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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFinancial ReviewAbbott’s revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott’s products under a contract most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs. Abbott’s primary products are medical devices, diagnostic testing products, nutritional products and branded generic pharmaceuticals. Sales in international markets comprise approximately 62 percent of consolidated net sales.In 2020, the coronavirus (COVID-19) pandemic affected Abbott’s diversified health care businesses in various ways. As is further described below, some businesses have performed at the levels required to successfully meet new demands, others have faced challenges, and still others have been relatively less impacted by the pandemic. Abbott’s Diagnostics business experienced the most significant change in sales from 2019 to 2020 as sales from new tests and other related products to detect COVID-19 more than outweighed the negative impact of COVID-19 on routine diagnostic testing volumes. Abbott mobilized its teams across multiple fronts to develop and launch the following new diagnostic tests for COVID-19 in 2020: ●In March, Abbott launched a molecular test using polymerase chain reaction (PCR) methods on its m2000™ RealTime lab-based platform to detect COVID-19 pursuant to an Emergency Use Authorization (EUA) in the U.S. and CE Mark.●In March, Abbott also launched a molecular test to detect COVID-19 on its ID NOW™ rapid point-of-care platform in the U.S. pursuant to an EUA. ●In April, Abbott launched an IgG (Immunoglobulin G) lab-based serology blood test on its ARCHITECT® i1000SR and i2000SR® laboratory instruments for the detection of an antibody to determine if someone was previously infected with the virus. The serology test was granted an EUA in the U.S. and CE Mark in April.●In May, Abbott launched a lab-based serology blood test on its Alinity® i system pursuant to an EUA in the U.S. and CE Mark.●In May, Abbott also launched a molecular PCR test on its Alinity m system to detect COVID-19 pursuant to an EUA in the U.S. Abbott received CE Mark for this test in June. ●In June, Abbott launched a lateral flow COVID-19 rapid antibody test on its Panbio™ system in select countries pursuant to a CE Mark. This serology test detects an antibody to determine if someone was previously infected with the virus.●In August, Abbott launched its AdviseDx SARS-CoV-2 IgM (Immunoglobulin M) lab-based serology test for use on its ARCHITECT and Alinity platforms pursuant to a CE Mark. Abbott was granted an EUA in the U.S. for this test in October.●In August, Abbott launched its BinaxNOW™ COVID-19 Ag Card test, a portable, lateral flow rapid test to detect COVID-19 pursuant to an EUA in the U.S.●In September, Abbott launched its Panbio rapid antigen test to detect COVID-19 pursuant to a CE Mark. In October, Abbott received approval by the World Health Organization for emergency use listing for the Panbio antigen test.●In December, Abbott received CE Mark and launched its SARS-CoV-2-IgG II quantitative lab-based serology blood test for use on its ARCHITECT and Alinity i platforms.●In December, Abbott received an EUA in the U.S. for virtually guided at-home use of its BinaxNOW COVID-19 Ag Card rapid test to detect COVID-19 and launched the product for at-home use.●In December, Abbott launched its multiplex molecular test on its Alinity m system to detect COVID-19, flu A, flu B, and respiratory syncytial virus (RSV) pursuant to a CE Mark.21 In 2020, Abbott’s COVID-19 testing related sales totaled approximately $3.884 billion, led by sales related to Abbott’s BinaxNOW, Panbio and ID NOW rapid testing platforms.In addition to negatively impacting routine core diagnostic testing volumes, the pandemic negatively affected the number of cardiovascular and neuromodulation procedures performed by health care providers globally, thereby reducing the demand for Abbott’s cardiovascular and neuromodulation devices and routine diagnostic tests in 2020. The decrease began in February in China as that country implemented quarantine restrictions and postponed non-emergency health care activities. The negative impact on cardiovascular and neuromodulation procedures and routine diagnostic tests expanded to other countries and geographic regions as COVID-19 spread geographically in the first half of 2020 and health care systems in these countries shifted their focus to fighting COVID-19.The extent of the impact and the timing of a recovery in the number of procedures and routine testing in a particular country or geographic region depended upon the progression of COVID-19 cases in the country or region. The recovery in procedures and routine testing volumes in China began in March. In other parts of the world, such as the U.S. and Europe, volumes improved across Abbott’s hospital-based businesses as the second quarter progressed and the improvement continued in the third quarter. However, in the fourth quarter, the improving trends in the demand for procedures and routine testing flattened or were negatively impacted depending upon the business and the region as many countries experienced an increase in the number of COVID-19 cases and hospitalizations.Abbott’s branded generic pharmaceuticals business was also negatively affected by the pandemic in 2020 as COVID-19 spread across emerging market countries in the second and third quarters of 2020. Abbott’s nutritional and diabetes care businesses were the least affected by the pandemic as is further discussed below.Abbott is continually implementing business continuity plans in the face of the pandemic. Due to the critical nature of its products and services, Abbott was generally exempt from governmental orders issued during the first quarter of 2020 in the U.S. and other countries requiring businesses to cease operations. The majority of its office-based work was conducted remotely during the period of such governmental orders and the company implemented strict travel restrictions. As some governmental orders were lifted in May and June 2020, Abbott entered a new phase in its operations whereby some office-based employees started working at Abbott’s offices on a rotational basis. As various governmental orders and guidelines were modified in the fourth quarter to put in place new restrictions, Abbott continued to ensure that its guidance was aligned with such restrictions. Abbott has taken aggressive steps to limit exposure and enhance the safety of facilities for its employees.Due to the unpredictability of the duration and impact of the current COVID-19 pandemic, the extent to which the COVID-19 pandemic will have a material effect on its business, financial condition or results of operations is uncertain.While Abbott’s 2020 sales were most significantly affected by the COVID-19 pandemic, the increase in total sales over the last three years also reflects volume growth due to the introduction of new products across various businesses as well as higher sales of various existing products. Sales in emerging markets, which represent approximately 37 percent of total company sales, increased 2.0 percent in 2020 and 8.2 percent in 2019, excluding the impact of foreign exchange. (Emerging markets include all countries except the United States, Western Europe, Japan, Canada, Australia and New Zealand.)Over the last three years, Abbott’s operating margin as a percentage of sales increased from 11.9 percent in 2018 to 14.2 percent in 2019 and 15.5 percent in 2020. The increase in 2020 reflects the sales volume increases in the rapid and molecular diagnostics businesses, partially offset by lower Medical Devices sales due to the impact of the pandemic and the unfavorable effect of foreign exchange. In addition, a reduction in the costs associated with business acquisitions and restructuring activities drove an improvement in operating margins from 2018 to 2020. In 2019, the increase in Abbott’s operating margin also reflects margin improvement in various businesses and lower intangible amortization expense compared to 2018.With respect to the performance of each reportable segment over the last three years, sales in the Medical Devices segment excluding the impact of foreign exchange decreased 3.8 percent in 2020 and increased 10.5 percent in 2019. The sales decrease in 2020 was driven by Abbott’s cardiovascular and neuromodulation businesses due primarily to reduced procedure volumes as a result of the COVID-19 pandemic. These decreases were partially offset by double-digit growth in Diabetes Care. The sales increase in 2019 was driven primarily by higher Diabetes Care, Structural Heart, Electrophysiology and Heart Failure sales.22 In 2020, operating earnings for the Medical Devices segment decreased 19.4 percent. The operating margin profile decreased from 30.8 percent of sales in 2019 to 25.8 percent in 2020 primarily due to lower sales and manufacturing volumes as a result of the pandemic and pricing pressures on drug eluting stents (DES) as a result of market competition in the U.S. and other major markets. In 2020, key product approvals in the Medical Devices segment included:●CE Mark for Abbott’s Tendyne™ Transcatheter Mitral Valve Implantation system for the treatment of significant mitral regurgitation (MR) in patients requiring a heart valve replacement who are not candidates for open-heart surgery or transcatheter mitral valve repair,●CE Mark for Abbott’s TriClip® heart valve repair system, the world’s first minimally invasive, clip-based device for repair of a leaky tricuspid heart valve,●U.S. Food and Drug Administration (FDA) clearance of FreeStyle® Libre 2 as an integrated continuous glucose monitoring (iCGM) system for adults and children ages 4 and older with diabetes, ●CE Mark for Abbott’s FreeStyle Libre 3 system, which automatically delivers real time, up-to-the-minute glucose readings, 14-day accuracy and real-time glucose alarms, ●CE Mark for the Libre Sense™ Glucose Sport Biosensor that provides continuous glucose monitoring to help athletes better understand the efficacy of their nutrition choices on training and athletic performance,●U.S. FDA approval of the next-generation Gallant™ implantable cardioverter defibrillator and cardiac resynchronization therapy defibrillator devices which help manage heart rhythm disorders and offer Bluetooth technology and a new patient smartphone app for improved remote monitoring and enhanced patient-physician engagement,●CE Mark for MitraClip® G4, Abbott’s next-generation MitraClip mitral valve repair device, ●CE Mark of EnSite™ X EP System, a next-generation 3D cardiac mapping platform used for ablation therapy to treat abnormal heart rhythms,●U.S. FDA clearance and CE Mark of the IonicRF™ Generator, a non-surgical, minimally invasive device that uses heat to target specific nerves for the management of chronic pain, and●U.S. FDA approval of updated labeling to allow Abbott’s HeartMate 3™ heart pump to be used in pediatric patients with advanced refractory left ventricular heart failure.In Abbott’s worldwide diagnostics business, sales increased 40.6 percent in 2020 and 5.9 percent in 2019, excluding the impact of foreign exchange. As was discussed above, sales growth in 2020 was driven by demand for Abbott's portfolio of COVID-19 diagnostics tests across its rapid and lab-based platforms, partially offset by lower volumes of routine laboratory testing due to the pandemic. Growth in 2019 reflected continued market penetration by the core laboratory business in the U.S. and internationally. The 2019 growth included the continued adoption by customers of Alinity, which is Abbott’s integrated family of next-generation diagnostic systems and solutions that are designed to increase efficiency by running more tests in less space, generating test results faster and minimizing human errors while continuing to provide quality results.Abbott has regulatory approvals in the U.S., Europe, China, and other markets for the “Alinity c” and “Alinity i” instruments and has continued to build out its test menu for clinical chemistry and immunoassay diagnostics. Abbott has obtained regulatory approval for the “Alinity h” instrument for hematology in Europe and Japan. Abbott has also obtained regulatory approvals in the U.S. and Europe for the “Alinity s” (blood screening) and “Alinity m” (molecular) instruments and several testing assays.In 2020, operating earnings for the Diagnostics segment increased 94.8 percent. The operating margin profile increased from 24.9 percent of sales in 2018 to 34.5 percent in 2020 primarily due to higher sales in 2020 in Rapid Diagnostics and Molecular Diagnostics, partially offset by lower volumes of routine testing in Core Laboratory.23 In Abbott’s worldwide nutritional products business, sales over the last three years were positively impacted by numerous new product introductions, including the roll-outs of human milk oligosaccharide, or HMO, in infant formula and of high-protein Ensure®, that leveraged Abbott’s strong brands. Sales were also positively affected by demographics such as an aging population and an increasing rate of chronic disease in developed markets and the rise of a middle class in many emerging markets. Excluding the impact of foreign exchange, total adult nutrition sales increased 10.3 percent in 2020 and 6.6 percent in 2019 led by the continued growth of Ensure, Abbott’s market-leading complete and balanced nutrition brand, and Glucerna®, Abbott’s market-leading diabetes-specific nutrition brand, across several countries. The 2019 sales growth was partially offset by the unfavorable impact of the discontinuation of a non-core product line in the U.S. Excluding the impact of foreign exchange, total pediatric nutrition sales increased 0.3 percent in 2020 and 3.4 percent in 2019 driven by the PediaSure® and Pedialyte® brands in the U.S. as well as infant and toddler product growth across several markets in Asia and Latin America, partially offset by challenging market dynamics in the infant category in Greater China. The 2020 increase was also driven by higher Similac® sales in the U.S.The Established Pharmaceutical Products segment focuses on the sale of its products in emerging markets. Excluding the impact of foreign exchange, Established Pharmaceutical sales increased 1.9 percent in 2020 and 7.3 percent in 2019. The sales increases in 2020 and 2019 reflect higher sales in several geographies including India, China, Brazil and Russia. Operating margins decreased from 20.2 percent of sales in 2018 to 18.5 percent in 2020 primarily due to the unfavorable impact of foreign exchange, product mix and lower gross margins.With respect to Abbott’s financial position, at December 31, 2020, Abbott’s cash and cash equivalents and short-term investments total approximately $7.1 billion compared to $4.1 billion at December 31, 2019. Abbott’s long-term debt and short-term borrowings total $18.7 billion and $18.1 billion at December 31, 2020 and 2019, respectively.Abbott declared dividends of $1.53 per share in 2020 compared to $1.32 per share in 2019, an increase of approximately 16 percent. Dividends paid totaled $2.560 billion in 2020 compared to $2.270 billion in 2019. The year-over-year change in the amount of dividends paid primarily reflects the increase in the dividend rate. In December 2020, Abbott increased the company’s quarterly dividend by 25 percent to $0.45 per share from $0.36 per share, effective with the dividend paid in February 2021.In 2021, Abbott will focus on continuing to meet the demand for COVID-19 tests and will continue to invest in product development areas that provide the opportunity for strong sustainable growth over the next several years. In its diagnostics business, Abbott will continue to focus on driving market adoption and geographic expansion of its Alinity suite of diagnostics instruments. In the medical devices business, Abbott will continue to focus on expanding its market position in various areas including diabetes care, structural heart, electrophysiology, and heart failure. In its nutritionals business, Abbott will continue to focus on driving growth globally and further enhancing its portfolio with the introduction of line extensions of its science-based products. In the established pharmaceuticals business, Abbott will continue to focus on growing its business with the depth and breadth of its portfolio in emerging markets.24 Critical Accounting PoliciesSales Rebates — In 2020, approximately 41 percent of Abbott’s consolidated gross revenues were subject to various forms of rebates and allowances that Abbott recorded as reductions of revenues at the time of sale. Most of these rebates and allowances in 2020 are in the Nutritional Products and Diabetes Care businesses. Abbott provides rebates to state agencies that administer the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), wholesalers, group purchasing organizations, and other government agencies and private entities. Rebate amounts are usually based upon the volume of purchases using contractual or statutory prices for a product. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate, which customer or government agency price terms apply, and the estimated lag time between sale and payment of a rebate. Using historical trends, adjusted for current changes, Abbott estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when Abbott records its sale of the product. Settlement of the rebate generally occurs from one to six months after sale. Abbott regularly analyzes the historical rebate trends and makes adjustments to reserves for changes in trends and terms of rebate programs. Rebates and chargebacks charged against gross sales in 2020, 2019 and 2018 amounted to approximately $3.3 billion, $3.1 billion and $3.0 billion, respectively, or 20.1 percent, 19.1 percent and 19.0 percent of gross sales, respectively, based on gross sales of approximately $16.6 billion, $16.3 billion and $16.0 billion, respectively, subject to rebate. A one-percentage point increase in the percentage of rebates to related gross sales would decrease net sales by approximately $166 million in 2020. Abbott considers a one-percentage point increase to be a reasonably likely increase in the percentage of rebates to related gross sales. Other allowances charged against gross sales were approximately $207 million, $169 million and $175 million for cash discounts in 2020, 2019 and 2018, respectively, and $232 million, $192 million and $191 million for returns in 2020, 2019 and 2018, respectively. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated because Abbott’s historical returns are low, and because sales returns terms and other sales terms have remained relatively unchanged for several periods.Management analyzes the adequacy of ending rebate accrual balances each quarter. In the domestic nutritional business, management uses both internal and external data available to estimate the accruals. In the WIC business, estimates are required for the amount of WIC sales within each state where Abbott holds the WIC contract. The state where the sale is made, which is the determining factor for the applicable rebated price, is reliably determinable. Rebated prices are based on contractually obligated agreements generally lasting a period of two to four years. Except for a change in contract price or a transition period before or after a change in the supplier for the WIC business in a state, accruals are based on historical redemption rates and data from the U.S. Department of Agriculture (USDA) and the states submitting rebate claims. The USDA, which administers the WIC program, has been making its data available for many years. Management also estimates the states' processing lag time based on sales and claims data. Inventory in the retail distribution channel does not vary substantially. Management has access to several large customers' inventory management data, which allows management to make reliable estimates of inventory in the retail distribution channel. At December 31, 2020, Abbott had WIC business in 27 states.Historically, adjustments to prior years’ rebate accruals have not been material to net income. Abbott employs various techniques to verify the accuracy of claims submitted to it, and where possible, works with the organizations submitting claims to gain insight into changes that might affect the rebate amounts. For government agency programs, the calculation of a rebate involves interpretations of relevant regulations, which are subject to challenge or change in interpretation.Income Taxes — Abbott operates in numerous countries where its income tax returns are subject to audits and adjustments. Because Abbott operates globally, the nature of the audit items is often very complex, and the objectives of the government auditors can result in a tax on the same income in more than one country. Abbott employs internal and external tax professionals to minimize audit adjustment amounts where possible. In accordance with the accounting rules relating to the measurement of tax contingencies, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. Application of these rules requires a significant amount of judgment. In the U.S., Abbott’s federal income tax returns through 2016 are settled. Undistributed foreign earnings remain indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in its foreign entities is not practicable.25 Pension and Post-Employment Benefits — Abbott offers pension benefits and post-employment health care to many of its employees. Abbott engages outside actuaries to assist in the determination of the obligations and costs under these programs. Abbott must develop long-term assumptions, the most significant of which are the health care cost trend rates, discount rates and the expected return on plan assets. The discount rates used to measure liabilities were determined based on high-quality fixed income securities that match the duration of the expected retiree benefits. The health care cost trend rates represent Abbott’s expected annual rates of change in the cost of health care benefits and are a forward projection of health care costs as of the measurement date. A difference between the assumed rates and the actual rates, which will not be known for years, can be significant in relation to the obligations and the annual cost recorded for these programs. Low interest rates have significantly increased actuarial losses for these plans. At December 31, 2020, pretax net actuarial losses and prior service costs and (credits) recognized in Accumulated other comprehensive income (loss) were net losses of $4.6 billion for Abbott’s defined benefit plans and net losses of $419 million for Abbott’s medical and dental plans. Actuarial losses and gains are amortized over the remaining service attribution periods of the employees under the corridor method, in accordance with the rules for accounting for post-employment benefits. Differences between the expected long-term return on plan assets and the actual annual return are amortized over a five-year period.Valuation of Intangible Assets — Abbott has acquired and continues to acquire significant intangible assets that Abbott records at fair value at the acquisition date. Transactions involving the purchase or sale of intangible assets occur with some frequency between companies in the health care field and valuations are usually based on a discounted cash flow analysis. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, cost of capital, terminal values and market participants. Each of these factors can significantly affect the value of the intangible asset. Abbott engages independent valuation experts who review Abbott’s critical assumptions and calculations for acquisitions of significant intangibles. Abbott reviews definite-lived intangible assets for impairment each quarter using an undiscounted net cash flows approach. If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, the intangible asset is written down to its fair value, which is usually the discounted cash flow amount. Where cash flows cannot be identified for an individual asset, the review is applied at the lowest group level for which cash flows are identifiable. Goodwill and indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, are reviewed for impairment annually or when an event that could result in impairment occurs. At December 31, 2020, goodwill amounted to $23.7 billion and net intangibles amounted to $14.8 billion. Amortization expense in continuing operations for intangible assets amounted to $2.1 billion in 2020, $1.9 billion in 2019 and $2.2 billion in 2018. There was no reduction of goodwill relating to impairments in 2020, 2019 and 2018.Litigation — Abbott accounts for litigation losses in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 450, “Contingencies.” Under ASC No. 450, loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period as additional information becomes known. Accordingly, Abbott is often initially unable to develop a best estimate of loss, and therefore the minimum amount, which could be zero, is recorded. As information becomes known, either the minimum loss amount is increased, resulting in additional loss provisions, or a best estimate can be made, also resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected. Abbott estimates the range of possible loss to be from approximately $90 million to $120 million for its legal proceedings and environmental exposures. Accruals of approximately $105 million have been recorded at December 31, 2020 for these proceedings and exposures. These accruals represent management’s best estimate of probable loss, as defined by FASB ASC No. 450, “Contingencies.”26 Results of OperationsSalesThe following table details the components of sales growth by reportable segment for the last two years:​​​​​​​​​​​​​​Components of % Change​​Total​​​​​​​ % Change Price Volume ExchangeTotal Net Sales 2020 vs. 2019 8.5 (0.4) 10.2 (1.3)2019 vs. 2018 4.3 0.2 7.3 (3.2)​​​​​​​​​Total U.S. ​ ​ ​ ​2020 vs. 2019 14.2 (1.1) 15.3 —2019 vs. 2018 5.2 (0.4) 5.6 —​​​​​​​​​Total International ​ ​ ​ ​2020 vs. 2019 5.3 0.1 7.2 (2.0)2019 vs. 2018 3.9 0.5 8.3 (4.9)​​​​​​​​​Established Pharmaceutical Products Segment ​ ​ ​ ​2020 vs. 2019 (4.1) 2.7 (0.8) (6.0)2019 vs. 2018 1.4 3.0 4.3 (5.9)​​​​​​​​​Nutritional Products Segment ​ ​ ​ ​2020 vs. 2019 3.2 0.8 3.9 (1.5)2019 vs. 2018 2.5 0.9 3.9 (2.3)​​​​​​​​​Diagnostic Products Segment ​ ​ ​ ​2020 vs. 2019 40.1 (0.8) 41.4 (0.5)2019 vs. 2018 2.9 (0.5) 6.4 (3.0)​​​​​​​​​Medical Devices Segment ​ ​ ​ ​2020 vs. 2019 (3.7) (1.9) (1.9) 0.12019 vs. 2018 7.6 (0.9) 11.4 (2.9)​The increase in Total Net Sales in 2020 reflects volume growth in the Diagnostics and Nutritional Products segments. In Medical Devices, the impact of COVID-19 on Abbott’s cardiovascular and neuromodulation businesses was partially offset by double-digit volume growth in Diabetes Care. The increase in Total Net Sales in 2019 reflects volume growth across all of Abbott’s segments. The price declines related to the Medical Devices segment in 2020 and 2019 primarily reflect DES pricing pressures as a result of market competition in the U.S. and other major markets.27 A comparison of significant product and product group sales is as follows. Percent changes are versus the prior year and are based on unrounded numbers.​​​​​​​​​​​​​​​​​​​​​​ Total Impact of Total Change ​​ 2020 2019 Change Exchange Excl. Exchange​(dollars in millions)​​​​​​​​​​​​​Total Established Pharmaceuticals — ​ ​​​ ​Key Emerging Markets​$ 3,209​$ 3,392 (5)% (8)% 3%Other​ 1,094​​ 1,094 — 1 (1)​​​​​​​​​​​​​​​Nutritionals —​ ​​​​ ​ ​ ​​International Pediatric Nutritionals​ 2,140​​ 2,282 (6) (2) (4)​U.S. Pediatric Nutritionals​ 1,987​​ 1,879 6 — 6​International Adult Nutritionals​ 2,228​​ 2,017 11 (3) 14​U.S. Adult Nutritionals​ 1,292​​ 1,231 5 — 5​​​​​​​​​​​​​​​Diagnostics —​ ​​​​ ​ ​ ​​Core Laboratory​ 4,475​​ 4,656 (4) (1) (3)​Molecular​ 1,438​​ 442 225 (1) 226​Point of Care​ 516​​ 561 (8) — (8)​Rapid Diagnostics​ 4,376​​ 2,054 113 1 112​​​​​​​​​​​​​​​Medical Devices —​ ​​​​ ​ ​ ​​Rhythm Management​ 1,914​​ 2,144 (11) — (11)​Electrophysiology​ 1,578��​ 1,721 (8) 1 (9)​Heart Failure​ 740​​ 769 (4) — (4)​Vascular (a)​ 2,339​​ 2,850 (18) — (18)​Structural Heart​ 1,247​​ 1,400 (11) — (11)​Neuromodulation​​ 702​​ 831​ (16)​—​ (16)​Diabetes Care​​ 3,267​​ 2,524​ 29​—​ 29​​​​​​​​​​​​​​​(a) Vascular Product Lines:​​​​​​​​​​​​​Coronary and Endovascular​ 2,263​​ 2,740 (17) — (17)​​28 ​​​​​​​​​​​​​​​​​​​​​​​Total​Impact of​Total Change ​ 2019 2018 Change Exchange Excl. Exchange (dollars in millions)​​​​​​​​​​​​​Total Established Pharmaceuticals — ​ ​​​ ​Key Emerging Markets​$ 3,392​$ 3,363 1% (7)% 8%Other​ 1,094​​ 1,059 3 (3) 6​​​​​​​​​​​​​​​Nutritionals —​ ​​​​ ​ ​ ​​International Pediatric Nutritionals​ 2,282​​ 2,254 1 (4) 5​U.S. Pediatric Nutritionals​ 1,879​​ 1,843 2 — 2​International Adult Nutritionals​ 2,017​​ 1,900 6 (5) 11​U.S. Adult Nutritionals​ 1,231​​ 1,232 — — —​​​​​​​​​​​​​​​Diagnostics —​ ​​​​ ​ ​ ​​Core Laboratory​ 4,656​​ 4,386 6 (4) 10​Molecular​ 442​​ 484 (9) (3) (6)​Point of Care​ 561​​ 553 2 — 2​Rapid Diagnostics​ 2,054​​ 2,072 (1) (2) 1​​​​​​​​​​​​​​​Medical Devices —​ ​​​​ ​ ​ ​​Rhythm Management​ 2,144​​ 2,198 (3) (3) —​Electrophysiology​ 1,721​​ 1,561 10 (3) 13​Heart Failure​ 769​​ 646 19 (1) 20​Vascular (a)​ 2,850​​ 2,929 (3) (3) —​Structural Heart​ 1,400​​ 1,239 13 (3) 16​Neuromodulation​​ 831​​ 864​ (4)​ (2)​ (2)​Diabetes Care​​ 2,524​​ 1,933​ 31​ (5)​ 36​​​​​​​​​​​​​​​(a) Vascular Product Lines:​​​​​​​​​​​​​Coronary and Endovascular​ 2,740​​ 2,778 (1) (2) 1​In order to compute results excluding the impact of exchange rates, current year U.S. dollar sales are multiplied or divided, as appropriate, by the current year average foreign exchange rates and then those amounts are multiplied or divided, as appropriate, by the prior year average foreign exchange rates.Total Established Pharmaceutical Products sales increased 1.9 percent in 2020 and 7.3 percent in 2019, excluding the unfavorable impact of foreign exchange. The Established Pharmaceutical Products segment is focused on several key emerging markets including India, Russia, China and Brazil. Excluding the impact of foreign exchange, total sales in these key emerging markets increased 2.6 percent in 2020 and 7.9 percent in 2019 due to higher sales in several geographies including China, Brazil, India and Russia. Excluding the impact of foreign exchange, sales in Established Pharmaceuticals’ other emerging markets decreased 0.5 percent in 2020 and increased 5.6 percent in 2019.Total Nutritional Products sales increased 4.7 percent in 2020 and 4.8 percent in 2019, excluding the impact of foreign exchange. In 2020, International Pediatric Nutritional sales, excluding the effect of foreign exchange, decreased 4.1 percent as growth across Abbott’s pediatric products in various countries in Southeast Asia was more than offset by challenging market dynamics in the infant category in Greater China. The 4.6 percent increase in 2019 International Pediatric Nutritional sales, excluding the effect of foreign exchange, was driven by growth across Abbott’s portfolio, including Similac and PediaSure in various countries in Asia and Latin America and Pedialyte in Latin America. This growth was partially offset by challenging market dynamics in the infant category in Greater China. In the U.S. Pediatric Nutritional business, sales increased 5.8 percent in 2020 and 1.9 percent in 2019, reflecting growth in Similac in 2020 and growth in PediaSure and Pedialyte in both years.29 In the International Adult Nutritional business, sales increased 13.6 percent and 10.9 percent in 2020 and 2019, respectively, excluding the effect of foreign exchange, due to continued growth of Ensure and Glucerna in several countries. In 2020 U.S. Adult Nutritional sales increased 4.9 percent, primarily due to growth of Ensure. In 2019, U.S. Adult Nutritional sales were unchanged from 2018 due to the impact of Abbott’s discontinuation of a non-core product line during the third quarter of 2018 that was offset by growth in other areas of the business.In the Diagnostics segment, Core Laboratory sales decreased 2.8 percent in 2020, excluding the effect of foreign exchange, as the lower volume of routine testing performed in hospital and other laboratories due to COVID-19 was partially offset by sales of Abbott’s COVID-19 laboratory-based tests for the detection of the IgG and IgM antibodies, which determine if someone was previously infected with the virus. Core Laboratory antibody testing-related sales on Abbott’s ARCHITECT and Alinity i platforms were $268 million in 2020. The 225.7 percent increase in Molecular Diagnostics sales in 2020, excluding the effect of foreign exchange, reflects higher volumes due to demand for Abbott’s laboratory-based molecular tests for COVID-19 on its m2000 and Alinity m platforms. Abbott received U.S. FDA approval in March 2020 for its Alinity m molecular diagnostics system. Molecular Diagnostics COVID-19 testing-related sales were $1.023 billion in 2020.In Rapid Diagnostics, sales increased 112.3 percent in 2020, excluding the effect of foreign exchange, due to strong demand for Abbott’s point-of-care COVID-19 molecular test on its ID NOW platform and its BinaxNOW COVID-19 Ag Card test in the U.S. as well as international demand for COVID-19 rapid tests on its Panbio system and increased testing in the first quarter for the flu in the U.S. These increases were partially offset by the unfavorable impact of COVID-19 on routine diagnostic testing. Rapid Diagnostics COVID-19 testing-related sales were $2.593 billion in 2020. In the Diagnostics segment, the sales increase in 2019 was driven by above-market growth in Core Laboratory in the U.S. and internationally, where Abbott achieved continued adoption of its Alinity family of diagnostic instruments. The 6.3 percent decrease in 2019 Molecular sales, excluding the effect of foreign exchange, reflects the negative impact of lower non-governmental organization purchases in Africa. In Rapid Diagnostics, sales growth in 2019 in various areas, including infectious disease testing in developed markets and cardio-metabolic testing, was mostly offset by lower than expected infectious disease testing sales in Africa.Excluding the effect of foreign exchange, total Medical Devices sales decreased 3.8 percent and increased 10.5 percent in 2020 and 2019, respectively. In 2020, double-digit growth in Diabetes Care was more than offset by decreases in Abbott’s cardiovascular and neuromodulation businesses due to the impact of COVID-19 and lower vascular sales in China in the fourth quarter of 2020 as a result of a new national tender program. The 2019 sales increase was driven by double-digit growth in Diabetes Care, Structural Heart, Electrophysiology and Heart Failure.The 2020 and 2019 growth in Diabetes Care revenue was driven by continued growth of FreeStyle Libre, Abbott’s continuous glucose monitoring system, internationally and in the U.S. In 2020, FreeStyle Libre sales totaled $2.635 billion, which reflected a 42.6 percent increase over 2019, excluding the effect of foreign exchange. FreeStyle Libre sales in 2019 were $1.842 billion, which reflected a 69.8 percent increase, excluding the effect of foreign exchange, over 2018 when sales totaled $1.128 billion.In 2019, growth in Structural Heart revenue was broad-based across several areas of the business, including MitraClip, Abbott's market-leading device for the minimally invasive treatment of mitral regurgitation (MR), a leaky heart valve. 