2022INTERIM REPORTFOR THE SIX-MONTH PERIOD ENDED 31 MARCH 2022 TRAFIGURA GROUP PTE.LTD.Financial and business highlights1Trafigura Group Pte.Ltd.and the companies which it directly or indirectly owns investments in are separate and distinct entities.In this publication,the collective expressions Trafigura,Trafigura Group,the Company and the Group may be used for convenience where reference is made in general to those companies.Likewise,the words we,us,our and ourselves are used in some places to refer to the companies of the Trafigura Group in general.These expressions are also used where no useful purpose is served by identifying any particular company or companies.1.For the six-month period ended 31 March 2022.2.For the six-month period ended 31 March 2021.3.For the six-month period ended 31 March 2020.4.As at 30 September 2021.5.As at 30 September 2020.6.The Energy segment comprises oil,petroleum products,natural gas,Puma Energy,power,carbon and renewables.Group revenue$170.6bn$98.4bn in 20212$83.0bn in 20203Underlying EBITDA$4.7bn$3.7bn in 20212$2.4bn in 20203Underlying EBITDA margin2.8%3.8%in 202122.9%in 20203Net profit$2.7bn$2.1bn in 20212$0.5bn in 20203Energy segment revenue as a percentage of Group revenue666Y%in 2021263%in 20203Total non-current assets$16.3bn$15.0bn in 20214$11.1bn in 20205Metals and Minerals revenue as a percentage of Group revenue34A%in 2021237%in 20203Total assets$105.8bn$90.1bn in 20214$57.0bn in 20205Total Group equity$12.7bn$10.6bn in 20214$7.8bn in 20205Report of the Board of Directors02 Statement from the Executive Chairman and Chief Executive Officer04 Financial review08 Marketplace reviewFinancial statements13 Contents14 Interim consolidated statement of income14 Supplementary statement of income information15 Interim consolidated statement of other comprehensive income16 Interim consolidated statement of financial position17 Interim consolidated statement of changes in equity18 Interim consolidated statement of cash flows19 Notes to the interim consolidated financial statementsContentsWe ceased all trading of crude oil with sanctioned Russian organisations in advance of the European Union and Swiss sanctions taking effect on 15 May 2022,and we will continue to comply in full with all applicable subsequent sanctions packages.We also immediately froze our investments in Russia and announced a review of our ten percent nonoperational,passive shareholding in Vostok Oil,with the intention of exiting.At the same time,the derivatives markets on which commodity trading firms,among others,depend to manage index price risk exposures experienced their own disruptions.Extreme volatility,in particular after the outbreak of war in Ukraine,brought elevated margin calls and tighter position limits that made hedging activity more expensive and in some cases constrained access to commodities futures markets.Despite these challenging conditions for our customers and for our business in the final weeks of the reporting period,both principal operating segments,Energy*and Metals and Minerals,achieved excellent profitability and handled record volumes.The Group reported a robust financial position for the period amidst challenging market conditions and substantially increased liquidity requirements as commodity prices saw unprecedented volatility,ending the period with a strengthened balance sheet and cash position.Group equity increased to USD12.7 billion,an increase of 20 percent compared to the end of our 2021 financial year.Our industrial assets are also now on a much sounder footing than in recent years.The Nyrstar metal refining business continued its turnaround plan with improved operational performance,although it is being severely challenged by the strong headwind of high energy prices in Europe.The sixmonth period ending 31 March 2022 was an extremely challenging time in global markets,featuring heightened volatility,continued supply chain disruptions and,from 24 February 2022,war in Ukraine.Trafiguras global and diversified business footprint,market knowledge and customer relationships,logistical skills and robust balance sheet were all significantly tested.These qualities are also required more than ever by our customers during periods of seismic change in commodity markets,and the last few months have been no exception.I am pleased to report that Trafigura Group successfully navigated these challenges to achieve another strong commercial performance and a record profit for the period.Russias invasion of Ukraine has resulted first and foremost in a humanitarian crisis,but also in substantial dislocations in energy markets and global supply chains,the full impact of which is only beginning to become clear.Trafigura unconditionally condemns the war in Ukraine and we responded rapidly and effectively to the requirements of Western sanctions,engaging openly and regularly with governments and our customers throughout this turbulent and fastchanging period.Jeremy WeirExecutive Chairman and Chief Executive OfficerStatement from the Executive Chairman and Chief Executive OfficerAnother strong performance in challenging times*The Energy segment comprises oil,petroleum products,natural gas,Puma Energy,power,carbon and renewables.2Statement from the Executive Chairman and Chief Executive OfficerPuma Energy,now fully consolidated within the Trafigura Group after the buyout of its Angolan shareholders,is being streamlined under new management,including agreeing the sale of its infrastructure business during the period.We continued to grow our power,renewables and carbon trading operations,and to invest in projects to support the energy transition.Nala Renewables,our 50/50 joint venture with IFM Investors,acquired a large portfolio of solar projects in Chile and a further four projects to construct battery energy storage systems in the United States.Our growing carbon team completed a landmark transaction,investing in the worlds largest mangrove restoration project in Pakistan for which Trafigura is the anchor offtaker,to deliver high quality carbon removal credits.Through our joint venture with H2 Energy,we are progressing plans to build a 1GW green hydrogen electrolyser in Denmark to fuel trucks and other heavy landbased transport.In addition,we are developing up to 250 green hydrogen retail refuelling stations in Austria,Denmark and Germany together with Phillips 66,the owner of JET branded stations.In Australia,we are progressing a study to develop a commercial scale green hydrogen manufacturing facility at Nyrstars Port Pirie site.And in Norway,Trafigura is part of a consortium together with Hy2gen and Copenhagen Infrastructure Partners to produce green ammonia for the shipping sector in a project that is expected to be operational in 2027.Looking ahead,we see no letup in the challenging market conditions.Global supply chains remain disrupted and the geopolitical situation will continue to be turbulent.Commodity inventories are at perilously low levels across metals and energy markets as demand continues to outstrip supply,following a sustained period of structural underinvestment in natural resources production over several years.In terms of demand,we are not yet seeing a slowdown in physical demand for oil and metals all of which points to a tight market for commodities and heightened prices for some time to come.Significant investment will be required to produce,process and transport energy,minerals and metals to meet future needs and support the ongoing energy transition.Whilst we expect another strong performance from the business in the remainder of the financial year,there are a number of growing headwinds.These include ongoing geopolitical tensions and the continued challenges of dysfunctional commodities futures markets.The very significant impact of inflation and constrained availability of energy,food and natural resources will also take their toll on global economies with the most vulnerable unfortunately likely to bear the greatest impact.Trafigura proved yet again in the first half of its 2022 financial year that its business and global platform are resilient and agile to adapt rapidly to difficult market conditions,and I am confident that this will continue to be the case for the full year.The largescale Delta Blue Carbon mangrove forest restoration project in the Indus Delta in Pakistan,for which Trafigura is the anchor offtaker of verified carbon credits.Trafigura Interim Report 20223Trafigura Group registered its highest ever first half year profit in the sixmonth period ending 31 March 2022,as volatile commodity markets put a premium on our ability to move commodities to where they are in highest demand as efficiently as possible,producing higher margins.Net profit for the period was USD2,659 million,a 27 percent increase over the figure of USD2,095 million recorded in the first half of the 2021 financial year.Higher average commodity prices and traded volumes generated a 73 percent increase in revenues to USD170,609 million from last years USD98,389 million*.For the same reason,materials,transport,storage and financing costs also rose substantially.Underlying EBITDA rose 26 percent to USD4,713 million from USD3,729 million in the first half of 2021.The key driver of commodity markets volatility and the biggest challenge during the period was the rise in geopolitical tension,culminating in Russias invasion of Ukraine on 24 February and the consequent tightening of western sanctions on Russia.Global commodity inventories were already depleted as a result of the economic rebound from the COVID19 pandemic,tightening the balance between supply and demand.In addition,the Ukraine crisis placed supply chains under unprecedented strain,especially in oil,gas and refined petroleum products as buyers struggled to find alternative sources of supply.As has been regularly observed in recent years,market disruption placed a premium on Trafiguras logistical skills and market knowledge in helping customers to reorder their supply chains.As a result,our trading volumes increased across the board.Oil and petroleum products volumes increased by 14 percent compared to the first half of 2021,to an average of 7.3 million barrels per day,while nonferrous metals volumes grew by 16 percent and bulk minerals volumes by 13 percent.Adjusted debt to Group equity(0.04)x1 Sixmonth period ended 31 March 2021.2 As at 30 September 2021.3 As from financial yearend 2021 onwards,the Group has changed its income statement presentation from a classification based on the function of expense to a classification based on the nature of expense.This change provides readers of our financial statements with a more transparent and clearer analysis of the financial performance.Also,it prepares the Group for anticipated future IFRS developments.In addition,the Group replaced the gross profit metric with two new financial performance metrics:operating profit before depreciation and amortisation,and underlying EBITDA.*A USD20 million restatement has been made compared to the number published last year see page 20.Underlying EBITDA3$4.7bn20222021Total assets$105.8bn20222021Non-current assets$16.3bnNet profit$2.7bnUnderlying EBITDA margin2.8 222022202220212021202120222021Group equity$12.7bn20222021Group revenue$170.6bnFinancial reviewFinancial strength in turbulent times underpinned record profitabilityTrafigura delivered a strong performance in the first half of its 2022 financial year,1 October 2021 to 31 March 2022,with its highest ever net profit for the period of USD2,659 million,compared to USD2,095 million for the first half of 2021.Christophe SalmonGroup Chief Financial Officer20222021(0.04)x2.8.72.716.34.7105.8170.6(0.21)x23.80.622.1115.023.7190.1298.414Financial reviewMarket risk management was challenging during the first half year,as market volatility prompted increased margin calls and the imposition of restrictive position limits by clearing brokers on commodity exchanges which impacted the proper functioning of commodity derivative markets,particularly in natural gas and nickel.This made hedging our commodity inventories,in a highprice environment,more difficult and expensive.Nevertheless,despite the increased need for credit lines generated by higher commodity prices and significant margin calls,our financial position and access to liquidity remained robust.Given the uncertainty triggered by the start of the war in Ukraine and the unprecedented price movements across energy and metals that followed,Trafigura took rapid and decisive actions to build an ample liquidity buffer at the outset of the crisis.Access to additional funding sources across different markets and instruments was key in providing the Group with adequate liquidity to weather the unprecedented turbulences in both the physical and derivatives commodity markets in late February and March 2022.The total balance sheet grew by 17 percent during the period to USD105,786 million from USD90,066 million on 30 September 2021.The main drivers of this increase were trade receivables on the asset side and current loans and borrowings as well as trade payables on the liabilities side.We ended the sixmonth period with a level of cash and cash equivalents little changed from six months ago,at USD10,288 million.Group equity,which rose above USD10 billion for the first time to reach USD10,560 million at the end of the 2021 financial year,increased by a further 20 percent to USD12,704 million as at 31 March 2022.Meanwhile,we continued to optimise our portfolio of industrial assets relevant to our core trading business.This half year income statement incorporates the result of Puma Energy for the first time,following consolidation of the fuel distribution business on Trafiguras balance sheet on 30 September 2021.Now 96.7 percent owned by Trafigura Group,Puma Energy completed the sale of its Angolan assets in December 2021 and is benefiting from new management and investment in its downstream retail business.In February 2022,we completed the sale of our Spanish mining joint venture Minas de Aguas Tenidas(MATSA).In addition,we made a number of investments in renewable energy and battery energy storage assets throughout the sixmonth period.Puma Energy/Trafigura storage facility at Campana,Argentina.Trafigura Interim Report 20225Income,expenditure and balance sheetRevenue rose 73 percent year on year to USD170,609 million.Operating profit before depreciation and amortisation was USD4,648 million,compared to USD3,659 million a year ago.Of total revenue,the Energy segment contributed USD112,903 million,93 percent more than the USD58,539 million generated in the first half of 2021.Operating profit before depreciation and amortisation in the Energy segment was 23 percent higher than a year ago,at USD2,889 million,compared to USD2,344 million.Metals and Minerals segment revenues rose 45 percent to USD57,706 million from USD39,850 million,and divisional operating profit before depreciation and amortisation rose by 34 percent year on year to USD1,779 million from USD1,332 million.Meanwhile,increased traded volumes and prices also pushed up the cost of materials,transportation and storage by 76 percent to USD164,191 million from USD93,182 million a year ago.Net finance expense rose by 72 percent to USD689 million from USD401 million following higher funding needs and an increase in base rates.The increase in traded volumes and prices was also reflected in a rise of current assets to USD87,813 million as at 31 March 2022,from USD72,516 million as at 30 September 2021,mainly driven by increased trade and other receivables to USD36,543 million from USD24,748 million.Total noncurrent assets rose at a much slower pace by nine percent to USD16,296 million from USD15,014 million.Current loans and borrowings rose to USD38,474 million from USD34,270 million six months ago,reflecting the increased need for financing caused by higher prices and traded volumes.However,the substantial increase in Group equity during the period helped to ensure that our leverage ratio stayed low and well within our target.We assess the Groups financial leverage by calculating a ratio of adjusted net debt to equity.Adjusted net debt corresponds to the Companys total noncurrent and current debt less cash,fullyhedged and readily marketable inventories,nonrecourse debt related to the Groups securitisation programme and the nonrecourse portion of loans from financial institutions.As at 31 March 2022 the ratio of adjusted net debt to equity stood at negative 0.04x.Liquidity and financingTrafigura secured increased access to liquidity throughout the half year,to support the increased levels of volatility in global markets,in particular after the outbreak of the war in Ukraine.Total credit lines reached a record level of USD73 billion,excluding Puma Energy,from a network of around 140 financial institutions,of which USD7 billion was raised over the last six months.The majority of our daytoday trading activity is financed through uncommitted,selfliquidating trade finance facilities,while we use corporate credit facilities to finance other shortterm liquidity requirements,such as margin calls or bridge financing.This funding model gives us the necessary flexibility to cope with periods of enhanced price volatility as utilisation of the trade finance facilities increases or decreases to reflect the volumes traded and underlying prices.Trafigura also maintains an active debt capital markets presence to secure longerterm finance in support of our investments.During the six months ended 31 March 2022,the Group completed a number of important transactions,demonstrating once again Trafiguras strong access to committed and uncommitted sources of funding from banks,despite unprecedented market conditions and extreme volatility in the global economy,in particular since late February 2022.In October 2021,Trafigura refinanced its Asian Syndicated Revolving Credit Facility(RCF)and Term Loan Facilities(TLF)at USD2.4 billionequivalent,with 36 banks participating in the transaction,including eight new lenders.The new facilities comprised a 365day USD RCF(USD700 million),a oneyear CNH TLF(c.USD890 millionequivalent)and a threeyear USD TLF(USD810 million).In line with its European RCF from March 2021,Trafigura implemented a sustainabilitylinked loan structure in those new facilities.In March 2022,the Group refinanced two of its core syndicated credit facilities.First,Trafigura announced the closing of its flagship European multicurrency syndicated revolving credit facilities(ERCF)totalling USD5,295 million,comprised a USD2,025 million 365day RCF and a USD3,270 million threeyear RCF.Similar to the previous year,the facilities include a sustainabilitylinked loan structure,with an updated set of KPIs.The ERCF was initially launched at USD4.5 billion and closed substantially oversubscribed,with 55 banks joining the transaction.Trafigura also returned to the Japanese domestic syndicated bank loan market for the sixth time and refinanced its Japanese yen term loan credit facility(Samurai loan)with a total value of JPY93.75 billion(USD790 millionequivalent at closing exchange rate).The Samurai Loan comprises a JPY84.75 billion threeyear credit facility(refinanced this year)and a JPY9 billion fiveyear credit facility(amended but not refinanced this year,maturing March 2025).In line with the Groups European and Asian RCFs,and a first for its Samurai loan,the Company structured the threeyear tranche as a sustainabilitylinked loan.Recently installed solar panels on the roof of Impala Terminals storage and distribution facility in Manzanillo,Mexico.Financial review6In addition to those renewals,Trafigura closed the syndication of a ninemonth multicurrency RCF of USD2.3 billionequivalent in March 2022.The transaction was set up following the renewal of the Groups European RCF at a time of major uncertainties in global markets due to the Ukrainian war.It provides an additional funding buffer for the Group in order to proactively anticipate and mitigate liquidity requirements as a result of the substantial ongoing volatility in global commodity markets.Cash flowAfter adjusting profit before tax for noncash items,the operating cash flow before working capital charges for the first half of the year rose by 26 percent to USD4,677 million from USD3,722 million.Trafigura believes its financial performance is best assessed on the basis of operating cash flow before working capital changes,as the level of working capital is primarily determined by prevailing commodity prices and price variations are financed through the Groups selfliquidating finance lines.Net cash used in operating activities(after working capital changes)was negative USD3,018 million.Net cash gained from investing activities was USD480 million,compared to a cash usage of USD2,222 million in the first half of 2021.Net cash generated from financing activities was USD3,130 million,financing a portion of the working capital needs of the period.OutlookThe record performance in this first half amidst a period of extreme turbulence is a testament to the resilience of our business model and our financial strength key attributes that have enabled our growth and profitability over successive years.Importantly,Trafigura continues to benefit from a flight to quality in the banking sector,attracting support from a network of around 140 banks,enabling us to capture market opportunities and build a resilient,global network with an increased equity base.Our commitments to transparency,open engagement with stakeholders and high standards of ethical and responsible conduct have been prerequisites to achieving this success and support from the financial sector.The lack of depth available in the commodities futures markets looks set to continue to be a challenge for the industry,as reduced access to derivatives for all participants in turn puts pressure on the ability to move physical commodities.Further headwinds include continued geopolitical turbulence and a more challenging macroeconomic outlook in many of our key markets.Nonetheless,we continue to expect robust profitability and strong business performance in the second half of our 2022 financial year.Zinc at Nyrstars smelting plant in Budel,the Netherlands.Trafigura Interim Report 20227Marketplace review A turbulent and volatile time for the global economyAs our fiscal year began in October 2021,most COVID19 restrictions were being eased,and it looked like the world would begin reopening fully,allowing the global economy to return to a modest but sustainable growth path.Instead,the global economy has suffered multiple shocks starting with a gas crisis in Europe shortly after the beginning of our fiscal year.This was quickly followed by the outbreak of the Omicron variant of COVID19,the spread of which led to large parts of Chinas economy going into lockdown,exacerbating the supply chain issues and weighing on commodities demand.And then,the end of February saw the largest shock of all,the Russian invasion of Ukraine,which has disrupted energy and food flows to degrees that are coming in to clear focus,with significant upward pressure on prices and downward pressure on growth only expected to increase further.In no small part due to these disruptions,inflation has reached levels not seen for 40 years in most regions.This is leading central banks around the world to tighten monetary policy more rapidly and more aggressively than expected only a few months ago.The result has been the strongest US dollar in 20 years,a surge fuelled by fears that disrupted Russian energy flows would lead to price spikes and lack of availability of supply in Europe would cause recession.The stronger USD,combined with higher interest rates globally,has been another headwind for the global economy,particularly for emerging markets.The supply disruption from Russia and the demand disruption from China have affected our key markets differently.Base metals prices moved upwards initially,reaching alltime highs in some instances,and in the case of London Metal Exchange nickel prices,threatening to upend markets entirely.However,subsequently,prices have faltered as the impact of developments in China outweighed that of those in Russia.The pace of postlockdown recovery in China will be a critical factor in determining how metals markets perform in the second half of our fiscal year.In energy markets,however,it has been a different story,as global demand has continued to grow strongly despite the drop in China,while supplies have been constrained,as a result of a lack of capacity due to underinvestment or by sanctions(Iran,Russia,Venezuela).In both energy and metals markets,inventories are extraordinarily low by historical standards and will struggle to meet any sustained rebound in demand.Saad RahimChief Economist 8Marketplace reviewEnergy marketsEven before the Russian invasion of Ukraine disrupted global energy flows,energy markets were facing challenging supply and demand dynamics.For gas markets,Europe entered the winter months with storage at very low levels,while low hydropower reserves and constrained coal output in China,combined with a strong sequential yearonyear increase in power demand,meant that Asia,and particularly China,paid recordhigh prices to attract record amounts of liquefied natural gas(LNG).In Europe,already low gas stocks depleted by lower injection into storage from Russia following lower exports in the summer months were called upon earlier and to a greater extent than expected,due to low wind power output and reduced production in the Netherlands and Norway which reduced domestic supply.On top of those temporary issues,the decline of coalfired capacity,amounting to an over 40 percent reduction in the last five years,and reduced nuclear capacity,are structural trends that exacerbated the situation.As a result,price pressures in European natural gas markets started to build through August and September,including periods of extreme intraday volatility.At the start of our fiscal year in October saw prices spike sharply upwards,increasing 78 percent(intraday peak)in just four trading days.At their peak,prices were about six times their normal average(EUR120/MWh vs.EUR20/MWh).The problem persisted through most of the European winter as Gazpromowned storage in Europe was effectively empty.Prices spiked again in December,rising 85 percent in just seven days to make an alltime intraday high of EUR185/MWh.A spell of warmer than normal weather from late December through January brought muchneeded respite that allowed a path out of winter without reaching critical storage levels.At the same time,Chinas rampup of coal production and usage freed up LNG imports into Europe.Prices spiked again in the immediate wake of Russias invasion of Ukraine;this time more than tripling from EUR105/MWh to EUR335/MWh between the invasion on 24 February and 7 March.Since then,despite some minor disruptions,Russian flows to Europe have remained largely intact.This is despite some countries being cut off from gas due to noncompliance with Russias condition that gas imports must be paid for in Roubles.In the meantime,Europe has significantly increased LNG imports from the US,Middle East and elsewhere.This is in no small part due to the fact that high prices have led to a curtailment of pricesensitive imports into India and China,enabling those volumes to flow to Europe instead.Increased supplies and seasonal reductions in demand have allowed inventories to build,and have led European benchmark TTF prices to return to preinvasion albeit still historically high levels.Oil markets began our financial year in relatively sedate fashion trading between USD80USD85 per barrel for most of October and November.However,that was before Omicron hit,with the news of a significantly more transmissible variant in South Africa breaking the day after the Thanksgiving holiday in the United States,when market liquidity is substantially lower than normal,exacerbating the sharp selloff.Prices tumbled by almost USD10 per barrel in one day,in total collapsing about USD20 per barrel(21 percent)between 24 November and 2 December.Initial concerns about the virulence of Omicron kept oil markets under pressure throughout December,but once it became clear by the start of 2022 that the global economy was not returning to widespread lockdowns,the constrained supply situation became increasingly in focus,with crude oil inventories(excludingChina)at extremely low levels compared with both the fiveyear average and range.For example,in the United States,crude inventories began 2022 at some 40 million barrels below the normal fiveyear level.Selected commodity prices indexed from 1 October 2021Source:Bloomberg,Trafigura ResearchBrentGasolineDieselAluminiumZincCopper128.7141.4155.1120.8145.5113.4701109013015017019021022020018016014012010080October 21November 21December 201January 22February 22March 22BrentGasolineDieselAluminiumZincCopperTrafigura Interim Report 20229While prices would usually rise to incentivise increased output in the US and OPEC ,this time US shale producers have exercised significant capital discipline as pressure from shareholders to prioritise cash returns rather than new capital expenditure has significantly slowed US production growth.As at publication of this report,US production levels had recovered from their postCOVID19 level of approximately 11.0 million barrels per day,reaching back up to 11.9 million barrels per day,but this remains well below the 13.2 million barrels per day level the US was producing at just before the pandemic.Even this recovery has in large part been made possible by the industry drawing down its inventory of halfcompleted wells and by highgrading to focus primarily on the most productive acreage.To highlight the challenge,since the end of 2020,US rig count has increased by 115 percent but US production has increased only by eight percent indicating the need for significant further spending in order to raise production levels back to prepandemic levels.OPEC members(including Russia preinvasion of Ukraine),have nominally been adding about 400,000 barrels per day of production back in to the market each month since last summer,gradually reversing the cuts they had enacted in April 2020.However,due to years of underinvestment and also occasional political flareups in places such as Libya,the group has actually only been adding about half of their agreed amount per month.As such,preinvasion,the group was underproducing its collective quota by at least one million barrels per day.The fact that they were doing so despite high prices(prices at the start of February 2022 were 60 percent higher than a year ago),and despite increasing pressure from oil consumer nations,the United States,the European Union and others,indicates that most countries were already producing at their maximum sustainable capacity well before the invasion.Indeed,it seems that,at the time of writing only Saudi Arabia,Iraq and the United Arab Emirates have meaningful capacity to increase.However,to keep adding barrels from here will mean going well below the critical threshold of two million barrels per day of global spare capacity.Should this happen,any unforeseen disruption would lead to a rapid tightening of oil markets.On the day of Russias invasion of Ukraine,oil prices broke the USD100 per barrel level for the first time since 2014 and reached one of the highest levels ever at USD139 per barrel in early trading on 7 March.Since this date,oil prices have been very volatile,falling over 30 percent in just seven days from their peak,rebounding 30 percent in six days,and then trading in a range of USD100 to USD115 per barrel.The volatility,not just in oil but gas,food products,freight and base metals,is the direct result of Russia being one of the largest commodity producers in the world any disruption in export flows has further tightened markets that were already,in most cases,very tight or in substantial deficit to begin with.So far,outside of food and fertiliser,exports have witnessed less severe disruption than expected,as measures restricting Russian flows of oil have only recently started to come into force.As those measures and other countries restrictions take effect,Russian authorities are now indicating that oil production is likely to drop by over 15 percent this year,impacting global supplies of both crude oil and refined products such as gasoline and diesel.Meeting increasingly tight supply and increasingly high demand in coming months presents a significant challenge.At some point,higher energy prices will start to mitigate demand growth,particularly as inflation is widespread across spending categories.Governments around the world are choosing to cushion demand as much as possible for the time being,via subsidies and tax cuts,so the full impact of higher prices may not be felt for some time yet.Diesel inventories versus 5-year range and 5-year averageSource:US Department of Energy100,000110,000120,000130,000140,000150,000160,000170,000180,000190,000JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecemberDistillate inventories(Last Price)High 2017-2021152,029135,288122,428106,392Average 2017-2021Low 2017-2021US distillate stocks10Marketplace reviewMetals marketsWhile Russia is an important producer of many metals,both in terms of widelyused base metals(aluminium,nickel,copper)and more specialised metals(titanium,palladium),the impact of the war in Ukraine has not been as significant as it has been in the energy markets.The impact of COVID19 in China has had a far greater impact over the period in review.Even beyond China,macroeconomic drivers have affected prices the most,acting as a headwind as microlevel inventory balances for most metals remain historically tight.In general,metals have recovered faster from the initial impact of the pandemic than other markets primarily because the shutdown in China was relatively shortlived compared with other regions.That situation has,of course,reversed in recent months as China began to struggle with the outbreak of Omicron.For copper markets,the start of our fiscal year in October coincided with rising awareness that inventories were historically very low in the face of robust demand as the world economy tried to replenish low stocks of everything from cars and houses to durable goods,all of which are metals intensive.This tightness was further exacerbated by rapidly expanding demand from the energy transition,in particular for electric vehicles and renewable power generation.In October alone,LME inventories drew by 86,000 tonnes,a 43 percent drop in available stocks.The combination of lack of available supply and strong demand led to LME prices reaching their secondhighest level of USD10,452 per tonne.Even more tellingly,the spread between the first and second contract months spiked sharply upwards,rising to a record level of USD1,086 per tonne(for context,the longterm average is basically just above flat).That severe backwardation,when current month prices are higher than future ones,was a clear indicator that inventories were extremely tight,and that the market wanted as much material out into the physical market as possible.The contraction in stocks continued through November,reaching the lowest levels recorded since 2005.Backwardation reduced from the October highs,but nonetheless remained very high by historical standards,between USD200USD400 per tonne.Which in turn meant that material was delivered into the LME system,pausing the oneway trajectory of stocks before inventories started to rise again as the West and then China went into their respective holiday(and therefore slower activity)seasons.The seasonal slowdown was compounded by the emergence of Omicron,raising fears of another round of global lockdowns,as well as a flight to safety in financial markets.This was clear from the fall in yields as investors flocked to the safety of US Treasury(USTs)securities,with the yield on the 10year UST falling rapidly from 1.7 percent to 1.3 percent.On top of this,China had been enacting measures to address the growing indebtedness of the property sector,and as such real estate activity started to contract significantly.Copper front spreadSource:LME and Bloomberg-20002004006008001,0001,200June2021July2021August2021September2021October2021November2021December2021January2022February2022March2022April2022May20222.01,103.5$/tonneTrafigura Interim Report 202211Nevertheless,the tightening micro picture led to a slow grind higher in prices,reaching a preinvasion peak of just under USD10,300 per tonne.The Russian invasion then caused a further spike to an alltime high of USD10,845 per tonne as concerns over possible supply disruptions grew.Other metals followed a similar pattern.Zinc prices rose in October to a high of nearly USD4,000 per tonne,levels last reached just before the 2008 financial crisis.Zinc inventories had been drawing in a nearcontinuous fashion since 2012(late 2015 being the exception),hitting a low in early 2020 before starting to climb through the rest of the year and into 2021 as the auto sector slumped due to supply chain issues.But from October 2021,inventories started to fall again as demand picked up and supply remained constrained.Although mine supply did expand in 2021,those expansions have only just managed to bring global supply back to the same level as 2015,while demand grew by over 0.6 percent annually on average over the same period.Aluminium inventories started 2022 well below their fiveyear range,and about 500,000 tonnes below their fiveyear average,despite substantial builds during the early stages of the pandemic and again in mid2021.Although auto demand was a drag,consumer demand and construction kept overall demand very strong outside of China,resulting in recordhigh premiums for material delivered into the US and Europe.Here too capacity growth is constrained,as China had been the only region globally that has added any meaningful smelting capacity since 2008 but has now placed a hard cap on growth in smelters.Aluminium and zinc prices followed a similar pattern,to each other and to copper:higher in October,in all three cases reaching close to record highs,before retracing into the end of the calendar year and then starting to move higher as 2022 began,mainly on optimism that COVID19 was finally behind us.Nickel prices followed a similar path initially as well,although they remained well below the previous record high(over USD50,000 per tonne)for the most part.However,once the Russian invasion of Ukraine occurred,prices of all metals spiked to alltime highs:Aluminium hit close to USD4,100 per tonne,copper to USD10,845 per tonne,zinc to just under USD4,900 per tonne.Nickel was the metal that really surprised markets as prices rose 60 percent in a single day,and then a further 100 percent the next day.The speed and magnitude of the move meant that many market participants faced significant margin calls,which further exacerbated the volatility.Eventually,the LME cancelled trades made on the second day of the spike to restore an orderly market:a consequence has been that the paper market for nickel has until very recently been stuck in limbo as price discovery has been hampered due to the small volumes being traded.The sharp move higher in metals prices in early March was driven by fears that exports from Russia would be disrupted,further tightening alreadyconstrained markets.In the event,not much supply has been disrupted so far;but thanks to the emergence of Omicron,China has had to undergo the most serious lockdowns since the early days of the pandemic.After significantly impacting Hong Kong,the spread of the virus on the mainland has led to an extended lockdown in Shanghai,and in many other provinces and areas.The result overall has been a sharp shock to economic growth,in some ways more severe than the initial 2020 outbreak.Property in particular continues to be hit hard,with slumping sales and construction activity,in turn dragging on metals consumption.Furthermore,Shanghai and Jilin,one of the other provinces hit hardest,together produce some 2225 percent of Chinas cars,so the shutting down of manufacturing facilities in those areas has led to another curtailment of auto production,exacerbating the ongoing issues in that sector globally and weakening metals demand.As such,metals prices(excluding nickel)have been trading some 1530 percent off the highs as the market waits for Chinas next steps in terms of reopening.Chinas strategy has shifted to vastly expanding testing capacity in order to be able to move to more rapid but more targeted lockdowns.This approach appears to be paying dividends outside of Shanghai,allowing areas such as Shenzhen and others to open back up after a short,sharp lockdown.However,cases in Shanghai and Beijing remained elevated,slowing their full reopenings,although at the time of writing,indications are of an improving situation.In the meantime,China has reversed many of the policies it had put in place last year,designed to prevent certain sectors of the economy from taking on too much debt or overheating,and also to bring costs of living down in order to foster demographic growth.In addition,the government has undertaken major stimulus efforts,lowering interest rates,encouraging lending,cutting taxes,targeting consumption growth,and boosting infrastructure spending.So far,given the ongoing lockdowns,these measures have failed to kickstart growth.The expectation,however,is that once the economy is substantively reopened,these measures,totalling some USD5.5 trillion,will lead to a strong second half of the calendar year.A resurgent China might be good for global economic growth,but given that commodity inventories are already extremely,and in some cases unprecedently,low,it remains to be seen how prices might react from here.Inflation is already problematically elevated,but Chinese demand for commodity imports could further spur inflationary pressures.12Marketplace reviewUnaudited interim consolidated financial statementsFor the sixmonth period ended 31 March 2022ContentsInterim consolidated statement of income 14Supplementary statement of income information 14Interim consolidated statement of other comprehensive income 15Interim consolidated statement of financial position 16Interim consolidated statement of changes in equity 17Interim consolidated statement of cash flows 18Notes to the interim consolidated financial statements 1913Trafigura Interim Report 2022Interim consolidated statement of income For the sixmonth period ended 31 March 2022Note20222021USDMUSDMRevenue4170,609.1 98,389.2 Materials,transportation and storage(164,191.0)(93,182.2)Employee benefits32(829.7)(919.9)Services and other(940.4)(628.4)Operating profit or(loss)before depreciation and amortisation44,648.0 3,658.7 Depreciation(rightofuse assets)13(582.7)(525.6)Depreciation and amortisation(PP&E and intangible fixed assets)11/12(286.2)(176.4)Impairments(fixed assets)7(0.9)(76.3)(Reversal of)Impairments(financial assets and prepayments)719.4(1.3)Operating profit or(loss)3,797.6 2,879.1 Share of profit/(loss)of equityaccounted investees823.4(25.3)Disposal results and impairments of equityaccounted investees8(17.6)(0.3)Income/(expenses)from investments8(2.0)52.4 Result from equity-accounted investees and investments3.8 26.8 Finance income216.2 201.4 Finance expense(905.5)(602.3)Result from financing activities(689.3)(400.9)Profit before tax 3,112.1 2,505.0 Income tax9(452.7)(410.4)Profit for the period2,659.4 2,094.6 Profit attributable to:Owners of the Company2,654.3 2,093.2 Noncontrolling interests5.1 1.4 Profit for the period2,659.4 2,094.6 See accompanying notes.Note20222021Reconciliation to underlying EBITDAUSDMUSDMOperating profit or(loss)before depreciation and amortisation44,648.0 3,658.7 Adjustments1064.6 70.2 Underlying EBITDA104,712.6 3,728.9 See accompanying notes.Supplementary statement of income information For the sixmonth period ended 31 March 2022Financial statements14Interim consolidated statement of other comprehensive income For the sixmonth period ended 31 March 2022Note20222021USDMUSDMProfit for the period2,659.42,094.6Other comprehensive incomeItems that are or may be reclassified to profit or loss:Gain/(loss)on cash flow hedges30108.9(56.6)Effect from hyperinflation adjustment6.89.6 Tax on other comprehensive income(42.8)16.2Exchange gain/(loss)on translation of foreign operations11.655.4Share of comprehensive income/(loss)from associates(1.4)(6.2)Items that will not be reclassified to profit or loss:Net change in fair value through other comprehensive income,net of tax(0.2)(11.4)Defined benefit plan actuarial gains/(losses),net of tax(1.9)(0.3)Other comprehensive income for the period,net of tax 81.06.7Total comprehensive income for the period2,740.42,101.3Total comprehensive income attributable to:Owners of the Company2,734.22,099.9Noncontrolling interests6.21.4Total comprehensive income for the period2,740.42,101.3See accompanying notes.Trafigura Interim Report 202215Interim consolidated statement of financial position As at 31 March 2022Note 31 March 2022 30 September 2021 USDMUSDM AssetsProperty,plant and equipment114,828.94,828.6Intangible assets121,652.41,679.0Rightofuse assets133,068.62,408.1Equityaccounted investees14900.0843.6Prepayments151,691.11,804.6 Loans receivable15390.6362.4Other investments15 716.31,586.8Derivatives30531.0331.8Deferred tax assets297.2265.7Other noncurrent assets162,220.2903.6Total non-current assets16,296.315,014.2Inventories1730,050.329,653.5Trade and other receivables1836,543.024,748.1Derivatives30 4,336.6 2,610.3Prepayments152,008.21,736.8Income tax receivable173.0143.7Other current assets203,715.32,486.0Deposits21699.0460.0Cash and cash equivalents2110,287.610,677.5Total current assets87,813.072,515.9Assets classified as held for sale221,676.22,535.6Total assets105,785.590,065.7Note 31 March 2022 30 September 2021 USDMUSDM Equity Share capital231,503.71,503.7Capital securities23684.71,173.9Reserves23(214.6)(289.5)Retained earnings2310,578.07,914.8Equity attributable to the owners of the Company12,551.810,302.9Noncontrolling interests152.0257.0Total group equity12,703.810,559.9LiabilitiesLoans and borrowings2411,050.210,911.2Longterm lease liabilities132,139.71,646.9Derivatives30948.5804.3Provisions453.2449.9Other noncurrent liabilities561.3551.8Deferred tax liabilities447.3393.7Total non-current liabilities15,600.214,757.8Loans and borrowings2438,474.234,269.8Shortterm lease liabilities131,045.7 925.4Trade and other payables 2529,095.622,690.0Current tax liabilities823.8648.0Other current liabilities261,323.8 1,430.1Derivatives306,348.04,323.2Total current liabilities77,111.164,286.5Liabilities classified as held for sale22370.4461.5Total group equity and liabilities105,785.590,065.7See accompanying notes.Financial statements16Interim consolidated statement of changes in equity For the sixmonth period ended 31 March 2022 Equity attributable to the owners of the CompanyUSD000NoteShare capitalCurrency translation reserveRevaluation reserveCash flow hedge reserveCapital securitiesRetained earningsProfit for the yearTotalNoncontrolling interestsTotal Group equityBalance at 1 October 20211,503,722(79,388)(34,899)(175,168)1,173,8644,814,7693,100,00010,302,900256,93910,559,839Profit for the year2,654,3242,654,3245,0932,659,417Other comprehensive income6,782(173)68,2614,99879,8681,10980,977Total comprehensive income for the year6,782(173)68,2614,9982,654,3242,734,1926,2022,740,394Profit appropriation3,100,000(3,100,000)Dividend23(12,138)(12,138)Acquisition of noncontrolling interest in subsidiary5(32,435)(32,435)(32,906)(65,341)Sharebased payments3264,59664,59664,596Repayment of capital securities23(479,179)(479,179)(479,179)Capital securities(currency translation)23(12,328)12,328Capital securities dividend23(40,482)(40,482)(40,482)Divestment and deconsolidation of subsidiary(66,096)(66,096)Other2,387(174)2,2132,213Balance at 31 March 20221,503,722(72,606)(35,072)(106,907)684,7447,923,6002,654,32412,551,805152,00112,703,806Equity attributable to the owners of the CompanyUSD000NoteShare capitalCurrency translation reserveRevaluation reserveCash flow hedge reserveCapital SecuritiesRetained earningsProfit forthe yearTotalNoncontrolling interestsTotal Group equityBalance at 1 October 20201,503,722(822,640)(63,329)(79,442)1,097,6924,224,2021,699,1397,559,344230,6427,789,986Profit for the year2,093,221 2,093,2211,4472,094,668Other comprehensive income59,458(11,389)(50,738)9,3786,7096,709Total comprehensive income for the year59,458(11,389)(50,738)9,3782,093,2212,099,9301,4472,101,377Profit appropriation1,699,139(1,699,139)Dividend23(13,000)(13,000)(13,000)Recycling revaluation reserve to retained earnings FVOCI instruments43,482(43,482)Sharebased payments3269,85869,85869,858Reclassification(12,799)12,799Capital securities(currency translation)23657(657)Capital securities dividend23(39,430)(39,430)(39,430)Share of other changes in equity of associates(13,871)(13,871)(13,871)Other(1,265)2,063(2,063)(1,265)(1,265)Balance at 31 March 20211,503,722(775,981)(32,501)(130,180)1,100,4125,902,8732,093,221 9,661,566232,0899,893,655See accompanying notes.Trafigura Interim Report 202217Interim consolidated statement of cash flows For the sixmonth period ended 31 March 2022Note20222021USDMUSDMCash flows from operating activitiesProfit before tax3,112.1 2,505.0 Adjustments for:Depreciation and amortisation11/12/13868.9702.0Impairments(included in operating profit or loss)7(18.5)77.6Result from equityaccounted investees and investments8(3.8)(26.8)Result from financing activities689.3400.9Equitysettled sharebased payment transactions3264.670.2Provisions3.81.2(Gain)/loss on sale of fixed assets(included in Services and Other)(39.2)(8.3)Operating cash flows before working capital changes4,677.23,721.8Changes in:Inventories17(396.6)(7,639.9)Trade and other receivables and derivatives18(17,314.6)(10,062.9)Prepayments15(170.4)3.3Trade and other payables and derivatives2510,186.09,408.6Cash generated from/(used in)operating activities(3,018.4)(4,569.1)Interest paid(893.7)(523.6)Interest received190.4181.5Dividends(paid)/received14.283.8Tax(paid)/received(292.7)(289.0)Net cash flows from/(used in)operating activities(4,000.2)(5,116.4)Cash flows from investing activitiesAcquisition of property,plant and equipment11(551.8)(187.8)Proceeds from sale of property,plant and equipment11363.230.9Disposal of assets/liabilities held for sale22609.5Acquisition of intangible assets12(36.4)(26.2)Acquisition of equityaccounted investees14(24.0)(39.6)Disposal of equityaccounted investees18709.60.7Loans receivable and advances granted(6.2)(73.1)Repayment of loans receivable and advances granted5.80.5Acquisition of other investments(0.4)(1,927.9)Disposal of other investments10.81.0Acquisition of subsidiaries,net of cash acquired5(600.0)Net cash flows from/(used in)investing activities480.1(2,221.5)Cash flows from financing activitiesPayment of capital securities dividend(34.7)(35.5)Repayment of capital securities(479.2)Increase in longterm loans and borrowings1,742.37,446.4(Decrease)in longterm loans and borrowings(123.5)(5,171.1)Net payment of leases13(579.9)(499.4)Net increase/(decrease)in shortterm bank financing2,605.26,673.9Net cash flows from/(used in)financing activities3,130.28,414.3Net increase/(decrease)in cash and cash equivalents(389.9)1,076.4Cash and cash equivalents at start of the period10,677.55,757.0Cash and cash equivalents at end of the period10,287.66,833.4See accompanying notes.Financial statements181.Corporate informationThe principal business activities of Trafigura Group Pte.Ltd.(Trafigura or the Company)and together with its subsidiaries(the Group)are trading in crude and petroleum products,power and renewables,nonferrous concentrates,refined metals and bulk commodities such as coal and iron ore.The Group also invests in assets,including through investments in associates,which have strong synergies with its core trading activities.These include storage terminals,service stations,metal warehouses,industrial facilities and mines.The Company is incorporated in Singapore and its principal business office is at 10 Collyer Quay,Ocean Financial Centre,#2901/05,Singapore,049315.The Companys immediate holding company is Trafigura Beheer B.V.,a company incorporated in the Netherlands.Trafigura Beheer B.V.is ultimately controlled by Farringford Foundation,which is established under the laws of Panama.The interim consolidated financial statements for the sixmonth period ended 31 March 2022 were authorised for issue by the Board of Directors on 10 June 2022.2.Basis of preparation2.1 Statement of complianceThe Companys interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards(IFRS)as issued by the International Accounting Standards Board(IASB).The interim consolidated financial statements have not been audited.2.2 Basis of measurementThe interim consolidated financial statements have been prepared under the historical cost convention except for inventories,derivatives and certain other financial instruments that have been measured at fair value.The consolidated financial statements have been prepared on a goingconcern basis.2.3 Functional and presentation currency The Groups presentation currency is the US dollar(USD)and all values are rounded to the nearest tenth of a million(USDM 0.1)unless otherwise indicated.The US dollar is the functional currency of most of the Groups principal operating subsidiaries.Most of the markets in which the Group is involved are USD denominated.2.4 Accounting policies The interim consolidated financial statements for the first half of the 2022 financial year follow the same accounting policies the Groups consolidated financial statements for the financial year ended 30 September 2021,except for any new,amended or revised accounting standard and interpretations endorsed by the IASB,effective for the accounting period beginning on 1 October 2021.Any new or amended standards and interpretations that may impact Trafigura are presented in the next section.These interim financial statements contain selected accounting policies and should therefore be read in conjunction with the Groups consolidated financial statements for the financial year ended 30 September 2021.Notes to the interim consolidated financial statements Trafigura Interim Report 2022192.5 Key accounting estimates and judgementsPreparing the interim consolidated financial statements in compliance with IFRS requires management to make judgements,estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements,and the reported amounts of revenues and expenses during the reporting period.Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances,and are used to judge the carrying amount of assets and liabilities that are not readily apparent from other sources.Actual outcomes could differ from these estimates.Existing circumstances and assumptions about future developments,however,may change as a result of market changes or circumstances arising beyond the control of the Group.Such changes are reflected in the assumptions when they occur.For the areas the Group identified as being critical to understanding its financial position,reference is made to the 2021 annual report.2.6 Going concernTrafigura assessed the goingconcern assumptions,during the preparation of the Groups consolidated financial statements.The Group believes that no events or conditions,including those related to the current COVID19 pandemic and the Ukraine war,give rise to doubt about the ability of the Group to continue to operate in the next reporting period.This conclusion is drawn based on the knowledge of the Group,the estimated economic outlook and identified risks and uncertainties in relation thereto.Furthermore,this conclusion is based on review of the current cash balance and expected developments in liquidity and capital.The Group has sufficient cash and headroom in its credit facilities.Therefore,it expects that it will be able to meet contractual and expected maturities and covenants.Consequently,it has been concluded that it is reasonable to apply the goingconcern concept as the underlying assumption for the financial statements.Notes to the interim consolidated financial statements Restatements for first half of the 2021 financial yearAs from financial yearend 2021 onwards the Group has changed the presentation of the Consolidated Statement of Income from a classification based on the function of expense to a classification based on the nature of expense in order to provide a clearer analysis of the Groups financial performance.The income statement and notes on the comparison period have been restated accordingly.In addition,the Group has reclassified its bank charges and other financial expenses,such as L/C charges,from services and other to result from financing activities.The income statement and notes on the comparison period have been restated accordingly.The reclassifications for the first half of the 2021 financial year amounted to USD66.6 million.Reconciliation from presentation based on a byfunction classification to presentation based on a bynature classification for the comparative period.The first half of the 2021 financial year,can be summarised as follows:RevenueCost of salesGeneral and administrative expensesImpairments of PP&E and intangible fixed assetsImpairments of financial assets and prepaymentsImpairments of equityaccounted investeesOther income/(expenses)netShare of profit/(loss)of equityaccounted investeesFinance incomeFinance expenseIncome tax expenseProfit for the periodFirst half of financial year 2021USDMUSDMUSDMUSDMUSDMUSDMUSDMUSDMUSDMUSDMUSDMUSDMRevenue98,369.220.098,389.2Materials,transportation and storage(92,136.7)(1,045.5)(93,182.2)Employee benefits(212.9)(707.0)(919.9)Services and other(1,651.4)987.335.7(628.4)Depreciation(rightofuse assets)(525.6)(525.6)Depreciation and amortisation(PP&E and intangible fixed assets)(103.8)(72.6)(176.4)Impairments(PP&E and intangible fixed assets)(76.3)(76.3)Impairments(financial assets and prepayments)57.1(58.4)(1.3)Share of profit/(loss)of equityaccounted investees(25.3)(25.3)Impairments on and disposal results of equityaccounted investees(0.2)(0.1)(0.3)Income/(expenses)from investments52.452.4Finance income201.4201.4Finance expense(66.5)(0.1)(535.7)(602.3)Income tax(410.4)(410.4)Profit for the period98,369.2(94,094.2)(1,363.5)(76.3)(58.4)(0.2)88.0(25.3)201.4(535.7)(410.4)2,094.6Financial statements203.Adoption of new and revised standards3.1 New and amended standards or interpretations adoptedIn the current period,the Group adopted the following new and amended standards or interpretations:Standard/InterpretationName of standard/interpretation or amendmentsDate of publicationExpected date of initial application(financial years starting as of)Amendments to IFRS 3Business Combinations27 August 202013 January 2021Amendments to IAS 39Financial Instruments:Recognition and Measurement27 August 202013 January 2021Amendments to IFRS 7Financial Instruments:Disclosures27 August 202013 January 2021Amendments to IFRS 4Insurance contracts27 August 2020 13 January 2021Amendments to IFRS 16Leases(Interest Rate Benchmark Reform Phase 2)27 August 202013 January 2021The amendments shown in the table had no material effect on the interim consolidated financial statements.3.2 New standard and interpretations not yet adoptedCertain new accounting standards and interpretations have been published that are not mandatory for the 2022 financial year reporting periods and have not been early adopted by the Group:Standard/InterpretationName of standard/interpretation or amendmentsDate of publicationExpected date of initial application(financial years starting as of)Amendments to IFRS 3Business Combinations(Amendment to References to the Conceptual Framework)14 May 20201 January 2022Amendments to IAS 16Property,Plant and Equipment(Proceeds before Intended Use)14 May 20201 January 2022Amendments to IAS 37Provisions,Contingent Liabilities and Contingent Assets(Onerous Contracts,Settlement Costs from Contracts)14 May 20201 January 2022Annual improvements to IFRS 20182020Amendments to:IFRS 1(Subsidiary as a FirstTime Adopter)IFRS 9(Fees in the“10%Test”Regarding Derecognition of Financial Liabilities)IFRS 16(Lease Incentives)IAS 41(Taxation in Fair Value Measurements)14 May 20201 January 2022Amendments to IFRS 17Insurance Contracts(including amendments to the standard)25 June 20201 January 2022Amendments to IAS 1Presentation of Financial Statements(Classification of Liabilities as Current or Noncurrent)(including Deferral of Effective Date)23 January 2020(15 July 2020)1 January 2022Amendments to IAS 1 and IFRS Practice Statement 2Presentation of Financial Statements and Making Materiality Judgements(Presentation of Key Accounting Policies)12 February 20211 January 2022Amendments to IAS 8Accounting Policies,Changes in Accounting Estimates and Errors(Definition of Changes in Accounting Policies and Accounting Estimates)12 February 20211 January 2022Amendments to IAS 12Income Taxes(Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction)7 May 20211 January 2022Trafigura currently assumes that the amendments shown in the table are unlikely to have a material impact on its reporting.4.Operating segmentsThe basis of the segmentation of the Company has not changed compared to the annual consolidated financial statements.EnergyMetals and MineralsCorporate and OtherTotal First half of financial year 2022 USDMUSDMUSDMUSDMSales revenue from external customers112,156.557,420.3169,576.8Service revenue from external customers746.6285.71,032.3Revenue112,903.1 57,706.0 170,609.1 Operating profit or(loss)before depreciation and amortisation2,888.81,778.7(19.5)4,648.0EnergyMetals and MineralsCorporate and OtherTotalFirst half of financial year 2021 USDMUSDMUSDMUSDMSales revenue from external customers58,106.3 39,753.6 97,859.9 Service revenue from external customers433.1 96.2 529.3 Revenue58,539.4 39,849.8 98,389.2 Operating profit or(loss)before depreciation and amortisation2,343.6 1,331.5(16.4)3,658.7 Trafigura Interim Report 2022215.Business combinations and non-controlling interests5.1 H1 FY2022Trafiguras share in Puma Energy increased to 96.7 percent as per 31 March 2022 as Cochan Holdings ceased to be a shareholder in Puma Energy in December 2021.The exit was undertaken in accordance with applicable laws and regulations.5.2 FY2021Acquisition of Puma EnergyOn 30 September 2021,through a series of linked transactions,the Group acquired control over Puma Energy Holdings Pte.Ltd.(Puma Energy),a nonlisted company incorporated in Singapore.On this date,the Group obtained a majority in Puma Energys Board of Directors.Following the conversion of debt into equity and purchase of shares from minority shareholders,the Groups shareholding increased from 55.5 percent as at 30 September 2020 to 72.8 percent as at 30 September 2021.Puma Energys main activities include ownership,operation and the management of storage and retail facilities for the sale and distribution of petroleum products.The Group acquired Puma Energy as part of a strategy to recapitalise and strengthen the business.One of the linked transactions,the acquisition of the Puma Energy shares held by Sonangol,was signed in conjunction with another transaction,through which Sonangol acquired Puma Energys business in Angola for a consideration of USD600.0 million.Completion of this transaction was dependent on the approval of Sonangols filing with antitrust authorities in Angola,which was received in the first quarter of the 2022 financial year.As the amount payable to Sonangol was fixed and management expected approval to be received in the first quarter of the 2022 financial year,the(economic)risk and rewards of Sonangols shares in Puma Energy economically increase the Groups share in Puma Energy to 93.4 percent as per 30 September 2021,and this has been accounted as such in the business combination.As at 31 March 2022,the net assets recognised with regard to the acquisition of Puma Energy are based on a provisional assessment of their fair values,while the Group continued to work with independent valuators on determining more precise values for the acquired tangible and intangible fixed assets,and continued to evaluate certain deferred tax positions.These procedures were not complete by the date that the interim consolidated financial statements were approved for issue by the Board of Directors.6.Deconsolidation of subsidiariesThere was no significant deconsolidation of subsidiaries and noncontrolling interest during the sixmonth period ended 31 March 2022,and the financial year ended 30 September 2021.7.Impairments20222021USDMUSDM(Reversal of)Impairments of property,plant and equipment(0.4)76.3Impairments of intangible assets1.3Impairments of fixed assets0.976.3(Reversal of)Impairments of financial assets(15.5)20.6(Reversal of)Impairments of prepayments(3.9)(19.3)(Reversal of)Impairments of financial assets and prepayments(19.4)1.3Total(reversal of)impairments included in operating profit or loss(18.5)77.6Impairments of equityaccounted investees0.20.2Impairments of equity-accounted investees0.20.2Total(Reversal of)impairments(18.3)77.87.1 H1 FY2022There were no significant impairments or reversals of impairments during the sixmonth period ended 31 March 2022.7.2 H1 FY20217.2.1 Impairments of fixed assets Property,plant and equipmentBurnside logistics export terminalOil and oil product demand destruction,largely a result of the COVID19 global pandemic,coupled with the continued suppression of coal export opportunities have limited nearterm opportunities for bulk export,resulting in a trigger to perform an impairment test for the Burnside logistics export terminal on the Mississippi River in Louisiana,US.The identifiable assets were combined into one CGU with independent cash flows to assess the potential impairment.The valueinuse calculation includes projections over the period from 2021 to and including 2025,and results in an estimated recoverable amount of USD36 million.Consequently,the related operational fixed assets were impaired by USD55 million.7.2.2 Impairments of financial assets and prepaymentsReference is made to this in Note 15.Notes to the interim consolidated financial statements Financial statements228.Result from equity-accounted investees and investments20222021USDMUSDMShare of profit/(loss)of equity-accounted investees23.4(25.3)Disposal result of equityaccounted investees(17.4)(0.1)Impairments of equityaccounted investees(0.2)(0.2)Disposal results and impairments of equity-accounted investees(17.6)(0.3)Income/(expenses)from equity-accounted investees5.8(25.6)Gain/(loss)on fair value through profit and loss instruments2.450.3Gain/(loss)on divestment of subsidiaries(4.1)Dividend income(1.2)1.8Other0.90.3Income/(expenses)from investments(2.0)52.4Result from equity-accounted investees and investments3.826.88.1 H1 FY2022In September 2021,the Group sold its 50 percent stake in Minas de Aguas Tenidas SA(MATSA)to Sandfire Resources Limited for a total expected consideration of USD777.8 million.The sale was agreed in partnership with the Groups former jointventure partner,Mubadala Investment Company PJSC,which received the same corresponding consideration,making Sandfire Spain Holdings Limited the new sole owner of MATSA.In the first half of the 2022 financial year,an adjustment has been made to the contingent consideration,which was recorded under the disposal result of equityaccounted investees.8.2 H1 FY2021The gain on fair value through profit and loss instruments includes various fair value movements on other investments,including a USD22.2 million positive fair value movement of the debt securities related to the investment in Porto Sudeste.9.Income tax9.1 Tax expenseIncome tax expense recognised in the Consolidated Statement of Income consists of the following:20222021USDMUSDMCurrent income tax expense467.6397.9Adjustments in relation to current income tax of previous periods10.05.1Deferred tax expense/(income)(33.8)1.1Withholding tax in the current period8.96.3Total452.7410.410.Underlying EBITDA20222021USDMUSDMOperating profit or(loss)before depreciation and amortisation4,648.03,658.7AdjustmentsSharebased payments64.670.2Adjustments64.670.2Underlying EBITDA4,712.63,728.9As percentage of revenue2.8%3.8%Sharebased payments have been excluded as a result of their noncash nature.Accounting policyThe Group believes that the supplemental presentation of underlying EBITDA provides useful information on the Groups financial performance,its ability to service debt and to fund capital expenditures,and provides a helpful measure for comparing its operating performance with that of other companies.Underlying EBITDA,when used by Trafigura,means operating profit or loss before depreciation and amortisation excluding sharebased payments and other adjustments.In addition to sharebased payments,the adjustments made to arrive at underlying EBITDA are considered exceptional and/or nonoperational from a management perspective based on their size or nature.They can be either favourable or unfavourable.These items include for example:Significant restructuring costs and other associated costs arising from significant strategy changes that are not considered by the Group to be part of the normal operating costs of the business;Significant acquisition and similar costs related to business combinations such as transaction costs;Provisions that are considered to be exceptional and/or nonoperational in nature and/or size to the financial performance of the business;and Various legal settlements that are significant to the result of the Group.From time to time,it may be appropriate to disclose further items as exceptional or nonoperational items in order to reflect the underlying performance of the Group.Underlying EBITDA is not a defined term under IFRS and therefore may not be comparable with similarly titled profit measures and disclosures reported by other companies.It is not intended to be a substitute for or superior to GAAP measures.Trafigura Interim Report 20222311.Property,plant and equipmentUSDM Land and buildings Machinery and equipment Barges and vessels Mine property and development Other fixed assets Total CostBalance at 1 October 20212,594.52,839.5611.564.61,031.07,141.1Additions19.433.8275.78.0215.2552.1 Provisional purchase price allocation movements*(17.4)0.828.712.1Reclassifications(712.6)142.23.611.5530.9(24.4)Effect of movements in exchange rates,including hyperinflation adjustment(13.3)13.2(0.3)0.6(5.5)(5.3)Divestment of subsidiaries(31.7)(20.4)(9.2)(61.3)Disposals(47.5)(27.7)(282.8)(11.9)(369.9)Balance at 31 March 20221,791.42,981.4607.784.71,779.27,244.4Depreciation and impairment lossesBalance at 1 October 2021593.1 973.1295.4450.92,312.5 Depreciation37.7117.914.76.452.4229.1 Impairment losses0.1(0.6)0.1(0.4)Reclassifications(44.1)19.9(0.8)(5.7)(30.7)Effect of movements in exchange rates,including hyperinflation adjustment(7.6)(2.5)(0.3)0.1(0.2)(10.5)Divestment of subsidiaries(8.2)(8.4)(6.9)(23.5)Disposals(22.1)(24.9)(3.2)(10.8)(61.0)Balance at 31 March 2022548.9 1,074.5305.86.5479.82,415.5Net book value at 31 March 20221,242.51,906.9301.978.21,299.44,828.9*Movements are resulting from provisional remeasurements in relation to the purchase price allocation related to the acquisition of Puma Energy.Total additions for the period(USD552.1 million)mainly relate to investments in the Nyrstar industrial facilities(USD127.3 million),vessels(USD264.0 million),and various individual smaller projects.The investments in Nyrstar were made across its global operations,with the main investments relating to neglected maintenance that had occurred prior to acquisition and to sustaining capital investments to maintain the current asset base.The USD369.9 million disposals mainly relate to the sale of vessels,which were subsequently leased back for a period of between five and seven years.Included in the Other fixed assets category are assets under construction,which relates to assets not yet in use,and some Nyrstarrelated assets.Net book value as at 31 March 2022 amounted to USD432.6 million(30 September 2021:USD383.1 million).Once the assets under construction come into operation they are reclassified to the appropriate asset category and from that point they are depreciated.Depreciation is included in depreciation and amortisation.Impairment charges are separately disclosed in the Consolidated Statement of Income.Refer to note 7 for details on impairments.Notes to the interim consolidated financial statements Financial statements2412.Intangible fixed assetsUSDM Goodwill Licences Other intangible assets Total CostBalance at 1 October 20211,152.852.31,021.62,226.7Additions3.629.332.9Provisional purchase price allocation movements*(33.3)45.412.1Reclassifications(0.4)(4.5)(4.9)Effect of movements in exchange rates,including hyperinflation adjustment0.4(6.5)(6.1)Divestment of subsidiaries(0.1)(0.1)Disposals(0.2)(0.2)Balance at 31 March 20221,119.555.61,085.32,260.4Amortisation and impairment lossesBalance at 1 October 2021108.423.7415.6547.7Amortisation8.748.256.9Impairment losses1.3 1.3Effect of movements in exchange rates,including hyperinflation adjustment0.41.51.9Reclassifications(0.3)0.70.4Disposals(0.2)(0.2)Balance at 31 March 2022109.732.3466.0608.0Net book value at 31 March 20221,009.823.3619.31,652.4*Movements are resulting from provisional remeasurements in relation to the purchase price allocation related to the acquisition of Puma Energy.Additions in the sixmonth period ended 31 March 2022 amounted to USD32.9 million,mainly relating to investments in IT development.Trafigura Interim Report 20222513.LeasesThe Group leases various assets,including land and buildings,storage facilities,vessels and service stations.Leases are negotiated on an individual basis and contain a wide range of different terms and conditions,including termination and renewal rights.The Group,as a lessor,only has finance leases.The lease agreements do not impose any covenants,but leased assets may not be used as security for borrowing purposes.13.1 Right-of-use assets 20222021USDMUSDMFreight2,282.6 1,588.1 Storage148.0 114.3 Land and buildings303.2 338.6 Service stations164.9174.9Other169.9192.2Total undiscounted lease receivables3,068.6 2,408.1 USDMFreightStorageLand and buildingsService stationsOther Total Balance at 1 October 20211,588.1114.3338.6174.9192.22,408.1Additions/remeasurements1,446.956.55.98.129.41,546.8Reclassification to AHFS(0.1)(2.3)(22.7)(0.2)(25.3)Disposals(258.6)0.1(1.2)(0.1)(259.8)Depreciation(468.6)(22.8)(23.1)(15.9)(52.3)(582.7)Effect of movement in exchange rates2.32.9(0.3)(0.1)4.8Other(25.1)(0.1)2.8(1.8)0.9(23.3)Balance at 31 March 20222,282.6148.0303.2164.9169.93,068.6During the first half of FY2022,the Group entered into various new lease contracts for vessels for a total amount of USD1.4 billion.The disposals of USD258.6 million relate to vessels of which the lease was ended before the contract end date.The Other category mainly includes assets located in Corpus Christi,Texas,which enable transportation,storing,processing and vessel loading of crude oil and crude oil products.Notes to the interim consolidated financial statements Financial statements2613.2 Lease liabilitiesHY2022FY2021USDMUSDMOpening balance2,572.32,389.0Interest62.491.1Additions/remeasurements1,548.31,159.6Effect of business combination373.4Reclassification to AHFS(25.3)Disposals(273.4)(184.6)Payments(698.1)(1,253.0)Effect of movement in exchange rate1.5(0.8)Other(2.3)(2.4)Closing balance3,185.42,572.3Current1,045.7925.4Noncurrent2,139.71,646.9Closing balance3,185.42,572.3The following table sets out a maturity analysis of the lease liabilities at 31 March 2022 and 30 September 2021,indicating the undiscounted lease amounts to be paid.20222021USDMUSDMLess than one year1,162.31,033.7Later than one year and less than five years1,926.51,528.3Later than five years499.81,186.7Total undiscounted lease payable3,588.63,748.7Future finance costs(403.2)(1,176.4)Lease liabilities included in the statement of financial position3,185.42,572.314.Equity-accounted investeesHY2022FY2021USDMUSDMOpening balance 843.62,438.6Acquisition through business combination51.4Effect of movements in exchange rates(6.3)26.0Additions24.0155.5Disposals(5.9)(414.4)Impairments(0.2)(26.3)Share of net profit/(loss)23.4(110.8)Dividends received(13.4)(164.3)Effect of business combination(956.4)Reclassification to assets held for sale(141.0)Other34.8(14.7)Total900.0843.6Corporate guarantees in favour of associates and joint ventures as at 31 March 2022 amounted to USD160.4 million(30 September 2021:USD93.7 million).14.1 H1 FY2022Additions for the first half of the 2022 financial year consist of various small investments.14.2 FY2021The additions to equityaccounted investees amounted to USD155.5 million.In the financial year,the Group participated for its share in an equity contribution in Tendril Ventures Pte.Ltd.(Tendril Ventures)resulting in an additional investment(USD52.3 million).Other additions include investments in Sawtooth Caverns LLC(USD49.6 million),Liaoning Port(USD30.8 million)and various other investments.For the disposals of equityaccounted investees during the financial year ended 30 September 2021,such as Minas de Aguas Tenidas SA(MATSA),refer to note 8.The share of net loss from investments amounted to USD110.8 million.This is predominantly the result of losses in Puma Energy(USD165.9 million)and Porto Sudeste do Brasil(USD69.6 million),partly offset by USD108.2 million profits from MATSA,Atalaya Mining PLC,and Impala Terminals Group S.r.l.During FY2021,the Group received USD164.3 million in dividends from its investments in equityaccounted investees,which mainly related to MATSA(USD136.4 million)and Sawtooth Caverns LLC(USD24.3 million).Trafigura Interim Report 20222715.Prepayments and financial assets15.1 Prepayments20222021USDMUSDMCurrent2,008.2 1,736.8 Noncurrent1,691.1 1,804.6 Total3,699.3 3,541.4 Prepayments relate to prepayments of commodity deliveries and are split into noncurrent prepayments(due 1 year)and current prepayments(due 1 year).A significant portion of the noncurrent prepayments,as well as current prepayments,are either financed on a nonrecourse basis or insured.Under the prepayments category,the Group accounts for the prepayments of commodity deliveries.Of the total current prepayments balance,an amount of USD1.2 billion(30 September 2021:USD0.9 billion)relates to prepayments that are made for specifically identified cargos.The contractually outstanding prepayments amount decreases in size with each cargo that is delivered,until maturity.Once the contractually agreed total cargo has been fully delivered,the prepayment agreement falls away leaving no remaining contractual obligations on Trafigura or the supplier.The Group monitors the commodity prices in relation to the prepayment contracts and manages the credit risk together with its financial assets as described in note 29.A portion of the longterm prepayments,as well as shortterm prepayments,is on a limited recourse basis.Interest on the prepayments is added to the prepayment balance.The Group has calculated expected credit losses on the outstanding prepayments as from FY2020 onwards.The methodology of the expected credit loss calculation is similar to the methodology used in the expected credit loss calculations on loans receivable.Based on the individual analysis of the prepayments,the cumulated expected credit losses on these prepayments recorded by the Group amount to USD118.3 million(30 September 2021:USD124.1 million).The following table explains the movements of the expected credit loss between the beginning and the end of the reporting period and the gross carrying amounts of the prepayments by credit risk category.31 March 202230 September 2021PerformingUnderperformingTotalPerformingUnderperformingTotal12-months ECLLife-time ECL12months ECLLifetime ECLUSDMUSDMUSDMUSDMUSDMUSDMExpected credit loss(ECL)provisionOpening balance 1 October24.799.4124.140.3103.5143.8Transfer to underperforming(0.3)0.3ECL on prepayments recognised during the period1.211.612.80.421.622.0ECL on prepayments derecognised during the period(12.5)(12.5)(13.7)(25.6)(39.3)Changes in PD/LGD/EAD8.8(15.0)(6.2)(2.0)(0.4)(2.4)Closing balance34.783.5118.224.799.4124.1Carrying amountCurrent1,738.7269.52,008.21,434.5302.31,736.8Noncurrent546.11,145.01,691.1687.71,116.91,804.6Total2,284.81,414.53,699.32,122.21,419.23,541.4Notes to the interim consolidated financial statements Financial statements2815.2 Loans and other receivables20222021USDMUSDMLoans to associates and related parties68.362.9Other noncurrent loans receivable322.3299.5Total390.6362.4Loans to associates and related parties include a loan receivable to a Galena investment fund of USD40.3 million(30 September 2021:USD39.8 million).Other noncurrent loans receivables include various loans which are granted to counterparties which the Group trades with.This line also includes the debt agreement with the Angolan Ministry of Finance which relates to compensation for iron ore investments made by the Group following the liquidation of a consolidated Angolan subsidiary in 2016.In 2019,the original debt agreement has been renegotiated with a new redemption schedule in place.Over the years,as a result of the economic situation in Angola,with collapsing oil prices in 2020,a lack of liquidity and COVID19,it has not been possible for the Angolan Ministry of Finance to honour all of its obligations.The Angolan Ministry of Finance has made regular debt payments since October 2021.Based upon the individual analysis of these loans,the recorded expected credit losses on these loans amount to USD147.2 million(30 September 2021:USD136.6 million).The following table explains the movements of the expected credit loss between the beginning and the end of the reporting period and the gross carrying amounts of the loan receivables by credit risk category:31 March 202230 September 2021PerformingUnder-performingTotalPerformingUnderperformingTotal12-months ECLLife-time ECL12months ECLLifetime ECLUSDMUSDMUSDMUSDMUSDMUSDMExpected credit loss(ECL)provisionOpening balance 1 October2.4134.2136.64.6117.4122.0Transfer to underperforming(0.3)0.3ECL on new loans originated during the period0.70.7 1.41.4ECL on loans derecognised during the period(3.3)(3.0)(6.3)Changes in PD/LGD/EAD(0.1)10.110.019.519.5Closing balance at 30 September3.0144.3147.32.4134.2136.6Carrying amountCurrent18.7132.5151.2107.1166.0273.1Noncurrent109.6281.0390.688.3274.1362.4Total128.3413.5541.8195.4440.1635.515.3 Other investments20222021USDMUSDMListed equity securities Fair value through OCI2.82.7Listed equity securities Fair value through profit or loss63.368.7Listed debt securities Fair value through profit or loss253.7 277.3Unlisted equity investments Fair value through profit or loss154.4133.5Unlisted equity investments Fair value through OCI242.1242.4Other investments Fair value through profit or loss862.2Total716.31,586.8The Groups longterm investments consist of listed equity securities,listed debt securities and unlisted equity securities.The listed equity securities have no fixed maturity or coupon rate.The fair values of listed equity investments are based on quoted market prices,while the fair value of the unlisted equity securities is determined based on a Level 3 valuation as prepared by Management.The decrease in the listed debt securities was mainly caused by a sale of debt securities of USD10.6 million,and a negative adjustment to the value of the FPOR11 securities of USD14.6 million.The increase in the unlisted equity investments(fair value through profit or loss)has primarily resulted from a fair value gain on investments held in the Galena Multistrategy Fund.Trafigura Interim Report 20222915.3.1 Participatory equity interest in Vostok Oil LLC(10%)On 24 December 2020,the Group entered into a transaction consisting of an investment in a 100 percent owned structured entity(SE)that subsequently acquired a 10 percent participatory equity interest in Vostok Oil LLC from Rosneft,and other contractual agreements.Vostok Oil LLC is an oil and gas company incorporated in the Russian Federation.The SE is governed by an independent board of directors and as a result the Group does not have the ability to use its power to influence the variable returns from the SE.As a consequence,the SE is not consolidated in the Groups consolidated financial statements.The Group made an initial contribution of EUR1.5 billion of equity to the SE in cash.Additional debt funding was attracted by the SE to finance the acquisition of the 10 percent participatory equity interest in Vostok Oil LLC for a total consideration of EUR7.0 billion.The principal activity of the SE is that of a holding and trading company.The debt financing attracted by the SE is nonrecourse to the Group.The initial equity investment in the SE and the associated agreements are considered as a single unitofaccount and was classified under Other Investments on the Consolidated Statement of Financial Position in previous financial year.As the Group does not control the SE,the Other investment qualifies as a financial instrument classified as fair value through profit or loss.The main level 3 inputs used by the Group are derived as follows:Discount rate reflecting the Groups own capital structure and time value of money;Risk adjustment to factor in exposures relating to the counterparties,as well as the specific terms of the contractual agreements;Market volatility in oil price estimated based on the Groups knowledge of the business.The net value of the unit of account as at 31 March 2022 amounts to USD610.1 million negative(30 September 2021:USD862.2 million positive),and accounts for value of the investment and associated agreements.The negative fair value of the unitofaccount is presented under trade and other payables on the Consolidated Statement of Financial Position.Subsequent to 31 March 2022,the Group has terminated commercial agreements in the unit of account.The Group is reviewing its investment in the SE with the intention of divesting.Notes to the interim consolidated financial statements 16.Other non-current assets20222021USDMUSDMNonfinancial hedged items1,723.0605.6Restricted deposits357.1133.3Other140.1164.7Total2,220.2903.6For further information on the nonfinancial hedged items,refer to note 30.2.The restricted deposits mainly represent amounts placed on deposit accounts relating to repurchase agreements of crude oil and Puma Energy.17.Inventories20222021USDMUSDMStorage inventories18,858.918,126.5Floating inventories10,438.110,906.3Workinprogress inventories723.2592.2Supplies30.128.5Total30,050.329,653.5Trafigura policy provides that the inventory(except the item Supplies)has either been presold or hedged.Workinprogress inventories predominantly relate to intermediate processing inventories located at the Nyrstar smelters.Financial statements3018.Trade and other receivables20222021USDMUSDMTrade debtors14,613.811,917.9Provision for bad and doubtful debts(78.6)(110.9)Accrued turnover12,391.78,220.1Broker balances4,157.61,707.1Other debtors2,880.31,888.2Loans to third parties151.2273.1Other taxes575.5619.0Related parties1,851.5233.6Total36,543.024,748.1All financial instruments included in trade and other receivables are held to collect the contractual cash flows.Furthermore,the cash flows that the Group receives on these instruments are solely payments of principal and interest except for trade and other receivables related to contracts including provisional pricing features.The Group entered into a number of dedicated financing facilities,which finance a portion of its receivables.Part of these facilities meet the criteria of derecognition of the receivables according to IFRS.As at 31 March 2022,an amount of USD9,289.4 million(30 September 2021:USD7,690.6 million)of trade debtors has been discounted.Of this amount,USD7,457 million(30 September 2021:USD7,152.4 million)has been derecognised,as the Group has transferred substantially all the risks and rewards of ownership of the financial asset with nonrecourse.The remaining part of discounted receivables which does not meet the criteria for derecognition amounting to USD1,832.4 million(30 September 2021:USD538.2 million),continues to be recognised as trade debtors.For the received amount of cash of these items the Group has recognised a liability under current loans and borrowings.Of USD14,613.8 million trade debtors(30 September 2021:USD11,917.9 million),USD5,975.0 million had been sold on a non recourse basis under the receivables securitisation programmes(30 September 2021:USD5,069.6 million).Of the USD1,851.5 million receivables on related parties(30 September 2021:USD233.8 million),USD60.2 million had been sold on a nonrecourse basis under the receivables securitisation programmes(30 September 2021:USD103.8 million).Refer to Note 19.As at 31 March 2022,11.8 percent(30 September 2021:8.4%)of receivables were between 160 days overdue,and 4.8 percent(30 September 2021:5.4%)were greater than 60 days overdue.Trafigura applied the simplified method in assessing expected credit losses.The accounts receivables have been divided in aging buckets and based on an analysis on historical defaults and recovery rates,and considering forward looking information,a percentage for expected credit losses has been determined.Trafigura manages to limit credit losses by renegotiating contracts in the case of a default.From the above analysis,an expected credit loss as at 31 March 2022 amounting to USD4.2 million(30 September 2021:USD4.2 million)has been recorded.The loss allowance provision as at 31 March 2022 amounts to USD78.6 million(30 September 2021:USD110.9 million).The provision mostly relates to demurrage claims and commercial disputes with our clients.Accrued turnover represents receivable balances for sales which have not yet been invoiced.They have similar risks and characteristics as trade debtors.Trade debtors and accrued turnover have similar cash flow characteristics and are therefore considered to be a homogeneous group of financial assets.Total trade and other receivables related to contracts including provisional pricing features amount to USD12.6 billion(30 September 2021:USD8.0 billion).Other debtors mainly consist of swap margin payments of USD2.4 billion(30 September 2021:USD0.7 billion).The 30 September 2021 balance also included the amount due from Sandfire Resources Limited in relation to the sale of MATSA,which was fully received in the first half of the 2022 financial year.Trafigura Interim Report 20223119.Securitisation programmesThe Group operates various securitisation programmes:Trafigura Securitisation Finance plc.(TSF)and Argonaut Receivables Company S.A.(Argo)enable the Group to sell eligible receivables,and an inventory securitisation programme,through Trafigura Commodities Funding Pte.Ltd.(TCF),and Trafigura Global Commodities Funding Pte.Ltd.(TGCF),enables Trafigura to sell and repurchase eligible inventories.Those securitisation vehicles are consolidated and consequently the securitised receivables and inventories are included within the consolidated trade debtor and inventory balances.19.1 Receivables securitisationOver time the external funding of TSF has increased significantly in size,mostly through Variable Funding Notes(VFN)purchased by bank sponsored conduits,while incorporating a longerterm committed funding element,in the form of Medium Term Notes(MTN).Argonaut receivables was launched in May 2020 and is funded through shortterm VFN only.The available external funding of the receivables securitisation programmes consists of:20222021Interest rateMaturityUSDMUSDMTSF AAA MTNLibor 0.53 24 July139.5139.5TSF AAA MTN1.08 24 July139.5139.5TSF BBB MTN1.78 24 July21.021.0TSF AAA VFNSee noteVarious throughout the year4,798.34,170.6TSF BBB VFNSee noteVarious throughout the year361.2313.8Argonaut Receivables Securitisation2022 April300.0300.0TSF senior subordinated debt2023 March193.8119.1Total5,953.35,203.5As at 31 March 2022,the maximum available amount of external funding was USD5,953.2 million(30 September 2021:USD5,203.5 million)for the receivables securitisation programmes.The rate of interest applied to the TSF AAA VFN is principally determined by the demand for commercial paper issued by 10 banksponsored conduits.The Group benchmarks the rate provided against Libor and SOFR rates.In the case of the rate of interest applicable to the TSF BBB VFN,the rate of interest is principally determined by the liquidity of the interbank market.The maturity of the TSF AAA and BBB VFNs have been staggered to diversify the maturity profile of the notes.This aims to mitigate the liquidity wall risk associated with a single maturity date for a significant funding amount.19.2 Inventory securitisationThe available external funding of the inventory securitisation programme consists of:20222021Interest rateMaturityUSDMUSDMTCF/TGCF VFN See note2022 November465.0455.0TCF/TGCF MLF See note2022 November50.045.0Total515.0500.0As at 31 March 2022,the maximum available amount of external funding was USD515.0 million(30 September 2021:USD500.0 million)for the inventory securitisation programme.The rate of interest applied to the VFN and Margin Liquidity Facilities(MLF)under the inventories securitisation is defined in the facility documentation.20.Other current assets20222021USDMUSDMNonfinancial hedged items3,353.42,154.7Prepaid expenses340.5322.4Other21.48.9Total3,715.32,486.0Refer to note 30.2 for further information on the nonfinancial hedged items.Prepaid expenses relate to prepayments other than those made for physical commodities.Notes to the interim consolidated financial statements Financial statements3221.Cash and cash equivalents and deposits20222021USDMUSDMCash at bank and in hand8,289.0 9,234.9 Shortterm deposits1,998.6 1,442.6 Cash and cash equivalents10,287.6 10,677.5 Cash at bank earns interest at floating rates based on daily bank deposit rates.Shortterm deposits are made for varying periods between one day and three months depending on the immediate cash requirements of the Group and earn interest at the respective shortterm deposit rates.The fair value of cash and cash equivalents approximates the carrying value.An amount of USD110.1 million(30 September 2021:USD158.1 million)of cash at bank is restricted,including restrictions that require the funds to be used for a specified purpose and restrictions that limit the purpose for which the funds can be used,unless fixed asset construction invoices are presented to the banks.As at 31 March 2022,the Group had USD12.3 billion(30 September 2021:USD11.4 billion)of committed unsecured syndicated loans,of which USD3.3 billion(30 September 2021:USD2.5 billion)remained unutilised.The Group had USD4.4 billion(30 September 2021:USD5.4 billion)of immediately(same day)available cash in liquidity funds.Therefore,the Group had immediate access to available liquidity balances from liquidity funds and corporate facilities in excess of USD7.7 billion(30 September 2021:USD7.9 billion).21.1 DepositsShortterm deposits made for periods longer than three months are shown separately in the Consolidated Statement of Financial Position and earn interest at the respective shortterm deposit rates.22.Assets classified as held for sale and discontinued operations20222021USDMUSDMAssets classified as held for sale1,676.2 2,535.6 Liabilities classified as held for sale(370.4)(461.5)Net assets classified as held for sale1,305.8 2,074.1 As at 31 March 2022,net assets held for sale primarily consists of the Groups equity investment in Tendril Ventures Pte.Ltd.and Puma Energys Infrastructure division.Puma Energy decided to divest its Infrastructure division as part of its strategy to streamline the business and focus on its core downstream retail business.Completion is expected to happen within the next 12 months.Measurement is based on the fair value less cost of disposal as part of the provisional purchase price allocation.The decrease compared to September 2021 results from the sale of Puma Energys business in Angola to Sonangol.Trafigura Interim Report 20223323.Capital and reserves23.1 Share capitalAs at 31 March 2022,the Company has 25,000,000 ordinary shares outstanding and a capital of USD1,504 million.During the sixmonth period ended 31 March 2022,no changes took place in the outstanding share capital.The holders of ordinary shares are entitled to receive dividends as and when declared by the Company.All ordinary shares carry one vote per share without restriction.The ordinary shares have no par value.23.2 Capital securitiesAs part of the financing of the Company and its subsidiaries,the Company has two capital securities instruments with a total carrying value of USD684.7 million as at 31 March 2022(30 September 2021:three capital securities instruments amounting to USD1,173.9 million).These two capital securities have a par value of EUR262.5 million and USD400.0 million respectively(30 September 2021:USD479.2 million,EUR262.5 million and USD400.0 million respectively).These two capital securities are perpetual in respect of which there is no fixed redemption date.The distribution on the capital securities is payable semiannually in arrears every six months from the date of issue.The Company may elect to defer(in whole but not in part except for the USD400.0 million capital security where partial interest deferral is allowed)any distribution in respect of these capital securities by providing no more than 30 or less than five business days notice,unless a compulsory interest payment event has occurred,including amongst others the occurrence of a dividend payment in respect of subordinated obligations of the Company.Any interest deferred shall constitute arrears of interest and shall bear interest.In the event of a windingup,the rights and claims of the holders in respect of the capital securities shall rank ahead of claims in respect of the Companys shareholders,but shall be subordinated in right of payment to the claims of all present and future senior obligations,except for obligations of the Company that are expressed to rank pari passu with,or junior to,its obligations under the capital securities.On 21 March 2022,USD479.2 million of the outstanding amount of the USD800.0 million capital security has been fully repaid.Initially the capital security was issued as at 21 March 2017 for USD600.0 million,and reopened as at 21 November 2017 for USD200.0 million,This capital security was listed on the Singapore Stock Exchange and had a distribution on the capital security of 6.875 percent per annum.The EUR262.5 million capital security was issued on 31 July 2019 and is listed on the Singapore Stock Exchange.The distribution on the capital security is 7.5 percent per annum until the distribution payment date in July 2024.Th
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2 022 I NTE RI M REPORTAdd:No.69,Jianguomen Nei Avenue,Dongcheng District,Beijing,P.R.ChinaPostal Code:100005 Tel:86-10-85108888http:/2022(A joint stock company incorporated in the Peoples Republic of China with limited liability)Stock Code:1288INTERIM REPORT1Interim Report 2022Definitions2Basic Corporate Information and Major Financial Indicators4Discussion and Analysis9 Situation and Prospects10 Financial Statement Analysis11 Business Review27 County Area Banking Business44 Risk Management and Internal Control49 Capital Management63Environment and Social Responsibility64 Green Finance64 Human Capital Development67 Consumers Interests Protection67 Privacy and Data Security68 Accessibility of Finance Services69Corporate Governance71 Operation of Corporate Governance71 Directors,Supervisors and Senior Management73 Details of Ordinary Shares74 Details of Preference Shares79Significant Events82Appendix I Capital Adequacy Ratio Information86Appendix II Liquidity Coverage Ratio Information104Appendix III Net Stable Funding Ratio Information106Appendix IV Leverage Ratio Information110Appendix V Interim Financial Information(Unaudited)111Appendix VI Unreviewed Supplementary Financial Information231ContentsDefinitions2In this report,unless the context otherwise requires,the following terms shall have the meanings set out below:1.ABC/Agricultural Bank of China/the Bank/the Group/WeAgricultural Bank of China Limited,or Agricultural Bank of China Limited and its subsidiaries2.A Share(s)Ordinary shares listed domestically which are subscribed and traded in Renminbi3.CASs/PRC GAAPThe Accounting Standards for Enterprises promulgated on 15 February 2006 by the Ministry of Finance of the Peoples Republic of China and other related rules and regulations subsequently issued4.CBIRCChina Banking and Insurance Regulatory Commission,or its predecessors,the former China Banking Regulatory Commission and/or the former China Insurance Regulatory Commission,where the context requires5.County Area Banking DivisionAn internal division with management mechanism adopted by us for specialized operation of financial services provided to Sannong and the County Areas,as required under our restructuring into a joint stock limited liability company,which focuses on the County Area Banking Business with independence in aspects such as governance mechanism,operational decision making,financial accounting as well as incentive and constraint mechanism to a certain extent6.CSRCChina Securities Regulatory Commission7.Global Systemically Important BanksBanks recognized as key players in the financial market with global features as announced by the Financial Stability Board8.Green FinanceEconomic activities designed to support environmental improvement,respond to climate change and efficient use of resources,that is,financial services provided for project investment and financing,project operation,risk management,etc.in the fields of environmental protection,energy saving,clean energy,green transportation,green building,etc9.H Share(s)Shares listed on The Stock Exchange of Hong Kong Limited and subscribed and traded in Hong Kong Dollars,the nominal value of which are denominated in Renminbi10.Hong Kong Listing RulesThe Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited11.Hong Kong Stock ExchangeThe Stock Exchange of Hong Kong Limited12.HuijinCentral Huijin Investment Ltd.3Interim Report 2022Definitions13.MOFMinistry of Finance of the Peoples Republic of China14.PBOCThe Peoples Bank of China15.SannongAgriculture,rural areas and rural people16.SSFNational Council for Social Security Fund of the Peoples Republic of ChinaBasic Corporate Information and Major Financial Indicators4Basic Corporate InformationLegal name in ChineseAbbreviation中國農業銀行股份有限公司中國農業銀行Legal name in EnglishAbbreviationAGRICULTURAL BANK OF CHINA LIMITEDAGRICULTURAL BANK OF CHINA(ABC)Legal representativeGU ShuAuthorized representativeZHANG QingsongHAN GuoqiangSecretary to the Board of Directors and Company SecretaryHAN GuoqiangAddress:No.69,Jianguomen Nei Avenue,Dongcheng District,Beijing,PRCTel:86-10-85109619(Investors Relations)Fax:86-10-85126571E-mail:Selected media and websites for information disclosureChina Securities Journal()Shanghai Securities News()Securities Times()Securities Daily()Website of Shanghai Stock Exchange publishing the interim report(A Shares)Website of Hong Kong Stock Exchange publishing the interim report(H Shares)www.hkexnews.hkLocation where copies of the interim report are keptOffice of the Board of Directors of the BankListing exchange of A SharesShanghai Stock ExchangeStock name農業銀行Stock code601288Share registrarChina Securities Depository and Clearing Corporation Limited,Shanghai Branch(Address:3/F,China Insurance Building,No.166 Lujiazui East Road,New Pudong District,Shanghai,PRC)Listing exchange of H SharesThe Stock Exchange of Hong Kong LimitedStock nameABCStock code1288Share registrarComputershare Hong Kong Investor Services Limited(Address:Shops 17121716,17th Floor,Hopewell Center,183 Queens Road East,Wanchai,Hong Kong,PRC)5Interim Report 2022Basic Corporate Information and Major Financial IndicatorsTrading exchange and platform of preference sharesThe Integrated Business Platform of Shanghai Stock ExchangeStock name(stock code)農行優1(360001),農行優2(360009)Share registrarChina Securities Depository and Clearing Corporation Limited,Shanghai Branch(Address:3/F,China Insurance Building,No.166 Lujiazui East Road,New Pudong District,Shanghai,PRC)Legal advisor as to laws of Chinese mainland King&Wood MallesonsAddress1718/F,East Tower,World Financial Centre Building 1,No.1 Dongsanhuan Zhong Road,Chaoyang District,Beijing,PRCLegal advisor as to laws of Hong KongClifford ChanceAddress27/F,Jardine House 1 Connaught Place,Central,Hong Kong,PRCDomestic auditorKPMG Huazhen LLPAddress8/F,Office Tower E2,Oriental Plaza,1 East Chang An Avenue,Dongcheng District,Beijing,PRCName of the undersigned accountantsSHI Jian,HUANG AizhouInternational auditorAddressKPMG8/F,Princes Building,10 Chater Road,Central,Hong Kong,PRC6Basic Corporate Information and Major Financial IndicatorsFinancial Highlights(Financial data and indicators recorded in this report are prepared in accordance with the International Financial Reporting Standards(the“IFRSs”)and denominated in RMB,unless otherwise stated)Total loans and advances to customersNet profitCost-to-income ratioAllowance to non-performing loans(in millions of RMB)(in millions of RMB)(%)(%)0.0080.00160.00240.00320.000.0010.0020.0030.00040,00080,000120,000160,00005,000,00010,000,00015,000,00020,000,00031 December 202031 December 202130 June 2022Six months ended 30 June 2020Six months ended 30 June 2021Six months ended 30 June 2022Six months ended 30 June 2020Six months ended 30 June 2021Six months ended 30 June 202231 December 202031 December 202130 June 202215,170,44217,175,07318,813,552109,190122,833128,95024.6424.5424.54266.20299.73304.91Total assetsDeposits from customersNet interest marginNon-performing loan ratio(in millions of RMB)(in millions of RMB)(%)(%)09,000,00018,000,00027,000,00036,000,00027,205,04729,069,15532,426,42007,000,00014,000,00021,000,00028,000,0000.000.601.201.802.400.000.400.801.201.6031 December 202031 December 202130 June 2022Six months ended 30 June 2020Six months ended 30 June 2021Six months ended 30 June 202231 December 202031 December 202130 June 202231 December 202031 December 202130 June 202220,372,90121,907,12724,119,8542.122.021.571.431.412.207Interim Report 2022Basic Corporate Information and Major Financial IndicatorsMajor Financial Data30 June 202231 December 202131 December 2020At the end of the reporting period(in millions of RMB)Total assets32,426,42029,069,15527,205,047Total loans and advances to customers18,813,55217,175,07315,170,442Including:Corporate loans10,254,9949,168,0328,134,487 Discounted bills607,121424,329389,475 Retail loans7,483,4247,117,2126,198,743 Overseas and others424,784426,179413,416Allowance for impairment losses on loans777,380720,570618,009Loans and advances to customers,net18,036,17216,454,50314,552,433Financial investments8,965,9558,230,0437,822,659 Cash and balances with central banks2,669,5272,321,4062,437,275Deposits and placements with and loans to banks and other financial institutions924,234665,444981,133Financial assets held under resale agreements1,106,640837,637816,206Total liabilities29,900,20726,647,79624,994,301Deposits from customers24,119,85421,907,12720,372,901Including:Corporate deposits8,879,0008,037,9297,618,591 Retail deposits14,189,82912,934,17111,926,040 Overseas and others727,368623,353562,741Deposits and placements from banks and other financial institutions2,505,4971,913,4711,785,176Financial assets sold under repurchase agreements20,57436,033109,195Debt securities issued1,775,5311,507,6571,371,845Equity attributable to equity holders of the Bank2,519,4962,414,6052,204,789Net capital13,226,4183,057,8672,817,924 Common Equity Tier 1(CET1)capital,net12,097,3652,042,4801,875,372 Additional Tier 1 capital,net1 409,878359,881319,884 Tier 2 capital,net1719,175655,506622,668Risk-weighted assets118,880,45517,849,56616,989,668Six months ended 30 June 2022Six months ended 30 June 2021Six months ended 30 June 2020Interim operating results(in millions of RMB)Operating income387,659366,254339,774Net interest income300,219283,357267,009Net fee and commission income49,48948,15044,238Operating expenses125,971116,691108,043Credit impairment losses105,53096,13899,123Total profit before tax156,271153,538132,555Net profit128,950122,833109,190Net profit attributable to equity holders of the Bank128,945122,278108,834Net cash flows generated from operating activities908,785161,165(323,946)8Basic Corporate Information and Major Financial IndicatorsFinancial IndicatorsSix months ended 30 June 2022Six months ended 30 June 2021Six months ended 30 June 2020Profitability(%)Return on average total assets20.84*0.88*0.85*Return on weighted average net assets3 11.94*12.40*11.94*Net interest margin4 2.02*2.12*2.20*Net interest spread5 1.86*1.96*2.04*Return on risk-weighted assets1,6 1.37*1.38*1.33*Net fee and commission income to operating income12.7713.1513.02Cost-to-income ratio724.5424.54 24.64 Data per share(RMB Yuan)Basic earnings per share3 0.350.340.30 Diluted earnings per share3 0.350.340.30Net cash flows per share generated from operating activities2.600.46(0.93)30 June 202231 December 202131 December 2020Asset quality(%)Non-performing loan ratio81.411.43 1.57 Allowance to non-performing loans9304.91299.73 266.20 Allowance to loan ratio104.304.30 4.17 Capital adequacy(%)Common Equity Tier 1(CET1)capital adequacy ratio111.1111.4411.04Tier 1 capital adequacy ratio113.2813.4612.92Capital adequacy ratio117.0917.1316.59Risk-weighted assets to total assets ratio158.2361.4062.45Total equity to total assets ratio7.798.338.13Data per share(RMB Yuan)Net assets per ordinary share116.035.875.39Notes:1.Figures were calculated in accordance with the Capital Rules for Commercial Banks(Provisional)and other relevant regulations.2.Calculated by dividing net profit by the average balances of total assets at the beginning and the end of the period.3.Calculated in accordance with the Rules for the Compilation and Submission of Information Disclosure by Companies that Offer Securities to the Public No.9 Computation and Disclosure of Return on Net Assets and Earnings per Share(2010 Revision)issued by the CSRC and International Accounting Standard 33 Earnings per share.4.Calculated by dividing net interest income by the average balances of interest-earning assets.5.Calculated as the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.6.Calculated by dividing net profit by risk-weighted assets at the end of the period.The risk-weighted assets are calculated in accordance with the relevant regulations of the CBIRC.7.Calculated by dividing operating and administrative expenses by operating income in accordance with CASs,which is consistent with the corresponding figures as stated in the financial report of the Bank prepared in accordance with CASs.8.Calculated by dividing the balance of non-performing loans(excluding accrued interest)by the balance of total loans and advances to customers(excluding accrued interest).9.Calculated by dividing the balance of allowance for impairment losses on loans by the balance of non-performing loans(excluding accrued interest),among which,the balance of allowance for impairment losses on loans includes the allowance for impairment losses on bills and forfeiting recognized in other comprehensive income.10.Calculated by dividing the balance of allowance for impairment losses on loans by the balance of total loans and advances to customers(excluding accrued interest),among which,the balance of allowance for impairment losses on loans includes the allowance for impairment losses on bills and forfeiting recognized in other comprehensive income.11.Calculated by dividing equity attributable to ordinary equity holders of the Bank(excluding other equity instruments)at the end of the period by the total number of ordinary shares at the end of the period.