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    AMC   AU000000AMC4

AMCOR PLC

(AMC)
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AMCOR : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

08/24/2021 | 06:14am EDT
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements and related Notes included in Item 8 of this
Annual Report on Form 10-K.

Two Year Review of Results
(in millions)                                                          2021                                2020
Net sales                                                  $ 12,861             100.0  %       $ 12,468             100.0  %
Cost of sales                                               (10,129)            (78.8)           (9,932)            (79.7)

Gross profit                                                  2,732              21.2             2,536              20.3

Operating expenses:
Selling, general, and administrative expenses                (1,292)            (10.0)           (1,385)            (11.1)
Research and development expenses                              (100)             (0.8)              (97)             (0.8)
Restructuring and related expenses, net                         (94)             (0.7)             (115)             (0.9)
Other income, net                                                75               0.6                55               0.4

Operating income                                              1,321              10.3               994               8.0

Interest income                                                  14               0.1                22               0.2
Interest expense                                               (153)             (1.2)             (207)             (1.7)
Other non-operating income, net                                  11               0.1                16               0.1

Income from continuing operations before income
taxes and equity in income (loss) of affiliated
companies                                                     1,193               9.3               825               6.6

Income tax expense                                             (261)             (2.0)             (187)             (1.5)
Equity in income (loss) of affiliated companies, net             19               0.1               (14)             (0.1)

of tax


Income from continuing operations                               951               7.4               624               5.0

Income (loss) from discontinued operations, net of                -                 -                (8)             (0.1)
tax

Net income                                                 $    951               7.4  %       $    616               4.9  %

Net income attributable to non-controlling interests            (12)             (0.1)               (4)                -

Net income attributable to Amcor plc                       $    939               7.3  %       $    612               4.9  %



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Overview


  Amcor is a global leader in developing and producing responsible packaging for
food, beverage, pharmaceutical, medical, home and personal-care, and other
products. We work with leading companies around the world to protect their
products and the people who rely on them, differentiate brands, and improve
supply chains through a range of flexible and rigid packaging, specialty
cartons, closures, and services. We are focused on making packaging that is
increasingly light-weighted, recyclable and reusable, and made using an
increasing amount of recycled content. During fiscal year 2021, approximately
46,000 Amcor employees generated $12.9 billion in sales from operations that
spanned approximately 225 locations in over 40 countries.

Significant Items Affecting the Periods Presented

Impact of COVID-19


  The ongoing 2019 Novel Coronavirus ("COVID-19") pandemic has resulted in a
period of historic uncertainty and challenges with the extent and severity of
the pandemic continuing to vary among the various regions in which we operate.
Our business is almost entirely exposed to end markets which have demonstrated
the same resilience experienced through past economic cycles. Our operations
have been largely recognized as 'essential' by governments and authorities
around the world given the role we play in the supply chains for critical food
and healthcare products. Our scale and global footprint has enabled us to
collaborate with customers and suppliers to meet volatile changes in demand and
continue to service our customers. In dealing with the exceptional challenges
posed by COVID-19, we have established three guiding principles focusing on the
health and safety of our employees, keeping our operations running, and
contributing to relief efforts in our communities.

Health and Safety


  Our commitment to the health and safety of our employees remains our first
priority. Our rigorous precautionary measures include global and regional
response teams that maintain contact with authorities and experts to actively
manage the situation, restrictions on company travel, quarantine protocols for
employees who may have had exposure or have symptoms, frequent disinfecting of
our locations, and other measures designed to help protect employees, customers,
and suppliers. We expect to continue these measures until the COVID-19 pandemic
is adequately contained for our business.

Operations and Supply Chain


  To support our business partners, we have instituted business continuity plans
in each of our operations and offices globally which address infection
prevention measures, incident response, return to work protocols, and supply
chain risks. We have experienced minimal disruptions to our operations to date
as we have largely been deemed as providing essential services. Our facilities
have largely been exempt from government mandated closure orders and while
governmental measures may be modified, we expect that our operations will remain
operational given the essential products we supply. However, despite our best
efforts to contain the impact in our facilities, it remains possible that
significant disruptions could occur as a result of the pandemic, including
temporary closures of our facilities. We have not experienced any significant
disruptions in our supply chain to date attributed to COVID-19.

Contributions to Our Communities

To support our local communities, we launched a global program to help mitigate the impact of COVID-19 by donating food and healthcare packaging products and by funding local community initiatives to improve access to healthcare, education or food, and other essential products.

Looking Ahead


  We continue to believe we are well-positioned to meet the challenges of the
ongoing COVID-19 pandemic. However, we cannot reasonably estimate the duration
and severity of this pandemic or its ultimate impact on the global economy and
our operations and financial results. Recent outbreaks of variants of the virus
have resulted in increased government actions to contain the pandemic. The
ultimate near-term impact of the pandemic on our business will depend on the
extent and nature of any future disruptions across the supply chain, the
duration of social distancing measures and other government imposed
restrictions, as well as the nature and pace of macroeconomic recovery in key
global economies.



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Raw Material and Supply Chain Trends


We experienced supply shortages of certain resins and raw materials and
increased price volatility of certain raw materials across many of the regions
in which we operate for both of our reportable segments in the second half of
fiscal 2021 attributed to a variety of global factors, including significant
winter storms across the southern United States. We have been able to work
closely with our suppliers and customers, leveraging our global capabilities and
expertise to work through supply and other resulting issues to date. We expect
supplies of certain raw materials will continue to be tight through at least the
first half of fiscal 2022 as supply channels recover, barring any future weather
or other impacts.

The Acquisition of Bemis Company, Inc.


  On June 11, 2019, we completed the acquisition of 100% of the outstanding
shares of Bemis Company, Inc. ("Bemis"), a global manufacturer of flexible
packaging products based in the United States, for the purchase price of $5.2
billion in an all-stock transaction. In connection with the Bemis transaction,
we assumed $1.4 billion of debt.

2019 Bemis Integration Plan


  In connection with the acquisition of Bemis, we initiated restructuring
activities in the fourth quarter of 2019 aimed at integrating and optimizing the
combined organization. As previously announced, we continue to target realizing
at least $180 million of pre-tax synergies driven by procurement, supply chain,
and general and administrative savings by the end of fiscal year 2022.