2019 growth in Electrophysiology revenue reflects higher sales of cardiac diagnostic and ablation catheters in both the U.S. and internationally. The growth in Heart Failure revenue in 2019 was driven by rapid market adoption in the U.S. of Abbott's HeartMate 3® Left Ventricular Assist Device (LVAD) following FDA approval in October 2018 as a destination (long-term use) therapy for people living with advanced heart failure as well as higher sales of Abbott’s CardioMEMS® heart failure monitoring system. In Vascular, excluding the effect of foreign exchange, sales in 2019 were flat as the 1.3 percent increase in coronary and endovascular product sales, which includes drug-eluting stents, balloon catheters, guidewires, vascular imaging/diagnostics products, vessel closure, carotid and other coronary and peripheral products, was offset by reductions in royalty and contract manufacturing revenue. In Rhythm Management, higher 2019 international sales, excluding the effect of foreign exchange, were offset by a 4.4 percent decrease in U.S. revenue. In 2019, the 2.4 percent decline in Neuromodulation sales, excluding the effect of foreign exchange, reflects a 4.2 percent decline in U.S. sales.Abbott has periodically sold product rights to non-strategic products and has recorded the related gains in net sales in accordance with Abbott’s revenue recognition policies as discussed in Note 1 to the consolidated financial statements. Related net sales were not significant in 2020, 2019 and 2018.30 The expiration of licenses and patent protection can affect the future revenues and operating income of Abbott. There are no significant patent or license expirations in the next three years that are expected to materially affect Abbott.In April 2017, Abbott received a warning letter from the U.S. FDA related to its manufacturing facility in Sylmar, CA which was acquired by Abbott on January 4, 2017 as part of the acquisition of St. Jude Medical, Inc. (St. Jude Medical). This facility manufactures implantable cardioverter defibrillators, cardiac resynchronization therapy defibrillators, and monitors. Abbott prepared and executed a comprehensive plan of corrective actions. On April 28, 2020, Abbott received a letter from the FDA indicating that, based on the FDA’s evaluation, it appeared that Abbott had addressed the items in the warning letter. As a result, the warning letter is considered closed.Operating EarningsGross profit margins were 50.5 percent of net sales in 2020, 52.5 percent in 2019 and 51.3 percent in 2018. In 2020, the decrease primarily reflects the mix of sales across Abbott’s various businesses and operational inefficiencies due to the impact of COVID-19, as well as the increase in intangible asset amortization, the impairment of intangible assets and the unfavorable effect of foreign exchange on gross margin in 2020. In 2019, the increase primarily reflects lower intangible amortization expense and lower integration and restructuring costs.Research and development (R&D) expenses were $2.4 billion in 2020 and 2019, and $2.3 billion in 2018. R&D spending in 2020 was relatively flat compared to 2019 as the impact of the immediate expensing in 2019 of an R&D asset valued at $102 million that was acquired in conjunction with the acquisition of Cephea Valve Technologies, Inc. (Cephea) was partially offset by the $55 million impairment of an in-process R&D intangible asset in 2020. R&D expense in 2020 also reflects lower integration and restructuring costs in 2020 related to R&D, partially offset by higher spending on various projects. R&D expenses in 2019 increased 6.1 percent, primarily reflecting the immediate expensing of the Cephea R&D asset as well as higher R&D spending in various businesses, primarily in Medical Devices, partially offset by the favorable effect of foreign exchange. In 2020, R&D expenditures totaled $1.3 billion for the Medical Devices segment, $608 million for the Diagnostic Products segment, $189 million for the Nutritional Products segment and $177 million for the Established Pharmaceutical Products segment.Selling, general and administrative (SG&A) expenses were basically flat in 2020 and 2019 versus the respective prior years. In 2020, the favorable effect of foreign exchange, income of approximately $100 million from a litigation settlement in 2020, lower spending due to COVID-19 travel restrictions, and the impact of various cost saving initiatives were offset by higher spending to drive growth in various businesses. In 2019, the favorable effect of foreign exchange and lower acquisition-related integration costs offset higher selling and marketing costs to drive continued growth across various businesses.RestructuringsFrom 2017 to 2020, Abbott management approved restructuring plans as part of the integration of the acquisitions of St. Jude Medical into the Medical Devices segment, and Alere Inc. (Alere) into the Diagnostic Products segment, in order to leverage economies of scale and reduce costs. As of December 31, 2017, the accrued balance associated with these actions was $68 million. From 2018 to 2020, Abbott recorded employee related severance and other charges totaling approximately $137 million, comprised of $13 million in 2020, $72 million in 2019 and $52 million in 2018. Approximately $30 million was recorded in Cost of products sold, approximately $15 million was recorded in Research and development, and approximately $92 million was recorded in Selling, general and administrative expense over the last three years. As of December 31, 2020, the accrued liabilities remaining in the Consolidated Balance Sheet related to these actions total $25 million and primarily represent severance obligations.From 2016 to 2020, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in various Abbott businesses including the nutritional, established pharmaceuticals and vascular businesses. Abbott recorded employee related severance and other charges of approximately $36 million in 2020, $66 million in 2019 and $28 million in 2018. Approximately $6 million in 2020, $16 million in 2019 and $10 million in 2018 are recorded in Cost of products sold, approximately $2 million in 2020, $28 million in 2019 and $2 million in 2018 are recorded in Research and development, and approximately $28 million in 2020, $22 million in 2019 and $16 million in 2018 are recorded in Selling, general and administrative expense.31 Interest Expense and Interest (Income)Interest expense, net decreased $76 million in 2020 due to a reduction in interest expense resulting from the favorable impact of the euro debt financing in November 2019, the repayment of debt in December 2019 and a lower interest rate environment in 2020. In 2019, interest expense, net decreased $145 million due to the favorable impact of the euro debt financing in September 2018, as well as the repayment of debt in 2018 and the first quarter of 2019.Debt Extinguishment CostsOn December 19, 2019, Abbott redeemed the $2.850 billion principal amount of its 2.9% Notes due 2021. Abbott incurred a charge of $63 million related to the early repayment of this debt.On October 28, 2018, Abbott redeemed approximately $4 billion of debt, which included $750 million principal amount of its 2.00% Notes due 2020; $597 million principal amount of its 4.125% Notes due 2020; $900 million principal amount of its 3.25% Notes due 2023; $450 million principal amount of its 3.4% Notes due 2023; and $1.300 billion principal amount of its 3.75% Notes due 2026. Abbott incurred a net charge of $153 million related to the early repayment of this debt and the unwinding of related interest rate swaps.On March 22, 2018, Abbott redeemed all of the $947 million principal amount of its 5.125% Notes due 2019, as well as $1.055 billion of the $2.850 billion principal amount of its 2.35% Notes due 2019. Abbott incurred a net charge of $14 million related to the early repayment of this debt.Other (Income) Expense, netOther (income) expense, net, for 2020, 2019 and 2018 includes approximately $205 million, $225 million, and $160 million of income in each year, respectively, related to the non-service cost components of the net periodic benefit costs associated with the pension and post-retirement medical plans. Other (income) expense, net for 2020 also includes equity investment impairments that totaled approximately $115 million.Taxes on Earnings The income tax rates on earnings from continuing operations were 10.0 percent in 2020, 9.6 percent in 2019 and 18.8 percent in 2018.In 2020, taxes on earnings from continuing operations include the recognition of approximately $170 million of tax benefits associated with the impairment of certain assets, approximately $140 million of net tax benefits as a result of the resolution of various tax positions related to prior years, and approximately $100 million in excess tax benefits associated with share-based compensation. In 2020, taxes on earnings from continuing operations also include a $26 million increase to the transition tax associated with the 2017 Tax Cuts and Jobs Act (TCJA). The $26 million increase to the transition tax liability was the result of the resolution of various tax positions related to prior years. This adjustment increased the cumulative net tax expense related to the TCJA to $1.53 billion.In 2019, taxes on earnings from continuing operations included approximately $100 million in excess tax benefits associated with share-based compensation, an $86 million reduction of the transition tax and $68 million of tax expense resulting from tax legislation enacted in the fourth quarter of 2019 in India. The $86 million reduction to the transition tax liability was the result of the issuance of final transition tax regulations by the U.S. Department of Treasury in 2019. In 2018, taxes on earnings from continuing operations included $98 million of net tax expense related to the settlement of Abbott’s 2014-2016 federal income tax audit in the U.S., partial settlement of the former St. Jude Medical consolidated group’s 2014 and 2015 federal income tax returns in the U.S. and audit settlements in various countries as well as approximately $90 million in excess tax benefits associated with share-based compensation. In 2018, Abbott also recorded $130 million of additional tax expense related to the TCJA; the $130 million reflected a $120 million increase in the transition tax from $2.89 billion to $3.01 billion and a $10 million reduction in the net benefit related to the remeasurement of deferred tax assets and liabilities.32 Exclusive of these discrete items, tax expense was favorably impacted by lower tax rates and tax exemptions on foreign income primarily derived from operations in Puerto Rico, Switzerland, Ireland, the Netherlands, Costa Rica, Singapore, and Malta. Abbott benefits from a combination of favorable statutory tax rules, tax rulings, grants, and exemptions in these tax jurisdictions. See Note 15 to the consolidated financial statements for a full reconciliation of the effective tax rate to the U.S. federal statutory rate.Discontinued OperationsThe net earnings of discontinued operations include income tax benefits of $24 million in 2020 and $39 million in 2018. The 2020 tax benefits primarily relate to the resolution of various tax positions related to Abbott’s developed markets branded generic pharmaceuticals business which was sold to Mylan Inc. (Mylan) in 2015. The tax positions relate to years prior to the sale to Mylan. The 2018 tax benefits primarily relate to the resolution of various tax positions related to the operations of AbbVie Inc. (AbbVie) for years prior to the separation. Abbott completed the separation of AbbVie, which was formed to hold Abbott’s research-based proprietary pharmaceuticals business, in January 2013. Abbott retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation.Research and Development ProgramsAbbott currently has numerous pharmaceutical, medical devices, diagnostic and nutritional products in development.Research and Development ProcessIn the Established Pharmaceuticals segment, the development process focuses on the geographic expansion and continuous improvement of the segment’s existing products to provide benefits to patients and customers. As Established Pharmaceuticals does not actively pursue primary research, development usually begins with work on existing products or after the acquisition of an advanced stage licensing opportunity.Depending upon the product, the phases of development may include:●Drug product development.●Phase I bioequivalence studies to compare a future Established Pharmaceutical’s brand with an already marketed compound with the same active pharmaceutical ingredient (API).●Phase II studies to test the efficacy of benefits in a small group of patients.●Phase III studies to broaden the testing to a wider population that reflects the actual medical use.●Phase IV and other post-marketing studies to obtain new clinical use data on existing products within approved indications.The specific requirements (e.g., scope of clinical trials) for obtaining regulatory approval vary across different countries and geographic regions. The process may range from one year for a bioequivalence study project to 6 or more years for complex formulations, new indications, or geographic expansion in specific countries, such as China.In the Diagnostics segment, the phases of the research and development process include:●Discovery which focuses on identification of a product that will address a specific therapeutic area, platform, or unmet clinical need.●Concept/Feasibility during which the materials and manufacturing processes are evaluated, testing may include product characterization and analysis is performed to confirm clinical utility.●Development during which extensive testing is performed to demonstrate that the product meets specified design requirements and that the design specifications conform to user needs and intended uses.33 The regulatory requirements for diagnostic products vary across different countries and geographic regions. In the U.S., the FDA classifies diagnostic products into classes (I, II, or III) and the classification determines the regulatory process for approval. While the Diagnostics segment has products in all three classes, the vast majority of its products are categorized as Class I or Class II. Submission of a separate regulatory filing is not required for Class I products. Class II devices typically require pre-market notification to the FDA through a regulatory filing known as a 510(k) submission. Most Class III products are subject to the FDA’s Premarket Approval (PMA) requirements. Other Class III products, such as those used to screen blood, require the submission and approval of a Biological License Application (BLA).In the European Union (EU), diagnostic products are also categorized into different categories and the regulatory process, which has been governed by the European In Vitro Diagnostic Medical Device Directive, depends upon the category, with certain product categories requiring review and approval by an independent company, known as a Notified Body, before the manufacturer can affix a CE mark to the product to declare conformity to the Directive. Other products only require a self-certification process. In the second quarter of 2017, the EU adopted the new In Vitro Diagnostic Regulation (IVDR) which replaces the existing directive in the EU for in vitro diagnostic products. The IVDR will apply after a five-year transition period and imposes additional premarket and postmarket regulatory requirements on manufacturers of such products.In the Medical Devices segment, the research and development process begins with research on a specific technology that is evaluated for feasibility and commercial viability. If the research program passes that hurdle, it moves forward into development. The development process includes evaluation, selection and qualification of a product design, completion of applicable clinical trials to test the product’s safety and efficacy, and validation of the manufacturing process to demonstrate its repeatability and ability to consistently meet pre-determined specifications.Similar to the diagnostic products discussed above, in the U.S., medical devices are classified as Class I, II, or III. Most of Abbott’s medical device products are classified as Class II devices that follow the 510(k) regulatory process or Class III devices that are subject to the PMA process.In the EU, medical devices are also categorized into different classes and the regulatory process, which has been governed by the European Medical Device Directive and the Active Implantable Medical Device Directive, varies by class. Each product must bear a CE mark to show compliance with the Directive. In the second quarter of 2017, the EU adopted the new Medical Devices Regulation (MDR) which replaces the existing directives in the EU for medical devices and imposes additional premarket and postmarket regulatory requirements on manufacturers of such products. While the MDR was previously adopted to apply after a three year transition period, in 2020 the European Parliament postponed the date of application by one year.Some products require submission of a design dossier to the appropriate regulatory authority for review and approval prior to CE marking of the device. For other products, the company is required to prepare a technical file which includes testing results and clinical evaluations but can self-certify its ability to apply the CE mark to the product. Outside the U.S. and the EU, the regulatory requirements vary across different countries and regions.After approval and commercial launch of some medical devices, post-market trials may be conducted either due to a conditional requirement of the regulatory market approval or with the objective of proving product superiority.In the Nutritional segment, the research and development process generally focuses on identifying and developing ingredients and products that address the nutritional needs of particular populations (e.g., infants and adults) or patients (e.g., people with diabetes). Depending upon the country and/or region, if claims regarding a product’s efficacy will be made, clinical studies typically must be conducted.In the U.S., the FDA requires that it be notified of proposed new formulations and formulation or packaging changes related to infant formula products. Prior to the launch of an infant formula or product packaging change, the company is required to obtain the FDA’s confirmation that it has no objections to the proposed product or packaging. For other nutritional products, notification or pre-approval from the FDA is not required unless the product includes a new food additive. In some countries, regulatory approval may be required for certain nutritional products, including infant formula and medical nutritional products.34 Areas of FocusIn 2021 and beyond, Abbott’s significant areas of therapeutic focus will include the following:Established Pharmaceuticals — Abbott focuses on building country-specific portfolios made up of high-quality medicines that meet the needs of people in emerging markets. Over the next several years, Abbott plans to expand its product portfolio in key therapeutic areas with the aim of being among the first to launch new off-patent and differentiated medicines. In addition, Abbott continues to expand existing brands into new markets, implement product enhancements that provide value to patients and acquire strategic products and technology through licensing activities. Abbott is also actively working on the further development of several key brands such as Creon™, Duphaston™, Duphalac™ and Influvac™. Depending on the product, the activities focus on development of new data, markets, formulations, delivery systems, or indications. One example includes the launch of Abbott’s quadrivalent influenza vaccination Influvac® Tetra in 12 markets and an expanded indication in 16 markets to cover children, adolescents and young adults from 3 to 17 years old.Medical Devices — Abbott’s research and development programs focus on:●Cardiac Rhythm Management – Development of next-generation rhythm management technologies, including advanced communication capabilities and leadless pacing therapies.●Heart Failure – Continued enhancements to Abbott’s mechanical circulatory support and pulmonary artery pressure systems, including enhanced clinical performance and usability.●Electrophysiology – Development of next-generation technologies in the areas of ablation, diagnostic, mapping, and visualization and recording.●Vascular – Development of next-generation technologies for use in coronary and peripheral vascular procedures.●Structural Heart – Development of minimally-invasive transcatheter and surgical devices for the repair and replacement of heart valves and other structural heart conditions.●Neuromodulation – Development of additional clinical evidence and next-generation technologies leveraging digital health to improve patient and physician engagement to treat chronic pain, movement disorders and other indications.●Diabetes Care – Develop enhancements and additional indications for the FreeStyle Libre platform of continuous glucose monitoring products to help patients improve their ability to manage diabetes and for use beyond diabetes. Nutritionals — Abbott is focusing its research and development spend on platforms that span the pediatric and adult nutrition areas: gastro intestinal/immunity health, brain health, mobility and metabolism, and user experience platforms. Numerous new products that build on advances in these platforms are currently under development, including clinical outcome testing, and are expected to be launched over the coming years.Core Laboratory Diagnostics — Abbott continues to commercialize its next-generation blood screening, immunoassay, clinical chemistry and hematology systems, along with assays, including a focus on unmet medical need, in various areas including infectious disease, cardiac care, metabolics, and oncology, as well as informatics solutions to help optimize diagnostics laboratory performance and automation solutions to increase efficiency in laboratories.Molecular Diagnostics — Several new molecular in vitro diagnostic (IVD) tests are in various stages of development and launch.Rapid Diagnostics — Abbott’s research and development programs focus on the development of diagnostic products for infectious disease, cardiometabolic disease and toxicology.In addition, the Diagnostics Divisions are pursuing the FDA’s customary regulatory process for various COVID-19 tests for which an EUA was obtained in 2020.35 Given the diversity of Abbott’s business, its intention to remain a broad-based health care company and the numerous sources for potential future growth, no individual project is expected to be material to cash flows or results of operations over the next five years. Factors considered included research and development expenses projected to be incurred for the project over the next year relative to Abbott’s total research and development expenses, as well as qualitative factors, such as marketplace perceptions and impact of a new product on Abbott’s overall market position. There were no delays in Abbott’s 2020 research and development activities that are expected to have a material impact on operations.While the aggregate cost to complete the numerous projects currently in development is expected to be material, the total cost to complete will depend upon Abbott’s ability to successfully finish each project, the rate at which each project advances, and the ultimate timing for completion. Given the potential for significant delays and the risk of failure inherent in the development of medical device, diagnostic and pharmaceutical products and technologies, it is not possible to accurately estimate the total cost to complete all projects currently in development. Abbott plans to manage its portfolio of projects to achieve research and development spending that will be competitive in each of the businesses in which it participates, and such spending is expected to approximate 7.0 percent of total Abbott sales in 2021. Abbott does not regularly accumulate or make management decisions based on the total expenses incurred for a particular development phase in a given period.GoodwillAt December 31, 2020, goodwill recorded as a result of business combinations totaled $23.7 billion. Goodwill is reviewed for impairment annually in the third quarter or when an event that could result in an impairment occurs, using a quantitative assessment to determine whether it is more likely than not that the fair value of any reporting unit is less than its carrying amount. The income and market approaches are used to calculate the fair value of each reporting unit. The results of the last impairment test indicated that the fair value of each reporting unit was substantially in excess of its carrying value.Financial ConditionCash FlowNet cash from operating activities amounted to $7.9 billion, $6.1 billion and $6.3 billion in 2020, 2019 and 2018, respectively. The increase in Net cash from operating activities in 2020 was primarily due to the favorable cash flow impact of higher segment operating earnings, lower payments related to interest, integration expenses, and restructuring actions, and the proceeds from a litigation settlement partially offset by an increased investment in working capital and higher income tax payments. The decrease in Net cash from operating activities in 2019 was primarily due to an increased investment in working capital, timing of pension contributions relative to 2018 and higher income tax payments, partially offset by the favorable cash flow impact of improved segment operating earnings and lower interest and acquisition-related expenses.While a significant portion of Abbott’s cash and cash equivalents at December 31, 2020, are reinvested in foreign subsidiaries, Abbott does not expect such reinvestment to affect its liquidity and capital resources. Due to the enactment of the TCJA, if these funds were needed for operations in the U.S., Abbott does not expect to incur significant additional income taxes in the future to repatriate these funds.Abbott funded $400 million in 2020, $382 million in 2019 and $114 million in 2018 to defined benefit pension plans. Abbott expects pension funding of approximately $410 million in 2021 for its pension plans. Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends. Debt and CapitalAt December 31, 2020, Abbott’s long-term debt rating was A by Standard & Poor’s Corporation and A3 by Moody’s. Abbott expects to maintain an investment grade rating.36 Abbott has readily available financial resources, including unused lines of credit that support commercial paper borrowing arrangements and provide Abbott with the ability to borrow up to $5 billion on an unsecured basis. The lines of credit are part of a Five Year Credit Agreement (Revolving Credit Agreement) that Abbott entered into on November 12, 2020. At that time, Abbott also terminated its 2018 revolving credit agreement. There were no outstanding borrowings under the 2018 revolving credit agreement at the time of its termination. Any borrowings under the Revolving Credit Agreement will mature and be payable on November 12, 2025. Any borrowings under the Revolving Credit Agreement will bear interest, at Abbott’s option, based on either a base rate or Eurodollar rate, plus an applicable margin based on Abbott’s credit ratings.In 2020, financing activities related to the issuance and repayment of long-term debt included the following:●On June 24, 2020, Abbott completed the issuance of $1.3 billion aggregate principal amount of senior notes, consisting of $650 million of its 1.15% Notes due 2028 and $650 million of its 1.40% Notes due 2030. ●On September 28, 2020, Abbott repaid the €1.140 billion outstanding principal amount of its 0.00% Notes due 2020 upon maturity. The repayment equated to approximately $1.3 billion.As of December 31, 2020, Abbott’s total debt is $18.7 billion.In 2018 and 2019, Abbott committed to reducing its debt levels which had increased as part of the acquisitions of St. Jude Medical and Alere in 2017. In 2018, net repayments totaled approximately $8.3 billion of debt.On February 24, 2019, Abbott redeemed the $500 million outstanding principal amount of its 2.80% Notes due 2020.In September 2019, the board of directors authorized the early redemption of up to $5 billion of outstanding long-term notes. This bond redemption authorization superseded the board’s previous authorization under which $700 million had not yet been redeemed. On December 19, 2019, Abbott redeemed the $2.850 billion outstanding principal amount of its 2.90% Notes due 2021. $2.15 billion of the 2019 $5 billion redemption authorization remains available as of December 31, 2020.On November 19, 2019, Abbott’s wholly owned subsidiary, Abbott Ireland Financing DAC, completed a euro debt offering of €1.180 billion of long-term debt. The proceeds equated to approximately $1.3 billion. The Notes are guaranteed by Abbott.On November 21, 2019, Abbott borrowed ¥59.8 billion under a 5-year term loan and designated the yen-denominated loan as a hedge of its net investment in certain foreign subsidiaries. The term loan bears interest at TIBOR plus a fixed spread, and the interest rate is reset quarterly. The proceeds equated to approximately $550 million.In total, these 2019 transactions resulted in the repayment of approximately of $1.6 billion of debt, net of borrowings.In September 2014, the board of directors authorized the repurchase of up to $3.0 billion of Abbott’s common shares from time to time. Under the program authorized in 2014, Abbott repurchased 36.2 million shares at a cost of $1.666 billion in 2015, 10.4 million shares at a cost of $408 million in 2016, 1.9 million shares at a cost of $130 million in 2018, 6.3 million shares at a cost of $525 million in 2019, and 1.6 million shares at a cost of $173 million in 2020 for a total of approximately $2.9 billion. In October 2019, the board of directors authorized the repurchase of up to $3 billion of Abbott’s common shares from time to time. The 2019 authorization is in addition to the approximately $100 million unused portion of the share repurchase program authorized in 2014.On April 27, 2016, the board of directors authorized the issuance and sale for general corporate purposes of up to 75 million common shares that would result in proceeds of up to $3 billion. No shares have been issued under this authorization.Abbott declared dividends of $1.53 per share in 2020 compared to $1.32 per share in 2019, an increase of approximately 16 percent. Dividends paid were $2.560 billion in 2020 compared to $2.270 billion in 2019. The year-over-year change in dividends paid primarily reflects the impact of the increase in the dividend rate.37 Working CapitalWorking capital was $8.5 billion at December 31, 2020 and $4.8 billion at December 31, 2019. The increase was due in large part to the higher level of cash and cash equivalents, which was due primarily to the increase in cash generated from operating activities, and the repayment of the current portion of long term debt after the issuance of new long term notes in 2020. Working capital also increased due to the higher levels of accounts receivable and inventory partially offset by an increase in accounts payable associated with the growth of the business.Abbott monitors the credit worthiness of customers and establishes an allowance that reflects the current estimate of credit losses expected to be incurred over the life of the financial asset. Abbott considers various factors in establishing, monitoring, and adjusting its allowance for doubtful accounts, including the aging of the accounts and aging trends, the historical level of charge-offs, and specific exposures related to particular customers. Abbott also monitors other risk factors and forward-looking information, such as country risk, when determining credit limits for customers and establishing adequate allowances.Capital ExpendituresCapital expenditures of $2.2 billion in 2020, $1.6 billion in 2019 and $1.4 billion in 2018 were principally for upgrading and expanding manufacturing and research and development facilities and equipment in various segments, investments in information technology, and laboratory instruments placed with customers. The 2020 increase in capital expenditures primarily reflects the building of capacity for the manufacture of COVID-19 diagnostics tests.Contractual ObligationsThe table below summarizes Abbott’s estimated contractual obligations as of December 31, 2020.​​​​​​​​​​​​​​​​​​​Payments Due By Period​​​​​​​​​​​2026 and(in millions) Total 2021 2022‑2023 2024‑2025 ThereafterLong‑term debt, including current maturities ​$ 18,490​$ 7​$ 3,203​$ 2,802​$ 12,478Interest on debt obligations ​ 9,011​ 596​ 1,152​ 1,024​ 6,239Operating lease obligations​ 1,315​ 272​ 405​ 231​ 407Purchase commitments (a)​ 4,757​ 4,192​ 478​ 77​ 10Other long‑term liabilities (b)​ 3,845​ —​ 1,959​ 1,266​ 620Total (c)​$ 37,418​$ 5,067​$ 7,197​$ 5,400​$ 19,754(a)Purchase commitments are for purchases made in the normal course of business to meet operational and capital expenditure requirements.(b)Other long-term liabilities include estimated payments for the transition tax under the TCJA, net of applicable credits.(c)Net unrecognized tax benefits totaling approximately $740 million are excluded from the table above as Abbott is unable to reasonably estimate the period of cash settlement with the respective taxing authorities on such items. See Note 15 — Taxes on Earnings from Continuing Operations for further details. The company has employee benefit obligations consisting of pensions and other post-employment benefits, including medical and life, which have been excluded from the table. A discussion of the company’s pension and post-retirement plans, including funding matters is included in Note 14 — Post-employment Benefits.​38 Contingent ObligationsAbbott periodically acquires a business or product rights in which Abbott agrees to pay contingent consideration based on attaining certain thresholds or based on the occurrence of certain events.Legislative IssuesAbbott’s primary markets are highly competitive and subject to substantial government regulations throughout the world. Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services. It is not possible to predict the extent to which Abbott or the health care industry in general might be adversely affected by these factors in the future. A more complete discussion of these factors is contained in Item 1, Business, and Item 1A, Risk Factors.Recently Issued Accounting StandardsIn December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which among other things, eliminates certain exceptions in the current rules regarding the approach for intraperiod tax allocations and the methodology for calculating income taxes in an interim period, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard becomes effective for Abbott in the first quarter of 2021. Adoption of this new standard will not have a material impact on Abbott’s consolidated financial statements.In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act, from Accumulated other comprehensive income (loss) to retained earnings (Earnings employed in the business). Abbott adopted the new standard at the beginning of the fourth quarter of 2018. As a result of the adoption of the new standard, approximately $337 million of stranded tax effects were reclassified from Accumulated other comprehensive income (loss) to Earnings employed in the business.In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs. Abbott adopted the standard on January 1, 2018, using a modified retrospective approach and recorded a cumulative catch-up adjustment to Earnings employed in the business in the Consolidated Balance Sheet that was not significant.In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which changes the methodology to be used to measure credit losses for certain financial instruments and financial assets, including trade receivables. The new methodology requires the recognition of an allowance that reflects the current estimate of credit losses expected to be incurred over the life of the financial asset. Abbott adopted the standard on January 1, 2020 and recorded a cumulative adjustment that was not significant to Earnings employed in the business in the Consolidated Balance Sheet. Private Securities Litigation Reform Act of 1995 — A Caution Concerning Forward-Looking StatementsUnder the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Abbott cautions investors that any forward-looking statements or projections made by Abbott, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Economic, competitive, governmental, technological and other factors that may affect Abbott’s operations are discussed in Item 1A, Risk Factors.​​39 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKFinancial Instruments and Risk ManagementMarket Price Sensitive InvestmentsThe fair value of equity securities held by Abbott with a readily determinable fair value was approximately $20 million and $11 million as of December 31, 2020 and 2019, respectively. These equity securities are subject to potential changes in fair value. A hypothetical 20 percent decrease in the share prices of these investments would decrease their fair value at December 31, 2020 by approximately $4 million. Changes in the fair value of these securities are recorded in earnings. The fair value of investments in mutual funds that are held in a rabbi trust for the purpose of paying benefits under a deferred compensation plan was approximately $366 million and $346 million as of December 31, 2020 and 2019, respectively. Changes in the fair value of these investments, as well as an offsetting change in the benefit obligation, are recorded in earnings.Non-Publicly Traded Equity SecuritiesAbbott holds equity securities that are not traded on public stock exchanges. The carrying value of these investments was $113 million and $158 million as of December 31, 2020 and 2019, respectively. No individual investment is recorded at a value in excess of $15 million. Abbott measures these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.Interest Rate Sensitive Financial InstrumentsAt December 31, 2020 and 2019, Abbott had interest rate hedge contracts totaling $2.9 billion to manage its exposure to changes in the fair value of debt. The effect of these hedges is to change the fixed interest rate to a variable rate for the portion of the debt that is hedged. Abbott does not use derivative financial instruments, such as interest rate swaps, to manage its exposure to changes in interest rates for its investment securities. The fair value of long-term debt at December 31, 2020 and 2019 amounted to $22.8 billion and $20.8 billion, respectively (average interest rates of 3.3% as of December 31, 2020 and 2019) with maturities through 2046. At December 31, 2020 and 2019, the fair value of current and long-term investment securities amounted to approximately $1.1 billion and $1.2 billion, respectively. A hypothetical 100-basis point change in the interest rates would not have a material effect on cash flows, income or fair values.Foreign Currency Sensitive Financial InstrumentsCertain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts are designated as cash flow hedges of the variability of the cash flows due to changes in foreign currency exchange rates and are marked-to-market with the resulting gains or losses reflected in Accumulated other comprehensive income (loss). Gains or losses will be included in Cost of products sold at the time the products are sold, generally within the next twelve to eighteen months. At December 31, 2020 and 2019, Abbott held $8.1 billion and $6.8 billion, respectively, of such contracts. Contracts held at December 31, 2020 will mature in 2021 or 2022 depending upon the contract. Contracts held at December 31, 2019 matured in 2020 or will mature in 2021 depending upon the contract.Abbott enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated intercompany loans and trade payables and third-party trade payables and receivables. The contracts are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by losses or gains on the foreign currency exposure being managed. At December 31, 2020 and 2019, Abbott held $11.0 billion and $9.1 billion, respectively, of such contracts, which mature in the next 13 months.40 In November 2019, Abbott borrowed ¥59.8 billion under a 5-year term loan and designated the yen-denominated loan as a hedge of the net investment in certain foreign subsidiaries. The proceeds equated to approximately $550 million. The value of this long-term debt was approximately $577 million and $546 million as of December 31, 2020 and December 31, 2019, respectively. The change in the value of the debt, which is due to changes in foreign exchange rates, was recorded in Accumulated other comprehensive income (loss), net of tax.The following table reflects the total foreign currency forward exchange contracts outstanding at December 31, 2020 and 2019:​​​​​​​​​​​​​​​​​​​​2020​2019​ ​​ Weighted Fair and ​​ Weighted Fair and​​​​​Average​Carrying Value​​​​Average​Carrying Value​​Contract​Exchange​Receivable/​Contract​Exchange​Receivable/(dollars in millions)​Amount​Rate​(Payable)​Amount​Rate​(Payable)Primarily U.S. Dollars to be exchanged for the following currencies: ​ ​ ​ ​ Euro​$ 7,781 1.1821​$ (91)​$ 7,085 1.1189​$ 65Chinese Yuan​ 2,401 6.4900​ (99)​ 2,177 7.0216​ 4Japanese Yen​ 1,589 105.3861​ (20)​ 1,092 106.8530​ 13All other currencies​ 7,369 n/a​ (198)​ 5,532 n/a​ (23)Total​$ 19,140 ​​$ (408)​$ 15,886 ​$ 59​​​41

