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

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period ended December 31, 2017*. Except as otherwise indicated or unless the context otherwise requires, “Xylem,” “we,” “us,” “our” and “the Company” refer to Xylem Inc. and its subsidiaries.*

Overview

Xylem is a leading global water technology company. We design, manufacture and service highly engineered solutions ranging across a wide variety of critical applications. Our broad portfolio of solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test and treatment of wastewater to the return of water to the environment. Our product and service offerings are organized into three reportable segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water and Measurement & Control Solutions (formerly Sensus & Analytics).

As previously announced, in the second quarter of 2017 we implemented an organizational redesign by moving Xylem’s Analytics business from our Water Infrastructure segment to combine it with our Sensus and Visenti businesses, which were acquired in the fourth quarter of 2016, to form Measurement & Control Solutions. We believe that the combination of these businesses will enhance our focus on advanced sensing technologies and will lead to operating efficiencies by integrating the supply chain process and moving to a leaner functional structure. Accordingly, our reportable segments have changed. Beginning with the second quarter of 2017, the Company now reports the financial position and results of operations of its Analytics, Sensus and Visenti businesses as one new reportable segment, which is called Measurement & Control Solutions. Our Water Infrastructure reportable segment no longer includes the results of our Analytics business. The Company has recast certain historical amounts between the Company's Water Infrastructure and Measurement & Control Solutions reportable segments, however this change had no impact on the Company's historical consolidated financial position or results of operations. The recast financial information does not represent a restatement of previously issued financial statements. Our Applied Water reportable segment remains unchanged.

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Water Infrastructure serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process. We also provide sales and rental of specialty dewatering pumps and related equipment and services. In the Water Infrastructure segment, we provide the majority of our sales directly to customers with strong applications expertise, while the remaining amount is through distribution partners.

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Applied Water serves the usage applications sector with water pressure boosting systems for heating, ventilation and air conditioning and for fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat exchangers, and controls provide cooling to power plants and manufacturing facilities, as well as circulation for food and beverage processing. We also provide boosting systems for farming irrigation and pumps for dairy operations. In the Applied Water segment, we provide the majority of our sales through long-standing relationships with many of the leading independent distributors in the markets we serve, with the remainder going directly to customers.

•

Measurement & Control Solutions primarily serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and services that allow customers to more effectively use their distribution networks for the delivery of critical resources such as water, electricity and natural gas. In the Measurement & Control Solutions segment, we also provide analytical instrumentation used to measure water quality, flow and level in wastewater, surface water and coastal environments. Additionally, we sell software and services including cloud-based analytics, remote monitoring and data management, leak detection and pressure monitoring solutions. We also sell smart lighting products and solutions that improve efficiency and public safety efforts across communities. In the Measurement & Control Solutions segment, we generate our sales through a combination of long-standing relationships with leading distributors and dedicated channel partners as well as direct sales depending on the regional availability of distribution channels and the type of product.

Key Performance Indicators and Non-GAAP Measures

Management reviews key performance indicators including revenue, gross margins, segment operating income and margins, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases and debt repayment. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax items, without unreasonable effort. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating activities as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:

•

"organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of fluctuations in foreign currency translation and contributions from acquisitions and divestitures. Divestitures include sales of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency translation impacts is determined by translating current period and prior period activity using the same currency conversion rate.

•	"constant currency" defined as financial results adjusted for foreign currency translation impacts by translating current period and prior period activity using the same currency conversion rate. This approach is used for countries whose functional currency is not the U.S. dollar.

•

"adjusted operating income", "adjusted segment operating Income", "adjusted net income" and “adjusted EPS” defined as operating income, segment operating income, net income and earnings per share, adjusted to exclude restructuring and realignment costs, Sensus acquisition related costs, gain or loss from sale of businesses, special charges and tax-related special items, as applicable. A reconciliation of adjusted net income is provided below.

(in millions, except per share data)		2017				2016				2015
Net income attributable to Xylem		$	331			$	260			$	340
Restructuring and realignment, net of tax of $13, $13 and $5, respectively		28				34				15
Sensus acquisition related costs, net of tax of $8 and $15, respectively		14				38				—
Special charges, net of tax of $4, $7 and $0, respectively		8				11				5
Tax-related special items		40				21				(15		)
Loss (gain) from sale of businesses, net of tax benefit of $2 and net of tax of $0, respectively		12				—				(9		)
Adjusted net income		$	433			$	364			$	336
Weighted average number of shares diluted		180.9				180.0				181.7
Earnings per share - diluted		$	1.83			$	1.45			$	1.87
Adjusted earnings per share		$	2.40			$	2.03			$	1.85

▪	"operating expenses excluding restructuring and realignment costs, Sensus acquisition related costs and special charges" defined as operating expenses, adjusted to exclude restructuring and realignment costs, Sensus acquisition related costs and special charges.

▪	“realignment costs” defined as costs not included in restructuring costs that are incurred as part of actions taken to reposition our business, including items such as professional fees, severance, relocation, travel, facility set-up and other costs.

▪	"Sensus acquisition related costs" defined as costs incurred by the Company associated with the acquisition of Sensus that are being reported within operating income. These costs include integration costs, acquisition

costs, costs related to the recognition of the backlog intangible asset amortization and inventory step-up recoded in purchase accounting.

▪	“special charges" defined as costs incurred by the Company, such as non-cash impairment charges, due diligence costs, initial acquisition and integration costs not related to Sensus and other special non-operating items, as well as interest expense related to the early extinguishment of debt and financing costs on the bridge loan entered into for the Sensus acquisition during 2016.

▪	"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, significant reserves for cash repatriation, excess tax benefits/losses and other discrete tax adjustments.

▪

"free cash flow" defined as net cash from operating activities, as reported in the Statement of Cash Flow, less capital expenditures as well as adjustments for other significant items that impact current results which management believes are not related to our ongoing operations and performance. Our definition of free cash flow does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.

(in millions)		2017				2016				2015
Net cash provided by operating activities		$	686			$	497			$	464
Capital expenditures		(170		)		(124		)		(117		)
Free cash flow		$	516			$	373			$	347
Cash paid for Sensus acquisition related costs		28				13				—
Free cash flow, excluding Sensus acquisition related costs		$	544			$	386			$	347

▪	“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense. “Adjusted EBITDA” reflects adjustments to EBITDA to exclude share-based compensation charges, restructuring and realignment costs, Sensus acquisition related costs, gain or loss from sale of businesses and special charges.

(in millions)		2017				2016				2015
Net Income		$	330			$	260			$	340
Income tax expense		136				80				63
Interest expense (Income), net		79				68				53
Depreciation		109				87				88
Amortization		125				64				45
EBITDA		$	779			$	559			$	589
Share-based compensation		21				18				15
Restructuring and realignment		41				47				20
Sensus acquisition related costs		14				46				—
Special charges		13				5				5
Loss (gain) from sale of business		10				—				(9		)
Adjusted EBITDA		$	878			$	675			$	620

Executive Summary

Xylem reported revenue of $4,707 million for 2017, an increase of $936 million or 24.8% from $3,771 million reported in 2016. Revenue increased 23.9% on a constant currency basis mostly due to $790 million of revenue related to acquisitions and organic revenue growth of $122 million driven by growth in all end markets.

Operating income for 2017 was $556 million, reflecting an increase of $150 million or 36.9% compared to $406 million in 2016. Operating margin was 11.8% for 2017 versus 10.8% for 2016, an increase of 100 basis points. The increase in operating margin was primarily due to cost reductions resulting from progress in our global procurement and productivity initiatives, a decrease in Sensus acquisition related costs, restructuring savings and a decrease in restructuring and realignment charges. These favorable impacts on operating margin were partially offset by cost inflation increases, Sensus purchase accounting impacts and an increase in special charges.

Adjusted operating income was $630 million, with an adjusted operating margin of 13.4% in 2017 as compared to adjusted operating income of $511 million with an adjusted operating margin of 13.6% in 2016. The decrease in adjusted operating margin was mostly due to cost inflation increases, increased spending on strategic investments and Sensus purchase accounting impacts, which were largely offset by cost savings from our global procurement and productivity initiatives and restructuring savings. The non-cash Sensus purchase accounting impact on adjusted operating margin for the year was 50 basis points, which if excluded would bring the adjusted operating margin to 13.9%, a 30 basis point increase over the prior year.