*Annualized figures.Discussion and AnalysisSituation and Prospects 10Financial Statement Analysis 11Business Review 27County Area Banking Business 44Risk Management and Internal Control 49Capital Management 6310Discussion and AnalysisSituation and ProspectsChinas economy was generally stable in the first quarter,but was subject to increasing downward pressure in the second quarter due to the unexpected factors such as the complex changes of the international environment and the impact of COVID-19 in China.With the overall improvement in epidemic prevention and control,the orderly work resumption,and a series of measures to stabilize growth taking effect,the major economic indicators stabilized and picked up in June.In the first half of the year,Chinas GDP grew by 2.5%year on year;the aggregate financing to the real economy(flow)was RMB21 trillion,representing an increase of RMB3.2 trillion year on year;consumer prices basically remained stable,with the consumer price index(CPI)rising by 1.7%year on year;the upward pressure on industrial product prices was to certain extent eased,with the producer price index(PPI)rising by 7.7%year on year,and the monthly growth rate(YoY)on the decline.In the first half of the year,the Chinese government responded to COVID-19 and pursued economic and social development in a well-coordinated way and launched a number of measures of maintaining steady growth to stabilize the economic and social development to the maximum extent.Proactive fiscal policies were pre-arranged,accelerating the issuance of special bonds by local governments,increasing the transfer payments to local governments by central government and implementing large-scale VAT credit refunds policy.The prudent monetary policy was flexible and appropriate,placing more emphasis on cross-and countercyclical policy and maintaining reasonably ample liquidity.Special re-lending tools and carbon emission reduction support tools were leveraged to support the clean and efficient use of coal,scientific and technological innovation,inclusive elderlycare,transportation and logistics,and financial institutions were encouraged to increase their support to small and micro enterprises,scientific and technological innovation,and green development.The reform in the financial sector was further deepened,releasing the benefits of the loan prime rate(LPR)reform,steadily promoting the global use of Renminbi and constantly facilitating the trading and investment activities.Looking forward to the second half of the year,supported by the policies to maintain steady growth in fiscal,financial and investment sectors,the recovery of domestic demand will be relatively certain,but will still face various challenges such as weak expectations.The Bank will actively adjust the operation strategies based on circumstances,adhere to serving the real economy,enhance the financial support to Sannong,micro and small businesses,manufacturing sector,and green economy,optimize the quality and efficiency of financial service and strengthen risk prevention and control in key areas to promote high-quality development.11Interim Report 2022Discussion and AnalysisFinancial Statement AnalysisIncome Statement AnalysisIn the first half of 2022,we achieved a net profit of RMB128,950 million,representing an increase of RMB6,117 million or 4.98%,as compared to the first half of the previous year.Changes of Significant Income Statement Items In millions of RMB,except for percentagesItemSix months ended 30 June 2022Six months ended 30 June 2021Increase/(decrease)Growth rate(%)Net interest income300,219283,35716,862 6.0 Net fee and commission income49,48948,1501,339 2.8 Other non-interest income37,95134,7473,204 9.2 Operating income387,659366,25421,405 5.8 Less:Operating expenses125,971116,6919,280 8.0 Credit impairment losses105,53096,1389,392 9.8 Impairment losses on other assets17314 466.7 Operating profit156,141153,4222,719 1.8 Share of results of associates and joint ventures13011614 12.1 Profit before tax156,271153,5382,733 1.8 Less:Income tax expense 27,321 30,705(3,384)-11.0 Net profit128,950122,8336,1174.98Attributable to:Equity holders of the Bank128,945122,2786,667 5.5 Non-controlling interests5555(550)-99.1 Net Interest IncomeNet interest income was the largest component of our operating income,accounting for 77.4%of the operating income in the first half of 2022.Our net interest income was RMB300,219 million in the first half of 2022,representing an increase of RMB16,862 million as compared to the first half of the previous year,among which,an increase of RMB31,407 million resulted from the increase in volume and a decrease of RMB14,545 million resulted from the changes in interest rates.In the first half of 2022,our net interest margin and net interest spread were 2.02%and 1.86%,respectively,both representing decreases of ten basis points as compared to the first half of the previous year.The year-on-year decreases in net interest margin and net interest spread were primarily due to a decrease in average yield on interest-earning assets as a result of the implementation of national policies on benefiting the real economy and an increase in average cost on interest-bearing liabilities as a result of the market environment.12Discussion and AnalysisThe table below presents the average balance,interest income/expense,and average yield/cost of interest-earning assets and interest-bearing liabilities.In millions of RMB,except for percentagesSix months ended 30 June 2022Six months ended 30 June 2021ItemAverage balanceInterest income/expenseAverage yield/cost7(%)Average balanceInterest income/expenseAverage yield/cost7(%)AssetsLoans and advances to customers17,993,402377,0374.2315,966,009 336,1444.25Debt securities investments17,907,455133,3133.407,177,256 123,6433.47 Non-restructuring-related debt securities7,523,225128,0783.436,793,017 118,6533.52 Restructuring-related debt securities2384,2305,2352.75384,239 4,9902.62Balances with central banks2,229,11316,5321.502,317,191 18,1501.58Amounts due from banks and other financial institutions31,780,02615,8911.801,529,242 15,5342.05Total interest-earning assets29,909,996542,7733.6626,989,698 493,4713.69Allowance for impairment losses4(810,212)(693,551)Non-interest-earning assets41,545,8741,637,328 Total assets30,645,65827,933,475 LiabilitiesDeposits from customers22,235,871184,1241.6720,240,329 159,674 1.59Amounts due to banks and other financial institutions52,550,78226,1662.072,091,223 21,153 2.04Other interest-bearing liabilities62,375,84032,2642.742,100,897 29,287 2.81Total interest-bearing liabilities27,162,493242,5541.8024,432,449 210,114 1.73Non-interest-bearing liabilities41,100,0671,072,873 Total liabilities28,262,56025,505,322 Net interest income300,219283,357 Net interest spread1.861.96Net interest margin2.022.12Notes:1.Debt securities investments include debt securities investments at fair value through other comprehensive income and debt securities investments at amortized cost.2.Restructuring-related debt securities include the receivable from the MOF and the special government bonds.3.Amounts due from banks and other financial institutions primarily include deposits with banks and other financial institutions,placements with and loans to banks and other financial institutions and financial assets held under resale agreements.4.The average balances of non-interest-earning assets,non-interest-bearing liabilities and allowance for impairment losses are the average of their respective balances at the beginning and the end of the period.5.Amounts due to banks and other financial institutions primarily include deposits from banks and other financial institutions,placements from banks and other financial institutions as well as financial assets sold under repurchase agreements.6.Other interest-bearing liabilities primarily include debt securities issued and borrowings from central banks.7.Annualized figures.13Interim Report 2022Discussion and AnalysisThe table below presents the changes in net interest income due to changes in volume and interest rate.In millions of RMBIncrease/(decrease)due toNet increase/(decrease)ItemVolumeInterest rateAssets Loans and advances to customers42,482(1,589)40,893 Debt securities investments12,311(2,641)9,670 Balances with central banks(653)(965)(1,618)Amounts due from banks and other financial institutions2,239(1,882)357 Changes in interest income56,379(7,077)49,302 LiabilitiesDeposits from customers16,524 7,926 24,450 Amounts due to banks and other financial institutions4,7142995,013 Other interest-bearing liabilities3,734(757)2,977 Changes in interest expense24,9727,46832,440 Changes in net interest income31,407(14,545)16,862 Note:Changes caused by both volume and interest rate have been allocated to changes in volume.Interest IncomeWe achieved interest income of RMB542,773 million in the first half of 2022,representing an increase of RMB49,302 million as compared to the first half of the previous year,which was primarily due to an increase of RMB2,920,298 million in the average balance of interest-earning assets.Interest Income from Loans and Advances to CustomersInterest income from loans and advances to customers increased by RMB40,893 million,or 12.2%,as compared to the first half of the previous year to RMB377,037 million,which was primarily due to an increase of RMB2,027,393 million in the average balance.14Discussion and AnalysisThe table below presents the average balances,interest income and average yield of loans and advances to customers by business type.In millions of RMB,except for percentagesSix months ended 30 June 2022Six months ended 30 June 2021ItemAverage balanceInterest incomeAverage yield1(%)Average balanceInterest incomeAverage yield1(%)Corporate loans 9,850,570 195,623 4.00 8,736,484 176,689 4.08 Short-term corporate loans 2,926,427 51,917 3.58 2,620,768 46,901 3.61 Medium-and long-term corporate loans 6,924,143 143,706 4.19 6,115,716 129,788 4.28 Discounted bills 457,737 4,006 1.76 271,275 3,536 2.63 Retail loans 7,307,193 172,895 4.77 6,493,870 151,502 4.70 Overseas and others 377,902 4,513 2.41 464,380 4,417 1.92 Total loans and advances to customers 17,993,402 377,037 4.23 15,966,009 336,144 4.25 Note:1.Annualized figures.Interest Income from Debt Securities InvestmentsInterest income from debt securities investments was the second largest component of interest income.In the first half of 2022,interest income from debt securities investments increased by RMB9,670 million to RMB133,313 million as compared to the first half of the previous year,which was primarily due to an increase in investment in bonds.Interest Income from Balances with Central BanksInterest income from balances with central banks decreased by RMB1,618 million to RMB16,532 million as compared to the first half of the previous year,which was primarily due to the decreased average yield of balances with central banks resulting from a decrease in the proportion of mandatory deposits reserves with a high yield.Interest Income from Amounts Due from Banks and Other Financial InstitutionsInterest income from amounts due from banks and other financial institutions increased by RMB357 million to RMB15,891 million as compared to the first half of the previous year,which was primarily due to an increase in the average balance of the financial assets held under resale agreements.Interest ExpenseInterest expense increased by RMB32,440 million to RMB242,554 million as compared to the first half of the previous year,which was mainly due to an increase of RMB2,730,044 million in the average balance of interest-bearing liabilities.Interest Expense on Deposits from CustomersInterest expense on deposits from customers increased by RMB24,450 million to RMB184,124 million as compared to the first half of the previous year,which was primarily due to an increase in the scale of deposits from customers.15Interim Report 2022Discussion and AnalysisAnalysis of Average Cost of Deposits by Product TypeIn millions of RMB,except for percentagesSix months ended 30 June 2022Six months ended 30 June 2021ItemAverage balanceInterest expenseAverage cost1(%)Average balanceInterest expenseAverage cost1(%)Corporate deposits Time3,333,58840,404 2.44 2,734,95133,090 2.44 Demand5,429,33527,168 1.01 5,288,86424,538 0.94 Sub-Total8,762,92367,572 1.56 8,023,81557,628 1.45 Retail deposits Time7,601,107107,392 2.85 6,430,18791,260 2.86 Demand5,871,8419,160 0.31 5,786,32710,786 0.38 Sub-Total13,472,948116,552 1.74 12,216,514102,046 1.68 Total deposits from customers22,235,871184,124 1.67 20,240,329159,674 1.59 Note:1.Annualized figures.Interest Expense on Amounts Due to Banks and Other Financial InstitutionsInterest expense on amounts due to banks and other financial institutions increased by RMB5,013 million to RMB26,166 million as compared to the first half of the previous year,which was primarily due to an increase in the scale of deposits from banks and other financial institutions.Interest Expense on Other Interest-bearing LiabilitiesInterest expense on other interest-bearing liabilities increased by RMB2,977 million to RMB32,264 million as compared to the first half of the previous year,which was principally due to an increase in the scale of interbank certificates of deposit.Net Fee and Commission IncomeIn the first half of 2022,we generated net fee and commission income of RMB49,489 million,representing an increase of RMB1,339 million or 2.8%as compared to the first half of the previous year.In particular,bank card fees increased by 12.6%,which was primarily due to an increase in the fee income from credit card services.16Discussion and AnalysisComposition of Net Fee and Commission IncomeIn millions of RMB,except for percentagesItemSix months ended 30 June 2022Six months ended 30 June 2021Increase/(decrease)Growth rate(%)Agency commissions14,14014,014126 0.9 Settlement and clearing fees6,7867,114(328)-4.6 Bank card fees8,4167,472944 12.6 Consultancy and advisory fees9,3099,757(448)-4.6 Electronic banking service fees13,78615,433(1,647)-10.7 Custodian and other fiduciary service fees2,3232,076247 11.9 Credit commitment fees1,1921,257(65)-5.2 Others275364(89)-24.5 Fee and commission income56,22757,487(1,260)-2.2 Less:Fee and commission expenses6,7389,337(2,599)-27.8 Net fee and commission income49,48948,1501,339 2.8 Other Non-interest IncomeIn the first half of 2022,other non-interest income amounted to RMB37,951 million,representing an increase of RMB3,204 million,as compared to the first half of the previous year.In particular,net trading gain decreased by RMB597 million,primarily due to an increase in net trading loss on foreign exchange derivatives.Net gain on financial investments increased by RMB1,756 million,primarily due to a decrease in net trading loss on financial liabilities designated as at fair value through profit or loss.Other operating income increased by RMB1,945 million,primarily due to an increase in the premium income of the subsidiary.Composition of Other Non-interest IncomeIn millions of RMBItemSix months ended 30 June 2022Six months ended 30 June 2021Net trading gain7,7628,359Net gain on financial investments3,1881,432Net gain on derecognition of financial assets measured at amortized cost1011Other operating income26,90024,955Total37,95134,74717Interim Report 2022Discussion and AnalysisOperating ExpensesIn the first half of 2022,operating expenses increased by RMB9,280 million to RMB125,971 million as compared to the first half of the previous year;cost-to-income ratio was 24.54%and remained flat compared to the first half of the previous year.Composition of Operating ExpensesIn millions of RMB,except for percentagesItemSix months ended 30 June 2022Six months ended 30 June 2021Increase/(decrease)Growth rate(%)Staff costs63,62461,9931,631 2.6 Insurance benefits and claims26,21822,7223,496 15.4 General operating and administrative expenses21,48018,0323,448 19.1 Depreciation and amortization9,9069,663243 2.5 Tax and surcharges3,3993,188211 6.6 Others1,3441,093251 23.0 Total125,971116,6919,280 8.0 18Discussion and AnalysisCredit Impairment LossesIn the first half of 2022,our credit impairment losses increased by RMB9,392 million to RMB105,530 million.In particular,impairment losses on loans increased by RMB766 million to RMB92,777 million as compared to the first half of the previous year.Income Tax ExpenseIn the first half of 2022,our income tax expense decreased by RMB3,384 million,or 11.0%,to RMB27,321 million as compared to the first half of the previous year.The effective tax rate was 17.48%,which was lower than the statutory tax rate.This was primarily because the interest income from the PRC treasury bonds and local government bonds held by the Bank was exempted from enterprise income tax by the relevant tax laws.Segment InformationWe assessed our performance and determined the allocation of resources based on the segment reports.Segment information had been presented in the same manner with that of internal management and reporting.At present,we manage our segments from the aspects of business lines,geographical regions and the County Area Banking Business.The table below presents our operating income by business segment during the periods indicated.In millions of RMB,except for percentagesSix months ended 30 June 2022Six months ended 30 June 2021ItemAmountPercentage(%)AmountPercentage(%)Corporate banking business146,93437.9 149,55440.8 Retail banking business179,58146.3 138,22637.7 Treasury operations26,9627.0 46,64412.8 Other business34,1828.8 31,8308.7 Total operating income387,659 100.0 366,254 100.0 The table below presents our operating income by geographic segment during the periods indicated.In millions of RMB,except for percentagesSix months ended 30 June 2022Six months ended 30 June 2021ItemAmountPercentage(%)AmountPercentage(%)Head Office3,8321.0 39,62310.8 Yangtze River Delta82,79821.4 66,29218.1 Pearl River Delta59,09515.2 48,29813.2 Bohai Rim53,55113.8 45,83912.5 Central China61,26915.8 51,10614.0 Western China78,79820.3 71,45719.5 Northeastern China12,7793.3 11,4583.1 Overseas and others35,5379.2 32,1818.8 Total operating income387,659100.0366,254100.019Interim Report 2022Discussion and AnalysisThe table below presents our operating income from the County Area Banking Business and Urban Area Banking Business during the periods indicated.In millions of RMB,except for percentagesSix months ended 30 June 2022Six months ended 30 June 2021ItemAmountPercentage(%)AmountPercentage(%)County Area Banking Business159,91141.3143,23039.1 Urban Area Banking Business227,74858.7223,02460.9 Total operating income387,659100.0366,254100.0Balance Sheet AnalysisAssetsAt 30 June 2022,our total assets amounted to RMB32,426,420 million,representing an increase of RMB3,357,265 million,or 11.5%,as compared to the end of the previous year.In particular,net loans and advances to customers increased by RMB1,581,669 million,or 9.6%;financial investments increased by RMB735,912 million,or 8.9%;cash and balances with central banks increased by RMB348,121 million,or 15.0%;deposits and placements with and loans to banks and other financial institutions increased by RMB258,790 million,or 38.9%,which was primarily due to an increase in cooperative deposits with banks and other financial institutions;and financial assets held under resale agreements increased by RMB269,003 million,or 32.1%,which was primarily due to an increase in debt securities held under resale agreements.Key Items of AssetsIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Total loans and advances to customers18,813,55217,175,073Less:Allowance for impairment losses on loans777,380720,570Loans and advances to customers,net18,036,17255.616,454,50356.6Financial investments8,965,95527.78,230,04328.3Cash and balances with central banks2,669,5278.22,321,4068.0Deposits and placements with and loans to banks and other financial institutions924,2342.9665,4442.3Financial assets held under resale agreements1,106,6403.4837,6372.9Others723,8922.2560,1221.9Total assets32,426,420100.0 29,069,155100.0 20Discussion and AnalysisLoans and Advances to CustomersAt 30 June 2022,our total loans and advances to customers amounted to RMB18,813,552 million,representing an increase of RMB1,638,479 million,or 9.5%,as compared to the end of the previous year.Distribution of Loans and Advances to Customers by Business TypeIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Loans granted by domestic branches18,345,539 97.7 16,709,573 97.5 Corporate loans10,254,994 54.6 9,168,032 53.5 Discounted bills607,121 3.2 424,329 2.5 Retail loans7,483,424 39.9 7,117,212 41.5 Overseas and others424,784 2.3 426,179 2.5 Sub-Total18,770,323 100.0 17,135,752 100.0 Accrued interest43,22939,321Total18,813,55217,175,073Distribution of Corporate Loans by MaturityIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Short-term corporate loans 3,104,531 30.32,613,74928.5Medium-and long-term corporate loans7,150,46369.76,554,28371.5Total 10,254,994 100.0 9,168,032 100.0 Distribution of Corporate Loans by IndustryIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Manufacturing 1,805,565 17.6 1,497,847 16.3Production and supply of electricity,heating,gas and water 1,102,905 10.8 1,017,210 11.1Real estate1 842,866 8.2 830,457 9.1Transportation,storage and postal services 2,218,049 21.6 2,092,461 22.8Wholesale and retail 593,113 5.8 493,538 5.4Water,environment and public utilities management 813,758 7.9 716,090 7.8Construction 393,778 3.8 291,573 3.2Mining 190,026 1.9 193,539 2.1Leasing and commercial services 1,655,801 16.1 1,494,187 16.3Finance 197,143 1.9 153,577 1.7Information transmission,software and IT services 72,086 0.7 58,283 0.6Others2 369,904 3.7 329,270 3.6Total 10,254,994 100.0 9,168,032 100.0Notes:1.Classification of the loans in the above table is based on the industries in which the borrowers operate.Real estate loans include real estate development loans granted to enterprises mainly engaged in the real estate industry,mortgage loans for operating properties and other non-real estate loans granted to enterprises in the real estate industry.At the end of June 2022,the balance of real estate loans to corporate customers amounted to RMB459,831 million,representing an increase of RMB29,521 million as compared to the end of the previous year.2.Others mainly include agriculture,forestry,animal husbandry,fishery,public health,and social work,etc.21Interim Report 2022Discussion and AnalysisAt 30 June 2022,the top five major industries for our corporate loans include:(1)transportation,storage and postal services;(2)manufacturing;(3)leasing and commercial services;(4)production and supply of electricity,heating,gas and water;and(5)real estate.The loan balance of the top five major industries accounted for 74.3%of our total corporate loans,representing a decrease of 1.3 percentage points as compared to the end of the previous year.Distribution of Retail Loans by Product TypeIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Residential mortgage loans 5,344,446 71.55,242,28873.6Personal consumption loans 186,230 2.5175,7702.5Loans to private business 550,003 7.3468,6886.6Credit card balances 651,745 8.7626,7838.8Loans to rural households 750,747 10.0603,3928.5Others 253 291Total 7,483,424 100.0 7,117,212100.0At 30 June 2022,the retail loans increased by RMB366,212 million,or 5.1%,as compared to the end of the previous year.In particular,residential mortgage loans increased by 1.9%as compared to the end of the previous year,which was mainly due to the Banks implementation of regulatory requirements to support customers to purchase their residential properties for non-investment purpose;personal consumption loans increased by 6.0%as compared to the end of the previous year,which was primarily due to the increase in consumption loans;loans to private business increased by 17.3%as compared to the end of the previous year,primarily due to the increase in inclusive loans;loans to rural households increased by 24.4%as compared to the end of the previous year,primarily due to the sustained rapid increase in Huinong E-loan.Distribution of Loans and Advances to Customers by Geographic RegionIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Head Office 423,953 2.3 313,295 1.8Yangtze River Delta 4,548,290 24.2 4,088,464 23.8Pearl River Delta 3,098,142 16.5 2,839,822 16.6Bohai Rim 2,688,214 14.3 2,461,253 14.4Central China 2,928,927 15.5 2,664,937 15.6Northeastern China 611,149 3.3 592,710 3.5Western China 4,046,864 21.6 3,749,092 21.8Overseas and others 424,784 2.3 426,179 2.5Sub-Total18,770,323100.017,135,752100.0Accrued interest43,22939,321Total18,813,55217,175,073Financial InvestmentsAt 30 June 2022,our financial investments amounted to RMB8,965,955 million,representing an increase of RMB735,912 million,or 8.9%,as compared to the end of the previous year.In particular,investments in non-restructuring-related debt securities increased by RMB730,115 million,as compared to the end of the previous year,which was primarily due to an increase in investment in local government bonds.22Discussion and AnalysisDistribution of Financial Investments by Product TypeIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Non-restructuring-related debt securities 8,230,558 93.3 7,500,443 92.7Restructuring-related debt securities 384,230 4.4 384,231 4.7Equity instruments 109,814 1.2 114,544 1.4Others 98,041 1.1 93,794 1.2Sub-Total 8,822,643 100.0 8,093,012 100.0Accrued interest 143,312 137,031 Total 8,965,955 8,230,043 Distribution of Non-restructuring-related Debt Securities Investments by IssuerIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Government bonds 5,381,976 65.4 4,760,965 63.4Bonds issued by policy banks 1,670,518 20.3 1,557,354 20.8Bonds issued by other banks and financial institutions 735,490 8.9 710,759 9.5Bonds issued by entities in public sectors 230,066 2.8 238,604 3.2Corporate bonds 212,508 2.6 232,761 3.1Total 8,230,558 100.0 7,500,443 100.0Distribution of Non-restructuring-related Debt Securities Investments by Remaining MaturityIn millions of RMB,except for percentages30 June 202231 December 2021Remaining MaturityAmountPercentage(%)AmountPercentage(%)Overdue 39 32 Less than 3 months 404,266 4.9 255,381 3.4312 months 812,848 9.9 900,411 12.015 years 2,884,519 35.0 2,952,095 39.4More than 5 years 4,128,886 50.2 3,392,524 45.2Total 8,230,558 100.0 7,500,443 100.0Distribution of Non-restructuring-related Debt Securities Investments by CurrencyIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)RMB 7,897,447 96.0 7,190,104 95.9USD 257,650 3.1 249,096 3.3Other foreign currencies 75,461 0.9 61,243 0.8Total 8,230,558 100.0 7,500,443 100.023Interim Report 2022Discussion and AnalysisDistribution of Financial Investments by Business Models and Characteristics of Contractual Cash FlowsIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Financial assets at fair value through profit or loss 459,865 5.2 460,241 5.7Debt investments at amortized cost 6,811,494 77.2 6,249,598 77.2Other debt instrument and other equity investments at fair value through other comprehensive income 1,551,284 17.6 1,383,173 17.1Sub-Total8,822,643100.0 8,093,012 100.0Accrued interest 143,312 137,031 Total 8,965,955 8,230,043 Investment in Financial BondsFinancial bonds refer to securities issued by policy banks,commercial banks and other financial institutions,the principals and interests of which are to be repaid pursuant to a pre-determined schedule.At 30 June 2022,the balance of financial bonds held by the Bank was RMB2,406,008 million,including bonds of RMB1,670,518 million issued by policy banks and bonds of RMB735,490 million issued by commercial banks and other financial institutions.The table below presents the top ten financial bonds held by the Bank in terms of face value at 30 June 2022.In millions of RMB,except for percentagesBondsFace valueAnnual interest rateMaturity dateAllowance12022 policy bank bond52,9403.18 32-03-112021 policy bank bond50,9523.38 31-07-162020 policy bank bond50,5623.74 30-11-162020 policy bank bond48,7633.79 30-10-262021 policy bank bond46,6903.30 31-11-052021 policy bank bond41,6323.52 31-05-242021 policy bank bond40,8523.22 26-05-142021 policy bank bond34,0803.48 28-02-042017 policy bank bond33,1103.85 27-01-062020 policy bank bond29,3403.43 25-10-23Note:1.Allowance in this table refers to allowance for impairment losses in stage II and stage III,not including allowance for impairment losses in stage I.LiabilitiesAt 30 June 2022,our total liabilities increased by RMB3,252,411 million,or 12.2%,to RMB29,900,207 million as compared to the end of the previous year.In particular,deposits from customers increased by RMB2,212,727 million,or 10.1%;deposits and placements from banks and other financial institutions increased by RMB592,026 million,or 30.9%,mainly due to an increase in deposits from other domestic financial institutions;financial assets sold under repurchase agreements decreased by RMB15,459 million,or 42.9%,which was primarily due to a decrease in debt securities sold under repurchase agreements;debt securities issued increased by RMB267,874 million,or 17.8%,which was primarily due to the increase in issuance of interbank certificates of deposit.24Discussion and AnalysisKey Items of LiabilitiesIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Deposits from customers24,119,85480.7 21,907,12782.2 Deposits and placements from banks and other financial institutions2,505,4978.4 1,913,4717.2 Financial assets sold under repurchase agreements20,5740.1 36,0330.1 Debt securities issued1,775,5315.9 1,507,6575.7 Other liabilities1,478,7514.9 1,283,5084.8 Total liabilities29,900,207100.0 26,647,796100.0 Deposits from CustomersAt 30 June 2022,the balance of deposits from customers of the Bank increased by RMB2,212,727 million,or 10.1%,to RMB24,119,854 million as compared to the end of the previous year.In terms of customer structure,the proportion of retail deposits decreased by 0.3 percentage point to 59.6%.In terms of maturity structure,the proportion of demand deposits was 49.6%.Distribution of Deposits from Customers by Business TypeIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Domestic deposits 23,672,562 99.5 21,479,255 99.5 Corporate deposits 8,879,000 37.4 8,037,929 37.3 Time 3,227,371 13.6 2,667,190 12.4 Demand 5,651,629 23.8 5,370,739 24.9 Retail deposits 14,189,829 59.6 12,934,171 59.9 Time 8,042,285 33.8 6,993,575 32.4 Demand 6,147,544 25.8 5,940,596 27.5 Other deposits1 603,733 2.5 507,155 2.3 Overseas and others 123,635 0.5 116,198 0.5 Sub-Total 23,796,197 100.0 21,595,453 100.0Accrued interest 323,657 311,674 Total 24,119,854 21,907,127 Note:1.Include margin deposits,remittance payables and outward remittance.25Interim Report 2022Discussion and AnalysisDistribution of Deposits from Customers by Remaining MaturityIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Demand 13,215,616 55.6 12,380,970 57.4 Less than 3 months 1,604,204 6.7 1,838,380 8.5 312 months 4,088,391 17.2 3,120,029 14.4 15 years 4,882,896 20.5 4,240,028 19.6 More than 5 years 5,090 16,046 0.1 Sub-Total 23,796,197 100.0 21,595,453 100.0 Accrued interest 323,657 311,674 Total 24,119,854 21,907,127 Distribution of Deposits from Customers by Geographic RegionIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Head Office 68,922 0.3 99,2890.5Yangtze River Delta 5,909,978 24.9 5,228,10724.2Pearl River Delta 3,406,837 14.3 3,023,02114.0Bohai Rim 4,133,485 17.4 3,787,78417.5Central China 4,072,838 17.1 3,676,92517.0Northeastern China 1,145,477 4.8 1,094,5265.1Western China 4,935,025 20.7 4,569,60321.2Overseas and others 123,635 0.5 116,1980.5Sub-Total 23,796,197 100.0 21,595,453100.0Accrued interest 323,657 311,674Total 24,119,854 21,907,127Shareholders EquityAt 30 June 2022,our shareholders equity amounted to RMB2,526,213 million,representing an increase of RMB104,854 million,as compared to the end of the previous year.Net assets per ordinary share were RMB6.03,representing an increase of RMB0.16 as compared to the end of the previous year.Composition of Shareholders EquityIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Ordinary shares349,98313.9 349,98314.5 Other equity instruments409,86916.2 359,87214.9 Capital reserve173,5566.9 173,5567.2 Investment revaluation reserve36,1301.3 34,9271.4 Surplus reserve 220,814 8.7 220,792 9.1 General reserve385,38715.3 351,61614.5 Retained earnings 943,837 37.4 925,955 38.2 Foreign currency translation reserve(80)(2,096)(0.1)Non-controlling interests 6,717 0.3 6,754 0.3 Total2,526,213100.0 2,421,359100.0 26Discussion and AnalysisOff-balance Sheet ItemsOff-balance sheet items primarily include derivative financial instruments,contingent liabilities and commitments.The Bank enters into derivative transactions related to exchange rates,interest rates and precious metals for the purposes of trading,assets and liabilities management and business on behalf of customers.The Banks contingent liabilities and commitments include credit commitments,capital expenditure commitments,bond underwriting and redemption commitments,mortgaged and pledged assets,legal proceedings and other contingencies.Credit commitments are the major components of off-balance sheet items and comprise loan commitments,bank acceptances,guarantees and letters of guarantee,letters of credit and credit card commitments.Composition of Credit CommitmentsIn millions of RMB,except for percentages30 June 202231 December 2021ItemAmountPercentage(%)AmountPercentage(%)Loan commitments 384,380 17.4459,90022.0Bank acceptances 542,500 24.5414,93419.9Guarantees and letters of guarantee 311,664 14.1304,23814.6Letters of credit 191,302 8.7165,6397.9Credit card commitments 780,636 35.3743,59435.6Total2,210,482100.02,088,305100.0Other Financial InformationChanges in Accounting PoliciesThere were no significant changes in accounting policies during the reporting period.Differences between the Consolidated Financial Statements Prepared under IFRSs and those Prepared under CASsThere were no differences between the net profit or shareholders equity in the Consolidated Interim Financial Statements of the Bank prepared under IFRSs and the corresponding figures prepared in accordance with CASs.Other Financial IndicatorsRegulatoryStandard30 June 202231 December 202131 December 2020Liquidity ratio1(%)RMB2565.2962.0159.15Foreign Currency25168.54138.94122.98Percentage of loans to the largest single customer2(%)102.182.444.07Percentage of loans to the top ten customers3(%)11.3211.6712.58Loan migration ratio4(%)Normal1.41 1.10 1.39 Special mention31.18 20.23 31.86 Substandard68.75 57.43 33.92 Doubtful6.68 13.66 12.20 Notes:1.Calculated by dividing current assets by current liabilities in accordance with the relevant regulations of the CBIRC.2.Calculated by dividing total loans to the largest single customer(excluding accrued interest)by net capital.3.Calculated by dividing total loans to the top ten customers(excluding accrued interest)by net capital.4.Calculated in accordance with the latest indicator definition revised by the CBIRC in 2022.The data on 30 June 2022 was annualized and the data in the comparative periods was adjusted accordingly.27Interim Report 2022Discussion and AnalysisBusiness ReviewCorporate BankingDuring the reporting period,in order to promote high-quality development of our corporate banking business,we strictly implemented the national decisions and deployment of stabilizing the overall economy,actively served major national strategies and key areas of the real economy,cultivated new growth drivers of the digital transformation,established a new integrated service model,and improved our comprehensive financial service capability and customer satisfaction.At the end of June 2022,the balance of domestic corporate deposits amounted to RMB8,879,000 million,representing an increase of RMB841,071 million as compared to the end of the previous year.The balance of domestic corporate loans and discounted bills amounted to RMB10,862,115 million,representing an increase of RMB1,269,754 million as compared to the end of the previous year.The loans newly granted to the projects included in our major marketing projects pool amounted to RMB404.2 billion.At the end of June 2022,we had 9,051.0 thousand corporate banking customers,among which 396.2 thousand customers had outstanding loan balances,representing an increase of 35.6 thousand customers as compared to the end of the previous year.We provided services to support the national strategy of building a manufacturing power.Persisting in the financial service for manufacturing industry as the key focus to support the real economy,we enhanced relevant top-level designs,ensured that the necessary policies and resources were in place and innovated the product and service model to improve the financial service system continuously.We continued to increase financial supply by focusing on key areas such as advanced manufacturing,high-end equipment manufacturing,optimization and upgrade of traditional industries and quality and efficiency improvement of consumer goods industry.The balance of loans in the manufacturing industry(based on the use of loans)increased by RMB428.3 billion as compared to the end of the previous year,which was 2.18 times of the increase in the same period of the previous year.Among which,the growth rate of medium-and long-term loans in the manufacturing industry reached 34%,while the growth rate of loans to high-tech manufacturing industries such as electronics and communication equipment,computer,pharmaceutical and aerospace equipment was 38%.We served major national strategies of regional development.We took advantage of our omni-channel,full range of products and multiple licenses to comprehensively support major strategies of regional development,such as Beijing-Tianjin-Hebei Region,Yangtze River Delta,Guangdong-Hong Kong-Macao Greater Bay Area and Chengdu-Chongqing Region.We enhanced the support to the real economy.We strengthened the construction of key customer groups of the new economy,accelerated the construction of financial service system for science and technology innovation,and maintained the first-mover advantage in the marketing of specialized and sophisticated“little giant”enterprises that produce new and unique products.The balance of loans to strategic emerging industries increased by RMB250.8 billion as compared to the end of the previous year.We introduced policies to break the hidden barriers such as“the difficulty and the high cost in financing”of private enterprises,accelerated the product innovation,strengthened mechanism guarantee,assisted in the bail-outs of the private enterprises to increase the financial support.At the end of June 2022,the number of private enterprises with outstanding loan balances reached 371.1 thousand,representing an increase of 32.7 thousand as compared to the end of the previous year.The balance of loans was RMB2,873,689 million,representing an increase of RMB406,038 million as compared to the end of the previous year.We promoted the digital transformation.We promoted the construction of the middle platform for operation and management of corporate banking and the optimization of the CMM system,and introduced a series of digital marketing management tools focusing on key project research and development,data governance,and targeted chain marketing for corporate customers.We accelerated the layout of scenarios in transportation,tourism and pension finance,and continued to enrich the application of online credit,transaction banking,pension and other products.The number of active customers for corporate online banking and corporate mobile banking increased by 645.4 thousand and 622.1 thousand,respectively.28Discussion and AnalysisTransaction BankingWe continued to improve the transaction banking system based on accounts and payment settlement,and accelerated the layout of our online products to promote the high-quality development of our transaction banking business.We implemented graded and classified management of corporate accounts,optimized account opening services for enterprises,and improved the ability of branch outlets and online channel in customer acquisition continuously.At the end of June 2022,we had 9,549.4 thousand corporate RMB-denominated settlement accounts.We promoted E-guarantee to achieve whole-process online services in terms of domestic non-financing electronic guarantees with low risk.We optimized the smart supervision service to safeguard the capitals of major construction projects.We iteratively upgraded smart guaranteed payment and refined the industries and application scenarios to provide comprehensive financial service to multiple types of customers such as E-commerce platform.At the end of June 2022,we had 3,730.4 thousand active transaction banking customers.Institutional BankingWe promoted the construction of Smart Customer and continuously improved our comprehensive service capabilities in institutional banking business.At the end of June 2022,we had 598.2 thousand institutional customers,representing an increase of 6.9%as compared to the end of the previous year.In terms of financial services provided to the governments,our coverage rate of cooperation with prefecture-level service platforms for government affairs reached 83%.We continued to improve functions such as pandemic prevention and control,rural revitalization and integration of party building on“iXiangyang”APP.We had cooperated with 13 counties in 8 provinces through Smart County,a smart service platform for county government affairs,whose functions and applications were further enriched.In terms of services with respect to peoples livelihood,the number of customers with electronic certificates for medical insurance through our mobile banking exceeded 50.82 million.We cooperated with over 30 thousand schools on our smart campus,and over four thousand hospitals on our smart hospital.In terms of services to financial institutions,the contracted customers for third-party depository services amounted to 62,080.0 thousand at the end of June 2022,representing an increase of 5,327.4 thousand as compared to the end of the previous year.Investment BankingPersisting in serving the real economy,we accelerated product innovation and continued to improve the“financing financing intelligence”service solutions to meet the needs of customers for diversified financing.In the first half of the year,the income from our investment banking business was RMB8,019 million.We actively met the needs of customers for diversified financing.By leveraging the advantage of syndicated services,we continued to increase credit support to major projects in transportation,energy,water conservancy and other infrastructure fields,with the balance of syndicated loans exceeding RMB2 trillion.We actively supported M&A transactions related to industrial upgrade and enterprise transformation,and maintained a leading position in the market in terms of the scale of M&A loans.We increased support for direct financing to enterprises and underwrote debt financing instruments of non-financial enterprises with an amount of over RMB200 billion.We continuously promoted business innovation.We launched a number of funds for science and technology innovation,accelerated the promotion of the advisory service of stock option arrangement,orderly promoted the enterprise listing cultivation service,and actively promoted the model of investment and loan linkage service for science and technology startups.We underwrote the first batch of science and technology innovation notes,the first batch of transition bonds and the first high-growth asset-backed commercial paper(ABCP)in the market,and led in the market in terms of underwriting volume of rural revitalization bonds and green bonds.29Interim Report 2022Discussion and AnalysisRetail BankingIn the first half of the year,adhering to the customers-centered principle,we further promoted the development strategy of“One Main Body with Two Wings”,improved customer service,strengthened“broad wealth management”and digital transformation,improved financial services to new urban residents and rural revitalization,and promoted the high-quality development of retail banking.At the end of June 2022,the total number of our retail banking customers reached 859 million,maintaining a leading position in banking industry.We focused on sophisticated services and upgraded customer management model.To meet customers needs,we built a three-dimensional matrix customer management system that is layered,grouped and graded.We strengthened the hierarchical service to accompany the growth of customers by providing them with exclusive rights and interests.We carried out group-based operations to provide targeted financial solutions to different customer groups.We implemented graded management of customer managers to improve customer satisfaction.We built an open ecosystem and developed“broad wealth management”.We have extensively cooperated with high-quality companies in wealth management,insurance,fund,precious metals and other industries,and continued to enrich our full-spectrum product pool.We vigorously promoted asset allocation services,focused on accompanying customers during the whole process of pre-sale,sales and after-sale,and duly performed our duty as family finance advisors.We actively promoted the construction of a professional and multi-layered“broad wealth management”service team to improve our professional services capabilities.We unleashed data value and promoted the digital transformation.Focusing on data empowerment,we continued to improve the digital transformation infrastructure such as the“smart brain for retail business”,strengthened the“precise identification”,and provided customers with intelligent,accurate and predictable financial services by relying on tools such as“smart customer reception”,“smart customer retention”,“digital people”,and digital customer relationship management system.We focused on social concerns and fulfilled our responsibilities in retail banking.We accelerated the promotion of products such as“Gongxin Bao”,“Mingong Xinrong”and“ABC Zhufu Card”,strengthened cooperation with Internet platforms which had attracted many new urban residents to actively serve new urban residents.Relying on digital tools such as the full-scenario marketing service platform for rural revitalization,we extended the service focus to underserved areas,expanded the service coverage,and strengthened the promotion of exclusive products such as rural revitalization cards,Huinong wealth management and Huinong E-loan to improve the rural financial service capabilities.Retail Loans We adhered to the principle that houses are for living in,not for speculation,supported the reasonal housing need of residents and implemented city-specific policies to promote the virtuous cycle and healthy development of the real estate industry.The balance of retail residential mortgage loans increased by 1.9%as compared to the end of the previous year.In accordance with the national policy requirements to promote the continuous recovery of consumption,we actively met the comprehensive consumption needs of individuals for car purchase,decoration,home appliances,etc.,and continued to increase consumption loans,with the balance of personal consumption loans increased by 6.0%as compared to the end of the previous year.We continued to enhance financing supports for the stable production and sufficient supply to market entities in the fields of peoples livelihood such as wholesale and retail,accommodation and catering,and resident services,and the balance of loans to private business increased by 17.3%as compared to the end of the previous year.30Discussion and AnalysisRetail Deposits We continued to enrich product system,optimized service process to meet diversified wealth management needs of customers and achieved sustained and steady growth in retail deposits.At the end of June 2022,the balance of domestic retail deposits of the Bank reached RMB14,189,829 million,representing an increase of RMB1,255,658 million as compared to the end of the previous year,maintaining a leading position in the industry.Bank Card Business We improved the innovation and service capabilities of debit cards.We launched the“Jinsui Freight Card”to support the smoothness of freight logistics with financial services.We carried out a variety of debit card marketing activities,and cooperated with UnionPay to organize a number of consumption promotion activities for the benefit of people covering catering and convenience stores.We fully implemented the policies of fee reduction and interest concession,continued to waive inter-bank ATM cash withdrawal fees for all debit cards,and further waived inter-bank fees for cash withdrawal in rural areas.At the end of June 2022,we had 1,052 million existing debit cards,and 22,197.1 thousand debit cards were newly issued in the first half of the year.We continuously upgraded products and services of credit cards.We launched key products such as Car Owner Cards,Constellation Cards(China trend version)and Youran Joy Platinum Card,upgraded the customized benefits of card numbers and card design,and improved the experience of customers in their online card application and card use.We established a special preferential business circle and continued to carry out brand marketing activities,such as“Affectionate Companion”,“Affectionate Benefit”,“Automobile Festival”and“Home Decoration Festival”to effectively meet the residents consumption needs of clothing,food,housing,transportation and entertainment.We actively implemented the policy of benefiting people and protecting enterprises,introduced differentiated repayment services,and implemented preferential transaction fees for certain merchants.In the first half of 2022,the transaction volume of credit cards amounted to RMB1,106,223 million.Private Banking Business We continued to strengthen the marketing for private banking customers,launched the“On-the-Wing Initiative”for private banking business,continued to establish private banking centers at the head office level,and strengthened the construction of key wealth management centers and penetration supervision.We accelerated the development of family trust business,established a four-level linkage mechanism,and responded to customers needs for customized wealth inheritance in real time.We deepened the construction of the“Yi Private Banking”public welfare financial laboratory,and launched a number of charitable trusts with strong social influence such as Yuan Longping Charitable Trust.We continued to develop the private banking high-end wealth management business,practiced the concept of long-term and steady asset allocation,and continued to strengthen the sales of steady strategic products,with the scale of agency sales of asset management and private banking exclusive wealth management products steadily increased.At the end of June 2022,the number of our private banking customers reached 191 thousand and the balance of assets under management amounted to RMB2,062.4 billion,representing an increase of 21 thousand and RMB215.9 billion,respectively,as compared to the end of the previous year.31Interim Report 2022Discussion and AnalysisTreasury OperationsTreasury operations of the Bank include money market activities and investment portfolio management.We adhered to serving the real economy,made contribution to the stabilization of the overall economy and supported green and low-carbon development.We flexibly adjusted investment strategies and strengthened flow operations on the basis of ensuring the security of bank-wide liquidity.Our investment return remained at a relatively high level in the industry.Money Market Activities We strengthened our research on monetary policies and forecasts of market liquidity,comprehensively used various financing instruments such as placement and lending,repurchases,certificates of deposit and deposits to smoothen liquidity fluctuations and reasonably allocated maturing funds to improve the efficiency of fund utilization on the basis of ensuring the security of our liquidity.In the first half of 2022,the volume of RMB-denominated financing transactions amounted to RMB66,264,247 million,including RMB66,105,285 million in lending and RMB158,962 million in borrowing.Investment Portfolio ManagementAt 30 June 2022,our financial investments amounted to RMB8,965,955 million,representing an increase of RMB735,912 million,or 8.9%,as compared to the end of the previous year.Trading Book Activities We maintained a leading position in the industry in terms of the bond market-making business in the inter-bank market.We proactively provided market-making quotation for green bonds to support green and low-carbon development.We focused on serving the opening-up of the bond market,and our market-making transaction volume of Bond Connect approximately increased by 30%on a year-on-year basis.We