  Our total 2019 Bemis Integration Plan pre-tax integration costs are expected
to be approximately $230 million to $240 million. The total 2019 Bemis
Integration Plan costs include approximately $190 million to $200 million of
restructuring and related expenses, net, and $40 million of general integration
expenses. We estimate that net cash expenditures including disposal proceeds
will be approximately $160 million to $170 million, of which $40 million relates
to general integration expense. As of June 30, 2021, we have incurred $135
million in employee related expenses, $38 million in fixed asset related
expenses, $26 million in other restructuring and $27 million in restructuring
related expenses, partially offset by a gain on disposal of a business of
$51 million. The year ended June 30, 2021 resulted in net cash inflows of $1
million, including $78 million of business disposal proceeds, offset by $77
million of cash outflows, of which $69 million were payments related to
restructuring and related expenditures. The 2019 Bemis Integration Plan relates
to the Flexibles segment and Corporate and is expected to be substantially
completed by the end of fiscal year 2022.

  Restructuring related costs are directly attributable to restructuring
activities; however, they do not qualify for special accounting treatment as
exit or disposal activities. General integration costs are not linked to
restructuring. We believe the disclosure of restructuring related costs provides
more information on the total cost of the 2019 Bemis Integration Plan. The
restructuring related costs relate primarily to the closure of facilities and
include costs to replace graphics, train new employees on relocated equipment,
and anticipated losses on sale of closed facilities.

2018 Rigid Packaging Restructuring Plan


  On August 21, 2018, we announced a restructuring plan in Amcor Rigid Packaging
("2018 Rigid Packaging Restructuring Plan") aimed at reducing structural costs
and optimizing the footprint. The Plan includes the closures of manufacturing
facilities and headcount reductions to achieve manufacturing footprint
optimization and productivity improvements, as well as overhead cost reductions.

  The 2018 Rigid Packaging Restructuring Plan was completed by June 30, 2021
with total pre-tax restructuring costs of $121 million, whereof $78 million
resulted in cash expenditures, with the main component being the cost to exit
manufacturing facilities and employee related costs.

For more information about our restructuring plans, refer to Note 6, "Restructuring Plans" of "Part II, Item 8, Notes to Consolidated Financial Statements."

Equity Method Investment - AMVIG Holdings Limited ("AMVIG")


  We sold our equity method investment in AMVIG on September 30, 2020, realizing
a net gain of $15 million, which was recorded in equity in income (loss) of
affiliated companies, net of tax in the consolidated statements of income. Prior
to the sale and due to impairment indicators being present for the years ended
June 30, 2020 and 2019, we performed impairment tests by comparing the carrying
value of our investment in AMVIG at the end of each period, including interim
periods, to the fair
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value of the investment, which was determined based on AMVIG's quoted share price. We recorded impairment charges in fiscal years 2020 and 2019 of $26 million and $14 million, respectively, as the fair value of the investment was below its carrying value. Refer to Note 7, "Equity Method and Other Investments."

Highly Inflationary Accounting


  We have subsidiaries in Argentina that historically had a functional currency
of the Argentine Peso. As of June 30, 2018, the Argentine economy was designated
as highly inflationary for accounting purposes. Accordingly, beginning July 1,
2018, we began reporting the financial results of our Argentine subsidiaries
with a functional currency of the U.S. dollar. The transition to highly
inflationary accounting resulted in a negative impact on monetary balances of
$19 million, $28 million, and $30 million that was reflected in the consolidated
statements of income for the years ended June 30, 2021, 2020, and 2019,
respectively.


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Results of Operations


The following is a discussion and analysis of changes in the financial condition
and results of operations for fiscal year 2021 compared to fiscal year 2020. A
discussion and analysis regarding our results of operations for fiscal year 2020
compared to fiscal year 2019 that are not included in this Annual Report on Form
10-K can be found in Part II, Item 7 of our Annual Report on Form 10-K for the
fiscal year ended June 30, 2020, filed with the SEC on August 27, 2020.

Consolidated Results of Operations

        (in millions, except per share data)                  2021           2020
        Net sales                                          $ 12,861       $ 12,468
        Operating income                                      1,321            994
        Operating income as a percentage of net sales          10.3  %         8.0  %

        Net income attributable to Amcor plc               $    939       $    612
        Diluted Earnings Per Share                         $  0.602       $  0.382



  Net sales increased by $393 million, or 3.2%, to $12,861 million for the
fiscal year 2021, from $12,468 million for the fiscal year 2020. Excluding the
impact of disposed operations of $66 million, or (0.5%), positive currency
impacts of $190 million, or 1.5%, and pass-through of raw material costs of $3
million, or 0.0%, the increase in net sales for the fiscal year 2021 was $273
million or 2.2%, driven by favorable volumes of 1.6% and favorable price/mix of
0.6%.

  Net income attributable to Amcor plc increased by $327 million, or 53.4%, to
$939 million for the fiscal year 2021, from $612 million for the fiscal year
2020 mainly as a result of gross profit margin improvement, Bemis acquisition
related synergies, nonrecurrence of Bemis acquisition related costs incurred in
fiscal year 2020, and reduced interest expense, partially offset by associated
tax charges.

  Diluted earnings per shares ("Diluted EPS") increased to $0.602, or by 57.5%,
for the fiscal year 2021, from $0.382 for the fiscal year 2020, with net income
attributable to ordinary shareholders increasing by 53.4% and the diluted
weighted-average number of shares outstanding decreasing by 2.9%. The decrease
in the diluted weighted-average number of shares outstanding was due to
repurchase of shares under announced share buyback programs.

Segment Results of Operations

Flexibles Segment

The Flexibles reportable segment develops and supplies flexible packaging globally. (in millions)

                                                              2021               2020
Net sales including intersegment sales                                 $  10,040          $   9,755
Adjusted EBIT from continuing operations                                   1,427              1,296
Adjusted EBIT from continuing operations as a percentage of net
sales                                                                       14.2  %            13.3  %



  Net sales including intersegment sales increased by $285 million, or 2.9%, to
$10,040 million for fiscal year 2021, from $9,755 million for fiscal year 2020.
Excluding the impact of disposed operations of $66 million, or (0.7%), positive
currency impacts of $219 million, or 2.2%, and pass-through of raw material
costs of $89 million, or 1.0%, the increase in net sales including intersegment
sales for the fiscal year 2021 was $43 million, or 0.4%, driven by favorable
volumes of 0.6% and unfavorable price/mix of (0.2%).

  Adjusted earnings before interest and tax from continuing operations
("Adjusted EBIT") for the fiscal year 2021 increased by $131 million, or 10.1%
to $1,427 million from $1,296 million for the fiscal year 2020. Excluding
positive currency impacts of $20 million, or 1.6%, the increase in Adjusted EBIT
for fiscal year 2021 was $111 million, or 8.5%, driven by plant cost
improvements of 7.0%, favorable selling, general, and administrative ("SG&A")
and other cost impacts of 4.8%, and favorable volumes of 1.0%, partially offset
by unfavorable price/mix of (4.3%).




