Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. All statements regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company's ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. Additionally, the actual impact of the U.S. Tax Cuts and Jobs Act (TCJ Act) may affect future performance and earnings projections as the amounts reflected in this period are preliminary estimates and exact amounts will not be determined until a later date, and there may be other judicial or regulatory interpretations of the TCJ Act that may also affect these estimates and the actual impact on the Company. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.

Among other factors which may affect future performance are:

•	changes in business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;

•	disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs, and changes in product mix;

•	ability to identify acceptable strategic acquisition targets; uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions, including the integration of CLARCOR Inc. (Clarcor); ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;

•	the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;

•	ability to implement successfully the Company's capital allocation initiatives, including timing, price and execution of share repurchases;

•	availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;

•	ability to manage costs related to insurance and employee retirement and health care benefits;

•	compliance costs associated with environmental laws and regulations;

•	potential labor disruptions;

•	threats associated with and efforts to combat terrorism and cyber-security risks;

•	uncertainties surrounding the ultimate resolution of outstanding legal proceedings, including the outcome of any appeals;

•	global competitive market conditions, including global reactions to U.S. trade polices, and resulting effects on sales and pricing; and

•	global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates and credit availability.

The Company makes these statements as of the date of the filing of its Annual Report on Form 10-K for the year ended June 30, 2018, and undertakes no obligation to update them unless otherwise required by law.

Overview

The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.

The Company's order rates provide a near-term perspective of the Company's outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. The Company believes the leading economic indicators of these markets that have a correlation to the Company's future order rates are as follows:

•	Purchasing Managers Index (PMI) on manufacturing activity specific to regions around the world with respect to most mobile and industrial markets;

•	Global aircraft miles flown and global revenue passenger miles for commercial aerospace markets and Department of Defense spending for military aerospace markets; and

•	Housing starts with respect to the North American residential air conditioning market and certain mobile construction markets.

A PMI above 50 indicates that the manufacturing activity specific to a region of the world in the mobile and industrial markets is expanding. A PMI below 50 indicates the opposite. Recent PMI levels for some regions around the world were as follows:

	June 30, 2018			March 31, 2018			June 30, 2017
United States	60.2			59.3			57.8
Eurozone countries	54.9			56.6			57.4
China	51.0			51.0			50.4
Brazil	49.8			53.4			50.5

Global aircraft miles flown increased by approximately six percent and global revenue passenger miles increased approximately seven percent from their comparable 2017 levels. The Company anticipates that U.S. Department of Defense spending with regards to appropriations and operations and maintenance for the U.S. Government's fiscal year 2018 will increase by approximately two percent from their fiscal 2017 level.

Housing starts in June 2018 were 11 percent lower than housing starts in March 2018 and four percent lower than housing starts in June 2017.

The Company believes many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation.

The Company believes it can meet its strategic objectives by:

•	Serving the customer and continuously enhancing its experience with the Company;

•	Successfully executing its Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;

•	Maintaining its decentralized division and sales company structure;

•	Fostering a safety first and entrepreneurial culture;

•	Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;

•	Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;

•	Acquiring strategic businesses;

•	Organizing around targeted regions, technologies and markets;

•	Driving efficiency by implementing lean enterprise principles; and

•	Creating a culture of empowerment through its values, inclusion and diversity, accountability and teamwork.

Acquisitions will be considered from time to time to the extent there is a strong strategic fit, while at the same time maintaining the Company’s strong financial position. In addition, the Company will continue to assess its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.

The discussion below is structured to separately discuss the financial statements presented in Part II, Item 8 of this Annual Report on Form 10-K. The term "year" and references to specific years refer to the applicable fiscal year.

CONSOLIDATED STATEMENT OF INCOME

The Consolidated Statement of Income summarizes the Company's operating performance over the last three years.

