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

All currency amounts are in millions unless specified

You should read the following discussion in conjunction with “Selected Financial Data” and our Consolidated Financial Statements and related notes included in this Annual Report.

Overview

We are a diversified technology company. We operate businesses that design and develop software (both license and software-as-a-service) and engineered products and solutions for a variety of niche end markets.

We pursue consistent and sustainable growth in earnings and cash flow by emphasizing continuous improvement in the operating performance of our existing businesses and by acquiring other carefully selected businesses. Our acquisitions have represented both new strategic platforms and additions to existing businesses.

Application of Critical Accounting Policies

Our Consolidated Financial Statements are prepared in conformity with generally accepted accounting principles in the United States (“GAAP”). A discussion of our significant accounting policies can also be found in the notes to our Consolidated Financial Statements for the year ended December 31, 2018 included in this Annual Report.

GAAP offers acceptable alternative methods for accounting for certain issues affecting our financial results, such as determining inventory cost, depreciating long-lived assets and recognizing revenue. We have not changed the application of acceptable accounting methods or the significant estimates affecting the application of these principles in the last three years in a manner that had a material effect on our consolidated financial statements.

The preparation of financial statements in accordance with GAAP requires the use of estimates, assumptions, judgments and interpretations that can affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities and other supplemental disclosures.

The development of accounting estimates is the responsibility of our management. Our management discusses those areas that require significant judgments with the Audit Committee of our Board of Directors. The Audit Committee has reviewed all financial disclosures in our annual filings with the SEC. Although we believe the positions we have taken with regard to uncertainties are reasonable, others might reach different conclusions and our positions can change over time as more information becomes available. If an accounting estimate changes, its effects are accounted for prospectively or through a cumulative catch up adjustment.

Our most significant accounting uncertainties are encountered in the areas of accounts receivable collectibility, inventory valuation, future warranty obligations, revenue recognition, income taxes and goodwill and indefinite-lived impairment analyses. These issues affect each of our business segments and are evaluated using a combination of historical experience, current conditions and relatively short-term forecasting.

Accounts receivable collectibility is based on the economic circumstances of customers and credits given to customers after shipment of products, including in certain cases credits for returned products. Accounts receivable are regularly reviewed to determine customers who have not paid within agreed upon terms, whether these amounts are consistent with past experiences, what historical experience has been with amounts deemed uncollectible and the impact that economic conditions might have on collection efforts in general and with specific customers. The returns and other sales credit allowance is an estimate of customer returns, exchanges, discounts or other forms of anticipated concessions and is treated as a reduction in revenue. The returns and other sales credits histories are analyzed to determine likely future rates for such credits. At December 31, 2018, our allowance for doubtful accounts receivable was $17.3 and our allowance for sales returns and sales credits was $5.8, for a total of $23.1, or 3.2% of total gross accounts receivable, as compared to a total of $12.7, or 1.9% of total gross accounts receivable, at December 31, 2017. This percentage is influenced by the risk profile of the underlying receivables, and the timing of write-offs of accounts deemed uncollectible.

We regularly compare inventory quantities on hand against anticipated future usage, which we determine as a function of historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities. When we use historical usage, this information is also qualitatively compared to business trends to evaluate the reasonableness of using historical information as an estimate of future usage. At December 31, 2018, inventory reserves for excess and obsolete inventory were

$30.3, or 13.7% of gross inventory cost, as compared to $38.1, or 15.7% of gross inventory cost, at December 31, 2017. The inventory reserve as a percent of gross inventory cost will continue to fluctuate based upon specific identification of reserves needed based upon changes in our business as well as the physical disposal of obsolete inventory.

Most of our product-based revenues are covered by warranty provisions that generally provide for the repair or replacement of qualifying defective items for a specified period after the time of sale, typically 12 to 24 months. Future warranty obligations are evaluated using, among other factors, historical cost experience, product evolution and customer feedback. Our expense for warranty obligations was less than 1% of net revenues for each of the years ended December 31, 2018, 2017 and 2016.