continuously improved the management capability of bond trading portfolio.In the first half of 2022,the overall yields of domestic bond market were range-bound with a downward trend.We dynamically adjusted the portfolio considering the market trend,strictly controlled the portfolio risk exposure and appropriately used derivatives to manage the portfolio market risks.Banking Book Activities We continuously improved the quality and effectiveness of bond investment to serve the real economy and contributed to the stability of the overall economy.We maintained the scale of our investment in local government bonds and optimized the investment structure of credit bonds.We served the national regional strategies and local economic development,and supported the infrastructure construction in water conservancy projects,transportation and other sectors and the financing demands from the industries of the real economy such as public utilities,energy and science and technology.We increased our investment in green bonds,proactively supporting the construction of green projects related to sectors such as clean energy and infrastructure green upgrading to assist with the green transformation of the real economy.We reasonably seized the investment opportunities and dynamically adjusted the structures of investment portfolios by considering the market rate trend and bond supply.As a result,we reduced portfolio risks and achieved relatively high returns.32Discussion and AnalysisAsset ManagementWealth ManagementIn the first half of 2022,we proactively implemented the requirements for the net worth operation of wealth management products,and steadily carried out wealth management investment.At the end of June 2022,the balance of the Groups wealth management products amounted to RMB1,843,806 million,of which RMB162,221 million was generated from the Bank and RMB1,681,585 million was generated from Agricultural Bank of China Wealth Management Co.,Ltd.Wealth Management Products of the BankDuring the reporting period,our outstanding wealth management products were non-principal guaranteed wealth management products.At the end of June 2022,the balance of non-principal guaranteed wealth management products amounted to RMB162,221 million,representing a decrease of RMB87,101 million as compared to the end of the previous year.In terms of offering approach,the balance of publicly offered wealth management products amounted to RMB162,221 million,representing a decrease of RMB85,995 million as compared to the end of the previous year;the balance of privately offered wealth management products amounted to zero,representing a decrease of RMB1,106 million as compared to the end of the previous year.The table below presents the issuance,maturity and duration of our wealth management products during the reporting period.In 100 million of RMB,except for tranches31 December 2021IssuanceMaturity30 June 2022ItemTrancheAmountTrancheAmountTrancheAmountTrancheAmountNon-principal guaranteed wealth management542,493.2241871.01131,622.21Note:The amount of maturity includes redemption and maturity amount of wealth management products during the reporting period.The table below presents the balances of direct and indirect investment assets under the Banks wealth management as of the date indicated.In 100 million of RMB,except for percentages30 June 2022ItemAmountPercentage(%)Cash,deposits and interbank certificates of deposit118.37 6.6Placements with and loans to banks and other financial institutions and financial assets held under resale agreementsDebt securities993.61 55.1Non-standardized debt assets523.83 29.0Other assets167.52 9.3Total1,803.33 100.033Interim Report 2022Discussion and AnalysisWealth Management Products of Agricultural Bank of China Wealth Management Co.,Ltd.At the end of June 2022,the balance of wealth management products of Agricultural Bank of China Wealth Management Co.,Ltd.amounted to RMB1,681,585 million.These were all net worth wealth management products,among which publicly offered wealth management products accounted for 99.45%while privately offered wealth management products accounted for 0.55%.Custody Service In the first half of 2022,we successfully achieved the custodianship of the largest Infrastructure Public Offered REITs in the market,led in the industry in terms of quantity and scale of initial offering of public funds under custody.The scale of pension funds under custody exceeded RMB1 trillion,and breakthrough was achieved in the custody business of wealth management pension.Our market competitiveness was effectively enhanced.In the election of the 12th“Golden Pixiu Award”Gold Medal List,we were awarded“Gold Medal Asset Custody Bank of the Year”,and our brand influence was continuously improved.At the end of June 2022,our assets under custody amounted to RMB13,567,843 million,representing an increase of 8.9%as compared to the end of the previous year,of which the pension funds under custody amounted to RMB1,006,145 million,representing an increase of 6.9%as compared to the end of the previous year.Pension To proactively serve the national strategy of rigorously coping with aging population and contribute to the development of a multi-layered and multi-pillar social pension insurance system,we carried out the overall layout of pension financial services.We were committed to providing annuity asset management services to various types of institutions including micro,small and medium-sized enterprises and individual customers.The increase of the number of entrusted management customers of enterprise annuity and account management customers of enterprise annuity both led in the industry,with the steady growth of business scale.At the end of June 2022,our pension funds under entrusted management1 amounted to RMB187,937 million,representing an increase of RMB17,040 million,or 10.0%,as compared to the end of the previous year.Precious Metals In the first half of 2022,we traded 2,092.96 tons of gold and 10,828.88 tons of silver for our own account as well as on behalf of customers and maintained the leading position in the industry in terms of transaction volume.We steadily developed the precious metal leasing and lending businesses and continuously strengthened the support to entity customers of the precious metal industry chain to guarantee the stable operation of commodities production enterprises.We strengthened due diligence on customers in the areas such as green and low-carbon,and improved the assessment of ESG factors.Treasury Transactions on Behalf of Customers We actively promoted the concept of exchange rate risk neutrality,continued to improve services for customers by optimizing processes and improving online service experience,and assisted enterprises in improving their capabilities in managing exchange rate risk.In the first half of 2022,the transaction volume of foreign exchange sales and settlements as well as foreign exchange trading on behalf of customers amounted to USD274,121 million,representing a year-on-year increase of 18.0%.1 Including occupational annuity,enterprise annuity and other pension assets under entrusted management.34Discussion and Analysis The counter bond(Zhaishibao)business developed steadily.The counter bond customer group steadily expanded,with the amount of distribution of bonds exceeding RMB16 billion in the first half of 2022.We strengthened our efforts to serve the real economy and support major national development strategies by proactively providing quotations of local government bonds and thematic bonds such as rural revitalization bonds.As of the end of June 2022,we provided counter quotations for more than 70 bonds including local government bonds and thematic bonds such as rural revitalization bonds in total.Agency Insurance Business In the first half of 2022,our agency insurance premium reached RMB80.9 billion,maintaining a leading position in the industry,among which the agency regular insurance premium increased by 19.6%as compared to the same period of the previous year,and the business structure continued to be optimized.Agency Distribution of Fund Products We further deepened the cooperation with the leading fund companies to implement“the quality products strategy”in the fund agency distribution.According to the market situation and the customer demands,we strengthened the agency distribution of publicly offered funds with relatively-low risks and actively explored strategic fields,such as pension FOF and publicly offered REITs and provided whole process management of products and customer services.In the first half of 2022,the number of funds distributed by the Bank amounted to 3,428,with sales volume amounted to RMB114,356 million.Agency Sales of PRC Government Bonds In the first half of 2022,we,as an agent,distributed 4 tranches of savings PRC government bonds with the actual sales amount of RMB10,656 million,including 2 tranches of savings PRC government bonds(in certificate form)of RMB4,323 million and 2 tranches of savings PRC government bonds(in electronic form)of RMB6,333 million.Internet FinanceWe implemented the online business philosophy,deeply taped into the value of traffic,and promoted the high-quality development of Internet Finance business.Smart Mobile Banking The level of intelligence was improved.We launched the 7.3 Version of Mobile Banking,which improved the electronic payroll and other highlight products and provided functions such as adding accounts and real-time LPR query.We optimized the business process to improve the success rate of self-service registration and promote the intelligent interaction of Mobile Banking and interconnection between channels.We upgraded the channels including homepage and life,and optimized the information display of transfer,wealth management and other modules,which continuously improved the customer experience.As of the end of June 2022,we had more than 164 million of monthly active users(MAU)of mobile banking.The rural version of Mobile Banking was optimized.We launched exclusive financial products of rural revitalization series and Huinong series,enriched the products of Huinong loan,and optimized the functions of line of credit measurement and loan application,which effectively improved the digitalization of financial services for county areas.35Interim Report 2022Discussion and AnalysisOnline Corporate Banking Corporate finance service platform was upgraded.We upgraded the technical framework of the platform,optimized configuration center for special versions,and enhanced the capability of the platform for customized service.We launched the Enterprise WeChat Bank to-do task prompt and other functions to improve the channel collaboration service ability.We enriched the deployment of corporate banking functions,optimized corporate financing services,and upgraded the“Inclusive E-Station”channel,which enhanced our mobile financial service capabilities.The“Salary Manager”service platform was optimized.We realized the separation of HR and finance of payroll business in financial scenarios of the Bank.We developed and launched hybrid salary function,supporting hybrid payment of salary from digital RMB accounts and basic settlement accounts.Smart Scene-based Finance The scene-based applications with high-frequency transactions were deeply promoted.In terms of campuses,we accelerated the iteration of headquarters version of smart campus application to provide comprehensive financial and non-financial services such as campus payment,campus access control,notice and announcement,and new student registration.In terms of canteens,we completed the R&D of ABC canteen mini apps to realize meal card query,meal card recharge,dining payment,online ordering and other functions.In terms of government affairs,we promoted the e-government dedicated zone of Mobile Banking and accelerated the cooperation with the e-government platforms of various provinces and cities.In terms of travel,we established the car owner service zone and integrated related products,services and interests,achieving“cooperation with and sharing of external services,and seamless integration of banking products”.The service capabilities of open banking were improved.We continued to enrich the open banking output products,and provided seven types of output services including user authentication,account services,payment and settlement,fund products,financing services,mobile banking collaboration,and information services through the open banking platform.We improved the interconnection efficiency of internal and external systems,and satisfied the needs of personalized and diversified cooperation through flexible configuration.The number of open banking cooperation projects increased by 32%as compared to the end of the previous year.36Discussion and AnalysisDigital RMB Projects The digital RMB product functions were improved.We developed finance and capital management functions for group enterprises,and realized the application of corporate“parent-child wallet”across different legal entities,improving the Groups capital settlement efficiency.We upgraded the comprehensive cashier products,realizing quick acceptance of digital RMB business from merchants,so as to support the operation of small and medium-sized merchants.We explored the supply chain applications and exported the digital RMB functions to supply chain platforms,providing“one-stop”digital RMB services for the upstream and downstream enterprises.The construction of digital RMB scenarios was promoted.We continued to promote the scene-based construction including supermarket retail,bus,park consumption,public payment and rural tourism to constantly improve the stickiness of digital RMB application.Cross-border Financial ServicesWe actively provided services to support the development of the export-oriented economy and high-quality opening up,and supported the Belt and Road Initiative,RMB internationalization,the establishment of pilot free trade zone and Hainan Free Trade Port,the transformation and upgrading of foreign trade and foreign investment.As of the end of June 2022,the total assets of our overseas branches and subsidiaries reached USD162.77 billion,representing an increase of 6.6%as compared to the end of the previous year.In the first half of 2022,the net profit of our overseas branches and subsidiaries amounted to USD0.4 billion.In the first half of 2022,the volume of international settlement by domestic branches reached USD847,655 million and the volume of international trade financing(including financing with domestic letters of credit)reached USD80,412 million.We optimized the cross-border integrated financial service system.We implemented integrated operation of RMB and foreign currency businesses to improve our cross-border financial services.We accelerated product innovation and digital transformation,and optimized service process.Three online brands for cross-border business,namely,ABC Cross-border E-Remittance,ABC Cross-border E-Certificate and ABC Cross-border E-Finance,were promoted with our further enhanced customer service capabilities.We supported the Belt and Road Initiative and the enterprises financial demands of“going global”.Responding to the foreign trade situation,the customer demands and new development pattern of“double cycle”,we effectively marketed and provided services for“going global”projects,with focus on Easy Construction Finance series.In the first half of 2022,the volume of loans,letters of guarantee,overseas bond issuance and other businesses related to“going global”amounted to USD12,407 million,among others,the related businesses in countries along the Belt and Road amounted to USD3,095 million.We supported the development of pilot free trade zone and Hainan Free Trade Port.We issued an action plan to support the high-quality development of pilot free trade zone and formulated relevant measures to enhance our financial service in pilot free trade zone and Hainan Free Trade Port.In the first half of 2022,the number of free trade accounts increased by 1,013,representing a year-on-year growth of 36.97%.The cross-border RMB business maintained a steady growth,notching a total volume of RMB1,148,288 million in the first half of 2022.Actively playing its role as RMB clearing bank,Dubai Branch handled RMB clearing business amounting to RMB43,460 million in the first half of 2022,representing a year-on-year increase of 146.65%.37Interim Report 2022Discussion and AnalysisOverseas Subsidiary BanksAgricultural Bank of China(Luxembourg)LimitedAgricultural Bank of China(Luxembourg)Limited is a wholly-owned subsidiary of the Bank incorporated in Luxembourg,with a registered capital of EUR20 million.Its scope of business includes wholesale banking business such as international settlement,corporate deposits,syndicated loans,bilateral loans,trade financing and foreign exchange trading.At the end of June 2022,its total assets and net assets amounted to USD39 million and USD25 million,respectively.It recorded a net profit of USD2.18 million for the first half of 2022.Agricultural Bank of China(Moscow)LimitedAgricultural Bank of China(Moscow)Limited is a wholly-owned subsidiary of the Bank incorporated in Russia,with a registered capital of RUB7,556 million.Its scope of business includes wholesale banking business such as international settlement,corporate deposits,syndicated loans,bilateral loans,trade financing and foreign exchange trading.At the end of June 2022,its total assets and net assets amounted to USD205 million and USD162 million,respectively.It recorded a net profit of USD1.81 million for the first half of 2022.In addition,we own Agricultural Bank of China(UK)Limited in the United Kingdom,with a share capital of USD100 million.According to our overseas business development strategy,after the opening of the London branch of the Bank,the financial license of Agricultural Bank of China(UK)Limited was revoked,and we have been undertaking the procedures needed to dissolve Agricultural Bank of China(UK)Limited.Integrated OperationsWe have established an integrated operation platform covering fund management,securities and investment banking,financial leasing,life insurance,debt-to-equity swap and wealth management businesses.In the first half of 2022,our six subsidiaries of integrated operation focused on core businesses,delved into respective professional territory and operated prudently regarding the development strategy of the Group.Their market competitiveness was steadily improved and synergy of the Groups integrated operation was achieved gradually.ABC-CA Fund Management Co.,Ltd.ABC-CA Fund Management Co.,Ltd.was established in March 2008 with a registered capital of RMB1.75 billion,51.67%of which was held by the Bank.Its businesses include fund-raising,sales of fund and asset management,and its major products include stock funds,mixed funds,bond funds,monetary funds and FOF funds.At 30 June 2022,its total assets and net assets amounted to RMB4,844 million and RMB4,164 million,respectively.It recorded a net profit of RMB121 million for the first half of 2022.ABC-CA constantly enhanced its investment and research capabilities,improved its product and business deployment,and strengthened risk management,with its scale of asset under management increased steadily and the structure of asset under management optimized continuously.As of the end of the reporting period,ABC-CA had 67 publicly offered funds,101 privately offered funds,and the assets under management reached RMB418.6 billion,representing an increase of RMB33.8 billion as compared to the end of the previous year.Its equity fund achieved an absolute yield rate of 4.48%in the past year,ranking 18th among 155 fund companies.38Discussion and AnalysisABC International Holdings LimitedABC International Holdings Limited was established in Hong Kong SAR in November 2009 with a share capital of HKD4,113 million,100%of which was held by the Bank.ABC International Holdings Limited is eligible to engage in providing comprehensive and integrated financial services in Hong Kong SAR,including sponsor and underwriter for listing,issuance and underwriting of bonds,financial consultation,asset management,direct investment,institutional sales,securities brokerage and securities consultation,and is also eligible to engage in businesses including private fund management,financial consultation,investment in Chinese mainland.At 30 June 2022,its total assets and net assets amounted to HKD47,142 million and HKD10,751 million,respectively.It recorded a net profit of HKD183 million for the first half of 2022.ABC International maintained its leading position among its comparable peers in terms of core indicators of investment banking business.In the first half of 2022,it completed 2 IPO sponsorship projects and 9 underwriting projects,ranking third among all domestic and foreign investment banks in Hong Kong SAR in terms of the number of underwriting projects.It underwrote 58 overseas bonds,with the underwriting scale increased by 63%compared to the same period of the previous year,ranking first among investment banks controlled by banks in terms of overseas bond underwriting scale issued by Chinese companies.ABC Financial Leasing Co.,Ltd.ABC Financial Leasing Co.,Ltd.was established in September 2010 with a registered capital of RMB9.5 billion,100%of which was held by the Bank.Its principal scope of business includes financial leasing,transfer and acceptance of financial leasing assets,fixed-income securities investment business,acceptance of leasing deposits from lessees,absorbing time deposits with a maturity of three months or above from non-bank shareholders,inter-bank lending,borrowing from financial institutions,overseas borrowings,selling and disposal of leased items,economic consultation,establishment of project companies in domestic bonded zones to carry out financial leasing business,provision of guarantee for external financing of controlled subsidiaries and project companies,and other businesses approved by the CBIRC.At 30 June 2022,its total assets and net assets amounted to RMB77,502 million and RMB10,853 million,respectively.It recorded a net profit of RMB429 million for the first half of 2022.Persisting the characteristic development,ABC Financial Leasing achieved positive results in serving the goals of“peak carbon emissions and carbon neutrality”and rural revitalization.As of the end of June,the proportion of the balance of green leasing assets and agriculture-related leasing assets amounted to 66.4%and 25.2%,respectively.ABC Financial Leasing returned to basics of leasing business,with the proportion of the balance of direct lease in the balance of financial leasing amounted to 44.4%.ABC Life Insurance Co.,Ltd.The registered capital of ABC Life Insurance Co.,Ltd.was RMB2.95 billion,51%of which was held by the Bank.Its principal scope of business includes various types of personal insurance such as life insurance,health insurance and accident insurance;reinsurance business for the above-mentioned businesses;businesses with the application of insurance funds as permitted by the laws and regulations of the PRC;and other businesses approved by the CBIRC.At 30 June 2022,its total assets and net assets amounted to RMB136,579 million and RMB8,540 million,respectively.It recorded a net loss1 of RMB112 million for the first half of 2022.Focusing on the primary responsibilities and core businesses in insurance,the business development capability of ABC Life Insurance was significantly improved.In the first half of 2022,the total premium income reached RMB26,252 million,with a year-on-year growth of 13.4%.Among them,regular premium reached RMB4,068 million,with a year-on-year growth of 48.4%.“ABC Quick E-Compensation”won the“Model Case of Customer Service in Insurance Industry”award by China Banking and Insurance News.1 In order to be consistent with the Groups disclosure standards,the data is in accordance with the new financial instrument standard,which is different from the data in accordance with the financial instrument standard currently adopted by the insurance industry.Under the financial instruments standard currently adopted by the insurance industry,ABC Life Insurance recorded a net profit of RMB303 million for the first half of 2022.39Interim Report 2022Discussion and AnalysisABC Financial Asset Investment Co.,Ltd.The registered capital of ABC Financial Asset Investment Co.,Ltd.was RMB20.0 billion,100%of which was held by the Bank.Its principal scope of business includes:acquiring the creditors rights of the banks to the enterprises for the purpose of debt-to-equity swap,converting the creditors rights into equity and managing the equity;restructuring,transferring and disposing of the creditors rights that cannot be converted into equity;investing in enterprises for the purpose of debt-to-equity swap,where the invested enterprise uses all the equity investment funds to repay the existing creditors rights;raising funds from qualified investors according to law and regulations,issuing private asset management products to support debt-to-equity swaps;issuing financial bonds;raising funds through bond repurchase,inter-bank lending and placement,inter-bank borrowing;conducting necessary investment management for proprietary funds and raised funds,where the proprietary funds may be used for interbank deposit taking,interbank loan,purchase of national bonds or other fixed income securities and other businesses,and the use of raised funds shall conform to the purposes agreed upon in fund raising;financial advisory and consulting services related to the debt-to-equity swap business;other business approved by the banking regulatory authority of the State Council.At 30 June 2022,its total assets and net assets amounted to RMB124,395 million and RMB26,041 million,respectively.It recorded a net profit of RMB1,500 million for the first half of 2022.ABC Financial Asset Investment focused on the primary responsibilities and core businesses of debt-to-equity swap,actively served the supply-side structural reform and the real economy,and put more emphasis on rural revitalization,green and low-carbon development,risk mitigation,and scientific and technological innovation,with the new investments in above-mentioned fields accounting for more than 70%.Agricultural Bank of China Wealth Management Co.,Ltd.Agricultural Bank of China Wealth Management Co.,Ltd.was established in July 2019 with a registered capital of RMB12.0 billion,100%of which was held by the Bank.The principal scope of business includes public offering of wealth management products to the general public,investment and management of the above-mentioned properties entrusted by the investors;private placement of wealth management products to qualified investors,investment and management of the above-mentioned properties entrusted by the investors;wealth management advisory and consulting services;and other businesses approved by the CBIRC.At 30 June 2022,its total assets and net assets amounted to RMB16,567 million and RMB16,293 million,respectively.It recorded a net profit of RMB1,226 million for the first half of 2022.2022 was the first year for the full net worth operation of wealth management business after the end of the transition period of the Guiding Opinions regarding Asset Management Business of Financial Institutions.ABC Wealth Management maintained a leading position in the industry in terms of assets under management through various measures,such as innovating product design,enriching product functions,improving product deployment and optimizing customer experience.Prudently carrying out wealth management investment.It strengthened the study and judgment of market trends,and adjusted the asset allocation strategy in a timely manner to effectively avoid market fluctuations.In the first half of 2022,the monthly performance of multiple fixed income and hybrid products of ABC Wealth Management ranked in the front of the market.Actively serving the rural revitalization.The scale of rural vitalization themed wealth management products exceeded RMB50.0 billion,and the balance of county customers accounted for more than 40%.Constantly improving the brand image.It won awards such as“Trustworthy Wealth Management Institution of Banks”and“Best Green Wealth Management Company of the Year”held by media such as Economic Observer and“Sina Finance”.Besides,we own China Agricultural Finance Co.,Ltd.in Hong Kong SAR with a share capital of HKD589 million,100%of which was held by the Bank.40Discussion and AnalysisFinTechDuring the reporting period,we continued to deepen the application of frontier technologies related to FinTech,further promoted the implementation of our iABC strategy in information technology,and continued to improve our capability of science and technology empowerment.Focusing on FinTech InnovationActively responding to the accelerated evolution of technology transformation,we speeded up the transformation into a new-generation technology system,built a new digital infrastructure and an IT architecture base which were future-oriented,and deepened the application of FinTech to empower the high-quality development of business operations.Regarding the application of Big Data technology,we promoted in-depth data integration and common data accumulation and provided one-stop exclusive data services through the big data platform and the middle-end data platform.In addition,we steadily advanced the cloud deployment of data-type applications of our branches.Regarding the application of cloud computing technology,we promoted the construction of an integrated cloud platform and completed the construction of the system for technology stack of“one cloud with multiple cores”.The physical nodes of the cloud platform of the Head Office exceeded 25,000 and the cloudification rate of computing resources reached 91%.Regarding the application of AI technology,we built a one-stop and whole-process knowledge graph platform,completed the construction and service of a ten-billion-level graphs asset,which were applied to Sannong,credit card,credit and other fields.We built a privacy computing platform to provide privacy computing basic services for AI and BI scenarios.We released 7.3 version of mobile banking,which improved the ability of smart recommendation.Regarding the application of distributed architecture,we promoted the transformation of core system to distributed architecture,with the distributed core system accounting for more than 67%of the trading volume during the peak trading period of the Spring Festival.We established the distributed middle-end technology platform to provide technical support of high-availability,high-reliability and high-performance to our product and application.Regarding the application of block chain technology,we promoted the construction of the blockchain cloud service platform and established a new trusted certificate system platform,which enabled us to achieve the whole-process traceability of data in the certificate chain,provide blockchain certificate scenario services and support the innovative application of digital collectible and cloud signature.Regarding the application of information security technology,we completed the promotion and deployment of the enterprise-level network Security Operation Center(SOC)in the Head Office and 37 tier-1 branches and achieved the overall access of 590 security log sources covering 20 categories,which supported the bank-wide supervision of daily network security situation.Regarding the application of network technology,we continued to upgrade the stock domain name to IPv6,explored the innovative application of“IPv6 ”,and built end-to-end visual SRv6 network.Regarding the application of Internet of Things and virtual technologies,we initiated the bank-wide construction of Internet of Things,and set out a plan to construct Visual Reality(VR)and Augmented Reality(AR)platforms.41Interim Report 2022Discussion and AnalysisImproving the Level of Guarantee of Our Business ContinuityWe focused on the construction of a disaster recovery system,promoted the dual-active construction of tier-1 business,improved the take-over scope of disaster recovery business,improved the coverage of emergency drills,and comprehensively improved the level of guarantee business continuity.The construction of disaster recovery was promoted.We completed the disaster recovery construction of 537 systems/modules,equipping all the tier-1 businesses,tire-2 businesses an
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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.
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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.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 October 30,2022or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number:1-8207THE HOME DEPOT,INC.(Exact name of registrant as specified in its charter)Delaware95-3261426(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)2455 Paces Ferry RoadAtlanta,Georgia30339(Address of principal executive offices)(Zip Code)(770)433-8211(Registrants telephone number,including area code)Not Applicable(Former name,former address and former fiscal year,if changed since last report)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading SymbolName of each exchange on which registeredCommon Stock,$0.05 Par Value Per ShareHDNew 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 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 reporting company,or anemerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”inRule 12b-2 of 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 Indicate the number of shares outstanding of each of the issuers classes of common stock,as of the latest practicable date.1,019,186,022 shares of common stock,$0.05 par value,outstanding as of November 15,2022TABLE OF CONTENTSCommonly Used or Defined TermsiiForward-Looking StatementsiiiPART I FINANCIAL INFORMATION1Item 1.Financial Statements.1Consolidated Balance Sheets1Consolidated Statements of Earnings2Consolidated Statements of Comprehensive Income3Consolidated Statements of Stockholders Equity4Consolidated Statements of Cash Flows5Notes to Consolidated Financial Statements6Note 1.Summary of Significant Accounting Policies6Note 2.Net Sales7Note 3.Property and Leases7Note 4.Debt and Derivative Instruments8Note 5.Stockholders Equity10Note 6.Fair Value Measurements10Note 7.Weighted Average Common Shares11Note 8.Contingencies11Report of Independent Registered Public Accounting Firm12Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations.13Item 3.Quantitative and Qualitative Disclosures About Market Risk.20Item 4.Controls and Procedures.20PART II OTHER INFORMATION20Item 1A.Risk Factors.20Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.21Item 6.Exhibits.22SIGNATURES23iTable of ContentsCOMMONLY USED OR DEFINED TERMSTermDefinitionASUAccounting Standards UpdateComparable salesAs defined in the Results of Operations section of MD&AExchange ActSecurities Exchange Act of 1934,as amendedFASBFinancial Accounting Standards Boardfiscal 2021Fiscal year ended January 30,2022fiscal 2022Fiscal year ending January 29,2023GAAPU.S.generally accepted accounting principlesMD&AManagements Discussion and Analysis of Financial Condition and Results of OperationsNOPATNet operating profit after taxRestoration PlanHome Depot FutureBuilder Restoration PlanROICReturn on invested capitalSECSecurities and Exchange CommissionSecurities ActSecurities Act of 1933,as amendedSG&ASelling,general and administrative2021 Form 10-KAnnual Report on Form 10-K for fiscal 2021 as filed with the SEC on March 23,2022iiTable of ContentsFORWARD-LOOKING STATEMENTSCertain statements contained herein,as well as in other filings we make with the SEC and other written and oral information we release,regarding our performance or other events or developments in the future constitute“forward-looking statements”as defined in the PrivateSecurities Litigation Reform Act of 1995.Forward-looking statements may relate to,among other things,the impact of the COVID-19 pandemicand the related recovery on our business,results of operations,cash flows and financial condition(which,among other things,may affect manyof the items listed below);the demand for our products and services;net sales growth;comparable sales;the effects of competition;our brandand reputation;implementation of store,interconnected retail,supply chain and technology initiatives;inventory and in-stock positions;the stateof the economy;the state of the housing and home improvement markets;the state of the credit markets,including mortgages,home equityloans,and consumer credit;impact of tariffs;issues related to the payment methods we accept;demand for credit offerings;management ofrelationships with our associates,potential associates,suppliers and service providers;cost and availability of labor;costs of fuel and otherenergy sources;international trade disputes,natural disasters,climate change,public health issues(including pandemics and quarantines,related shut-downs and other governmental orders,and similar restrictions,as well as subsequent re-openings),cybersecurity events,militaryconflicts or acts of war,and other business interruptions that could disrupt operation of our stores,distribution centers and other facilities,ourability to operate or access communications,financial or banking systems,or supply or delivery of,or demand for,the Companys products orservices;our ability to meet environmental,social and governance(“ESG”)goals;continuation or suspension of share repurchases;net earningsperformance;earnings per share;dividend targets;capital allocation and expenditures;liquidity;return on invested capital;expense leverage;commodity or other price inflation and deflation;our ability to issue debt on terms and at rates acceptable to us;the impact and expectedoutcome of investigations,inquiries,claims,and litigation,including compliance with related settlements;the effect of accounting charges;theeffect of adopting certain accounting standards;the impact of regulatory changes,including changes to tax laws and regulations;store openingsand closures;financial outlook;and the impact of acquired companies on our organization and the ability to recognize the anticipated benefits ofthose acquisitions.Forward-looking statements are based on currently available information and our current assumptions,expectations and projections about futureevents.You should not rely on our forward-looking statements.These statements are not guarantees of future performance and are subject tofuture events,risks and uncertainties many of which are beyond our control,dependent on the actions of third parties,or currently unknown tous as well as potentially inaccurate assumptions that could cause actual results to differ materially from our historical experience and ourexpectations and projections.These risks and uncertainties include,but are not limited to,those described in Part II,Item 1A,Risk Factors andelsewhere in this report and also as may be described from time to time in future reports we file with the SEC.You should read such informationin conjunction with our consolidated financial statements and related notes and Managements Discussion and Analysis of Financial Conditionand Results of Operations in this report.There also may be other factors that we cannot anticipate or that are not described herein,generallybecause we do not currently perceive them to be material.Such factors could cause results to differ materially from our expectations.Forward-looking statements speak only as of the date they are made,and we do not undertake to update these statements other than asrequired by law.You are advised,however,to review any further disclosures we make on related subjects in our filings with the SEC and in ourother public statements.iiiTable of ContentsPART I FINANCIAL INFORMATIONItem 1.Financial Statements.THE HOME DEPOT,INC.CONSOLIDATED BALANCE SHEETS(Unaudited)in millions,except per share dataOctober 30,2022January 30,2022AssetsCurrent assets:Cash and cash equivalents$2,462$2,343 Receivables,net3,732 3,426 Merchandise inventories25,719 22,068 Other current assets1,768 1,218 Total current assets33,681 29,055 Net property and equipment25,240 25,199 Operating lease right-of-use assets6,523 5,968 Goodwill7,434 7,449 Other assets3,988 4,205 Total assets$76,866$71,876 Liabilities and Stockholders EquityCurrent liabilities:Short-term debt$1,035 Accounts payable12,402 13,462 Accrued salaries and related expenses1,934 2,426 Sales taxes payable640 848 Deferred revenue3,173 3,596 Current installments of long-term debt1,224 2,447 Current operating lease liabilities942 830 Other accrued expenses3,965 4,049 Total current liabilities24,280 28,693 Long-term debt,excluding current installments41,740 36,604 Long-term operating lease liabilities5,807 5,353 Other long-term liabilities3,741 2,922 Total liabilities75,568 73,572 Common stock,par value$0.05;authorized:10,000 shares;issued:1,793 shares at October 30,2022and 1,792 shares at January 30,2022;outstanding:1,020 shares at October 30,2022 and 1,035shares at January 30,202290 90 Paid-in capital12,385 12,132 Retained earnings75,467 67,580 Accumulated other comprehensive loss(856)(704)Treasury stock,at cost,773 shares at October 30,2022 and 757 shares at January 30,2022(85,788)(80,794)Total stockholders equity(deficit)1,298(1,696)Total liabilities and stockholders equity$76,866$71,876 See accompanying notes to consolidated financial statements.1Table of ContentsTHE HOME DEPOT,INC.CONSOLIDATED STATEMENTS OF EARNINGS(Unaudited)Three Months EndedNine Months Endedin millions,except per share dataOctober 30,2022October 31,2021October 30,2022October 31,2021Net sales$38,872$36,820$121,572$115,438 Cost of sales25,648 24,257 80,720 76,468 Gross profit13,224 12,563 40,852 38,970 Operating expenses:Selling,general and administrative6,468 6,168 19,735 18,975 Depreciation and amortization608 600 1,830 1,780 Total operating expenses7,076 6,768 21,565 20,755 Operating income6,148 5,795 19,287 18,215 Interest and other(income)expense:Interest income and other,net(7)(15)(12)(26)Interest expense413 341 1,166 1,006 Interest and other,net406 326 1,154 980 Earnings before provision for income taxes5,742 5,469 18,133 17,235 Provision for income taxes1,403 1,340 4,390 4,154 Net earnings$4,339$4,129$13,743$13,081 Basic weighted average common shares1,020 1,049 1,024 1,059 Basic earnings per share$4.25$3.94$13.42$12.35 Diluted weighted average common shares1,023 1,053 1,028 1,063 Diluted earnings per share$4.24$3.92$13.37$12.31 See accompanying notes to consolidated financial statements.2Table of ContentsTHE HOME DEPOT,INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Unaudited)Three Months EndedNine Months Endedin millionsOctober 30,2022October 31,2021October 30,2022October 31,2021Net earnings$4,339$4,129$13,743$13,081 Other comprehensive income(loss),net of tax:Foreign currency translation adjustments(187)(20)(158)35 Cash flow hedges3 3 6 7 Other 27 Total other comprehensive income(loss),net of tax(184)(17)(152)69 Comprehensive income$4,155$4,112$13,591$13,150 See accompanying notes to consolidated financial statements.3Table of ContentsTHE HOME DEPOT,INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY(Unaudited)Three Months EndedNine Months Endedin millionsOctober 30,2022October 31,2021October 30,2022October 31,2021Common Stock:Balance at beginning of period$90$90$90$89 Shares issued under employee stock plans 1 Balance at end of period90 90 90 90 Paid-in Capital:Balance at beginning of period12,309 11,797 12,132 11,540 Shares issued under employee stock plans(2)18(21)50 Stock-based compensation expense78 74 274 299 Balance at end of period12,385 11,889 12,385 11,889 Retained Earnings:Balance at beginning of period73,074 63,560 67,580 58,134 Net earnings4,339 4,129 13,743 13,081 Cash dividends(1,946)(1,738)(5,856)(5,264)Balance at end of period75,467 65,951 75,467 65,951 Accumulated Other Comprehensive Income(Loss):Balance at beginning of period(672)(585)(704)(671)Foreign currency translation adjustments,net of tax(187)(20)(158)35 Cash flow hedges,net of tax3 3 6 7 Other,net of tax 27 Balance at end of period(856)(602)(856)(602)Treasury Stock:Balance at beginning of period(84,564)(72,793)(80,794)(65,793)Repurchases of common stock(1,224)(3,500)(4,994)(10,500)Balance at end of period(85,788)(76,293)(85,788)(76,293)Total stockholders equity$1,298$1,035$1,298$1,035 See accompanying notes to consolidated financial statements.4Table of ContentsTHE HOME DEPOT,INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)Nine Months Endedin millionsOctober 30,2022October 31,2021Cash Flows from Operating Activities:Net earnings$13,743$13,081 Reconciliation of net earnings to net cash provided by operating activities:Depreciation and amortization2,216 2,128 Stock-based compensation expense286 312 Changes in receivables,net(312)(533)Changes in merchandise inventories(3,748)(3,871)Changes in other current assets(568)(375)Changes in accounts payable and accrued expenses(1,568)1,918 Changes in deferred revenue(413)672 Changes in income taxes payable30(10)Changes in deferred income taxes129(73)Other operating activities226 137 Net cash provided by operating activities10,021 13,386 Cash Flows from Investing Activities:Capital expenditures(2,216)(1,737)Payments for businesses acquired,net(416)Other investing activities(29)21 Net cash used in investing activities(2,245)(2,132)Cash Flows from Financing Activities:Repayments of short-term debt,net(1,035)Proceeds from long-term debt,net of discounts6,942 2,979 Repayments of long-term debt(2,423)(1,480)Repurchases of common stock(5,136)(10,374)Proceeds from sales of common stock146 190 Cash dividends(5,856)(5,264)Other financing activities(185)(160)Net cash used in financing activities(7,547)(14,109)Change in cash and cash equivalents229(2,855)Effect of exchange rate changes on cash and cash equivalents(110)27 Cash and cash equivalents at beginning of period2,343 7,895 Cash and cash equivalents at end of period$2,462$5,067 Supplemental Disclosures:Cash paid for interest,net of interest capitalized$1,160$1,021 Cash paid for income taxes4,173 4,170 See accompanying notes to consolidated financial statements.5Table of ContentsTHE HOME DEPOT,INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBusinessThe Home Depot,Inc.,together with its subsidiaries(the“Company,”“Home Depot,”“we,”“our”or“us”),is a home improvement retailer thatsells a wide assortment of building materials,home improvement products,lawn and garden products,dcor items,and facilities maintenance,repair and operations products,and provides a number of services,in stores and online.We operate in the U.S.(including the Commonwealth ofPuerto Rico and the territories of the U.S.Virgin Islands and Guam),Canada,and Mexico,each representing one of our three operatingsegments,which we aggregate into one reportable segment due to the similar nature of their operations and economic characteristics.Basis of PresentationThe accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q anddo not include all of the information and footnotes required by GAAP for complete financial statements.In the opinion of management,alladjustments(consisting of normal recurring accruals)considered necessary for a fair presentation have been included.Results of operations forinterim periods are not necessarily indicative of results for the entire year.As a result,these consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto included in our 2021 Form 10-K.There were no significant changes to our significant accounting policies as disclosed in the 2021 Form 10-K.Recently Adopted Accounting PronouncementsWe did not adopt any new accounting pronouncements during the first nine months of fiscal 2022 that had a material impact on our consolidatedfinancial condition,results of operations or cash flows.Recently Issued Accounting PronouncementsASU No.2022-04.In September 2022,the FASB issued ASU No.2022-04,“LiabilitiesSupplier Finance Programs(Topic 405-50)-Disclosureof Supplier Finance Program Obligations,”to enhance the transparency of supplier finance programs used by an entity in connection with thepurchase of goods and services.The standard requires entities that use supplier finance programs to disclose the key terms,including adescription of payment terms,the confirmed amount outstanding under the program at the end of each reporting period,a description of wherethose obligations are presented on the balance sheet,and an annual rollforward,including the amount of obligations confirmed and the amountpaid during the period.The guidance does not affect the recognition,measurement,or financial statement presentation of obligations covered bysupplier finance programs.ASU No.2022-04 is effective for fiscal years beginning after December 15,2022,including interim periods withinthose fiscal years,except for the requirement on rollforward information,which is effective for fiscal years beginning after December 15,2023.Early adoption is permitted.We are currently evaluating the impact of the standard on our consolidated financial statements and relateddisclosures.Recent accounting pronouncements pending adoption not discussed above or in the 2021 Form 10-K are either not applicable or will not have orare not expected to have a material impact on our consolidated financial condition,results of operations or cash flows.6Table of Contents2.NET SALESThe following table presents net sales,classified by geography:Three Months EndedNine Months Endedin millionsOctober 30,2022October 31,2021October 30,2022October 31,2021Net sales in the U.S.$35,784$33,736$111,834$106,095 Net sales outside the U.S.3,088 3,084 9,738 9,343 Net sales$38,872$36,820$121,572$115,438 The following table presents net sales by products and services:Three Months EndedNine Months Endedin millionsOctober 30,2022October 31,2021October 30,2022October 31,2021Net sales products$37,448$35,383$117,261$111,371 Net sales services1,424 1,437 4,311 4,067 Net sales$38,872$36,820$121,572$115,438 The following table presents major product lines and the related merchandising departments(and related services):Major Product LineMerchandising DepartmentsBuilding MaterialsBuilding Materials,Electrical/Lighting,Lumber,Millwork,and PlumbingDcorAppliances,Dcor/Storage,Flooring,Kitchen and Bath,and PaintHardlinesHardware,Indoor Garden,Outdoor Garden,and ToolsThe following table presents net sales by major product lines(and related services):Three Months EndedNine Months Endedin millionsOctober 30,2022October 31,2021October 30,2022October 31,2021Building Materials$15,343$13,809$46,095$41,880 Dcor13,070 12,783 40,040 38,060 Hardlines10,459 10,228 35,437 35,498 Net sales$38,872$36,820$121,572$115,438 Deferred RevenueFor products and services sold in stores or online,payment is typically due at the point of sale.When we receive payment from customersbefore the customer has taken possession of the merchandise or the service has been performed,the amount received is recorded as deferredrevenue until the sale or service is complete.Such performance obligations are part of contracts with expected original durations of typicallythree months or less.As of October 30,2022 and January 30,2022,deferred revenue for products and services was$2.2 billion and$2.6 billion,respectively.We further record deferred revenue for the sale of gift cards and recognize the associated revenue upon the redemption of those gift cards,which generally occurs within six months of gift card issuance.As of both October 30,2022 and January 30,2022,our performance obligationsfor unredeemed gift cards were$1.0 billion.Gift card breakage income,which is our estimate of the portion of our gift card balance not expectedto be redeemed,was immaterial during the three and nine months ended October 30,2022 and October 31,2021.3.PROPERTY AND LEASESNet Property and EquipmentNet property and equipment includes accumulated depreciation and finance lease amortization of$27.5 billion as of October 30,2022 and$26.1billion as of January 30,2022.7Table of ContentsLeasesThe following table presents the consolidated balance sheet location of assets and liabilities related to operating and finance leases:in millionsConsolidated Balance Sheet ClassificationOctober 30,2022January 30,2022Assets:Operating lease assetsOperating lease right-of-use assets$6,523$5,968 Finance lease assets Net property and equipment2,890 2,896 Total lease assets$9,413$8,864 Liabilities:Current:Operating lease liabilitiesCurrent operating lease liabilities$942$830 Finance lease liabilitiesCurrent installments of long-term debt224 198 Long-term:Operating lease liabilitiesLong-term operating lease liabilities5,807 5,353 Finance lease liabilitiesLong-term debt,excluding current installments3,038 3,038 Total lease liabilities$10,011$9,419(1)Finance lease assets are recorded net of accumulated amortization of$1.2 billion as of October 30,2022 and$1.0 billion as of January 30,2022.The following table presents supplemental non-cash information related to leases:Nine Months Endedin millionsOctober 30,2022October 31,2021Lease assets obtained in exchange for new operating lease liabilities$1,308$637 Lease assets obtained in exchange for new finance lease liabilities234 581 4.DEBT AND DERIVATIVE INSTRUMENTSShort-Term DebtIn July 2022,we expanded our commercial paper program from$3.0 billion to$5.0 billion to further enhance our financial flexibility.All of ourshort-term borrowings in the first nine months of fiscal 2022 were under our commercial paper program,and the maximum amount outstandingat any time was$2.7 billion.In connection with our program,we have back-up credit facilities with a consortium of banks.In July 2022,we alsoexpanded the borrowing capacity under these back-up facilities from$3.0 billion to$5.0 billion,by entering into a five-year$3.5 billion creditfacility scheduled to expire in July 2027 and a 364-day$1.5 billion credit facility scheduled to expire in July 2023.These facilities replaced ourpreviously existing five-year$2.0 billion credit facility,which was scheduled to expire in December 2023,and our 364-day$1.0 billion creditfacility,which was scheduled to expire in December 2022.At October 30,2022,we had no outstanding borrowings under our commercial paperprogram,and at January 30,2022,we had$1.0 billion of outstanding borrowings under our commercial paper program.Long-Term DebtSeptember 2022 Issuance.In September 2022,we issued three tranches of senior notes.The first tranche consisted of$750 million of 4.00%senior notes due September 15,2025 at a discount of$0.3 million.Interest on thesenotes is due semi-annually on March 15 and September 15 of each year,beginning March 15,2023.The second tranche consisted of$1.25 billion of 4.50%senior notes due September 15,2032 at a discount of$1 million.Interest onthese notes is due semi-annually on March 15 and September 15 of each year,beginning March 15,2023.