(dollars in millions)		2018				2017				2016
Net sales		$	14,302			$	12,029			$	11,361
Gross profit margin		24.7		%		23.6		%		22.3		%
Selling, general and administrative expenses		$	1,657			$	1,454			$	1,359
Selling, general and administrative expenses, as a percent of sales		11.6		%		12.1		%		12.0		%
Interest expense		$	214			$	162			$	137
Other (income), net		(29		)		(61		)		(62		)
(Gain) on disposal of assets		(4		)		(43		)		(11		)
Effective tax rate		37.7		%		26.0		%		27.6		%
Net income attributable to common shareholders		$	1,061			$	983			$	807

Net sales in 2018 were 18.9 percent higher than 2017. The increase in net sales in 2018 was a result of an increase in volume in both the Diversified Industrial North American and Diversified Industrial International operations and acquisitions completed during 2017, which contributed approximately $970 million to current-year incremental net sales. The effect of currency rate changes increased net sales in 2018 by approximately $295 million, of which $270 million was attributable to the Diversified Industrial International operations. Net sales in 2017 were 5.9 percent higher than 2016. The increase in net sales in 2017 was primarily a result of acquisitions made in 2017 (which contributed approximately $558 million in sales in 2017) and an increase in volume in both the Diversified Industrial International operations and the Aerospace Systems Segment, partially offset by the effect of currency rate changes (which decreased net sales in 2017 by approximately $84 million).

Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased in 2018 primarily due to higher margins in the Aerospace Systems Segment resulting from a favorable product mix. All segments benefited from lower operating expenses related to simplification and realignment efforts. These benefits were partially offset by unfavorable product mix, unfavorable raw material prices and inefficiencies created by manufacturing facility consolidations which contributed to lower margins in the Diversified Industrial North American and Diversified Industrial International operations during 2018. Gross profit margin increased in 2017 primarily due to lower operating expenses resulting from the Company's simplification initiative and other restructuring activities, primarily experienced in the Diversified Industrial Segment, partially offset by lower margins in the Aerospace Systems Segment. Foreign currency transaction loss (relating to cash, marketable securities and other investments and intercompany transactions) included in cost of sales for 2018, 2017 and 2016 was $7.3 million, $8.1 million and $22.7 million, respectively. Pension cost included in cost of sales in 2018, 2017 and 2016 was $86.1 million, $135.0 million and $172.4 million, respectively. Included in cost of sales in 2018, 2017 and 2016 were business realignment charges of $44.9 million, $35.9 million and $76.2 million, respectively.

Selling, general and administrative expenses increased 14.0 percent in 2018 and increased 7.0 percent in 2017. The increase in 2018 was primarily due to higher sales expense resulting from an increase in sales, higher amortization expense resulting from recent acquisitions and higher incentive compensation, partially offset by lower acquisition expenses. The increase in 2017 was primarily due to higher amortization expense resulting from recent acquisitions and higher acquisition expenses, partially offset by lower expenses resulting from the Company's simplification initiative, lower expenses associated with the Company's deferred compensation program and lower professional services expenses. Pension cost included in selling, general and administrative expenses in 2018, 2017 and 2016 was $36.9 million, $65.8 million and $74.4 million, respectively. Included in selling, general and administrative expenses in 2018, 2017 and 2016 were business realignment charges of $36.8 million, $19.7 million and $21.1 million, respectively.

Interest expense in 2018 increased primarily due to higher weighted-average borrowings and higher weighted-average interest rates. Interest expense in 2017 increased primarily due to higher weighted-average borrowings, partially offset by lower weighted-average interest rates.

Other (income), net in 2018, 2017 and 2016 includes $50.5 million, $42.4 million, and $25.6 million of income, respectively, related to the Company's equity interests in joint ventures. Other (income), net in 2018 also includes a writedown of an investment of $27.4 million and a loss on the sale of an investment of $13.8 million.

(Gain) on disposal of assets includes a loss of $20 million on the sale of a business in 2018, a gain of $42 million related to the sale of a product line in 2017 and a gain of $11.5 million related to the sale of businesses in 2016.