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion should be read in conjunction with the consolidated financial statements as of December 26, 2020 and December 28, 2019 and for each of the three years in the period ended December 26, 2020 and related notes, which are included in this Annual Report on Form 10-K as well as with the other sections of this Annual Report on Form 10-K, including “Part I, Item 1: Business,” “Part II, Item 6: Selected Financial Data” and “Part II, Item 8: Financial Statements and Supplementary Data.”IntroductionIn this section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for 2020 compared to 2019, an analysis of changes in our financial condition and a discussion of our contractual obligations and off-balance sheet arrangements. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019.OverviewDuring 2020, we continued to build on our technical, operational and financial foundation to drive our long-term growth strategy. We delivered strong financial results and further extended our industry-leading product portfolio despite the backdrop of the COVID-19 pandemic. Net revenue for 2020 was $9.8 billion, an increase of 45% compared to 2019 net revenue of $6.7 billion. Gross margin, as a percentage of net revenue for 2020, was 45%, compared to 43% in 2019. Our operating income for 2020 improved to $1.4 billion compared to operating income of $631 million for 2019. Our net income for 2020 improved to $2.5 billion compared to $341 million in the prior year. We recognized a $1.3 billion income tax benefit upon the release of a portion of the valuation allowance on deferred tax assets. We made significant progress towards improving our balance sheet in 2020. Cash, cash equivalents and short-term investments as of December 26, 2020 were $2.3 billion, compared to $1.5 billion at the end of 2019. The aggregate principal amount of total debt as of December 26, 2020 was $338 million, compared to $563 million as of December 28, 2019.During 2020, we consistently executed our product roadmap and launched multiple products in leading-edge manufacturing technologies. We introduced a number of 7 nanometer (nm) products during the year, including new additions to our 3rd Gen AMD Ryzen™ desktop processor family, the AMD Ryzen 3 3100 and AMD Ryzen 3 3300X for the mainstream market, and the AMD Ryzen 9 3900XT, AMD Ryzen 7 3800XT and AMD Ryzen 5 3600XT processors for the enthusiast market. In July 2020, we introduced the AMD Ryzen Threadripper™ PRO Processor family designed for professional workstations from OEMs to system integrators and AMD Ryzen 4000 Series desktop processors with Radeon™ graphics for consumers, gamers, streamers and creators. We also introduced AMD Athlon™ 3000 Series desktop processors using the same Zen core architecture and built-in Radeon graphics as the AMD Ryzen desktop processor family. Also, the AMD Ryzen PRO 4000 series and AMD Athlon PRO 3000 series desktop processors were introduced for the commercial market. In October 2020, we introduced the AMD Ryzen 5000 Series desktop processor family powered by “Zen 3” core architecture. We also expanded our notebook products in 2020. In May 2020, we announced the global availability of the AMD Ryzen™ PRO 4000 Series Mobile family for commercial notebooks built with enterprise-grade AMD PRO technologies, which deliver a set of security and manageability features for Enterprise IT deployments. Also, we announced the AMD Ryzen 3000 C-Series mobile processors and the AMD Athlon 3000 C-Series mobile processors for Chromebook platforms designed for multi-tasking and content creation in distance learning and remote working. With respect to our graphics products, we expanded our professional offerings with the AMD Radeon™ Pro VII workstation graphics card designed for broadcast and engineering professionals. In August 2020, we announced the availability of the new AMD Radeon Pro 5000 series GPUs for the updated 27-inch iMac bringing a wide variety of graphically intensive applications and workloads to consumer and professional users. We also introduced the AMD Radeon RX 6000 Series graphics cards built on AMD RDNA™ 2 gaming architecture and designed for enthusiast-class PC gaming. In November 2020, we introduced our data center graphics processor, the AMD Instinct™ MI100 GPU accelerator, the first accelerator to use new AMD CDNA architecture dedicated to HPC workloads. We expanded our EPYC server family during the year. In April 2020, we announced the extension of the 2nd Gen AMD EPYC processor family with three new processors: AMD EPYC 7F32 (8 cores), AMD EPYC 7F52 (16 cores) and AMD EPYC 7F72 (24 cores). These new processors leverage up to 500 MHz of additional base frequency and large amounts of cache. In October 2020, we announced the AMD EPYC™ processor based Azure Dav4, Eav4, 39Easv4 and Lsv2 VMs for use to improve real-time analysis on large volumes of data streaming from applications, websites and more. We also expanded our embedded processor family with two new AMD Ryzen Embedded R1000 low-power processors that provide customers with a thermal design power (TDP) range of 6 up to 10 watts. In November 2020, we launched the AMD Ryzen Embedded V2000 series processor built on 7 nm process technology, “Zen 2” cores and high-performance AMD Radeon graphics.While the current COVID-19 pandemic continues to impact our business operations and practices, and we expect that it may continue to impact our business, we experienced limited financial disruption during 2020. Although many of our offices remained open to enable critical on-site business functions in accordance with local government guidelines, most of our employees worked from home during 2020. During the second half of 2020, the majority of our employees in China returned to work and we maintained normal business operations subject to local government health measures. We continue to monitor and take measures to protect the health and safety of our employees, and support those employees who work from home so that they can be productive. We monitor demand signals as we adjust our supply chain requirements based on changing customer needs and demands. We also assess our product schedules and roadmaps to make any adjustments that may be necessary to support remote working requirements and address the geographic and market demand shifts caused by COVID-19.As part of our strategy to establish AMD as the industry’s high performance computing leader, we announced in October 2020 that we entered into a definitive agreement to acquire Xilinx, Inc. in an all-stock transaction. The transaction is currently expected to close by the end of calendar year 2021.We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements. Critical Accounting EstimatesOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, goodwill and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.Management believes the following critical accounting estimates are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments.Revenue Allowances. Revenue contracts with our customers include variable amounts which we evaluate under ASC 606-10-32-8 through 14 in order to determine the net amount of consideration to which we are entitled and which we recognize as revenue. We determine the net amount of consideration to which we are entitled by estimating the most likely amount of consideration we expect to receive from the customer after adjustments to the contract price for rights of return and rebates to our OEM customers and rights of return, rebates and price protection on unsold merchandise to our distributor customers.We base our determination of necessary adjustments to the contract price by reference to actual historical activity and experience, including actual historical returns, rebates and credits issued to OEM and distributor customers adjusted, as applicable, to include adjustments, if any, for known events or current economic conditions, or both.Our estimates of necessary adjustments for distributor price incentives and price protection on unsold products held by distributors are based on actual historical incentives provided to distributor customers and known future price movements based on our internal and external market data analysis.Our estimates of necessary adjustments for OEM price incentives utilize, in addition to known pricing agreements, actual historical rebate attainment rates and estimates of future OEM rebate program attainment based on internal and external market data analysis.40We offer incentive programs through cooperative advertising and marketing promotions. Where funds provided for such programs can be estimated, we recognize a reduction to revenue at the time the related revenue is recognized; otherwise, we recognize such reduction to revenue at the later of when: i) the related revenue transaction occurs; or ii) the program is offered. For transactions where we reimburse a customer for a portion of the customer’s cost to perform specific product advertising or marketing and promotional activities, such amounts are recognized as a reduction to revenue unless they qualify for expense recognition.We also provide limited product return rights to certain OEMs and to most distribution customers. These return rights are generally limited to a contractual percentage of the customer’s prior quarter shipments, although, from time to time we may approve additional product returns beyond the contractual arrangements based on the applicable facts and circumstances. In order to estimate adjustments to revenue to account for these returns, including product restocking rights provided to distributor and OEM customers, we utilize relevant, trended actual historical product return rate information gathered, adjusted for actual known information or events, as applicable.Overall, our estimates of adjustments to contract price due to variable consideration under our contracts with OEM and distributor customers, based on our assumptions and include adjustments, if any, for known events, have been materially consistent with actual results; however, these estimates are subject to management’s judgment and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenue and operating results.Inventory Valuation. We value inventory at standard cost, adjusted to approximate the lower of actual cost or estimated net realizable value using assumptions about future demand and market conditions. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances. In determining excess or obsolescence reserves for products, we consider assumptions such as changes in business and economic conditions, other-than-temporary decreases in demand for our products, and changes in technology or customer requirements. In determining the lower of cost or net realizable value reserves, we consider assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices. If in any period we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales, resulting in a negative impact to our gross margin in that period. If in any period we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, related revenue would be recorded with a lower or no offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period. Overall, our estimates of inventory carrying value adjustments have been materially consistent with actual results.Goodwill. We perform our goodwill impairment analysis as of the first day of the fourth quarter of each year and, if certain events or circumstances indicate that an impairment loss may have been incurred, on a more frequent basis. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment.We first analyze qualitative factors to determine if it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. Qualitative factors include industry and market considerations, overall financial performance, share price trends and market capitalization and Company-specific events. If we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, we do not proceed to perform a quantitative impairment test. If we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative goodwill impairment test will be performed by comparing the fair value of each reporting unit to its carrying value. A quantitative impairment analysis, if necessary, considers the income approach, which requires estimates of the present value of expected future cash flows to determine a reporting unit’s fair value. Significant estimates include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates, and future economic and market conditions. A goodwill impairment charge is recognized for the amount by which a reporting unit’s fair value is less than its carrying value, not to exceed the total amount of goodwill allocated to that reporting unit.Income Taxes. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.41We regularly assess the likelihood that we will be able to recover our deferred tax assets. Unless recovery is considered more-likely-than-not (a probability level of more than 50%), we will record a charge to income tax expense in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable or maintain the valuation allowance recorded in prior periods. When considering all available evidence, if we determine it is more-likely-than-not we will realize our deferred tax assets, we will reverse some or all of the existing valuation allowance, which would result in a credit to income tax expense and the establishment of an asset in the period of reversal.In determining the need to establish or maintain a valuation allowance, we consider the four sources of jurisdictional taxable income: (i) carryback of net operating losses to prior years; (ii) future reversals of existing taxable temporary differences; (iii) viable and prudent tax planning strategies; and (iv) future taxable income exclusive of reversing temporary differences and carryforwards. Through the end of 2020, we demonstrated consistent, continued and increasing profitability over the preceding three-year period. Our ability to sustain and grow our profitability is supported by the continued positive momentum of our consumer and commercial products, including our newly released desktop, mobile and graphics processors, greater market acceptance for our server products, the successful adoption of our new game console processor products, and our leadership in the continued development of HPC products. In assessing the realizability of the deferred tax assets, we considered the highly dynamic and competitive landscape of our industry, the continued performance and market acceptance of our new products, and the impact of such market acceptance on our estimates of future profitability. As a result, in the fourth quarter of 2020, we concluded that our history of profitable operating results, including the current period results, along with increasingly favorable forecasts of continued future profitability, provided sufficient positive evidence supporting the realizability of a certain amount of our U.S. deferred tax assets, accordingly, the release of the related valuation allowance previously recorded against these deferred tax assets, resulting in a tax benefit of $1.3 billion in the fourth quarter of 2020. We continue to maintain a valuation allowance of approximately $1.6 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to current limitations, including limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. The state and foreign valuation allowance maintained is due to lack of sufficient sources of income.In addition, the calculation of our tax liabilities involves addressing uncertainties in the application of complex, multi-jurisdictional tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing authorities. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge could result.Results of OperationsWe report our financial performance based on the following two reportable segments: the Computing and Graphics segment and the Enterprise, Embedded and Semi-Custom segment.Additional information on our reportable segments is contained in Note 14 – Segment Reporting of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).Our operating results tend to vary seasonally. Historically, our net revenue has been generally higher in the second half of the year than in the first half of the year, although market conditions and product transitions could impact these trends.42The following table provides a summary of net revenue and operating income (loss) by segment for 2020, 2019 and 2018.202020192018 (In millions)Net revenue:Computing and Graphics$6,432 $4,709 $4,125 Enterprise, Embedded and Semi-Custom3,331 2,022 2,350 Total net revenue$9,763 $6,731 $6,475 Operating income (loss):Computing and Graphics$1,266 $577 $470 Enterprise, Embedded and Semi-Custom391 263 163 All Other(288)(209)(182)Total operating income$1,369 $631 $451 Computing and GraphicsComputing and Graphics net revenue of $6.4 billion in 2020 increased by 37%, compared to $4.7 billion in 2019, primarily as a result of a 37% increase in unit shipments and a 2% increase in average selling price. The increase in unit shipments was primarily due to higher demand for our Ryzen processors. The increase in average selling price was primarily driven by a richer mix of client processors from higher sales of our Ryzen processors, which have a higher average selling price, partially offset by lower average selling price for our Radeon products due to product cycle timing.Computing and Graphics operating income was $1.3 billion in 2020 compared to $577 million in 2019. The increase in operating income was primarily driven by the margin contribution from higher sales which more than offset higher operating expenses. Operating expenses increased for the reasons outlined under “Expenses” below.Enterprise, Embedded and Semi-CustomEnterprise, Embedded and Semi-Custom net revenue of $3.3 billion in 2020 increased by 65% compared to net revenue of $2.0 billion in 2019, primarily driven by higher sales of our EPYC server processors and higher semi-custom revenue.Enterprise, Embedded and Semi-Custom operating income was $391 million in 2020 compared to $263 million in 2019. The increase in operating income was primarily due to the margin contribution from the increase in revenue which more than offset higher operating expenses in 2020 and a $60 million licensing gain recorded in 2019. Operating expenses increased for the reasons outlined under “Expenses” below.All OtherAll Other operating loss of $288 million in 2020 included stock-based compensation expense of $274 million and acquisition-related costs of $14 million.All Other operating loss of $209 million in 2019 included $197 million of stock-based compensation expense and a $12 million contingent loss accrual on a legal matter.43Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Expense and Income TaxesThe following is a summary of certain consolidated statement of operations data for 2020, 2019 and 2018:202020192018 (In millions, except for percentages)Net revenue$9,763 $6,731 $6,475 Cost of sales5,416 3,863 4,028 Gross profit4,347 2,868 2,447 Gross margin45 %43 %38 %Research and development1,983 1,547 1,434 Marketing, general and administrative995 750 562 Licensing gain— (60)— Interest expense(47)(94)(121)Other expense, net(47)(165)— Income tax provision (benefit)(1,210)31 (9)Gross MarginGross margin as a percentage of net revenue was 45% in 2020 compared to 43% in 2019. The increase in gross margin was primarily driven by sales of Ryzen and EPYC processors in 2020, which have a higher gross margin than the corporate average, partially offset by sales of semi-custom products and Radeon products, which have a lower gross margin than the corporate average.ExpensesResearch and Development ExpensesResearch and development expenses of $2.0 billion in 2020 increased by $436 million, or 28%, compared to $1.5 billion in 2019. The increase was primarily driven by an increase in product development costs in both the Computing and Graphics and Enterprise and Embedded and Semi-Custom segments, due to an increase in headcount and higher annual employee incentives driven by improved financial performance.Marketing, General and Administrative ExpensesMarketing, general and administrative expenses of $995 million in 2020 increased by $245 million, or 33%, compared to $750 million in 2019. The increase was primarily due to an increase in go-to-market activities in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments, and an increase in headcount and higher annual employee incentives driven by improved financial performance.Licensing GainDuring 2019, we recognized $60 million as licensing gain associated with the licensed IP to THATIC JV. See Note 4 of “Notes to Consolidated Financial Statements” for additional information.Interest ExpenseInterest expense of $47 million in 2020 decreased by $47 million compared to $94 million in 2019, primarily due to lower debt balances.Other Expense, NetOther expense, net decreased in 2020 by $118 million from net of $165 million in 2019. Other expense, net for both periods primarily comprised of losses on redemptions, repurchases and conversions of our outstanding debt and convertible debt instruments.44Income Taxes Provision (Benefit)Through the end of 2020, we demonstrated consistent, continued and increasing profitability over the preceding three-year period. Our ability to sustain and grow such profitability is supported by the continued positive momentum of our consumer and commercial products including our newly released desktop, mobile and graphics processors, greater market acceptance for our server products, the successful adoption of our new game console processor products, and our continued leadership in the development of HPC products. In assessing the realizability of the deferred tax assets, we considered the highly dynamic and competitive landscape of our industry, the continued performance and market acceptance of our new products, and the impact of such market acceptance on forecasts of future profitability. As a result, in the fourth quarter of 2020, we concluded that our history of profitable operating results, including the current period results, along with increasingly favorable forecasts of continued future profitability, provided sufficient positive evidence supporting the realizability of a certain amount of our U.S. deferred tax assets and, accordingly, the release of the related valuation allowance previously recorded against these deferred tax assets, resulting in a tax benefit of $1.3 billion in the fourth quarter of 2020. We continue to maintain a valuation allowance of approximately $1.6 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to current limitations, including limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. The state and foreign valuation allowance maintained is due to lack of sufficient sources of income.We recorded an income tax benefit of $1.2 billion in 2020 and an income tax provision of $31 million in 2019. The income tax benefit in 2020 was primarily due to $1.3 billion of tax benefit from the valuation allowance release in the U.S. This benefit was partially offset by approximately $10 million of withholding tax expense related to cross-border transactions, $13 million of state and foreign taxes, and a $75 million increase in valuation allowance against certain state and foreign tax credits, which are reflected as part of the state taxes and foreign rate benefit in the reconciliation table in the tax footnote.The income tax provision in 2019 was primarily due to $22 million of withholding taxes related to cross-border transactions and $22 million of foreign income taxes in profitable locations, partially offset by a $13 million benefit for a reduction of U.S. income taxes accrued in the prior year.International SalesInternational sales as a percentage of net revenue were 77% in 2020 and 74% in 2019. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Substantially all of our sales transactions are denominated in U.S. dollars.FINANCIAL CONDITIONLiquidity and Capital ResourcesAs of December 26, 2020, our cash, cash equivalents and short-term investments were $2.3 billion compared to $1.5 billion as of December 28, 2019. The percentage of cash and cash equivalents held domestically was 94% as of December 26, 2020, and 90% as of December 28, 2019. Our operating, investing and financing cash flow activities for fiscal 2020, 2019 and 2018 were as follows:202020192018 (In millions)Net cash provided by (used in):Operating activities$1,071 $493 $34 Investing activities(952)(149)(170)Financing activities6 43 28 Net increase (decrease) in cash and cash equivalents, and restricted cash$125 $387 $(108)Our aggregate principal debt obligations were $338 million and $563 million as of December 26, 2020 and December 28, 2019, respectively.45We believe our cash, cash equivalents and short-term investments balance along with our Revolving Credit Facility entered into in June 2019 (refer to Note 6 of “Notes to Consolidated Financial Statements for additional information) will be sufficient to fund operations, including capital expenditures, over the next 12 months. We believe we will be able to access the capital markets should we require additional funds. However, we cannot assure that such funds will be available on favorable terms, or at all.Operating ActivitiesOur working capital cash inflows and outflows from operations are primarily cash collections from our customers, payments for inventory purchases and payments for employee-related expenditures.Net cash provided by operating activities was $1.1 billion in 2020, primarily due to our net income of $2.5 billion, adjusted for non-cash adjustments of $488 million and net cash outflows of $931 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $219 million increase in accounts receivable driven primarily by $1.1 billion higher revenue in the fourth quarter of 2020 compared to the fourth quarter of 2019, partially offset by higher collections due to better revenue linearity in the fourth quarter of 2020 compared to the fourth quarter of 2019, a $417 million increase in inventories driven by an increase in product build in support of customer demand, a $231 million increase in prepaid expenses and other assets due primarily to an increase in vendor credits, a $513 million decrease in accounts payable primarily due to timing of payments to our suppliers, offset by a $574 million increase in accrued liabilities and other driven by higher marketing accruals and higher accrued annual employee incentives due to improved financial performance.Net cash provided by operating activities was $493 million in 2019, primarily due to our net income of $341 million, adjusted for non-cash and non-operating charges of $694 million and net cash outflows of $542 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $623 million increase in account receivable driven primarily by $708 million higher revenue during the fourth quarter of 2019 compared to the fourth quarter of 2018, a $137 million increase in inventories driven by an increase in wafer purchases during the fourth quarter of 2019 compared to the fourth quarter of 2018, and a $176 million increase in prepaid expenses and other assets due primarily to an increase in vendor credits and other non-current assets, partially offset by a $153 million increase in accounts payable due to an increase in inventory purchases and a $220 million increase in accrued liabilities and other driven by higher marketing accruals.Investing ActivitiesNet cash used in investing activities was $952 million in 2020, which primarily consisted of $850 million for purchases of short-term investments and $294 million for purchases of property and equipment, partially offset by $192 million for maturities of short-term investments.Net cash used in investing activities was $149 million in 2019, which primarily consisted of $217 million for purchases of property and equipment, partially offset by a net cash inflow from purchases and maturities of available-for-sale debt securities of $41 million.Financing ActivitiesNet cash provided by financing activities was $6 million in 2020, which primarily consisted of proceeds from the issuance of common stock under our employee equity plans of $85 million, partially offset by $78 million of common stock repurchased to cover employee withholding taxes on vesting of employee equity grants. We borrowed $200 million of short-term debt during the second quarter of 2020 and paid off the balance during the third quarter of 2020.Net cash provided by financing activities was $43 million in 2019, which primarily consisted of a cash inflow of $449 million from the warrant exercised by West Coast Hitech L.P. (WCH) and $74 million from the issuance of common stock under our stock-based compensation equity plans, partially offset by $473 million of cash used for debt reduction activities during the year.46Contractual ObligationsThe following table summarizes our consolidated principal contractual cash obligations, as of December 26, 2020, and is supplemented by the discussion following the table:Payment due by period(In millions)Total202120222023202420252026 and thereafterTerm debt (1)$338 $— $312 $— $— $— $26 Aggregate interest obligation (2)54 25 25 1 1 1 1 Other long-term liabilities (3)159 55 64 19 10 8 3 Operating leases (4)284 52 55 48 41 34 54 Purchase obligations (5)3,032 2,971 7 15 15 15 9 Total contractual obligations (6)$3,867 $3,103 $463 $83 $67 $58 $93 (1)See Note 6 – Debt and Revolving Credit Facility of the Notes to Consolidated Financial Statements for additional information.(2)Represents interest obligations, payable in cash, for our outstanding debt.(3)Amounts primarily represent future fixed and non-cancellable cash payments associated with software technology and licenses and IP licenses, including the payments due within the next 12 months.(4)See Note 16 – Commitments and Guarantees of the Notes to Consolidated Financial Statements for additional information.(5)Represents purchase obligations for goods and services where payments are based, in part, on the volume or type of services we acquire. In those cases, we only included the minimum volume of purchase obligations in the table above. Purchase orders for goods and services that are cancellable upon notice and without significant penalties are not included in the amounts above.(6)Total amount excludes contractual obligations already recorded on our consolidated balance sheets except for debt obligations and other liabilities related to software and technology licenses and IP licenses.The expected timing of payments of the obligations in the preceding table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the timing of receipt of goods or services, or changes to agreed-upon amounts for some obligations. Our total gross unrecognized tax benefits were $119 million as of December 26, 2020. We have foreign and U.S. state tax audits in process at any one point in time. At this time, we are unable to make a reasonably reliable estimate of the timing of payments due to uncertainties in the timing of tax audit outcomes; therefore, such amounts are not included in the above contractual obligations table.Off-Balance Sheet ArrangementsAs of December 26, 2020, we had no off-balance sheet arrangements.47ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and long-term debt. We usually invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of December 26, 2020, our investment portfolio consisted of time deposits and commercial paper. Due to the relatively short, weighted-average maturity of our investment portfolio and the current low interest rate environment, our exposure to interest rate risk is minimal.As of December 26, 2020, all of our outstanding long-term debt had fixed interest rates. Consequently, our exposure to market risk for changes in interest rates on reported interest expense and corresponding cash flows is minimal.We will continue to monitor our exposure to interest rate risk.Default Risk. We mitigate default risk in our investment portfolio by investing in only high credit quality securities and by constantly positioning our portfolio to respond to a significant reduction in a credit rating of any investment issuer or guarantor. Our portfolio includes investments in marketable debt securities with active secondary or resale markets to ensure portfolio liquidity. We are averse to principal loss and strive to preserve our invested funds by limiting default risk and market risk.We actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated debt securities with relatively short maturities and do not invest in securities which we believe involve a higher degree of risk. As of December 26, 2020, substantially all of our investments in debt securities were A-rated by at least one of the rating agencies. While we believe we take prudent measures to mitigate investment-related risks, such risks cannot be fully eliminated as there are circumstances outside of our control. Foreign Exchange Risk. As a result of our foreign operations, we incur costs and we carry assets and liabilities that are denominated in foreign currencies, while sales of products are primarily denominated in U.S. dollars. We maintain a foreign currency hedging strategy which uses derivative financial instruments to mitigate the risks associated with changes in foreign currency exchange rates. This strategy takes into consideration all of our exposures. We do not use derivative financial instruments for trading or speculative purposes.The following table provides information about our foreign currency forward contracts as of December 26, 2020 and December 28, 2019. All of our foreign currency forward contracts mature within 12 months. December 26, 2020December 28, 2019NotionalAmountAverageContractRateEstimatedFair ValueGain (Loss)NotionalAmountAverageContractRateEstimatedFair ValueGain (Loss) (In millions except contract rates)Foreign currency forward contracts:Chinese Renminbi$261 6.8160 $8 $277 6.9890 $(1)Canadian Dollar247 1.3165 6 249 1.3183 2 Indian Rupee97 76.0259 1 76 72.9476 — Singapore Dollar50 1.3574 1 50 1.3597 — Euro35 0.8578 1 48 0.8927 1 Taiwan Dollar58 28.0978 — 38 30.1873 — Pound Sterling3 0.7375 — 1 0.7614 — Malaysian Ringgit3 4.0456 — — 4.0889 — Japanese Yen1 103.5000 — — — — Total$755 $17 $739 $2 48

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+Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations—SBU Performance Analysis of this Form 10-K for reconciliation and definitions of Adjusted PTC.For financial reporting purposes, the Company's corporate activities and certain other investments are reported within "Corporate and Other" because they do not require separate disclosure. See Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 18—Segment and Geographic Information included in

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ALLIANT ENERGY CORP_10-K_2021-02-19 00:00:00_352541-0000352541-21-000022.html