(1)8Table of ContentsThe third tranche consisted of$1.0 billion of 4.95%senior notes due September 15,2052 at a discount of$14 million.Interest on thesenotes is due semi-annually on March 15 and September 15 of each year,beginning March 15,2023.Issuance costs totaled$15 million.March 2022 Issuance.In March 2022,we issued four tranches of senior notes.The first tranche consisted of$500 million of 2.70%senior notes due April 15,2025 at a discount of$1 million.Interest on these notes isdue semi-annually on April 15 and October 15 of each year,beginning October 15,2022.The second tranche consisted of$750 million of 2.875%senior notes due April 15,2027 at a discount of$4 million.Interest on thesenotes is due semi-annually on April 15 and October 15 of each year,beginning October 15,2022.The third tranche consisted of$1.25 billion of 3.25%senior notes due April 15,2032 at a discount of$6 million.Interest on these notes isdue semi-annually on April 15 and October 15 of each year,beginning October 15,2022.The fourth tranche consisted of$1.5 billion of 3.625%senior notes due April 15,2052 at a discount of$32 million.Interest on thesenotes is due semi-annually on April 15 and October 15 of each year,beginning October 15,2022.Issuance costs totaled$22 million.Each of these senior notes may be redeemed by us at any time,in whole or in part,at the redemption price plus accrued interest up to theredemption date.Prior to the Par Call Date,as defined in the notes,the redemption price is equal to the greater of(1)100%of the principalamount of the notes to be redeemed or(2)the sum of the present values of the remaining scheduled payments of principal and interest to thePar Call Date.On or after the Par Call Date,the redemption price is equal to 100%of the principal amount of the notes.Additionally,if a Changein Control Triggering Event occurs,as defined in the notes,holders of all such notes have the right to require us to redeem those notes at 101%of the aggregate principal amount of the notes plus accrued interest up to the redemption date.The indenture governing the notes does not generally limit our ability to incur additional indebtedness or require us to maintain financial ratios orspecified levels of net worth or liquidity.The indenture governing the notes contains various customary covenants;however,none are expectedto impact our liquidity or capital resources.Repayments.In March 2022,we repaid our$700 million 3.25%senior notes and$300 million floating rate senior notes at maturity.In May 2022,we repaid our$1.25 billion 2.625%senior notes,which had a maturity date of June 2022,at the Par Call Date for the notes.Derivative Instruments and Hedging ActivitiesWe had outstanding interest rate swap agreements with combined notional amounts of$5.4 billion at both October 30,2022 and January 30,2022.These agreements are accounted for as fair value hedges that swap fixed for variable rate interest to hedge changes in the fair values ofcertain senior notes.At October 30,2022,the fair values of these agreements totaled$1.0 billion,all of which is recognized within other long-term liabilities on the consolidated balance sheet.At January 30,2022,the fair values of these agreements totaled$191 million,with$249 millionrecognized in other long-term liabilities and$58 million recognized in other assets on the consolidated balance sheet.All of our interest rate swap agreements designated as fair value hedges meet the shortcut method requirements under GAAP.Accordingly,thechanges in the fair values of these agreements offset the changes in the fair value of the hedged long-term debt.There were no material changes to the other hedging arrangements disclosed in our 2021 Form 10-K,and all related activity was immaterial forthe periods presented within this document.Collateral.We generally enter into master netting arrangements,which are designed to reduce credit risk by permitting net settlement oftransactions with the same counterparty.To further limit our credit risk,we enter into collateral security arrangements that provide for collateral tobe received or posted when the net fair value of certain derivative instruments exceeds or falls below contractually established thresholds.Thecash collateral posted by the Company related to derivative instruments under our collateral security arrangements was$883 million as ofOctober 30,2022,which was recorded in other current assets on the consolidated balance sheet.We did not hold any cash collateral as ofOctober 30,2022,and cash collateral both held and posted was immaterial as of January 30,2022.9Table of Contents5.STOCKHOLDERS EQUITYStock RollforwardThe following table presents a reconciliation of the number of shares of our common stock outstanding and cash dividends per share:shares in millionsThree Months EndedNine Months EndedOctober 30,2022October 31,2021October 30,2022October 31,2021Common stock:Balance at beginning of period1,793 1,791 1,792 1,789 Shares issued under employee stock plans 1 2 Balance at end of period1,793 1,791 1,793 1,791 Treasury stock:Balance at beginning of period(769)(735)(757)(712)Repurchases of common stock(4)(10)(16)(33)Balance at end of period(773)(745)(773)(745)Shares outstanding at end of period1,020 1,046 1,020 1,046 Cash dividends per share$1.90$1.65$5.70$4.95 Share RepurchasesIn August 2022,our Board of Directors approved a$15.0 billion share repurchase authorization that replaced the previous authorization of$20.0 billion,which was approved in May 2021.This new authorization does not have a prescribed expiration date.As of October 30,2022,$14.0 billion of the$15.0 billion share repurchase authorization remained available.The following table presents information about our repurchases of common stock,all of which were completed through open market purchases:in millionsThree Months EndedNine Months EndedOctober 30,2022October 31,2021October 30,2022October 31,2021Total number of shares repurchased4 10 16 33 Total cost of shares repurchased$1,224$3,500$4,994$10,500 These amounts may differ from the repurchases of common stock amounts in the consolidated statements of cash flows due to unsettled sharerepurchases at the end of a period.6.FAIR VALUE MEASUREMENTSThe fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelatedknowledgeable and willing parties.A liabilitys fair value is defined as the amount that would be paid to transfer the liability to a new obligor,rather than the amount that would be paid to settle the liability with the creditor.Assets and liabilities recorded at fair value are measured using athree-tier fair value hierarchy,which prioritizes the inputs used in measuring fair value.The levels of the fair value hierarchy are:Level 1:observable inputs such as quoted prices in active markets for identical assets or liabilities;Level 2:inputs other than quoted prices in active markets in Level 1 that are either directly or indirectly observable;andLevel 3:unobservable inputs for which little or no market data exists,therefore requiring management judgment to develop theCompanys own models with estimates and assumptions.10Table of ContentsAssets and Liabilities Measured at Fair Value on a Recurring BasisThe following table presents the assets and liabilities that are measured at fair value on a recurring basis:October 30,2022January 30,2022in millions Level 1Level 2Level 3Level 1Level 2Level 3Derivative agreements assets$58$Derivative agreements liabilities(977)(249)Total$(977)$(191)$The fair values of our derivative instruments are determined using an income approach and Level 2 inputs,which include the respective interestrate or foreign currency forward curves and discount rates.Our derivative instruments are discussed further in Note 4.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisLong-lived assets,goodwill,and other intangible assets are subject to nonrecurring fair value measurement for the assessment of impairment.During the third quarter of fiscal 2022,we completed our annual assessment of the recoverability of goodwill for our U.S.,Canada and Mexicoreporting units based on qualitative factors.We performed a qualitative assessment to determine if there were any indicators of impairment andconcluded that while there have been events and circumstances in the macro-environment that have impacted us,we have not experienced anyentity-specific indicators that would indicate that it is more likely than not that the fair value of any of our reporting units were less than theircarrying amounts.Additionally,during the third quarter of fiscal 2022,we completed our annual assessment of the recoverability of our indefinite-lived intangibles based on quantitative factors and concluded no impairment losses should be recognized.We did not have any material assets or liabilities that were measured at fair value on a nonrecurring basis during the three and nine monthsended October 30,2022 or October 31,2021.Other Fair Value DisclosuresThe carrying amounts of cash and cash equivalents,receivables,accounts payable,and short-term debt approximate fair value due to theirshort-term nature.The following table presents the aggregate fair values and carrying values of our senior notes:October 30,2022January 30,2022in millions Fair Value(Level 1)CarryingValueFair Value(Level 1)CarryingValueSenior notes$35,453$39,702$39,397$35,815 7.WEIGHTED AVERAGE COMMON SHARESThe following table presents the reconciliation of our basic to diluted weighted average common shares:in millionsThree Months EndedNine Months EndedOctober 30,2022October 31,2021October 30,2022October 31,2021Basic weighted average common shares1,020 1,049 1,024 1,059 Effect of potentially dilutive securities 3 4 4 4 Diluted weighted average common shares1,023 1,053 1,028 1,063 Anti-dilutive securities excluded from diluted weighted average commonshares1 1(1)Represents the dilutive impact of stock-based awards.8.CONTINGENCIESWe are involved in litigation arising in the normal course of business.In managements opinion,any such litigation is not expected to have amaterial adverse effect on our consolidated financial condition,results of operations or cash flows.(1)11Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and Board of DirectorsThe Home Depot,Inc.:Results of Review of Interim Financial InformationWe have reviewed the consolidated balance sheet of The Home Depot,Inc.and subsidiaries(the“Company”)as of October 30,2022,therelated consolidated statements of earnings,comprehensive income,and stockholders equity for the three-month and nine-month periodsended October 30,2022 and October 31,2021,the related consolidated statements of cash flows for the nine-month periods ended October 30,2022 and October 31,2021,and the related notes(collectively,the“consolidated interim financial information”).Based on our reviews,we arenot aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S.generally accepted accounting principles.We have previously audited,in accordance with the standards of the Public Company Accounting Oversight Board(United States)(“PCAOB”),the consolidated balance sheet of the Company as of January 30,2022,and the related consolidated statements of earnings,comprehensiveincome,stockholders equity,and cash flows for the fiscal year then ended(not presented herein);and in our report dated March 23,2022,weexpressed an unqualified opinion on those consolidated financial statements.In our opinion,the information set forth in the accompanyingconsolidated balance sheet as of January 30,2022,is fairly stated,in all material respects,in relation to the consolidated balance sheet fromwhich it has been derived.Basis for Review ResultsThis consolidated interim financial information is the responsibility of the Companys management.We are a public accounting firm registeredwith the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our reviews in accordance with the standards of the PCAOB.A review of consolidated interim financial information consistsprincipally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.It is substantiallyless in scope than an audit conducted in accordance with the standards of the PCAOB,the objective of which is the expression of an opinionregarding the financial statements taken as a whole.Accordingly,we do not express such an opinion./s/KPMG LLPAtlanta,GeorgiaNovember 21,202212Table of ContentsItem 2.Managements Discussion and Analysis of Financial Condition and Results of Operations.The following discussion provides an analysis of the Companys financial condition and results of operations from managements perspectiveand should be read in conjunction with the consolidated financial statements and related notes included in this report and in the 2021 Form 10-Kand with our MD&A included in the 2021 Form 10-K.Our MD&A includes the following sections:Executive SummaryResults of OperationsLiquidity and Capital ResourcesCritical Accounting PoliciesEXECUTIVE SUMMARYThe following table presents quarter-to-date and year-to-date highlights of our financial performance:dollars in millions,except per share dataThree Months EndedNine Months EndedOctober 30,2022October 31,2021October 30,2022October 31,2021Net sales$38,872$36,820$121,572$115,438 Net earnings4,339 4,129 13,743 13,081 Diluted earnings per share$4.24$3.92$13.37$12.31 Net cash provided by operating activities$10,021$13,386 Proceeds from long-term debt,net of discounts6,942 2,979 Repayments of long-term debt2,423 1,480 Repurchases of common stock5,136 10,374 We reported net sales of$38.9 billion in the third quarter of fiscal 2022.Net earnings were$4.3 billion,or$4.24 per diluted share.For the firstnine months of fiscal 2022,net sales were$121.6 billion and net earnings were$13.7 billion,or$13.37 per diluted share.During the third quarter of fiscal 2022,we opened one new store in the U.S.and two new stores in Mexico,and we had no store closures,resulting in a store count of 2,319 at the end of the quarter.As of October 30,2022,a total of 313 stores,or 13.5%of our total store count,werelocated in Canada and Mexico.For the third quarter of fiscal 2022,sales per retail square foot were$618.50,and for the first nine months offiscal 2022,sales per retail square foot were$646.81.Our inventory turnover ratio was 4.3 times at the end of the third quarter of fiscal 2022,compared to 5.4 times at the end of the third quarter of fiscal 2021.The decrease in our inventory turnover ratio was driven by an increase inaverage inventory levels during the first nine months of fiscal 2022 resulting from strategic investments to promote higher in-stock levels and pullforward merchandise in response to ongoing global supply chain disruption,as well as continued investment in our new supply chain facilitiesand carry over of some spring seasonal inventory.We generated$10.0 billion of cash flow from operations and issued$6.9 billion of long-term debt,net of discounts,during the first nine months offiscal 2022.This cash flow,together with cash on hand,was used to fund cash payments of$5.9 billion for dividends and$5.1 billion for sharerepurchases.In addition,we repaid$2.4 billion of long-term debt and$1.0 billion of net short-term debt and funded$2.2 billion in capitalexpenditures.In February 2022,we announced a 15%increase in our quarterly cash dividend to$1.90 per share.Our ROIC for the trailing twelve-month period was 43.3%at the end of the third quarter of fiscal 2022 and 43.9%at the end of the third quarter offiscal 2021.See the Non-GAAP Financial Measures section below for our definition and calculation of ROIC,as well as a reconciliation ofNOPAT,a non-GAAP financial measure,to net earnings(the most comparable GAAP financial measure).13Table of ContentsRESULTS OF OPERATIONSThe following table presents the percentage relationship between net sales and major categories in our consolidated statements of earnings.FISCAL 2022 AND FISCAL 2021 THREE MONTH COMPARISONSThree Months EndedOctober 30,2022October 31,2021dollars in millions$%ofNet Sales$%ofNet SalesNet sales$38,872$36,820 Gross profit13,224 34.0,563 34.1%Operating expenses:Selling,general and administrative6,468 16.6 6,168 16.8 Depreciation and amortization608 1.6 600 1.6 Total operating expenses7,076 18.2 6,768 18.4 Operating income6,148 15.8 5,795 15.7 Interest and other(income)expense:Interest income and other,net(7)(15)Interest expense413 1.1 341 0.9 Interest and other,net406 1.0 326 0.9 Earnings before provision for income taxes5,742 14.8 5,469 14.9 Provision for income taxes1,403 3.6 1,340 3.6 Net earnings$4,339 11.2%$4,129 11.2%Note:Certain percentages may not sum to totals due to rounding.Three Months EndedSelected financial and sales data:October 30,2022October 31,2021%ChangeComparable sales(%change)4.3%6.1%N/AComparable customer transactions(%change)(4.4)%(5.8)%N/AComparable average ticket(%change)8.8.7%N/ACustomer transactions(in millions)409.8 428.2(4.3)%Average ticket$89.67$82.38 8.8%Sales per retail square foot$618.50$587.28 5.3%Diluted earnings per share$4.24$3.92 8.2%(1)Does not include results for HD Supply.(2)Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company,as it represents aprimary driver in measuring sales performance.(3)Sales per retail square foot represents annualized sales divided by retail store square footage.Sales per retail square foot is a measure of the efficiency ofsales based on the total square footage of our stores and is used by management to monitor the performance of the Companys retail operations as anindicator of the productivity of owned and leased square footage for these retail operations.SalesWe assess our sales performance by evaluating both net sales and comparable sales.Net Sales.Net sales for the third quarter of fiscal 2022 were$38.9 billion,an increase of 5.6%from$36.8 billion for the third quarter of fiscal2021.The increase in net sales for the third quarter of fiscal 2022 primarily reflected the impact of positive comparable sales driven by anincrease in comparable average ticket,partially offset by a decrease in comparable customer transactions.A stronger U.S.dollar negativelyimpacted net sales by$132 million in the third quarter of fiscal 2022.(1)(1)(1)(1)(2)(1)(3)14Table of ContentsOnline sales,which consist of sales generated through our websites and mobile applications for products picked up at our stores or delivered tocustomer locations,represented 13.3%of net sales during the third quarter of fiscal 2022 and grew by 9.6%compared to the third quarter offiscal 2021.The increase in online sales for the third quarter of fiscal 2022 was a result of customers continuing to leverage our digital platformsand reflects our ongoing investments to enhance these platforms and related fulfillment capabilities,which support our interconnected retailstrategy.Comparable Sales.Comparable sales is a measure that highlights the performance of our existing locations and websites by measuring thechange in net sales for a period over the comparable prior period of equivalent length.Comparable sales includes sales at all locations,physicaland online,open greater than 52 weeks(including remodels and relocations)and excludes closed stores.Retail stores become comparable onthe Monday following their 52 week of operation.Acquisitions are typically included in comparable sales after they have been owned for morethan 52 weeks.Comparable sales is intended only as supplemental information and is not a substitute for net sales presented in accordancewith GAAP.Total comparable sales for the third quarter of fiscal 2022 increased 4.3%,reflecting an 8.8%increase in comparable average ticket,partiallyoffset by a 4.4crease in comparable customer transactions compared to the third quarter of fiscal 2021.The increase in comparableaverage ticket was primarily driven by inflation,as well as demand for new and innovative products.The decrease in comparable customertransactions reflects the impact of macroeconomic factors including the broader inflationary environment.During the third quarter of fiscal 2022,11 of our 14 merchandising departments posted positive comparable sales compared to the third quarterof fiscal 2021,led by Building Materials,Plumbing,Lumber,Millwork,Paint,and Hardware,which posted comparable sales above the Companyaverage.Our Appliances,Flooring,and Indoor Garden departments posted negative comparable sales.Gross ProfitGross profit for the third quarter of fiscal 2022 increased 5.3%to$13.2 billion from$12.6 billion for the third quarter of fiscal 2021.Gross profit asa percentage of net sales,or gross profit margin,was 34.0%for the third quarter of fiscal 2022 compared to 34.1%for the third quarter of fiscal2021.The decrease in gross profit margin during the third quarter of fiscal 2022 was primarily driven by investments in our supply chain networkand higher product and transportation costs,offset by the benefit from higher retail prices.Operating ExpensesOur operating expenses are composed of SG&A and depreciation and amortization.Selling,General&Administrative.SG&A for the third quarter of fiscal 2022 increased$300 million,or 4.9%,to$6.5 billion from$6.2 billion forthe third quarter of fiscal 2021.As a percentage of net sales,SG&A was 16.6%for the third quarter of fiscal 2022 compared to 16.8%for thethird quarter of fiscal 2021,primarily reflecting leverage from a positive comparable sales environment and lower incentive compensation,partially offset by wage investments for hourly associates and increased operational costs,including investments designed to drive efficiencies inour stores.Depreciation and Amortization.Depreciation and amortization for the third quarter of fiscal 2022 increased$8 million,or 1.3%,to$608 millionfrom$600 million for the third quarter of fiscal 2021.As a percentage of net sales,depreciation and amortization was 1.6%for the third quarter ofboth fiscal 2022 and fiscal 2021,primarily reflecting leverage from a positive comparable sales environment,offset by increased depreciationexpense from strategic investments in the business.Interest and Other,netInterest and other,net,was$406 million for the third quarter of fiscal 2022 compared to$326 million for the third quarter of fiscal 2021.Interestand other,net,as a percentage of net sales was 1.0%for the third quarter of fiscal 2022 compared to 0.9%for the third quarter of fiscal 2021,primarily reflecting higher interest expense due to higher debt balances and increased variable rate interest from our interest rate swaps duringthe third quarter of fiscal 2022,partially offset by leverage from a positive comparable sales environment.Provision for Income TaxesOur combined effective income tax rate was 24.4%for the third quarter of fiscal 2022 compared to 24.5%for the third quarter of fiscal 2021.nd15Table of ContentsDiluted Earnings per ShareDiluted earnings per share were$4.24 for the third quarter of fiscal 2022 compared to$3.92 for the third quarter of fiscal 2021.The increase indiluted earnings per share was driven by higher net earnings during the third quarter of fiscal 2022,as well as lower diluted shares due to sharerepurchases.FISCAL 2022 AND FISCAL 2021 NINE MONTH COMPARISONSNine Months EndedOctober 30,2022October 31,2021dollars in millions$%ofNet Sales$%ofNet SalesNet sales$121,572$115,438 Gross profit40,852 33.68,970 33.8%Operating expenses:Selling,general and administrative19,735 16.2 18,975 16.4 Depreciation and amortization1,830 1.5 1,780 1.5 Total operating expenses21,565 17.7 20,755 18.0 Operating income19,287 15.9 18,215 15.8 Interest and other(income)expense:Interest income and other,net(12)(26)Interest expense1,166 1.0 1,006 0.9 Interest and other,net1,154 0.9 980 0.8 Earnings before provision for income taxes18,133 14.9 17,235 14.9 Provision for income taxes4,390 3.6 4,154 3.6 Net earnings$13,743 11.3%$13,081 11.3%Note:Certain percentages may not sum to totals due to rounding.Nine Months EndedSelected financial and sales data:October 30,2022October 31,2021%ChangeComparable sales(%change)4.2.5%N/AComparable customer transactions(%change)(5.3)%1.1%N/AComparable average ticket(%change)9.7.5%N/ACustomer transactions(in millions)1,287.9 1,357.2(5.1)%Average ticket$90.45$82.43 9.7%Sales per retail square foot$646.81$615.98 5.0%Diluted earnings per share$13.37$12.31 8.6%(1)Does not include results for HD Supply.(2)Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company,as it represents aprimary driver in measuring sales performance.(3)Sales per retail square foot represents annualized sales divided by retail store square footage.Sales per retail square foot is a measure of the efficiency ofsales based on the total square footage of our stores and is used by management to monitor the performance of the Companys retail operations as anindicator of the productivity of owned and leased square footage for these retail operations.SalesWe assess our sales performance by evaluating both net sales and comparable sales.Net Sales.Net sales for the first nine months of fiscal 2022 were$121.6 billion,an increase of 5.3%from$115.4 billion for the first nine monthsof fiscal 2021.The increase in net sales for the first nine months of fiscal 2022 primarily reflected the impact of positive comparable sales drivenby an increase in comparable average ticket,partially offset by a decrease in comparable customer transactions.A stronger U.S.dollarnegatively impacted net sales by$284 million for the first nine months of fiscal 2022.(1)(1)(1)(1)(2)(1)(3)16Table of ContentsOnline sales,which consist of sales generated through our websites and mobile applications for products picked up in our stores or delivered tocustomer locations,represented 13.8%of net sales during the first nine months of fiscal 2022 and grew by 8.4%compared to the first ninemonths of fiscal 2021.The increase in online sales for the first nine months of fiscal 2022 was a result of customers continuing to leverage ourdigital platforms and reflects our ongoing investments to enhance these platforms and related fulfillment capabilities,which support ourinterconnected retail strategy.Comparable Sales.Total comparable sales for the first nine months of fiscal 2022 increased 4.2%,reflecting a 9.7%increase in comparableaverage ticket,partially offset by a 5.3crease in comparable customer transactions compared to the first nine months of fiscal 2021.Theincrease in comparable average ticket was primarily driven by inflation,as well as demand for new and innovative products.The decrease incomparable customer transactions reflects the impact of macroeconomic factors including the broader inflationary environment,as well ascycling favorable weather and government stimulus during the first nine months of fiscal 2021.During the first nine months of fiscal 2022,11 of our 14 merchandising departments posted positive comparable sales when compared to the firstnine months of fiscal 2021,led by Building Materials,Plumbing,Millwork,Paint,Hardware,and Kitchen and Bath,which posted comparablesales above the Company average.Our Indoor Garden,Outdoor Garden and Appliances departments posted negative comparable sales.Gross ProfitGross profit for the first nine months of fiscal 2022 increased 4.8%to$40.9 billion from$39.0 billion for the first nine months of fiscal 2021.Grossprofit as a percentage of net sales,or gross profit margin,was 33.6%for the first nine months of fiscal 2022 compared to 33.8%for the first ninemonths of fiscal 2021.The decrease in gross profit margin during the first nine months of fiscal 2022 was primarily driven by investments in oursupply chain network and higher product and transportation costs,offset by the benefit from higher retail prices.Operating ExpensesOur operating expenses are composed of SG&A and depreciation and amortization.Selling,General&Administrative.SG&A for the first nine months of fiscal 2022 increased$760 million,or 4.0%to$19.7 billion from$19.0billion for the first nine months of fiscal 2021.As a percentage of net sales,SG&A was 16.2%for the first nine months of fiscal 2022 compared to16.4%for the first nine months of fiscal 2021,primarily reflecting leverage from a positive comparable sales environment and lower incentivecompensation,partially offset by wage investments for hourly associates and increased operational costs,including investments designed todrive efficiencies in our stores.Depreciation and Amortization.Depreciation and amortization for the first nine months of fiscal 2022 increased$50 million,or 2.8%to$1.8billion.As a percentage of net sales,depreciation and amortization was 1.5%for the first nine months of both fiscal 2022 and fiscal 2021,reflecting leverage from a positive comparable sales environment,offset by increased depreciation expense from strategic investments in thebusiness.Interest and Other,netInterest and other,net for the first nine months of fiscal 2022 was$1.2 billion compared to$980 million for the first nine months of fiscal 2021.Interest and other,net,as a percentage of net sales was 0.9%for the first nine months of fiscal 2022 and 0.8%for the first nine months of fiscal2021,primarily reflecting higher interest expense due to higher debt balances and increased variable rate interest from our interest rate swapsduring the first nine months of fiscal 2022,partially offset by leverage from a positive comparable sales environment.Provision for Income TaxesOur combined effective income tax rate was 24.2%for the first nine months of fiscal 2022 compared to 24.1%for the first nine months of fiscal2021.Diluted Earnings per ShareDiluted earnings per share were$13.37 for the first nine months of fiscal 2022,compared to$12.31 for the first nine months of fiscal 2021.Theincrease in diluted earnings per share was driven by higher net earnings during the first nine months of fiscal 2022,as well as lower dilutedshares due to share repurchases.17Table of ContentsNON-GAAP FINANCIAL MEASURESTo provide clarity on our operating performance,we supplement our reporting with certain non-GAAP financial measures.However,thissupplemental information should not be considered in isolation or as a substitute for the related GAAP measures.Non-GAAP financial measurespresented herein may differ from similar measures used by other companies.Return on Invested CapitalWe believe ROIC is meaningful for investors and management because it measures how effectively we deploy our capital base.We define ROICas NOPAT,a non-GAAP financial measure,for the most recent twelve-month period,divided by average debt and equity.We define averagedebt and equity as the average of beginning and ending long-term debt(including current installments)and equity for the most recent twelve-month period.The following table presents the calculation of ROIC,together with a reconciliation of NOPAT to net earnings(the most comparable GAAPmeasure):Twelve Months Endeddollars in millionsOctober 30,2022October 31,2021Net earnings$17,095$15,938 Interest and other,net1,477 1,307 Provision for income taxes5,540 5,053 Operating income24,112 22,298 Income tax adjustment(5,844)(5,378)NOPAT$18,268$16,920 Average debt and equity$42,222$38,519 ROIC43.3C.9%(1)Income tax adjustment is defined as operating income multiplied by our effective tax rate for the trailing twelve months.LIQUIDITY AND CAPITAL RESOURCESAt October 30,2022,we had$2.5 billion in cash and cash equivalents,of which$719 million was held by our foreign subsidiaries.We believethat our current cash position,cash flow generated from operations,funds available from our commercial paper program,and access to the long-term debt capital markets should be sufficient not only for our operating requirements,any required debt payments,and satisfaction of othercontractual obligations,but also to enable us to invest in the business,fund dividend payments,and fund any share repurchases through thenext several fiscal years.In addition,we believe that we have the ability to obtain alternative sources of financing,if necessary.Our material cash requirements include contractual and other obligations arising in the normal course of business.These obligations primarilyinclude long-term debt and related interest payments,operating and finance lease obligations,and purchase obligations.In addition to our cash requirements,we follow a disciplined approach to capital allocation.This approach first prioritizes investing in thebusiness,followed by paying dividends,with the intent of then returning excess cash to shareholders in the form of share repurchases.For fiscal2022,we plan to invest approximately$3 billion back into the business in the form of capital expenditures,in line with our expectation ofapproximately two percent of net sales on an annual basis.However,we may adjust our capital expenditures to support the operations of thebusiness,to enhance long-term strategic positioning,or in response to the economic environment,as necessary or appropriate.In February 2022,we announced a 15%increase in our quarterly cash dividend from$1.65 to$1.90 per share.During the first nine months offiscal 2022,we paid cash dividends of$5.9 billion to shareholders.We intend to pay a dividend in the future;however,any future dividend issubject to declaration by our Board of Directors based on our earnings,capital requirements,financial condition,and other factors consideredrelevant by our Board of Directors.(1)18Table of ContentsIn August 2022,our Board of Directors approved a$15.0 billion share repurchase authorization that replaced the previous authorization of$20.0 billion,which was approved in May 2021.This new authorization does not have a prescribed expiration date.As of October 30,2022,approximately$14.0 billion of the$15.0 billion share repurchase authorization remained available.During the first nine months of fiscal 2022,wehad cash payments of$5.1 billion for repurchases of our common stock through open market purchases.DEBTIn July 2022,we expanded our commercial paper program from$3.0 billion to$5.0 billion to further enhance our financial flexibility.All of ourshort-term borrowings in the first nine months of fiscal 2022 were under our commercial paper program,and the maximum amount outstandingat any time was$2.7 billion.In connection with our program,we have back-up credit facilities with a consortium of banks.In July 2022,we alsoexpanded the borrowing capacity under these back-up facilities from$3.0 billion to$5.0 billion,by entering into a five-year$3.5 billion creditfacility scheduled to expire in July 2027 and a 364-day$1.5 billion credit facility scheduled to expire in July 2023.These facilities replaced ourpreviously existing five-year$2.0 billion credit facility,which was scheduled to expire in December 2023,and our 364-day$1.0 billion creditfacility,which was scheduled to expire in December 2022.At October 30,2022,we had no outstanding borrowings under our commercial paperprogram,and we were in compliance with all of the covenants contained in our credit facilities,none of which are expected to impact our liquidityor capital resources.We also issue senior notes from time to time as part of our capital management strategy.In March 2022,we issued$4.0 billion of senior notes.The net proceeds from this issuance were used for general corporate purposes,including repayment of outstanding indebtedness andrepurchases of shares of our common stock.In September 2022,we issued$3.0 billion of senior notes.The net proceeds from this issuance arebeing used for general corporate purposes,including repurchases of shares of our common stock.During the first nine months of fiscal 2022,werepaid an aggregate of$2.25 billion of senior notes.The indentures governing our senior notes do not generally limit our ability to incur additional indebtedness or require us to maintain financialratios or specified levels of net worth or liquidity.The indentures governing our notes contain various customary covenants;however,none areexpected to impact our liquidity or capital resources.See Note 4 to our consolidated financial statements for further discussion of our debtarrangements.CASH FLOWS SUMMARYOperating ActivitiesCash flow generated from operations provides us with a significant source of liquidity.Our operating cash flows result primarily from cashreceived from our customers,offset by cash payments we make for products and services,associate compensation,operations,occupancycosts,and income taxes.Cash provided by or used in operating activities is also subject to changes in working capital.Working capital at anypoint in time is subject to many variables,including seasonality,inventory management and category expansion,the timing of cash receipts andpayments,vendor payment terms,and fluctuations in foreign exchange rates.Net cash provided by operating activities decreased by$3.4 billion in the first nine months of fiscal 2022 compared to the first nine months offiscal 2021,primarily driven by changes in working capital,slightly offset by an increase in net earnings.Working capital was impacted by highermerchandise inventories and reduced inventory turnover,timing of vendor payments,and decreases in deferred revenue in fiscal 2022.Ourinventory position reflects the impact of inflation,along with strategic investments to promote higher in-stock levels and pull forward merchandisein response to ongoing global supply chain disruption,as well as continued investment in our new supply chain facilities and carry over of somespring seasonal inventory.Investing ActivitiesCash used in investing activities increased by$113 million in the first nine months of fiscal 2022 compared to the first nine months of fiscal 2021,primarily resulting from increased capital expenditures,partially offset by cash paid for an acquired business during the first nine months of fiscal2021.19Table of ContentsFinancing ActivitiesCash used in financing activities in the first nine months of fiscal 2022 primarily reflected$5.9 billion of cash dividends paid,$5.1 billion of sharerepurchases,$2.4 billion of repayments of long-term debt,and$1.0 billion of net repayments of short-term debt,partially offset by$6.9 billion ofnet proceeds from long-term debt.Cash used in financing activities in the first nine months of fiscal 2021 primarily reflected$10.4 billion of sharerepurchases,$5.3 billion of cash dividends paid,and$1.5 billion of repayments of long-term debt,partially offset by$3.0 billion of net proceedsfrom long-term debt.CRITICAL ACCOUNTING POLICIESDuring the first nine months of fiscal 2022,there were no changes to our critical accounting policies as disclosed in the 2021 Form 10-K.Refer toNote 1 to our consolidated financial statements for further discussion regarding our significant accounting policies.ADDITIONAL INFORMATIONFor information on accounting pronouncements that have impacted or are expected to materially impact our consolidated financial condition,results of operations or cash flows,see Note 1 to our consolidated financial statements.Item 3.Quantitative and Qualitative Disclosures about Market Risk.Our exposure to market risk results primarily from fluctuations in interest rates in connection with our long-term debt portfolio.We are alsoexposed to risks from foreign currency exchange rate fluctuations on the translation of our foreign operations into U.S.dollars and on thepurchase of goods by these foreign operations that are not denominated in their local currencies.Additionally,we may experience inflation anddeflation related to our purchase of certain commodity products.There have been no material changes to our exposure to market risks,includingthe types of instruments we use to manage our exposure to such risks,from those disclosed in the 2021 Form 10-K.Item 4.Controls and Procedures.Under the direction and with the participation of our Chief Executive Officer and Chief Financial Officer,we evaluated our disclosure controls andprocedures(as defined in Rule 13a-15(e)under the Exchange Act)and concluded that our disclosure controls and procedures were effective asof October 30,2022.We are in the process of an ongoing business transformation initiative,which includes upgrading and migrating certain accounting and financesystems.We plan to continue to migrate additional business processes over the course of the next few years and have modified and willcontinue to modify the design and implementation of certain internal control processes as the transformation continues.Except as described above,there were no other changes in our internal control over financial reporting during the fiscal quarter endedOctober 30,2022 that have materially affected,or are reasonably likely to materially affect,our internal control over financial reporting.PART II OTHER INFORMATIONItem 1A.Risk Factors.In addition to the other information set forth in this report,you should carefully consider the factors discussed under Part I,Item 1A,“RiskFactors”and elsewhere in the 2021 Form 10-K.These risks and uncertainties could materially and adversely affect our business,consolidatedfinancial condition,results of operations,or cash flows.Our operations could also be affected by additional factors that are not presently knownto us or by factors that we currently do not consider material to our business.There have been no material changes in the risk factors discussedin the 2021 Form 10-K.20Table of ContentsItem 2.Unregistered Sales of Equity Securities and Use of Proceeds.ISSUER PURCHASES OF EQUITY SECURITIESThe following table presents the number and average price of shares purchased in each fiscal month of the third quarter of fiscal 2022:PeriodTotal Number ofShares Purchased Average PricePaid Per ShareTotal Number ofShares Purchased as Part ofPublicly Announced ProgramDollar Value ofShares that May YetBe Purchased Under theProgram August 1,2022 August 28,20221,006,934$311.63 1,002,575$14,906,250,890 August 29,2022 September 25,20221,042,671 285.15 1,041,201 14,609,360,775 September 26,2022 October 30,20222,192,077 282.02 2,179,438 13,994,589,035 4,241,682 289.82 4,223,214(1)These amounts include repurchases pursuant to our Omnibus Stock Incentive Plan,as Amended and Restated May 19,2022,and our 1997 Omnibus StockIncentive Plan(collectively,the“Plans”).Under the Plans,participants may surrender shares as payment of applicable tax withholding on the vesting ofrestricted stock.Participants in the Plans may also exercise stock options by surrendering shares of common stock that the participants already own aspayment of the exercise price.Shares so surrendered by participants in the Plans are repurchased pursuant to the terms of the Plans and applicable awardagreement and not pursuant to publicly announced share repurchase programs.(2)On August 18,2022,our Board of Directors approved a$15.0 billion share repurchase authorization that replaced the previous authorization of$20.0 billion,which was approved on May 20,2021.This new authorization does not have a prescribed expiration date.SALES OF UNREGISTERED SECURITIESDuring the third quarter of fiscal 2022,we issued 579 deferred stock units under The Home Depot,Inc.Nonemployee Directors Deferred StockCompensation Plan pursuant to the exemption from registration provided by Section 4(a)(2)of the Securities Act and Rule 506 of the SECsRegulation D thereunder.The deferred stock units were credited during the third quarter of fiscal 2022 to the accounts of those non-employeedirectors who elected to receive all or a portion of board retainers in the form of deferred stock units instead of cash.The deferred stock unitsconvert to shares of common stock on a one-for-one basis following a termination of service as described in this plan.During the third quarter of fiscal 2022,we credited 1,108 deferred stock units to participant accounts under the Restoration Plan pursuant to anexemption from the registration requirements of the Securities Act for involuntary,non-contributory plans.The deferred stock units convert toshares of common stock on a one-for-one basis following a termination of service as described in this plan.(1)(1)(2)(2)21Table of ContentsItem 6.Exhibits.Exhibits marked with an asterisk(*)are incorporated by reference to exhibits or appendices previously filed with the SEC,as indicated by thereferences in brackets.All other exhibits are filed or furnished herewith.ExhibitDescription3.1*Amended and Restated Certificate of Incorporation of The Home Depot,Inc.Form 10-Q filed on September 1,2011,Exhibit 3.13.2*By-Laws of The Home Depot,Inc.(Amended and Restated Effective February 28,2019)Form 8-K filed on March 4,2019,Exhibit 3.24.1*Form of 4.000%Note due September 15,2025Form 8-K filed on September 19,2022,Exhibit 4.24.2*Form of 4.500%Note due September 15,2032Form 8-K filed on September 19,2022,Exhibit 4.34.3*Form of 4.950%Note due September 15,2052Form 8-K filed on September 19,2022,Exhibit 4.415.1Acknowledgement of Independent Registered Public Accounting Firm31.1Certification of the Chair,President and Chief Executive Officer pursuant to Rule 13a-14(a)31.2Certification of the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a)32.1Certification of the Chair,President and Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Actof 200232.2Certification of the Executive Vice President and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INSXBRL Instance Document-the instance document does not appear in the Interactive Data file because its XBRL tags areembedded within the Inline XBRL document101.SCHInline XBRL Taxonomy Extension Schema Document101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document101.LABInline XBRL Taxonomy Extension Label Linkbase Document101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document104Cover Page Interactive Data File(formatted as inline XBRL and contained in Exhibit 101)22Table 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.THE HOME DEPOT,INC.(Registrant)By:/s/EDWARD P.DECKEREdward P.Decker,Chair,President and Chief Executive Officer(Principal Executive Officer)/s/RICHARD V.MCPHAILRichard V.McPhail,Executive Vice President and Chief FinancialOfficer(Principal Financial Officer)/s/STEPHEN L.GIBBSStephen L.Gibbs,Vice President,Chief Accounting Officer andCorporate Controller(Principal Accounting Officer)Date:November 21,202223Exhibit 15.1ACKNOWLEDGEMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and Board of DirectorsThe Home Depot,Inc.:We acknowledge our awareness of the use of our report dated November 21,2022 related to our review of interim financial information includedwithin the Quarterly Report on Form 10-Q of The Home Depot,Inc.for the three-month and nine-month periods ended October 30,2022,andincorporated by reference in the following Registration Statements:DescriptionRegistrationStatement NumberForm S-3Depot Direct stock purchase program333-249732Debt securities333-259121Form S-8The Home Depot,Inc.1997 Omnibus Stock Incentive Plan333-61733The Home Depot Canada Registered Retirement Savings Plan333-38946The Home Depot,Inc.Restated and Amended Employee Stock Purchase Plan333-151849The Home Depot,Inc.Amended and Restated Employee Stock Purchase Plan333-182374The Home Depot,Inc.Non-Qualified Stock Option and Deferred Stock Units Plan and Agreement333-56722The Home Depot,Inc.2005 Omnibus Stock Incentive Plan333-125331The Home Depot,Inc.2005 Omnibus Stock Incentive Plan333-153171The Home Depot FutureBuilder and The Home Depot FutureBuilder for Puerto Rico333-125332Pursuant to Rule 436 under the Securities Act of 1933(“the Act”),such report is not considered part of a registration statement prepared orcertified by an independent registered public accounting firm,or a report prepared or certified by an independent registered public accountingfirm within the meaning of Sections 7 and 11 of the Act./s/KPMG LLPAtlanta,GeorgiaNovember 21,2022Exhibit 31.1CERTIFICATIONI,Edward P.Decker,certify that:1.I have reviewed this quarterly report on Form 10-Q of The Home Depot,Inc.;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 under oursupervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is made known tous 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.Date:November 21,2022/s/Edward P.Decker Edward P.DeckerChair,President and Chief Executive OfficerExhibit 31.2CERTIFICATIONI,Richard V.McPhail,certify that:1.I have reviewed this quarterly report on Form 10-Q of The Home Depot,Inc.;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 under oursupervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is made known tous 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.Date:November 21,2022/s/Richard V.McPhail Richard V.McPhailExecutive Vice President and Chief Financial OfficerExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of The Home Depot,Inc.(the“Company”)on Form 10-Q(“Form 10-Q”)for the period ended October 30,2022 as filed with the Securities and Exchange Commission,I,Edward P.Decker,Chair,President and Chief Executive Officer of the Company,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that,to my knowledge:(1)The Form 10-Q 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 Form 10-Q fairly presents,in all material respects,the financial condition and results of operations ofthe Company./s/Edward P.DeckerEdward P.DeckerChair,President and Chief Executive OfficerNovember 21,2022Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of The Home Depot,Inc.(the“Company”)on Form 10-Q(“Form 10-Q”)for the period ended October 30,2022 as filed with the Securities and Exchange Commission,I,Richard V.McPhail,Executive Vice President and Chief Financial Officer 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,to myknowledge:(1)The Form 10-Q 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 Form 10-Q fairly presents,in all material respects,the financial condition and results of operations ofthe Company./s/Richard V.McPhail Richard V.McPhailExecutive Vice President and Chief Financial OfficerNovember 21,2022