Effective tax rate in 2018 was higher than the comparable prior-year period primarily due to the net impact of one-time adjustments recorded as a result of the TCJ Act. See Note 4 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of the impact of the TCJ Act. Excluding the impact of the TCJ Act one-time adjustments, the effective tax rate for 2018 was lower primarily due to the reduced U.S. income tax rate resulting from enactment of the TCJ Act and a net increase in discrete tax benefits, partially offset by an increase in taxes related to international activities. The effective tax rate in 2017 was favorably impacted by an increase of discrete tax benefits, mostly related to stock-based compensation expense.

BUSINESS SEGMENT INFORMATION

The Business Segment information presents sales, operating income and assets on a basis that is consistent with the manner in which the Company's various businesses are managed for internal review and decision-making.

Diversified Industrial Segment

(dollars in millions)	2018				2017				2016
Sales
North America	$	6,727			$	5,367			$	4,955
International	5,260				4,378				4,145
Operating income
North America	1,076				874				790
International	765				579				448
Operating income as a percent of sales
North America	16.0		%		16.3		%		15.9		%
International	14.5		%		13.2		%		10.8		%
Backlog	$	2,167			$	2,041			$	1,455
Assets	13,369				13,367				8,729
Return on average assets	13.8		%		13.1		%		14.2		%

The Diversified Industrial Segment operations experienced the following percentage changes in net sales:

		2018			2017
Diversified Industrial North America – as reported		25.3	%		8.3	%
Acquisitions		14.9	%		8.8	%
Divestitures		(0.1	)%		—	%
Currency		0.4	%		(0.3	)%
Diversified Industrial North America – without acquisitions, divestitures and currency		10.1	%		(0.2	)%
Diversified Industrial International – as reported		20.1	%		5.6	%
Acquisitions		3.9	%		2.9	%
Divestitures		(0.2	)%		—	%
Currency		6.2	%		(1.6	)%
Diversified Industrial International – without acquisitions, divestitures and currency		10.2	%		4.3	%
Total Diversified Industrial Segment – as reported		23.0	%		7.1	%
Acquisitions		10.0	%		6.1	%
Divestitures		(0.2	)%		—	%
Currency		3.0	%		(0.9	)%
Total Diversified Industrial Segment – without acquisitions, divestitures and currency		10.2	%		1.9	%

The above presentation reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions and divestitures made within the prior four fiscal quarters as well as the effects of currency exchange rates (a non-GAAP measure). The effects of acquisitions, divestitures and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Sales in 2018 for the Diversified Industrial North American operations increased 25.3 percent from 2017 as compared to increasing 8.3 percent from 2016 to 2017. Acquisitions completed during 2017 contributed approximately $798 million in incremental sales in 2018, and the effect of currency exchange rates increased sales in 2018 by $20 million. Excluding acquisitions, divestitures and the effect of currency rate changes, sales in 2018 for the Diversified Industrial North American operations increased 10.1 percent from prior-year levels reflecting higher demand from distributors and end users in the construction equipment, cars and light trucks, heavy-duty truck, oil and gas, and general industrial machinery markets. Excluding acquisitions and the effect of currency rate changes, sales in 2017 for the Diversified Industrial North American operations remained flat from 2016 levels reflecting higher demand from distributors offset by lower demand from end users in the heavy-duty truck, cars and light trucks, life sciences, and oil and gas markets.

Sales in the Diversified Industrial International operations increased 20.1 percent in 2018 as compared to increasing 5.6 percent from 2016 to 2017. Acquisitions completed in 2017 contributed approximately $173 million in incremental sales in 2018. The effect of currency rate changes increased sales by $270 million, reflecting the weakening of the U.S. dollar primarily against currencies in the Eurozone countries, China and the United Kingdom. Excluding acquisitions, divestitures and the effect of currency rate changes, sales in 2018 for the Diversified Industrial International operations increased 10.2 percent from 2017 levels due to higher volume in all regions. The Asia Pacific region contributed approximately 50 percent of the increase in sales due to higher demand from distributors as well as end users in the construction equipment, semiconductor and engine markets, partially offset by lower end-user demand in the telecommunications and marine markets. Europe contributed approximately 40 percent of the increase in sales due to higher demand from distributors and end users in the construction equipment, mining, heavy-duty truck and engine markets, partially offset by lower end-user demand in the power generation market. Within Latin America, higher demand from distributors and end users in the construction equipment and heavy-duty truck markets contributed to the increase in sales.

