
Currency exchange rates	0.7				0.1	%
Investment spending	(7.2		)		(0.4	)%
Acquisitions	3.3				(1.3	)%
Restructuring / acquisition costs	1.3				0.1	%
December 31, 2018	$	544.5			27.4	%

Operating income increased primarily due to favorable volume/product mix, favorable foreign currency exchange rate movements, acquisitions during the current year and year-over-year decreases in restructuring and acquisition costs. These increases were partially offset by inflation in excess of pricing and productivity and increased investment spending.

Operating margin decreased primarily due to inflation in excess of pricing and productivity, increased investment spending and lower margins from acquisitions during the current year. These decreases were partially offset by favorable volume/product mix, favorable foreign currency exchange rate movements and year-over-year decreases in restructuring and acquisition costs.

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 Net 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 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 prior year.

Operating income/margin

Segment operating income for the year ended December 31, 2017 increased $51.8 million and Segment operating margin increased to 28.8% from 27.8% compared to the same period in 2016 due to the following:

In millions	Operating Income				Operating Margin
December 31, 2016	$	456.7			27.8	%
Pricing and productivity in excess of inflation	25.9				1.0	%
Volume / product mix	22.2				0.3	%
Currency exchange rates	2.6				0.1	%
Investment spending	(10.7		)		(0.7	)%
Acquisitions	0.3				(0.4	)%
Environmental remediation charge	15.0				0.9	%
Restructuring / acquisition costs	(3.5		)		(0.2	)%
December 31, 2017	$	508.5			28.8	%

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 2017 due to a 2016 charge 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 2017 due to a charge in 2016 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.

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 products and access control systems, as well as time and attendance and workforce productivity solutions. This segment’s primary brands are AXA, Bricard, Briton, CISA, Interflex and SimonsVoss. This segment also resells LCN, Schlage and Von Duprin products, primarily in the Middle East.

2018 vs 2017

Net revenues

Net revenues for the year ended December 31, 2018 increased by 12.7%, or $66.4 million, compared to the same period in 2017 due to the following:

Pricing	1.5	%
Volume	2.2	%
Acquisitions	5.1	%
Currency exchange rates	3.9	%
Total	12.7	%

The increase in Net revenues is due to higher volumes, improved pricing, favorable foreign currency exchange rate movements and the impact of acquisitions in the current year.

Operating income/margin

Segment operating income for the year ended December 31, 2018 increased $5.2 million compared to the same period in 2017, while Segment operating margin remained consistent at 8.4% in 2018, the same as in 2017, due to the following:

In millions	Operating Income				Operating Margin
December 31, 2017	$	44.1			8.4	%
Pricing and productivity in excess of inflation	0.2				(0.1	)%
Volume / product mix	5.3				0.8	%
Currency exchange rates	3.0				0.3	%
Investment spending	(4.1		)		(0.8	)%
Acquisitions	(2.6		)		(0.9	)%
Restructuring / acquisition costs	3.4				0.7	%
December 31, 2018	$	49.3			8.4	%

Operating income increased due to favorable volume/product mix, pricing improvements and productivity in excess of inflation, favorable foreign currency exchange rate movements and year-over-year decreases in restructuring and acquisition costs. These increases were partially offset by increased investment spending and the impact of acquisitions in the current year.

Operating margin was unchanged year-over-year at 8.4%. Improvements due to favorable volume/product mix, foreign currency exchange rate movements and year-over-year changes in restructuring and acquisition costs were offset by lower pricing improvements and productivity in excess of inflation, increased investment spending and lower margins from acquisitions during the current year.

2017 vs 2016

Net revenue

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 following:

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

The increase in Net 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 $8.8 million and Segment operating margin increased to 8.4% from 7.3% compared to the same period in 2016 due to the following:

In millions	Operating Income				Operating Margin
December 31, 2016	$	35.3			7.3	%
Pricing and productivity in excess of inflation	4.6				0.8	%
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	$	44.1			8.4	%

The increases were primarily due to favorable volume/product mix, pricing improvements and productivity in excess of inflation, 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 2016.