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#PoweringProgressTHIRD QUARTER 2022 RESULTSROBUST RESULTS FROM A RESILIENT PORTFOLIOOctober 27,2022Shell plcShell plc|October 27,2022 2“Adjusted Earnings”is the income attributable to Shell plc shareholders for the period,adjusted for the after-tax effect of oil price changes on inventory and for identified items,and excludes earnings attributable to non-controlling interest.In this presentation,“earnings”refers to“Adjusted Earnings”unless stated otherwise.We define“Adjusted EBITDA“as“Income/(loss)for the period“adjusted for current cost of supplies;identified items;tax charge/(credit);depreciation,amortisation and depletion;exploration well write-offs and net interest expense.All items include the non-controlling interest component.In this presentation,“operating expenses”,“costs”and“underlying costs”refer to“Underlying operating expenses”unless stated otherwise.Underlying operating expenses represent“operating expenses excluding identified items”.Operating expenses consist of the following lines in the Consolidated Statement of Income:(i)production and manufacturing expenses;(ii)selling,distribution and administrative expenses;and(iii)research and development expenses.Cash flow from operating activities excluding working capital movements is defined as“Cash flow from operating activities”less the sum of the following items in the Consolidated Statement of Cash Flows:(i)(increase)/decrease in inventories,(ii)(increase)/decrease in current receivables,and(iii)increase/(decrease)in current payables.In this presentation,“capex”refers to“Cash capital expenditure”unless stated otherwise.Cash capital expenditure comprises the following lines from the Consolidated Statement of Cash Flows:Capital expenditure,Investments in joint ventures and associates and Investments in equity securities.Free cash flow is defined as the sum of“Cash flow from operating activities”and“Cash flow from investing activities”.Organic free cash flow is defined as free cash flow excluding inorganic cash capital expenditure,divestment proceeds and tax paid on divestments.In this presentation,“divestments”refers to“divestment proceeds”unless stated otherwise.Divestment proceeds are defined as the sum of(i)proceeds from sale of property,plant and equipment and businesses,(ii)proceeds from sale of joint ventures and associates,and(iii)proceeds from sale of equity securities.Net debt is defined as the sum of current and non-current debt,less cash and cash equivalents,adjusted for the fair value of derivative financial instruments used to hedge foreign exchange and interest rate risks relating to debt,and associated collateral balances.Reconciliations of the above non-GAAP measures are included in the Shell plc Unaudited Condensed Interim Financial Report for the nine months ended September 30,2022.This presentation may contain certain forward-looking non-GAAP measures such as cash capital expenditure and divestments.We are unable to provide a reconciliation of these forward-looking non-GAAP measures to the most comparable GAAP financial measures because certain information needed to reconcile those non-GAAP measures to the most comparable GAAP financial measures is dependent on future events some of which are outside the control of Shell,such as oil and gas prices,interest rates and exchange rates.Moreover,estimating such GAAP measures with the required precision necessary to provide a meaningful reconciliation is extremely difficult and could not be accomplished without unreasonable effort.Non-GAAP measures in respect of future periods which cannot be reconciled to the most comparable GAAP financial measure are calculated in a manner which is consistent with the accounting policies applied in Shell plcs consolidated financial statements.The contents of websites referred to in this presentation do not form part of this presentation.We may have used certain terms,such as resources,in this presentation that the United States Securities and Exchange Commission(SEC)strictly prohibits us from including in our filings with the SEC.Investors are urged to consider closely the disclosure in our Form 20-F,File No 1-32575,available on the SEC website www.sec.gov.The companies in which Shell plc directly and indirectly owns investments are separate legal entities.In this presentation“Shell”,“Shell Group”and“Group”are sometimes used for convenience where references are made to Shell plc and its subsidiaries in general.Likewise,the words“we”,“us”and“our”are also used to refer to Shell plc and its subsidiaries in general or to those who work for them.These terms are also used where no useful purpose is served by identifying the particular entity or entities.“Subsidiaries“,“Shell subsidiaries”and“Shell companies”as used in this presentation refer to entities over which Shell plc either directly or indirectly has control.Entities and unincorporated arrangements over which Shell has joint control are generally referred to as“joint ventures”and“joint operations”,respectively.“Joint ventures”and“joint operations”are collectively referred to as“joint arrangements”.Entities over which Shell has significant influence but neither control nor joint control are referred to as“associates”.The term“Shell interest”is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement,after exclusion of all third-party interest.Also,in this presentation we may refer to Shells“Net Carbon Footprint”or“Net Carbon Intensity”,which include Shells carbon emissions from the production of our energy products,our suppliers carbon emissions in supplying energy for that production and our customers carbon emissions associated with their use of the energy products we sell.Shell only controls its own emissions.The use of the term Shells“Net Carbon Footprint”or“Net Carbon Intensity”is for convenience only and not intended to suggest these emissions are those of Shell plc or its subsidiaries.Shells operating plan,outlook and budgets are forecasted for a ten-year period and are updated every year.They reflect the current economic environment and what we can reasonably expect to see over the next ten years.Accordingly,they reflect our Scope 1,Scope 2 and Net Carbon Footprint(NCF)targets over the next ten years.However,Shells operating plans cannot reflect our 2050 net-zero emissions target and 2035 NCF target,as these targets are currently outside our planning period.In the future,as society moves towards net-zero emissions,we expect Shells operating plans to reflect this movement.However,if society is not net zero in 2050,as of today,there would be significant risk that Shell may not meet this target.This presentation contains forward-looking statements(within the meaning of the U.S.Private Securities Litigation Reform Act of 1995)concerning the financial condition,results of operations and businesses of Shell.All statements other than statements of historical fact are,or may be deemed to be,forward-looking statements.Forward-looking statements are statements of future expectations that are based on managements current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results,performance or events to differ materially from those expressed or implied in these statements.Forward-looking statements include,among other things,statements concerning the potential exposure of Shell to market risks and statements expressing managements expectations,beliefs,estimates,forecasts,projections and assumptions.These forward-looking statements are identified by their use of terms and phrases such as“aim”,“ambition”,“anticipate”,“believe”,”could”,”estimate”,”expect”,”goals”,”intend”,”may”,“milestones”,”objectives”,”outlook”,”plan”,“probably”,“project”,“risks”,“schedule”,“seek”,“should”,“target”,“will”and similar terms and phrases.There are a number of factors that could affect the future operations of Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this presentation,including(without limitation):(a)price fluctuations in crude oil and natural gas;(b)changes in demand for Shells products;(c)currency fluctuations;(d)drilling and production results;(e)reserves estimates;(f)loss of market share and industry competition;(g)environmental and physical risks;(h)risks associated with the identification of suitable potential acquisition properties and targets,and successful negotiation and completion of such transactions;(i)the risk of doing business in developing countries and countries subject to international sanctions;(j)legislative,judicial,fiscal and regulatory developments including regulatory measures addressing climate change;(k)economic and financial market conditions in various countries and regions;(l)political risks,including the risks of expropriation and renegotiation of the terms of contracts with governmental entities,delays or advancements in the approval of projects and delays in the reimbursement for shared costs;(m)risks associated with the impact of pandemics,such as the COVID-19(coronavirus)outbreak;and(n)changes in trading conditions.No assurance is provided that future dividend payments will match or exceed previous dividend payments.All forward-looking statements contained in this presentation are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.Readers should not place undue reliance on forward-looking statements.Additional risk factors that may affect future results are contained in Shell plcs Form 20-F for the year ended December 31,2021(available at and www.sec.gov).These risk factors also expressly qualify all forward-looking statements contained in this presentation and should be considered by the reader.Each forward-looking statement speaks only as of the date of this presentation,October 27,2022.Neither Shell plc nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information,future events or other information.In light of these risks,results could differ materially from those stated,implied or inferred from the forward-looking statements contained in this presentation.DEFINITIONS&CAUTIONARY NOTE POWERING LIVESGENERATINGSHAREHOLDER VALUEACHIEVING NET-ZERO EMISSIONSRESPECTING NATUREUNDERPINNED BY OUR CORE VALUES AND OUR FOCUS ON SAFETYGrowing value through a dynamic portfolio and disciplined capital allocation Working with our customers and sectors to accelerate the energy transition to net-zero emissionsPowering lives through our products and activities,and supporting an inclusive societyProtecting the environment,reducing waste and making a positive contribution to biodiversityOur strategy to accelerate the transition to net-zero emissions,purposefully and profitably THE SHELL INVESTMENT CASEPOWERINGPROGRESS3Shell plc|October 27,2022 Shell plc|October 27,2022$14.5 billion buyback programme for Q1 Q3 2022 completed$4 billion buyback programme announced for this quarter$0.25 dividend per share for Q3 2022Plan to increase the dividend per share(DPS)for the fourth quarter,which will be paid in March 2023,by an expected 15%,subject to Board approvalEnhanced shareholder distributionsInvesting in energy security&transitionRobust performance in a turbulent economic environmentAdjusted Earnings1of$9.5 billion in Q3 2022Adjusted EBITDA of$21.5 billion in Q3 2022Resilience across Shell businesses,with lower Integrated Gas results offset by strong Upstream deliveryCFFO of$12.5 billion in Q3 2022,reflecting working capital outflows mainly due to gas inventory build-ups in Europe and initial margin outflowsDelivering robust results 4Q3 2022 KEY MESSAGES 1Income/(loss)attributable to shareholders is$6.7 billion in Q3 2022.POWERING PROGRESSDisciplined cash capex:expected to be in the$23-27 billion range in 2022Strengthening the portfolioCompletion of Sprng Energy,India acquisitionParticipation in the North Field South LNG expansion,QatarFID to develop Rosmari-Marjoram,Malaysia,field,which will be primarily powered by renewable energyAera Upstream JV,California,USA divestment announcedDriving value and simplification by acquisition of Shell Midstream Partners,USA($2 billion,completed in Q4)Shell plc|October 27,2022 Shell plc|October 27,2022 5POWERING PROGRESS IN ACTION1Kline&Company,September 20222Battery energy storage systemSTRATEGY UPDATESBRS GmbH,Germany,acquisition to expand into new electric vehicle market segmentsSigned a non-binding MoUwith Union Pacific Railroad to accelerate the decarbonisation of rail transportation#1 global lubricant supplier for 16 years in a row1Completed acquisition of Sprng Energy,India Signed agreement to acquire Daystar Power Group,a provider of Power-as-a-Service solutions in West AfricaAcquired standalone BESS2development rights for three projects across two sites in CaliforniaSelected as partner in the North Field South 16 mtpa LNG project in Qatar Unloaded the first cargo at the new LNG import hub in the Dutch port of EemshavenAgreed purchase of 2.1 mtpa of LNG from Energy Transfer,USA,under a 20-year agreementProgressing start-up of Shell Polymers Monaca,PennsylvaniaRepurposing of Shell Convent,USA,into a renewable fuel facility obtained Tax Exemption Program supportSigned plastic waste pyrolysis oil supply agreement with Sepco Industries in ThailandAnnounced Rosmari-MarjoramFID in Malaysia,an offshore platform which will be primarily powered by renewable energyHighest production from GOM Shell-operated assets in the last decadeFocusing on core positions with divestment of Aera JV,USAProfitably decarbonising with our customers Integrated clean energy systems:higher future returnsA world leader in LNG:resilient cash generationIntegrated energy and chemicals parks delivering low-carbon products Delivering the energy of today while funding the energy of tomorrowMarketingUpstreamRenewables&Energy SolutionsIntegrated Gas Chemicals&ProductsShell plc|October 27,2022 Shell plc|October 27,2022 6ACCELERATING ENERGY TRANSITIONSTRATEGY UPDATECompleted first road trial in India using new bio-based materials to reduce carbon footprint of asphalt pavementsSigned MoU1for exploring sustainable aviation fuel(SAF)supply with:Lufthansa Group for seven years,at airports across the globe,from 2024Korean Air for five years,at major airports in Asia-Pacific and the Middle East,from 2026 Cebu Pacific for five years for the Philippine carriers operations,from 2026 Announced JV with Shenergy Group to build a network of hydrogen refuelling stations in Shanghai,Shells first hydrogen refuelling network in AsiaAnnounced JV with Foresight to acquire development rights for 370 MW renewables projects in Western Australia,including wind,solar and battery storageAnnounced plans to purchase 100 MW portfolio of new-build solar capacity in the UK from AnescoSigned a ten-year agreement to supply marine LNG to ZIM,a container shipping company,with the potential to reduce vessel emissions by 20%vs conventional marine fuelsLNG1Non-bindingSigned a joint development agreement with AMPYR for a proposed battery energy storage systemin Wellington,New South Wales.The target capacity of the Wellington BESS is 500 MW/1,000 MWh,making it one of the largest battery storage projects in New South WalesShell plc|October 27,2022 Shell plc|October 27,2022 7Oil and Gas PricesShell Indicative Refining and Chemical Margins$/bbl$/MMBtu$/bbl$/tonneVOLATILE BUSINESS ENVIRONMENT$/MMBtuData based on monthly averages.MACRO01020304050607080020406080100120140BrentJCC-3Henry Hub(RHS)EU TTF(RHS)-100010020030040005101520253035Indicative Refining marginIndicative Chemical margin(RHS)Shell plc|October 27,2022 Adjusted EBITDACash flow from operationsCash capital expenditureFree cash flow Income attributable to Shell plc shareholdersAdjusted EarningsShell plc|October 27,2022 Net debt8$21.5 billion$12.5 billion$5.4 billion$7.5 billion$6.7 billion$9.5 billionIncludes net losses of$1.0 billion due to the fair value accounting of commodity derivatives and current cost of supplies adjustments of$1.4 billion with lower Brent prices compared to Q2 2022ROBUST RESULTS IN VOLATILE TIMESQ3 2022 average Brent price:$101/bblQ3 2022 FINANCIAL RESULTS$48.3 billionStrong Upstream delivery offset by significantly lower LNG trading and optimisation results and lower chemicals and refining marginsWorking capital outflow of$4.2 billion consisting of inventory price help from lower crude prices more than offset by European gas inventory build-up and initial margin outflows in Renewable and Energy SolutionDivestment proceeds of$0.3 billion Historical comparisons available in Quarterly Databook.Full year 2022 outlook:$23-27 billion range4ove Q2 2022 levels,includes absorption of the Sprng Energy debtShell plc|October 27,2022 Shell plc|October 27,2022 9.521.512.504812162024289Cash conversion Q3 2022$billion1Non-controlling interest2AR/AP&Other includes initial marginQ3 2022 FINANCIAL RESULTS11.59.502468101214Adjusted Earnings Q2 2022 to Q3 2022$billion0.45.95.8(1.7)(4.2)working capital movement 1.1(4.3)2.9(2.4)(4.6)ROBUST RESULTS IN VOLATILE TIMES(1.4)1.00.1(1.3)(0.3)(0.0)Shell plc|October 27,2022 Shell plc|October 27,2022 10ROBUST RESULTS IN VOLATILE TIMESAdditional information available in the Q3 2022 Quarterly Press Release1Non-controlling interestQuarterly Databook available here.Q3 2022 FINANCIAL RESULTSAdjusted EarningsAdjusted EBITDACFFO$billionQ3 2022Q2 2022Q3 2022Q2 2022Q3 2022Q2 2022Integrated Gas2.33.85.46.56.78.2Upstream5.94.912.511.28.38.1Marketing0.80.81.51.52.3(0.5)Chemicals&Products0.82.01.83.23.42.7R&ES0.40.70.51.0(8.1)(0.6)Corporate&NCI1(0.7)(0.7)(0.3)(0.2)(0.1)0.7Total9.511.521.523.112.518.7Shell plc|October 27,2022 Shell plc|October 27,2022 ShellPeer range 11Adjusted EBITDA Track record of strong CFFO$billionINTEGRATED BUSINESS MODEL DELIVERING RESILIENT EBITDA AND CASH Left graph excludes CorporateRight graph:Peer range comprises ExxonMobil,Chevron,BP and TotalEnergies,CFFO for Shell adjusted for interest received(in CFFI)and interest paid(CFFF).CASH POTENTIAL$billion01020304050600510152025GrowthTransitionUpstreamShell plc|October 27,2022 Shell plc|October 27,2022 Volatile and dislocated market$/MMBtu12With tighter LNG markets in winter,Shells LNG trading portfolio has historically been skewed towards the northern hemisphere winterNet Term Volumes have historically been low in the third quarter,reducing the volume available for trading and optimisationThe seasonality impact was amplified by term supply constraintsSeasonality effect and supply constraintsThe Ukraine war impacted markets with extreme volatility and dislocations Unprecedented divergence between JKM,EU TTF and EU spot LNG prices driven by EU LNG imports and regasification constraints,reducing our optimisation opportunitiesThe Eemshaven LNG Import Terminal(NL),in which Shell holds long-term capacity rights,went into operation in mid-September 2022 which will improve accessQ3 2022 FINANCIAL RESULTSIG TRADING AND OPTIMISATION RESULTS IMPACTED BY SEASONALITY AND MARKET DISLOCATIONS020406080JKMEU TTFOutbreak of Ukraine warEU TTF JKM,with increased differential end of Q3 2022Net Term Volumes(Term Purchases-Term Sales)Shell plc|October 27,2022 Shell plc|October 27,2022 13Cash dividends and Share buybacksNet debt Q2 2022 to Q3 2022$billion$billion1Dividends paid to Shell shareholders2Q4 2021,Q1 and Q2 2022 include buybacks from the Permian(USA)asset sale proceeds.3Including Sprng Energy debt Q3 2022 FINANCIAL RESULTS46.448.30204060(16.7)4.2(0.3)5.46.80.71.00.9012345678Cash dividendsBuybacksENHANCED DISTRIBUTIONS AND NET DEBT MOVEMENT12Shell plc|October 27,2022 Shell plc|October 27,2022$18.5 billion of share buybacks announced in 2022 We have now completed$6 billion of share buybacks,announced at Q2 results$4 billion share buyback programme announced at Q3 results,expected to be completed by the Q4 2022 results announcement,subject to market conditionsTotal distributions continue to be in excess of 30%of CFFO for the last four quartersContinued execution of buyback across Amsterdam and London exchanges following shareholder approval at 2022 AGMDisciplined cash capex:expected to be in the$23-27 billion range in 202214ENHANCED SHAREHOLDER DISTRIBUTIONS*Combined with dividend announcements earlier in 2022 totals c.$7.4 billion announced during the yearCAPITAL ALLOCATIONFY 2022announcements$13 billion$5.5 billionOrdinary progressive dividendShareholder distributionsShare buyback ordinary courseShare buyback Permian divestment proceeds$0.25per share for Q3,4ove Q3 2021*Expectations for ordinary progressive dividend at Q4 results15%increase in dividend per share,subject to board approval$26 billionShell plc|October 27,2022 Shell plc|October 27,2022 15CONTINUING PORTFOLIO FOCUS AND HIGH-GRADING DIVESTMENTSCompleted divestments in 2022 Announced intent to divest/withdrawMalampayaMobile refineryPCK Schwedt refineryMap not to scaleDeer Park refineryEgypt Western DesertQGC infrastructureOML 17GasnorFredericia refineryDuvernay shalesPuget SoundPermianCompleted divestments in 2021 Sakhalin-2SalymShell NeftNigeria onshoreAera EnergyShell plc|October 27,2022 Shell plc|October 27,2022 2016 baseline20212030E2050E41016OUR PROGRESS1Measured by our Net Carbon Footprint(NCF)methodology,available on our website.CARBONNet-zero emissions energy business by 2050 including all emissions(Scopes 1,2 and 3)NET ZERO BY 2050Covers emissions associated with the production,processing,transport and end-use of our productsWe believe Shells total carbon emissions from energy sold peaked in 2018 at around 1.7 gtpa and will be brought down to net-zero by 2050.In 2021 the total emissions were 1.4 gtpaFROM 1.7 GTPA TO ZEROUN PARIS AGREEMENTStrategy aligns with goal to limit the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levelsNet Carbon Intensity1(Scope 1,2 and 3)-6-8 23205020302035Net Carbon Intensity1target-20%-45%-100tualsgCO2e/MJ7979Covers all Scope 1 and 2 emissions under Shells operational controlAbsolute emissions(Scope 1 and 2)83mtpa CO2e682024-9-12 22-3-4 21-2.5%Scope 1Scope 22016baselineShell plc|October 27,2022 Shell plc|October 27,2022 PLATFORM FOR GROWTHA WORLD-LEADING CUSTOMER-FACING BUSINESSMobility Making customers life journeys better as the most valuable brand in the industry1Lubricants Keeping the world progressing as#1 lubricants solutions provider2Sectors&Decarbonisation Profitably helping our customers to decarboniseRESILIENT PERFORMANCE THROUGH THE ENERGY TRANSITIONGlobal customer access across locations and businesses Competitive advantages in brand,technology and peopleGrowth strategy to$6 billion Adjusted Earnings by 2025Target average project IRR of 15-25%3Mobility 171Brand Finance Global 500(2022)2Kline&Company,September 20223The capital-weighted average project forward-looking unlevered expected rate of return where NPV equals zero,calculated at FID for pre-FID projectsSHELL INSIGHTS:MARKETING BUSINESSAdditional information:Shell Insights:Marketing Business UpdateShell plc|October 27,2022 Shell plc|October 27,2022 Differentiated offerings contributing 60%Customer access as a key differentiator32 million customers per day46k locations in 80 markets84 million loyalty members1 million B2B customers%Gross margin 20210200%MobilityMobilityLubricantsLubricantsConvenience RetailShell RechargeFleet SolutionsV-PowerLoyaltyDigital and ServicesB2B Premium SyntheticsPure PlusTMGlobal AccountsMain-grade FuelsMainstream Lubricants 4%ptssince 2017 12%ptssince 2017$50 billion brand value1 18%vs 202118LEADING BRAND,CUSTOMER ACCESS AND DIFFERENTIATED OFFERINGS 1Brand Finance Global 500(2022);Additional information:Shell Insights:Marketing Business UpdateFocusing on low-carbon products and services050100Total Opex Cash CapexTotal Opex Cash CapexTotal EarningsTotal EarningsIncludes lubricants,convenience retail,E-mobility,biofuels,agriculture and forestry,construction and roadLow-carbonearningsLow-carbonexpenditureMOST VALUABLE BRAND IN THE INDUSTRY1SHELL INSIGHTS:MARKETING BUSINESSShell plc|October 27,2022 Shell plc|October 27,2022 19MARKETING MAJOR PROJECTS Biofuels Plant RotterdamVarennes Carbon RecyclingShell BovariusShell Junction CityShell GallowayLanzaJetKEYLow-carbon fuelsMarketing major projects exclude M&A.Additional data on Mobility available in the Quarterly Databook.ProjectCountryShell share%ProductsShell-operatedUnder construction Start-up 2022-2023Shell GallowayUSA100Renewable Fuels RNG LanzaJetUSA15.4Renewable FuelsVarennes Carbon RecyclingCanada40Renewable Fuels Under construction Start-up 2024 Biofuels Plant RotterdamThe Netherlands100Renewable Fuels Shell BovariusUSA100Renewable Fuels RNG Shell FriesianUSA100Renewable Fuels RNG Investancia Group Paraguay30Renewable Feedstock Pre-FID optionsNL EnerkemThe Netherlands100Renewable Fuels Biofuels Plant SingaporeSingapore100Renewable Fuels Biofuels Plant ConventUSA100Renewable Fuels Shell DexterUSA100Renewable Fuels RNG Bukom Group II Base OilSingapore100Lubricants Multi-year investment programmesMobility Organic GrowthGlobal100Varied Mobility Electric ChargingGlobal100Power Map not to scaleInvestancia Shell plc|October 27,2022 Shell plc|October 27,2022 Oman20Companies with a global portfolio are represented on a map based on where they are headquartered.INTEGRATED POWER AND HYDROGEN PORTFOLIO AND PROJECTS KEYRenewable generation capacity in operationProjectCountryShell sharepacityMW Project typeRenewable generation Capacity under construction and/or committed for saleGangarriAustralia100120SolarSprng EnergyIndia100575SolarCleantech SolarAsia24109SolarKoegorspolder TractaatwegNL 10030SolarSluiskilNL10023SolarPottendijkNL10092Solar/WindBrazos RepowerUSA100182WindCrosswindNL80760Offshore windAtlantic Shores-Project 1USA501,509Offshore windMayflower-Project 1&ITCUSA501,200Offshore windHydrogen electrolysers Under construction Holland Hydrogen INL200HydrogenHydrogen electrolysers Pre-FID options NorthH2NL1,000-2,000HydrogenRefhyne2 Germany100HydrogenNorwaySpainFranceGermanyNLUKMalaysiaUSAPhilippinesCanadaJapanAustraliaChinaBrazilPower and gas trading Energy solutions for homes and businessesHydrogen electrolysers and refuelling stations SingaporeTurkeyGhanaItalyIndiaMap not to scaleShell plc|October 27,2022 Shell plc|October 27,2022 21CCS hubs developed to offer CCS-as-a-service to our customers will be reported in the Renewables and Energy Solutions segment.Where existing or future CCS projects help decarbonise our own assets,they will be reported in the segment where this asset sits.CARBON CAPTURE AND STORAGE AND NATURE-BASED PROJECTSKEYCarbon capture and storage projects in operationInvestments in naturebased projectsGorgonTechnology Centre MongstadQuestCarbon capture and storage projects under constructionNorthern LightsMap not to scaleAnnounced projectsCountryShell share%CO2 captured and/or storedmtpa Shell-operatedCCS projects Under constructionNorthern Lights(Phase 1)Norway 33.3%1.5JVCCS projects Pre-FID optionsAcorn(Initial)UK 30%5 TBDAramis(Initial)NL 25%5 JV transportYes storageNorthern Endurance(Initial)UK TBD4 NoPolarisCanada100%0.7*Yes captureAtlasCanadaTBD10JV storageSouth Wales Industrial ClusterUK 100%1.5YesPernis CO2captureNL 100%1.15*Yes captureNo transport and storageAsia-Pacific CCS hubAsia-PacificTBD5-15Yes captureTBD transport and storageUS Gulf Coast(Phase 1)USA100%2*YesLiberty(Phase 1)USA100%1.7*YesDaya Bay ChinaTBD10JVNorthern Carnarvon(Angel)Australia20%5JV*Shell quantities only,third-party commitments under discussionShell plc|October 27,2022 Shell plc|October 27,2022 22Projects listed are a selection of our project portfolio.Peak production and LNG capacity are 100%.A to be confirmed.INTEGRATED GAS PORTFOLIO&MAJOR PROJECTS KEYNLNGELNGQG4OLNGQLNGPreludeNWSGorgonQCLNGBLNGALNGLNGCPLNGGibraltarDragonGATECosta Azul Lake CharlesSingaporeCove PointElba IslandSMDSChangbeiBoliviaRegasification terminalsLiquefaction plantsGTLLiquefaction plants under constructionOn-stream gas projectsProjectCountryShell share%Peak productionkboe/dLNG capacity mtpaShell-operatedUnder construction Start-up 2022-2023Arrow-Surat GasAustralia50backfillGorgon-Jansz Australia25backfillOman GasOman53120 QGC SW*Australia Variousbackfill Under construction Start-up 2024 Gorgon-Jansz compressionAustralia25backfillLNG Canada T1-2Canada4014NLNG T7Nigeria267.6North Field East ExpansionQatar6.25*32Prelude-CruxAustralia84.5backfill Pre-FID optionsAbadiIndonesia352459.5East MedEgypt35backfillLNG Canada ExpansionCanada4014ManateeTrinidad&Tobago100backfill NWS-Browse Australia27backfillTanzaniaTanzania25A15*QGC SW is split into 3 different sub-projects:SW 2.5(Shell share 73%,under construction),SW 2.6 and SW Lifecyle(both pre-FID)*25%share in a JV company which will own 25%of the North Field East(NFE)expansion projectOn October 23,2022,Shell announced its selection as partner in the 16 mtpa North Field South LNG project in Qatar with a 9.375%participating interest SEIMap not to scalePearlQNFEEemshavenShell plc|October 27,2022 Shell plc|October 27,2022 23Projects listed are a selection of our project portfolio.Products capacity is 100%.A to be confirmed.CHEMICALS AND PRODUCTS PORTFOLIO&MAJOR PROJECTS ScotfordRheinlandNanhaiMoerdijkGeismarPennsylvaniaNorcoPulau BukomJurong IslandMossmorranKEYEnergy and chemicals parks Integrated refining and chemicals sitesChemicals-only sitesSites pre start-upProjectCountryShell share%ProductsShell-operatedConstruction complete Start-up 2022Pennsylvania Petrochemicals ComplexUSA1001.5 mtpa polyethylene Under construction Start-up 2023 Moerdijk energy efficiencyNL100Olefins Pre-FID optionsChemicals derivativesUSA100Derivatives Cracker&derivatives IraqAAACSPC expansion project China50Olefins&performance chemicals CSPC Polycarbonate project China 50Polycarbonates RotterdamMap not to scaleDeer ParkShell plc|October 27,2022 Shell plc|October 27,2022 24Projects listed are a selection of our project portfolio excluding short-cycle Shales activities.Peak production is 100%.A Subject to unitisation agreements,production shown is FPSO oil capacity as per operator.UPSTREAM PORTFOLIO&MAJOR PROJECTSProjectCountryShell share%Peak production kboe/dShell-operatedUnder construction Start-up 2022-2023Mero 2 ABrazil19.3180TimiMalaysia7550 Pierce post DepressurisationUK9330 Penguins RedevelopmentUK5045 VitoUSA63100 Under construction Start-up 2024 Mero 3 ABrazil19.3180Mero 4 ABrazil19.3180JerunMalaysia3095Marjoram/RosmariMalaysia75100 JackdawUK10040 WhaleUSA60100 Pre-FID optionsGato do MatoBrazil5070 Kashagan Phase 2BKazakhstan 17190Bonga South WestNigeria43150 HI DevelopmentNigeria4075 Bonga Main Life Extension&UpgradeNigeria5560 Bonga North Tranche 1Nigeria55120 DoverUSA10030 Fort SumterUSA10030 KEYTotal projects under constructionShell share 500 kboe/dPre-FID optionsShell share 800 kboe/dCore positionsUK BruneiMalaysiaNigeriaBrazilGulf of MexicoKazakhstanOmanMap not to scaleShell plc|October 27,2022 Shell plc|October 27,2022 25Upcoming events:May 4,2023Q1 2023 resultsFeb 2,2023Q4 2022 resultsCorporate Reports:Sustainability Report 2021Payments to Governments Report 2021Annual Report 2021Energy Transition Progress Report 2021 Useful links:Strategy Day 2021Annual and Quarterly DatabookShell Energy Transition StrategyNigeria briefing notes 2021 ESG performance dataSimplified Share StructureWar in Ukraine:Shells ResponseShell Insights:Marketing Business UpdateJul 27,2023Q2 2023 resultsNov 2,2023Q3 2023 results
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#PoweringProgressFOURTH QUARTER AND FULL YEAR 2022 RESULTSStrong results,disciplined capital allocationFebruary 2,2023Shell plcShell plc|February 2,20232“Adjusted Earnings”is the income attributable to Shell plc shareholders for the period,adjusted for the after-tax effect of oil price changes on inventory and for identified items,and excludes earnings attributable to non-controlling interest.In this presentation,“earnings”refers to“Adjusted Earnings”unless stated otherwise.We define“Adjusted EBITDA“as“Income/(loss)for the period“adjusted for current cost of supplies;identified items;tax charge/(credit);depreciation,amortisation and depletion;exploration well write-offs and net interest expense.All items include the non-controlling interest component.In this presentation,“operating expenses”,“costs”and“underlying costs”refer to“Underlying operating expenses”unless stated otherwise.Underlying operating expenses represent“operating expenses excluding identified items”.Operating expenses consist of the following lines in the Consolidated Statement of Income:(i)production and manufacturing expenses;(ii)selling,distribution and administrative expenses;and(iii)research and development expenses.Cash flow from operating activities excluding working capital movements is defined as“Cash flow from operating activities”less the sum of the following items in the Consolidated Statement of Cash Flows:(i)(increase)/decrease in inventories,(ii)(increase)/decrease in current receivables,and(iii)increase/(decrease)in current payables.In this presentation,“capex”refers to“Cash capital expenditure”unless stated otherwise.Cash capital expenditure comprises the following lines from the Consolidated Statement of Cash Flows:Capital expenditure,Investments in joint ventures and associates and Investments in equity securities.Free cash flow is defined as the sum of“Cash flow from operating activities”and“Cash flow from investing activities”.Organic free cash flow is defined as free cash flow excluding inorganic cash capital expenditure,divestment proceeds and tax paid on divestments.In this presentation,“divestments”refers to“divestment proceeds”unless stated otherwise.Divestment proceeds are defined as the sum of(i)proceeds from sale of property,plant and equipment and businesses,(ii)proceeds from sale of joint ventures and associates,and(iii)proceeds from sale of equity securities.Net debt is defined as the sum of current and non-current debt,less cash and cash equivalents,adjusted for the fair value of derivative financial instruments used to hedge foreign exchange and interest rate risks relating to debt,and associated collateral balances.Reconciliations of the above non-GAAP measures are included in the Shell plc Unaudited Condensed Interim Financial Report for the full year ended December 31,2022.Reserves:Our use of the term“reserves”in this presentation means United States Securities and Exchange Commission(SEC)proved oil and gas reserves.Resources:Our use of the term“resources”in this presentation includes quantities of oil and gas not yet classified as SEC proved oil and gas reserves.Resources are consistent with the Society of Petroleum Engineers(SPE)2P 2C definitions.This presentation may contain certain forward-looking non-GAAP measures such as cash capital expenditure and divestments.We are unable to provide a reconciliation of these forward-looking non-GAAP measures to the most comparable GAAP financial measures because certain information needed to reconcile those non-GAAP measures to the most comparable GAAP financial measures is dependent on future events some of which are outside the control of Shell,such as oil and gas prices,interest rates and exchange rates.Moreover,estimating such GAAP measures with the required precision necessary to provide a meaningful reconciliation is extremely difficult and could not be accomplished without unreasonable effort.Non-GAAP measures in respect of future periods which cannot be reconciled to the most comparable GAAP financial measure are calculated in a manner which is consistent with the accounting policies applied in Shell plcs consolidated financial statements.The contents of websites referred to in this presentation do not form part of this presentation.We may have used certain terms,such as resources,in this presentation that the United States Securities and Exchange Commission(SEC)strictly prohibits us from including in our filings with the SEC.Investors are urged to consider closely the disclosure in our Form 20-F,File No 1-32575,available on the SEC website www.sec.gov.The companies in which Shell plc directly and indirectly owns investments are separate legal entities.In this presentation“Shell”,“Shell Group”and“Group”are sometimes used for convenience where references are made to Shell plc and its subsidiaries in general.Likewise,the words“we”,“us”and“our”are also used to refer to Shell plc and its subsidiaries in general or to those who work for them.These terms are also used where no useful purpose is served by identifying the particular entity or entities.“Subsidiaries“,“Shell subsidiaries”and“Shell companies”as used in this presentation refer to entities over which Shell plc either directly or indirectly has control.Entities and unincorporated arrangements over which Shell has joint control are generally referred to as“joint ventures”and“joint operations”,respectively.“Joint ventures”and“joint operations”are collectively referred to as“joint arrangements”.Entities over which Shell has significant influence but neither control nor joint control are referred to as“associates”.The term“Shell interest”is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement,after exclusion of all third-party interest.Also,in this presentation we may refer to Shells“Net Carbon Footprint”or“Net Carbon Intensity”,which include Shells carbon emissions from the production of our energy products,our suppliers carbon emissions in supplying energy for that production and our customers carbon emissions associated with their use of the energy products we sell.Shell only controls its own emissions.The use of the term Shells“Net Carbon Footprint”or“Net Carbon Intensity”is for convenience only and not intended to suggest these emissions are those of Shell plc or its subsidiaries.Shells operating plan,outlook and budgets are forecasted for a ten-year period and are updated every year.They reflect the current economic environment and what we can reasonably expect to see over the next ten years.Accordingly,they reflect our Scope 1,Scope 2 and Net Carbon Footprint(NCF)targets over the next ten years.However,Shells operating plans cannot reflect our 2050 net-zero emissions target and 2035 NCF target,as these targets are currently outside our planning period.In the future,as society moves towards net-zero emissions,we expect Shells operating plans to reflect this movement.However,if society is not net zero in 2050,as of today,there would be significant risk that Shell may not meet this target.This presentation contains forward-looking statements(within the meaning of the U.S.Private Securities Litigation Reform Act of 1995)concerning the financial condition,results of operations and businesses of Shell.All statements other than statements of historical fact are,or may be deemed to be,forward-looking statements.Forward-looking statements are statements of future expectations that are based on managements current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results,performance or events to differ materially from those expressed or implied in these statements.Forward-looking statements include,among other things,statements concerning the potential exposure of Shell to market risks and statements expressing managements expectations,beliefs,estimates,forecasts,projections and assumptions.These forward-looking statements are identified by their use of terms and phrases such as“aim”,“ambition”,“anticipate”,“believe”,”could”,”estimate”,”expect”,”goals”,”intend”,”may”,“milestones”,”objectives”,”outlook”,”plan”,“probably”,“project”,“risks”,“schedule”,“seek”,“should”,“target”,“will”and similar terms and phrases.There are a number of factors that could affect the future operations of Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this presentation,including(without limitation):(a)price fluctuations in crude oil and natural gas;(b)changes in demand for Shells products;(c)currency fluctuations;(d)drilling and production results;(e)reserves estimates;(f)loss of market share and industry competition;(g)environmental and physical risks;(h)risks associated with the identification of suitable potential acquisition properties and targets,and successful negotiation and completion of such transactions;(i)the risk of doing business in developing countries and countries subject to international sanctions;(j)legislative,judicial,fiscal and regulatory developments including regulatory measures addressing climate change;(k)economic and financial market conditions in various countries and regions;(l)political risks,including the risks of expropriation and renegotiation of the terms of contracts with governmental entities,delays or advancements in the approval of projects and delays in the reimbursement for shared costs;(m)risks associated with the impact of pandemics,such as the COVID-19(coronavirus)outbreak;and(n)changes in trading conditions.No assurance is provided that future dividend payments will match or exceed previous dividend payments.All forward-looking statements contained in this presentation are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.Readers should not place undue reliance on forward-looking statements.Additional risk factors that may affect future results are contained in Shell plcs Form 20-F for the year ended December 31,2021(available at and www.sec.gov).These risk factors also expressly qualify all forward-looking statements contained in this presentation and should be considered by the reader.Each forward-looking statement speaks only as of the date of this presentation,February 2,2023.Neither Shell plc nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information,future events or other information.In light of these risks,results could differ materially from those stated,implied or inferred from the forward-looking statements contained in this presentation.Definitions&cautionary note Shell plc|February 2,2023Shell plc|February 2,20232023 outlook:disciplined capital allocationEnhanced shareholder distributionsStrong results financial&carbon 3Key messages 1Income attributable to shareholders is$10.4 billion in Q4 2022 and$42 billion in full year 2022.Q4 2022 Q4 2022Adjusted Earnings1of$9.8 billionCFFO of$22.4 billionFull year 2022Adjusted Earnings1of$40 billion,CFFO of$68 billionCash capex$25 billion(including inorganic capex)within the$23-27 billion rangeCarbonScope 1&2 emissions:57 mtpa CO2e(preliminiary)30%lower Scope 1&2 emissions in 2022 vs 2016Total shareholder distributions$26 billion in 2022 35%of CFFODividends15%increase in dividend for Q4 2022$0.2875 dividend per share,payable in March 2023Share buybacks$4 billion share buyback programme announcedExpected to be completed by the Q1 2023 results announcement,subject to market conditionsCash capex$23-27 billion in 2023 Including inorganic capex,like Nature Energy biogasLow-carbon energy,Non-energy productsMore than 1/3rd of cash capex and opex expected to be spent towards energy transitionCash capex split by pillarsGrowth1/3rdTransition 1/3rdUpstream1/3rdPOWERING LIVESGENERATINGSHAREHOLDER VALUEACHIEVING NET-ZERO EMISSIONSRESPECTING NATUREUNDERPINNED BY OUR CORE VALUES AND OUR FOCUS ON SAFETYGrowing value through a dynamic portfolio and disciplined capital allocation Working with our customers and sectors to accelerate the energy transition to net-zero emissionsPowering lives through our products and activities,and supporting an inclusive societyProtecting the environment,reducing waste and making a positive contribution to biodiversityOur strategy to accelerate the transition to net-zero emissions,purposefully and profitably THE SHELL INVESTMENT CASEPOWERINGPROGRESS4Shell plc|February 2,2023Shell plc|February 2,20235Disciplined focus on value creation2023 cash capex split by business is rounded and will be managed within the overall 2023 range.FINANCIAL FRAMEWORK Significant shareholder distributionsResilient balance sheet Capital disciplineMinimum 4%annual growth in dividend per share,subject to Board approval2023 cash capex within$23-27 billionIncludes inorganic capexTargeting AA credit metrics through the cycleContinued focus on Net debt reduction in upcycleDivest for value Sustainable progressive dividendTotal shareholder distributions 20-30%of CFFOMarketing$6 billionR&ES$2-4 billionIntegrated Gas$5 billionC&P$3-4 billionUpstream$8 billionTotal shareholder distributions(dividends share buybacks)based on cash generation,macro-outlook and balance sheet trajectoryShell plc|February 2,2023Shell plc|February 2,20232016baseline202120222023202420252030203520502016 baseline20212022E*2030E2050E4106Our progress*Preliminary results1Measured by our Net Carbon Footprint(NCF)methodology,available on our website.CARBONNet-zero emissions energy business by 2050 including all emissions(Scopes 1,2 and 3)NET ZERO BY 2050Covers emissions associated with the production,processing,transport and end-use of our productsWe believe Shells total carbon emissions from energy sold peaked in 2018 at around 1.7 gtpa and will be brought down to net-zero by 2050.In 2021 the total emissions were 1.4 gtpaFROM 1.7 GTPA TO ZEROUN PARIS AGREEMENTStrategy aligns with goal to limit the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levelsNet Carbon Intensity1(Scope 1,2 and 3)Net Carbon Intensity1targetActualsCovers all Scope 1 and 2 emissions under Shells operational controlAbsolute emissions(Scope 1 and 2)83mtpa CO2e68Scope 1Scope 257gCO2e/MJ-6-8%-20%-45%-100%-9-12%-3-4%-2.5y-9-13%Shell plc|February 2,2023Shell plc|February 2,20237Strong financial performance continuesAPM reconciliations available in the Q4 2022 Quarterly Databook Q4 2022 Quarterly Databook here.FINANCIAL RESULTS Q4 AND FULL YEAR 2022Adjusted EBITDACash flow from operationsCash capital expenditureFree cash flow Income attributable to Shell plc shareholdersAdjusted EarningsNet debt$84.3 billion$68.4 billion$24.8 billion$46.0 billion$42.3 billion$39.9 billion$44.8 billionFull year 2022Q4 2022$20.6 billion$22.4 billion$7.3 billion$15.5 billion$10.4 billion$9.8 billion$44.8 billionShell plc|February 2,2023Shell plc|February 2,20239.820.622.404812162024288Cash conversion Q4 2022$billion1Non-controlling interest2AR/AP&Other includes initial margin.Q4 2022 FINANCIAL RESULTS9.59.802468101214Adjusted Earnings Q3 2022 to Q4 2022$billion0.66.14.10.6$10.4 billionworking capital movement(2.1)(7.2)2.40.57.5Strong performance mainly driven by Integrated Gas3.6(2.8)(0.4)(0.0)(0.1)0.0Shell plc|February 2,2023Shell plc|February 2,202339.984.368.40204060801009Cash conversion full year 2022$billion1Non-controlling interestFULL YEAR 2022 FINANCIAL RESULTS19.339.901020304050Adjusted Earnings 2021 to 2022$billion2.123.319.0(2.2)0.6(8.9)(5.4)Strong performance in volatile times7.19.3(0.7)2.62.00.3Shell plc|February 2,2023Shell plc|February 2,2023Disciplined capital expenditure across segmentsTotal 2022 capex includes Corporate.2022 DELIVERYC&P$3.8 billionUpstream$8.1 billionIntegrated Gas$4.3 billionMarketing$4.8 billionR&ES$3.5 billion2022$25 billion139,000EV charge points 62%vs 2021Growth(Marketing&R&ES)$8.3 billionTransition(IG&C&P)$8.1 billionUpstream$8.1 billion2x increase vs 20216.4 GW of renewable power generation capacity in operation and under construction8.8 yearsreserves-to-production ratio 16%vs 202110Shell plc|February 2,2023Shell plc|February 2,2023ET opexET capexOther11Investing purposefully in energy transition LOW-CARBON ENERGY&NON-ENERGY PRODUCTSGrowthTransitionUpstream$64 billion30%in Energy Transition spend 1/3rdin Energy Transition spend2022 total expenditure 2022 share of Energy Transition spend2023 Energy Transition spendET spend allocation based on valueET spend up by 21%in 2022 vs 202161%in opex and 39%in capexEnergy Transition(ET)spend reflects spend on low-carbon energy and non-energy products.It consists of operating expenses(opex)and cash capital expenditure(capex)for the below.Low-carbon energy:Marketing(E-Mobility,EV charging services,low-carbon fuels)and R&ES(all business activities excluding trading and optimisation of power and pipeline gas).Non-energy products:Marketing(Convenience retailing and,lubricants production and sales)and C&P(chemicals production and sales).Classification deviates from the EU Taxonomy,which is subject to separate disclosure.ET opex and capexOtherShell plc|February 2,2023Shell plc|February 2,202313Strong performance mainly driven by Integrated Gas1Non-controlling interestQuarterly Databook available here.Q4 2022 FINANCIAL RESULTSAdjusted EarningsAdjusted EBITDACFFO$billionQ4 2022Q3 2022Q4 2022Q3 2022Q4 2022Q3 2022Integrated Gas6.02.38.35.46.46.7Upstream3.15.99.412.57.28.3Marketing0.40.81.01.51.12.3Chemicals&Products0.70.81.61.83.13.4R&ES0.30.40.40.52.7(8.1)Corporate&NCI1(0.7)(0.7)(0.2)(0.3)1.9(0.1)Total9.89.59.520.621.521.522.412.512.5Additional information available in the Q4 2022 Quarterly Press ReleaseShell plc|February 2,2023Shell plc|February 2,2023141Non-controlling interestQuarterly Databook available here.FULL YEAR 2022 FINANCIAL RESULTSAdjusted EarningsAdjusted EBITDACFFO$billion202220212022202120222021Integrated Gas16.19.026.616.827.713.2Upstream17.38.042.127.229.621.6Marketing2.83.55.36.02.45.0Chemicals&Products4.72.18.65.612.93.7R&ES1.7(0.2)2.5(0.0)(6.4)0.5Corporate&NCI1(2.8)(3.1)(0.7)(0.6)2.21.2Total39.919.319.384.355.055.068.445.145.1Strong performance in volatile timesShell plc|February 2,2023Shell plc|February 2,202315Injuries(TRCF)per million working hoursMillion working hoursOperational spillsThousand tonnes#of spillsGHG emissions(preliminary)Million tonnes CO2eMillion tonnes CO2eGoal Zero on safetyHSSE performancePRELIMINARY RESULTSTRCFWorking hours(RHS)Volume of spillsNumber of spills(RHS)04008000.51.52012201320142015201620172018201920202021202201002003000123201220132014201520162017201820192020202120220240501002016201720182019202020212022Scope 1Scope 1-Methane only(RHS)Scope 2Process safety#of incidentsTier 1 Tier 2020040020122013201420152016201720182019202020212022Shell plc|February 2,2023Shell plc|February 2,202316Reserves performance in 2022Proved reserves 2022 vs 2021billion boeSEC proved reserves positionPRELIMINARY RESULTS9.49.6024681012billion boe202020212022Production1.31.21.1SEC proved reserves9.19.49.6Reserves/Production(years)7.17.68.8RRR-53% 120% 120%RRR(excl.A&D) 26%RRR 3-year average(excl.A&D) 39%RRR 3-year average 120% 58%Reserves/Production 16%vs 20218.8 yearsRRR(1.1)1.00.3Shell plc|February 2,2023Shell plc|February 2,202317Portfolio high-grading2022 DELIVERYMap not to scaleClick on the icons on map for further details on the deal/project.Project start-upsAtapu acquisitionPowerNapHydrogen electrolyserColibriShell Polymers Monaca MalampayaMobile refineryPCK Schwedt refineryDeer Park refinerySakhalin-2SalymShell NeftNigeria onshoreAera EnergyNature EnergySprng EnergyPowershop AustraliaLandmark fuel and convenience storeBaram DeltaCompleted divestmentsAnnounced intent to divest/withdrawCompleted/announced acquisitions Mero-1 start-upQatars LNG expansion participationsShell plc|February 2,2023Shell plc|February 2,202318Pipeline of major projects KEYLow-carbon fuelsMap not to scaleProjects under constructionCountryShell share%Peak production/Capacity/ProductsShell-operatedStart-up 2023-2024Mero 2 ABrazil19.3180 kboe/dMero 3 ABrazil19.3180 kboe/dVitoUSA63100 kboe/d WhaleUSA60100 kboe/d Sprng Energy(multiple)BIndia100575 MW Crosswind/HKN BThe Netherlands80760 MWShell BovariusUSA100400,000 MMBtu RNG Shell GallowayUSA100500,000 MMBtu RNG Northern Lights JV(Phase 1)Norway33.31.5 mtpa CO2captured and/or storedStart-up 2025 Mero 4 ABrazil19.3 180 kboe/dMarjoram/RosmariMalaysia80100 kboe/d LNG Canada T1-2Canada4014 mtpaNLNG T7Nigeria267.6 mtpaNorth Field East ExpansionQatar6.25*32 mtpaBiofuels Plant RotterdamThe Netherlands100820,000 tonnes of renewable diesel Holland Hydrogen IThe Netherlands100200 MW HKW BThe Netherlands60759 MWMayflower-Project 1&ITC BUSA501,200 MWAtlantic Shores-Project 1 BUSA501,509 MWUpstreamLiquefaction plantsHydrogen electrolyser.CCSSolarOffshore wind.A Subject to unitisation agreements,data shown as per operator.B Renewable generation capacity under construction and/or committed for sale.*25%share in a JV company which will own 25%of the North Field East expansion project.On October 23,2022,Shell announced its selection as partner in the 16 mtpa North Field South LNG project in Qatar with 9.375%participating interest.Further details available on our investors page on Shell plc|February 2,2023Shell plc|February 2,202319Upcoming events:May 4,2023Q1 2023 resultsFeb 16,2023Shell LNG Outlook 2023Corporate Reports:Sustainability Report 2021Payments to Governments Report 2021Annual Report 2021Energy Transition Progress Report 2021 Useful links:Annual and Quarterly DatabookShell Energy Transition StrategyNigeria briefing notes 2021 ESG performance dataWar in Ukraine:Shells ResponseJul 27,2023Q2 2023 resultsNov 2,2023Q3 2023 resultsJun 14,2023Capital Markets Day 2023May 23,2023Annual General MeetingMar 22,2023Annual ESG Update
