Q UA RTER LY STATEMEN T3 1 M A RCH 20 23CONTENTS3 BMWGroup ataGlance7 Interim Group Management Repor.
2023-06-01
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-Q(Mark One)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28,2023OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO .Commission File No.1-10635NIKE,Inc.(Exact name of Registrant as specified in its charter)Oregon93-0584541(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)One Bowerman Drive,Beaverton,Oregon 97005-6453(Address of principal executive offices and zip code)(503)671-6453(Registrants telephone number,including area code)SECURITIES REGISTERED PURSUANT TO SECTION 12(B)OF THE ACT:Class B Common StockNKENew York Stock Exchange(Title of each class)(Trading symbol)(Name of each exchange on which registered)Indicate by check mark:YESNOwhether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for thepast 90 days.whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filer Non-accelerated filerSmaller reporting companyEmerging growth companyif an emerging growth company,if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a)of the Exchange Act.whether the registrant is a shell company(as defined in Rule 12b-2 of the Act).As of March 30,2023,the number of shares of the Registrants Common Stock outstanding were:Class A304,897,252 Class B1,232,091,564 1,536,988,816 Table of ContentsNIKE,INC.FORM 10-QTABLE OF CONTENTSPAGEPART I-FINANCIAL INFORMATION1ITEM 1.Financial Statements1Unaudited Condensed Consolidated Statements of Income1Unaudited Condensed Consolidated Statements of Comprehensive Income2Unaudited Condensed Consolidated Balance Sheets3Unaudited Condensed Consolidated Statements of Cash Flows4Unaudited Condensed Consolidated Statements of Shareholders Equity5Notes to the Unaudited Condensed Consolidated Financial Statements7ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations24ITEM 3.Quantitative and Qualitative Disclosures about Market Risk44ITEM 4.Controls and Procedures44PART II-OTHER INFORMATION46ITEM 1.Legal Proceedings46ITEM 1A.Risk Factors46ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds47ITEM 6.Exhibits48Signatures49Table of ContentsPART I-FINANCIAL INFORMATIONITEM 1.FINANCIAL STATEMENTSNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOMETHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(In millions,except per share data)2023202220232022Revenues$12,390$10,871$38,392$34,476 Cost of sales7,019 5,804 21,695 18,500 Gross profit5,371 5,067 16,697 15,976 Demand creation expense923 854 2,968 2,789 Operating overhead expense3,036 2,584 9,035 7,980 Total selling and administrative expense3,959 3,438 12,003 10,769 Interest expense(income),net(7)53 22 165 Other(income)expense,net(58)(94)(283)(235)Income before income taxes1,477 1,670 4,955 5,277 Income tax expense237 274 916 670 NET INCOME$1,240$1,396$4,039$4,607 Earnings per common share:Basic$0.80$0.88$2.59$2.91 Diluted$0.79$0.87$2.57$2.85 Weighted average common shares outstanding:Basic1,543.8 1,579.0 1,556.7 1,581.1 Diluted1,564.8 1,610.7 1,574.4 1,615.8 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.1Table of ContentsNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMETHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)2023202220232022Net income$1,240$1,396$4,039$4,607 Other comprehensive income(loss),net of tax:Change in net foreign currency translation adjustment153(6)281(289)Change in net gains(losses)on cash flow hedges(433)(29)(279)775 Change in net gains(losses)on other23(11)(18)(7)Total other comprehensive income(loss),net of tax(257)(46)(16)479 TOTAL COMPREHENSIVE INCOME$983$1,350$4,023$5,086 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.2Table of ContentsNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSFEBRUARY 28,MAY 31,(In millions)20232022ASSETSCurrent assets:Cash and equivalents$6,955$8,574 Short-term investments3,847 4,423 Accounts receivable,net4,513 4,667 Inventories8,905 8,420 Prepaid expenses and other current assets1,815 2,129 Total current assets26,035 28,213 Property,plant and equipment,net4,939 4,791 Operating lease right-of-use assets,net2,834 2,926 Identifiable intangible assets,net277 286 Goodwill281 284 Deferred income taxes and other assets3,928 3,821 TOTAL ASSETS$38,294$40,321 LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt$500$500 Notes payable14 10 Accounts payable2,675 3,358 Current portion of operating lease liabilities435 420 Accrued liabilities5,594 6,220 Income taxes payable330 222 Total current liabilities9,548 10,730 Long-term debt8,925 8,920 Operating lease liabilities2,692 2,777 Deferred income taxes and other liabilities2,598 2,613 Commitments and contingencies(Note 13)Redeemable preferred stock Shareholders equity:Common stock at stated value:Class A convertible 305 and 305 shares outstanding Class B 1,235 and 1,266 shares outstanding3 3 Capital in excess of stated value12,074 11,484 Accumulated other comprehensive income(loss)302 318 Retained earnings2,152 3,476 Total shareholders equity14,531 15,281 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY$38,294$40,321 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.3Table of ContentsNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)20232022Cash provided(used)by operations:Net income$4,039$4,607 Adjustments to reconcile net income to net cash provided(used)by operations:Depreciation516 538 Deferred income taxes(216)(234)Stock-based compensation556 467 Amortization,impairment and other107 6 Net foreign currency adjustments(197)3 Changes in certain working capital components and other assets and liabilities:(Increase)decrease in accounts receivable109 466(Increase)decrease in inventories(527)(872)(Increase)decrease in prepaid expenses,operating lease right-of-use assets and other current and non-currentassets(273)(639)Increase(decrease)in accounts payable,accrued liabilities,operating lease liabilities and other current and non-current liabilities(526)(305)Cash provided(used)by operations3,588 4,037 Cash provided(used)by investing activities:Purchases of short-term investments(4,844)(9,229)Maturities of short-term investments2,470 5,152 Sales of short-term investments3,149 2,921 Additions to property,plant and equipment(700)(516)Other investing activities62(39)Cash provided(used)by investing activities137(1,711)Cash provided(used)by financing activities:Increase(decrease)in notes payable4 4 Proceeds from exercise of stock options and other stock issuances413 959 Repurchase of common stock(4,101)(2,923)Dividends common and preferred(1,488)(1,356)Other financing activities(94)(140)Cash provided(used)by financing activities(5,266)(3,456)Effect of exchange rate changes on cash and equivalents(78)(55)Net increase(decrease)in cash and equivalents(1,619)(1,185)Cash and equivalents,beginning of period8,574 9,889 CASH AND EQUIVALENTS,END OF PERIOD$6,955$8,704 Supplemental disclosure of cash flow information:Non-cash additions to property,plant and equipment$145$126 Dividends declared and not paid527 488 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.4Table of ContentsNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYCOMMON STOCKCAPITAL INEXCESSOF STATEDVALUEACCUMULATEDOTHERCOMPREHENSIVEINCOME(LOSS)RETAINEDEARNINGSTOTALCLASS ACLASS B(In millions,except per share data)SHARESAMOUNTSHARESAMOUNTBalance at November 30,2022305$1,245$3$11,851$559$2,859$15,272 Stock options exercised3 153 153 Repurchase of Class B Common Stock(13)(99)(1,420)(1,519)Dividends on common stock($0.340 per share)(527)(527)Issuance of shares to employees,net of shareswithheld for employee taxes(23)(23)Stock-based compensation192 192 Net income1,240 1,240 Other comprehensive income(loss)(257)(257)Balance at February 28,2023305$1,235$3$12,074$302$2,152$14,531 COMMON STOCKCAPITAL INEXCESSOF STATEDVALUEACCUMULATEDOTHERCOMPREHENSIVEINCOME(LOSS)RETAINEDEARNINGSTOTALCLASS ACLASS B(In millions,except per share data)SHARESAMOUNTSHARESAMOUNTBalance at November 30,2021305$1,278$3$10,990$145$3,786$14,924 Stock options exercised1 112 112 Repurchase of Class B Common Stock(8)(57)(1,165)(1,222)Dividends on common stock($0.305 per share)(488)(488)Issuance of shares to employees,net of shareswithheld for employee taxes(20)(8)(28)Stock-based compensation161 161 Net income1,396 1,396 Other comprehensive income(loss)(46)(46)Balance at February 28,2022305$1,271$3$11,186$99$3,521$14,809 COMMON STOCKCAPITAL INEXCESSOF STATEDVALUEACCUMULATEDOTHERCOMPREHENSIVEINCOME(LOSS)RETAINEDEARNINGSTOTALCLASS ACLASS B(In millions,except per share data)SHARESAMOUNTSHARESAMOUNTBalance at May 31,2022305$1,266$3$11,484$318$3,476$15,281 Stock options exercised6 302 302 Repurchase of Class B Common Stock(39)(288)(3,829)(4,117)Dividends on common stock($0.985 per share)and preferred stock($0.10 per share)(1,535)(1,535)Issuance of shares to employees,net of shareswithheld for employee taxes2 20 1 21 Stock-based compensation556 556 Net income4,039 4,039 Other comprehensive income(loss)(16)(16)Balance at February 28,2023305$1,235$3$12,074$302$2,152$14,531 5Table of ContentsCOMMON STOCKCAPITAL INEXCESSOF STATEDVALUEACCUMULATEDOTHERCOMPREHENSIVEINCOME(LOSS)RETAINEDEARNINGSTOTALCLASS ACLASS B(In millions,except per share data)SHARESAMOUNTSHARESAMOUNTBalance at May 31,2021305$1,273$3$9,965$(380)$3,179$12,767 Stock options exercised14 837 837 Repurchase of Class B Common Stock(19)(126)(2,806)(2,932)Dividends on common stock($0.885 per share)and preferred stock($0.10 per share)(1,406)(1,406)Issuance of shares to employees,net of shareswithheld for employee taxes3 43(53)(10)Stock-based compensation467 467 Net income4,607 4,607 Other comprehensive income(loss)479 479 Balance at February 28,2022305$1,271$3$11,186$99$3,521$14,809 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.6Table of ContentsNOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTSNOTE 1Summary of Significant Accounting Policies8NOTE 2Inventories8NOTE 3Accrued Liabilities8NOTE 4Fair Value Measurements9NOTE 5Short-term Borrowings and Credit Lines10NOTE 6Income Taxes11NOTE 7Stock-Based Compensation11NOTE 8Earnings Per Share12NOTE 9Risk Management and Derivatives13NOTE 10Accumulated Other Comprehensive Income(Loss)17NOTE 11Revenues19NOTE 12Operating Segments21NOTE 13Contingencies23NOTE 14Acquisitions and Divestitures237Table of ContentsNOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBASIS OF PRESENTATIONThe Unaudited Condensed Consolidated Financial Statements include the accounts of NIKE,Inc.and its subsidiaries(the“Company”or“NIKE”)and reflect all normalrecurring adjustments which are,in the opinion of management,necessary for a fair statement of the results of operations for the interim period.The year-end CondensedConsolidated Balance Sheet data as of May 31,2022,was derived from audited financial statements,but does not include all disclosures required by accountingprinciples generally accepted in the United States of America(“U.S.GAAP”).The interim financial information and notes thereto should be read in conjunction with theCompanys latest Annual Report on Form 10-K for the fiscal year ended May 31,2022.The results of operations for the three and nine months ended February 28,2023,are not necessarily indicative of results to be expected for the entire fiscal year.The uncertain state of the global economy or worsening macroeconomic conditions could affect the Companys business,including,among other things,potential impactsof inflation and rising interest rates on consumer behavior,higher inventory levels in various markets,higher inventory obsolescence reserves,higher promotional activity,reduced demand for product,reduced orders from wholesale customers for products and order cancellations.There could also be new or prolonged COVID-19 relatedrestrictions or disruptions.Any of these factors,among others,could have material adverse impacts on the Companys revenue growth as well as overall profitability infuture periods.RECENTLY ISSUED ACCOUNTING STANDARDSIn September 2022,the Financial Accounting Standards Board(the“FASB”)issued Accounting Standards Update(“ASU”)ASU 2022-04,Liabilities Supplier FinancePrograms(Subtopic 405-50):Disclosure of Supplier Finance Program Obligations,which enhances transparency surrounding the use of supplier finance programs.Thenew guidance requires qualitative and quantitative disclosure sufficient to enable users of the financial statements to understand the nature,activity during the period,changes from period to period and potential magnitude of such programs.The amendments are effective for fiscal years beginning after December 15,2022,includinginterim periods within those fiscal years,except for the amendment on rollforward information,which is effective for fiscal years beginning after December 15,2023.TheCompany is currently evaluating the ASU to determine its impact on the Companys disclosures.NOTE 2 INVENTORIESInventory balances of$8,905 million and$8,420 million at February 28,2023 and May 31,2022,respectively,were substantially all finished goods.NOTE 3 ACCRUED LIABILITIESAccrued liabilities included the following:FEBRUARY 28,MAY 31,(Dollars in millions)20232022Compensation and benefits,excluding taxes$1,445$1,297 Sales-related reserves1,0671,015 Dividends payable531485 Endorsement compensation498496 Allowance for expected loss on sale397 Other2,0532,530TOTAL ACCRUED LIABILITIES$5,594$6,220(1)Refer to Note 14 Acquisitions and Divestitures for additional information.(1)8Table of ContentsNOTE 4 FAIR VALUE MEASUREMENTSThe Company measures certain financial assets and liabilities at fair value on a recurring basis,including derivatives,equity securities and available-for-sale debtsecurities.For additional information about the Companys fair value policies,refer to Note 1 Summary of Significant Accounting Policies of the Annual Report on Form10-K for the fiscal year ended May 31,2022.The following tables present information about the Companys financial assets measured at fair value on a recurring basis as of February 28,2023 and May 31,2022,andindicate the level in the fair value hierarchy in which the Company classifies the fair value measurement:FEBRUARY 28,2023(Dollars in millions)ASSETS AT FAIR VALUECASH AND EQUIVALENTSSHORT-TERM INVESTMENTSCash$1,105$1,105$Level 1:U.S.Treasury securities3,185 1 3,184 Level 2:Commercial paper and bonds583 8 575 Money market funds5,114 5,114 Time deposits781 727 54 U.S.Agency securities34 34 Total Level 26,512 5,849 663 TOTAL$10,802$6,955$3,847 MAY 31,2022(Dollars in millions)ASSETS AT FAIR VALUECASH AND EQUIVALENTSSHORT-TERM INVESTMENTSCash$839$839$Level 1:U.S.Treasury securities3,801 8 3,793 Level 2:Commercial paper and bonds660 37 623 Money market funds6,458 6,458 Time deposits1,237 1,232 5 U.S.Agency securities2 2 Total Level 28,357 7,727 630 TOTAL$12,997$8,574$4,423 As of February 28,2023,the Company held$3,089 million of available-for-sale debt securities with maturity dates within one year and$758 million with maturity datesgreater than one year and less than five years in Short-term investments on the Unaudited Condensed Consolidated Balance Sheets.The fair value of the Companysavailable-for-sale debt securities approximates their amortized cost.Included in Interest expense(income),net was interest income related to the Companys investment portfolio of$83 million and$22 million for the three months endedFebruary 28,2023 and 2022,respectively,and$196 million and$57 million for the nine months ended February 28,2023 and 2022,respectively.9Table of ContentsThe following tables present information about the Companys derivative assets and liabilities measured at fair value on a recurring basis and indicate the level in the fairvalue hierarchy in which the Company classifies the fair value measurement:FEBRUARY 28,2023DERIVATIVE ASSETSDERIVATIVE LIABILITIES(Dollars in millions)ASSETS ATFAIR VALUEOTHERCURRENTASSETSOTHER LONG-TERM ASSETSLIABILITIESAT FAIRVALUEACCRUEDLIABILITIESOTHER LONG-TERMLIABILITIESLevel 2:Foreign exchange forwards and options$651$551$100$176$112$64 Embedded derivatives5 5 2 2 TOTAL$656$556$100$178$114$64(1)If the foreign exchange derivative instruments had been netted on the Unaudited Condensed Consolidated Balance Sheets,the asset and liability positions each would have been reduced by$175million as of February 28,2023.As of that date,the Company received$100 million of cash collateral from counterparties related to foreign exchange derivative instruments.No amount of collateral wasposted on the derivative liability balance as of February 28,2023.MAY 31,2022DERIVATIVE ASSETSDERIVATIVE LIABILITIES(Dollars in millions)ASSETS ATFAIR VALUEOTHERCURRENTASSETSOTHER LONG-TERM ASSETSLIABILITIESAT FAIRVALUEACCRUEDLIABILITIESOTHER LONG-TERMLIABILITIESLevel 2:Foreign exchange forwards and options$875$669$206$76$65$11 Embedded derivatives5 5 1 1 TOTAL$880$674$206$77$66$11(1)If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets,the asset and liability positions each would have been reduced by$76 million as of May 31,2022.As of that date,the Company received$486 million of cash collateral from counterparties related to foreign exchange derivative instruments.No amount of collateral was posted on the derivative liabilitybalance as of May 31,2022For additional information related to the Companys derivative financial instruments and credit risk,refer to Note 9 Risk Management and Derivatives.The carrying amounts of other current financial assets and other current financial liabilities approximate fair value.FINANCIAL ASSETS AND LIABILITIES NOT RECORDED AT FAIR VALUEThe Companys Long-term debt is recorded at adjusted cost,net of unamortized premiums,discounts and debt issuance costs.The fair value of long-term debt isestimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets(Level 2).The fair value of the Companys Long-term debt,including the current portion,was approximately$8,241 million at February 28,2023 and$8,933 million at May 31,2022.For fair value information regarding Notes payable,refer to Note 5 Short-term Borrowings and Credit Lines.NOTE 5 SHORT-TERM BORROWINGS AND CREDIT LINESThe carrying amounts reflected on the Unaudited Condensed Consolidated Balance Sheets for Notes payable approximate fair value.As of February 28,2023 and May 31,2022,the Company had no borrowings outstanding under its$3 billion commercial paper program.On March 10,2023,subsequent to the end of the third quarter of fiscal 2023,the Company entered into a 364-day committed credit facility agreement with a syndicate ofbanks,which provides for up to$1 billion of borrowings,with an option to increase borrowings up to$1.5 billion in total with lender approval.The facility matures on March8,2024,with an option to extend the maturity date an additional 364 days.This facility replaces the prior$1 billion 364-day credit facility agreement entered into on March11,2022,which matured on March 10,2023.Based on the Companys current long-term senior unsecured debt ratings of AA-and A1 from Standard and PoorsCorporation and Moodys Investor Services,respectively,the interest rate charged on any outstanding borrowings would be the prevailing Term Secured OvernightFinancing Rate(Term SOFR)for the applicable interest period plus 0.60%.The facility fee is 0.02%of the total undrawn commitment.As of April 6,2023,no amountswere outstanding under this committed credit facility.(1)(1)10Table of ContentsThere have been no other changes to the credit lines reported in the Companys Annual Report on Form 10-K for the fiscal year ended May 31,2022.NOTE 6 INCOME TAXESThe effective tax rate was 18.5%and 12.7%for the nine months ended February 28,2023 and 2022,respectively.The increase in the Companys effective tax rate wasprimarily due to a less favorable impact from stock-based compensation and a shift in the Companys earnings mix.As of February 28,2023,total gross unrecognized tax benefits,excluding related interest and penalties,were$941 million,$657 million of which would affect theCompanys effective tax rate if recognized in future periods.The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferredincome taxes and other liabilities on the Unaudited Condensed Consolidated Balance Sheets.As of May 31,2022,total gross unrecognized tax benefits,excluding relatedinterest and penalties,were$848 million.As of February 28,2023 and May 31,2022,accrued interest and penalties related to uncertain tax positions were$282 millionand$248 million,respectively,(excluding federal benefit)and included within Deferred income taxes and other liabilities on the Unaudited Condensed ConsolidatedBalance Sheets.The Company is subject to taxation in the U.S.,as well as various state and foreign jurisdictions.The Company is currently under audit by the U.S.IRS for fiscal years2017 through 2019.The Company has closed all U.S.federal income tax matters through fiscal 2016,with the exception of certain transfer pricing adjustments.Tax years after 2011 remain open in certain major foreign jurisdictions.Although the timing of resolution of audits is not certain,the Company evaluates all domestic andforeign audit issues in the aggregate,along with the expiration of applicable statutes of limitations,and estimates that it is reasonably possible the total grossunrecognized tax benefits could decrease by up to$30 million within the next 12 months.In January 2019,the European Commission opened a formal investigation toexamine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company.The Company believes the investigation is withoutmerit.If this matter is adversely resolved,the Netherlands may be required to assess additional amounts with respect to prior periods,and the Companys income taxesrelated to prior periods in the Netherlands could increase.NOTE 7 STOCK-BASED COMPENSATIONSTOCK-BASED COMPENSATIONThe NIKE,Inc.Stock Incentive Plan(the“Stock Incentive Plan”)provides for the issuance of up to 798 million previously unissued shares of Class B Common Stock inconnection with equity awards granted under the Stock Incentive Plan.The Stock Incentive Plan authorizes the grant of non-statutory stock options,incentive stockoptions,stock appreciation rights and stock awards,including restricted stock and restricted stock units.Restricted stock units include both time-vesting restricted stockunits(RSUs)as well as performance-based restricted stock units(PSUs).In addition to the Stock Incentive Plan,the Company gives employees the right to purchaseshares at a discount from the market price under employee stock purchase plans(ESPPs).Refer to Note 11 Common Stock and Stock-Based Compensation of theAnnual Report on Form 10-K for the fiscal year ended May 31,2022 for additional information.The following table summarizes the Companys total stock-based compensation expense recognized in Cost of sales or Operating overhead expense,as applicable:THREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)2023202220232022Stock options$78$75$232$221 ESPPs20 15 53 44 Restricted stock and restricted stock units94 71 271 202 TOTAL STOCK-BASED COMPENSATION EXPENSE$192$161$556$467(1)Expense for stock options includes the expense associated with stock appreciation rights.Accelerated stock option expense is primarily recorded for employees meeting certain retirement eligibilityrequirements.(2)Restricted stock units include RSUs and PSUs.The income tax benefit related to stock-based compensation expense was$22 million and$34 million for the three months ended February 28,2023 and 2022,respectively,and$44 million and$307 million for the nine months ended February 28,2023 and 2022,respectively,and reported within Income tax expense.(1)(1)(2)11Table of ContentsSTOCK OPTIONSThe weighted average fair value per share of stock options granted during the nine months ended February 28,2023 and 2022,computed as of the grant date using theBlack-Scholes pricing model,was$31.31 and$37.53,respectively.The weighted average assumptions used to estimate these fair values were as follows:NINE MONTHS ENDED FEBRUARY 28,20232022Dividend yield0.9%0.8%Expected volatility27.1$.9%Weighted average expected life(in years)5.85.8Risk-free interest rate3.3%0.9%Expected volatilities are based on an analysis of the historical volatility of the Companys common stock,the implied volatility in market-traded options on the Companyscommon stock with a term greater than one year,as well as other factors.The weighted average expected life of stock options is based on an analysis of historical andexpected future exercise patterns.The interest rate is based on the U.S.Treasury(constant maturity)risk-free rate in effect at the date of grant for periods correspondingwith the expected term of the stock options.As of February 28,2023,the Company had$502 million of unrecognized compensation costs from stock options,net of estimated forfeitures,to be recognized in Cost ofsales or Operating overhead expense,as applicable,over a weighted average remaining period of 2.6 years.RESTRICTED STOCK AND RESTRICTED STOCK UNITSThe weighted average fair value per share of restricted stock and RSUs granted for the nine months ended February 28,2023 and 2022,computed as of the grant date,was$110.27 and$158.94,respectively.The weighted average fair value per share of PSUs granted for the nine months ended February 28,2023 and 2022,computed as of the grant date,was$134.71 and$250.52,respectively.As of February 28,2023,the Company had$727 million of unrecognized compensation costs from restricted stock and restricted stock units,net of estimated forfeitures,to be recognized in Cost of sales or Operating overhead expense,as applicable,over a weighted average remaining period of 2.5 years.NOTE 8 EARNINGS PER SHAREThe following is a reconciliation from basic earnings per common share to diluted earnings per common share.The computations of diluted earnings per common shareexclude restricted stock,restricted stock units and options,including shares under ESPPs,to purchase an estimated additional 29.5 million and 9.3 million shares ofcommon stock outstanding for the three months ended February 28,2023 and 2022,respectively,and 31.8 million and 9.4 million shares of common stock outstanding forthe nine months ended February 28,2023 and 2022,respectively,because the awards were assumed to be anti-dilutive.THREE MONTHS ENDEDFEBRUARY 28,NINE MONTHS ENDEDFEBRUARY 28,(In millions,except per share data)2023202220232022Net income available to common stockholders$1,240$1,396$4,039$4,607 Determination of shares:Weighted average common shares outstanding1,543.8 1,579.0 1,556.7 1,581.1 Assumed conversion of dilutive stock options and awards21.0 31.7 17.7 34.7 DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING1,564.8 1,610.7 1,574.4 1,615.8 Earnings per common share:Basic$0.80$0.88$2.59$2.91 Diluted$0.79$0.87$2.57$2.85 12Table of ContentsNOTE 9 RISK MANAGEMENT AND DERIVATIVESThe Company is exposed to global market risks,including the effect of changes in foreign currency exchange rates and interest rates,and uses derivatives to managefinancial exposures that occur in the normal course of business.As of and for the nine months ended February 28,2023,there have been no material changes to theCompanys hedging program or strategy from what was disclosed within the Annual Report on Form 10-K.For additional information about the Companys derivatives andhedging policies,refer to Note 1 Summary of Significant Accounting Policies and Note 14 Risk Management and Derivatives of the Annual Report on Form 10-K forthe fiscal year ended May 31,2022.The majority of derivatives outstanding as of February 28,2023,are designated as foreign currency cash flow hedges,primarily for Euro/U.S.Dollar,Chinese Yuan/U.S.Dollar,British Pound/Euro and Japanese Yen/U.S.Dollar currency pairs.All derivatives are recognized on the Unaudited Condensed Consolidated Balance Sheets at fairvalue and classified based on the instruments maturity date.The following tables present the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets:DERIVATIVE ASSETSBALANCE SHEET LOCATIONFEBRUARY 28,MAY 31,(Dollars in millions)20232022Derivatives formally designated as hedging instruments:Foreign exchange forwards and optionsPrepaid expenses and other current assets$530$639 Foreign exchange forwards and optionsDeferred income taxes and other assets100 206 Total derivatives formally designated as hedging instruments630 845 Derivatives not designated as hedging instruments:Foreign exchange forwards and optionsPrepaid expenses and other current assets21 30 Embedded derivativesPrepaid expenses and other current assets5 5 Total derivatives not designated as hedging instruments26 35 TOTAL DERIVATIVE ASSETS$656$880 DERIVATIVE LIABILITIESBALANCE SHEET LOCATIONFEBRUARY 28,MAY 31,(Dollars in millions)20232022Derivatives formally designated as hedging instruments:Foreign exchange forwards and optionsAccrued liabilities$93$37 Foreign exchange forwards and optionsDeferred income taxes and other liabilities64 11 Total derivatives formally designated as hedging instruments157 48 Derivatives not designated as hedging instruments:Foreign exchange forwards and optionsAccrued liabilities19 28 Embedded derivativesAccrued liabilities2 1 Total derivatives not designated as hedging instruments21 29 TOTAL DERIVATIVE LIABILITIES$178$77 13Table of ContentsThe following tables present the amounts in the Unaudited Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded and theeffects of cash flow hedge activity on these line items:THREE MONTHS ENDED FEBRUARY 28,20232022(Dollars in millions)TOTALAMOUNT OF GAIN(LOSS)ON CASH FLOWHEDGE ACTIVITYTOTALAMOUNT OF GAIN(LOSS)ON CASH FLOWHEDGE ACTIVITYRevenues$12,390$14$10,871$(22)Cost of sales7,019 182 5,804 17 Demand creation expense923(1)854 Other(income)expense,net(58)90(94)45 Interest expense(income),net(7)(2)53(2)NINE MONTHS ENDED FEBRUARY 28,20232022(Dollars in millions)TOTALAMOUNT OF GAIN(LOSS)ON CASH FLOWHEDGE ACTIVITYTOTALAMOUNT OF GAIN(LOSS)ON CASH FLOWHEDGE ACTIVITYRevenues$38,392$9$34,476$(63)Cost of sales21,695 464 18,500(79)Demand creation expense2,968(4)2,789 1 Other(income)expense,net(283)297(235)56 Interest expense(income),net22(6)165(5)The following tables present the amounts affecting the Unaudited Condensed Consolidated Statements of Income:(Dollars in millions)AMOUNT OF GAIN(LOSS)RECOGNIZED IN OTHERCOMPREHENSIVE INCOME(LOSS)ON DERIVATIVESAMOUNT OF GAIN(LOSS)RECLASSIFIED FROM ACCUMULATEDOTHER COMPREHENSIVEINCOME(LOSS)INTO INCOMETHREE MONTHS ENDEDFEBRUARY 28,LOCATION OF GAIN(LOSS)RECLASSIFIED FROM ACCUMULATEDOTHER COMPREHENSIVE INCOME(LOSS)INTO INCOMETHREE MONTHS ENDEDFEBRUARY 28,2023202220232022Derivatives designated as cash flowhedges:Foreign exchange forwards and options$30$(37)Revenues$14$(22)Foreign exchange forwards and options(141)4 Cost of sales182 17 Foreign exchange forwards and options1 Demand creation expense(1)Foreign exchange forwards and options(65)31 Other(income)expense,net90 45 Interest rate swaps Interest expense(income),net(2)(2)TOTAL DESIGNATED CASH FLOWHEDGES$(175)$(2)$283$38(1)For the three months ended February 28,2023 and 2022,the amounts recorded in Other(income)expense,net as a result of the discontinuance of cash flow hedges because the forecastedtransactions were no longer probable of occurring were immaterial.(2)Gains and losses associated with terminated interest rate swaps,which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income(loss),will bereleased through Interest expense(income),net over the term of the issued debt.(1)(1)(2)14Table of Contents(Dollars in millions)AMOUNT OF GAIN(LOSS)RECOGNIZED IN OTHERCOMPREHENSIVE INCOME(LOSS)ON DERIVATIVESAMOUNT OF GAIN(LOSS)RECLASSIFIED FROM ACCUMULATEDOTHER COMPREHENSIVEINCOME(LOSS)INTO INCOMENINE MONTHS ENDEDFEBRUARY 28,LOCATION OF GAIN(LOSS)RECLASSIFIED FROM ACCUMULATEDOTHER COMPREHENSIVE INCOME(LOSS)INTO INCOMENINE MONTHS ENDEDFEBRUARY 28,2023202220232022Derivatives designated as cash flowhedges:Foreign exchange forwards and options$52$(74)Revenues$9$(63)Foreign exchange forwards and options245 522 Cost of sales464(79)Foreign exchange forwards and options(2)(3)Demand creation expense(4)1 Foreign exchange forwards and options181 304 Other(income)expense,net297 56 Interest rate swaps Interest expense(income),net(6)(5)TOTAL DESIGNATED CASH FLOWHEDGES$476$749$760$(90)(1)For the nine months ended February 28,2023 and 2022,the amounts recorded in Other(income)expense,net as a result of the discontinuance of cash flow hedges because the forecastedtransactions were no longer probable of occurring were immaterial.(2)Gains and losses associated with terminated interest rate swaps,which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income(loss),will bereleased through Interest expense(income),net over the term of the issued debt.AMOUNT OF GAIN(LOSS)RECOGNIZEDIN INCOME ON DERIVATIVESLOCATION OF GAIN(LOSS)RECOGNIZED IN INCOMEON DERIVATIVESTHREE MONTHS ENDEDFEBRUARY 28,NINE MONTHS ENDEDFEBRUARY 28,(Dollars in millions)2023202220232022Derivatives not designated as hedging instruments:Foreign exchange forwards and options$(12)$(20)$32$12 Other(income)expense,netEmbedded derivatives(14)20(9)Other(income)expense,netCASH FLOW HEDGESAll changes in fair value of derivatives designated as cash flow hedge instruments are recorded in Accumulated other comprehensive income(loss)until Net income isaffected by the variability of cash flows of the hedged transaction.Effective hedge results are classified in the Unaudited Condensed Consolidated Statements of Incomein the same manner as the underlying exposure.When it is no longer probable the forecasted hedged transaction will occur in the initially identified time period,hedgeaccounting is discontinued and the Company accounts for the associated derivative as an undesignated instrument as discussed below.Additionally,the gains and lossesassociated with derivatives no longer designated as cash flow hedge instruments in Accumulated other comprehensive income(loss)are recognized immediately in Other(income)expense,net,if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-monthperiod thereafter.In rare circumstances,the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecastedtransaction that are outside the control or influence of the Company.The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was approximately$19.5 billion as of February 28,2023.Approximately$495 million of deferred net gains(net of tax)on both outstanding and matured derivatives in Accumulated other comprehensive income(loss)as ofFebruary 28,2023,are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded inNet income.Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature.As of February 28,2023,the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 27 months.(1)(1)(2)15Table of ContentsUNDESIGNATED DERIVATIVE INSTRUMENTSThe Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Unaudited CondensedConsolidated Balance Sheets and/or embedded derivative contracts.These undesignated instruments are recorded at fair value as a derivative asset or liability on theUnaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other(income)expense,net,together with theremeasurement gain or loss from the hedged balance sheet position and/or embedded derivative contract.The total notional amount of outstanding undesignatedderivative instruments was$4.7 billion as of February 28,2023.EMBEDDED DERIVATIVESEmbedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related contract and recorded at fair value as a derivativeasset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other(income)expense,net,through the date the foreign currency fluctuations cease to exist.As of February 28,2023,the total notional amount of embedded derivatives outstanding was approximately$460 million.CREDIT RISKThe Companys bilateral credit-related contingent features generally require the owing entity,either the Company or the derivative counterparty,to post collateral for theportion of the fair value in excess of$50 million should the fair value of outstanding derivatives per counterparty be greater than$50 million.Additionally,a certain level ofdecline in credit rating of either the Company or the counterparty could trigger collateral requirements.As of February 28,2023,the Company was in compliance with allcredit risk-related contingent features,and derivative instruments with such features were in a net asset position of approximately$475 million.Accordingly,the Companywas not required to post cash collateral as a result of these contingent features.Further,$100 million of collateral was received on the Companys derivative assetbalance as of February 28,2023.The Company considers the impact of the risk of counterparty default to be immaterial.For additional information related to the Companys derivative financial instruments and collateral,refer to Note 4 Fair Value Measurements.16Table of ContentsNOTE 10 ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS)The changes in Accumulated other comprehensive income(loss),net of tax,were as follows:(Dollars in millions)FOREIGNCURRENCYTRANSLATIONADJUSTMENTCASH FLOWHEDGESNETINVESTMENTHEDGESOTHERTOTALBalance at November 30,2022$(392)$933$115$(97)$559 Other comprehensive income(loss):Other comprehensive gains(losses)before reclassifications150(179)(29)Reclassifications to net income of previously deferred(gains)losses3(254)23(228)Total other comprehensive income(loss)153(433)23(257)Balance at February 28,2023$(239)$500$115$(74)$302(1)The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or uponcomplete or substantially complete liquidation of the respective entity.(2)Net of tax benefit(expense)of$0 million,$(4)million,$0 million,$1 million and$(3)million,respectively.(3)Net of tax(benefit)expense of$0 million,$29 million,$0 million,$(9)million and$20 million,respectively.(Dollars in millions)FOREIGNCURRENCYTRANSLATIONADJUSTMENTCASH FLOWHEDGESNETINVESTMENTHEDGESOTHERTOTALBalance at November 30,2021$(281)$369$115$(58)$145 Other comprehensive income(loss):Other comprehensive gains(losses)before reclassifications(6)4 (7)(9)Reclassifications to net income of previously deferred(gains)losses(33)(4)(37)Total other comprehensive income(loss)(6)(29)(11)(46)Balance at February 28,2022$(287)$340$115$(69)$99(1)The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or uponcomplete or substantially complete liquidation of the respective entity.(2)Net of tax benefit(expense)of$0 million,$6 million,$0 million,$2 million and$8 million,respectively.(3)Net of tax(benefit)expense of$0 million,$5 million,$0 million,$1 million and$6 million,respectively.(Dollars in millions)FOREIGNCURRENCYTRANSLATIONADJUSTMENTCASH FLOWHEDGESNETINVESTMENTHEDGESOTHERTOTALBalance at May 31,2022$(520)$779$115$(56)$318 Other comprehensive income(loss):Other comprehensive gains(losses)before reclassifications(77)399 (27)295 Reclassifications to net income of previously deferred(gains)losses358(678)9(311)Total other comprehensive income(loss)281(279)(18)(16)Balance at February 28,2023$(239)$500$115$(74)$302(1)The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or uponcomplete or substantially complete liquidation of the respective entity.(2)Net of tax benefit(expense)of$0 million,$(77)million,$0 million,$8 million and$(69)million,respectively.(3)Net of tax(benefit)expense of$(16)million,$82 million,$0 million,$(3)million and$63 million,respectively.(1)(1)(2)(3)(1)(1)(2)(3)(1)(1)(2)(3)17Table of Contents(Dollars in millions)FOREIGNCURRENCYTRANSLATIONADJUSTMENTCASH FLOWHEDGESNETINVESTMENTHEDGESOTHERTOTALBalance at May 31,2021$2$(435)$115$(62)$(380)Other comprehensive income(loss):Other comprehensive gains(losses)before reclassifications(289)689 7 407 Reclassifications to net income of previously deferred(gains)losses 86 (14)72 Total other comprehensive income(loss)(289)775 (7)479 Balance at February 28,2022$(287)$340$115$(69)$99(1)The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or uponcomplete or substantially complete liquidation of the respective entity.(2)Net of tax benefit(expense)of$0 million,$(60)million,$0 million,$(2)million and$(62)million,respectively.(3)Net of tax(benefit)expense of$0 million,$(4)million,$0 million,$5 million and$1 million,respectively.The following table summarizes the reclassifications from Accumulated other comprehensive income(loss)to the Unaudited Condensed Consolidated Statements ofIncome:AMOUNT OF GAIN(LOSS)RECLASSIFIED FROM ACCUMULATEDOTHER COMPREHENSIVE INCOME(LOSS)INTO INCOMELOCATION OF GAIN(LOSS)RECLASSIFIED FROMACCUMULATEDOTHER COMPREHENSIVEINCOME(LOSS)INTO INCOMETHREE MONTHS ENDEDFEBRUARY 28,NINE MONTHS ENDEDFEBRUARY 28,(Dollars in millions)2023202220232022Gains(losses)on foreign currency translationadjustment$(3)$(374)$Other(income)expense,netTotal before tax(3)(374)Tax(expense)benefit 16 Gain(loss)net of tax(3)(358)Gains(losses)on cash flow hedges:Foreign exchange forwards and options$14$(22)$9$(63)RevenuesForeign exchange forwards and options182 17 464(79)Cost of salesForeign exchange forwards and options(1)(4)1 Demand creation expenseForeign exchange forwards and options90 45 297 56 Other(income)expense,netInterest rate swaps(2)(2)(6)(5)Interest expense(income),netTotal before tax283 38 760(90)Tax(expense)benefit(29)(5)(82)4 Gain(loss)net of tax254 33 678(86)Gains(losses)on other(32)5(12)19 Other(income)expense,netTotal before tax(32)5(12)19 Tax(expense)benefit9(1)3(5)Gain(loss)net of tax(23)4(9)14 Total net gain(loss)reclassified for the period$228$37$311$(72)(1)(1)(2)(3)18Table of ContentsNOTE 11 REVENUESDISAGGREGATION OF REVENUESThe following tables present the Companys Revenues disaggregated by reportable operating segment,major product line and distribution channel:THREE MONTHS ENDED FEBRUARY 28,2023(Dollars in millions)NORTHAMERICAEUROPE,MIDDLEEAST&AFRICAGREATERCHINAASIAPACIFIC&LATINAMERICAGLOBALBRANDDIVISIONSTOTALNIKEBRANDCONVERSECORPORATETOTALNIKE,INC.Revenues by:Footwear$3,322$2,011$1,496$1,141$7,970$540$8,510 Apparel1,419 1,094 461 407 3,381 29 3,410 Equipment172 141 37 53 403 6 409 Other 12 12 37 12 61 TOTAL REVENUES$4,913$3,246$1,994$1,601$12$11,766$612$12$12,390 Revenues by:Sales to Wholesale Customers$2,323$2,061$1,126$913$6,423$323$6,746 Sales through Direct to Consumer2,590 1,185 868 688 5,331 252 5,583 Other 12 12 37 12 61 TOTAL REVENUES$4,913$3,246$1,994$1,601$12$11,766$612$12$12,390 THREE MONTHS ENDED FEBRUARY 28,2022(Dollars in millions)NORTHAMERICAEUROPE,MIDDLEEAST&AFRICAGREATERCHINAASIAPACIFIC&LATINAMERICAGLOBALBRANDDIVISIONSTOTALNIKEBRANDCONVERSECORPORATETOTALNIKE,INC.Revenues by:Footwear$2,532$1,569$1,554$1,005$6,660$503$7,163 Apparel1,207 1,083 548 394 3,232 29 3,261 Equipment143 127 58 62 390 7 397 Other 41 41 28(19)50 TOTAL REVENUES$3,882$2,779$2,160$1,461$41$10,323$567$(19)$10,871 Revenues by:Sales to Wholesale Customers$1,769$1,858$1,241$860$5,728$303$6,031 Sales through Direct to Consumer2,113 921 919 601 4,554 236 4,790 Other 41 41 28(19)50 TOTAL REVENUES$3,882$2,779$2,160$1,461$41$10,323$567$(19)$10,871 19Table of ContentsNINE MONTHS ENDED FEBRUARY 28,2023(Dollars in millions)NORTHAMERICAEUROPE,MIDDLEEAST&AFRICAGREATERCHINAASIAPACIFIC&LATINAMERICAGLOBALBRANDDIVISIONSTOTALNIKEBRANDCONVERSECORPORATETOTALNIKE,INC.Revenues by:Footwear$11,090$6,086$4,099$3,313$24,588$1,633$26,221 Apparel4,598 3,528 1,228 1,255 10,609 70 10,679 Equipment565 454 111 167 1,297 21 1,318 Other 44 44 117 13 174 TOTAL REVENUES$16,253$10,068$5,438$4,735$44$36,538$1,841$13$38,392 Revenues by:Sales to Wholesale Customers$8,533$6,506$2,862$2,792$20,693$971$21,664 Sales through Direct to Consumer7,720 3,562 2,576 1,943 15,801 753 16,554 Other 44 44 117 13 174 TOTAL REVENUES$16,253$10,068$5,438$4,735$44$36,538$1,841$13$38,392 NINE MONTHS ENDED FEBRUARY 28,2022(Dollars in millions)NORTHAMERICAEUROPE,MIDDLEEAST&AFRICAGREATERCHINAASIAPACIFIC&LATINAMERICAGLOBALBRANDDIVISIONSTOTALNIKEBRANDCONVERSECORPORATETOTALNIKE,INC.Revenues by:Footwear$8,648$5,358$4,238$2,914$21,158$1,555$22,713 Apparel4,117 3,444 1,588 1,181 10,330 87 10,417 Equipment473 426 160 178 1,237 21 1,258 Other 54 54 90(56)88 TOTAL REVENUES$13,238$9,228$5,986$4,273$54$32,779$1,753$(56)$34,476 Revenues by:Sales to Wholesale Customers$6,774$6,194$3,251$2,571$18,790$975$19,765 Sales through Direct to Consumer6,464 3,034 2,735 1,702 13,935 688 14,623 Other 54 54 90(56)88 TOTAL REVENUES$13,238$9,228$5,986$4,273$54$32,779$1,753$(56)$34,476 For the three and nine months ended February 28,2023 and 2022,Global Brand Divisions revenues included NIKE Brand licensing and other miscellaneous revenuesthat are not part of a geographic operating segment.Converse Other revenues were primarily attributable to licensing businesses.Corporate revenues primarily consistedof foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse,but managedthrough the Companys central foreign exchange risk management program.As of February 28,2023 and May 31,2022,the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accruedliabilities on the Unaudited Condensed Consolidated Balance Sheets.20Table of ContentsNOTE 12 OPERATING SEGMENTSThe Companys operating segments are evidence of the structure of the Companys internal organization.The NIKE Brand segments are defined by geographic regionsfor operations participating in NIKE Brand sales activity.Each NIKE Brand geographic segment operates predominantly in one industry:the design,development,marketing and selling of athletic footwear,apparel andequipment.The Companys reportable operating segments for the NIKE Brand are:North America;Europe,Middle East&Africa(EMEA);Greater China;and Asia Pacific&Latin America(APLA),and include results for the NIKE and Jordan brands.The Companys NIKE Direct operations are managed within each NIKE Brand geographic operating segment.Converse is also a reportable segment for the Companyand operates in one industry:the design,marketing,licensing and selling of athletic lifestyle sneakers,apparel and accessories.Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company.Global Brand Divisionsrevenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.Global Brand Divisions costs representdemand creation and operating overhead expense that include product creation and design expenses centrally managed for the NIKE Brand,as well as,costs associatedwith NIKE Direct global digital operations and enterprise technology.Corporate consists primarily of unallocated general and administrative expenses,including expenses associated with centrally managed departments;depreciation andamortization related to the Companys headquarters;unallocated insurance,benefit and compensation programs,including stock-based compensation;and certainforeign currency gains and losses,including certain hedge gains and losses.The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes(EBIT),whichrepresents Net income before Interest expense(income),net and Income tax expense in the Unaudited Condensed Consolidated Statements of Income.As part of the Companys centrally managed foreign exchange risk management program,standard foreign currency rates are assigned twice per year to each NIKEBrand entity in the Companys geographic operating segments and to Converse.These rates are set approximately nine and twelve months in advance of the futureselling seasons to which they relate(specifically,for each currency,one standard rate applies to the fall and holiday selling seasons and one standard rate applies to thespring and summer selling seasons)based on average market spot rates in the calendar month preceding the date they are established.Inventories and Cost of sales forgeographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entitys functionalcurrency.Differences between assigned standard foreign currency rates and actual market rates are included in Corporate,together with foreign currency hedge gainsand losses generated from the Companys centrally managed foreign exchange risk management program and other conversion gains and losses.Accounts receivable,net,Inventories and Property,plant and equipment,net for operating segments are regularly reviewed by management and are therefore providedbelow.21Table of Contents THREE MONTHS ENDEDFEBRUARY 28,NINE MONTHS ENDEDFEBRUARY 28,(Dollars in millions)2023202220232022REVENUESNorth America$4,913$3,882$16,253$13,238 Europe,Middle East&Africa3,246 2,779 10,068 9,228 Greater China1,994 2,160 5,438 5,986 Asia Pacific&Latin America1,601 1,461 4,735 4,273 Global Brand Divisions12 41 44 54 Total NIKE Brand11,766 10,323 36,538 32,779 Converse612 567 1,841 1,753 Corporate12(19)13(56)TOTAL NIKE,INC.REVENUES$12,390$10,871$38,392$34,476 EARNINGS BEFORE INTEREST AND TAXESNorth America$1,190$967$4,064$3,636 Europe,Middle East&Africa785 713 2,750 2,394 Greater China702 784 1,754 2,054 Asia Pacific&Latin America485 478 1,470 1,347 Global Brand Divisions(1,160)(975)(3,573)(3,033)Converse164 168 526 504 Corporate(696)(412)(2,014)(1,460)Interest expense(income),net(7)53 22 165 TOTAL NIKE,INC.INCOME BEFORE INCOME TAXES$1,477$1,670$4,955$5,277 FEBRUARY 28,MAY 31,(Dollars in millions)20232022ACCOUNTS RECEIVABLE,NETNorth America$1,718$1,850 Europe,Middle East&Africa1,392 1,351 Greater China294 406 Asia Pacific&Latin America707 664 Global Brand Divisions81 113 Total NIKE Brand4,192 4,384 Converse263 230 Corporate58 53 TOTAL ACCOUNTS RECEIVABLE,NET$4,513$4,667 INVENTORIESNorth America$4,054$4,098 Europe,Middle East&Africa2,066 1,887 Greater China1,060 1,044 Asia Pacific&Latin America957 686 Global Brand Divisions219 197 Total NIKE Brand8,356 7,912 Converse343 279 Corporate206 229 TOTAL INVENTORIES$8,905$8,420(1)(1)22Table of ContentsFEBRUARY 28,MAY 31,(Dollars in millions)20232022PROPERTY,PLANT AND EQUIPMENT,NETNorth America$733$639 Europe,Middle East&Africa966 920 Greater China293 303 Asia Pacific&Latin America272 274 Global Brand Divisions802 789 Total NIKE Brand3,066 2,925 Converse39 49 Corporate1,834 1,817 TOTAL PROPERTY,PLANT AND EQUIPMENT,NET$4,939$4,791(1)Excludes assets held-for-sale as of May 31,2022.See Note 14 Acquisitions and Divestitures for additional information.NOTE 13 CONTINGENCIESIn the ordinary course of business,the Company is subject to various legal proceedings,claims and government investigations relating to its business,products andactions of its employees and representatives,including contractual and employment relationships,product liability,antitrust,customs,tax,intellectual property and othermatters.The outcome of these legal matters is inherently uncertain,and the Company cannot predict the eventual outcome of currently pending matters,the timing oftheir ultimate resolution or the eventual losses,fines,penalties or consequences relating to those matters.When a loss related to a legal proceeding or claim is probableand reasonably estimable,the Company accrues its best estimate for the ultimate resolution of the matter.If one or more legal matters were to be resolved against theCompany in a reporting period for amounts above managements expectations,the Companys financial position,operating results and cash flows for that reporting periodcould be materially adversely affected.In the opinion of management,based on its current knowledge and after consultation with counsel,the Company does not believeany currently pending legal matters will have a material adverse impact on the Companys results of operations,financial position or cash flows,except as describedbelow.BELGIAN CUSTOMS CLAIMThe Company has received claims for certain years from the Belgian Customs Authorities for alleged underpaid duties related to products imported beginning in fiscal2018.The Company disputes these claims and has engaged in the appellate process.At this time,the Company is unable to estimate the range of loss and cannotpredict the final outcome as it could take several years to reach a resolution on this matter.If this matter is ultimately resolved against the Company,the amounts owed,including fines,penalties and other consequences relating to the matter,could have a material adverse effect on the Companys results of operations,financial positionand cash flows.NOTE 14 ACQUISITIONS AND DIVESTITURESDuring the fourth quarter of fiscal 2022,the Company entered into separate definitive agreements to sell its entities in Argentina and Uruguay,as well as its entity in Chile,to third-party distributors.The sale of the Companys entity in Chile to a third-party distributor was completed during the first quarter of fiscal 2023.The impacts from the transaction were notmaterial to the Companys Unaudited Condensed Consolidated Financial Statements.The sale of the Companys entities in Argentina and Uruguay to a third-party distributor was completed during the second quarter of fiscal 2023 and the net loss on thesale of these entities totaled approximately$550 million.This loss included$389 million,recognized primarily in fiscal 2020,largely due to the anticipated release of thecumulative foreign currency translation losses.The remaining loss recognized in fiscal 2023 was due to the devaluation of local currency and cash equivalents included inthe transferred assets.Upon completion of the sale,the foreign currency translation losses recorded in Accumulated other comprehensive income(loss)were reclassifiedto Net income within Other(income)expense,net,on the Unaudited Condensed Consolidated Statements of Comprehensive Income along with the allowance forpreviously recognized losses recorded in Accrued liabilities.The net loss was classified within Corporate.The net cash proceeds received are reflected within Other investing activities on the Unaudited Condensed Consolidated Statements of Cash Flows.The related assets and liabilities of these entities within the Companys APLA operating segment were classified as held-for-sale on the Consolidated Balance Sheetswithin Prepaid expenses and other current assets and Accrued liabilities,respectively,until the transactions closed.As of May 31,2022,held-for-sale assets were$182million and held-for-sale liabilities were$58 million.(1)23Table of ContentsITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONSOVERVIEWNIKE designs,develops,markets and sells athletic footwear,apparel,equipment,accessories and services worldwide.We are the largest seller of athletic footwear andapparel in the world.We sell our products through NIKE Direct operations,which is comprised of both NIKE-owned retail stores and sales through our digital platforms(also referred to as NIKE Brand Digital),to retail accounts and to a mix of independent distributors,licensees and sales representatives in virtually all countries aroundthe world.Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear,apparel,equipment and accessories businesses.Our strategy is to achieve long-term revenue growth by creating innovative,“must-have”products,building deep personal consumer connections with our brands anddelivering compelling consumer experiences through digital platforms and at retail.Through the Consumer Direct Acceleration,we are focusing on creating the marketplace of the future through more premium,consistent and seamless consumerexperiences,leading with digital and our owned stores,as well as select wholesale partners that share our marketplace vision.Over the last several years,as we haveexecuted against the Consumer Direct Acceleration,we have grown our NIKE Direct revenues,on a reported basis,to be approximately 45%and 43%of total NIKEBrand revenues for the third quarter and first nine months of fiscal 2023,respectively.We have also reduced the number of wholesale accounts globally.Additionally,wehave aligned our product creation and category organizations around a new consumer construct focused on Mens,Womens and Kids and continue to invest in data andanalytics,demand sensing,insight gathering,inventory management and other areas to create an end-to-end technology foundation,which we expect will furtheraccelerate our digital transformation.We believe this unified approach will accelerate growth and unlock more efficiency for our business,while driving speed andresponsiveness as we serve consumers globally.CURRENT ECONOMIC CONDITIONS AND MARKET DYNAMICSRevenues for the third quarter and first nine months of fiscal 2023 grew 14%and 11%,respectively,compared to the prior year,reflecting strong demand for our product,despite ongoing macroeconomic volatility and ongoing supply chain challenges.In the first quarter of fiscal 2022,government mandated shutdowns in Vietnam and Indonesia due to COVID-19 impacted our contract manufacturers operations and oursupply of available product.This,coupled with elevated inventory transit times due to port congestion,transportation delays and labor and container shortages,causedseasonal product to arrive later than planned.We expected these elevated inventory transit times to continue and as a result we purchased product for fiscal 2023 earlierthan normal.However,during the first quarter of fiscal 2023,inventory transit times improved ahead of plan resulting in seasonal product arriving early.This disruption in the flow ofseasonal inventory led to elevated inventory levels at the end of the first quarter of fiscal 2023.Starting in the first quarter of fiscal 2023,we took action to reduce excess inventory by decreasing inventory purchases and increasing promotional activity.These actionsled to Inventories decreasing sequentially in the second and third quarters of fiscal 2023.As inventory transit and product purchase timelines continue to converge towards pre-pandemic levels,we expect that the flow of seasonal product,and our inventorylevels will normalize by the end of fiscal 2023.During the first nine months of fiscal 2023,we experienced higher product input,freight and logistics costs primarily due to inflationary pressures.These costs,combinedwith higher promotional activity,contributed to gross margin contraction of 330 basis points and 280 basis points in the third quarter and first nine months of fiscal 2023,respectively.These impacts were partially offset by strategic pricing actions taken in prior quarters.Fluctuations in currency exchange rates also create volatility in our reported results as we translate the balance sheets,operational results and cash flows of oursubsidiaries into U.S.Dollars for consolidated reporting.During the third quarter of fiscal 2023,foreign currency headwinds increased significantly as the U.S.Dollarstrengthened in relation to most foreign currencies,reducing reported Revenues by$549 million and$2.5 billion for the third quarter and first nine months of fiscal 2023,respectively.We expect unfavorable changes in foreign currency exchange rates,net of hedges,will negatively impact our results of operations in the fourth quarter of fiscal 2023,which could result in continued gross margin contraction.24Table of ContentsMost of our geographies operated with little to no COVID-19 related disruptions during the third quarter of fiscal 2023.In Greater China,however,the shifting of the localgovernments COVID-19 policies in December 2022 led to temporary store closures as well as lower physical traffic during the month.Since January 2023,nearly allstores in Greater China have remained open and are operating on normal hours with improved physical traffic.Across our geographies and Converse,the operating environment remains dynamic,and we expect promotional activity to continue in the fourth quarter of fiscal 2023.Inaddition,we expect product costs to remain elevated due to higher input,freight and logistics costs,which could result in continued gross margin contraction.We also continue to closely monitor macroeconomic conditions,including potential impacts inflation and rising interest rates could have on consumer behavior.While webelieve our Consumer Direct Acceleration Strategy continues to drive our business toward our long-term financial goals,worsening macroeconomic conditions could affectour business,including,among other things,higher inventory levels in various markets,higher inventory obsolescence reserves,higher promotional activity,reduceddemand for our products,reduced orders from our wholesale customers for our products and order cancellations.There could also be new or prolonged COVID-19 relatedrestrictions or disruptions across our geographies.Any of these factors,among others,could have material adverse impacts on our revenue growth as well as overallprofitability in future periods.THIRD QUARTER OVERVIEWFor the third quarter of fiscal 2023,NIKE,Inc.Revenues increased 14%to$12.4 billion compared to the third quarter of fiscal 2022 and increased 19%on a currency-neutral basis.Net income was$1,240 million and diluted earnings per common share was$0.79 for the third quarter of fiscal 2023,compared to Net income of$1,396million and diluted earnings per common share of$0.87 for the third quarter of fiscal 2022.Income before income taxes decreased 12%compared to the third quarter of fiscal 2022 due to higher Selling and administrative expense and gross margin contraction,partially offset by higher revenues.NIKE Brand revenues,which represent over 90%of NIKE,Inc.Revenues,increased 14%compared to the third quarter of fiscal 2022.On a currency-neutral basis,NIKE Brand revenues increased 19%,driven by higher revenues across all geographies,led by increases in North America and Europe,Middle East&Africa(EMEA).Additionally,NIKE Brand currency-neutral revenues were higher across footwear and apparel,as well as across Mens,the Jordan Brand,Womens and Kids.Revenues for Converse increased 8%and 12%compared to the third quarter of fiscal 2022,on a reported and currency-neutral basis,respectively,as revenue growth in North America,Western Europe and licensee markets was partially offset by declines in Asia.Our effective tax rate was 16.0%for the third quarter of fiscal 2023 and substantially consistent compared to 16.4%for the third quarter of fiscal 2022.On August 16,2022,the U.S.government enacted the Inflation Reduction Act of 2022 that includes,among other provisions,changes to the U.S.corporate income taxsystem,including a fifteen percent minimum tax based on adjusted financial statement income,which is effective for NIKE beginning June 1,2023.Based on our currentanalysis of the provisions,we do not expect these tax law changes to have a material impact on our financial statements;however,we will continue to evaluate theirimpact as further information becomes available.During the second quarter of fiscal 2023,we completed the sale of our entities in Argentina and Uruguay to a third party distributor.For more information see Note 14 Acquisitions and Divestitures within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.Now that we have completed the shift froma wholesale and direct to consumer operating model to a distributor model within our Central and South America(CASA)territory,we expect consolidated NIKE,Inc.andAsia Pacific&Latin America(APLA)revenue growth will be reduced due to different commercial terms.However,over time we expect the future operating model to havea favorable impact on our overall profitability as we reduce selling and administrative expenses,as well as reduce exposure to foreign exchange rate volatility.25Table of ContentsUSE OF NON-GAAP FINANCIAL MEASURESThroughout this Quarterly Report on Form 10-Q,we discuss non-GAAP financial measures,including references to wholesale equivalent revenues,currency-neutralrevenues,as well as Total NIKE Brand earnings before interest and taxes(EBIT),Total NIKE,Inc.EBIT and EBIT Margin,which should be considered in addition to,andnot in lieu of,the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America(“U.S.GAAP”).References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations.NIKE Brand wholesale equivalent revenues consist of(1)sales to external wholesale customers and(2)internal sales from our wholesale operations to our NIKE Directoperations,which are charged at prices comparable to those charged to external wholesale customers.Additionally,currency-neutral revenues are calculated using actualexchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising fromforeign currency exchange rate fluctuations.EBIT is calculated as Net income before Interest expense(income),net and Income tax expense in the UnauditedCondensed Consolidated Statements of Income.EBIT Margin is calculated as EBIT divided by total NIKE,Inc.Revenues.Management uses these non-GAAP financial measures when evaluating the Companys performance,including when making financial and operating decisions.Additionally,management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessingour underlying business performance and trends.However,references to wholesale equivalent revenues,currency-neutral revenues,EBIT and EBIT margin should not beconsidered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S.GAAP and may not be comparable to similarlytitled non-GAAP measures used by other companies.26Table of ContentsRESULTS OF OPERATIONSTHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions,except per share data)20232022%CHANGE20232022%CHANGERevenues$12,390$10,871 14%$38,392$34,476 11%Cost of sales7,019 5,804 21!,695 18,500 17%Gross profit5,371 5,067 6,697 15,976 5%Gross margin43.3F.6C.5F.3mand creation expense923 854 8%2,968 2,789 6%Operating overhead expense3,036 2,584 17%9,035 7,980 13%Total selling and administrative expense3,959 3,438 15,003 10,769 11%of revenues32.01.61.31.2%Interest expense(income),net(7)53 22 165 Other(income)expense,net(58)(94)(283)(235)Income before income taxes1,477 1,670-12%4,955 5,277-6%Income tax expense237 274-146 670 37fective tax rate16.0.4.5.7%NET INCOME$1,240$1,396-11%$4,039$4,607-12%Diluted earnings per common share$0.79$0.87-9%$2.57$2.85-10%CONSOLIDATED OPERATING RESULTSREVENUESTHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGES20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESNIKE,Inc.Revenues:NIKE Brand Revenues by:Footwear$7,970$6,660 20%$24,588$21,158 16$%Apparel3,381 3,232 5,609 10,330 3%Equipment403 390 3%8%1,297 1,237 5%Global Brand Divisions12 41-71%-69D 54-19%-17%Total NIKE Brand Revenues11,766 10,323 146,538 32,779 11%Converse612 567 8%1,841 1,753 5%Corporate12(19)13(56)TOTAL NIKE,INC.REVENUES$12,390$10,871 14%$38,392$34,476 11%Supplemental NIKE Brand RevenuesDetails:NIKE Brand Revenues by:Sales to Wholesale Customers$6,423$5,728 12%$20,693$18,790 10%Sales through NIKE Direct5,331 4,554 17,801 13,935 13 %Global Brand Divisions12 41-71%-69D 54-19%-17%TOTAL NIKE BRAND REVENUES$11,766$10,323 14%$36,538$32,779 11%(1)The percent change excluding currency changes represents a non-GAAP financial measure.See Use of Non-GAAP Financial Measures for further information.(2)Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.(3)Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse,butmanaged through our central foreign exchange risk management program.(1)(1)(2)(3)(2)27Table of ContentsTHIRD QUARTER OF FISCAL 2023 COMPARED TO THIRD QUARTER OF FISCAL 2022On a currency-neutral basis,NIKE,Inc.Revenues increased 19%the third quarter of fiscal 2023,driven by higher revenues in both the NIKE Brand and Converse.Higherrevenues in North America,EMEA,APLA and Converse contributed approximately 9,7,2 and 1 percentage points to NIKE,Inc.Revenues,respectively.On a currency-neutral basis,NIKE Brand footwear revenues increased 25%in the third quarter of fiscal 2023,driven by higher revenues in Mens,the Jordan Brand andWomens.Unit sales of footwear increased 19%,while higher average selling price(ASP)per pair contributed approximately 6 percentage points of footwear revenuegrowth,primarily due to higher full-price ASP,net of discounts,on a wholesale equivalent basis,and growth in NIKE Direct.This was partially offset by lower NIKE DirectASP.Currency-neutral NIKE Brand apparel revenues for the third quarter of fiscal 2023 increased 10%,driven by higher revenues in Mens.Unit sales of apparel increased 5%and higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth,primarily due to higher full-price ASP and growth in NIKE Direct,partially offset by lower NIKE Direct ASP.NIKE Brand wholesale revenues increased 12%and 18%compared to the third quarter of fiscal 2022,on a reported and currency-neutral basis,respectively.On areported basis,NIKE Direct revenues represented approximately 45%of our total NIKE Brand revenues for the third quarter of fiscal 2023 compared to 44%for the thirdquarter of fiscal 2022.NIKE Brand Digital sales were$3.1 billion for the third quarter of fiscal 2023 compared to$2.7 billion for the third quarter of fiscal 2022.On acurrency-neutral basis,NIKE Direct revenues increased 22%,primarily driven by NIKE Brand Digital sales growth of 24%and comparable store sales growth of 20%.Comparable store sales,which exclude NIKE Brand Digital sales,comprises revenues from NIKE-owned in-line and factory stores for which all three of the followingrequirements have been met:(1)the store has been open at least one year,(2)square footage has not changed by more than 15%within the past year and(3)the storehas not been permanently repositioned within the past year.Comparable store sales includes revenues from stores that were temporarily closed during the period as aresult of COVID-19.Comparable store sales represents a performance measure that we believe is useful information for management and investors in understanding theperformance of our established NIKE-owned in-line and factory stores.Management considers this metric when making financial and operating decisions.The method ofcalculating comparable store sales varies across the retail industry.As a result,our calculation of this metric may not be comparable to similarly titled measures used byother companies.FIRST NINE MONTHS OF FISCAL 2023 COMPARED TO FIRST NINE MONTHS OF FISCAL 2022On a currency-neutral basis,NIKE,Inc.Revenues increased 19%for the first nine months of fiscal 2023,driven by higher revenues in North America,EMEA,APLA andConverse,which contributed approximately 9,7,3 and 1 percentage points to NIKE,Inc.Revenues,respectively.Lower revenues in Greater China reduced NIKE,Inc.Revenues by approximately 1 percentage point.On a currency-neutral basis,NIKE Brand footwear revenues increased 24%,driven by growth in Mens and the Jordan Brand.Unit sales of footwear increased 15%,whilehigher ASP per pair contributed approximately 9 percentage points of footwear revenue growth,primarily due to higher full-price ASP and growth in NIKE Direct.Currency-neutral NIKE Brand apparel revenues increased 10%,driven by growth in Mens.Unit sales of apparel increased 7%and higher ASP per unit contributedapproximately 3 percentage points of apparel revenue growth.Higher ASP per unit was primarily due to higher full-price ASP and growth in NIKE Direct,partially offset bylower NIKE Direct ASP.NIKE Brand wholesale revenues increased 10%and 18%compared to the first nine months of fiscal 2022,on a reported and currency-neutral basis,respectively.On areported basis,NIKE Direct revenues represented approximately 43%of our total NIKE Brand revenues for the first nine months of fiscal 2023 and the first nine months offiscal 2022.NIKE Brand Digital sales were$9.4 billion for the first nine months of fiscal 2023 compared to$7.9 billion for the first nine months of fiscal 2022.On acurrency-neutral basis,NIKE Direct revenues increased 20%,primarily driven by NIKE Brand Digital sales growth of 27%and comparable store sales growth of 11%.GROSS MARGINTHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)20232022%CHANGE20232022%CHANGEGross profit$5,371$5,067 6%$16,697$15,976 5%Gross margin43.3F.6%(330)bps43.5F.3%(280)bpsFor the third quarter of fiscal 2023,our consolidated gross margin was 330 basis points lower than the prior year and primarily reflected the following factors:Higher NIKE Brand product costs,on a wholesale equivalent basis,(decreasing gross margin approximately 360 basis points)primarily due to higher input costsand elevated inbound freight and logistics costs as well as product mix;28Table of ContentsLower margin in NIKE Direct,driven by higher promotional activity to liquidate inventory in the current period compared to lower promotional activity in the priorperiod resulting from lower available inventory supply(decreasing gross margin approximately 140 basis points);Unfavorable changes in net foreign currency exchange rates,including hedges(decreasing gross margin approximately 140 basis points);Lower off-price margin,on a wholesale equivalent basis(decreasing gross margin approximately 30 basis points);andHigher NIKE Brand full-price ASP,net of discounts,on a wholesale equivalent basis,(increasing gross margin approximately 370 basis points)due primarily tostrategic pricing actions and product mix.For the first nine months of fiscal 2023,our consolidated gross margin was 280 basis points lower than the prior year and primarily reflected the following factors:Higher NIKE Brand product costs,on a wholesale equivalent basis,(decreasing gross margin approximately 360 basis points)primarily due to higher input costsand elevated inbound freight and logistics costs as well as product mix;Lower margin in NIKE Direct,driven by higher promotional activity to liquidate inventory in the current period compared to lower promotional activity in the priorperiod resulting from lower available inventory supply(decreasing gross margin approximately 130 basis points);Unfavorable changes in net foreign currency exchange rates,including hedges(decreasing gross margin approximately 100 basis points);andHigher NIKE Brand full-price ASP,net of discounts,on a wholesale equivalent basis,(increasing gross margin approximately 320 basis points)due primarily tostrategic pricing actions and product mix.TOTAL SELLING AND ADMINISTRATIVE EXPENSETHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)20232022%CHANGE20232022%CHANGEDemand creation expense$923$854 8%$2,968$2,789 6%Operating overhead expense3,036 2,584 17%9,035 7,980 13%Total selling and administrative expense$3,959$3,438 15%$12,003$10,769 11%of revenues32.01.6 bps31.31.2 bps(1)Demand creation expense consists of advertising and promotion costs,including costs of endorsement contracts,complimentary products,television,digital and print advertising and media costs,brandevents and retail brand presentation.THIRD QUARTER OF FISCAL 2023 COMPARED TO THIRD QUARTER OF FISCAL 2022Demand creation expense increased 8%for the third quarter of fiscal 2023 primarily due to an increase in advertising and marketing expense.Changes in foreigncurrency exchange rates decreased Demand creation expense by approximately 3 percentage points.Operating overhead expense increased 17%primarily due to higher wage-related expenses,higher strategic technology enterprise investments and NIKE Direct variablecosts.Changes in foreign currency exchange rates decreased Operating overhead expense by approximately 3 percentage points.Foreign exchange rate fluctuations had a similar impact on the translation of our consolidated Revenues,resulting in an unfavorable impact of approximately 5 percentagepoints.FIRST NINE MONTHS OF FISCAL 2023 COMPARED TO FIRST NINE MONTHS OF FISCAL 2022Demand creation expense increased 6%for the first nine months of fiscal 2023 primarily due to higher advertising and marketing expense and higher sports marketingexpense.Changes in foreign currency exchange rates decreased Demand creation expense by approximately 5 percentage points.Operating overhead expense increased 13%primarily due to an increase in wage-related expenses,higher strategic technology enterprise investments and NIKE Directvariable costs.Changes in foreign currency exchange rates decreased Operating overhead expense by approximately 4 percentage points.Foreign exchange rate fluctuations had a similar impact on the translation of our consolidated Revenues,resulting in an unfavorable impact of approximately 8 percentagepoints.(1)29Table of ContentsOTHER(INCOME)EXPENSE,NETTHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)2023202220232022Other(income)expense,net$(58)$(94)$(283)$(235)Other(income)expense,net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments,as well as unusual or non-operating transactions that are outside the normalcourse of business.For the third quarter of fiscal 2023,Other(income)expense,net decreased from$94 million of other income,net to$58 million in the current year,largely due to netfavorable settlements of legal and insurance matters in the prior year and favorable activity in the prior year related to our strategic distributor partnership transition withinAPLA,partially offset by a net favorable change in foreign currency conversion gains and losses,including hedges.For the first nine months of fiscal 2023,Other(income)expense,net increased from$235 million of other income,net to$283 million in the current year,primarily due to anet favorable change in foreign currency conversion gains and losses,including hedges,and settlements of legal matters.This increase was partially offset by netunfavorable activity related to our strategic distributor partnership transition within APLA,including the loss recognized upon the completion of the sale of our entities inArgentina and Uruguay to a third-party distributor in the second quarter of fiscal 2023.For more information related to our distributor partnership transition within APLA,see Note 14 Acquisitions and Divestitures within the accompanying Notes to theUnaudited Condensed Consolidated Financial Statements.We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreigncurrency-related gains and losses included in Other(income)expense,net had unfavorable impacts of approximately$147 million and$508 million on our Income beforeincome taxes for the third quarter and first nine months of fiscal 2023,respectively.INCOME TAXESTHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,20232022%CHANGE20232022%CHANGEEffective tax rate16.0.4%(40)bps18.5.7X0 bpsOur effective tax rate was 16.0%for the third quarter of fiscal 2023 and substantially consistent compared to 16.4%for the third quarter of fiscal 2022.Our effective tax rate was 18.5%for the first nine months of fiscal 2023,compared to 12.7%for the first nine months of fiscal 2022,primarily due to decreased benefitsfrom stock-based compensation and a shift in our earnings mix.Refer to Note 6 Income Taxes within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for additional information.30Table of ContentsOPERATING SEGMENTSOur operating segments are evidence of the structure of the Companys internal organization.The NIKE Brand segments are defined by geographic regions for operationsparticipating in NIKE Brand sales activity.Each NIKE Brand geographic segment operates predominantly in one industry:the design,development,marketing and selling of athletic footwear,apparel andequipment.The Companys reportable operating segments for the NIKE Brand are:North America;Europe,Middle East&Africa(EMEA);Greater China;and Asia Pacific&Latin America(APLA),and include results for the NIKE and Jordan brands.The Companys NIKE Direct operations are managed within each geographic operatingsegment.Converse is also a reportable operating segment for the Company and operates predominately in one industry:the design,marketing,licensing and selling ofathletic lifestyle sneakers,apparel and accessories.As part of our centrally managed foreign exchange risk management program,standard foreign currency exchange rates are assigned twice per year to each NIKE Brandentity in our geographic operating segments and Converse.These rates are set approximately nine and twelve months in advance of the future selling seasons to whichthey relate(specifically,for each currency,one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer sellingseasons)based on average market spot rates in the calendar month preceding the date they are established.Inventories and Cost of sales for geographic operatingsegments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entitys functional currency.Differencesbetween assigned standard foreign currency exchange rates and actual market rates are included in Corporate,together with foreign currency hedge gains and lossesgenerated from our centrally managed foreign exchange risk management program and other conversion gains and losses.The breakdown of Revenues is as follows:THREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGES20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESNorth America$4,913$3,882 27%$16,253$13,238 23#%Europe,Middle East&Africa3,246 2,779 17&,068 9,228 9%Greater China1,994 2,160-8%1%5,438 5,986-9%-2%Asia Pacific&Latin America1,601 1,461 10%4,735 4,273 11%Global Brand Divisions12 41-71%-69D 54-19%-17%TOTAL NIKE BRAND11,766 10,323 146,538 32,779 11%Converse612 567 8%1,841 1,753 5%Corporate12(19)13(56)TOTAL NIKE,INC.REVENUES$12,390$10,871 14%$38,392$34,476 11%(1)The percent change excluding currency changes represents a non-GAAP financial measure.See Use of Non-GAAP Financial Measures for further information.(2)Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.(3)Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse,butmanaged through our central foreign exchange risk management program.The primary financial measure used by the Company to evaluate performance of individual operating segments is EBIT,which represents Net income before Interestexpense(income),net and Income tax expense in the Unaudited Condensed Consolidated Statements of Income.As discussed in Note 12 Operating Segments in theaccompanying Notes to the Unaudited Condensed Consolidated Financial Statements,certain corporate costs are not included in EBIT of our operating segments.(1)(1)(2)(3)31Table of ContentsThe breakdown of earnings before interest and taxes is as follows:THREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)20232022%CHANGE20232022%CHANGENorth America$1,190$967 23%$4,064$3,636 12%Europe,Middle East&Africa785 713 10%2,750 2,394 15%Greater China702 784-10%1,754 2,054-15%Asia Pacific&Latin America485 478 1%1,470 1,347 9%Global Brand Divisions(1,160)(975)-19%(3,573)(3,033)-18%TOTAL NIKE BRAND2,002 1,967 2%6,465 6,398 1%Converse164 168-2R6 504 4%Corporate(696)(412)-69%(2,014)(1,460)-38%TOTAL NIKE,INC.EARNINGS BEFOREINTEREST AND TAXES1,470 1,723-15%4,977 5,442-9IT margin11.9.8.0.8%Interest expense(income),net(7)53 22 165 TOTAL NIKE,INC.INCOME BEFORE INCOMETAXES$1,477$1,670-12%$4,955$5,277-6%(1)Total NIKE Brand EBIT,Total NIKE,Inc.EBIT and EBIT margin represent non-GAAP financial measures.See Use of Non-GAAP Financial Measures for further information.NORTH AMERICATHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGES20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESRevenues by:Footwear$3,322$2,532 311%$11,090$8,648 28(%Apparel1,419 1,207 18%4,598 4,117 12%Equipment172 143 20!V5 473 19 %TOTAL REVENUES$4,913$3,882 27%$16,253$13,238 23#%Revenues by:Sales to Wholesale Customers$2,323$1,769 312%$8,533$6,774 26&%Sales through NIKE Direct2,590 2,113 23#%7,720 6,464 19 %TOTAL REVENUES$4,913$3,882 27%$16,253$13,238 23#RNINGS BEFORE INTEREST ANDTAXES$1,190$967 23%$4,064$3,636 12%THIRD QUARTER OF FISCAL 2023 COMPARED TO THIRD QUARTER OF FISCAL 2022On a currency-neutral basis,North America revenues for the third quarter of fiscal 2023 increased 27%,due primarily to higher revenues in Mens and the Jordan Brand.NIKE Direct revenues increased 23%,primarily driven by strong digital sales growth of 25%,comparable store sales growth of 17%and the addition of new stores.Currency-neutral footwear revenues increased 31%,primarily driven by higher revenues in the Jordan Brand and Mens.Unit sales of footwear increased 26%,whilehigher ASP per pair contributed approximately 5 percentage points of footwear revenue growth.Higher ASP per pair was primarily due to higher full-price ASP and growthin NIKE Direct,partially offset by lower NIKE Direct ASP,reflecting higher promotional activity.Currency-neutral apparel revenues increased 18%,primarily driven by higher revenues in Mens.Unit sales of apparel increased 20%,while lower ASP per unit reducedapparel revenues by approximately 2 percentage points.Lower ASP was primarily due to lower NIKE Direct ASP,reflecting higher promotional activity,and a lower mix offull-price sales.This activity was partially offset by higher ASP in both full and off-price.(1)(1)(1)32Table of ContentsReported EBIT increased 23%primarily due to higher revenues,partially offset by higher selling and administrative expense and gross margin contraction.Gross margindecreased approximately 200 basis points largely driven by lower margin in NIKE Direct in part due to higher promotional activity,higher product costs reflecting higherinput costs and inbound freight and logistics costs,including supply chain network costs,and a lower mix of full-price sales.This was partially offset by higher full-priceASP,net of discounts,driven by strategic pricing actions and product mix.Selling and administrative expense increased due to higher operating overhead and demandcreation expense.Operating overhead expense increased primarily due to higher wage-related expenses and NIKE Direct variable costs,in part due to new storeadditions.The increase in demand creation expense was primarily due to an increase in digital marketing.FIRST NINE MONTHS OF FISCAL 2023 COMPARED TO FIRST NINE MONTHS OF FISCAL 2022On a currency-neutral basis,North America revenues for the first nine months of fiscal 2023 increased 23%,due primarily to higher revenues in Mens and the JordanBrand.NIKE Direct revenues increased 20%,primarily driven by strong digital sales growth of 25%,comparable store sales growth of 9%and the addition of new stores.Currency-neutral footwear revenues increased 28%,largely driven by higher revenues in Mens and the Jordan Brand.Unit sales of footwear increased 23%,while higherASP per pair contributed approximately 5 percentage points of footwear revenue growth.Higher ASP per pair was primarily due to higher full-price ASP and growth inNIKE Direct,partially offset by lower NIKE Direct ASP,reflecting higher promotional activity.Currency-neutral apparel revenues increased 12%,driven primarily by higher revenues in Mens.Unit sales of apparel increased 12%,while ASP per unit remained flat,as lower NIKE Direct ASP,reflecting higher promotional activity,was offset by higher full-price ASP and growth in NIKE Direct.Reported EBIT increased 12%primarily due to higher revenues,partially offset by gross margin contraction and higher selling and administrative expense.Gross margindecreased approximately 340 basis points primarily due to higher product costs,reflecting higher input costs and inbound freight and logistics costs,lower margins inNIKE Direct due to higher promotional activity and a lower mix of full-price sales.This was partially offset by higher full-price ASP,net of discounts,largely due to productmix and strategic pricing actions.Selling and administrative expense increased due to higher operating overhead and demand creation expense.Operating overheadexpense increased primarily as a result of higher wage-related costs and NIKE Direct variable costs.The increase in demand creation expense reflected higher sportsmarketing expenses and an increase in digital marketing.EUROPE,MIDDLE EAST&AFRICATHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGES20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESRevenues by:Footwear$2,011$1,569 289%$6,086$5,358 140%Apparel1,094 1,083 1%3,528 3,444 2%Equipment141 127 11 E4 426 7%TOTAL REVENUES$3,246$2,779 17&%$10,068$9,228 9%Revenues by:Sales to Wholesale Customers$2,061$1,858 11 %$6,506$6,194 5!%Sales through NIKE Direct1,185 921 299%3,562 3,034 174%TOTAL REVENUES$3,246$2,779 17&%$10,068$9,228 9%RNINGS BEFORE INTEREST ANDTAXES$785$713 10%$2,750$2,394 15%THIRD QUARTER OF FISCAL 2023 COMPARED TO THIRD QUARTER OF FISCAL 2022On a currency-neutral basis,EMEA revenues for the third quarter of fiscal 2023 increased 26%,primarily driven by growth in Mens.NIKE Direct revenues increased 39%,driven by strong digital sales growth of 43%and comparable store sales growth of 36%.Currency-neutral footwear revenues increased 39%,driven by higher revenues in Mens and Womens.Unit sales of footwear increased 24%,while higher ASP per paircontributed approximately 15 percentage points of footwear revenue growth.Higher ASP per pair was primarily due to higher full-price ASP,growth in NIKE Direct andhigher NIKE Direct ASP.33Table of ContentsCurrency-neutral apparel revenues increased 10%due primarily to higher revenues in Mens.Unit sales of apparel decreased 2%,while higher ASP per unit contributedapproximately 12 percentage points of apparel revenue growth,primarily due to growth in NIKE Direct and higher full-price ASP,partially offset by lower NIKE Direct ASP,reflecting higher promotional activity.Reported EBIT increased 10%primarily due to higher revenues,partially offset by gross margin contraction and higher selling and administrative expenses.Gross margindecreased approximately 250 basis points primarily due to higher product costs reflecting higher input costs and inbound freight and logistics costs as well as product mixand unfavorable changes in standard foreign currency exchange rates.This activity was partially offset by higher full-price ASP,net of discounts,in part due to strategicpricing actions and product mix.Selling and administrative expense increased due to higher operating overhead and demand creation expense.Operating overheadexpense increased primarily due to wage-related expenses and other administrative costs,partially offset by favorable changes in foreign currency exchange rates.Higher demand creation expense was driven by higher advertising and marketing expense,partially offset by favorable changes in foreign currency exchange rates.FIRST NINE MONTHS OF FISCAL 2023 COMPARED TO FIRST NINE MONTHS OF FISCAL 2022On a currency-neutral basis,EMEA revenues for the first nine months of fiscal 2023 increased 25%,due primarily to higher revenues in Mens.NIKE Direct revenuesincreased 34%primarily due to strong digital sales growth of 51%and comparable store sales growth of 18%.Currency-neutral footwear revenues increased 30%,driven by higher revenues led by Mens,the Jordan Brand and Womens.Unit sales of footwear increased 13%,whilehigher ASP per pair contributed approximately 17 percentage points of footwear revenue growth.Higher ASP per pair was primarily due to higher full-price and NIKEDirect ASPs,as well as growth in NIKE Direct.Currency-neutral apparel revenues increased 18%due primarily to higher revenues in Mens.Unit sales of apparel increased 5%,while higher ASP per unit contributedapproximately 13 percentage points of apparel revenue growth,primarily due to higher full-price ASP and growth in NIKE Direct,partially offset by lower NIKE Direct ASP,reflecting higher promotional activity.Reported EBIT increased 15%due to higher revenues and gross margin expansion,partially offset by higher selling and administrative expense.Gross margin increasedapproximately 30 basis points primarily due to higher full-price ASP,net of discounts,in part due to strategic pricing actions and product mix.This activity was partiallyoffset by higher product costs reflecting higher input costs,inbound freight and logistics costs as well as product mix.Selling and administrative expense increased due tohigher demand creation and operating overhead expense.Higher demand creation expense was primarily due to higher advertising and marketing expense,partiallyoffset by favorable changes in foreign currency exchange rates.Operating overhead expense increased primarily due to other administrative costs and higher wage-related expenses,partially offset by favorable changes in foreign currency exchange rates.GREATER CHINATHREE MONTHS ENDED FEBRUARY 28,NINE MONTHS ENDED FEBRUARY 28,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGES20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESRevenues by:Footwear$1,496$1,554-4%5%$4,099$4,238-3%4%Apparel461 548-16%-8%1,228 1,588-23%-17%Equipment37 58-36%-311 160-31%-26%TOTAL REVENUES$1,994$2,160-8%1%$5,438$5,986-9%-2%Revenues by:Sales to Wholesale Customers$1,126$1,241-9%-1%$2,862$3,251-12%-5%Sales through NIKE Direct868 919-6%3%2,576 2,735-6%2%TOTAL REVENUES$1,994$2,160-8%1%$5,438$5,986-9%-2RNINGS BEFORE INTEREST ANDTAXES$702$784-10%$1,754$2,054-15%THIRD QUARTER OF FISCAL 2023 COMPARED TO THIRD QUARTER OF FISCAL 2022On a currency-neutral basis,Greater China revenues for the third quarter of fiscal 2023 increased 1%.The increase in revenues was primarily due to higher revenues inMens,the Jordan Brand and Kids,largely offset by lower revenues in Womens.NIKE Direct revenues increased 3%due to comparable store sales growth of 9%,in partdue to improved physical traffic,and growth in non-comparable store sales,partially offset by digital sales declines of 11%.34Table of ContentsCurrency-neutral footwear revenues increased 5%,driven primarily by higher revenues in Mens.Unit sales of footwear increased 6%,while lower ASP per unit reducedfootwear revenues by approximately 1 percentage point.Currency-neutral apparel revenues decreased 8%,due primarily to lower revenues in Mens and Womens.Unit sales of apparel decreased 16%,partially offset byapproximately 8 percentage points of growth due to higher ASP per unit.Higher ASP was primarily due to higher full-price,NIKE Direct and off-price ASPs as well as ahigher mix of full-price sales.Reported EBIT decreased 10%as lower revenues and gross margin contraction were partially offset by lower selling and administrative expense.Gross margindecreased approximately 80 basis points,primarily due to higher product costs reflecting higher input costs and product mix.This activity was partially offset by favorablechanges in standard foreign currency exchange rates and higher full-price ASP,net of discounts,in part due to product mix.Selling and administrative expense decreaseddue to lower demand creation and operating overhead expense.The decrease in demand creation expense was primarily due to lower retail brand presentation expense,favorable changes in foreign
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-Q(Mark one)xTrueQUARTERLY.