Excluding acquisitions and the effect of currency rate changes, sales in 2017 in the Diversified Industrial International operations increased 4.3 percent from 2016, primarily due to higher volume in the Asia Pacific region and Latin America, partially offset by lower volume in Europe. Within the Asia Pacific region, higher demand was experienced from distributors as well as end users in the semiconductor, cars and light trucks, telecommunications, construction equipment and engine markets. Within Latin America, higher demand was experienced from distributors and end-user demand in the agriculture equipment market. Within Europe, higher demand from distributors and end-user demand in the construction equipment, forestry, and miscellaneous manufacturing markets was more than offset by lower end-user demand in the general industrial machinery, oil and gas, and marine markets.

The lower operating margins in 2018 in the Diversified Industrial North American operations were primarily due to an unfavorable product mix, unfavorable raw material prices, higher amortization expense and inefficiencies created by manufacturing facility consolidations, partially offset by the impact of higher sales volume and lower operating expenses resulting from prior-year restructuring activities and the Company's simplification initiative. The increase in operating margins in 2018 for the Diversified Industrial International operations was primarily due to higher sales volume and lower operating expenses resulting from restructuring activities and the Company's simplification initiative, partially offset by higher amortization expense, inefficiencies created by manufacturing facility consolidations and an unfavorable product mix.

The increase in operating margins in 2017 in the Diversified Industrial North American operations was primarily due to lower operating expenses resulting from the Company's simplification initiative and other restructuring activities, resulting in manufacturing efficiencies, partially offset by higher acquisition-related expenses and higher amortization expense. The increase in operating margins in 2017 in the Diversified Industrial International operations was primarily due to the higher sales volume, lower operating expenses resulting from restructuring activities and the Company's simplification initiative, resulting in manufacturing efficiencies.

The following business realignment charges and acquisition integration costs are included in Diversified Industrial North America and Diversified Industrial International operating income:

(dollars in millions)		2018				2017				2016
Diversified Industrial North America		$	37			$	20			$	31
Diversified Industrial International		41				33				60

The business realignment charges consist primarily of severance and plant closure costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity, which is being implemented by its operating units throughout the world. The majority of the Diversified Industrial International business realignment charges were incurred in Europe. In addition to the business realignment charges presented in the table above, the Company recognized $12 million of expense associated with enhanced retirement benefits in connection with a plant closure during 2016. The Company anticipates that cost savings realized from the work force reduction measures taken during 2018 will increase 2019 operating income by approximately three percent in both the Diversified Industrial North American and Diversified Industrial International operations. In 2019, the Company expects to continue to take actions necessary to structure appropriately the operations of the Diversified Industrial Segment, including the continued integration of 2017 acquisitions. Such actions are expected to result in approximately $35 million in charges in 2019.

The Company anticipates Diversified Industrial North American sales for 2019 will increase between 2.6 and 5.6 percent from the 2018 level and Diversified Industrial International sales for 2019 will range between a 2.5 percent decrease and 0.5 percent increase from the 2018 level. Diversified Industrial North American operating margins in 2019 are expected to range from 16.4 to 17.2 percent and Diversified Industrial International margins are expected to range from 15.3 to 15.7 percent.

The increase in total Diversified Industrial Segment backlog in 2018 was primarily due to orders exceeding shipments in the Asia Pacific region and North America, with the Asia Pacific region accounting for approximately 60 percent of the increase and North America accounting for approximately 40 percent of the increase. The increase in total Diversified Industrial Segment backlog in 2017 was primarily due to recent acquisitions as well as orders exceeding shipments in all regions, with North America and Europe each accounting for approximately 40 percent of the increase. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

Diversified Industrial Segment assets in 2018 remained flat as compared to the 2017 balance. At June 30, 2018, increases in cash and cash equivalents and trade accounts receivable were offset by a decrease in intangible assets. The increase in total Diversified Industrial Segment assets in 2017 was primarily due to acquisitions, partially offset by the effect of currency rate fluctuations.