Additional financial highlights for 2017 include the following:

•	Net income attributable to Xylem of $331 million, or $1.83 per diluted share ($433 million or $2.40 per diluted share on an adjusted basis, up 19% from 2016)

•	Cash from operating activities of $686 million, and free cash flow, excluding Sensus acquisition related costs, of $544 million up 40.9% from 2016.

•	Orders of $4,868 million, up 27.3% from $3,824 million in 2016 (up 6.8% on an organic basis)

•	Dividends paid to shareholders increased 16% in 2017.

2018 Business Outlook

We anticipate total revenue growth in the range of 8% to 10% in 2018, with the recently announced acquisition of Pure Technologies contributing approximately 2% of that growth. Organic revenue growth is anticipated to be 4% to 6%. The following is a summary of our 2017 organic revenue performance and 2018 organic revenue outlook by end market.

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Public utilities increased approximately 3% for 2017 on an organic basis driven by growth in the United States and Asia Pacific. For 2018, we expect organic growth in the mid-single-digit range driven by solid growth in the U.S. from water and wastewater spending and stable low-single-digit growth in Europe. Additionally, we expect high-single-digit growth from the smart meter market. A healthy infrastructure investment focus in the emerging markets will continue broadly in China and India.

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Industrial increased by roughly 2% for 2017 on an organic basis driven by growth in the emerging markets, specifically in China and Latin America, and a recovery in global oil and gas and mining markets. For 2018, we expect organic growth in the low to mid-single-digits. We believe that market conditions in the U.S. and Europe will continue to improve modestly and oil and gas and mining markets will continue to stabilize in North America. We expect conditions in the emerging markets to be mixed as strength in China and India will be offset by softening conditions in the Middle East and Latin America.

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In the commercial markets, organic growth was around 5% for 2017 primarily driven by strength in the United States. For 2018, we expect continued organic growth in the low to mid-single-digit range. The U.S. market is expected to see low, stable growth while growth in Europe is expected to moderate after strong performance. Strength in the emerging markets will be driven by initiatives in India, the building market in China and large project wins in the Middle East from product localization.

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In residential markets, organic growth increased by about 12% in 2017 primarily driven by strength in Asia Pacific and the United States. For 2018, we expect mid-single-digit growth primarily driven by solid mid-single-digit growth in the U.S. market. Market share gains from an increased selling focus in Europe, along with an increased demand in China and other Asia Pacific countries for a secondary clean water source, are also expected to contribute to this growth.

We will continue to strategically execute restructuring and realignment actions primarily to reposition our European and North American businesses in an effort to optimize our cost structure and improve our operational efficiency and effectiveness. During 2017, we incurred $20 million and $21 million in restructuring and realignment costs, respectively. As a result of these actions in 2017, we realized $6 million of net savings and expect to realize approximately $10 million of incremental net savings in 2018. We expect additional incremental savings to be realized in 2019 and beyond as we complete these actions. During 2018, we currently expect to incur approximately $35 million in restructuring, realignment and integration costs.

We plan to continue to take actions and focus spending in 2018 on actions that allow us to make progress on our top strategic priorities. The priority of accelerating profitable growth encompass our initiatives to drive commercial excellence, grow in emerging markets and strengthen innovation and technology through creation of new centers of excellence, a streamlined approach to product development and smart acquisitions. The priority of driving continuous improvement is an area where we will continue to work to create new opportunities to unlock savings by eliminating waste and increasing efficiencies, which is supported by efforts to expand and further deepen our talent pool. We plan to continue to deploy capital in smart, disciplined ways to develop and acquire solutions to address our customers’ challenges. Finally, we continue to work to improve cash performance and generate capital to return to our shareholders.

Results of Operations

(in millions)		2017				2016				2015				2017 v. 2016			2016 v. 2015
Revenue		$	4,707			$	3,771			$	3,653			24.8	%		3.2	%
Gross profit		1,851				1,461				1,404				26.7	%		4.1	%
Gross margin		39.3		%		38.7		%		38.4		%		60	bp		30	bp
Total operating expenses		1,295				1,055				955				22.7	%		10.5	%
Expense to revenue ratio		27.5		%		28.0		%		26.1		%		(50	)bp		190	bp
Restructuring and realignment costs		(41		)		(47		)		(20		)		(12.8	)%		135.0	%
Sensus acquisition related charges		(22		)		(53		)		—				(58.5	)%		NM
Special charges		(11		)		(5		)		(5		)		120.0	%		—	%
Operating expenses excluding restructuring and realignment costs, Sensus acquisition related costs and special charges		1,221				950				930				28.5	%		2.2	%
Expense to revenue ratio		25.9		%		25.2		%		25.5		%		70	bp		(30	)bp
Operating income		556				406				449				36.9	%		(9.6	)%
Operating margin		11.8		%		10.8		%		12.3		%		100	bp		(150	)bp
Interest and other non-operating expense (income), net		80				66				55				21.2	%		20.0	%
(Loss)/gain from sale of businesses		(10		)		—				9				NM			NM
Income tax expense		136				80				63				70.0	%		27.0	%
Tax rate		29.2		%		23.5		%		15.6		%		570	bp		790	bp
Net income		$	330			$	260			$	340			26.9	%		(23.5	)%

NM Not Meaningful

2017 versus 2016

Revenue

Revenue generated for 2017 was $4,707 million, an increase of $936 million, or 24.8%, compared to $3,771 million in 2016. On a constant currency basis, revenue grew 23.9%. This increase in revenue was primarily driven by additional revenue of $790 million from acquisitions. There was also strong organic growth of $122 million during the year, driven primarily by North America as well as strength in the emerging markets, particularly in China and India. Additionally, to a lesser extent, Europe contributed to this organic growth despite ongoing weakness in the United Kingdom during the year.

The following table illustrates the impact on 2017 revenue from organic growth, recent acquisitions and divestitures, and foreign currency translation in relation to revenue.

	Water Infrastructure						Applied Water						Measurement & Control Solutions						Total Xylem
(in millions)	$ Change			% Change			$ Change			% Change			$ Change			% Change			$ Change			% Change
2016 Revenue	$	1,932					$	1,393					$	446					$	3,771
Organic Growth	56			2.9	%		34			2.4	%		32			7.2	%		122			3.2	%
Acquisitions/(Divestitures)	—			—	%		(10		)	(0.7	)%		790			177.1	%		780			20.7	%
Constant Currency	56			2.9	%		24			1.7	%		822			184.3	%		902			23.9	%
Foreign currency translation (a)	16			0.8	%		4			0.3	%		14			3.1	%		34			0.9	%
Total change in revenue	72			3.7	%		28			2.0	%		836			187.4	%		936			24.8	%
2017 Revenue	$	2,004					$	1,421					$	1,282					$	4,707

(a)	Foreign currency translation impact primarily due to strength in the value of the Euro, Canadian dollar, Russian Ruble, Australian dollar, South African Rand and various other currencies, partially offset by weakness in the British Pound against the U.S. Dollar.

Water Infrastructure

Water Infrastructure’s revenue increased $72 million, or 3.7%, in 2017 (2.9% increase on a constant currency basis) compared to 2016. Revenue benefited from $16 million of foreign currency translation for the year and included organic growth of $56 million, or 2.9%.

Organic growth for the year was driven by strength in the industrial end market, and to a lesser extent in the public utility end market. The growth in both of these end markets was driven by strength from Asia Pacific and North America.

From an application perspective, organic revenue growth was driven primarily by our transport application. The transport application grew in the industrial end market due to strength in the dewatering business which benefited from the recovery of the industrial construction market, particularly within the distribution channel and recovery of oil and gas and mining markets in North America and Latin America. The transport application also grew in the public utility end market driven by increased municipal spending in North America and increased projects in the Middle East and India. Organic revenue from our treatment application also contributed to the segment's growth primarily from growth in China from industrial treatment project deliveries as well as growth in Europe from municipal treatment projects.

Applied Water

Applied Water’s revenue increased $28 million, or 2.0%, in 2017 (1.7% increase on a constant currency basis) compared to 2016. Revenue benefited from $4 million of foreign currency translation for the year and the constant currency increase included organic growth of $34 million, or 2.4%.

Organic growth for the year was driven by strength in the residential and commercial end markets in the United States, Asia Pacific and western Europe, which were partially offset by declines in the industrial market.

From an application perspective, growth in residential building services was primarily driven by strength in the United States, where we benefited from the timing of promotions and market share gains, and continued strength in Asia Pacific. Commercial building services also grew, primarily in North America, western Europe and Asia Pacific, driven by new product traction and sales channel investments. This growth was partially offset by a decline in industrial applications, primarily driven by unfavorable weather conditions impacting the agriculture business in the United States, partially offset by strength in western Europe.