Asia Pacific

Our Asia Pacific segment provides security products, services 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 products and access control systems. This segment’s primary brands are Brio, Briton, FSH, Gainsborough, Legge, Milre and Schlage.

2018 vs 2017

Net revenues

Net revenues for the year ended December 31, 2018 increased by 30.7%, or $36.0 million, compared to the same period in 2017, due to the following:

Pricing	(0.1	)%
Volume	3.2	%
Acquisitions	28.6	%
Currency exchange rates	(1.0	)%
Total	30.7	%

The increase in Net revenues was primarily due to an acquisition during the current year and higher volumes. These increases were partially offset by unfavorable foreign currency exchange rate movements and slightly lower pricing.

Operating income/margin

Segment operating income for the year ended December 31, 2018 decreased $2.6 million and Segment operating margin decreased to 4.5% from 8.1% compared to the same period in 2017 due to the following:

In millions	Operating Income				Operating Margin
December 31, 2017	$	9.5			8.1	%
Pricing and productivity in excess of inflation	1.3				1.1	%
Volume / product mix	(2.1		)		(2.0	)%
Currency exchange rates	(0.6		)		(0.4	)%
Investment spending	(1.0		)		(0.8	)%
Acquisitions	2.1				(0.4	)%
Restructuring / acquisition costs	(2.3		)		(1.1	)%
December 31, 2018	$	6.9			4.5	%

Operating income decreased due to unfavorable volume/product mix, unfavorable foreign currency exchange rate movements, increased investment spending and year-over-year increases in restructuring and acquisition costs. These decreases were partially offset by pricing and productivity improvements in excess of inflation and an acquisition during the current year.

Operating margin decreased due to unfavorable volume/product mix, unfavorable foreign currency exchange rate movements, increased investment spending, lower margins from an acquisition during the current year and year-over-year increases in restructuring and acquisition expenses. These decreases were partially offset by pricing and productivity improvements in excess of inflation.

2017 vs 2016

Net revenues

Net revenues for the year ended December 31, 2017 increased by 10.2%, or $10.8 million, compared with 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 Net revenues was due to higher volumes, improved pricing, the impact of an acquisition in 2016 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 2016.

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 from our 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		2018				2017				2016
Net cash provided by operating activities		$	457.8			$	347.2			$	377.5
Net cash used in investing activities		(443.8		)		(50.2		)		(64.0		)
Net cash used in financing activities		$	(183.4	)		$	(150.9	)		$	(196.0	)

Operating activities

Net cash provided by operating activities for the year ended December 31, 2018 increased $110.6 million compared to 2017. This increase in Net cash provided by operating activities for 2018 was primarily due to higher Net earnings in the current year and a discretionary $50.0 million contribution to the U.S. qualified defined benefit pension plan in 2017, partially offset by changes in working capital and an increase in cash paid for taxes.

Net cash provided by operating activities for the year ended December 31, 2017 decreased $30.3 million compared to 2016, reflecting the $50.0 million discretionary contribution to the U.S. qualified defined benefit pension plan discussed above, as well as increased cash paid for taxes, partially offset by higher Net earnings in 2017 compared to 2016.

Investing activities

Net cash used in investing activities for the year ended December 31, 2018 increased $393.6 million compared to 2017. The increase in Net cash used in investing activities is primarily due to approximately $368 million of cash payments related to acquisitions and approximately $8 million of investments in unconsolidated entities during the year ended December 31, 2018, compared to $20.8 million for an acquisition in 2017. Additionally contributing to the increase in Net cash used in investing activities was the purchase of $14.3 million of investments during the year ended December 31, 2018 and the sale of an equity investment during 2017, which resulted in an investing cash inflow of $15.6 million that did not recur in 2018.