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis MDA includes information relating to Alliant Energy, IPL and WPL, as well as AEF and Corporate Services. Where appropriate, information relating to a specific entity has been segregated and labeled as such. The following discussion and analysis should be read in conjunction with the Financial Statements and Notes included in this report. Unless otherwise noted, all “per share” references in MDA refer to earnings per diluted share. In addition, this MDA includes certain financial information for 2020 compared to 2019. Refer to MDA in the combined 2019 Form 10-K for details on certain financial information for 2019 compared to 2018.OVERVIEWStrategy and MissionAlliant Energy’s mission is to deliver affordable energy solutions and exceptional service that its customers and communities count on - safely, efficiently and responsibly. The mission is supported by a strategy focused on meeting the evolving expectations of customers while providing an attractive return for investors, as well as serving its customers and building strong communities. This strategy includes the following key elements:Providing affordable energy solutions to customers - Alliant Energy’s strategy focuses on affordable energy solutions that support retention and growth of its existing customers and attract new customers to its service territories.Key Highlights - •WPL maintaining flat base rates in 2020 and 2021 by utilizing Federal Tax Reform benefits and lower fuel costs to offset higher revenue requirements from rate base additions.•IPL’s renewable energy rider became effective February 26, 2020, which allows for annual adjustments to electric rates charged to IPL’s retail electric customers for actual renewable energy costs incurred to fund IPL’s 1,000 MW of wind generating facilities placed in service in 2019 and 2020, and tax benefits.•Providing $35 million of billing credits to IPL’s retail electric customers beginning in the third quarter of 2020 through June 2021, largely driven by Federal Tax Reform benefits for customers.•Providing $42 million of billing credits to IPL’s retail electric customers in the second quarter of 2020 through its transmission cost rider for amounts previously collected in rates.•Significant fuel cost reductions achieved in 2020 and further reductions in fuel cost expected in 2021 as a result of expansion of renewable generation, operating highly efficient, low cost natural gas facilities and shortening the term of IPL’s DAEC PPA by 5 years.•Changes in recovery amounts for energy efficiency costs through the energy efficiency rider resulted in lower costs for IPL’s retail electric and gas customers in 2020.Making customer-focused investments - Alliant Energy’s strategic priorities include making significant customer-focused investments toward cleaner energy and sustainable customer solutions. Alliant Energy’s strategy drives a capital allocation process focused on: 1) transitioning its generation portfolio to meet the growing interest of customers for cleaner sources of energy, 2) upgrading its electric and gas distribution systems to strengthen safety and resiliency, as well as enable distributed energy solutions in its service territories, and 3) enhancing its customers’ experience with evolving technology and greater flexibility.Key Highlights (refer to “Customer Investments” for details) - •IPL’s completion of more than 500 MW of new wind farms: Whispering Willow North (201 MW in January 2020), Golden Plains (200 MW in March 2020) and Richland (131 MW in September 2020).•WPL’s completion of the natural gas-fired West Riverside Energy Center (723 MW in May 2020), the Kossuth wind farm (152 MW in October 2020) and the expansion of its gas distribution system in Western Wisconsin in November 2020.•Planned development and acquisition of additional renewable energy, including approximately 1,000 MW of solar generation at WPL by the end of 2023, approximately 400 MW of solar generation by the end of 2023 at IPL and approximately 100 MW of distributed energy resources, including community solar and energy storage systems beginning in 2021 at IPL. In addition, WPL may also develop additional solar generation and distributed energy resources.Growing customer demand - Alliant Energy’s strategy supports expanding electric and gas usage in its service territories by promoting electrification initiatives and economic development in the communities it serves.Key Highlights - •WPL entered into a wholesale power supply agreement with Consolidated Water Power Company, which was effective January 1, 2021 and is expected to bring approximately 60 MW of load to WPL’s electric system.23Table of Contents•Alliant Energy has various development-ready sites throughout Iowa and Wisconsin, including the 1,300-acre Big Cedar Industrial Center Mega-site in Cedar Rapids, Iowa, and the 730-acre Prairie View Industrial Center Super Park in Ames, Iowa, which are rail-served ready-to-build manufacturing and industrial sites in close proximity to the regional airport and interstate freeways and access IPL’s electric services. The Big Cedar Industrial Center Mega-site also accesses Travero’s rail and warehousing services. In addition, the Beaver Dam Commerce Park is a 520-acre ready-to-build manufacturing and industrial site in Beaver Dam, Wisconsin, with access to commercial and freight airports, interstate freeways and WPL’s electric services.COVID-19The outbreak of COVID-19 has become a global pandemic and Alliant Energy’s service territories are not immune to the challenges presented by COVID-19. Despite these challenges, Alliant Energy, IPL and WPL continue to focus on providing the critical, reliable service their customers depend on, while emphasizing the health and welfare of their employees, customers and communities. Alliant Energy, IPL and WPL have not experienced significant impacts on their overall business operations, financial condition, results of operations or cash flows; however, the degree to which the COVID-19 pandemic may impact such items in the future is currently unknown and will depend on future developments of the pandemic as well as possible additional actions by government and regulatory authorities. Alliant Energy has mitigated the impact of sales declines from COVID-19 by accelerating planned cost transformation activities. Actual and potential impacts from COVID-19 include, but are not limited to, the following:Operational and Supply Chain Impacts - Alliant Energy has modified certain business practices to help ensure the health and safety of its employees, contractors, customers and vendors consistent with orders and best practices issued by government and regulatory authorities. For example, Alliant Energy implemented its business continuity and pandemic plans for critical items and services, including travel restrictions, physical distancing, working-from-home protocols, and rescheduling of planned EGU outages. Alliant Energy also temporarily suspended service disconnects, waived late payment fees for its customers, and modified reconnect service procedures to ensure continuity of service for customers unable to pay their bills and consistency with regulatory orders.While Alliant Energy has not experienced any significant issues to-date, it continues to monitor potential disruptions or constraints in materials and supplies from key suppliers. Alliant Energy’s construction projects are currently progressing as planned with added safety protocols, and while it continues to monitor its supply chain, there have been no immediate disruptions. Alliant Energy’s wind farms under construction during the pandemic were placed in service as previously planned to meet the timing requirements to qualify for the maximum renewable tax credits. In addition, Alliant Energy does not currently expect any material changes to its construction and acquisition expenditures plans disclosed in “Liquidity and Capital Resources” resulting from COVID-19.Alliant Energy has not experienced, and currently does not expect, an interruption in its ability to provide electric and natural gas services to its customers. Alliant Energy currently expects to incur incremental direct expenses related to certain of these operational and supply chain impacts but does not expect them to have a material impact on its results of operations.Customer Impacts - COVID-19 has resulted in various travel restrictions and closures of commercial spaces and industrial facilities in Alliant Energy’s service territories. While the total expected impact of COVID-19 on future sales is currently unknown, Alliant Energy has experienced higher electric residential sales and lower electric commercial and industrial sales since the outset of the pandemic, and expects these sales trends by customer class to continue into 2021 but at lower impacts than in 2020. In 2020 compared to 2019, Alliant Energy’s retail electric residential temperature-normalized sales increased 3%, and its retail electric commercial and industrial temperature-normalized sales decreased 4% in aggregate. In addition, Alliant Energy has not experienced a material increase in customer bankruptcies in 2020.Liquidity and Capital Resources Impacts - In response to the uncertainty of the impacts of COVID-19, Alliant Energy enhanced its liquidity position in the first quarter of 2020 by settling $222 million under the equity forward sale agreements and AEF accelerating the refinancing of its $300 million term-loan credit agreement that would have been due in April 2020. Alliant Energy also enhanced its liquidity position by accelerating and/or increasing the size of new debt offerings in 2020, including WPL's issuance of $350 million of debentures due 2050 in April 2020, IPL's issuance of $400 million of senior debentures due 2030 in June 2020 and AEF's issuance of $200 million of senior notes due 2026 in November 2020. Alliant Energy maintains a single credit facility, which allows borrowing capacity to shift among Alliant Energy (at the parent company level), IPL and WPL, as needed. During March and April 2020, Alliant Energy and WPL borrowed under the single credit facility for a portion of their temporary cash needs to obtain more favorable interest rates than available in the commercial paper market at that time. In addition, IPL maintains a sales of accounts receivable program as an alternative financing source; however, if customer arrears were to exceed certain levels, IPL’s access to the program may be restricted.Alliant Energy, IPL and WPL currently expect to maintain compliance with the financial covenants of the credit facility agreement, and Alliant Energy currently expects to maintain compliance with the financial covenants in AEF’s term loan credit agreement. In addition, Alliant Energy currently expects to have adequate liquidity to fulfill its contractual obligations, access to capital markets and continue with its planned quarterly dividend payments.24Table of ContentsCredit Risk Impacts - Alliant Energy’s temporary suspension of service disconnects and waivers of late payment fees for its customers, as well as broad economic factors, may negatively impact its customers’ willingness and ability to pay, which could increase customer arrears and bad debts, and negatively impact Alliant Energy’s cash flows from operations. Currently, Alliant Energy does not anticipate any material credit risk related to its commodity transactions.Regulatory Impacts - In March 2020, WPL received authorization from the PSCW to defer certain incremental costs incurred resulting from COVID-19, including bad debt expenses and foregone revenues from late payment fees. In August 2020, IPL received authorization from the IUB for utilization of a regulatory asset account to track increased expenses and other financial impacts incurred after March 1, 2020 resulting from COVID-19. The recovery of any authorized deferrals will be addressed in future regulatory proceedings. In 2020, such amounts were not material.Legislative Impacts - In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted. The most significant provision of the CARES Act for Alliant Energy relates to an acceleration of refunds of existing alternative minimum tax credits to increase liquidity. In July 2020, Alliant Energy received $11 million of credits that otherwise would have been received in 2021 and 2022. In addition, Alliant Energy has deferred certain 2020 payroll taxes to 2021 and 2022. The CARES Act also provides additional funding to the Low Income Home Energy Assistance Program, which assists certain of Alliant Energy’s customers with managing their energy costs, as well as financial support for certain of Alliant Energy’s residential, small business and non-profit customers.In December 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSA) was enacted. The most significant provision of the CRRSA Act for Alliant Energy relates to the extension of certain renewable tax credits, and as a result, Alliant Energy will evaluate additional opportunities for repowering of its existing wind farms and additional solar projects beyond 2023. The CRRSA Act also provides additional funding to the Low Income Home Energy Assistance Program, as well as financial support for certain of Alliant Energy’s residential, small business and non-profit customers.Derecho WindstormIn August 2020, a derecho windstorm caused considerable damage to IPL’s electric distribution system in its service territory, and over 250,000 of its customers lost power. IPL completed its initial restoration efforts in August 2020 and permanent repairs to the system will continue into 2021. Refer to Note 2 for further discussion, including IPL’s current estimate and requested regulatory treatment of certain incremental costs and benefits incurred resulting from the windstorm.RESULTS OF OPERATIONSResults of operations include financial information prepared in accordance with GAAP as well as utility electric margins and utility gas margins, which are not measures of financial performance under GAAP. Utility electric margins are defined as electric revenues less electric production fuel, purchased power and electric transmission service expenses. Utility gas margins are defined as gas revenues less cost of gas sold. Utility electric margins and utility gas margins are non-GAAP financial measures because they exclude other utility and non-utility revenues, other operation and maintenance expenses, depreciation and amortization expenses, and taxes other than income tax expense.Management believes that utility electric and gas margins provide a meaningful basis for evaluating and managing utility operations since electric production fuel, purchased power and electric transmission service expenses and cost of gas sold are generally passed through to customers, and therefore, result in changes to electric and gas revenues that are comparable to changes in such expenses. The presentation of utility electric and gas margins herein is intended to provide supplemental information for investors regarding operating performance. These utility electric and gas margins may not be comparable to how other entities define utility electric and gas margin. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.Additionally, the table below includes EPS for Utilities and Corporate Services, ATC Holdings, and Non-utility and Parent, which are non-GAAP financial measures. Alliant Energy believes these non-GAAP financial measures are useful to investors because they facilitate an understanding of segment performance and trends, and provide additional information about Alliant Energy’s operations on a basis consistent with the measures that management uses to manage its operations and evaluate its performance.Financial Results Overview - Alliant Energy’s net income and EPS attributable to Alliant Energy common shareowners were as follows (dollars in millions, except per share amounts):20202019Income (Loss)EPSIncome (Loss)EPSUtilities and Corporate Services$586$2.36 $529$2.22 ATC Holdings340.14 340.14 Non-utility and Parent(6)(0.03)(6)(0.03)Alliant Energy Consolidated$614$2.47 $557$2.33 25Table of ContentsAlliant Energy’s Utilities and Corporate Services income increased $57 million in 2020 compared to 2019. The increase was primarily due to higher earnings resulting from IPL’s and WPL’s increasing rate base. This item was partially offset by higher depreciation expense, lower AFUDC and higher WPL electric fuel-related costs, net of recoveries.Operating income and a reconciliation of utility electric and gas margins to the most directly comparable GAAP measure, operating income, was as follows (in millions):Alliant EnergyIPLWPL202020192020201920202019Operating income$740 $778 $410 $403 $306 $347 Electric utility revenues$2,920 $3,064 $1,695 $1,781 $1,225 $1,283 Electric production fuel and purchased power expenses(652)(777)(352)(435)(300)(342)Electric transmission service expense(449)(481)(298)(340)(151)(141)Utility Electric Margin (non-GAAP)1,819 1,806 1,045 1,006 774 800 Gas utility revenues373 455 208 264 165 191 Cost of gas sold(182)(222)(99)(120)(83)(102)Utility Gas Margin (non-GAAP)191 233 109 144 82 89 Other utility revenues49 46 44 44 5 2 Non-utility revenues74 83 — — — — Other operation and maintenance expenses(670)(712)(375)(404)(254)(261)Depreciation and amortization expenses(615)(567)(356)(327)(254)(236)Taxes other than income tax expense(108)(111)(57)(60)(47)(47)Operating income$740 $778 $410 $403 $306 $347 Operating Income Variances - Variances between periods in operating income for 2020 compared to 2019 were as follows (in millions):Alliant EnergyIPLWPLTotal higher (lower) utility electric margin variance (Refer to details below)$13$39($26)Total lower utility gas margin variance (Refer to details below)(42)(35)(7)Total lower other operation and maintenance expenses variance (Refer to details below)42297Higher depreciation and amortization expense primarily due to additional plant in service in 2019 and 2020, including IPL’s new wind generation and WPL’s West Riverside Energy Center(48)(29)(18)Other(3)33($38)$7($41)Electric and Gas Revenues and Sales Summary - Electric and gas revenues (in millions), and MWh and Dth sales (in thousands), were as follows:ElectricGasRevenuesMWhs SoldRevenuesDths Sold20202019202020192020201920202019Alliant EnergyRetail$2,652 $2,751 24,535 25,121 $333 $408 48,808 55,850 Sales for resale204 250 6,046 6,594 N/AN/AN/AN/ATransportation/Other64 63 71 79 40 47 102,790 97,135 $2,920 $3,064 30,652 31,794 $373 $455 151,598 152,985 IPLRetail$1,564 $1,615 13,830 14,142 $183 $236 25,508 29,498 Sales for resale88 128 3,485 4,479 N/AN/AN/AN/ATransportation/Other43 38 34 36 25 28 39,543 38,323 $1,695 $1,781 17,349 18,657 $208 $264 65,051 67,821 WPLRetail$1,088 $1,136 10,705 10,979 $150 $172 23,300 26,352 Sales for resale116 122 2,561 2,115 N/AN/AN/AN/ATransportation/Other21 25 37 43 15 19 63,247 58,812 $1,225 $1,283 13,303 13,137 $165 $191 86,547 85,164 26Table of ContentsSales Trends and Temperatures - Alliant Energy’s retail electric and gas sales volumes decreased 2% and 13% in 2020 compared to 2019, respectively, primarily due to the impacts from COVID-19, the derecho windstorm, and changes in temperatures in Alliant Energy’s service territories, partially offset by an extra day of sales in 2020 due to leap year. In 2020, COVID-19 impacts on sales volumes resulted in increases for retail electric residential sales volumes and decreases for retail electric commercial and industrial sales volumes.Estimated increases (decreases) to electric and gas margins from the impacts of temperatures were as follows (in millions):Electric MarginsGas Margins2020201920202019IPL$1$10$—$5WPL34(1)3Total Alliant Energy$4$14($1)$8Utility Electric Margin Variances - The following items contributed to increased (decreased) utility electric margins for 2020 compared to 2019 (in millions):Alliant EnergyIPLWPLImpact of IPL’s retail electric final and interim rate increases effective February 2020 and April 2019, respectively (a)$63$63$—Higher revenues at IPL due to credits on customers’ bills in 2019 related to production tax credits through the fuel-related cost recovery mechanism (offset by changes in income tax)1616—Lower purchased electric capacity expense at WPL8—8Higher revenues at IPL due to changes in electric tax benefit rider credits on customers’ bills (offset by changes in income tax expense)66—Higher WPL electric fuel-related costs, net of recoveries(18)—(18)Lower revenues at IPL due to credits on customers’ bills in 2020 related to excess deferred amortization through the tax benefit rider (offset by changes in income tax)(15)(15)—Changes in timing of collection of electric transmission service costs at WPL(10)—(10)Estimated changes in sales volumes caused by temperatures(10)(9)(1)Lower revenues at IPL related to changes in recovery amounts for energy efficiency costs through the energy efficiency rider (offset by changes in energy efficiency expense)(8)(8)—Other (includes lower temperature-normalized sales primarily due to the derecho windstorm and COVID-19 impacts)(19)(14)(5)$13$39($26)(a)IPL’s interim retail electric base rate increase was effective April 1, 2019 and final retail electric base rate increase was effective February 26, 2020. Effective with final rates, the recovery of, and return on, IPL’s new wind generation placed in service in 2019 and 2020 is provided through the renewable energy rider. Both interim and final rate increases include a reduction for anticipated production tax credits for IPL’s new wind generation. This reduction is expected to be offset by a reduction in income tax expense resulting from production tax credits recognized from this new wind generation. Refer to Note 2 for further discussion.Utility Gas Margin Variances - The following items contributed to increased (decreased) utility gas margins for 2020 compared to 2019 (in millions):Alliant EnergyIPLWPLLower revenues at IPL related to changes in recovery amounts for energy efficiency costs through the energy efficiency rider (offset by changes in energy efficiency expense)($34)($34)$—Estimated changes in sales volumes caused by temperatures(9)(5)(4)Impact of IPL’s retail gas rate increase effective January 20201111—Other (includes lower temperature-normalized sales primarily due to COVID-19 impacts)(10)(7)(3)($42)($35)($7)27Table of ContentsOther Operation and Maintenance Expenses Variances - The following items contributed to (increased) decreased other operation and maintenance expenses for 2020 compared to 2019 (in millions):Alliant EnergyIPLWPLLower energy efficiency expense at IPL (primarily offset by lower electric and gas revenues)$39$39$—Lower incentive compensation expense963Credit loss adjustments related to guarantees for an affiliate of Whiting Petroleum (Refer to Note 17(d))7——Higher generation operation and maintenance expenses (primarily related to new generation, including wind at IPL and WPL and West Riverside at WPL)(8)(4)(4)Other (5)(12)8$42$29$7Other Income and Deductions Variances - The following items contributed to (increased) decreased other income and deductions for 2020 compared to 2019 (in millions):Alliant EnergyIPLWPLHigher interest expense primarily due to higher average outstanding long-term debt balances, partially offset by lower interest rates on short-term debt outstanding at Alliant Energy and WPL($2)($12)($2)Lower AFUDC primarily due to changes in CWIP balances related to IPL’s new wind generation and WPL’s West Riverside Energy Center and new wind generation(38)(26)(12)Other (Refer to Note 6 for details of increased income from unconsolidated equity investments)9—3($31)($38)($11)Income Taxes - Refer to Note 12 for details of effective income tax rates.Other Future Considerations - In addition to items discussed in this report, the following key items could impact Alliant Energy’s, IPL’s and WPL’s future financial condition or results of operations:•Financing Plans - WPL currently expects to issue up to $300 million of long-term debt in 2021. Alliant Energy currently expects to issue up to $25 million of common stock in 2021 through its Shareowner Direct Plan.•Common Stock Dividends - Alliant Energy announced a 6% increase in its targeted 2021 annual common stock dividend to $1.61 per share, which is equivalent to a quarterly rate of $0.4025 per share, beginning with the February 2021 dividend payment. The timing and amount of future dividends is subject to an approved dividend declaration from Alliant Energy’s Board of Directors, and is dependent upon earnings expectations, capital requirements, and general financial business conditions, among other factors.•Higher Earnings on Increasing Rate Base - Alliant Energy, IPL and WPL currently expect an increase in earnings in 2021 compared to 2020 due to impacts from increasing revenue requirements related to investments in the utility business, including IPL’s and WPL’s wind investments, WPL’s Western Wisconsin gas distribution system expansion, and the impacts of IPL’s DAEC PPA amendment buyout payment.•Extreme Temperatures - In February 2021, portions of the central and southern U.S., including Alliant Energy’s service territories, experienced a prolonged period of very cold temperatures and a series of winter storms. This resulted in significant volatility and increases in commodity prices caused by higher demand for electricity and natural gas and disruptions in commodity supply. As a result, Alliant Energy currently expects to incur higher electric production fuel and cost of gas sold expenses in 2021 compared to 2020 related to the extreme temperatures and winter storms. Any changes in electric production fuel and cost of gas sold is expected to be recovered through IPL’s and WPL’s cost recovery mechanisms resulting in impacts to customer bills in 2021. As a result of these impacts to customers during a pandemic, Alliant Energy plans to work with the respective commissions to evaluate the recovery of any higher costs over a longer period of time.•Depreciation and Amortization Expenses - Alliant Energy, IPL and WPL currently expect an increase in depreciation and amortization expenses in 2021 compared to 2020 due to property additions, including IPL’s and WPL’s expansion of wind generation and WPL’s natural gas-fired West Riverside Energy Center.•Allowance for Funds Used During Construction - Alliant Energy currently expects AFUDC to decrease in 2021 compared to 2020 primarily due to decreased CWIP balances related to IPL’s and WPL’s wind generation and WPL’s West Riverside Energy Center, which were placed in service in 2020.28Table of ContentsCUSTOMER INVESTMENTSAlliant Energy’s, IPL’s and WPL’s strategic priorities include making significant customer-focused investments toward cleaner energy and sustainable customer solutions. These priorities include:Environmental StewardshipAlliant Energy’s environmental stewardship is focused on meeting its customers’ energy needs in an economical, efficient and sustainable manner. Alliant Energy proactively considers future environmental compliance requirements and proposed regulations in its planning, decision-making, construction and ongoing operations activities. Alliant Energy is focused on executing a long-term strategy to deliver reliable and affordable energy with lower emissions independent of changing policies and political landscape. To achieve these long-term goals, Alliant Energy will transition away from coal-fired EGUs and incorporate more renewable energy, distributed energy resources, energy efficiency, demand response, highly-efficient natural gas-fired EGUs and other emerging technologies such as energy storage. Alliant Energy’s voluntary environmental-related goals and achievements include the following: •Reduced air emissions for sulfur dioxide by 90%, nitrogen oxide by 80% and mercury by 90% from 2005 levels, which it achieved in 2019.•By 2030, reduce CO2 emissions by 50% and water supply by 75% from 2005 levels from its owned fossil-fueled generation, as well as transition 100% of its light-duty fleet vehicles to be electric.•By 2040, eliminate all coal-fired EGUs from its generating fleet.•By 2050, achieve an aspirational goal of net-zero CO2 emissions from the electricity it generates.Future updates to sustainable energy plans and attaining these goals will depend on future economic developments, evolving energy technologies and emerging trends in Alliant Energy’s service territories.Renewable GenerationAlliant Energy’s cleaner energy strategy, or Clean Energy Blueprint, includes the planned development and acquisition of additional renewable energy, including approximately 1,000 MW of solar generation at WPL by the end of 2023, approximately 400 MW of solar generation by the end of 2023 at IPL and approximately 100 MW of distributed energy resources, including community solar and energy storage systems beginning in 2021 at IPL. Alliant Energy, IPL and WPL continue to evaluate additional opportunities to add more renewable generation, including repowering of existing wind farms and additional solar generation and distributed energy resources. Estimated capital expenditures for these planned projects for 2021 through 2024 are included in the “Renewable projects” line in the construction and acquisition table in “Liquidity and Capital Resources.” IPL and WPL currently assume that a portion of the construction costs for the new solar generation will be financed by a tax equity partner, which is discussed in “IPL and WPL Solar Project Tax Equity Credits” in “Liquidity and Capital Resources.” In addition, Alliant Energy completed the construction and acquisition of approximately 1,200 MW of wind generation in aggregate (approximately 1,000 MW at IPL and approximately 200 MW at WPL) from 2018 through 2020.WPL’s Solar Generation - In May 2020, WPL filed a CA with the PSCW for approval to acquire, construct, own, and operate 675 MW of new solar generation in the following Wisconsin counties: Grant (200 MW in 2023), Sheboygan (150 MW in 2022), Wood (150 MW in 2022), Jefferson (75 MW in 2022), Richland (50 MW in 2022) and Rock (50 MW in 2023). The 675 MW of new solar generation would replace energy and capacity being eliminated with the planned retirement of the coal-fired Edgewater Generating Station (414 MW) by the end of 2022, and Columbia Unit 1 by the end of 2023 and Columbia Unit 2 by the end of 2024 (595 MW in aggregate). In addition, WPL currently expects to file a second CA with the PSCW in the first half of 2021 for approximately 325 MW of new solar generation. As a result of WPL’s neighboring utilities anticipated exercise of their options to purchase a partial ownership interest in West Riverside, WPL anticipates additional capacity needs by 2024.IPL’s Solar Generation and Distributed Energy Resources - IPL’s plans include development and acquisition of up to 400 MW of solar generation by the end of 2023 and up to 100 MW of distributed energy resources, including community solar and energy storage systems beginning in 2021. IPL currently plans to file for advance rate-making principles for up to 400 MW of solar generation in the first half of 2021. The 400 MW of new solar generation would help replace a portion of the energy and capacity expected to be eliminated with the planned retirement of the coal-fired Lansing Generating Station (275 MW) by the end of 2022 and the expected reduction of energy and capacity resulting from the planned fuel switch of the Burlington Generating Station (212 MW) from coal to natural gas by the end of 2021.IPL’s Expansion of Wind Generation - In 2016 and 2018, IPL received approvals from the IUB for advance rate-making principles for 1,000 MW of new wind generation. IPL completed the construction of various wind farms as follows:Wind SiteNameplate CapacityIn-service DateLocationUpland Prairie299 MWMarch 2019Clay and Dickinson Counties, IowaEnglish Farms172 MWMarch 2019Poweshiek County, IowaWhispering Willow North201 MWJanuary 2020Franklin County, IowaGolden Plains200 MWMarch 2020Winnebago and Kossuth Counties, IowaRichland131 MWSeptember 2020Sac County, Iowa29Table of ContentsWPL’s Expansion of Wind Generation - In October 2020, WPL completed the construction of the Kossuth wind farm (152 MW) in Kossuth County, Iowa, pursuant to approvals from the PSCW. In addition, WPL acquired a partial ownership interest in the assets of the Forward Wind Energy Center located in Wisconsin (59 MW) in 2018, pursuant to approvals from the PSCW and FERC.Complementary Generation InvestmentsWPL’s Construction of West Riverside Natural Gas-fired Generating Station - In 2016, WPL received an order from the PSCW authorizing WPL to construct a natural gas-fired combined-cycle EGU in Beloit, Wisconsin, referred to as West Riverside. WPL’s construction of West Riverside began in 2016 and the 723 MW EGU was placed in service in May 2020. West Riverside replaces energy and capacity being eliminated with the retirements of various EGUs.WPL entered into agreements with neighboring utilities and electric cooperatives that provide each of them options to purchase a partial ownership interest in West Riverside. The purchase price for such options is based on the ownership interest acquired and the net book value of West Riverside on the date of the purchase. The exercise of the WPSC and MGE options is subject to PSCW approval, and the timing and ownership amounts of the options are as follows:CounterpartyOption Amount and TimingWisconsin Public Service Corporation (WPSC)Up to 200 MW may be exercised through May 2024 (no more than 100 MW to be acquired prior to May 2022) (a)Madison Gas and Electric Company (MGE)Up to 50 MW may be exercised through May 2025 (no more than 25 MW to be acquired prior to May 2022) Electric cooperativesApproximately 60 MW were exercised January 2018(a)If WPSC exercises its options, WPL may exercise reciprocal options, subject to approval by the PSCW, to purchase up to 200 MW of any natural-gas combined-cycle EGU that either WPSC or its affiliated utility, Wisconsin Electric Power Company, places in service within 10 years of the date West Riverside is placed in service.Plant Retirements and Fuel Switching - The current strategy includes the retirement, or fuel switch from coal to natural gas, of various EGUs in the next several years. IPL currently expects to retire the coal-fired Lansing Generating Station (275 MW) by the end of 2022 and fuel switch the Burlington Generating Station (212 MW) from coal to natural gas by the end of 2021. WPL currently expects to retire the coal-fired Edgewater Generating Station (414 MW) by the end of 2022, Columbia Unit 1 by the end of 2023 and Columbia Unit 2 by the end of 2024. Alliant Energy, IPL and WPL are working with MISO, state regulatory commissions and other regulatory agencies, as required, to determine the timing of these actions, which are subject to change depending on operational, regulatory, market and other factors. Refer to Note 3 for additional details on these EGUs, as well as Note 17(e) for discussion of IPL’s requirements to fuel switch or retire certain EGUs under a Consent Decree.Other Customer-focused InvestmentsElectric and Gas Distribution Systems - Customer-focused investments include replacing, modernizing and upgrading infrastructure in the electric and gas distribution systems. Electric system investments will focus on areas such as improving resiliency with more underground electric distribution and enabling distributed energy solutions with higher capacity lines. Gas system investments will focus on pipeline replacement to ensure safety and pipeline expansion to support reliability and economic development. Estimated capital expenditures for expected and current electric and gas distribution infrastructure projects for 2021 through 2024 are included in the “Electric and gas distribution systems” lines in the construction and acquisition expenditures table in “Liquidity and Capital Resources.”Fiber Optic Telecommunication Network - Alliant Energy is currently installing fiber optic routes between its facilities to enhance its communications network to improve resiliency and reliability of, and enable and strengthen, the integrated grid network to help serve its customers.Gas Pipeline Expansion - IPL and WPL currently expect to make investments to extend various gas distribution systems to provide natural gas to unserved or underserved areas in their service territories. In April 2020, WPL received authorization from the PSCW to expand its gas distribution system in Western Wisconsin, which was completed in November 2020.Gas Pipeline Safety - In October 2019, the Pipeline and Hazardous Materials Safety Administration published a final rule that updates safety requirements for gas transmission pipelines, and various updated procedures were implemented in July 2020. Plans to address certain requirements for specific pipelines must be developed by July 2021, and remediation efforts must be completed by July 2035. In anticipation of these rule changes, Alliant Energy, IPL and WPL have been proactively replacing certain of IPL’s transmission pipelines and making modifications to certain of WPL’s transmission pipelines. Alliant Energy, IPL, and WPL also continue to evaluate the impact of this final rule and resulting remediation plans on their financial condition and results of operations.Non-utility business - Alliant Energy continues to explore growth of its Travero businesses and other limited scope opportunities outside of, but complimentary to, Alliant Energy’s core utility business. This non-utility strategy continues to evolve through exploration of modest strategic opportunities that are accretive to earnings and cash flows within and outside of Alliant Energy’s service territories.30Table of ContentsRATE MATTERSRate ReviewsRetail Base Rate Filings - Base rate changes reflect both returns on additions to infrastructure and recovery of changes in costs incurred or expected to be incurred. Given that a portion of the rate changes will offset changes in costs, revenues from rate changes should not be expected to result in an equal change in net income for either IPL or WPL.IPL’s Retail Electric and Gas Rate Reviews (2020 Forward-looking Test Period) - In 2019, IPL filed retail electric and gas rate review requests with the IUB covering the 2020 forward-looking Test Period. In January 2020, IPL received an order from the IUB approving IPL’s proposed settlement for its retail electric rate review. Final retail electric rates were effective February 26, 2020. In December 2019, IPL received an order from the IUB approving IPL’s proposed settlement for its retail gas rate review. Final retail gas rates were effective January 10, 2020. Refer to Note 2 for details.IPL currently expects to file a subsequent proceeding with the IUB in the second quarter of 2021 for its 2020 Forward-looking Test Period retail electric and gas rate reviews, which will compare actual revenues and costs to those initially forecasted by IPL. IPL currently does not expect any rate adjustments from the subsequent proceeding.WPL’s Retail Electric and Gas Rate Review (2021 Forward-looking Test Period) - In December 2020, the PSCW issued an order authorizing WPL to maintain its current retail electric and gas base rates, authorized return on common equity, regulatory capital structure and earnings sharing mechanism through the end of 2021. WPL will utilize anticipated fuel-related cost savings and excess deferred income tax benefits in 2021 to offset the revenue requirement impacts of increasing electric and gas rate base, including the Kossuth wind farm, which was placed in service in October 2020, and the expansion of its gas distribution system in Western Wisconsin, which was placed in service in November 2020.Planned Rate Review - WPL currently expects to file a retail electric and gas rate review with the PSCW in the second quarter of 2021 for either a single or multiple year forward-looking test period. The key drivers for the anticipated filing include lower excess deferred income tax benefits in 2022 and revenue requirement impacts of increasing electric and gas rate base, including investments in solar generation. Any rate changes granted from this request are expected to be effective on January 1, 2022. WPL currently expects a decision from the PSCW regarding this rate filing by the end of 2021.Rate Review Details - Details related to IPL’s and WPL’s key jurisdictions were as follows:AverageAuthorized ReturnCommon EquityRegulatoryRate Baseon CommonComponent of RegulatoryEffectiveBody(in millions)Equity (a)Capital StructureDateIPL Retail Electric (2020 Test Period)Marshalltown (b)IUB$55911.00%51.0%2/26/2020Emery (b)IUB16512.23%51.0%2/26/2020Whispering Willow - East (b)IUB16311.70%51.0%2/26/2020Renewable energy rider (c)IUB1,31710.66%51.0%2/26/2020Other (b)IUB3,7679.50%51.0%2/26/2020IPL Retail Gas (2020 Test Period) (b)IUB5579.60%51.0%1/10/2020IPL Wholesale ElectricFERC14510.97%50.0%1/1/2020WPL Retail Electric and GasElectric (2021 Test Period) (d)PSCW4,16710.00%52.5%1/1/2021Gas (2021 Test Period) (d)PSCW48110.00%52.5%1/1/2021WPL Wholesale ElectricFERC29610.90%55.0%1/1/2020(a)Authorized returns on common equity may not be indicative of actual returns earned or projections of future returns.(b)Average rate base amounts reflect IPL’s allocated retail share of rate base and do not include CWIP, and were calculated using a forecasted 13-month average for the test period.(c)Average rate base amounts recovered through IPL’s renewable energy rider mechanism include construction costs incurred to fund IPL’s 1,000 MW of wind generation facilities placed in service in 2019 and 2020 (11.00% return on common equity), production tax credit carryforwards for the 1,000 MW of wind generation facilities (5.00% return on common equity) and certain transmission facilities classified as intangible assets (9.50% return on common equity), and were calculated using a 13-month average.