Measurement & Control Solutions

Measurement & Control Solutions revenue increased $836 million, or 187.4%, in 2017 (184.3% on a constant currency basis) compared to 2016. The revenue increase for the year was almost entirely from $790 million of revenue related to acquisitions that we did not have in the prior year. Most of the additional revenue contributed by the Sensus business was generated in the United States with additional revenue coming primarily from western Europe and China. The majority of the Sensus business revenue came from water applications with gas and electric applications making up most of the remaining sales for the year. Organic revenue growth in the Measurement & Control Solutions segment was $32 million, or 7.2%, for the year. Organic growth was driven primarily by growth across all applications, except electric which had slight declines. Much of the organic revenue increase was in the water application, which had increased AMI deployments in North America as well as higher demand for iPerl product in eastern Europe and the Middle East. Organic revenue also increased in the gas application, primarily due to AMI deployments in North America, as well as in the software and services application, primarily driven by a couple of major contract upgrades. The test application also contributed to the increase in organic revenue as a result of strength from the environmental monitoring business in the United States.

Orders/Backlog

Orders received during 2017 increased by $1,044 million, or 27.3%, to $4,868 million (26.4% increase on a constant currency basis). The order growth on a constant currency basis was primarily driven by additional orders from recent acquisitions, primarily Sensus, of $762 million. Organic order growth was $260 million, or 6.8%, over the prior year.

Water Infrastructure segment orders increased $155 million, or 7.9%, to $2,112 million (7.1% growth on a constant currency basis). Orders benefited from $16 million of foreign currency translation for the year and included organic growth of $139 million, or 7.1%. The majority of the organic order growth for the segment came from the transport application, driven by the public utility sector in the United States, as well as strong project orders in China and India. Additionally, dewatering distributor orders increased driven by storm related activity and the strengthening of the oil and gas markets. Treatment applications also had strong order intake, primarily from projects in the emerging markets, Latin America and North America.

Orders increased in our Applied Water segment by $71 million, or 5.1%, to $1,476 million (4.8% increase on a constant currency basis). The order increase was primarily due to organic order growth of $79 million, or 5.6%, driven by strength in the emerging markets and strong commercial building and industrial performance in North America, which was partially offset by the loss of orders related to divested businesses of $11 million.

Orders increased in our Measurement & Control Solutions segment by $818 million, or 177.1%, to $1,280 million (174% growth on a constant currency basis). This increase included orders from recent acquisitions, primarily Sensus, of $762 million and organic order growth of $42 million, or 9.1%, primarily from Sensus order increases in North America for most applications, as well as increased orders from test application strength in the United States and China.

Backlog includes contractual customer commitments as well as orders on hand as of the end of the period. Delivery schedules vary from customer to customer based upon their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues will not equal ending total backlog due to contract adjustments, foreign currency fluctuations and other factors. Typically, large projects require longer lead production cycles and deployment schedules, and delays can occur from time to time. Total backlog was $1,513 million at December 31, 2017 and $1,292 million at December 31, 2016, an increase of 17%. The December 31, 2016 backlog balance has been revised to include contractual agreements that Sensus has with customers that do not have minimum commitments but which we believe will be executed upon over the terms of the contracts. This year over year increase in backlog of $221 million is due to strong order growth in the fourth quarter across all of our segments as well as benefits from currency translation impacts. We anticipate that over 60% of our total backlog at December 31, 2017 will be recognized as revenue during 2018.

Gross Margin

Gross margins as a percentage of consolidated revenue increased to 39.3% in 2017 from 38.7% in 2016. The gross margin increase was primarily due to the benefits realized from cost reductions from global procurement and continuous improvement initiatives, as well as a decrease in the inventory step-up charge for Sensus in 2017. These positive impacts on gross margin were partially offset by cost inflation and unfavorable product mix.

Operating Expenses

(in millions)	2017				2016				Change
Selling, general and administrative expenses ("SG&A")	$	1,090			$	915			19.1	%
SG&A as a % of revenue	23.2		%		24.3		%		(110	)bp
Research and development expenses ("R&D")	180				110				63.6	%
R&D as a % of revenue	3.8		%		2.9		%		90	bp
Restructuring and asset impairment charges	25				30				(16.7	)%
Operating expenses	$	1,295			$	1,055			22.7	%
Expense to revenue ratio	27.5		%		28.0		%		(50	)bp

Selling, General and Administrative Expenses

SG&A increased by $175 million (increase of 19.1%) to 23.2% of revenue in 2017, as compared to 24.3% of revenue in 2016. The increase in SG&A expenses includes approximately $160 million of incremental SG&A spending for the Sensus business that we did not have prior to the acquisition in the fourth quarter of 2016. The remaining increases in SG&A expenses were primarily due to inflation, investments in regional sales channels and operational capabilities and foreign currency impacts, which were partially offset by savings from restructuring and other cost actions.

Research and Development Expenses

R&D spending increased $70 million or 63.6% to 3.8% of revenue in 2017 as compared to 2.9% of revenue in 2016 primarily due to additional R&D spend from our recent acquisitions and investments in new products and technologies.

Restructuring Charges and Asset Impairment

Restructuring Charges

During 2017, we incurred restructuring costs of $7 million, $8 million and $5 million in our Water Infrastructure, Applied Water and Measurement & Control Solutions segments, respectively. We incurred these charges related to actions taken in 2017 primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Applied Water and Water Infrastructure segments, as well as headcount reductions within our Measurement & Control Solutions segment.

During 2016, we recognized restructuring costs of $12 million, $10 million, $6 million and $2 million in our Water Infrastructure, Applied Water, Measurement & Control Solutions and Corporate, respectively. These charges were incurred primarily in an effort to realign our organizational structure in Europe and North America to optimize our cost structure. The charges relate to the reduction in structural costs, including a decrease in headcount and consolidation of facilities.

The following table presents expected restructuring spend:

(in millions)		Water Infrastructure				Applied Water				Measurement & Control Solutions				Corporate				Total
Actions Commenced in 2017:
Total expected costs		$	19			$	12			$	2			$	1			$	34
Costs incurred during 2017		5				4				2				—				11
Total expected costs remaining		$	14			$	8			$	—			$	1			$	23
Actions Commenced in 2016:
Total expected costs		$	13			$	14			$	10			$	2			$	39
Costs incurred during 2016		11				10				6				2				29
Costs incurred during 2017		2				4				3				—				9
Total expected costs remaining		$	—			$	—			$	1			$	—			$	1
Actions Commenced in 2015:
Total expected costs		$	4			$	1			$	1			$	—			$	6
Costs incurred during 2015		3				1				1				—				5
Costs incurred during 2016		1				—				—				—				1
Total expected costs remaining		$	—			$	—			$	—			$	—			$	—

The Water Infrastructure, Applied Water, Measurement & Control Solutions, and Corporate actions commenced in 2017 consist primarily of severance charges and are expected to continue through the end of 2018. The Water Infrastructure, Applied Water, Measurement & Control Solutions and Corporate actions commenced in 2016 consist primarily of severance charges and are largely complete. The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2015 consist primarily of severance charges and are complete. As a result of these actions initiated in 2017, we achieved savings of approximately $4 million in 2017 and estimate annual future net savings beginning in 2018 of approximately $9 million, resulting in $5 million of incremental savings from the 2017 actions.

Asset Impairment Charges

During the first quarter of 2017 we determined that certain assets within our Applied Water segment, including a tradename, were impaired. Accordingly we recognized an impairment charge of $5 million. Refer to Note 10, "Goodwill and Other Intangible Assets," for additional information.

Operating Income

We generated operating income of $556 million (operating margin of 11.8%) during 2017, reflecting an increase of $150 million, or 36.9%, when compared to operating income of $406 million (operating margin of 10.8%) during the prior year. This increase in operating income was largely driven by the inclusion of Sensus operating income for the

full year in 2017. Sensus acquisition related costs and restructuring and realignment costs decreased $31 million and $6 million, respectively, while special charges increased $6 million when compared to the prior year period. Excluding these costs, adjusted operating income was $630 million (adjusted operating margin of 13.4%) for 2017 as compared to $511 million (adjusted operating margin of 13.6%) for 2016. The decrease in adjusted operating margin was mostly due to cost inflation increases, increased spending on strategic investments and Sensus purchase accounting impacts, which were largely offset by cost savings from our global procurement and productivity initiatives and restructuring savings. The non-cash Sensus purchase accounting impact on adjusted operating margin for the year was 50 basis points.