Net cash used in investing activities for the year ended December 31, 2017 decreased $13.8 million compared to 2016. 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 2016 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 2017.

Financing activities

Net cash used in financing activities for the year ended December 31, 2018 increased $32.5 million compared to the year ended December 31, 2017. The increase in Net cash used in financing activities is primarily due to an increase in dividend payments of $18.5 million year-over-year. Additionally, during the year ended December 31, 2018, we repurchased $67.3 million of common shares, compared to $60.0 million during 2017.

Net cash used in financing activities for the year ended December 31, 2017 decreased $45.1 million compared to 2016. The decrease in Net 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. Debt financing activity in 2017 included 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 in 2017, compared to $46.0 million in 2016.

Capitalization

Long-term debt at December 31 consisted of the following:

In millions	2018				2017
Term Facility	$	656.3			$	691.3
Revolving Facility	—				—
3.200% Senior Notes due 2024	400.0				400.0
3.550% Senior Notes due 2027	400.0				400.0
Other debt	1.2				1.0
Total borrowings outstanding	1,457.5				1,492.3
Less discounts and debt issuance costs, net	(12.7		)		(15.0		)
Total debt	1,444.8				1,477.3
Less current portion of long-term debt	35.3				35.0
Total long-term debt	$	1,409.5			$	1,442.3

As of December 31, 2018, we have an unsecured 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, 2018, there were no borrowings outstanding on the Revolving Facility, and we had $17.1 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 to the Consolidated Financial Statements).

As of December 31, 2018, 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”). 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 analyzed 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. Based on this analysis, we made no changes to our permanent reinvestment assertions to reinvest earnings in our non-U.S. subsidiaries outside of 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, contributions 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, 2018, the funded status of our qualified pension plan for U.S. employees decreased to 93.1% from 93.3% at December 31, 2017. The funded status for our non-U.S. pension plans decreased to 98.7% at December 31, 2018 from 100.5% at December 31, 2017. Funded status for all of our pension plans at December 31, 2018 decreased to 94.1% from 95.5% at December 31, 2017. 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		2019				2020-2021				2022-2023				Thereafter				Total
Long-term debt (including current maturities)		$	35.3			$	105.0			$	516.3			$	800.9			$	1,457.5
Interest payments on long-term debt		49.9				99.6				69.5				62.9				281.9
Purchase obligations		402.7				—				—				—				402.7
Operating leases		30.3				35.5				14.8				17.4				98.0
Total contractual cash obligations		$	518.2			$	240.1			$	600.6			$	881.2			$	2,240.1

Future interest payments on variable rate long-term debt are estimated based on the rate in effect as of December 31, 2018. 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, 2018, we had net pension liabilities of $38.5 million, which consist of plan assets of $611.6 million and benefit obligations of $650.1 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 decreased to 94.1% at December 31, 2018 from 95.5% at December 31, 2017. We currently project that an additional approximately $11.6 million will be contributed to our plans worldwide in 2019. 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, 2018, we had postretirement benefit obligations of $7.6 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 subsidies, are not expected to be material in 2019. Because the timing and amounts of long-term funding requirements for postretirement obligations are uncertain, they have been excluded from the preceding table.

Income Taxes

At December 31, 2018, we have total unrecognized tax benefits for uncertain tax positions of $42.0 million and $5.7 million of related accrued interest and penalties, net of tax. These liabilities have 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 litigation, 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 20 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, revenues 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:

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Goodwill and indefinite-lived intangible assets – We have significant goodwill and indefinite-lived intangible assets on our Consolidated Balance Sheets related to previous business combinations. 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 values 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 2018 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 2018 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, 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 indefinite-lived intangible assets. 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.

•

Long-lived assets and finite-lived intangible assets – Long-lived assets and finite-lived intangible assets 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. The estimates of fair value are based on the best information available as of the date of the assessment, and changes in business conditions could potentially require future adjustments to these valuations.