2023-05-29
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,DC 20549FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended April 2,2023OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission File Number:000-20322Starbucks Corporation(Exact Name of Registrant as Specified in its Charter)Washington91-1325671(State or Other Jurisdiction ofIncorporation or Organization)(IRS EmployerIdentification No.)2401 Utah Avenue South,Seattle,Washington 98134(Address of principal executive offices)(206)447-1575(Registrants Telephone Number,including Area Code)Securities registered pursuant to Section 12(b)of the Act:TitleTrading SymbolName of each exchange on which registeredCommon Stock,par value$0.001 per shareSBUXNasdaq Global Select MarketIndicate by check mark whether the registrant:(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 duringthe preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements forthe past 90 days.Yes x No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit suchfiles).Yes x No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,smaller reporting company,or anemerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerxAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act):Yes No x Indicate the number of shares outstanding of each of the issuers classes of common stock,as of the latest practicable date.Shares Outstanding as of April 26,20231,146.4 millionTable of ContentsSTARBUCKS CORPORATIONFORM 10-QFor the Quarterly Period Ended April 2,2023Table of Contents PART I.FINANCIAL INFORMATIONItem 1Financial Statements(Unaudited)3Consolidated Statements of Earnings3Consolidated Statements of Comprehensive Income4Consolidated Balance Sheets5Consolidated Statements of Cash Flows6Consolidated Statements of Equity7Index for Notes to Consolidated Financial Statements9Notes to Consolidated Financial Statements10Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations27Item 3Quantitative and Qualitative Disclosures About Market Risk40Item 4Controls and Procedures40PART II.OTHER INFORMATIONItem 1Legal Proceedings41Item 1ARisk Factors41Item 2Unregistered Sales of Equity Securities and Use of Proceeds41Item 3Defaults Upon Senior Securities41Item 4Mine Safety Disclosures41Item 5Other Information41Item 6Exhibits42Signatures43 Table of ContentsPART I FINANCIAL INFORMATIONItem 1.Financial StatementsSTARBUCKS CORPORATIONCONSOLIDATED STATEMENTS OF EARNINGS(in millions,except per share data)(unaudited)Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Net revenues:Company-operated stores$7,142.3$6,276.7$14,225.7$12,999.1 Licensed stores1,069.5 849.5 2,189.0 1,700.3 Other508.0 509.4 1,019.1 986.6 Total net revenues8,719.8 7,635.6 17,433.8 15,686.0 Product and distribution costs2,801.7 2,465.8 5,611.9 4,992.7 Store operating expenses3,636.0 3,314.7 7,301.3 6,714.6 Other operating expenses126.2 101.7 255.4 203.4 Depreciation and amortization expenses341.9 367.7 669.0 733.8 General and administrative expenses620.4 481.5 1,201.3 1,007.3 Restructuring and impairments8.8 4.4 14.7(3.1)Total operating expenses7,535.0 6,735.8 15,053.6 13,648.7 Income from equity investees51.4 49.1 109.2 89.4 Gain from sale of assets91.3 91.3 Operating income1,327.5 948.9 2,580.7 2,126.7 Interest income and other,net18.4 46.3 30.0 46.2 Interest expense(136.3)(119.1)(266.0)(234.4)Earnings before income taxes1,209.6 876.1 2,344.7 1,938.5 Income tax expense301.3 201.1 581.1 447.4 Net earnings including noncontrolling interests908.3 675.0 1,763.6 1,491.1 Net earnings attributable to noncontrolling interests0.0 0.5 0.0 0.7 Net earnings attributable to Starbucks$908.3$674.5$1,763.6$1,490.4 Earnings per share-basic$0.79$0.59$1.54$1.29 Earnings per share-diluted$0.79$0.58$1.53$1.28 Weighted average shares outstanding:Basic1,148.5 1,149.2 1,148.4 1,159.4 Diluted1,152.7 1,153.9 1,152.8 1,165.2 See Notes to Consolidated Financial Statements.3Table of ContentsSTARBUCKS CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in millions,unaudited)Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Net earnings including noncontrolling interests$908.3$675.0$1,763.6$1,491.1 Other comprehensive income/(loss),net of tax:Unrealized holding gains/(losses)on available-for-sale debt securities3.6(10.5)5.6(13.9)Tax(expense)/benefit(0.8)2.6(1.3)3.4 Unrealized gains/(losses)on cash flow hedging instruments(1.2)67.1(181.9)155.8 Tax(expense)/benefit0.1(14.2)29.6(26.0)Unrealized gains/(losses)on net investment hedging instruments(2.7)38.1(67.3)79.6 Tax(expense)/benefit0.7(9.6)17.0(20.1)Translation adjustment and other74.7(38.5)283.6(24.3)Tax(expense)/benefit Reclassification adjustment for net(gains)/losses realized in netearnings for available-for-sale debt securities,hedging instruments,and translation adjustment(66.6)(34.2)(165.0)(50.3)Tax expense/(benefit)9.5 6.0 21.3 8.9 Other comprehensive income/(loss)17.3 6.8(58.4)113.1 Comprehensive income including noncontrolling interests925.6 681.8 1,705.2 1,604.2 Comprehensive income attributable to noncontrolling interests 0.5 0.7 Comprehensive income attributable to Starbucks$925.6$681.3$1,705.2$1,603.5 See Notes to Consolidated Financial Statements.4Table of ContentsSTARBUCKS CORPORATIONCONSOLIDATED BALANCE SHEETS(in millions,except per share data)(unaudited)Apr 2,2023Oct 2,2022ASSETSCurrent assets:Cash and cash equivalents$3,071.8$2,818.4 Short-term investments379.4 364.5 Accounts receivable,net1,185.8 1,175.5 Inventories2,000.6 2,176.6 Prepaid expenses and other current assets408.6 483.7 Total current assets7,046.2 7,018.7 Long-term investments251.2 279.1 Equity investments360.5 311.2 Property,plant and equipment,net6,818.6 6,560.5 Operating lease,right-of-use asset8,251.6 8,015.6 Deferred income taxes,net1,811.1 1,799.7 Other long-term assets526.7 554.2 Other intangible assets130.8 155.9 Goodwill3,412.3 3,283.5 TOTAL ASSETS$28,609.0$27,978.4 LIABILITIES AND SHAREHOLDERS EQUITY/(DEFICIT)Current liabilities:Accounts payable$1,434.0$1,441.4 Accrued liabilities1,970.0 2,137.1 Accrued payroll and benefits710.9 761.7 Current portion of operating lease liability1,269.5 1,245.7 Stored value card liability and current portion of deferred revenue1,795.9 1,641.9 Short-term debt52.8 175.0 Current portion of long-term debt1,888.7 1,749.0 Total current liabilities9,121.8 9,151.8 Long-term debt13,544.8 13,119.9 Operating lease liability7,753.5 7,515.2 Deferred revenue6,200.2 6,279.7 Other long-term liabilities488.1 610.5 Total liabilities37,108.4 36,677.1 Shareholders deficit:Common stock($0.001 par value)authorized,2,400.0 shares;issued and outstanding,1,147.0 and 1,147.9shares,respectively1.1 1.1 Additional paid-in capital38.2 205.3 Retained deficit(8,024.6)(8,449.8)Accumulated other comprehensive income/(loss)(521.6)(463.2)Total shareholders deficit(8,506.9)(8,706.6)Noncontrolling interests7.5 7.9 Total deficit(8,499.4)(8,698.7)TOTAL LIABILITIES AND SHAREHOLDERS EQUITY/(DEFICIT)$28,609.0$27,978.4 See Notes to Consolidated Financial Statements.5Table of ContentsSTARBUCKS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(in millions,unaudited)Two Quarters EndedApr 2,2023Apr 3,2022OPERATING ACTIVITIES:Net earnings including noncontrolling interests$1,763.6$1,491.1 Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization709.3 777.7 Deferred income taxes,net2.6 28.4 Income earned from equity method investees(109.9)(118.7)Distributions received from equity method investees88.0 100.8 Gain on sale of assets(91.3)Stock-based compensation159.3 149.2 Non-cash lease costs584.7 670.7 Loss on retirement and impairment of assets75.6 77.3 Other22.6(17.9)Cash provided by/(used in)changes in operating assets and liabilities:Accounts receivable26.2(62.1)Inventories194.6(324.9)Accounts payable(51.2)133.0 Deferred revenue54.0 110.2 Operating lease liability(621.8)(766.3)Other operating assets and liabilities(445.5)(215.7)Net cash provided by operating activities2,360.8 2,032.8 INVESTING ACTIVITIES:Purchases of investments(247.7)(67.5)Sales of investments1.9 72.6 Maturities and calls of investments270.0 55.7 Additions to property,plant and equipment(1,002.0)(871.9)Proceeds from sale of assets110.0 Other(39.2)(69.8)Net cash used in investing activities(907.0)(880.9)FINANCING ACTIVITIES:Net(payments)/proceeds from issuance of commercial paper(175.0)Net proceeds from issuance of short-term debt52.8 17.4 Repayments of short-term debt(12.6)Net proceeds from issuance of long-term debt1,497.8 1,498.1 Repayments of long-term debt(1,000.0)Proceeds from issuance of common stock129.8 56.3 Cash dividends paid(1,217.4)(1,139.2)Repurchase of common stock(479.3)(3,997.5)Minimum tax withholdings on share-based awards(81.4)(122.1)Other(10.7)(9.2)Net cash provided by/(used in)financing activities(1,283.4)(3,708.8)Effect of exchange rate changes on cash and cash equivalents83.0 14.6 Net increase/(decrease)in cash and cash equivalents253.4(2,542.3)CASH AND CASH EQUIVALENTS:Beginning of period2,818.4 6,455.7 End of period$3,071.8$3,913.4 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for:Interest,net of capitalized interest$250.4$236.0 Income taxes$636.8$783.2 See Notes to Consolidated Financial Statements.6Table of ContentsSTARBUCKS CORPORATIONCONSOLIDATED STATEMENTS OF EQUITYFor the Quarter Ended April 2,2023 and April 3,2022(in millions,except per share data,unaudited)Common StockAdditionalPaid-inCapitalRetainedEarnings/(Deficit)AccumulatedOtherComprehensiveIncome/(Loss)ShareholdersEquity/(Deficit)NoncontrollingInterestsTotal SharesAmountBalance,January 1,20231,148.5$1.1$67.2$(8,203.2)$(538.9)$(8,673.8)$7.9$(8,665.9)Net earnings 908.3 908.3 908.3 Other comprehensive loss 17.3 17.3 17.3 Stock-based compensation expense 75.0 75.0 75.0 Exercise of stock options/vesting ofRSUs1.3 68.2 68.2 68.2 Sale of common stock0.2 13.3 13.3 13.3 Repurchase of common stock(3.0)(182.5)(121.5)(304.0)(304.0)Cash dividends declared,$0.53 pershare (608.2)(608.2)(608.2)Purchase of noncontrolling interests(3.0)(3.0)(0.4)(3.4)Balance,April 2,20231,147.0$1.1$38.2$(8,024.6)$(521.6)$(8,506.9)$7.5$(8,499.4)Balance,January 2,20221,151.6$1.2$41.1$(8,753.0)$253.5$(8,457.2)$6.9$(8,450.3)Net earnings 674.5 674.5 0.5 675.0 Other comprehensive income 6.8 6.8 6.8 Stock-based compensation expense 54.4 54.4 54.4 Exercise of stock options/vesting ofRSUs0.4(0.1)(4.4)(4.5)(4.5)Sale of common stock0.1 11.0 11.0 11.0 Repurchase of common stock(5.2)(61.0)(431.1)(492.1)(492.1)Cash dividends declared,$0.49 pershare (560.9)(560.9)(560.9)Net distributions to noncontrollinginterests (0.6)(0.6)Balance,April 3,20221,146.9$1.1$41.1$(9,070.5)$260.3$(8,768.0)$6.8$(8,761.2)See Notes to Consolidated Financial Statements.7Table of ContentsSTARBUCKS CORPORATIONCONSOLIDATED STATEMENTS OF EQUITYFor the Two Quarters Ended April 2,2023 and April 3,2022(in millions,except per share data,unaudited)Common StockAdditionalPaid-inCapitalRetainedEarnings/(Deficit)AccumulatedOtherComprehensiveIncome/(Loss)ShareholdersEquity/(Deficit)NoncontrollingInterestsTotal SharesAmountBalance,October 2,20221,147.9$1.1$205.3$(8,449.8)$(463.2)$(8,706.6)$7.9$(8,698.7)Net earnings 1,763.6 1,763.6 1,763.6 Other comprehensive loss (58.4)(58.4)(58.4)Stock-based compensation expense 161.4 161.4 161.4 Exercise of stock options/vesting ofRSUs3.7 23.5 23.5 23.5 Sale of common stock0.3 24.9 24.9 24.9 Repurchase of common stock(4.9)(373.9)(121.5)(495.4)(495.4)Cash dividends declared,$1.06 pershare (1,216.9)(1,216.9)(1,216.9)Purchase of noncontrolling interests(3.0)(3.0)(0.4)(3.4)Balance,April 2,20231,147.0$1.1$38.2$(8,024.6)$(521.6)$(8,506.9)$7.5$(8,499.4)Balance,October 3,20211,180.0$1.2$846.1$(6,315.7)$147.2$(5,321.2)$6.7$(5,314.5)Net earnings 1,490.4 1,490.4 0.7 1,491.1 Other comprehensive income 113.1 113.1 113.1 Stock-based compensation expense 151.5 151.5 151.5 Exercise of stock options/vesting ofRSUs3.0(0.1)(88.5)(88.6)(88.6)Sale of common stock0.2 22.8 22.8 22.8 Repurchase of common stock(36.3)(890.8)(3,122.2)(4,013.0)(4,013.0)Cash dividends declared,$0.98 pershare (1,123.0)(1,123.0)(1,123.0)Net distributions to noncontrollinginterests (0.6)(0.6)Balance,April 3,20221,146.9$1.1$41.1$(9,070.5)$260.3$(8,768.0)$6.8$(8,761.2)See Notes to Consolidated Financial Statements.8Table of ContentsSTARBUCKS CORPORATIONINDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1Summary of Significant Accounting Policies and Estimates10Note 2Acquisitions,Divestitures and Strategic Alliance10Note 3Derivative Financial Instruments11Note 4Fair Value Measurements15Note 5Inventories17Note 6Supplemental Balance Sheet and Statement of Earnings Information17Note 7Other Intangible Assets and Goodwill18Note 8Debt19Note 9Leases21Note 10Deferred Revenue22Note 11Equity23Note 12Employee Stock Plans24Note 13Earnings per Share25Note 14Commitments and Contingencies25Note 15Segment Reporting259Table of ContentsSTARBUCKS CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 1:Summary of Significant Accounting Policies and EstimatesFinancial Statement PreparationThe unaudited consolidated financial statements as of April 2,2023,and for the quarters and two quarters ended April 2,2023 and April 3,2022,have beenprepared by Starbucks Corporation under the rules and regulations of the Securities and Exchange Commission(“SEC”).In the opinion of management,thefinancial information for the quarters and two quarters ended April 2,2023 and April 3,2022 reflects all adjustments and accruals,which are of a normalrecurring nature,necessary for a fair presentation of the financial position,results of operations and cash flows for the interim periods.In this Quarterly Reporton Form 10-Q(“10-Q”),Starbucks Corporation is referred to as“Starbucks,”the“Company,”“we,”“us”or“our.”Segment information is prepared on the same basis that our management reviews financial information for operational decision-making purposes.Certain prior period information on the consolidated statements of cash flows have been reclassified to conform to the current presentation.The financial information as of October 2,2022 is derived from our audited consolidated financial statements and notes for the fiscal year ended October 2,2022(“fiscal 2022”)included in Item 8 in the Fiscal 2022 Annual Report on Form 10-K(“10-K”).The information included in this 10-Q should be read inconjunction with the footnotes and managements discussion and analysis of the consolidated financial statements in the 10-K.The results of operations for the quarter and two quarters ended April 2,2023 are not necessarily indicative of the results of operations that may be achieved forthe entire fiscal year ending October 1,2023(“fiscal 2023”).The novel coronavirus,known as the global COVID-19 pandemic,was first identified in December 2019 before spreading to markets where we have company-operated or licensed stores.We have since established the necessary protocols to operate safely,and in many of our markets,our businesses demonstratedpowerful momentum beyond recovery from the COVID-19 pandemic.During the quarter ended April 2,2023,our China market began recovering frompandemic-related business interruptions in previous quarters that had suppressed customer mobility.We continue to monitor the COVID-19 pandemic and itseffect on our business and results of operations;however,we cannot predict the duration,scope or severity of the COVID-19 pandemic or its future impact onour business,results of operations,cash flows and financial condition.RestructuringIn fiscal 2022,we announced our plan in the U.S.market to increase efficiency while elevating the partner and customer experience(the“Reinvention Plan”).We believe the company-operated market investments in partner wages and trainings have increased retention and productivity while the acceleration ofpurpose-built store concepts and innovations in technologies will provide additional convenience and connection with our customers.As a result of therestructuring efforts in connection with the Reinvention Plan,we recorded an immaterial charge on our consolidated statements of earnings during the quarterand two quarters ended April 2,2023.Future restructuring and impairment costs attributable to our Reinvention Plan are not expected to be material.As of April 2,2023 and October 2,2022,there were no material restructuring-related accrued liabilities on our consolidated balance sheets.Recently Adopted Accounting PronouncementsIn the first quarter of fiscal 2022,we adopted the Financial Accounting Standards Board(“FASB”)issued guidance related to reference rate reform.Thepronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease thefinancial reporting burden related to the expected market transition from the London Interbank Offered Rate(“LIBOR”)and other interbank offered rates toalternative reference rates.The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31,2024.The adoption of the new guidance did not have a material impact on our financial statements.Note 2:Acquisitions,Divestitures and Strategic AllianceFiscal 2023On January 13,2023,we sold the assets,primarily consisting of intellectual properties associated with the Seattles Best Coffee brand,to Nestl for$110.0million.The transaction resulted in a pre-tax gain of$91.3 million,which was included in gain from sale of assets on our consolidated statements of earnings.Results from Seattles Best Coffee operations prior to the sale are reported in our Channel Development operating segment.10Table of ContentsFiscal 2022In the fourth quarter of fiscal 2022,we sold our Evolution Fresh brand and business to Bolthouse Farms.This transaction did not have a material impact on ourconsolidated financial statements.Note 3:Derivative Financial InstrumentsInterest RatesFrom time to time,we enter into designated cash flow hedges to manage the variability in cash flows due to changes in benchmark interest rates.We enter intointerest rate swap agreements and treasury locks,which are synthetic forward sales of U.S.Treasury securities settled in cash based upon the differencebetween an agreed-upon treasury rate and the prevailing treasury rate at settlement.These agreements are cash settled at the time of the pricing of the relateddebt.Each derivative agreements gain or loss is recorded in accumulated other comprehensive income(“AOCI”)and is subsequently reclassified to interestexpense over the life of the related debt.To hedge the exposure to changes in the fair value of our fixed-rate debt,we enter into interest rate swap agreements,which are designated as fair value hedges.The changes in fair values of these derivative instruments and the offsetting changes in fair values of the underlying hedged debt due to changes in the relevantbenchmark interest rates are recorded in interest expense.Refer to Note 8,Debt,for additional information on our long-term debt.Foreign CurrencyTo reduce cash flow volatility from foreign currency fluctuations,we enter into forward and swap contracts to hedge portions of cash flows of anticipatedintercompany royalty payments,inventory purchases,and intercompany borrowing and lending activities.The resulting gains and losses from these derivativesare recorded in AOCI and subsequently reclassified to revenue,product and distribution costs,or interest income and other,net,respectively,when the hedgedexposures affect net earnings.From time to time,we may enter into financial instruments,including,but not limited to,forward and swap contracts or foreign currency-denominated debt,tohedge the currency exposure of our net investments in certain international operations.The resulting gains and losses from these derivatives are recorded inAOCI and are subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.Foreign currency forward and swap contracts not designated as hedging instruments are used to mitigate the foreign exchange risk of certain other balancesheet items.Gains and losses from these derivatives are largely offset by the financial impact of translating foreign currency-denominated payables andreceivables,and these gains and losses are recorded in interest income and other,net.CommoditiesDepending on market conditions,we may enter into coffee forward contracts,futures contracts and collars to hedge anticipated cash flows under our price-to-be-fixed green coffee contracts,which are described further in Note 5,Inventories,or our longer-dated forecasted coffee demand where underlying fixed priceand price-to-be-fixed contracts are not yet available.The resulting gains and losses are recorded in AOCI and are subsequently reclassified to product anddistribution costs when the hedged exposure affects net earnings.Depending on market conditions,we may also enter into dairy forward contracts and futures contracts to hedge a portion of anticipated cash flows under ourdairy purchase contracts and our forecasted dairy demand.The resulting gains or losses are recorded in AOCI and are subsequently reclassified to product anddistribution costs when the hedged exposure affects net earnings.Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge.Cash flows from hedging transactions areclassified in the same categories as the cash flows from the respective hedged items.For de-designated cash flow hedges in which the underlying transactionsare no longer probable of occurring,the related accumulated derivative gains or losses are recognized in interest income and other,net on our consolidatedstatements of earnings.These derivatives may be accounted for prospectively as non-designated derivatives until maturity,re-designated to new hedgingrelationships or terminated early.We continue to believe transactions related to our other designated cash flow hedges are probable to occur.To mitigate the price uncertainty of a portion of our future purchases,including diesel fuel and other commodities,we enter into swap contracts,futures andcollars that are not designated as hedging instruments.The resulting gains and losses are recorded in interest income and other,net to help offset pricefluctuations on our beverage,food,packaging and transportation costs,which are included in product and distribution costs on our consolidated statements ofearnings.11Table of ContentsGains and losses on derivative contracts and foreign currency-denominated debt designated as hedging instruments included in AOCI and expected to bereclassified into earnings within 12 months,net of tax(in millions):Net Gains/(Losses)Included in AOCINet Gains/(Losses)Expectedto be Reclassified from AOCIinto Earnings within 12MonthsOutstanding Contract/DebtRemaining Maturity(Months)Apr 2,2023Oct 2,2022Cash Flow Hedges:Coffee$(89.8)$153.9$(87.7)4Cross-currency swaps(1.3)(1.9)20Dairy(3.4)(2.6)(3.4)10Foreign currency-other11.7 55.3 11.7 33Interest rates(5.3)(5.8)0.2 0Net Investment Hedges:Cross-currency swaps46.7 67.3 108Foreign currency16.1 16.1 0Foreign currency debt86.8 125.7 1212Table of ContentsPre-tax gains and losses on derivative contracts and foreign currency-denominated long-term debt designated as hedging instruments recognized in othercomprehensive income(“OCI”)and reclassifications from AOCI to earnings(in millions):Quarter EndedGains/(Losses)Recognized inOCI Before ReclassificationsGains/(Losses)Reclassified fromAOCI to EarningsLocation of gain/(loss)Apr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Cash Flow Hedges:Coffee$(0.5)$24.0$59.9$17.8 Product and distribution costsCross-currency swaps(2.5)4.9(3.0)(0.8)Interest expense(0.1)9.4 Interest income and other,netDairy(2.3)3.4(3.3)2.9 Product and distribution costsForeign currency-other3.8 0.7 4.0 2.4 Licensed stores revenue2.2(0.3)Product and distribution costsInterest rates0.3 34.1 0.2(0.5)Interest expenseNet Investment Hedges:Cross-currency swaps(1.1)(2.1)7.0 3.5 Interest expenseForeign currency debt(1.6)40.2 Two Quarters EndedGains/(Losses)Recognized inOCI Before ReclassificationsGains/(Losses)Reclassified fromAOCI to EarningsLocation of gain/(loss)Apr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Cash Flow Hedges:Coffee$(119.9)$95.5$156.6$24.3 Product and distribution costsCross-currency swaps(14.2)9.4(5.7)(1.6)Interest expense(9.2)16.3 Interest income and other,netDairy(5.9)8.0(4.8)2.5 Product and distribution costsForeign currency-other(42.2)7.6 11.9 4.5 Licensed stores revenue4.4(1.7)Product and distribution costs0.2 Interest income and other,netInterest rates0.3 35.3(0.3)(0.9)Interest expenseNet Investment Hedges:Cross-currency swaps(15.1)14.2 12.3 6.9 Interest expenseForeign currency debt(52.2)65.4 Pre-tax gains and losses on non-designated derivatives and designated fair value hedging instruments and the related fair value hedged item recognized inearnings(in millions):Gains/(Losses)Recognized in EarningsLocation of gain/(loss)recognized in earningsQuarter EndedTwo Quarters Ended Apr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Non-Designated Derivatives:DairyInterest income and other,net$0.1$0.1 Foreign currency-otherInterest income and other,net1.6 11.6(10.0)21.8 CoffeeInterest income and other,net 6.2(5.5)9.3 Diesel fuel and other commoditiesInterest income and other,net(1.7)0.7(1.9)0.7 Fair Value Hedges:Interest rate swapInterest expense4.7(21.3)3.1(26.1)Long-term debt(hedged item)Interest expense(12.1)24.8(15.4)33.0 13Table of ContentsNotional amounts of outstanding derivative contracts(in millions):Apr 2,2023Oct 2,2022Coffee$186$649 Cross-currency swaps1,108 741 Dairy77 94 Diesel fuel and other commodities25 33 Foreign currency-other1,194 1,269 Interest rate swaps1,100 1,100 Fair value of outstanding derivative contracts(in millions)including the location of the asset and/or liability on the consolidated balance sheets:Derivative AssetsBalance Sheet LocationApr 2,2023Oct 2,2022Designated Derivative Instruments:Cross-currency swapsOther long-term assets$81.9$115.4 DairyPrepaid expenses and other current assets0.1 0.5 Foreign currency-otherPrepaid expenses and other current assets19.9 39.9 Other long-term assets10.9 33.5 Non-designated Derivative Instruments:Diesel fuel and other commoditiesPrepaid expenses and other current assets0.1 0.4 Foreign currencyPrepaid expenses and other current assets4.1 34.3 Other long-term assets 7.3 Derivative LiabilitiesBalance Sheet LocationApr 2,2023Oct 2,2022Designated Derivative Instruments:Cross-currency swapsOther long-term liabilities$8.8$DairyAccrued liabilities1.8 2.9 Foreign currency-otherAccrued liabilities7.9 0.3 Other long-term liabilities8.1 Interest rate swapsAccrued liabilities10.0 12.0 Other long-term liabilities25.9 34.0 Non-designated Derivative Instruments:Diesel fuel and other commoditiesAccrued liabilities1.3 Foreign currencyAccrued liabilities1.6 5.8 The following amounts were recorded on the consolidated balance sheets related to fixed-to-floating interest rate swaps designated in fair value hedgingrelationships(in millions):Carrying amount of hedged itemCumulative amount of fair value hedging adjustmentincluded in the carrying amountApr 2,2023Oct 2,2022Apr 2,2023Oct 2,2022Location on the balance sheetLong-term debt$1,063.1$1,047.7$(36.9)$(52.3)Additional disclosures related to cash flow gains and losses included in AOCI,as well as subsequent reclassifications to earnings,are included in Note 11,Equity.14Table of ContentsNote 4:Fair Value MeasurementsAssets and liabilities measured at fair value on a recurring basis(in millions):Fair Value Measurements at Reporting Date Using Balance atApril 2,2023Quoted Prices in ActiveMarkets for Identical Assets(Level 1)Significant OtherObservable Inputs(Level 2)Significant Unobservable Inputs(Level 3)Assets:Cash and cash equivalents$3,071.8$3,071.8$Short-term investments:Available-for-sale debt securitiesCommercial paper0.1 0.1 Corporate debt securities53.2 53.2 U.S.government treasury securities5.4 5.4 Foreign government obligations3.8 3.8 Mortgage and other asset-backedsecurities0.7 0.7 Total available-for-sale debt securities63.2 5.4 57.8 Structured deposits248.4 248.4 Marketable equity securities67.8 67.8 Total short-term investments379.4 73.2 306.2 Prepaid expenses and other current assets:Derivative assets24.2 24.2 Long-term investments:Available-for-sale debt securitiesCorporate debt securities101.0 101.0 Mortgage and other asset-backedsecurities50.7 50.7 State and local government obligations1.3 1.3 U.S.government treasury securities98.2 98.2 Total long-term investments251.2 98.2 153.0 Other long-term assets:Derivative assets92.8 92.8 Total assets$3,819.4$3,243.2$576.2$Liabilities:Accrued liabilities:Derivative liabilities$22.6$22.6$Other long-term liabilities:Derivative liabilities42.8 42.8 Total liabilities$65.4$65.4$15Table of Contents Fair Value Measurements at Reporting Date Using Balance atOctober 2,2022Quoted Prices in ActiveMarkets for Identical Assets(Level 1)Significant OtherObservable Inputs(Level 2)SignificantUnobservable Inputs(Level 3)Assets:Cash and cash equivalents$2,818.4$2,797.3$21.1$Short-term investments:Available-for-sale debt securitiesCorporate debt securities22.4 22.4 U.S.government treasury securities9.3 9.3 Total available-for-sale debt securities31.7 9.3 22.4 Structured deposits275.1 275.1 Marketable equity securities57.7 57.7 Total short-term investments364.5 67.0 297.5 Prepaid expenses and other current assets:Derivative assets75.1 75.1 Long-term investments:Available-for-sale debt securitiesCorporate debt securities134.7 134.7 Foreign government obligations3.8 3.8 Mortgage and other asset-backedsecurities56.5 56.5 State and local government obligations1.3 1.3 U.S.government treasury securities82.8 82.8 Total long-term investments279.1 82.8 196.3 Other long-term assets:Derivative assets156.2 156.2 Total assets$3,693.3$2,947.1$746.2$Liabilities:Accrued liabilities:Derivative liabilities$21.0$21.0$Other long-term liabilities:Derivative liabilities34.0 34.0 Total liabilities$55.0$55.0$There were no material transfers between levels and there was no significant activity within Level 3 instruments during the periods presented.The fair valuesof any financial instruments presented above exclude the impact of netting assets and liabilities when a legally enforceable master netting agreement exists.Gross unrealized holding gains and losses on available-for-sale debt securities,structured deposits and marketable equity securities were not material as ofApril 2,2023 and October 2,2022.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisAssets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property,plantand equipment,ROU assets,goodwill and other intangible assets and other assets.These assets are measured at fair value if determined to be impaired.16Table of ContentsThe estimated fair value of our long-term debt based on the quoted market price(Level 2)is included at Note 8,Debt.There were no material fair valueadjustments during the two quarters ended April 2,2023 and April 3,2022.Note 5:Inventories(in millions):Apr 2,2023Oct 2,2022Coffee:Unroasted$944.2$1,018.6 Roasted279.4 310.3 Other merchandise held for sale376.1 430.9 Packaging and other supplies400.9 416.8 Total$2,000.6$2,176.6 Other merchandise held for sale includes,among other items,serveware,food and tea.Inventory levels vary due to seasonality,commodity market supply andprice fluctuations.As of April 2,2023,we had committed to purchasing green coffee totaling$408.4 million under fixed-price contracts and an estimated$828.3 million underprice-to-be-fixed contracts.A portion of our price-to-be-fixed contracts are effectively fixed through the use of futures.See Note 3,Derivative FinancialInstruments,for further discussion.Price-to-be-fixed contracts are purchase commitments whereby the quality,quantity,delivery period and other negotiatedterms are agreed upon,but the date,and therefore the price,at which the base“C”coffee commodity price component will be fixed has not yet beenestablished.For most contracts,either Starbucks or the seller has the option to“fix”the base“C”coffee commodity price prior to the delivery date.For othercontracts,Starbucks and the seller may agree upon pricing parameters determined by the base“C”coffee commodity price.Until prices are fixed,we estimatethe total cost of these purchase commitments.We believe,based on established relationships with our suppliers and continuous monitoring,the risk of non-delivery on these purchase commitments is remote.Note 6:Supplemental Balance Sheet and Statement of Earnings Information(in millions):Property,Plant and Equipment,netApr 2,2023Oct 2,2022Land$46.1$46.1 Buildings567.3 555.4 Leasehold improvements9,578.2 9,066.8 Store equipment3,179.2 3,018.2 Roasting equipment816.3 838.5 Furniture,fixtures and other1,609.4 1,526.1 Work in progress654.4 558.7 Property,plant and equipment,gross16,450.9 15,609.8 Accumulated depreciation(9,632.3)(9,049.3)Property,plant and equipment,net$6,818.6$6,560.5 Accrued LiabilitiesApr 2,2023Oct 2,2022Accrued occupancy costs$82.8$84.6 Accrued dividends payable607.8 608.3 Accrued capital and other operating expenditures686.3 878.1 Self-insurance reserves248.7 232.3 Income taxes payable150.6 139.2 Accrued business taxes193.8 194.6 Total accrued liabilities$1,970.0$2,137.1 17Table of ContentsStore Operating ExpensesQuarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Wages and benefits$2,174.3$2,018.3$4,389.9$4,029.0 Occupancy costs703.4 664.9 1,374.9 1,330.2 Other expenses758.3 631.5 1,536.5 1,355.4 Total store operating expenses$3,636.0$3,314.7$7,301.3$6,714.6 Note 7:Other Intangible Assets and GoodwillIndefinite-Lived Intangible Assets(in millions)Apr 2,2023Oct 2,2022Trade names,trademarks and patents$79.7$97.5 Finite-Lived Intangible AssetsApr 2,2023Oct 2,2022(in millions)Gross CarryingAmountAccumulatedAmortizationNet CarryingAmountGross CarryingAmountAccumulatedAmortizationNet CarryingAmountAcquired and reacquired rights$1,025.9$(1,025.9)$990.0$(990.0)$Acquired trade secrets and processes27.6(27.6)27.6(27.3)0.3 Trade names,trademarks and patents130.9(82.6)48.3 124.6(69.6)55.0 Licensing agreements18.4(15.6)2.8 19.3(16.2)3.1 Other finite-lived intangible assets21.3(21.3)20.6(20.6)Total finite-lived intangible assets$1,224.1$(1,173.0)$51.1$1,182.1$(1,123.7)$58.4 Amortization expense for finite-lived intangible assets was$5.3 million and$10.9 million for the quarter and two quarters ended April 2,2023,respectivelyand$49.2 million and$99.4 million for the quarter and two quarters ended April 3,2022,respectively.Estimated future amortization expense as of April 2,2023(in millions):Fiscal YearTotal2023(excluding the two quarters ended April 2,2023)$10.3 202420.5 202514.5 20261.8 20271.5 Thereafter2.5 Total estimated future amortization expense$51.1 GoodwillChanges in the carrying amount of goodwill by reportable operating segment(in millions):North AmericaInternationalChannel DevelopmentCorporate and OtherTotalGoodwill balance at October 2,2022$491.1$2,756.7$34.7$1.0$3,283.5 Other0.3 128.5 128.8 Goodwill balance at April 2,2023$491.4$2,885.2$34.7$1.0$3,412.3“Other”consists of changes in the goodwill balance resulting from foreign currency translation.(1)(1)18Table of ContentsNote 8:DebtRevolving Credit FacilityOur$3.0 billion unsecured five-year revolving credit facility(the“2021 credit facility”),of which$150 million may be used for issuances of letters of credit,iscurrently set to mature on September 16,2026.The 2021 credit facility is available for working capital,capital expenditures and other corporate purposes,including acquisitions and share repurchases.We have the option,subject to negotiation and agreement with the related banks,to increase the maximumcommitment amount by an additional$1.0 billion.Borrowings under the 2021 credit facility bear interest at a variable rate based on LIBOR,and,for U.S.dollar-denominated loans under certain circumstances,a Base Rate(as defined in the 2021 credit facility),in each case plus an applicable margin.The applicable margin is based on the Companys long-term creditratings assigned by the Moodys and Standard&Poors rating agencies.The 2021 credit facility contains alternative interest rate provisions specifying ratecalculations to be used at such time LIBOR ceases to be available as a benchmark due to reference rate reform.The“Base Rate”is the highest of(i)the FederalFunds Rate(as defined in the 2021 credit facility)plus 0.500%,(ii)Bank of Americas prime rate,and(iii)the Eurocurrency Rate(as defined in the 2021 creditfacility)plus 1.000%.On April 17,2023,Starbucks amended the 2021 credit facility to replace LIBOR with Term SOFR(Secured Overnight Financing Rate)as a successor rate.Allother material terms and conditions of the 2021 credit facility were unchanged.Borrowings under the amended 2021 credit facility will bear interest at avariable rate based on Term SOFR,and,for U.S.dollar-denominated loans under certain circumstances,a Base Rate(as defined in the 2021 credit facility),ineach case plus an applicable margin.The applicable margin is based on the Companys long-term credit ratings assigned by the Moodys and Standard&Poors rating agencies.The“Base Rate”is the highest of(i)the Federal Funds Rate(as defined in the 2021 credit facility)plus 0.500%,(ii)Bank of Americasprime rate,and(iii)Term SOFR plus 1.000%.Term SOFR means the forward-looking SOFR term rate administrated by the Chicago Mercantile Exchange plusa SOFR Adjustment of 0.100%.The 2021 credit facility contains provisions requiring us to maintain compliance with certain covenants,including a minimum fixed charge coverage ratio,which measures our ability to cover financing expenses.As of April 2,2023,we were in compliance with all applicable covenants.No amounts wereoutstanding under our 2021 credit facility as of April 2,2023 or October 2,2022.Short-term DebtUnder our commercial paper program,we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of$3.0billion,with individual maturities that may vary but not exceed 397 days from the date of issue.Amounts outstanding under the commercial paper program arerequired to be backstopped by available commitments under our 2021 credit facility.The proceeds from borrowings under our commercial paper program maybe used for working capital needs,capital expenditures and other corporate purposes,including,but not limited to,business expansion,payment of cashdividends on our common stock and share repurchases.As of April 2,2023,we had no borrowings outstanding under the program.As of October 2,2022,wehad$175.0 million in borrowings outstanding under this program.Additionally,we hold the following Japanese yen-denominated credit facilities that are available for working capital needs and capital expenditures within ourJapanese market:A 5 billion,or$37.7 million,credit facility is currently set to mature on January 4,2024.Borrowings under this credit facility are subject to termsdefined within the facility and will bear interest at a variable rate based on Tokyo Interbank Offered Rate(TIBOR)plus an applicable margin of0.400%.A 10 billion,or$75.4 million,credit facility is currently set to mature on March 27,2024.Borrowings under this credit facility are subject to termsdefined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.300%.As of April 2,2023,we had 7 billion,or$52.8 million,of borrowings outstanding under these credit facilities.As of October 2,2022,we had no borrowingsoutstanding under these credit facilities.19Table of ContentsLong-term DebtComponents of long-term debt including the associated interest rates and related estimated fair values by calendar maturity(in millions,except interest rates):Apr 2,2023Oct 2,2022Stated Interest RateEffective InterestRateIssuanceAmountEstimated FairValueAmountEstimated FairValueMarch 2023 notes$1,000.0$996.5 3.100%3.107%October 2023 notes750.0 746.4 750.0 744.8 3.850%2.859bruary 2024 notes500.0 497.0 500.0 497.3 5.147%5.378%March 2024 notes640.6 643.3 588.4 584.7 0.372%0.462%August 2025 notes1,250.0 1,230.2 1,250.0 1,209.6 3.800%3.721bruary 2026 notes1,000.0 1,008.8 4.750%4.788%June 2026 notes500.0 469.2 500.0 458.3 2.450%2.511%March 2027 notes500.0 455.1 500.0 437.9 2.000%2.058%March 2028 notes600.0 578.0 600.0 554.8 3.500%3.529%November 2028 notes750.0 731.6 750.0 704.7 4.000%3.958%August 2029 notes1,000.0 947.8 1,000.0 900.3 3.550%3.840%March 2030 notes750.0 647.3 750.0 607.7 2.250%3.084%November 2030 notes1,250.0 1,087.3 1,250.0 1,017.9 2.550%2.582bruary 2032 notes1,000.0 889.3 1,000.0 827.1 3.000%3.155bruary 2033 notes500.0 508.8 4.800%3.798%June 2045 notes350.0 310.3 350.0 281.5 4.300%4.348cember 2047 notes500.0 403.7 500.0 369.6 3.750%3.765%November 2048 notes1,000.0 905.5 1,000.0 824.6 4.500%4.504%August 2049 notes1,000.0 904.8 1,000.0 817.8 4.450%4.447%March 2050 notes500.0 374.2 500.0 342.0 3.350%3.362%November 2050 notes1,250.0 974.1 1,250.0 874.9 3.500%3.528%Total15,590.6 14,312.7 15,038.4 13,052.0 Aggregate debt issuance costs andunamortized premium/(discount),net(120.2)(117.2)Hedge accounting fair value adjustment(36.9)(52.3)Total$15,433.5$14,868.9 Includes the effects of the amortization of any premium or discount and any gain or loss upon settlement of related treasury locks or forward-startinginterest rate swaps utilized to hedge interest rate risk prior to the debt issuance.Amount includes the change in fair value due to changes in benchmark interest rates related to hedging our October 2023 notes and$350 million of ourAugust 2029 notes.Refer to Note 3,Derivative Financial Instruments,for additional information on our interest rate swaps designated as fair value hedges.Floating rate notes which bear interest at a rate equal to Compounded SOFR(as defined in the February 2024 notes)plus 0.420%,resulting in a statedinterest rate of 5.147%at April 2,2023.Japanese yen-denominated long-term debt.(1)(2)(3)(4)(2)(2)(1)(2)(3)(4)20Table of ContentsThe following table summarizes our long-term debt maturities as of April 2,2023 by fiscal year(in millions):Fiscal YearTotal2023$750.0 20241,140.6 20251,250.0 20261,500.0 2027500.0 Thereafter10,450.0 Total$15,590.6 Note 9:LeasesThe components of lease costs(in millions):Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Operating lease costs$401.7$393.4$786.5$779.5 Variable lease costs253.9 235.8 489.2 465.6 Short-term lease costs7.0 7.1 14.0 14.2 Total lease costs$662.6$636.3$1,289.7$1,259.3 Includes immaterial amounts of sublease income and rent concessions.The following table includes supplemental information(in millions):Two Quarters EndedApr 2,2023Apr 3,2022Cash paid related to operating lease liabilities$819.0$845.5 Operating lease liabilities arising from obtaining ROU assets828.0 710.6 Apr 2,2023Apr 3,2022Weighted-average remaining operating lease term8.5 years8.5 yearsWeighted-average operating lease discount rate2.9%2.5%Finance lease assets are recorded in property,plant and equipment,net with the corresponding lease liabilities included in accrued liabilities and other long-term liabilities on the consolidated balance sheet.There were no material finance leases as of April 2,2023 and October 2,2022.Minimum future maturities of operating lease liabilities(in millions):Fiscal YearTotal2023(excluding the two quarters ended April 2,2023)$771.8 20241,522.4 20251,432.2 20261,279.2 20271,090.0 Thereafter4,183.1 Total lease payments10,278.7 Less imputed interest(1,255.7)Total$9,023.0 As of April 2,2023,we have entered into operating leases that have not yet commenced of$1.3 billion,primarily related to real estate leases.These leases willcommence between fiscal year 2023 and fiscal year 2029 with lease terms ranging from three to twenty years.(1)(1)21Table of ContentsNote 10:Deferred RevenueOur deferred revenue primarily consists of the prepaid royalty from Nestl,for which we have continuing performance obligations to support the Global CoffeeAlliance,our unredeemed stored value card liability and unredeemed loyalty points(“Stars”)associated with our loyalty program.As of April 2,2023,the current and long-term deferred revenue related to Nestl was$177.0 million and$6.1 billion,respectively.As of October 2,2022,thecurrent and long-term deferred revenue related to the Nestl up-front payment was$177.0 million and$6.2 billion,respectively.During the quarter and twoquarters ended April 2,2023,we recognized$44.1 million and$88.2 million of prepaid royalty revenue related to Nestl.During the quarter and two quartersended April 3,2022,we recognized$44.2 million and$88.4 million of prepaid royalty revenue related to Nestl.Changes in our deferred revenue balance related to our stored value cards and loyalty program(in millions):Quarter Ended April 2,2023TotalStored value cards and loyalty program at January 1,2023$2,025.6 Revenue deferred-card activations,card reloads and Stars earned3,416.0 Revenue recognized-card and Stars redemptions and breakage(3,778.4)Other1.3 Stored value cards and loyalty program at April 2,2023$1,664.5 Quarter Ended April 3,2022TotalStored value cards and loyalty program at January 2,2022$1,952.5 Revenue deferred-card activations,card reloads and Stars earned3,124.0 Revenue recognized-card and Stars redemptions and breakage(3,426.3)Other(5.0)Stored value cards and loyalty program at April 3,2022$1,645.2 Two Quarters Ended April 2,2023TotalStored value cards and loyalty program at October 2,2022$1,503.0 Revenue deferred-card activations,card reloads and Stars earned7,639.4 Revenue recognized-card and Stars redemptions and breakage(7,492.5)Other14.6 Stored value cards and loyalty program at April 2,2023$1,664.5 Two Quarters Ended April 3,2022TotalStored value cards and loyalty program at October 3,2021$1,448.5 Revenue deferred-card activations,card reloads and Stars earned7,041.5 Revenue recognized-card and Stars redemptions and breakage(6,837.1)Other(7.7)Stored value cards and loyalty program at April 3,2022$1,645.2“Other”primarily consists of changes in the stored value cards and loyalty program balances resulting from foreign currency translation.As of April 2,2023 and April 3,2022,approximately$1.6 billion and$1.5 billion of these amounts were current,respectively.(1)(2)(1)(2)(1)(2)(1)(2)(1)(2)22Table of ContentsNote 11:EquityChanges in AOCI by component,net of tax(in millions):Quarter Ended Available-for-SaleDebt Securities Cash Flow Hedges Net InvestmentHedgesTranslationAdjustment andOtherTotalApril 2,2023Net gains/(losses)in AOCI,beginning of period$(13.9)$(34.9)$156.8$(646.9)$(538.9)Net gains/(losses)recognized in OCI beforereclassifications2.8(1.1)(2.0)74.7 74.4 Net(gains)/losses reclassified from AOCI to earnings0.2(52.1)(5.2)(57.1)Other comprehensive income/(loss)attributable toStarbucks3.0(53.2)(7.2)74.7 17.3 Net gains/(losses)in AOCI,end of period$(10.9)$(88.1)$149.6$(572.2)$(521.6)April 3,2022Net gains/(losses)in AOCI,beginning of period$(1.2)$224.6$77.1$(47.0)$253.5 Net gains/(losses)recognized in OCI beforereclassifications(7.9)52.9 28.5(38.5)35.0 Net(gains)/losses reclassified from AOCI to earnings0.1(25.8)(2.6)0.1(28.2)Other comprehensive income/(loss)attributable toStarbucks(7.8)27.1 25.9(38.4)6.8 Net gains/(losses)in AOCI,end of period$(9.0)$251.7$103.0$(85.4)$260.3 Two Quarters EndedAvailable-for-SaleDebt SecuritiesCash Flow HedgesNet InvestmentHedgesTranslationAdjustment andOtherTotalApril 2,2023Net gains/(losses)in AOCI,beginning of period$(15.5)$199.0$209.1$(855.8)$(463.2)Net gains/(losses)recognized in OCI beforereclassifications4.3(152.3)(50.3)283.6 85.3 Net(gains)/losses reclassified from AOCI to earnings0.3(134.8)(9.2)(143.7)Other comprehensive income/(loss)attributable toStarbucks4.6(287.1)(59.5)283.6(58.4)Net gains/(losses)in AOCI,end of period$(10.9)$(88.1)$149.6$(572.2)$(521.6)April 3,2022Net gains/(losses)in AOCI,beginning of period$1.5$158.3$48.6$(61.2)$147.2 Net gains/(losses)recognized in OCI beforereclassifications(10.5)129.8 59.5(24.3)154.5 Net(gains)/losses reclassified from AOCI to earnings(36.4)(5.1)0.1(41.4)Other comprehensive income/(loss)attributable toStarbucks(10.5)93.4 54.4(24.2)113.1 Net gains/(losses)in AOCI,end of period$(9.0)$251.7$103.0$(85.4)$260.3 23Table of ContentsImpact of reclassifications from AOCI on the consolidated statements of earnings(in millions):Quarter EndedAOCIComponentsAmounts Reclassified from AOCIAffected Line Item inthe Statements of EarningsApr 2,2023Apr 3,2022Gains/(losses)on available-for-sale debt securities$(0.3)$(0.2)Interest income and other,netGains/(losses)on cash flow hedges59.9 30.9 Please refer to Note 3,Derivative Financial Instrumentsfor additional information.Gains/(losses)on net investment hedges7.0 3.5 Interest expense66.6 34.2 Total before tax(9.5)(6.0)Tax expense$57.1$28.2 Net of taxTwo Quarters EndedAOCIComponentsAmounts Reclassified from AOCIAffected Line Item inthe Statements of EarningsApr 2,2023Apr 3,2022Gains/(losses)on available-for-sale debt securities$(0.4)$Interest income and other,netGains/(losses)on cash flow hedges153.1 43.4 Please refer to Note 3,Derivative Financial Instrumentsfor additional information.Gains/(losses)on net investment hedges12.3 6.9 Interest expense165.0 50.3 Total before tax(21.3)(8.9)Tax expense$143.7$41.4 Net of taxIn addition to 2.4 billion shares of authorized common stock with$0.001 par value per share,the Company has authorized 7.5 million shares of preferred stock,none of which was outstanding as of April 2,2023.During the two quarters ended April 2,2023 and April 3,2022,we repurchased 4.9 million and 36.3 million shares of common stock for$495.3 million and$4,013.0 million,respectively.As of April 2,2023,47.7 million shares remained available for repurchase under current authorizations.During the second quarter of fiscal 2023,our Board of Directors approved a quarterly cash dividend to shareholders of$0.53 per share to be paid on May 26,2023 to shareholders of record as of the close of business on May 12,2023.Note 12:Employee Stock PlansAs of April 2,2023,there were 92.3 million shares of common stock available for issuance pursuant to future equity-based compensation awards and 10.5million shares available for issuance under our employee stock purchase plan.Stock-based compensation expense recognized in the consolidated statements of earnings(in millions):Quarter EndedTwo Quarters Ended Apr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Restricted Stock Units(“RSUs”)$74.1$54.1$159.2$149.8 Options0.0(0.6)0.1(0.5)Total stock-based compensation expense$74.1$53.5$159.3$149.3 Stock option and RSU transactions from October 2,2022 through April 2,2023(in millions):Stock OptionsRSUsOptions outstanding/Nonvested RSUs,October 2,20224.1 7.0 Granted 4.1 Options exercised/RSUs vested(1.9)(2.7)Forfeited/expired(0.6)Options outstanding/Nonvested RSUs,April 2,20232.2 7.8 Total unrecognized stock-based compensation expense,net of estimated forfeitures,as of April 2,2023$278.5 24Table of ContentsNote 13:Earnings per ShareCalculation of net earnings per common share(“EPS”)basic and diluted(in millions,except EPS):Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Net earnings attributable to Starbucks$908.3$674.5$1,763.6$1,490.4 Weighted average common shares outstanding(for basiccalculation)1,148.5 1,149.2 1,148.4 1,159.4 Dilutive effect of outstanding common stock options andRSUs4.2 4.7 4.4 5.8 Weighted average common and common equivalent sharesoutstanding(for diluted calculation)1,152.7 1,153.9 1,152.8 1,165.2 EPS basic$0.79$0.59$1.54$1.29 EPS diluted$0.79$0.58$1.53$1.28 Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options(both vested and non-vested)andunvested RSUs,calculated using the treasury stock method.The calculation of dilutive shares outstanding excludes anti-dilutive stock options or unvestedRSUs,which were immaterial in the periods presented.Note 14:Commitments and ContingenciesLegal ProceedingsIn 2010 and 2011,an organization named Council for Education and Research on Toxics(“Plaintiff”)filed lawsuits in the Superior Court of the State ofCalifornia,County of Los Angeles,against the Company and other companies who manufacture,package,distribute or sell brewed coffee.The suits were laterconsolidated into a single action.Plaintiff alleged that the Company and the other defendants failed to provide warnings for their coffee products of exposure tothe chemical acrylamide as required under California Health and Safety Code section 25249.5,the California Safe Drinking Water and Toxic Enforcement Actof 1986,better known as Proposition 65.In 2020,the trial court granted defendants motion for summary judgment,which was affirmed by the CaliforniaCourt of Appeal.The California Supreme Court denied Plaintiffs petition for review on February 15,2023,concluding the matter.Starbucks is involved in various other legal proceedings arising in the ordinary course of business,including certain employment litigation cases that have beencertified as class or collective actions,but is not currently a party to any legal proceeding that management believes could have a material adverse effect on ourconsolidated financial position,results of operations or cash flows.Note 15:Segment ReportingSegment information is prepared on the same basis that our chief executive officer,who is our chief operating decision maker,manages the segments,evaluatesfinancial results and makes key operating decisions.Consolidated revenue mix by product type(in millions):Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Beverage$5,226.9 60%$4,599.0 60%$10,401.4 60%$9,497.4 60%Food1,590.9 18%1,364.3 18%3,157.0 18%2,798.9 18%Other1,902.0 22%1,672.3 22%3,875.4 22%3,389.7 22%Total$8,719.8 100%$7,635.6 100%$17,433.8 100%$15,686.0 100verage represents sales within our company-operated stores.Food includes sales within our company-operated stores.Other primarily consists of packaged and single-serve coffees and teas,royalty and licensing revenues,beverage-related ingredients,serveware and ready-to-drink beverages,among other items.(1)(2)(3)(1)(2)(3)25Table of ContentsThe tables below present financial information for our reportable operating segments and Corporate and Other segment(in millions):Quarter EndedNorth AmericaInternationalChannelDevelopmentCorporate andOtherTotalApril 2,2023Total net revenues$6,380.6$1,854.8$480.7$3.7$8,719.8 Depreciation and amortization expenses226.3 86.3 0.0 29.3 341.9 Income from equity investees 0.8 50.6 51.4 Operating income/(loss)1,217.9 314.7 262.1(467.2)1,327.5 April 3,2022Total net revenues$5,445.7$1,702.4$463.1$24.4$7,635.6 Depreciation and amortization expenses202.0 133.4 32.3 367.7 Income from equity investees 0.6 48.5 49.1 Operating income/(loss)931.5 180.7 197.9(361.2)948.9 Two Quarters EndedNorth AmericaInternationalChannelDevelopmentCorporate andOtherTotalApril 2,2023Total net revenues$12,931.8$3,534.9$958.9$8.2$17,433.8 Depreciation and amortization expenses443.1 167.7 0.1 58.1 669.0 Income from equity investees 1.2 108.0 109.2 Operating income/(loss)2,430.4 555.1 488.4(893.2)2,580.7 April 3,2022Total net revenues$11,178.0$3,578.4$880.1$49.5$15,686.0 Depreciation and amortization expenses402.1 266.5 65.2 733.8 Income from equity investees 1.3 88.1 89.4 Operating income/(loss)2,014.6 480.3 381.1(749.3)2,126.7 26Table of ContentsItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsCAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995Certain statements contained herein are“forward-looking”statements within the meaning of applicable securities laws and regulations.Generally,thesestatements can be identified by the use of words such as“aim,”“anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“feel,”“forecast,”“intend,”“may,”“outlook,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“will,”“would,”and similar expressions intended to identifyforward-looking statements,although not all forward-looking statements contain these identifying words.These statements include statements relating to trendsin,or expectations relating to,the effects of our existing and any future initiatives,strategies,investments and plans,including our Reinvention Plan,as well astrends in,or expectations regarding,our financial results and long-term growth model and drivers;our operations in the U.S.and China;our environmental,social and governance efforts;our partners;economic and consumer trends,including the impact of inflationary pressures;impact of foreign currencytranslation;strategic pricing actions;the conversion of certain market operations to fully licensed models;our plans for streamlining our operations,including store openings,closures and changes in store formats and models;the success of our licensing relationship with Nestl,of our consumer packagedgoods and foodservice business and its effects on our Channel Development segment results;tax rates;business opportunities,expansions and new initiatives,including Starbucks Odyssey;strategic acquisitions;our dividends programs;commodity costs and our mitigation strategies;our liquidity,cash flow fromoperations,investments,borrowing capacity and use of proceeds;continuing compliance with our covenants under our credit facilities and commercial paperprogram;repatriation of cash to the U.S.;the likelihood of the issuance of additional debt and the applicable interest rate;the continuing impact of theCOVID-19 pandemic or other public health events on our financial results;our ceo transition;our share repurchase program;our use of cash and cashrequirements;the expected effects of new accounting pronouncements and the estimated impact of changes in U.S.tax law,including on tax rates,investmentsfunded by these changes and potential outcomes;and effects of legal proceedings.Such statements are based on currently available operating,financial andcompetitive information and are subject to various risks and uncertainties.Actual future results and trends may differ materially depending on a variety offactors,including,but not limited to:the continuing impact of COVID-19 on our business;regulatory measures or voluntary actions that may be put in place tolimit the spread of COVID-19,including restrictions on business operations or social distancing requirements,and the duration and efficacy of suchrestrictions;the resurgence of COVID-19 infections and the circulation of novel variants of COVID-19;fluctuations in U.S.and international economies andcurrencies;our ability to preserve,grow and leverage our brands;the ability of our business partners and third-party providers to fulfill their responsibilitiesand commitments;potential negative effects of incidents involving food or beverage-borne illnesses,tampering,adulteration,contamination or mislabeling;potential negative effects of material breaches of our information technology systems to the extent we experience a material breach;material failures of ourinformation technology systems;costs associated with,and the successful execution of,the Companys initiatives and plans;new initiatives and plans orrevisions to existing initiatives or plans;our ability to obtain financing on acceptable terms;the acceptance of the Companys products by our customers,evolving consumer preferences and tastes and changes in consumer spending behavior;partner investments,changes in the availability and cost of laborincluding any union organizing efforts and our responses to such efforts;failure to attract or retain key executive or employee talent or successfully transitionexecutives;significant increased logistics costs;inflationary pressures;the impact of competition;inherent risks of operating a global business including anypotential negative effects stemming from the Russian invasion of Ukraine;the prices and availability of coffee,dairy and other raw materials;the effect oflegal proceedings;and the effects of changes in tax laws and related guidance and regulations that may be implemented,including the Inflation Reduction Actof 2022 and other risks detailed in our filings with the SEC,including in the Risk Factors”and“Managements Discussion and Analysis of FinancialCondition and Results of Operations”sections of the companys most recently filed periodic reports on Form 10-K and Form 10-Q and subsequent filings.A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances,and those future events or circumstances may not occur.You should not place undue reliance on the forward-looking statements,which speak only as of the date of this report.We are under no obligation to update oralter any forward-looking statements,whether as a result of new information,future events or otherwise.This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the auditedconsolidated financial statements and notes,and Managements Discussion and Analysis of Financial Condition and Results of Operations(“MD&A”),contained in the 10-K filed with the SEC on November 18,2022.Introduction and OverviewStarbucks is the premier roaster,marketer and retailer of specialty coffee in the world,operating in 84 markets.As of April 2,2023,Starbucks had more than36,600 company-operated and licensed stores,an increase of 6%from the prior year.Additionally,we sell a variety of consumer-packaged goods,primarilythrough the Global Coffee Alliance established with Nestl and other partnerships and joint ventures.27Table of ContentsWe have three reportable operating segments:1)North America,which is inclusive of the U.S.and Canada,2)International,which is inclusive of China,Japan,Asia Pacific,Europe,Middle East,Africa,Latin America and the Caribbean;and 3)Channel Development.Non-reportable operating segments and unallocatedcorporate expenses are reported within Corporate and Other.We believe our financial results and long-term growth model will continue to be driven by new store openings,comparable store sales growth and operatingmargin management,underpinned by disciplined capital allocation.We believe these key operating metrics are useful to investors because management usesthese metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies.Throughout this MD&A,we commonlydiscuss the following key operating metrics:New store openings and store countComparable store sales growthOperating marginComparable store sales growth represents the percentage change in sales in one period from the same prior year period for company-operated stores open for13 months or longer and exclude the impact of foreign currency translation.We analyze comparable store sales growth on a constant currency basis as thishelps identify underlying business trends,without distortion from the effects of currency movements.Stores that are temporarily closed or operating at reducedhours due to the COVID-19 pandemic remain in comparable store sales while stores identified for permanent closure have been removed.Our fiscal year ends on the Sunday closest to September 30.Fiscal 2023 and 2022 included 52 weeks.All references to store counts,including data for newstore openings,are reported net of store closures,unless otherwise noted.Starbucks results for the second quarter of fiscal 2023 demonstrate the overall strength of our brand.Consolidated net revenues increased 14%to$8.7 billion inthe second quarter of fiscal 2023 compared to$7.6 billion in the second quarter of fiscal 2022,primarily driven by strength in our U.S.business and growth inour international licensed markets and the beginning of a recovery from COVID-19 pandemic-related business interruptions in China.During the quarter endedApril 2,2023,our global comparable store sales grew 11%,primarily driven by 12%growth in the U.S.market and 7%growth internationally,as evidenced bythe strength of the Starbucks brand in global markets.Consolidated operating margin increased 280 basis points from the prior year to 15.2%,primarily drivenby sales leverage,pricing,productivity improvement and the gain from sale of our Seattles Best Coffee brand.These were partially offset by previously-committed investments in labor,including enhancements in retail store partner wages and benefits,increased general and administrative costs related to ourReinvention Plan and higher supply chain costs driven by inflationary pressures.We anticipate continued recovery in China,coupled with sales leverage,pricing and productivity gains from the Reinvention Plan,will position us to meet ourexpected financial results in the remainder of the fiscal year.Absent significant and prolonged COVID-19 relapses or global economic disruptions,we believeour strategy will result in sustainable and profitable growth over the long-term.Results of Operations(in millions)Revenues Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022$Change%ChangeApr 2,2023Apr 3,2022$Change%ChangeCompany-operated stores$7,142.3$6,276.7$865.6 13.8%$14,225.7$12,999.1$1,226.6 9.4%Licensed stores1,069.5 849.5 220.0 25.9 2,189.0 1,700.3 488.7 28.7 Other508.0 509.4(1.4)(0.3)1,019.1 986.6 32.5 3.3 Total net revenues$8,719.8$7,635.6$1,084.2 14.2%$17,433.8$15,686.0$1,747.8 11.1%For the quarter ended April 2,2023 compared with the quarter ended April 3,2022Total net revenues for the second quarter of fiscal 2023 increased$1.1 billion,primarily due to higher revenues from company-operated stores($866 million).The growth of company-operated stores revenue was driven by an 11%increase in comparable store sales($669 million),attributable to a 6%increase incomparable transactions and a 4%increase in average ticket.Also contributing was incremental revenues from 1,114 net new Starbucks company-operatedstores,or a 6%increase,over the past 12 months($312 million).Partially offsetting these increases was unfavorable foreign currency translation($163million).Licensed stores revenue increased$220 million contributing to the increase in total net revenues,driven by higher product and equipment sales to and royaltyrevenues from our licensees($233 million).Partially offsetting this increase was unfavorable foreign currency translation($21 million).28Table of ContentsFor the two quarters ended April 2,2023 compared with the two quarters ended April 3,2022Total net revenues for the first two quarters of fiscal 2023 increased$1.7 billion,primarily due to higher revenues from company-operated stores($1.2 billion).The growth of company-operated stores revenue was driven by a 8%increase in comparable store sales($1.0 billion)attributed to a 6%increase in averageticket and a 2%increase in transactions.Also contributing to the increase were incremental revenues from 1,114 net new Starbuckscompany-operated stores,or a 6%increase,over the past 12 months($571 million).Partially offsetting these increases was unfavorable foreign currency translation($388 million).Licensed stores revenue increased$489 million contributing to the increase in total net revenues,driven by higher product and equipment sales to and royaltyrevenues from our licensees($532 million).Partially offsetting this increase was unfavorable foreign currency translation($57 million).Other revenues increased$33 million,primarily due to higher product sales and royalty revenue in the Global Coffee Alliance($63 million),partially offset bythe absence of revenues from the Evolution Fresh business following its sale in the fourth quarter of fiscal 2022($37 million).Operating Expenses Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022As a%ofTotal Net RevenuesAs a%ofTotal Net RevenuesProduct and distributioncosts$2,801.7$2,465.8$335.9 32.12.3%$5,611.9$4,992.7$619.2 32.21.8%Store operating expenses3,636.0 3,314.7 321.3 41.7 43.4 7,301.3 6,714.6 586.7 41.9 42.8 Other operating expenses126.2 101.7 24.5 1.4 1.3 255.4 203.4 52.0 1.5 1.3 Depreciation andamortization expenses341.9 367.7(25.8)3.9 4.8 669.0 733.8(64.8)3.8 4.7 General andadministrative expenses620.4 481.5 138.9 7.1 6.3 1,201.3 1,007.3 194.0 6.9 6.4 Restructuring andimpairments8.8 4.4 4.4 0.1 0.1 14.7(3.1)17.8 0.1 0.0 Total operating expenses7,535.0 6,735.8 799.2 86.4 88.2,053.6 13,648.7 1,404.9 86.3 87.0 Income from equityinvestees51.4 49.1 2.3 0.6 0.6 109.2 89.4 19.8 0.6 0.6 Gain from sale of assets91.3 91.3 1.0 nm91.3 91.3 0.5 nmOperating income1,327.5 948.9 378.6 15.2 12.4%2,580.7 2,126.7 454.0 14.8 13.6 Store operating expenses as a%of company-operated stores revenue50.9R.8Q.3Q.7%For the quarter ended April 2,2023 compared with the quarter ended April 3,2022Product and distribution costs as a percentage of total net revenues decreased 20 basis points for the second quarter of fiscal 2023,primarily due to pricing(approximately 120 basis points),partially offset by higher supply chain costs driven by inflationary pressures(approximately 100 basis points).Store operating expenses as a percentage of total net revenues decreased 170 basis points for the second quarter of fiscal 2023.Store operating expenses as apercentage of company-operated stores revenue decreased 190 basis points,primarily due to sales leverage(approximately 260 basis points),pricing(approximately 160 basis points)and productivity improvement(approximately 160 basis points).These were partially offset by previously-committedinvestments in labor,including enhancements in retail store partner wages and benefits(approximately 340 basis points).Other operating expenses increased$25 million for the second quarter of fiscal 2023,primarily due to higher support costs for our growing licensed markets($9 million)and strategic investments in technology and other initiatives($6 million).29Table of ContentsDepreciation and amortization expenses as a percentage of total net revenues decreased 90 basis points,primarily due to lapping amortization expenses ofacquisition-related intangibles assets that are now fully amortized.General and administrative expenses increased$139 million,primarily due to incremental investments in technology($36 million),higher performance-basedcompensation($30 million),increased support costs of strategic initiatives including the Reinvention Plan($18 million),a donation to the StarbucksFoundation($15 million)and higher partner wages and benefits($13 million).Gain from sale of assets includes the sale of our Seattles Best Coffee brand to Nestl in the second quarter of fiscal 2023.The combination of these changes resulted in an overall increase in operating margin of 280 basis points for the second quarter of fiscal 2023.For the two quarters ended April 2,2023 compared with the two quarters ended April 3,2022Product and distribution costs as a percentage of total net revenues increased 40 basis points for the first two quarters of fiscal 2023,primarily due to highersupply chain costs driven by inflationary pressures(approximately 130 basis points)and business mix shift(approximately 60 basis points),partially offset bypricing(approximately 160 basis points).Store operating expenses as a percentage of total net revenues decreased 90 basis points for the first two quarters of fiscal 2023.Store operating expenses as apercentage of company-operated stores revenue decreased 40 basis points,primarily due to pricing(approximately 210 basis points),sales leverage(approximately 120 basis points)and productivity improvement(approximately 110 basis points).These were partially offset by previously-committedinvestments in labor,including enhancements in retail store partner wages and benefits(approximately 340 basis points).Other operating expenses increased$52 million for the first two quarters of fiscal 2023,primarily due to higher support costs for our growing licensed markets($17 million)and strategic investments in technology and other initiatives($13 million).Depreciation and amortization expenses as a percentage of total net revenues decreased 90 basis points,primarily due to lapping amortization expenses ofacquisition-related intangibles assets that are now fully amortized.General and administrative expenses increased$194 million,primarily due to incremental investments in technology($64 million),increased support costs toaddress labor market conditions and leadership training($28 million),higher performance-based compensation($24 million),increased support costs ofstrategic initiatives including the Reinvention Plan($24 million)and higher partner wages and benefits($20 million).Income from equity investees increased$20 million,primarily due to higher income from our North American Coffee Partnership joint venture.Gain from sale of assets includes the sale of our Seattles Best Coffee brand to Nestl in the second quarter of fiscal 2023.The