The table below provides a reconciliation of total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin:

(In millions)	2017				2016				Change
Water Infrastructure
Operating income	$	308			$	291			5.8		%
Operating margin	15.4		%		15.1		%		30		bp
Restructuring and realignment costs	16				16				—		%
Special charges	—				2				(100.0	)	%
Adjusted operating income	$	324			$	309			4.9		%
Adjusted operating margin	16.2		%		16.0		%		20		bp
Applied Water
Operating income	$	197			$	188			4.8		%
Operating margin	13.9		%		13.5		%		40		bp
Restructuring and realignment costs	17				16				6.3		%
Special charges	5				—				NM
Adjusted operating income	$	219			$	204			7.4		%
Adjusted operating margin	15.4		%		14.6		%		80		bp
Measurement & Control Solutions
Operating income	$	110			$	—			NM
Operating margin	8.6		%		—		%		NM
Sensus acquisition related costs	15				25				(40.0	)	%
Restructuring and realignment costs	8				13				(38.5	)	%
Special charges	—				3				(100.0	)	%
Adjusted operating income	$	133			$	41			224.4		%
Adjusted operating margin	10.4		%		9.2		%		120		bp
Corporate and other
Operating loss	$	(59	)		$	(73	)		(19.2	)	%
Restructuring and realignment costs	—				2				(100.0	)	%
Sensus acquisition related costs	7				28				(75.0	)	%
Special charges	6				—				NM
Adjusted operating loss	$	(46	)		$	(43	)		7.0		%
Total Xylem
Operating income	$	556			$	406			36.9		%
Operating margin	11.8		%		10.8		%		100		bp
Restructuring and realignment costs	41				47				(12.8	)	%
Sensus acquisition related costs	22				53				(58.5	)	%
Special charges	11				5				120.0		%
Adjusted operating income	$	630			$	511			23.3		%
Adjusted operating margin	13.4		%		13.6		%		(20	)	bp

NM Not Meaningful

Water Infrastructure

Operating income for our Water Infrastructure segment increased $17 million, or 5.8%, with operating margin also increasing from 15.1% to 15.4%, a 30 basis point increase as compared to the prior year. Operating margin was positively impacted year over year by special charges of $2 million in 2016 that did not recur, while restructuring and realignment costs remained flat. Excluding these items, adjusted operating income increased $15 million, or 4.9%, with adjusted operating margin increasing from 16.0% to 16.2%, a 20 basis point increase as compared to the prior year. The increase in adjusted operating margin was primarily due to cost reductions from global procurement and continuous improvement initiatives as well as restructuring savings and favorable volume. These drivers were partially offset by increases in cost inflation and spending on strategic investments, as well as unfavorable transactional foreign currency impacts.

Applied Water

Operating income for our Applied Water segment increased $9 million, or 4.8%, with operating margin also increasing from 13.5% to 13.9%, a 40 basis point increase as compared to the prior year. Operating margin was negatively impacted by higher special charges for a non-cash impairment of $5 million and a $1 million increase in restructuring and realignment costs. Excluding these items, adjusted operating income increased $15 million, or 7.4%, with adjusted operating margin increasing from 14.6% to 15.4%, an 80 basis point increase as compared to the prior year. The increase in adjusted operating margin was primarily due to cost reductions from global procurement and continuous improvement initiatives and restructuring savings, which were partially offset by increases in cost inflation and unfavorable mix.

Measurement & Control Solutions

Operating income for our Measurement & Control Solutions segment increased $110 million (operating margin of 8.6%) for the year as compared to operating income and margin of zero in 2016. Operating margin was positively impacted by decreases in Sensus acquisition related costs, restructuring and realignment costs and special charges of $10 million, $5 million and $3 million, respectively. Excluding these items, adjusted operating income increased $92 million, or 224.4%, with most of the increase coming from the inclusion of the incremental adjusted operating income for Sensus in 2017. Adjusted operating margin increased from 9.2% to 10.4%, a 120 basis point increase as compared to the prior year. The increase in adjusted operating margin was primarily due to cost reductions from global procurement and continuous improvement initiatives, restructuring savings and favorable volume impacts. These drivers were partially offset by the inclusion of Sensus margins, which were negatively impacted by purchase accounting. Non-cash Sensus purchase accounting negatively impacted the segment's full year adjusted operating margin by 200 basis points.

Corporate and other

Operating expense for corporate and other decreased $14 million, or 19.2%, compared to the prior year, primarily due to a $21 million decrease in Sensus acquisition related costs and a $2 million decrease in restructuring and realignment costs. This was partially offset by $6 million of special charges incurred during the year which we did not have in the prior year. Excluding these costs, adjusted operating expense increased $3 million compared to the prior year, driven mostly by employee related costs.

Interest Expense

Interest expense was $82 million and $70 million for 2017 and 2016, respectively. The increased interest expense for the the year includes additional interest expense in 2017 related to debt entered into in the fourth quarter of 2016 to fund our acquisition of Sensus. The increase in interest expense was partially offset by the reduction in special interest charges incurred in 2016 of $8 million in connection with the early extinguishment of our Senior Notes due in 2016 and $5 million of financing charges on the bridge loan related to the Sensus acquisition, neither of which recurred in 2017, as well as a lower interest rate on the Senior Notes due 2023 which effectively replaced the Senior Notes due in 2016. See Note 13, "Credit Facilities and Debt" of our consolidated financial statements for a description of our credit facilities and long-term debt and related interest.

Income Tax Expense

The income tax provision for 2017 was $136 million at an effective tax rate of 29.2% compared to $80 million at an effective tax rate of 23.5% in 2016. The 2017 effective tax rate is higher than 2016 due to the provisional one time deemed repatriation transition tax under the newly enacted Tax Cuts and Jobs Act, partially offset by the benefit from the remeasurement of deferred tax assets and liabilities and the release of valuation allowances.

Tax Act

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated foreign earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional tax expense of $46 million as a discrete item. This net income tax expense primarily consists of a tax benefit for the corporate tax rate reduction of $107 million related to the remeasurement of deferred tax assets and liabilities and a tax expense for the repatriation transition tax of $153 million. As permitted under SAB 118, we have not completed our accounting for the income tax effects of certain elements of the Tax Act, and have recorded provisional estimates related to these items. For certain items, a provisional estimate could not be determined, and therefore, we have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act. See Note 6, "Income Taxes" of our consolidated financial statements for further discussion of the Tax Act.

Other Comprehensive Income

Other comprehensive income was $108 million in 2017 as compared to an $80 million loss in 2016. This increase was driven primarily by favorable foreign currency translation impacts, primarily due to the strengthening of the Euro, Great British Pound, Chinese Yuan, Polish Zloty, amongst other various currencies, against the U.S. Dollar as compared to the weakening of these same currencies in the prior year. Partially offsetting these favorable movements, was the Euro movement on the Company's net investment hedge as compared to the prior year. The tax impact on the foreign currency translation related to the net investment hedge also contributed to the year over year increase. Finally, year over year movement in foreign currency translation on postretirement benefit plans partially offset the increase in other comprehensive income.

2016 versus 2015

Revenue

Revenue generated for 2016 was $3,771 million, an increase of $118 million, or 3.2%, compared to $3,653 million in 2015. On a constant currency basis, revenue grew 5.3%. This increase in revenue was primarily driven by additional revenue of $163 million from acquisitions. Additionally, we had strong organic growth, driven by strength within the public utility, industrial and commercial end markets in western Europe, particularly in the United Kingdom, as well as large project deliveries in emerging markets, including India and Asia. Partially offsetting this growth were declines in the United States primarily due to ongoing weakness in the industrial end market.

The following table illustrates the impact on 2016 revenue from organic growth, recent acquisitions/divestitures, and foreign currency translation in relation to revenue.