Revenues from our project-based businesses, including toll and traffic systems, control systems and installations of large software application projects, are generally recognized over time using the input method, primarily utilizing the ratio of costs incurred to total estimated costs, as the measure of performance. The Company recognized revenues of $245.9, $249.3 and $241.3 for the years ended December 31, 2018, 2017 and 2016, respectively, using this method. At December 31, 2018, $241.6 of revenue related to unfinished percentage-of-completion contracts had yet to be recognized.

Income taxes can be affected by estimates of whether and within which jurisdictions future earnings will occur and if, how and when cash is repatriated to the U.S., combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. During 2018, our effective income tax rate was 21.2%, as compared to the 2017 rate of 6.1%. The increase was due primarily to the recognition of a $215.4 net income tax benefit related to the Tax Act in 2017, partially offset by the reduction in the U.S. federal corporate income tax rate from 35% to 21%. We expect the effective tax rate for 2019 to be between 21% and 23%.

We account for goodwill in a purchase business combination as the excess purchase price over the fair value of the net identifiable assets acquired. Goodwill, which is not amortized, is tested for impairment on an annual basis in conjunction with our annual forecast process during the fourth quarter (or an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value).

When testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform the quantitative impairment test; otherwise, no further analysis is required. Under the qualitative assessment, we consider various qualitative factors, including macroeconomic conditions, relevant industry and market trends, cost factors, overall financial performance, other entity-specific events and events affecting the reporting unit that could indicate a potential change in the fair value of our reporting unit or the composition of its carrying values. We also consider the specific future outlook for the reporting unit.

We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The quantitative assessment utilizes both an income approach (discounted cash flows) and a market approach (consisting of a comparable company earnings multiples methodology) to estimate the fair value of a reporting unit. To determine the reasonableness of the estimated fair values, we review the assumptions to ensure that neither the income approach nor the market approach provides significantly different valuations. If the estimated fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the estimated fair value, a non-cash impairment loss is recognized in the amount of that excess.

Key assumptions used in the income and market approaches are updated when the analysis is performed for each reporting unit. Various assumptions are utilized including forecasted operating results, strategic plans, economic projections, anticipated future cash flows, the weighted-average cost of capital, comparable transactions, market data and earnings multiples. While we use reasonable and timely information to prepare our cash flow and discount rate assumptions, actual future cash flows or market conditions could differ significantly and could result in future non-cash impairment charges related to recorded goodwill balances.

Recently acquired reporting units generally represent a higher inherent risk of impairment, which typically decreases as the businesses are integrated into our enterprise. Negative industry or economic trends, disruptions to our business, actual results significantly below projections, unexpected significant changes or planned changes in the use of the assets, divestitures and market capitalization declines may have a negative effect on the fair value of our reporting units.

Roper has 33 reporting units with individual goodwill amounts ranging from zero to $2.4 billion. In 2018, the Company performed its annual impairment test in the fourth quarter for all reporting units. The Company conducted its analysis qualitatively and

assessed whether it was more likely than not that the respective fair value of these reporting units was less than the carrying amount. The Company determined that impairment of goodwill was not likely in 30 of its reporting units and thus was not required to perform a quantitative assessment for these reporting units. For the remaining three reporting units, the Company performed its quantitative assessment and concluded that the fair value of each of these three reporting units was substantially in excess of its carrying value, with no impairment indicated as of October 1, 2018.

Trade names that are determined to have an indefinite useful economic life are not amortized, but separately tested for impairment during the fourth quarter of the fiscal year or on an interim basis if an event occurs that indicates the fair value is more likely than not below the carrying value. We first qualitatively assess whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of the indefinite-lived trade name is less than its carrying amount. If necessary, we conduct a quantitative assessment using the relief-from-royalty method, which we believe to be an acceptable methodology due to its common use by valuation specialists in determining the fair value of intangible assets. This methodology assumes that, in lieu of ownership, a third-party would be willing to pay a royalty in order to exploit the related benefits of these assets. The fair value of each trade name is determined by applying a royalty rate to a projection of net revenues discounted using a risk-adjusted rate of capital. Each royalty rate is determined based on the profitability of the trade name to which it relates and observed market royalty rates. Revenue growth rates are determined after considering current and future economic conditions, recent sales trends, discussions with customers, planned timing of new product launches or other variables. Trade names resulting from recent acquisitions generally represent the highest risk of impairment, which typically decreases as the businesses are integrated into our enterprise and positioned for future sales growth.