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Rigid Packaging Segment


  The Rigid Packaging reportable segment manufactures rigid packaging containers
and related products.
(in millions)                                                              2021               2020
Net sales                                                              $   2,823          $   2,716
Adjusted EBIT from continuing operations                                     299                284
Adjusted EBIT from continuing operations as a percentage of net
sales                                                                       10.6  %            10.5  %



  Net sales increased by $107 million, or 3.9%, to $2,823 million for fiscal
year 2021, from $2,716 million for fiscal year 2020. Excluding negative currency
impacts of $30 million, or (1.1%), and pass-through of raw material costs of $92
million, or (3.4%), the increase in net sales including intersegment sales for
the fiscal year 2021 was $229 million, or 8.4%, driven by favorable volumes of
5.2% and favorable price/mix of 3.2%.

  Adjusted EBIT for the fiscal year 2021 increased by $15 million, or 5.3%, to
$299 million for the fiscal year 2021 from $284 million for the fiscal year
2020. Excluding negative currency impacts of $7 million, or (2.3%), the increase
in Adjusted EBIT for fiscal year 2021 was $22 million, or 7.6%, driven by
favorable volumes of 7.4%, favorable price/mix of 7.1%, unfavorable plant costs
of (5.0%), and unfavorable selling, general, and administrative ("SG&A"), and
other cost impacts of (1.9%).

Consolidated Gross Profit
           (in millions)                                      2021          2020
           Gross profit                                    $ 2,732       $ 2,536
           Gross profit as a percentage of net sales          21.2  %       20.3  %



  Gross profit increased by $196 million, or 7.7%, to $2,732 million for fiscal
year 2021, from $2,536 million for fiscal year 2020. The increase was primarily
driven by growth in sales volume and plant cost performance and the
non-recurrence of $55 million of amortization of purchase price accounting
adjustments for fiscal year 2020.

Consolidated Selling, General, and Administrative ("SG&A") Expense

          (in millions)                                      2021           2020
          SG&A expenses                                   $ (1,292)      $ (1,385)
          SG&A expenses as a percentage of net sales         (10.0) %       (11.1) %



  SG&A decreased by $93 million, or 6.7%, to $1,292 million for fiscal year
2021, from $1,385 million for fiscal year 2020. The decrease was primarily due
to the nonrecurrence of Bemis related acquisition costs in fiscal year 2020,
together with the impact of synergy benefits and other savings.

Consolidated Research and Development ("R&D") Expense

            (in millions)                                     2021         2020
            R&D expenses                                    $ (100)      $ (97)
            R&D expenses as a percentage of net sales         (0.8) %     (0.8) %


Research and development costs increased by $3 million, or 3.1%, to $100 million for fiscal year 2021, from $97 million for fiscal year 2020.

Consolidated Restructuring and Related Expense, Net (in millions)

                                                              2021               2020
Restructuring and related expenses, net                                $     (94)         $    (115)
Restructuring and related expenses, net, as a percentage of net
sales                                                                       (0.7) %            (0.9) %



  Restructuring and related costs decreased by $21 million to $94 million for
fiscal year 2021, from $115 million for fiscal year 2020. The decrease was
primarily driven by lower costs from the 2018 Rigid Packaging Restructuring Plan
than in fiscal 2020.
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Consolidated Other Income, Net

           (in millions)                                          2021       2020
           Other income, net                                     $ 75       $ 55
           Other income, net, as a percentage of net sales        0.6  %     0.4  %


Other income, net increased by $20 million to $75 million for fiscal year 2021, from $55 million for fiscal year 2020. The increase was mainly driven by a favorable Brazil Supreme Court ruling on Brazil indirect tax credits.


Consolidated Interest Income
            (in millions)                                       2021       2020
            Interest income                                    $ 14       $ 22
            Interest income as a percentage of net sales        0.1  %     0.2  %


Interest income decreased by $8 million, or 36.4%, to $14 million for fiscal year 2021, from $22 million for fiscal year 2020, mainly driven by overall decreases in market interest rates.

Consolidated Interest Expense

         (in millions)                                          2021        

2020

         Interest expense                                     $ (153)      

$ (207)

Interest expense as a percentage of net sales (1.2) %

(1.7) %

Interest expense decreased by $54 million, or 26.1%, to $153 million for fiscal year 2021 compared to $207 million for fiscal year 2020, mainly driven by use of commercial paper and lower floating interest rates and repayment of higher cost debt and term loans.

Consolidated Other Non-Operating Income, Net

   (in millions)                                                         

2021 2020

   Other non-operating income, net                                      $ 

11 $ 16

Other non-operating income, net, as a percentage of net sales 0.1 % 0.1 %




  Other non-operating income, net decreased by $5 million to $11 million for
fiscal year 2021, from $16 million for fiscal year 2020, mainly driven by lower
expected returns on pension assets partially offset by lower pension interest.

Consolidated Income Tax Expense

                        (in millions)             2021         2020
                        Income tax expense      $ (261)      $ (187)
                        Effective tax rate        21.9  %      22.6  %


Income tax expense increased by $74 million, or 39.6%, to $261 million for fiscal year 2021, from $187 million for fiscal year 2020. The increase was primarily driven by the higher overall profit of the total Company.

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Presentation of Non-GAAP Information


  This Annual Report on Form 10-K refers to financial measures that have not
been prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"): adjusted earnings before interest and
taxes ("Adjusted EBIT") from continuing operations, adjusted net income from
continuing operations, and net debt. These non-GAAP financial measures adjust
for factors that are unusual or unpredictable. These measures exclude the impact
of significant tax reforms, certain amounts related to the effect of changes in
currency exchange rates, acquisitions, and restructuring, including
employee-related costs, equipment relocation costs, accelerated depreciation,
and the write-down of equipment. These measures also exclude gains or losses on
sales of significant property and divestitures, certain litigation matters,
significant pension settlements, impairments in goodwill and equity method
investments, and certain acquisition-related expenses, including transaction
expenses, due diligence expenses, professional and legal fees, purchase
accounting adjustments for inventory, order backlog, intangible amortization,
and changes in the fair value of deferred acquisition payments.

  This adjusted information should not be construed as an alternative to results
determined under U.S. GAAP. We use the non-GAAP measures to evaluate operating
performance and believe that these non-GAAP measures are useful to enable
investors and other external parties to perform comparisons of our current and
historical performance.