Aerospace Systems Segment

(dollars in millions)	2018				2017				2016
Sales	$	2,316			$	2,285			$	2,260
Operating income	398				337				338
Operating income as a percent of sales	17.2		%		14.8		%		14.9		%
Backlog	$	1,954			$	1,753			$	1,762
Assets	1,447				1,413				1,431
Return on average assets	27.8		%		23.7		%		24.1		%

Sales in 2018 were higher than the 2017 level primarily due to higher volume in the commercial and military aftermarket businesses, partially offset by lower volume in the commercial and military original equipment manufacturer (OEM) businesses. Sales in 2017 were higher than the 2016 level primarily due to higher volume in the military OEM and commercial and military aftermarket businesses, partially offset by lower volume in the commercial OEM business.

The higher margin in 2018 was primarily due to a favorable product mix resulting from higher aftermarket volume and profitability and lower engineering development and operating expenses, partially offset by unfavorable contract settlements and higher product support costs. The slightly lower margin in 2017 was primarily due to an unfavorable OEM product mix, higher warranty-related costs, higher favorable contract settlements in 2016 and higher business realignment expenses, partially offset by higher aftermarket profitability and lower engineering development and operating expenses.

The increase in backlog in 2018 was primarily due to orders exceeding shipments in the commercial and military OEM businesses and the commercial and military aftermarket businesses. The decrease in backlog in 2017 was primarily due to shipments exceeding orders in the commercial and military OEM businesses, partially offset by orders exceeding shipments in the commercial and military aftermarket businesses. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

For 2019, sales are expected to increase between 2.5 and 4.5 percent from the 2018 level and operating margins are expected to range from 17.2 to 17.6 percent. A higher concentration of commercial OEM volume in future product mix and higher than expected new product development costs could result in lower margins.

The increase in assets in 2018 was primarily due to increases in trade accounts receivable and other receivables, partially offset by a decrease in other assets. The decrease in assets in 2017 was primarily due to a decrease in trade accounts receivable, intangible assets and other assets, partially offset by an increase in cash and cash equivalents and inventory.

Corporate general and administrative expenses were $200.9 million in 2018 compared to $172.6 million in 2017 and $173.2 million in 2016. As a percent of sales, corporate general and administrative expenses in both 2018 and 2017 were 1.4 percent compared to 1.5 percent in 2016. The higher expense in 2018 was primarily due to higher expenses associated with the Company's incentive compensation programs. The lower expense in 2017 was primarily due to lower expenses associated with the Company's deferred compensation program as well as lower professional services fees.

Corporate assets decreased 28.9 percent in 2018 compared to a decrease of 62.1 percent from 2016 to 2017. The decrease in Corporate assets in 2018 was primarily due to a decrease in cash and cash equivalents, partially offset by an increase in non-current deferred taxes. The decrease in Corporate assets in 2017 was primarily due to decreases in cash and cash equivalents, marketable securities and non-current deferred taxes. Decreases in these assets in 2017 primarily resulted from the Clarcor acquisition.

Other expense (in the Business Segment Information)

(dollars in millions)
Expense (income)	2018				2017				2016
Foreign currency transaction	$	7			$	8			$	23
Stock-based compensation	51				52				49
Pensions	26				78				116
Divestitures and asset sales and writedowns	(4		)		(43		)		(11		)
Sale and writedown of investments	41				—				—
Interest income	(15		)		(12		)		(18		)
Acquisition expenses	5				41				—
Other items, net	11				3				(8		)
	$	122			$	127			$	151

Foreign currency transaction primarily relates to the impact of changes in foreign exchange rates on cash, marketable securities and other investments and intercompany transactions. The lower pension expense in 2018 is primarily due to a lower level of amortization of past actuarial losses. The lower pension expense in 2017 is primarily due to a change in methodology to use of the spot yield curve approach to estimate the interest cost component of net periodic pension cost instead of the single-weighted average discount rate. Divestitures and asset sales and writedowns in 2018 includes a net gain on the sale of assets, partially offset by a loss on the sale of the global Facet filtration business. Divestitures and asset sales and writedowns in 2017 includes a gain on the sale of the Company's Autoline product line. Acquisition expenses in 2017 primarily relate to Clarcor (see Note 2 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion).