(d)Average rate base amounts reflect WPL’s allocated retail share of rate base and do not include CWIP or a cash working capital allowance, and were calculated using a forecasted 13-month average for the test period. The PSCW provides a return on selected CWIP and a cash working capital allowance by adjusting the percentage return on rate base.Other Rate MattersFederal Tax Reform - Federal Tax Reform resulted in future benefits to customers as a result of remeasurement of accumulated deferred income taxes (approximately $350 million for IPL and $460 million for WPL of retail revenue requirement). The majority of these benefits are subject to tax normalization rules (protected benefits), which limit the rate at which they can be passed on to their electric and gas customers.31Table of ContentsFor those benefits that were not limited by tax normalization rules (the non-protected benefits), IPL began providing retail electric billing credits that will continue through June 2021, which include $27 million of excess deferred tax benefits. After returning these benefits to customers, IPL is not expected to have any significant remaining non-protected benefits as a result of the original Federal Tax Reform impacts.WPL provided non-protected benefits back to its retail electric and gas customers in 2019 and 2020. In 2020, WPL utilized approximately $72 million to help maintain base rates at current levels and will utilize approximately $113 million to help maintain base rates at current levels through 2021. The remaining non-protected benefits of approximately $5 million will be addressed in WPL’s future retail electric and gas rate reviews.LIQUIDITY AND CAPITAL RESOURCESOverview - Alliant Energy, IPL and WPL expect to maintain adequate liquidity to operate their businesses and implement their strategy as a result of operating cash flows generated by their utility business, and available capacity under a single revolving credit facility and IPL’s sales of accounts receivable program, supplemented by periodic issuances of long-term debt and Alliant Energy equity securities. As summarized below, Alliant Energy, IPL and WPL believe they have the ability to generate and obtain adequate amounts of cash to meet their requirements and plans for cash in the next 12 months and beyond.COVID-19 and Derecho Windstorm Considerations - Refer to “Overview” in MDA for discussion of COVID-19 and the derecho windstorm and the impacts on Alliant Energy’s, IPL’s and WPL’s liquidity and capital resources.Liquidity Position - At December 31, 2020, Alliant Energy had $54 million of cash and cash equivalents, $611 million ($318 million at the parent company, $250 million at IPL and $43 million at WPL) of available capacity under the single revolving credit facility and $109 million of available capacity at IPL under its sales of accounts receivable program.Capital Structure - Alliant Energy, IPL and WPL plan to maintain debt-to-total capitalization ratios that are consistent with investment-grade credit ratings. IPL and WPL expect to maintain capital structures consistent with their authorized levels. Capital structures as of December 31, 2020 were as follows (Common Equity (CE); IPL’s Preferred Stock (PS); Long-term Debt (including current maturities) (LD); Short-term Debt (SD)):Alliant Energy, IPL and WPL intend to manage their capital structures and liquidity positions in such a way that facilitates their ability to raise funds reliably and on reasonable terms and conditions, while maintaining capital structures consistent with those approved by regulators. In addition to capital structures, other important factors used to determine the characteristics of future financings include financial coverage ratios, capital spending plans and solar construction that is expected to be financed by tax equity partners, regulatory orders and rate-making considerations, levels of debt imputed by rating agencies, market conditions, the impact of tax initiatives and legislation, and any potential proceeds from asset sales. The PSCW factors certain imputed debt adjustments in establishing a regulatory capital structure as part of WPL’s retail rate reviews. The IUB does not make any explicit adjustments for imputed debt in establishing capital ratios used in determining customer rates, although such adjustments are considered by IPL in recommending an appropriate capital structure. Debt imputations by rating agencies include, among others, pension and OPEB obligations and the sales of accounts receivable program.Credit and Capital Markets - Alliant Energy, IPL and WPL maintain a single revolving credit facility to provide backstop liquidity to their commercial paper programs, and ensure a committed source of liquidity in the event the commercial paper market becomes disrupted. In addition, IPL maintains a sales of accounts receivable program as an alternative financing source; however, if customer arrears were to exceed certain levels, IPL’s access to the program may be restricted.Primary Sources and Uses of Cash - Alliant Energy’s most significant source of cash is from electric and gas sales to IPL’s and WPL’s customers. Cash from these sales reimburses IPL and WPL for prudently-incurred expenses to provide service to their utility customers and generally provides IPL and WPL a return of and a return on the assets used to provide such services. Capital needed to retire debt and fund capital expenditures related to large strategic projects is expected to be met primarily through external financings.32Table of ContentsCash Flows - Selected information from the cash flows statements was as follows (in millions):Alliant EnergyIPLWPL202020192020201920202019Cash, cash equivalents and restricted cash, January 1$18 $26 $9 $12 $4 $9 Cash flows from (used for):Operating activities501 660 (6)173 466 423 Investing activities(951)(1,287)(301)(667)(613)(557)Financing activities488 619 348 491 146 129 Net increase (decrease)38 (8)41 (3)(1)(5)Cash, cash equivalents and restricted cash, December 31$56 $18 $50 $9 $3 $4 Operating Activities - The following items contributed to increased (decreased) operating activity cash flows for 2020 compared to 2019 (in millions):Alliant EnergyIPLWPLDAEC PPA amendment buyout payment in 2020 (Refer to Note 2)($110)($110)$—Amounts issued to IPL’s retail electric customers in 2020 through its transmission cost rider for amounts previously collected in rates (Refer to Note 2)(42)(42)—Timing of WPL’s fuel-related cost recoveries from customers(38)—(38)Decreased collections from IPL’s gas customers for energy efficiency amounts through the energy efficiency rider(34)(34)—Changes in cash collateral and deposit balances at Corporate Services(24)——Decreased collections from IPL’s and WPL’s retail customers caused by temperature impacts on electric and gas sales(19)(14)(5)Changes in income taxes paid/refunded(16)(25)42Credits issued to IPL’s retail electric customers in 2020 through its tax benefit rider related to excess deferred income taxes amortization(15)(15)—Changes in interest payments(6)(19)1Higher collections from IPL’s retail electric and gas base rate increases7474—Changes in levels of production fuel28127Refunds received in 2020 related to the MISO transmission owner return on equity complaint FERC orders (Refer to Note 17(g))20155Other (primarily due to other changes in working capital)23(10)11($159)($179)$43Income Tax Payments and Refunds - Income tax (payments) refunds, including refunds of alternative minimum tax credits, were as follows (in millions):20202019IPL($18)$7WPL13(29)Other subsidiaries1043Alliant Energy$5$21Alliant Energy, IPL and WPL currently do not expect to make any significant federal income tax payments through 2023 based on their current federal net operating loss and credit carryforward positions. While no significant federal income tax payments through 2023 are expected to occur, some tax payments and refunds may occur for state taxes and between consolidated group members (including IPL and WPL) under the tax sharing agreement between Alliant Energy and its subsidiaries. Refer to Note 12 for discussion of the carryforward positions.Pension Plan Contributions - Alliant Energy, IPL and WPL currently expect to make $39 million, $17 million and $18 million of pension plan contributions in 2021, respectively, based on the funded status and assumed return on assets for each plan as of the December 31, 2020 measurement date. Refer to Note 13(a) for discussion of the current funded levels of pension plans.33Table of ContentsInvesting Activities - The following items contributed to increased (decreased) investing activity cash flows for 2020 compared to 2019 (in millions):Alliant EnergyIPLWPLLower (higher) utility construction and acquisition expenditures (a)$246$333($87)Changes in the amount of cash receipts on sold receivables4545—Refund from ATC in 2020 for construction deposits WPL previously provided to ATC for transmission network upgrades for West Riverside42—42Expenditures for new acquisitions at AEF in 201913——Other (10)(12)(11)$336$366($56)(a)Largely due to lower expenditures for IPL’s expansion of wind generation, WPL’s West Riverside Energy Center and IPL’s advanced metering infrastructure, partially offset by higher expenditures for IPL’s and WPL’s electric and gas distribution systems (which include the derecho windstorm) and WPL’s expansion of wind generation.Construction and Acquisition Expenditures - Construction and acquisition expenditures and financing plans are reviewed, approved and updated as part of the strategic planning process. Changes may result from a number of reasons, including regulatory requirements, changing legislation, not obtaining favorable and acceptable regulatory approval on certain projects, improvements in technology and improvements to ensure reliability of the electric and gas distribution systems. Alliant Energy, IPL and WPL have not yet entered into contractual commitments relating to the majority of their anticipated future construction and acquisition expenditures. As a result, they have some discretion with regard to the level and timing of these expenditures. The table below summarizes anticipated construction and acquisition expenditures (in millions). Cost estimates represent Alliant Energy’s, IPL’s and WPL’s portion of construction expenditures and exclude AFUDC and capitalized interest, if applicable. Such estimates do not reflect the assumption that a portion of the construction is expected to be financed by tax equity partners, which is described in more detail below in “IPL and WPL Solar Project Tax Equity Credits.” Refer to “Customer Investments” for further discussion of certain key projects impacting construction and acquisition plans related to the utility business.Alliant EnergyIPLWPL202120222023202420212022202320242021202220232024Generation:Renewable projects$485 $750 $635 $320 $45 $270 $270 $50 $440 $480 $365 $270 Other90 180 175 90 45 135 135 55 45 45 40 35 Distribution:Electric systems470 435 535 695 240 225 290 375 230 210 245 320 Gas systems70 75 70 70 35 40 30 30 35 35 40 40 Other180 185 190 195 10 10 10 25 15 10 10 10 $1,295 $1,625 $1,605 $1,370 $375 $680 $735 $535 $765 $780 $700 $675 West Riverside Options - WPL entered into agreements with neighboring utilities that provide them options to purchase a partial ownership interest in West Riverside. If such options are exercised, WPL will receive proceeds from the sale. Refer to “Customer Investments” for additional information, including the timing for the potential exercise of options.Financing Activities - The following items contributed to increased (decreased) financing activity cash flows for 2020 compared to 2019 (in millions):Alliant EnergyIPLWPLLower (higher) payments to retire long-term debt($401)($200)$100Lower net proceeds from common stock issuances(143)——Higher common stock dividends(40)(68)(16)Higher (lower) net proceeds from issuance of long-term debt300(200)—Net changes in the amount of commercial paper outstanding1565026Higher (lower) capital contributions from IPL’s and WPL’s parent company, Alliant Energy—279(100)Other(3)(4)7($131)($143)$17IPL and WPL Solar Project Tax Equity Credits - IPL and WPL each propose to own and operate their planned solar projects, which are currently expected to qualify for 30% investment tax credits, through a tax equity partnership, with approximately 35% to 45% of the construction costs financed with capital from the tax equity partner. This would allow IPL’s and WPL’s customers to share the costs of the solar projects with an investment partner for 10 years or less, while ensuring their customers receive energy, capacity, and renewable energy credit benefits from the projects. IPL and WPL would expect to purchase the tax equity partner’s interest in the solar projects within 10 years of operation, and then convert to a traditional 34Table of Contentsownership structure for the remainder of the useful life of the projects. Assuming a portion of the construction costs are financed by the tax equity partner, IPL would receive approximately $205 million from the tax equity partner in 2023, and WPL would receive approximately $210 million in 2022 and $275 million in 2023. IPL and WPL would expect to include their portion of capital expenditures, less the amounts financed by the tax equity partner, in their respective rate base.FERC and Public Utility Holding Company Act Financing Authorizations - Under the Public Utility Holding Company Act of 2005, FERC has authority over the issuance of utility securities, except to the extent that a public utility’s primary state regulatory commission has retained jurisdiction over such matters. FERC currently has authority over the issuance of securities by IPL. FERC does not have authority over the issuance of securities by Alliant Energy, WPL, AEF or Corporate Services. In 2019, IPL received authorization from FERC to issue securities in 2020 and 2021 as follows (in millions):Initial AuthorizationRemaining Capacity as of December 31, 2020Long-term debt securities issuances in aggregate$700$300Short-term debt securities outstanding at any time (including borrowings from its parent)400400Preferred stock issuances in aggregate300300State Regulatory Financing Authorizations - In 2017, WPL received authorization from the PSCW to have up to $400 million of short-term borrowings and/or letters of credit outstanding at any time through the earlier of the expiration date of WPL’s credit facility agreement (including extensions) or December 2024. In September 2020, WPL received authorization from the PSCW to issue up to $1 billion of long-term debt securities in aggregate through December 2023.Shelf Registrations - Alliant Energy, IPL and WPL have current shelf registration statements on file with the SEC for availability to issue unspecified amounts of securities through December 2023. Alliant Energy’s shelf registration statement may be used to issue common stock, debt and other securities. IPL’s and WPL’s shelf registration statements may be used to issue preferred stock and debt securities.Common Stock Dividends - Payment of common stock dividends is subject to dividend declaration by Alliant Energy’s Board of Directors and is dependent upon, among other factors, regulatory limitations, earnings, cash flows, capital requirements and general financial condition of subsidiaries. Alliant Energy’s general long-term goal is to maintain a dividend payout ratio that is competitive with the industry average. Based on that, Alliant Energy’s goal is to maintain a dividend payout ratio of approximately 60% to 70% of consolidated earnings from continuing operations. Refer to “Results of Operations” for discussion of expected common stock dividends in 2021.Common Stock Issuances - Refer to Note 7 for discussion of common stock issuances by Alliant Energy in 2019 and 2020, and “Results of Operations” for discussion of expected issuances of common stock in 2021.Short-term Debt - In 2017, Alliant Energy, IPL and WPL entered into a single revolving credit facility agreement, which expires in August 2023 and is discussed in Note 9(a). There are currently 13 lenders that participate in the credit facility, with respective commitments ranging from $20 million to $130 million. Subject to certain conditions, Alliant Energy, IPL and WPL may exercise one extension option, extending the maturity date by one year. The credit facility has a provision to expand the facility size up to an additional $300 million, for a potential total commitment of $1.3 billion, subject to lender approval for Alliant Energy and subject to lender and regulatory approvals for IPL and WPL.The credit agreement contains customary events of default, including a cross-default provision that would be triggered if Alliant Energy or certain of its significant subsidiaries (including IPL and WPL) defaults on debt (other than non-recourse debt) totaling $100 million or more. IPL and WPL are subject to a similar cross-default provision with respect to their own respective consolidated debt. A default by Alliant Energy or its non-utility subsidiaries would not trigger a cross-default at IPL or WPL, nor would a default by either of IPL or WPL constitute a cross-default event for the other. If an event of default under the credit agreement occurs and is continuing, then the lenders may declare any outstanding obligations of the defaulting borrower under the credit agreement immediately due and payable.The single credit facility agreement contains a financial covenant, which requires Alliant Energy, IPL and WPL to maintain certain debt-to-capital ratios in order to borrow under the credit facility. AEF’s term loan credit agreement contains a financial covenant, which requires Alliant Energy to maintain a certain debt-to-capital ratio in order to borrow under the term loan credit agreement. The required debt-to-capital ratios compared to the actual debt-to-capital ratios at December 31, 2020 were as follows:Alliant EnergyIPLWPLRequirement, not to exceed65%65%65%Actual55%46%50%The debt component of the capital ratios includes, when applicable, long- and short-term debt (excluding non-recourse debt and hybrid securities to the extent the total carrying value of such hybrid securities does not exceed 15% of consolidated capital of the applicable borrower), finance lease obligations, certain letters of credit, guarantees of the foregoing and new synthetic leases. Unfunded vested benefits under qualified pension plans and sales of accounts receivable are not included in 35Table of Contentsthe debt-to-capital ratios. The equity component of the capital ratios excludes accumulated other comprehensive income (loss).Long-term Debt - Refer to Note 9(b) for discussion of issuances and retirements of long-term debt in 2020 and “Results of Operations” for discussion of expected issuances of long-term debt in 2021. In 2019, IPL issued $300 million of 3.6% senior debentures (green bonds) due 2029 and $300 million of 3.5% senior debentures (green bonds) due 2049. In 2019, WPL issued $350 million of 3% debentures due 2029, and a portion of the proceeds from the issuance was used by WPL to refinance its $250 million 5% debentures that matured in 2019.Impact of Credit Ratings on Liquidity and Collateral Obligations -Ratings Triggers - The long-term debt of Alliant Energy and its subsidiaries is not subject to any repayment requirements as a result of explicit credit rating downgrades or so-called “ratings triggers.” However, Alliant Energy and its subsidiaries are parties to various agreements that contain provisions dependent on credit ratings. In the event of a significant downgrade, Alliant Energy or its subsidiaries may need to provide credit support, such as letters of credit or cash collateral equal to the amount of any exposure, or may need to unwind contracts or pay underlying obligations. In the event of a significant downgrade, management believes Alliant Energy, IPL and WPL have sufficient liquidity to cover counterparty credit support or collateral requirements under these various agreements. In addition, a downgrade in the credit ratings of Alliant Energy, IPL or WPL, could also result in them paying higher interest rates in future financings, reduce flexibility with future financing plans, reduce their pool of potential lenders, increase their borrowing costs under existing credit facilities or limit their access to the commercial paper market. Credit ratings and outlooks as of the date of this report are as follows:Standard & Poor’s Ratings ServicesMoody’s Investors ServiceAlliant Energy:Corporate/issuerA-Baa2Commercial paperA-2P-2Senior unsecured long-term debtN/AN/AOutlookStableStableIPL:Corporate/issuerA-Baa1Commercial paperA-2P-2Senior unsecured long-term debtA-Baa1Preferred stockBBBBaa3OutlookStableStableWPL:Corporate/issuerAA3Commercial paperA-1P-2Senior unsecured long-term debtAA3OutlookStableStableStandard & Poor’s Ratings Services and Moody’s Investors Service issued credit ratings of BBB+ and Baa2, respectively, for the senior notes issued by AEF in 2018 and 2020 (with Alliant Energy as guarantor). Credit ratings are not recommendations to buy or sell securities and are subject to change, and each rating should be evaluated independently of any other rating. Each of Alliant Energy, IPL or WPL assumes no obligation to update their respective credit ratings. Refer to Note 15 for additional information on ratings triggers for commodity contracts accounted for as derivatives.Off-Balance Sheet Arrangements -Special Purpose Entities - IPL maintains a Receivables Agreement whereby it may sell its customer accounts receivables, unbilled revenues and certain other accounts receivables to a third party through wholly-owned and consolidated special purpose entities. The purchase commitment from the third party to which IPL sells its receivables expires in March 2021. IPL currently expects to amend and extend the purchase commitment. In 2020 and 2019, IPL evaluated the third party that purchases IPL’s receivable assets under the Receivables Agreement and believes that the third party is a VIE; however, IPL concluded consolidation of the third party was not required.In addition, IPL’s sales of accounts receivable program agreement contains a cross-default provision that is triggered if IPL or Alliant Energy incurs an event of default on debt totaling $100 million or more. If an event of default under IPL’s sales of accounts receivable program agreement occurs, then the counterparty could terminate such agreement. Refer to Note 5(b) for additional information regarding IPL’s sales of accounts receivable program.Guarantees and Indemnifications - At December 31, 2020, various guarantees and indemnifications are outstanding related to Alliant Energy’s cash equity ownership interest in a non-utility wind farm and prior divestiture activities. Refer to Note 17(d) for additional information.36Table of ContentsCertain Financial Commitments - Contractual Obligations - Alliant Energy, IPL and WPL have various long-term contractual obligations as of December 31, 2020, which include long-term debt maturities in Note 9(b), operating and finance leases in Note 10, capital purchase obligations in Note 17(a), and other purchase obligations in Note 17(b). At December 31, 2020, Alliant Energy, IPL and WPL had no uncertain tax positions recorded as liabilities. Refer to Note 13(a) for anticipated pension and OPEB funding amounts, which are not included in the above tables. Refer to “Construction and Acquisition Expenditures” above for additional information on construction and acquisition programs. In addition, at December 31, 2020, there were various other liabilities included on the balance sheets that, due to the nature of the liabilities, the timing of payments cannot be estimated.OTHER MATTERSMarket Risk Sensitive Instruments and Positions - Primary market risk exposures are associated with commodity prices, investment prices and interest rates. Risk management policies are used to monitor and assist in mitigating these market risks and derivative instruments are used to manage some of the exposures related to commodity prices. Refer to Notes 1(h) and 15 for further discussion of derivative instruments, and Note 1(g) for details of utility cost recovery mechanisms that significantly reduce commodity risk.Commodity Price - Alliant Energy, IPL and WPL are exposed to the impact of market fluctuations in the price and transportation costs of commodities they procure and market. Established policies and procedures mitigate risks associated with these market fluctuations, including the use of various commodity derivatives and contracts of various durations for the forward sale and purchase of these commodities. Exposure to commodity price risks in the utility businesses is also significantly mitigated by current rate-making structures in place for recovery of fuel-related costs as well as the cost of natural gas purchased for resale. IPL’s electric and gas tariffs and WPL’s wholesale electric and gas tariffs provide for subsequent monthly adjustments to their tariff rates for material changes in prudently incurred commodity costs. IPL’s and WPL’s rate mechanisms, combined with commodity derivatives, significantly reduce commodity risk associated with their electric and gas margins. WPL’s retail electric margins have modest exposure to the impact of changes in commodity prices due largely to the current retail recovery mechanism in place in Wisconsin for fuel-related costs.Investment Price - Alliant Energy, IPL and WPL are exposed to investment price risk as a result of their investments in securities, largely related to securities held by their pension and OPEB plans. Refer to Note 13(a) for details of the securities held by their pension and OPEB plans. Refer to “Critical Accounting Policies and Estimates” for the impact on retirement plan costs of changes in the rate of returns earned by plan assets.Interest Rate - Alliant Energy, IPL and WPL are exposed to risk resulting from changes in interest rates associated with variable-rate borrowings. In addition, Alliant Energy and IPL are exposed to risk resulting from changes in interest rates on cash amounts outstanding under IPL’s sales of accounts receivable program. Assuming the impact of a hypothetical 100 basis point increase in interest rates on variable-rate borrowings and cash amounts outstanding under IPL’s sales of accounts receivable program at December 31, 2020, Alliant Energy’s, IPL’s and WPL’s annual pre-tax expense would increase by approximately $7 million, $0 and $3 million, respectively. Refer to Notes 5(b) and 9 for additional information on cash amounts outstanding under IPL’s sales of accounts receivable program, and short- and long-term variable-rate borrowings, respectively. Refer to “Critical Accounting Policies and Estimates” for the impacts of changes in discount rates on retirement plan obligations and costs.New Accounting Standards - Refer to Note 1(o) for discussion of new accounting standards impacting Alliant Energy, IPL and WPL.Critical Accounting Policies and Estimates - Alliant Energy’s, IPL’s and WPL’s financial statements are prepared in conformity with GAAP, which requires management to apply accounting policies, judgments and assumptions, and make estimates that affect results of operations and the amounts of assets and liabilities reported in the financial statements. The following accounting policies and estimates are critical to the business and the understanding of financial results as they require critical assumptions and judgments by management. The results of these assumptions and judgments form the basis for making estimates regarding the results of operations and the amounts of assets and liabilities that are not readily apparent from other sources. Actual financial results may differ materially from estimates. Management has discussed these critical accounting policies and estimates with the Audit Committee of the Board of Directors. Refer to Note 1 for additional discussion of accounting policies and estimates used in the preparation of the financial statements.Regulatory Assets and Regulatory Liabilities - IPL and WPL are regulated by various federal and state regulatory agencies. As a result, they are subject to GAAP for regulated operations, which recognizes that the actions of a regulator can provide reasonable assurance of the existence of an asset or liability. Regulatory assets or regulatory liabilities arise as a result of a difference between GAAP and actions imposed by the regulatory agencies in the rate-making process. Regulatory assets generally represent incurred costs that have been deferred as such costs are probable of recovery in future customer rates. Regulatory liabilities generally represent obligations to make refunds to customers or amounts collected in rates for which the related costs have not yet been incurred. Regulatory assets and regulatory liabilities are recognized in accordance with the rulings of applicable federal and state regulators, and future regulatory rulings may impact the carrying value and accounting treatment of regulatory assets and regulatory liabilities.37Table of ContentsAssumptions and judgments are made each reporting period regarding whether regulatory assets are probable of future recovery and regulatory liabilities are probable future obligations by considering factors such as regulatory environment changes, rate orders issued by the applicable regulatory agencies, historical decisions by such regulatory agencies regarding similar regulatory assets and regulatory liabilities, and subsequent events of such regulatory agencies. The decisions made by regulatory authorities have an impact on the recovery of costs, the rate of return on invested capital and the timing and amount of assets to be recovered by rates. A change in these decisions may result in a material impact on results of operations and the amount of assets and liabilities in the financial statements. Note 2 provides details of the nature and amounts of regulatory assets and regulatory liabilities assessed at December 31, 2020.Income Taxes - Alliant Energy, IPL and WPL are subject to income taxes in various jurisdictions. Assumptions and judgments are made each reporting period to estimate income tax assets, liabilities, benefits and expenses. Judgments and assumptions are supported by historical data and reasonable projections. Significant changes in these judgments and assumptions could have a material impact on financial condition and results of operations. Alliant Energy’s and IPL’s critical assumptions and judgments for 2020 include estimates of qualifying deductions for repairs expenditures and allocation of mixed service costs due to the impact of Iowa rate-making principles on such property-related differences. Critical assumptions and judgments also include projections of future taxable income used to determine the ability to utilize net operating losses and credit carryforwards prior to their expiration. Refer to Note 12 for further discussion of tax matters.Effect of Rate-making on Property-related Differences - Alliant Energy’s and IPL’s effective income tax rates are normally impacted by certain property-related differences at IPL for which deferred tax is not recorded in the income statement pursuant to Iowa rate-making principles. Changes in methods or assumptions regarding the amount of IPL’s qualifying repairs expenditures, allocation of mixed service costs, and costs related to retirement or removal of depreciable property could result in a material impact on Alliant Energy’s and IPL’s financial condition and results of operations.Carryforward Utilization - Significant federal tax credit carryforwards and federal and state net operating loss carryforwards exist for Alliant Energy, IPL and WPL as of December 31, 2020. Based on projections of current and future taxable income, Alliant Energy, IPL and WPL plan to utilize substantially all of these carryforwards prior to their expiration. Taxable income must be reduced by federal net operating losses carryforwards prior to utilizing federal tax credit carryforwards. Alliant Energy does not expect to utilize all of its federal net operating loss carryforwards until 2023, and therefore, currently does not expect to utilize 2002 vintage federal credit carryforwards prior to their expiration in 2022, resulting in valuation allowances that remain as of December 31, 2020. Refer to Note 12 for discussion of expected utilization of 2003 vintage federal credit carryforwards prior to their expiration in 2023, which resulted in the reversal of previously recorded valuation allowances in 2020. Federal credit carryforwards generated from 2003 through 2009, which amount to $17 million for Alliant Energy, are expected to be utilized within five years of expiration. All other federal credit carryforwards and federal net operating loss carryforwards are expected to be utilized more than five years before expiration. Changes in tax regulations or assumptions regarding current and future taxable income could require changes to valuation allowances in the future resulting in a material impact on financial condition and results of operations.Long-Lived Assets - Periodic assessments regarding the recoverability of certain long-lived assets are completed when factors indicate the carrying value of such assets may not be recoverable or such assets are planned to be sold. These assessments require significant assumptions and judgments by management. The long-lived assets assessed for impairment generally include certain assets within regulated operations that may not be fully recovered from IPL’s and WPL’s customers as a result of regulatory decisions in the future, and assets within non-utility operations that are proposed to be sold or are currently generating operating losses.Regulated Operations - Alliant Energy’s, IPL’s and WPL’s long-lived assets within their regulated operations that were assessed for impairment and plant abandonment in 2020 included IPL’s and WPL’s generating units subject to early retirement.Generating Units Subject to Early Retirement - Alliant Energy, IPL and WPL evaluate future plans for their electric generation fleet and have announced the early retirement of certain older and less-efficient EGUs. When it becomes probable that an EGU will be retired before the end of its useful life, Alliant Energy, IPL and WPL must assess whether the EGU meets the criteria to be considered probable of abandonment. EGUs that are considered probable of abandonment generally have material remaining net book values and are expected to cease operations in the near term significantly before the end of their original estimated useful lives. If an EGU meets such criteria to be considered probable of abandonment, Alliant Energy, IPL and WPL must assess the probability of full recovery of the remaining carrying value of such EGU. If it is probable that regulators will not allow full recovery of and a full return on the remaining net book value of the abandoned EGU, an impairment charge is recognized equal to the difference between the remaining carrying value and the present value of the future revenues expected from the abandoned EGU.Alliant Energy and IPL concluded that Lansing, and Alliant Energy and WPL concluded that Edgewater Unit 5, met the criteria to be considered probable of abandonment in 2020. IPL and WPL are currently allowed a full recovery of and a full return on its respective EGU from both its retail and wholesale customers, and as a result, Alliant Energy, IPL and WPL concluded that no impairment was required as of December 31, 2020. Alliant Energy, IPL and WPL evaluated their other EGUs that are subject to early retirement and determined that no other EGUs met the criteria to be considered probable of abandonment as of December 31, 2020. Note 3 provides additional details of these assets anticipated to be retired early.38Table of ContentsUnbilled Revenues - Unbilled revenues are primarily associated with utility operations. Energy sales to individual customers are based on the reading of customers’ meters, which occurs on a systematic basis throughout the month. Amounts of energy delivered to customers since the date of the last meter reading are estimated at the end of each reporting period and the corresponding estimated unbilled revenue is recorded. The unbilled revenue is based on estimates of daily system demand volumes, customer usage by class, temperature impacts, line losses and the most recent customer rates. Such process involves the use of various judgments and assumptions and significant changes in these judgments and assumptions could have a material impact on results of operations. As of December 31, 2020, unbilled revenues related to Alliant Energy’s utility operations were $174 million ($92 million at IPL and $82 million at WPL).Pensions and Other Postretirement Benefits - Alliant Energy, IPL and WPL sponsor various defined benefit pension and OPEB plans that provide benefits to a significant portion of their employees and retirees. Assumptions and judgments are made periodically to estimate the obligations and costs related to their retirement plans. There are many judgments and assumptions involved in determining an entity’s pension and other postretirement liabilities and costs each period including employee demographics (including life expectancies and compensation levels), discount rates, assumed rates of return and funding. Changes made to plan provisions may also impact current and future benefits costs. Judgments and assumptions are supported by historical data and reasonable projections and are reviewed at least annually. The following table shows the impacts of changing certain key actuarial assumptions discussed above (in millions):Defined Benefit Pension PlansOPEB PlansChange in Actuarial AssumptionImpact on Projected Benefit Obligation at December 31, 2020Impact on 2021 Net Periodic Benefit CostsImpact on Accumulated Benefit Obligation at December 31, 2020Impact on 2021 Net Periodic Benefit CostsAlliant Energy1% change in discount rate$183$11$22$21% change in expected rate of returnN/A10N/A1IPL1% change in discount rate866811% change in expected rate of returnN/A4N/A1WPL1% change in discount rate815811% change in expected rate of returnN/A4N/A—Contingencies - Assumptions and judgments are made each reporting period regarding the future outcome of contingent events. Loss contingency amounts are recorded for any contingent events for which the likelihood of loss is probable and able to be reasonably estimated based upon current available information. The amounts recorded may differ from actuals when the uncertainty is resolved. The estimates made in accounting for contingencies, and the gains and losses that are recorded upon the ultimate resolution of these uncertainties, could have a significant effect on results of operations and the amount of assets and liabilities in the financial statements.Effective January 1, 2020 upon the adoption of the new accounting standard for credit losses, certain contingencies, such as Alliant Energy Resources, LLC’s guarantees of the partnership obligations of an affiliate of Whiting Petroleum, require estimation each reporting period of the expected credit losses on those contingencies. These estimates require significant judgment and result in recognition of a credit loss liability sooner than the previous accounting standards, which required recognition when the contingency became probable and could be reasonably estimated based on then currently available information. With respect to Alliant Energy’s guarantees of the partnership obligations of an affiliate of Whiting Petroleum, the most significant judgments in determining the credit loss liability were the estimate of the exposure under the guarantees and the methodology used for calculating the credit loss liability. As of December 31, 2020, Alliant Energy currently estimates the exposure to be a portion of the known partnership abandonment obligations. The methodology used to determine the credit loss liability considers both quantitative and qualitative information, which utilizes potential outcomes in a range of possible estimated amounts. Factors considered include market and external data points, the creditworthiness of the other partners, Whiting Petroleum’s emergence from bankruptcy in the third quarter of 2020, and forecasted cash flow expenditures associated with the abandonment obligations based on information made available to Alliant Energy. Note 1(o) provides discussion of the adoption of the new accounting standard for credit losses.Note 17 provides further discussion of contingencies assessed at December 31, 2020 that may have a material impact on financial condition and results of operations, including impacts to Alliant Energy’s ATC Holdings equity earnings as a result of future changes in FERC’s evaluation of certain MISO return on equity complaints, various pending legal proceedings, guarantees and indemnifications.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk are reported in “Other Matters - Market Risk Sensitive Instruments and Positions” in MDA.