The Company performed a quantitative analysis over the fair values of four of its trade names and concluded that the fair value exceeded its carrying value, with no impairment indicated as of October 1, 2018. Of those trade names subjected to our quantitative analysis, one, associated with our lab software business, had a fair value that approximated its carrying value, which was $100.4 as of October 1, 2018. Holding other assumptions constant, for the specific trade name associated with our lab software business, a 50 basis point increase in the discount rate would result in a $6.8 impairment and a 100 basis point decrease in the terminal growth rate would result in an $11.7 impairment.

The assessment of fair value for impairment purposes requires significant judgments to be made by management. Although our forecasts are based on assumptions that are considered reasonable by management and consistent with the plans and estimates management uses to operate the underlying businesses, there is significant judgment in determining the expected results attributable to the businesses and/or reporting units. Changes in estimates or the application of alternative assumptions could produce significantly different results. No impairment resulted from the annual reviews performed in 2018.

The most significant identifiable intangible assets with definite useful economic lives recognized from our acquisitions are customer relationships. The fair value for customer relationships is determined as of the acquisition date using the excess earnings method. Under this methodology the fair value is determined based on the estimated future after-tax cash flows arising from the acquired customer relationships over their estimated lives after considering customer attrition and contributory asset charges. When testing customer relationship intangible assets for potential impairment, management considers historical customer attrition rates and projected revenues and profitability related to customers that existed at acquisition. In evaluating the amortizable life for customer relationship intangible assets, management considers historical customer attrition patterns.

We evaluate whether there has been an impairment of identifiable intangible assets with definite useful economic lives, or of the remaining life of such assets, when certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost or remaining period of amortization of any asset may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future gross, undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to fair value or a revision in the remaining amortization period is required.

Results of Operations

All currency amounts are in millions unless specified, percentages are net of revenues

Percentages may not sum due to rounding.

The following table sets forth selected information for the years indicated.

	Years ended December 31,
	2018				2017				2016
Net revenues:
RF Technology (1)	$	2,168.4			$	1,862.1			$	1,210.3
Medical & Scientific Imaging (2)	1,522.4				1,410.4				1,362.8
Industrial Technology	900.0				783.7				706.6
Energy Systems & Controls (3)	600.4				551.3				510.2
Total	$	5,191.2			$	4,607.5			$	3,789.9
Gross margin:
RF Technology	63.9		%		61.1		%		56.7		%
Medical & Scientific Imaging	71.4				72.0				73.2
Industrial Technology	50.9				50.6				50.6
Energy Systems & Controls	58.2				57.4				57.1
Total	63.2		%		62.2		%		61.5		%
Segment operating margin:
RF Technology	28.3		%		25.7		%		30.8		%
Medical & Scientific Imaging	34.2				34.5				35.0
Industrial Technology	31.6				30.0				28.7
Energy Systems & Controls	30.1				27.4				25.4
Total	30.8		%		29.3		%		31.2		%
Corporate administrative expenses	(3.9		)%		(3.1		)%		(3.4		)%
Income from operations	26.9				26.3				27.8
Interest expense, net	(3.5		)		(3.9		)		(2.9		)
Loss on debt extinguishment	(0.3		)		—				—
Other income/(expense)	—				0.1				(0.1		)
Earnings before income taxes	23.1				22.5				24.8
Income taxes	(4.9		)		(1.4		)		(7.4		)
Net earnings	18.2		%		21.1		%		17.4		%

(1)

Includes results from the acquisitions of ConstructConnect from October 31, 2016, Deltek, Inc. from December 28, 2016, Handshake Software, Inc. from August 4, 2017, Workbook Software A/S from September 15, 2017, Onvia, Inc. from November 17, 2017, Quote Software from January 2, 2018, PlanSwift Software from March 28, 2018, Smartbid from May 8, 2018, PowerPlan, Inc. from June 4, 2018, ConceptShare from June 7, 2018, BillBlast from July 10, 2018 and Avitru from December 31, 2018.