CONSOLIDATED BALANCE SHEET

The Consolidated Balance Sheet shows the Company's financial position at year-end, compared with the previous year-end. This discussion provides information to assist in assessing factors such as the Company's liquidity and financial resources.

(dollars in millions)		2018				2017
Cash		$	855			$	924
Trade accounts receivable, net		2,146				1,931
Inventories		1,621				1,549
Shareholders' equity		5,860				5,262
Working capital		$	1,888			$	1,384
Current ratio		1.6				1.4

Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes $836 million and $874 million held by the Company's foreign subsidiaries at June 30, 2018 and 2017, respectively. As a result of the TCJ Act, the prior worldwide tax system was replaced by a territorial tax system, which generally allows companies to repatriate future foreign source earnings without incurring additional U.S. federal taxes. However, other U.S. or foreign taxes may be incurred should cash be distributed between the Company's subsidiaries. The Company has determined it will no longer permanently reinvest certain foreign earnings. All other undistributed foreign earnings remain permanently reinvested. Refer to Note 4 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Trade accounts receivable, net are receivables due from customers for sales of product. Days sales outstanding relating to trade receivables for the Company was 51 days in both 2018 and 2017. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded.

Inventories increased $72 million from 2017 primarily due to a $107 million increase in inventories in the Diversified Industrial Segment, partially offset by a decrease of $20 million related to a sale of a business and a decrease of $10 million in the Aerospace Systems Segment. Days supply of inventory on hand was 64 days in 2018 and 67 days in 2017.

Shareholders' equity activity during 2018 included a decrease of $300 million related to share repurchases, an increase of $179 million related to pensions and postretirement benefits resulting from net actuarial gains and amortizations and a decrease of $18 million related to foreign currency translation adjustments.

CONSOLIDATED STATEMENT OF CASH FLOWS

The Consolidated Statement of Cash Flows reflects cash inflows and outflows from the Company's operating, investing and financing activities.

A summary of cash flows follows:

(dollars in millions)		2018				2017				2016
Cash provided by (used in):
Operating activities		$	1,600			$	1,302			$	1,211
Investing activities		20				(3,365		)		(265		)
Financing activities		(1,682		)		1,783				(843		)
Effect of exchange rates		(1		)		(57		)		(62		)
Net (decrease) increase in cash and cash equivalents		$	(63	)		$	(337	)		$	41

Cash flows from operating activities in 2018 reflects an increase in net income from 2017 of $77 million and a reduction of $251 million for cash used by working capital items. Cash flows from operating activities in 2017 reflects an increase in net income from 2016 of $177 million and a reduction of $28 million for cash used by working capital items. Cash flows from operating activities in 2016 reflects an increase of $120 million for cash provided by working capital items. The Company also made discretionary cash contributions to the Company's domestic qualified defined benefit plan of $220 million in 2017 and $200 million in 2016.

Cash flows from investing activities in 2018 benefited from proceeds related to the sale of the global Facet filtration business, and sale of plant and equipment. Cash flows from investing activity in 2017 includes $4,069 million related to acquisition activities, primarily for the Clarcor acquisition. Cash flows from investing activities in 2018, 2017, and 2016 also includes $3 million, $814 million, and $(51) million, respectively, in net maturities (purchases) of marketable securities and other investments.

Cash flows from financing activities during 2018 included the repayment of long-term debt of approximately $945 million. Cash flows from financing activities during 2017 included the issuance of approximately $2,646 million of notional borrowings of long-term debt as well as the repayment of long-term debt of approximately $381 million, which includes debt assumed in the Clarcor acquisition. The Company repurchased 1.7 million common shares for $300 million during 2018 as compared to the repurchase of 2.0 million common shares for $265 million in 2017 and 5.1 million common shares for $558 million in 2016.