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FY&4Q 2022 financial results&update on strategic progressfinancial results&update on strategic progressCraig MarshallSVP investor relationsGood morning everyone and welcome to todays presentation,this morning we aregoing to cover bps fourth quarter and full year 2022 results.We will also providean update on strategic progress.Before we begin today,let me draw your attention to our cautionary statement.2FY&4Q 2022 financial results&update on strategic progressCautionary statement*For items marked with an asterisk throughout this document,definitions are provided in the glossary3 3In order to utilize the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995(the PSLRA)and the general doctrine of cautionary statements,bp is providing the following cautionary statement:The discussion in this results announcement contains certainforecasts,projections and forward-looking statements-that is,statements related to future,not past events and circumstances-with respect to the financial condition,results of operations and businesses of bp and certain of the plans and objectives of bp with respect to these items.Thesestatements may generally,but not always,be identifiedby the use of words such as will,expects,is expectedto,aims,should,may,objective,is likely to,intends,believes,anticipates,plans,we see,focus on or similar expressions.In particular,the following,among other statements,are all forward looking in nature:plans,expectations and assumptions regarding oil and gas demand,supply,prices,volatility,inventory levels,refining margins,turnaround activity,product demand,capacity,production and unit productioncosts;expectations regarding bps financial performance,results of operations,cash flows,investment and spending plans;expectations regarding impacts of the war in Ukraine;expectations regarding the pace of transition to a lower-carbon economy and energy system and the implicationsof the energy transition for bp;plans,expectations and assumptions regarding oil and gas demand,supply or prices,storage,or decision making by OPEC ;plans and expectations regarding bps transition growth engines of bioenergy,convenience(including the number of strategicconvenience sites),EV charging(including the number of EV charge points),hydrogen and renewables and power,including plans and expectations related to capital expenditure in the transition growth engines,and expectations related to their returns and EBITDA growth;expectations thatannual capital investment,including inorganics,will be in a range of$14-18 billion through 2030,including plans in 2023 to invest between$16-18 billion;expectations regarding bps plans to invest by 2030 up to$8 billion more in its transition growth engines and up to$8 billion more in todaysenergy system;plans and expectations regarding the types of oil and gas projects bp will target and the period over which it will retain them;expectations that bps additional investment in transition growth engines will contribute around$1 billion additional EBITDA in 2025 and aim for around$2 billion in 2030 and that bps additional investment in oil and gas projects will contribute around$2 billion additional EBITDA in 2025 and aim for$3-4 billion in 2030;plans and expectations related to earnings growth,including the aim of group EBITDA of$46-49 billion in 2025 and$51-56billion in 2030 at oil prices of$70 per barrel in 2021 real terms,that EBITDA from bps transition growth engines will reach$3-4 billion by 2025 and$10-12 billion by 2030,that EBITDA from bioenergy will reach$2 billion in 2025,over$4 billion in 2030 and generate greater than 15%returns,that EBITDA from convenience and EV charging will exceed$1.5 billion in 2025 and over$4 billion in 2030,with greater than 15%returns,that EBITDA from hydrogen and renewables and power will be around$2-3 billion in 2030,with double digit unlevered returns in hydrogen and 6-8%unlevered returns in renewables,and with ramped up EBITDA in the 2030s and beyond;plans and expectations of delivering an EBIDA per share CAGR of over 12tween 2H19/1H20 and 2025 and ROACE of over 18%in both 2025 and 2030(each at$70 per barrel 2021 real);plans andexpectations of investing more than 40%,or$6-8 billion of capital expenditure in transition growth engines in 2025 and around 50%in 2030,or about$7-9 billion;plans and expectations regarding the increase of biogas supply volumes and biofuel production volumes;plans and expectationsregarding biofuel projects and sustainable aviation fuel(SAF);plans and expectations regarding hydrogen,including customer demand,anticipated regulatory support,development of hydrogen derivatives,planned investments,and bps pipeline of hydrogen projects and available opportunities;plans and expectations related to bps renewables portfolio,including expectations regarding capacity in wind and solar,bps target of developing 50 gigawatts to FID by 2030 and anticipated spending in hydrogen and other renewables;plans and expectations to market bps Rosneftshareholding and update the market;plans and expectations related to oil and gas,including the growth of underlying oil and gas production to 2025 relative to 2022,and the potential to sustain underlying production broadly flat to 2030 relative to 2022;plans and expectations with respect todivestments,including bps aim to divest around 200k/boed of lower margin assets by 2030 and its 2030 production aim of around 2 million barrels of oil equivalent per day after divestments;plans and expectations regarding bps safety targets and plant reliability;plans and expectationsregarding Solomon availability and net cash margins,business improvement plans,and related costs;plans and expectations relating to bps refineries,including their role in bps biofuels and hydrogen strategies;plans and expectations regarding bps net zero aims,emissions reduction,methane and carbon intensity and carbon capture projects;plans and expectations regarding integrated energy value chains;expectations regarding price assumptions used in accounting estimates;bps plans and expectations regarding the allocation of surplus cash flow and cash balancepoint;plans regarding the amount and timing of dividends and share buybacks;plans and expectations regarding bps credit rating,including in respect of maintaining a strong investment grade credit rating;plans and expectations regarding capital discipline;expectations related to Gulf ofMexico oil spill payments,the underlying annual charge,the underlying effective tax rate,depreciation,depletion and amortization,upstream production and bps customers business;plans and expectations regarding the bp Bunge Bioenergia joint venture in Brazil and LNG supply from Coral,Venture,Freeport,Mad Dog Phase2,the Tangguh expansionand Tortue;and plans and expectationsregardingjoint ventures,partnershipsand other collaborationswith Hertz and M&S.By their nature,forward-lookingstatementsinvolverisk and uncertaintybecause they relate to eventsand dependon circumstancesthat will or may occur in the future and are outsidethe controlof bp.Actual results or outcomes,may differ materially from those expressed in such statements,depending on a variety of factors,including:the extent and duration of the impact of current market conditions including the volatility of oil prices,the effects of bps plan to exit its shareholding inRosneft and other investments in Russia,the impact of COVID-19,overall global economic and business conditions impacting bps business and demand for bps products as well as the specific factors identified in the discussions accompanying such forward-looking statements;changes inconsumer preferences and societal expectations;the pace of development and adoption of alternative energy solutions;developments in policy,law,regulation,technology and markets,including societal and investor sentiment related to the issue of climate change;the receipt of relevant thirdparty and/or regulatory approvals;the timing and level of maintenance and/or turnaround activity;the timing and volume of refinery additions and outages;the timing of bringing new fields onstream;the timing,quantum and nature of certain acquisitions and divestments;future levels ofindustry product supply,demand and pricing,including supply growth in North America and continued base oil and additive supply shortages;OPEC quota restrictions;PSA and TSC effects;operational and safety problems;potential lapses in product quality;economic and financial marketconditions generally or in various countries and regions;political stability and economic growth in relevant areas of the world;changes in laws and governmental regulations and policies,including related to climate change;changes in social attitudes and customer preferences;regulatory orlegal actions including the types of enforcement action pursued and the nature of remedies sought or imposed;the actions of prosecutors,regulatory authorities and courts;delays in the processes for resolving claims;amounts ultimately payable and timing of payments relating to the Gulf ofMexico oil spill;exchange rate fluctuations;development and use of new technology;recruitment and retention of a skilled workforce;the success or otherwise of partnering;the actions of competitors,trading partners,contractors,subcontractors,creditors,rating agencies and others;bpsaccess to future credit resources;business disruption and crisis management;the impact on bps reputation of ethical misconduct and non-compliance with regulatory obligations;trading losses;major uninsured losses;the possibility that international sanctions or other steps or actions takenby any competent authorities or any other relevant persons may impact Rosnefts business or outlook,bps ability to sell its interests in Rosneft,or the price for which bp could sell such interests;the actions of contractors;natural disasters and adverse weather conditions;changes in publicexpectations and other changes to business conditions;wars and acts of terrorism;cyber-attacks or sabotage;and other factors discussed elsewhere in this report,as well as those factors discussed under“Risk factors”in bps Annual Report and Form 20-F 2021 as filed with the US Securitiesand Exchange Commissionand those factorsdiscussedunder“Principalrisks and uncertainties”in bps Report on Form 6-K regardingresults for the six-month periodended30 June 2022 as filed with the US Securitiesand ExchangeCommission.Reconciliations to GAAP-This presentation also contains financial information which is not presented in accordance with generally accepted accounting principles(GAAP).A quantitative reconciliation of this information to the most directly comparable financial measure calculated and presentedin accordancewith GAAP can be foundon our websiteat.This presentationcontainsreferencesto non-provedresourcesand productionoutlooksbased on non-provedresourcesthat the SECsrules prohibit us from includingin our filings with the SEC.U.S.investors are urgedto consider closely the disclosuresin our Form 20-F,SEC File No.1-06262.Tables and projections in this presentationare bp projectionsunlessotherwisestated.FebruaryFebruary20232023During todays presentation,we will make forward-looking statements includingthose that refer to our estimates,plans and expectations.Actual results andoutcomes could differ materially due to factors we note on this slide and in our UKand SEC filings.Please refer to our Annual Report,Stock Exchange announcementand SEC filings for more details.These documents are available on our website.Let me now handover to Bernard.3Bernard LooneyChief executive officerThanks Craig.Good morning everyone.It is great to have you join us on the call and to see those of you here in the room inLondon.Before we beginAfter yesterdays terrible earthquakes in Trkiye and Syria,our thoughts go out tocolleagues and everyone with friends and family in the region.All our colleaguesare accounted for,and we have a team set up to support them but of course manymore people were affected,thousands of people have died and we will do whatwe can to support.There will be operational matters to attend to in time,but in thefirst instance our focus is on people.4FY&4Q 2022 financial results&update on strategic progressEmmaCarolGordonMurrayBernardAnjaIn the room todayBernard LooneyChief executive officerMurray AuchinclossChief financial officerGordon BirrellEVP,production&operationsEmma DelaneyEVP,customers&productsAnja Dotzenrath EVP,gas&low carbon energyCarol HowleEVP,trading&shipping5 5FY&4Q 2022 financial results&update on strategic progressI am here today with Murray.And I will be joined in a bit for Q&A by Carol Howle,Gordon Birrell,Emma Delaneyand Anja Dotzenrath.The rest of the bp Leadership Team are also in the room today namely GiuliaChierchia,EVP Strategy,Sustainability&Ventures,Kerry Dryburgh,EVP People&Culture,William Lin,EVP Regions,Corporates and Solutions,Eric Nitcher,EVPLegal and Leigh-Ann Russell,EVP Innovation&Engineering.56FY&4Q 2022 financial results&update on strategic progress6 6FY&4Q 2022 financial results&update on strategic progressPerformingtransformingwhileLeaning furtherstrategyinto ourDeliveringshareholdersforFrom IOC to IEC three years of deliveryInvesting more into our transition growth enginesinvesting more into todays oil and gas systemStrong operational delivery and cost control,strengthening balance sheet,investing with discipline,growing returnsDelivering a resilient and growing dividenda material share buyback programmeThree years ago we announced a significant strategic change for bp pivoting fromour 110-year history of being an International Oil Company,or IOC,to becoming anIntegrated Energy Company,or IEC.I am personally in awe of what the bp team has delivered since then.And all duringthe most volatile and uncertain times that many of us have ever experienced.When we updated the market this time last year,I said to you that our directionwas set,our change was done,and we were now 100%focused on deliveryandthat is exactly what weve been doing.With that backdrop-there are three things youll hear from us today:First,bp is performing.Our businesses are running well,our costs are beingcontrolled,we are reducing emissions,we are growing value,our strategy isworking and we are more confident than ever that the strategy weannounced in 2020 is the right one.As we have said consistently,we areperforming while transforming.Second,we are leaning further into our strategy planning to invest more intoour transition growth engines AND,at the same time,investing more intotodays oil and gas system.A plan that we expect will materially increaseEBITDA by 2025 and 2030.And third,crucially,we are delivering for shareholders.In 2022,wehave grown distributions through an increase in our resilient dividendand delivery of a material share buyback programme.Lets start off if its ok with a short video that shows some of thedelivery by the bp team over the past three years.6WellI might be a bit biased but I think thats absolutely brilliant and as youmight expect Im incredibly proud of the team!Turning now to focus on delivery in 2022.First,reflecting on safety.At bp,safety comes first its core to the way that welive our purpose.We have seen our combined tier 1 and 2 process safety eventscontinue to improve in 2022,compared to 2021.However,we know from incidentsduring 2022,that there is always more that we can,and will,do.Safety is simplyfoundational to everything.Turning secondly to our businesses where our focus on operational reliability andcost performance underpinned strong financial delivery.Adjusted EBITDA for 2022 was$60.7 billion.Operating cash flow was$40.9 billion,including a working capital build of$6.9billion.Net debt reduced for the 11th consecutive quarter to reach$21.4 billion thelowest level in almost a decade.And return on average capital employed was 30.5%.And third,we delivered for shareholders,executing against our clear,consistentand disciplined financial frame,and delivering sector leading distributions.7FY&4Q 2022 financial results&update on strategic progressPerforming while transforming full year 20227 7FY&4Q 2022 financial results&update on strategic progress21%Dividend growth since 4Q21Dividend growth since 4Q213$11.25bnShare Share buybackbuyback4 4Operating cash flowOperating cash flow*including including$6.96.9bn working capitalbn working capital*buildbuild1$60.7bnEBITDAEBITDA*$21.4bnROACEROACE*$40.9bn30.5%Net debtNet debt*lowest since 3Q13 lowest since 3Q13$9.2bn reduction$9.2bn reduction2(1)Adjusted for inventory holding gains,fair value accounting effects and other adjusting items*(2)4Q 2022 vs 4Q 2021(3)4Q 2022 vs 4Q 2021 growth in dividend per ordinary share(4)Buybacks announced from 2022 surplus cash flow(5)Cumulative reduction in issued share capital at 6 February 2023 since commencing the buyback programme in 202111%Cumulative reduction in Cumulative reduction in issued share capital since issued share capital since 1Q 20211Q 20215 5Safety comes firstToday we have announced a 10%increase in our dividend perordinary share for the fourth quarter underpinned by our strongunderlying performance and supported by our plans to lean into ourstrategy and deliver further growth in EBITDA.Including this increase,our dividend per ordinary share for the fourthquarter is 21%higher than a year ago,and very importantly fullyaccommodated within our resilient$40 per barrel balance point.And since commencing the share buyback programme in 2021 wehave reduced our issued share capital by 11%Ill say more about our plans to lean further into our strategy in a momentbut let me first handover to Murray to run through our results in moredetail.Murray.7Murray Auchincloss Chief financial officerThanks Bernard and good morning everyone.8FY&4Q 2022 financial results&update on strategic progressMacro environment(1)Spot priceRefining marker margin1$/bblBrent oil price1$/bblNatural gas price1$/mmbtuSource:Platts-all data 1 January 2022 to 1 February 2023Henry HubTTFBrentRMM*9 9As usual,Ill start with the macro environment.During the fourth quarter Brent fell by 12%relative to the third quarter to average$89 per barrel.This reflected increased uncertainty over the economic outlook andrelatively high production from Russia and OPEC.In the first quarter,we expect prices to remain supported by recovering Chinesedemand,ongoing uncertainty around the level of Russian exports and low inventorylevels.Turning to natural gas.During the fourth quarter we saw a sharp decline in bothspot and futures prices.The quarter average TTF price fell by 51%as a warm startto winter allowed Europe to maintain inventory levels.In the US,Henry Hubdeclined as storage levels recovered towards seasonal norms.The outlook for the first quarter remains dependent on weather in the NorthernHemisphere and the pace of Chinese demand recovery.Moving to refining.Consistent with trends in seasonal demand,global marginsdecreased modestly to average$32.20 per barrel during the quarter.We expect industry refining margins to remain elevated in the first quarter due tosanctioning of Russian crude and product.9Moving to our long-term price assumptions.Last week we presented the bp 2023 Energy Outlook.And in line with our annualcycle,we have reviewed our price assumptions used for investment appraisal andaccounting.To summarise,the continuing impact of the war in Ukraine and the resulting energyshortages together with changes in the structure of energy markets post-Covid means we now expect oil and gas prices and refining margins to remain higherthrough much of this decade.Further out,we continue to expect prices to fall asthe energy transition gathers pace.The charts on this slide show our old and new assumptions for Brent,Henry Huband the Refining Marker Margin.In addition,reflecting current market conditions we have raised our internationalgas price assumptions through the middle of the decade.In the second half of thedecade,we assume that prices return toward historical levels.These changes have no impact on our cash balance point of$40 Brent,$11 RMMand$3 Henry Hub.10FY&4Q 2022 financial results&update on strategic progressLong-term price assumptionsOld central assumptions(2020 real)New central assumptions(2021 real)Brent oil price$/bblHenry Hub gas price$/mmbtuRefining marker margin$/bbl1010FY&4Q 2022 financial results&update on strategic progressUnderlying results(1)Comparative information for 2021 has been restated for other businesses and corporate segment to include the Rosneft segment4Q 2022 vs 3Q 2022Below average gas marketing and trading after the exceptional result in 3Q22Lower oil and gas realisations*Higher refinery turnaround and maintenance activityLower marketing margins and seasonally lower volumes1111FY&4Q 2022 financial results&update on strategic progress$bn4Q213Q224Q22Underlying RCPBIT*7.013.89.3 Gas&low carbon energy2.26.23.1 Oil production&operations4.05.24.4 Customers&products0.62.71.9 Other businesses and corporate10.2(0.4)(0.3)Of which Other businesses and corporate excluding Rosneft*(0.5)(0.4)(0.3)Rosneft*0.7 Consolidation adjustment-UPII*(0.0)(0.0)0.1Underlying replacement cost profit*4.18.24.8Operating cash flow*6.18.313.6Capital expenditure*(3.6)(3.2)(7.4)Divestment and other proceeds2.30.60.6Surplus cash flow*3.03.55.1Net issue(repurchase)of shares(1.7)(2.9)(3.2)Net debt*30.622.021.4Announced dividend per ordinary share(cents per share)5.4606.0066.610Turning to results.In the fourth quarter we reported a profit of$10.8 billion.Allowing for post-tax adjusting items of$7.1 billion and an inventory holding loss of$1.1 billion,our underlying replacement cost profit was$4.8 billion,compared to$8.2 billion in the third quarter.Turning to business group performance,compared to the third quarter:In gas and low carbon energy the result reflects a below average gas marketingand trading performance,compared to an exceptional result in the third quarter,lower gas realisations and lower production.In oil production and operations,the result reflects lower liquids and gasrealisations.And in customers and products,the products result reflects a higher level ofturnaround and maintenance activity.The customers result reflects lowermarketing margins and seasonally lower volumes.In the fourth quarter our underlying effective tax rate was 40%bringing the rate forthe full year to 34%.And finally,our trading business had an exceptional year,and with consistentstrong delivery has now contributed an average uplift of 4%to group ROACE overthe past three years.11FY&4Q 2022 financial results&update on strategic progress$13.6bn operating cash flow*including;$4.2bn working capital*1 release$7.4bn capital expenditure*$5.1bn surplus cash flow*$3.2bn share buyback executed$2.5bn programme announced with 3Q22 results completed on 3 FebFurther$2.75bn share buyback announced Net debt*reduced to$21.4bnCash flow and balance sheet4Q 2022 highlightsFY 2022 cash inflows/outflows$bn(1)Adjusted for inventory holding losses,fair value accounting effects and other adjusting items*1212Moving to cash flow.Operating cash flow was$13.6 billion in the fourth quarter.This included a workingcapital release of$4.2 billion,after adjusting for inventory holding losses,fair valueaccounting effects and other adjusting items.Capital expenditure was$7.4 billion in the fourth quarter and$16.3 billion for theyear.For the fourth quarter,inorganic expenditure was$3.5 billion including$3.0billion for Archaea Energy,net of adjustments,and$500 million for the earlier thanexpected completion of the acquisition of EDF Energy Services.During the quarter,bp repurchased$3.2 billion of shares.Reflecting strong cash generation,net debt fell for the 11th consecutive quarter toreach$21.4 billion.And with surplus cash flow of$5.1 billion in the fourth quarter,bp intends toexecute a further$2.75 billion buyback prior to announcing first quarter 2023results.12FY&4Q 2022 financial results&update on strategic progressDelivery against 2022 financial frame10%Increase in dividend per ordinary share to 6.610 for 4Q22Acquisition of Archaea Energy3#1#2#5#4#3$16.3bnLow carbon energy and convenience&mobility2022 capital expenditure*1,2 21%Growth in dividend per ordinary share from 4Q21Reduction in net debt*$2.8bnBuybacks announced from 2022 surplus cash flow*4$11.25bn$21.4bn$10.0bnResilient hydrocarbons(excl.acquisitions)$3.0bnCumulative reduction in issued share capital since 1Q 2021511 22 year-end net debt*$9.2bnDisciplined investment allocationStrong investment grade credit ratingResilientdividendShare buybacks (1)Included OB&C*capital expenditure of$500m(2)Of which,total capital expenditure for transition growth engines in 2022 is$4.9 billion(3)Headline consideration of$3.3bn adjusted for cash acquired and other adjustments on completion(4)In addition,$500m share buyback completed during 1Q22 to offset dilution from vesting of awards under employee share schemes(5)Cumulative reduction in issued share capital at 6 February 2023 since commencing the buyback programme in 20211313Turning to our disciplined financial frame.A resilient dividend remains our first priority.As Bernard outlined,for the fourth quarter we have announced an increase in thedividend to 6.61 cents per ordinary share.This is underpinned by strong underlyingperformance and supported by the confidence we have in delivering further growthin EBITDA as a result of our updated investment plans.Second,our strong investment grade credit rating.During 2022 we reduced netdebt by a further$9.2 billion.Third,disciplined investment allocation.Capital expenditure for the year was$16.3billion slightly higher than expected due to the phasing of our acquisition of EDFEnergy Services.And finally,share buybacks,where in 2022 we announced$11.25 billion ofbuybacks from surplus cash flow.Ill now hand back to Bernard.13Bernard LooneyChief executive officer14FY&4Q 2022 financial results&update on strategic progress1515FY&4Q 2022 financial results&update on strategic progressWe are delivering,We are delivering,and increasingly and increasingly confidentconfidentWorld needs World needs to solve the to solve the energy trilemmaenergy trilemmaWe areWe are3 year track recordInvesting in lower carbon solutionsInvesting in hydrocarbons to keep energy flowingAction is neededTo accelerate the energy transitionAn orderly transition from todays hydrocarbon system into ourstrategyThanks Murray.Let me turn then to the update on our strategy.The world is in a very different place today compared to when we began thisjourney just three years ago.The challenges and volatility we have seen,make itclear maybe clearer than ever that the world wants and needs a better andmore balanced energy system one that can deliver more secure,more affordableas well as lower-carbon energy solutions the so called energy trilemma.To deliver that better energy system,action is needed:1.To accelerate the energy transition.And2.Ensure an orderly transition from todays predominantly hydrocarbons-basedenergy system with the emphasis being on orderly to maintain on-goingenergy security and affordability.This means both:increasedinvestmentinlowercarbonsolutionsthatcanhelpsocietydecarbonise fasterand not orat the same time15continued investment in hydrocarbons to keep energy flowing,withenergy security and affordability at a premium.At the same time our track record of delivery over three years has givenus increased confidence in the strategy we laid out.An Integrated EnergyCompany is we believe uniquely set up to help deliver energy securityand affordability today as well as to help accelerate the energytransition.And crucially we believe we can generate growth and attractive returnsin doing so.It is for these reasons that we see the opportunity to lean further into ourstrategy.And this is what I will now describe.15FY&4Q 2022 financial results&update on strategic progress(1)Bioenergy includes biofuels marketing reported in convenience and mobility1616Convenience and mobilityLow carbon energyResilient hydrocarbons Retail fuels Castrol,aviation,B2B/midstream Oil and gas Refining Convenience EV Charging Hydrogen Renewables&Power Bioenergy1Transforming to an integrated energy companySustainabilityWe remain focused on transforming to an integrated energy company.Ourthree-pillar strategy,which includes our five transition growth engines,isunchanged.As is the fact that the power of integration underpins andconnects it all.16FY&4Q 2022 financial results&update on strategic progressInvesting more into todays oil and gas systemRetaining certain oil and gas assets for longeradditional capital by 2030up toup to$8bnInvesting more in high-quality oil and gas projectsInvesting more into our transition growth enginesInvesting more into higher return Bioenergy,and Convenience&EV Chargingadditional capital by 20301717FY&4Q 2022 financial results&update on strategic progresswhilebuilding a leading position globally in Hydrogen and focusing on creating integration value in Renewables&Powerup toup to$8bnSo what does leaning in look like?First,we plan to invest up to$8 billion more this decade in our transition growthengines on average$1 billion more each year investing more into higher returnBioenergy,andConvenience&EVCharging,wherewehaveestablishedbusinesses,strong capabilities and a proven track record.Alongside this,we are focusing our Hydrogen and Renewables&Power strategy.Anja Dotzenrath,who I introduced earlier,joined us last year and has brought realclarity to that strategy,while building our organisational capability and a pipeline ofvalue accretive growth options.I will come back to this shortly.Second,we plan to invest up to$8 billion more this decade on average$1 billionmore each year in todays energy system,which depends on oil and gas:Targeting shorter-cycle,fast-payback oil and gas projectsAnd investing in certain oil and gas assets that we now expect to retain forlonger.These are investments that we can deliver quickly over the next few years,withminimal new infrastructure,and that capture any price upside in the near-to-medium term.17FY&4Q 2022 financial results&update on strategic progressInvesting$1bn p.a.more into our transition growth engines1Additional EBITDA$2bnin 20302$1bnin 20252Accelerating EBITDA growth to 2030Uplift to 2030 Group EBITDA*aim$bn1818FY&4Q 2022 financial results&update on strategic progressInvesting$1bn p.a.more into todays oil and gas system1Additional EBITDA$3-4bnin 20303$2bnin 20253(1)2023-30 average(2)At the upper end of the relevant capex range(3)$70/bbl 2021 real,previous price assumption$60/bbl 2020 real,and at the upper end of the relevant capex range(4)8 Feb 2022s 2030 aim at$60/bbl 2020 real and restated to exclude Rosneft;7 Feb 2023s 2030 aim at$70/bbl 2021 real,and at the upper end of the relevant capex range(5)Includes revisions from other businesses since 8 Feb 2022 updateAs we do both of these,we expect to materially accelerate growth in EBITDAthrough 2030.In February last year,we laid out plans to generate group EBITDA of$39-46 billionin 2030,at$60 real in 2020 terms.With the plan we are announcing today,we now expect to deliver around$3 billionmore EBITDA in 2025 rising to an aim of$5-6 billion more in 2030.We expect our additional investment in transition growth engines to contributearound$1 billion additional EBITDA in 2025 and aim for around$2 billion in2030.We expect our additional oil and gas investment to contribute around$2 billionadditional EBITDA in 2025 and aim for$3-4 billion in 2030.And as Murray previously mentioned,we have raised our price assumptions.Taken together,we now aim to generate group EBITDA of$51-56 billion in 2030.18FY&4Q 2022 financial results&update on strategic progressInvesting more to accelerate our transition growth enginesHydrogen and Renewables&PowerConvenience and EV ChargingBioenergyincremental investment$8bnUp to1919FY&4Q 2022 financial results&update on strategic progress(1)Expected return(IRR)(2)2030 EBITDA aim at$70/bbl 2021 real and bp planning assumptions,and at the upper end of the relevant capex range(3)Renewables$10-12bn2023-30 cumulative capex*EBITDA$bnReturns and EBITDA*Returns12030 EBITDA*2BioenergyBioenergy15%$4bnConvenienceConvenienceEV ChargingEV ChargingHydrogenHydrogenDouble digit(unlevered)$2-3bnRenewables Renewables&Power&Power6-8%(unlevered)15%$4bnIncreased from$10bn23$55-65bn2022202 2030Turning to some more detail on our plans for our transition growth engines.We expect to invest around 50%of our capex in 2030 in these five engines thisincludes both organic and inorganic investments.We will continue to allocate capital to transition opportunities with discipline;applying our balanced investment criteria and investing where we can meet ourreturn hurdle rates.We expect this investment to accelerate earnings growth from our transitiongrowth engines,increasing EBITDA to$3-4 billion in 2025,and$10-12 billion in2030,up from greater than$10 billion previously.We continue to expect to deliver greater than 15%returns in Bioenergy andgreater than 15%returns in Convenience and EV Charging combined.We alsoexpectdoubledigitreturnsinHydrogenand6-8%unleveredreturnsinRenewables.Taking each transition growth engine then in turn.19FY&4Q 2022 financial results&update on strategic progressBioenergy deepening investment2020(1)Includes EBITDA*from customer facing biofuels reported in C&M and assumes capex at the upper end of the range(2)IRR(3)2022-2030;biogas CAGR excluding Archaea Energy in 2022(4)Includes Archaea Energy which closed on 28 December 2022(5)Expected increase in biogas supply volumes from 2022 prior to Archaea Energy acquisition to 2030(6)Compared to 2022cumulative capex 2023cumulative capex 2023-3030expected returnsexpected returns2EBITDAEBITDA*115%$15bn2030 aim2030 aim2025 target2025 targetbp bungeCo-processing5 biofuel projects70Biogas supply volumes mboedBiofuel production volumes mbdEquityOfftakeArchaea Energy4increase in biogas supply by 203056xproduction from 5 biofuel projectsby 2030$2bnRapidly growing demand,attractive fiscal incentivesEstablished,global biogas&biofuels businesses today well positionedWorld-class trading capabilities capturing enhanced valueArchaea acquisition a game changerFive new biofuel projects leveraging global refining footprintco-processing volumes by 203063x50mbd$4bn2022202 2030 A R3 2022202 2030 A R3 In Bioenergy,we are deepening our investment,and now expect to deliver around$2 billion EBITDA in 2025 and aim to deliver more than$4 billion in 2030.We have established,global biogas and biofuel businesses that are positioned in anincreasingly supportive environment of rapidly growing demand,with attractivefiscal incentives.And our trading capabilities enable us to integrate supply volumesto capture enhanced value.We plan to increase biogas supply volumes by around six times by 2030,to around70 thousand barrels of oil equivalent per day:We completed the acquisition of Archaea in December a real game changerfor us rapidly advancing our access to feedstock and scaling our upstreamparticipation in the biogas value chain a distinct source of competitiveadvantage.We are now focused on integrating Archaea into bp and building out thesignificant development pipeline.We have also identified opportunities to getrenewable natural gas projects online faster,and we are looking at ways toimprove landfill gas recovery.This is a business we are really excited about,and one we believe can deliver significant value faster than we thought.In biofuels,we aim to materially grow biofuel production volumes to around 100thousand barrels per day by 2030,focused on sustainable aviation fuel,or SAF,where we aim to be a sector leader:20We already produce more than seven thousand barrels per day ofbiofuels through co-processing we aim to triple this by 2030.We also plan to deliver five biofuel projects focused on SAF at ourKwinana,Rotterdam,Castellon,Lingen,and Cherry Point facilities.We expect these projects to produce around 50 thousand barrels perday by 2030.And the bp Bunge Bioenergia joint venture in Brazil one of thelargest bio-ethanol producers in Brazil aims to produce around 30thousand barrels per day by 2030 net to bp.20FY&4Q 2022 financial results&update on strategic progressConvenience and EV Charging deeper convictionConvenience gross margin*$bnEV charge points*and energy sales42121cumulative capex 2023cumulative capex 2023-30302030 aim2030 aim2025 target2025 targetConvenienceGlobal growth in sector continues Resiliency,with proven track record of growthEV ChargingMoving at pace high growth opportunityFocused on fast charging*our customers preferred choiceStrong momentum in fleets$15bn$15bn.15%(1)At the upper end of the relevant capex range(2)IRR(3)At constant forex(4)Operated on the go EV charge points,energy sales TWh$4bnEBITDAEBITDA*1expected returnsexpected returns2 220 2022202 2030 0 0k k 2222k k 7 7 k k 0 0 installed capacity 00 00k k 6060 Rapid/ultra fast 0 0 Rapid/ultra fast 2222k k20 2022202 2030 p a3 In Convenience and EV Charging,we plan to deliver EBITDA of more than$1.5billion in 2025 and aim to deliver more than$4 billion in 2030.We are confident indelivering our strategy it remains unchanged and we have even deeperconviction in it:First,in the growing convenience sector,our combination of local strategicpartnerships and global reach enables us to deliver leading offers for ourcustomers.Second,we have a proven track record of delivering growth and havecontinuedtogrowconveniencegrossmargindespiteachallengingenvironment.Third,EV Charging is moving at pace,and we see significant value through ourfocus on fast charging with customers using our rapid and ultra-fast chargingpoints significantly more than the slower ones.And fourth,major corporations are increasingly demanding decarbonisationsolutions driving strong momentum in fleets.We are excited about bringing our capabilities and reach in Convenience togetherwith EV Charging,enabling us over time to provide customer-focused,lowercarbon transport solutions,and our confidence is underpinned by strong strategicmomentum in 2022.21In Convenience:We now have 2,400 strategic convenience sites,with 250 added in2022.We grew our highly profitable loyalty customer base by more than5%versus 2021.And we are particularly excited about our progress in the US forexample,Thorntons has integrated well and delivered a recordconvenience gross margin in 2022.In EV Charging:We now have 22,000 charge points and almost all charge pointsthat we roll out now are rapid or ultra-fast.We sold 2.5 times more electrons year-on-year,supported byincreasing power utilisation,which is now approaching double digits.And in fleets,we are building scale,recently announcing ournationwide collaboration plans with Hertz in the US.21FY&4Q 2022 financial results&update on strategic progressRenewables&Power2222(1)IRRHydrogen and Renewables&Power focusing investmentHydrogenFocusing investment in service of integration with hydrogen,trading,EVs and e-fuelsBuilding our capability in offshore windScaling Lightsource bp:world class solar developer,self fundinghydrogen production by 20300.50.5-0.70.7mtpamtpaCreating value through integrationinstalled capacity by 20301010GW netGW netAim to deliverAim to deliverdeveloped to FID by 20305050GW netGW netAim to deliverBuilding a leading position globallyHydrogenKey enabler to decarbonise hard to abate sectorsEarly stage,fast growing sector with high barriers to entryRenewables&PowerIntegration increasingly a key value driverScale and complexity in offshore wind supports enhanced returnsStarting with own operations bps refining demand Scaling-up refining facilities to regional hubs in US and EuropeBuilding export hubs for hydrogen and hydrogen derivativescumulative capex 2023cumulative capex 2023-3030$2-3bnHydrogenHydrogenunleveredRenewablesRenewablesunleveredexpected returnsexpected returns1 1$30bndouble digit 6-8 30 aim2030 aimEBITDAEBITDA*Moving to Hydrogen and Renewables&Power.This is about establishing this decade the foundations of a material business forthe following decades to come.We expect to invest up to$30 billion by 2030,while remaining flexible in our capital allocation as markets evolve and with a focuson returns.Through this we aim to deliver EBITDA of$2-3 billion by 2030.Rampingup thereafter in the 2030s and beyond.In Hydrogen,our ambition is to build a leading position globally.While the market is at an early stage of development,we see customer demandgrowing rapidly,and regulatory support gaining momentum,as evidenced by theInflation Reduction Act in the US.We plan to use our refineries as demand anchors for hydrogen,and to scale theseup to regional hubs.These hubs will provide low carbon energy solutions forcustomers,particularly in hard to abate sectors,such as steel.In parallel,as markets evolve,we expect to invest to build global export hubs forhydrogen and hydrogen derivatives.These are in advantaged geographies wherewe have an established presence.Across all of these focus areas we will leverage our distinctive trading andshipping capabilities.22By 2030,we aim to produce between 0.5 and 0.7 million tonnes perannum of primarily green hydrogen,while selectively pursuing bluehydrogen opportunities where there is regulatory support and CCSaccess.Turning to Renewables&Power.Here we are focusing our investment in Renewables on opportunitieswhere we can create integration value,and enhance returns.We aim to participate in two ways.First,focused investment to build out a renewables portfolio in service of:Green hydrogenGreen and e-fuelsEV charging,andPower trading,including low carbon flexible generation.As part of this,we are building a global position in offshore wind,enabledby our capabilities in large scale,complex offshore projects.Second,we continue to progress a solar development and sell modelwith Lightsource bp,which is self-funding and capable of deliveringrenewable power rapidly,at scale.Taken together,we remain on-track to deliver our 50 gigawatts netdeveloped to FID aim by 2030.Of this we aim to have around 10gigawatts net installed capacity largely operated in offshore wind,solarandonshorewind.Wealsoexpecttohaveassetsunderconstruction and for Lightsource bp to contribute materially.And finally,we have brought power trading into the Renewables growthengine.This reflects our focus on creating value through integrationacross our own portfolio,as well as the opportunity to help customersdecarbonisetheirpowerneedsasgridsandourownsupplydecarbonises.22FY&4Q 2022 financial results&update on strategic progressHydrogen and Renewables&Power building scale2323Hydrogen pipeline1mtpa net4Q 20221.8Renewables pipeline*2GW net 4Q 2022Offshore windSolarRenewables in support of hydrogen(Onshore wind and solar)37.2(1)Includes projects in concept design(2)Includes projects with land access(3)Primarily green hydrogen,supplied by solar and onshore wind(4)Blue and green hydrogen for local industry,leveraging refineriesKey projectsUS MidwestMidwest H2and CCS hub(Whiting refinery)Gulf Coast Gulf Coast H2and CCS hub(incl.ammonia)Pacific Northwest Pacific Northwest H2hub(Cherry Point refinery)Empire and Beacon offshore windMENA UAEUAE RUWAIS,Masdar Partnership SAF,Abu Dhabi export hub OmanOman Global export hub MauritaniaMauritania Global export hub EgyptEgypt Global export hubAsPac AustraliaAustralia-AREH,Geri projects,Kwinana;Global export hubUK and Europe UKUK-NZT Power,NEP,HyGreen,H2Teesside Irish Sea and Scotwind offshore wind GermanyGermany Lingen refinery NetherlandsNetherlands H2-Fifty and H2Vision(Rotterdam refinery)SpainSpain Castellon refinery;Global export hubHydrogen global export hub3Hydrogen regional hub4Included in Hydrogen pipeline as of 4Q22Offshore wind Onshore wind Lightsource bpbp US SolarGlobal export hubsRegional hubsAnd we are in action.Looking back over the past 12 months we have madesignificant progress in Hydrogen and Renewables.We now have a pipeline of hydrogen projects in concept development totalling 1.8million tonnes per annum net to bp,and we expect to double that in 2023.We arealso progressing customer acquisition and have an un-risked customer hopper ofaround 10 million tonnes per annum.Our Renewables pipeline increased by 14 gigawatts in 2022 to 37 gigawattsthroughoffshore wind,Lightsource bp,and hydrogen-linked renewablesinAustralia.As this slide shows,our portfolio is global focused in four regions with cost-advantaged renewable resources,policy or government support,where we have anestablished presence,and where we can leverage our distinctive trading andshipping and integration capabilities.To summarise we are excited about the portfolio we are building,we havedistinctive capabilities to succeed,and see huge opportunity to enhance returns byintegrating across renewables,hydrogen,e-fuels and e-mobility.23FY&4Q 2022 financial results&update on strategic progressInvesting more into todays oil and gas system Oil and gas production mmboed2424$8bnUp toincremental investment15-20%Investment hurdle rate6(1)Before future divestments(2)Includes Rosneft and other businesses in Russia(3)Excludes Rosneft and other businesses in Russia(4)2021 real,and assumes capex at the upper end of the range(5)Includes deals announced(6)bp investment IRR hurdle rate at$60/bblOil and gas EBITDA*$bnFocus on safe and reliable operationsTarget no major process safety incidents or life changing injuriesMaintain plant reliability*at 96ep resource base provides optionality18bn boe of resource in plan1$10/boe average point-forward development cost1Growing underlying production*to 2025200mboed production from nine high-margin major project start-ups by end-202530-40%increase in bpx production by 20253-5se decline to 2025Retaining certain assets for longerPortfolio high-gradingAim for 200mboed divestments to 2030New hub investment options 2030 Driving cost efficiencies$6/boe unit production costs to 20250 23 20 2022202 2030202$7/bbl)2030$70/bbl real)2 3 2 0 ex Russia prev 0)ivestment 33 8incl Russia 2 32 6 0 eadline ivestmentRussia2Turning now to our oil,gas and refining portfolio.Let me start with where our oil and gas production is today it is around 40%lower versus 2019 including the decision by bps board to exit Russia.We remainactively engaged in marketing our Rosneft shareholding and will update the marketas appropriate.But as you have heard me say before,our oil and gas strategy is about value,notonly volume and our focus remains on maximising returns and cash flow,reducing emissions,and is underpinned by a deep and high-quality resource basethat allows us to choose the best investments.Our hopper of resource options enables us to allocate more capital particularly toshort-cycle opportunities,to maximise value including investing more in bpx andin the Gulf of Mexico.Having grown production in 2022 we plan to grow underlying production to 2025.Adding around 200 thousand barrels of oil equivalent per day of high marginproduction from nine major project start-upsContinuing to manage base decline between 3-5%Increasing bpx production by 30-40%And retaining some assets for longer than previously planned24And our resource base has the potential to sustain underlying productionbroadly flat to 2030 relative to 2022.A great example is in the Gulf of Mexico where we expect production toincrease to around 400 thousand barrels per day by mid-decade,andaverage 350 thousand barrels per day through the end of the decade.In the second half of the decade,we also have options to progressseveral new-hub opportunities including in offshore Canada,Brazil,Mauritania and Senegal,Australia,the Gulf of Mexico and Indonesia.We also remain focused on high-grading our portfolio and aim to divestaround 200 thousand barrels of oil equivalent per day of lower marginassets by 2030 less than previously assumed given the strongprogresswehavemadeimprovingoperationalreliabilityandcommerciality across our portfolio over the past few years.As a result,our 2030 production aim is now around 2 million barrels of oilequivalent per day after divestments.And to maximise value we intend to:-Maintain investment discipline with hurdle rates of 15-20%at$60 perbarrel-Maintain a balanced portfolio with a broadly equal mix across oil andgas-Drive capital productivity through strong execution capability acrossour sub-surface,wells and projects organisations-And sustain cost efficiency and reliability improvements in ouroperations.Our 2022 performance shows our focus on this,deliveringour lowest unit production cost since 2006 and our highest plantreliability on record24FY&4Q 2022 financial results&update on strategic progressLeveraging our advantaged refining portfolioImproving safety&operational emissionsTarget no major process safety incidents or life changing injuriesThrough energy efficiency,emission reduction and carbon capture projectsDelivering portfolio performanceRetaining increasingly competitive refining portfolio96%Solomon availability*by 2025Maintain Solomon 1st quartile net cash margin*Foundation for Biofuels and HydrogenExpanding opportunities for refinery conversion or consolidationBiofuels strategy leverages our refineriesHydrogen strategy anchored by our refinery demandDrive competitiveness through digitisation and business improvement plans3co-processing volumes by 2030150production from 5 biofuel projects by 2030450existing refining hydrogen demand mbd2525ktpa2XSpain Spain CastellonGermany Germany LingenNetherlands Netherlands RotterdamGermany Germany GelsenkirchenKwinana4USEuropeAustraliaWhitingCherry PointHydrogenBiofuelsToledo3(1)Compared to 2022(2)Based on 2020 data includes Toledo Refinery(3)Sale of bps 0 interest in Toledo Refinery to JV partner enovus Energy announced 8 August 2022(4)Kwinana conversion to an Integrated Clean Energy Hub announced 19 April 2022SAPREF not shown as refinery operations have been paused;Whangarei not shown as converted to import terminalMap excludes terminals and pipelinesTurning to refining.Three things.First,through our business improvement plans,we are continuing to drive greatercompetitiveness and value from our refineries.We are focused on:improving process safety and operational emissions,anddelivering portfolio performanceSecond,as I mentioned earlier,our refineries are a foundation for two transitiongrowth engines Bioenergy,specifically biofuels,and Hydrogen.We plan to grow biofuel co-processing production and deliver five projectsfocused on sustainable aviation fuel.Our existing refining hydrogen demand will be an anchor to build scale throughboth green and blue hydrogen projects.And third,we will continue to invest to digitise and modernise the systems andback office of our refining business as we have in the upstream over the pastdecade.This is expected to drive higher reliability,more efficient work andeliminate substantial waste in the system.Thecombinationofanincreasinglycompetitiverefiningportfolio,andtheopportunities we see to convert or consolidate refineries to deliver our biofuels andhydrogen strategies,means we plan to retain our current refining footprint andthroughput at around current levels.25FY&4Q 2022 financial results&update on strategic progress(1)2025 target and 2030 aim for Aims 1-3 are against our 2019 baseline.100%means to net zero*by 2050 or sooner(2)Aim 5 now aligned with our transition growth engines(3)Target/aim set in 2020(4)Aim 3 relates to the carbon intensity for the energy products that we sell*.Aim 3 emissions can be thought of as combining elements of bp Scopes 1,2 and 3(5)Target/aim set in 2020 for low carbon investment Scope2025 target2030 aim2050 or sooner aimsAim 1Net zero operationsScope1 21 220P0%Aim 2Net zero productionScope3 310-15 -300%Aim 3Net zero salesCarbon Carbon intensityintensity45-200%Aim 4Reducing methaneMethaneMethaneintensityintensity0.20%(measurement approach)Aim 5More$intotransitionTransition Transition growth growth enginesengines$6-8bn$7-9bnGetting bp to net zero our evolving pathway262630-3535-40201550%3$3-4bn5$5bn5Arrows indicate updates to 2025 and 2030 target and aim since 2020*1*1*12So,what does this mean in terms of our pathway to net zero.In short,our destination is unchanged with a triple net zero ambition acrossoperations,production and sales by 2050 or sooner.Since we laid out our aims in 2020,we have enhanced our Net Zero ambition:Increased Aim 1 to 50%in 2030Increased Aim 3 to 15-20%in 2030 and net zero by 2050,as well as expandingthe scope of Aim 3 to include physically traded energy products.As we lean further into our strategy,We have updated our goals for Aim 5 now aligned with our transition growthengines for 2025 and 2030.We expect to invest more than 40%,or$6-8billion of our capital expenditure in transition growth engines in 2025 up from3%in 2019 and around 50%in 2030 or about$7-9 billion.We have updated our pathway for Aim 2 our net zero production aim.We arenow targeting 10-15%reduction by 2025 and aiming for 20-30%reduction by2030We continue to believe our ambition and aims,taken together,are consistent withthe goals of the Paris Agreement.26FY&4Q 2022 financial results&update on strategic progressMomentum in our strategic delivery201920222025 target2030 aimResilient Resilient hydrocarbons hydrocarbons Oil and gas production(mmboed)2.62.3200mboed major project production2.0 2.3Deep resource base provides optionality1.5 2.0Refining throughput(mmbd)1.71.510121520Strategic convenience sites*1,6502,4003,0003,500EV charge points*000)7.52240100Low carbon Low carbon energy energy Hydrogen production(mtpa net)2023-25:Refinery and US projects to FID andconstruction2025-30Start-up US and Europe projectsH2export hubs FID and construction0.5-0.7Renewables(GW developed to FID)2.65.8First offshore wind project to FID20Offshore wind new bids FID Renewables for H2FID and start-up50Renewables(GW installed net)1.12.2US solar projectsstart-upFirst offshore wind project operational10Denotes transition growth engine 27271.8mtpapipeline37.2GW renewables pipeline 3.8 incl.Russia productionExcl.Archaea EnergyIn summary,our transformation is gaining momentum some of the key elementsof which are on this slide.We are turning planning into delivery turning data on PowerPoint slides intoshovels in the ground.Thats what performing while transforming is all about it iswhat people want to see from us delivery,delivery,delivery.We are making strong progress towards delivering our 2025 targets and 2030 aims.And we are leaning in.And with that,importantly,Murray will now take you through our financial framethat underpins this.27Murray Auchincloss Chief financial officerThanks Bernard.28FY&4Q 2022 financial results&update on strategic progressDisciplined investment allocation(1)Includes OB&C*(2)Includes acquisition of Archaea EnergyCapital expenditure*(including inorganics)$bn 202120222025 target2030 aimResilient hydrocarbons9.113.029-11 8-10Convenience and mobility1.61.82-33-4Low carbon energy 1.6 1.03-53-5Group capital Group capital expenditureexpenditure*112.812.816.316.31414-18181414-1818Of which:Transition Of which:Transition growth enginesgrowth engines2.42.44.94.96 6-8 87 7-9 92929Of which:Transition Of which:Transition growth enginesgrowth enginesAs youve heard,we see the potential to advance the delivery of our strategy andcreate additional value by investing on average up to$2 billion per annum morethan previously planned through 2030.Compared to our previous plan:We expect to invest more in resilient hydrocarbons in oil and gas andBioenergyWe also expect to invest more in Convenience and mobility in Convenience&EV ChargingAnd we are focusing our capital expenditure in Hydrogen and Renewables&Power,planning to reallocate around$10 billion across the decade,towardBioenergy,and Convenience&EV Charging.In aggregate,we now expect annual capital investment,including inorganics,to bein a range of$14-18 billion through 2030.For 2023,reflecting our expectation of a supportive price environment,we plan toinvest between$16-18 billion.And we retain significant flexibility in our investment plans.In a lower priceenvironment,we anticipate managing shorter-cycle investment,particularly inhydrocarbons,to maintain a resilient cash balance point of around$40 per barrelBrent,$11 RMM and$3 Henry Hub.29FY&4Q 2022 financial results&update on strategic progressGrowing EBITDA as the business transitions(1)8 Feb 2022s 2030 aim at$60/bbl 2020 real and restated to exclude Rosneft;7 Feb 2023s 2030 aim at$70/bbl 2021 real(2)Includes revisions from other businesses since 8 Feb 2022 update(3)Brent$70/bbl 2021 real,at bp planning assumptions,and at the upper end of the relevant capex ranges(4)2021 and 2022 not restated for re-allocation of power trading to low carbon energy(5)Includes OB&C*3030202120222025 target2030 aim$71/bbl$103/bbl$70/bbl3$70/bbl3Resilient hydrocarbons30.6456.9440-4239-42Convenience and mobility4.44.379-11 Low carbon energy 2-3Group EBITDAGroup EBITDA534.434.460.760.74646-49495151-5656Of which:Transition Of which:Transition Growth EnginesGrowth Engines3 3-4 41010-1212Growth phaseOf which:Transition Of which:Transition growth enginesgrowth enginesUplift to 2030 Group EBITDA*aim$bn020 060202$7 2030$60 realPriceT E il andgas ther2030$70 real2Feb 22 strategy update Feb 23 strategy update$3 6bn Turning to EBITDA.These changes to our capital investment plans underpin an uplift of$5-6 billion toour 2030 EBITDA aim.As a result,and together with our revised price assumptions,our 2025 EBITDAtarget increases to$46-49 billion and our 2030 EBITDA aim to$51-56 billion.And as Bernard outlined,within this we now expect our transition growth enginesto contribute$10-12 billion of EBITDA in 2030.30FY&4Q 2022 financial results&update on strategic progressStrong momentum to 202 Numbers relative to 2022 baseline(1)Brent$70/bbl 2021 real,at bp planning assumptions,and at the upper end of the ranges*1supported by our cost and efficiency agendaunderpinning 202 EBIT A$46-49bnin our transition growth engines25%increase in strategic convenience sites*200mboedfrom 9 new high-margin major project start-upsin our oil and gas portfoliodoublenumber of EV charge points*30-40%increase in bpx production25%increase in deepwater rigs by 202530%increase in LNG supply Standardisation and simplification DigitisationLocation strategyOptimising third-party spend 30mboed increase in biogas supply80%increase in biofuels volumes3131FY&4Q 2022 financial results&update on strategic progressOur$46-49 billion 2025 EBITDA target is underpinned by the strong and highlyvisible operational momentum we see ahead of us.In our transition growth engines,by 2025 we expect:Around an 80%increase in our biofuels volumesAround a 30 thousand barrels oil equivalent per day increase in biogas supplyA 25%increase in the number of strategic convenience sitesAnd around a doubling of EV charge pointsIn oil and gas,by 2025 we expect:An incremental 200 thousand barrels per day of high-margin productionAn increase of 30 to 40%in production from bpx energyAnd more than a 30%increase in LNG supply to around 25 million tonnes perannum from Coral,Venture,Mauritania and Senegal,Tangguh and the returnof Freeport.And this strong operational momentum is supported by our continuing focus oncost efficiency and digital.31Having completed the largest reorganisation in our history,we havedelivered on our target of$3-4 billion of pre-tax cash cost savings by2023,relative to 2019,around a year ahead of schedule.Looking ahead,we are working hard to extend the progress we havemade in deploying digital and standardisation in the upstream to thebroader group.This will take time,but we continue to see a substantial opportunity todrive savings which absorb inflation and provide the space for us toprofitably expand our transition growth engines.31FY&4Q 2022 financial results&update on strategic progressContinued discipline in executing our financial frameDisciplined investment allocationStrong investment grade credit ratingResilientdividend2023 surplus cash flow*2,32023 surplus cash flow*per ordinary share for 4Q22#1#2#5#4#3Commitment to allocate 60 surplus cash flow 2to buybacks2023 capital expenditure*Target further progress within an A grade credit rating(1)Cash balance point$40/bbl Brent,$11/bbl RMM*,$3/mmbtu Henry Hub,all 2021 real(2)Subject to maintaining a strong investment grade credit rating.(3)In addition,intend to execute share buybacks to offset expected dilution from vesting of awards under employee schemes during 2023Share buybacksResilient$40/bbl cash balance point*13232$16-18bn40%Oil,gas,refining and other businessesTransition growth enginesCapacity for annual increase of the dividend per ordinary share of 4%at$60/bblIntend to allocate 40 23 surplus cash flow to further strengthen balance sheetExpect$4.0bn p.a.at$60/bblat the lower end of the capital investment range2024-2030:$14-18bn6.610As we deliver our business plan,we remain focused on the disciplined delivery ofour financial frame.Our first priority remains a resilient dividend accommodated within a balance pointof$40 per barrel Brent,$11 RMM and$3 Henry Hub now defined on a point-forward basis.We see capacity for an annual increase in the dividend per ordinaryshare of around 4%per annum at around$60 per barrel,subject to the Boardsdiscretion.Second,maintaining a strong investment grade credit rating.For 2023 we intend tocontinue to allocate 40%of surplus cash flow to further strengthen the balancesheet and now target further progress within an A grade credit rating.Third and fourth,we plan to invest with discipline in our transition growth enginesand in our oil,gas and refining businesses.And finally share buybacks.We are committed to allocating 60%of 2023 surpluscash flow to buybacks and expect a buyback of$4 billion per annum at around$60per barrel,at the lower end of our capital range and subject to maintaining a stronginvestment grade credit rating.32FY&4Q 2022 financial results&update on strategic progressDelivering for shareholders(1)122 EBIDA per share for 2H19/1H20 base,with base year adjusted to exclude Rosneft(2)Brent,2021 real(3)Cash balance point$40/bbl Brent,$11/bbl,RMM*$3/mmbtu Henry Hub,all 2021 realROACE*Higher returns 7-9%2H19/1H20 2025$50-60/bbl(prior guidance)18-14 25$50-60/bbl(prior guidance)2025 and 2030$70/bbl2EBIDA*per share CAGR*1Accelerating growth Growing distributions 2H19/1H20 2025$70/bbl212333Capacity for annual increase of the dividend per ordinary dividend per ordinary shareshare of at$60/bblExpect share buybackshare buyback4%p.a.at$60/bbl atthe lower end of the capital investment rangeResilient cash balance point*3$40/bbl$4bnTaken together,we believe this business plan and financial frame delivers forshareholders today.It offers:-First,double digit per share growth.We now expect to deliver an EBIDA pershare CAGR of over 12tween 2H19/1H20 to 2025 at$70 per barrel 2021real.