(2)	Includes results from the acquisitions of CliniSys from January 7, 2016, PCI Medical from March 17, 2016, GeneInsight from April 1, 2016 and UNIConnect from November 10, 2016.

(3)	Includes results from the acquisition of Phase Technology from June 21, 2017.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Net revenues for the year ended December 31, 2018 were $5.19 billion as compared to $4.61 billion for the year ended December 31, 2017, an increase of 12.7%. The increase was the result of organic growth of 9.4%, a net effect from acquisitions and divestitures of 2.9%, and foreign exchange benefit of 0.4%.

In our RF Technology segment, net revenues for the year ended December 31, 2018 increased by $306.3 or 16% over the year ended December 31, 2017. Organic revenues increased by 9% and acquisitions accounted for 7% of our growth. The growth in organic revenues was due primarily to broad-based strength across our software businesses and the non-recurrence of purchase accounting adjustments to acquired deferred revenues in the year ended December 31, 2017 associated with our 2016 Deltek and ConstructConnect acquisitions. Gross margin was 63.9% for the year ended December 31, 2018 as compared to 61.1% for the year ended December 31, 2017, due primarily to an increased percentage of revenues from our software businesses, which have higher gross margins, including the net reduction of purchase accounting adjustments. Selling, general and administrative (“SG&A”) expenses as a percentage of revenues in the year ended December 31, 2018 increased to 35.6%, as compared to 35.3% in the year ended December 31, 2017, due primarily to an increased percentage of revenues from our software businesses, which have a higher SG&A structure, including amortization of acquired intangibles. The resulting operating margin was 28.3% in the year ended December 31, 2018 as compared to 25.7% in the year ended December 31, 2017.

Our Medical & Scientific Imaging segment reported a $112.0 or 8% increase in net revenues for the year ended December 31, 2018 over the year ended December 31, 2017, all of which was attributable to organic growth. The growth in organic revenues was due primarily to broad-based growth in our imaging and medical products businesses. Gross margin decreased to 71.4% for the year ended December 31, 2018 from 72.0% for the year ended December 31, 2017, due primarily to growth in our lower margin imaging businesses. SG&A expenses as a percentage of net revenues decreased to 37.2% in the year ended December 31, 2018, as compared to 37.5% in the year ended December 31, 2017, due primarily to operating leverage on higher revenues at our imaging businesses. The resulting operating margin was 34.2% in the year ended December 31, 2018 as compared to 34.5% in the year ended December 31, 2017.

Net revenues for our Industrial Technology segment increased by $116.3 or 15% for the year ended December 31, 2018 from the year ended December 31, 2017. Organic revenues increased 14% and the foreign exchange benefit was 1%. The growth in organic revenues was broad-based, due primarily to our fluid handling and water meter technology. Gross margin increased to 50.9% in the year ended December 31, 2018, as compared to 50.6% in the year ended December 31, 2017, and SG&A expenses as a percentage of net revenues decreased to 19.3% in the year ended December 31, 2018, as compared to 20.6% in the year ended December 31, 2017, both of which were due primarily to operating leverage on higher sales volume. The resulting operating margin was 31.6% in the year ended December 31, 2018 as compared to 30.0% in the year ended December 31, 2017.

In our Energy Systems & Controls segment, net revenues for the year ended December 31, 2018 increased by $49.1 or 9% from the year ended December 31, 2017. Organic sales increased by 7% and the foreign exchange benefit was 1%. The growth in organic revenues was due to broad-based growth in our businesses serving energy and industrial end markets. Gross margin increased to 58.2% in the year ended December 31, 2018 as compared to 57.4% in the year ended December 31, 2017 and SG&A expenses as a percentage of net revenues decreased to 28.0% in the year ended December 31, 2018, as compared to 30.0% in the year ended December 31, 2017, both of which were due to operating leverage on higher sales volume. As a result, operating margin was 30.1% in the year ended December 31, 2018 as compared to 27.4% in the year ended December 31, 2017.