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsPage2020 Highlights34Property-Liability Operations40Allstate Protection 43– Allstate brand51– Encompass brand56Discontinued Lines and Coverages59Protection Services (previously Service Businesses)62Claims and Claims Expense Reserves64Allstate Life71Allstate Benefits76Allstate Annuities79Investments83Market Risk94Capital Resources and Liquidity98Enterprise Risk and Return Management104Application of Critical Accounting Estimates107Regulation and Legal Proceedings121Pending Accounting Standards121The Allstate Corporation 332020 Form 10-K 2020 HighlightsOverviewThe following discussion highlights significant factors influencing the consolidated financial position and results of operations of The Allstate Corporation (referred to in this document as “we,” “our,” “us,” the “Company” or “Allstate”). It should be read in conjunction with the consolidated financial statements and related notes found under

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsEXECUTIVE SUMMARY OF 2020 FINANCIAL RESULTSAon is a leading global professional services firm providing a broad range of risk, retirement, and health solutions underpinned by proprietary data and analytics. Management continues to lead its set of initiatives designed to strengthen Aon and unite the firm with one portfolio of capability enabled by proprietary data and analytics and one operating model to deliver additional insight, connectivity, and efficiency.Financial Results The following is a summary of our 2020 financial results from continuing operations:•Revenue increased $53 million, or 0%, to $11,066 million in 2020 compared to 2019, reflecting 1% organic revenue growth, offset by a 1% unfavorable impact from divestitures, net of acquisitions. Organic revenue growth for the year was driven by strength in the core portions of the business, partially offset by a decline in the more discretionary portions.•Operating expenses decreased $559 million, or 6%, to $8,285 million in 2020 compared to 2019 due primarily to a $451 million decrease in restructuring charges, a $138 million decrease from accelerated amortization related to certain tradenames that were fully amortized in the second quarter, expense discipline in an effort to proactively manage liquidity due to uncertainties surrounding COVID-19 and its impact on the Company, including lower travel and entertainment expense, and a $42 million favorable impact from translating prior year period results at current period foreign exchange rates (“foreign currency translation”), partially offset by $123 million of transaction costs related to the pending combination with WTW and a $37 million increase in expenses related to acquisitions, net of divestitures.•Operating margin increased to 25.1% in 2020 from 19.7% in 2019. The increase in operating margin from the prior year is primarily driven by organic revenue growth of 1% and a decrease in operating expenses as listed above.•Due to the factors set forth above, net income from continuing operations was $2,017 million in 2020, an increase of $443 million, or 28%, from 2019. •Diluted earnings per share from continuing operations was $8.45 per share during the twelve months of 2020 compared to $6.37 per share for the prior year period.•Cash flows provided by operating activities was $2,783 million in 2020, an increase of $948 million, or 52%, from $1,835 million in 2019, primarily due to working capital improvements, including improved collections and actions taken to proactively manage liquidity, a $288 million decrease in restructuring cash outlays, and strong operational improvement. The prior year period included approximately $130 million of net cash payments related to legacy litigation.We focus on four key non-GAAP metrics that we communicate to shareholders: organic revenue growth (decline), adjusted operating margins, adjusted diluted earnings per share, and free cash flows. These non-GAAP metrics should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto (the “Consolidated Financial Statements”). The following is our measure of performance against these four metrics from continuing operations for 2020:•Organic revenue growth (decline), a non-GAAP measure defined under the caption “Review of Consolidated Results — Organic Revenue Growth (Decline),” was 1% in 2020, compared to 6% organic growth in the prior year. Organic revenue growth was driven by strength in the core portions of our business, partially offset by a decline in the more discretionary portions.•Adjusted operating margin, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Operating Margin,” was 28.5% in 2020, compared to 27.5% in the prior year. The increase in adjusted operating margin primarily reflects expense discipline, including lower travel and entertainment expense, increased operating leverage across the portfolio, and 1% organic revenue growth, partially offset by a $47 million decrease in fiduciary investment income and an unfavorable impact from foreign currency translation of $12 million.30•Adjusted diluted earnings per share from continuing operations, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Diluted Earnings per Share,” was $9.81 per share in 2020, an increase of $0.64 per share, or 7%, from $9.17 per share in 2019. The increase in adjusted diluted earnings per share primarily reflects strong operational performance and effective capital management, highlighted by $1.8 billion of share repurchase during 2020, partially offset by an unfavorable impact from foreign currency translation.•Free cash flow, a non-GAAP measure defined under the caption “Review of Consolidated Results — Free Cash Flow,” was $2,642 million in 2020, an increase of $1,032 million, or 64%, from $1,610 million in 2019, driven by an increase of $948 million in cash flows from operations and a $84 million decrease in capital expenditures. The prior year included $75 million of capital expenditures related to the restructuring program.IRELAND REORGANIZATIONFor a description of the Ireland Reorganization, see Part I, Item 1. “Business - Ireland Reorganization” in this report.BUSINESS COMBINATION AGREEMENTOn March 9, 2020, Aon and WTW, entered into a Business Combination Agreement with respect to a combination of the parties. At the effective date of the Combination, WTW shareholders will be entitled to receive 1.08 newly issued Class A ordinary shares of Aon in exchange for each ordinary share of WTW held by such holders. The Combination is subject to Irish Takeover Rules. The Business Combination Agreement contains certain operating covenants relating to the conduct of business of both parties in the interim period until the transaction is completed. These covenants require both parties to operate their respective businesses in all material respects in the ordinary course of business consistent with past practice. In addition, these covenants restrict each party from engaging in certain actions unless a party obtains the prior written consent of the other party. These actions relate to, among other things, authorizing or paying dividends above a specified rate; issuing or authorizing for issuance additional securities; salary, benefits or other compensation and employment-related matters; capital management, debt and liquidity matters; engaging in mergers, acquisitions and dispositions; entering into or materially modifying material agreements; entering into material litigation-related settlements; and making other corporate, tax and accounting changes. The parties’ respective shareholders approved the Combination on August 26, 2020. On October 30, 2020, Aon and WTW amended the Business Combination Agreement to provide that, at the effective date of the transaction, there will be 12 members of Aon’s Board of Directors, including one director mutually agreed by the parties.The parties continue to work with regulators, including the Antitrust Division of the U.S. Department of Justice (which, as previously disclosed, has delivered a “Second Request” pursuant to the HSR Act) and the European Commission (which, as previously disclosed, has initiated a Phase II review of the Combination) to obtain the required approvals to close the Combination. Aon expects to close the Combination in the first half of 2021, subject to regulatory approval and customary closing conditions.RECENT DEVELOPMENTSThe outbreak of the coronavirus, COVID-19, was declared by the World Health Organization to be a pandemic and has continued to spread across the globe, impacting almost all countries, in varying degrees, creating significant public health concerns, and significant volatility, uncertainty and economic disruption in every region in which we operate. While countries are in various stages of business and travel restrictions to address the COVID-19 pandemic, as well as related re-openings, these policies have impacted and will continue to impact worldwide economic activity and may continue to adversely affect our business. We continue to closely monitor the situation and our business, liquidity, and capital planning initiatives. We continue to be fully operational and continue to reoccupy certain offices in phases, where deemed appropriate and in compliance with governmental restrictions considering the impact on health and safety of our colleagues, their families, and our clients. For other areas where restrictions remain in place or where we have started to see a resurgence of COVID-19, we are closely monitoring the situation and continuously reevaluating our plan to return to the workplace. We continue to deploy business continuity protocols to facilitate remote working capabilities to ensure the health and safety of our colleagues and to comply with public health and travel guidelines and restrictions. As the situation continues to evolve, and the scale and duration of disruption cannot be predicted, it is not possible to quantify or estimate the full impact that COVID-19 will have on our business. We are focused on navigating these challenges and potential future impacts to our business presented by COVID-19 through preserving our liquidity and managing our cash flow by taking proactive steps to enhance our ability to meet our short-term liquidity needs and support a commitment to no layoffs of our colleagues due to COVID-19. Such actions include, but are not limited to, issuing $1 billion of our new 10-year senior unsecured notes on May 12, 2020 and using the proceeds to repay short-term debt and for other corporate purposes, and reducing our discretionary spending, including limiting discretionary spending on mergers and acquisitions. We also temporarily suspended our share buyback program and temporarily reduced compensation for named executive officers, 31directors, and colleagues during the second quarter, as a precautionary measure, focusing on implementing cash and expense discipline measures. After carefully monitoring the situation, we determined it was appropriate, based on macroeconomic conditions and business performance, to resume share buyback during the third quarter. In addition, temporarily reduced salaries for non-executives were restored at the end of the second quarter and withheld salaries, plus 5% of the withheld salary amounts, were repaid in the third quarter. Temporarily reduced salaries for named executive officers and cash compensation reductions for non-executive directors were fully reinstated and the withheld amounts were paid in full during the fourth quarter. While the ultimate public health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net revenues, earnings, and cash flows, will be adversely impacted, depending on the duration and severity of the downturn, as well as governmental or other regulatory policies and actions that may impact our business or operations. Our revenues can be generalized into two categories: core and more discretionary arrangements. Core revenues tend to be highly-recurring and non-discretionary, where the services are typically regulated, required, or necessary costs of managing the risk of doing business. As expected, in the fourth quarter of 2020 our core revenues did not experience a significant decrease due to the impacts of COVID-19; however, if the economic downturn becomes more severe, we expect that certain services within our core business may be negatively impacted as well. More discretionary revenues tend to include project-related services, where as expected, in the fourth quarter of 2020 we saw an impact from decreases in revenue due to the impacts of COVID-19. The impacts of the pandemic on our business operations and results of operations for the fourth quarter of 2020 are further described in the section entitled “Review of Consolidated Results” and “Liquidity and Financial Condition” contained in Part II, Item 7 of this report.32REVIEW OF CONSOLIDATED RESULTSSummary of ResultsOur consolidated results are as follow:Years ended December 31(millions)202020192018Revenue Total revenue$11,066 $11,013 $10,770 Expenses Compensation and benefits5,905 6,054 6,103 Information technology444 494 484 Premises291 339 370 Depreciation of fixed assets167 172 176 Amortization and impairment of intangible assets246 392 593 Other general expense1,232 1,393 1,500 Total operating expenses8,285 8,844 9,226 Operating income2,781 2,169 1,544 Interest income6 8 5 Interest expense(334)(307)(278)Other income (expense)12 1 (25)Income from continuing operations before income taxes2,465 1,871 1,246 Income tax expense448 297 146 Net income from continuing operations2,017 1,574 1,100 Net income (loss) from discontinued operations1 (1)74 Net income2,018 1,573 1,174 Less: Net income attributable to noncontrolling interests49 41 40 Net income attributable to Aon shareholders$1,969 $1,532 $1,134 Diluted net income per share attributable to Aon shareholdersContinuing operations$8.45 $6.37 $4.29 Discontinued operations— — 0.30 Net income$8.45 $6.37 $4.59 Weighted average ordinary shares outstanding - diluted233.1 240.6 247.0 Consolidated Results for 2020 Compared to 2019 RevenueTotal revenue increased $53 million, or 0%, to $11,066 million in 2020, compared to $11,013 million in 2019. The increase was driven by 1% organic revenue growth, partially offset by a 1% unfavorable impact from divestitures, net of acquisitions. Organic revenue growth for the year was driven by strength in the core portions of the business, partially offset by a decline in the more discretionary portions.Commercial Risk Solutions revenue increased $17 million, or less than 1%, to $4,690 million in 2020, compared to $4,673 million in 2019. Organic revenue growth was 3% in 2020, driven by growth across most major geographies, including solid growth in the U.S. and Canada and double-digit growth in Latin America, driven by strong retention and management of the renewal book portfolio, partially offset by a decline in the more discretionary portions of our book globally. On average globally, exposures and pricing were both modestly positive, resulting in a modestly positive market impact overall.Reinsurance Solutions revenue increased $128 million, or 8%, to $1,814 million in 2020, compared to $1,686 million in 2019. Organic revenue growth was 10% in 2020 driven by double-digit growth in treaty and in facultative placements, reflecting continued net new business generation. In addition, market impact was modestly positive on results.33Retirement Solutions revenue decreased $64 million, or 4%, to $1,753 million in 2020, compared to $1,817 million in 2019. Organic revenue decline was 2% in 2020 driven primarily by a decline in Human Capital for rewards and assessment services and a modest decline in the discretionary portions of Retirement and Investments, partially offset by growth in the core portions of Retirement and Investments.Health Solutions revenue decreased $12 million, or 1%, to $1,655 million in 2020, compared to $1,667 million in 2019. Organic revenue decline was 1% in 2020 driven by a decrease primarily related to COVID-19, including a reduction primarily reflecting the annualized impact of lower employment levels and lower renewals, and a decline in the more discretionary portions of the business. Results were further negatively impacted by a one-time adjustment of $16 million related to revenue that was recorded across multiple years and was identified in connection with the implementation of a new system, partially offset by growth internationally.Data & Analytic Services revenue decreased $13 million, or 1%, to $1,171 million in 2020, compared to $1,184 million in 2019. Organic revenue decline was 5% in 2020 driven by a decrease in the travel and events practice globally.Compensation and BenefitsCompensation and benefits decreased $149 million, or 2%, in 2020 compared to 2019. The decrease was primarily driven by a $205 million decrease in restructuring charges and a $26 million favorable impact from foreign currency translation, partially offset by a $17 million increase in expenses related to acquisitions, net of divestitures, and an increase in expense associated with 1% organic revenue growth.Information TechnologyInformation technology, which represents costs associated with supporting and maintaining our infrastructure, decreased $50 million, or 10%, in 2020 compared to 2019. The decrease was primarily driven by a $39 million decrease in restructuring charges and expense discipline.PremisesPremises, which represents the cost of occupying offices in various locations throughout the world, decreased $48 million, or 14%, in 2020 compared to 2019. The decrease was primarily driven by a $33 million decrease in restructuring charges and a decrease related to reduced office occupancy.Depreciation of Fixed AssetsDepreciation of fixed assets primarily relates to software, leasehold improvements, furniture, fixtures and equipment, computer equipment, buildings, and automobiles. Depreciation of fixed assets decreased $5 million, or 3%, in 2020 compared to 2019. The decrease was primarily driven by a $14 million decrease in restructuring charges.Amortization and Impairment of Intangible Assets Amortization and impairment of intangibles primarily relates to finite-lived tradenames and customer-related, contract-based, and technology assets. Amortization and impairment of intangibles decreased $146 million, or 37%, in 2020 compared to 2019. The decrease was primarily driven by a $138 million decrease from accelerated amortization related to certain tradenames that were fully amortized in the second quarter.Other General ExpensesOther general expenses decreased $161 million, or 12%, in 2020 compared to 2019. The decrease was primarily driven by a $160 million decrease in restructuring charges and a temporary reduction of certain expenses, primarily travel and entertainment, partially offset by $123 million of transaction costs related to the pending combination with WTW and a $13 million increase in expenses related to acquisitions, net of divestitures.Interest IncomeInterest income represents income earned on operating cash balances and other income-producing investments. It does not include interest earned on funds held on behalf of clients. Interest income was $6 million in 2020, a decrease of $2 million, or 25%, from 2019, reflecting the currency composition of operating cash.Interest ExpenseInterest expense, which represents the cost of our debt obligations, was $334 million in 2020, an increase of $27 million, or 9%, from 2019. The increase was driven primarily by higher outstanding debt balances.34Other Income (Expense)Total other income was $12 million in 2020, compared to other income of $1 million in 2019. Other income in 2020 primarily includes a $25 million gain on the sale of certain businesses, $13 million of pension and other postretirement income, and $4 million of equity earnings, partially offset by $12 million of losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies, $11 million of losses on financial instruments used to economically hedge gains and losses from changes in foreign exchange rates, and $7 million of expense related to the prepayment of $600 million Senior Notes due September 2020. Other income in 2019 primarily includes a $13 million gain on the sale of certain businesses, $9 million of gains due to the favorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies, $9 million of pension and other postretirement income, and $4 million of equity earnings, partially offset by $34 million of losses on financial instruments used to economically hedge gains and losses from changes in foreign exchange rates.Income from Continuing Operations before Income TaxesDue to factors discussed above, income from continuing operations before income taxes was $2,465 million in 2020, a 32% increase from $1,871 million in 2019. Income Taxes from Continuing OperationsThe effective tax rate on net income from continuing operations was 18.2% in 2020 and 15.9% in 2019. The primary driver of the 2020 tax rate is the geographical distribution of income, as well as net favorable discrete items including the impact of share-based payments.The 2019 tax rate was primarily driven by the geographical distribution of income including restructuring charges, as well as net favorable discrete items including the impact of share-based payments.Net Income from Discontinued OperationsNet income from discontinued operations was $1 million in the twelve months ended December 31, 2020, compared to a net loss from discontinued operations of $1 million in 2019.Net Income Attributable to Aon ShareholdersNet income attributable to Aon shareholders increased to $1,969 million, or $8.45 per diluted share, in 2020, compared to $1,532 million, or $6.37 per diluted share, in 2019.Consolidated Results for 2019 Compared to 2018We have elected not to include a discussion of our consolidated results for 2019 compared to 2018 in this report in reliance upon Instruction 1 to Item 303(a) of Regulation S-K. This discussion can be found in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 14, 2020.Non-GAAP MetricsIn our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth (decline), adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Consolidated Financial Statements.35Organic Revenue Growth (Decline)We use supplemental information related to organic revenue growth (decline) to help us and our investors evaluate business growth from existing operations. Organic revenue growth (decline) is a non-GAAP measure that includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. This supplemental information related to organic revenue growth (decline) represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of this non-GAAP measure to the reported Total revenue is as follows (in millions, except percentages): Twelve Months EndedDec 31, 2020Dec 31, 2019% ChangeLess: Currency Impact(1)Less: Fiduciary Investment Income(2)Less: Acquisitions, Divestitures & OtherOrganic Revenue Growth (Decline)(3)Commercial Risk Solutions$4,690 $4,673 — %— %— %(3)%3 %Reinsurance Solutions1,814 1,686 8 — (1)(1)10 Retirement Solutions1,753 1,817 (4)— — (2)(2)Health Solutions1,655 1,667 (1)(2)— 2 (1)Data & Analytic Services1,171 1,184 (1)— — 4 (5)Elimination(17)(14)N/AN/AN/AN/AN/ATotal revenue$11,066 $11,013 — %— %— %(1)%1 % Twelve Months EndedDec 31, 2019Dec 31, 2018% ChangeLess: Currency Impact(1)Less: Fiduciary Investment Income(2)Less: Acquisitions, Divestitures & OtherOrganic Revenue Growth (Decline)(3)Commercial Risk Solutions$4,673 $4,652 — %(3)%— %(4)%7 %Reinsurance Solutions1,686 1,563 8 (2)1 (1)10 Retirement Solutions1,817 1,865 (3)(2)— (3)2 Health Solutions1,667 1,596 4 (3)— 2 5 Data & Analytic Services1,184 1,105 7 (3)— 6 4 Elimination(14)(11)NANANANANATotal revenue$11,013 $10,770 2 %(3)%— %(1)%6 %(1)Currency impact is determined by translating prior period's revenue at this period's foreign exchange rates.(2)Fiduciary investment income for the years ended December 31, 2020, 2019, and 2018 was $27 million, $74 million, and $53 million, respectively.(3)Organic revenue growth (decline) includes the impact of intercompany activity, changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges.36Adjusted Operating MarginWe use adjusted operating margin as a non-GAAP measure of core operating performance of the Company. Adjusted operating margin excludes the impact of certain items, as listed below, because management does not believe these expenses reflect our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance with U.S. GAAP, and should be viewed in addition to, not instead of, our Consolidated Financial Statements.A reconciliation of this non-GAAP measure to reported operating margins is as follows (in millions, except percentages):Years ended December 31202020192018Revenue from continuing operations$11,066 $11,013 $10,770 Operating income from continuing operations$2,781 $2,169 $1,544 Restructuring— 451 485 Amortization and impairment of intangible assets (1)246 392 593 Legacy litigation (2)— 13 75 Transaction costs (3)123 — — Operating income from continuing operations - as adjusted$3,150 $3,025 $2,697 Operating margin from continuing operations25.1 %19.7 %14.3 %Operating margin from continuing operations - as adjusted28.5 %27.5 %25.0 %(1)Included in the twelve months ended December 30, 2018 was a $176 million non-cash impairment charge taken on certain assets and liabilities held for sale. (2)During the fourth quarter of 2019 we settled legacy litigation that had been reported in a prior year as an adjustment to GAAP earnings. In connection with the settlement, we recorded a $13 million charge in 2019, which represents the difference between the amount accrued in the prior year and the final settlement amount of the legacy litigation.(3)Certain transaction costs associated with the Combination will be incurred prior to the expected completion of the Combination in the first half of 2021. These costs may include advisory, legal, accounting, valuation, and other professional or consulting fees required to complete the Combination.Adjusted Diluted Earnings per ShareWe use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the items identified above, along with pension settlements and related income taxes, because management does not believe these expenses are representative of our core earnings. This supplemental information related to adjusted diluted earnings per share represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements.37A reconciliation of this non-GAAP measure to reported diluted earnings per share is as follows (in millions, except per share data and percentages):Year Ended December 31, 2020(millions, except per share data)U.S. GAAPAdjustmentsNon-GAAP AdjustedOperating income from continuing operations$2,781 $369 $3,150 Interest income6 — 6 Interest expense(334)— (334)Other income (expense) (1)12 — 12 Income before income taxes from continuing operations2,465 369 2,834 Income tax expense (2)448 51 499 Net income from continuing operations2,017 318 2,335 Net income (loss) from discontinued operations (3)1 — 1 Net income2,018 318 2,336 Less: Net income attributable to noncontrolling interests49 — 49 Net income attributable to Aon shareholders$1,969 $318 $2,287 Diluted net income per share attributable to Aon shareholdersContinuing operations$8.45 $1.36 $9.81 Discontinued operations— — — Net income$8.45 $1.36 $9.81 Weighted average ordinary shares outstanding — diluted233.1 — 233.1 Effective tax rates (2)Continuing operations18.2 %17.6 %Discontinued operations24.1 %24.1 %Year Ended December 31, 2019(millions, except per share data)U.S. GAAPAdjustmentsNon-GAAP AdjustedOperating income from continuing operations$2,169 $856 $3,025 Interest income8 — 8 Interest expense(307)— (307)Other income (expense) (1) 1 — 1 Income before income taxes from continuing operations1,871 856 2,727 Income tax expense (2)297 181 478 Net income from continuing operations1,574 675 2,249 Net income (loss) from discontinued operations (3)(1)— (1)Net income1,573 675 2,248 Less: Net income attributable to noncontrolling interests41 — 41 Net income attributable to Aon shareholders$1,532 $675 $2,207 Diluted net income (loss) per share attributable to Aon shareholdersContinuing operations$6.37 $2.80 $9.17 Discontinued operations— — — Net income$6.37 $2.80 $9.17 Weighted average ordinary shares outstanding — diluted240.6 — 240.6 Effective tax rates (2)Continuing operations15.9 %17.5 %Discontinued operations47.4 %47.4 %38Year Ended December 31, 2018(millions, except per share data)U.S. GAAPAdjustmentsNon-GAAP AdjustedOperating income from continuing operations$1,544 $1,153 $2,697 Interest income5 — 5 Interest expense(278)— (278)Other income (expense) (1)(25)37 12 Income before income taxes from continuing operations1,246 1,190 2,436 Income tax expense (2)146 233 379 Net income from continuing operations1,100 957 2,057 Net income (loss) from discontinued operations (3)74 (82)(8)Net income1,174 875 2,049 Less: Net income attributable to noncontrolling interests40 — 40 Net income attributable to Aon shareholders$1,134 $875 $2,009 Diluted net income (loss) per share attributable to Aon shareholdersContinuing operations$4.29 $3.87 $8.16 Discontinued operations0.30 (0.33)(0.03)Net income$4.59 $3.54 $8.13 Weighted average ordinary shares outstanding — diluted247.0 — 247.0 Effective tax rates (2)Continuing operations11.7 %15.6 %Discontinued operations15,949.3 %29.7 %(1)Adjusted Other income (expense) excludes pension settlement charges of $37 million for the year ended 2018.(2)Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with estimated Restructuring Plan expenses, legacy litigation, transaction costs, accelerated tradename amortization, impairment charges and non-cash pension settlement charges, which are adjusted at the related jurisdictional rates. In addition, tax expense excludes the tax impacts of the sale of the disposal group and enactment date impacts of the Tax Cuts and Jobs Act of 2017. (3)Adjusted Net income (loss) from discontinued operations excludes the gain on sale of discontinued operations of $82 million for the year ended 2018. The effective tax rate was further adjusted for the applicable tax impact associated with the gain on sale and intangible asset amortization, as applicable.Free Cash FlowWe use free cash flow, defined as cash flow provided by operations minus capital expenditures, as a non-GAAP measure of our core operating performance and cash generating capabilities of our business operations. This supplemental information related to free cash flow represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, the Consolidated Financial Statements. The use of this non-GAAP measure does not imply or represent the residual cash flow for discretionary expenditures. A reconciliation of this non-GAAP measure to cash flow provided by operations is as follows (in millions):Years Ended December 31202020192018Cash provided by continuing operating activities$2,783 $1,835 $1,686 Capital expenditures used for continuing operations(141)(225)(240)Free cash flow provided by continuing operations$2,642 $1,610 $1,446 Impact of Foreign Currency Exchange Rate FluctuationsBecause we conduct business in more than 120 countries and sovereignties, foreign currency exchange rate fluctuations have a significant impact on our business. Foreign currency exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, to give financial statement users meaningful information about our operations, we have provided an illustration of the impact of foreign currency exchange rate fluctuations on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between 39periods by translating the prior year’s revenue, expenses, and net income using the current year’s foreign currency exchange rates. Translating prior year results at current year foreign currency exchange rates, currency fluctuations had a $0.03 unfavorable impact on net income per diluted share during the year ended December 31, 2020. Currency fluctuations had a $0.19 unfavorable impact on net income per diluted share during the year ended December 31, 2019, when 2018 results were translated at 2019 rates. Currency fluctuations had a $0.08 favorable impact on net income per diluted share during the year ended December 31, 2018, when 2017 results were translated at 2018 rates. Translating prior year results at current year foreign currency exchange rates, currency fluctuations had a $0.04 unfavorable impact on adjusted net income per diluted share during the year ended December 31, 2020. Currency fluctuations had a $0.23 unfavorable impact on adjusted net income per diluted share during the year ended December 31, 2019, when 2018 results were translated at 2019 rates. Currency fluctuations had a $0.09 favorable impact on adjusted net income per diluted share during the year ended December 31, 2018, when 2017 results were translated at 2018 rates. These translations are performed for comparative purposes only and do not impact the accounting policies or practices for amounts included in the Consolidated Financial Statements.LIQUIDITY AND FINANCIAL CONDITIONLiquidityExecutive SummaryWe believe that our balance sheet and strong cash flow provide us with adequate liquidity. Our primary sources of liquidity are cash flows provided by operations, available cash reserves, and debt capacity available under our credit facilities. Our primary uses of liquidity are operating expenses and investments, capital expenditures, acquisitions, share repurchases, pension obligations, shareholder dividends, and restructuring activities. We believe that cash flows from operations, available credit facilities, and the capital markets will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, pension contributions, and anticipated working capital requirements over the long-term.As a result of the COVID-19 pandemic, we have taken various proactive steps and continue to evaluate opportunities that will increase our liquidity and strengthen our financial position. Such actions include, but are not limited to, issuing $1 billion of 10-year senior unsecured notes on May 12, 2020 and using the proceeds to repay short-term debt and for other corporate purposes, and reducing our discretionary spending, including limiting discretionary spending on mergers and acquisitions. We also temporarily suspended our share buyback program and temporarily reduced compensation for named executive officers, directors, and colleagues during the second quarter, as a precautionary measure to protect our liquidity, focusing on implementing cash and expense discipline measures. After carefully monitoring the situation, we determined it was appropriate, based on macroeconomic conditions and business performance, to resume share buyback during the third quarter. In addition, temporarily reduced salaries for non-executives were restored at the end of the second quarter and withheld salaries, plus 5% of the withheld salary amounts, were repaid in the third quarter. Temporarily reduced salaries for named executive officers and cash compensation reductions for non-executive directors were fully reinstated and the withheld amounts were paid in full during the fourth quarter.We expect to have the ability to meet our cash needs for the next 12 months and beyond through the use of Cash and cash equivalents, Short-term investments, funds available under our credit facilities and commercial paper programs, and cash flows from operations. Short-term investments included in our liquidity portfolio are expected to be highly liquid, giving us the ability to readily convert them to cash, as deemed appropriate. In the second quarter, we issued $1 billion in 2.80% Senior Notes due May 2030, from which a portion of the proceeds were used to repay our $600 million 5.00% senior notes in June 2020, which were scheduled to mature in September 2020. Additionally, in the third quarter, Aon Global Holdings plc established the European Commercial Paper Program for €625 million, subsequently the previous European Commercial Paper Program, established by Aon Global Limited for €525 million, was withdrawn in the quarter, increasing the aggregate outstanding borrowings under the European program by €100 million. In February of 2021 we repaid the $400 million 2.80% Senior Notes that were due to mature in March 2021, which further reduced our debt obligations.We believe our liquidity position at December 31, 2020 remains strong as evidenced by strong cash flows in the quarter and significant cash, cash equivalent and short-term investment balances. Given the significant uncertainties of economic conditions due to COVID-19, we will continue to closely monitor and actively manage our liquidity as economic conditions change.Cash on our balance sheet includes funds available for general corporate purposes, as well as amounts restricted as to their use. Funds held on behalf of clients in a fiduciary capacity are segregated and shown together with uncollected insurance 40premiums and claims in Fiduciary assets in the Consolidated Statements of Financial Position, with a corresponding amount in Fiduciary liabilities. In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance underwriters. We also collect claims or refunds from underwriters on behalf of insureds, which are then returned to the insureds. Unremitted insurance premiums and claims are held by us in a fiduciary capacity. The levels of fiduciary assets and liabilities can fluctuate significantly depending on when we collect the premiums, claims, and refunds, make payments to underwriters and insureds, and collect funds from clients and make payments on their behalf, and upon the impact of foreign currency movements. Fiduciary assets, because of their nature, are generally invested in very liquid securities with highly rated, credit-worthy financial institutions. Our Fiduciary assets included cash and short-term investments of $5.7 billion and $5.2 billion at December 31, 2020 and 2019, respectively, and fiduciary receivables of $8.1 billion and $6.7 billion at December 31, 2020 and 2019, respectively. While we earn investment income on the fiduciary assets held in cash and investments, the cash and investments cannot be used for general corporate purposes.We maintain multi-currency cash pools with third-party banks in which various Aon entities participate. Individual Aon entities are permitted to overdraw on their individual accounts provided the overall global balance does not fall below zero. At December 31, 2020, non-U.S. cash balances of one or more entities may have been negative; however, the overall balance was positive.The following table summarizes our Cash and cash equivalents, Short-term investments, and Fiduciary assets as of December 31, 2020 (in millions): Statement of Financial Position Classification Asset TypeCash and CashEquivalentsShort-TermInvestmentsFiduciaryAssetsTotalCertificates of deposit, bank deposits or time deposits$884 $— $3,216 $4,100 Money market funds— 308 2,473 2,781 Cash and short-term investments884 308 5,689 6,881 Fiduciary receivables— — 8,109 8,109 Total$884 $308 $13,798 $14,990 Cash and cash equivalents increased $94 million in 2020 compared to 2019. A summary of our cash flows provided by and used for continuing operations from operating, investing, and financing activities is as follows (in millions): Years Ended December 31202020192018Cash provided by operating activities$2,783 $1,835 $1,686 Cash provided by (used for) investing activities$(679)$(229)$31 Cash used for financing activities$(2,088)$(1,493)$(1,699)Effect of exchange rates changes on cash and cash equivalents$78 $21 $(118)Operating ActivitiesNet cash provided by operating activities during the twelve months ended December 31, 2020 increased $948 million, or 52%, from the prior year to $2,783 million. This amount represents net income reported, as adjusted for gains or losses on sales of businesses, share-based compensation expense, depreciation expense, amortization and impairments, and other non-cash income and expenses, as well as changes in working capital that relate primarily to the timing of payments of accounts payable and accrued liabilities and the collection of receivables.Pension ContributionsPension contributions were $120 million for the twelve months ended December 31, 2020, as compared to $135 million for the twelve months ended December 31, 2019. In 2021, we expect to contribute approximately $122 million in cash to our pension plans, including contributions to non-U.S. pension plans, which are subject to changes in foreign exchange rates.Investing ActivitiesCash flows used for investing activities in continuing operations during the twelve months ended December 31, 2020 were $679 million, an increase of $450 million compared to prior year. Generally, the primary drivers of cash flows used for 41investing activities are acquisition of businesses, purchases of short-term investments, capital expenditures, and payments for investments. Generally, the primary drivers of cash flows provided by investing activities are sales of businesses, sales of short-term investments, and proceeds from investments. The gains and losses corresponding to cash flows provided by proceeds from investments and used for payments for investments are primarily recognized in Other income (expense) in the Consolidated Statements of Income.Short-term InvestmentsShort-term investments increased $170 million at December 31, 2020 as compared to December 31, 2019. As disclosed in Note 15 “Fair Value Measurements and Financial Instruments” of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report, the majority of our investments carried at fair value are money market funds. These money market funds are held throughout the world with various financial institutions. We are not aware of any market liquidity issues that would materially impact the fair value of these investments.Acquisitions and Dispositions of BusinessesDuring 2020, the Company completed the acquisition of six businesses for consideration of $368 million, net of cash acquired, and the disposition of one businesses for a $30 million cash inflow, net of cash sold.During 2019, the Company completed the acquisition of three businesses for consideration of $39 million, net of cash acquired, and the disposition of eight businesses for a $52 million cash inflow, net of cash sold.Capital ExpendituresThe Company’s additions to fixed assets, including capitalized software, which amounted to $141 million in 2020 and $225 million in 2019, primarily related to the refurbishing and modernizing of office facilities, software development costs, and computer equipment purchases. Financing ActivitiesCash flows used for financing activities in continuing operations during the twelve months ended December 31, 2020 were $2,088 million, an increase of $595 million compared to prior year. Generally, the primary drivers of cash flows used for financing activities are share repurchases, issuances of debt, net of repayments, dividends paid to shareholders, issuances of shares for employee benefit plans, transactions with noncontrolling interests, and other financing activities, such as collection of or payments for deferred consideration in connection with prior-year business acquisitions and divestitures.Share Repurchase ProgramWe have a share repurchase program authorized by our Board of Directors. The Repurchase Program was established in April 2012 with $5.0 billion in authorized repurchases, and was increased by $5.0 billion in authorized repurchases in each of November 2014, June 2017, and November 2020 for a total of $20.0 billion in repurchase authorizations. Although the Company temporarily suspended its share Repurchase Program in the first half of the year, the Company resumed share buyback during the third quarter based on macroeconomic conditions and business performance.The following table summarizes the Company’s Share Repurchase activity (in millions, except per share data):Twelve months ended December 3120202019Shares repurchased8.5 10.5 Average price per share$206.28 $186.33 Costs recorded to retained earningsTotal repurchase cost$1,761 $1,950 Additional associated costs2 10 Total costs recorded to retained earnings$1,763 $1,960 At December 31, 2020, the remaining authorized amount for share repurchase under the Repurchase Program was approximately $5.3 billion. Under the Repurchase Program, we have repurchased a total of 137.3 million shares for an aggregate cost of approximately $14.7 billion.42BorrowingsTotal debt at December 31, 2020 was $7.7 billion, an increase of $0.4 billion compared to December 31, 2019. Commercial paper activity during the years ended December 31, 2020 and 2019 is as follows (in millions):Twelve months ended December 3120202019Total issuances(1)$3,162 $4,812 Total repayments(3,275)(4,941)Net repayments$(113)$(129)(1) The proceeds of the commercial paper issuances were used primarily for short-term working capital needs.On May 29, 2020, Aon Corporation, a Delaware corporation and a wholly owned subsidiary of the Company (“Aon Corporation”), issued an irrevocable notice of redemption to holders of its 5.00% Senior Notes, which were set to mature on September 30, 2020, for the redemption of all $600 million outstanding aggregate principal amount of the notes. The redemption date was on June 30, 2020 and resulted in a loss of $7 million due to extinguishment.On May 12, 2020, Aon Corporation issued $1 billion 2.80% Senior Notes due May 2030. Aon Corporation used a portion of the net proceeds on June 30, 2020 to repay its outstanding 5.00% Senior Notes, which were set to mature on September 30, 2020. The Company intends to use the remainder to repay other borrowings and for general corporate purposes.On March 2020, the Company’s $400 million 2.80% Senior Notes due March 2021 were classified as Short-term debt and current portion of long-term debt in the Consolidated Statements of Financial Position as the date of maturity is in less than one year.On November 15, 2019, Aon Corporation issued $500 million 2.20% Senior Notes due November 2022. The Company used the net proceeds of the offering to pay down a portion of outstanding commercial paper and for general corporate purposes.On May 2, 2019, Aon Corporation issued $750 million 3.75% Senior Notes due May 2029. The Company used the net proceeds of the offering to pay down a portion of outstanding commercial paper and for general corporate purposes.Subsequent EventsOn January 13, 2021, Aon Global Limited, a limited company organized under the laws of England and Wales and a wholly owned subsidiary of Aon plc, issued an irrevocable notice of redemption to holders of its 2.80% Senior Notes, which were set to mature in March 2021, for the redemption of all $400 million outstanding aggregate principal amount of the notes. The redemption date was on February 16, 2021 and resulted in an insignificant loss due to extinguishment.Other Liquidity MattersDistributable ProfitsThe Company is required under Irish law to have available “distributable profits” to make share repurchases or pay dividends to shareholders. Distributable profits are created through the earnings of the Irish parent company and, among other methods, through intercompany dividends or a reduction in share capital approved by the High Court of Ireland. Distributable profits are not linked to a U.S. GAAP reported amount (e.g., retained earnings). Following the Ireland Reorganization, we must reestablish distributable profits of the parent entity and will regularly create distributable profits as required to meet our capital needs. As of December 31, 2020 and December 31, 2019 (associated with Aon Global Limited), we had distributable profits in excess of $0.2 billion and $32.4 billion, respectively. We believe that we have the ability to create sufficient distributable profits for the foreseeable future.Credit FacilitiesWe expect cash generated by operations for 2020 to be sufficient to service our debt and contractual obligations, finance capital expenditures, continue purchases of shares under the Repurchase Program, and continue to pay dividends to our shareholders. Although cash from operations is expected to be sufficient to service these activities, we have the ability to access the commercial paper markets or borrow under our credit facilities to accommodate any timing differences in cash flows. Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed.43As of December 31, 2020, we had two primary committed credit facilities outstanding: our $900 million multi-currency U.S. credit facility expiring in February 2022 and our $750 million multi-currency U.S. credit facility expiring in October 2023. Effective February 27, 2020, the $750 million multi-currency U.S. credit facility was increased by $350 million from the original $400 million. In aggregate, these two facilities provide $1.65 billion in available credit. Each of these facilities includes customary representations, warranties, and covenants, including financial covenants that require us to maintain specified ratios of adjusted consolidated EBITDA to consolidated interest expense and consolidated debt to adjusted consolidated EBITDA, in each case, tested quarterly. At December 31, 2020, we did not have borrowings under either facility, and we were in compliance with the financial covenants and all other covenants contained therein during the twelve months ended December 31, 2020. Shelf Registration StatementOn May 12, 2020, we filed a shelf registration statement with the SEC, registering the offer and sale from time to time of an indeterminate amount of, among other securities, debt securities, preference shares, Class A Ordinary Shares and convertible securities. Our ability to access the market as a source of liquidity is dependent on investor demand, market conditions, and other factors.Rating Agency RatingsThe major rating agencies’ ratings of our debt at February 19, 2021 appear in the table below.Ratings Senior Long-term Debt Commercial Paper OutlookStandard & Poor’sA- A-2 StableMoody’s Investor ServicesBaa2 P-2 StableFitch, Inc.BBB+ F-2 NegativeOn March 11, 2020, Fitch Inc. (“Fitch”) placed our ‘BBB+’ rating on Rating Watch Negative (versus a prior Stable Outlook) following the announcement of the Combination. Negative Watch indicates that our Fitch rating could stay at its present level or potentially be downgraded. In its rating action commentary, Fitch states “rating expectations will unfold after further transaction details emerge and after Fitch evaluates both companies ongoing financial results prior to the projected first half 2021 closing”. We are committed to managing our current investment grade ratings. Any downgrade in the credit ratings of our senior debt or commercial paper could increase our borrowing costs, reduce or eliminate our access to capital, reduce our financial flexibility, restrict our access to the commercial paper market altogether, or impact future pension contribution requirements.Guarantees in Connection with the Sale of the Divested BusinessIn connection with the sale of the Divested Business, we guaranteed future operating lease commitments related to certain facilities assumed by the Buyer. We are obligated to perform under the guarantees if the Divested Business defaults on the leases at any time during the remainder of the lease agreements, which expire on various dates through 2025. As of December 31, 2020, the undiscounted maximum potential future payments under the lease guarantee were $55 million, with an estimated fair value of $8 million. No cash payments were made in connection to the lease commitments during the year ended December 31, 2020.Additionally, we are subject to performance guarantee requirements under certain client arrangements that were assumed by the Buyer. Should the Divested Business fail to perform as required by the terms of the arrangements, we would be required to fulfill the remaining contract terms, which expire on various dates through 2023. As of December 31, 2020, the undiscounted maximum potential future payments under the performance guarantees were $104 million, with an estimated fair value of $1 million. No cash payments were made in connection to the performance guarantees during the year ended December 31, 2020.Letters of Credit and Other GuaranteesWe have entered into a number of arrangements whereby our performance on certain obligations is guaranteed by a third party through the issuance of a letter of credit (“LOC”). We had total LOCs outstanding of approximately $79 million at December 31, 2020, compared to $73 million at December 31, 2019. These LOCs cover the beneficiaries related to certain of our U.S. and Canadian non-qualified pension plan schemes and secure deductible retentions for our own workers’ compensation program. We also have obtained LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at our international subsidiaries.44We have certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately $113 million at December 31, 2020, compared to $110 million at December 31, 2019.Off-Balance Sheet ArrangementsApart from commitments, guarantees, and contingencies, as disclosed herein and Note 16 “Claims, Lawsuits, and Other Contingencies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, results of operations, or liquidity. Our cash flows from operations, borrowing availability, and overall liquidity are subject to risks and uncertainties. See “Information Concerning Forward-Looking Statements” at the beginning of this report.Contractual ObligationsOur contractual obligations and commitments as of December 31, 2020 are comprised of principal payments on debt, interest payments on debt, operating leases, pension and other postretirement benefit plans, and purchase obligations.Operating leases are primarily comprised of leased office space throughout the world. As leases expire, we do not anticipate difficulty in negotiating renewals or finding other satisfactory space if the premise becomes unavailable. In certain circumstances, we may have unused space and may seek to sublet such space to third parties, depending upon the demands for office space in the locations involved. Refer to Note 9 “Lease Commitments” for further information.Pension and other postretirement benefit plan obligations include estimates of our minimum funding requirements pursuant to the Employee Retirement Income Security Act and other regulations, as well as minimum funding requirements agreed with the trustees of our U.K. pension plans. Additional amounts may be agreed to with, or required by, the U.K. pension plan trustees. Nonqualified pension and other postretirement benefit obligations are based on estimated future benefit payments. We may make additional discretionary contributions. Refer to Note 12 “Employee Benefits” for further information.Purchase obligations are defined as agreements to purchase goods and services that are enforceable and legally binding on us, and that specifies all significant terms, including the goods to be purchased or services to be rendered, the price at which the goods or services are to be rendered, and the timing of the transactions. Most of our purchase obligations are related to purchases of information technology services or other service contracts. We had no other cash requirements from known contractual obligations and commitments that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, results of operations, or liquidity. Guarantee of Registered SecuritiesIn connection with the 2012 Redomestication, the Company on April 2, 2012 entered into various agreements pursuant to which it agreed to guarantee the obligations of its subsidiaries arising under issued and outstanding debt securities. Those agreements included the: (1) Amended and Restated Indenture, dated April 2, 2012, among Aon Corporation, Aon Global Limited, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) (amending and restating the Indenture, dated September 10, 2010, between Aon Corporation and the Trustee); (2) Amended and Restated Indenture, dated April 2, 2012, among Aon Corporation, Aon Global Limited and the Trustee (amending and restating the Indenture, dated December 16, 2002, between Aon Corporation and the Trustee); and (3) Amended and Restated Indenture, dated April 2, 2012, among Aon Corporation, Aon Global Limited and the Trustee (amending and restating the Indenture, dated January 13, 1997, between Aon Corporation and the Trustee, as supplemented by the First Supplemental Indenture, dated January 13, 1997). In connection with the Ireland Reorganization, on April 1, 2020 Aon plc and Aon Global Holdings plc, a company incorporated under the laws of England and Wales, entered into various agreements pursuant to which they agreed to guarantee the obligations of Aon Corporation arising under issued and outstanding debt securities, which were previously guaranteed solely by Aon Global Limited and the obligations of Aon Global Limited arising under issued and outstanding debt securities, which were previously guaranteed solely by Aon Corporation. Those agreements include: (1) Second Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, and Aon Global Holdings plc and the Trustee (amending and restating the Amended and Restated Indenture, dated April 2, 2012, among Aon Corporation, Aon Global Limited and the Trustee); (2) Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Indenture, dated December 12, 2012, among Aon Corporation, Aon Global Limited plc and the Trustee); (3) Second Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Amended and Restated Indenture, dated May 20, 2015, among Aon Corporation, Aon Global Limited and the Trustee); (4) Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Indenture, dated November 13, 2015, among Aon Corporation, Aon Global Limited and the Trustee); and (5) Amended and Restated Indenture, dated April 1, 2020, among Aon 45Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Indenture, dated December 3, 2018, among Aon Corporation, Aon Global Limited and the Trustee).After the Ireland Reorganization, newly issued and outstanding debt securities by Aon Corporation are guaranteed by Aon Global Limited, Aon plc, and Aon Global Holdings plc, and include the following (collectively, the “Aon Corporation Notes”): Aon Corporation Notes2.20% Senior Notes due November 20228.205% Junior Subordinated Notes due January 20274.50% Senior Notes due December 20283.75% Senior Notes due May 20292.80% Senior Notes due 20306.25% Senior Notes due September 2040All guarantees of Aon plc, Aon Global Limited, and Aon Global Holdings plc of the Aon Corporation Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the company. There are no subsidiaries other than those listed above that guarantee the Aon Corporation Notes.After the Ireland Reorganization, newly issued and outstanding debt securities by Aon Global Limited are guaranteed by Aon plc, Aon Global Holdings plc, and Aon Corporation, and include the following (collectively, the “Aon Global Limited Notes”):Aon Global Limited Notes2.80% Senior Notes due March 2021 (1)4.00% Senior Notes due November 20233.50% Senior Notes due June 20243.875% Senior Notes due December 20252.875% Senior Notes due May 20264.25% Senior Notes due December 20424.45% Senior Notes due May 20434.60% Senior Notes due June 20444.75% Senior Notes due May 2045(1) The 2.80% Senior Notes due March 2021 were repaid in full on February 16, 2021. Refer to Note 8 “Debt” for more information.All guarantees of Aon plc, Aon Global Holdings plc, and Aon Corporation of the Aon Global Limited Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the company. There are no subsidiaries other than those listed above that guarantee the Aon Global Limited Notes. Aon Corporation, Aon Global Limited, and Aon Global Holdings plc are indirect wholly owned subsidiaries of Aon plc. Aon plc, Aon Global Limited, Aon Global Holdings plc, and Aon Corporation together comprise the ‘Obligor group’. The following tables set forth summarized financial information for the Obligor group. Adjustments are made to the tables to eliminate intercompany balances and transactions between the Obligor group. Intercompany balances and transactions between the Obligor group and non-guarantor subsidiaries are presented as separate line items within the summarized financial information. These balances are presented on a net presentation basis, rather than a gross basis, as this better reflects the nature of the intercompany positions and presents the funding or funded position that is to be received or owed. No balances or transactions of non-guarantor subsidiaries are presented in the summarized financial information, including investments of the Obligor group in non-guarantor subsidiaries.46Obligor GroupSummarized Statement of Income InformationTwelve Months Ended(millions)December 31, 2020Revenue$— Operating income$(174)Income (expense) from non-guarantor subsidiaries before income taxes$(642)Net income (loss) from continuing operations$(988)Net income (loss) attributable to Aon shareholders$(988)Obligor GroupSummarized Statement of Financial Position InformationAs of(millions)December 31, 2020Receivables due from non-guarantor subsidiaries$1,196 Other current assets137 Total current assets$1,333 Non-current receivables due from non-guarantor subsidiaries$516 Other non-current assets894 Total non-current assets$1,410 Payables to non-guarantor subsidiaries$15,167 Other current liabilities1,695 Total current liabilities$16,862 Non-current payables to non-guarantor subsidiaries$5,396 Other non-current liabilities8,871 Total non-current liabilities$14,267 CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we make estimates, assumptions, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the periods presented.In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, and base our estimates, assumptions, and judgments on our historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these Consolidated Financial Statements.Revenue RecognitionThe Company recognizes revenue when control of the promised services is transferred to the customer in the amount that best reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements where control is transferred over time, an input or output method is applied that represents a faithful depiction of the progress towards completion of the performance obligation. For arrangements that include variable consideration, the Company assesses whether any amounts should be constrained. For arrangements that include multiple performance obligations, the Company allocates consideration based on their relative fair values.47Costs incurred by the Company in obtaining a contract are capitalized and amortized on a systematic basis that is consistent with the transfer of control of the services to which the asset relates, considering anticipated renewals when applicable. Certain contract related costs, including pre-placement brokerage costs, are capitalized as a cost to fulfill and are amortized on a systematic basis consistent with the transfer of control of the services to which the asset relates, which is generally less than one year.Commercial Risk Solutions includes retail brokerage, cyber solutions, global risk consulting, and captives. Revenue primarily includes insurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units transferred and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Revenue is recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data. Commissions and fees for brokerage services may be invoiced near the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. Reinsurance Solutions includes treaty and facultative reinsurance brokerage and capital markets. Revenue primarily includes reinsurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units delivered and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Commissions and fees for brokerage services may be invoiced at the inception of the reinsurance period for certain reinsurance brokerage, or more commonly, over the term of the arrangement in installments based on deposit or minimum premiums for most treaty reinsurance arrangements.Retirement Solutions includes core retirement, investment consulting, and human capital. Revenue consists primarily of fees paid by customers for consulting services. Revenue recognized for these arrangements is predominantly recognized over the term of the arrangement using input or output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services, or for certain arrangements, at a point in time upon completion of the services. For consulting arrangements recognized over time, revenue will be recognized based on a measure of progress that depicts the transfer of control of the services to the customer, utilizing an appropriate input or output measure to provide a reasonable assessment of the progress towards completion of the performance obligation including units delivered or time elapsed. Fees paid by customers for consulting services are typically charged on an hourly, project or fixed-fee basis, and revenue for these arrangements is typically recognized based on time incurred, days elapsed, or reports delivered. Revenue from time-and-materials or cost-plus arrangements are recognized as services are performed using input or output measures to provide a reasonable assessment of the progress towards completion of the performance obligation including hours worked, and revenue for these arrangements is typically recognized based on time and materials incurred. Reimbursements received for out-of-pocket expenses are generally recorded as a component of revenue. Payment terms vary but are typically over the contract term in installments.Health Solutions includes health and benefits brokerage and health care exchanges. Revenue primarily includes insurance commissions and fees for services rendered. For brokerage commissions, revenue is predominantly recognized at the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services using input or output measures, including units delivered or time elapsed, to provide a faithful depiction of the progress towards completion of the performance obligation. Revenue from health care exchange arrangements are typically recognized upon successful enrollment of participants, net of a reserve for estimated cancellations. Commissions and fees for brokerage services may be invoiced at the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. Payment terms for other services vary but are typically over the contract term in installments.Data & Analytic Services includes Affinity, Aon Inpoint, CoverWallet, and ReView. Revenue consists primarily of fees for services rendered and is generally recognized over the term of the arrangement to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. Payment terms vary but are typically over the contract term in installments. For arrangements recognized over time, revenue will be recognized based on a measure of progress that depicts the transfer of control of the services to the customer, utilizing an appropriate input or output measure to provide a faithful depiction of the progress towards completion of the 48performance obligation, including units delivered or time elapsed. Input and output measures utilized vary based on the arrangement but typically include reports provided or days elapsed.PensionsWe sponsor defined benefit pension plans throughout the world. Our most significant plans are located in the U.S., the U.K., the Netherlands, and Canada, which are closed to new entrants. We have ceased crediting future benefits relating to salary and services for our U.S., U.K., Netherlands, and Canada plans to the extent statutorily permitted. The service cost component of net periodic benefit cost is reported in Compensation and benefits and all other components are reported in Other income (expense). We used a full-yield curve approach in the estimation of the service and interest cost components of net periodic pension and postretirement benefit cost for our major pension and other postretirement benefit plans; this was obtained by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.Recognition of gains and losses and prior service Certain changes in the value of the obligation and in the value of plan assets, which may occur due to various factors such as changes in the discount rate and actuarial assumptions, actual demographic experience, and/or plan asset performance are not immediately recognized in net income. Such changes are recognized in Other comprehensive income and are amortized into net income as part of the net periodic benefit cost. Unrecognized gains and losses that have been deferred in Other comprehensive income, as previously described, are amortized into expense as a component of periodic pension expense based on the average life expectancy of the U.S., U.K., Netherlands, and Canada plan members. We amortize any prior service expense or credits that arise as a result of plan changes over a period consistent with the amortization of gains and losses.As of December 31, 2020, our pension plans have deferred losses that have not yet been recognized through income in the Consolidated Financial Statements. We amortize unrecognized actuarial losses outside of a corridor, which is defined as 10% of the greater of market-related value of plan assets or projected benefit obligation. To the extent not offset by future gains, incremental amortization as calculated above will continue to affect future pension expense similarly until fully amortized.The following table discloses our unrecognized actuarial gains and losses, the number of years over which we are amortizing the experience loss, and the estimated 2021 amortization of loss by country (in millions, except amortization period):U.K.U.S.OtherUnrecognized actuarial gains and losses$1,329 $1,812 $514 Amortization period8 to 26 years6 to 24 years13 to 36 yearsEstimated 2021 amortization of loss$34 $78 $14 The U.S. had no unrecognized prior service cost (credit) at December 31, 2020. The unrecognized prior service cost (credit) at December 31, 2020 was $43 million, and $(7) million for the U.K. and other plans, respectively.For the U.S. pension plans, we use a market-related valuation of assets approach to determine the expected return on assets, which is a component of net periodic benefit cost recognized in the Consolidated Statements of Income. This approach recognizes 20% of any gains or losses in the current year’s value of market-related assets, with the remaining 80% spread over the next four years. As this approach recognizes gains or losses over a five-year period, the future value of assets and therefore, our net periodic benefit cost will be impacted as previously deferred gains or losses are recorded. As of December 31, 2020, the market-related value of assets was $2.1 billion. We do not use the market-related valuation approach to determine the funded status of the U.S. plans recorded in the Consolidated Statements of Financial Position. Instead, we record and present the funded status in the Consolidated Statements of Financial Position based on the fair value of the plan assets. As of December 31, 2020, the fair value of plan assets was $2.3 billion. Our non-U.S. plans use fair value to determine expected return on assets.49Rate of return on plan assets and asset allocationThe following table summarizes the expected long-term rate of return on plan assets for future pension expense as of December 31, 2020:U.K.U.S.OtherExpected return on plan assets, net of administration expenses2.04%2.65 - 6.56%1.70 - 2.65%In determining the expected rate of return for the plan assets, we analyze investment community forecasts and current market conditions to develop expected returns for each of the asset classes used by the plans. In particular, we surveyed multiple third-party financial institutions and consultants to obtain long-term expected returns on each asset class, considered historical performance data by asset class over long periods, and weighted the expected returns for each asset class by target asset allocations of the plans.The U.S. pension plan asset allocation is based on approved allocations following adopted investment guidelines. The investment policy for U.K. and other non-U.S. pension plans is generally determined by the plans’ trustees. Because there are several pension plans maintained in the U.K. and other non-U.S. categories, our target allocation presents a range of the target allocation of each plan. Target allocations are subject to change.Impact of changing economic assumptionsChanges in the discount rate and expected return on assets can have a material impact on pension obligations and pension expense.Holding all other assumptions constant, the following table reflects what a 25 basis point (“bps”) increase and decrease in our discount rate would have on our projected benefit obligation at December 31, 2020 (in millions):Increase (decrease) in projected benefit obligation (1)25 bps Change in Discount RateIncreaseDecreaseU.K. plans$(299)$242 U.S. plans$(100)$105 Other plans$(70)$75 (1)Increases to the projected benefit obligation reflect increases to our pension obligations, while decreases in the projected benefit obligation are recoveries toward fully-funded status. A change in the discount rate has an inverse relationship to the projected benefit obligation.Holding all other assumptions constant, the following table reflects what a 25 bps increase and decrease in our discount rate would have on our estimated 2021 pension expense (in millions): 25 bps Change in Discount RateIncrease (decrease) in expenseIncreaseDecreaseU.K. plans$1 $(1)U.S. plans$2 $(2)Other plans$1 $(1)Holding all other assumptions constant, the following table reflects what a 25 bps increase and decrease in our long-term rate of return on plan assets would have on our estimated 2021 pension expense (in millions): 25 bps Change in Long-Term Rate of Return on Plan AssetsIncrease (decrease) in expenseIncreaseDecreaseU.K. plans$(16)$16 U.S. plans$(5)$5 Other plans$(4)$4 Estimated future contributionsWe estimate cash contributions of approximately $122 million to our pension plans in 2021 as compared with cash contributions of $120 million in 2020.50Goodwill and Other Intangible AssetsGoodwill represents the excess of cost over the fair market value of the net assets acquired. We classify our intangible assets acquired as either tradenames, customer-related and contract-based, or technology and other.Goodwill is not amortized, but rather tested for impairment at least annually in the fourth quarter. We test more frequently if there are indicators of impairment or whenever business circumstances suggest that the carrying value of goodwill may not be recoverable. These indicators may include a sustained significant decline in our share price and market capitalization, a decline in our expected future cash flows, or a significant adverse change in legal factors or in the business climate, among others. We perform impairment reviews at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components are a reporting unit, or if the segment comprises only a single component.When evaluating these assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, then the goodwill impairment test becomes a quantitative analysis. If the fair value of a reporting unit is determined to be greater than the carrying value of the reporting unit, goodwill is deemed not to be impaired and no further testing is necessary. If the fair value of a reporting unit is less than the carrying value, a goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value limited to the total amount of the goodwill allocated to the reporting unit. In determining the fair value of our reporting units, we use a discounted cash flow (“DCF”) model based on our most current forecasts. We discount the related cash flow forecasts using the weighted average cost of capital method at the date of evaluation. Preparation of forecasts and selection of the discount rate for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium. We believe the implied control premium determined by our impairment analysis is reasonable based upon historic data of premiums paid on actual transactions within our industry. We review intangible assets that are being amortized for impairment whenever events or changes in circumstance indicate that their carrying amount may not be recoverable. If we are required to record impairment charges in the future, they could materially impact our results of operations.ContingenciesWe define a contingency as an existing condition that involves a degree of uncertainty as to a possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. Under U.S. GAAP, we are required to establish reserves for loss contingencies when the loss is probable and we can reasonably estimate its financial impact. We are required to assess the likelihood of material adverse judgments or outcomes, as well as potential ranges or probability of losses. We determine the amount of reserves required, if any, for contingencies after carefully analyzing each individual item. The required reserves may change due to new developments in each issue. We do not recognize gain contingencies until the contingency is resolved and amounts due are probable of collection.Share-Based PaymentsShare-based compensation expense is measured based on the grant date fair value and recognized over the requisite service period for awards that we ultimately expect to vest. We estimate forfeitures at the time of grant based on our actual experience to date and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.Restricted Share UnitsRestricted share units (“RSUs”) are service-based awards for which we recognize the associated compensation cost on a straight-line basis over the requisite service period. We estimate the fair value of the awards based on the market price of the underlying share on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period where applicable.51Performance Share AwardsPerformance share awards (“PSAs”) are performance-based awards for which vesting is dependent on the achievement of certain objectives. Such objectives may be made on a personal, group or company level. We estimate the fair value of the awards based on the market price of the underlying share on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period.Compensation expense is recognized over the performance period. The number of shares issued on the vesting date will vary depending on the actual performance objectives achieved, which are based on a fixed number of potential outcomes. We make assessments of future performance using subjective estimates, such as long-term plans. As a result, changes in the underlying assumptions could have a material impact on the compensation expense recognized.The largest plan is the Leadership Performance Plan (“LPP”), which has a three-year performance period. As the percent of expected performance increases or decreases, the potential change in expense can go from 0% to 200% of the targeted total expense. The 2018 to 2020 performance period ended on December 31, 2020, the 2017 to 2019 performance period ended on December 31, 2019, and the 2016 to 2018 performance period ended on December 31, 2018. The LPP currently has two open performance periods: 2019 to 2021 and 2020 to 2022. A 10% upward adjustment in our estimated performance achievement percentage for both open performance periods would have increased our 2020 expense by approximately $7.2 million, while a 10% downward adjustment would have decreased our expense by approximately $7.2 million. Income TaxesWe earn income in numerous countries and this income is subject to the laws of taxing jurisdictions within those countries. The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies and are based on management’s assumptions and estimates about future operating results and levels of taxable income, and judgments regarding the interpretation of the provisions of current accounting principles.Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Considerations with respect to the realizability of deferred tax assets include the period of expiration of the deferred tax asset, historical earnings and projected future taxable income by jurisdiction as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Significant management judgment is required in determining the assumptions and estimates related to the amount and timing of future taxable income. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors.We assess carryforwards and tax credits for realization as a reduction of future taxable income by using a “more likely than not” determination. We base the carrying values of liabilities and assets for income taxes currently payable and receivable on management’s interpretation of applicable tax laws and incorporate management’s assumptions and judgments about using tax planning strategies in various taxing jurisdictions. Using different estimates, assumptions, and judgments in accounting for income taxes, especially those that deploy tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and changes in our results of operations.NEW ACCOUNTING PRONOUNCEMENTSNote 2 “Summary of Significant Accounting Principles and Practices” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report contains a summary of our significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable.Item 7A. Quantitative and Qualitative Disclosures About Market RiskWe are exposed to potential fluctuations in earnings, cash flows, and the fair values of certain of our assets and liabilities due to changes in interest rates and foreign exchange rates. To manage the risk from these exposures, we enter into a variety of derivative instruments. We do not enter into derivatives or financial instruments for trading or speculative purposes.The following discussion describes our specific exposures and the strategies we use to manage these risks. Refer to Note 2 “Summary of Significant Accounting Principles and Practices” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for a discussion of our accounting policies for financial instruments and derivatives.52Foreign Exchange RiskWe are subject to foreign exchange rate risk. Our primary exposures include exchange rates between the U.S. dollar and the euro, the British pound, the Canadian dollar, the Australian dollar, the Indian rupee, and the Japanese yen. We use over-the-counter options and forward contracts to reduce the impact of foreign currency risk to our financial statements.Additionally, some of our non-U.S. brokerage subsidiaries receive revenue in currencies that differ from their functional currencies. Our U.K. subsidiaries earn a portion of their revenue in U.S. dollars, euro, and Japanese yen, but most of their expenses are incurred in British pounds. At December 31, 2020, we have hedged approximately 45% of our U.K. subsidiaries’ expected exposures to the U.S. dollar, euro, and Japanese yen transactions for the years ending December 31, 2021 and 2022. We generally do not hedge exposures beyond three years.We also use forward and option contracts to economically hedge foreign exchange risk associated with monetary balance sheet exposures, such as intercompany notes and current assets and liabilities that are denominated in a non-functional currency and are subject to remeasurement.The potential loss in future earnings from foreign exchange derivative instruments resulting from a hypothetical 10% adverse change in year-end exchange rates would be $28 million and $14 million at December 31, 2021 and 2022, respectively.The translated value of revenues and expenses from our international brokerage operations are subject to fluctuations in foreign exchange rates. If we were to translate prior year results at current year exchange rates, diluted earnings per share would have an unfavorable $0.03 impact during the twelve months ended December 31, 2020. Further, adjusted diluted earnings per share, a non-GAAP measure as defined and reconciled under the caption “Review of Consolidated Results — Adjusted Diluted Earnings Per Share,” would have an unfavorable $0.04 impact during the twelve months ended December 31, 2020 if we were to translate prior year results at current quarter exchange rates.Interest Rate RiskOur fiduciary investment income is affected by changes in international and domestic short-term interest rates. We monitor our net exposure to short-term interest rates and, as appropriate, hedge our exposure with various derivative financial instruments. This activity primarily relates to brokerage funds held on behalf of clients in the U.S. and in continental Europe. A hypothetical, instantaneous parallel decrease in the year-end yield curve of 100 basis points would cause a decrease, net of derivative positions, of $58 million to each of 2021 and 2022 pretax income. A corresponding increase in the year-end yield curve of 100 basis points would cause an increase, net of derivative positions, of $58 million to each of 2021 and 2022 pre-tax income.We have long-term debt outstanding, excluding the current portion, with a fair market value of $8.8 billion and $7.4 billion as of December 31, 2020 and December 31, 2019, respectively. The fair value was greater than the carrying value by $1,471 million at December 31, 2020, and $815 million greater than the carrying value at December 31, 2019. A hypothetical 1% increase or decrease in interest rates would change the fair value by a decrease of 7% or an increase of 8%, respectively, at December 31, 2020.We have selected hypothetical changes in foreign currency exchange rates, interest rates, and equity market prices to illustrate the possible impact of these changes; we are not predicting market events.53

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Apple Inc._10-Q_2021-01-28 00:00:00_320193-0000320193-21-000010.html

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Apple Inc._10-Q_2021-04-29 00:00:00_320193-0000320193-21-000056.html

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Applovin Corp_10-Q_2021-05-14 00:00:00_1751008-0001193125-21-161989.html

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Avery Dennison Corp_10-K_2021-02-25 00:00:00_8818-0001193125-21-055146.html

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+Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information called for by this Item appears under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report and is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this Item is contained under ”Market-Sensitive Instruments and Risk Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report and incorporated herein by reference.