	Water Infrastructure						Applied Water						Measurement & Control Solutions						Total Xylem
(in millions)	$ Change			% Change			$ Change			% Change			$ Change			% Change			$ Change			% Change
2015 Revenue	$	1,940					$	1,422					$	291					$	3,653
Organic Growth	44			2.3	%		(9		)	(0.6	)%		(6		)	(2.1	)%		29			0.8	%
Acquisitions	—			—	%		—			—	%		163			56.0	%		163			4.5	%
Constant Currency	44			2.3	%		(9		)	(0.6	)%		157			54.0	%		192			5.3	%
Foreign currency translation (a)	(52		)	(2.7	)%		(20		)	(1.4	)%		(2		)	(0.7	)%		(74		)	(2.0	)%
Total change in revenue	(8		)	(0.4	)%		(29		)	(2.0	)%		155			53.3	%		118			3.2	%
2016 Revenue	$	1,932					$	1,393					$	446					$	3,771

(a)	Foreign currency translation impact primarily due to fluctuations in the value of the British Pound, Chinese Yuan, Argentinian Peso and other various currencies against the U.S. Dollar.

Water Infrastructure

Water Infrastructure’s revenue decreased $8 million, or 0.4%, in 2016 (2.3% increase on a constant currency basis) compared to 2015. The constant currency increase included organic growth of $44 million, or 2.3%.

Organic growth in our treatment and transport applications primarily reflect increases in the public utility end market where we have been gaining share. Organic growth in the transport application in the public utility end markets in the United States and India was largely offset by declines in the industrial dewatering business in the United States due to continued challenges in the oil and gas market, as well as weakness in the Middle East driven by slower government funding. Organic growth in the treatment application was driven primarily by strong backlog execution and project deliveries in the United States public utility market.

Applied Water

Applied Water’s revenue decreased $29 million, or 2.0%, in 2016 (0.6% decrease on a constant currency basis) compared to 2015. The decline on a constant currency basis was entirely attributable to organic revenue decline of $9 million, or 0.6%, which was driven by declines in the United States, partially offset by growth in western Europe and, to a lesser extent, the emerging markets.

From an applications perspective, the decrease in organic revenue was predominately due to declines in the United States across all applications, particularly industrial water which saw continued weakness in the oil and gas markets. These declines were partially offset by strength in western Europe due to several large projects combined with strength in commercial building services as well as general industrial applications. Agricultural applications declined in the United States primarily due to market weakness.

Measurement & Control Solutions

Measurement & Control Solutions' revenue increased $155 million, or 53.3%, in 2016 (54.0% increase on a constant currency basis) compared to 2015. The constant currency increase included contributions from acquisitions of $163 million which was partially offset by an organic decline of $6 million, or 2.1%, due to weakness from test applications in the United States primarily as a result of lower government agency spending and weakness in the mining and oil and gas markets.

Orders/Backlog

Orders received during 2016 increased by $113 million, or 3.0%, to $3,824 million (5.1% increase on a constant currency basis). The order growth on a constant currency basis was primarily made up of orders from recent acquisitions, primarily Sensus, of $179 million and organic order growth of $12 million, or 0.3%, over the prior year.

Water Infrastructure segment orders decreased $52 million, or 2.6%, to $1,957 million (0.1% growth on a constant currency basis). Orders were unfavorably impacted by $55 million from foreign currency translation, while orders were up slightly year over year on an organic basis. Organic orders for the treatment application increased by 5% over the prior year reflecting continued growth in the public utility market with a large ozone project in China and order increases in Europe; however, these orders are largely project based with longer lead times for delivery and recognition of revenue. Largely offsetting the organic order growth in the treatment application were declines in the transport application, primarily due to decreased dewatering orders impacted by the continued weakness in oil and gas, as well as mining, which were partially offset by public utility water and wastewater transport order strength in Europe, particularly in the Nordic region.

Orders decreased in our Applied Water segment by $10 million, or 0.7%, to $1,405 million (0.7% increase on a constant currency basis). The order increase on a constant currency basis was due to organic order growth of 0.7% driven by strength in Europe from new product launches that was partially offset by weakness in the United States.

The Measurement & Control Solutions segment orders increased $175 million, or 61.0%, to $462 (62.0% increase on a constant currency basis). The order growth on a constant currency basis was primarily orders from recent acquisitions of $179 million. Organic orders from test applications were flat versus the prior year.

Backlog includes contractual customer commitments as well as purchase orders on hand as of the end of the period. Delivery schedules vary from customer to customer based upon their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues will not equal ending total backlog due to contract adjustments, foreign currency fluctuations and other factors. Typically, large projects require longer lead production cycles, and delays can occur from time to time. Total backlog was $1,292 million at December 31, 2016 and $716 million at December 31, 2015. The December 31, 2016 backlog balance has been revised to include contractual agreements that Sensus has with customers that do not have minimum commitments but which we believe will be

executed upon over the terms of the contracts. This increase is primarily attributable to the acquisition of the Sensus business which had a backlog balance of $599 million at December 31, 2016.

Gross Margin

Gross margins as a percentage of consolidated revenue increased to 38.7% in 2016 from 38.4% in 2015. The gross margin increase was primarily due to the benefits realized from cost saving initiatives through global sourcing and lean six sigma, partially offset by material and labor inflation headwinds and unfavorable currency impacts and mix.

Operating Expenses

(in millions)	2016				2015				Change
Selling, general and administrative expenses	$	915			$	854			7.1	%
SG&A as a % of revenue	24.3		%		23.4		%		90	bp
Research and development expenses	110				95				15.8	%
R&D as a % of revenue	2.9		%		2.6		%		30	bp
Restructuring charges	30				6				400.0	%
Operating expenses	$	1,055			$	955			10.5	%
Expense to revenue ratio	28.0		%		26.1		%		190	bp

Selling, General and Administrative Expenses

SG&A increased by $61 million (increase of 7.1%) to 24.3% of revenue in 2016, as compared to 23.4% of revenue in 2015. The increase in SG&A expenses includes $28 million of Sensus acquisition related costs. The remaining increases in SG&A expenses were primarily due to additional operating expenses from recent acquisitions, investments in regional sales channels and operational capabilities and inflation, which were partially offset by savings from restructuring and other cost actions.

Research and Development Expenses

R&D spending increased $15 million or 15.8% to 2.9% of revenue in 2016 as compared to 2.6% of revenue in 2015 primarily due to additional R&D spend from our recent acquisitions and investments in new products and technologies.

Restructuring Charges

During 2016, we incurred restructuring costs of $12 million, $10 million, $6 million and $2 million in our Water Infrastructure, Applied Water, Measurement & Control Solutions and Corporate and other segments, respectively. These charges were incurred primarily in an effort to realign our organizational structure in Europe and North America to optimize our cost structure. The charges relate to the reduction in structural costs, including a decrease in headcount and consolidation of facilities.

During 2015, we recognized restructuring costs of $4 million, $1 million, and $1 million in our Water Infrastructure, Applied Water, and Monitoring & Control Solutions segments, respectively. These charges were incurred primarily in an effort to realign our organizational structure in Europe and North America to optimize our cost structure. The charges relate to the reduction in structural costs, including a decrease in headcount and consolidation of facilities.

The following table presents expected restructuring spend:

(in millions)		Water Infrastructure				Applied Water				Measurement & Control Solutions				Corporate				Total
Actions Commenced in 2016:
Total expected costs		$	13			$	14			$	10			$	2			$	39
Costs incurred during 2016		11				10				6				2				29
Total expected costs remaining		$	2			$	4			$	4			$	—			$	10
Actions Commenced in 2015:
Total expected costs		$	4			$	1			$	1			$	—			$	6
Costs incurred during 2015		3				1				1				—				5
Costs incurred during 2016		1				—				—				—				1
Total expected costs remaining		$	—			$	—			$	—			$	—			$	—

Approximate total expected costs associated with actions that commenced during 2016 are $13 million for Water Infrastructure, $14 million for Applied Water, $10 million for Measurement & Control Solutions, and $2 million for Corporate. These costs primarily comprise severance charges. The Water Infrastructure and Applied Water actions are expected to continue through the end of 2017. The Measurement & Control Solutions actions are expected to continue through 2018. All of the costs associated with the Corporate actions have been incurred. As a result of these actions initiated in 2016, we achieved savings of approximately $8 million in 2016 and estimate annual future net savings beginning in 2017 of approximately $28 million, resulting in $20 million of incremental savings from the 2016 actions.

Operating Income

We generated operating income of $406 million during 2016, reflecting a decrease of $43 million or 9.6% from $449 million during the prior year. Operating income as a percentage of revenue was 10.8% for 2016 versus 12.3% for 2015, a decrease of 150 basis points. This decrease in operating margin was primarily due to Sensus acquisition related costs of $53 million, increases in restructuring and realignment costs of $27 million and increases in special charges of $4 million. Excluding these costs, adjusted operating income was $511 million, with an adjusted operating margin of 13.6%, reflecting an increase of $41 million or 8.7% and 70 basis points, respectively, as compared with 2015 adjusted operating income of $470 million (adjusted operating margin of 12.9%). This increase in adjusted operating income was driven by strong progress in our productivity initiatives and cost saving actions, which more than offset cost inflation, spending on strategic investments in new products and technologies and unfavorable mix.