Corporate expenses increased by $61.7 to $203.5, or 3.9% of revenues, in 2018 as compared to $141.8, or 3.1% of revenues, in 2017. The increase was due primarily to (i) $35.0 of accelerated vesting associated with the passing of our former executive chairman, (ii) increased equity compensation as a result of increases in our common stock price and (iii) acquisition-related expenses.

Interest expense, net, increased $1.5, or 0.8%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The increase was due to higher weighted average interest rates, partially offset by lower weighted average debt balances.

Loss on debt extinguishment of $15.9 for the for the year ended December 31, 2018, incurred in connection with the redemption of the 2019 Notes (as defined below), was composed of the early redemption premium and remaining unamortized deferred financing costs.

Other income, net, of $0.0 for the year ended December 31, 2018 was composed primarily of royalty income, offset entirely by various other immaterial expenses. Other income, net of $5.1 for the year ended December 31, 2017 was composed primarily of a $9.4 gain on sale of a product line in our Energy Systems & Controls segment, offset in part by a $1.8 charge on a minority investment and foreign exchange losses at our non-U.S. based companies.

During 2018, our effective income tax rate was 21.2% as compared to our 2017 rate of 6.1%. The increase was due primarily to the recognition of a $215.4 net income tax benefit related to the Tax Act in 2017, partially offset by the reduction in the U.S. federal corporate income tax rate from 35% to 21%.

Order backlog is equal to our remaining performance obligations expected to be recognized within the next 12 months as discussed in Note 1 of the Notes to Consolidated Financial Statements.

	2018				2017				change
RF Technology	$	1,005.9			$	991.4			1.5	%
Medical & Scientific Imaging	468.0				467.8				—
Industrial Technology	119.2				110.9				7.5
Energy Systems & Controls	99.7				102.3				(2.5	)
Total	$	1,692.8			$	1,672.4			1.2	%

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Net revenues for the year ended December 31, 2017 were $4.61 billion as compared to $3.79 billion for the year ended December 31, 2016, an increase of 21.6%. The increase was the result of contributions from acquisitions of 16.3%, organic growth of 5.3% and no impact from foreign exchange.

In our RF Technology segment, net revenues for the year ended December 31, 2017 increased by $651.9 or 54% over the year ended December 31, 2016. Acquisitions accounted for 51% and organic revenues increased by 3%. The increase in organic revenues was due primarily to growth in our software businesses. Gross margin was 61.1% for the year ended December 31, 2017 as compared to 56.7% for the year ended December 31, 2016, due primarily to an increased percentage of revenues from our software businesses, which have a higher gross margin. Selling, general and administrative expenses as a percentage of revenues in the year ended December 31, 2017 increased to 35.3%, as compared to 25.9% in the year ended December 31, 2016, due primarily to an increased percentage of revenues from our software businesses, which have a higher SG&A structure, including amortization of acquired intangibles. The resulting operating margin was 25.7% in 2017 as compared to 30.8% in 2016.

Our Medical & Scientific Imaging segment reported a $47.5 or 3% increase in net revenues for the year ended December 31, 2017 over the year ended December 31, 2016, all of which was attributable to organic growth. The growth in organic revenues was due primarily to increased sales in our medical products businesses, led by NDI, and our alternate site healthcare businesses. Gross margin decreased to 72.0% for the year ended December 31, 2017 from 73.2% for the year ended December 31, 2016, due primarily to an unfavorable sales mix at both our software and medical products businesses. SG&A expenses as a percentage of net revenues decreased to 37.5% in the year ended December 31, 2017, as compared to 38.2% in the year ended December 31, 2016, due primarily to operating leverage on higher sales. The resulting operating margin was 34.5% in the year ended December 31, 2017 as compared to 35.0% in the year ended December 31, 2016.