A reconciliation of reported net income attributable to Amcor plc to Adjusted EBIT from continuing operations and adjusted net income from continuing operations for fiscal years 2021, 2020, and 2019 is as follows:

                                                                           For the years ended June 30,
(in millions)                                                         2021               2020             2019
Net income attributable to Amcor plc, as reported                $       939          $   612          $    430
Add: Net income attributable to non-controlling interests                 12                4                 7

Add/(Less): (Income) loss from discontinued operations, net of tax

                                                                 -                8                (1)
Income from continuing operations                                        951              624               436
Add: Income tax expense                                                  261              187               172
Add: Interest expense                                                    153              207               208
Less: Interest income                                                    (14)             (22)              (17)
EBIT from continuing operations                                        1,351              996               799
Add: Material restructuring programs (1)                                  88              106                64
Add: Impairments in equity method investments (2)                          -               26                14
Add: Material acquisition costs and other (3)                              7              145               143

Add: Amortization of acquired intangible assets from business combinations (4)

                                                165              191                31

Less: Economic net investment hedging activities not qualifying for hedge accounting (5)

                                        -                -                (1)
Add: Impact of hyperinflation (6)                                         19               28                30
Less: Net legal settlements (7)                                            -                -                (5)
Add: Pension settlements (8)                                               -                5                 -
Less: Net gain on disposals (9)                                           (9)               -                 -
Adjusted EBIT from continuing operations                               1,621            1,497             1,075
Less: Income tax expense                                                (261)            (187)             (172)
Add/(Less): Adjustments to income tax expense (10)                       (51)             (89)               23
Less: Interest expense                                                  (153)            (207)             (208)
Add: Interest income                                                      14               22                17

Less: Material restructuring programs attributable to non-controlling interest

                                                   -               (4)                -
Less: Net income attributable to non-controlling interests               (12)              (4)               (7)
Adjusted net income from continuing operations                   $     

1,158 $ 1,028 $ 728



(1)Material restructuring programs include restructuring and related expenses
for the 2018 Rigid Packaging Restructuring Plan and the 2019 Bemis Integration
Plan for fiscal years 2021 and 2020, respectively, and the 2018 Rigid Packaging
Restructuring Plan for fiscal year 2019. Refer to Note 6, "Restructuring Plans,"
for more information about our restructuring plans.
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(2)Impairments in equity method investments includes the impairment charges
related to other-than-temporary impairments related to the investment in AMVIG.
During fiscal year 2021 we sold our interest in AMVIG. Refer to Note 7, "Equity
Method and Other Investments" for more information about our equity method
investments.
(3)Fiscal year 2021 includes a $19 million benefit related to Brazil indirect
taxes resulting from a May 2021 Brazil Supreme Court decision. During fiscal
year 2020, material acquisition costs and other includes $58 million
amortization of Bemis acquisition related inventory fair value step-up and
$88 million of Bemis transaction related costs and integration costs not
qualifying as exit costs, including certain advisory, legal, audit and audit
related fees. During fiscal year 2019, material acquisition costs and other
includes $48 million of costs related to the 2019 Bemis Integration Plan,
$16 million of Bemis acquisition related inventory fair value step-up,
$43 million of long-lived asset impairments, $134 million of Bemis
transaction-related costs, partially offset by $97 million of gain related to
the U.S. Remedy sale net of related and other costs.
(4)Amortization of acquired intangible assets from business combinations
includes amortization expenses related to all acquired intangible assets from
acquisitions impacting the periods presented, including $26 million and
$5 million of sales backlog amortization for the fiscal year 2020 and 2019,
respectively, from the Bemis acquisition.
(5)Economic net investment hedging activities not qualifying for hedge
accounting includes the exchange rate movements on external loans not deemed to
be effective net investment hedging instruments resulting from our conversion to
U.S. GAAP from Australian Accounting Standards ("AAS") recognized in other
non-operating income, net in fiscal 2019.
(6)Impact of hyperinflation includes the adverse impact of highly inflationary
accounting for subsidiaries in Argentina where the functional currency was the
Argentine Peso.
(7)Net legal settlements include the impact of significant legal settlements
after associated costs.
(8)Impact of pensions settlements includes the amount of actuarial losses
recognized in the consolidated income statements related to the settlement of
certain defined benefit plans, not including related tax effects.
(9)Net gain on disposals includes the gain realized upon the disposal of AMVIG
and the loss upon disposal of other non-core businesses not part of material
restructuring programs. Refer to Note 7, "Equity Method and Other Investments"
for further information the disposal of AMVIG and Note 4, "Acquisitions and
Divestitures" for more information about our other disposals.
(10)Net tax impact on items (1) through (9) above.

Reconciliation of Net Debt

A reconciliation of total debt to net debt at June 30, 2021 and 2020 is as follows:

        (in millions)                              June 30, 2021       June 

30, 2020

        Current portion of long-term debt         $            5      $           11
        Short-term debt                                       98                 195
        Long-term debt, less current portion               6,186               6,028
        Total debt                                         6,289               6,234
        Less cash and cash equivalents                       850                 743
        Net debt                                  $        5,439      $        5,491




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Supplemental Guarantor Information

Amcor plc, along with certain wholly owned subsidiary guarantors, guarantee the following senior notes issued by the wholly owned subsidiaries, Amcor Finance (USA), Inc., Amcor Flexibles North America, Inc. (formerly known as Bemis Company, Inc.), and Amcor UK Finance plc.


•4.500% Guaranteed Senior Notes due 2021 of Amcor Flexibles North America, Inc.
•3.100% Guaranteed Senior Notes due 2026 of Amcor Flexibles North America, Inc.
•2.630% Guaranteed Senior Notes due 2030 of Amcor Flexibles North America, Inc.
•2.690% Guaranteed Senior Notes due 2031 of Amcor Flexibles North America, Inc.
•3.625% Guaranteed Senior Notes due 2026 of Amcor Finance (USA), Inc.
•4.500% Guaranteed Senior Notes due 2028 of Amcor Finance (USA), Inc.
•1.125% Guaranteed Senior Notes due 2027 of Amcor UK Finance plc

  The four notes issued by Amcor Flexibles North America, Inc. are guaranteed by
its parent entity Amcor plc and the subsidiary guarantors Amcor Pty Ltd
(formerly known as Amcor Limited), Amcor Finance (USA), Inc., and Amcor UK
Finance plc. The two notes issued by Amcor Finance (USA), Inc. are guaranteed by
its parent entity Amcor plc and the subsidiary guarantors Amcor Pty Ltd, Amcor
Flexibles North America, Inc., and Amcor UK Finance plc. The note issued by
Amcor UK Finance plc is guaranteed by its parent entity, Amcor plc and the
subsidiary guarantors Amcor Pty Ltd, Amcor Flexibles North America, Inc., and
Amcor Finance (USA), Inc.