The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin:

(In millions)	2016				2015				Change
Water Infrastructure
Operating income	$	291			$	261			11.5		%
Operating margin	15.1		%		13.5		%		160		bp
Restructuring and realignment costs	16				11				45.5		%
Special charges	2				1				100.0		%
Adjusted operating income	$	309			$	273			13.2		%
Adjusted operating margin	16.0		%		14.1		%		190		bp
Applied Water
Operating income	$	188			$	190			(1.1	)	%
Operating margin	13.5		%		13.4		%		10		bp
Restructuring and realignment costs	16				7				128.6		%
Adjusted operating income	$	204			$	197			3.6		%
Adjusted operating margin	14.6		%		13.9		%		70		bp
Measurement & Control Solutions
Operating income	$	—			$	42			NM
Operating margin	—		%		14.4		%		NM
Sensus acquisition related costs	25				—				NM
Restructuring and realignment costs	13				2				NM
Special charges	3				$	—			NM
Adjusted operating income	$	41			$	44			(6.8	)	%
Adjusted operating margin	9.2		%		15.1		%		(590	)	bp
Corporate and other
Operating loss	$	(73	)		$	(44	)		65.9		%
Restructuring and realignment costs	2				—				NM
Sensus acquisition related costs	28				—				NM
Adjusted operating loss	$	(43	)		$	(44	)		(2.3	)	%
Total Xylem
Operating income	$	406			$	449			(9.6	)	%
Operating margin	10.8		%		12.3		%		(150	)	bp
Restructuring and realignment costs	47				20				135.0		%
Sensus acquisition related costs	53				—				100.0		%
Special charges	5				1				NM
Adjusted operating income	$	511			$	470			8.7		%
Adjusted operating margin	13.6		%		12.9		%		70		bp

NM Not Meaningful

Water Infrastructure

Operating income for our Water Infrastructure segment increased $30 million or 11.5%, with operating margin also increasing from 13.5% to 15.1%, a 160 basis point increase as compared to the prior year. Operating margin was negatively impacted by a $5 million increase in restructuring and realignment costs and a $1 million increase for special charges. Excluding restructuring and realignment costs and special charges, adjusted operating income increased $36 million or 13.2%, with adjusted operating margin increasing from 14.1% to 16.0%, a 190 basis point increase as compared to the prior year. The increase in adjusted operating margin was due to global procurement and continuous improvement initiatives, which more than offset cost inflation and increased spending in growth initiatives.

Applied Water

Operating income for our Applied Water segment decreased $2 million or 1.1%, with operating margin increasing slightly from 13.4% to 13.5%. Operating margin was negatively impacted by increased restructuring and realignment costs of $9 million. Excluding restructuring and realignment costs, adjusted operating income increased $7 million or 3.6%, with adjusted operating margin increasing from 13.9% to 14.6%, a 60 basis point increase as compared to the prior year. The increase in adjusted operating margin was due to global procurement and productivity gains, which more than offset cost inflation, strategic investments and unfavorable mix.

Measurement & Control Solutions

Operating income for our Measurement & Control Solutions segment was $0 million, a decrease of $42 million. Operating income was negatively impacted by $25 million of Sensus acquisition related costs in 2016 and increases in restructuring and realignment and special charges of $11 million and $3 million, respectively. Excluding these costs, adjusted operating income decreased $3 million, or 6.8%, with adjusted operating margin decreasing from 15.1% to 9.2%, a 590 basis point decrease as compared to the prior year. The decrease in operating margin was largely due to negative impacts from acquisitions as well as increased spending on strategic investments.

Corporate and other

Operating loss for corporate and other increased $29 million or 65.9% (decreased $1 million or 2.3% on an adjusted basis) compared to the prior year, primarily due to $28 million of Sensus acquisition related costs and increased restructuring costs of $2 million.

Interest Expense

Interest expense was $70 million and $55 million for 2016 and 2015, respectively, primarily related to interest on our Senior Notes, including a make-whole interest premium of $7 million that was paid in the second quarter of 2016 and fees of $5 million related to the Bridge Facility entered into for the Sensus acquisition. See Note 13, “Credit Facilities and Long-Term Debt,” for further details.

Income Tax Expense

The income tax provision for 2016 was $80 million at an effective tax rate of 23.5% compared to $63 million at an effective tax rate of 15.6% in 2015. The 2016 effective tax rate is higher than 2015 due to an increase in valuation allowance and impact of repatriation of foreign earnings offset by a favorable settlement with the tax authorities.

Other Comprehensive (Loss) Income

Other comprehensive loss before tax of $57 million in 2016 as compared to $130 million loss in 2015 was primarily due to foreign currency translation loss of $65 million in 2016 compared to a loss of $180 million for 2015. Contributing to this decreased loss was a lower translation loss of $115 million primarily due to less weakening of the Swedish Krona and the Canadian Dollar against the U.S. Dollar, partially offset by the additional weakening of the Euro and the Great British Pound against the U.S. Dollar. Additionally, there were net investment hedges in place that more than offset the weakening of the Euro against the U.S. Dollar, contributing a net Euro gain into comprehensive income in 2016. Other items offsetting the lower translation loss of $115 million were net changes in postretirement benefit plan gains/losses of $43 million.

Liquidity and Capital Resources

The following table summarizes our sources and uses of cash:

	Year Ended December 31,
(in millions)	2017				2016				2015
Operating activities	$	686			$	497			$	464
Investing activities	(181		)		(1,886		)		(132		)
Financing activities	(421		)		1,034				(262		)
Foreign exchange (a)	22				(17		)		(53		)
Total	$	106			$	(372	)		$	17

(a)	2017 impact is primarily due to the strengthening of the Euro and the Chinese Yuan against the U.S. Dollar. 2016 impact is primarily due to the weakness of the Euro and the Chinese Yuan against the U.S. dollar. 2015 impact is primarily due to the weakness of the Euro against the U.S. Dollar.

Sources and Uses of Liquidity

Operating Activities

During 2017, net cash provided by operating activities was $686 million, compared to $497 million in 2016. The $189 million year-over-year increase was primarily driven by increased cash from operating activities of the Sensus business acquired in the fourth quarter of 2016 and strong operating cash performance across the rest of the business.

During 2016, net cash provided by operating activities was $497 million, compared to $464 million in 2015. The $33 million year-over-year increase was primarily driven by continued improvement in working capital levels. The improvement in working capital includes significant contribution from the acquisition of Sensus during the fourth quarter of 2016 which has positively impacted our working capital efficiency.

Investing Activities

Cash used in investing activities was $181 million in 2017, compared to $1,886 million in 2016. This decrease of $1,705 million was primarily driven by the $1,782 million spent on the acquisition of Sensus and two other businesses in 2016 as compared to the $33 million spent for acquisitions in 2017. This impact is partially offset by increased spending of $46 million over the prior year on capital projects, including spending on capitalized software in the Sensus business.

Cash used in investing activities was $1,886 million in 2016 compared to $132 million in 2015. The increase of $1,754 million was primarily due to $1,782 million spent on the acquisition of Sensus and two other businesses in 2016 as compared to $18 million in 2015. Cash provided from other investing activities partially offset the usage.

Financing Activities

Cash used by financing activities was $421 million in 2017, compared to cash generated by financing activities of $1,034 in 2016. In 2017, the net decrease in cash provided was primarily due to the issuance of long term and short term debt related to acquisition financing in 2016 versus the net repayment of short-term debt in 2017 (see Note 13, "Credit Facilities and Long-Term Debt" of our consolidated financial statements for a full discussion of debt activities). Also contributing to the decrease in cash generated by financing activities were increased share repurchases and higher dividend payments in 2017.

Cash generated by financing activities was $1,034 million in 2016. In 2015, financing activities used $262 million of cash. In 2016, the net increase in cash provided was due to the issuance of long term and short term debt related to acquisition financing and a reduction in share repurchases. This increase was partially offset by net repayments of short term debt (see Note 13, "Credit Facilities and Long-Term Debt" of our consolidated financial statements for a full discussion of debt activities) and higher dividend payments.