Net revenues for our Industrial Technology segment increased by $77.1 or 11% for the year ended December 31, 2017 from the year ended December 31, 2016, all of which was attributable to organic growth. The growth in organic revenues was broad-based, due primarily to our fluid handling, water meter technology and materials testing businesses. Gross margin was consistent at 50.6% for the years ended December 31, 2017 and 2016. SG&A expenses as a percentage of net revenues were 20.6% in the year ended December 31, 2017, as compared to 21.9% in the year ended December 31, 2016, due primarily to operating leverage on higher sales volume. The resulting operating margin was 30.0% in the year ended December 31, 2017 as compared to 28.7% in the year ended December 31, 2016.

In our Energy Systems & Controls segment, net revenues for the year ended December 31, 2017 increased by $41.1 or 8% from the year ended December 31, 2016. Organic sales increased by 7% and the benefit from foreign exchange and acquisitions totaled 1%. The growth in organic revenues was due primarily to increased sales in pressure sensors and valves businesses serving energy markets as well as businesses serving industrial end markets. Gross margin increased to 57.4% in the year ended December 31, 2017 as compared to 57.1% in the year ended December 31, 2016 and SG&A expenses as a percentage of net revenues decreased to 30.0% in the year ended December 31, 2017, as compared to 31.7% in the year ended December 31, 2016, both of which were due to operating leverage on higher sales volume. As a result, operating margin was 27.4% in the year ended December 31, 2017 as compared to 25.4% in the year ended December 31, 2016.

Corporate expenses increased by $14.3 to $141.8, or 3.1% of revenues, in 2017 as compared to $127.5, or 3.4% of revenues, in 2016. The dollar increase was due primarily to increased incentive compensation and professional services.

Interest expense increased $69.0, or 61.9%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The increase was due primarily to higher average debt balances to fund acquisitions at the end of 2016.

Other income, net, of $5.1 for the year ended December 31, 2017 was composed primarily of a $9.4 gain on sale of a product line in our Energy Systems & Controls segment, offset in part by a $1.8 charge on a minority investment and foreign exchange losses at our non-U.S. based companies. Other expense of $1.5 for the year ended December 31, 2016 was composed primarily of foreign exchange losses at our non-U.S. based companies, offset in part by royalty income.

During 2017, our effective income tax rate was 6.1% as compared to our 2016 rate of 30.0%. The decrease was due primarily to the recognition of a $215.4 net income tax benefit related to the Tax Act as well as increased excess tax benefits related to equity compensation in 2017 as compared to 2016.

Order backlog is equal to our remaining performance obligations expected to be recognized within the next 12 months as discussed in Note 1 of the Notes to Consolidated Financial Statements.

	2017				2016				change
RF Technology	$	991.4			$	991.2			—	%
Medical & Scientific Imaging	467.8				423.6				10.4	%
Industrial Technology	110.9				65.3				69.8	%
Energy Systems & Controls	102.3				92.3				10.8	%
Total	$	1,672.4			$	1,572.4			6.4	%

Financial Condition, Liquidity and Capital Resources

All currency amounts are in millions unless specified

Selected cash flows for the years ended December 31, 2018, 2017 and 2016 are as follows:

	2018				2017				2016
Cash provided by/(used in):
Operating activities	$	1,430.1			$	1,234.5			$	963.8
Investing activities	(1,335.1		)		(209.6		)		(3,752.9		)
Financing activities	(388.1		)		(1,170.0		)		2,805.3

Operating activities - The growth in cash provided by operating activities in 2018 and in 2017 was primarily due to increased earnings net of non-cash expenses. In addition, the growth in cash provided by operating activities in 2017 over 2016 was increased in part by income tax payments in the first quarter of 2016 related to the gain on the sale of the Abel Pumps business in the fourth quarter of 2015.

Investing activities - Cash used in investing activities during 2018 was primarily for business acquisitions, most notably PowerPlan, and to a much lesser extent capital expenditures. Cash used in investing activities during 2017 was primarily for business acquisitions and capital expenditures. Cash used in investing activities during 2016 was primarily for business acquisitions, most notably Deltek.