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BALL Corp_10-K_2021-02-17 00:00:00_9389-0001558370-21-001121.html

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations​Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K (annual report), which include additional information about our accounting policies, practices and the transactions underlying our financial results. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and the accompanying notes, including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising during the normal course of business. We apply our best judgment, our knowledge of existing facts and circumstances and actions that we may undertake in the future in determining the estimates that affect our consolidated financial statements. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effects cannot be determined with precision, actual results may differ from these estimates. Ball Corporation and its subsidiaries are referred to collectively as “Ball Corporation,” “Ball,” “the company,” “we” or “our” in the following discussion and analysis.​OVERVIEW​Business Overview and Industry Trends​Ball Corporation is one of the world’s leading aluminum packaging suppliers. Our packaging products are produced for a variety of end uses, are manufactured in facilities around the world and are competitive with other substrates, such as plastics and glass. In the aluminum packaging industry, sales and earnings can be increased by reducing costs, increasing prices, developing new products, expanding volumes and making strategic acquisitions. We also provide aerospace and other technologies and services to governmental and commercial customers, including national defense hardware, antenna and video tactical solutions, civil and operational space hardware and system engineering services.​We sell our aluminum packaging products mainly to large, multinational beverage, personal care and household products companies with which we have developed long-term relationships. This is evidenced by our high customer retention and our large number of long-term supply contracts. While we have a diversified customer base, we sell a significant portion of our packaging products to major companies and brands, as well as to numerous regional customers. The overall global aluminum beverage and aerosol container industries are growing and are expected to continue to grow in the medium to long term. The primary customers for the products and services provided by our aerospace segment are U.S. government agencies or their prime contractors.​We purchase our raw materials from relatively few suppliers. We also have exposure to inflation, in particular the rising costs of raw materials, as well as other direct cost inputs. We mitigate our exposure to the changes in the costs of aluminum through the inclusion of provisions in contracts covering the majority of our volumes to pass through aluminum price changes, as well as through the use of derivative instruments. The pass-through provisions generally result in proportional increases or decreases in sales and costs with a greatly reduced impact, if any, on net earnings. Because of our customer and supplier concentration, our business, financial condition and results of operations could be adversely affected by the loss, insolvency or bankruptcy of a major customer or supplier or a change in a supply agreement with a major customer or supplier, although our contract provisions generally mitigate the risk of customer loss, and our long-term relationships represent a known, stable customer base.​The majority of our aerospace business involves work under contracts, generally from one to five years in duration, as a prime contractor or subcontractor for various U.S. government agencies. Intense competition and long operating cycles are key characteristics of the company’s aerospace and defense industry where it is common for work on major programs to be shared among a number of companies. A company competing to be a prime contractor may, upon ultimate award of the contract to a competitor, become a subcontractor for the ultimate prime contracting company.​25 Table of ContentsCorporate Strategy ​Our Drive for 10 vision encompasses five strategic levers that are key to growing our business and achieving long-term success. Since launching Drive for 10 in 2011, we have made progress on each of the levers as follows:​●Maximizing value in our existing businesses by expanding specialty container production across our global plant network to meet current demand and improving efficiencies in our beverage container and end facilities in North America, South America and Europe; leveraging plant floor and integrated planning systems to reduce costs and manage contractual provisions across our diverse customer base; successfully acquiring and integrating a large global aluminum beverage business and regional aluminum aerosol facility while also divesting underperforming steel food and steel aerosol packaging assets in North and South America and four beverage packaging facilities in China; and in the remaining aluminum aerosol business, installing new extruded aluminum aerosol lines in our European, Mexican and Indian facilities while also implementing cost-out and value-in initiatives across all of our businesses;​●Expanding further into new products and capabilities through commercializing our new lightweight, infinitely recyclable aluminum cup and providing next-generation extruded aluminum aerosol packaging that utilizes proprietary technology to significantly lightweight the can; and successfully introducing new specialty beverage cans and aluminum bottle-shaping technology; ​●Aligning ourselves with the right customers and markets by investing capital to meet continued growth for specialty beverage containers throughout our global network, which represent approximately 45 percent of our global beverage packaging mix; aligning with spiked seltzer and craft brewers, sparkling and still water fillers, wine producers and other new beverage producers who continue to use aluminum beverage containers to grow their business; and in our new aluminum cup business, utilizing online platforms and North American retailers to provide infinitely recyclable aluminum cups directly to consumers;​●Broadening our geographic reach with our acquisition of Rexam and our new investments in beverage manufacturing facilities in the United States, Brazil, Paraguay, Spain, Mexico, Myanmar and Panama, as well as an extruded aluminum aerosol manufacturing facility in India and successful start-up of a dedicated aluminum cup manufacturing facility in the U.S.; and​●Leveraging our technological expertise in packaging innovation, including the introduction of our new proprietary, brandable lightweight aluminum cup and providing next-generation aluminum bottle-shaping technologies and the increased production of lightweight ReAl® containers, which utilize technology that increases the strength of aluminum used in the manufacturing process while lightweighting the can by up to 20 percent over a standard aluminum aerosol can, as well as our investment in cyber, data analytics methane monitoring, 5G and LIDAR capabilities to further enhance our aerospace technical expertise across a broader customer portfolio. ​These ongoing business developments help us stay close to our customers while expanding and/or sustaining our industry positions and global reach with major beverage, personal care, household products and aerospace customers. In order to successfully execute our strategy and reach our goals, we realize the importance of excelling in the following areas: customer focus, operational excellence, innovation and business development, people and culture focus and sustainability.​26 Table of ContentsRESULTS OF OPERATIONS ​Management’s discussion and analysis for our results of operations on a consolidated and segment basis include a quantification of factors that had a material impact. Other factors that did not have a material impact, but that are significant to understand the results, are qualitatively described.​Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed on February 19, 2020, for a comparison of our 2019 results of operations to the 2018 results. Prior Forms 10-K have not been restated to reflect changes to Ball’s internal reporting structure that were effective January 1, 2020.​Novel Coronavirus (COVID-19) ​The novel coronavirus (COVID-19) had a material effect upon the global business environment during the year ended December 31, 2020. Ball provides key products and services to the consumer beverage and household markets and the U.S. aerospace markets and, consequently, the operations of Ball and of its principal customers and suppliers have been designated as essential across our key markets. This designation allowed Ball to operate its manufacturing facilities throughout 2020, and it is expected that Ball will continue to operate its facilities without disruption in the foreseeable future. However, countries around the globe have issued stay-at-home orders and mandated operational closures of non-essential businesses, which has impacted certain of our customers by constraining some supply of products to certain consumers. The risks that COVID-19 continues to present to Ball’s business have been outlined in Item 1. Risk Factors and Note 1 to the consolidated financial statements within Item 8 of this annual report.​Consolidated Sales and Earnings​​​​​​​​​​​​​​Years Ended December 31,​($ in millions) 2020 2019 2018 ​​​​​​​​​​​Net sales​$ 11,781​$ 11,474​$ 11,635​Net earnings attributable to Ball Corporation​​ 585​​ 566​​ 454​Net earnings attributable to Ball Corporation as a % of net sales​​ 5% ​ 5% ​ 4%​Sales in 2020 were $307 million higher compared to 2019 primarily as a result of increased sales volumes in our beverage packaging segments and increased sales in our aerospace segment, partially offset by the pass through of lower aluminum prices, the sale of the China beverage packaging can business in the third quarter of 2019 and the sale of the Argentine steel aerosol business in the fourth quarter of 2019. ​Net earnings attributable to Ball Corporation in 2020 were $19 million higher than 2019 primarily due to higher comparable operating earnings for reportable segments and lower interest expense, partially offset by higher business consolidation and debt refinancing costs and a higher effective tax rate. ​Cost of Sales (Excluding Depreciation and Amortization)​Cost of sales, excluding depreciation and amortization, was $9,323 million in 2020 compared to $9,203 million in 2019. These amounts represented 79 percent and 80 percent of consolidated net sales for the years ended 2020 and 2019, respectively. ​Depreciation and Amortization​Depreciation and amortization expense was $668 million in 2020 compared to $678 million in 2019. These amounts represented 6 percent of consolidated net sales for the years ended 2020 and 2019. Amortization expense in 2020 and 2019 included $150 million and $155 million, respectively, for the amortization of acquired Rexam intangibles.​27 Table of ContentsSelling, General and Administrative​Selling, general and administrative (SG&A) expenses were $525 million in 2020 compared to $417 million in 2019. These amounts represented 4 percent of consolidated net sales for both years. Personnel and other costs increased year over year to support growth investments.​Business Consolidation Costs and Other Activities​Business consolidation costs and other activities were $262 million in 2020 compared to $244 million in 2019. These amounts represented 2 percent of consolidated net sales for both years.​Interest Expense​Total interest expense was $316 million in 2020 compared to $324 million in 2019. Interest expense, excluding the effect of debt refinancing and other costs, as a percentage of average borrowings decreased by approximately 85 basis points from 4.4 percent in 2019 to 3.5 percent in 2020 due to the drop in global interest rates. ​Tax Provision​The company’s effective tax rate is affected by recurring items such as income earned in foreign jurisdictions with tax rates that differ from the U.S. tax rate and by discrete items that may occur in any given year but are not consistent from year to year. ​The 2020 effective income tax rate was 14.4 percent compared to 11.7 percent for 2019. As compared with the statutory U.S. federal income tax rate of 21 percent, the 2020 effective rate was reduced by 6.8 percent for equity compensation benefits, by 5.7 percent for the impact of the U.S. R&D credit and by 2 percent for various uncertain tax positions. These reductions were partially offset by an increase of 3.4 percent for the impact of foreign exchange fluctuations on certain deferred tax assets. While these items are expected to recur, the potential magnitude of each item is uncertain. ​The 2020 effective income tax rate was also increased by 2.6 percent for enacted changes to tax rates in the UK and by 2.3 percent for the impact of non-deductible goodwill. These items are not expected to recur.​Further details of taxes on income are included in Note 16 to the consolidated financial statements within Item 8 of this annual report.​RESULTS OF BUSINESS SEGMENTS​Segment Results​Ball’s operations are organized and reviewed by management along its product lines and geographical areas, and its operating results are presented in the four reportable segments discussed below. Effective January 1, 2020, Ball implemented changes to its management and internal reporting structure for cost reduction and operational efficiency purposes. As a result of these changes, the company’s plants in Cairo, Egypt, and Manisa, Turkey, are now included in the beverage packaging, Europe, Middle East and Africa (beverage packaging, EMEA), segment. In addition, the company’s operations in India and Saudi Arabia are now combined with the former non-reportable beverage packaging, Asia Pacific, operating segment as a new non-reportable beverage packaging, other, operating segment. The company’s segment results and disclosures for the years ended December 31, 2019 and 2018, have been retrospectively adjusted to conform to the current year presentation.​28 Table of ContentsBeverage Packaging, North and Central America​​​​​​​​​​​​​​Years Ended December 31,​($ in millions)​2020 2019 2018 ​​​​​​​​​​​Net sales​$ 5,076​$ 4,758​$ 4,626​​​​​​​​​​​​Comparable operating earnings​​ 683​​ 555​​ 551​Business consolidation and other activities (a)​​ (5)​​ (14)​​ (6)​Amortization of acquired Rexam intangibles​​ (27)​​ (29)​​ (31)​Total segment earnings​$ 651​$ 512​$ 514​Comparable operating earnings as a % of segment net sales​​ 13% ​ 12% ​ 12%(a)Further details of these items are included in Note 6 to the consolidated financial statements within Item 8 of this annual report.​Segment sales in 2020 were $318 million higher compared to 2019. The increase in 2020 was primarily due to higher volumes, higher specialty mix and improved customer contractual terms, partially offset by lower aluminum prices. We cannot predict the impact on sales that will result from future changes in aluminum input prices. ​Comparable operating earnings in 2020 were $128 million higher compared to 2019 primarily due to higher sales volumes, higher specialty mix, benefits from improved customer contractual terms and improved operating performance, partially offset by increased capacity expansion and labor costs.​Beverage Packaging, EMEA​​​​​​​​​​​​Years Ended December 31,​($ in millions)2020 2019 2018 ​​​​​​​​​​Net sales$ 2,945​$ 2,857​$ 2,809​​​​​​​​​​​Comparable operating earnings​ 354​​ 351​​ 328​Business consolidation and other activities (a)​ (10)​​ (39)​​ (49)​Amortization of acquired Rexam intangibles​ (64)​​ (67)​​ (73)​Total segment earnings$ 280​$ 245​$ 206​Comparable operating earnings as a % of segment net sales​ 12% ​ 12% ​ 12%(a)Further details of these items are included in Note 6 to the consolidated financial statements within Item 8 of this annual report.​Segment sales in 2020 were $88 million higher compared to 2019. The increase in 2020 was primarily due to higher sales volumes and improved customer and specialty mix, partially offset by the pass through of lower aluminum prices. ​Comparable operating earnings in 2020 were $3 million higher compared to 2019 primarily due to higher sales volumes and improved customer and specialty mix, partially offset by higher labor and warehousing costs and intermittent production line downtime during the second quarter of 2020. ​​29 Table of ContentsBeverage Packaging, South America​​​​​​​​​​​​​​Years Ended December 31,​($ in millions)​2020 2019 2018 ​​​​​​​​​​​Net sales​$ 1,695​$ 1,670​$ 1,701​​​​​​​​​​​​Comparable operating earnings​​ 280​​ 288​​ 313​Business consolidation and other activities (a)​​ 1​​ 15​​ 11​Amortization of acquired Rexam intangibles​​ (55)​​ (56)​​ (56)​Total segment earnings​$ 226​$ 247​$ 268​Comparable operating earnings as a % of segment net sales​​ 17% ​ 17% ​ 18%(a)Further details of these items are included in Note 6 to the consolidated financial statements within Item 8 of this annual report.​Segment sales in 2020 were $25 million higher compared to 2019. The increase in 2020 was primarily related to higher volumes, partially offset by regional pricing and the pass through of lower aluminum prices.​Comparable operating earnings in 2020 were $8 million lower compared to 2019 primarily related to adverse cost absorption due to intermittent production line downtime in the second quarter of 2020 and regional pricing, partially offset by increased sales volumes. ​Aerospace ​​​​​​​​​​​​Years Ended December 31,​($ in millions)2020 2019 2018 ​​​​​​​​​​Net sales$ 1,741​$ 1,479​$ 1,196​Comparable operating earnings​ 153​​ 140​​ 113​Comparable operating earnings as a % of segment net sales​ 9% ​ 9% ​ 9%​Segment sales in 2020 were $262 million higher compared to 2019, and comparable operating earnings were $13 million higher. The increase in sales and operating earnings for 2020 was primarily the result of increases from significant U.S. national defense contracts.​Sales to the U.S. government, either directly as a prime contractor or indirectly as a subcontractor, represented 97 percent of segment sales in 2020 compared to 98 percent of segment sales in 2019. The aerospace contract mix in 2020 consisted of 49 percent cost-type contracts, which are billed at our costs plus an agreed-upon and/or earned profit component, and 48 percent fixed-price contracts. The remaining sales were for time and materials contracts.​Contracted backlog for the aerospace segment at December 31, 2020 and 2019, was $2.4 billion and $2.5 billion, respectively. The segment has numerous outstanding bids for future contract awards. The backlog at December 31, 2020, consisted of 42 percent cost-type contracts. Comparisons of backlog are not necessarily indicative of the trend of future operations due to the nature of varying delivery and milestone schedules on contracts, funding of programs and the uncertainty of timing of future contract awards.​30 Table of ContentsManagement Performance Measures​Management internally uses various measures to evaluate company performance, including comparable operating earnings (earnings before interest, taxes and business consolidation and other non-comparable costs); comparable net earnings (earnings before business consolidation costs and other non-comparable costs after tax); comparable diluted earnings per share (comparable net earnings divided by diluted weighted average shares outstanding); return on average invested capital (net operating earnings after tax over the relevant performance period divided by average invested capital over the same period); economic value added (EVA®) dollars (net operating earnings after tax less a capital charge on average invested capital employed); earnings before interest and taxes (EBIT); earnings before interest, taxes, depreciation and amortization (EBITDA); and diluted earnings per share. In addition, management uses free cash flow (generally defined by the company as cash flow from operating activities less capital expenditures) as a measure to evaluate the company’s liquidity. We believe this information is also useful to investors as it provides insight into the earnings and cash flow criteria that management uses to make strategic decisions. These financial measures may be adjusted at times for items that affect comparability between periods such as business consolidation costs and gains or losses on acquisitions and dispositions.​Nonfinancial measures in the packaging businesses include production efficiency and spoilage rates; quality control figures; environmental, health and safety statistics; production and sales volumes; asset utilization rates; and measures of sustainability. Additional measures used to evaluate financial performance in the aerospace segment include contract revenue realization, award and incentive fees realized, proposal win rates and backlog (including awarded, contracted and funded backlog).​Many of the above noted financial measurements are presented on a non-U.S. GAAP basis and should be considered in connection with the consolidated financial statements within Item 8 of this annual report. Non-U.S. GAAP measures should not be considered in isolation, nor should they not be considered superior to, or a substitute for, financial measures calculated in accordance with U.S. GAAP. A presentation of earnings in accordance with U.S. GAAP is available in Item 8 of this annual report.​Based on the above definitions, our calculations of comparable operating earnings, comparable net earnings, comparable diluted earnings per share and free cash flow are summarized as follows:​​​​​​​​​​​Years Ended December 31,($ in millions)2020 2019 2018​​​​​​​​​Net earnings attributable to Ball Corporation$ 585​$ 566​$ 454Net earnings (loss) attributable to noncontrolling interests, net of tax​ (3)​​ (30)​​ (1)Net earnings​ 582​​ 536​​ 453Equity in results of affiliates, net of tax​ 6​​ 1​​ (5)Tax provision (benefit)​ 99​​ 71​​ 185Earnings before taxes, as reported​ 687​​ 608​​ 633Total interest expense​ 316​​ 324​​ 302Earnings before interest and taxes​ 1,003​​ 932​​ 935Business consolidation and other activities​ 262​​ 244​​ 191Amortization of acquired Rexam intangibles​ 150​​ 155​​ 164Comparable operating earnings$ 1,415​$ 1,331​$ 1,29031 Table of Contents​​​​​​​​​​​​​​Years Ended December 31,($ in millions, except per share amounts) 2020 2019 2018​​​​​​​​​​Net earnings attributable to Ball Corporation​$ 585​$ 566​$ 454Business consolidation and other activities​​ 262​​ 244​​ 191Amortization of acquired Rexam intangibles​​ 150​​ 155​​ 164Share of equity method affiliate non-comparable costs, net of tax​​ 31​​ 16​​ 8Debt refinancing and other costs​​ 41​​ 7​​ 1Impact of U.S. tax reform ​​ —​​ —​​ (45)Non-controlling interest share of non-comparable costs, net of tax​​ 1​​ (32)​​ —Noncomparable taxes​​ (83)​​ (95)​​ 2Net earnings attributable to Ball Corporation before above transactions (Comparable Net Earnings)​$ 987​$ 861​$ 775​​​​​​​​​​Diluted earnings per share​$ 1.76​$ 1.66​$ 1.29Comparable diluted earnings per share​$ 2.97​$ 2.53​$ 2.20​CRITICAL AND SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS​For information regarding the company’s critical and significant accounting policies, as well as recent accounting pronouncements, see Notes 1 and 2 to the consolidated financial statements within Item 8 of this annual report.​FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES​Cash Flows and Capital Expenditures​Our primary sources of liquidity are cash provided by operating activities and external borrowings. We believe that cash flows from operating activities and cash provided by short-term, long-term and committed revolver borrowings, when necessary, will be sufficient to meet our ongoing operating requirements, scheduled principal and interest payments on debt, dividend payments, anticipated share repurchases and anticipated capital expenditures. We have no debt maturities until 2022, our senior credit facilities are in place until 2024 and we are focused in the near term on maintaining liquidity and flexibility in the current economic environment. The following table summarizes our cash flows:​​​​​​​​​​​Years Ended December 31,($ in millions)2020 2019 2018​​​​​​​​​Cash flows provided by (used in) operating activities$ 1,432​$ 1,548​$ 1,566Cash flows provided by (used in) investing activities​ (1,181)​​ (422)​​ (206)Cash flows provided by (used in) financing activities​ (602)​​ (46)​​ (1,040)​Cash flows provided by operating activities were $116 million lower in 2020 compared to 2019, primarily due to higher working capital outflows of $106 million in 2020 compared to inflows of $236 million in 2019, partially offset by lower pension contributions. The higher working capital outflows in 2020 resulted from seasonal working capital build which was more sizeable than typical due largely to the timing of aluminum payments in the first quarter, increased personnel costs to support growth and a proportionally larger increase in days sales outstanding as compared to days payable outstanding. In comparison to the same period of 2019, our working capital movements reflect an increase of days sales outstanding from 38 days in 2019 to 42 days in 2020 and an increase of inventory days on hand from 48 days in 2019 to 50 days in 2020, partially offset by an increase of days payable outstanding from 118 days in 2019 to 128 days in 2020.​Cash outflows from investing activities increased by $759 million from $422 million in 2019 to $1,181 million in 2020. This predominantly reflected a $515 million increase in capital expenditures for large growth projects, a $160 million inflow from the 2019 sale of the steel food and steel aerosol business and a $69 million outflow for the 2020 acquisition of the Brazil aluminum aerosol packaging business.​32 Table of ContentsCash outflows from financing activities increased by $556 million from $46 million in 2019 to $602 million in 2020, primarily related to total debt activity changing from net borrowings of $1.1 billion in 2019 to net repayments of $262 million in 2020, partially offset by a reduction in net share repurchases from $945 million in 2019 to $75 million in 2020.​We have entered into several regional committed and uncommitted accounts receivable factoring programs with various financial institutions for certain of our accounts receivable. Programs accounted for as true sales of the receivables, without recourse to Ball, had combined limits of approximately $1.6 billion and $1.4 billion at December 31, 2020, and December 31, 2019, respectively. A total of $232 million and $230 million were available for sale under these programs at December 31, 2020 and 2019, respectively. ​As of December 31, 2020, approximately $684 million of our cash was held outside of the U.S. In the event we need to utilize any of the cash held outside of the U.S. for purposes within the U.S., there are no material legal or other economic restrictions regarding the repatriation of cash from any of the countries outside the U.S. where we have cash. The company believes its U.S. operating cash flows, cash on hand, as well as availability under its long-term, revolving credit facilities, uncommitted short-term credit facilities and committed and uncommitted accounts receivable factoring programs will be sufficient to meet the cash requirements of the U.S. portion of our ongoing operations, scheduled principal and interest payments on U.S. debt, dividend payments, capital expenditures and other U.S. cash requirements. If foreign funds are needed for our U.S. cash requirements and we are unable to provide the funds through intercompany financing arrangements, we would be required to repatriate funds from foreign locations where the company has previously asserted indefinite reinvestment of funds outside the U.S. ​Based on its indefinite reinvestment assertion, the company has not provided deferred taxes on earnings in certain non-U.S. subsidiaries because such earnings are intended to be indefinitely reinvested in its international operations. It is not practical to estimate the additional taxes that might become payable if these earnings were remitted to the U.S.​Share Repurchases​The company’s share repurchases, net of issuances, totaled $75 million in 2020 and $945 million in 2019. The repurchases were completed using cash on hand, cash provided by operating activities, proceeds from the sale of businesses and available borrowings. ​Debt Facilities and Refinancing ​Given our cash flow projections and unused credit facilities that are available until March 2024, our liquidity is strong and is expected to meet our ongoing cash and debt service requirements. Total interest-bearing debt was $7.8 billion at both December 31, 2020 and 2019.​In the third quarter of 2020, Ball issued $1.3 billion of 2.875% senior notes due in 2030. In the first quarter of 2020, Ball redeemed the outstanding euro-denominated 3.50% senior notes due in 2020 in the amount of €400 million and the outstanding 4.375% senior notes due 2020 in the amount of $1 billion. We recorded debt refinancing and other costs of $41 million in 2020.​In November 2019, Ball issued €1.3 billion in aggregate principal amount of 1.50% and 0.875% euro-denominated senior notes for general corporate purposes. In March 2019, the company refinanced its existing credit facilities with a U.S. dollar term loan facility, a U.S. dollar revolving facility and a multi-currency revolving facility that mature in March 2024. The revolving facilities provide the company with up to the U.S. dollar equivalent of $1.75 billion.​At December 31, 2020, taking into account outstanding letters of credit, approximately $1.7 billion was available under the company’s long-term, multi-currency committed revolving credit facilities, which are available until March 2024. In addition to these facilities, the company had $1 billion of short-term uncommitted credit facilities available at December 31, 2020, of which $14 million was outstanding and due on demand. ​33 Table of ContentsWhile ongoing financial and economic conditions in certain areas may raise concerns about credit risk with counterparties to derivative transactions, the company mitigates its exposure by allocating the risk among various counterparties and limiting exposure to any one party. We also monitor the credit ratings of our suppliers, customers, lenders and counterparties on a regular basis.​We were in compliance with all loan agreements at December 31, 2020, and for all prior years presented, and we have met all debt payment obligations. The U.S. note agreements and bank credit agreement contain certain restrictions relating to dividends, investments, financial ratios, guarantees and the incurrence of additional indebtedness. In August 2020, we amended certain of our credit agreements, which among other things, modified the most restrictive of our debt covenants. This covenant requires us to maintain a leverage ratio (as defined) of no greater than 5.0 times, which will change to 4.5 times as of December 31, 2022. As of December 31, 2020, the company could borrow up to its limits available under the company’s long-term multi-currency committed revolving facilities and short-term uncommitted credit facilities without violating our existing debt covenants. Additional details about our debt are available in Note 15 to the consolidated financial statements within Item 8 of this annual report.​Other Liquidity Measures​Free Cash Flow​Management internally uses a free cash flow measure to: (1) evaluate the company’s liquidity, (2) evaluate strategic investments, (3) plan share repurchase and dividend levels and (4) evaluate the company’s ability to incur and service debt. Free cash flow is not a defined term under U.S. GAAP, and it should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The company defines free cash flow as cash flow from operating activities less capital expenditures. Free cash flow is typically derived directly from the company’s consolidated statement of cash flows; however, it may be adjusted for items that affect comparability between periods.​Based on the above definition, our consolidated free cash flow is summarized as follows:​​​​​​​​​​​​​​Years Ended December 31,($ in millions) 2020 2019 2018​​​​​​​​​​Total cash provided by operating activities​$ 1,432​$ 1,548​$ 1,566Capital expenditures​​ (1,113)​​ (598)​​ (816)Free cash flow​$ 319​$ 950​$ 750​Based on information currently available, we estimate that cash flows from operating activities for 2021 will exceed 2020 levels and capital expenditures will exceed $1.5 billion. In 2021, we intend to utilize our operating cash flow to fund our growth capital projects, dividend payments, share repurchases, debt service requirements and, to the extent available, acquisitions that meet our rate of return criteria. Approximately $1.1 billion of capital expenditures was contractually committed as of December 31, 2020.​34 Table of ContentsCommitments​Cash payments required for long-term debt maturities and interest payments, rental payments under noncancellable operating leases and purchase obligations in effect at December 31, 2020, are summarized in the following table: ​​​​​​​​​​​​​​​​​​​Payments Due By Year (a)($ in millions) Total 2021 2022-2023 2024-2025 2026 and Thereafter​​​​​​​​​​​​​​​​Long-term debt (b) ​$ 7,853​$ 3​$ 2,610​$ 2,515​$ 2,725Interest payments on long-term debt (c)​​ 1,172​​ 268​​ 462​​ 250​​ 192Purchase obligations (d)​​ 15,448​​ 4,871​​ 6,377​​ 3,718​​ 482Lease liabilities​​ 370​​ 66​​ 104​​ 63​​ 137 Total payments on contractual obligations​$ 24,843​$ 5,208​$ 9,553​$ 6,546​$ 3,536(a)Amounts reported in local currencies have been translated at year-end 2020 exchange rates.(b)Amounts represent future cash payments due and exclude future amortization of debt issuance costs of $67 million at December 31, 2020.(c)For variable rate facilities, amounts are based on interest rates in effect at year end and do not contemplate the effects of any hedging instruments utilized by the company.(d)The company’s purchase obligations include capital expenditures and contracted amounts for aluminum and other direct materials. Also included are commitments for purchases of natural gas and electricity, expenses related to aerospace and technologies contracts and other less significant items. In cases where variable prices and/or usage are involved, management’s best estimates have been used. Depending on the circumstances, early termination of the contracts may or may not result in penalties and, therefore, actual payments could vary significantly.​The table above excludes $55 million of uncertain tax positions, as the ultimate timing of resolution for these matters is unknown at this time. ​Also excluded from the table above are contributions to the company’s defined benefit pension plans, which are expected to be approximately $185 million in 2021 of which $157 million was paid in January 2021. This estimate may change based on changes in the Pension Protection Act, actual plan asset performance and available company cash flow, among other factors. Benefit payments related to the plans are expected to be approximately $337 million, $336 million, $339 million, $344 million and $347 million for the years ending December 31, 2021 through 2025, respectively, and approximately $1.8 billion for the years ending December 31, 2026 through 2030. ​Based on changes in return on asset and discount rate assumptions, as well as revisions based on plan experience studies, total pension expense in 2021, is expected to be approximately $4 million higher than in 2020, excluding settlement charges. A reduction of the expected return on pension assets assumption by one quarter of a percentage point would result in an increase of approximately $14 million in total 2021 pension expense, while a quarter of a percentage point reduction in the discount rate applied to the pension liability would result in a negligible increase to pension expense in 2021. Additional details about our defined benefit pension plans are available in Note 17 to the consolidated financial statements within Item 8 of this annual report.​CONTINGENCIES, INDEMNIFICATIONS AND GUARANTEES​Details of the company’s contingencies, legal proceedings, indemnifications and guarantees are available in Notes 22 and 23 to the consolidated financial statements within Item 8 of this annual report. The company is routinely subject to litigation incident to operating its businesses and has been designated by various federal and state environmental agencies as a potentially responsible party, along with numerous other companies, for the clean-up of several hazardous waste sites, including in respect of sites related to alleged activities of certain former Rexam subsidiaries. The company believes the matters identified will not have a material adverse effect upon its liquidity, results of operations or financial condition. ​35 Table of ContentsGuaranteed Securities​The company’s senior notes are guaranteed on a full and unconditional, joint and several basis by the issuer of the company’s senior notes and the subsidiaries that guarantee the notes (the obligor group). The entities that comprise the obligor group are 100 percent owned by the company. As described in the supplemental indentures governing the company’s existing senior notes, the senior notes are guaranteed by any of the company’s domestic subsidiaries that guarantee any other indebtedness of the company.​The following summarized financial information relates to the obligor group as of and for the years ended December 31, 2020 and 2019. Intercompany transactions, equity investments and other intercompany activity between obligor group subsidiaries have been eliminated from the summarized financial information. Investments in subsidiaries not forming part of the obligor group have also been eliminated.​​​​​​​​Years Ended December 31,($ in millions)2020 2019​​​​​​Net sales$ 7,115​$ 6,540Gross profit (a)​ 935​​ 789Net earnings (loss)​ 528​​ 211Net earnings (loss) attributable to Ball​ 528​​ 211(a)Gross profit is shown after depreciation and amortization related to cost of sales of $167 million and $160 million for the years ended December 31, 2020 and 2019, respectively.​​​​​​​​​​December 31,($ in millions) 2020 2019​​​​​​​Current assets​$ 2,211​$ 2,310Noncurrent assets​​ 13,701​​ 13,073Current liabilities​​ 3,704​​ 5,073Noncurrent liabilities​​ 10,854​​ 9,953​Included in the amounts disclosed in the tables above, at December 31, 2020 and 2019, the obligor group held receivables due from other subsidiary companies of $221 million and $299 million, respectively, long-term notes receivable due from other subsidiary companies of $9.2 billion and $9.3 billion, respectively, payables due to other subsidiary companies of $1.7 billion and $1.9 billion, respectively, and long-term notes payable due to other subsidiary companies of $1.5 billion and $2.2 billion, respectively. ​For the years ended December 31, 2020 and 2019, the obligor group recorded the following transactions with other subsidiary companies: sales to them of $804 million and $792 million, respectively, net credits from them of $24 million and net charges to them of $21 million, respectively, and net interest income from them of $393 million and $127 million, respectively. During the years ended December 31, 2020 and 2019, the obligor group received dividends from other subsidiary companies of $56 million and $775 million, respectively.​A description of the terms and conditions of the company’s debt guarantees is located in Note 23 to the consolidated financial statements within Item 8 of this annual report.​36 Table of ContentsFORWARD-LOOKING STATEMENTS ​This report contains "forward-looking" statements concerning future events and financial performance. Words such as "expects," "anticipates," "estimates," "believes," "targets," "likely," "positions" and similar expressions typically identify forward-looking statements, which are generally any statements other than statements of historical fact. Such statements are based on current expectations or views of the future and are subject to risks and uncertainties, which could cause actual results or events to differ materially from those expressed or implied. You should therefore not place undue reliance upon any forward-looking statements and any such statements should be read in conjunction with, and, qualified in their entirety by, the cautionary statements referenced below. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Key factors, risks and uncertainties that could cause actual outcomes and results to be different are summarized in filings with the Securities and Exchange Commission, including Exhibit 99 in our Form 10-K, which are available on our website and at www.sec.gov. Additional factors that might affect: a) our packaging segments include product capacity, supply, and demand constraints and fluctuations, including due to virus and disease outbreaks and responses thereto; availability/cost of raw materials, equipment, and logistics; competitive packaging, pricing and substitution; changes in climate and weather; footprint adjustments and other manufacturing changes, including the startup of new facilities and lines; failure to achieve synergies, productivity improvements or cost reductions; unfavorable mandatory deposit or packaging laws; customer and supplier consolidation; power and supply chain interruptions; potential delays and tariffs related to the U.K’s departure from the EU; changes in major customer or supplier contracts or a loss of a major customer or supplier; political instability and sanctions; currency controls; changes in foreign exchange or tax rates; and tariffs, trade actions, or other governmental actions, including business restrictions and shelter-in-place orders in any country or jurisdiction affecting goods produced by us or in our supply chain, including imported raw materials; b) our aerospace segment include funding, authorization, availability and returns of government and commercial contracts; and delays, extensions and technical uncertainties affecting segment contracts; c) the company as a whole include those listed above plus: the extent to which sustainability-related opportunities arise and can be capitalized upon; changes in senior management, succession, and the ability to attract and retain skilled labor; regulatory action or issues including tax, environmental, health and workplace safety, including U.S. FDA and other actions or public concerns affecting products filled in our containers, or chemicals or substances used in raw materials or in the manufacturing process; technological developments and innovations; the ability to manage cyber threats; litigation; strikes; disease; pandemic; labor cost changes; rates of return on assets of the company's defined benefit retirement plans; pension changes; uncertainties surrounding geopolitical events and governmental policies both in the U.S. and in other countries, including policies, orders and actions related to COVID-19, the U.S. government elections, stimulus package(s), budget, sequestration and debt limit; reduced cash flow; interest rates affecting our debt; and successful or unsuccessful joint ventures, acquisitions and divestitures, and their effects on our operating results and business generally.​Item 7A. Quantitative and Qualitative Disclosures About Market Risk​Financial Instruments and Risk Management​The company employs established risk management policies and procedures which seek to reduce the company’s commercial risk exposure to fluctuations in commodity prices, interest rates, currency exchange rates and prices of the company’s common stock with regard to common share repurchases and the company’s deferred compensation stock plan. However, there can be no assurance that these policies and procedures will be successful. Although the instruments utilized involve varying degrees of credit, market and interest risk, the counterparties to the agreements are expected to perform fully under the terms of the agreements. The company monitors counterparty credit risk, including lenders, on a regular basis, but Ball cannot be certain that all risks will be discerned or that its risk management policies and procedures will always be effective. Additionally, in the event of default under the company’s master derivative agreements, the non-defaulting party has the option to set off any amounts owed with regard to open derivative positions. ​We have estimated our market risk exposure using sensitivity analysis. Market risk exposure has been defined as the changes in fair value of derivative instruments, financial instruments and commodity positions. To test the sensitivity of our market risk exposure, we have estimated the changes in fair value of market risk sensitive instruments assuming a hypothetical 10 percent adverse change in market prices or rates. The results of the sensitivity analyses are summarized below.37 Table of ContentsCommodity Price Risk​Aluminum​We manage commodity price risk in connection with market price fluctuations of aluminum ingot through two different methods. First, we enter into container sales contracts that include aluminum ingot-based pricing terms that generally reflect the same price fluctuations included in commercial purchase contracts for aluminum sheet. The terms include fixed, floating or pass-through aluminum ingot component pricing. Second, we use derivative instruments such as option and forward contracts as economic and cash flow hedges of commodity price risk where there are material differences between sales and purchase contracted pricing and volume.​Considering the effects of derivative instruments, the company’s ability to pass through certain raw material costs through contractual provisions, the market’s ability to accept price increases and the company’s commodity price exposures under its contract terms, a hypothetical 10 percent adverse change in the company’s aluminum prices would result in an estimated $4 million after-tax reduction in net earnings over a one-year period. Additionally, the company has currency exposures on raw materials and the effect of a 10 percent adverse change is included in the total currency exposure discussed below. Actual results may vary based on actual changes in market prices and rates.​Interest Rate Risk​Our objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to minimize our overall borrowing costs. To achieve these objectives, we may use a variety of interest rate swaps, collars and options to manage our mix of floating and fixed-rate debt. Interest rate instruments held by the company at December 31, 2020, included pay-fixed interest rate swaps which effectively convert variable rate obligations to fixed-rate instruments.​Based on our interest rate exposure at December 31, 2020, assumed floating rate debt levels throughout the next 12 months and the effects of our existing derivative instruments, a 100-basis point increase in interest rates would result in an estimated $2 million after-tax reduction in net earnings over a one-year period. Actual results may vary based on actual changes in market prices and rates and the timing of these changes.​Currency Exchange Rate Risk​Our objective in managing exposure to currency fluctuations is to limit the exposure of cash flows and earnings from changes associated with currency exchange rate changes through the use of various derivative contracts. In addition, at times Ball manages earnings translation volatility through the use of currency option strategies, and the change in the fair value of those options is recorded in the company’s net earnings. Our currency translation risk results from the currencies in which we transact business. The company faces currency exposures in our global operations as a result of various factors including intercompany currency denominated loans, selling our products in various currencies, purchasing raw materials and equipment in various currencies and tax exposures not denominated in the functional currency. Sales contracts are negotiated with customers to reflect cost changes and, where there is not an exchange pass-through arrangement, the company may use forward and option contracts to manage significant currency exposures.​Considering the company’s derivative financial instruments outstanding at December 31, 2020, and the various currency exposures, a hypothetical 10 percent reduction (U.S. dollar strengthening, mainly against the Russian ruble) in currency exchange rates compared to the U.S. dollar would result in an estimated $12 million after-tax reduction in net earnings over a one-year period. This hypothetical adverse change in currency exchange rates would also reduce our forecasted average debt balance by $256 million. Actual changes in market prices or rates may differ from hypothetical changes.​​38 Table of Contents

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