•

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.

•	Revenue recognition – Net revenues are recognized based on the satisfaction of performance obligations under the terms of a contract. A performance obligation is a promise in a contract to transfer control of a distinct product or to provide a

service, or a bundle of products or services, to a customer, and is the unit of account under ASC 606. We have two principal revenue streams, tangible product sales and services. Approximately 99% of consolidated Net revenues involve contracts with a single performance obligation, the transfer of control of a product or bundle of products to a customer. Transfer of control typically occurs when goods are shipped from our facilities or at other predetermined control transfer points (for instance, destination terms). Net revenues are measured as the amount of consideration we expect to receive in exchange for transferring control of the products and takes into account variable consideration, such as sales incentive programs, including discounts and volume rebates. The existence of these programs does not preclude revenue recognition but does require our best estimate of the variable consideration to be made based on expected activity, as these items are reserved for as a deduction to Net revenues over time based on our historical rates of providing these incentives and annual forecasted sales volumes.

Our remaining Net revenues involve services, including installation and consulting. Unlike the single performance obligation to ship a product or bundle of products, the service revenue stream delays revenue recognition until the service performance obligations are satisfied. In some instances, customer acceptance provisions are included in sales arrangements to give the buyer the ability to ensure the service meets the criteria established in the order. In these instances, revenue recognition is deferred until the performance obligations are satisfied, which could include acceptance terms specified in the arrangement being fulfilled through customer acceptance or a demonstration that established criteria have been satisfied.

We do not adjust the transaction price for the effects of a significant financing component, as the time period between control transfer of goods and services is less than one year. Sales, value-added and other similar taxes collected by us are excluded from Net revenues. We also have elected to account for shipping and handling activities that occur after control of the related goods transfers as fulfillment activities instead of performance obligations. Our payment terms are generally consistent with the industries in which our businesses operate.

Sales returns and customer disputes involving a question of quantity or price are accounted for as variable consideration, and therefore, as a reduction in revenue and a contra receivable. At December 31, 2018 and 2017, we had a customer claim accrual (contra receivable) of $31.6 million and $32.5 million, respectively. All other incentives or incentive programs where the customer is required to reach a certain level of purchases, remain a customer for a certain period, provide a rebate form or is subject to additional requirements are also considered variable consideration and are accounted for as a reduction of revenue and a liability. At December 31, 2018 and 2017, we had a sales incentive accrual of $33.9 million and $31.8 million, respectively. Variable consideration is estimated based on the most likely amount we expect to receive from customers. Each of these accruals represents the Company’s best estimate of the most likely amount expected to be received from customers based on historical experience. These estimates are reviewed regularly for accuracy. If updated information or actual amounts are different from previous estimates, the revisions are included in the Company’s results for the period in which they become known. Historically, the aggregate differences, if any, between the Company’s estimates and actual amounts in any year have not had a material impact on the Consolidated Financial Statements. We also offer a standard warranty with most product sales, and the value of such warranty is included in the contractual price. The corresponding cost of the warranty obligation is accrued as a liability (see Note 20).

•

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 future tax benefits.

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 estimates 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 constituted 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 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 future 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 into Accumulated other comprehensive loss 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 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 and postretirement benefit cost. Estimated sensitivities to the expected 2018 net periodic pension benefit 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 $0.6 million.

•

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. Acquired intangible assets primarily include indefinite-lived trade names, customer relationships and completed technologies. The accounting for acquisitions involves a considerable amount of judgment and estimation, 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 to determine the fair value of acquired intangible assets include projections developed using internal forecasts, available industry and market data, estimates of long-term growth rates, profitability, customer attrition and royalty rates, which are determined at the time of the business combination. The Company uses an income approach or market approach (or both) in accordance with accepted valuation models for each acquired intangible asset to determine the fair value. The impact of prior or future business combinations 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 8 herein for a discussion of recently issued and adopted accounting pronouncements.