  All guarantors fully, unconditionally, and irrevocably guarantee, on a joint
and several basis, to each holder of the notes the due and punctual payment of
the principal of, and any premium and interest on, such note and all other
amounts payable, when and as the same shall become due and payable, whether at
stated maturity, by declaration of acceleration, call for redemption or
otherwise, in accordance with the terms of the notes and related indenture. The
obligations of the applicable guarantors under their guarantees will be limited
as necessary to recognize certain defenses generally available to guarantors
(including those that relate to fraudulent conveyance or transfer, voidable
preference, financial assistance, corporate purpose, or similar laws) under
applicable law. The guarantees will be unsecured and unsubordinated obligations
of the guarantors and will rank equally with all existing and future unsecured
and unsubordinated debt of each guarantor. None of our other subsidiaries
guarantee such notes. The issuers and guarantors conduct large parts of their
operations through other subsidiaries of Amcor plc.

  Amcor Flexibles North America, Inc. is incorporated in Missouri in the United
States, Amcor Finance (USA) Inc. is incorporated in Delaware in the United
States, Amcor UK Finance plc is incorporated in England and Wales, United
Kingdom, and the guarantors are incorporated under the laws of Jersey,
Australia, the United States, and England and Wales and, therefore, insolvency
proceedings with respect to the issuers and guarantors could proceed under, and
be governed by, among others, Jersey, Australian, United States or English
insolvency law, as the case may be, if either issuer or any guarantor defaults
on its obligations under the applicable Notes or Guarantees, respectively.

  Set forth below is the summarized financial information of the combined
Obligor Group made up of Amcor plc (as parent guarantor), Amcor Flexibles North
America, Inc., Amcor Finance (USA), Inc., and Amcor UK Finance plc (as
subsidiary issuers of the notes and guarantors of each other's notes) and Amcor
Pty Ltd (as the remaining subsidiary guarantor).

                                       35
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Basis of Preparation


  We voluntarily adopted amendments to the financial disclosure requirements for
guarantors and issuers of guaranteed securities registered or being registered
as issued by the SEC [Release No. 33-10762; 34-88307; File No. S7-19-18] in
March 2020. The following summarized financial information is presented for the
parent, issuer, and guarantor subsidiaries ("Obligor Group") on a combined basis
after elimination of intercompany transactions between entities in the combined
group and amounts related to investments in any subsidiary that is a
non-guarantor.

This information is not intended to present the financial position or results of operations of the combined group of companies in accordance with U.S. GAAP.

                     Statement of Income for Obligor Group
                                 (in millions)
For the year ended June 30,                                         2021
Net sales - external                                              $   953
Net sales - to subsidiaries outside the Obligor Group                   6
Total net sales                                                   $   959

Gross profit                                                          178

Income from continuing operations (1)                               3,057

Income (loss) from discontinued operations, net of tax                  -

Net income                                                        $ 3,057

Net (income) loss attributable to non-controlling interests             -

Net income attributable to Obligor Group                          $ 3,057


(1)Includes $2,920 million of net income from subsidiaries outside the Obligor
Group mainly made up of intercompany dividend and interest income, partially
offset by expenses related to legal entity reorganizations executed during the
period and other expenses related to transactions with subsidiaries outside the
Obligor Group.

                        Balance Sheet for Obligor Group
                                 (in millions)
As of June 30,                                                                 2021
                            Assets
Current assets - external                                            $                 814

Current assets - due from subsidiaries outside the Obligor Group

                                                                                   95
Total current assets                                                                   909
Non-current assets - external                                               

1,428

Non-current assets - due from subsidiaries outside the Obligor
Group                                                                               11,838
Total non-current assets                                                            13,266
Total assets                                                         $              14,175
                         Liabilities
Current liabilities - external                                       $      

1,183

Current liabilities - due to subsidiaries outside the Obligor Group

                                                                                   22
Total current liabilities                                                   

1,205

Non-current liabilities - external                                          

6,321

Non-current liabilities - due to subsidiaries outside the Obligor Group

11,563

Total non-current liabilities                                                       17,884
Total liabilities                                                    $              19,089



                                       36
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Liquidity and Capital Resources


  We finance our business primarily through cash flows provided by operating
activities, borrowings from banks, and proceeds from issuances of debt and
equity. We periodically review our capital structure and liquidity position in
light of market conditions, expected future cash flows, potential funding
requirements for debt refinancing, capital expenditures, and acquisitions, the
cost of capital, sensitivity analyses reflecting downside scenarios, the impact
on our financial metrics and credit ratings, and our ease of access to funding
sources.

  Despite the existing market uncertainties and volatilities stemming from the
COVID-19 pandemic, based on our current and expected cash flow from operating
activities and available cash, we believe our cash flows provided by operating
activities, together with borrowings available under our credit facilities and
access to the commercial paper market back stopped by our bank facilities, will
continue to provide sufficient liquidity to fund our operations, capital
expenditures, and other commitments, including dividends and purchases of our
ordinary shares and CHESS Depositary Instruments under authorized share
repurchase programs, into the foreseeable future.

Overview
                                                            Year Ended June 30,
(in millions)                                            2021                    2020              Change 2021 vs. 2020
Net cash provided by operating activities        $       1,461              $      1,384          $                 77
Net cash (used in) provided by investing
activities                                                (233)                       38                          (271)
Net cash used in financing activities                   (1,179)                   (1,236)                           57



Cash Flow Overview

Net Cash Provided by Operating Activities


  Net cash inflows provided by operating activities increased by $77 million, or
6%, to $1,461 million for fiscal year 2021, from $1,384 million for fiscal year
2020. This increase was primarily due to higher cash earnings in fiscal year
2021 partially offset by working capital outflows versus the prior fiscal year.

Net Cash (Used in) Provided by Investing Activities


  Net cash flows from investing activities decreased by $271 million, or 713%,
to a $233 million outflow for fiscal year 2021, from a $38 million inflow for
fiscal year 2020. This decrease was primarily due to higher disposal proceeds
from the divestiture of three Bemis' medical packaging facilities located in the
United Kingdom and Ireland ("EC Remedy") in the prior period and higher capital
expenditures in the current period.

  Capital expenditures were $468 million for fiscal year 2021, an increase of
$68 million compared to $400 million for fiscal year 2020. The increase in
capital expenditures was primarily due to the increased capital spending in the
Flexibles segment.

Net Cash Used in Financing Activities


  Net cash flows used in financing activities decreased by $57 million, or 5%,
to $1,179 million for fiscal year 2021, from a $1,236 million outflow for fiscal
year 2020. This decrease was primarily due to lower share buyback payments and
on-market purchases of own shares, partially offset by lower cash net debt
drawdowns.

Net Debt


  We borrow from financial institutions and debt investors in the form of bank
overdrafts, bank loans, corporate bonds, unsecured notes, and commercial paper.
We have a mixture of fixed and floating interest rates and use interest rate
swaps to provide further flexibility in managing the interest cost of
borrowings.