combination of these changes resulted in an overall increase in operating margin of 120 basis points for the first two quarters of fiscal 2023.30Table of ContentsOther Income and Expenses Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022As a%of TotalNet RevenuesAs a%of TotalNet RevenuesOperating income$1,327.5$948.9$378.6 15.2.4%$2,580.7$2,126.7$454.0 14.8.6%Interest income and other,net18.4 46.3(27.9)0.2 0.6 30.0 46.2(16.2)0.2 0.3 Interest expense(136.3)(119.1)(17.2)(1.6)(1.6)(266.0)(234.4)(31.6)(1.5)(1.5)Earnings before incometaxes1,209.6 876.1 333.5 13.9 11.5 2,344.7 1,938.5 406.2 13.4 12.4 Income tax expense301.3 201.1 100.2 3.5 2.6 581.1 447.4 133.7 3.3 2.9 Net earnings includingnoncontrolling interests908.3 675.0 233.3 10.4 8.8 1,763.6 1,491.1 272.5 10.1 9.5 Net earningsattributable tononcontrolling interests 0.5(0.5)0.7(0.7)Net earningsattributable toStarbucks$908.3$674.5$233.8 10.4%8.8%$1,763.6$1,490.4$273.2 10.1%9.5fective tax rate includingnoncontrolling interests24.9#.0$.8#.1%For the quarter ended April 2,2023 compared with the quarter ended April 3,2022Interest income and other,net decreased$28 million,primarily due to lapping higher investment gains in the prior year.Interest expense increased$17 million,primarily due to additional interest incurred on floating rate debt.The effective tax rate for the quarter ended April 2,2023 was 24.9%compared to 23.0%for the same period in fiscal 2022.The increase was primarily due tolapping a beneficial return-to-provision adjustment recorded related to the divestiture of certain joint venture operations(approximately 260 basis points).For the two quarters ended April 2,2023 compared with the two quarters ended April 3,2022Interest income and other,net decreased$16 million,primarily due to lapping higher investment gains in the prior year.Interest expense increased$32 million,primarily due to additional interest incurred on floating rate debt.The effective tax rate for the first two quarters ended April 2,2023 was 24.8%compared to 23.1%for the same period in fiscal 2022.The increase wasprimarily due to lapping a beneficial return-to-provision adjustment recorded related to the divestiture of certain joint venture operations(approximately 120basis points)and a decrease in stock-based compensation excess tax benefits(approximately 80 basis points).31Table of ContentsSegment InformationResults of operations by segment(in millions):North America Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022As a%of North AmericaTotal Net RevenuesAs a%of North AmericaTotal Net RevenuesNet revenues:Company-operatedstores$5,742.7$4,936.3$806.4 90.0.6%$11,613.2$10,150.4$1,462.8 89.8.8%Licensed stores637.4 507.0 130.4 10.0 9.3 1,317.4 1,022.9 294.5 10.2 9.2 Other0.5 2.4(1.9)0.0 0.0 1.2 4.7(3.5)0.0 0.0 Total net revenues6,380.6 5,445.7 934.9 100.0 100.0 12,931.8 11,178.0 1,753.8 100.0 100.0 Product and distributioncosts1,821.7 1,564.0 257.7 28.6 28.7 3,739.3 3,193.4 545.9 28.9 28.6 Store operating expenses2,951.6 2,625.4 326.2 46.3 48.2 5,983.0 5,327.7 655.3 46.3 47.7 Other operating expenses63.4 47.1 16.3 1.0 0.9 128.9 95.3 33.6 1.0 0.9 Depreciation andamortization expenses226.3 202.0 24.3 3.5 3.7 443.1 402.1 41.0 3.4 3.6 General andadministrative expenses91.2 71.3 19.9 1.4 1.3 193.5 148.0 45.5 1.5 1.3 Restructuring andimpairments8.5 4.4 4.1 0.1 0.1 13.6(3.1)16.7 0.1 0.0 Total operating expenses5,162.7 4,514.2 648.5 80.9 82.9 10,501.4 9,163.4 1,338.0 81.2 82.0 Operating income$1,217.9$931.5$286.4 19.1.1%$2,430.4$2,014.6$415.8 18.8.0%Store operating expenses as a%ofcompany-operated stores revenue51.4S.2Q.5R.5%For the quarter ended April 2,2023 compared with the quarter ended April 3,2022RevenuesNorth America total net revenues for the second quarter of fiscal 2023 increased$935 million,or 17%,primarily due to a 12%increase in comparable storesales($584 million)driven by a 6%increase in transactions and a 5%increase in average ticket.Also contributing to these increases were the performance ofnet new company-operated store openings over the past 12 months($205 million)and higher product and equipment sales to and royalty revenues from ourlicensees($122 million).Operating MarginNorth America operating income for the second quarter of fiscal 2023 increased 31%to$1.2 billion,compared to$0.9 billion in the second quarter of fiscal2022.Operating margin increased 200 basis points to 19.1%,primarily due to pricing(approximately 320 basis points)and sales leverage(approximately 270basis points).Also contributing were productivity improvement(approximately 170 basis points)and lower COVID-19 pandemic related catastrophe pay forstore partners(approximately 120 basis points).These increases were partially offset by previously-committed investments in labor,including enhancements inretail store partner wages and benefits(approximately 360 basis points)and inflationary pressures on commodities and our supply chain(approximately 120basis points).32Table of ContentsFor the two quarters ended April 2,2023 compared with the two quarters ended April 3,2022RevenuesNorth America total net revenues for the first two quarters of fiscal 2023 increased$1.8 billion,or 16%,primarily due to a 11%increase in comparable storesales($1.1 billion)driven by a 7%increase in average ticket and a 4%increase in transactions.Also contributing to these increases were net new company-operated store openings over the past 12 months($388 million)and higher product and equipment sales to and royalty revenues from our licensees($282million).Operating MarginNorth America operating income for the first two quarters of fiscal 2023 increased 21%to$2.4 billion,compared to$2.0 billion for the same period in fiscal2022.Operating margin increased 80 basis points to 18.8%,primarily due to pricing(approximately 420 basis points)and sales leverage(approximately 230basis points).Also contributing was productivity improvement(approximately 120 basis points).These increases were partially offset by previously-committedinvestments in labor,including enhancements in retail store partner wages and benefits(approximately 380 basis points)and inflationary pressures oncommodities and our supply chain(approximately 170 basis points).International Quarter EndedTwo Quarters Ended Apr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022As a%of InternationalTotal Net RevenuesAs a%of InternationalTotal Net RevenuesNet revenues:Company-operatedstores$1,399.6$1,340.4$59.2 75.5x.7%$2,612.5$2,848.7$(236.2)73.9y.6%Licensed stores432.1 342.5 89.6 23.3 20.1 871.6 677.4 194.2 24.7 18.9 Other23.1 19.5 3.6 1.2 1.1 50.8 52.3(1.5)1.4 1.5 Total net revenues1,854.8 1,702.4 152.4 100.0 100.0 3,534.9 3,578.4(43.5)100.0 100.0 Product and distributioncosts632.9 580.5 52.4 34.1 34.1 1,226.5 1,196.4 30.1 34.7 33.4 Store operating expenses684.4 689.3(4.9)36.9 40.5 1,318.3 1,386.9(68.6)37.3 38.8 Other operating expenses49.9 39.5 10.4 2.7 2.3 100.6 78.7 21.9 2.8 2.2 Depreciation andamortization expenses86.3 133.4(47.1)4.7 7.8 167.7 266.5(98.8)4.7 7.4 General andadministrative expenses87.4 79.6 7.8 4.7 4.7 167.9 170.9(3.0)4.7 4.8 Total operating expenses1,540.9 1,522.3 18.6 83.1 89.4 2,981.0 3,099.4(118.4)84.3 86.6 Income from equityinvestees0.8 0.6 0.2 1.2 1.3(0.1)Operating income$314.7$180.7$134.0 17.0.6%$555.1$480.3$74.8 15.7.4%Store operating expenses as a%of company-operated stores revenue48.9Q.4P.5H.7%For the quarter ended April 2,2023 compared with the quarter ended April 3,2022RevenuesInternational total net revenues for the second quarter of fiscal 2023 increased$152 million,or 9%,primarily due to higher product and equipment sales to androyalty revenues from our licensees($111 million),721 net new company-operated store openings,or a 10%increase,over the past 12 months($107 million).Also contributing was a 7%increase in comparable store sales($85 million),driven by a 7%increase in customer transactions,primarily attributable tobusiness recovery from COVID-19 pandemic related disruptions in China.These increases were partially offset by unfavorable foreign currency translation($163 million).33Table of ContentsOperating MarginInternational operating income for the second quarter of fiscal 2023 increased 74%to$315 million,compared to$181 million in the second quarter of fiscal2022.Operating margin increased 640 basis points to 17.0%,primarily due to sales leverage(approximately 470 basis points)and lapping amortizationexpenses of acquisition-related intangibles assets that are now fully amortized(approximately 250 basis points).These decreases were partially offset by higherpartner wages and benefits(approximately 100 basis points).For the two quarters ended April 2,2023 compared with the two quarters ended April 3,2022RevenuesInternational total net revenues for the first two quarters of fiscal 2023 decreased$44 million,or 1%,primarily due to unfavorable foreign currency translation($399 million),as well as a 3cline in comparable store sales($85 million),driven by a 3crease in customer transactions primarily due to COVID-19pandemic related disruptions in China during the first quarter of fiscal 2023.These were partially offset by higher product and equipment sales to and royaltyrevenues from our licensees($250 million),as well as 721 net new company-operated store openings,or a 10%increase,over the past 12 months($183million).Operating MarginInternational operating income for the first two quarters of fiscal 2023 increased 16%to$555 million,compared to$480 million for the same period in fiscal2022.Operating margin increased 230 basis points to 15.7%,primarily due to lapping amortization expenses of acquisition-related intangibles assets that arenow fully amortized(approximately 240 basis points)and sales leverage across markets outside of China(approximately 190 basis points).These increaseswere partially offset by sales deleverage related to COVID-19 pandemic related impacts in our China market during the first quarter of fiscal 2023(approximately 160 basis points)and higher partner wages and benefits(approximately 100 basis points).34Table of ContentsChannel Development Quarter EndedTwo Quarters Ended Apr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022$ChangeApr 2,2023Apr 3,2022As a%of ChannelDevelopmentTotal Net RevenuesAs a%of ChannelDevelopmentTotal Net RevenuesNet revenues$480.7$463.1$17.6$958.9$880.1$78.8 Product and distribution costs345.6 300.5 45.1 71.9d.9c9.8 559.3 80.5 66.7c.5%Other operating expenses12.8 10.7 2.1 2.7 2.3 25.8 22.0 3.8 2.7 2.5 General and administrativeexpenses2.1 2.5(0.4)0.4 0.5 4.1 5.8(1.7)0.4 0.7 Total operating expenses360.5 313.7 46.8 75.0 67.7 669.8 587.1 82.7 69.9 66.7 Income from equity investees50.6 48.5 2.1 10.5 10.5 108.0 88.1 19.9 11.3 10.0 Gain from sale of assets91.3 91.3 19.0 nm91.3 91.3 9.5%nmOperating income$262.1$197.9$64.2 54.5B.7%$488.4$381.1$107.3 50.9C.3%For the quarter ended April 2,2023 compared with the quarter ended April 3,2022RevenuesChannel Development total net revenues for the second quarter of fiscal 2023 increased$18 million,or 4%,primarily due to higher Global Coffee Allianceproduct sales and royalty revenue($20 million).Operating MarginChannel Development operating income for the second quarter of fiscal 2023 increased 32%to$262 million,compared to$198 million in the second quarterof fiscal 2022.Operating margin increased 1,180 basis points to 54.5%,primarily due to the gain from sale of our Seattles Best Coffee brand(approximately1,900 basis points),partially offset by impairment charges against certain manufacturing assets(approximately 360 basis points).For the two quarters ended April 2,2023 compared with the two quarters ended April 3,2022RevenuesChannel Development total net revenues for the first two quarters of fiscal 2023 increased$79 million,or 9%,primarily due to higher Global Coffee Allianceproduct sales and royalty revenue($63 million)and growth in our global ready-to-drink business($27 million).Operating MarginChannel Development operating income for the first two quarters of fiscal 2023 increased 28%to$488 million,compared to$381 million for the same periodin fiscal 2022.Operating margin increased 760 basis points to 50.9%,primarily due to the gain from sale of our Seattles Best Coffee brand(approximately 950basis points)and growth in our North American Coffee Partnership joint venture income(approximately 110 basis points),partially offset by impairmentcharges against certain manufacturing assets(approximately 190 basis points)and business mix shift(approximately 160 basis points).35Table of ContentsCorporate and Other Quarter EndedTwo Quarters EndedApr 2,2023Apr 3,2022$Change%ChangeApr 2,2023Apr 3,2022$Change%ChangeNet revenues:Other$3.7$24.4$(20.7)(84.8)%$8.2$49.5$(41.3)(83.4)%Total net revenues3.7 24.4(20.7)(84.8)8.2 49.5(41.3)(83.4)Product and distribution costs1.5 20.8(19.3)(92.8)6.3 43.6(37.3)(85.6)Other operating expenses0.1 4.4(4.3)(97.7)0.1 7.4(7.3)(98.6)Depreciation and amortizationexpenses29.3 32.3(3.0)(9.3)58.1 65.2(7.1)(10.9)General and administrativeexpenses439.7 328.1 111.6 34.0 835.8 682.6 153.2 22.4 Restructuring and impairments0.3 0.3 nm1.1 1.1 nmTotal operating expenses470.9 385.6 85.3 22.1 901.4 798.8 102.6 12.8 Operating loss$(467.2)$(361.2)$(106.0)29.3%$(893.2)$(749.3)$(143.9)19.2%Corporate and Other primarily consists of our unallocated corporate expenses and Evolution Fresh,prior to its sale in the fourth quarter of fiscal 2022.Unallocated corporate expenses include corporate administrative functions that support the operating segments but are not specifically attributable to ormanaged by any segment and are not included in the reported financial results of the operating segments.For the quarter ended April 2,2023 compared with the quarter ended April 3,2022Corporate and Other operating loss increased by 29%to$467 million for the second quarter of fiscal 2023 compared to$361 million for the second quarter offiscal 2022.This increase was primarily driven by incremental investments in technology($34 million),higher performance-based compensation($25 million),increased support costs of strategic initiatives including the Reinvention Plan($18 million)and a donation to the Starbucks Foundation($15 million).For the two quarters ended April 2,2023 compared with the two quarters ended April 3,2022Corporate and Other operating loss increased by 19%to$893 million for the first two quarters of fiscal 2023 compared to$749 million for the same period infiscal 2022.This increase was primarily driven by incremental investments in technology($62 million),increased support costs of strategic initiativesincluding the Reinvention Plan($24 million),increased support costs to address labor market conditions($16 million),higher performance-basedcompensation($16 million)and a donation to the Starbucks Foundation($15 million).36Table of ContentsQuarterly Store DataOur store data for the periods presented is as follows:Net stores opened/(closed)and transferred during the period Quarter EndedTwo Quarters EndedStores open as ofApr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022Apr 2,2023Apr 3,2022North AmericaCompany-operated stores91 54 131 93 10,347 9,954 Licensed stores10(16)56 7 7,135 6,972 Total North America101 38 187 100 17,482 16,926 InternationalCompany-operated stores174 102 271 315 8,308 7,587 Licensed stores189 173 465 382 10,844 10,117 Total International363 275 736 697 19,152 17,704 Total Company464 313 923 797 36,634 34,630 Financial Condition,Liquidity and Capital ResourcesCash and Investment OverviewOur cash and investments totaled$3.7 billion as of April 2,2023 and$3.5 billion as of October 2,2022.We actively manage our cash and investments in orderto internally fund operating needs,make scheduled interest and principal payments on our borrowings,make acquisitions and return cash to shareholdersthrough common stock cash dividend payments and share repurchases.Our investment portfolio primarily includes highly liquid available-for-sale securities,including corporate debt securities,government treasury securities(foreign and domestic)and commercial paper as well as principal-protected structureddeposits.As of April 2,2023,approximately$2.6 billion of cash and short-term investment were held in foreign subsidiaries.Borrowing CapacityRevolving Credit FacilityOur$3.0 billion unsecured five-year revolving credit facility(the“2021 credit facility”),of which$150 million may be used for issuances of letters of credit,iscurrently set to mature on September 16,2026.The 2021 credit facility is available for working capital,capital expenditures and other corporate purposes,including acquisitions and share repurchases.We have the option,subject to negotiation and agreement with the related banks,to increase the maximumcommitment amount by an additional$1.0 billion.Borrowings under the 2021 credit facility bear interest at a variable rate based on LIBOR,and,for U.S.dollar-denominated loans under certain circumstances,a Base Rate(as defined in the 2021 credit facility),in each case plus an applicable margin.The applicable margin is based on the Companys long-term creditratings assigned by the Moodys and Standard&Poors rating agencies.The 2021 credit facility contains alternative interest rate provisions specifying ratecalculations to be used at such time LIBOR ceases to be available as a benchmark due to reference rate reform.The“Base Rate”is the highest of(i)the FederalFunds Rate(as defined in the 2021 credit facility)plus 0.500%,(ii)Bank of Americas prime rate and(iii)the Eurocurrency Rate(as defined in the 2021 creditfacility)plus 1.000%.On April 17,2023,Starbucks amended the 2021 credit facility to replace LIBOR with Term SOFR(Secured Overnight Financing Rate)as a successor rate.Allother material terms and conditions of the 2021 credit facility were unchanged.Borrowings under the amended 2021 credit facility will bear interest at avariable rate based on Term SOFR,and,for U.S.dollar-denominated loans under certain circumstances,a Base Rate(as defined in the 2021 credit facility),ineach case plus an applicable margin.The applicable margin is based on the Companys long-term credit ratings assigned by the Moodys and Standard&Poors rating agencies.The“Base Rate”is the highest of(i)the Federal Funds Rate(as defined in the 2021 credit facility)plus 0.500%,(ii)Bank of Americasprime rate,and(iii)Term SOFR plus 1.000%.Term SOFR means the forward-looking SOFR term rate administrated by the Chicago Mercantile Exchange plusa SOFR Adjustment of 0.100%.The 2021 credit facility contains provisions requiring us to maintain compliance with certain covenants,including a minimum fixed charge coverage ratio,which measures our ability to cover financing expenses.As of April 2,2023,we were in compliance with all applicable covenants.No amounts wereoutstanding under our 2021 credit facility as of April 2,2023 or October 2,2022.37Table of ContentsCommercial PaperUnder our commercial paper program,we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of$3.0billion,with individual maturities that may vary but not exceed 397 days from the date of issue.Amounts outstanding under the commercial paper program arerequired to be backstopped by available commitments under the 2021 credit facility discussed above.The proceeds from borrowings under our commercialpaper program may be used for working capital needs,capital expenditures and other corporate purposes,including,but not limited to,business expansion,payment of cash dividends on our common stock and share repurchases.As of April 2,2023,we had no borrowings outstanding under our commercial paperprogram.As of October 2,2022,we had$175.0 million in borrowings outstanding under this program.Our total contractual borrowing capacity for generalcorporate purposes was$3.0 billion as of the end of our second quarter of fiscal 2023.Credit facilities in JapanAdditionally,we hold Japanese yen-denominated credit facilities for the use of our Japan subsidiary.These are available for working capital needs and capitalexpenditures within our Japanese market.A 5 billion,or$37.7 million,credit facility is currently set to mature on January 4,2024.Borrowings under this credit facility are subject to termsdefined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.400%.A 10 billion,or$75.4 million,credit facility is currently set to mature on March 27,2024.Borrowings under this credit facility are subject to termsdefined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.300%.As of April 2,2023,we had 7 billion,or$52.8 million,of borrowings outstanding under these credit facilities.As of October 2,2022,we had no borrowingsoutstanding under these credit facilities.See Note 8,Debt,to the consolidated financial statements included in Item 1 of Part I of this 10-Q for details of the components of our long-term debt.Our ability to incur new liens and conduct sale and leaseback transactions on certain material properties is subject to compliance with terms of the indenturesunder which the long-term notes were issued.As of April 2,2023,we were in compliance with all applicable covenants.Use of CashWe expect to use our available cash and investments,including,but not limited to,additional potential future borrowings under the credit facilities,commercialpaper program and the issuance of debt to support and invest in our core businesses,including investing in new ways to serve our customers and supporting ourstore partners,repaying maturing debts,as well as returning cash to shareholders through common stock cash dividend payments and discretionary sharerepurchases and investing in new business opportunities related to our core and developing businesses.Furthermore,we may use our available cash resourcesto make proportionate capital contributions to our investees.We may also seek strategic acquisitions to leverage existing capabilities and further build ourbusiness.Acquisitions may include increasing our ownership interests in our investees.Any decisions to increase such ownership interests will be driven byvaluation and fit with our ownership strategy.We believe that net future cash flows generated from operations and existing cash and investments both domestically and internationally combined with ourability to leverage our balance sheet through the issuance of debt will be sufficient to finance capital requirements for our core businesses as well asshareholder distributions for at least the next 12 months.We are currently not aware of any trends or demands,commitments,events or uncertainties that willresult in,or that are reasonably likely to result in,our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyondthe next 12 months.We have borrowed funds and continue to believe we have the ability to do so at reasonable interest rates;however,additional borrowingswould result in increased interest expense in the future.In this regard,we may incur additional debt,within targeted levels,as part of our plans to fund ourcapital programs,including cash returns to shareholders through future dividends and discretionary share repurchases as well as investing in new businessopportunities.If necessary,we may pursue additional sources of financing,including both short-term and long-term borrowings and debt issuances.We regularly review our cash positions and our determination of indefinite reinvestment of foreign earnings.In the event we determine that all or a portion ofsuch foreign earnings are no longer indefinitely reinvested,we may be subject to additional foreign withholding taxes and U.S.state income taxes,which couldbe material.While we do not anticipate the need for repatriated funds to the U.S.to satisfy domestic liquidity requirements,any foreign earnings which are notindefinitely reinvested may be repatriated at managements discretion.During the second quarter of fiscal 2023,our Board of Directors approved a quarterly cash dividend to shareholders of$0.53 per share to be paid on May 26,2023 to shareholders of record as of the close of business on May 12,2023.38Table of ContentsDuring the first quarter of fiscal 2023,we resumed our share repurchase program which was temporarily suspended in April 2022.During the two quartersended April 2,2023,we repurchased 4.9 million shares of common stock for$495.3 million.As of April 2,2023,47.7 million shares remained available forrepurchase under current authorizations.Other than normal operating expenses,cash requirements for the remainder of fiscal 2023 are expected to consist primarily of capital expenditures forinvestments in our new and existing stores,our supply chain and corporate facilities.Total capital expenditures for fiscal 2023 are expected to be approximately$2.5 billion.In the MD&A included in the 10-K,we disclosed that we had$33.2 billion of current and long-term material cash requirements as of October 2,2022.Therehave been no material changes to our material cash requirements during the period covered by this 10-Q outside of the normal course of our business.Cash FlowsCash provided by operating activities was$2.
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-Q(Mark one)xTrueQUARTERLY.
2023-05-29
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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington,DC 20549Form 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31,2023ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission file number 001-34960GENERAL MOTORS COMPANY(Exact name of registrant as specified in its charter)Delaware27-0756180(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)300 Renaissance Center,Detroit,Michigan 48265-3000(Address of principal executive offices)(Zip Code)(313)667-1500(Registrants telephone number,including area code)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock,$0.01 par valueGMNew York Stock ExchangeIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 duringthe preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements forthe past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit suchfiles).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerginggrowth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and emerging growth company in Rule 12b-2of the Exchange Act.Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company If an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No As of April 14,2023 there were 1,390,123,499 shares of common stock outstanding.INDEX PagePART IItem 1.Condensed Consolidated Financial Statements1Condensed Consolidated Income Statements(Unaudited)1Condensed Consolidated Statements of Comprehensive Income(Unaudited)1Condensed Consolidated Balance Sheets(Unaudited)2Condensed Consolidated Statements of Cash Flows(Unaudited)3Condensed Consolidated Statements of Equity(Unaudited)4Notes to Condensed Consolidated Financial Statements5Note 1.Nature of Operations and Basis of Presentation5Note 2.Revenue6Note 3.Marketable and Other Securities7Note 4.GM Financial Receivables and Transactions8Note 5.Inventories11Note 6.Equipment on Operating Leases11Note 7.Equity in Net Assets of Nonconsolidated Affiliates12Note 8.Variable Interest Entities12Note 9.Debt13Note 10.Derivative Financial Instruments14Note 11.Product Warranty and Related Liabilities16Note 12.Pensions and Other Postretirement Benefits16Note 13.Commitments and Contingencies17Note 14.Income Taxes20Note 15.Restructuring and Other Initiatives20Note 16.Stockholders Equity and Noncontrolling Interests20Note 17.Earnings Per Share22Note 18.Stock Incentive Plans22Note 19.Segment Reporting22Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations25Item 3.Quantitative and Qualitative Disclosures About Market Risk41Item 4.Controls and Procedures42PART IIItem 1.Legal Proceedings43Item 1A.Risk Factors43Item 2.Unregistered Sales of Equity Securities and Use of Proceeds44Item 6.Exhibits45Signature46Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESPART IItem 1.Condensed Consolidated Financial StatementsCONDENSED CONSOLIDATED INCOME STATEMENTS(In millions,except per share amounts)(Unaudited)Three Months Ended March 31,2023March 31,2022Net sales and revenueAutomotive$36,646$32,824 GM Financial3,339 3,155 Total net sales and revenue(Note 2)39,985 35,979 Costs and expensesAutomotive and other cost of sales32,247 29,353 GM Financial interest,operating and other expenses2,612 1,926 Automotive and other selling,general and administrative expense2,547 2,504 Total costs and expenses37,407 33,783 Operating income(loss)2,578 2,196 Automotive interest expense234 226 Interest income and other non-operating income,net409 517 Equity income(loss)(Note 7)21 292 Income(loss)before income taxes2,775 2,779 Income tax expense(benefit)(Note 14)428(28)Net income(loss)2,346 2,807 Net loss(income)attributable to noncontrolling interests49 131 Net income(loss)attributable to stockholders$2,395$2,939 Net income(loss)attributable to common stockholders$2,369$1,987 Earnings per share(Note 17)Basic earnings per common share$1.70$1.36 Weighted-average common shares outstanding basic1,396 1,458 Diluted earnings per common share$1.69$1.35 Weighted-average common shares outstanding diluted1,402 1,470 Dividends declared per common share$0.09$CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In millions)(Unaudited)Three Months Ended March 31,2023March 31,2022Net income(loss)$2,346$2,807 Other comprehensive income(loss),net of tax(Note 16)Foreign currency translation adjustments and other148 340 Defined benefit plans(35)103 Other comprehensive income(loss),net of tax113 442 Comprehensive income(loss)2,460 3,250 Comprehensive loss(income)attributable to noncontrolling interests58 145 Comprehensive income(loss)attributable to stockholders$2,518$3,394 Reference should be made to the notes to condensed consolidated financial statements.Amounts may not add due to rounding.1Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(In millions,except per share amounts)(Unaudited)March 31,2023December 31,2022ASSETSCurrent AssetsCash and cash equivalents$18,227$19,153 Marketable debt securities(Note 3)9,981 12,150 Accounts and notes receivable,net of allowance of$261 and$26013,702 13,333 GM Financial receivables,net of allowance of$801 and$869(Note 4;Note 8 at VIEs)32,283 33,623 Inventories(Note 5)17,758 15,366 Other current assets(Note 3;Note 8 at VIEs)6,881 6,825 Total current assets98,832 100,451 Non-current AssetsGM Financial receivables,net of allowance of$1,351 and$1,227(Note 4;Note 8 at VIEs)43,582 40,591 Equity in net assets of nonconsolidated affiliates(Note 7)10,542 10,176 Property,net46,895 45,248 Goodwill and intangible assets,net4,968 4,945 Equipment on operating leases,net(Note 6;Note 8 at VIEs)31,848 32,701 Deferred income taxes20,676 20,539 Other assets(Note 3;Note 8 at VIEs)9,661 9,386 Total non-current assets168,173 163,586 Total Assets$267,004$264,037 LIABILITIES AND EQUITYCurrent LiabilitiesAccounts payable(principally trade)$28,931$27,486 Short-term debt and current portion of long-term debt(Note 9)Automotive425 1,959 GM Financial(Note 8 at VIEs)36,585 36,819 Accrued liabilities24,244 24,910 Total current liabilities90,185 91,173 Non-current LiabilitiesLong-term debt(Note 9)Automotive15,929 15,885 GM Financial(Note 8 at VIEs)61,482 60,036 Postretirement benefits other than pensions(Note 12)4,162 4,193 Pensions(Note 12)5,697 5,698 Other liabilities15,318 14,767 Total non-current liabilities102,588 100,579 Total Liabilities192,773 191,752 Commitments and contingencies(Note 13)Noncontrolling interest-Cruise stock incentive awards271 357 Equity(Note 16)Common stock,$0.01 par value14 14 Additional paid-in capital26,323 26,428 Retained earnings51,318 49,251 Accumulated other comprehensive loss(7,778)(7,901)Total stockholders equity69,877 67,792 Noncontrolling interests4,084 4,135 Total Equity73,961 71,927 Total Liabilities and Equity$267,004$264,037 Reference should be made to the notes to condensed consolidated financial statements.Amounts may not add due to rounding.2Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions)(Unaudited)Three Months EndedMarch 31,2023March 31,2022Cash flows from operating activitiesNet income(loss)$2,346$2,807 Depreciation and impairment of Equipment on operating leases,net1,241 1,223 Depreciation,amortization and impairment charges on Property,net1,571 1,668 Foreign currency remeasurement and transaction(gains)losses135 56 Undistributed earnings of nonconsolidated affiliates,net(61)(274)Pension contributions and OPEB payments(236)(213)Pension and OPEB income,net(20)(300)Provision(benefit)for deferred taxes46(81)Change in other operating assets and liabilities(1,936)(2,784)Net cash provided by(used in)operating activities3,086 2,104 Cash flows from investing activitiesExpenditures for property(2,431)(1,661)Available-for-sale marketable securities,acquisitions(643)(3,451)Available-for-sale marketable securities,liquidations2,947 1,960 Purchases of finance receivables,net(8,963)(8,189)Principal collections and recoveries on finance receivables7,282 6,845 Purchases of leased vehicles,net(3,154)(2,990)Proceeds from termination of leased vehicles3,264 3,732 Other investing activities(563)(154)Net cash provided by(used in)investing activities(2,262)(3,909)Cash flows from financing activitiesNet increase(decrease)in short-term debt(167)722 Proceeds from issuance of debt(original maturities greater than three months)11,487 10,685 Payments on debt(original maturities greater than three months)(12,127)(10,827)Payments to purchase common stock(369)Issuance(redemption)of subsidiary stock(Note 16)(2,124)Dividends paid(185)(73)Other financing activities(324)(235)Net cash provided by(used in)financing activities(1,685)(1,852)Effect of exchange rate changes on cash,cash equivalents and restricted cash54 93 Net increase(decrease)in cash,cash equivalents and restricted cash(807)(3,564)Cash,cash equivalents and restricted cash at beginning of period21,948 23,542 Cash,cash equivalents and restricted cash at end of period$21,141$19,978 Significant Non-cash Investing and Financing ActivityNon-cash property additions$3,041$1,931 Reference should be made to the notes to condensed consolidated financial statements.Amounts may not add due to rounding.3Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(In millions)(Unaudited)Common StockholdersNoncontrollingInterestsTotal Equity(PermanentEquity)NoncontrollingInterest Cruise Stock IncentiveAwards(Temporary Equity)CommonStockAdditionalPaid-inCapitalRetainedEarningsAccumulated OtherComprehensiveLossBalance at January 1,2022$15$27,061$41,937$(9,269)$6,071$65,815$Net income(loss)2,939 (131)2,807 Other comprehensive income(loss)456(13)442 Issuance(redemption)of subsidiary stock(Note 16)(909)(1,215)(2,124)Stock based compensation(31)(1)(32)289 Dividends to noncontrolling interests (12)(1)(14)Other(15)(74)(31)(120)Balance at March 31,2022$15$27,015$43,879$(8,814)$4,679$66,774$289 Balance at January 1,2023$14$26,428$49,251$(7,901)$4,135$71,927$357 Net income(loss)2,395 (49)2,346 Other comprehensive income(loss)123(9)113 Purchase of common stock(168)(201)(369)Stock based compensation(34)(2)(35)7 Cash dividends paid on common stock (126)(126)Other 97 7 103(93)Balance at March 31,2023$14$26,323$51,318$(7,778)$4,084$73,961$271 Reference should be made to the notes to condensed consolidated financial statements.Amounts may not add due to rounding.4Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNote 1.Nature of Operations and Basis of PresentationGeneral Motors Company(sometimes referred to in this Quarterly Report on Form 10-Q as we,our,us,ourselves,the Company,General Motors or GM)designs,builds and sells trucks,crossovers,cars and automobile parts and provides software-enabled services and subscriptions worldwide.Additionally,weare investing in and growing an autonomous vehicle(AV)business.We also provide automotive financing services through General Motors FinancialCompany,Inc.(GM Financial).We analyze the results of our operations through the following segments:GM North America(GMNA),GM International(GMI),Cruise,and GM Financial.Cruise is our global segment responsible for the development and commercialization of AV technology.Nonsegmentoperations are classified as Corporate.Corporate includes certain centrally recorded income and costs such as interest,income taxes,corporate expendituresand certain nonsegment-specific revenues and expenses.The condensed consolidated financial statements are prepared in conformity with U.S.GAAP pursuant to the rules and regulations of the Securities andExchange Commission(SEC)for interim financial information.Accordingly,they do not include all of the information and notes required by U.S.GAAPfor complete financial statements.The condensed consolidated financial statements include all adjustments,which consist of normal recurring adjustmentsand transactions or events discretely impacting the interim periods,considered necessary by management to fairly state our results of operations,financialposition and cash flows.The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim periodor for the full year.These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements andnotes thereto included in our 2022 Form 10-K.Except for per share amounts or as otherwise specified,amounts presented within tables are stated inmillions.Certain columns and rows may not add due to rounding.Throughout this report,we refer to General Motors Company and its consolidated subsidiaries in a simplified manner and on a collective basis,usingwords like we,our,us and the Company.This drafting style is suggested by the SEC and is not meant to indicate that General Motors Company,thepublicly traded parent company,or any particular subsidiary of the parent company,owns or operates any particular asset,business or property.Theoperations and businesses described in this report are owned and operated by distinct subsidiaries of General Motors Company.Principles of Consolidation We consolidate entities that we control due to ownership of a majority voting interest and we consolidate variable interestentities(VIEs)when we are the primary beneficiary.All intercompany balances and transactions are eliminated in consolidation.Our share of earnings orlosses of nonconsolidated affiliates is included in our consolidated operating results using the equity method of accounting when we are able to exercisesignificant influence over the operating and financial decisions of the affiliate.GM Financial The amounts presented for GM Financial are adjusted to reflect the impact on GM Financials deferred tax positions and provision forincome taxes resulting from the inclusion of GM Financial in our consolidated tax return and to eliminate the effect of transactions between GM Financialand the other members of the consolidated group.Accordingly,the amounts presented will differ from those presented by GM Financial on a stand-alonebasis.5Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 2.RevenueThe following table disaggregates our revenue by major source:Three Months Ended March 31,2023GMNAGMICorporateTotalAutomotiveCruiseGMFinancialEliminations/ReclassificationsTotalVehicle,parts and accessories$31,876$3,342$9$35,227$35,227 Used vehicles175 5 180 180 Services and other837 380 22 1,239 25 (25)1,239 Automotive net sales and revenue32,889 3,727 31 36,646 25 (25)36,646 Leased vehicle income 1,818 1,818 Finance charge income 1,368(3)1,366 Other income 156(1)155 GM Financial net sales and revenue 3,343(4)3,339 Net sales and revenue$32,889$3,727$31$36,646$25$3,343$(29)$39,985 Three Months Ended March 31,2022GMNAGMICorporateTotalAutomotiveCruiseGMFinancialEliminations/ReclassificationsTotalVehicle,parts and accessories$28,572$3,014$5$31,591$31,591 Used vehicles75 5 80 80 Services and other809 295 48 1,152 26 (25)1,153 Automotive net sales and revenue29,456 3,313 53 32,823 26 (25)32,824 Leased vehicle income 2,066 2,066 Finance charge income 1,010 1,010 Other income 80(1)79 GM Financial net sales and revenue 3,156(1)3,155 Net sales and revenue$29,456$3,313$53$32,823$26$3,156$(26)$35,979 Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.Adjustments to salesincentives for previously recognized sales increased revenue by an insignificant amount in the three months ended March 31,2023 and 2022.Contract liabilities in our Automotive segments primarily consist of maintenance,extended warranty and other service contracts of$4.0 billion and$3.3 billion at March 31,2023 and December 31,2022,which are included in Accrued liabilities and Other liabilities.We recognized revenue of$408million and$444 million related to contract liabilities in the three months ended March 31,2023 and 2022.We expect to recognize revenue of$1.2 billionin the nine months ending December 31,2023 and$989 million,$750 million and$1.1 billion in the years ending December 31,2024,2025 and thereafterrelated to contract liabilities at March 31,2023.6Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 3.Marketable and Other SecuritiesThe following table summarizes the fair value of cash equivalents and marketable debt securities,which approximates cost:Fair ValueLevelMarch 31,2023December 31,2022Cash and cash equivalentsCash and time deposits$9,521$8,921 Available-for-sale debt securitiesU.S.government and agencies2126 1,012 Corporate debt21,712 2,778 Sovereign debt2823 1,828 Total available-for-sale debt securities cash equivalents2,661 5,618 Money market funds16,045 4,613 Total cash and cash equivalents(a)$18,227$19,153 Marketable debt securitiesU.S.government and agencies2$4,174$4,357 Corporate debt24,375 5,147 Mortgage and asset-backed2552 538 Sovereign debt2880 2,108 Total available-for-sale debt securities marketable securities(b)$9,981$12,150 Restricted cashCash and cash equivalents$335$341 Money market funds12,579 2,455 Total restricted cash$2,914$2,796 Available-for-sale debt securities included above with contractual maturities(c)Due in one year or less$6,079 Due between one and five years5,901 Total available-for-sale debt securities with contractual maturities$11,979 _(a)Includes$1.9 billion and$1.5 billion in Cruise at March 31,2023 and December 31,2022.(b)Includes$612 million and$1.4 billion in Cruise at March 31,2023 and December 31,2022.(c)Excludes mortgage and asset-backed securities of$552 million at March 31,2023 as these securities are not due at a single maturity date.Proceeds from the sale of available-for-sale debt securities sold prior to maturity were$380 million and$464 million in the three months ended March 31,2023 and 2022.Net unrealized gains and losses on available-for-sale debt securities were insignificant in the three months ended March 31,2023 and 2022.Cumulative unrealized losses on available-for-sale debt securities were$275 million and$344 million at March 31,2023 and December 31,2022.The following table provides a reconciliation of cash,cash equivalents and restricted cash reported within the condensed consolidated balance sheets tothe total shown in the condensed consolidated statement of cash flows:March 31,2023Cash and cash equivalents$18,227 Restricted cash included in Other current assets2,467 Restricted cash included in Other assets447 Total$21,141 7Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 4.GM Financial Receivables and TransactionsMarch 31,2023December 31,2022RetailCommercial(a)TotalRetailCommercial(a)TotalGM Financial receivables,net of fees$67,704$10,313$78,017$65,322$10,988$76,310 Less:allowance for loan losses(2,123)(29)(2,152)(2,062)(34)(2,096)GM Financial receivables,net$65,581$10,283$75,865$63,260$10,954$74,214 Fair value of GM Financial receivables utilizing Level 2inputs$10,283$10,954 Fair value of GM Financial receivables utilizing Level 3inputs$65,165$62,150 _(a)Net of dealer cash management balances of$2.2 billion and$1.9 billion at March 31,2023 and December 31,2022.Under the cash management program,subject tocertain conditions,a dealer may choose to reduce the amount of interest on its floorplan line by making principal payments to GM Financial in advance.Three Months EndedMarch 31,2023March 31,2022Allowance for loan losses at beginning of period$2,096$1,886 Provision for loan losses131 122 Charge-offs(322)(275)Recoveries187 177 Effect of foreign currency and other61 18 Allowance for loan losses at end of period$2,152$1,928 Retail Finance Receivables GM Financials retail finance receivable portfolio includes loans made to consumers and businesses to finance the purchaseof vehicles for personal and commercial use.The following tables are consolidated summaries of the retail finance receivables by FICO score or itsequivalent,determined at origination,for each vintage of the retail finance receivables portfolio at March 31,2023 and December 31,2022:Year of OriginationMarch 31,202320232022202120202019PriorTotalPercentPrime FICO score 680 and greater$6,996$20,633$12,223$7,149$1,915$914$49,829 73.6%Near-prime FICO score 620 to 679832 3,012 2,389 1,345 599 322 8,498 12.6%Sub-prime FICO score less than 620835 3,054 2,525 1,443 916 603 9,377 13.8%Retail finance receivables,net of fees$8,663$26,699$17,138$9,936$3,429$1,839$67,704 100.0%Year of OriginationDecember 31,202220222021202020192018PriorTotalPercentPrime FICO score 680 and greater$22,677$13,399$7,991$2,254$1,019$205$47,543 72.8%Near-prime FICO score 620 to 6793,202 2,601 1,487 688 310 104 8,392 12.8%Sub-prime FICO score less than 6203,211 2,746 1,604 1,051 496 280 9,388 14.4%Retail finance receivables,net of fees$29,090$18,745$11,081$3,992$1,824$589$65,322 100.0%8Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)GM Financial reviews the ongoing credit quality of retail finance receivables based on customer payment activity.A retail account is considereddelinquent if a substantial portion of a scheduled payment has not been received by the date the payment was contractually due.Retail finance receivablesare collateralized by vehicle titles and,subject to local laws,GM Financial generally has the right to repossess the vehicle in the event the customer defaultson the payment terms of the contract.The accrual of finance charge income had been suspended on delinquent retail finance receivables with contractualamounts due of$585 million and$685 million at March 31,2023 and December 31,2022.The following tables are consolidated summaries of theamortized cost of retail finance receivables by delinquency status,for each vintage of the portfolio at March 31,2023 and December 31,2022,as well assummary totals for March 31,2022:Year of OriginationMarch 31,2023March 31,202220232022202120202019PriorTotalPercentTotalPercent0-to-30 days$8,646$26,262$16,648$9,640$3,236$1,676$66,109 97.6%$58,179 97.81-to-60 days17 316 363 222 146 124 1,188 1.83 1.7%Greater-than-60 days1 104 112 68 43 36 363 0.502 0.5%Finance receivables morethan 30 days delinquent17 420 475 290 190 160 1,551 2.3%1,285 2.2%In repossession 17 15 6 3 2 44 0.19 0.1%Finance receivables morethan 30 days delinquent orin repossession17 437 489 296 193 162 1,595 2.4%1,324 2.2%Retail finance receivables,net of fees$8,663$26,699$17,138$9,936$3,429$1,839$67,704 100.0%$59,503 100.0%Year of OriginationDecember 31,202220222021202020192018PriorTotalPercent0-to-30 days$28,676$18,128$10,702$3,743$1,685$493$63,426 97.11-to-60 days310 452 275 184 103 69 1,393 2.1%Greater-than-60 days93 150 98 62 35 26 465 0.7%Finance receivables more than30 days delinquent403 603 373 246 138 95 1,857 2.8%In repossession11 14 6 4 2 1 39 0.1%Finance receivables more than30 days delinquent or inrepossession414 617 380 249 140 96 1,896 2.9%Retail finance receivables,netof fees$29,090$18,745$11,081$3,992$1,824$589$65,322 100.0%Commercial Finance Receivables GM Financials commercial finance receivables consist of dealer financings,primarily for inventory purchases.Proprietary models are used to assign a risk rating to each dealer.GM Financial performs periodic credit reviews of each dealership and adjusts thedealerships risk rating,if necessary.There were no commercial finance receivables on nonaccrual status at March 31,2023.9Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)GM Financials commercial risk model and risk rating categories are as follows:RatingDescriptionIPerforming accounts with strong to acceptable financial metrics with at least satisfactory capacity to meet financial commitments.IIPerforming accounts experiencing potential weakness in financial metrics and repayment prospects resulting in increased monitoring.IIINon-Performing accounts with inadequate paying capacity for current obligations and have the distinct possibility of creating a loss ifdeficiencies are not corrected.IVNon-Performing accounts with inadequate paying capacity for current obligations and inherent weaknesses that make collection ofliquidation in full highly questionable or improbable.Dealers with III and IV risk ratings are subject to additional monitoring and restrictions on funding,including suspension of lines of credit and liquidationof assets.The following tables summarize the credit risk profile by dealer risk rating of commercial finance receivables at March 31,2023 and December31,2022:Year of Origination(a)March 31,2023Revolving20232022202120202019PriorTotalPercentI$8,823$71$435$336$338$87$42$10,133 98.3%II94 1 96 0.9%III59 15 10 84 0.8%IV%Commercial finance receivables,net of fees$8,976$71$450$338$338$97$42$10,313 100.0%_(a)Floorplan advances comprise 96%of the total revolving balance.Dealer term loans are presented by year of origination.Year of Origination(a)December 31,2022Revolving20222021202020192018PriorTotalPercentI$9,493$438$356$360$91$38$18$10,794 98.2%II89 1 91 0.8%III78 15 10 104 0.9%IV%Commercial finance receivables,net of fees$9,660$453$357$360$102$38$18$10,988 100.0%_(a)Floorplan advances comprise 97%of the total revolving balance.Dealer term loans are presented by year of origination.Transactions with GM Financial The following table shows transactions between our Automotive segments and GM Financial.These amounts arepresented in GM Financials condensed consolidated balance sheets and statements of income.March 31,2023December 31,2022Condensed Consolidated Balance Sheets(a)Commercial finance receivables,net due from GM consolidated dealers$163$187 Receivables from Cruise$151$113 Subvention receivable(b)$594$469 Commercial loan funding payable$72$105 10Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Three Months EndedMarch 31,2023March 31,2022Condensed Consolidated Statements of IncomeInterest subvention earned on finance receivables$279$221 Leased vehicle subvention earned$393$547 _(a)All balance sheet amounts are eliminated upon consolidation.(b)Our Automotive segments made cash payments to GM Financial for subvention of$749 million and$439 million in the three months ended March 31,2023 and 2022.GM Financials Board of Directors declared and paid dividends of$450 million on its common stock in the three months ended March 31,2023.Note 5.InventoriesMarch 31,2023December 31,2022Total productive material,supplies and work in process$8,822$8,014 Finished product,including service parts8,935 7,353 Total inventories$17,758$15,366 Note 6.Equipment on Operating LeasesEquipment on operating leases consists of leases to retail customers of GM Financial.March 31,2023December 31,2022Equipment on operating leases$39,991$40,919 Less:accumulated depreciation(8,143)(8,218)Equipment on operating leases,net$31,848$32,701 The estimated residual value of our leased assets at the end of the lease term was$24.1 billion and$24.7 billion at March 31,2023 and December 31,2022.Depreciation expense related to Equipment on operating leases,net was$1.2 billion in the three months ended March 31,2023 and 2022.The following table summarizes lease payments due to GM Financial on leases to retail customers:Year Ending December 31,20232024202520262027ThereafterTotalLease receipts under operating leases$3,807$3,293$1,505$243$8$8,855 11Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 7.Equity in Net Assets of Nonconsolidated AffiliatesNonconsolidated affiliates are entities in which we maintain an equity ownership interest and for which we use the equity method of accounting due toour ability to exert significant influence over decisions relating to their operating and financial affairs.Revenue and expenses of our joint ventures are notconsolidated into our financial statements;rather,our proportionate share of the earnings of each joint venture is reflected as Equity income(loss)orAutomotive and other cost of sales.Three Months EndedMarch 31,2023March 31,2022Automotive China equity income(loss)$83$234 Other joint ventures equity income(loss)(a)(8)59 Total Equity income(loss)$75$292 _(a)Equity earnings related to Ultium Cells Holdings LLC are presented in Automotive and other cost of sales as this entity is integral to the operations of our business byproviding battery cells for our electric vehicles(EVs).In the three months ended March 31,2023,equity earnings related to Ultium Cells Holdings LLC wereinsignificant.There have been no significant ownership changes in our Automotive China joint ventures(Automotive China JVs)since December 31,2022.Three Months EndedMarch 31,2023March 31,2022Summarized Operating Data of Automotive China JVsAutomotive China JVs net sales$5,833$8,992 Automotive China JVs net income(loss)$123$505 Dividends declared but not paid from our nonconsolidated affiliates were insignificant at March 31,2023 and December 31,2022.Dividends receivedfrom our nonconsolidated affiliates were insignificant in the three months ended March 31,2023 and 2022.Undistributed earnings from ournonconsolidated affiliates were$2.0 billion and$1.9 billion at March 31,2023 and December 31,2022.Note 8.Variable Interest EntitiesConsolidated VIEsAutomotive Financing GM FinancialGM Financial uses special purpose entities(SPEs)that are considered VIEs to issue variable funding notes to third party,bank-sponsored warehousefacilities or asset-backed securities to investors in securitization transactions.The debt issued by these VIEs is backed by finance receivables and leasing-related assets transferred to the VIEs(Securitized Assets).GM Financial determined that it is the primary beneficiary of the SPEs because the servicingresponsibilities for the Securitized Assets give GM Financial the power to direct the activities that most significantly impact the performance of the VIEsand the variable interests in the VIEs give GM Financial the obligation to absorb losses and the right to receive residual returns that could potentially besignificant.The assets of the VIEs serve as the sole source of repayment for the debt issued by these entities.Investors in the notes issued by the VIEs donot have recourse to GM Financial or its other assets,with the exception of customary representation and warranty repurchase provisions and indemnitiesthat GM Financial provides as the servicer.GM Financial is not required to provide additional financial support to these SPEs.While these subsidiaries areincluded in GM Financials condensed consolidated financial statements,they are separate legal entities and the finance receivables,lease-related assets andcash held by them are legally owned by them and are not available to GM Financials creditors or creditors of GM Financials other subsidiaries.12Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)The following table summarizes the assets and liabilities related to GM Financials consolidated VIEs:March 31,2023December 31,2022Restricted cash current$2,271$2,176 Restricted cash non-current$367$360 GM Financial receivables,net of fees current$17,968$19,896 GM Financial receivables,net of fees non-current$20,031$18,748 GM Financial equipment on operating leases,net$16,414$18,456 GM Financial short-term debt and current portion of long-term debt$19,903$21,643 GM Financial long-term debt$21,410$20,545 GM Financial recognizes finance charge,leased vehicle and fee income on the Securitized Assets and interest expense on the secured debt issued in asecuritization transaction and records a provision for loan losses to recognize loan losses expected over the remaining life of the finance receivables.Nonconsolidated VIEsAutomotiveNonconsolidated VIEs principally include automotive related operating entities to which we provided financial support to ensure that our supply needs forproduction are met or are not disrupted.Our variable interests in these nonconsolidated VIEs include equity investments,accounts and loans receivable,committed financial support and other off-balance sheet arrangements.The carrying amounts of assets were approximately$1.9 billion and$1.6 billion andliabilities were insignificant related to our nonconsolidated VIEs at March 31,2023 and December 31,2022.Our maximum exposure to loss as a result ofour involvement with these VIEs was approximately$3.3 billion,inclusive of approximately$1.2 billion and$1.4 billion in committed capital contributionsto Ultium Cells Holdings LLC,at March 31,2023 and December 31,2022.Our maximum exposure to loss,and required capital contributions,could varydepending on Ultium Cells Holdings LLCs requirements and access to capital.We currently lack the power through voting or similar rights to direct theactivities of these entities that most significantly affect their economic performance.Note 9.DebtAutomotive The following table presents debt in our automotive operations:March 31,2023December 31,2022Carrying AmountFair ValueCarrying AmountFair ValueSecured debt$134$134$124$123 Unsecured debt(a)15,799 15,171 17,340 16,323 Finance lease liabilities421 429 381 381 Total automotive debt(b)$16,354$15,734$17,844$16,828 Fair value utilizing Level 1 inputs$14,837$15,971 Fair value utilizing Level 2 inputs$897$857 Available under credit facility agreements(c)$13,526$15,095 Weighted-average interest rate on outstanding short-term debt(d)9.5%6.1%Weighted-average interest rate on outstanding long-term debt(d)5.8%5.8%_(a)Primarily consists of senior notes.(b)Includes net discount and debt issuance costs of$531 million and$525 million at March 31,2023 and December 31,2022.(c)Excludes our 364-day,$2.0 billion facility allocated for exclusive use by GM Financial.(d)Includes coupon rates on debt denominated in various foreign currencies and interest free loans.13Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)In March 2023,we redeemed our$1.5 billion,4.875%senior unsecured notes with a maturity date of October 2023 and recorded an insignificant loss.Also,in March 2023,we renewed and reduced the total borrowing capacity of our five-year,$11.2 billion facility to$10.0 billion,which now maturesMarch 31,2028.We also renewed and reduced the total borrowing capacity of our three-year,$4.3 billion facility to$4.1 billion,which now matures March31,2026,and renewed our 364-day,$2.0 billion revolving credit facility allocated for the exclusive use of GM Financial,which now matures March 30,2024.The renewed credit facilities are based on Term Secured Overnight Financing Rate(Term SOFR)whereas the previous credit facilities were based onthe London Interbank Offered Rate(LIBOR).GM Financial The following table presents debt of GM Financial:March 31,2023December 31,2022Carrying AmountFair ValueCarrying AmountFair ValueSecured debt$41,253$40,773$42,131$41,467 Unsecured debt56,814 55,009 54,723 52,270 Total GM Financial debt$98,067$95,782$96,854$93,738 Fair value utilizing Level 2 inputs$93,799$91,545 Fair value utilizing Level 3 inputs$1,983$2,192 Secured debt consists of revolving credit facilities and securitization notes payable.Most of the secured debt was issued by VIEs and is repayable onlyfrom proceeds related to the underlying pledged assets.Refer to Note 8 to our condensed consolidated financial statements for additional information onGM Financials involvement with VIEs.In the three months ended March 31,2023,GM Financial renewed revolving credit facilities with total borrowingcapacity of$1.8 billion and issued$5.1 billion in aggregate principal amount of securitization notes payable with an initial weighted-average interest rateof 5.25%and maturity dates ranging from 2027 to 2032.Unsecured debt consists of senior notes,credit facilities and other unsecured debt.In the three months ended March 31,2023,GM Financial issued$3.2billion in aggregate principal amount of senior notes with an initial weighted-average interest rate of 5.41%and maturity dates ranging from 2026 to 2033.Note 10.Derivative Financial InstrumentsAutomotive The following table presents the notional amounts of derivative financial instruments in our automotive operations:Fair ValueLevelMarch 31,2023December 31,2022Derivatives not designated as hedges(a)Foreign currency2$3,176$4,072 Commodity2901 1,075 Total derivative financial instruments$4,077$5,148 _(a)The fair value of these derivative instruments at March 31,2023 and December 31,2022 and the gains/losses included in our condensed consolidated income statementsfor the three months ended March 31,2023 and 2022 were insignificant,unless otherwise noted.14Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)GM Financial The following table presents the gross fair value amounts of GM Financials derivative financial instruments and the associated notionalamounts:Fair ValueLevelMarch 31,2023December 31,2022NotionalFair Value ofAssetsFair Value ofLiabilitiesNotionalFair Value ofAssetsFair Value ofLiabilitiesDerivatives designated as hedges(a)Fair value hedgesInterest rate swaps2$16,559$8$334$19,950$821 Cash flow hedgesInterest rate swaps21,637 33 3 1,434 34 1 Foreign currency swaps(b)28,013 3 497 6,852 586 Derivatives not designated as hedges(a)Interest rate contracts2114,353 1,924 2,073 113,975 2,268 1,984 Total derivative financial instruments(c)$140,562$1,968$2,907$142,212$2,302$3,392 _(a)The gains/losses included in our condensed consolidated income statements and statements of comprehensive income for the three months ended March 31,2023 and2022 were insignificant,unless otherwise noted.Amounts accrued for interest payments in a net receivable position are included in Other assets.Amounts accrued forinterest payments in a net payable position are included in Other liabilities.(b)The effect of foreign currency cash flow hedges in the consolidated statements of comprehensive income include an insignificant gain and an insignificant lossrecognized in Accumulated other comprehensive loss,and an insignificant gain and a$149 million loss reclassified from Accumulated other comprehensive loss intoincome for the three months ended March 31,2023 and 2022.(c)GM Financial held$480 million and$553 million of collateral from counterparties available for netting against GM Financials asset positions,and posted$1.2 billionand$1.5 billion of collateral to counterparties available for netting against GM Financials liability positions at March 31,2023 and December 31,2022.The fair value for Level 2 instruments was derived using the market approach based on observable market inputs including quoted prices of similarinstruments and foreign exchange and interest rate forward curves.The following amounts were recorded in the condensed consolidated balance sheets related to items designated and qualifying as hedged items in fairvalue hedging relationships:March 31,2023December 31,2022Carrying Amount of HedgedItemsCumulative Amount of Fair ValueHedging Adjustments(a)Carrying Amount of HedgedItemsCumulative Amount of Fair ValueHedging Adjustments(a)Short-term unsecured debt$3,712$(12)$3,048$2 Long-term unsecured debt25,545 764 25,271 779 GM Financial unsecured debt$29,257$752$28,319$781 _(a)Includes$470 million of unamortized losses and an insignificant amount remaining on hedged items for which hedge accounting has been discontinued at March 31,2023 and December 31,2022.15Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 11.Product Warranty and Related LiabilitiesThree Months EndedMarch 31,2023March 31,2022Product Warranty and Related LiabilitiesWarranty balance at beginning of period$8,530$9,774 Warranties issued and assumed in period recall campaigns236 132 Warranties issued and assumed in period product warranty490 461 Payments(1,058)(1,077)Adjustments to pre-existing warranties279(5)Effect of foreign currency and other5 17 Warranty balance at end of period8,482 9,302 Less:Supplier recoveries balance at end of period(a)1,157 2,025 Warranty balance,net of supplier recoveries at end of period$7,325$7,277 _(a)The current portion of supplier recoveries is recorded in Accounts and notes receivable,net of allowance and the non-current portion is recorded in Other assets.Three Months EndedMarch 31,2023March 31,2022Product Warranty Expense,Net of RecoveriesWarranties issued and assumed in period$726$593 Supplier recoveries accrued in period(44)(57)Adjustments and other284 12 Warranty expense,net of supplier recoveries$966$548 We estimate our reasonably possible loss in excess of amounts accrued for recall campaigns to be insignificant at March 31,2023.Refer to Note 13 to ourcondensed consolidated financial statements for more details.Note 12.Pensions and Other Postretirement BenefitsThree Months Ended March 31,2023Three Months Ended March 31,2022Pension BenefitsGlobal OPEBPlansPension BenefitsGlobal OPEBPlansU.S.Non-U.S.U.S.Non-U.S.Service cost$44$42$2$58$35$4 Interest cost568 161 59 323 76 37 Expected return on plan assets(730)(168)(750)(139)Amortization of prior service cost(credit)(1)1 (1)1(1)Amortization of net actuarial(gains)losses 8(6)5 35 17 Net periodic pension and OPEB(income)expense$(119)$44$55$(365)$8$57 The non-service cost components of net periodic pension and other postretirement benefits(OPEB)income of$86 million and$376 million in the threemonths ended March 31,2023 and 2022 are presented in Interest income and other non-operating income,net.16Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 13.Commitments and ContingenciesLitigation-Related Liability and Tax Administrative Matters In the normal course of our business,we are named from time to time as a defendant invarious legal actions,including arbitrations,class actions and other litigation.We identify below the material individual proceedings and investigationswhere we believe a material loss is reasonably possible or probable.We accrue for matters when we believe that losses are probable and can be reasonablyestimated.At March 31,2023 and December 31,2022,we had accruals of$1.1 billion in Accrued liabilities and Other liabilities.In many matters,it isinherently difficult to determine whether loss is probable or reasonably possible or to estimate the size or range of the possible loss.Accordingly,while webelieve that appropriate accruals have been established for losses that are probable and can be reasonably estimated,it is possible that adverse outcomesfrom such proceedings could exceed the amounts accrued by an amount that could be material to our results of operations or cash flows in any particularreporting period.GM Korea Subcontract Workers Litigation GM Korea Company(GM Korea)is party to litigation with current and former subcontract workers overallegations that they are entitled to the same wages and benefits provided to full-time employees,and to be hired as full-time employees.In May 2018 andSeptember 2020,the Korean labor authorities issued adverse administrative orders finding that GM Korea must hire certain current subcontract workers asfull-time employees.GM Korea appealed the May 2018 and September 2020 orders.Since June 2020,the Seoul High Court(an intermediate-level appellatecourt)ruled against GM Korea in eight subcontract worker cases.Although GM Korea has appealed these decisions to the Supreme Court of the Republicof Korea(Korea Supreme Court),GM Korea has since hired certain of its subcontract workers as full-time employees.At March 31,2023,our accrualcovering certain asserted claims and claims that we believe are probable of assertion and for which liability is probable was approximately$261 million.Weestimate the reasonably possible loss in excess of amounts accrued for other current subcontract workers who may assert similar claims to be approximately$94 million at March 31,2023.We are currently unable to estimate any reasonably possible material loss or range of loss that may result from additionalclaims that may be asserted by former subcontract workers.Other Litigation-Related Liability and Tax Administrative Matters Various other legal actions,including class actions,governmental investigations,claims and proceedings are pending against us or our related companies or joint ventures,including,but not limited to,matters arising out of alleged productdefects;employment-related matters;product and workplace safety,vehicle emissions and fuel economy regulations;product warranties;financial services;dealer,supplier and other contractual relationships;government regulations relating to competition issues;tax-related matters not subject to the provision ofAccounting Standards Codification 740,Income Taxes(indirect tax-related matters);product design,manufacture and performance;consumer protectionlaws;and environmental protection laws,including laws regulating air emissions,water discharges,waste management and environmental remediation fromstationary sources.We also from time to time receive subpoenas and other inquiries or requests for information from agencies or other representatives ofU.S.federal,state and foreign governments on a variety of issues.There are several putative class actions pending against GM in federal courts in the U.S.and in the Provincial Courts in Canada alleging that variousvehicles sold,including model year 2011-2016 Duramax Diesel Chevrolet Silverado and GMC Sierra vehicles,violate federal,state and foreign emissionstandards.We are currently unable to estimate any reasonably possible material loss or range of loss that may result from these actions.GM has also faced aseries of additional lawsuits in the U.S.based on these allegations,including a shareholder demand lawsuit that remains pending.There are several putative class actions and one certified class action pending against GM in federal courts in the U.S.alleging that various 2011-2014model year vehicles are defective because they excessively consume oil.While many of these proceedings have been dismissed or have been settled forinsignificant amounts,several remain outstanding,and in October 2022,we received an adverse jury verdict in the certified class action proceedinginvolving three states.We do not believe that the verdict is supported by the evidence and plan to pursue post-trial motions and,if necessary,appeal.We arecurrently unable to estimate any reasonably possible material loss or range of loss that may result from the putative class action proceedings and havepreviously accrued an immaterial amount related to the certified class action proceeding.There is one putative class action and one certified class action pending against GM in federal court in the U.S.alleging that various 2015-2022 modelyear vehicles are defective because they are equipped with faulty 8-speed transmissions.In March 2023,the judge overseeing the class action concerning2015-2019 model year vehicles certified 26 state subclasses.The putative class action concerning 2020-2022 model year vehicles is pending in front of adifferent judge that has not yet addressed class certification.We are currently unable to estimate any reasonably possible material loss or range of loss thatmay result from these proceedings.17Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)There is a class action pending against GM in federal court in the U.S.,and a putative class action in provincial court in Canada,alleging that 2011-2016model year Duramax Diesel Chevrolet Silverado and GMC Sierra vehicles are equipped with defective fuel pumps that are prone to failure.In March 2023,the federal court certified seven state subclasses.We are currently unable to estimate any reasonably possible material loss or range of loss that may resultfrom these proceedings.Beyond the class action litigations disclosed,we have several other class action litigations pending at any given time.Historically,relatively few classeshave been certified in these types of cases.Therefore,we will generally only disclose specific class actions if a class is certified and we believe there is areasonably possible material exposure to the Company.We are currently in discussions with the Environmental Protection Agency regarding potential adjustments to our balance of greenhouse gas credits.Depending on the outcome of those discussions,it is reasonably possible that the costs associated with these matters could be material,but we are unable toprovide an estimate of the cost at this time.Indirect tax-related matters are being litigated globally pertaining to value added taxes,customs,duties,sales,property taxes and other non-income tax-related tax exposures.The various non-U.S.labor-related matters include claims from current and former employees related to alleged unpaid wage,benefit,severance and other compensation matters.Certain administrative proceedings are indirect tax-related and may require that we deposit funds in escrow orprovide an alternative form of security.Some of the matters may involve compensatory,punitive or other treble damage claims,environmental remediationprograms or sanctions that,if granted,could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated atMarch 31,2023.For indirect tax-related matters,we estimate our reasonably possible loss in excess of amounts accrued to be up to approximately$950million at March 31,2023.Takata Matters In November 2020,the National Highway Traffic Safety Administration(NHTSA)directed that we replace the Takata Corporation(Takata)airbag inflators in our GMT900 vehicles,which are full-size pickup trucks and sport utility vehicles(SUVs),and we decided not to contestNHTSAs decision.While we have already begun the process of executing the recall,given the number of vehicles in this population,the recall will takeseveral years to be completed.Accordingly,in the year ended December 31,2020,we recorded a warranty accrual of$1.1 billion for the expected costs ofcomplying with the recall remedy,and we believe the currently accrued amount remains reasonable.GM has recalled certain vehicles sold outside of the U.S.to replace Takata inflators in those vehicles.There are significant differences in vehicle andinflator design between the relevant vehicles sold internationally and those sold in the U.S.We continue to gather and analyze evidence about these inflatorsand to share our findings with regulators.Any additional recalls relating to these inflators could be material to our results of operations and cash flows.There are several putative class actions that have been filed against GM,including in the federal courts in the U.S.,in the Provincial Courts in Canada,and in Mexico,arising out of allegations that airbag inflators manufactured by Takata are defective.In March 2023,a federal court overseeing a putativeclass action against GM issued a final judgment in favor of GM on all claims in eight states at issue in that proceeding.At this stage of these proceedings,we are unable to provide an estimate of the amounts or range of reasonably possible material loss.Chevrolet Bolt Recall In July 2021,we initiated a voluntary recall for certain 2017-2019 model year Chevrolet Bolt EVs due to the risk that twomanufacturing defects present in the same battery cell could cause a high voltage battery fire in certain of these vehicles.Accordingly,in the three monthsended June 30,2021,we recorded a warranty accrual of$812 million.After further investigation into the manufacturing processes at our battery supplier,LG Energy Solution(LG),and disassembling battery packs,we determined that the risk of battery cell defects was not confined to the initial recallpopulation.As a result,in August 2021,we expanded the recall to include all 2017-2022 model year Chevrolet Bolt EV and Electric Utility Vehicles(EUVs)and recorded an additional warranty accrual of$1.2 billion in the three months ended September 30,2021.In October 2021,we reached anagreement with LG,under which LG will reimburse GM for costs and expenses associated with the recall.As a result,in the three months ended September30,2021,we recognized a receivable of$1.9 billion,which substantially offsets the warranty charges we recognized in connection with the recall.Thesecharges reflect our current best estimate for the cost of the recall remedy.The actual costs of the recall and GMs associated recovery from LG could bematerially higher or lower.For 2017-2019 model year vehicles,the recall remedy will be to replace the high voltage battery modules in these vehicles withnew modules.For 2020-2022 model year vehicles,the recall remedy will be to replace any defective high voltage battery modules in these vehicles withnew modules.18Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)In addition,putative class actions have been filed against GM in federal courts in the U.S.and in the Provincial Courts in Canada alleging that thebatteries contained in the Bolt EVs and EUVs included in the recall population are defective.At this stage of these proceedings,we are unable to provide anestimate of the amounts or range of reasonably possible material loss.Opel/Vauxhall Sale In 2017,we sold the Opel and Vauxhall businesses and certain other assets in Europe(the Opel/Vauxhall Business)to PSA Group,nowStellantis N.V.