Funding and Liquidity Strategy

Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. Historically, we have generated operating cash flow sufficient to fund our primary cash needs centered on operating activities, working capital, capital expenditures, strategic investments and dividends. If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be no assurance that such financing will be available to us on acceptable terms or that such financing will be available at all.

We monitor our global funding requirements and seek to meet our liquidity needs on a cost effective basis. Based on our current global cash positions, cash flows from operations and access to the commercial paper markets, we believe there is sufficient liquidity to meet our funding requirements. In addition, our existing committed credit facilities and access to the public debt markets would provide further liquidity if required.

We anticipate that our present sources of funds, including funds from operations and additional borrowings, will provide us with sufficient liquidity and capital resources to meet our liquidity and capital needs in both the United States and outside of the United States over the next twelve months.

Credit Facilities & Long-Term Contractual Commitments

See Note 13, "Credit Facilities and Long-Term Debt" of our consolidated financial statements for a description of our credit facilities and long-term debt.

Non-U.S. Operations

For 2017 and 2016, we generated 54% and 58% of our revenue from non-U.S. operations, respectively. While the addition of Sensus increases our revenue profile in the U.S., we continue to grow our operations in the emerging markets and elsewhere outside of the United States. As such, we expect to continue to generate significant revenue from non-U.S. operations and expect a substantial portion of our cash will be predominately held by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and other international subsidiaries when we believe it is cost effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations. As of December 31, 2017, we have provided a deferred tax liability of $20 million for foreign withholding taxes and state income taxes on $769 million expected to be repatriated to the U.S. parent as deemed necessary.

Contractual Obligations

The following table summarizes our contractual commitments as of December 31, 2017:

(in millions)	2018				2019 - 2020				2021 - 2022				Thereafter				Total
Debt and capital lease obligations (1)	$	—			$	—			$	600			$	1,622			$	2,222
Interest payments (1) (2)	77				153				124				499				853
Operating lease obligations	65				95				52				45				257
Purchase obligations (3)	141				7				1				—				149
Other long-term obligations reflected on the balance sheet	12				27				15				32				86
Total commitments	$	295			$	282			$	792			$	2,198			$	3,567

In addition to the amounts presented in the table above, we have recorded liabilities for net investment hedges of $64 million and employee severance indemnity of $16 million. These amounts have been excluded from the contractual obligations table due to an inability to reasonably estimate the timing or amounts of such payments in individual years. Further, benefit payments which reflect expected future service related to the Company's pension and other postretirement employee benefit obligations are presented in Note 14, “Postretirement Benefit Plans” of the consolidated financial statements and deferred income tax liabilities and uncertain tax positions are presented in Note 6, "Income Taxes" of the consolidated financial statements, and as such, these obligations are not included in the above table. Finally, estimated environmental payments and workers' compensation and general liability reserves are excluded from the table above. We estimate, based on historical experience, that we will spend approximately $2 million to $3 million per year on environmental investigation and remediation and approximately $6 million to

$7 million per year on workers' compensation and general liability. At December 31, 2017, we had estimated and accrued $4 million and $30 million related to environmental matters, and workers' compensation and general liability, respectively.

(1)	Refer to Note 13, “Credit Facilities and Long-Term Debt,” of the consolidated financial statements for discussion of the use and availability of debt and revolving credit agreements. Amounts represent principal payments of short-term and long-term debt including current maturities and exclude unamortized discounts.

(2)	Amounts represent estimates of future interest payments on short-term and long-term debt outstanding as of December 31, 2017.

(3)	Represents unconditional purchase agreements that are enforceable and legally binding and that specify all significant terms to purchase goods or services, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase agreements that are able to cancel without penalty have been excluded.

Off-Balance Sheet Arrangements

As of December 31, 2017, we have issued guarantees for the debt and other obligations of consolidated subsidiaries in the normal course of business. We have determined that none of these arrangements has a material current effect or is reasonably likely to have a material future effect on our consolidated financial statements, financial condition, changes in financial condition, revenues or expenses, liquidity, capital expenditures or capital resources.

We obtain certain stand-by letters of credit, bank guarantees and surety bonds from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance related requirements. As of December 31, 2017, the amount of stand-by letters of credit, bank guarantees and surety bonds was $240 million.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Significant accounting policies used in the preparation of the Consolidated Financial Statements are discussed in Note 1, “Summary of Significant Accounting Policies,” of the consolidated financial statements. Accounting estimates and assumptions discussed in this section are those that we consider most critical to an understanding of our financial statements because they are inherently uncertain, involve significant judgments, include areas where different estimates reasonably could have been used, and changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from management’s estimates under different assumptions or conditions.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability of the sales price is reasonably assured. For product sales, delivery does not occur until the products have been shipped, risk of loss has been transferred to the customer and the contractual terms have been fulfilled. In instances where contractual terms include a provision for customer acceptance, revenue is recognized when either (i) we have previously demonstrated that the product meets the specified criteria based on either seller- or customer-specified objective criteria or (ii) upon formal acceptance received from the customer where the product has not been previously demonstrated to meet customer-specified objective criteria. Revenue on service and repair contracts is recognized after services have been agreed to by the customer and rendered.

We enter into contracts to sell our products and services, and while the majority of our sales agreements contain standard terms and conditions, certain agreements contain multiple elements or non-standard terms and conditions. Where sales agreements contain multiple elements or non-standard terms and conditions, judgment is required to determine the appropriate accounting, including whether the deliverables specified in these agreements should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the transaction price should be allocated among the elements and when to recognize revenue for each element. When a sale involves multiple deliverables, the total revenue from the arrangement is allocated to each unit of accounting based on the relative selling price of the deliverable to all other deliverables in the contract. Revenue for multiple element arrangements is recognized when the appropriate revenue recognition criteria for the individual deliverable have been satisfied. Generally, these elements are satisfied within the same reporting period although certain contracts may be completed over 6 months. The allocation of sales price between elements may impact the timing of

revenue recognition, but will not change the total revenue recognized on the arrangement. For delivered elements accounted for as separate units of accounting in a multiple element arrangement, revenue is recognized only when the delivered elements have standalone value, there are no uncertainties regarding customer acceptance and there are no customer-negotiated refund or return rights affecting the sales recognized.

Certain businesses enter into long-term construction-type sales contracts for which revenue is recognized under the percentage-of-completion method based upon percentage of costs incurred to total estimated costs.

We record a reduction in revenue at the time of sale for estimated product returns, rebates and other allowances, based on historical experience and known trends.

We adopted the new accounting guidance regarding revenue from contracts with customers January 1, 2018 using the modified retrospective approach (refer to Note 2 “Recently Issued Accounting Pronouncements”). Adoption of the guidance did not have a material impact on our financial statements.

Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse. Based on the evaluation of available evidence, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely than not we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes to our estimate of the amount we are more likely than not to realize in the valuation allowance, with a corresponding adjustment to earnings or other comprehensive income, as appropriate.

In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates.

Due to U.S. Tax Reform, we have recorded provisional amounts of foreign withholding taxes and state income taxes on earnings that are expected to be repatriated to the U.S. parent. The Company intends to distribute a portion of the earnings taxed under the Tax Act. We have not recorded any deferred taxes on the amounts that the Company currently does not intend to distribute as the determination of any deferred taxes on this amount is not practicable.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and to the extent to which, additional taxes will be due. Furthermore, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

We adjust our liability for uncertain tax positions in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional tax expense would result. If a payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.

Business Combinations. We record acquisitions using the purchase method of accounting. All of the assets acquired, liabilities assumed, contractual contingencies and contingent consideration is recorded at fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. The application of the purchase method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed, in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. These assumptions and estimates include a market participant’s use of the asset and the appropriate discount rates for a market participant. Our estimates are based on historical experience, information obtained from the management of the acquired companies and, when appropriate, includes assistance from independent third-party appraisal firms. Significant assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in the future, the cost to build/recreate certain technology, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and

unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates.

Goodwill and Intangible Assets. We review goodwill and indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We also review the carrying value of our finite-lived intangible assets for potential impairment when impairment indicators arise. We conduct our annual impairment test as of the first day of the fourth quarter. For goodwill, the estimated fair value of each reporting unit is compared to the carrying value of the net assets assigned to that reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of the reporting unit exceeds its estimated fair value, then an impairment charge is recognized for that excess up to the amount of recorded goodwill. We estimate the fair value of our reporting units and intangible assets with indefinite lives using an income approach. Under the income approach, we calculate fair value based on the present value of estimated future cash flows.