Dividends have been paid for 272 consecutive quarters, including a yearly increase in dividends for the last 62 years. The current annual dividend rate is $3.04 per common share.

The Company’s goal is to maintain no less than an “A” rating on senior debt to ensure availability and reasonable cost of external funds. In periods following significant capital deployment, including for share repurchases or acquisitions, certain of the ratings assigned to the Company's senior debt may be, and at June 30, 2018 and 2017 were, lower than the stated goal. The Company's ability to borrow funds at desirable tenors and interest rates in 2018 and 2017 was not significantly impacted by certain ratings on senior debt that were below an "A" level. The Company does not believe that its ability to borrow funds in the future at desirable tenors and affordable interest rates will be impacted if certain of its ratings are below an "A" level at the time of such borrowings. At June 30, 2018, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:

Fitch Ratings		A-
Moody's Investor Services, Inc.		Baa1
Standard & Poor's		A

As of June 30, 2018, the Company had a line of credit totaling $2,000 million through a multi-currency revolving credit agreement with a group of banks, of which $1,466 million was available at June 30, 2018. Refer to Note 8 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

The Company is currently authorized to sell up to $2,000 million of short-term commercial paper notes. There were $534 million outstanding commercial paper notes as of June 30, 2018, and the largest amount of commercial paper notes outstanding during the last quarter of 2018 was $736 million.

The Company's credit agreements and indentures governing certain debt agreements contain various covenants, the violation of which would limit or preclude the use of the applicable agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the applicable agreements. The Company is in compliance with all covenants and expects to remain in compliance during the term of the credit agreements and indentures.

Contractual Obligations - The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $175 million at June 30, 2018. Payment of these obligations would result from settlements with worldwide taxing authorities. Due to the difficulty in determining the timing of the settlements, these obligations are not included in the following summary of the Company's fixed contractual obligations. References to Notes are to the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

(dollars in millions)		Payments due by period
Contractual obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Transition tax payments related to TCJ Act (Note 4)		$	255			$	20			$	41			$	41			$	153
Long-term debt (Note 9)		4,460				100				—				417				3,943
Interest on long-term debt		2,375				152				303				279				1,641
Operating leases (Note 9)		226				79				92				27				28
Retirement benefits (Note 10)		124				76				12				11				25
Total		$	7,440			$	427			$	448			$	775			$	5,790

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application places the most significant demands on management's judgment.

Revenue Recognition - Substantially all of the Diversified Industrial Segment revenues are recognized when persuasive evidence of an arrangement exists, product has shipped and the risks and rewards of ownership have transferred or services have been rendered, the price to the customer is fixed and determinable and collectibility is reasonably assured, which is generally at the time the product is shipped. The Aerospace Systems Segment recognizes revenues primarily using the percentage-of-completion method, and the extent of progress toward completion is primarily measured using the units-of-delivery method. The Company estimates costs to complete long-term contracts for purposes of evaluating and establishing contract reserves. The estimation of these costs requires judgment on the part of management due to the duration of the contractual agreements as well as the technical nature of the products involved. Adjustments to cost estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.

Impairment of Goodwill and Long-Lived Assets - Goodwill is tested for impairment, at the reporting unit level, on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. For the Company, a reporting unit is one level below the operating segment level. Determining whether an impairment has occurred requires the valuation of the respective reporting unit, which the Company has consistently estimated using primarily a discounted cash flow model. The Company believes that the use of a discounted cash flow model results in the most accurate calculation of a reporting unit's fair value since the market value for a reporting unit is not readily available. The discounted cash flow analysis requires several assumptions including future sales growth and operating margin levels as well as assumptions regarding future industry specific market conditions. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions used in the discounted cash flow analysis. The Company has consistently used a discount rate commensurate with its cost of capital, adjusted for inherent business risks, and an appropriate terminal growth factor. The Company also reconciles the estimated aggregate fair value of its reporting units as derived from the discounted cash flow analysis to the Company's overall market capitalization.