  Short-term debt consists of bank debt with a duration of less than 12 months
and bank overdrafts which are classified as current due to the short-term nature
of the borrowings, except where we have the ability and intent to refinance and
as such extend the debt beyond 12 months. The current portion of the long-term
debt consists of debt amounts repayable within a year after the balance sheet
date.
                                       37
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  Our primary bank debt facilities and notes are unsecured and subject to
negative pledge arrangements limiting the amount of secured indebtedness we can
incur to a range between 7.5% to 15.0% of our total tangible assets, subject to
some exceptions and variations by facility. In addition, the bank debt
facilities and U.S. private placement debt require us to comply with certain
financial covenants, including leverage and interest coverage ratios. The
negative pledge arrangements and the financial covenants are defined in the
related debt agreements. As of June 30, 2021, we are in compliance with all
applicable covenants under our bank debt facilities and U.S. private placement
debt.

Our net debt as of June 30, 2021 and June 30, 2020 was $5.4 billion and $5.5 billion, respectively.


Available Financing

  As of June 30, 2021, we had undrawn credit facilities available in the amount
of $2.0 billion. Our senior facilities are available to fund working capital,
capital expenditures, and refinancing obligations and are provided to us by
three separate bank syndicates.

During the quarter ending March 31, 2021, we extended $3.8 billion in aggregate
amount of the 3-, 4-, and 5-year revolving credit facilities via a one-year
extension option to April 2023, 2024, and 2025, respectively. In addition to
extending maturities, we also amended credit terms of the revolving facilities,
which, among other changes, modified the debt covenant basis. The amendments
removed the financial covenant requiring compliance with a minimum net interest
expense coverage ratio, increased maximum permitted leverage ratio, and permit
further increases at our election after we consummate certain qualified
transactions. We have an option to extend the maturities for 12 months in fiscal
year 2022.

On May 28, 2021, we canceled a $400 million term loan facility following the issuance of a $800 million 10-year senior unsecured note on May 25, 2021.

On July 15, 2021, we redeemed the $400 million U.S dollar notes due in October 2021 at a price equal to the principal plus accrued interest.


  As of June 30, 2021, the revolving senior bank debt facilities had an
aggregate limit of $3.8 billion, of which $1.8 billion had been drawn (inclusive
of amounts drawn under commercial paper programs reducing the overall balance of
available senior facilities).

Dividend Payments

In fiscal years 2021, 2020, and 2019, we paid $742 million, $761 million, and $680 million, respectively, in dividends.

Credit Rating


  Our capital structure and financial practices have earned us investment grade
credit ratings from two internationally recognized credit rating agencies. These
credit ratings are important to our ability to issue debt at favorable rates of
interest, for various tenors, and from a diverse range of markets that are
highly liquid, including European and U.S. debt capital markets and from global
financial institutions.

Share Repurchases

  On November 5, 2020, our Board of Directors approved a $150 million buyback of
ordinary shares and Chess Depositary Instruments ("CDIs"). On February 2, 2021,
our Board of Directors also approved a separate $200 million buyback of ordinary
shares and CDIs in the next twelve months. During the year ended June 30, 2021,
we repurchased approximately $350 million, excluding transaction costs, or
31 million shares. The shares repurchased were canceled upon repurchase.
Additionally, on August 17, 2021, our Board of Directors approved a further $400
million buyback of ordinary shares and/or CDIs in the next twelve months.

  We had cash outflows of $8 million, $67 million, and $20 million for the
purchase of our shares in the open market during fiscal years 2021, 2020, and
2019, respectively, as treasury shares to satisfy the vesting and exercises of
share-based compensation awards and shares purchased for shareholder settlement
in the fourth quarter of fiscal year 2020. As of June 30, 2021, 2020, and 2019,
we held treasury shares at cost of $29 million, $67 million, and $16 million,
representing 2.8 million, 6.7 million, and 1.4 million shares, respectively.

                                       38
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Contractual Obligations


  The following table provides a summary of contractual obligations including
our debt payment obligations, operating lease obligations, and certain other
commitments as of June 30, 2021. These amounts do not reflect all planned
spending under the various categories but rather that portion of spending to
which we are contractually committed.

                                               Less than 1         Within 1 to 3        Within 3 to 5         More than 5
(in millions)                                      year                years                years                years
Short-term debt obligations (1)               $        98          $         -          $         -          $         -
Long-term debt obligations (1)(2)                     678                1,035                1,744                2,712
Interest expense on short- and
long-term debt, fixed and floating rate
(3)                                                   114                  201                  191                  237
Operating leases (4)                                  110                  180                  116                  251
Finance leases                                          3                    6                    4                   31
Purchase obligations (5)                              840                  563                  273                   16
Employee benefit plan obligations                      89                  207                  189                  488
Total                                         $     1,932          $     2,192          $     2,517          $     3,735


(1)All debt obligations are based on their contractual face value, excluding
interest rate swap fair value adjustments and unamortized discounts.
(2)USD commercial paper and EUR commercial paper are classified as maturing in
2023 and 2025, supported by the 3-year and 5-year syndicated facilities,
maturing in 2023 and 2025, respectively.
(3)Variable interest rate commitments are based on the current contractual
maturity date of the underlying facility, calculated on the existing drawdown at
June 30, 2021, after allowing for increases/(decreases) in projected bank
reference rates.
(4)We lease certain manufacturing sites, office space, warehouses, land,
vehicles, and equipment under operating leases. The leases have varying terms,
escalation clauses, and renewal rights. Not included in the above commitments
are contingent rental payments which may arise as part of the rental increase
indexed to the consumer price index or in the event that units produced by
certain leased assets exceed a predetermined production capacity.
(5)Purchase obligations represent contracts or commitments for the purchase of
raw materials, utilities, capital equipment, and various other goods and
services.

Off-Balance Sheet Arrangements

Other than as described under "Contractual Obligations" as of June 30, 2021, we had no significant off-balance sheet contractual obligations or other commitments.

Liquidity Risk and Outlook


  Liquidity risk arises from the possibility that we might encounter difficulty
in settling our debts or otherwise meeting our obligations related to financial
liabilities. We manage liquidity risk centrally and such management involves
maintaining available funding and ensuring that we have access to an adequate
amount of committed credit facilities. Due to the dynamic nature of our
business, the aim is to maintain flexibility within our funding structure
through the use of bank overdrafts, bank loans, corporate bonds, unsecured
notes, and commercial paper. The following guidelines are used to manage our
liquidity risk:

•maintaining minimum undrawn committed liquidity of at least $200 million that
can be drawn at short notice;
•regularly performing a comprehensive analysis of all cash inflows and outflows
in relation to operational, investing, and financing activities;
•generally using tradable instruments only in highly liquid markets;
•maintaining a senior credit investment grade rating with a reputable
independent rating agency;
•managing credit risk related to financial assets;
•monitoring the duration of long-term debt;
•only investing surplus cash with major financial institutions; and
•to the extent practicable, spreading the maturity dates of long-term debt
facilities.