Financing activities - Cash provided by/(used in) financing activities in all periods presented was primarily debt repayments/borrowings as well as dividends paid to stockholders. Cash used in financing activities during 2018 was primarily from the pay-down of revolving debt borrowings of $405, partially offset by the net issuance of senior notes of $200 and dividends paid to shareholders. Cash used in financing activities during 2017 was primarily from the pay-down of revolving debt borrowings of $660 and the repayment of $400 of senior notes. Cash provided by financing activities during 2016 was primarily from the issuance of $1.2 billion of senior notes and revolving debt borrowings for acquisitions.

Cash and cash equivalents decreased as a result of the effects of foreign currency exchange rate changes during the year ended December 31, 2018 by $13.8 as compared to an increase during the year ended December 31, 2017 of $59.2 and a decrease during the year ended December 31, 2016 of $37.5. The decrease for the year ended December 31, 2018 was due primarily to the weakening

of functional currencies of our Canadian and certain European subsidiaries against the U.S. dollar, while the increase for the year ended December 31, 2017 was due primarily to the strengthening of functional currencies of our European subsidiaries against the U.S. dollar. The decrease for the year ended December 31, 2016 was due primarily to the weakening of functional currencies of our European subsidiaries against the U.S. dollar.

Net working capital (current assets, excluding cash, less total current liabilities, excluding debt) was a negative $200 at December 31, 2018 compared to negative $140 at December 31, 2017, due primarily to increased deferred revenue and accrued compensation, partially offset by increased accounts receivable. This deferred revenue increase is due to a higher percentage of revenue from software and subscription-based services.

Total debt excluding unamortized debt issuance costs was $5.0 billion at December 31, 2018 (39.1% of total capital) compared to $5.2 billion at December 31, 2017 (43.0% of total capital). Our decreased total debt at December 31, 2018 compared to December 31, 2017 was due primarily to the pay-down of revolving debt borrowings of $405, the repayment at maturity of $800 of outstanding 2.05% senior unsecured notes and the redemption of $500 of outstanding 6.25% senior unsecured notes, partially offset by the issuance of $700 of 3.65% senior unsecured notes and $800 of 4.20% senior unsecured notes.

On September 23, 2016, we entered into a five-year unsecured credit facility (the “2016 Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders, which replaced our previous unsecured credit facility, dated as of July 27, 2012, as amended as of October 28, 2015 (the “2012 Facility”). The 2016 Facility comprises a five year $2.5 billion revolving credit facility, which includes availability of up to $150 for letters of credit. We may also, subject to compliance with specified conditions, request term loans or additional revolving credit commitments in an aggregate amount not to exceed $500.

The 2016 Facility contains various affirmative and negative covenants which, among other things, limit our ability to incur new debt, enter into certain mergers and acquisitions, sell assets and grant liens, make restricted payments (including the payment of dividends on our common stock) and capital expenditures, or change our line of business. We also are subject to financial covenants which require us to limit our consolidated total leverage ratio and to maintain a consolidated interest coverage ratio. The most restrictive covenant is the consolidated total leverage ratio which is limited to 3.5 to 1.

On December 2, 2016, we amended the 2016 Facility to allow the consolidated total leverage ratio be increased, no more than twice during the term of the 2016 Facility, to 4.0 to 1 for a consecutive four quarter fiscal period per increase (or, for any portion of such four quarter fiscal period in which the maximum would be 4.25 to 1 pursuant to the 2016 facility amendment, 4.25 to 1). In conjunction with the Deltek acquisition (see Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report), we increased the maximum consolidated total leverage ratio covenant to 4.25 to 1 through June 30, 2017 and 4.00 to 1 through December 31, 2017.

At December 31, 2018, we had $4.1 billion of senior unsecured notes and $865 of outstanding revolver borrowings. In addition, we had $3 of other debt in the form of capital leases and several smaller facilities that allow for borrowings or the issuance of letters of credit in foreign locations to support our non-U.S. businesses. We had $79 of outstanding letters of credit at December 31, 2018, of which $37 was covered by our lending group, thereby reducing our revolving credit capacity commensurately.