(Stellantis),under a Master Agreement(the Agreement).We also sold the European financing subsidiaries and branches to Banque PSAFinance S.A.and BNP Paribas Personal Finance S.A.Although the sale reduced our new vehicle presence in Europe,we may still be impacted by actionstaken by regulators related to vehicles sold before the sale.General Motors Holdings LLC agreed,on behalf of our wholly owned subsidiary(the Seller),toindemnify Stellantis for certain losses resulting from any inaccuracy of the representations and warranties or breaches of our covenants included in theAgreement and for certain other liabilities,including costs related to certain emissions claims,product liabilities and recalls.We are unable to estimate anyreasonably possible material loss or range of loss that may result from these actions either directly or through an indemnification claim from Stellantis.Certain of these indemnification obligations are subject to time limitations,thresholds and/or caps as to the amount of required payments.Currently,various consumer lawsuits have been filed against the Seller and Stellantis in Germany,the United Kingdom and the Netherlands alleging thatOpel and Vauxhall vehicles sold by the Seller violated applicable emissions standards.In addition,we indemnified Stellantis for an immaterial amount forcertain recalls that Stellantis has conducted or will conduct,including recalls in certain geographic locations that Stellantis intends to conduct related toTakata inflators in legacy Opel vehicles.We may in the future be required to further indemnify Stellantis relating to its Takata recalls,but we believe suchfurther indemnification to be remote at this time.Product Liability We recorded liabilities of$570 million and$561 million in Accrued liabilities and Other liabilities at March 31,2023 and December 31,2022 for the expected cost of all known product liability claims,plus an estimate of the expected cost for product liability claims that have already beenincurred and are expected to be filed in the future for which we are self-insured.It is reasonably possible that our accruals for product liability claims mayincrease in future periods in material amounts,although we cannot estimate a reasonable range of incremental loss based on currently available information.We believe that any judgment against us involving our products for actual damages will be adequately covered by our recorded accruals and,whereapplicable,excess liability insurance coverage.Guarantees We enter into indemnification agreements for liability claims involving products manufactured primarily by certain joint ventures.Theseguarantees terminate in years ranging from 2023 to 2028,or upon the occurrence of specific events or are ongoing.We believe that the related potentialcosts incurred are adequately covered by our recorded accruals,which are insignificant.The maximum future undiscounted payments mainly based onroyalties received associated with vehicles sold to date were$3.2 billion and$3.1 billion for these guarantees at March 31,2023 and December 31,2022,the majority of which relates to the indemnification agreements.We provide payment guarantees on commercial loans outstanding with third parties such as dealers.In some instances,certain assets of the party or ourpayables to the party whose debt or performance we have guaranteed may offset,to some degree,the amount of any potential future payments.We are alsoexposed to residual value guarantees associated with certain sales to rental car companies.We periodically enter into agreements that incorporate indemnification provisions in the normal course of business.It is not possible to estimate ourmaximum exposure under these indemnifications or guarantees due to the conditional nature of these obligations.Insignificant amounts have been recordedfor such obligations as the majority of them are not probable or estimable at this time and the fair value of the guarantees at issuance was insignificant.Refer to the Opel/Vauxhall Sale section of this note for additional information on our indemnification obligations to Stellantis under the Agreement.Supplier Finance Programs Third-party finance providers offer certain suppliers the option for payment in advance of their invoice due date throughfinancing programs that we established.We retain our obligation to the participating suppliers,and we make payments directly to the third-party financeproviders on the original invoice due date pursuant to the original invoice terms.There are no assets pledged as security or other forms of guaranteesprovided for committed payments.Our outstanding eligible balances under our supplier finance programs are$1.1 billion and$852 million at March 31,2023 and December 31,2022,which are recorded in Accounts payable(principally trade).19Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 14.Income TaxesIn the three months ended March 31,2023,Income tax expense of$428 million was primarily due to tax expense attributable to entities included in oureffective tax rate calculation.In the three months ended March 31,2022,Income tax benefit of$28 million was primarily due to tax expense attributable toentities included in our effective tax rate calculation,offset by the release of a valuation allowance against certain Cruise deferred tax assets that wereconsidered realizable due to the reconsolidation of Cruise for U.S.tax purposes.Note 15.Restructuring and Other InitiativesWe have executed various restructuring and other initiatives and we may execute additional initiatives in the future,if necessary,to streamlinemanufacturing capacity and reduce other costs to improve the utilization of remaining facilities.To the extent these programs involve voluntary separations,a liability is generally recorded at the time offers to employees are accepted.To the extent these programs provide separation benefits in accordance withpre-existing agreements,a liability is recorded once the amount is probable and reasonably estimable.If employees are involuntarily terminated,a liabilityis generally recorded at the communication date.Related charges are recorded in Automotive and other cost of sales and Automotive and other selling,general and administrative expense.The following table summarizes the reserves and charges related to restructuring and other initiatives,including postemployment benefit reserves andcharges:Three Months EndedMarch 31,2023March 31,2022Balance at beginning of period$520$285 Additions,interest accretion and other980(2)Payments(51)(104)Revisions to estimates and effect of foreign currency(9)Balance at end of period$1,450$171 In the three months ended March 31,2023,restructuring and other initiatives included strategic activities in GMNA related to Buick dealerships.Werecorded charges of$99 million,which are included in the table above,and incurred$39 million in net cash outflows resulting from these dealerrestructurings in the three months ended March 31,2023,in addition to the charges of$511 million and net cash outflows of$120 million in the year endedDecember 31,2022.The remaining$451 million is expected to be paid by the end of 2023.Additionally,on March 9,2023,we announced a voluntary separation program(VSP)to accelerate attrition related to the cost reduction programannounced in January 2023.We recorded charges in GMNA of$875 million in the three months ended March 31,2023,primarily related to employeeseparation charges,which are reflected in the table above.We expect cash outflows related to these activities of approximately$875 million to besubstantially complete by the end of 2023.Note 16.Stockholders Equity and Noncontrolling InterestsWe have 2.0 billion shares of preferred stock and 5.0 billion shares of common stock authorized for issuance.We had no shares of preferred stock issuedand outstanding at March 31,2023 and December 31,2022.We had 1.4 billion shares of common stock issued and outstanding at March 31,2023 andDecember 31,2022.Common Stock Holders of our common stock are entitled to dividends at the sole discretion of our Board of Directors.Our dividends declared percommon share were$0.09 and our total dividends paid on common stock were$126 million for the three months ended March 31,2023.Dividends werenot declared or paid on our common stock for the three months ended March 31,2022.In August 2022,our Board of Directors increased the capacity under our previously announced common stock repurchase program to$5.0 billion fromthe$3.3 billion that remained under the program as of June 30,2022.In the three months ended March 31,2023,we purchased 9 million shares of ouroutstanding common stock for$369 million as part of the program,inclusive of an insignificant amount of excise tax related to the Inflation Reduction Actof 2022.We did not purchase shares of our outstanding common stock in the three months ended March 31,2022.20Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Cruise Preferred Shares In March 2022,under the Share Purchase Agreement,we acquired SoftBank Vision Fund(AIV M2)L.P.s(together with itsaffiliates,SoftBank)Cruise Class A-1,Class F and Class G Preferred Shares for$2.1 billion and made an additional$1.35 billion investment in Cruise inplace of SoftBank.SoftBank no longer has an ownership interest in or has any rights with respect to Cruise.Cruise Common Shares During the three months ended March 31,2023,GM Cruise Holdings LLC(Cruise Holdings)issued$95 million of Class BCommon Shares to net settle vested awards under Cruises 2018 Employee Incentive Plan and issued$56 million of Class B Common Shares to fund thepayment of statutory tax withholding obligations resulting from the settlement or exercise of vested awards.Also,GM conducted a quarterly tender offer,and paid$75 million in cash to purchase tendered Cruise Class B Common Shares during the three months ended March 31,2023.The Class B CommonShares are classified as noncontrolling interests in our condensed consolidated financial statements except for certain shares that are liability classified thathave a recorded value of approximately$60 million at both March 31,2023 and December 31,2022.Refer to Note 18 for additional information on Cruisestock incentive awards.During the three months ended March 31,2023 and 2022,the effect on the equity attributable to us for changes in our ownership interest in Cruise wasinsignificant.For the three months ended March 31,2023 and 2022,net income attributable to shareholders and transfers to the noncontrolling interest inCruise and other subsidiaries was$2.4 billion and$2.0 billion,which in 2022 included a$909 million decrease in retained earnings due to the redemption ofCruise preferred shares.The following table summarizes the significant components of Accumulated other comprehensive loss:Three Months EndedMarch 31,2023March 31,2022Foreign Currency Translation AdjustmentsBalance at beginning of period$(2,776)$(2,653)Other comprehensive income(loss)and noncontrolling interests,net of reclassification adjustment and tax(a)(b)164 397 Balance at end of period$(2,611)$(2,256)Defined Benefit PlansBalance at beginning of period$(4,851)$(6,528)Other comprehensive income(loss)before reclassification adjustment,net of tax(b)(39)52 Reclassification adjustment,net of tax(b)4 51 Other comprehensive income(loss),net of tax(b)(35)103 Balance at end of period(c)$(4,886)$(6,425)_(a)The noncontrolling interests and reclassification adjustment were insignificant in the three months ended March 31,2023 and 2022.(b)The income tax effect was insignificant in the three months ended March 31,2023 and 2022.(c)Primarily consists of unamortized actuarial loss on our defined benefit plans.Refer to Note 2.Significant Accounting Policies of our 2022 Form 10-K for additionalinformation.21Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 17.Earnings Per ShareThree Months EndedMarch 31,2023March 31,2022Basic earnings per shareNet income(loss)attributable to stockholders$2,395$2,939 Less:cumulative dividends on subsidiary preferred stock(a)(27)(952)Net income(loss)attributable to common stockholders$2,369$1,987 Weighted-average common shares outstanding1,396 1,458 Basic earnings per common share$1.70$1.36 Diluted earnings per shareNet income(loss)attributable to common stockholders diluted$2,369$1,987 Weighted-average common shares outstanding basic1,396 1,458 Dilutive effect of awards under stock incentive plans6 12 Weighted-average common shares outstanding diluted1,402 1,470 Diluted earnings per common share$1.69$1.35 Potentially dilutive securities(b)22 6 _(a)Includes a$909 million deemed dividend related to the redemption of Cruise preferred shares from SoftBank in the three months ended March 31,2022.(b)Potentially dilutive securities attributable to outstanding stock options,Restricted Stock Units(RSUs)and Performance Stock Units(PSUs)at March 31,2023 andoutstanding stock options and RSUs at March 31,2022 were excluded from the computation of diluted earnings per share(EPS)because the securities would have hadan antidilutive effect.Note 18.Stock Incentive PlansCruise Stock Incentive Awards In March 2022,Cruise modified its RSUs that settle in Cruise common stock to remove the liquidity vesting conditionsuch that all granted RSU awards vest solely upon satisfactions of a service condition.Total compensation expense related to Cruise Holdings share-basedawards was$103 million in the three months ended March 31,2023 and$1.2 billion in the three months ended March 31,2022,which in 2022 primarilyrepresents the impact of the modification to outstanding awards.GM conducted a quarterly tender offer and paid$75 million in cash to purchase tenderedCruise Class B Common Shares during the three months ended March 31,2023.No cash was paid to settle share-based awards in the three months endedMarch 31,2022.Note 19.Segment ReportingWe analyze the results of our business through the following reportable segments:GMNA,GMI,Cruise and GM Financial.The chief operating decision-maker evaluates the operating results and performance of our automotive segments and Cruise through earnings before interest and income taxes(EBIT)-adjusted,which is presented net of noncontrolling interests.The chief operating decision-maker evaluates GM Financial through earnings before incometaxes(EBT)-adjusted because interest income and interest expense are part of operating results when assessing and measuring the operational and financialperformance of the segment.Each segment has a manager responsible for executing our strategic initiatives.While not all vehicles within a segment areindividually profitable on a fully allocated cost basis,those vehicles attract customers to dealer showrooms and help maintain sales volumes for other,moreprofitable vehicles and contribute towards meeting required fuel efficiency standards.As a result of these and other factors,we do not manage our businesson an individual brand or vehicle basis.Substantially all of the trucks,crossovers,cars and automobile parts produced are marketed through retail dealers in North America and throughdistributors and dealers outside of North America,the substantial majority of which are independently owned.In addition to the products sold to dealers forconsumer retail sales,trucks,crossovers and cars are also sold to fleet customers,including daily rental car companies,commercial fleet customers,leasingcompanies and governments.Fleet sales are completed through the dealer network and in some cases directly with fleet customers.Retail and fleetcustomers can obtain22Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)a wide range of after-sale vehicle services and products through the dealer network,such as maintenance,light repairs,collision repairs,vehicle accessoriesand extended service warranties.GMNA meets the demands of customers in North America and GMI primarily meets the demands of customers outside North America with vehiclesdeveloped,manufactured and/or marketed under the Buick,Cadillac,Chevrolet and GMC brands.We also have equity ownership stakes in entities that meetthe demands of customers in other countries,primarily China,with vehicles developed,manufactured and/or marketed under the Baojun,Buick,Cadillac,Chevrolet and Wuling brands.Cruise is our global segment responsible for the development and commercialization of AV technology,and includes AV-related engineering and other costs.We provide automotive financing services through our GM Financial segment.Our automotive interest income and interest expense,legacy costs from the Opel/Vauxhall Business(primarily pension costs),corporate expenditures andcertain nonsegment specific revenues and expenses are recorded centrally in Corporate.Corporate assets primarily consist of cash and cash equivalents,marketable debt securities and intersegment balances.All intersegment balances and transactions have been eliminated in consolidation.The following tables summarize key financial information by segment:At and For the Three Months Ended March 31,2023GMNAGMICorporateEliminationsTotalAutomotiveCruiseGMFinancialEliminations/ReclassificationsTotalNet sales and revenue$32,889$3,727$31$36,646$25$3,343$(29)$39,985 Earnings(loss)before interest and taxes-adjusted$3,576$347$(327)$3,596$(561)$771$(3)$3,803 Adjustments(a)$(974)$(974)$(974)Automotive interest income229 Automotive interest expense(234)Net income(loss)attributable tononcontrolling interests(49)Income(loss)before income taxes2,775 Income tax benefit(expense)(428)Net income(loss)2,346 Net loss(income)attributable tononcontrolling interests49 Net income(loss)attributable to stockholders$2,395 Equity in net assets of nonconsolidatedaffiliates$2,000$6,817$8,818$1,725$10,542 Goodwill and intangibles$2,154$732$4$2,890$728$1,350$4,968 Total assets$144,903$24,992$40,880$(69,676)$141,098$5,217$122,789$(2,099)$267,004 Depreciation and amortization$1,428$122$5$1,555$4$1,251$2,810 Impairment charges$Equity income(loss)(b)$(46)$81$34$41$75 _(a)Consists of charges for strategic activities related to Buick dealerships and charges related to the VSP in GMNA.(b)Equity earnings related to Ultium Cells Holdings LLC are presented in Automotive and other cost of sales as this entity is integral to the operations of our business by providing battery cells for our EVs.In the threemonths ended March 31,2023,equity earnings related to Ultium Cells Holdings LLC were insignificant.23Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)At and For the Three Months Ended March 31,2022GMNAGMICorporateEliminationsTotalAutomotiveCruiseGMFinancialEliminations/ReclassificationsTotalNet sales and revenue$29,456$3,313$53$32,823$26$3,156$(26)$35,979 Earnings(loss)before interest and taxes-adjusted$3,141$328$(387)$3,082$(325)$1,284$4$4,044 Adjustments(a)$100$100$(1,057)$(957)Automotive interest income50 Automotive interest expense(226)Net income(loss)attributable tononcontrolling interests(131)Income(loss)before income taxes2,779 Income tax benefit(expense)28 Net income(loss)2,807 Net loss(income)attributable tononcontrolling interests131 Net income(loss)attributable to stockholders$2,939 Equity in net assets of nonconsolidatedaffiliates$1,217$7,406$8,623$1,779$10,402 Goodwill and intangibles$2,213$765$2,978$733$1,346$5,058 Total assets$126,454$24,612$35,696$(55,702)$131,060$6,310$115,312$(1,190)$251,492 Depreciation and amortization$1,504$134$5$1,643$12$1,236$2,891 Impairment charges$Equity income(loss)$6$232$238$54$292 _(a)Consists of the resolution of substantially all royalty matters accrued with respect to past-year vehicle sales in GMNA;and charges related to the one-time modification of Cruise stock incentive awards.24Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsBasis of Presentation This Managements Discussion and Analysis of Financial Condition and Results of Operations(MD&A)should be read inconjunction with the accompanying condensed consolidated financial statements and the notes thereto,and the audited consolidated financial statements andnotes thereto included in our 2022 Form 10-K.Forward-looking statements in this MD&A are not guarantees of future performance and may involve risks and uncertainties that could cause actualresults to differ materially from those projected.Refer to the Forward-Looking Statements section of this MD&A and Part 1,Item 1A.Risk Factors of our2022 Form 10-K for a discussion of these risks and uncertainties.Except for per share amounts or as otherwise specified,dollar amounts presented withintables are stated in millions.Certain columns and rows may not add due to rounding.Non-GAAP Measures Our non-GAAP measures include:EBIT-adjusted,presented net of noncontrolling interests;EBT-adjusted for our GM Financialsegment;EPS-diluted-adjusted;effective tax rate-adjusted(ETR-adjusted);return on invested capital-adjusted(ROIC-adjusted)and adjusted automotivefree cash flow.Our calculation of these non-GAAP measures may not be comparable to similarly titled measures of other companies due to potentialdifferences between companies in the method of calculation.As a result,the use of these non-GAAP measures has limitations and should not be consideredsuperior to,in isolation from,or as a substitute for,related U.S.GAAP measures.These non-GAAP measures allow management and investors to view operating trends,perform analytical comparisons and benchmark performancebetween periods and among geographic regions to understand operating performance without regard to items we do not consider a component of our coreoperating performance.Furthermore,these non-GAAP measures allow investors the opportunity to measure and monitor our performance against ourexternally communicated targets and evaluate the investment decisions being made by management to improve ROIC-adjusted.Management uses thesemeasures in its financial,investment and operational decision-making processes,for internal reporting and as part of its forecasting and budgetingprocesses.Further,our Board of Directors uses certain of these,and other measures,as key metrics to determine management performance under ourperformance-based compensation plans.For these reasons,we believe these non-GAAP measures are useful for our investors.EBIT-adjusted EBIT-adjusted is presented net of noncontrolling interests and is used by management and can be used by investors to review ourconsolidated operating results because it excludes automotive interest income,automotive interest expense and income taxes as well as certain additionaladjustments that are not considered part of our core operations.Examples of adjustments to EBIT include,but are not limited to,impairment charges onlong-lived assets and other exit costs resulting from strategic shifts in our operations or discrete market and business conditions,and certain costs arisingfrom legal matters.For EBIT-adjusted and our other non-GAAP measures,once we have made an adjustment in the current period for an item,we will alsoadjust the related non-GAAP measure in any future periods in which there is an impact from the item.Our corresponding measure for our GM Financialsegment is EBT-adjusted because interest income and interest expense are part of operating results when assessing and measuring the operational andfinancial performance of the segment.EPS-diluted-adjusted EPS-diluted-adjusted is used by management and can be used by investors to review our consolidated diluted EPS results on aconsistent basis.EPS-diluted-adjusted is calculated as net income attributable to common stockholders-diluted less adjustments noted above for EBIT-adjusted and certain income tax adjustments divided by weighted-average common shares outstanding-diluted.Examples of income tax adjustments includethe establishment or reversal of significant deferred tax asset valuation allowances.ETR-adjusted ETR-adjusted is used by management and can be used by investors to review the consolidated effective tax rate for our core operations ona consistent basis.ETR-adjusted is calculated as Income tax expense less the income tax related to the adjustments noted above for EBIT-adjusted and theincome tax adjustments noted above for EPS-diluted-adjusted divided by Income before income taxes less adjustments.When we provide an expectedadjusted effective tax rate,we do not provide an expected effective tax rate because the U.S.GAAP measure may include significant adjustments that aredifficult to predict.ROIC-adjusted ROIC-adjusted is used by management and can be used by investors to review our investment and capital allocation decisions.We defineROIC-adjusted as EBIT-adjusted for the trailing four quarters divided by ROIC-adjusted average net assets,which is considered to be the average equitybalances adjusted for average automotive debt and interest liabilities,exclusive of finance leases;average automotive net pension and OPEB liabilities;andaverage automotive net income tax assets during the same period.25Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESAdjusted automotive free cash flow Adjusted automotive free cash flow is used by management and can be used by investors to review the liquidity ofour automotive operations and to measure and monitor our performance against our capital allocation program and evaluate our automotive liquidity againstthe substantial cash requirements of our automotive operations.We measure adjusted automotive free cash flow as automotive operating cash flow fromoperations less capital expenditures adjusted for management actions.Management actions can include voluntary events such as discretionary contributionsto employee benefit plans or nonrecurring specific events such as a closure of a facility that are considered special for EBIT-adjusted purposes.Refer to theLiquidity and Capital Resources section of this MD&A for additional information.The following table reconciles Net income attributable to stockholders under U.S.GAAP to EBIT-adjusted:Three Months EndedMarch 31,December 31,September 30,June 30,20232022202220212022202120222021Net income attributable to stockholders$2,395$2,939$1,999$1,741$3,305$2,420$1,692$2,836 Income tax expense(benefit)428(28)580 471 845 152 490 971 Automotive interest expense234 226 267 227 259 230 234 243 Automotive interest income(229)(50)(215)(44)(122)(38)(73)(32)Adjustments Voluntary separation program(a)875 Cruise compensation modifications(b)1,057 Russia exit(c)657 Buick dealer strategy(d)99 511 Patent royalty matters(e)(100)250 GM Brazil indirect tax matters(f)194 Cadillac dealer strategy(g)158 17 GM Korea wage litigation(h)82 Total adjustments974 957 1,168 444 158 99 EBIT-adjusted$3,803$4,044$3,799$2,839$4,287$2,922$2,343$4,117 _(a)This adjustment was excluded because it relates to the acceleration of attrition as part of the cost reduction program announced in January 2023,primarily in the UnitedStates.(b)This adjustment was excluded because it relates to the one-time modification of Cruise stock incentive awards.(c)This adjustment was excluded because it relates to the shutdown of our Russia business including the write off of our net investment and release of accumulatedtranslation losses into earnings.(d)These adjustments were excluded because they relate to strategic activities to transition certain Buick dealers out of our dealer network as part of Buicks EV strategy.(e)These adjustments were excluded because they relate to certain royalties accrued with respect to past-year vehicle sales in the three months ended December 31,2021,and the resolution of substantially all of these matters in the three months ended March 31,2022.(f)This adjustment was excluded because it relates to a settlement with third parties in the three months ended December 31,2021 relating to retrospective recoveries ofindirect taxes in Brazil realized in prior periods.(g)These adjustments were excluded because they relate to strategic activities to transition certain Cadillac dealers from the network as part of Cadillacs EV strategy.(h)This adjustment was excluded because of the unique events associated with Korea Supreme Court decisions related to our salaried workers.26Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESThe following table reconciles diluted earnings per common share under U.S.GAAP to EPS-diluted-adjusted:Three Months EndedMarch 31,2023March 31,2022AmountPer ShareAmountPer ShareDiluted earnings per common share$2,369$1.69$1,987$1.35 Adjustments(a)974 0.69 957 0.65 Tax effect on adjustments(b)(239)(0.17)(296)(0.20)Tax adjustments(c)(482)(0.33)Deemed dividend adjustment(d)909 0.62 EPS-diluted-adjusted$3,104$2.21$3,075$2.09 _(a)Refer to the reconciliation of Net income attributable to stockholders under U.S.GAAP to EBIT-adjusted within this section of MD&A for the details of each individualadjustment.(b)The tax effect of each adjustment is determined based on the tax laws and valuation allowance status of the jurisdiction to which the adjustment relates.(c)This adjustment consists of tax benefit related to the release of a valuation allowance against deferred tax assets considered realizable as a result of Cruise taxreconsolidation in the three months ended March 31,2022.This adjustment was excluded because significant impacts of valuation allowances are not considered part ofour core operations.(d)This adjustment consists of a deemed dividend related to the redemption of Cruise preferred shares from SoftBank in the three months ended March 31,2022.The following table reconciles our effective tax rate under U.S.GAAP to ETR-adjusted:Three Months EndedMarch 31,2023March 31,2022Income before incometaxesIncome tax expense(benefit)Effective tax rateIncome before incometaxesIncome tax expense(benefit)Effective tax rateEffective tax rate$2,775$428 15.4%$2,779$(28)(1.0)justments(a)974 239 1,053 296 Tax adjustments(b)482 ETR-adjusted$3,749$667 17.8%$3,832$750 19.6%_(a)Refer to the reconciliation of Net income attributable to stockholders under U.S.GAAP to EBIT-adjusted within this section of MD&A for adjustment details.Theseadjustments include Net income attributable to noncontrolling interests where applicable.The tax effect of each adjustment is determined based on the tax laws andvaluation allowance status of the jurisdiction to which the adjustment relates.(b)Refer to the reconciliation of diluted earnings per common share under U.S.GAAP to EPS-diluted-adjusted within this section of MD&A for adjustment details.We define return on equity(ROE)as Net income attributable to stockholders for the trailing four quarters divided by average equity for the same period.Management uses average equity to provide comparable amounts in the calculation of ROE.The following table summarizes the calculation of ROE(dollars in billions):Four Quarters EndedMarch 31,2023March 31,2022Net income attributable to stockholders$9.4$9.9 Average equity(a)$68.6$59.6 ROE13.7.7%_(a)Includes equity of noncontrolling interests where the corresponding earnings(loss)are included in Net income attributable to stockholders.27Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESThe following table summarizes the calculation of ROIC-adjusted(dollars in billions):Four Quarters EndedMarch 31,2023March 31,2022EBIT-adjusted(a)$14.2$13.9 Average equity(b)$68.6$59.6 Add:Average automotive debt and interest liabilities(excluding finance leases)17.4 16.9 Add:Average automotive net pension&OPEB liability8.6 14.0 Less:Average automotive and other net income tax asset(20.9)(21.8)ROIC-adjusted average net assets$73.6$68.8 ROIC-adjusted19.3 .2%_(a)Refer to the reconciliation of Net income attributable to stockholders under U.S.GAAP to EBIT-adjusted within this section of MD&A.(b)Includes equity of noncontrolling interests where the corresponding earnings(loss)are included in EBIT-adjusted.Overview Our vision for the future is a world with zero crashes,zero emissions and zero congestion,which guides our growth-focused strategy to invest inEVs and AVs,software-enabled services and subscriptions and new business opportunities,while strengthening our market position in profitable ICEvehicles,such as trucks and SUVs.We will execute our strategy with a diverse team and a steadfast commitment to good citizenship through sustainableoperations and a leading health and safety culture.We continue to monitor the macro-economic environment,including higher interest rates,inflationary pressures and competitor actions.Supply chain andlogistics challenges have begun to ease,leading to increased production,which could result in a gradual increase in incentive activity as the year progresses.We expect pricing performance on our new and refreshed vehicles to partially offset this headwind.U.S.dealer inventories remained flat compared toDecember 2022 as we matched supply with demand and proactively planned some downtime at our facilities.In January 2023,we announced our intention to implement a cost reduction program to reduce fixed costs by$2.0 billion on an annual run rate basis by2024.In March 2023,we took the initial steps and announced performance-based exits and a VSP in an effort to accelerate attrition,which we believe willresult in approximately$1.0 billion towards this target on an annual run rate basis.In addition to people costs,we expect the remaining$1.0 billion willcome from reducing complexity across the vehicle portfolio and throughout the business,prioritizing growth initiatives and reducing overhead anddiscretionary costs.Refer to the Consolidated Results and regional analysis sections of this MD&A for additional information.We also face continuing market,operating and regulatory challenges in several countries across the globe due to,among other factors,competitivepressures,our product portfolio offerings,heightened emission standards,potentially weakening economic conditions,labor disruptions,foreign exchangevolatility,evolving trade policy and political uncertainty.Refer to Part I,Item 1A.Risk Factors of our 2022 Form 10-K for a discussion of these challenges.As we continue to assess our performance and the needs of our evolving business,additional restructuring and rationalization actions could be required.These actions could give rise to future asset impairments or other charges,which may have a material impact on our operating results.On August 16,2022,the Inflation Reduction Act of 2022(the Act)was signed into law.The Act modified climate and clean energy tax provisions,including the consumer credit for EV purchases,and added new corporate tax credits for commercial EV purchases and investments in clean energyproduction,supply chains and manufacturing facilities.We expect to generate credits from our production of battery components and commercial EV taxcredits that will increase net income and impact income tax cash payments.We also expect to benefit from the Act through lower raw material costs.Whilewaiting on pending Department of Treasury regulatory guidance,we are continuing to evaluate the ultimate impact of the tax credits on our financial results,including our net earnings and cash flow.For the year ending December 31,2023,we expect Net income attributable to stockholders of between$8.4 billion and$9.9 billion,EBIT-adjusted ofbetween$11.0 billion and$13.0 billion,EPS-diluted of between$5.83 and$6.83 and EPS-diluted-adjusted of between$6.35 and$7.35.We do not considerthe potential impact of future adjustments on our expected financial results.28Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESThe following table reconciles expected Net income attributable to stockholders under U.S.GAAP to expected EBIT-adjusted(dollars in billions):Year Ending December 31,2023Net income attributable to stockholders$8.4-9.9Income tax expense1.5-2.0Automotive interest expense,net0.1Adjustments(a)1.0EBIT-adjusted$11.0-13.0_(a)Refer to the reconciliation of Net income attributable to stockholders under U.S.GAAP to EBIT-adjusted within the MD&A for the details of each individualadjustment.We do not consider the potential future impact of adjustments on our expected financial results.The following table reconciles expected EPS-diluted under U.S.GAAP to expected EPS-diluted-adjusted:Year Ending December 31,2023Diluted earnings per common share$5.83-6.83Adjustments(a)0.52EPS-diluted-adjusted$6.35-7.35_(a)Refer to the reconciliation of diluted earnings per common share under U.S.GAAP to EPS-diluted-adjusted within the MD&A for the details of each individualadjustment.We do not consider the potential future impact of adjustments on our expected financial results.GMNA Industry sales in North America were 4.5 million units in the three months ended March 31,2023,representing an increase of 9.2%compared tothe corresponding period in 2022.U.S.industry sales were 3.7 million units in the three months ended March 31,2023,representing an increase of 8.3%compared to the corresponding period in 2022.Our total vehicle sales in the U.S.,our largest market in North America,were 0.6 million units for market share of 16.4%in the three months endedMarch 31,2023,representing an increase of 1.3 percentage points compared to the corresponding period in 2022.We expect to sustain relatively strong EBIT-adjusted margins in 2023 on the continued strength of vehicle pricing and healthy U.S.industry demand,partially offset by elevated costs associated with commodities,raw materials and logistics.Our outlook is dependent on the pricing environment,continuingimprovement of supply chain availability and overall economic conditions.As a result of supply chain disruptions,we experienced interruptions to ourplanned production schedules and continue to prioritize production of our most popular and in-demand products,including our full-size trucks,full-sizeSUVs and EVs.In 2023,our collective bargaining agreements with the International Union,United Automobile,Aerospace and Agricultural Implement Workers ofAmerica(UAW)in the United States and Unifor in Canada,as well as collective bargaining agreements in Mexico,will expire,which will requirenegotiation of new agreements.Refer to Part I,Item 1A.Risk Factors of our 2022 Form 10-K for a discussion of the risks related to any significantdisruption at our manufacturing facilities.GMI Industry sales in China were 5.2 million units in the three months ended March 31,2023,representing a decrease of 10.3%compared to thecorresponding period in 2022.Our total vehicle sales in China were 0.5 million units for market share of 9.0%in the three months ended March 31,2023,representing a decrease of 1.7 percentage points compared to the corresponding period in 2022.The ongoing supply chain disruptions,global macro-economic impact and geopolitical tensions continue to place pressure on Chinas automotive industry and our vehicle sales in China.Our Automotive ChinaJVs generated equity income of$0.1 billion in the three months ended March 31,2023.Although price competition,higher costs associated withcommodities and raw materials and a more challenging regulatory environment related to emissions,fuel consumption and new energy vehicles will placepressure on our operations in China,we will continue to build upon our strong brands,network,and partnerships in China as well as drive improvements invehicle mix and cost.Outside of China,industry sales were 6.4 million units in the three months ended March 31,2023,representing an increase of 5.7%compared to thecorresponding period in 2022.Our total vehicle sales outside of China were 0.2 million units for a market share of 3.4%in the three months ended March31,2023,representing a decrease of 0.2 percentage points compared to the corresponding period in 2022.29Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESCruise Gated by safety and regulation,Cruise continues to make significant progress towards commercialization of a network of on-demand AVs.In2021,Cruise received a driverless test permit from the California Public Utilities Commission(CPUC)to provide unpaid rides to the public in driverlessvehicles and received approval of its Autonomous Vehicle Deployment Permit from the California Department of Motor Vehicles to commercially deploydriverless AVs.In June 2022,Cruise received the first ever Driverless Deployment Permit granted by the CPUC,which allows them to charge a fare for thedriverless rides they are providing to members of the public in certain parts of San Francisco.Additionally,in September 2022,Cruise acquired regulatorypermits to operate driverless ride hail services in Phoenix,Arizona and began pursuing ride hail operations in Austin,Texas.GM and Cruise are alsoawaiting a decision on an exemption petition that was filed with NHTSA seeking regulatory approval for the deployment of the Cruise Origin.Vehicle Sales The principal factors that determine consumer vehicle preferences in the markets in which we operate include overall vehicle design,price,quality,available options,safety,reliability,fuel economy and functionality.Market leadership in individual countries in which we compete varies widely.We present both wholesale and total vehicle sales data to assist in the analysis of our revenue and our market share.Wholesale vehicle sales data consistsof sales to GMs dealers and distributors as well as sales to the U.S.Government and excludes vehicles sold by our joint ventures.Wholesale vehicle salesdata correlates to our revenue recognized from the sale of vehicles,which is the largest component of Automotive net sales and revenue.In the three monthsended March 31,2023,28.4%of our wholesale vehicle sales volume was generated outside the U.S.The following table summarizes wholesale vehiclesales by automotive segment(vehicles in thousands):Three Months EndedMarch 31,2023March 31,2022GMNA723 83.7i4 83.5%GMI141 16.37 16.5%Total864 100.01 100.0%Total vehicle sales data represents:(1)retail sales(i.e.,sales to consumers who purchase new vehicles from dealers or distributors);(2)fleet sales(i.e.,sales to large and small businesses,governments,and daily rental car companies);and(3)certain vehicles used by dealers in their business.Total vehiclesales data includes all sales by joint ventures on a total vehicle basis,not based on our percentage ownership interest in the joint venture.Certain jointventure agreements in China allow for the contractual right to report vehicle sales of non-GM trademarked vehicles by those joint ventures,which areincluded in the total vehicle sales we report for China.While total vehicle sales data does not correlate directly to the revenue we recognize during aparticular period,we believe it is indicative of the underlying demand for our vehicles.Total vehicle sales data represents managements good faith estimatebased on sales reported by GMs dealers,distributors,and joint ventures,commercially available data sources such as registration and insurance data,andinternal estimates and forecasts when other data is not available.30Table of ContentsGENERAL MOTORS COMPANY AND SUBSIDIARIESThe following table summarizes industry and GM total vehicle sales and our related competitive position by geographic region(vehicles in thousands):Three Months Ended March 31,2023March 31,2022 IndustryGMMarket ShareIndustryGMMarket ShareNorth AmericaUnited States3,684 603 16.4%3,402 513 15.1%Other786 103 13.2i3 88 12.7%Total North America4,470 707 15.8%4,095 601 14.7%Asia/Pacific,Middle East and AfricaChina(a)5,154 462 9.0%5,745 613 10.7%Other5,547 110 2.0%5,260 123 2.3%Total Asia/Pacific,Middle East and Africa10,701 572 5.3,005 736 6.7%South AmericaBrazil471 71 15.15 50 12.4%Other380 34 9.089 40 10.3%Total South America852 105 12.4y5 90 11.3%Total in GM markets16,023 1,384 8.6,895 1,427 9.0%Total Europe4,012%3,461 1%Total Worldwide(b)(c)20,035 1,384 6.9,357 1,427 7.4%United StatesCars719 61 8.4g2 47 7.0%Trucks993 297 29.94 287 31.8%Crossovers1,972 246 12.5%1,826 179 9.8%Total United States3,684 603 16.4%3,402 513 15.1%China(a)SGMS173 263 SGMW289 350 Total China5,154 462 9.0%5,745 613 10.7%_(a)Includes sales by the Automotive China JVs:SAIC General Motors Sales Co.,Ltd.(SGMS)and SAIC GM Wuling Automobile Co.,Ltd.(SGMW).(b)Cuba,Iran,North Korea,Sudan and Syria are subject to broad economic sanctions.Accordingly,these countries are excluded from industry sales data andcorresponding calculation of market share.(c)As of March 2022,GM is no longer importing vehicles or parts to Russi
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,DC 20549FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended January 1,2023OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission File Number:000-20322Starbucks Corporation(Exact Name of Registrant as Specified in its Charter)Washington91-1325671(State or Other Jurisdiction ofIncorporation or Organization)(IRS EmployerIdentification No.)2401 Utah Avenue South,Seattle,Washington 98134(Address of principal executive offices)(206)447-1575(Registrants Telephone Number,including Area Code)Securities registered pursuant to Section 12(b)of the Act:TitleTrading SymbolName of each exchange on which registeredCommon Stock,par value$0.001 per shareSBUXNasdaq Global Select MarketIndicate by check mark whether the registrant:(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 duringthe preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements forthe past 90 days.Yes x No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit suchfiles).Yes x No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,smaller reporting company,or anemerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerxAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act):Yes No x Indicate the number of shares outstanding of each of the issuers classes of common stock,as of the latest practicable date.Shares Outstanding as of January 27,20231,149.3 millionTable of ContentsSTARBUCKS CORPORATIONFORM 10-QFor the Quarterly Period Ended January 1,2023Table of Contents PART I.FINANCIAL INFORMATIONItem 1Financial Statements(Unaudited)3Consolidated Statements of Earnings3Consolidated Statements of Comprehensive Income4Consolidated Balance Sheets5Consolidated Statements of Cash Flows6Consolidated Statements of Equity7Index for Notes to Consolidated Financial Statements8Notes to Consolidated Financial Statements9Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations25Item 3Quantitative and Qualitative Disclosures About Market Risk35Item 4Controls and Procedures36PART II.OTHER INFORMATIONItem 1Legal Proceedings37Item 1ARisk Factors37Item 2Unregistered Sales of Equity Securities and Use of Proceeds37Item 3Defaults Upon Senior Securities37Item 4Mine Safety Disclosures37Item 5Other Information37Item 6Exhibits38Signatures39 Table of ContentsPART I FINANCIAL INFORMATIONItem 1.Financial StatementsSTARBUCKS CORPORATIONCONSOLIDATED STATEMENTS OF EARNINGS(in millions,except per share data)(unaudited)Quarter EndedJan 1,2023Jan 2,2022Net revenues:Company-operated stores$7,083.5$6,722.4 Licensed stores1,119.5 850.8 Other510.9 477.2 Total net revenues8,713.9 8,050.4 Product and distribution costs2,810.2 2,526.9 Store operating expenses3,665.3 3,400.0 Other operating expenses129.3 101.7 Depreciation and amortization expenses327.1 366.0 General and administrative expenses580.9 525.8 Restructuring and impairments5.8(7.5)Total operating expenses7,518.6 6,912.9 Income from equity investees57.8 40.3 Operating income1,253.1 1,177.8 Interest income and other,net11.6(0.1)Interest expense(129.7)(115.3)Earnings before income taxes1,135.0 1,062.4 Income tax expense279.8 246.3 Net earnings including noncontrolling interests855.2 816.1 Net earnings attributable to noncontrolling interests 0.2 Net earnings attributable to Starbucks$855.2$815.9 Earnings per share-basic$0.74$0.70 Earnings per share-diluted$0.74$0.69 Weighted average shares outstanding:Basic1,148.5 1,169.6 Diluted1,152.9 1,176.6 See Notes to Consolidated Financial Statements.3Table of ContentsSTARBUCKS CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in millions,unaudited)Quarter EndedJan 1,2023Jan 2,2022Net earnings including noncontrolling interests$855.2$816.1 Other comprehensive income/(loss),net of tax:Unrealized holding gains/(losses)on available-for-sale debt securities2.0(3.4)Tax(expense)/benefit(0.5)0.8 Unrealized gains/(losses)on cash flow hedging instruments(180.7)88.7 Tax(expense)/benefit29.5(11.8)Unrealized gains/(losses)on net investment hedging instruments(64.6)41.5 Tax(expense)/benefit16.3(10.5)Translation adjustment and other208.9 14.2 Tax(expense)/benefit Reclassification adjustment for net(gains)/losses realized in net earnings for available-for-sale debt securities,hedging instruments,and translation adjustment(98.4)(16.1)Tax expense/(benefit)11.8 2.9 Other comprehensive income/(loss)(75.7)106.3 Comprehensive income including noncontrolling interests779.5 922.4 Comprehensive income attributable to noncontrolling interests 0.2 Comprehensive income attributable to Starbucks$779.5$922.2 See Notes to Consolidated Financial Statements.4Table of ContentsSTARBUCKS CORPORATIONCONSOLIDATED BALANCE SHEETS(in millions,except per share data)(unaudited)Jan 1,2023Oct 2,2022ASSETSCurrent assets:Cash and cash equivalents$3,186.5$2,818.4 Short-term investments123.9 364.5 Accounts receivable,net1,162.9 1,175.5 Inventories2,088.1 2,176.6 Prepaid expenses and other current assets373.5 483.7 Total current assets6,934.9 7,018.7 Long-term investments283.6 279.1 Equity investments330.5 311.2 Property,plant and equipment,net6,699.5 6,560.5 Operating lease,right-of-use asset8,133.8 8,015.6 Deferred income taxes,net1,811.8 1,799.7 Other long-term assets527.6 554.2 Other intangible assets151.4 155.9 Goodwill3,383.0 3,283.5 TOTAL ASSETS$28,256.1$27,978.4 LIABILITIES AND SHAREHOLDERS EQUITY/(DEFICIT)Current liabilities:Accounts payable$1,348.2$1,441.4 Accrued liabilities2,089.6 2,137.1 Accrued payroll and benefits664.6 761.7 Current portion of operating lease liability1,257.5 1,245.7 Stored value card liability and current portion of deferred revenue2,137.0 1,641.9 Short-term debt 175.0 Current portion of long-term debt1,749.3 1,749.0 Total current liabilities9,246.2 9,151.8 Long-term debt13,176.7 13,119.9 Operating lease liability7,635.4 7,515.2 Deferred revenue6,263.2 6,279.7 Other long-term liabilities600.5 610.5 Total liabilities36,922.0 36,677.1 Shareholders deficit:Common stock($0.001 par value)authorized,2,400.0 shares;issued and outstanding,1,148.5 and 1,147.9shares,respectively1.1 1.1 Additional paid-in capital67.2 205.3 Retained deficit(8,203.2)(8,449.8)Accumulated other comprehensive income/(loss)(538.9)(463.2)Total shareholders deficit(8,673.8)(8,706.6)Noncontrolling interests7.9 7.9 Total deficit(8,665.9)(8,698.7)TOTAL LIABILITIES AND SHAREHOLDERS EQUITY/(DEFICIT)$28,256.1$27,978.4 See Notes to Consolidated Financial Statements.5Table of ContentsSTARBUCKS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(in millions,unaudited)Quarter EndedJan 1,2023Jan 2,2022OPERATING ACTIVITIES:Net earnings including noncontrolling interests$855.2$816.1 Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization342.5 386.4 Deferred income taxes,net15.8(0.3)Income earned from equity method investees(56.9)(46.6)Distributions received from equity method investees45.7 44.9 Stock-based compensation85.2 95.8 Non-cash lease costs263.7 330.4 Loss on retirement and impairment of assets21.1 50.7 Other6.7(4.9)Cash provided by/(used in)changes in operating assets and liabilities:Accounts receivable42.0(91.6)Inventories108.5(36.0)Accounts payable(117.3)84.0 Deferred revenue461.0 461.3 Operating lease liability(281.4)(363.3)Other operating assets and liabilities(198.6)144.0 Net cash provided by operating activities1,593.2 1,870.9 INVESTING ACTIVITIES:Purchases of investments(10.5)(61.0)Sales of investments0.8 72.6 Maturities and calls of investments253.3 45.6 Additions to property,plant and equipment(516.8)(416.8)Other(6.1)(41.4)Net cash used in investing activities(279.3)(401.0)FINANCING ACTIVITIES:Net proceeds/(payments)from issuance of commercial paper(175.0)200.0 Proceeds from issuance of common stock45.9 41.3 Cash dividends paid(608.3)(576.0)Repurchase of common stock(191.4)(3,520.9)Minimum tax withholdings on share-based awards(79.0)(113.6)Net cash provided by/(used in)financing activities(1,007.8)(3,969.2)Effect of exchange rate changes on cash and cash equivalents62.0 13.0 Net increase/(decrease)in cash and cash equivalents368.1(2,486.3)CASH AND CASH EQUIVALENTS:Beginning of period2,818.4 6,455.7 End of period$3,186.5$3,969.4 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for:Interest,net of capitalized interest$116.7$108.3 Income taxes$106.2$161.4 See Notes to Consolidated Financial Statements.6Table of ContentsSTARBUCKS CORPORATIONCONSOLIDATED STATEMENTS OF EQUITYFor the Quarters Ended January 1,2023 and January 2,2022(in millions,except per share data,unaudited)Common StockAdditionalPaid-inCapitalRetainedEarnings/(Deficit)AccumulatedOtherComprehensiveIncome/(Loss)ShareholdersEquity/(Deficit)NoncontrollingInterestsTotal SharesAmountBalance,October 2,20221,147.9$1.1$205.3$(8,449.8)$(463.2)$(8,706.6)$7.9$(8,698.7)Net earnings 855.2 855.2 855.2 Other comprehensive loss (75.7)(75.7)(75.7)Stock-based compensation expense 86.4 86.4 86.4 Exercise of stock options/vesting ofRSUs2.4(44.7)(44.7)(44.7)Sale of common stock0.1 11.6 11.6 11.6 Repurchase of common stock(1.9)(191.4)(191.4)(191.4)Cash dividends declared,$0.53 pershare (608.6)(608.6)(608.6)Balance,January 1,20231,148.5$1.1$67.2$(8,203.2)$(538.9)$(8,673.8)$7.9$(8,665.9)Balance,October 3,20211,180.0$1.2$846.1$(6,315.7)$147.2$(5,321.2)$6.7$(5,314.5)Net earnings 815.9 815.9 0.2 816.1 Other comprehensive income 106.3 106.3 106.3 Stock-based compensation expense 97.1 97.1 97.1 Exercise of stock options/vesting ofRSUs2.6(84.1)(84.1)(84.1)Sale of common stock0.1 11.8 11.8 11.8 Repurchase of common stock(31.1)(829.8)(2,691.1)(3,520.9)(3,520.9)Cash dividends declared,$0.49 pershare (562.1)(562.1)(562.1)Balance,January 2,20221,151.6$1.2$41.1$(8,753.0)$253.5$(8,457.2)$6.9$(8,450.3)See Notes to Consolidated Financial Statements.7Table of ContentsSTARBUCKS CORPORATIONINDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1Summary of Significant Accounting Policies and Estimates9Note 2Acquisitions,Divestitures and Strategic Alliance9Note 3Derivative Financial Instruments10Note 4Fair Value Measurements13Note 5Inventories15Note 6Supplemental Balance Sheet and Statement of Earnings Information16Note 7Other Intangible Assets and Goodwill16Note 8Debt18Note 9Leases20Note 10Deferred Revenue21Note 11Equity22Note 12Employee Stock Plans22Note 13Earnings per Share23Note 14Commitments and Contingencies23Note 15Segment Reporting24Note 16Subsequent Event248Table of ContentsSTARBUCKS CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 1:Summary of Significant Accounting Policies and EstimatesFinancial Statement PreparationThe unaudited consolidated financial statements as of January 1,2023,and for the quarters ended January 1,2023 and January 2,2022,have been prepared byStarbucks Corporation under the rules and regulations of the Securities and Exchange Commission(“SEC”).In the opinion of management,the financialinformation for the quarters ended January 1,2023 and January 2,2022 reflects all adjustments and accruals,which are of a normal recurring nature,necessaryfor a fair presentation of the financial position,results of operations and cash flows for the interim periods.In this Quarterly Report on Form 10-Q(“10-Q”),Starbucks Corporation is referred to as“Starbucks,”the“Company,”“we,”“us”or“our.”Segment information is prepared on the same basis that our management reviews financial information for operational decision-making purposes.Certain prior period information on the consolidated statements of cash flows have been reclassified to conform to the current presentation.The financial information as of October 2,2022 is derived from our audited consolidated financial statements and notes for the fiscal year ended October 2,2022(“fiscal 2022”)included in Item 8 in the Fiscal 2022 Annual Report on Form 10-K(“10-K”).The information included in this 10-Q should be read inconjunction with the footnotes and managements discussion and analysis of the consolidated financial statements in the 10-K.The results of operations for the quarter ended January 1,2023 are not necessarily indicative of the results of operations that may be achieved for the entirefiscal year ending October 1,2023(“fiscal 2023”).The novel coronavirus,known as the global COVID-19 pandemic,was first identified in December 2019 before spreading to markets where we have company-operated or licensed stores.We have since established the necessary protocols to operate safely,and in many of our markets,our businesses demonstratedpowerful momentum beyond recovery from the COVID-19 pandemic.During the first quarter of fiscal 2023,our China market continued to experiencepandemic-related business interruptions,including escalating COVID outbreaks that suppressed customer mobility.We continue to monitor the COVID-19pandemic and its effect on our business and results of operations;however,we cannot predict the duration,scope or severity of the COVID-19 pandemic or itsfuture impact on our business,results of operations,cash flows and financial condition.RestructuringIn fiscal 2022,we announced our plan in the U.S.market to increase efficiency while elevating the partner and customer experience(the“Reinvention Plan”).We believe the investments in partner wages and trainings will increase retention and productivity while the acceleration of purpose-built store concepts andinnovations in technologies will provide additional convenience and connection with our customers.As a result of the restructuring efforts in connection withthe Reinvention Plan,we recorded an immaterial charge on our consolidated statements of earnings during the quarter ended January 1,2023.Futurerestructuring and impairment costs attributable to our Reinvention Plan are not expected to be material.As of January 1,2023 and October 2,2022,there were no material restructuring-related accrued liabilities on our consolidated balance sheets.Recently Adopted Accounting PronouncementsIn the first quarter of fiscal 2022,we adopted the Financial Accounting Standards Board(“FASB”)issued guidance related to reference rate reform.Thepronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease thefinancial reporting burden related to the expected market transition from the London Interbank Offered Rate(“LIBOR”)and other interbank offered rates toalternative reference rates.The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31,2024.The adoption of the new guidance did not have a material impact on our financial statements.Note 2:Acquisitions,Divestitures and Strategic AllianceIn the fourth quarter of fiscal 2022,we sold our Evolution Fresh brand and business to Bolthouse Farms.This transaction did not have a material impact on ourconsolidated financial statements.9Table of ContentsNote 3:Derivative Financial InstrumentsInterest RatesFrom time to time,we enter into designated cash flow hedges to manage the variability in cash flows due to changes in benchmark interest rates.We enter intointerest rate swap agreements and treasury locks,which are synthetic forward sales of U.S.Treasury securities settled in cash based upon the differencebetween an agreed-upon treasury rate and the prevailing treasury rate at settlement.These agreements are cash settled at the time of the pricing of the relateddebt.Each derivative agreements gain or loss is recorded in accumulated other comprehensive income(“AOCI”)and is subsequently reclassified to interestexpense over the life of the related debt.To hedge the exposure to changes in the fair value of our fixed-rate debt,we enter into interest rate swap agreements,which are designated as fair value hedges.The changes in fair values of these derivative instruments and the offsetting changes in fair values of the underlying hedged debt due to changes in the relevantbenchmark interest rates are recorded in interest expense.Refer to Note 8,Debt,for additional information on our long-term debt.Foreign CurrencyTo reduce cash flow volatility from foreign currency fluctuations,we enter into forward and swap contracts to hedge portions of cash flows of anticipatedintercompany royalty payments,inventory purchases,and intercompany borrowing and lending activities.The resulting gains and losses from these derivativesare recorded in AOCI and subsequently reclassified to revenue,product and distribution costs,or interest income and other,net,respectively,when the hedgedexposures affect net earnings.From time to time,we may enter into financial instruments,including,but not limited to,forward and swap contracts or foreign currency-denominated debt,tohedge the currency exposure of our net investments in certain international operations.The resulting gains and losses from these derivatives are recorded inAOCI and are subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.Foreign currency forward and swap contracts not designated as hedging instruments are used to mitigate the foreign exchange risk of certain other balancesheet items.Gains and losses from these derivatives are largely offset by the financial impact of translating foreign currency-denominated payables andreceivables,and these gains and losses are recorded in interest income and other,net.CommoditiesDepending on market conditions,we may enter into coffee forward contracts,futures contracts and collars to hedge anticipated cash flows under our price-to-be-fixed green coffee contracts,which are described further in Note 5,Inventories,or our longer-dated forecasted coffee demand where underlying fixed priceand price-to-be-fixed contracts are not yet available.The resulting gains and losses are recorded in AOCI and are subsequently reclassified to product anddistribution costs when the hedged exposure affects net earnings.Depending on market conditions,we may also enter into dairy forward contracts and futures contracts to hedge a portion of anticipated cash flows under ourdairy purchase contracts and our forecasted dairy demand.The resulting gains or losses are recorded in AOCI and are subsequently reclassified to product anddistribution costs when the hedged exposure affects net earnings.Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge.Cash flows from hedging transactions areclassified in the same categories as the cash flows from the respective hedged items.For de-designated cash flow hedges in which the underlying transactionsare no longer probable of occurring,the related accumulated derivative gains or losses are recognized in interest income and other,net on our consolidatedstatements of earnings.These derivatives may be accounted for prospectively as non-designated derivatives until maturity,re-designated to new hedgingrelationships or terminated early.We continue to believe transactions related to our other designated cash flow hedges are probable to occur.To mitigate the price uncertainty of a portion of our future purchases,including diesel fuel and other commodities,we enter into swap contracts,futures andcollars that are not designated as hedging instruments.The resulting gains and losses are recorded in interest income and other,net to help offset pricefluctuations on our beverage,food,packaging and transportation costs,which are included in product and distribution costs on our consolidated statements ofearnings.10Table of ContentsGains and losses on derivative contracts and foreign currency-denominated debt designated as hedging instruments included in AOCI and expected to bereclassified into earnings within 12 months,net of tax(in millions):Net Gains/(Losses)Included in AOCINet Gains/(Losses)Expectedto be Reclassified from AOCIinto Earnings within 12MonthsOutstanding Contract/DebtRemaining Maturity(Months)Jan 1,2023Oct 2,2022Cash Flow Hedges:Coffee$(36.4)$153.9$(20.7)5Cross-currency swaps(1.7)(1.9)23Dairy(4.2)(2.6)(4.2)8Foreign currency-other12.8 55.3 12.1 33Interest rates(5.4)(5.8)0.7 0Net Investment Hedges:Cross-currency swaps52.7 67.3 111Foreign currency16.1 16.1 0Foreign currency debt88.1 125.7 15Pre-tax gains and losses on derivative contracts and foreign currency-denominated long-term debt designated as hedging instruments recognized in othercomprehensive income(“OCI”)and reclassifications from AOCI to earnings(in millions):Quarter EndedGains/(Losses)Recognized inOCI Before ReclassificationsGains/(Losses)Reclassified fromAOCI to EarningsLocation of gain/(loss)Jan 1,2023Jan 2,2022Jan 1,2023Jan 2,2022Cash Flow Hedges:Coffee$(119.4)$71.5$96.7$6.5 Product and distribution costsCross-currency swaps(11.7)4.5(2.7)(0.8)Interest expense(9.1)6.9 Interest income and other,netDairy(3.6)4.6(1.5)(0.4)Product and distribution costsForeign currency-other(46.0)6.9 8.0 2.2 Licensed stores revenue2.2(1.5)Product and distribution costs0.2 Interest income and other,netInterest rates 1.2(0.5)(0.4)Interest expenseNet Investment Hedges:Cross-currency swaps(14.0)16.3 5.3 3.4 Interest expenseForeign currency debt(50.6)25.2 Pre-tax gains and losses on non-designated derivatives and designated fair value hedging instruments and the related fair value hedged item recognized inearnings(in millions):Gains/(Losses)Recognized in EarningsLocation of gain/(loss)recognized in earningsQuarter Ended Jan 1,2023Jan 2,2022Non-Designated Derivatives:Foreign currency-otherInterest income and other,net$(11.6)$10.2 CoffeeInterest income and other,net(5.5)3.1 Diesel fuel and other commoditiesInterest income and other,net(0.2)Fair Value Hedges:Interest rate swapInterest expense(1.6)(4.8)Long-term debt(hedged item)Interest expense(3.3)8.2 11Table of ContentsNotional amounts of outstanding derivative contracts(in millions):Jan 1,2023Oct 2,2022Coffee$401$649 Cross-currency swaps1,124 741 Dairy68 94 Diesel fuel and other commodities25 33 Foreign currency-other1,305 1,269 Interest rate swaps1,100 1,100 Fair value of outstanding derivative contracts(in millions)including the location of the asset and/or liability on the consolidated balance sheets:Derivative AssetsBalance Sheet LocationJan 1,2023Oct 2,2022Designated Derivative Instruments:Cross-currency swapsOther long-term assets$85.4$115.4 DairyPrepaid expenses and other current assets0.2 0.5 Foreign currency-otherPrepaid expenses and other current assets22.4 39.9 Other long-term assets13.8 33.5 Non-designated Derivative Instruments:Diesel fuel and other commoditiesPrepaid expenses and other current assets0.1 0.4 Foreign currencyPrepaid expenses and other current assets15.8 34.3 Other long-term assets 7.3 Derivative LiabilitiesBalance Sheet LocationJan 1,2023Oct 2,2022Designated Derivative Instruments:Cross-currency swapsOther long-term liabilities$1.6$DairyAccrued liabilities3.1 2.9 Foreign currency-otherAccrued liabilities10.0 0.3 Other long-term liabilities10.1 Interest rateAccrued liabilities20.4 12.0 Interest rate swapOther long-term liabilities33.6 34.0 Non-designated Derivative Instruments:Diesel fuel and other commoditiesAccrued liabilities0.4 Foreign currencyAccrued liabilities1.3 5.8 The following amounts were recorded on the consolidated balance sheets related to fixed-to-floating interest rate swaps designated in fair value hedgingrelationships(in millions):Carrying amount of hedged itemCumulative amount of fair value hedging adjustmentincluded in the carrying amountJan 1,2023Oct 2,2022Jan 1,2023Oct 2,2022Location on the balance sheetLong-term debt$1,051.0$1,047.7$(49.0)$(52.3)Additional disclosures related to cash flow gains and losses included in AOCI,as well as subsequent reclassifications to earnings,are included in Note 11,Equity.12Table of ContentsNote 4:Fair Value MeasurementsAssets and liabilities measured at fair value on a recurring basis(in millions):Fair Value Measurements at Reporting Date Using Balance atJanuary 1,2023Quoted Prices in ActiveMarkets for Identical Assets(Level 1)Significant OtherObservable Inputs(Level 2)Significant Unobservable Inputs(Level 3)Assets:Cash and cash equivalents$3,186.5$3,042.5$144.0$Short-term investments:Available-for-sale debt securitiesCommercial paper0.2 0.2 Corporate debt securities23.2 23.2 U.S.government treasury securities8.9 8.9 Total available-for-sale debt securities32.3 8.9 23.4 Structured deposits28.8 28.8 Marketable equity securities62.8 62.8 Total short-term investments123.9 71.7 52.2 Prepaid expenses and other current assets:Derivative assets38.5 38.5 Long-term investments:Available-for-sale debt securitiesCorporate debt securities136.4 136.4 Foreign government obligations3.8 3.8 Mortgage and other asset-backedsecurities53.3 53.3 State and local government obligations1.3 1.3 U.S.government treasury securities88.8 88.8 Total long-term investments283.6 88.8 194.8 Other long-term assets:Derivative assets99.2 99.2 Total assets$3,731.7$3,203.0$528.7$Liabilities:Accrued liabilities:Derivative liabilities$35.2$35.2$Other long-term liabilities:Derivative liabilities45.3 45.3 Total liabilities$80.5$80.5$13Table of Contents Fair Value Measurements at Reporting Date Using Balance atOctober 2,2022Quoted Prices in ActiveMarkets for Identical Assets(Level 1)Significant OtherObservable Inputs(Level 2)SignificantUnobservable Inputs(Level 3)Assets:Cash and cash equivalents$2,818.4$2,797.3$21.1$Short-term investments:Available-for-sale debt securitiesCorporate debt securities22.4 22.4 U.S.government treasury securities9.3 9.3 Total available-for-sale debt securities31.7 9.3 22.4 Structured deposits275.1 275.1 Marketable equity securities57.7 57.7 Total short-term investments364.5 67.0 297.5 Prepaid expenses and other current assets:Derivative assets75.1 75.1 Long-term investments:Available-for-sale debt securitiesCorporate debt securities134.7 134.7 Foreign government obligations3.8 3.8 Mortgage and other asset-backedsecurities56.5 56.5 State and local government obligations1.3 1.3 U.S.government treasury securities82.8 82.8 Total long-term investments279.1 82.8 196.3 Other long-term assets:Derivative assets156.2 156.2 Total assets$3,693.3$2,947.1$746.2$Liabilities:Accrued liabilities:Derivative liabilities$21.0$21.0$Other long-term liabilities:Derivative liabilities34.0 34.0 Total liabilities$55.0$55.0$There were no material transfers between levels and there was no significant activity within Level 3 instruments during the periods presented.The fair valuesof any financial instruments presented above exclude the impact of netting assets and liabilities when a legally enforceable master netting agreement exists.Gross unrealized holding gains and losses on available-for-sale debt securities,structured deposits and marketable equity securities were not material as ofJanuary 1,2023 and October 2,2022.