In the third quarter of fiscal year 2021, we extended $3.8 billion in aggregate
amount of our 3-, 4-, and 5-year revolving credit facilities via a one-year
extension option to April 2023, 2024, and 2025, respectively. At the same time,
we entered into amendments to our revolving credit facilities, as described
above under "Available Financing." We have an option to extend the maturities
for another 12 months in fiscal year 2022.
                                       39
--------------------------------------------------------------------------------


During the fourth quarter of fiscal 2021, we canceled a $400 million term loan
facility following the issuance of an $800 million 10-year senior unsecured note
on May 25, 2021.

On July 15, 2021, we redeemed the $400 million U.S. dollar notes due in October 2021 at a price equal to the principal plus accrued interest.


  As of June 30, 2021 and 2020, an aggregate principal amount of $1.8 billion
and $2.0 billion, respectively, was drawn under commercial paper programs.
However, such programs are backstopped by committed bank syndicated loan
facilities with maturities in April 2023 ($750 million), April 2024
($1.5 billion), and April 2025 ($1.5 billion), with an option to extend, under
which we had $2.0 billion in unused capacity remaining as of June 30, 2021.

  We expect long-term future funding needs to primarily relate to refinancing
and servicing our outstanding financial liabilities maturing as outlined above
and to finance our capital expenditure and payments for acquisitions that may be
completed. We expect to continue to fund our long-term business needs on the
same basis as in the past, i.e., partially through the cash flow provided by
operating activities available to the business and management of the capital of
the business, in particular through issuance of commercial paper and debt
securities on a regular basis. We decide on discretionary growth capital
expenditures and acquisitions individually based on, among other factors, the
return on investment after related financing costs and the payback period of
required upfront cash investments in light of our mid-term liquidity planning
covering a period of four years post the current financial year. Our long-term
access to liquidity depends on both our results of operations and on the
availability of funding in financial markets.


                                       40
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Critical Accounting Estimates and Judgments


  Our discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of expenses during the reporting period. On an ongoing basis, we
evaluate our estimates and judgments, including those related to retirement
benefits, intangible assets, goodwill, equity method investments, and expected
future performance of operations. Our estimates and judgments are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following are critical accounting estimates used in the preparation of our consolidated financial statements.


•the calculation of annual pension costs and related assets and liabilities;
•valuation of intangible assets and goodwill;
•calculation of deferred taxes and uncertain tax positions;
•calculation of equity method investments; and
•calculation of acquisition fair values.

Considerations Related to the COVID-19 Pandemic


  The impact that the ongoing COVID-19 pandemic will have on our consolidated
operations is uncertain. While the overall impact on our operations to date has
not been material, we have experienced volatility in customer order patterns. We
have considered the potential impacts of the COVID-19 pandemic in our critical
accounting estimates and judgments as of June 30, 2021 and will continue to
evaluate the nature and extent of the impact on our business and consolidated
results of operations.

Pension Costs

  Approximately 50% of our defined benefits plans are closed to new entrants and
future accruals. The accounting for the pension plans requires us to recognize
the overfunded or underfunded status of the pension plans on our balance sheet.
A substantial portion of our pension amounts relates to our defined benefit
plans in the United States, Switzerland, and the United Kingdom. Net periodic
pension cost recorded in fiscal year 2021 was $15 million, compared to pension
cost of $10 million in fiscal year 2020 and $13 million in fiscal year 2019. We
expect pension expense before the effect of income taxes for fiscal year 2022 to
be approximately $3 million.

  For our sponsored plans, the relevant accounting guidance requires that
management make certain assumptions relating to the long-term rate of return on
plan assets, discount rates used to determine the present value of future
obligations and expenses, salary inflation rates, mortality rates, and other
assumptions. We believe that the accounting estimates related to our pension
plans are critical accounting estimates because they are highly susceptible to
change from period to period based on the performance of plan assets, actuarial
valuations, market conditions, and contracted benefit changes. The selection of
assumptions is based on historical trends and known economic and market
conditions at the time of valuation, as well as independent studies of trends
performed by our actuaries. However, actual results may differ substantially
from the estimates that were based on the critical assumptions.

  The amount by which the fair value of plan assets differs from the projected
benefit obligation of a pension plan must be recorded on the consolidated
balance sheets as an asset, in the case of an overfunded plan, or as a
liability, in the case of an underfunded plan. The gains or losses and prior
service costs or credits that arise but are not recognized as components of
pension cost are recorded as a component of other comprehensive income. Pension
plan liabilities are revalued annually, or when an event occurs that requires
remeasurement, based on updated assumptions and information about the
individuals covered by the plan. Accumulated actuarial gains and losses in
excess of a 10 percent corridor and the prior service cost are amortized on a
straight-line basis from the date recognized over the average remaining service
period of active participants or over the average life expectancy for plans with
significant inactive participants. The service costs related to defined benefits
are included in operating income. The other components of net benefit cost are
presented in the consolidated statements of income separately from the service
cost component and outside operating income.

  We review annually the discount rate used to calculate the present value of
pension plan liabilities. The discount rate used at each measurement date is set
based on a high-quality corporate bond yield curve, derived based on bond
universe
                                       41
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information sourced from reputable third-party indexes, data providers, and
rating agencies. In countries where there is no deep market in corporate bonds,
we have used a government bond approach to set the discount rate. For Mexico,
Poland, and Turkey, a corporate bond credit spread has been added to the
government bond yields. Additionally, the expected long-term rate of return on
plan assets is derived for each benefit plan by considering the expected future
long-term return assumption for each individual asset class. A single long-term
return assumption is then derived for each plan based upon the plan's target
asset allocation.

Pension Assumptions Sensitivity Analysis

The following chart depicts the sensitivity of estimated fiscal year 2022 pension expense to incremental changes in the discount rate and the expected long-term rate of return on assets.