Determining the fair value of a reporting unit or an indefinite-lived intangible asset is judgmental in nature and involves the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions and identification of appropriate market comparable data. In addition, the identification of reporting units and the allocation of assets and liabilities to the reporting units when determining the carrying value of each reporting unit also require judgment. Goodwill is tested for impairment at either the operating segment identified in Note 20, “Segment and Geographic Data,” of the consolidated financial statements, or one level below. The fair value of our reporting units and indefinite-lived intangible assets is based on estimates and assumptions that are believed to be reasonable. Significant changes to these estimates and assumptions could adversely impact our conclusions. Actual future results may differ from those estimates.

During the fourth quarter of 2017, we performed our annual impairment assessment and determined that the estimated fair values of our goodwill reporting units were substantially in excess of each of their carrying values. However, future goodwill impairment tests could result in a charge to earnings. We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth quarter and whenever events and changes in circumstances indicate there may be a potential impairment. We determined that no impairment of the indefinite-lived intangibles existed as of the measurement date in 2017. However, future indefinite-lived intangible impairment tests could result in a charge to earnings. We will continue to evaluate indefinite-lived intangibles on an annual basis as of the beginning of our fourth quarter and whenever events and changes in circumstances indicate there may be a potential impairment.

Contingent Liabilities. As discussed in Note 18, "Commitments and Contingencies" of the consolidated financial statements, the Company is, from time to time, subject to a variety of litigation, environmental liabilities, product liabilities, and similar contingent liabilities incidental to its business (or the business operations of previously owned entities). The Company recognizes a liability for any contingency that is known or probable of occurrence and reasonably estimable. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims and the cost of both pending and future claims. In addition, because most contingencies are resolved over long periods of time, liabilities may change in the future due to various factors, including those discussed in Note 18 of the consolidated financial statements. If the liabilities established by the Company with respect to these contingencies are inadequate, the Company would be required to incur an expense equal to the amount of the loss incurred in excess of the recorded liability, which would adversely affect the Company’s financial statements.

Receivables and Allowance for Doubtful Accounts and Discounts. Receivables primarily comprise uncollected amounts owed to us from transactions with customers and are presented net of allowances for doubtful accounts and early payment discounts.

We determine our allowance for doubtful accounts using a combination of factors to reduce our trade receivable balances to their estimated net realizable amount. We maintain an allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, macroeconomic trends and conditions, significant one-time events, historical experience and the financial condition of customers. In addition, we record a specific reserve for individual accounts when we become aware of specific customer circumstances, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. The past due or delinquency status of a receivable is based on the contractual payment terms of the receivable. If circumstances related to the specific customer change, we adjust estimates of the recoverability of receivables as appropriate. We determine our allowance for early payment discounts primarily based on historical experience with customers.

Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising our customer base and their dispersion across many different geographical regions. We perform ongoing credit evaluations of the financial condition of our third-party distributors, resellers and other customers and require collateral, such as letters of credit and bank guarantees, in certain circumstances. As of December 31, 2017 and 2016 we do not believe we have any significant concentrations of credit risk.

Postretirement Plans. Company employees around the world participate in numerous defined benefit plans. The determination of projected benefit obligations and the recognition of expenses related to these plans are dependent on various assumptions. These major assumptions primarily relate to discount rates, expected long-term rates of return on plan assets, rate of future compensation increases, mortality, health care inflation and years of service (some of which are disclosed in Note 14, “Postretirement Benefit Plans,” of the consolidated financial statements) and other factors. Actual results that differ from our assumptions are accumulated and amortized on a straight-line basis only to the extent they exceed 10% of the higher of the market-related value or projected benefit obligation, over the average remaining service period of active plan participants, or for plans with all or substantially all inactive participants, over the average remaining life expectancy.

Significant Assumptions

Management develops each assumption using relevant Company experience, in conjunction with market-related data for each individual country in which such plans exist. All assumptions are reviewed annually with third-party consultants and adjusted as necessary. The table included below provides the weighted average assumptions used to estimate our defined benefit pension obligations and costs as of and for the years ended 2017 and 2016.

	2017						2016
	U.S.			Int’l			U.S.			Int’l
Benefit Obligation Assumptions
Discount rate	3.75	%		2.43	%		4.25	%		2.63	%
Rate of future compensation increase	NM			2.93	%		NM			2.76	%
Net Periodic Benefit Cost Assumptions
Discount rate	4.25	%		2.63	%		4.27	%		3.44	%
Expected long-term return on plan assets	8.00	%		7.20	%		8.00	%		7.25	%
Rate of future compensation increase	NM			2.76	%		NM			3.29	%

NM	Not meaningful. The pension benefits for future service for all the U.S. pension plans are based on years of service and not impacted by future compensation increases.

We determine the expected long-term rate of return on plan assets by evaluating both historical returns and estimates of future returns. Specifically, the Company analyzes the estimated future returns based on independent estimates of asset class returns and evaluates historical broad market returns over long-term timeframes based on the strategic asset allocation, which is detailed in Note 14, “Postretirement Benefit Plans,” of the consolidated financial statements.

Based on the approach described above, the chart below shows weighted average actual returns versus the weighted average expected long-term rates of return for our pension plans that were utilized in the calculation of the net periodic pension cost for each respective year.

	2017			2016			2015
Expected long-term rate of return on plan assets	7.30	%		7.32	%		7.38	%
Actual rate of return on plan assets	5.70	%		12.20	%		3.51	%

For the recognition of net periodic pension cost, the calculation of the expected return on plan assets is generally derived by applying the expected long-term rate of return to the market-related value of plan assets. The market-related value of plan assets is based on average asset values at the measurement date over the last five years. The use of fair value, rather than a calculated value, could materially affect net periodic pension cost. The weighted average expected long-term rate of return for all of our plan assets to be used in determining net periodic benefit costs for 2018 is estimated at 7.30%. We estimate that every 25 basis point change in the expected return on plan assets impacts the expense by $1 million.

The discount rate reflects our expectation of the present value of expected future cash payments for benefits at the measurement date. A decrease in the discount rate increases the present value of benefit obligations and increases pension expense. We base the discount rate assumption on current investment yields of high-quality fixed income

investments during the retirement benefits maturity period. The pension discount rate was determined by considering an interest rate yield curve comprising AAA/AA bonds, with maturities between zero and 30 years, developed by the plan’s actuaries. Annual benefit payments are then discounted to present value using this yield curve to develop a single-point discount rate matching the plan’s characteristics. Our weighted average discount rate for all pension plans effective January 1, 2018, is 2.58%. We estimate that every 25 basis point change in the discount rate impacts the expense by $1 million.

The rate of future compensation increase assumption reflects our long-term actual experience and future and near-term outlook. Effective January 1, 2018, our expected rate of future compensation is 3.03% for all pension plans. The estimated impact of a 25 basis point change in the expected rate of future compensation is less than $1 million.

The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 8.72% for 2018, decreasing ratably to 4.50% in 2026. An increase or decrease in the health care trend rates by one percent per year would impact the aggregate annual service and interest components by less than $1 million, and impact the benefit obligation by approximately $4 million.

We currently anticipate making contributions to our pension and postretirement benefit plans in the range of $20 million to $30 million during 2018, of which $6 million is expected to be made in the first quarter.

Funded Status

Funded status is derived by subtracting the respective year-end values of the projected benefit obligations from the fair value of plan assets. We estimate that every 25 basis point change in the discount rate impacts the funded status by approximately $31 million.

Fair Value of Plan Assets

The plan assets of our pension plans comprise a broad range of investments, including domestic and foreign equity securities, interests in private equity and hedge funds, fixed income investments, insurance contracts, and cash and cash equivalents.

A portion of our pension benefit plan assets portfolio comprises investments in private equity and hedge funds. The private equity and hedge fund investments are generally measured at net asset value. However, in certain instances, the values reported by the asset managers were not current at the measurement date. Accordingly, we made estimate adjustments to the last reported value where necessary to measure the assets at fair value at the measurement date. These adjustments consider information received from the asset managers, as well as general market information. The adjustment recorded at December 31, 2017 and 2016 for these assets represented less than one percent of total plan assets in each respective year. Asset values for other positions were generally measured using market observable prices. We estimate that a 5% change in asset values will impact funded status by approximately $29 million.

New Accounting Pronouncements

See Note 2, “Recently Issued Accounting Pronouncements,” of the consolidated financial statements for a complete discussion of recent accounting pronouncements.