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisAssets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property,plantand equipment,ROU assets,goodwill and other intangible assets and other assets.These assets are measured at fair value if determined to be impaired.14Table of ContentsThe estimated fair value of our long-term debt based on the quoted market price(Level 2)is included at Note 8,Debt.There were no material fair valueadjustments during the quarters ended January 1,2023 and January 2,2022.Note 5:Inventories(in millions):Jan 1,2023Oct 2,2022Coffee:Unroasted$1,015.1$1,018.6 Roasted293.2 310.3 Other merchandise held for sale383.5 430.9 Packaging and other supplies396.3 416.8 Total$2,088.1$2,176.6 Other merchandise held for sale includes,among other items,serveware,food and tea.Inventory levels vary due to seasonality,commodity market supply andprice fluctuations.As of January 1,2023,we had committed to purchasing green coffee totaling$333.3 million under fixed-price contracts and an estimated$773.2 million underprice-to-be-fixed contracts.A portion of our price-to-be-fixed contracts are effectively fixed through the use of futures.See Note 3,Derivative FinancialInstruments,for further discussion.Price-to-be-fixed contracts are purchase commitments whereby the quality,quantity,delivery period and other negotiatedterms are agreed upon,but the date,and therefore the price,at which the base“C”coffee commodity price component will be fixed has not yet beenestablished.For most contracts,either Starbucks or the seller has the option to“fix”the base“C”coffee commodity price prior to the delivery date.For othercontracts,Starbucks and the seller may agree upon pricing parameters determined by the base“C”coffee commodity price.Until prices are fixed,we estimatethe total cost of these purchase commitments.We believe,based on established relationships with our suppliers and continuous monitoring,the risk of non-delivery on these purchase commitments is remote.15Table of ContentsNote 6:Supplemental Balance Sheet and Statement of Earnings Information(in millions):Prepaid Expenses and Other Current AssetsJan 1,2023Oct 2,2022Income tax receivable$10.0$27.7 Government subsidies receivable28.4 69.4 Other prepaid expenses and current assets335.1 386.6 Total prepaid expenses and current assets$373.5$483.7 Property,Plant and Equipment,netJan 1,2023Oct 2,2022Land$46.1$46.1 Buildings566.6 555.4 Leasehold improvements9,368.6 9,066.8 Store equipment3,086.6 3,018.2 Roasting equipment809.3 838.5 Furniture,fixtures and other1,578.4 1,526.1 Work in progress603.0 558.7 Property,plant and equipment,gross16,058.6 15,609.8 Accumulated depreciation(9,359.1)(9,049.3)Property,plant and equipment,net$6,699.5$6,560.5 Accrued LiabilitiesJan 1,2023Oct 2,2022Accrued occupancy costs$77.9$84.6 Accrued dividends payable608.6 608.3 Accrued capital and other operating expenditures683.8 878.1 Self-insurance reserves243.6 232.3 Income taxes payable280.1 139.2 Accrued business taxes195.6 194.6 Total accrued liabilities$2,089.6$2,137.1 Store Operating ExpensesQuarter EndedJan 1,2023Jan 2,2022Wages and benefits$2,215.7$2,010.7 Occupancy costs671.5 665.3 Other expenses778.1 724.0 Total store operating expenses$3,665.3$3,400.0 Note 7:Other Intangible Assets and GoodwillIndefinite-Lived Intangible Assets(in millions)Jan 1,2023Oct 2,2022Trade names,trademarks and patents$97.8$97.5 16Table of ContentsFinite-Lived Intangible AssetsJan 1,2023Oct 2,2022(in millions)Gross CarryingAmountAccumulatedAmortizationNet CarryingAmountGross CarryingAmountAccumulatedAmortizationNet CarryingAmountAcquired and reacquired rights$1,030.4$(1,030.4)$990.0$(990.0)$Acquired trade secrets and processes27.6(27.6)27.6(27.3)0.3 Trade names,trademarks and patents125.0(74.5)50.5 124.6(69.6)55.0 Licensing agreements18.4(15.3)3.1 19.3(16.2)3.1 Other finite-lived intangible assets21.0(21.0)20.6(20.6)Total finite-lived intangible assets$1,222.4$(1,168.8)$53.6$1,182.1$(1,123.7)$58.4 Amortization expense for finite-lived intangible assets was$5.6 million for the quarter ended January 1,2023 and$50.2 million for the quarter endedJanuary 2,2022,respectively.Estimated future amortization expense as of January 1,2023(in millions):Fiscal YearTotal2023(excluding the quarter ended January 1,2023)$15.2 202420.0 202514.0 20261.3 20271.0 Thereafter2.1 Total estimated future amortization expense$53.6 GoodwillChanges in the carrying amount of goodwill by reportable operating segment(in millions):North AmericaInternationalChannel DevelopmentCorporate and OtherTotalGoodwill balance at October 2,2022$491.1$2,756.7$34.7$1.0$3,283.5 Other0.3 99.2 99.5 Goodwill balance at January 1,2023$491.4$2,855.9$34.7$1.0$3,383.0“Other”consists of changes in the goodwill balance resulting from foreign currency translation.(1)(1)17Table of ContentsNote 8:DebtRevolving Credit FacilityOur$3.0 billion unsecured five-year revolving credit facility(the“2021 credit facility”),of which$150 million may be used for issuances of letters of credit,iscurrently set to mature on September 16,2026.The 2021 credit facility is available for working capital,capital expenditures and other corporate purposes,including acquisitions and share repurchases.We have the option,subject to negotiation and agreement with the related banks,to increase the maximumcommitment amount by an additional$1.0 billion.Borrowings under the 2021 credit facility will bear interest at a variable rate based on LIBOR,and,for U.S.dollar-denominated loans under certaincircumstances,a Base Rate(as defined in the 2021 credit facility),in each case plus an applicable margin.The applicable margin is based on the Companyslong-term credit ratings assigned by the Moodys and Standard&Poors rating agencies.The 2021 credit facility contains alternative interest rate provisionsspecifying rate calculations to be used at such time LIBOR ceases to be available as a benchmark due to reference rate reform.The“Base Rate”is the highestof(i)the Federal Funds Rate(as defined in the 2021 credit facility)plus 0.500%,(ii)Bank of Americas prime rate,and(iii)the Eurocurrency Rate(as definedin the 2021 credit facility)plus 1.000%.The 2021 credit facility contains provisions requiring us to maintain compliance with certain covenants,including a minimum fixed charge coverage ratio,which measures our ability to cover financing expenses.As of January 1,2023,we were in compliance with all applicable covenants.No amounts wereoutstanding under our 2021 credit facility as of January 1,2023 or October 2,2022.Short-term DebtUnder our commercial paper program,we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of$3.0billion,with individual maturities that may vary but not exceed 397 days from the date of issue.Amounts outstanding under the commercial paper program arerequired to be backstopped by available commitments under our 2021 credit facility.The proceeds from borrowings under our commercial paper program maybe used for working capital needs,capital expenditures and other corporate purposes,including,but not limited to,business expansion,payment of cashdividends on our common stock and share repurchases.As of January 1,2023,we had no borrowings outstanding under the program.As of October 2,2022,we had$175.0 million in borrowings outstanding under this program.Additionally,we hold the following Japanese yen-denominated credit facilities that are available for working capital needs and capital expenditures within ourJapanese market:A 5 billion,or$37.6 million,credit facility is currently set to mature on January 4,2024.Borrowings under this credit facility are subject to termsdefined within the facility and will bear interest at a variable rate based on Tokyo Interbank Offered Rate(TIBOR)plus an applicable margin of0.400%.A 10 billion,or$75.2 million,credit facility is currently set to mature on March 27,2023.Borrowings under this credit facility are subject to termsdefined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.350%.As of January 1,2023 and October 2,2022,we had no borrowings outstanding under these Japanese yen-denominated credit facilities.18Table of ContentsLong-term DebtComponents of long-term debt including the associated interest rates and related estimated fair values by calendar maturity(in millions,except interest rates):Jan 1,2023Oct 2,2022Stated Interest RateEffective InterestRateIssuanceAmountEstimated FairValueAmountEstimated FairValueMarch 2023 notes$1,000.0$996.6$1,000.0$996.5 3.100%3.107%October 2023 notes750.0 745.0 750.0 744.8 3.850%2.859bruary 2024 notes500.0 496.8 500.0 497.3 4.590%4.821%March 2024 notes639.0 653.5 588.4 584.7 0.372%0.462%August 2025 notes1,250.0 1,225.3 1,250.0 1,209.6 3.800%3.721%June 2026 notes500.0 465.6 500.0 458.3 2.450%2.511%March 2027 notes500.0 447.5 500.0 437.9 2.000%2.058%March 2028 notes600.0 565.2 600.0 554.8 3.500%3.529%November 2028 notes750.0 713.8 750.0 704.7 4.000%3.958%August 2029 notes1,000.0 924.7 1,000.0 900.3 3.550%3.840%March 2030 notes750.0 625.2 750.0 607.7 2.250%3.084%November 2030 notes1,250.0 1,052.7 1,250.0 1,017.9 2.550%2.582bruary 2032 notes1,000.0 857.8 1,000.0 827.1 3.000%3.155%June 2045 notes350.0 296.4 350.0 281.5 4.300%4.348cember 2047 notes500.0 381.5 500.0 369.6 3.750%3.765%November 2048 notes1,000.0 866.6 1,000.0 824.6 4.500%4.504%August 2049 notes1,000.0 857.0 1,000.0 817.8 4.450%4.447%March 2050 notes500.0 356.1 500.0 342.0 3.350%3.362%November 2050 notes1,250.0 906.3 1,250.0 874.9 3.500%3.528%Total15,089.0 13,433.6 15,038.4 13,052.0 Aggregate debt issuance costs andunamortized premium/(discount),net(114.0)(117.2)Hedge accounting fair value adjustment(49.0)(52.3)Total$14,926.0$14,868.9 Includes the effects of the amortization of any premium or discount and any gain or loss upon settlement of related treasury locks or forward-startinginterest rate swaps utilized to hedge interest rate risk prior to the debt issuance.Amount includes the change in fair value due to changes in benchmark interest rates related to hedging our October 2023 notes and$350 million of ourAugust 2029 notes.Refer to Note 3,Derivative Financial Instruments,for additional information on our interest rate swaps designated as fair value hedges.Floating rate notes which bear interest at a rate equal to Compounded SOFR(as defined in the February 2024 notes)plus 0.420%,resulting in a statedinterest rate of 4.590%at January 1,2023.Japanese yen-denominated long-term debt.(1)(2)(3)(4)(2)(2)(1)(2)(3)(4)19Table of ContentsThe following table summarizes our long-term debt maturities as of January 1,2023 by fiscal year(in millions):Fiscal YearTotal2023$1,750.0 20241,139.0 20251,250.0 2026500.0 2027500.0 Thereafter9,950.0 Total$15,089.0 Note 9:LeasesThe components of lease costs(in millions):Quarter EndedJan 1,2023Jan 2,2022Operating lease costs$384.8$386.1 Variable lease costs235.3 229.8 Short-term lease costs7.0 7.1 Total lease costs$627.1$623.0 Includes immaterial amounts of sublease income and rent concessions.The following table includes supplemental information(in millions):Quarter EndedJan 1,2023Jan 2,2022Cash paid related to operating lease liabilities$404.1$410.0 Operating lease liabilities arising from obtaining ROU assets367.3 346.8 Jan 1,2023Jan 2,2022Weighted-average remaining operating lease term8.5 years8.6 yearsWeighted-average operating lease discount rate2.7%2.5%Finance lease assets are recorded in property,plant and equipment,net with the corresponding lease liabilities included in accrued liabilities and other long-term liabilities on the consolidated balance sheet.There were no material finance leases as of January 1,2023 and October 2,2022.Minimum future maturities of operating lease liabilities(in millions):Fiscal YearTotal2023(excluding the quarter ended January 1,2023)$1,511.5 20241,472.9 20251,332.8 20261,177.8 2027975.4 Thereafter3,600.2 Total lease payments10,070.6 Less imputed interest(1,177.7)Total$8,892.9 As of January 1,2023,we have entered into operating leases that have not yet commenced of$1.2 billion,primarily related to real estate leases.These leaseswill commence between fiscal year 2023 and fiscal year 2028 with lease terms ranging from three to twenty years.(1)(1)20Table of ContentsNote 10:Deferred RevenueOur deferred revenue primarily consists of the prepaid royalty from Nestl,for which we have continuing performance obligations to support the Global CoffeeAlliance,our unredeemed stored value card liability and unredeemed loyalty points(“Stars”)associated with our loyalty program.As of January 1,2023,the current and long-term deferred revenue related to Nestl was$177.0 million and$6.1 billion,respectively.As of October 2,2022,the current and long-term deferred revenue related to the Nestl up-front payment was$177.0 million and$6.2 billion,respectively.During the quarter endedJanuary 1,2023,we recognized$44.1 million of prepaid royalty revenue related to Nestl.During the quarter ended January 2,2022,we recognized$44.2million of prepaid royalty revenue related to Nestl.Changes in our deferred revenue balance related to our stored value cards and loyalty program(in millions):Quarter Ended January 1,2023TotalStored value cards and loyalty program at October 2,2022$1,503.0 Revenue deferred-card activations,card reloads and Stars earned4,223.4 Revenue recognized-card and Stars redemptions and breakage(3,714.1)Other13.3 Stored value cards and loyalty program at January 1,2023$2,025.6 Quarter Ended January 2,2022TotalStored value cards and loyalty program at October 3,2021$1,448.5 Revenue deferred-card activations,card reloads and Stars earned3,917.5 Revenue recognized-card and Stars redemptions and breakage(3,410.8)Other(2.7)Stored value cards and loyalty program at January 2,2022$1,952.5“Other”primarily consists of changes in the stored value cards and loyalty program balances resulting from foreign currency translation.As of January 1,2023 and January 2,2022,approximately$1.9 billion and$1.8 billion of these amounts were current,respectively.(1)(2)(1)(2)(1)(2)21Table of ContentsNote 11:EquityChanges in AOCI by component,net of tax(in millions):Quarter Ended Available-for-SaleDebt Securities Cash Flow Hedges Net InvestmentHedgesTranslationAdjustment andOtherTotalJanuary 1,2023Net gains/(losses)in AOCI,beginning of period$(15.5)$199.0$209.1$(855.8)$(463.2)Net gains/(losses)recognized in OCI beforereclassifications1.5(151.2)(48.3)208.9 10.9 Net(gains)/losses reclassified from AOCI to earnings0.1(82.7)(4.0)(86.6)Other comprehensive income/(loss)attributable toStarbucks1.6(233.9)(52.3)208.9(75.7)Net gains/(losses)in AOCI,end of period$(13.9)$(34.9)$156.8$(646.9)$(538.9)January 2,2022Net gains/(losses)in AOCI,beginning of period$1.5$158.3$48.6$(61.2)$147.2 Net gains/(losses)recognized in OCI beforereclassifications(2.6)76.9 31.0 14.2 119.5 Net(gains)/losses reclassified from AOCI to earnings(0.1)(10.6)(2.5)(13.2)Other comprehensive income/(loss)attributable toStarbucks(2.7)66.3 28.5 14.2 106.3 Net gains/(losses)in AOCI,end of period$(1.2)$224.6$77.1$(47.0)$253.5 Impact of reclassifications from AOCI on the consolidated statements of earnings(in millions):Quarter EndedAOCIComponentsAmounts Reclassified from AOCIAffected Line Item inthe Statements of EarningsJan 1,2023Jan 2,2022Gains/(losses)on available-for-sale debt securities$(0.2)$0.2 Interest income and other,netGains/(losses)on cash flow hedges93.3 12.5 Please refer to Note 3,Derivative Financial Instrumentsfor additional information.Gains/(losses)on net investment hedges5.3 3.4 Interest expense98.4 16.1 Total before tax(11.8)(2.9)Tax expense$86.6$13.2 Net of taxIn addition to 2.4 billion shares of authorized common stock with$0.001 par value per share,the Company has authorized 7.5 million shares of preferred stock,none of which was outstanding as of January 1,2023.During the quarters ended January 1,2023 and January 2,2022,we repurchased 1.9 million and 31.1 million shares of common stock for$191.4 million and$3.5 billion,respectively.As of January 1,2023,50.6 million shares remained available for repurchase under current authorizations.During the first quarter of fiscal 2023,our Board of Directors approved a quarterly cash dividend to shareholders of$0.53 per share to be paid on February 24,2023 to shareholders of record as of the close of business on February 10,2023.Note 12:Employee Stock PlansAs of January 1,2023,there were 91.8 million shares of common stock available for issuance pursuant to future equity-based compensation awards and 10.7million shares available for issuance under our employee stock purchase plan.22Table of ContentsStock-based compensation expense recognized in the consolidated statements of earnings(in millions):Quarter Ended Jan 1,2023Jan 2,2022Restricted Stock Units(“RSUs”)$85.0$95.7 Options0.1 0.1 Total stock-based compensation expense$85.1$95.8 Stock option and RSU transactions from October 2,2022 through January 1,2023(in millions):Stock OptionsRSUsOptions outstanding/Nonvested RSUs,October 2,20224.1 7.0 Granted 4.0 Options exercised/RSUs vested(0.7)(2.7)Forfeited/expired(0.2)Options outstanding/Nonvested RSUs,January 1,20233.4 8.1 Total unrecognized stock-based compensation expense,net of estimated forfeitures,as of January 1,2023$345.3 Note 13:Earnings per ShareCalculation of net earnings per common share(“EPS”)basic and diluted(in millions,except EPS):Quarter EndedJan 1,2023Jan 2,2022Net earnings attributable to Starbucks$855.2$815.9 Weighted average common shares outstanding(for basic calculation)1,148.5 1,169.6 Dilutive effect of outstanding common stock options and RSUs4.4 7.0 Weighted average common and common equivalent shares outstanding(for diluted calculation)1,152.9 1,176.6 EPS basic$0.74$0.70 EPS diluted$0.74$0.69 Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options(both vested and non-vested)andunvested RSUs,calculated using the treasury stock method.The calculation of dilutive shares outstanding excludes anti-dilutive stock options or RSUs,whichwere immaterial in the periods presented.Note 14:Commitments and ContingenciesLegal ProceedingsIn 2010 and 2011,an organization named Council for Education and Research on Toxics(“Plaintiff”)filed lawsuits in the Superior Court of the State ofCalifornia,County of Los Angeles,against the Company and other companies who manufacture,package,distribute or sell brewed coffee.The suits were laterconsolidated into a single action.Plaintiff alleged that the Company and the other defendants failed to provide warnings for their coffee products of exposure tothe chemical acrylamide as required under California Health and Safety Code section 25249.5,the California Safe Drinking Water and Toxic Enforcement Actof 1986,better known as Proposition 65.Plaintiff sought equitable relief,including providing warnings to consumers of coffee products,as well as civilpenalties in the amount of the statutory maximum of two thousand five hundred dollars per day per alleged violation of Proposition 65,which the Plaintiffclaimed was every day coffee is sold without a compliant warning.The Company denied the claims.During the pendency of the litigation,the California Office of Environmental Health Hazard Assessment(“OEHHA”)proposed a new regulation clarifying thatcancer warnings are not required for coffee under Proposition 65.The regulation was approved by the Office of Administrative Law and became effective onOctober 1,2019.In 2020,the trial court granted the defendants motion for summary judgment,ruling that the coffee exemption regulation is a completedefense to the Plaintiffs complaint.On October 26,2022,the California Court of Appeal affirmed the trial courts dismissal of the case.The Plaintiffssubsequent request for a rehearing before the California Court of Appeals was denied.On December 2,2022 Plaintiff filed a petition for review in theCalifornia Supreme Court and Starbucks filed a response brief on December 22,2022.Starbucks believes that the likelihood that the Company will ultimatelyincur a material loss in connection with this litigation is less than reasonably possible.Accordingly,as of January 1,2023,no loss contingency has beenrecorded for this matter.23Table of ContentsStarbucks is involved in various other legal proceedings arising in the ordinary course of business,including certain employment litigation cases that have beencertified as class or collective actions,but,except as noted above,is not currently a party to any legal proceeding that management believes could have amaterial adverse effect on our consolidated financial position,results of operations or cash flows.Note 15:Segment ReportingSegment information is prepared on the same basis that our interim chief executive officer,who is our chief operating decision maker,manages the segments,evaluates financial results and makes key operating decisions.Consolidated revenue mix by product type(in millions):Quarter EndedJan 1,2023Jan 2,2022Beverage$5,173.0 59%$4,898.4 61%Food1,565.9 18%1,434.6 18%Other1,975.0 23%1,717.4 21%Total$8,713.9 100%$8,050.4 100verage represents sales within our company-operated stores.Food includes sales within our company-operated stores.Other primarily consists of packaged and single-serve coffees and teas,royalty and licensing revenues,serveware,beverage-related ingredients and ready-to-drink beverages,among other items.The tables below present financial information for our reportable operating segments and Corporate and Other segment(in millions):Quarter EndedNorth AmericaInternationalChannelDevelopmentCorporate andOtherTotalJanuary 1,2023Total net revenues$6,551.3$1,680.1$478.2$4.3$8,713.9 Depreciation and amortization expenses216.9 81.5 28.7 327.1 Income from equity investees 0.5 57.3 57.8 Operating income/(loss)1,212.4 240.4 226.3(426.0)1,253.1 January 2,2022Total net revenues$5,732.3$1,875.9$417.1$25.1$8,050.4 Depreciation and amortization expenses200.0 133.1 32.9 366.0 Income from equity investees 0.7 39.6 40.3 Operating income/(loss)1,083.1 299.6 183.2(388.1)1,177.8 Note 16:Subsequent EventOn January 13,2023,Starbucks finalized the sale of the Seattles Best Coffee brand to Nestl and will recognize a pre-tax gain of approximately$90 million inthe second quarter of fiscal 2023.With the exception of recognizing the sale to Nestl,we do not expect the transaction will have a material impact on ourongoing operations and future financial results.(1)(2)(3)(1)(2)(3)24Table of ContentsItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsCAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995Certain statements contained herein are“forward-looking”statements within the meaning of applicable securities laws and regulations.Generally,thesestatements can be identified by the use of words such as“aim,”“anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“feel,”“forecast,”“intend,”“may,”“outlook,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“will,”“would,”and similar expressions intended to identifyforward-looking statements,although not all forward-looking statements contain these identifying words.These statements include statements relating to trendsin or expectations relating to the effects of our existing and any future initiatives,strategies,investments and plans,including our Reinvention Plan,as well astrends in or expectations regarding our financial results and long-term growth model and drivers;our operations in the U.S.and China;our environmental,social and governance efforts;our partners;economic and consumer trends,including the impact of inflationary pressures;impact of foreign currencytranslation;strategic pricing actions;the conversion of certain market operations to fully licensed models;our plans for streamlining our operations,including store openings,closures and changes in store formats and models;the success of our licensing relationship with Nestl,of our consumer packagedgoods and foodservice business and its effects on our Channel Development segment results;tax rates;business opportunities,expansions and new initiatives,including Starbucks Odyssey;strategic acquisitions;our dividends programs;commodity costs and our mitigation strategies;our liquidity,cash flow fromoperations,investments,borrowing capacity and use of proceeds;continuing compliance with our covenants under our credit facilities and commercial paperprogram;repatriation of cash to the U.S.;the likelihood of the issuance of additional debt and the applicable interest rate;the continuing impact of theCOVID-19 pandemic on our financial results and future availability of governmental subsidies for COVID-19 or other public health events;our ceo transition;our share repurchase program;our use of cash and cash requirements;the expected effects of new accounting pronouncements and the estimated impact ofchanges in U.S.tax law,including on tax rates,investments funded by these changes and potential outcomes;and effects of legal proceedings.Such statementsare based on currently available operating,financial and competitive information and are subject to various risks and uncertainties.Actual future results andtrends may differ materially depending on a variety of factors,including,but not limited to:the continuing impact of COVID-19 on our business;regulatorymeasures or voluntary actions that may be put in place to limit the spread of COVID-19,including restrictions on business operations or social distancingrequirements,and the duration and efficacy of such restrictions;the resurgence of COVID-19 infections and the circulation of novel variants of COVID-19;fluctuations in U.S.and international economies and currencies;our ability to preserve,grow and leverage our brands;the ability of our business partnersand third-party providers to fulfill their responsibilities and commitments;potential negative effects of incidents involving food or beverage-borne illnesses,tampering,adulteration,contamination or mislabeling;potential negative effects of material breaches of our information technology systems to the extent weexperience a material breach;material failures of our information technology systems;costs associated with,and the successful execution of,the Companysinitiatives and plans;new initiatives and plans or revisions to existing initiatives or plans;our ability to obtain financing on acceptable terms;the acceptanceof the Companys products by our customers,evolving consumer preferences and tastes and changes in consumer spending behavior;partner investments,changes in the availability and cost of labor including any union organizing efforts and our responses to such efforts;failure to attract or retain key executiveor employee talent or successfully transition executives;significant increased logistics costs;inflationary pressures;the impact of competition;inherent risks ofoperating a global business including any potential negative effects stemming from the Russian invasion of Ukraine;the prices and availability of coffee,dairyand other raw materials;the effect of legal proceedings;and the effects of changes in tax laws and related guidance and regulations that may be implemented,including the Inflation Reduction Act of 2022 and other risks detailed in our filings with the SEC,including in the Risk Factors”and“ManagementsDiscussion and Analysis of Financial Condition and Results of Operations”sections of the companys most recently filed periodic reports on Form 10-K andForm 10-Q and subsequent filings.A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances,and those future events or circumstances may not occur.You should not place undue reliance on the forward-looking statements,which speak only as of the date of this report.We are under no obligation to update oralter any forward-looking statements,whether as a result of new information,future events or otherwise.This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the auditedconsolidated financial statements and notes,and Managements Discussion and Analysis of Financial Condition and Results of Operations(“MD&A”),contained in the 10-K filed with the SEC on November 18,2022.Introduction and OverviewStarbucks is the premier roaster,marketer and retailer of specialty coffee in the world,operating in 84 markets.As of January 1,2023,Starbucks had more than36,100 company-operated and licensed stores,an increase of 5%from the prior year.Additionally,we sell a variety of consumer-packaged goods,primarilythrough the Global Coffee Alliance established with Nestl and other partnerships and joint ventures.During the quarter ended January 1,2023,our globalcomparable store sales25Table of Contentsgrew 5%,primarily driven by 10%growth in the U.S.market,partially offset by COVID-19 pandemic-related business conditions in China,leading to a 29crease in China comparable store sales.We have three reportable operating segments:1)North America,which is inclusive of the U.S.and Canada,2)International,which is inclusive of China,Japan,Asia Pacific,Europe,Middle East,Africa,Latin America and the Caribbean;and 3)Channel Development.Non-reportable operating segments and unallocatedcorporate expenses are reported within Corporate and Other.We believe our financial results and long-term growth model will continue to be driven by new store openings,comparable store sales growth and operatingmargin management,underpinned by disciplined capital allocation.We believe these key operating metrics are useful to investors because management usesthese metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies.Throughout this MD&A,we commonlydiscuss the following key operating metrics:New store openings and store countComparable store sales growthOperating marginComparable store sales growth represents the percentage change in sales in one period from the same prior year period for company-operated stores open for13 months or longer and exclude the impact of foreign currency translation.We analyze comparable store sales growth on a constant currency basis as thishelps identify underlying business trends,without distortion from the effects of currency movements.Stores that are temporarily closed or operating at reducedhours due to the COVID-19 pandemic remain in comparable store sales while stores identified for permanent closure have been removed.Our fiscal year ends on the Sunday closest to September 30.Fiscal 2023 and 2022 included 52 weeks.All references to store counts,including data for newstore openings,are reported net of store closures,unless otherwise noted.Starbucks results for the first quarter of fiscal 2023 demonstrate the overall strength and resilience of our brand,despite continued COVID-19 pandemic relateddisruptions in our China market and continued inflationary pressures.Consolidated net revenues increased 8%to$8.7 billion in the first quarter of fiscal 2023compared to$8.1 billion in the first quarter of fiscal 2022,primarily driven by strength in our U.S.business and growth in our International segment excludingChina,partially offset by COVID-19 pandemic related disruptions in China and unfavorable foreign currency translation.Consolidated operating margindecreased 20 basis points from the prior year to 14.4%,primarily driven by previously committed investments in labor including enhanced store partner wagesand benefits,inflationary pressures and sales deleverage in China,partially offset by strategic pricing in North America and sales leverage across marketsoutside of China.For both the North America segment and our U.S.market,comparable store sales increased 10%for the first quarter of fiscal 2023 compared to an increase of18%in the first quarter of fiscal 2022.Average ticket for both the North America segment and the U.S.market grew 9%,primarily driven by strategic pricing.The segment also experienced higher costs,primarily related to enhancements in retail store partner wages and benefits,as well as increased supply chain costsdue to inflationary pressures.For the International segment,comparable store sales declined 13%for the first quarter of fiscal 2023,driven by comparable store sales decline of 29%in ourChina market,which experienced suppressed customer mobility and store closures due to pandemic-related restrictions and a spike in infections.Thesecontributed to a decline in both revenue and operating margin for the segment.The unfavorable impacts were partially offset by strong growth in our majorinternational markets outside of China.Net revenues for our Channel Development segment increased$61 million,or 15%,when compared with the first quarter of fiscal 2022.This was due tohigher product sales to and royalty revenue from the Global Coffee Alliance and growth in our ready-to-drink business.Despite COVID-19 induced business interruptions in our China market,we have seen the strength and resilience of our brand as well as strong customerdemand across our portfolio.While we anticipate continued inflationary pressure,albeit to a lesser extent than in fiscal 2022,and COVID-related interruptionsin the China market,we expect improved financial performance in the second half of fiscal 2023,driven by sales leverage,pricing,productivity gains fromReinvention,as well as recovery in China.Absent significant and prolonged COVID-19 relapses or global economic disruptions,we believe our strategy willresult in sustainable and profitable growth over the long-term.26Table of ContentsResults of Operations(in millions)Revenues Quarter EndedJan 1,2023Jan 2,2022$Change%ChangeCompany-operated stores$7,083.5$6,722.4$361.1 5.4%Licensed stores1,119.5 850.8 268.7 31.6 Other510.9 477.2 33.7 7.1 Total net revenues$8,713.9$8,050.4$663.5 8.2%For the quarter ended January 1,2023 compared with the quarter ended January 2,2022Total net revenues for the first quarter of fiscal 2023 increased$664 million,primarily due to higher revenues from company-operated stores($361 million).The growth of company-operated stores revenue was driven by a 5%increase in comparable store sales($328 million),attributable to a 7%increase in averageticket offset by a 2crease in comparable transactions.Also contributing was incremental revenues from 1,005 net new Starbucks company-operatedstores,or a 6%increase,over the past 12 months($259 million).Partially offsetting these increases was unfavorable foreign currency translation($225million).Licensed stores revenue increased$269 million contributing to the increase in total net revenues,driven by higher product and equipment sales to and royaltyrevenues from our licensees($299 million).Partially offsetting this increase was unfavorable foreign currency translation($35 million).Other revenues increased$34 million,primarily due to higher product sales and royalty revenue in the Global Coffee Alliance.Operating Expenses Quarter EndedJan 1,2023Jan 2,2022$ChangeJan 1,2023Jan 2,2022 As a%of TotalNet RevenuesProduct and distribution costs$2,810.2$2,526.9$283.3 32.21.4%Store operating expenses3,665.3 3,400.0 265.3 42.1 42.2 Other operating expenses129.3 101.7 27.6 1.5 1.3 Depreciation and amortization expenses327.1 366.0(38.9)3.8 4.5 General and administrative expenses580.9 525.8 55.1 6.7 6.5 Restructuring and impairments5.8(7.5)13.3 0.1(0.1)Total operating expenses7,518.6 6,912.9 605.7 86.3 85.9 Income from equity investees57.8 40.3 17.5 0.7 0.5 Operating income$1,253.1$1,177.8$75.3 14.4.6%Store operating expenses as a%of company-operated stores revenue51.7P.6%For the quarter ended January 1,2023 compared with the quarter ended January 2,2022Product and distribution costs as a percentage of total net revenues increased 80 basis points for the first quarter of fiscal 2023,primarily due to higher supplychain costs driven by inflationary pressures.Store operating expenses as a percentage of total net revenues decreased 10 basis points for the first quarter of fiscal 2023.Store operating expenses as apercentage of company-operated stores revenue increased 110 basis points,primarily due to enhancements in retail store partner wages and benefits(approximately 350 basis points)and increased spend on new partner training(approximately 60 basis points),partially offset by sales leverage.Other operating expenses increased$28 million for the first quarter of fiscal 2023,primarily due to higher support costs for our growing licensed markets($8million)and strategic investments in technology and other initiatives($8 million).Depreciation and amortization expenses as a percentage of total net revenues decreased 70 basis points,primarily due to lapping amortization expenses ofacquisition-related intangibles assets.27Table of ContentsGeneral and administrative expenses increased$55 million,primarily due to incremental investments in technology($28 million)and increased support coststo address labor market conditions and leadership training($17 million).Income from equity investees increased$18 million,primarily due to higher income from our North American Coffee Partnership joint venture.The combination of these changes resulted in an overall decrease in operating margin of 20 basis points for the first quarter of fiscal 2023.Other Income and Expenses Quarter EndedJan 1,2023Jan 2,2022$ChangeJan 1,2023Jan 2,2022As a%of TotalNet RevenuesOperating income$1,253.1$1,177.8$75.3 14.4.6%Interest income and other,net11.6(0.1)11.7 0.1 Interest expense(129.7)(115.3)(14.4)(1.5)(1.4)Earnings before income taxes1,135.0 1,062.4 72.6 13.0 13.2 Income tax expense279.8 246.3 33.5 3.2 3.1 Net earnings including noncontrolling interests855.2 816.1 39.1 9.8 10.1 Net earnings attributable to noncontrolling interests 0.2(0.2)Net earnings attributable to Starbucks$855.2$815.9$39.3 9.8.1fective tax rate including noncontrolling interests24.6#.2%For the quarter ended January 1,2023 compared with the quarter ended January 2,2022Interest income and other,net increased$12 million,primarily due to lower net losses from certain investments.Interest expense increased$14 million,primarily due to rising interest rates on floating rate debt and additional interest incurred on long-term debt issued inFebruary 2022.The effective tax rate for the quarter ended January 1,2023 was 24.6%compared to 23.2%for the same period in fiscal 2022.The increase was primarily dueto a decrease in stock-based compensation excess tax benefits(approximately 150 basis points).28Table of ContentsSegment InformationResults of operations by segment(in millions):North America Quarter EndedJan 1,2023Jan 2,2022$ChangeJan 1,2023Jan 2,2022As a%ofNorth AmericaTotal Net RevenuesNet revenues:Company-operated stores$5,870.6$5,214.1$656.5 89.6.0%Licensed stores680.0 515.9 164.1 10.4 9.0 Other0.7 2.3(1.6)Total net revenues6,551.3 5,732.3 819.0 100.0 100.0 Product and distribution costs1,917.6 1,629.4 288.2 29.3 28.4 Store operating expenses3,031.4 2,702.4 329.0 46.3 47.1 Other operating expenses65.6 48.2 17.4 1.0 0.8 Depreciation and amortization expenses216.9 200.0 16.9 3.3 3.5 General and administrative expenses102.3 76.7 25.6 1.6 1.3 Restructuring and impairments5.1(7.5)12.6 0.1(0.1)Total operating expenses5,338.9 4,649.2 689.7 81.5 81.1 Operating income$1,212.4$1,083.1$129.3 18.5.9%Store operating expenses as a%of company-operated stores revenue51.6Q.8%For the quarter ended January 1,2023 compared with the quarter ended January 2,2022RevenuesNorth America total net revenues for the first quarter of fiscal 2023 increased$819 million,or 14%,primarily due to a 10%increase in comparable store sales($498 million)driven by a 9%increase in average ticket and a 1%increase in transactions.Also contributing to these increases were the performance of netnew company-operated store openings over the past 12 months($183 million)and higher product and equipment sales to and royalty revenues from ourlicensees($160 million).Operating MarginNorth America operating income for the first quarter of fiscal 2023 increased 12%to$1.2 billion,compared to$1.1 billion in the first quarter of fiscal 2022.Operating margin decreased 40 basis points to 18.5%,primarily due to investments in labor,including enhancements in retail store partner wages and benefits(approximately 390 basis points),inflationary pressures on commodities and our supply chain(approximately 210 basis points),as well as increased spend onnew partner training(approximately 70 basis points).These were partially offset by strategic pricing(approximately 510 basis points)and sales leverage.29Table of ContentsInternational Quarter Ended Jan 1,2023Jan 2,2022$ChangeJan 1,2023Jan 2,2022As a%of InternationalTotal Net RevenuesNet revenues:Company-operated stores$1,212.9$1,508.3$(295.4)72.2.4%Licensed stores439.5 334.9 104.6 26.2 17.9 Other27.7 32.7(5.0)1.6 1.7 Total net revenues1,680.1 1,875.9(195.8)100.0 100.0 Product and distribution costs593.6 615.8(22.2)35.3 32.8 Store operating expenses633.9 697.6(63.7)37.7 37.2 Other operating expenses50.7 39.2 11.5 3.0 2.1 Depreciation and amortization expenses81.5 133.1(51.6)4.9 7.1 General and administrative expenses80.5 91.3(10.8)4.8 4.9 Total operating expenses1,440.2 1,577.0(136.8)85.7 84.1 Income from equity investees0.5 0.7(0.2)Operating income$240.4$299.6$(59.2)14.3.0%Store operating expenses as a%of company-operated stores revenue52.3F.3%For the quarter ended January 1,2023 compared with the quarter ended January 2,2022RevenuesInternational total net revenues for the first quarter of fiscal 2023 decreased$196 million,or 10%,primarily due to unfavorable foreign currency translation($236 million),as well as a 13cline in comparable store sales($170 million),driven by a 12crease in customer transactions and a 1crease inaverage ticket,primarily attributable to COVID-19 pandemic related disruptions in China.These decreases were partially offset by higher product andequipment sales to and royalty revenues from our licensees($139 million),as well as 649 net new company-operated store openings,or 9%increase,over thepast 12 months($76 million).Operating MarginInternational operating income for the first quarter of fiscal 2023 decreased 20%to$240 million,compared to$300 million in the first quarter of fiscal 2022.Operating margin decreased 170 basis points to 14.3%,primarily due to sales deleverage related to COVID-19 pandemic related impacts in our China market(approximately 650 basis points)and higher commodity and supply chain costs due to inflationary pressures(approximately 70 basis points).These decreaseswere partially offset by sales leverage across markets outside of China(approximately 240 basis points)the resulting business mix(approximately 140 basispoints),as well as lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized(approximately 230 basis points).30Table of ContentsChannel Development Quarter Ended Jan 1,2023Jan 2,2022$ChangeJan 1,2023Jan 2,2022As a%of Channel DevelopmentTotal Net RevenuesNet revenues$478.2$417.1$61.1 Product and distribution costs294.2 258.8 35.4 61.5b.0%Other operating expenses13.0 11.4 1.6 2.7 2.7 General and administrative expenses2.0 3.3(1.3)0.4 0.8 Total operating expenses309.2 273.5 35.7 64.7 65.6 Income from equity investees57.3 39.6 17.7 12.0 9.5 Operating income$226.3$183.2$43.1 47.3C.9%For the quarter ended January 1,2023 compared with the quarter ended January 2,2022RevenuesChannel Development total net revenues for the first quarter of fiscal 2023 increased$61 million,or 15%,primarily due to higher Global Coffee Allianceproduct sales and royalty revenue($43 million)and growth in our ready-to-drink business($26 million).Operating MarginChannel Development operating income for the first quarter of fiscal 2023 increased 24%to$226 million,compared to$183 million in the first quarter offiscal 2022.Operating margin increased 340 basis points to 47.3%,primarily due to growth in our North American Coffee Partnership joint venture income.31Table of ContentsCorporate and Other Quarter EndedJan 1,2023Jan 2,2022$Change%ChangeNet revenues:Other$4.3$25.1$(20.8)(82.9)%Total net revenues4.3 25.1(20.8)(82.9)Product and distribution costs4.8 22.9(18.1)(79.0)Other operating expenses 2.9(2.9)nmDepreciation and amortization expenses28.7 32.9(4.2)(12.8)General and administrative expenses396.1 354.5 41.6 11.7 Restructuring and impairments0.7 0.7 nmTotal operating expenses430.3 413.2 17.1 4.1 Operating loss$(426.0)$(388.1)$(37.9)9.8%Corporate and Other primarily consists of our unallocated corporate expenses and Evolution Fresh,prior to its sale in the fourth quarter of fiscal 2022.Unallocated corporate expenses include corporate administrative functions that support the operating segments but are not specifically attributable to ormanaged by any segment and are not included in the reported financial results of the operating segments.For the quarter ended January 1,2023 compared with the quarter ended January 2,2022Corporate and Other operating loss increased to$426 million for the first quarter of fiscal 2023,or 10%,compared to$388 million for the first quarter of fiscal2022.This increase was primarily driven by incremental investments in technology($28 million)and increased support costs to address labor marketconditions($9 million).These increases were partially offset by lower performance based compensation($12 million).32Table of ContentsQuarterly Store DataOur store data for the periods presented is as follows:Net stores opened/(closed)and transferredduring the period Quarter EndedStores open as ofJan 1,2023Jan 2,2022Jan 1,2023Jan 2,2022North AmericaCompany-operated stores40 39 10,256 9,900 Licensed stores46 23 7,125 6,988 Total North America86 62 17,381 16,888 InternationalCompany-operated stores97 213 8,134 7,485 Licensed stores276 209 10,655 9,944 Total International373 422 18,789 17,429 Total Company459 484 36,170 34,317 Financial Condition,Liquidity and Capital ResourcesCash and Investment OverviewOur cash and investments totaled$3.6 billion as of January 1,2023 and$3.5 billion as of October 2,2022.We actively manage our cash and investments inorder to internally fund operating needs,make scheduled interest and principal payments on our borrowings,make acquisitions and return cash to shareholdersthrough common stock cash dividend payments and share repurchases.Our investment portfolio primarily includes highly liquid available-for-sale securities,including corporate debt securities,government treasury securities(foreign and domestic)and commercial paper as well as principal-protected structureddeposits.As of January 1,2023,approximately$2.7 billion of cash and short-term investment were held in foreign subsidiaries.Borrowing CapacityRevolving Credit FacilityOur$3.0 billion unsecured five-year revolving credit facility(the“2021 credit facility”),of which$150 million may be used for issuances of letters of credit,iscurrently set to mature on September 16,2026.The 2021 credit facility is available for working capital,capital expenditures and other corporate purposes,including acquisitions and share repurchases.We have the option,subject to negotiation and agreement with the related banks,to increase the maximumcommitment amount by an additional$1.0 billion.Borrowings under the 2021 credit facility will bear interest at a variable rate based on LIBOR,and,for U.S.dollar-denominated loans under certaincircumstances,a Base Rate(as defined in the 2021 credit facility),in each case plus an applicable margin.The applicable margin is based on the Companyslong-term credit ratings assigned by the Moodys and Standard&Poors rating agencies.The 2021 credit facility contains alternative interest rate provisionsspecifying rate calculations to be used at such time LIBOR ceases to be available as a benchmark due to reference rate reform.The“Base Rate”is the highestof(i)the Federal Funds Rate(as defined in the 2021 credit facility)plus 0.500%,(ii)Bank of Americas prime rate and(iii)the Eurocurrency Rate(as definedin the 2021 credit facility)plus 1.000%.The 2021 credit facility contains provisions requiring us to maintain compliance with certain covenants,including a minimum fixed charge coverage ratio,which measures our ability to cover financing expenses.As of January 1,2023,we were in compliance with all applicable covenants.No amounts wereoutstanding under our 2021 credit facility as of January 1,2023 or October 2,2022.Commercial PaperUnder our commercial paper program,we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of$3.0billion,with individual maturities that may vary but not exceed 397 days from the date of issue.Amounts outstanding under the commercial paper program arerequired to be backstopped by available commitments under the 2021 credit facility discussed above.The proceeds from borrowings under our commercialpaper program may be used for working capital needs,capital expenditures and other corporate purposes,including,but not limited to,business expansion,payment of cash dividends on our common stock and share repurchases.As of January 1,2023,we had no borrowings outstanding under our commercial paperprogram.As of October 2,2022,we had$175.0 million in borrowings outstanding33Table of Contentsunder this program.Our total contractual borrowing capacity for general corporate purposes was$3.0 billion as of the end of our first quarter of fiscal 2023.Credit facilities in JapanAdditionally,we hold Japanese yen-denominated credit facilities for the use of our Japan subsidiary.These are available for working capital needs and capitalexpenditures within our Japanese market.A 5 billion,or$37.6 million,credit facility is currently set to mature on January 4,2024.Borrowings under this credit facility are subject to termsdefined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.400%.A 10 billion,or$75.2 million,credit facility is currently set to mature on March 27,2023.Borrowings under this credit facility are subject to termsdefined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.350%.As of January 1,2023 and October 2,2022,we had no borrowings outstanding under these Japanese yen-denominated credit facilities.See Note 8,Debt,to the consolidated financial statements included in Item 1 of Part I of this 10-Q for details of the components of our long-term debt.Our ability to incur new liens and conduct sale and leaseback transactions on certain material properties is subject to compliance with terms of the indenturesunder which the long-term notes were issued.As of January 1,2023,we were in compliance with all applicable covenants.Use of CashWe expect to use our available cash and investments,including,but not limited to,additional potential future borrowings under the credit facilities,commercialpaper program and the issuance of debt to support and invest in our core businesses,including investing in new ways to serve our customers and supporting ourstore partners,repaying maturing debts,as well as returning cash to shareholders through common stock cash dividend payments and discretionary sharerepurchases and investing in new business opportunities related to our core and developing businesses.Furthermore,we may use our available cash resourcesto make proportionate capital contributions to our investees.We may also seek strategic acquisitions to leverage existing capabilities and further build ourbusiness.Acquisitions may include increasing our ownership interests in our investees.Any decisions to increase such ownership interests will be driven byvaluation and fit with our ownership strategy.We believe that net future cash flows generated from operations and existing cash and investments both domestically and internationally combined with ourability to leverage our balance sheet through the issuance of debt will be sufficient to finance capital requirements for our core businesses as well asshareholder distributions for at least the next 12 months.We are currently not aware of any trends or demands,commitments,events or uncertainties that willresult in,or that are reasonably likely to result in,our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyondthe next 12 months.We have borrowed funds and continue to believe we have the ability to do so at reasonable interest rates;however,additional borrowingswould result in increased interest expense in the future.In this regard,we may incur additional debt,within targeted levels,as part of our plans to fund ourcapital programs,including cash returns to shareholders through future dividends and discretionary share repurchases as well as investing in new businessopportunities.If necessary,we may pursue additional sources of financing,including both short-term and long-term borrowings and debt issuances.We regularly review our cash positions and our determination of indefinite reinvestment of foreign earnings.In the event we determine that all or a portion ofsuch foreign earnings are no longer indefinitely reinvested,we may be subject to additional foreign withholding taxes and U.S.state income taxes,which couldbe material.While we do not anticipate the need for repatriated funds to the U.S.to satisfy domestic liquidity requirements,any foreign earnings which are notindefinitely reinvested may be repatriated at managements discretion.During the first quarter of fiscal 2023,our Board of Directors approved a quarterly cash dividend to shareholders of$0.53 per share to be paid on February 24,2023 to shareholders of record as of the close of business on February 10,2023.During the first quarter of fiscal 2023,we resumed our share repurchase program which was temporarily suspended in April 2022.During the quarter endedJanuary 1,2023,we repurchased 1.9 million shares of common stock for$191.4 million.As of January 1,2023,50.6 million shares remained available forrepurchase under current authorizations.Other than normal operating expenses,cash requirements for the remainder of fiscal 2023 are expected to consist primarily of capital expenditures forinvestments in our new and existing stores,our supply chain and corporate facilities.Total capital expenditures for fiscal 2023 are expected to be approximately$2.5 billion.34Table of ContentsIn the MD&A included in the 10-K,we disclosed that we had$33.2 billion of current and long-term material cash requirements as of October 2,2022.Therehave been no material changes to our material cash requirements during the period covered by this 10-Q outside of the normal course of our business.Cash FlowsCash provided by operating activities was$1.6 billion for the first quarter of fiscal 2023,compared to$1.9 billion for the same period in fiscal 2022.Thechange was primarily due to the timing of payments,lower non-cash depreciation and amortization expenses in current year,and net cash used by changes inother operating assets and liabilities.Cash used in investing activities for the first quarter of fiscal 2023 totaled$279 million,compared to cash used in investing activities of$401 million for thesame period in fiscal 2022.The change was primarily due to an increase in maturities and calls of investments,partially offset by higher spend on capitalexpenditures.Cash used in financing activities for the first quarter of fiscal 2023 totaled$1.0 billion compared to cash used in financing activities of$4.0 billion for the sameperiod in fiscal 2022.The change is primarily due to a decrease in share repurchase activities.Commodity Prices,Availability and General Risk ConditionsCommodity price risk represents our primary market risk,generated by our purchases of green coffee and dairy products,among other items.We purchase,roast and sell high-quality arabica coffee and related products and risk arises from the price volatility of green coffee.In addition to coffee,we also purchasesignificant amounts of dairy products to support the needs of our company-operated stores.The price and availability of these commodities directly impact ourresults of operations,and we expect commodity prices,particularly coffee,to impact future results of operations.For additional details,see Product Supply inItem 1 of the 10-K,as well as Risk Factors in Item 1A of the 10-K.Seasonality and Quarterly ResultsOur business is subject to moderate seasonal fluctuations,of which our fiscal second quarter typically experiences lower revenues and operating income.However,the COVID-19 pandemic may have an impact on consumer behaviors and customer traffic that result in changes in the seasonal fluctuations of ourbusiness.Additionally,as our stored value cards are issued to and loaded by customers during the holiday season,we tend to have higher cash flows fromoperations during the first quarter of the fiscal year.However,since revenues from our stored value cards are recognized upon redemption and not when cash isloaded,the impact of seasonal fluctuations on the consolidated statements of earnings is much less pronounced.As a result of moderate seasonal fluctuations,results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.Critical Accounting EstimatesThe preparation of financial statements and related disclosures in conformity with U.S.generally accepted accounting principles and the Companys discussionand analysis of its financial condition and operating results require the Companys management to make judgments,assumptions and estimates that affect theamounts reported.Note 1,Summary of Significant Accounting Policies and Estimates,to the consolidated financial statements included in Item 1 of Part I ofthis 10-Q and in the Notes to Consolidated Financial Statements in Part II,Item 8 of the 10-K describe the significant accounting policies and methods used inthe preparation of the Companys consolidated financial statements.There have been no material changes to the Companys critical accounting estimates sincethe 10-K.RECENT ACCOUNTING PRONOUNCEMENTSSee Note 1,Summary of Significant Accounting Policies and Estimates,to the consolidated financial statements included in Item 1 of Part I of this 10-Q,for adetailed description of recent accounting pronouncements.Item 3.Quantitative and Qualitative Disclosures About Market RiskThere has been no material change in the commodity price risk,foreign currency exchange risk,equity security price risk or interest rate risk discussed inItem 7A of the 10-K.35Table of ContentsItem 4.Controls and ProceduresWe maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed orsubmitted under the Securities Exchange Act of 1934,as amended(the“Exchange Act”),is recorded,processed,summarized and reported within the timeperiods specified in the SECs rules and forms.Our disclosure controls and procedures are also designed to ensure that information required to be disclosed inthe reports we file or submit under the Exchange Act is accumulated and communicated to our management,including our principal executive officer andprincipal financial officer as appropriate,to allow timely decisions regarding required disclosure.During the first quarter of fiscal 2023,we carried out an evaluation,under the supervision and with the participation of our management,including our interimchief executive officer and our chief financial officer,of the effectiveness of the design and operation of the disclosure controls and procedures,as defined inRules 13a-15(e)and 15d-15(e)under the Exchange Act.Based upon that evaluation,our interim chief executive officer and chief financial officer concludedthat our disclosure controls and procedures were effective,as of the end of the period covered by this report(January 1,2023).There were no changes in our internal control over financial reporting(as defined in Rules 13a-15(f)and 15d-15(f)of the Exchange Act)during our mostrecently completed fiscal quarter that materially affected,or are reasonably likely to materially affect,our internal control over financial reporting.36Table of ContentsPART II OTHER INFORMATIONItem 1.Legal ProceedingsSee Note 14,Commitments and Contingencies,to the consolidated financial statements included in Item 1 of Part I of this 10-Q for information regardingcertain legal proceedings in which we are involved.Item 1A.Risk FactorsIn addition to the other information set forth in this 10-Q,you should carefully consider the risks and uncertainties discussed in Part I,Item 1A.Risk Factors inour 10-K and Part II,Item 1A.There have been no material changes to the risk factors disclosed in our 10-K.Item 2.Unregistered Sales of Equity Securities and Use of ProceedsInformation regarding repurchases of our common stock during the quarter ended January 1,2023:TotalNumber ofSharesPurchasedAveragePricePaid perShareTotal Numberof SharesPurchased asPart of PubliclyAnnouncedPlans orProgramsMaximumNumber ofShares that MayYet BePurchasedUnder the Plansor ProgramsPeriod October 3,2022-October 30,2022 52,572,178 October 31,2022-November 27,2022826,522$95.83 826,522 51,745,656 November 28,2022-January 1,20231,107,480 101.32 1,107,480 50,638,176 Total1,934,002$98.97 1,934,002 Monthly information is presented by reference to our fiscal months during the first quarter of fiscal 2023.Share repurchases are conducted under our ongoing share repurchase program announced in September 2001,which has no expiration date,and for whichthe authorized number of shares has been increased by our Board numerous times,with our Board most recently authorizing the repurchase of up to anadditional 40 million shares in March 2022.This column includes the total number of shares available for repurchase under the Companys ongoing share repurchase program.Shares under ourongoing share repurchase program may be repurchased in open market transactions,including pursuant to a trading plan adopted in accordance with Rule10b5-1 of the Securities Exchange Act of 1934,or through privately negotiated transactions.The timing,manner,price and amount of repurchases will bedetermined at our discretion and the share repurchase program may be suspended,terminated or modified at any time for any reason.Item 3.Defaults upon Senior SecuritiesNone.Item 4.Mine Safety DisclosuresNot applicable.Item 5.Other InformationNone.(2)(3)(1)(1)(2)(3)37Table of ContentsItem 6.Exhibits Incorporated by Reference ExhibitNo.Exhibit DescriptionFormFile No.Date ofFilingExhibitNumberFiledHerewith3.1Restated Articles of Incorporation of Starbucks Corporation10-Q000-2032204/28/20153.13.2Amended and Restated Bylaws of Starbucks Corporation(Asamended and restated through March 17,2021)8-K000-2032203/19/20213.131.1Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)of the Securities Exchange Act of 1934,as Adopted Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002X31.2Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)of the Securities Exchange Act of 1934,as Adopted Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002X32*Certifications of Principal Executive Officer and Principal FinancialOfficer Pursuant to 18 U.S.C.Section 1350,as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002101The following financial statements from the Companys 10-Q forthe fiscal quarter ended January 1,2023,formatted in iXBRL:(i)Consolidated Statements of Earnings,(ii)Consolidated Statementsof Comprehensive Income,(iii)Consolidated Balance Sheets,(iv)Consolidated Statements of Cash Flows,(v)ConsolidatedStatements of Equity and(vi)Notes to Consolidated FinancialStatementsX104Cover Page Interactive Data File(formatted in iXBRL andcontained in Exhibit 101)X*Furnished herewith.38Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.February 2,2023 STARBUCKS CORPORATIONBy:/s/Rachel RuggeriRachel Ruggeriexecutive vice president,chief financial officerSigning on behalf of the registrant and asprincipal financial officer39Exhibit 31.1CERTIFICATION PURSUANT TO RULE 13a-14(a)OF THE SECURITIES EXCHANGE ACT OF 1934AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I,Howard Schultz,certify that:1.I have reviewed this Annual Report on Form 10-Q for the fiscal year ended January 1,2023,of Starbucks Corporation;2.Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made,in light of the circumstances under which such statements were made,not misleading with respect to the period covered by thisreport;3.Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all material respects thefinancial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4.The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures(as defined inExchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)for the registrant and have:(a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed under our supervision,toensure that material information relating to the registrant,including its consolidated subsidiaries,is made known to us by others within thoseentities,particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designed under oursupervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based on such evaluation;and(d)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recentfiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or is reasonably likely tomaterially affect,the registrants internal control over financial reporting;and5.The registrants other certifying officer and I have disclosed,based on our most recent evaluation of internal control over financial reporting,to theregistrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;and(b)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrants internalcontrol over financial reporting.Date:February 2,2023/s/Howard SchultzHoward Schultzinterim chief executive officerExhibit 31.2CERTIFICATION PURSUANT TO RULE 13a-14(a)OF THE SECURITIES EXCHANGE ACT OF 1934AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I,Rachel Ruggeri,certify that:1.I have reviewed this Annual Report on Form 10-Q for the fiscal year ended January 1,2023,of Starbucks Corporation;2.Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made,in light of the circumstances under which such statements were made,not misleading with respect to the period covered by thisreport;3.Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all material respects thefinancial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4.The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures(as defined inExchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)for the registrant and have:(a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed under our supervision,toensure that material information relating to the registrant,including its consolidated subsidiaries,is made known to us by others within thoseentities,particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designed under oursupervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based on such evaluation;and(d)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recentfiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or is reasonably likely tomaterially affect,the registrants internal control over financial reporting;and5.The registrants other certifying officer and I have disclosed,based on our most recent evaluation of internal control over financial reporting,to theregistrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;and(b)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrants internalcontrol over financial reporting.Date:February 2,2023/s/Rachel RuggeriRachel Ruggeriexecutive vice president,chief financial officerExhibit 32CERTIFICATIONS PURSUANT TO 18 U.S.C.SECTION 1350AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Starbucks Corporation(“Starbucks”)on Form 10-Q for the fiscal quarter ended January 1,2023,as filed with theSecurities and Exchange Commission on February 2,2023(the“Report”),Howard Schultz,interim chief executive officer of Starbucks,and Rachel Ruggeri,executive vice president,chief financial officer of Starbucks,each hereby certifies,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906
2023-05-29
42页
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香港交易及結算所有限公司及香港聯合交易所有限公司對本公告的內容概不負責，對其準確性或完整性亦不發表任何聲明，並明確表示概不就因本公告全部或任何部分內容而產生或因倚賴該等內容而引致的任何損失承擔任何責任.
2023-05-25
23页
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1香港交易及結算所有限公司及香港聯合交易所有限公司對本公告的內容概不負責，對其準確性或完整性亦不發表任何聲明，並明確表示概不會就本公告全部或任何部分內容而產生或因倚賴該等內容而引致的任何損失承擔任何責.
2023-05-25
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Half-year Financial Report first half of fiscal 2023 Table of contents 3 A.Interim Group Management.
2023-05-23
16页
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-Q(Mark One)QUARTERLY REPO.