                                        Total Increase                                                    Total Increase
                                    (Decrease) to Pension                                             (Decrease) to Pension
                                     Expense from Current                                              Expense from Current
                                          Assumption                                                        Assumption
Discount Rate                          (in $ millions)           Rate of Return on Plan Assets           (in $ millions)
+25 basis points                                   1             +25 basis points                                   (4)
2.13 percent (current                                            3.78 percent (current
assumption)                                        -             assumption)                                         -
-25 basis points                                  (2)            -25 basis points                                    4


Intangible Assets and Goodwill


  Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired, including intangible assets. Goodwill is not
amortized but is instead tested annually or when events and circumstances
indicate an impairment may have occurred. Our reporting units each contain
goodwill that is assessed for potential impairment. All goodwill is assigned to
a reporting unit, which is defined as an operating segment, at the time of each
acquisition based on the relative fair value of the reporting unit. We have six
reporting units, of which five are included in our Flexibles Segment. The other
reporting unit that is also a reportable segment is Rigid Packaging.

  Goodwill for our reporting units is reviewed for impairment annually in the
fourth quarter of each year or whenever events and circumstances indicate an
impairment may have occurred during the year. When the carrying value of a
reporting unit exceeds its fair value, we recognize an impairment loss equal to
the difference between the carrying value and estimated fair value of the
reporting unit, adjusted for any tax benefits, limited to the amount of the
carrying value of goodwill.

  In performing our impairment analysis, we may elect to first assess
qualitative factors to determine whether a quantitative test is necessary. If we
determine that a quantitative test is necessary, or elect to perform a
quantitative test instead of the qualitative test, we derive an estimate of fair
values for each of our reporting units using income approaches. The most
significant assumptions used in the determination of the estimated fair value of
the reporting units are revenue growth, projected operating income growth,
terminal values, and discount rates.

  Our estimates associated with the goodwill impairment tests are considered
critical due to the amount of goodwill recorded on our consolidated balance
sheets and the judgment required in determining fair value amounts, including
projected future cash flows. Judgment is used in assessing whether goodwill
should be tested more frequently for impairment than annually. Factors such as a
significant decrease in expected net earnings, adverse equity market conditions,
and other external events, such as the COVID-19 pandemic, may result in the need
for more frequent assessments.

  Intangible assets consist primarily of purchased customer relationships,
technology, trademarks, and software and are amortized using the straight-line
method over their estimated useful lives, which range from one to 20 years. We
review these intangible assets for impairment as changes in circumstances or the
occurrence of events suggest that the remaining value is not recoverable. The
test for impairment requires us to make estimates about fair value, most of
which are based on projected future cash flows and discount rates. These
estimates and projections require judgments as to future events, conditions, and
amounts of future cash flows.




                                       42
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Deferred Taxes and Uncertain Tax Positions


  We deal with uncertainties and judgments in the application of complex tax
regulations in a multitude of jurisdictions. The determination of uncertain tax
positions is based on an evaluation of whether the weight of available evidence
indicates that it is more likely than not that the position taken or expected to
be taken in the tax return will be sustained on tax audit, including resolution
of related appeals or litigation processes, if any. The recognized tax benefits
are measured as the largest benefit of having a more likely than not likelihood
of being sustained upon settlement. Significant estimates are required in
determining such uncertain tax positions and related income tax expense and
benefit. Additionally, we are also required to assess the likelihood of
recovering deferred tax assets against future sources of taxable income which
might result in the need for a valuation allowance on deferred tax assets,
including operating loss, capital loss, and tax credit carryforwards if we do
not reach the more likely than not threshold based on all available evidence.
Significant judgments and estimates, including expected future performance of
operations and taxable earnings and the feasibility of tax planning strategies,
are required in determining the need for and amount of valuation allowances for
deferred tax assets. If actual results differ from these estimates or there are
future changes to tax laws or statutory tax rates, we may need to adjust
valuation allowances or tax liabilities, which could have a material impact on
our consolidated financial position and results of operations.

Equity Accounted Investments


  Investments in ordinary shares of companies, in which we believe we exercise
significant influence over operating and financial policies, are accounted for
using the equity method of accounting. Under this method, the investment is
carried at cost and is adjusted to recognize our share of earnings or losses of
the investee after the date of acquisition and cash dividends paid. The
assessment of whether a decline in fair value below the cost basis is
other-than-temporary and the amount of such other-than-temporary decline
requires significant estimates. We review our investments in affiliated
companies for impairment whenever events or changes in circumstances indicate
the carrying amount may not be recoverable.

Acquisitions


  We record acquisitions resulting in the consolidation of an enterprise using
the purchase method of accounting. We recognize the identifiable assets
acquired, the liabilities assumed, and any non-controlling interests in an
acquired business at their fair values as of the date of acquisition. Goodwill
is measured as the excess of the consideration transferred, also measured at
fair value, over the net of the acquisition date fair values of the identifiable
assets acquired and liabilities assumed. The acquisition method of accounting
requires us to make significant estimates and assumptions, especially with
respect to intangible assets.

  We use all available information to estimate fair values and typically engage
outside appraisal firms to assist in the fair value determination for
significant acquisitions. The fair value measurements are based on available
historical information and on expectations and assumptions about the future,
considering the perspective of marketplace participants. Critical estimates in
valuing intangible assets include, but are not limited to, expected cash flows
from customer relationships, acquired developed technology, corporate trade
name, and brand names; the period of time we expect to use the acquired
intangible asset; and discount rates.

  In estimating the future cash flows, we consider demand, competition, other
economic factors, and actuarial assumptions for defined benefit plans. We
utilize common valuation techniques such as discounted cash flows and market
approaches, including the relief-from-royalty method to value acquired developed
technology, trade names, and brand names. Customer relationships are valued
using the cost approach or an income approach such as the excess earnings
method. We believe our estimates to be based on assumptions that are reasonable,
but which are inherently uncertain and unpredictable and, as a result, actual
results may differ from estimates, which could result in impairment charges in
the future.

  In connection with a given business acquisition, we may identify
pre-acquisition contingencies as of the acquisition date and may extend our
review and evaluation of these pre-acquisition contingencies throughout the
measurement period in order to obtain sufficient information to assess whether
we include these contingencies as part of the fair value estimates acquired and
liabilities assumed and, if so, to determine the estimated amounts.

  In addition, uncertain tax positions and tax related valuation allowances
assumed in a business combination are initially estimated as of the acquisition
date. We reevaluate these items quarterly based on facts and circumstances that
existed as of the acquisition date with any adjustments to our preliminary
estimates being recorded to goodwill if identified within the measurement
period.

                                       43
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  We account for costs to exit or restructure certain activities of an acquired
company separately from the business acquisition. A liability for costs
associated with an exit or disposal activity is recognized and measured at fair
value in the consolidated statements of income in the period in which the
liability is incurred. We reflect acquired operations that we intend to dispose
of as discontinued operations in our consolidated statements of income and as
assets held for sale in our consolidated balance sheets.


New Accounting Pronouncements

Refer to Note 3, "New Accounting Guidance" of the notes to consolidated financial statements for information about new accounting pronouncements.


















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