The results of the Company's 2018 annual goodwill impairment test performed as of December 31, 2017 indicated that no goodwill impairment existed. However, certain reporting units within the Diversified Industrial Segment had estimated fair values that the Company determined, from a quantitative and qualitative perspective, were not significantly in excess of their carrying values. For these reporting units, the sales growth assumptions had the most significant influence on the estimation of fair value. The key uncertainties in these sales growth assumptions include end-market growth, the ability to secure business with new customers and new product development. The Company continually monitors its reporting units for impairment indicators and updates assumptions used in the most recent calculation of the fair value of a reporting unit as appropriate. The Company is unaware of any current market trends that are contrary to the assumptions made in the estimation of the fair value of any of its reporting units. If actual experience is not consistent with the assumptions made in the estimation of the fair value of the reporting units, it is possible that the estimated fair value of certain reporting units could fall below their carrying value resulting in the necessity to conduct additional goodwill impairment tests.

Long-lived assets held for use, which primarily includes finite-lived intangible assets and plant and equipment, are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During 2018, there were no events or circumstances that indicated that the carrying value of the Company's long-lived assets held for use were not recoverable.

Pensions - The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets, increases in compensation levels and amortization periods for actuarial gains and losses. Assumptions are determined based on Company data and appropriate market indicators, and are evaluated each year as of the plans' measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements. Beginning in 2017, the Company changed the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs from the single-weighted average discount rate to spot yield curve approach. The change does not affect the measurement of the Company's benefit obligations. The new method provides a more precise measure of service and interest costs by improving the correlation between projected benefit cash flows and the discrete spot yield curve rates and was accounted for as a change in estimate prospectively beginning in the first quarter of 2017. Annual net periodic pension expense in 2017 was lower by approximately $30 million compared to the previous method. Annual net periodic postretirement cost was not materially different.

For the Company's domestic qualified defined benefit plan, a 50 basis point change in the assumed long-term rate of return on plan assets is estimated to have a $14 million effect on annual pension expense and a 50 basis point decrease in the discount rate is estimated to increase annual pension expense by $17 million. As of June 30, 2018, $841 million of past years' net actuarial losses related to the Company's domestic qualified defined benefit plan are subject to amortization in the future. These losses will generally be amortized over approximately seven years and will negatively affect earnings in the future. Actuarial gains experienced in future years will help reduce the effect of the net actuarial loss amortization. Further information on pensions is provided in Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Income Taxes - Significant judgment is required in determining the Company's income tax expense and in evaluating tax positions. Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting and income tax basis of assets and liabilities. Factors considered by the Company in determining the probability of realizing deferred income tax assets include forecasted operating earnings, available tax planning strategies and the time period over which the temporary differences will reverse. The Company reviews its tax positions on a regular basis and adjusts the balances as new information becomes available. For those tax positions where it is more likely than not that a tax benefit will be sustained, the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon examination by a taxing authority that has full knowledge of all relevant information will be recorded. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements.

On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act significantly reforms the Internal Revenue Code of 1986, as amended, by among other things, lowering the U.S. corporate income tax rate and creating a territorial tax system (with a one time transition tax imposed on previously unremitted foreign earnings and profits). The Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the TCJ Act. SAB 118 provides a measurement period that should not extend beyond one year of the TCJ Act’s enactment date, to complete the applicable accounting of the related tax impacts of the TCJ Act. The final impact of the TCJ Act may differ from the provisional amounts recorded in the current period, due to, among other things, any updates to estimates that have been utilized in the calculation of the tax impacts, changes in interpretation of the existing law, or additional guidance from U. S. Treasury department or the Internal Revenue Service.

Further information on income taxes is provided in Note 4 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Loss Contingencies - The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability and litigation reserves. Establishing loss accruals for these matters requires management's estimate and judgment with regards to risk exposure and ultimate liability or realization. These loss accruals are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements are described in Note 1 to the Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.