2023-05-23
146页
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended April 2,2023OR TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _ to _COMMISSION FILE NUMBER 1-3619-PFIZER INC.(Exact name of registrant as specified in its charter)Delaware13-5315170(State of Incorporation)(I.R.S.Employer Identification No.)66 Hudson Boulevard East,New York,New York 10001-2192(Address of principal executive offices)(zip code)(212)733-2323(Registrants telephone number including area code)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock,$0.05 par valuePFENew York Stock Exchange1.000%Notes due 2027PFE27New York Stock ExchangeIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during thepreceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for the past 90days.YesxNoIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).YesxNoIndicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerginggrowth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 ofthe Exchange Act:Large Accelerated filer x Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company If an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).YesNoxAt May 5,2023,5,645,307,020 shares of the issuers voting common stock were outstanding.TABLE OF CONTENTSPART I.FINANCIAL INFORMATIONPageItem 1.Financial Statements Condensed Consolidated Statements of Income5Condensed Consolidated Statements of Comprehensive Income6Condensed Consolidated Balance Sheets7Condensed Consolidated Statements of Equity8Condensed Consolidated Statements of Cash Flows9Notes to Condensed Consolidated Financial Statements10Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations34Item 3.Quantitative and Qualitative Disclosures About Market Risk53Item 4.Controls and Procedures53PART II.OTHER INFORMATION Item 1.Legal Proceedings53Item 1A.Risk Factors53Item 2.Unregistered Sales of Equity Securities and Use of Proceeds54Item 3.Defaults Upon Senior SecuritiesN/AItem 4.Mine Safety DisclosuresN/AItem 5.Other InformationN/AItem 6.Exhibits54Signature54N/A=Not Applicable2DEFINED TERMSUnless the context requires otherwise,references to“Pfizer,”“the Company,”“we,”“us”or“our”in this Form 10-Q(defined below)refer to Pfizer Inc.and itssubsidiaries.Pfizers fiscal quarter-end for subsidiaries operating outside the U.S.is as of and for the three months ended February 26,2023 and February 27,2022,and for U.S.subsidiaries is as of and for the three months ended April 2,2023 and April 3,2022.References to“Notes”in this Form 10-Q are to theNotes to the Condensed or Consolidated Financial Statements in this Form 10-Q or in our 2022 Form 10-K.We also have used several other terms in this Form10-Q,most of which are explained or defined below:2022 Form 10-KAnnual Report on Form 10-K for the fiscal year ended December 31,2022ACIPAdvisory Committee on Immunization PracticesALKanaplastic lymphoma kinaseAlliance revenuesRevenues from alliance agreements under which we co-promote products discovered or developed by other companies or usArenaArena Pharmaceuticals,Inc.AstellasAstellas Pharma Inc.,Astellas US LLC and Astellas Pharma US,Inc.ATTR-CMtransthyretin amyloid cardiomyopathyBiohavenBiohaven Pharmaceutical Holding Company Ltd.BioNTechBioNTech SEBiopharmaGlobal Biopharmaceuticals BusinessBMSBristol-Myers Squibb CompanyBODBoard of DirectorsCDCU.S.Centers for Disease Control and PreventionCMAconditional marketing authorisationComirnaty*Unless otherwise noted,refers to,as applicable,and as authorized or approved,the Pfizer-BioNTech COVID-19 Vaccine,the Pfizer-BioNTech COVID-19 Vaccine,Bivalent(Original and Omicron BA.4/BA.5),the Comirnaty Original/Omicron BA.1 Vaccine,andComirnaty Original/Omicron BA.4/BA.5 Vaccine.In the U.S.,monovalent mRNA COVID-19 vaccines are no longer emergency useauthorized or CDC-recommended,although Comirnaty remains a licensed vaccine.Cond.J-NDAConditional Japan New Drug ApplicationConsumer Healthcare JVGSK Consumer Healthcare JVCOVID-19novel coronavirus disease of 2019Developed EuropeIncludes the following markets:Western Europe,Scandinavian countries and FinlandDeveloped MarketsIncludes the following markets:U.S.,Developed Europe,Japan,South Korea,Canada,Australia and New ZealandDeveloped Rest of WorldIncludes the following markets:Japan,South Korea,Canada,Australia and New ZealandECEuropean CommissionEMAEuropean Medicines AgencyEmerging MarketsIncludes,but is not limited to,the following markets:Asia(excluding Japan and South Korea),Latin America,Eastern Europe,Central Europe,the Middle East,Africa and TurkeyEPSearnings per shareESGEnvironmental,Social and GovernanceEUEuropean UnionEUAemergency use authorizationExchange ActSecurities Exchange Act of 1934,as amendedFASBFinancial Accounting Standards BoardFDAU.S.Food and Drug AdministrationFFDCAU.S.Federal Food,Drug and Cosmetic ActForm 10-QThis Quarterly Report on Form 10-Q for the quarterly period ended April 2,2023GAAPGenerally Accepted Accounting PrinciplesGBTGlobal Blood Therapeutics,Inc.GPDGlobal Product Development organizationGSKGSK plcHaleonHaleon plcHIPAAHealth Insurance Portability and Accountability Act of 1996HospiraHospira,Inc.IPR&Din-process research and developmentIRAInflation Reduction Act of 2022IRSU.S.Internal Revenue ServiceJAKJanus kinaseJVjoint ventureKingKing Pharmaceuticals LLC(formerly King Pharmaceuticals,Inc.)LIBORLondon Interbank Offered RateLOEloss of exclusivitymCRCmetastatic colorectal cancer3mCRPCmetastatic castration-resistant prostate cancermCSPCmetastatic castration-sensitive prostate cancerMD&AManagements Discussion and Analysis of Financial Condition and Results of OperationsMDLMulti-District LitigationMeridianMeridian Medical Technologies,Inc.mRNAmessenger ribonucleic acidMSAManufacturing Supply AgreementMylanMylan N.V.MyovantMyovant Sciences Ltd.NDANew Drug ApplicationNimbusNimbus Therapeutics,LLCnmCRPCnon-metastatic castration-resistant prostate cancerNSCLCnon-small cell lung cancerODToral disintegrating tabletOnoOno Pharmaceutical Co.,Ltd.OPKOOPKO Health,Inc.OTCover-the-counterPaxlovid*an oral COVID-19 treatment(nirmatrelvir PF-07321332 tablets and ritonavir tablets)PC1Pfizer CentreOnePharmaciaPharmacia CorporationPrevnar familyIncludes Prevnar 13/Prevenar 13(pediatric and adult)and Prevnar 20/Apexxnar(adult)PsApsoriatic arthritisRArheumatoid arthritisRCCrenal cell carcinomaR&Dresearch and developmentSeagenSeagen Inc.SECU.S.Securities and Exchange CommissionSI&Aselling,informational and administrativeTSAstransition service arrangementsUCulcerative colitisU.K.United KingdomU.S.United StatesUpjohn BusinessPfizers former global,primarily off-patent branded and generics business,which included a portfolio of 20 globally recognized solidoral dose brands,including Lipitor,Lyrica,Norvasc,Celebrex and Viagra,as well as a U.S.-based generics platform,Greenstone,thatwas spun-off on November 16,2020 and combined with Mylan to create ViatrisViatrisViatris Inc.ViiVViiV Healthcare LimitedVyndaqel familyIncludes Vyndaqel,Vyndamax and VynmacWRDMWorldwide Research,Development and Medical*Paxlovid and the Pfizer-BioNTech COVID-19 Vaccine,Bivalent(Original and Omicron BA.4/BA.5)have not been approved or licensed by the FDA.Paxlovid has been authorized for emergency use by theFDA under an EUA,for the treatment of mild-to-moderate COVID-19 in adults and pediatric patients(12 years of age and older weighing at least 40 kg)with a current diagnosis of mild-to-moderate COVID-19 and who are at high risk for progression to severe COVID-19,including hospitalization or death.The Pfizer-BioNTech COVID-19 Vaccine,Bivalent has been authorized by the FDA under an EUA toprevent COVID-19 in individuals aged 6 months and older.The emergency uses are only authorized for the duration of the declaration that circumstances exist justifying the authorization of emergency use ofthe medical product during the COVID-19 pandemic under Section 564(b)(1)of the FFDCA unless the declaration is terminated or authorization revoked sooner.Please see the EUA Fact Sheets and www.cvdvaccine-.This Form 10-Q includes discussion of certain clinical studies relating to various in-line products and/or product candidates.These studies typically are part ofa larger body of clinical data relating to such products or product candidates,and the discussion herein should be considered in the context of the larger body ofdata.In addition,clinical trial data are subject to differing interpretations,and,even when we view data as sufficient to support the safety and/or effectivenessof a product candidate or a new indication for an in-line product,regulatory authorities may not share our views and may require additional data or may denyapproval altogether.Some amounts in this Form 10-Q may not add due to rounding.All percentages have been calculated using unrounded amounts.All trademarks mentioned arethe property of their owners.The information contained on our website,our Facebook,Instagram,YouTube and LinkedIn pages or our Twitter accounts,or any third-party website,is notincorporated by reference into this Form 10-Q.4PART I.FINANCIAL INFORMATIONITEM 1.FINANCIAL STATEMENTSPFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)Three Months Ended(MILLIONS,EXCEPT PER SHARE DATA)April 2,2023April 3,2022Revenues$18,282$25,661 Costs and expenses:Cost of sales4,886 9,984 Selling,informational and administrative expenses3,418 2,593 Research and development expenses2,505 2,301 Acquired in-process research and development expenses21 355 Amortization of intangible assets1,103 835 Restructuring charges and certain acquisition-related costs9 192 Other(income)/deductionsnet70 350 Income from continuing operations before provision/(benefit)for taxes on income6,270 9,050 Provision/(benefit)for taxes on income715 1,172 Income from continuing operations5,555 7,879 Discontinued operationsnet of tax1(9)Net income before allocation to noncontrolling interests5,556 7,870 Less:Net income attributable to noncontrolling interests13 6 Net income attributable to Pfizer Imon shareholders$5,543$7,864 Earnings per common sharebasic:Income from continuing operations attributable to Pfizer Imon shareholders$0.98$1.40 Discontinued operationsnet of tax Net income attributable to Pfizer Imon shareholders$0.98$1.40 Earnings per common sharediluted:Income from continuing operations attributable to Pfizer Imon shareholders$0.97$1.37 Discontinued operationsnet of tax Net income attributable to Pfizer Imon shareholders$0.97$1.37 Weighted-average sharesbasic5,634 5,617 Weighted-average sharesdiluted5,727 5,758 Exclusive of amortization of intangible assets.See Accompanying Notes.(a)(a)(a)(a)5PFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)Three Months Ended(MILLIONS)April 2,2023April 3,2022Net income before allocation to noncontrolling interests$5,556$7,870 Foreign currency translation adjustments,net101(363)Unrealized holding gains/(losses)on derivative financial instruments,net2 203 Reclassification adjustments for(gains)/losses included in net income303(213)305(10)Unrealized holding gains/(losses)on available-for-sale securities,net87(133)Reclassification adjustments for(gains)/losses included in net income(509)233 (422)99 Reclassification adjustments related to amortization of prior service costs and other,net(30)(36)Reclassification adjustments related to curtailments of prior service costs and other,net(5)(11)(35)(47)Other comprehensive income/(loss),before tax(50)(321)Tax provision/(benefit)on other comprehensive income/(loss)(63)(60)Other comprehensive income/(loss)before allocation to noncontrolling interests$12$(260)Comprehensive income/(loss)before allocation to noncontrolling interests$5,569$7,610 Less:Comprehensive income/(loss)attributable to noncontrolling interests10 6 Comprehensive income/(loss)attributable to Pfizer Inc.$5,558$7,604 Reclassified into Other(income)/deductionsnet and Cost of sales.See Note 7E.Reclassified into Other(income)/deductionsnet.See Accompanying Notes.(a)(b)(a)(b)6PFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED BALANCE SHEETS(MILLIONS)April 2,2023December 31,2022(Unaudited)AssetsCash and cash equivalents$2,166$416 Short-term investments17,806 22,316 Trade accounts receivable,less allowance for doubtful accounts:2023$465;2022$44912,305 10,952 Inventories9,541 8,981 Current tax assets3,140 3,577 Other current assets5,120 5,017 Total current assets50,078 51,259 Equity-method investments11,175 11,033 Long-term investments3,568 4,036 Property,plant and equipment,less accumulated depreciation:2023$15,514;2022$15,17417,052 16,274 Identifiable intangible assets42,002 43,370 Goodwill51,476 51,375 Noncurrent deferred tax assets and other noncurrent tax assets7,302 6,693 Other noncurrent assets12,965 13,163 Total assets$195,617$197,205 Liabilities and Equity Short-term borrowings,including current portion of long-term debt:2023$3,567;2022$2,560$4,188$2,945 Trade accounts payable6,123 6,809 Dividends payable 2,303 Income taxes payable1,969 1,587 Accrued compensation and related items2,277 3,407 Deferred revenues1,750 2,520 Other current liabilities20,255 22,568 Total current liabilities36,562 42,138 Long-term debt31,704 32,884 Pension and postretirement benefit obligations2,179 2,250 Noncurrent deferred tax liabilities1,067 1,023 Other taxes payable9,860 9,812 Other noncurrent liabilities13,009 13,180 Total liabilities94,381 101,288 Commitments and ContingenciesCommon stock478 476 Additional paid-in capital92,153 91,802 Treasury stock(114,473)(113,969)Retained earnings131,102 125,656 Accumulated other comprehensive loss(8,289)(8,304)Total Pfizer Inc.shareholders equity100,970 95,661 Equity attributable to noncontrolling interests266 256 Total equity101,236 95,916 Total liabilities and equity$195,617$197,205 See Accompanying Notes.7PFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(UNAUDITED)PFIZER INC.SHAREHOLDERSCommon StockTreasury Stock(MILLIONS,EXCEPT PER SHARE DATA)SharesPar ValueAddlPaid-InCapitalSharesCostRetainedEarningsAccum.OtherComp.LossShare-holders EquityNon-controllinginterestsTotal EquityBalance,January 1,20239,519$476$91,802(3,903)$(113,969)$125,656$(8,304)$95,661$256$95,916 Net income5,543 5,543 13 5,556 Other comprehensive income/(loss),net of tax15 15(3)12 Cash dividends declared,per share:$Common stock Share-based payment transactions41 2 350(12)(504)(97)(249)(249)Other Balance,April 2,20239,560$478$92,153(3,915)$(114,473)$131,102$(8,289)$100,970$266$101,236 PFIZER INC.SHAREHOLDERSCommon StockTreasury Stock(MILLIONS,EXCEPT PER SHARE DATA)SharesPar ValueAddlPaid-InCapitalSharesCostRetainedEarningsAccum.OtherComp.LossShare-holders EquityNon-controllinginterestsTotal EquityBalance,January 1,20229,471$473$90,591(3,851)$(111,361)$103,394$(5,897)$77,201$262$77,462 Net income7,864 7,864 6 7,870 Other comprehensive income/(loss),net of tax(260)(260)(260)Cash dividends declared,per share:$Common stock Share-based payment transactions23 2 249(12)(570)(65)(383)(383)Purchases of common stock(39)(2,000)(2,000)(2,000)Other3 3(7)(4)Balance,April 3,20229,494$476$90,844(3,903)$(113,931)$111,193$(6,157)$82,424$261$82,685 See Accompanying Notes.8PFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)Three Months Ended(MILLIONS)April 2,2023April 3,2022Operating Activities Net income before allocation to noncontrolling interests$5,556$7,870 Discontinued operationsnet of tax1(9)Net income from continuing operations before allocation to noncontrolling interests5,555 7,879 Adjustments to reconcile net income before allocation to noncontrolling interests to net cash provided by operating activities:Depreciation and amortization1,487 1,187 Asset write-offs and impairments270 31 Deferred taxes(598)(2,321)Share-based compensation expense105 86 Benefit plan contributions in excess of expense/income(200)(404)Other adjustments,net99 815 Other changes in assets and liabilities,net of acquisitions and divestitures(5,507)(730)Net cash provided by operating activities1,212 6,541 Investing Activities Purchases of property,plant and equipment(1,139)(643)Purchases of short-term investments(6,665)(8,758)Proceeds from redemptions/sales of short-term investments6,400 13,421 Net(purchases of)/proceeds from redemptions/sales of short-term investments with original maturities of three months or less4,665 3,409 Purchases of long-term investments(51)(676)Proceeds from redemptions/sales of long-term investments124 52 Acquisition of business,net of cash acquired(6,225)Other investing activities,net(18)(13)Net cash provided by/(used in)investing activities3,315 567 Financing Activities Proceeds from short-term borrowings11 Net(payments on)/proceeds from short-term borrowings with original maturities of three months or less226(220)Payments on long-term debt(269)(1,609)Purchases of common stock(2,000)Cash dividends paid(2,303)(2,249)Other financing activities,net(436)(501)Net cash provided by/(used in)financing activities(2,771)(6,578)Effect of exchange-rate changes on cash and cash equivalents and restricted cash and cash equivalents(2)(1)Net increase/(decrease)in cash and cash equivalents and restricted cash and cash equivalents1,754 529 Cash and cash equivalents and restricted cash and cash equivalents,at beginning of period468 1,983 Cash and cash equivalents and restricted cash and cash equivalents,at end of period$2,222$2,513 Supplemental Cash Flow InformationCash paid during the period for:Income taxes$329$354 Interest paid419 453 Interest rate hedges60 26 See Accompanying Notes.9PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Note 1.Basis of Presentation and Significant Accounting PoliciesA.Basis of PresentationWe prepared these condensed consolidated financial statements in conformity with U.S.GAAP,consistent in all material respects with those applied in our2022 Form 10-K.As permitted under the SEC requirements for interim reporting,certain footnotes or other financial information have been condensed oromitted.These financial statements include all normal and recurring adjustments that are considered necessary for the fair statement of results for the interim periodspresented.The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notesincluded in our 2022 Form 10-K.Revenues,expenses,assets and liabilities can vary during each quarter of the year.Therefore,the results and trends in theseinterim financial statements may not be representative of those for the full year.Pfizers fiscal quarter-end for subsidiaries operating outside the U.S.is as of and for the three months ended February 26,2023 and February 27,2022,and forU.S.subsidiaries is as of and for the three months ended April 2,2023 and April 3,2022.We manage our commercial operations through two operating segments,each led by a single manager:Biopharma and Business Innovation.Biopharma is theonly reportable segment.See Note 13A below and Note 17A in our 2022 Form 10-K.Business development activities impacted financial results in the periods presented.See Notes 2A and 2B below as well as Notes 1A and 2 in our 2022 Form10-K.We have made certain reclassification adjustments to conform prior-period amounts to the current presentation for segment reporting.B.New Accounting Standard Adopted in 2023On January 1,2023,we adopted a new accounting standard for supplier finance programs which requires increased disclosures in the notes to our financialstatements.See Note 8C.C.Revenues and Trade Accounts ReceivableCustomersOur prescription biopharmaceutical products,with the exception of Paxlovid,are sold principally to wholesalers,but we also sell directly toretailers,hospitals,clinics,government agencies and pharmacies.We principally sell Paxlovid to government agencies and distributors.In the U.S.,weprimarily sell our vaccines directly to the federal government,CDC,wholesalers,individual provider offices,retail pharmacies and integrated delivery systems.Outside the U.S.,we primarily sell our vaccines to government and non-government institutions.Deductions from RevenuesOur accruals for Medicare,Medicaid and related state program and performance-based contract rebates,chargebacks,salesallowances and sales returns and cash discounts are as follows:(MILLIONS)April 2,2023December 31,2022Reserve against Trade accounts receivable,less allowance for doubtful accounts$1,068$1,200 Other current liabilities:Accrued rebates4,743 4,479 Other accruals521 430 Other noncurrent liabilities324 612 Total accrued rebates and other sales-related accruals$6,656$6,722 Trade Accounts ReceivableTrade accounts receivable are stated at their net realizable value.The allowance for credit losses reflects our best estimate ofexpected credit losses of the receivables portfolio determined on the basis of historical experience,current information,and forecasts of future economicconditions.In developing the estimate for expected credit losses,trade accounts receivables are segmented into pools of assets depending on market(U.S.versus international),delinquency status,and customer type(high risk versus low risk and government versus non-government),and fixed reserve percentagesare established for each pool of trade accounts receivables.In determining the reserve percentages for each pool of trade accounts receivables,we considered our historical experience with certain customers andcustomer types,regulatory and legal environments,country and political risk,and other relevant current10PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)and future forecasted macroeconomic factors.When management becomes aware of certain customer-specific factors that impact credit risk,specificallowances for these known troubled accounts are recorded.During the three months ended April 2,2023 and April 3,2022,additions to the allowance for credit losses,write-offs and recoveries of customer receivableswere not material to our condensed consolidated financial statements.For additional information on our trade accounts receivable,see Note 1G in our 2022Form 10-K.Note 2.Acquisitions,Discontinued Operations and Equity-Method InvestmentA.AcquisitionsGBTOn October 5,2022,we acquired GBT,a biopharmaceutical company dedicated to the discovery,development and delivery of life-changing treatmentsfor underserved patient communities,starting with sickle cell disease.The total fair value of the consideration transferred was$5.7 billion($5.2 billion,net ofcash acquired).In connection with this business combination,we provisionally recorded:(i)$4.4 billion in Identifiable intangible assets,consisting of$3.0billion of IPR&D and$1.4 billion of developed technology rights with a useful life of six years,(ii)$1.1 billion of Goodwill,(iii)$672 million of inventories tobe sold over approximately three years,(iv)$568 million of net deferred tax liabilities and(v)$331 million of assumed long-term debt that was paid in full inthe fourth quarter of 2022.The allocation of the consideration transferred to the assets acquired and liabilities assumed has not yet been finalized.BiohavenOn October 3,2022,we acquired Biohaven,the maker of Nurtec ODT/Vydura(rimegepant),an innovative therapy approved for both acutetreatment of migraine and prevention of episodic migraine in adults.The total fair value of the consideration transferred was$11.8 billion,which includes thefair value of Pfizers previous investment in Biohaven on the acquisition date of approximately$300 million.In connection with this business combination,weprovisionally recorded:(i)$12.1 billion in Identifiable intangible assets,consisting of$11.6 billion of developed technology rights with a useful life of 11 yearsand$450 million of IPR&D,(ii)$817 million of inventories to be sold over approximately two years,(iii)$797 million of Goodwill,(iv)$398 million of tradeaccounts receivable,(v)$1.4 billion of assumed long-term debt that was paid in full in the fourth quarter of 2022,(vi)$566 million of net deferred taxliabilities and(vii)$476 million of Other current liabilities.The allocation of the consideration transferred to the assets acquired and liabilities assumed has notyet been finalized.ArenaOn March 11,2022,we acquired Arena,a clinical stage company with development-stage therapeutic candidates in gastroenterology,dermatology andcardiology.The total fair value of the consideration transferred was$6.6 billion($6.2 billion,net of cash acquired).The final allocation of the considerationtransferred to the assets acquired and the liabilities assumed was completed in the first quarter of 2023.In connection with this business combination,werecorded:(i)$5.5 billion in Identifiable intangible assets,consisting of$5.0 billion of IPR&D and$460 million of indefinite-lived licensing agreements andother,(ii)$1.0 billion of Goodwill and(iii)$490 million of net deferred tax liabilities.B.Discontinued OperationsDiscontinued operationsnet of tax in the periods presented are post-close adjustments related to the previously disposed discontinued Meridian subsidiaryand the Upjohn Business.In the three months ended April 2,2023 and April 3,2022,amounts recorded under interim agreements,including TSAs and MSAs,associated with these disposals were not material.Under agreements related to the 2020 spin-off and the combination of the Upjohn Business with Mylan toform Viatris,net amounts due from Viatris were approximately$57 million as of April 2,2023 and net amounts due to Viatris were$94 million as of December31,2022.The cash flows associated with the agreements are included in Net cash provided by operating activities.For information about the nature of theseagreements,see Note 2B in our 2022 Form 10-K.C.Equity-Method InvestmentHaleon/Consumer Healthcare JVOn July 18,2022,GSK completed a demerger of the Consumer Healthcare JV which became Haleon,an independent,publicly traded company listed on the London Stock Exchange that holds the joint historical consumer healthcare business of GSK and Pfizer following thedemerger.We continue to own 32%of the ordinary shares of Haleon after the demerger.The carrying value of our investment in Haleon as of April 2,2023 and as of December 31,2022 is$11.0 billion and$10.8 billion,respectively,and is reportedin Equity-method investments.The fair value of our investment in Haleon as of April 2,2023,based on quoted market prices of Haleon stock,was$11.8 billion.Haleon/the Consumer Healthcare JV is a foreign investee whose reporting currency is the U.K.pound,and therefore we translate its financial statements intoU.S.dollars and recognize the impact of foreign currency translation adjustments in the carrying value of our investment and in other comprehensive income.The increase in the value of our investment from December 31,2022 is primarily due to$90 million in11PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)pre-tax foreign currency translation adjustments(see Note 6)and our share of Haleons earnings.We record our share of earnings from Haleon/the ConsumerHealthcare JV on a quarterly basis on a one-quarter lag in Other(income)/deductionsnet.Our total share of Haleons earnings generated in the fourth quarterof 2022,which we recorded in our operating results in the first quarter of 2023,was$68 million.Our total share of the JVs earnings generated in the fourthquarter of 2021,which we recorded in our operating results in the first quarter of 2022,was$185 million.The total amortization and adjustment of basisdifferences resulting from the excess of the initial fair value of our investment over the underlying equity in the carrying value of the net assets of Haleon/theConsumer Healthcare JV was not material to our results of operations in the periods presented.See Note 4.Summarized financial information for our equity-method investee,Haleon/the Consumer Healthcare JV,for the three months ending December 31,2022,the most recent period available,and for the three months ending December 31,2021,is as follows:Three Months Ended(MILLIONS)December 31,2022December 31,2021Net sales$3,261$3,420 Cost of sales(1,496)(1,312)Gross profit$1,766$2,108 Income from continuing operations225 590 Net income225 590 Income attributable to shareholders211 578 Note 3.Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity InitiativesA.Transforming to a More Focused Company ProgramIn 2019,we announced that we would be incurring costs associated with our Transforming to a More Focused Company Program,a multi-year effort to ensureour cost base aligns appropriately with our operating structure following Pfizers transformation into a more focused,innovative science-based globalbiopharmaceutical business.This program includes activities to(i)restructure our corporate enabling functions to appropriately support our operating structure;(ii)transform our commercial go-to-market model;and(iii)optimize our manufacturing network and R&D operations.The activities associated with transforming our commercial go-to-market model are substantially complete.Activities associated with restructuring ourcorporate enabling functions and optimizing our manufacturing network and R&D operations are ongoing and are expected to be substantially completed bythe end of 2023.The costs to restructure our corporate enabling functions,and to optimize our R&D operations and reduce cycle times,as well as to furtherprioritize our internal R&D portfolio,primarily include severance and implementation costs.The costs to optimize our manufacturing network largely includeseverance,implementation costs,product transfer costs,site exit costs,and accelerated depreciation.From the start of this program in the fourth quarter of 2019 through April 2,2023,we incurred costs of$3.5 billion,of which$1.4 billion($1.1 billion ofrestructuring charges)is associated with Biopharma.We have incurred approximately 85%of total expected costs to date,and we expect the remaining costs tobe substantially incurred through 2023.12PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)B.Key ActivitiesThe following summarizes costs and credits for acquisitions and cost-reduction/productivity initiatives:Three Months Ended(MILLIONS)April 2,2023April 3,2022Restructuring charges/(credits):Employee terminations$(36)$25 Asset impairments(10)8 Exit costs/(credits)2 11 Restructuring charges/(credits)(44)43 Transaction costs 6 Integration costs and other52 142 Restructuring charges and certain acquisition-related costs9 192 Net periodic benefit costs/(credits)recorded in Other(income)/deductionsnet(5)(6)Additional depreciationasset restructuring recorded in our condensed consolidated statements of income,mainly inCost of sales18 9 Implementation costs recorded in our condensed consolidated statements of income as follows:Cost of sales15 12 Selling,informational and administrative expenses59 74 Research and development expenses11 Total implementation costs85 85 Total costs associated with acquisitions and cost-reduction/productivity initiatives$107$280 Primarily represents cost reduction initiatives.Restructuring charges/(credits)associated with Biopharma:credits of$28 million for the three months ended April 2,2023 and credits of$4 millionfor the three months ended April 3,2022.Represents external costs for banking,legal,accounting and other similar services.Represents external,incremental costs directly related to integrating acquired businesses,such as expenditures for consulting and the integration of systems and processes,and certain otherqualifying costs.In the first quarter of 2022,integration costs and other were mostly related to our acquisition of Arena,including$138 million in payments to Arena employees for the fair value ofpreviously unvested long-term incentive awards that was recognized as post-closing compensation expense.Represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.Represents external,incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.The following summarizes the components and changes in restructuring accruals:(MILLIONS)EmployeeTerminationCostsAssetImpairmentChargesExit CostsAccrualBalance,December 31,2022$1,196$8$1,204 Provision/(credit)(36)(10)2(44)Utilization and other(420)10(1)(411)Balance,April 2,2023$740$9$750 Included in Other current liabilities($991 million)and Other noncurrent liabilities($213 million).Includes adjustments for foreign currency translation.Included in Other current liabilities($548 million)and Other noncurrent liabilities($202 million).(a)(b)(c)(d)(e)(a)(b)(c)(d)(e)(a)(b)(c)(a)(b)(c)13PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Note 4.Other(Income)/DeductionsNetComponents of Other(income)/deductionsnet include:Three Months Ended(MILLIONS)April 2,2023April 3,2022Interest income$(177)$(14)Interest expense318 322 Net interest expense141 308 Royalty-related income(204)(173)Net(gains)/losses on asset disposals(7)(1)Net(gains)/losses recognized during the period on equity securities451 699 Income from collaborations,out-licensing arrangements and sales of compound/product rights(68)(9)Net periodic benefit costs/(credits)other than service costs(80)(283)Certain legal matters,net36 79 Certain asset impairments264 Haleon/Consumer Healthcare JV equity method(income)/loss(68)(184)Other,net(396)(88)Other(income)/deductionsnet$70$350 The losses in the first quarter of 2023 include,among other things,unrealized losses of$363 million related to our investments in Cerevel Therapeutics Holdings,Inc.and BioNTech.The losses inthe first quarter of 2022 included,among other things,unrealized losses of$473 million related to our investment in BioNTech.The first quarter of 2023 primarily includes certain product liability expenses related to products discontinued and/or divested by Pfizer.The first quarter of 2022 includes certain product liabilityexpenses related to products discontinued and/or divested by Pfizer,and to a lesser extent,legal obligations related to pre-acquisition commitments.The first quarter of 2023 primarily represents intangible asset impairment charges,including$128 million associated with Other business activities,related to IPR&D and developed technologyrights for acquired software assets and reflects unfavorable pivotal trial results and updated commercial forecasts,and$120 million associated with our Biopharma segment due to thediscontinuation of a study related to an out-licensed IPR&D asset for the treatment of prostate cancer,acquired in our Array BioPharma Inc.acquisition.See Note 2C.The first quarter of 2023 primarily includes,among other things,dividend income of$211 million from our investment in Nimbus resulting from Takeda Pharmaceutical Company Limitedsacquisition of Nimbuss oral,selective allosteric tyrosine kinase 2(TYK2)inhibitor program subsidiary,and$92 million from our investment in ViiV.Additional information about the intangible assets that were impaired during 2023 follows:Three Months EndedFair ValueApril 2,2023(MILLIONS)AmountLevel 1Level 2Level 3ImpairmentIntangible assetsLicensing agreements and other$120 Intangible assetsIPR&D 94 Intangible assetsDeveloped technology rights 34 Total$248 The fair value amount is presented as of the date of impairment,as this asset is not measured at fair value on a recurring basis.See also Note 1E in our 2022 Form 10-K.Reflects intangible assets written down to fair value in 2023.Fair value was determined using the income approach,specifically the multi-period excess earnings method,also known as thediscounted cash flow method.We started with a forecast of all the expected net cash flows for the asset and then applied an asset-specific discount rate to arrive at a net present value amount.Someof the more significant estimates and assumptions inherent in this approach include:the amount and timing of the projected net cash flows,which includes the expected impact of competitive,legaland/or regulatory forces on the product;the discount rate,which seeks to reflect the various risks inherent in the projected cash flows;and the tax rate,which seeks to incorporate the geographicdiversity of the projected cash flows.Note 5.Tax MattersA.Taxes on Income from Continuing OperationsOur effective tax rate for continuing operations was 11.4%for the first quarter of 2023,compared to 12.9%for the first quarter of 2022.The lower effective taxrate for the first quarter of 2023,was due to a favorable change in the jurisdictional mix of earnings.(a)(b)(c)(d)(e)(a)(b)(c)(d)(e)(a)(b)(b)(b)(a)(b)14PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)We elected,with the filing of our 2018 U.S.Federal Consolidated Income Tax Return,to pay our initial estimated$15 billion repatriation tax liability onaccumulated post-1986 foreign earnings over eight years through 2026.The fifth annual installment of this liability was paid by its April 18,2023 due date andis reported in current Income taxes payable and the remaining liability is reported in noncurrent Other taxes payable as of April 2,2023.Our obligations mayvary as a result of changes in our uncertain tax positions and/or availability of attributes such as foreign tax and other credit carryforwards.B.Tax ContingenciesWe are subject to income tax in many jurisdictions,and a certain degree of estimation is required in recording the assets and liabilities related to income taxes.All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction.These tax audits can involve complex issues,interpretationsand judgments and the resolution of matters may span multiple years,particularly if subject to negotiation or litigation.The U.S.is one of our major tax jurisdictions,and we are regularly audited by the IRS.With respect to Pfizer,tax years 2016-2018 are under audit.Tax years2019-2023 are open but not under audit.All other tax years are closed.In addition to the open audit years in the U.S.,we have open audit years and certainrelated audits,appeals and investigations in certain major international tax jurisdictions dating back to 2012.See Note 5D in our 2022 Form 10-K.C.Tax Provision/(Benefit)on Other Comprehensive Income/(Loss)Components of Tax provision/(benefit)on other comprehensive income/(loss)include:Three Months Ended(MILLIONS)April 2,2023April 3,2022Foreign currency translation adjustments,net$(25)$(72)Unrealized holding gains/(losses)on derivative financial instruments,net3 32 Reclassification adjustments for(gains)/losses included in net income21(22)24 10 Unrealized holding gains/(losses)on available-for-sale securities,net11(17)Reclassification adjustments for(gains)/losses included in net income(64)29(53)12 Reclassification adjustments related to amortization of prior service costs and other,net(7)(9)Reclassification adjustments related to curtailments of prior service costs and other,net(1)(2)(9)(11)Tax provision/(benefit)on other comprehensive income/(loss)$(63)$(60)Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that we intend to hold indefinitely.Note 6.Accumulated Other Comprehensive Loss,Excluding Noncontrolling InterestsThe following summarizes the changes,net of tax,in Accumulated other comprehensive loss:Net Unrealized Gains/(Losses)Benefit Plans(MILLIONS)Foreign CurrencyTranslationAdjustmentsDerivativeFinancialInstrumentsAvailable-For-Sale SecuritiesPrior Service(Costs)/Credits andOtherAccumulated OtherComprehensiveIncome/(Loss)Balance,December 31,2022$(8,360)$(412)$220$248$(8,304)Other comprehensive income/(loss)129 281(369)(27)15 Balance,April 2,2023$(8,231)$(131)$(149)$222$(8,289)Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests.Foreign currency translation adjustments include net gains related to our equity-method investment in Haleon(see Note 2C)and the impact of our net investment hedging program.(a)(a)(a)(b)(a)(b)15PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Note 7.Financial InstrumentsA.Fair Value MeasurementsFinancial Assets and Liabilities Measured at Fair Value on a Recurring Basis and Fair Value Hierarchy,using a Market Approach:April 2,2023December 31,2022(MILLIONS)TotalLevel 1Level 2TotalLevel 1Level 2Financial assets:Short-term investmentsEquity securities with readily determinable fair values:Money market funds$1,165$1,165$1,588$1,588 Available-for-sale debt securities:Government and agencynon-U.S.13,278 13,278 15,915 15,915 Government and agencyU.S.927 927 1,313 1,313 Corporate and other1,914 1,914 1,514 1,514 16,118 16,118 18,743 18,743 Total short-term investments17,283 17,283 20,331 20,331 Other current assetsDerivative assets:Foreign exchange contracts734 734 714 714 Total other current assets734 734 714 714 Long-term investmentsEquity securities with readily determinable fair values2,355 2,348 7 2,836 2,823 13 Available-for-sale debt securities:Government and agencynon-U.S.261 261 280 280 Corporate and other72 72 72 72 333 333 352 352 Total long-term investments2,688 2,348 340 3,188 2,823 365 Other noncurrent assetsDerivative assets:Foreign exchange contracts295 295 364 364 Total derivative assets295 295 364 364 Insurance contracts700 700 665 665 Total other noncurrent assets995 995 1,028 1,028 Total assets$21,699$2,348$19,352$25,261$2,823$22,439 Financial liabilities:Other current liabilitiesDerivative liabilities:Interest rate contracts$10$10 Foreign exchange contracts382 382 694 694 Total other current liabilities383 383 704 704 Other noncurrent liabilitiesDerivative liabilities:Interest rate contracts274 274 321 321 Foreign exchange contracts832 832 864 864 Total other noncurrent liabilities1,105 1,105 1,185 1,185 Total liabilities$1,488$1,488$1,889$1,889 Long-term equity securities of$115 million as of April 2,2023 and$143 million as of December 31,2022 were held in restricted trusts for U.S.non-qualified employee benefit plans.Includes life insurance policies held in restricted trusts for U.S.non-qualified employee benefit plans.The underlying invested assets in these contracts are marketable securities,which are carriedat fair value,with changes in fair value recognized in Other(income)/deductionsnet(see Note 4).Financial Assets and Liabilities Not Measured at Fair Value on a Recurring BasisThe carrying value of Long-term debt,excluding the current portion was$32 billion as of April 2,2023 and$33 billion as of December 31,2022.The estimated fair value of such debt,using a market approach and Level 2 inputs,was$30 billion as of April 2,2023 and$30 billion as of December 31,2022.The differences between the estimated fair values and carrying values of held-to-maturity debt securities,private equity securities,long-term receivables andshort-term borrowings not measured at fair value on a recurring basis were not significant(a)(b)(a)(b)16PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)as of April 2,2023 and December 31,2022.The fair value measurements of our held-to-maturity debt securities and short-term borrowings are based on Level2 inputs.The fair value measurements of our long-term receivables and private equity securities are based on Level 3 inputs.B.InvestmentsTotal Short-Term,Long-Term and Equity-Method InvestmentsThe following summarizes our investments by classification type:(MILLIONS)April 2,2023December 31,2022Short-term investmentsEquity securities with readily determinable fair values$1,165$1,588 Available-for-sale debt securities16,118 18,743 Held-to-maturity debt securities523 1,985 Total Short-term investments$17,806$22,316 Long-term investmentsEquity securities with readily determinable fair values$2,355$2,836 Available-for-sale debt securities333 352 Held-to-maturity debt securities52 48 Private equity securities at cost828 800 Total Long-term investments$3,568$4,036 Equity-method investments11,175 11,033 Total long-term investments and equity-method investments$14,743$15,069 Held-to-maturity cash equivalents$436$679 Includes money market funds primarily invested in U.S.Treasury and government debt.Represent investments in the life sciences sector.Debt SecuritiesOur investment portfolio consists of investment-grade debt securities issued across diverse governments,corporate and financial institutions:April 2,2023December 31,2022Gross UnrealizedContractual or Estimated Maturities(inYears)Gross Unrealized(MILLIONS)AmortizedCostGainsLossesFair ValueWithin 1Over 1to 5Over 5AmortizedCostGainsLossesFair ValueAvailable-for-sale debt securitiesGovernment and agencynon-U.S.$13,702$51$(214)$13,539$13,278$261$15,946$297$(48)$16,195 Government and agencyU.S.927 927 927 1,313 1,313 Corporate and other1,992 (7)1,985 1,914 72 1,584 7(4)1,586 Held-to-maturity debt securitiesTime deposits and other936 936 888 34 14 1,171 1,171 Government and agencynon-U.S.75 75 71 3 1 1,542 1,542 Total debt securities$17,632$51$(221)$17,462$17,077$371$15$21,556$304$(53)$21,807 Any expected credit losses to these portfolios would be immaterial to our financial statements.Equity SecuritiesThe following presents the calculation of the portion of unrealized(gains)/losses that relates to equity securities,excluding equity-method investments,held atthe reporting date:Three Months Ended(MILLIONS)April 2,2023April 3,2022Net(gains)/losses recognized during the period on equity securities$451$699 Less:Net(gains)/losses recognized during the period on equity securities sold during the period(33)(11)Net unrealized(gains)/losses during the reporting period on equity securities still held at the reporting date$485$710 Reported in Other(income)/deductionsnet.See Note 4.(a)(b)(b)(a)(b)(a)(b)(a)17PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Included in net unrealized(gains)/losses are observable price changes on equity securities without readily determinable fair values.As of April 2,2023,there were cumulative impairments anddownward adjustments of$171 million and upward adjustments of$203 million.Impairments,downward and upward adjustments were not significant in the first quarters of 2023 and 2022.C.Short-Term BorrowingsShort-term borrowings include:(MILLIONS)April 2,2023December 31,2022Current portion of long-term debt,principal amount$3,550$2,550 Other short-term borrowings,principal amount622 385 Total short-term borrowings,principal amount4,172 2,935 Net fair value adjustments17 10 Total Short-term borrowings,including current portion of long-term debt,carried at historical proceeds,asadjusted$4,188$2,945 Primarily includes cash collateral.See Note 7F.D.Long-Term DebtThe following summarizes the aggregate principal amount of our senior unsecured long-term debt,and adjustments to report our aggregate long-term debt:(MILLIONS)April 2,2023December 31,2022Total long-term debt,principal amount$30,909$32,080 Net fair value adjustments related to hedging and purchase accounting966 959 Net unamortized discounts,premiums and debt issuance costs(171)(175)Other long-term debt 20 Total long-term debt,carried at historical proceeds,as adjusted$31,704$32,884 E.Derivative Financial Instruments and Hedging ActivitiesForeign Exchange RiskA significant portion of our revenues,earnings and net investments in foreign affiliates is exposed to changes in foreign exchangerates.Where foreign exchange risk is not offset by other exposures,we manage our foreign exchange risk principally through the use of derivative financialinstruments and foreign currency debt.These financial instruments serve to mitigate the impact on net income as a result of remeasurement into anothercurrency,or against the impact of translation into U.S.dollars of certain foreign exchange-denominated transactions.The derivative financial instruments primarily hedge or offset exposures in the euro,U.K.pound,Japanese yen,Chinese renminbi,Canadian dollar andSingapore dollar,and include a portion of our forecasted foreign exchange-denominated intercompany inventory sales hedged up to two years.We may seek toprotect against possible declines in the reported net investments of our foreign business entities.Interest Rate RiskOur interest-bearing investments and borrowings are subject to interest rate risk.Depending on market conditions,we may change theprofile of our outstanding debt or investments by entering into derivative financial instruments like interest rate swaps,either to hedge or offset the exposure tochanges in the fair value of hedged items with fixed interest rates,or to convert variable rate debt or investments to fixed rates.The derivative financialinstruments primarily hedge U.S.dollar fixed-rate debt.(b)(a)(a)18PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)The following summarizes the fair value of the derivative financial instruments and notional amounts:April 2,2023December 31,2022Fair ValueFair Value(MILLIONS)NotionalAssetLiabilityNotionalAssetLiabilityDerivatives designated as hedging instruments:Foreign exchange contracts$26,179$809$1,038$26,603$838$1,196 Interest rate contracts2,250 274 2,250 331 809 1,311 838 1,527 Derivatives not designated as hedging instruments:Foreign exchange contracts$21,870 220 177$29,814 240 362 Total$1,029$1,488$1,078$1,889 The notional amount of outstanding foreign exchange contracts hedging our intercompany forecasted inventory sales was$4.5 billion as of April 2,2023 and$4.4 billion as of December 31,2022.The following summarizes information about the gains/(losses)incurred to hedge or offset operational foreign exchange or interest rate risk exposures:Gains/(Losses)Recognized in OIDGains/(Losses)Recognized in OCIGains/(Losses)Reclassified fromOCI into OID and COSThree Months Ended(MILLIONS)April 2,2023April 3,2022April 2,2023April 3,2022April 2,2023April 3,2022Derivative Financial Instruments in Cash Flow HedgeRelationships:Foreign exchange contracts$(53)$187$(356)$195 Amount excluded from effectiveness testing andamortized into earnings 55 16 53 18 Derivative Financial Instruments in Fair Value HedgeRelationships:Interest rate contracts48(156)Hedged item(48)156 Derivative Financial Instruments in Net Investment HedgeRelationships:Foreign exchange contracts (213)259 Amount excluded from effectiveness testing andamortized into earnings 67(74)34 30 Non-Derivative Financial Instruments in Net InvestmentHedge Relationships:Foreign currency short-term borrowings 26 Foreign currency long-term debt (16)23 Derivative Financial Instruments Not Designated as Hedges:Foreign exchange contracts17(19)$17$(19)$(160)$436$(269)$243 OID=Other(income)/deductionsnet,included in Other(income)/deductionsnet in the condensed consolidated statements of income.COS=Cost of Sales,included in Cost of sales in thecondensed consolidated statements of income.OCI=Other comprehensive income/(loss),included in the condensed consolidated statements of comprehensive income.The amounts reclassified from OCI into COS were a net gain of$91 million in the first quarter of 2023 and a net gain of$34 million in the first quarter of 2022.The remaining amounts werereclassified from OCI into OID.Based on quarter-end foreign exchange rates that are subject to change,we expect to reclassify a pre-tax gain of$235 million within the next 12 months intoincome.The maximum length of time over which we are hedging our exposure to the variability in future foreign exchange cash flows is approximately 20 years and relates to foreign currencydebt.The amounts reclassified from OCI were reclassified into OID.Short-term borrowings and long-term debt include foreign currency borrowings,which are used in net investment hedges.The related long-term debt carrying values as of April 2,2023 andDecember 31,2022 were$811 million and$795 million,respectively.(a)(a)(a)(a)(a)(b)(c)(c)(d)(a)(b)(c)(d)19PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)The following summarizes cumulative basis adjustments to our debt in fair value hedges:April 2,2023December 31,2022Cumulative Amount of Fair ValueHedging AdjustmentIncrease/(Decrease)toCarrying AmountCumulative Amount of Fair ValueHedging AdjustmentIncrease/(Decrease)toCarrying Amount(MILLIONS)Carrying Amount ofHedgedAssets/LiabilitiesActive HedgingRelationshipsDiscontinuedHedgingRelationshipsCarrying Amount ofHedgedAssets/LiabilitiesActive HedgingRelationshipsDiscontinuedHedgingRelationshipsShort-term borrowings,including currentportion of long-term debt$12$10 Long-term debt$2,236$(274)$1,014$2,235$(321)$1,042 Carrying amounts exclude the cumulative amount of fair value hedging adjustments.F.Credit RiskA significant portion of our trade accounts receivable balances are due from wholesalers and governments.For additional information on our trade accountsreceivables with significant customers,see Note 13C below and Note 17C in our 2022 Form 10-K.As of April 2,2023,the largest investment exposures in our portfolio represent primarily sovereign debt instruments issued by Canada,Japan,Germany,France,the U.S.,and the U.K.With respect to our derivative financial instrument agreements with financial institutions,we do not expect to incur a significant loss from failure of anycounterparty.Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements with credit-supportannexes that contain zero threshold provisions requiring collateral to be exchanged daily depending on levels of exposure.As a result,there are no significantconcentrations of credit risk with any individual financial institution.As of April 2,2023,the aggregate fair value of these derivative financial instruments thatare in a net payable position was$763 million,for which we have posted collateral of$831 million with a corresponding amount reported in Short-terminvestments.As of April 2,2023,the aggregate fair value of our derivative financial instruments that are in a net receivable position was$715 million,forwhich we have received collateral of$530 million with a corresponding amount reported in Short-term borrowings,including current portion of long-termdebt.Note 8.Other Financial InformationA.InventoriesThe following summarizes the components of Inventories:(MILLIONS)April 2,2023December 31,2022Finished goods$2,657$2,603 Work-in-process6,129 5,519 Raw materials and supplies755 859 Inventories$9,541$8,981 Noncurrent inventories not included above$5,616$5,827 The increase from December 31,2022 reflects higher inventory levels for Paxlovid and increases for certain products due to supply recovery and inventory build,partially offset by decreases due tomarket demand.Included in Other noncurrent assets.Based on our current estimates and assumptions,there are no recoverability issues for these amounts,which are primarily related to Paxlovid.B.Other Current LiabilitiesOther current liabilities includes,among other things,amounts payable to BioNTech for the gross profit split for Comirnaty,which totaled$4.7 billion as ofApril 2,2023 and$5.2 billion as of December 31,2022.C.Supplier Finance Program ObligationWe maintain voluntary supply chain finance agreements with several participating financial institutions.Under these agreements,participating suppliers mayvoluntarily elect to sell their accounts receivable with Pfizer to these financial institutions.Our suppliers negotiate their financing agreements directly with therespective financial institutions and we are not a party to these agreements.We have no economic interest in our suppliers decision to participate and we paythe financial institutions the stated amount of confirmed invoices on the original maturity dates,which is generally within 90 to 120 days of(a)(a)(a)(a)(b)(a)(b)20PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)the invoice date.The agreements with the financial institutions do not require Pfizer to provide assets pledged as security or other forms of guarantees for thesupplier finance program.All outstanding amounts related to suppliers participating in such financing arrangements are recorded within trade payables in ourconsolidated balance sheet.As of April 2,2023 and December 31,2022,respectively,$755 million and$849 million of our trade payables to suppliers whoparticipate in these financing arrangements are outstanding.Note 9.Identifiable Intangible AssetsA.Identifiable Intangible AssetsThe following summarizes the components of Identifiable intangible assets:April 2,2023December 31,2022(MILLIONS)GrossCarryingAmountAccumulatedAmortizationIdentifiableIntangibleAssets,lessAccumulatedAmortizationGrossCarryingAmountAccumulatedAmortizationIdentifiableIntangibleAssets,lessAccumulatedAmortizationFinite-lived intangible assetsDeveloped technology rights$84,973$(56,887)$28,086$85,604$(56,307)$29,297 Brands922(854)68 922(844)78 Licensing agreements and other2,420(1,433)987 2,237(1,397)841 88,315(59,174)29,141 88,763(58,548)30,215 Indefinite-lived intangible assetsBrands827 827 827 827 IPR&D11,269 11,269 11,357 11,357 Licensing agreements and other764 764 971 971 12,860 12,860 13,155 13,155 Identifiable intangible assets$101,176$(59,174)$42,002$101,919$(58,548)$43,370 The decrease is primarily due to amortization expense and impairments(see Note 4).Note 10.Pension and Postretirement Benefit PlansThe following summarizes the components of net periodic benefit cost/(credit):Pension Plans U.S.InternationalPostretirementPlansThree Months Ended(MILLIONS)April 2,2023April 3,2022April 2,2023April 3,2022April 2,2023April 3,2022Service cost$22$30$3$7 Interest cost148 118 71 42 5 7 Expected return on plan assets(194)(245)(76)(79)(11)(12)Amortization of prior service cost/(credit)(30)(36)Actuarial(gains)/losses9(65)3 Curtailments (1)(5)(13)Special termination benefits2 6 Net periodic benefit cost/(credit)reported in income$(36)$(186)$18$(8)$(37)$(46)The components of net periodic benefit cost/(credit)other than the service cost component are primarily included in Other(income)/deductionsnet(see Note4).For the three months ended April 2,2023,we contributed$85 million,$39 million,and$20 million to our U.S.Pension Plans,International Pension Plans,andPostretirement Plans,respectively,from our general assets,which include direct employer benefit payments.(a)(a)21PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Note 11.Earnings Per Common Share Attributable to Pfizer Inc.Common ShareholdersThe following presents the detailed calculation of EPS:Three Months Ended(MILLIONS)April 2,2023April 3,2022EPS NumeratorBasicIncome from continuing operations attributable to Pfizer Imon shareholders$5,542$7,872 Discontinued operationsnet of tax1(9)Net income attributable to Pfizer Imon shareholders$5,543$7,864 EPS NumeratorDiluted Income from continuing operations attributable to Pfizer Imon shareholders and assumed conversions$5,542$7,872 Discontinued operationsnet of tax,attributable to Pfizer Imon shareholders and assumed conversions1(9)Net income attributable to Pfizer Imon shareholders and assumed conversions$5,543$7,864 EPS Denominator Weighted-average number of common shares outstandingBasic5,634 5,617 Common-share equivalents93 141 Weighted-average number of common shares outstandingDiluted5,727 5,758 Anti-dilutive common stock equivalents2 These common stock equivalents were outstanding for the periods presented,but were not included in the computation of diluted EPS for those periods because their inclusion would have had ananti-dilutive effect.Note 12.Contingencies and Certain CommitmentsWe and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business,including tax and legal contingencies,guarantees and indemnifications.The following outlines our legal contingencies,guarantees and indemnifications.For a discussion of our tax contingencies,see Note 5B.A.Legal ProceedingsOur legal contingencies include,but are not limited to,the following:Patent litigation,which typically involves challenges to the coverage and/or validity of patents on various products,processes or dosage forms.An adverseoutcome could result in loss of patent protection for a product,a significant loss of revenues from a product or impairment of the value of associated assets.We are the plaintiff in the majority of these actions.Product liability and other product-related litigation related to current or former products,which can include personal injury,consumer,off-label promotion,securities,antitrust and breach of contract claims,among others,and often involves highly complex issues relating to medical causation,label warnings andreliance on those warnings,scientific evidence and findings,actual,provable injury and other matters.Commercial and other asserted or unasserted matters,which can include acquisition-,licensing-,intellectual property-,collaboration-or co-promotion-related and product-pricing claims and environmental claims and proceedings,and can involve complexities that will vary from matter to matter.Government investigations,which often are related to the extensive regulation of pharmaceutical companies by national,state and local government agenciesin the U.S.and in other jurisdictions.Certain of these contingencies could result in increased expenses and/or losses,including damages,royalty payments,fines and/or civil penalties,which couldbe substantial,and/or criminal charges.We believe that our claims and defenses in matters in which we are a defendant are substantial,but litigation is inherently unpredictable and excessive verdictsdo occur.We do not believe that any of these matters will have a material adverse effect on our financial position.However,we could incur judgments,enterinto settlements or revise our expectations regarding the outcome of matters,which could have a material adverse effect on our results of operations and/or ourcash flows in the period in which the amounts are accrued or paid.We have accrued for losses that are both probable and reasonably estimable.Substantially all of our contingencies are subject to significant uncertainties and,therefore,determining the likelihood of a loss and/or the measurement of any loss can be complex.(a)(a)22PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Consequently,we are unable to estimate the range of reasonably possible loss in excess of amounts accrued.Our assessments,which result from a complexseries of judgments about future events and uncertainties,are based on estimates and assumptions that have been deemed reasonable by management,but thatmay prove to be incomplete or inaccurate,and unanticipated events and circumstances may occur that might cause us to change those estimates andassumptions.Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can relyheavily on estimates and assumptions.For proceedings under environmental laws to which a governmental authority is a party,we have adopted a disclosurethreshold of$1 million in potential or actual governmental monetary sanctions.The principal pending matters to which we are a party are discussed below.In determining whether a pending matter is a principal matter,we consider bothquantitative and qualitative factors to assess materiality,such as,among others,the amount of damages and the nature of other relief sought,if specified;ourview of the merits of the claims and of the strength of our defenses;whether the action purports to be,or is,a class action and,if not certified,our view of thelikelihood that a class will be certified by the court;the jurisdiction in which the proceeding is pending;whether related actions have been transferred tomultidistrict litigation;any experience that we or,to our knowledge,other companies have had in similar proceedings;whether disclosure of the action wouldbe important to a reader of our financial statements,including whether disclosure might change a readers judgment about our financial statements in light ofall of the information that is available to the reader;the potential impact of the proceeding on our reputation;and the extent of public interest in the matter.Inaddition,with respect to patent matters in which we are the plaintiff,we consider,among other things,the financial significance of the product protected by thepatent(s)at issue.Some of the matters discussed below include those which management believes that the likelihood of possible loss in excess of amountsaccrued is remote.A1.Legal ProceedingsPatent LitigationWe are involved in suits relating to our patents(or those of our collaboration/licensing partners to which we have licenses or co-promotion rights),includingbut not limited to,those discussed below.We face claims by generic drug manufacturers that patents covering our products(or those of ourcollaboration/licensing partners to which we have licenses or co-promotion rights and to which we may or may not be a party),processes or dosage forms areinvalid and/or do not cover the product of the generic drug manufacturer.Also,counterclaims,as well as various independent actions,have been filed allegingthat our assertions of,or attempts to enforce,patent rights with respect to certain products constitute unfair competition and/or violations of antitrust laws.Inaddition to the challenges to the U.S.patents that are discussed below,patent rights to certain of our products or those of our collaboration/licensing partnersare being challenged in various other jurisdictions.Some of our collaboration or licensing partners face challenges to the validity of their patent rights in non-U.S.jurisdictions.For example,in April 2022,the U.K.High Court issued a judgment finding invalid a BMS patent related to Eliquis due to expire in 2026.InNovember 2022,BMS received permission to appeal the High Courts decision and the appeal hearing was held in April 2023.In May 2023,the Court ofAppeal dismissed the appeal.Additional challenges are pending in other jurisdictions.Also,in July 2022,CureVac AG(CureVac)brought a patent infringementaction against BioNTech and certain of its subsidiaries in the German Regional Court alleging that Comirnaty infringes certain German utility model patentsand certain expired and unexpired European patents.Additional challenges involving Comirnaty patents may be filed against us and/or BioNTech in otherjurisdictions in the future.Adverse decisions in these matters could have a material adverse effect on our results of operations.We are also party to patentdamages suits in various jurisdictions pursuant to which generic drug manufacturers,payers,governments or other parties are seeking damages from us forallegedly causing delay of generic entry.We also are often involved in other proceedings,such as inter partes review,post-grant review,re-examination or opposition proceedings,before the U.S.Patent and Trademark Office,the European Patent Office,or other foreign counterparts,as well as court proceedings relating to our intellectual property or theintellectual property rights of others,including challenges to such rights initiated by us.Also,if one of our patents(or one of our collaboration/licensingpartners patents)is found to be invalid by such proceedings,generic or competitive products could be introduced into the market resulting in the erosion ofsales of our existing products.For example,several of the patents in our pneumococcal vaccine portfolio have been challenged in inter partes review and post-grant review proceedings in the U.S.Patent and Trademark Office,as well as outside the U.S.The invalidation of any of the patents in our pneumococcalportfolio could potentially allow additional competitor vaccines,if approved,to enter the marketplace earlier than anticipated.In the event that any of thepatents are found valid and infringed,a competitors vaccine,if approved,might be prohibited from entering the market or a competitor might be required topay us a royalty.We are also subject to patent litigation pursuant to which one or more third parties seek damages and/or injunctive relief to compensate for allegedinfringement of its patents by our commercial or other activities.If one of our marketed products(or a product of our collaboration/licensing partners to whichwe have licenses or co-promotion rights)is found to infringe valid patent rights of a third party,such third party may be awarded significant damages or royaltypayments,or we may be23PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)prevented from further sales of that product.Such damages may be enhanced as much as three-fold if we or one of our subsidiaries is found to have willfullyinfringed valid patent rights of a third party.Actions In Which We Are The PlaintiffXeljanz(tofacitinib)Beginning in 2017,we brought patent-infringement actions against several generic manufacturers that filed separate abbreviated new drug applications(ANDAs)with the FDA seeking approval to market their generic versions of tofacitinib tablets in one or both of 5 mg and 10 mg dosage strengths,and in bothimmediate and extended release forms.To date,we have settled actions with several manufacturers on terms not material to us.The remaining action continuesin the U.S.District Court for the District of Delaware as described below.In October 2021,we brought a separate patent-infringement action against Sinotherapeutics Inc.(Sinotherapeutics)asserting the infringement and validity ofour patent covering extended release formulations of tofacitinib that was challenged by Sinotherapeutics in its ANDA seeking approval to market a genericversion of tofacitinib 11 mg extended release tablets.In November 2022,we filed an additional patent-infringement action against Sinotherapeutics relating toits challenge of our extended release formulation and method of treatment patents in its ANDA seeking approval to market a generic version of tofacitinib 22mg extended release tablets.Ibrance(palbociclib)Beginning in January 2021,several generic companies notified us that they had filed ANDAs with the FDA seeking approval to market generic versions ofIbrance tablets.The generic companies challenged some or all of the following patents:(i)the composition of matter patent expiring in 2027;(ii)thecomposition of matter patent expiring in 2023;(iii)the method of use patent expiring in 2023;(iv)the crystalline form patent expiring in 2034;and(v)a tabletformulation patent expiring in 2036.We brought patent infringement actions against each of the generic filers in various U.S.federal courts,asserting thevalidity and infringement of the patents challenged by the generic companies.We have settled with one of these generic companies on terms not material to us,and we dismissed the patent infringement actions relating to the crystalline form of patent,the composition of matter patent expiring in 2023,the method of usepatent,and the tablet formulation patent against the generic companies that had challenged these patents.The composition of matter patent expiring in 2027remains in suit.EucrisaBeginning in September 2021,several generic companies notified us that they had filed ANDAs with the FDA seeking approval to market generic versions ofEucrisa.The companies assert the invalidity and non-infringement of a composition of matter patent expiring in 2026,two method of use patents expiring in2027,and one other method of use patent expiring in 2030.In September 2021,we brought patent infringement actions against the generic filers in the U.S.District Court for the District of Delaware,asserting the validity and infringement of the patents challenged by the generic companies.Mektovi(binimetinib)Beginning in August 2022,several generic companies notified us that they had filed ANDAs with the FDA seeking approval to market generic versions ofMektovi.The companies assert the invalidity and non-infringement of two method of use patents expiring in 2030,a method of use patent expiring in 2031,two method of use patents expiring in 2033,and a product by process patent expiring in 2033.Beginning in September 2022,we brought patent infringementactions against the generic filers in the U.S.District Court for the District of Delaware,asserting the validity and infringement of all six patents.Actions in Which We are the DefendantComirnatyIn March 2022,Alnylam Pharmaceuticals,Inc.(Alnylam)filed a complaint in the U.S.District Court for the District of Delaware against Pfizer and Pharmacia&Upjohn Co.LLC,our wholly owned subsidiary,alleging that Comirnaty infringes U.S.Patent No.11,246,933,which was issued in February 2022,andseeking unspecified monetary damages.In July 2022,Alnylam filed a second complaint in the U.S.District Court for the District of Delaware against Pfizer,Pharmacia&Upjohn Co.LLC,BioNTech and BioNTech Manufacturing GmbH,alleging that Comirnaty infringes U.S.Patent No.11,382,979,which wasissued in July 2022,and seeking unspecified monetary damages.In August 2022,ModernaTX,Inc.(ModernaTX)and Moderna US,Inc.(Moderna)sued Pfizer,BioNTech,BioNTech Manufacturing GmbH and BioNTech USInc.in the U.S.District Court for the District of Massachusetts,alleging that Comirnaty infringes three U.S.patents.In its complaint,Moderna stated that it isseeking damages for alleged infringement occurring after March 7,2022.In August 2022,ModernaTX filed a patent infringement action in Germany against Pfizer and certain subsidiary companies,as well as BioNTech and certainsubsidiary companies,alleging that Comirnaty infringes two European patents.In September 2022,ModernaTX filed patent infringement actions in the U.K.and in the Netherlands against Pfizer and certain subsidiary24PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)companies,as well as BioNTech and certain subsidiary companies,on the same two patents.In its complaints,ModernaTX stated that it is seeking damages foralleged infringement occurring after March 7,2022.In the U.K.,Pfizer and BioNTech have brought an action against ModernaTX seeking to revoke theseEuropean patents,which was consolidated with the September 2022 action filed by ModernaTX.In April 2023,Arbutus Biopharma Corp.(Arbutus)and Genevant Sciences GmbH(Genevant)filed a complaint in the U.S.District Court for the District ofNew Jersey against Pfizer and BioNTech alleging that Comirnaty and its manufacture infringe five U.S.patents,and seeking unspecified monetary damages.PaxlovidIn June 2022,Enanta Pharmaceuticals,Inc.filed a complaint in the U.S.District Court for the District of Massachusetts against Pfizer alleging that the activeingredient in Paxlovid,nirmatrelvir,infringes U.S.Patent No.11,358,953,which was issued in June 2022,and seeking unspecified monetary damages.Matters Involving Pfizer and its Collaboration/Licensing PartnersComirnatyIn July 2022,Pfizer,BioNTech and BioNTech Manufacturing GmbH filed a declaratory judgment complaint against CureVac in the U.S.District Court for theDistrict of Massachusetts seeking a judgment of non-infringement for the following three patents relating to Comirnaty:U.S.Patent Nos.11,135,312,11,149,278,and 11,241,493.Outside of the U.S.,in the U.K.,Pfizer and BioNTech have sued CureVac seeking a judgment of invalidity of several patents andCureVac has made certain infringement counterclaims.Xtandi(enzalutamide)In July 2022,Medivation LLC and Medivation Prostate Therapeutics LLC(wholly owned subsidiaries of Pfizer);Astellas Pharma Inc.,Astellas US LLC andAstellas Pharma US,Inc.;and The Regents of the University of California filed a patent-infringement suit in the U.S.District Court for the District of NewJersey against Zydus Pharmaceuticals(USA)Inc.and Zydus Lifesciences Ltd.;and in December 2022,the same entities filed a patent-infringement suit in theU.S.District Court for the District of New Jersey against Sun in connection with those companies respective ANDAs seeking approval to market genericversions of enzalutamide.The generic manufacturers are challenging the composition of matter patent,which expires in 2027,covering enzalutamide andpharmaceutical compositions thereof,for treating prostate cancer.EliquisIn April 2023,we and BMS brought separate patent-infringement actions in Federal Court in Delaware against each of Biocon Pharma Limited(Biocon)andScieGen Pharmaceuticals Inc.(ScieGen)asserting the infringement and validity of the formulation patent for Eliquis,expiring in 2031,challenged by Bioconand ScieGen in their respective ANDAs seeking approval to market generic versions of Eliquis.In April 2023,we settled our action against ScieGen on termsnot material to us.A2.Legal ProceedingsProduct LitigationWe are defendants in numerous cases,including but not limited to those discussed below,related to our pharmaceutical and other products.Plaintiffs in thesecases seek damages and other relief on various grounds for alleged personal injury and economic loss.AsbestosBetween 1967 and 1982,Warner-Lambert owned American Optical Corporation(American Optical),which manufactured and sold respiratory protectivedevices and asbestos safety clothing.In connection with the sale of American Optical in 1982,Warner-Lambert agreed to indemnify the purchaser for certainliabilities,including certain asbestos-related and other claims.Warner-Lambert was acquired by Pfizer in 2000 and is a wholly owned subsidiary of Pfizer.Warner-Lambert is actively engaged in the defense of,and will continue to explore various means of resolving,these claims.Numerous lawsuits against American Optical,Pfizer and certain of its previously owned subsidiaries are pending in various federal and state courts seekingdamages for alleged personal injury from exposure to products allegedly containing asbestos and other allegedly hazardous materials sold by Pfizer and certainof its previously owned subsidiaries.There also are a small number of lawsuits pending in various federal and state courts seeking damages for alleged exposure to asbestos in facilities owned orformerly owned by Pfizer or its subsidiaries.EffexorBeginning in 2011,actions,including purported class actions,were filed in various federal courts against Wyeth and,in certain of the actions,affiliates ofWyeth and certain other defendants relating to Effexor XR,which is the extended-release formulation of Effexor.The plaintiffs in each of the class actions seekto represent a class consisting of all persons in the U.S.and its territories who directly purchased,indirectly purchased or reimbursed patients for the purchaseof Effexor XR or generic25PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Effexor XR from any of the defendants from June 14,2008 until the time the defendants allegedly unlawful conduct ceased.The plaintiffs in all of the actionsallege delay in the launch of generic Effexor XR in the U.S.and its territories,in violation of federal antitrust laws and,in certain of the actions,the antitrust,consumer protection and various other laws of certain states,as the result of Wyeth fraudulently obtaining and improperly listing certain patents for Effexor XRin the Orange Book,enforcing certain patents for Effexor XR and entering into a litigation settlement agreement with a generic drug manufacturer with respectto Effexor XR.Each of the plaintiffs seeks treble damages(for itself in the individual actions or on behalf of the putative class in the purported class actions)for alleged price overcharges for Effexor XR or generic Effexor XR in the U.S.and its territories since June 14,2008.All of these actions have beenconsolidated in the U.S.District Court for the District of New Jersey.In 2014,the District Court dismissed the direct purchaser plaintiffs claims based on the litigation settlement agreement,but declined to dismiss the other directpurchaser plaintiff claims.In 2015,the District Court entered partial final judgments as to all settlement agreement claims,including those asserted by directpurchasers and end-payer plaintiffs,which plaintiffs appealed to the U.S.Court of Appeals for the Third Circuit.In 2017,the U.S.Court of Appeals for theThird Circuit reversed the District Courts decisions and remanded the claims to the District Court.LipitorBeginning in 2011,purported class actions relating to Lipitor were filed in various federal courts against,among others,Pfizer,certain Pfizer affiliates,and,inmost of the actions,Ranbaxy Laboratories Ltd.