We may redeem some or all of our senior secured notes at any time or from time to time, at 100% of their principal amount, plus a make-whole premium based on a spread to U.S. Treasury securities.

We were in compliance with all debt covenants related to our credit facility throughout the years ended December 31, 2018 and 2017.

See Note 8 of the Notes to Consolidated Financial Statements included in this Annual Report for additional information regarding our credit facility and senior notes.

Cash and cash equivalents at our foreign subsidiaries at December 31, 2018 totaled $339 as compared to $592 at December 31, 2017, a decrease of 42.7%. The decrease was due primarily to the repatriation of $472 during the year, partially offset by cash generated from foreign operations. The Company intends to distribute all historical unremitted earnings up to the amount of foreign cash and cash equivalents, as well as all future foreign earnings that can be repatriated without incremental U.S. federal tax cost. Any remaining outside basis differences relating to the Company’s investments in foreign subsidiaries will be indefinitely reinvested. See Note 7 of the Notes to Consolidated Financial Statements included in this Annual Report for additional information regarding income taxes.

Capital expenditures of $49.1, $48.8 and $37.3 were incurred during 2018, 2017 and 2016, respectively. Capitalized software expenditures of $9.5, $10.8 and $2.8 were incurred during 2018, 2017 and 2016, respectively. Capital expenditures and capitalized

software expenditures were relatively consistent in 2018 as compared to 2017. The increase in 2017 as compared to 2016 was due primarily to our 2016 acquisitions. In the future, we expect the aggregate of capital expenditures and capitalized software expenditures as a percentage of annual net revenues to be between 1.0% and 1.5%.

Contractual Cash Obligations and Other Commercial Commitments and Contingencies

All currency amounts are in millions

The following tables quantify our contractual cash obligations and commercial commitments at December 31, 2018.

					Payments Due in Fiscal Year
Contractual Cash Obligations 1	Total				2019				2020				2021				2022				2023				Thereafter
Total debt	$	4,968.0			$	1.5			$	601.5			$	1,365.0			$	500.0			$	700.0			$	1,800.0
Senior note interest	876.0				144.9				144.2				126.4				111.0				89.8				259.7
Operating leases	304.2				60.1				53.1				44.9				35.2				28.0				82.9
Total	$	6,148.2			$	206.5			$	798.8			$	1,536.3			$	646.2			$	817.8			$	2,142.6

					Amounts Expiring in Fiscal Year
Other Commercial Commitments	Total Amount Committed				2019				2020				2021				2022				2023				Thereafter
Standby letters of credit and bank guarantees	$	78.7			$	28.2			$	1.7			$	39.7			$	8.6			$	0.1			$	0.4

1 We have excluded the liability for uncertain tax positions and certain other tax liabilities as we are not able to reasonably estimate the timing of the payments. See Note 7 of the Notes to Consolidated Financial Statements included in this Annual Report.

As of December 31, 2018, we had $582.6 of outstanding surety bonds. Certain contracts, primarily those involving public sector customers, require us to provide a surety bond as a guarantee of its performance of contractual obligations.

We believe that internally generated cash flows and the remaining availability under our credit facility will be adequate to finance normal operating requirements. Although we maintain an active acquisition program, any future acquisitions will be dependent on numerous factors and it is not feasible to reasonably estimate if or when any such acquisitions will occur and what the impact will be on our activities, financial condition and results of operations. We may also explore alternatives to attract additional capital resources.

We anticipate that our businesses will generate positive cash flows from operating activities, and that these cash flows will permit the reduction of currently outstanding debt in accordance with the repayment schedule. However, the rate at which we can reduce our debt during 2019 (and reduce the associated interest expense) will be affected by, among other things, the financing and operating requirements of any new acquisitions and the financial performance of our existing companies. None of these factors can be predicted with certainty.

Off-Balance Sheet Arrangements

At December 31, 2018 and 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recently Issued Accounting Standards

See Note 1 of the Notes to Consolidated Financial Statements included in this Annual Report for information regarding the effect of new accounting pronouncements on our consolidated financial statements.