(Ranbaxy)and certain Ranbaxy affiliates.The plaintiffs in these various actions seek to represent nationwide,multi-state or statewide classes consisting of persons or entities who directly purchased,indirectly purchased or reimbursed patients for the purchase of Lipitor(or,in certain of the actions,generic Lipitor)from any of the defendants from March 2010 until the cessation of the defendants allegedly unlawful conduct(theClass Period).The plaintiffs allege delay in the launch of generic Lipitor,in violation of federal antitrust laws and/or state antitrust,consumer protection andvarious other laws,resulting from(i)the 2008 agreement pursuant to which Pfizer and Ranbaxy settled certain patent litigation involving Lipitor and Pfizergranted Ranbaxy a license to sell a generic version of Lipitor in various markets beginning on varying dates,and(ii)in certain of the actions,the procurementand/or enforcement of certain patents for Lipitor.Each of the actions seeks,among other things,treble damages on behalf of the putative class for alleged priceovercharges for Lipitor(or,in certain of the actions,generic Lipitor)during the Class Period.In addition,individual actions have been filed against Pfizer,Ranbaxy and certain of their affiliates,among others,that assert claims and seek relief for the plaintiffs that are substantially similar to the claims asserted andthe relief sought in the purported class actions described above.These various actions have been consolidated for pre-trial proceedings in a MDL in the U.S.District Court for the District of New Jersey.In September 2013 and 2014,the District Court dismissed with prejudice the claims of the direct purchasers.In October and November 2014,the District Courtdismissed with prejudice the claims of all other MDL plaintiffs.All plaintiffs appealed the District Courts orders dismissing their claims with prejudice to theU.S.Court of Appeals for the Third Circuit.In addition,the direct purchaser class plaintiffs appealed the order denying their motion to amend the judgment andfor leave to amend their complaint to the Court of Appeals.In 2017,the Court of Appeals reversed the District Courts decisions and remanded the claims tothe District Court.Also,in 2013,the State of West Virginia filed an action in West Virginia state court against Pfizer and Ranbaxy,among others,that asserts claims and seeksrelief on behalf of the State of West Virginia and residents of that state that are substantially similar to the claims asserted and the relief sought in the purportedclass actions described above.EpiPen(Direct Purchaser)In February 2020,a lawsuit was filed in the U.S.District Court for the District of Kansas against Pfizer,its current and former affiliates King and Meridian,andvarious Mylan entities,on behalf of a purported U.S.nationwide class of direct purchaser plaintiffs who purchased EpiPen devices directly from thedefendants.Plaintiffs in this action generally allege that Pfizer and Mylan conspired to delay market entry of generic EpiPen through the settlement of patentlitigation regarding EpiPen,and thereby delayed market entry of generic EpiPen in violation of federal antitrust law.Plaintiffs seek treble damages for allegedovercharges for EpiPen since 2011.In July 2021,the District Court granted defendants motion to dismiss the direct purchaser complaint,without prejudice.InSeptember 2021,plaintiffs filed an amended complaint.In August 2022,the District Court granted Pfizers motion to dismiss the complaint,and plaintiffs haveappealed to the U.S.Court of Appeals for the Tenth Circuit.Nexium 24HR and ProtonixA number of individual and multi-plaintiff lawsuits have been filed against Pfizer,certain of its subsidiaries and/or other pharmaceutical manufacturers invarious federal and state courts alleging that the plaintiffs developed kidney-related injuries purportedly as a result of the ingestion of certain proton pumpinhibitors.The cases against Pfizer involve Protonix and/or Nexium 24HR and seek compensatory and punitive damages and,in some cases,treble damages,restitution or disgorgement.In 2017,the federal actions were ordered transferred for coordinated pre-trial proceedings to a MDL in the U.S.District Court for26PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)the District of New Jersey.As part of the combination of our and GSKs consumer healthcare businesses to form Haleon,Haleon assumed,and agreed toindemnify Pfizer for,liabilities arising out of such litigation to the extent related to Nexium 24HR.Docetaxel Personal Injury ActionsA number of lawsuits have been filed against Hospira and Pfizer in various federal and state courts alleging that plaintiffs who were treated with Docetaxeldeveloped permanent hair loss.The significant majority of the cases also name other defendants,including the manufacturer of the branded product,Taxotere.Plaintiffs seek compensatory and punitive damages.Additional lawsuits have been filed in which plaintiffs allege they developed blocked tear ducts followingtheir treatment with Docetaxel.In 2016,the federal cases were transferred for coordinated pre-trial proceedings to a MDL in the U.S.District Court for the Eastern District of Louisiana.In2022,the eye injury cases were transferred for coordinated pre-trial proceedings to a MDL in the U.S.District Court for the Eastern District of Louisiana.Mississippi Attorney General Government ActionIn 2018,the Attorney General of Mississippi filed a complaint in Mississippi state court against the manufacturer of the branded product and eight othermanufacturers including Pfizer and Hospira,alleging,with respect to Pfizer and Hospira,a failure to warn about a risk of permanent hair loss in violation of theMississippi Consumer Protection Act.The action seeks civil penalties and injunctive relief.ZantacA number of lawsuits have been filed against Pfizer in various federal and state courts alleging that plaintiffs developed various types of cancer,or face anincreased risk of developing cancer,purportedly as a result of the ingestion of Zantac.The significant majority of these cases also name other defendants thathave historically manufactured and/or sold Zantac.Pfizer has not sold Zantac since 2006,and only sold an OTC version of the product.In 2006,Pfizer sold theconsumer business that included its Zantac OTC rights to Johnson&Johnson and transferred the assets and liabilities related to Zantac OTC to Johnson&Johnson in connection with the sale.Plaintiffs in these cases seek compensatory and punitive damages.In February 2020,the federal actions were transferred for coordinated pre-trial proceedings to a MDL in the U.S.District Court for the Southern District ofFlorida(the Federal MDL Court).Plaintiffs in the MDL have filed against Pfizer and many other defendants a master personal injury complaint,asserting aconsolidated consumer class action alleging,among other things,claims under consumer protection statutes of all 50 states,and a medical monitoringcomplaint seeking to certify medical monitoring classes under the laws of 13 states.In December 2022,the Federal MDL Court granted defendants Daubertmotions to exclude plaintiffs expert testimony and motion for summary judgment on general causation,and dismissed the litigation.In addition,(i)Pfizer has received service of Canadian class action complaints naming Pfizer and other defendants,and seeking compensatory and punitivedamages for personal injury and economic loss,allegedly arising from the defendants sale of Zantac in Canada;and(ii)the State of New Mexico and theMayor and City Council of Baltimore separately filed civil actions against Pfizer and many other defendants in state courts,alleging various state statutory andcommon law claims in connection with the defendants alleged sale of Zantac in those jurisdictions.In April 2021,a Judicial Council Coordinated Proceedingwas created in the Superior Court of California in Alameda County to coordinate personal injury actions against Pfizer and other defendants filed in Californiastate court.Coordinated proceedings have also been created in other state courts.ChantixBeginning in August 2021,a number of putative class actions have been filed against Pfizer in various U.S.federal courts following Pfizers voluntary recall ofChantix due to the presence of a nitrosamine,N-nitroso-varenicline.Plaintiffs assert that they suffered economic harm purportedly as a result of purchasingChantix or generic varenicline medicines sold by Pfizer.Plaintiffs seek to represent nationwide and state-specific classes and seek various remedies,includingdamages and medical monitoring.In December 2022,the federal actions were transferred for coordinated pre-trial proceedings to a MDL in the U.S.DistrictCourt for the Southern District of New York.Similar putative class actions have been filed in Canada and Israel,where the product brand is Champix.A3.Legal ProceedingsCommercial and Other MattersMonsanto-Related MattersIn 1997,Monsanto Company(Former Monsanto)contributed certain chemical manufacturing operations and facilities to a newly formed corporation,SolutiaInc.(Solutia),and spun off the shares of Solutia.In 2000,Former Monsanto merged with Pharmacia&Upjohn Company to form Pharmacia.Pharmacia thentransferred its agricultural operations to a newly created27PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)subsidiary,named Monsanto Company(New Monsanto),which it spun off in a two-stage process that was completed in 2002.Pharmacia was acquired byPfizer in 2003 and is a wholly owned subsidiary of Pfizer.In connection with its spin-off that was completed in 2002,New Monsanto assumed,and agreed to indemnify Pharmacia for,any liabilities related toPharmacias former agricultural business.New Monsanto has defended and/or is defending Pharmacia in connection with various claims and litigation arisingout of,or related to,the agricultural business,and has been indemnifying Pharmacia when liability has been imposed or settlement has been reached regardingsuch claims and litigation.In connection with its spin-off in 1997,Solutia assumed,and agreed to indemnify Pharmacia for,liabilities related to Former Monsantos chemical businesses.As the result of its reorganization under Chapter 11 of the U.S.Bankruptcy Code,Solutias indemnification obligations relating to Former Monsantos chemicalbusinesses are primarily limited to sites that Solutia has owned or operated.In addition,in connection with its spin-off that was completed in 2002,NewMonsanto assumed,and agreed to indemnify Pharmacia for,any liabilities primarily related to Former Monsantos chemical businesses,including,but notlimited to,any such liabilities that Solutia assumed.Solutias and New Monsantos assumption of,and agreement to indemnify Pharmacia for,these liabilitiesapply to pending actions and any future actions related to Former Monsantos chemical businesses in which Pharmacia is named as a defendant,including,without limitation,actions asserting environmental claims,including alleged exposure to polychlorinated biphenyls.Solutia and/or New Monsanto aredefending Pharmacia in connection with various claims and litigation arising out of,or related to,Former Monsantos chemical businesses,and have beenindemnifying Pharmacia when liability has been imposed or settlement has been reached regarding such claims and litigation.Environmental MattersIn 2009,as part of our acquisition of Wyeth,we assumed responsibility for environmental remediation at the Wyeth Holdings LLC(formerly known as,WyethHoldings Corporation and American Cyanamid Company)discontinued industrial chemical facility in Bound Brook,New Jersey.Since that time,we haveexecuted or have become a party to a number of administrative settlement agreements,orders on consent,and/or judicial consent decrees,with the U.S.Environmental Protection Agency and/or New Jersey Department of Environmental Protection to perform remedial design,removal and remedial actions,andrelated environmental remediation activities at the Bound Brook facility.We have accrued for the currently estimated costs of these activities.We are a party to a number of other proceedings brought under the Comprehensive Environmental Response,Compensation,and Liability Act of 1980,asamended,and other state,local or foreign laws in which the primary relief sought is the cost of past and/or future remediation.Contracts with Iraqi Ministry of HealthIn 2017,a number of U.S.service members,civilians,and their families brought a complaint in the U.S.District Court for the District of Columbia against anumber of pharmaceutical and medical devices companies,including Pfizer and certain of its subsidiaries,alleging that the defendants violated the U.S.Anti-Terrorism Act.The complaint alleges that the defendants provided funding for terrorist organizations through their sales practices pursuant to pharmaceuticaland medical device contracts with the Iraqi Ministry of Health,and seeks monetary relief.In July 2020,the District Court granted defendants motions todismiss and dismissed all of plaintiffs claims.In January 2022,the Court of Appeals reversed the District Courts decision.In February 2022,the defendantsfiled for en banc review of the Court of Appeals decision.In February 2023,the Court of Appeals denied defendants en banc petitions.Allergan Complaint for IndemnityIn 2019,Pfizer was named as a defendant in a complaint,along with King,filed by Allergan Finance LLC(Allergan)in the Supreme Court of the State of NewYork,asserting claims for indemnity related to Kadian,which was owned for a short period by King in 2008,prior to Pfizers acquisition of King in 2010.Thissuit was voluntarily discontinued without prejudice in January 2021.Viatris Securities LitigationIn October 2021,a putative class action was filed in the Court of Common Pleas of Allegheny County,Pennsylvania on behalf of former Mylan N.V.shareholders who received Viatris common stock in exchange for Mylan shares in connection with the spin-off of the Upjohn Business and its combinationwith Mylan(the Transactions).Viatris,Pfizer,and certain of each companys current and former officers,directors and employees are named as defendants.Anamended complaint was filed in January 2023,and alleges that the defendants violated certain provisions of the Securities Act of 1933 in connection withcertain disclosures made in or omitted from the registration statement and related prospectus issued in connection with the Transactions,as well as relatedcommunications.Plaintiff seeks damages,costs and expenses and other equitable and injunctive relief.28PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)A4.Legal ProceedingsGovernment InvestigationsWe are subject to extensive regulation by government agencies in the U.S.,other developed markets and multiple emerging markets in which we operate.Criminal charges,substantial fines and/or civil penalties,limitations on our ability to conduct business in applicable jurisdictions,corporate integrity ordeferred prosecution agreements,as well as reputational harm and increased public interest in the matter could result from government investigations in theU.S.and other jurisdictions in which we do business.These matters often involve government requests for information on a voluntary basis or throughsubpoenas after which the government may seek additional information through follow-up requests or additional subpoenas.In addition,in a qui tam lawsuit inwhich the government declines to intervene,the relator may still pursue a suit for the recovery of civil damages and penalties on behalf of the government.Among the investigations by government agencies are the matters discussed below.Greenstone Investigations U.S.Department of Justice Antitrust Division InvestigationSince July 2017,the U.S.Department of Justices Antitrust Division has been investigating our former Greenstone generics business.We believe this is relatedto an ongoing broader antitrust investigation of the generic pharmaceutical industry.We have produced records relating to this investigation.State Attorneys General and Multi-District Generics Antitrust LitigationIn April 2018,Greenstone received requests for information from the Antitrust Department of the Connecticut Office of the Attorney General.In May 2019,Attorneys General of more than 40 states plus the District of Columbia and Puerto Rico filed a complaint against a number of pharmaceutical companies,including Greenstone and Pfizer.The matter has been consolidated with a MDL in the Eastern District of Pennsylvania.As to Greenstone and Pfizer,thecomplaint alleges anticompetitive conduct in violation of federal and state antitrust laws and state consumer protection laws.In June 2020,the State AttorneysGeneral filed a new complaint against a large number of companies,including Greenstone and Pfizer,making similar allegations,but concerning a new set ofdrugs.This complaint was transferred to the MDL in July 2020.The MDL also includes civil complaints filed by private plaintiffs and state counties againstPfizer,Greenstone and a significant number of other defendants asserting allegations that generally overlap with those asserted by the State Attorneys General.Subpoena&Civil Investigative Demand relating to Tris Pharma/Quillivant XRIn October 2018,we received a subpoena from the U.S.Attorneys Office for the Southern District of New York(SDNY)seeking records relating to ourrelationship with anot
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended November 20,2022orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934Commission file number 0-20355Costco Wholesale Corporation(Exact name of registrant as specified in its charter)Washington 91-1223280(State or other jurisdiction ofincorporation or organization)(I.R.S.Employer Identification No.)999 Lake Drive,Issaquah,WA 98027(Address of principal executive offices)(Zip Code)(Registrants telephone number,including area code):(425)313-8100Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock,$.005 Par ValueCOSTThe Nasdaq Global Select MarketIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject tosuch filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required tosubmit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reportingcompany,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The number of shares outstanding of the issuers common stock as of December 22,2022 was 443,729,036.1Table of ContentsCOSTCO WHOLESALE CORPORATIONINDEX TO FORM 10-Q PagePART IFINANCIAL INFORMATIONItem 1.Financial Statements3Condensed Consolidated Statements of Income3Condensed Consolidated Statements of Comprehensive Income4Condensed Consolidated Balance Sheets5Condensed Consolidated Statements of Equity6Condensed Consolidated Statements of Cash Flows7Notes to Condensed Consolidated Financial Statements8Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations17Item 3.Quantitative and Qualitative Disclosures About Market Risk25Item 4.Controls and Procedures25PART IIOTHER INFORMATIONItem 1.Legal Proceedings25Item 1A.Risk Factors25Item 2.Unregistered Sales of Equity Securities and Use of Proceeds26Item 3.Defaults Upon Senior Securities26Item 4.Mine Safety Disclosures26Item 5.Other Information26Item 6.Exhibits27Signatures282Table of ContentsPART IFINANCIAL INFORMATIONItem 1Financial StatementsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(amounts in millions,except per share data)(unaudited)12 Weeks EndedNovember 20,2022November 21,2021REVENUENet sales$53,437$49,417 Membership fees1,000 946 Total revenue54,437 50,363 OPERATING EXPENSESMerchandise costs47,769 43,952 Selling,general and administrative4,917 4,718 Operating income1,751 1,693 OTHER INCOME(EXPENSE)Interest expense(34)(39)Interest income and other,net53 42 INCOME BEFORE INCOME TAXES1,770 1,696 Provision for income taxes406 351 Net income including noncontrolling interests1,364 1,345 Net income attributable to noncontrolling interests(21)NET INCOME ATTRIBUTABLE TO COSTCO$1,364$1,324 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:Basic$3.07$2.99 Diluted$3.07$2.98 Shares used in calculation(000s):Basic443,837 443,377 Diluted444,531 444,604 The accompanying notes are an integral part of these condensed consolidated financial statements.3Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(amounts in millions)(unaudited)12 Weeks Ended November 20,2022November 21,2021NET INCOME INCLUDING NONCONTROLLING INTERESTS$1,364$1,345 Foreign-currency translation adjustment and other,net(96)(72)Comprehensive income1,268 1,273 Less:Comprehensive income attributable to noncontrolling interests 23 COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO$1,268$1,250 The accompanying notes are an integral part of these condensed consolidated financial statements.4Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(amounts in millions,except par value and share data)(unaudited)November 20,2022August 28,2022ASSETSCURRENT ASSETSCash and cash equivalents$10,856$10,203 Short-term investments817 846 Receivables,net2,312 2,241 Merchandise inventories18,571 17,907 Other current assets1,594 1,499 Total current assets34,150 32,696 OTHER ASSETSProperty and equipment,net25,144 24,646 Operating lease right-of-use assets2,787 2,774 Other long-term assets3,946 4,050 TOTAL ASSETS$66,027$64,166 LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable$18,348$17,848 Accrued salaries and benefits4,317 4,381 Accrued member rewards1,959 1,911 Deferred membership fees2,322 2,174 Current portion of long-term debt71 73 Other current liabilities6,050 5,611 Total current liabilities33,067 31,998 OTHER LIABILITIESLong-term debt,excluding current portion6,472 6,484 Long-term operating lease liabilities2,503 2,482 Other long-term liabilities2,509 2,555 TOTAL LIABILITIES44,551 43,519 COMMITMENTS AND CONTINGENCIESEQUITYPreferred stock$0.005 par value;100,000,000 shares authorized;no shares issued andoutstanding Common stock$0.005 par value;900,000,000 shares authorized;443,841,000 and442,664,000 shares issued and outstanding2 2 Additional paid-in capital6,982 6,884 Accumulated other comprehensive loss(1,925)(1,829)Retained earnings16,412 15,585 Total Costco stockholders equity21,471 20,642 Noncontrolling interests5 5 TOTAL EQUITY21,476 20,647 TOTAL LIABILITIES AND EQUITY$66,027$64,166 The accompanying notes are an integral part of these condensed consolidated financial statements.5Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)12 Weeks Ended November 20,2022 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST28,2022442,664$2$6,884$(1,829)$15,585$20,642$5$20,647 Net income 1,364 1,364 1,364 Foreign-currencytranslation adjustmentand other,net (96)(96)(96)Stock-basedcompensation 403 403 403 Release of vestedrestricted stock units(RSUs),including taxeffects1,462 (301)(301)(301)Repurchases ofcommon stock(285)(4)(137)(141)(141)Cash dividend declared (400)(400)(400)BALANCE ATNOVEMBER 20,2022443,841$2$6,982$(1,925)$16,412$21,471$5$21,476 12 Weeks Ended November 21,2021 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST29,2021441,825$4$7,031$(1,137)$11,666$17,564$514$18,078 Net income 1,324 1,324 21 1,345 Foreign-currencytranslation adjustmentand other,net (74)(74)2(72)Stock-basedcompensation 389 389 389 Release of vestedRSUs,including taxeffects1,686 (355)(355)(355)Repurchases ofcommon stock(77)(1)(34)(35)(35)Cash dividend declared (350)(350)(350)BALANCE ATNOVEMBER 21,2021443,434$4$7,064$(1,211)$12,606$18,463$537$19,000 The accompanying notes are an integral part of these condensed consolidated financial statements.6Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in millions)(unaudited)12 Weeks EndedNovember 20,2022November 21,2021CASH FLOWS FROM OPERATING ACTIVITIESNet income including noncontrolling interests$1,364$1,345 Adjustments to reconcile net income including noncontrolling interests to net cash provided byoperating activities:Depreciation and amortization447 432 Non-cash lease expense111 72 Stock-based compensation402 388 Other non-cash operating activities,net123 111 Deferred income taxes(2)(2)Changes in operating assets and liabilities:Merchandise inventories(737)(2,760)Accounts payable487 3,389 Other operating assets and liabilities,net415 283 Net cash provided by operating activities2,610 3,258 CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short-term investments(253)(258)Maturities of short-term investments274 444 Additions to property and equipment(1,057)(1,055)Other investing activities,net(21)(43)Net cash used in investing activities(1,057)(912)CASH FLOWS FROM FINANCING ACTIVITIESTax withholdings on stock-based awards(301)(355)Repurchases of common stock(141)(37)Cash dividend payments(400)(350)Other financing activities,net(21)(97)Net cash used in financing activities(863)(839)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS(37)(14)Net change in cash and cash equivalents653 1,493 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR10,203 11,258 CASH AND CASH EQUIVALENTS END OF PERIOD$10,856$12,751 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the first 12 weeks of the year for:Interest$52$64 Income taxes,net$214$206 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:Financing lease assets obtained in exchange for new or modified leases$49$118 Operating lease assets obtained in exchange for new or modified leases$68$61 The accompanying notes are an integral part of these condensed consolidated financial statements.7Table of ContentsCOSTCO WHOLESALE CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(amounts in millions,except share,per share,and warehouse count data)(unaudited)Note 1Summary of Significant Accounting PoliciesDescription of BusinessCostco Wholesale Corporation(Costco or the Company),a Washington corporation,and its subsidiaries operate membership warehousesbased on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range ofmerchandise categories will produce high sales volumes and rapid inventory turnover.At November 20,2022,Costco operated 845 warehousesworldwide:582 in the United States(U.S.)located in 46 states,Washington,D.C.,and Puerto Rico,107 in Canada,40 in Mexico,31 inJapan,29 in the United Kingdom(U.K.),18 in Korea,14 in Taiwan,13 in Australia,four in Spain,two each in France and China,and one eachin Iceland,New Zealand,and Sweden.The Company operates e-commerce websites in the U.S.,Canada,U.K.,Mexico,Korea,Taiwan,Japan,and Australia.Basis of PresentationThe condensed consolidated financial statements include the accounts of Costco,its wholly-owned subsidiaries,and a subsidiary in which it hasa controlling interest.All material inter-company transactions among the Company and its consolidated subsidiaries have been eliminated inconsolidation.Unless otherwise noted,references to net income relate to net income attributable to Costco.These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interimfinancial reporting pursuant to the rules and regulations of the Securities and Exchange Commission(SEC).While these statements reflect allnormal recurring adjustments that are,in the opinion of management,necessary for fair presentation of the results of the interim period,they donot include all of the information and footnotes required by U.S.generally accepted accounting principles(U.S.GAAP)for complete financialstatements.Therefore,the interim condensed consolidated financial statements should be read in conjunction with the consolidated financialstatements and notes included in the Companys Annual Report on Form 10-K for the fiscal year ended August 28,2022.Fiscal Year EndThe Company operates on a 52/53 week fiscal year basis,with the fiscal year ending on the Sunday closest to August 31.Fiscal 2023 is a 53-week year ending on September 3,2023.References to the first quarter of 2023 and 2022 relate to the 12-week fiscal quartersended November 20,2022,and November 21,2021.Use of EstimatesThe preparation of financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.These estimates and assumptions take into account historical andforward-looking factors that the Company believes are reasonable.Actual results could differ from those estimates and assumptions.8Table of ContentsReclassificationReclassifications were made to the condensed consolidated statement of cash flows for the first quarter of 2022 to conform with current yearpresentation.LeasesThe Company leases land,buildings,equipment,and other assets at warehouses,offices,or within the operations that support supply chain anddistribution channels.The Company reviews lease right-of-use assets for impairment when events or changes in circumstances indicate that thecarrying amount of the asset group may not be fully recoverable.The Company also occasionally revisits and modifies the terms of its leasingarrangements.During the first quarter of 2023,the Company recognized a charge of$93,primarily related to the termination costs andimpairment of certain leased assets associated with charter shipping activities.This charge is included in merchandise costs.Note 2InvestmentsThe Companys investments were as follows:November 20,2022:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$570$(12)$558 Held-to-maturity:Certificates of deposit259 259 Total short-term investments$829$(12)$817 August 28,2022:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$534$(5)$529 Held-to-maturity:Certificates of deposit317 317 Total short-term investments$851$(5)$846 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended November 20,2022,andAugust 28,2022.At those dates,there were no available-for-sale securities in a material continuous unrealized-loss position.There were nosales of available-for-sale securities during the first quarter of 2023 or 2022.The maturities of available-for-sale and held-to-maturity securities at November 20,2022 are as follows:Available-For-SaleHeld-To-Maturity Cost BasisFair ValueDue in one year or less$220$217$259 Due after one year through five years264 259 Due after five years86 82 Total$570$558$259 9Table of ContentsNote 3Fair Value MeasurementAssets and Liabilities Measured at Fair Value on a Recurring BasisThe table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicatesthe level within the fair-value hierarchy reflecting the valuation techniques utilized.Level 2November 20,2022August 28,2022Investment in government and agency securities$558$529 Forward foreign-exchange contracts,in asset position19 34 Forward foreign-exchange contracts,in(liability)position(25)(2)Total$552$561 _(1)The asset and liability values are included in other current assets and other current liabilities,respectively,in the accompanying condensed consolidated balance sheets.At November 20,2022,and August 28,2022,the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fairvalue on a recurring basis.There were no transfers between levels during the first quarter of 2023 or 2022.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisAssets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured atamortized cost and long-lived nonfinancial assets.These assets are measured at fair value if determined to be impaired.Please see Note 1 foradditional information.Note 4DebtThe carrying value of the Companys long-term debt consisted of the following:November 20,2022August 28,20222.750%Senior Notes due May 2024$1,000$1,000 3.000%Senior Notes due May 20271,000 1,000 1.375%Senior Notes due June 20271,250 1,250 1.600%Senior Notes due April 20301,750 1,750 1.750%Senior Notes due April 20321,000 1,000 Other long-term debt574 590 Total long-term debt6,574 6,590 Less unamortized debt discounts and issuance costs31 33 Less current portion71 73 Long-term debt,excluding current portion$6,472$6,484 _(1)Net of unamortized debt discounts and issuance costs.The fair value of the Senior Notes is estimated using Level 2 inputs.Other long-term debt consists of Guaranteed Senior Notes issued by theCompanys Japan subsidiary,valued using Level 3 inputs.The fair value of the Companys long-term debt,including the current portion,wasapproximately$5,816 and$6,033 at November 20,2022,and August 28,2022.(1)(1)(1)10Table of ContentsNote 5EquityDividendsOn October 12,2022,the Board of Directors declared a quarterly cash dividend in the amount of$0.90 per share,which was paid onNovember 10,2022.Share Repurchase ProgramThe Companys share repurchase program is conducted under a$4,000 authorization by the Board of Directors,which expires in April 2023.AtNovember 20,2022,the remaining amount available under the plan was$2,667.The following table summarizes the Companys stockrepurchase activity:Shares Repurchased(000s)Average Price per ShareTotal CostFirst quarter of 2023285$495.94$141 First quarter of 202277$455.08$35 These amounts may differ from repurchases of common stock in the accompanying condensed consolidated statements of cash flows due tochanges in unsettled stock repurchases at the end of each quarter.Purchases are made from time to time,as conditions warrant,in the openmarket or in block purchases and pursuant to plans under SEC Rule 10b5-1.Note 6Stock-Based CompensationThe 2019 Incentive Plan authorized the issuance of 17,500,000 shares(10,000,000 RSUs)of common stock for future grants,plus theremaining shares that were available for grant and the future forfeited shares from grants under the previous plan,up to a maximum of27,800,000 shares(15,885,000 RSUs).The Company issues new shares of common stock upon vesting of RSUs.Shares for vested RSUs aregenerally delivered to participants annually,net of shares withheld for taxes.Summary of Restricted Stock Unit ActivityAt November 20,2022,8,652,000 shares were available to be granted as RSUs,and the following awards were outstanding:2,976,000 time-based RSUs,which vest upon continued employment over specified periods and accelerate upon achievement of thelong-service term;41,000 performance-based RSUs,granted to executive officers of the Company,for which the performance targets have been met.Theawards vest upon continued employment over specified periods of time and upon achievement of the long-service term;and135,000 performance-based RSUs,granted to executive officers of the Company,subject to achievement of performance targets forfiscal 2023,as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year.These awards arenot included in the table below or in the amount of unrecognized compensation cost.11Table of ContentsThe following table summarizes RSU transactions during the first quarter of 2023:Number ofUnits(in 000s)Weighted-AverageGrant Date Fair ValueOutstanding at August 28,20223,449$338.41 Granted1,678 470.47 Vested and delivered(2,090)352.56 Forfeited(20)385.02 Outstanding at November 20,20223,017$401.75 The remaining unrecognized compensation cost related to RSUs unvested at November 20,2022,was$1,139,and the weighted-average periodover which this cost will be recognized is 1.8 years.Summary of Stock-Based CompensationThe following table summarizes stock-based compensation expense and the related tax benefits:12 Weeks EndedNovember 20,2022November 21,2021Stock-based compensation expense$402$388 Less recognized income tax benefits89 85 Stock-based compensation expense,net$313$303 Note 7Net Income per Common and Common Equivalent ShareThe following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and ofpotentially dilutive common shares outstanding(shares in 000s):12 Weeks EndedNovember 20,2022November 21,2021Net income attributable to Costco$1,364$1,324 Weighted average basic shares443,837 443,377 RSUs694 1,227 Weighted average diluted shares444,531 444,604 12Table of ContentsNote 8Commitments and ContingenciesLegal ProceedingsThe Company is involved in a number of claims,proceedings and litigations arising from its business and property ownership.In accordancewith applicable accounting guidance,the Company establishes an accrual for legal proceedings if and when those matters present losscontingencies that are both probable and reasonably estimable.There may be exposure to loss in excess of amounts accrued.The Companymonitors those matters for developments that would affect the likelihood of a loss(taking into account where applicable indemnificationarrangements concerning suppliers and insurers)and the accrued amount,if any,thereof,and adjusts the amount as appropriate.The Companyhas recorded immaterial accruals with respect to certain matters described below,in addition to other immaterial accruals for matters notdescribed below.If the loss contingency at issue is not both probable and reasonably estimable,the Company does not establish an accrual,butwill monitor the matter for developments that will make the contingency both probable and reasonably estimable.In each case,there is areasonable possibility that a loss may be incurred,including a loss in excess of the applicable accrual.For matters where no accrual has beenrecorded,the possible loss or range of loss(including any loss in excess of the accrual)cannot,in the Companys view,be reasonably estimatedbecause,among other things:(i)the remedies or penalties sought are indeterminate or unspecified;(ii)the legal and/or factual theories are notwell developed;and/or(iii)the matters involve complex or novel legal theories or a large number of parties.The Company is a defendant in an action commenced in July 2013 under the California Labor Code Private Attorneys General Act(PAGA)alleging violation of California Wage Order 7-2001 for failing to provide seating to employees who work at entrance and exit doors in Californiawarehouses.Canela v.Costco Wholesale Corp.(Case No.2013-1-CV-248813;Santa Clara Superior Court).The complaint seeks relief underthe California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denying the material allegations of thecomplaint.A bench trial was held in June and July;no decision has been issued.In June 2022,a business center employee raised similar claims alleging failure to provide seating to employees who work at membership refunddesks in California warehouses and business centers.Rodriguez v.Costco Wholesale Corp.(Case No.22CV012847;Alameda Superior Court).The complaint seeks relief under the California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denyingthe material allegations of the complaint.In December 2018,a depot employee raised similar claims,alleging that depot employees in California did not receive suitable seating orreasonably comfortable workplace temperature conditions.Lane v.Costco Wholesale Corp.(Case No.CIVDS 1908816;San BernardinoSuperior Court).The Company filed an answer denying the material allegations of the complaint.In October 2019,the parties settled for animmaterial amount the seating claims on a representative basis,which received court approval in February 2020.The parties settled thetemperature claims for an immaterial amount in April 2022,and court approval was received in May 2022.A February 2023 hearing has been setfor a final report on the settlement.In March 2019,employees filed a class action against the Company alleging claims under California law for failure to pay overtime,to providemeal and rest periods and itemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfairbusiness practices.Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Nevarez v.Costco WholesaleCorp.(Case No.2:19-cv-03454;C.D.Cal.).The Company filed an answer denying the material allegations of the complaint.In December 2019,the court issued an order denying class certification.In January 2020,the plaintiffs dismissed their Labor Code claims without prejudice,and thecourt remanded the action to state court.Settlement for an immaterial amount was agreed upon in February 2021.Final court approval of thesettlement was granted on May 3,2022.A proposed intervenor has appealed the denial of her motion to intervene.13Table of ContentsIn May 2019,an employee filed a class action against the Company alleging claims under California law for failure to pay overtime,to provideitemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfair business practices.Roughv.Costco Wholesale Corp.(Case No.2:19-cv-01340;E.D.Cal.).Relief is sought under the California Labor Code,including civil penalties andattorneys fees.In September 2021,the court granted Costcos motion for partial summary judgment and denied class certification.In August2019,the plaintiff filed a companion case in state court seeking penalties under PAGA.Rough v.Costco Wholesale Corp.(Case No.FCS053454;Sonoma County Superior Court).Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Thestate court action has been stayed pending resolution of the federal action.In December 2020,a former employee filed suit against the Company asserting collective and class claims on behalf of non-exempt employeesunder the Fair Labor Standards Act and New York Labor Law for failure to pay for all hours worked,failure to pay certain non-exempt employeeson a weekly basis,and failure to provide proper wage statements and notices.The plaintiff also asserted individual retaliation claims.Cappadorav.Costco Wholesale Corp.(Case No.1:20-cv-06067;E.D.N.Y.).An amended complaint was filed,and the Company denied the materialallegations of the amended complaint.Based on an agreement in principle concerning settlement of the matter,involving a proposed payment bythe Company of an immaterial amount,the federal action has been dismissed.In April 2022,Cappadora and a second plaintiff filed an actionagainst the Company in New York state court,asserting the same class claims asserted in the federal action under the New York Labor Law andseeking preliminary approval of the class settlement.Cappadora and Sancho v.Costco Wholesale Corp.(Index No.604757/2022;NassauCounty Supreme Court).The state court granted preliminary approval of the settlement in October 2022.In August 2021,a former employee filed a similar suit,asserting class claims on behalf of certain non-exempt employees under New York LaborLaw for failure to pay on a weekly basis.Umadat v.Costco Wholesale Corp.(Case No.2:21-cv-4814;E.D.N.Y.).The Company filed an answer,denying the material allegations of the complaint.In April 2022,a former employee filed a similar suit,asserting class claims on behalf of certainnon-exempt employees under New York Labor Law,as well as under the Fair Labor Standards Act,for failure to pay on a weekly basis andfailure to pay overtime.Burian v.Costco Wholesale Corp.(Case No.2:22-cv-02108;E.D.N.Y.).In September 2022,an amended complaint wasfiled,asserting class claims on behalf of certain non-exempt employees under New York Labor Law for failure to pay on a weekly basis.TheCompany responded by requesting permission to file a motion to dismiss.The court has not responded.In February 2021,a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment ofwages,meal and rest periods,wage statements,reimbursement of expenses,payment of final wages to terminated employees,and for unfairbusiness practices.Edwards v.Costco Wholesale Corp.(Case No.5:21-cv-00716:C.D.Cal.).In May 2021,the Company filed a motion todismiss the complaint,which was granted with leave to amend.In June 2021,the plaintiff filed an amended complaint,which the Companymoved to dismiss later that month.The court granted the motion in part in July 2021 with leave to amend.In August 2021,the plaintiff filed asecond amended complaint and filed a separate representative action under PAGA asserting the same Labor Code claims and seeking civilpenalties and attorneys fees.The Company filed an answer to the second amended class action complaint,denying the material allegations.The Company also filed an answer to the PAGA representative action,denying the material allegations.On September 27,2022,the partiesreached a settlement for an immaterial amount.The settlement requires court approval.In July 2021,a former temporary staffing employee filed a class action against the Company and a staffing company alleging violations of theCalifornia Labor Code regarding payment of wages,meal and rest periods,wage statements,the timeliness of wages and final wages,and forunfair business practices.Dimas v.Costco Wholesale Corp.(Case No.STK-CV-UOE-2021-0006024;San Joaquin Superior Court).TheCompany has moved to compel arbitration of the plaintiffs individual claims and to dismiss the class action complaint.On September 7,2021,the same former employee filed a separate representative14Table of Contentsaction under PAGA,asserting the same Labor Code violations and seeking civil penalties and attorneys fees.The case has been stayedpending the motion to compel in the related case.In September 2021,an employee filed a class action against the Company alleging violations of the California Labor Code regarding the allegedfailure to provide sick pay,failure to timely pay wages due at separation from employment,and for violations of Californias unfair competitionlaw.De Benning v.Costco Wholesale Corp.(Case No.34-2021-00309030-CU-OE-GDS;Sacramento Superior Court).The Company answeredthe complaint in January 2022,denying its material allegations.In April 2022,a settlement for an immaterial amount was agreed upon,subject tocourt approval.The court granted preliminary approval of the settlement on October 28,2022.A final approval hearing is set for February 10,2023.In March 2022,an employee filed a class action against the Company alleging violations of the California Labor Code regarding the failure to:pay wages,provide meal and rest periods,provide accurate wage statements,timely pay final wages,and reimburse business expenses.Diaz v.Costco Wholesale Corp.(Case No.22STCV09513;Los Angeles Superior Court).The Company filed an answer denying the material allegations.In May 2022,an employee filed a PAGA-only representative action against the Company alleging claims under the California Labor Coderegarding the payment of wages,meal and rest periods,the timeliness of wages and final wages,wage statements,accurate records andbusiness expenses.Gonzalez v.Costco Wholesale Corp.(Case No.22AHCV00255;Los Angeles Superior Court).Beginning in December 2017,the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts ofopioid abuses filed against various defendants by counties,cities,hospitals,Native American tribes,third-party payors,and others.In re NationalPrescription Opiate Litigation(MDL No.2804)(N.D.Ohio).Included are cases that name the Company,including actions filed by counties andcities in Michigan,New Jersey,Oregon,Virginia and South Carolina,a third-party payor in Ohio,and a hospital in Texas,class actions filed onbehalf of infants born with opioid-related medical conditions in 40 states,and class actions and individual actions filed on behalf of individualsseeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa.Claims against theCompany in state courts in New Jersey,Oklahoma,Utah,and Arizona have been dismissed.The Company is defending all of the pendingmatters.Members of the Board of Directors,six corporate officers and the Company are defendants in a shareholder derivative action related to chickenwelfare and alleged breaches of fiduciary duties.Smith,et ano.v.Vachris,et al.,Superior Court of the State of Washington,County of King,No,22-2-08937-7SEA,(filed 6/14/22,as amended,6/30/22);The complaint seeks from the individual defendants damages,injunctive relief,costs,and attorneys fees.A motion to dismiss the amended complaint has been filed.The Company does not believe that any pending claim,proceeding or litigation,either alone or in the aggregate,will have a material adverseeffect on the Companys financial position,results of operations or cash flows;it is possible that an unfavorable outcome of some or all of thematters,however unlikely,could result in a charge that might be material to the results of an individual fiscal quarter or year.15Table of ContentsNote 9Segment ReportingThe Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S.,Canada,Mexico,Japan,U.K.,Korea,Taiwan,Australia,Spain,France,China,Iceland,New Zealand,and Sweden.Reportable segments are largelybased on managements organization of the operating segments for operational decisions and assessments of financial performance,whichconsiders geographic locations.The material accounting policies of the segments are as described in the notes to the consolidated financialstatements included in the Companys Annual Report filed on Form 10-K for the fiscal year ended August 28,2022,and Note 1 above.Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income.The following table provides information for the Companys reportable segments:United StatesOperationsCanadianOperationsOtherInternationalOperationsTotal12 Weeks Ended November 20,2022Total revenue$40,145$7,356$6,936$54,437 Operating income1,236 288 227 1,751 12 Weeks Ended November 21,2021Total revenue$36,317$7,121$6,925$50,363 Operating income1,118 293 282 1,693 52 Weeks Ended August 28,2022Total revenue$165,294$31,675$29,985$226,954 Operating income5,268 1,346 1,179 7,793 Disaggregated RevenueThe following table summarizes net sales by merchandise category;sales from e-commerce websites and business centers have been allocatedto the applicable merchandise categories:12 Weeks EndedNovember 20,2022November 21,2021Foods and Sundries$21,448$19,563 Non-Foods14,032 14,162 Fresh Foods6,717 6,439 Warehouse Ancillary and Other Businesses11,240 9,253 Total net sales$53,437$49,417 16Table of ContentsItem 2Managements Discussion and Analysis of Financial Condition and Results of Operations(amounts in millions,except per share,share,percentages and warehouse count data)FORWARD-LOOKING STATEMENTSCertain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995.For these purposes,forward-looking statements are statements that address activities,events,conditions or developmentsthat the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth,changes in comparablesales,cannibalization of existing locations by new openings,price or fee changes,earnings performance,earnings per share,stock-basedcompensation expense,warehouse openings and closures,capital spending,the effect of adopting certain accounting standards,future financialreporting,financing,margins,return on invested capital,strategic direction,expense controls,membership renewal rates,shopping frequency,litigation,and the demand for our products and services.In some cases,forward-looking statements can be identified because they containwords such as“anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“intend,”“likely,”“may,”“might,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“target,”“will,”“would,”or similar expressions and the negatives of those terms.Such forward-looking statementsinvolve risks and uncertainties that may cause actual events,results,or performance to differ materially from those indicated by suchstatements.These risks and uncertainties include,but are not limited to,domestic and international economic conditions,including exchangerates,inflation or deflation,the effects of competition and regulation,uncertainties in the financial markets,consumer and small-businessspending patterns and debt levels,breaches of security or privacy of member or business information,conditions affecting the acquisition,development,ownership or use of real estate,capital spending,actions of vendors,rising costs associated with employees(generally includinghealth-care costs),energy and certain commodities,geopolitical conditions(including tariffs and the Ukraine conflict),the ability to maintaineffective internal control over financial reporting,regulatory and other impacts related to climate change,COVID-19 related factors andchallenges,and other risks identified from time to time in the Companys public statements and reports filed with the Securities and ExchangeCommission(SEC).Forward-looking statements speak only as of the date they are made,and the Company does not undertake to update thesestatements,except as required by law.OVERVIEWThe following Managements Discussion and Analysis of Financial Condition and Results of Operations(MD&A)is intended to promoteunderstanding of the results of operations and financial condition.MD&A is provided as a supplement to,and should be read in conjunction with,our condensed consolidated financial statements and the accompanying Notes to Financial Statements(Part I,Item 1 of this Form 10-Q),as wellas our consolidated financial statements,the accompanying Notes to Financial Statements,and the related Managements Discussion andAnalysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K,filed with the United States Securities andExchange Commission(SEC)on October 5,2022.We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limitedselection of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventoryturnover.When combined with the operating efficiencies achieved by volume purchasing,efficient distribution and reduced handling ofmerchandise in no-frills,self-service warehouse facilities,these volumes and turnover enable us to operate profitably at significantly lower grossmargins(net sales less merchandise costs)than most other retailers.We often sell inventory before we are required to pay for it,even whiletaking advantage of early payment discounts.We believe that the most important driver of our profitability is increasing net sales,particularly comparable sales.Net sales includes our coremerchandise categories(foods and sundries,non-foods,and fresh foods),warehouse ancillary(gasoline,pharmacy,optical,food court,hearingaids,and tire installation)and other businesses(e-commerce,business centers,travel and other).We define17Table of Contentscomparable sales as net sales from warehouses open for more than one year,including remodels,relocations and expansions,and sales relatedto e-commerce websites operating for more than one year.Comparable sales growth is achieved through increasing shopping frequency fromnew and existing members and the amount they spend on each visit(average ticket).Sales comparisons can also be particularly influenced bycertain factors that are beyond our control:fluctuations in currency exchange rates(with respect to our international operations);inflation andchanges in the cost of gasoline and associated competitive conditions.The higher our comparable sales exclusive of these items,the more wecan leverage our SG&A expenses,reducing them as a percentage of sales and enhancing profitability.Generating comparable sales growth isforemost a question of making available to our members the right merchandise at the right prices,a skill that we believe we have repeatedlydemonstrated over the long-term.Another substantial factor in net sales growth is the health of the economies in which we do business,including the effects of inflation or deflation,especially the United States.Net sales growth and gross margins are also impacted by ourcompetition,which is vigorous and widespread,across a wide range of global,national and regional wholesalers and retailers,including thosewith e-commerce operations.While we cannot control or reliably predict general economic health or changes in competition,we believe that wehave been successful historically in adapting our business to these changes,such as through adjustments to our pricing and merchandise mix,including increasing the penetration of our private-label items,and through online offerings.Our philosophy is to provide our members with quality goods and services at competitive prices.We do not focus in the short-term onmaximizing prices charged,but instead seek to maintain what we believe is a perception among our members of our“pricing authority”consistently providing the most competitive values.Merchandise costs in the first quarter of 2023 was impacted by inflation higher than what wehave experienced in recent years.The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategiesin response to cost increases.Those strategies can include,but are not limited to,working with our suppliers to share in absorbing costincreases,earlier-than-usual purchasing and in greater volumes,offering seasonal merchandise outside its season,as well as passing costincreases on to our members.Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meetcompetition and holding prices steady despite cost increases instead of passing the increases on to our members,all negatively impacting grossmargin and gross margin as a percentage of net sales(gross margin percentage).We believe our gasoline business enhances traffic in our warehouses,but it generally has a lower gross margin percentage relative to our non-gasoline businesses.It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline businesses.A higher penetrationof gasoline sales will generally lower our gross margin percentage.Rapidly changing gasoline prices may significantly impact our near-term netsales growth.Generally,rising gasoline prices benefit net sales growth which,given the higher sales base,negatively impacts our gross marginpercentage but decreases our SG&A expenses as a percentage of net sales.A decline in gasoline prices has the inverse effect.Additionally,government actions in various countries,particularly China and the United States,have affected the costs of some of our merchandise.Thedegree of our exposure is dependent on(among other things)the type of goods,rates imposed,and timing of the tariffs.Higher tariffs couldadversely impact our results.We also achieve net sales growth by opening new warehouses.As our warehouse base grows,available and desirable sites become moredifficult to secure,and square footage growth becomes a comparatively less substantial component of growth.The negative aspects of suchgrowth,however,including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouseswhen openings occur in existing markets,are continuing to decline in significance as they relate to the results of our total operations.Our rate ofsquare footage growth is generally higher in foreign markets,due to the smaller base in those markets,and we expect that to continue.Our e-commerce business,domestically and internationally,generally has a lower gross margin percentage than our warehouse operations.The membership format is an integral part of our business and has a significant effect on our profitability.This format is designed to reinforcemember loyalty and provide continuing fee revenue.The extent to18Table of Contentswhich we achieve growth in our membership base,increase the penetration of our Executive members,and sustain high renewal rates materiallyinfluences our profitability.Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets ascompared to new markets.Our financial performance depends heavily on controlling costs.While we believe that we have achieved successes in this area,some significantcosts are partially outside our control,particularly health care and utility expenses.With respect to the compensation of our employees,ourphilosophy is not to seek to minimize their wages and benefits.Rather,we believe that achieving our longer-term objectives of reducingemployee turnover and enhancing employee satisfaction require maintaining compensation levels that are better than the industry average formuch of our workforce.This may cause us,for example,to absorb costs that other employers might seek to pass through to their workforces.Because our business operates on very low margins,modest changes in various items in the consolidated statements of income,particularlymerchandise costs and SG&A expenses,can have substantial impacts on net income.Our operating model is generally the same across our U.S.,Canadian,and Other International operating segments(see Note 9 to thecondensed consolidated financial statements included in Part I,Item 1,of this Report).Certain operations in the Other International segmenthave relatively higher rates of square footage growth,lower wage and benefit costs as a percentage of sales,less or no direct membershipwarehouse competition,or lack e-commerce or business delivery.In discussions of our consolidated operating results,we refer to the impact of changes in foreign currencies relative to the U.S.dollar,which aredifferences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies intoU.S.dollars.This impact of foreign-exchange rate changes is calculated based on the difference between the current and prior periods currencyexchange rates.The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and priorperiods average price per gallon sold.Our fiscal year ends on the Sunday closest to August 31.References to the first quarter of 2023 and 2022 relate to the 12-week fiscal quartersended November 20,2022,and November 21,2021.Certain percentages presented are calculated using actual results prior to rounding.Unlessotherwise noted,references to net income relate to net income attributable to Costco.Highlights for the first quarter of 2023 versus 2022 include:Net sales increased 8%to$53,437,driven by an increase in comparable sales of 7%and sales at 22 net new warehouses opened sincethe end of the first quarter of 2022;Membership fee revenue increased 6%to$1,000,driven by new member sign-ups,upgrades to Executive Membership,and an increasein our renewal rate;Gross margin percentage decreased 45 basis points,driven primarily by our core merchandise categories and a charge of$93,$0.15 perdiluted share,predominantly related to downsizing our charter shipping activities.This was partially offset by increases in warehouseancillary and other businesses;SG&A expenses as a percentage of net sales decreased 35 basis points,primarily due to a write-off of information technology assets of$118,$0.20 per diluted share,recorded in the first quarter of 2022,and leveraging increased sales in the first quarter of 2023.The provision for income taxes in the first quarter of 2023 was positively impacted by a benefit related to stock compensation of$53,$0.12 per diluted share,compared to$91,$0.21 per diluted share,in the first quarter of 2022.Net income was$1,364,$3.07 per diluted share,compared to$1,324,$2.98 per diluted share in 2022;andOn October 12,2022,our Board declared a quarterly cash dividend of$0.90 per share,which was paid on November 10,2022.19Table of ContentsRESULTS OF OPERATIONSNet Sales12 Weeks EndedNovember 20,2022November 21,2021Net Sales$53,437$49,417 Changes in net sales:U.S11nada3%Other International%Total Company8%Changes in comparable sales:U.S9nada2%Other International(3)%Total Company7%E-commerce(4)%Changes in comparable sales excluding the impact of changes in foreign-currencyand gasoline prices:U.S7nada8%8%Other International9%Total Company7%E-commerce(2)%Net SalesNet sales increased$4,020 or 8%during the first quarter of 2023.This improvement was attributable to an increase in comparable sales of 7%and sales at the 22 net new warehouses opened since the end of the first quarter of 2022.Sales increased$2,033,or 5.1%in core merchandisecategories,led by foods and sundries and fresh foods;while non-foods decreased slightly.Sales increased$1,987,or 21.5%in warehouseancillary and other businesses,led by gasoline,business centers and travel businesses.During the first quarter of 2023,higher gasoline prices positively impacted net sales by$1,216,246 basis points,compared to 2022,with a 17%increase in the average price per gallon.The volume of gasoline sold increased approximately 10%,positively impacting net sales by$650,131basis points.Changes in foreign currencies relative to the U.S.dollar negatively impacted net sales by approximately$1,534,310 basis points,compared to the first quarter of 2022,attributable to our Canadian and Other International operations.Comparable SalesComparable sales increased 7%in the first quarter of 2023 and were positively impacted by increases in shopping frequency and the averageticket,which includes the effects of inflation and changes in foreign currency.20Table of ContentsMembership Fees12 Weeks EndedNovember 20,2022November 21,2021Membership fees$1,000$946 Membership fees increase6%Total paid members(000s)66,900 62,500 Total cardholders(000s)120,900 113,100 Membership fee revenue increased 6%in the first quarter of 2023,driven by sign-ups,upgrades to Executive Membership,and an increase inour renewal rate.Changes in foreign currencies relative to the U.S.dollar negatively impacted membership fees by$32,compared to the firstquarter of 2022.At the end of the first quarter of 2023,our member renewal rates were 93%in the U.S.and Canada and 90%worldwide.Renewal rates continue to benefit from more members auto renewing and increased penetration of Executive members,who on average renewat a higher rate.Our renewal rate,which excludes affiliates of Business members,is a trailing calculation that captures renewals during theperiod seven to eighteen months prior to the reporting date.We account for membership fee revenue on a deferred basis,recognized ratably over the one-year membership period.Our membership countsinclude active memberships and memberships that have not renewed within the 12 months prior to the reporting date.Gross Margin12 Weeks EndedNovember 20,2022November 21,2021Net sales$53,437$49,417 Less merchandise costs47,769 43,952 Gross margin$5,668$5,465 Gross margin percentage10.61.06%Total gross margin percentage decreased 45 basis points compared to the first quarter of 2022.Excluding the impact of gasoline price inflationon net sales,gross margin percentage was 10.85%,a decrease of 21 basis points.This was primarily due to a 31 basis-point decrease in coremerchandise categories,predominantly in non-foods and fresh foods,and an 18 basis-point charge,primarily related to downsizing our chartershipping activities.Gross margin was also negatively impacted by five basis points due to increased 2%rewards.Warehouse ancillary and otherbusinesses positively impacted gross margin by 30 basis points,predominantly gasoline,partially offset by e-commerce.A smaller LIFO chargein the first quarter of 2023 compared to the first quarter of 2022 positively contributed three basis points.Changes in foreign currencies relativeto the U.S.dollar negatively impacted gross margin by approximately$153,compared to the first quarter of 2022,attributable to our Canadianand Other International operations.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),decreased 31 basis points.The decrease was primarily due to fresh foods and non-foods,partially offset by foods and sundries.This measureeliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.21Table of ContentsGross margin on a segment basis,when expressed as a percentage of the segments own sales and excluding the impact of changes ingasoline prices on net sales(segment gross margin percentage),decreased across all segments.All segments were negatively impacted bydecreases in core merchandise categories as described above and increased 2%rewards,partially offset by increases in warehouse ancillaryand other businesses.Gross margin in our U.S.segment was also negatively impacted by the charge primarily related to the downsizing of ourcharter shipping activities,partially offset by a lower LIFO charge.Selling,General and Administrative Expenses12 Weeks EndedNovember 20,2022November 21,2021SG&A expenses$4,917$4,718 SG&A expenses as a percentage of net sales9.20%9.55%SG&A expenses as a percentage of net sales decreased 35 basis points.SG&A expenses as a percentage of net sales excluding the impact ofgasoline price inflation was 9.42%,a decrease of 13 basis points.The comparison to last year was favorably impacted by 24 basis points from awrite-off of certain information technology assets in the prior year.Stock compensation was also lower by one basis point.Warehouse operationsand other businesses were higher by nine basis points,largely attributable to the wage increases we instituted in 2022.Central operating costswere higher by three basis points.Changes in foreign currencies relative to the U.S.dollar decreased SG&A expenses by approximately$121compared to the first quarter of 2022.Interest Expense12 Weeks EndedNovember 20,2022November 21,2021Interest expense$34$39 Interest expense is primarily related to Senior Notes and financing leases.Interest expense decreased in the first quarter of 2023 due torepayment of the 2.300%Senior Notes on December 1,2021.Interest Income and Other,Net12 Weeks EndedNovember 20,2022November 21,2021Interest income$54$8 Foreign-currency transaction gains(losses),net(9)26 Other,net8 8 Interest income and other,net$53$42 The increase in interest income in the first quarter of 2023 was primarily due to higher global interest rates.Foreign-currency transaction gains(losses),net include the mark-to-market adjustments for forward foreign-exchange contracts and the revaluation or settlement of monetaryassets and liabilities by our Canadian and Other International operations.See Derivatives and Foreign Currency sections in Item 8,Note 1 of ourAnnual Report on Form 10-K,for the fiscal year ended August 28,2022.22Table of ContentsProvision for Income Taxes 12 Weeks Ended November 20,2022November 21,2021Provision for income taxes$406$351 Effective tax rate23.0 .7%The effective tax rate for the first quarter of 2023 was impacted by net discrete tax benefits of$56,primarily attributable to$53 in excess taxbenefits related to stock compensation.Excluding discrete net tax benefits,the tax rate was 26.1%for the first quarter of 2023.The effective tax rate for the first quarter of 2022 was impacted by net discrete tax benefits of$97,primarily attributable to$91 in excess taxbenefits related to stock compensation.Excluding discrete net tax benefits,the tax rate was 26.4%for the first quarter of 2022.LIQUIDITY AND CAPITAL RESOURCESThe following table summarizes our significant sources and uses of cash and cash equivalents:12 Weeks EndedNovember 20,2022November 21,2021Net cash provided by operating activities$2,610$3,258 Net cash used in investing activities(1,057)(912)Net cash used in financing activities(863)(839)Our primary sources of liquidity are cash flows from our operations,cash and cash equivalents,and short-term investments.Cash and cashequivalents and short-term investments were$11,673 and$11,049 at November 20,2022,and August 28,2022.Of these balances,unsettledcredit and debit card receivables represented approximately$2,488 and$2,010 at November 20,2022,and August 28,2022.These receivablesgenerally settle within four days.Material contractual obligations arising in the normal course of business primarily consist of purchase obligations,long-term debt and relatedinterest payments,leases,and construction and land purchase obligations.Purchase obligations consist of contracts primarily related to merchandise,equipment,and third-party services,the majority of which are due inthe next 12 months.Construction and land purchase obligations consist of contracts primarily related to the development and opening of newand relocated warehouses,the majority of which(other than leases)are due in the next 12 months.Management believes that our cash and investment position and operating cash flows with capacity under existing and available creditagreements will be sufficient to meet our liquidity and capital requirements for the foreseeable future.We believe that our U.S.current andprojected asset position is sufficient to meet our U.S.liquidity requirements.Cash Flows from Operating ActivitiesNet cash provided by operating activities totaled$2,610 in the first quarter of 2023,compared to$3,258 in the first quarter of 2022.Our cashflow provided by operations is primarily from net sales and membership fees.Cash flow used in operations generally consists of payments tomerchandise suppliers,warehouse operating costs,including payroll and employee benefits,utilities,and credit and debit card processing fees.Cash used in operations also includes payments for income taxes.Changes in our net investment in merchandise inventories(the differencebetween merchandise inventories and accounts payable)is23Table of Contentsimpacted by several factors,including inventory turnover,the forward deployment of inventory to accelerate delivery times,payment terms withsuppliers,and early payments to obtain discounts.Cash Flows from Investing ActivitiesNet cash used in investing activities totaled$1,057 in the first quarter of 2023,compared to$912 in the first quarter of 2022,and is primarilyrelated to capital expenditures.Net cash from investing activities also includes purchases and maturities of short-term investments.Capital Expenditure PlansOur primary requirements for capital are acquiring land,buildings,and equipment for new and remodeled warehouses.Capital is also requiredfor information systems,manufacturing and distribution facilities,initial warehouse operations,and working capital.In the first quarter of 2023,we spent$1,057 on capital expenditures,and it is our current intention to spend approximately$3,800 to$4,000 during fiscal 2023.Theseexpenditures are expected to be financed with cash from operations,existing cash and cash equivalents,and short-term investments.Weopened eight new warehouses,including one relocation,in the first quarter of 2023 and plan to open 19 additional new warehouses,includingtwo relocations,in the remainder of fiscal 2023.There can be no assurance that current expectations will be realized,and plans are subject tochange upon further review of our capital expenditure needs and the economic environment.Cash Flows from Financing ActivitiesNet cash used in financing activities totaled$863 in the first quarter of 2023,compared to$839 in the first quarter of 2022.Cash flow used infinancing activities was primarily related to the payment of dividends,withholding taxes on stock-based awards,and repurchases of commonstock.DividendsOn October 12,2022,our Board declared a quarterly cash dividend of$0.90 per share,payable to shareholders of record on October 28,2022,which was paid on November 10,2022.Share Repurchase ProgramDuring the first quarter of 2023 and 2022,we repurchased 285,000 and 77,000 shares of common stock,at an average price per share of$495.94 and$455.08,totaling approximately$141 and$35.These amounts may differ from the repurchase balances in the accompanyingcondensed consolidated statements of cash flows due to changes in unsettled repurchases at the end of a quarter.Purchases are made fromtime to time,as conditions warrant,in the open market or in block purchases,pursuant to plans under SEC Rule 10b5-1.Repurchased sharesare retired,in accordance with the Washington Business Corporation Act.Bank Credit Facilities and Commercial Paper ProgramsWe maintain bank credit facilities for working capital and general corporate purposes.At November 20,2022,we had borrowing capacity underthese facilities of$1,244.Our international operations maintain$756 of this capacity under bank credit facilities,of which$171 is guaranteed bythe Company.Short-term borrowings outstanding under the bank credit facilities were$37 and$88 at the end of the first quarter of 2023 and atthe end of fiscal 2022.The Company has letter of credit facilities,for commercial and standby letters of credit,totaling$226.The outstanding commitments under thesefacilities at the end of the first quarter of 2023 totaled$187,most of which were standby letters of credit that do not expire or have expirationdates within one year.The bank credit facilities have various expiration dates,most within one year,and we generally intend to renew thesefacilities.The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercialletters of credit outstanding.24Table of ContentsCritical Accounting EstimatesThe preparation of our consolidated financial statements in accordance with U.S.GAAP requires that we make estimates and judgments.Webase these on historical experience and on assumptions that we believe to be reasonable.Our critical accounting policies are discussed in PartII,Item 7,“Managements Discussion and Analysis of Financial Condition and Results of Operations”section of our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes to the critical accounting estimates previously disclosed in thatReport.Recent Accounting PronouncementsThere have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form10-K,for the fiscal year ended August 28,2022.Item 3Quantitative and Qualitative Disclosures about Market RiskOur direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates.There have been nomaterial changes to our market risks as disclosed in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.Item 4Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur disclosure controls and procedures(as defined in Rules 13a-15(e)or 15d-15(e)under the Securities Exchange Act of 1934,as amended)are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded,processed,summarized,and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission andto ensure that information required to be disclosed is accumulated and communicated to management,including our principal executive andfinancial officers,to allow timely decisions regarding disclosure.The Chief Executive Officer and the Chief Financial Officer,with assistance fromother members of management,have reviewed the effectiveness of our disclosure controls and procedures as of November 20,2022 and,based on their evaluation,have concluded the disclosure controls and procedures were effective as of such date.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting(as defined in Rules 13a-15(f)or 15d-15(f)of the Exchange Act)thatoccurred during the first quarter of fiscal 2023 that have materially affected,or are reasonably likely to materially affect,the Companys internalcontrol over financial reporting.PART IIOTHER INFORMATIONItem 1Legal ProceedingsSee discussion of Legal Proceedings in Note 8 to the condensed consolidated financial statements included in Part I,Item 1 of this Report.Item 1ARisk FactorsIn addition to the other information set forth in the Quarterly Report on Form 10-Q,you should carefully consider the factors discussed in Part I,Item 1A,“Risk Factors”in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes inour risk factors from those disclosed in our Annual Report on Form 10-K.25Table of ContentsItem 2Unregistered Sales of Equity Securities and Use of ProceedsThe following table sets forth information on our common stock repurchase program activity for the first quarter of 2023(amounts in millions,except share and per share data):PeriodTotal Number ofSharesPurchasedAverage PricePaid Per ShareTotal Number of SharesPurchased as Part ofPublicly AnnouncedProgramsMaximum Dollar Value ofShares that May Yet bePurchased Under theProgramsAugust 29,2022 September 25,202289,000$513.91 89,000$2,762 September 26,2022 October 23,2022101,000 473.85 101,000 2,714 October 24,2022 November 20,202295,000 502.66 95,000 2,667 Total first quarter285,000$495.94 285,000 _(1)Our share repurchase program is conducted under a$4,000 authorization approved by our Board of Directors in April 2019,which expires in April 2023.Item 3Defaults Upon Senior SecuritiesNone.Item 4Mine Safety DisclosuresNot applicable.Item 5Other Information(amounts in whole dollars)Disclosure pursuant to Section 2019 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r)of the SecuritiesExchange Act of 1934,as amended.During the first quarter of 2023,we had as cardholders at our subsidiary in Mexico three individuals under a business membership in the nameof the Embassy of the Islamic Republic of Iran.Gross revenue in the first quarter of 2023 attributable to the membership was approximately$1,131,and our estimated profit on these transactions was less than$100.The membership was canceled during the second quarter of 2023.The Company does not intend to continue these activities.(1)(1)26Table of ContentsItem 6ExhibitsThe following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.Incorporated by ReferenceExhibitNumberExhibit DescriptionFiledHerewithFormPeriod EndingFiling Date3.1Articles of Incorporation as amended of CostcoWholesale Corporation10-K8/28/202210/5/20223.2Bylaws as amended of Costco Wholesale Corporation10-Q5/8/20226/2/202210.1*Fiscal 2023 Executive Bonus Plan8-K11/9/202210.2*Extension of the Term of the Executive EmploymentAgreement effective January 1,2023,between W.CraigJelinek and Costco Wholesale Corporationx10.3Ninth Amendment to Citi,N.A.Co-Branded Credit CardAgreementx10.4Tenth Amendment to Citi,N.A.Co-Branded Credit CardAgreementx31.1Rule 13(a)14(a)Certificationsx32.1Section 1350 Certificationsx101.INSInline XBRL Instance Documentx101.SCHInline XBRL Taxonomy Extension Schema Documentx101.CALInline XBRL Taxonomy Extension Calculation LinkbaseDocumentx101.DEFInline XBRL Taxonomy Extension Definition LinkbaseDocumentx101.LABInline XBRL Taxonomy Extension Label LinkbaseDocumentx101.PREInline XBRL Taxonomy Extension Presentation LinkbaseDocumentx104Cover Page Interactive Data File(formatted as inlineXBRL and contained in Exhibit 101)x _*Management contract,compensatory plan or arrangement.27Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Report to be signed on its behalf by theundersigned,thereunto duly authorized.COSTCO WHOLESALE CORPORATION(Registrant)December 29,2022By/s/W.CRAIG JELINEKDateW.Craig JelinekChief Executive Officer and DirectorDecember 29,2022By/s/RICHARD A.GALANTIDateRichard A.GalantiExecutive Vice President,Chief Financial Officer and Director28Exhibit 10.2December 14,2022Hamilton E.JamesChairman of the BoardCostco Wholesale CorporationRE:Executive Employment AgreementDear Tony:As provided for under section 7(b)of the Executive Employment Agreement,effective January 1,2017,between Costco Wholesale Corporationand me,this letter will confirm an extension of the term through and including December 31,2023.Consistent with the prior decisions of theCompensation Committee:section 1(a)is amended to change the Annual Base Salary to$1,150,000;and section 1(h)is amended to changethe Target Bonus to$600,000.The reference in the first whereas clause to my serving as President shall be deemed omitted.Pleasecountersign below to indicate acceptance on behalf of the Company.Very truly yours,By:/s/W.Craig JelinekW.Craig JelinekChief Executive OfficerCostco Wholesale CorporationBy:/s/Hamilton JamesHamilton E.JamesChairman of the Boardcc:John StantonExhibit 10.3NINTH AMENDMENT TO THECO-BRANDED CREDIT CARD PROGRAM AGREEMENTThis Ninth Amendment(Amendment)is between Citibank,N.A.(Bank)and Costco Wholesale Corporation(Costco),is effective as ofAugust 13,2022,and amends that certain Co-Branded Credit Card Program Agreement,by and between Bank and Costco,dated February 27,2015(the Agreement).Pursuant to Section 16.10 of the Agreement,the Bank and Costco agree as follows:1.Defined Terms.All capitalized terms used but not defined in this Amendment will have the meanings ascribed to such terms in theAgreement.2.Amendments.a.Schedule 4.06(a).Schedule 4.06(a)is deleted in its entirety and replaced with the attached Schedule 4.06(a).b.Schedule 7.05(a).The bullet for“Purchases and transactions at Costco(gas only)”is amended to read,“Purchases andtransactions at Costco(gas and electric vehicle charging only)”.The bullet under“Purchases transactions outside Costco by type”isamended to add a bullet that says,“Electric vehicle charging”.3.Full Force and Effect.The Agreement,as modified hereby,will remain in full force and effect and this Amendment will not be deemedto be an amendment or a waiver of any other provision of the Agreement except as expressly stated herein.All such other provisions ofthe Agreement will also be deemed to apply to this Amendment.4.No Modification or Waiver;Incorporation.No modification,amendment or waiver of this Amendment will be effective or bindingunless made in writing and signed by the Parties.The Parties agree that,except for those modifications expressly set forth in thisAmendment,all terms and provisions of the Agreement will remain unchanged and in full force and effect.This Amendment and theAgreement will hereafter be read and construed together as a single document,and all references to the Agreement will hereafter referto the Agreement as amended by this Amendment.5.Counterparts.This Amendment may be executed in counterparts and if so executed will be enforceable and effective upon theexchange of executed counterparts,including by facsimile or electronic transmissions of executed counterparts.Signature page followsDuly authorized representatives of the Parties have executed this Amendment.COSTCO WHOLESALE CORPORATIONCITIBANK,N.A.By:/s/Sandy TorreyBy:/s/Matthew BremName:Sandy TorreyName:Matthew BremTitle:SVP,Corporate MarketingTitle:Vice President,Citibank N.A.Schedule 4.06(a)Loyalty Program and RewardsConsumer Card Loyalty Program(Cash Rebate portion only)Co-Branded Cardholders will earn an annual reward based on the eligible purchases on their Co-Branded Card from Costco and Citi during anannual reward period.An annual reward period is 12 billing periods,starting with the one that begins in February.Eligible purchases arepurchases for goods and services minus returns and other credits.Eligible purchases do NOT include fees or interest charges,balancetransfers,cash advances,purchases of travelers checks,purchases or reloading of prepaid cards,or purchases of any cash equivalents.Additional terms and restrictions apply.Co-Branded Cardholders will earn an annual reward of:4%on the first$7,000 of purchases each annualreward period(1%thereafter)of gasoline and electric vehicle charging transactions at Costco,gas stations and electric vehicle charginglocations in the U.S.(excluding superstores,supermarkets,convenience stores,and warehouse clubs other than Costco);3%at restaurantslocated in the U.S.;3%for eligible travel purchases(eligible travel purchases are:airfare for a scheduled flight on a passenger carrier,hotelstays(excluding timeshares,banquets and events),car rentals from select major car rental companies listed athttps:/ other purchases from Costco Travel,cruise lines,travel agencies and tour operators);2%on eligiblepurchases at Costco Locations(unless a higher reward applies,such as at Costco gas,Costco electric vehicle charging,or Costco travel);and1%on all other eligible purchases.Bank is obligated to fund the annual rewards up to the Loyalty Funding Cap.Merchants are assigned codes based on what they primarily sell.A purchase will not earn a higher percentage reward if the merchants code isnot eligible.Purchases made through a third-party payment account or on an online marketplace(with multiple retailers)will not earn a higherpercentage reward.A purchase may not earn a higher percentage reward if the merchant submits the purchase using a mobile or wireless cardreader or if the Co-Branded Cardholder uses a mobile or digital wallet.Reward is distributed and valid at any U.S.Costco warehouse,including Puerto Rico,for merchandise or cash.Requests for cash may befulfilled in the form of a check at the Costco warehouses discretion.Coupon must be redeemed in person prior to its expiration date ofDecember 31st in the year in which it is issued.Additional terms and conditions apply.See Co-Branded Cardholder Agreement for full terms andconditions.Small Business Loyalty Program(Cash Rebate portion only)Co-Branded Cardholders will earn an annual reward based on eligible purchases on their small business Co-Branded Cards from Costco duringan annual reward period.An annual reward period is 12 billing periods,starting with the one that begins in February.Eligible purchases arepurchases for goods and services minus returns and other credits.Eligible purchases do NOT include fees or interest charges,balancestransfers,cash advances,purchases of travelers checks,purchases or reloading of prepaid cards,or purchases of any cash equivalents.Additional terms and restrictions apply.Co-Branded Cardholders will earn an annual reward of:4%on the first$7,000 of purchases each annualreward period(1%thereafter)of gasoline and electric vehicle charging transactions at Costco,gas stations and electric vehicle charginglocations in the U.S.(excluding superstores,supermarkets,convenience stores,and warehouse clubs other than Costco);3%at restaurantslocated in the U.S.;3%for eligible travel purchases(eligible travel purchases are:airfare for a scheduled flight on a passenger carrier,hotelstays(excluding timeshares,banquets and events),car rentals from select major car rental companies listed athttps:/ other purchases from Costco Travel,cruise lines,travel agencies and tour operators);2%on eligiblepurchases at Costco Locations(unless a higher reward applies,such as at Costco gas,Costco electric vehicle charging,or Costco travel);and1%on all other eligible purchases.Bank is obligated to fund the annual rewards up to the Loyalty Funding Cap.Merchants are assigned codes based on what they primarily sell.A purchase will not earn a higher percentage reward if the merchants code isnot eligible.Purchases made through a third-party payment account or on an online marketplace(with multiple retailers)will not earn a higherpercentage reward.A purchase may not earn a higher percentage reward if the merchant submits the purchase using a mobile or wireless cardreader or if the Co-Branded Cardholder uses a mobile or digital wallet.Reward is distributed and valid at any U.S.Costco warehouse,including Puerto Rico,for merchandise or cash.Requests for cash may befulfilled in the form of a check at the Costco warehouses discretion.Coupon must be redeemed in person on or prior to its expiration dateof December 31st in the year in which it is issued.Additional terms and conditions apply.See Co-Branded Cardholder Agreement for fullterms and conditions.Exhibit 10.4TENTH AMENDMENT TO THECO-BRANDED CREDIT CARD PROGRAM AGREEMENTThis Tenth Amendment(Amendment)is between Citibank,N.A.(Bank)and Costco Wholesale Corporation(Costco),is effective as ofNovember 11,2022,and amends that certain Co-Branded Credit Card Program Agreement,by and between Bank and Costco,dated February27,2015(the Agreement).Pursuant to Section 16.10 of the Agreement,the Bank and Costco agree as follows:1.Defined Terms.All capitalized terms used but not defined in this Amendment will have the meanings ascribed to such terms in theAgreement.2.Amendments.a.Section 4.06(a)-1.Schedule 4.06(a)-1 is deleted in its entirety and replaced with the attached Schedule 4.06-1.3.Full Force and Effect.The Agreement,as modified hereby,will remain in full force and effect and this Amendment will not be deemedto be an amendment or a waiver of any other provision of the Agreement except as expressly stated herein.All such other provisions ofthe Agreement will also be deemed to apply to this Amendment.4.No Modification or Waiver;Incorporation.No modification,amendment or waiver of this Amendment will be effective or bindingunless made in writing and signed by the Parties.The Parties agree that,except for those modifications expressly set forth in thisAmendment,all terms and provisions of the Agreement will remain unchanged and in full force and effect.This Amendment and theAgreement will hereafter be read and construed together as a single document,and all references to the Agreement will hereafter referto the Agreement as amended by this Amendment.5.Counterparts.This Amendment may be executed in counterparts and if so executed will be enforceable and effective upon theexchange of executed counterparts,including by facsimile or electronic transmissions of executed counterparts.Signature page followsDuly authorized representatives of the Parties have executed this Amendment.COSTCO WHOLESALE CORPORATION CITIBANK,N.A.By:/s/Sandy TorreyBy:/s/Jennifer LonginoName:Sandy TorreyName:Jennifer LonginoTitle:SVP,Corporate MarketingTitle:Vice PresidentSchedule 4.06(a)-1Additional Co-Branded Cardholder BenefitsCar RentalNo country exclusions.No vehicle exclusionsDamage&TheftPurchase ProtectionUp to 120 days post purchase.Up to$1,000 per claim,$50,000 per year.Travel AccidentUp to$250,000Travel&EmergencyAssistanceEmergency travel arrangements,cash transfers,medicalreferrals,etc.Roadside AssistanceDispatch service for roadside support.Exhibit 31.1CERTIFICATIONSI,W.Craig Jelinek,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.December 29,2022/s/W.CRAIG JELINEKW.Craig JelinekChief Executive Officer and DirectorCERTIFICATIONSI,Richard A.Galanti,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.December 29,2022/s/RICHARD A.GALANTIRichard A.GalantiExecutive Vice President,Chief Financial Officer and DirectorExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended November 20,2022,as filed with the Securities and Exchange Commission(the Report),I,W.Craig Jelinek,Chief Executive Officer and Director of theCompany,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/W.CRAIG JELINEK Date:December 29,2022W.Craig Jelinek Chief Executive Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended November 20,2022,as filed with the Securities and Exchange Commission(the Report),I,Richard A.Galanti,Executive Vice President,Chief Financial Officerand Director of the Company,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/RICHARD A.GALANTI Date:December 29,2022Richard A.Galanti Executive Vice President,Chief Financial Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended February 12,2023orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934Commission file number 0-20355Costco Wholesale Corporation(Exact name of registrant as specified in its charter)Washington 91-1223280(State or other jurisdiction ofincorporation or organization)(I.R.S.Employer Identification No.)999 Lake Drive,Issaquah,WA 98027(Address of principal executive offices)(Zip Code)(Registrants telephone number,including area code):(425)313-8100Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock,$.005 Par ValueCOSTThe Nasdaq Global Select MarketIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject tosuch filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required tosubmit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reportingcompany,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The number of shares outstanding of the issuers common stock as of March 1,2023 was 443,483,205.1Table of ContentsCOSTCO WHOLESALE CORPORATIONINDEX TO FORM 10-Q PagePART IFINANCIAL INFORMATIONItem 1.Financial Statements3Condensed Consolidated Statements of Income3Condensed Consolidated Statements of Comprehensive Income4Condensed Consolidated Balance Sheets5Condensed Consolidated Statements of Equity6Condensed Consolidated Statements of Cash Flows8Notes to Condensed Consolidated Financial Statements9Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations18Item 3.Quantitative and Qualitative Disclosures About Market Risk27Item 4.Controls and Procedures27PART IIOTHER INFORMATIONItem 1.Legal Proceedings27Item 1A.Risk Factors27Item 2.Unregistered Sales of Equity Securities and Use of Proceeds28Item 3.Defaults Upon Senior Securities28Item 4.Mine Safety Disclosures28Item 5.Other Information28Item 6.Exhibits29Signatures302Table of ContentsPART IFINANCIAL INFORMATIONItem 1Financial StatementsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(amounts in millions,except per share data)(unaudited)12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022REVENUENet sales$54,239$50,937$107,676$100,354 Membership fees1,027 967 2,027 1,913 Total revenue55,266 51,904 109,703 102,267 OPERATING EXPENSESMerchandise costs48,423 45,517 96,192 89,469 Selling,general and administrative4,940 4,575 9,857 9,293 Operating income1,903 1,812 3,654 3,505 OTHER INCOME(EXPENSE)Interest expense(34)(36)(68)(75)Interest income and other,net114 25 167 67 INCOME BEFORE INCOME TAXES1,983 1,801 3,753 3,497 Provision for income taxes517 481 923 832 Net income including noncontrolling interests1,466 1,320 2,830 2,665 Net income attributable to noncontrolling interests(21)(42)NET INCOME ATTRIBUTABLE TO COSTCO$1,466$1,299$2,830$2,623 NET INCOME PER COMMON SHARE ATTRIBUTABLETO COSTCO:Basic$3.30$2.93$6.37$5.91 Diluted$3.30$2.92$6.37$5.90 Shares used in calculation(000s):Basic443,877 443,623 443,857 443,500 Diluted444,475 444,916 444,503 444,760 The accompanying notes are an integral part of these condensed consolidated financial statements.3Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(amounts in millions)(unaudited)12 Weeks Ended24 Weeks Ended February 12,2023February 13,2022February 12,2023February 13,2022NET INCOME INCLUDING NONCONTROLLINGINTERESTS$1,466$1,320$2,830$2,665 Foreign-currency translation adjustment and other,net253(35)157(107)Comprehensive income1,719 1,285 2,987 2,558 Less:Comprehensive income attributable tononcontrolling interests 21 44 COMPREHENSIVE INCOME ATTRIBUTABLE TOCOSTCO$1,719$1,264$2,987$2,514 The accompanying notes are an integral part of these condensed consolidated financial statements.4Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(amounts in millions,except par value and share data)(unaudited)February 12,2023August 28,2022ASSETSCURRENT ASSETSCash and cash equivalents$12,970$10,203 Short-term investments735 846 Receivables,net2,714 2,241 Merchandise inventories16,081 17,907 Other current assets1,830 1,499 Total current assets34,330 32,696 OTHER ASSETSProperty and equipment,net25,724 24,646 Operating lease right-of-use assets2,859 2,774 Other long-term assets3,935 4,050 TOTAL ASSETS$66,848$64,166 LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable$16,407$17,848 Accrued salaries and benefits4,483 4,381 Accrued member rewards2,016 1,911 Deferred membership fees2,412 2,174 Current portion of long-term debt76 73 Other current liabilities7,122 5,611 Total current liabilities32,516 31,998 OTHER LIABILITIESLong-term debt,excluding current portion6,506 6,484 Long-term operating lease liabilities2,557 2,482 Other long-term liabilities2,470 2,555 TOTAL LIABILITIES44,049 43,519 COMMITMENTS AND CONTINGENCIESEQUITYPreferred stock$0.005 par value;100,000,000 shares authorized;no shares issued andoutstanding Common stock$0.005 par value;900,000,000 shares authorized;443,550,000 and442,664,000 shares issued and outstanding2 2 Additional paid-in capital7,123 6,884 Accumulated other comprehensive loss(1,672)(1,829)Retained earnings17,341 15,585 Total Costco stockholders equity22,794 20,642 Noncontrolling interests5 5 TOTAL EQUITY22,799 20,647 TOTAL LIABILITIES AND EQUITY$66,848$64,166 The accompanying notes are an integral part of these condensed consolidated financial statements.5Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)12 Weeks Ended February 12,2023 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE ATNOVEMBER 20,2022443,841$2$6,982$(1,925)$16,412$21,471$5$21,476 Net income 1,466 1,466 1,466 Foreign-currencytranslation adjustmentand other,net 253 253 253 Stock-basedcompensation 148 148 148 Release of vestedrestricted stock units(RSUs),including taxeffects3 (1)(1)(1)Repurchases ofcommon stock(294)(6)(138)(144)(144)Cash dividend declared (399)(399)(399)BALANCE ATFEBRUARY 12,2023443,550$2$7,123$(1,672)$17,341$22,794$5$22,799 12 Weeks Ended February 13,2022 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE ATNOVEMBER 21,2021443,434$4$7,064$(1,211)$12,606$18,463$537$19,000 Net income 1,299 1,299 21 1,320 Foreign-currencytranslation adjustmentand other,net (35)(35)(35)Stock-basedcompensation 129 129 129 Release of vestedRSUs,including taxeffects4 (4)(4)(4)Repurchases ofcommon stock(159)(3)(80)(83)(83)Cash dividend declared (351)(351)(351)BALANCE ATFEBRUARY 13,2022443,279$4$7,186$(1,246)$13,474$19,418$558$19,976 The accompanying notes are an integral part of these condensed consolidated financial statements.6Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)24 Weeks Ended February 12,2023 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST28,2022442,664$2$6,884$(1,829)$15,585$20,642$5$20,647 Net income 2,830 2,830 2,830 Foreign-currencytranslation adjustmentand other,net 157 157 157 Stock-basedcompensation 551 551 551 Release of vestedrestricted stock units(RSUs),including taxeffects1,465 (302)(302)(302)Repurchases ofcommon stock(579)(10)(275)(285)(285)Cash dividendsdeclared (799)(799)(799)BALANCE ATFEBRUARY 12,2023443,550$2$7,123$(1,672)$17,341$22,794$5$22,799 24 Weeks Ended February 13,2022 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST29,2021441,825$4$7,031$(1,137)$11,666$17,564$514$18,078 Net income 2,623 2,623 42 2,665 Foreign-currencytranslation adjustmentand other,net (109)(109)2(107)Stock-basedcompensation 518 518 518 Release of vestedRSUs,including taxeffects1,690 (359)(359)(359)Repurchases ofcommon stock(236)(4)(114)(118)(118)Cash dividendsdeclared (701)(701)(701)BALANCE ATFEBRUARY 13,2022443,279$4$7,186$(1,246)$13,474$19,418$558$19,976 The accompanying notes are an integral part of these condensed consolidated financial statements.7Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in millions)(unaudited)24 Weeks EndedFebruary 12,2023February 13,2022CASH FLOWS FROM OPERATING ACTIVITIESNet income including noncontrolling interests$2,830$2,665 Adjustments to reconcile net income including noncontrolling interests to net cash provided byoperating activities:Depreciation and amortization917 868 Non-cash lease expense216 145 Stock-based compensation549 516 Other non-cash operating activities,net163 104 Deferred income taxes(18)(15)Changes in operating assets and liabilities:Merchandise inventories1,849(2,322)Accounts payable(1,417)970 Other operating assets and liabilities,net713 728 Net cash provided by operating activities5,802 3,659 CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short-term investments(396)(325)Maturities of short-term investments512 753 Additions to property and equipment(1,947)(1,778)Other investing activities,net(34)(43)Net cash used in investing activities(1,865)(1,393)CASH FLOWS FROM FINANCING ACTIVITIESRepayments of short-term borrowings(520)(87)Proceeds from short-term borrowings479 80 Repayments of long-term borrowings(800)Tax withholdings on stock-based awards(302)(359)Repurchases of common stock(284)(115)Cash dividend payments(400)(350)Other financing activities,net(188)(36)Net cash used in financing activities(1,215)(1,667)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS45(38)Net increase in cash and cash equivalents2,767 561 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR10,203 11,258 CASH AND CASH EQUIVALENTS END OF PERIOD$12,970$11,819 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the first half of the year for:Interest$62$76 Income taxes,net$636$469 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:Cash dividend declared,but not yet paid$399$351 Financing lease assets obtained in exchange for new or modified leases$47$172 Operating lease assets obtained in exchange for new or modified leases$131$60 The accompanying notes are an integral part of these condensed consolidated financial statements.8Table of ContentsCOSTCO WHOLESALE CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(amounts in millions,except share,per share,and warehouse count data)(unaudited)Note 1Summary of Significant Accounting PoliciesDescription of BusinessCostco Wholesale Corporation(Costco or the Company),a Washington corporation,and its subsidiaries operate membership warehousesbased on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range ofmerchandise categories will produce high sales volumes and rapid inventory turnover.At February 12,2023,Costco operated 848 warehousesworldwide:584 in the United States(U.S.)located in 46 states,Washington,D.C.,and Puerto Rico,107 in Canada,40 in Mexico,31 inJapan,29 in the United Kingdom(U.K.),18 in Korea,14 in Taiwan,14 in Australia,four in Spain,two each in France and China,and one eachin Iceland,New Zealand,and Sweden.The Company operates e-commerce websites in the U.S.,Canada,U.K.,Mexico,Korea,Taiwan,Japan,and Australia.Basis of PresentationThe condensed consolidated financial statements include the accounts of Costco,its wholly-owned subsidiaries,and a subsidiary in which it hasa controlling interest.All material inter-company transactions among the Company and its consolidated subsidiaries have been eliminated inconsolidation.Unless otherwise noted,references to net income relate to net income attributable to Costco.These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interimfinancial reporting pursuant to the rules and regulations of the Securities and Exchange Commission(SEC).While these statements reflect allnormal recurring adjustments that are,in the opinion of management,necessary for fair presentation of the results of the interim period,they donot include all of the information and footnotes required by U.S.generally accepted accounting principles(U.S.GAAP)for complete financialstatements.Therefore,the interim condensed consolidated financial statements should be read in conjunction with the consolidated financialstatements and notes included in the Companys Annual Report on Form 10-K for the fiscal year ended August 28,2022.Fiscal Year EndThe Company operates on a 52/53 week fiscal year basis,with the fiscal year ending on the Sunday closest to August 31.Fiscal 2023 is a 53-week year ending on September 3,2023.References to the second quarter of 2023 and 2022 relate to the 12-week fiscal quartersended February 12,2023,and February 13,2022.References to the first half of 2023 and 2022 relate to the 24 weeks ended February 12,2023and February 13,2022.Use of EstimatesThe preparation of financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.These estimates and assumptions take into account historical andforward-looking factors that the Company believes are reasonable.Actual results could differ from those estimates and assumptions.9Table of ContentsReclassificationReclassifications were made to the condensed consolidated statement of cash flows for the first half of 2022 to conform with current yearpresentation.LeasesThe Company leases land,buildings,equipment,and other assets at warehouses,offices,or within the operations that support supply chain anddistribution channels.The Company reviews lease right-of-use assets for impairment when events or changes in circumstances indicate that thecarrying amount of the asset group may not be fully recoverable.The Company also occasionally revisits and modifies the terms of its leasingarrangements.During the first quarter of 2023,the Company recognized a charge of$93,primarily related to the termination costs andimpairment of certain leased assets associated with charter shipping activities.This charge is included in merchandise costs.Note 2InvestmentsThe Companys investments were as follows:February 12,2023:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$595$(11)$584 Held-to-maturity:Certificates of deposit151 151 Total short-term investments$746$(11)$735 August 28,2022:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$534$(5)$529 Held-to-maturity:Certificates of deposit317 317 Total short-term investments$851$(5)$846 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended February 12,2023,andAugust 28,2022.At those dates,there were no available-for-sale securities in a material continuous unrealized-loss position.There were nosales of available-for-sale securities during the first half of 2023 or 2022.The maturities of available-for-sale and held-to-maturity securities at February 12,2023 are as follows:Available-For-SaleHeld-To-Maturity Cost BasisFair ValueDue in one year or less$177$175$151 Due after one year through five years287 282 Due after five years131 127 Total$595$584$151 10Table of ContentsNote 3Fair Value MeasurementAssets and Liabilities Measured at Fair Value on a Recurring BasisThe table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicatesthe level within the fair-value hierarchy reflecting the valuation techniques utilized.Level 2February 12,2023August 28,2022Investment in government and agency securities$584$529 Forward foreign-exchange contracts,in asset position6 34 Forward foreign-exchange contracts,in(liability)position(18)(2)Total$572$561 _(1)The asset and liability values are included in other current assets and other current liabilities,respectively,in the accompanying condensed consolidated balance sheets.At February 12,2023,and August 28,2022,the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fairvalue on a recurring basis.There were no transfers between levels during the first half of 2023 or 2022.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisAssets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured atamortized cost and long-lived nonfinancial assets.These assets are measured at fair value if determined to be impaired.Please see Note 1 foradditional information.Note 4DebtThe carrying value of the Companys long-term debt consisted of the following:February 12,2023August 28,20222.750%Senior Notes due May 2024$1,000$1,000 3.000%Senior Notes due May 20271,000 1,000 1.375%Senior Notes due June 20271,250 1,250 1.600%Senior Notes due April 20301,750 1,750 1.750%Senior Notes due April 20321,000 1,000 Other long-term debt612 590 Total long-term debt6,612 6,590 Less unamortized debt discounts and issuance costs30 33 Less current portion76 73 Long-term debt,excluding current portion$6,506$6,484 _(1)Net of unamortized debt discounts and issuance costs.The fair value of the Senior Notes is estimated using Level 2 inputs.Other long-term debt consists of Guaranteed Senior Notes issued by theCompanys Japan subsidiary,valued using Level 3 inputs.The fair value of the Companys long-term debt,including the current portion,wasapproximately$5,895 and$6,033 at February 12,2023,and August 28,2022.(1)(1)(1)11Table of ContentsNote 5EquityDividendsA quarterly cash dividend of$0.90 per share was declared on January 19,2023 and paid on February 17,2023.The Companys quarterlydividend was$0.79 per share in the second quarter of 2022 and dividends totaled$1.80 and$1.58 per share in the first half of 2023 and 2022.Share Repurchase ProgramOn January 19,2023,the Board of Directors authorized a new share repurchase program in the amount of$4,000,which expires in January2027.This authorization revoked previously authorized but unused amounts,totaling$2,568.At February 12,2023,the remaining amountavailable under the program was$3,955.The following table summarizes the Companys stock repurchase activity:Shares Repurchased(000s)Average Price per ShareTotal CostSecond quarter of 2023294$488.30$144 First half of 2023579$492.06$285 Second quarter of 2022159$518.73$83 First half of 2022236$498.00$118 These amounts may differ from the accompanying condensed consolidated statements of cash flows due to changes in unsettled stockrepurchases at the end of each quarter.Purchases are made from time to time,as conditions warrant,in the open market or in block purchasesand pursuant to plans under SEC Rule 10b5-1.Note 6Stock-Based CompensationThe 2019 Incentive Plan authorized the issuance of 17,500,000 shares(10,000,000 RSUs)of common stock for future grants,plus theremaining shares that were available for grant and the future forfeited shares from grants under the previous plan,up to a maximum of27,800,000 shares(15,885,000 RSUs).The Company issues new shares of common stock upon vesting of RSUs.Shares for vested RSUs aregenerally delivered to participants annually,net of shares withheld for taxes.Summary of Restricted Stock Unit ActivityAt February 12,2023,8,703,000 shares were available to be granted as RSUs,and the following awards were outstanding:2,921,000 time-based RSUs,which vest upon continued employment over specified periods and accelerate upon achievement of a long-service term;41,000 performance-based RSUs granted to executive officers of the Company,for which the performance targets have been met.Theawards vest upon continued employment over specified periods of time and upon achievement of a long-service term;and135,000 performance-based RSUs granted to executive officers of the Company,subject to achievement of performance targets for fiscal2023,as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year.These awards areincluded in the table below.The Company recognized compensation expense for these awards in the second quarter of 2023,as it iscurrently deemed probable that the targets will be achieved.12Table of ContentsThe following table summarizes RSU transactions during the first half of 2023:Number ofUnits(in 000s)Weighted-AverageGrant Date Fair ValueOutstanding at August 28,20223,449$338.41 Granted1,814 471.47 Vested and delivered(2,094)352.57 Forfeited(72)394.40 Outstanding at February 12,20233,097$405.46 The remaining unrecognized compensation cost related to RSUs unvested at February 12,2023,was$1,031,and the weighted-average periodover which this cost will be recognized is 1.8 years.Summary of Stock-Based CompensationThe following table summarizes stock-based compensation expense and the related tax benefits:12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Stock-based compensation expense$147$128$549$516 Less recognized income tax benefits24 23 113 108 Stock-based compensation expense,net$123$105$436$408 Note 7Net Income per Common and Common Equivalent ShareThe following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and ofpotentially dilutive common shares outstanding(shares in 000s):12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Net income attributable to Costco$1,466$1,299$2,830$2,623 Weighted average basic shares443,877 443,623 443,857 443,500 RSUs598 1,293 646 1,260 Weighted average diluted shares444,475 444,916 444,503 444,760 Anti-dilutive RSUs6 Anti-dilutive shares are excluded from the calculation of diluted shares and earnings per diluted share because their impact would increaseearnings per diluted shares.13Table of ContentsNote 8Commitments and ContingenciesLegal ProceedingsThe Company is involved in a number of claims,proceedings and litigations arising from its business and property ownership.In accordancewith applicable accounting guidance,the Company establishes an accrual for legal proceedings if and when those matters present losscontingencies that are both probable and reasonably estimable.There may be exposure to loss in excess of amounts accrued.The Companymonitors those matters for developments that would affect the likelihood of a loss(taking into account where applicable indemnificationarrangements concerning suppliers and insurers)and the accrued amount,if any,thereof,and adjusts the amount as appropriate.The Companyhas recorded immaterial accruals with respect to certain matters described below,in addition to other immaterial accruals for matters notdescribed below.If the loss contingency at issue is not both probable and reasonably estimable,the Company does not establish an accrual,butwill monitor the matter for developments that will make the contingency both probable and reasonably estimable.In each case,there is areasonable possibility that a loss may be incurred,including a loss in excess of the applicable accrual.For matters where no accrual has beenrecorded,the possible loss or range of loss(including any loss in excess of the accrual)cannot,in the Companys view,be reasonably estimatedbecause,among other things:(i)the remedies or penalties sought are indeterminate or unspecified;(ii)the legal and/or factual theories are notwell developed;and/or(iii)the matters involve complex or novel legal theories or a large number of parties.The Company is a defendant in an action commenced in July 2013 under the California Labor Code Private Attorneys General Act(PAGA)alleging violation of California Wage Order 7-2001 for failing to provide seating to employees who work at entrance and exit doors in Californiawarehouses.Canela v.Costco Wholesale Corp.(Case No.2013-1-CV-248813;Santa Clara Superior Court).The complaint seeks relief underthe California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denying the material allegations of thecomplaint.On January 19,2023,the court issued a Proposed/Tentative Statement of Decision Following Court Trial finding in favor of Costco.The plaintiff filed a request for further statement of decision and objections to the tentative decision.The parties are awaiting the courts review ofplaintiffs filings and Costcos response thereto,after which the court will decide if it requires a hearing before a final decision issues.In December 2018,a depot employee raised similar claims,alleging that depot employees in California did not receive suitable seating orreasonably comfortable workplace temperature conditions.Lane v.Costco Wholesale Corp.(Case No.CIVDS 1908816;San BernardinoSuperior Court).In October 2019,the parties settled for an immaterial amount the seating claims on a representative basis,which received courtapproval in February 2020.The parties settled the temperature claims for an immaterial amount in April 2022,and court approval was receivedin May 2022.In June 2022,a business center employee raised similar claims,alleging failure to provide seating to employees who work at membership refunddesks in California warehouses and business centers.Rodriguez v.Costco Wholesale Corp.(Case No.22CV012847;Alameda Superior Court).The complaint seeks relief under the California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denyingthe material allegations of the complaint.In March 2019,employees filed a class action against the Company alleging claims under California law for failure to pay overtime,to providemeal and rest periods and itemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfairbusiness practices.Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Nevarez v.Costco WholesaleCorp.(Case No.2:19-cv-03454;C.D.Cal.).The Company filed an answer denying the material allegations of the complaint.In December 2019,the court issued an order denying class certification.In January 2020,the plaintiffs dismissed their Labor Code claims without prejudice,and thecourt remanded the action to state court.Settlement for an immaterial amount was agreed upon in14Table of ContentsFebruary 2021.Final court approval of the settlement was granted on May 3,2022.A proposed intervenor appealed the denial of her motion tointervene.Her appeal was dismissed on February 15,2023.In May 2019,an employee filed a class action against the Company alleging claims under California law for failure to pay overtime,to provideitemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfair business practices.Roughv.Costco Wholesale Corp.(Case No.2:19-cv-01340;E.D.Cal.).Relief is sought under the California Labor Code,including civil penalties andattorneys fees.In September 2021,the court granted Costcos motion for partial summary judgment and denied class certification.In August2019,the plaintiff filed a companion case in state court seeking penalties under PAGA.Rough v.Costco Wholesale Corp.(Case No.FCS053454;Sonoma County Superior Court).Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Thestate court action has been stayed pending resolution of the federal action.In December 2020,a former employee filed suit against the Company asserting collective and class claims on behalf of non-exempt employeesunder the Fair Labor Standards Act and New York Labor Law for failure to pay for all hours worked,failure to pay certain non-exempt employeeson a weekly basis,and failure to provide proper wage statements and notices.The plaintiff also asserted individual retaliation claims.Cappadorav.Costco Wholesale Corp.(Case No.1:20-cv-06067;E.D.N.Y.).An amended complaint was filed,and the Company denied the materialallegations of the amended complaint.Based on an agreement in principle concerning settlement of the matter,involving a proposed payment bythe Company of an immaterial amount,the federal action has been dismissed.In April 2022,Cappadora and a second plaintiff filed an actionagainst the Company in New York state court,asserting the same class claims asserted in the federal action under the New York Labor Law andseeking preliminary approval of the class settlement.Cappadora and Sancho v.Costco Wholesale Corp.(Index No.604757/2022;NassauCounty Supreme Court).The state court granted preliminary approval of the settlement in October 2022.A final approval hearing is set for March27,2023.In August 2021,a former employee filed a similar suit,asserting class claims on behalf of certain non-exempt employees under New York LaborLaw for failure to pay on a weekly basis.Umadat v.Costco Wholesale Corp.(Case No.2:21-cv-4814;E.D.N.Y.).The Company filed an answer,denying the material allegations of the complaint.In April 2022,a former employee filed a similar suit,asserting class claims on behalf of certainnon-exempt employees under New York Labor Law,as well as under the Fair Labor Standards Act,for failure to pay on a weekly basis andfailure to pay overtime.Burian v.Costco Wholesale Corp.(Case No.2:22-cv-02108;E.D.N.Y.).In September 2022,an amended complaint wasfiled,asserting class claims on behalf of certain non-exempt employees under New York Labor Law for failure to pay on a weekly basis.TheCompany responded by requesting permission to file a motion to dismiss.The court stayed the action pending the class settlement in theCappadora matter noted above.In February 2021,a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment ofwages,meal and rest periods,wage statements,reimbursement of expenses,payment of final wages to terminated employees,and for unfairbusiness practices.Edwards v.Costco Wholesale Corp.(Case No.5:21-cv-00716:C.D.Cal.).In May 2021,the Company filed a motion todismiss the complaint,which was granted with leave to amend.In June 2021,the plaintiff filed an amended complaint,which the Companymoved to dismiss.The court granted the motion in part in July 2021 with leave to amend.In August 2021,the plaintiff filed a second amendedcomplaint and filed a separate representative action under PAGA asserting the same Labor Code claims and seeking civil penalties andattorneys fees.The Company filed an answer to the second amended class action complaint,denying the material allegations.The Companyalso filed an answer to the PAGA representative action,denying the material allegations.On September 27,2022,the parties reached asettlement for an immaterial amount.The settlement requires court approval.In July 2021,a former temporary staffing employee filed a class action against the Company and a staffing company alleging violations of theCalifornia Labor Code regarding payment of wages,meal and rest periods,wage statements,the timeliness of wages and final wages,and forunfair business practices.Dimas v.Costco Wholesale Corp.(Case No.STK-CV-UOE-2021-0006024;San Joaquin Superior Court).15Table of ContentsThe Company has moved to compel arbitration of the plaintiffs individual claims and to dismiss the class action complaint.On September 7,2021,the same former employee filed a separate representative action under PAGA,asserting the same Labor Code violations and seeking civilpenalties and attorneys fees.The case has been stayed pending resolution of the motion to compel in the related case.In September 2021,an employee filed a class action against the Company alleging violations of the California Labor Code regarding failure toprovide sick pay,failure to timely pay wages due at separation from employment,and for violations of Californias unfair competition law.DeBenning v.Costco Wholesale Corp.(Case No.34-2021-00309030-CU-OE-GDS;Sacramento Superior Court).The Company answered thecomplaint in January 2022,denying its material allegations.In April 2022,a settlement for an immaterial amount was agreed upon,subject tocourt approval.Final approval of the settlement was granted on February 10,2023.In March 2022,an employee filed a class action against the Company alleging violations of the California Labor Code regarding the failure to:pay wages,provide meal and rest periods,provide accurate wage statements,timely pay final wages,and reimburse business expenses.Diaz v.Costco Wholesale Corp.(Case No.22STCV09513;Los Angeles Superior Court).The Company filed an answer denying the material allegations.In December 2022,the case was settled for an immaterial amount.In May 2022,an employee filed a PAGA-only representative action against the Company alleging claims under the California Labor Coderegarding the payment of wages,meal and rest periods,the timeliness of wages and final wages,wage statements,accurate records andbusiness expenses.Gonzalez v.Costco Wholesale Corp.(Case No.22AHCV00255;Los Angeles Superior Court).The Company filed ananswer denying the allegations.Beginning in December 2017,the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts ofopioid abuses filed against various defendants by counties,cities,hospitals,Native American tribes,third-party payors,and others.In re NationalPrescription Opiate Litigation(MDL No.2804)(N.D.Ohio).Included are cases that name the Company,including actions filed by counties andcities in Michigan,New Jersey,Oregon,Virginia and South Carolina,a third-party payor in Ohio,and a hospital in Texas,class actions filed onbehalf of infants born with opioid-related medical conditions in 40 states,and class actions and individual actions filed on behalf of individualsseeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa.Claims against theCompany in state courts in New Jersey,Oklahoma,Utah,and Arizona have been dismissed.The Company is defending all of the pendingmatters.Members of the Board of Directors,six corporate officers and the Company are defendants in a shareholder derivative action filed in June 2022related to chicken welfare and alleged breaches of fiduciary duties.Smith,et ano.v.Vachris,et al.,Superior Court of the State of Washington,County of King,No,22-2-08937-7SEA.The complaint seeks from the individual defendants damages,injunctive relief,costs,and attorneys fees.A motion to dismiss the amended complaint has been filed.The Company does not believe that any pending claim,proceeding or litigation,either alone or in the aggregate,will have a material adverseeffect on the Companys financial position,results of operations or cash flows;it is possible that an unfavorable outcome of some or all of thematters,however unlikely,could result in a charge that might be material to the results of an individual fiscal quarter or year.16Table of ContentsNote 9Segment ReportingThe Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S.,Canada,Mexico,Japan,U.K.,Korea,Taiwan,Australia,Spain,France,China,Iceland,New Zealand,and Sweden.Reportable segments are largelybased on managements organization of the operating segments for operational decisions and assessments of financial performance,whichconsiders geographic locations.The material accounting policies of the segments are as described in the notes to the consolidated financialstatements included in the Companys Annual Report filed on Form 10-K for the fiscal year ended August 28,2022,and Note 1 above.Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income.The following table provides information for the Companys reportable segments:United StatesOperationsCanadianOperationsOtherInternationalOperationsTotal12 Weeks Ended February 12,2023Total revenue$40,145$7,299$7,822$55,266 Operating income1,295 284 324 1,903 12 Weeks Ended February 13,2022Total revenue$37,567$7,017$7,320$51,904 Operating income1,179 301 332 1,812 24 Weeks Ended February 12,2023Total revenue$80,290$14,655$14,758$109,703 Operating income2,531 572 551 3,654 24 Weeks Ended February 13,2022Total revenue$73,884$14,138$14,245$102,267 Operating income2,297 594 614 3,505 52 Weeks Ended August 28,2022Total revenue$165,294$31,675$29,985$226,954 Operating income5,268 1,346 1,179 7,793 Disaggregated RevenueThe following table summarizes net sales by merchandise category;sales from e-commerce websites and business centers have been allocatedto the applicable merchandise categories:12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Foods and Sundries$21,926$19,489$43,374$39,052 Non-Foods14,741 15,105 28,773 29,267 Fresh Foods7,376 6,959 14,093 13,398 Warehouse Ancillary and Other Businesses10,196 9,384 21,436 18,637 Total net sales$54,239$50,937$107,676$100,354 17Table of ContentsItem 2Managements Discussion and Analysis of Financial Condition and Results of Operations(amounts in millions,except per share,share,percentages and warehouse count data)FORWARD-LOOKING STATEMENTSCertain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995.For these purposes,forward-looking statements are statements that address activities,events,conditions or developmentsthat the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth,changes in comparablesales,cannibalization of existing locations by new openings,price or fee changes,earnings performance,earnings per share,stock-basedcompensation expense,warehouse openings and closures,capital spending,the effect of adopting certain accounting standards,future financialreporting,financing,margins,return on invested capital,strategic direction,expense controls,membership renewal rates,shopping frequency,litigation,and the demand for our products and services.In some cases,forward-looking statements can be identified because they containwords such as“anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“intend,”“likely,”“may,”“might,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“target,”“will,”“would,”or similar expressions and the negatives of those terms.Such forward-looking statementsinvolve risks and uncertainties that may cause actual events,results,or performance to differ materially from those indicated by suchstatements.These risks and uncertainties include,but are not limited to,domestic and international economic conditions,including exchangerates,inflation or deflation,the effects of competition and regulation,uncertainties in the financial markets,consumer and small businessspending patterns and debt levels,breaches of security or privacy of member or business information,conditions affecting the acquisition,development,ownership or use of real estate,capital spending,actions of vendors,rising costs associated with employees(generally includinghealth-care costs),energy and certain commodities,geopolitical conditions(including tariffs and the Ukraine conflict),the ability to maintaineffective internal control over financial reporting,regulatory and other impacts related to climate change,public-health related factors,and otherrisks identified from time to time in the Companys public statements and reports filed with the Securities and Exchange Commission.Forward-looking statements speak only as of the date they are made,and the Company does not undertake to update these statements,except asrequired by law.OVERVIEWThe following Managements Discussion and Analysis of Financial Condition and Results of Operations(MD&A)is intended to promoteunderstanding of the results of operations and financial condition.MD&A is provided as a supplement to,and should be read in conjunction with,our condensed consolidated financial statements and the accompanying Notes to Financial Statements(Part I,Item 1 of this Form 10-Q),as wellas our consolidated financial statements,the accompanying Notes to Financial Statements,and the related Managements Discussion andAnalysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K,filed with the United States Securities andExchange Commission on October 5,2022.We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limitedselection of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventoryturnover.When combined with the operating efficiencies achieved by volume purchasing,efficient distribution and reduced handling ofmerchandise in no-frills,self-service warehouse facilities,these volumes and turnover enable us to operate profitably at significantly lower grossmargins(net sales less merchandise costs)than most other retailers.We often sell inventory before we are required to pay for it,even whiletaking advantage of early payment discounts.We believe that the most important driver of our profitability is increasing net sales,particularly comparable sales.Net sales includes our coremerchandise categories(foods and sundries,non-foods,and fresh foods),warehouse ancillary(gasoline,pharmacy,optical,food court,hearingaids,and tire installation)and other businesses(e-commerce,business centers,travel and other).We define18Table of Contentscomparable sales as net sales from warehouses open for more than one year,including remodels,relocations and expansions,and sales relatedto e-commerce websites operating for more than one year.Comparable sales growth is achieved through increasing shopping frequency fromnew and existing members and the amount they spend on each visit(average ticket).Sales comparisons can also be particularly influenced bycertain factors that are beyond our control:fluctuations in currency exchange rates(with respect to our international operations);inflation andchanges in the cost of gasoline and associated competitive conditions.The higher our comparable sales exclusive of these items,the more wecan leverage our SG&A expenses,reducing them as a percentage of sales and enhancing profitability.Generating comparable sales growth isforemost a question of making available to our members the right merchandise at the right prices,a skill that we believe we have repeatedlydemonstrated over the long-term.Another substantial factor in net sales growth is the health of the economies in which we do business,including the effects of inflation or deflation,especially the United States.Net sales growth and gross margins are also impacted by ourcompetition,which is vigorous and widespread,across a wide range of global,national and regional wholesalers and retailers,including thosewith e-commerce operations.While we cannot control or reliably predict general economic health or changes in competition,we believe that wehave been successful historically in adapting our business to these changes,such as through adjustments to our pricing and merchandise mix,including increasing the penetration of our private-label items,and through online offerings.Our philosophy is to provide our members with quality goods and services at competitive prices.We do not focus in the short-term onmaximizing prices charged,but instead seek to maintain what we believe is a perception among our members of our“pricing authority”consistently providing the most competitive values.Merchandise costs in the second quarter of 2023 continued to be impacted by inflation.Theimpact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to cost increases.Thosestrategies can include,but are not limited to,working with our suppliers to share in absorbing cost increases,earlier-than-usual purchasing andin greater volumes,offering seasonal merchandise outside its season,as well as passing cost increases on to our members.Our investments inmerchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite costincreases instead of passing the increases on to our members,all negatively impacting gross margin and gross margin as a percentage of netsales(gross margin percentage).We believe our gasoline business enhances traffic in our warehouses,but it generally has a lower gross margin percentage relative to our non-gasoline businesses.It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline businesses.A higher penetrationof gasoline sales will generally lower our gross margin percentage.Rapidly changing gasoline prices may significantly impact our near-term netsales growth.Generally,rising gasoline prices benefit net sales growth which,given the higher sales base,negatively impacts our gross marginpercentage but decreases our SG&A expenses as a percentage of net sales.A decline in gasoline prices has the inverse effect.Additionally,government actions in various countries relating to tariffs,particularly China and the United States,have affected the costs of some of ourmerchandise.The degree of our exposure is dependent on(among other things)the type of goods,rates imposed,and timing of the tariffs.Higher tariffs could adversely impact our results.We also achieve net sales growth by opening new warehouses.As our warehouse base grows,available and desirable sites become moredifficult to secure,and square footage growth becomes a comparatively less substantial component of growth.The negative aspects of suchgrowth,however,including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouseswhen openings occur in existing markets,are continuing to decline in significance as they relate to the results of our total operations.Our rate ofsquare footage growth is generally higher in foreign markets,due to the smaller base in those markets,and we expect that to continue.Our e-commerce business,domestically and internationally,generally has a lower gross margin percentage than our warehouse operations.19Table of ContentsThe membership format is an integral part of our business and has a significant effect on our profitability.This format is designed to reinforcemember loyalty and provide continuing fee revenue.The extent to which we achieve growth in our membership base,increase the penetration ofour Executive members,and sustain high renewal rates materially influences our profitability.Our paid-membership growth rate may beadversely impacted when warehouse openings occur in existing markets as compared to new markets.Our financial performance depends heavily on controlling costs.While we believe that we have achieved successes in this area,some significantcosts are partially outside our control,particularly health care and utility expenses.With respect to the compensation of our employees,ourphilosophy is not to seek to minimize their wages and benefits.Rather,we believe that achieving our longer-term objectives of reducingemployee turnover and enhancing employee satisfaction require maintaining compensation levels that are better than the industry average formuch of our workforce.This may cause us,for example,to absorb costs that other employers might seek to pass through to their workforces.Because our business operates on very low margins,modest changes in various items in the consolidated statements of income,particularlymerchandise costs and SG&A expenses,can have substantial impacts on net income.Our operating model is generally the same across our U.S.,Canadian,and Other International operating segments(see Note 9 to thecondensed consolidated financial statements included in Part I,Item 1,of this Report).Certain operations in the Other International segmenthave relatively higher rates of square footage growth,lower wage and benefit costs as a percentage of sales,less or no direct membershipwarehouse competition,or lack e-commerce or business delivery.In discussions of our consolidated operating results,we refer to the impact of changes in foreign currencies relative to the U.S.dollar,which aredifferences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies intoU.S.dollars.This impact of foreign-exchange rate changes is calculated based on the difference between the current and prior periods currencyexchange rates.The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and priorperiods average price per gallon sold.Our fiscal year ends on the Sunday closest to August 31.References to the second quarter of 2023 and 2022 relate to the 12-week fiscalquarters ended February 12,2023,and February 13,2022.References to the first half of 2023 and 2022 relate to the 24 weeks endedFebruary 12,2023,and February 13,2022.Certain percentages presented are calculated using actual results prior to rounding.Unlessotherwise noted,references to net income relate to net income attributable to Costco.Highlights for the second quarter of 2023 versus 2022 include:Net sales increased 6%to$54,239,driven by an increase in comparable sales of 5%and sales at 20 net new warehouses opened sincethe end of the second quarter of 2022;Membership fee revenue increased 6%to$1,027,driven by new member sign-ups,upgrades to Executive Membership,and a higherrenewal rate;Gross margin percentage increased eight basis points,driven primarily by a LIFO charge recorded in the second quarter of 2022.Thiswas partially offset by decreases in core merchandise categories;SG&A expenses as a percentage of net sales increased 13 basis points,primarily due to central operating costs;Net income was$1,466,$3.30 per diluted share,compared to$1,299,$2.92 per diluted share in 2022;andA quarterly cash dividend of$0.90 per share was declared on January 19,2023 and paid on February 17,2023.20Table of ContentsRESULTS OF OPERATIONSNet Sales12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Net Sales$54,239$50,937$107,676$100,354 Changes in net sales:U.S7%9nada4%4%Other International7%4%Total Company6%7%Changes in comparable sales:U.S6%8nada4%3%Other International4%6%Total Company5%6%E-commerce(10)%(7)%Changes in comparable sales excluding the impact of changesin foreign-currency and gasoline prices:U.S6%6nada10%9%Other International10%9%9%Total Company7%7%E-commerce(9)%(6)%Net SalesNet sales increased$3,302 or 6%,and$7,322 or 7%during the second quarter and first half of 2023.This improvement was attributable to anincrease in comparable sales of 5%and 6%in the second quarter and first half of 2023,and sales at the 20 net new warehouses opened sincethe end of the second quarter of 2022.Sales increased$2,490,or 6%and$4,523,or 6%in core merchandise categories during the secondquarter and first half of 2023,led by foods and sundries and fresh foods;while non-foods decreased.Sales increased$812,or 9%and$2,799,or 15%in warehouse ancillary and other businesses during the second quarter and first half of 2023,led by gasoline,pharmacy and travel.During the second quarter of 2023,changes in foreign currencies relative to the U.S.dollar negatively impacted net sales by approximately$937,184 basis points,compared to the second quarter of 2022,attributable to our Canadian and Other International operations.The volume ofgasoline sold increased approximately 9%,positively impacting net sales by$565,111 basis points.Changes in gasoline prices did notmaterially impact net sales for the current quarter.During the first half of 2023,changes in foreign currencies relative to the U.S.dollar negatively impacted net sales by approximately$2,471,246basis points,compared to the first half of 2022,attributable to our Canadian and Other International Operations.Higher gasoline prices positivelyimpacted net sales by$1,254,125 basis points,compared to 2022,with a 9%increase in the average price per gallon.The volume of gasolinesold increased approximately 10%,positively impacting net sales by$1,215,121 basis points.21Table of ContentsComparable SalesComparable sales increased 5%and 6%in the second quarter and first half of 2023 and were positively impacted by increases in shoppingfrequency and the average ticket,which includes the effects of inflation and changes in foreign currency.Membership Fees12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Membership fees$1,027$967$2,027$1,913 Membership fees increase6%6%Total paid members(000s)68,100 63,400 Total cardholders(000s)123,000 114,800 Membership fee revenue increased 6%in both the second quarter and first half of 2023,driven by sign-ups,upgrades to Executive Membership,and a higher renewal rate.Changes in foreign currencies relative to the U.S.dollar negatively impacted membership fees by$20 and$52 in thesecond quarter and first half of 2023.At the end of the second quarter of 2023,our renewal rates were 92.6%in the U.S.and Canada and 90.5%worldwide.Renewal rates continue to benefit from more members auto renewing and increased penetration of Executive members,who onaverage renew at a higher rate.Our renewal rate,which excludes affiliates of Business members,is a trailing calculation that captures renewalsduring the period seven to eighteen months prior to the reporting date.We account for membership fee revenue on a deferred basis,recognized ratably over the one-year membership period.Our membership countsinclude active memberships and memberships that have not renewed within the 12 months prior to the reporting date.Gross Margin12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Net sales$54,239$50,937$107,676$100,354 Less merchandise costs48,423 45,517 96,192 89,469 Gross margin$5,816$5,420$11,484$10,885 Gross margin percentage10.72.64.67.85%Quarterly ResultsTotal gross margin percentage increased eight basis points compared to the second quarter of 2022.Excluding the impact of gasoline priceinflation on net sales,gross margin percentage was 10.73%,an increase of nine basis points.This was driven primarily by a 14 basis-pointincrease due to a LIFO charge recorded in the second quarter of 2022.Warehouse ancillary and other business also positively impacted grossmargin by three basis points,predominantly gasoline,partially offset by e-commerce and pharmacy.Core merchandise categories negativelyimpacted gross margin by six basis points,predominantly in non-foods and fresh foods,partially offset by foods and sundries.Gross margin wasnegatively impacted by two basis points due to increased 2%rewards.Changes in foreign currencies relative to the U.S.dollar negativelyimpacted gross margin by approximately$91,compared to the second quarter of 2022,attributable to our Canadian and Other Internationaloperations.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),decreased 26 basis points.The decrease was across all categories,most significantly in fresh foods.This measure eliminates the impact ofchanges in sales penetration and gross margins from our warehouse ancillary and other businesses.22Table of ContentsGross margin on a segment basis,when expressed as a percentage of the segments own sales and excluding the impact of changes ingasoline prices on net sales(segment gross margin percentage),increased in our U.S.segment,largely due to the LIFO charge discussedabove and an increase in our warehouse ancillary and other businesses,predominantly gasoline,partially offset by e-commerce.Gross marginpercentage decreased in our Canadian and Other International segment due to decreases in core merchandise categories and increased 2%rewards,partially offset by warehouse ancillary and other businesses.Year-to-date ResultsTotal gross margin percentage decreased 18 basis points compared to the first half of 2022.Excluding the impact of gasoline price inflation onnet sales,gross margin percentage was 10.79%,a decrease of six basis points.This was primarily due to an 18 basis-point decrease in coremerchandise categories,predominantly in non-foods and fresh foods,partially offset by foods and sundries,and a nine basis-point chargeprimarily related to downsizing our charter shipping activities during the first quarter of 2023.Gross margin was also negatively impacted bythree basis points due to increased 2%rewards.Warehouse ancillary and other businesses positively impacted gross margin by 16 basis points,predominantly gasoline,partially offset by e-commerce.A smaller LIFO charge in the first half of 2023 compared to the first half of 2022positively contributed eight basis points.Changes in foreign currencies relative to the U.S.dollar negatively impacted gross margin byapproximately$244,compared to the first half of 2022,attributable to our Canadian and Other International operations.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),decreased 29 basis points.The decrease was primarily due to fresh foods and non-foods.This measure eliminates the impact of changes insales penetration and gross margins from our warehouse ancillary and other businesses.Segment gross margin percentage increased in our U.S.segment,due to warehouse ancillary and other businesses and a smaller LIFO charge,partially offset by the charge related to downsizing our charter shipping activities and decreases in certain core merchandise categories,non-foods and fresh foods,partially offset by foods and sundries.Gross margin decreased in our Canadian and Other International segment due todecreases in core merchandise categories,partially offset by warehouse ancillary and other businesses.All segments were negatively impactedby increased 2%rewards.Selling,General and Administrative Expenses12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022SG&A expenses$4,940$4,575$9,857$9,293 SG&A expenses as a percentage of net sales9.11%8.98%9.15%9.26%Quarterly ResultsSG&A expenses as a percentage of net sales increased 13 basis points.The effect of gasoline price inflation had no impact on SG&A expensesas a percentage of sales.The comparison to last year was negatively impacted by nine basis points in central operating costs partiallyattributable to a charge related to a tax audit covering multiple years.Warehouse operations and other businesses and stock compensation wereboth higher by two basis points.Changes in foreign currencies relative to the U.S.dollar decreased SG&A expenses by approximately$75compared to the second quarter of 2022.23Table of ContentsYear-to-date ResultsSG&A expenses as a percentage of net sales decreased 11 basis points.SG&A expenses as a percentage of net sales excluding the impact ofgasoline price inflation was flat compared to the first half of 2022.The comparison to last year was favorably impacted by 12 basis points from awrite-off of certain information technology assets in the prior year.Warehouse operations and other businesses were higher by six basis points,largely attributable to the wage increases we instituted in 2022.Central operating costs were also higher by six basis points.Changes in foreigncurrencies relative to the U.S.dollar decreased SG&A expenses by approximately$196 compared to the first half of 2022.Interest Expense12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Interest expense$34$36$68$75 Interest expense is primarily related to Senior Notes and financing leases.The decrease in interest expense for the first half of 2023 was due torepayment of the 2.300%Senior Notes on December 1,2021.Interest Income and Other,Net12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Interest income$105$6$159$15 Foreign-currency transaction gains(losses),net3 12(6)38 Other,net6 7 14 14 Interest income and other,net$114$25$167$67 The increase in interest income in the second quarter and first half of 2023 was due to higher global interest rates.Foreign-currency transactiongains(losses),net,include mark-to-market adjustments for forward foreign-exchange contracts and the revaluation or settlement of monetaryassets and liabilities by our Canadian and Other International operations.See Derivatives and Foreign Currency sections in Item 8,Note 1 of ourAnnual Report on Form 10-K,for the fiscal year ended August 28,2022.Provision for Income Taxes 12 Weeks Ended24 Weeks Ended February 12,2023February 13,2022February 12,2023February 13,2022Provision for income taxes$517$481$923$832 Effective tax rate26.1&.7$.6#.8%The effective tax rate for the first half of 2023 was impacted by net discrete tax benefits of$57,primarily due to excess tax benefits related tostock compensation.Excluding discrete net tax benefits,the tax rate was 26.1%for the first half of 2023.The effective tax rate for the first half of 2022 was impacted by net discrete tax benefits of$91,primarily due to excess tax benefits related tostock compensation.Excluding discrete net tax benefits,the tax rate was 26.4%for the first half of 2022.24Table of ContentsLIQUIDITY AND CAPITAL RESOURCESThe following table summarizes our significant sources and uses of cash and cash equivalents:24 Weeks EndedFebruary 12,2023February 13,2022Net cash provided by operating activities$5,802$3,659 Net cash used in investing activities(1,865)(1,393)Net cash used in financing activities(1,215)(1,667)Our primary sources of liquidity are cash flows from operations,cash and cash equivalents,and short-term investments.Cash and cashequivalents and short-term investments were$13,705 and$11,049 at February 12,2023,and August 28,2022.Of these balances,unsettledcredit and debit card receivables represented approximately$2,083 and$2,010 at February 12,2023,and August 28,2022.These receivablesgenerally settle within four days.Material contractual obligations arising in the normal course of business primarily consist of purchase obligations,long-term debt and relatedinterest payments,leases,and construction and land purchase obligations.Purchase obligations consist of contracts primarily related to merchandise,equipment,and third-party services,the majority of which are due inthe next 12 months.Construction and land purchase obligations consist of contracts primarily related to the development and opening of newand relocated warehouses,the majority of which(other than leases)are due in the next 12 months.Management believes that our cash and investment position and operating cash flows with capacity under existing and available creditagreements will be sufficient to meet our liquidity and capital requirements for the foreseeable future.We believe that our U.S.current andprojected asset position is sufficient to meet our U.S.liquidity requirements.Cash Flows from Operating ActivitiesNet cash provided by operating activities totaled$5,802 in the first half of 2023,compared to$3,659 in the first half of 2022.Our cash flowprovided by operations is primarily from net sales and membership fees.Cash flow used in operations generally consists of payments tomerchandise suppliers,warehouse operating costs,including payroll and employee benefits,utilities,and credit and debit card processing fees.Cash used in operations also includes payments for income taxes.Changes in our net investment in merchandise inventories(the differencebetween merchandise inventories and accounts payable)is impacted by several factors,including inventory turnover,the forward deployment ofinventory to accelerate delivery times,payment terms with suppliers,and early payments to obtain discounts.Cash Flows from Investing ActivitiesNet cash used in investing activities totaled$1,865 in the first half of 2023,compared to$1,393 in the first half of 2022,and is primarily related tocapital expenditures.Net cash from investing activities also includes purchases and maturities of short-term investments.25Table of ContentsCapital Expenditure PlansOur primary requirements for capital are acquiring land,buildings,and equipment for new and remodeled warehouses.Capital is also requiredfor information systems,manufacturing and distribution facilities,initial warehouse operations,and working capital.In the first half of 2023,wespent$1,947 on capital expenditures,and it is our current intention to spend approximately$3,800 to$4,200 during fiscal 2023.Theseexpenditures are expected to be financed with cash from operations,existing cash and cash equivalents,and short-term investments.Weopened 12 new warehouses,including two relocations,in the first half of 2023 and plan to open 15 additional new warehouses,including onerelocation,in the remainder of fiscal 2023.There can be no assurance that current expectations will be realized,and plans are subject to changeupon further review of our capital expenditure needs and the economic environment.Cash Flows from Financing ActivitiesNet cash used in financing activities totaled$1,215 in the first half of 2023,compared to$1,667 in the first half of 2022.Cash flow used infinancing activities during the first half of 2023 was primarily related to the payment of dividends,withholding taxes on stock-based awards,andrepurchases of common stock.In the first half of 2022,cash flow used in financing activities was primarily due to the repayment of our 2.300%Senior Notes.DividendsA quarterly cash dividend of$0.90 per share was declared on January 19,2023,payable to shareholders of record on February 3,2023,whichwas paid on February 17,2023.Share Repurchase ProgramOn January 19,2023,the Board of Directors authorized a new share repurchase program in the amount of$4,000,which expires in January2027.During the first half of 2023 and 2022,we repurchased 579,000 and 236,000 shares of common stock,at an average price per share of$492.06 and$498.00,totaling approximately$285 and$118.These amounts may differ from the accompanying condensed consolidatedstatements of cash flows due to changes in unsettled repurchases at the end of a quarter.Purchases are made from time to time,as conditionswarrant,in the open market or in block purchases,pursuant to plans under SEC Rule 10b5-1.Repurchased shares are retired,in accordancewith the Washington Business Corporation Act.The remaining amount available to be purchased under our approved plan was$3,955 at the endof the second quarter.Bank Credit Facilities and Commercial Paper ProgramsWe maintain bank credit facilities for working capital and general corporate purposes.At February 12,2023,we had borrowing capacity underthese facilities of$1,269.Our international operations maintain$781 of this capacity under bank credit facilities,of which$177 is guaranteed bythe Company.Short-term borrowings outstanding under the bank credit facilities were$45 and$88 at the end of the second quarter of 2023 andat the end of fiscal 2022.The Company has letter of credit facilities,for commercial and standby letters of credit,totaling$231.The outstanding commitments under thesefacilities at the end of the second quarter of 2023 totaled$191,most of which were standby letters of credit that do not expire or have expirationdates within one year.The bank credit facilities have various expiration dates,most within one year,and we generally intend to renew thesefacilities.The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercialletters of credit outstanding.26Table of ContentsCritical Accounting EstimatesThe preparation of our consolidated financial statements in accordance with U.S.GAAP requires that we make estimates and judgments.Webase these on historical experience and on assumptions that we believe to be reasonable.Our critical accounting policies are discussed in PartII,Item 7,“Managements Discussion and Analysis of Financial Condition and Results of Operations”section of our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes to the critical accounting estimates previously disclosed in thatReport.Recent Accounting PronouncementsThere have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form10-K,for the fiscal year ended August 28,2022.Item 3Quantitative and Qualitative Disclosures about Market RiskOur direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates.There have been nomaterial changes to our market risks as disclosed in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.Item 4Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur disclosure controls and procedures(as defined in Rules 13a-15(e)or 15d-15(e)under the Securities Exchange Act of 1934,as amended)are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded,processed,summarized,and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission andto ensure that information required to be disclosed is accumulated and communicated to management,including our principal executive andfinancial officers,to allow timely decisions regarding disclosure.The Chief Executive Officer and the Chief Financial Officer,with assistance fromother members of management,have reviewed the effectiveness of our disclosure controls and procedures as of February 12,2023 and,basedon their evaluation,have concluded the disclosure controls and procedures were effective as of such date.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting(as defined in Rules 13a-15(f)or 15d-15(f)of the Exchange Act)thatoccurred during the second quarter of fiscal 2023 that have materially affected,or are reasonably likely to materially affect,the Companysinternal control over financial reporting.PART IIOTHER INFORMATIONItem 1Legal ProceedingsSee discussion of Legal Proceedings in Note 8 to the condensed consolidated financial statements included in Part I,Item 1 of this Report.Item 1ARisk FactorsIn addition to the other information set forth in the Quarterly Report on Form 10-Q,you should carefully consider the factors discussed in Part I,Item 1A,“Risk Factors”in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes inour risk factors from those disclosed in our Annual Report on Form 10-K.27Table of ContentsItem 2Unregistered Sales of Equity Securities and Use of ProceedsThe following table sets forth information on our common stock repurchase program activity for the second quarter of 2023(amounts in millions,except share and per share data):PeriodTotal Number ofSharesPurchasedAverage PricePaid Per ShareTotal Number of SharesPurchased as Part ofPublicly AnnouncedProgramsMaximum Dollar Value ofShares that May Yet bePurchased Under theProgramsNovember 21,2022 December 18,202291,000$499.57 91,000$2,621 December 19,2022 January 15,202396,000 465.99 96,000 2,576 January 16,2023 February 12,2023107,000 498.61 107,000 3,955 Total second quarter294,000$488.30 294,000 _(1)Our share repurchase program is conducted under a$4,000 authorization approved by our Board of Directors in January 2023,which expires in January 2027.Thisauthorization revoked previously authorized but unused amounts,totaling$2,568.Item 3Defaults Upon Senior SecuritiesNone.Item 4Mine Safety DisclosuresNot applicable.Item 5Other Information(amounts in whole dollars)Disclosure pursuant to Section 2019 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r)of the SecuritiesExchange Act of 1934,as amended.During the second quarter of 2023,we had two individual cardholders under a business membership in the name of the Embassy of the IslamicRepublic of Iran at our subsidiary in Mexico.Gross revenue in the second quarter of 2023 attributable to the membership was approximately$145,and our estimated profit on these transactions was less than$10.The membership was canceled during the second quarter of 2023.TheCompany does not intend to continue these activities.(1)(1)28Table of ContentsItem 6ExhibitsThe following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.Incorporated by ReferenceExhibitNumberExhibit DescriptionFiledHerewithFormPeriod EndingFiling Date3.1Articles of Incorporation as amended of CostcoWholesale Corporation10-K8/28/202210/5/20223.2Bylaws as amended of Costco Wholesale Corporation10-Q5/8/20226/2/202210.1Eleventh Amendment to Citi,N.A.Co-Branded CreditCard Agreementx31.1Rule 13(a)14(a)Certificationsx32.1Section 1350 Certificationsx101.INSInline XBRL Instance Documentx101.SCHInline XBRL Taxonomy Extension Schema Documentx101.CALInline XBRL Taxonomy Extension Calculation LinkbaseDocumentx101.DEFInline XBRL Taxonomy Extension Definition LinkbaseDocumentx101.LABInline XBRL Taxonomy Extension Label LinkbaseDocumentx101.PREInline XBRL Taxonomy Extension Presentation LinkbaseDocumentx104Cover Page Interactive Data File(formatted as inlineXBRL and contained in Exhibit 101)x29Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Report to be signed on its behalf by theundersigned,thereunto duly authorized.COSTCO WHOLESALE CORPORATION(Registrant)March 8,2023By/s/W.CRAIG JELINEKDateW.Craig JelinekChief Executive Officer and DirectorMarch 8,2023By/s/RICHARD A.GALANTIDateRichard A.GalantiExecutive Vice President,Chief Financial Officer and Director30Exhibit 10.1ELEVENTH AMENDMENT TO THECO-BRANDED CREDIT CARD PROGRAM AGREEMENTThis Eleventh Amendment(Amendment)is between Citibank,N.A.(Bank)and Costco Wholesale Corporation(Costco),is effective as ofFebruary 6,2023,and amends that certain Co-Branded Credit Card Program Agreement,by and between Bank and Costco,dated February 27,2015(the Agreement).Pursuant to Section 16.10 of the Agreement,Bank and Costco agree as follows:1.Defined Terms.All capitalized terms used but not defined in this Amendment will have the meanings ascribed to such terms in theAgreement.2.Amendments.a.Section 9.05 Manner and Timing of Payments.Section 9.05(c)is amended by replacing“LIBOR”with“SOFR plus twenty-oneand four tenths basis points(0.214%)”.b.Section 14.02 Payment of Fees Upon Termination.Section 14.02(a)is amended by replacing“LIBOR”with“SOFR plustwenty-one and four tenths basis points(0.214%)”.c.Exhibit A Definitional Supplement.Exhibit A is amended by deleting LIBOR and the corresponding definition in their entiretyand adding the following in their place:“SOFR”means a rate equal to the secured overnight financing rate as administered by the SOFR Administrator(Federal ReserveBank of New York or successor).For purposes of this Agreement,the 3 month average SOFR rate will be used,as published byBloomberg under ticker“USOSFRC BGN Curncy”,on the applicable due date.d.Schedule 7.05(a).The bullet for“Money cost(split by actual 1-Month LIBOR and spread)”is amended to read,“Money cost(split by actual SOFR and spread)”.e.Schedule 9.07(a)(v)-1.Schedule 9.07(a)(v)-2 is deleted in its entirety and replaced with the attached Schedule 9.07(a)(v)-1.3.Full Force and Effect.The Agreement,as modified hereby,will remain in full force and effect and this Amendment will not be deemedto be an amendment or a waiver of any other provision of the Agreement except as expressly stated herein.All such other provisions ofthe Agreement will also be deemed to apply to this Amendment.4.No Modification or Waiver;Incorporation.No modification,amendment or waiver of this Amendment will be effective or bindingunless made in writing and signed by the Parties.The Parties agree that,except for those modifications expressly set forth in thisAmendment,all terms and provisions of the Agreement will remain unchanged and in full force and effect.This Amendment and theAgreement will hereafter be read and construed together as a single document,and all references to the Agreement will hereafter referto the Agreement as amended by this Amendment.5.Counterparts.This Amendment may be executed in counterparts and if so executed will be enforceable and effective upon theexchange of executed counterparts,including by facsimile or electronic transmissions of executed counterparts.Signature page followsDuly authorized representatives of the Parties have executed this Amendment.COSTCO WHOLESALE CORPORATION CITIBANK,N.A.By:/s/Sandy TorreyBy:/s/Jennifer LonginoName:Sandy TorreyName:Jennifer LonginoTitle:SVP,Corporate MarketingTitle:Vice PresidentSchedule 9.07(a)(v)-1Money Cost CalculationThe funding rates for each balance category of asset will be calculated as follows:Variable Revolving Balances:1 month SOFR Spread 19.5 basis points,or1 month SOFR,whichever is higherPromotional Balances:10%of balance at 6 month SOFR Caterpillar Spread10%of balance at 1 year SOFR Caterpillar Spread80%of balance at 5 year SOFR Caterpillar SpreadTransactor/Intro Rate Balances:5%of balance at 1 month SOFR Spread95%of balance at 5 year SOFR Caterpillar SpreadThe Bloomberg tickers for the SOFR rates are as follows:1-month SOFR:USOSFRA BGN Curncy6-month SOFR:USOSFRF BGN Curncy1-year SOFR:USOSFR1 BGN Curncy5-year SOFR:USOSFR5 BGN CurncyAll SOFR rates will be sourced from Bloomberg on the last Business Day of the month.Funding costs will be applied to balances based on theActual/365 day count convention;i.e.Monthly funding cost=Balance*Rate*Actual/365.The“Spread”means the months average spread,weighted 80%as the AAA 7-year Credit Card Asset Backed Security spread,and 20%as theBBB 7-year Credit Card Asset Backed Security spread,in each case,using an average(excluding the high and the low)from major third partysecuirty dealers(e.g.,BAC,MUFG,BARC,RBC,BNP,WFC).The weighted-average spread will be capped at one hundred and forty-five(145)basis points.The“Caterpillar”will comprise a strip of equally-weighted funding tickets of the targeted tenor.For example,a 5-year SOFR Caterpillar willhave sixty(60)tickets,which are the previous sixty(60)months actual 5-year SOFR rates.The 5-year SOFR Caterpillar rate will be the simpleaverage of those sixty(60)tickets.Each month,the oldest funding ticket will drop out of the Caterpillar,and will be replaced with a new ticket atthe current rate.For example,the 5-year SOFR Caterpillar would have the 5-year SOFR rate from sixty(60)months ago drop out,and thatwould be replaced with the current 5-year SOFR rate.Exhibit 31.1CERTIFICATIONSI,W.Craig Jelinek,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.March 8,2023/s/W.CRAIG JELINEKW.Craig JelinekChief Executive Officer and DirectorCERTIFICATIONSI,Richard A.Galanti,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.March 8,2023/s/RICHARD A.GALANTIRichard A.GalantiExecutive Vice President,Chief Financial Officer and DirectorExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended February 12,2023,as filed with the Securities and Exchange Commission(the Report),I,W.Craig Jelinek,Chief Executive Officer and Director of theCompany,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/W.CRAIG JELINEK Date:March 8,2023W.Craig Jelinek Chief Executive Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended February 12,2023,as filed with the Securities and Exchange Commission(the Report),I,Richard A.Galanti,Executive Vice President,Chief Financial Officerand Director of the Company,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/RICHARD A.GALANTI Date:March 8,2023Richard A.Galanti Executive Vice President,Chief Financial Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.
2023-04-28
37页
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