-Second,competitive returns.We have increased our ROACE target and nowexpect to achieve over 18%in both 2025 and 2030 at$70 per barrel 2021 real.-Third,debt reduction through our intention to allocate a proportion of surpluscash flow to strengthening our balance sheet.-And fourth,compelling shareholder distributions though our resilient andgrowing dividend,and with leverage to higher prices through our share buybackcommitment.Let me now hand back to Bernard to conclude todays presentation.33Bernard LooneyChief executive officer34FY&4Q 2022 financial results&update on strategic progress3535A world-class team3535FY&4Q 2022 financial results&update on strategic progressDeepening ourcapabilityImproving ourdiversityAttracting newtalentGrowingpride in bpThanks Murray.As we come to a close what excites me maybe the most,and gives meconfidence in our ability to deliver on our growth plans,is the world-class bp team.We are building capabilities and skills,leveraging deep experience within,andattracting new talent from a broad range of sectors.We are becoming more diverse making tangible progress on both female andminority representation across our organisation.Our restructuring and change is behind us we have only one focus and that ison delivery.And finally-our transformation is inspiring our people and others who want to joinus.Pride in working for bp is at an all-time high and staff confidence in our future isat the highest point since we began surveying over a decade ago.35FY&4Q 2022 financial results&update on strategic progress3636FY&4Q 2022 financial results&update on strategic progressPerformingtransformingwhileLeaning furtherstrategyinto ourDeliveringshareholdersforSo,let me wrap up.First,I hope you will agree that our results show that bp is performing whiletransforming.Second,we have the right strategy and today,we are leaning further in helpinggive society the energy it needs and materially growing EBITDA at the same time.And third,crucially,we are delivering for shareholders:-Executing against our disciplined financial frame.-Growing our resilient dividend,and-Delivering a material share buyback programme.36FY&4Q 2022 financial results&update on strategic progressOur investor proposition(1)2H19/1H20 to 2025 at$70-bbl(2021 real),at bp planning assumptions,with base year adjusted to exclude Rosneft(2)By 2025,$70/bbl(2021 real),at bp planning assumptions(3)n average,based on bps current forecasts,at around$60 per barrel Brent and subject to the boards discretion each quarter,bp expects to be able to deliver buybacks of around$4bn per annum at the lower end of its capital investment range and have capacity for an annual increase in the dividend per ordinary share of around 4%(4)By 2025Sustainable valueDeliveringlong-termshareholdervalueInvesting in transition growth engines;driving down emissions40pital expenditure*in transition growth engines4Net zero*by 2050 or sooner across operations,production and sales12justed EBIDA*1per share CAGR*Growing ROACE*to 18%2Profitable growthGrowing value and returnsResilient dividend3,4%p.a.growth60 surplus cash flow*as share buybacks3Committed distributionsCompelling cash distributions3737FY&4Q 2022 financial results&update on strategic progressThis all comes together,as you can see on this slide,in,what we believe is acompelling investor proposition to grow long-term shareholder value.Thanks very much for your patience and for listening.Members of the team willnow join me on stage and we would be delighted to take your questions in theroom and from the phone.37FY&4Q 2022 financial results&update on strategic progressAppendix3838FY&4Q 2022 financial results&update on strategic progress1 1Q23 vs Q23 vs 4 4Q22Q22Expect first-quarter 2023 reported upstream production to be broadly flatcompared to fourth-quarter 2022.In our customers business,we expect seasonally lower volumes and in Castrolbase oil prices to remain high,although lower than the fourth quarter.Inrefining,we expect margins to remain elevated and a lower level of turnaroundactivity.(1)Underlying effective tax rate*is sensitive to the impact that volatility in the current price environment may have on the geographical mix of the groups profits and lossesFull year 2023Full year 2023Capital expenditure*$16-18bnDD&ASlightly above 2022Divestment and other proceeds$2-3bnGulf of Mexico oil spill payments$1.3bn pre-taxOB&C underlying annual charge$1.1-1.3bn full year,quarterly charges may vary Underlying effective tax rate*1Expected to be around 40%Reported and underlying*upstream production(ex.Rosneft)For full year 2023 we expect both reported andunderlying upstream production to be broadly flatcomparedwith2022.Withinthis,bpexpectsunderlying production from oil production&operationsto be slightly higher and production from gas&lowcarbon energy to be lower.bp expects the start-up ofMad Dog Phase 2 in the second quarter of 2023 andfirst gas from the Tangguh expansion and GTA Phase1 Tortue projects in the fourth quarter of 2023.3939GuidanceFY&4Q 2022 financial results&update on strategic progressReconciling strategic themes and reporting segmentsThis is not a exhaustive list of businesses(1)Includes customer-facing and midstream biofuels activities which form part of the Bioenergy transition growth engine Reporting segmentGas&low carbon Gas&low carbon energyenergyOil production Oil production&operations&operationsCustomers Customers&products&productsOther businesses Other businesses&corporate&corporateStrategic themeResilient Resilient hydrocarbonshydrocarbons Gas regions Gas marketingand trading Oil regions Refining and oil trading BioenergyConvenience Convenience and mobilityand mobility Convenience Fuels EV Charging Castrol Aviation,B2B/midstream1Low carbon Low carbon energyenergy1 Renewables&power Hydrogen*Other businesses Other businesses&corporate&corporate OB&C*Denotes transition growth engine 4040FY&4Q 2022 financial results&update on strategic progressFY&4Q 2022 financial results&update on strategic progressin resilient hydrocarbonsTrinidad Cypreproject FIDBrazil Cabo Frio discovery Algeria sale announcedAngola JV11%lower unit production costs96 22 plant reliability*Acquisition of Archaea Energy2022 Permian methane flaring intensity below 0.5%Indonesia Timpan discovery Egypt exploration accessToledo sale announcedSingle operating modelHigh grading position in CanadaTrinidad Cassiacompression start-upAchieved major project production target GoM Herschel start-up29%interest in GasrecAgreement with NuseedDoubled renewable diesel capacity at Cherry PointFirst Nuseedcargo shippedTangguh PSA extension202020234141FY&4Q 2022 financial results&update on strategic progressFY&4Q 2022 financial results&update on strategic progressSAF supply contracts BP Midstream US full ownershipUS AMPLY EV fleet acquisitionbp XiajouChinese ventureVW EV partnershipUK Green biofuels ltd investmentThorntons business full ownership Iberdrola EV partnershipAviation expansion in ChinaHertz US EV collaborationRewe EV partnershipCastrol ON e-fluids launched Jio-bp Indian ventureM&S convenience partnership extensionCastrol OEMpartnershipsNew Austrian fuels supply contractin convenience and mobilityM&S EV partnershipNew EVs operating in Spain,Australia and New Zealand202020234242FY&4Q 2022 financial results&update on strategic progressFY&4Q 2022 financial results&update on strategic progressEntered US offshore wind(Equinor Partnership)Formed NEP CCS in UK Oman MoUUAE ADNOC and Masdar MOU and partnershipsEmpire/Beacon awardEnBW partnership to develop offshore wind in UKAustralian Renewable Energy Hub(AREH)US Gulf Coast CCS appraisalMauritania MoUIberdrola partnership for hydrogen developmentH2 Teesside and Net Zero Teesside Power phase 2Scotwind lease option awardedMarubeni PartnershipMona/Morgan awardin low carbon energyAcquisition of EDF Energy202020234343FY&4Q 2022 financial results&update on strategic progressEgypt MoU7x solar acquisitionConstruction of Arche Solar,bp US solarsfirst farmFY&4Q 2022 financial results&update on strategic progressGas and low carbon energyUnderlying RCPBIT*$bnBelow average gas marketing and trading performance compared to an exceptional result in the third quarterLower gas realisations and lower production partly offset by favourable price lag effects on gas sales into Europe4Q 2022 vs 3Q 20224Q213Q224Q22Production volumeLiquids(mbd)122117121Natural gas(mmcfd)4,9415,0114,844Total hydrocarbons*(mboed)974981956Average realisations*Liquids($/bbl)71.6388.0380.50Natural gas($/mcf)6.949.859.40Total hydrocarbons*($/boe)43.6860.8057.60Selected financial metrics($bn)Adjusted EBITDA*3.57.44.5Capital expenditure*gas0.90.91.0Capital expenditure low carbon0.10.10.6Operational metrics(GW,bp net)Installed renewables capacity*1.92.02.2Developed renewables to FID*4.44.65.8Renewables pipeline*23.126.937.24444FY&4Q 2022 financial results&update on strategic progressOil production and operations4Q213Q224Q22Production volumeLiquids(mbd)1,004959966Natural gas(mmcfd)2,0532,0751,989Total hydrocarbons*(mboed)1,3581,3171,309Average realisations*Liquids($/bbl)71.0793.1480.43Natural gas1($/mcf)8.7312.1210.20Total hydrocarbons*1($/boe)66.1986.8374.60Selected financial metrics($bn)Exploration write-offs0.00.20.1Adjusted EBITDA*5.76.85.9Capital expenditure*1.31.41.4Combined upstreamOil and gas production(mboed)2,3322,2982,265bp average realisation1($/boe)56.0574.0866.18Unit production costs*2($/boe)6.826.256.07bp-operated plant reliability*2(%)94.095.896.0(1)Realisations calculation methodology has been changed to reflect gas price fluctuations within the North Sea region.All comparatives are restated.There is no impact on financial results.(2)On a year-to-date basisUnderlying RCPBIT*$bn4Q 2022 vs 3Q 2022Lower liquids and gas realisations,despite the favourable impact of month-ahead gas pricing contracts in UK North Sea and foreign exchange4545FY&4Q 2022 financial results&update on strategic progressCustomers and products4Q213Q224Q22Customers convenience&mobilityCustomers convenience&mobility adjusted EBITDA*1.01.41.0Castrol1adjusted EBITDA0.20.20.1Capital expenditure*0.70.40.7bp retail sites*total220,50020,55020,650Strategic convenience sites*22,1502,2502,400Marketing sales of refined products(mbd)2,9783,0472,981Products refining&tradingAdjusted EBITDA0.42.01.7Capital expenditure0.50.33.5Refining environmentRMM*3($/bbl)15.135.532.2Refining throughput(mbd)1,6441,5121,378Refining availability*(%)95.494.395.0Underlying RCPBIT*$bn4Q 2022 vs 3Q 2022CustomersLower marketing margins and seasonally lower volumes,with Castrol alsoimpacted by COVID lockdowns in China.ProductsHigher level of turnaround and maintenance activity,partially offset by higherrealised refining margins.(1)Castrol is included in customers convenience&mobility(2)Reported to the nearest 50(3)The RMM in the quarter is calculated based on bps current refinery portfolio.On a comparative basis,the fourth quarter 2021 RMM would be$15.3/bbl4646FY&4Q 2022 financial results&update on strategic progressBarrel(bbl)159 litres,42 US gallons.boeBarrels of oil equivalent.CAGRCompound annual growth rate.CCSCarbon,capture and storage.DD&ADepreciation,depletion and amortisation.EVElectric vehicle.EVPExecutive vice president.FIDFinal investment decision.GWGigawatt.IECIntegrated Energy Company.IOCInternational Oil Company.JVJoint venture.ktpaThousand tonnes per annum.LNGLiquefied natural gas.Glossary-abbreviations4747mbdThousand barrels per day.mboedThousand barrels of oil equivalent per day.mmbdMillion barrels per day.mmboedMillion barrels of oil equivalent per day.mmbtuMillion British thermal units.mmcfdMillion cubic feet per day.mtpaMillion tonnes per annum.OB&COther businesses and corporate.RCReplacement cost.SAFSustainable aviation fuel.SVPSenior vice president.TGETransition growth enginesTWhTerawatt hourFY&4Q 2022 financial results&update on strategic progressGlossaryAdjusting itemsInclude gains and losses on the sale of businesses and fixed assets,impairments,environmental and other provisions,restructuring,integrationand rationalisation costs,fair value accounting effects,financial impactsrelating to Rosneft for the 2022 financial reporting period and costs relating tothe Gulf of Mexico oil spill and other items.Adjusting items within equity-accounted earnings are reported net of incremental income tax reported bythe equity-accounted entity.Adjusting items are used as a reconcilingadjustment to derive underlying RC profit or loss and related underlyingmeasures which are non-GAAP measures.bp-operated plant reliabilityCalculated taking 100%less the ratio of total unplanned plant deferralsdivided by installed production capacity,excluding non-operated assets andbpx energy.Unplanned plant deferrals are associated with the topside plantand where applicable the subsea equipment(excluding wells and reservoir).Unplanned plant deferrals include breakdowns,which does not include Gulfof Mexico weather related downtime.Capital expenditureTotal cash capital expenditure as stated in the condensed group cash flowstatement.Capital expenditure for the operating segments and customers&products businesses is presented on the same basis.Carbon intensity of the energy products that we sellThe rate of GHG emissions per unit of energy delivered(in grams CO2e/MJ)estimated in respect of sales of energy products.GHG emissions areestimated on a lifecycle basis covering use,production,and distribution,ofsold energy products.Cash balance pointImplied Brent oil price 2021 real to balance bps sources and uses of cashassuming an average bp refining marker margin around$11/bbl and HenryHub at$3/mmbtu in 2021 real terms.Consolidation adjustment UPIIUnrealised profit in inventory arising on inter-segment transactions.Convenience gross marginCalculated as RC profit before interest and tax for the customers&productssegment,excluding RC profit before interest and tax for the refining&trading and petrochemicals businesses,and adjusting items*(as definedabove)for the convenience&mobility business to derive underlying RCprofit before interest and tax for the convenience&mobility business;subtracting underlying RC profit before interest and tax for the Castrolbusiness;adding back depreciation,depletion and amortisation,productionandmanufacturing,distributionandadministrationexpensesforconvenience&mobility(excluding Castrol);subtracting earnings from equity-accounted entities in the convenience&mobility business(excludingCastrol)and gross margin for the retail fuels,EV charging,aviation,B2B andmidstream businesses.Developed renewables to FIDTotal generating capacity for assets developed to FID by all entities wherebp has an equity share(proportionate to equity share).If asset issubsequently sold bp will continue to record capacity as developed to FID.IfbpequityshareincreasesdevelopedcapacitytoFIDwillincreaseproportionately to share increase for any assets where bp held equity at thepoint of FID.Disposal proceedsDivestments and other proceeds.EBIDA/adjusted EBIDAUnderlying replacement cost profit before interest and tax*,add backdepreciation,depletion and amortisation and exploration expenditure written-off(net of adjusting items*),less taxation on an underlying RC basis.EBITDA/adjusted EBITDAReplacement cost(RC)profit before interest and tax,excluding net adjustingitems*,adding back depreciation,depletion and amortisation and explorationwrite offs(net of adjusting items).Electric vehicle charge points/EV charge pointsNumber of connectors on a charging device,operated by either bp or a bpjoint venture.4848FY&4Q 2022 financial results&update on strategic progressFast chargingIncludes rapid*and ultra-fast*chargingHydrogen/low carbon hydrogenHydrogen fuel with reduced carbon attributes,including renewable(green)hydrogen made from solar,wind and hydro-electricity,and(blue)made fromnatural gas in combination with carbon capture and storage(CCS).Inorganic capital expenditureComprisesconsiderationinbusinesscombinationsandcertainothersignificant investments made by the group.It is reported on a cash basis.Installed renewables capacitybps share of capacity for operating assets owned by entities where bp hasan equity share.Lease paymentsLease liability payments.Major projectsHave a bp net investment of at least$250 million,or are considered to be ofstrategic importance to bp or of a high degree of complexity.Net debtCalculated as finance debt,as shown in the balance sheet,plus the fair valueof associated derivative financial instruments that are used to hedge foreigncurrency exchange and interest rate risks relating to finance debt,for whichhedge accounting is applied,less cash and cash equivalents.Net debt doesnot include accrued interest,which is reported within other receivables andother payables on the balance sheet and for which the associated cash flowsare presented as operating cash flows in the group cash flow statement.Net zeroReferences to net zero for bp in the context of our ambition and Aims 1,2and 3 mean achieving a balance between(a)the relevant Scope 1 and 2emissions(for Aim 1),Scope 3 emissions(for Aim 2)or product lifecycleemissions(for Aim 3),and(b)the aggregate of applicable deductions fromqualifying activities such as sinks under our methodology at the applicabletime.Net zero operationsbps aim to reach net zero*operational greenhouse gas(CO2and methane)emissions by 2050 or sooner,on a gross operational control basis,inaccordance with bps Aim 1,which relates to our reported Scope 1 and 2emissions.Any interim target or aim in respect of bps Aim 1 is defined interms of absolute reductions relative to the baseline year of 2019.Net zero productionbps aim to reach net zero*CO2emissions,in accordance with bps Aim 2,from the carbon in our upstream oil and gas production,in respect of theestimated CO2emissions from the combustion of upstream production ofcrude oil,natural gas and natural gas liquids(NGLs)on a bp equity sharebasis based on bps net share of production,excluding bps share of Rosneftproductionandassumingthatallproducedvolumesundergofullstoichiometric combustion to CO2.Aim 2 is bps Scope 3 aim and relates toScope 3,category 11 emissions.Any interim target or aim in respect of bpsAim 2 is defined in terms of absolute reductions relative to the baseline yearof 2019.Net zero salesbps aim to reach net zero*for the greenhouse gas emissions associatedwith the lifecycle(including end use)of its marketed and physically tradedenergy products*,in accordance with bps Aim 3.Any interim target or aim inrespect of bps Aim 3 is defined in terms of reductions in the weightedaverage greenhouse gas emissions per unit of energy delivered(in gramsCO2e/MJ)relative to the baseline year of 2019.(Work is ongoing to confirman assured baseline for this Aim to incorporate the inclusion of physicallytradedsales.)Greenhousegasemissions(CO2,methane,N2O)areestimatedonalifecyclebasiscoveringproduction/extraction,transportation,processing,distribution and use of the relevant products(assuming full stoichiometric combustion of the product to CO2).OB&COther businesses and corporate.Operating cash flowNet cash provided by(used in)operating activities as stated in thecondensed group cash flow statement.Glossary4949FY&4Q 2022 financial results&update on strategic progressPhysically traded energy product For the purposes of Aim 3,this includes trades in energy products which arephysically settled in circumstances where bp considers their inclusion to beconsistent with the intent of the Aim.It therefore excludes,for example,financial trades,and physical trades where the purpose or effect is that thevolumes traded net off against each other.Production-sharing agreement/contract(PSA/PSC)An arrangement through which an oil and gas company bears the risks andcosts of exploration,development and production.In return,if exploration issuccessful,the oil company receives entitlement to variable physical volumesof hydrocarbons,representing recovery of the costs incurred and a stipulatedshare of the production remaining after such cost recovery.Rapid/rapid chargingIncludes electric vehicle charging of 50kWRealisationsResult of dividing revenue generated from hydrocarbon sales,excludingrevenue generated from purchases made for resale and royalty volumes,byrevenue generating hydrocarbon production volumes.Revenue generatinghydrocarbon production reflects the bp share of production as adjusted forany production which does not generate revenue.Adjustments may includelossesduetoshrinkage,amountsconsumedduringprocessing,andcontractual or regulatory host committed volumes such as royalties.For thegas&low carbon energy and oil production&operations segments,realisations include transfers between businesses.Refining availabilityRepresents Solomon Associates operational availability for bp-operatedrefineries,which is defined as the percentage of the year that a unit isavailable for processing after subtracting the annualised time lost due toturnaround activity and all planned mechanical,process and regulatorydowntime.Refining marker margin(RMM)Average of regional indicator margins weighted for bps crude refiningcapacity in each region.Each regional marker margin is based on productyields and a marker crude oil deemed appropriate for the region.The regionalindicator margins may not be representative of the margins achieved by bpin any period because of bps particular refinery configurations and crude andproduct slate.Renewables pipelineRenewable projects satisfying the following criteria until the point they canbe considered developed to final investment decision(FID):Site basedprojects that have obtained land exclusivity rights,or for PPA based projectsan offer has been made to the counterparty,or for auction projects pre-qualification criteria has been met,or for acquisition projects post a bindingoffer being accepted.Retail sitesInclude sites operated by dealers,jobbers,franchisees or brand licensees orjoint venture(JV)partners,under the bp brand.These may move to and fromthe bp brand as their fuel supply agreement or brand licence agreementexpires and are renegotiated in the normal course of business.Retail sitesare primarily branded bp,ARCO,Amoco,Aral and Thorntons,and alsoincludes sites in India through our Jio-bp JV.ROACEDefined as underlying replacement cost profit,which is defined as profit orloss attributable to bp shareholders adjusted for inventory holding gains andlosses,adjusting items and related taxation on inventory holding gains andlosses and adjusting items total taxation,after adding back non-controllinginterest and interest expense net of tax,divided by the average of thebeginning and ending balances of total equity plus finance debt,excludingcash and cash equivalents and goodwill as presented on the group balancesheet over the periods presented.Interest expense before tax is financecosts as presented on the group income statement,excluding lease interest,the unwinding of the discount on provisions and other payables and otheradjusting items reported in finance costs.Glossary5050FY&4Q 2022 financial results&update on strategic progressSolomon availabilitySee Refining availability definitionSolomon net cash marginNet cash margin is defined by Solomon Associates as the net marginachieved after subtracting cash operating expenses and adding any refineryrevenue from other sources.Net cash margin is expressed in US dollars perbarrel of net refinery input.Strategic convenience sitesRetail sites,within the bp portfolio,which sell bp-branded vehicle energy(e.g.bp,Aral,Arco,Amoco,Thorntons and Pulse)and either carry one of thestrategic convenience brands(e.g.M&S,Rewe to Go)or a differentiatedconvenience offer.To be considered a strategic convenience site,theconvenience offer should have a demonstrable level of differentiation in themarket in which it operates.Strategic convenience site count includes sitesunder a pilot phase.Surplus cash flowRefers to the net surplus of sources of cash over uses of cash,after reachingthe$35 billion net debt target.Sources of cash include net cash provided byoperating activities,cash provided from investing activities and cash receiptsrelating to transactions involving non-controlling interests.Uses of cashincludeleaseliabilitypayments,paymentson perpetualhybridbond,dividends paid,cash capital expenditure,the cash cost of share buybacks tooffset the dilution from vesting of awards under employee share schemes,cash payments relating to transactions involving non-controlling interests andcurrency translation differences relating to cash and cash equivalents aspresented on the condensed group cash flow statement.Technical service contract(TSC)An arrangement through which an oil and gas company bears the risks andcosts of exploration,development and production.In return,the oil and gascompany receives entitlement to variable physical volumes of hydrocarbons,representing recovery of the costs incurred and a profit margin which reflectsincremental production added to the oilfield.Ultra fast/Ultra-fast chargingIncludes electric vehicle charging of 150kWUnderlying effectivetax rate(ETR)Calculated by dividing taxation on an underlying replacement cost(RC)basisby underlying RC profit or loss before tax.Taxation on an underlying RCbasis for the group is calculated as taxation as stated on the group incomestatement adjusted for taxation on inventory holding gains and losses andtotal taxation on adjusting items*.Underlying production2022 underlying production,when compared with 2021,is production afteradjusting for acquisitions and divestments,curtailments,and entitlementimpacts in our production-sharing agreements/contracts*and technicalservice contract*.Underlying replacement cost profitReplacement cost profit or loss*after excluding net adjusting items*andrelated taxation.Underlying replacement cost profit or loss before interest and tax(RCPBIT)Underlying RC profit or loss before interest and tax for the operatingsegments or customers&products businesses is calculated as RC profit orloss(as defined above)including profit or loss attributable to non-controllinginterests before interest and tax for the operating segments and excludingnet adjusting items for the respective operating segment or business.Unit production costsCalculated as production cost divided by units of production.Production costdoes not include ad valorem and severance taxes.Units of production arebarrels for liquids and thousands of cubic feet for gas.Amounts disclosedare for bp subsidiaries only and do not include bps share of equity-accounted entities.Glossary5151FY&4Q 2022 financial results&update on strategic progressWorking capitalMovements in inventories and other current and non-current assets andliabilities as reported in the condensed group cash flow statement.Change in working capital adjusted for inventory holding gains/losses,fairvalue accounting effects relating to subsidiaries and other adjusting items isa non-GAAP measure.It is calculated by adjusting for inventory holdinggains/losses reported in the period and from the second quarter 2021onwards,it is also adjusted for fair value accounting effects relating tosubsidiaries reported within adjusting items for the period.For 2022,it isadjusted for other adjusting items relating to the non-cash movement of USemissions obligations carried as a provision that will be settled byallowances held as inventory.This represents what would have beenreported as movements in inventories and other current and non-currentassets and liabilities,if the starting point in determining net cash provided byoperating activities had been underlying replacement cost profit rather thanprofit for the period.The nearest equivalent measure on an IFRS basis forthis is movements in inventories and other current and non-current assetsand liabilities.bp utilises various arrangements in order to manage its working capitalincluding discounting of receivables and,in the supply and trading business,the active management of supplier payment terms,inventory and collateral.Glossary5252
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1 November 2022bp third quarter 2022 financial resultsGood morning everyone and welcome to bps third quarter 2022 resultspresentation.Im Craig Marshall,bps head of bp investor relations and I am here today withMurray Auchincloss,our chief financial officer.Before we begin today,let me draw your attention to our cautionary statement.21Q 2022 financial resultssvp investor relations3During todays presentation,we will make forward-looking statements includingthose that refer to our estimates,plans and expectations.Actual results andoutcomes could differ materially due to factors we note on this slide and in ourUK and SEC filings.Please refer to our Annual Report,Stock Exchangeannouncement and SEC filings for more details.These documents are availableon our website.I will now handover to Murray.3Q 2022 financial resultsCautionary statement*For items marked with an asterisk throughout this document,definitions are provided in the glossary3 3In order to utilize the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995(the PSLRA)and the general doctrine of cautionary statements,bp is providing the following cautionary statement:The discussion in thisresults announcement contains certain forecasts,projections and forward-looking statements-that is,statements related to future,not past events and circumstances-with respect to the financial condition,results of operations and businesses of bp andcertain of the plans and objectives of bp with respect to these items.These statements may generally,but not always,be identified by the use of words such as will,expects,is expected to,aims,should,may,objective,is likely to,intends,believes,anticipates,plans,we see,focus on or similar expressions.In particular,the following,among other statements,are all forward looking in nature:plans,expectations and assumptions regarding oil and gas demand,supply,and prices;expectations regarding capacity and inventory levels;plans and expectationsregarding bps performance,earnings,balance sheet and capital expenditure,including with respect to the transition and bps resilient hydrocarbons,convenience and mobility and low carbon energy businesses;plans and expectations related to earningsgrowth;expectations regarding future working capital;plans to high-grade bps oil and gas portfolio;plans and expectations regarding bps five transition growth engines of EV charging,convenience,bioenergy,renewables and hydrogen;plans andexpectations regarding bps convenience and mobility business;plans and expectations regarding resilient hydrocarbons;expectations regarding refining margins and product demand;expectations regarding bps future financial performance and cashflows;expectations regarding supply issues;expectations with regards to bps transformation to an IEC;plans and expectations regarding bps financial frame;bps plans and expectations regarding the allocation of surplus cash flow to share buybacks andto further strengthening the balance sheet;plans regarding future quarterly dividends,including the capacity for annual increases,and the amount and timing of share buybacks;plans and expectations regarding bps credit rating,including in respect ofmaintaining a strong investment grade credit rating;expectations regarding bps development of hydrogen projects and bps hydrogen production;plans and expectations regarding start-ups during 2022;expectations of receiving slightly over$3 billion indisposal proceeds during 2022;plans and expectations of around$15.5 billion capital expenditure in 2022 and relating to medium-term guidance of$14-16 billion per annum,including$5-7 billion per annum in low carbon energy and convenience&mobility,and$9-10 billion per annum in resilient hydrocarbons;expectations regarding the acquisition of Archaea Energy,including its impact on bps participation in the biogas sector,the integration of the biogas supply with bps trading business and customerrelationships and the reduction of carbon intensity;plans and expectations regarding the agreement to divest bps Algeria assets to Eni,the acquisition of EDF Energy Services,the Toledo refinery sale to joint venture partner Cenovus,the approval of theCypre offshore gas project,the beginning of operations for Azule Energy and the completion of the Asian Renewable Energy Hub;and plans and expectations regarding joint ventures,partnerships and other collaborations with Hertz,REWE and AvatrTechnology.By their nature,forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances thatwill or may occur in the future and are outside the control of bp.Actual results or outcomes,may differ materially from those expressed in such statements,depending on a variety of factors,including:the extent and duration of the impact of current market conditions including the volatility of oil prices,the effects ofbps plan to exit its shareholding in Rosneft and other investments in Russia,the impact of COVID-19,overall global economic and business conditions impacting bps business and demand for bps products as well as the specific factors identified in thediscussions accompanying such forward-looking statements;changes in consumer preferences and societal expectations;the pace of development and adoption of alternative energy solutions;developments in policy,law,regulation,technology andmarkets,including societal and investor sentiment related to the issue of climate change;the receipt of relevant third party and/or regulatory approvals;the timing and level of maintenance and/or turnaround activity;the timing and volume of refineryadditions and outages;the timing of bringing new fields onstream;the timing,quantum and nature of certain acquisitions and divestments;future levels of industry product supply,demand and pricing,including supply growth in North America andcontinued base oil and additive supply shortages;OPEC quota restrictions;PSA and TSC effects;operational and safety problems;potential lapses in product quality;economic and financial market conditions generally or in various countries and regions;political stability and economic growth in relevant areas of the world;changes in laws and governmental regulations and policies,including related to climate change;changes in social attitudes and customer preferences;regulatory or legal actions includingthe types of enforcement action pursued and the nature of remedies sought or imposed;the actions of prosecutors,regulatory authorities and courts;delays in the processes for resolving claims;amounts ultimately payable and timing of payments relatingto the Gulf of Mexico oil spill;exchange rate fluctuations;development and use of new technology;recruitment and retention of a skilled workforce;the success or otherwise of partnering;the actions of competitors,trading partners,contractors,subcontractors,creditors,rating agencies and others;bps access to future credit resources;business disruption and crisis management;the impact on bps reputation of ethical misconduct and non-compliance with regulatory obligations;trading losses;major uninsured losses;the possibility that international sanctions or other steps taken by governmental authorities or any other relevant persons may impact Rosnefts business or outlook,bps ability to sell its interests in Rosneft,or the price for which bpcould sell such interests;the possibility that actions of any competent authorities or any other relevant persons may limit bps ability to sell its interests in Rosneft,or the price for which it could sell such interests;the actions of contractors;natural disastersand adverse weather conditions;changes in public expectations and other changes to business conditions;wars and acts of terrorism;cyber-attacks or sabotage;and other factors discussed elsewhere in this report,as well as those factors discussed under“Risk factors”in bps Annual Report and Form 20-F 2021 as filed with the US Securities and Exchange Commission.Reconciliations to GAAP-This presentation also contains financial information which is not presented in accordance with generally accepted accounting principles(GAAP).A quantitative reconciliation of this information to the most directly comparablefinancial measure calculated and presented in accordance with GAAP can be found on our website at.This presentation contains references to non-proved resources and production outlooks based on non-proved resources that the SECs rules prohibit us from including in our filings with the SEC.U.S.investors are urged to consider closely the disclosures inour Form 20-F,SEC File No.1-06262.Tables and projections in this presentation are bp projections unless otherwise stated.NovemberNovember202220224Thanks Craig.Good morning everyone.We are here today to report on another quarter of financial and strategic delivery.But first I want to take a moment to acknowledge the tragic incident at theToledo refinery where two of our employees sadly lost their lives following a fire.Our thoughts go to their families,to the team at Toledo,and to the localcommunity.Safety remains our number one priority and the refinery remains offline as wework to understand the root causes of this incident.1Q 2022 financial resultsChief financial officerTurning to third quarter results.We remain focused on strengthening bp.During the third quarter:We delivered$8.2 billion of underlying earnings;andOperating cash flow was$8.3 billion including a working capital build of$6.2billion.We continue to execute against our disciplined financial frame:Reducing net debt for the tenth consecutive quarter to reach$22 billion;andAnnouncing a further$2.5 billion share buyback.And we have momentum in our transformation to an integrated energycompany.Since reporting second quarter results we have:Accelerated our bioenergy strategy agreeing to acquire Archaea Energy aleading US biogas company;Advanced our growth strategy in EV charging and convenience through ourcollaboration with Hertz;andContinued to high-grade our hydrocarbons business.I will provide more detail on our results and strategic progress in a moment,butfirst let me turn to the macro environment.53Q 2022 financial resultsWhile accelerating our transformation to an IECStrengthening bp$8.3bn3Q22 operating cash flow3Q22 operating cash flow*including including$6.2bn working capital$6.2bn working capital*buildbuild$8.2bn3Q22 underlying earnings3Q22 underlying earnings$22.0bn3Q22 net debt3Q22 net debt*$2.5bnShare buyback announcedShare buyback announcedWithin a disciplined financial framePerforming while transformingAgreed acquisition of Agreed acquisition of Archaea Archaea Energy Energy Agreement with Hertz advancing Agreement with Hertz advancing EV growth strategy EV growth strategy HighHigh-grading oil&gas portfoliograding oil&gas portfolio5 53Q 2022 financial results6Starting with gas prices where we continue to see significant volatility.Duringthe quarter,reduced Russian pipeline imports led to sharp increases in both spotand futures prices in Europe with the quarter average TTF price rising by 92%.Prices also rose in the US as summer cooling demand offset the loss of FreeportLNG exports.Looking ahead to the fourth quarter,we expect gas prices to remain elevatedand volatile with the outlook heavily dependent on Russian pipeline flows andthe severity of the Northern Hemisphere winter.Moving to oil prices.During the third quarter,Brent averaged$101 per barrel,down from$114 per barrel in the second quarter.This reflected increaseduncertainty around the economic outlook and the continued COVID-relatedlockdowns in China.Despite this uncertainty,we expect oil prices to remain elevated in the fourthquarter given the backdrop of low inventory levels,OPEC supply cuts,limitedsupply growth and uncertainty around Russian exports.Turning to refining.Global margins decreased to average around$35.50 perbarrel during the third quarter,and are expected to remain at elevated levelsduring the fourth quarter due to lower stocks and sanctioning of Russian crudeand product.3Q 2022 financial resultsMacro environmentNatural gas price1,2Refining marker margin*1,2Brent oil price1,2(1)Source:Platts data 1 October 2021 to 28 October 2022(2)Spot price(3)Settlement prices published by ICE6 6$/bblTTF forward prices3$/mmbtuTTFHenry Hub31 Dec 2130 June 2230 Sept 227Moving to results.In the third quarter we reported a loss of$2.2 billion.After post-tax adjusting items of$8.1 billion and an inventory holding loss of$2.2 billion,we reported an underlying replacement cost profit of$8.2 billion,compared to$8.5 billion last quarter.Pre-tax adjusting items included fair value accounting effects of$10.1 billion,primarily due to the continued increase in forward gas prices.As a reminder,under IFRS,reported earnings include the mark-to-market valueof the hedges used to risk manage LNG contracts,but not of the contractsthemselves.In the underlying result,the fair value accounting effect adjusts forthis mismatch by also recognising changes in the value of the LNG contractsthat are being risk managed.Turning to business group performance,compared to the second quarter:In gas and low carbon energy the result benefited from an exceptional gasmarketing and trading performance,higher production and higher gasrealisations.In oil production and operations,the result reflects lower liquids realisationsand the impact of converting bps interest in Angola to an equity accountedentity.This was partially offset by higher gas realisations.3Q 2022 financial resultsUnderlying results3Q 2022 vs 2Q 2022Lower refining marginsAverage oil trading performance after exceptional result in 2Q22Lower liquids realisations*Exceptional gas marketing and trading performanceHigher gas realisations*7 73Q 2022 financial results$bn3Q212Q223Q22Underlying RCPBIT*5.912.813.8 Gas&low carbon energy1.83.16.2 Oil production&operations2.55.95.2 Customers&products1.24.02.7 Other businesses and corporate10.6(0.2)(0.4)Of which Other businesses and corporate excluding Rosneft*(0.4)(0.2)(0.4)Rosneft*0.9 Consolidation adjustment-UPII*(0.0)(0.0)(0.0)Underlying replacement cost profit*3.38.58.2Operating cash flow*6.010.98.3Capital expenditure*(2.9)(2.8)(3.2)Divestment and other proceeds0.30.70.6Surplus cash flow*0.96.63.5Net issue(repurchase)of shares(0.9)(2.3)(2.9)Net debt*32.022.822.0Announced dividend per ordinary share(cents per share)5.4606.0066.006(1)Comparative information for 2021 has been restated for other businesses and corporate segment to include the Rosneft segmentIn customers and products,the products result reflects lower realisedrefining margins,and oil trading returning to an average contributioncompared to an exceptional result in the second quarter.The customers result benefitted from an improved retail,midstreamand B2B,and aviation performance,partially offset by higher inputcosts,notably in Castrol.78Turning to cash flow.Operating cash flow was$8.3 billion in the third quarter.This included a workingcapital build of$6.2 billion,after adjusting for inventory holding losses and fairvalue accounting effects,mainly driven by the impact of the increase in forwardgas prices on bps LNG portfolio.Looking forward,the outlook for working capital remains subject to a number offactors,including price.However,following the build in working capital as aresult of rising gas prices since 2021,we now expect the working capitalmovement to include a release of around$7 billion,weighted toward the secondhalf of 2023 and 2024,primarily as LNG cargoes are delivered.Turning back to the third quarter.Capital expenditure was$3.2 billion.And disposal proceeds were$600 million.With$2.5 billion of proceeds receivedby the end of the third quarter,we now expect to realise slightly over$3 billionduring 2022 above the prior$2 to$3 billion guidance range.During the quarter we repurchased$2.9 billion of shares.And the$3.5 billionprogramme announced with second quarter 2022 results was completed on 27October.And net debt fell for the tenth consecutive quarter to reach$22 billion.3Q 2022 financial resultsCash flow and balance sheet3Q22 highlights9M22 cash inflows/outflows$bn(1)Adjusted for inventory holding losses and fair value accounting effects*8 8$8.3bn operating cash flow*including$6.2bn working capital*1 build$3.5bn surplus cash flow*$2.9bn share buyback executed$3.5bn programme announced with 2Q22 results completed on 27 OctoberNet debt*reduced to$22.0bn9Moving to our disciplined financial frame.Our first priority remains a resilient dividend.This is underpinned by an averagecash balance point of around$40 per barrel through 2025.Our second priority is to maintain a strong investment grade credit rating,andwe intend to allocate 40%of 2022 surplus cash flow to further strengtheningthe balance sheet.Third and fourth,we will continue to invest with discipline into the transition andresilient hydrocarbons.Our capital expenditure guidance for 2022,includinginorganics,is now expected to be around$15.5 billion if the acquisition ofArchaea Energy completes before year end.And our medium-term guidance isunchanged at$14 to 16 billion per annum.Fifth,we remain committed to returning 60%of 2022 surplus cash flow throughshare buybacks,subject to maintaining a strong investment grade credit rating.Against the authority granted at bps 2022 AGM to repurchase up to 1.95 billionshares,bp had repurchased 677 million shares at 31 October.And with third quarter surplus cash flow of$3.5 billion,we intend to execute abuyback of$2.5 billion prior to reporting fourth quarter results.This brings totalannounced share buybacks from 2022 surplus cash flow to$8.5 billion,equivalent to 60%of 2022 surplus cash flow year-to-date.3Q 2022 financial resultsMaintaining our disciplined financial frame9 96.00640 22 surplus cash flow*2,32022 surplus cash flow*per ordinary share for 3Q2260%Resilienthydrocarbons$9-10bn per year$15.5bnLow carbon energyand convenience&mobility$5-7bn per year Capacity for annual increase of the dividend per ordinary share of 4%through 2025 at$60/bblCommitment to allocate 60%surplus cash flow*1to share buybacks and expect to average$4.0bn p.a.through 2025 at$60/bbl2023-2025:$14-16bn2022 capital expenditure*1Intend to allocate 40 22 surplus cash flow*to further strengthen balance sheet(1)If acquisition of Archaea Energy completes before year-end 2022.Prior 2022 guidance$14-15bn(2)Subject to maintaining a strong investment grade credit rating(3)In addition,executed$500m buyback programme during 1Q22 to offset expected dilution from vesting of awards under employee schemes during 2022In setting the buyback,the board will continue to take into account factorsincluding the cumulative level of and outlook for surplus cash flow.910Turning to bps strategic progress,where we have real momentum in ourtransformation to an integrated energy company.Within resilient hydrocarbons we are accelerating the delivery of our strategy inbioenergy one of our five transition growth engines.In October,we announced an agreement to acquire Archaea Energy a leadingUS biogas company.This transaction,accommodated within our disciplinedfinancial frame,will:Deepen our participation in the rapidly growing biogas sector;Add distinctive value as we integrate biogas supply from Archaea Energy withour experienced trading business and global customer relationships;andReduce carbon intensity supporting our Aim 3.And also in resilient hydrocarbons we have also continued to high-grade ourportfolio.We have:Completed the formation of Azule Energy our new Angolan joint venturewith Eni;Taken final investment decision on the Cypre gas project offshore Trinidad-asubsea tie-back to existing infrastructure;andAgreed to divest our Algeria assets to Eni.In convenience and mobility,we are progressing our strategy in the EV charging3Q 2022 financial resultsMomentum in our transformation to an IECAgreed to acquire Archaea Energy1Accelerating growth and realising distinctive value in biogasHertz&bp pulse collaborationPlan to install a national network of EV charging solutions in North America Resilient hydrocarbonsConvenience and mobilityLow carbon energyAzule Energy begins operationsFormation of 50/50 JV with Eni combining Angolan upstream,LNG and solar assets Toledo refinery sale to JV partner Cenovus1bp and Cenovus will also enter into a multi-year product supply agreementDevelopment of ultra-fast EV charging network in China with Avatr CoRolling out more than 100 charging hubs in 19 cities by the end of 2023H2Teesside and Net Zero Teesside Power shortlistedIn Phase 2 of UK Government process for support of CCUSHyGreen Teesside bid submissionTo the UK government for bps proposed flagship green hydrogen projectAlgeria asset sale1Agreed sale of upstream business in Algeria to EniConvenience partnership with REWE in GermanyInstalling fast,reliable,convenient charging at REWE supermarketsEDF Energy Services acquisition1Expanding US commercial&industrial retail presence power and gas-opportunities for low carbon integrated energy solutions Approval of Cypre offshore gas projectSubsea tie-back offshore Trinidad with 250-300mmscf/d peak production(gross)Asian Renewable Energy Hub completionClosed the deal to lead and operate one of the worlds largest planned renewables and green hydrogen hubsHigh-grading position in Canada Completed Sunrise oil sands divestment and acquisition of 35%interest in Bay du Nord discovery(1)Deal or agreement not yet completedDenotes transition growth engine 3Q 2022 financial results1010and convenience transition growth engines.In North America we are advancing our fleet strategy,announcingplans to collaborate with Hertz to install a network of EV chargingsolutions for Hertz and its customers powered by bp pulse.Hertz is investing to create the largest electric rental fleet in NorthAmerica we look forward to working with them.We have expanded our partnership with leading retailer REWE inGermany to install fast,reliable,convenient charging at their sites.And in China,we signed a strategic collaboration agreement with AvatrTechnology to accelerate the development of an ultra-fast chargingnetwork in China.Finally,we have continued to advance our strategy to create integrated lowcarbon energy hubs.In Australia we have closed the deal to take a 40.5%stake in the AsianRenewables Energy Hub.And our two bp-led projects in the UK H2Teesside and Net ZeroTeesside Power were shortlisted in Phase 2 of UK Governmentscluster sequencing process for support of CCUS.10To summarise,todays results show that bp is performing while transforming.We are strengthening the company;We are delivering on our disciplined financial frame underpinning ourcommitment to shareholder distributions;We have real momentum in our transformation to an integrated energycompany;andWe remain focused on delivering long-term value for our shareholders.Thank you for your time,lets now turn to your questions.113Q 2022 financial resultsAccelerating our transformation to an IECStrengthening bpDisciplined financial frame11113Q 2022 financial results3Q 2022 financial results13133Q 2022 financial results4Q22 vs 3Q224Q22 vs 3Q22We expect fourth quarter 2022 upstream production on a reported basis to beslightly lower compared with the third quarter 2022,primarily in our gasregions.In our customers and products business,we expect lower marketing marginsand seasonally lower volumes and,in Castrol,base oil prices to remainelevated.There also remains an elevated level of uncertainty due to theongoingimpactsoftheconflictinUkraine,COVID-19restrictionsandinflationary pressure.In refining,we expect margins to remain high,thebenefits of which will be partially offset by elevated energy prices,a higherlevel of turnaround activity,and operational impacts following the shutdown ofthe bp-Husky Toledo refinery in Ohio,US.Guidance(1)Underlying effective tax rate*is sensitive to the impact that volatility in the current price environment may have on the geographical mix of the groups profits and lossesFull year 2022Full year 2022Capital expenditure*$15.5bn if Archaea Energy acquisition completes before year-end 2022 DD&ASimilar level to 2021Divestment and other proceedsSlightly over$3bnGulf of Mexico oil spill payments$1.4bn pre-taxOB&C underlying annual charge$1.2-1.4bn full year,quarterly charges may vary Underlying effective tax rate*1Expected to be around 35%Reported and underlying*upstream production(ex.Rosneft)For full year 2022 we now expect reported upstreamproduction to be slightly higher compared with 2021despite the absence of production from our Russiaincorporated joint ventures.On an underlying basis,we expect upstream production to be higher.14143Q 2022 financial resultsGas and low carbon energyUnderlying RCPBIT*$bnExceptional gas marketing and trading resultsStrong production and operational performance and higher gas realisations*3Q 2022 vs 2Q 20223Q212Q223Q22Production volumeLiquids(mbd)109112117Natural gas(mmcfd)4,5204,7095,011Total hydrocarbons*(mboed)889924981Average realisations*Liquids($/bbl)66.39105.5088.03Natural gas($/mcf)5.268.429.85Total hydrocarbons*($/boe)34.9155.7960.80Selected financial metrics($bn)Adjusted EBITDA*3.14.37.4Capital expenditure*gas0.70.70.9Capital expenditure*low carbon0.30.10.1Operational metrics(GW,bp net)Installed renewables capacity*1.72.02.0Developed renewables to FID*3.64.44.6Renewables pipeline*23.325.826.915153Q 2022 financial resultsGas and low carbon energyDeveloped renewables to FID*and renewables pipeline*bp net,GWRenewables pipeline*by technology bp netDeveloped to FID and pipeline 1.4GW higher than 2Q22,driven by increase in solar pipeline56 projects developed to FID since 2019 with weightedaverage expected IRR of 8 10tive projectsactive projectsRenewables hopper*bp net16163Q 2022 financial resultsOil production and operations3Q212Q223Q22Production volumeLiquids(mbd)975935959Natural gas(mmcfd)1,9611,9642,075Total hydrocarbons*(mboed)1,3131,2741,317Average realisations*Liquids($/bbl)65.53100.3493.14Natural gas($/mcf)5.617.9711.73Total hydrocarbons*($/boe)57.7287.4686.21Selected financial metrics($bn)Exploration write-offs0.00.10.2Adjusted EBITDA*4.27.46.8Capital expenditure*1.11.21.4Combined upstreamOil and gas production(mboed)2,2022,1982,298bp average realisation*($/boe)47.5773.2473.76Unit production costs*1($/boe)6.966.536.25bp-operated plant reliability*1(%)94.395.395.8(1)On a year-to-date basisUnderlying RCPBIT*$bn3Q 2022 vs 2Q 2022Lower liquids realisations*Impact of conversion of bps interest in Angola to an equity accounted entityPartially offset by Higher gas realisations*17173Q 2022 financial resultsCustomers and products3Q212Q223Q22Customers convenience&mobilityCustomers convenience&mobility adjusted EBITDA*1.11.01.4Castrol1adjusted EBITDA*0.30.30.2Capital expenditure*0.30.30.4bp retail sites*total220,35020,60020,550bp retail sites in growth markets*22,6502,6502,600Strategic convenience sites*22,0502,2002,250Marketing sales of refined products(mbd)2,9933,0033,047Products refining&tradingAdjusted EBITDA*0.83.72.0Capital expenditure*0.30.30.3Refining environmentRMM*3($/bbl)15.245.535.5Refining throughput(mbd)1,6221,4801,512Refining availability*(%)95.693.994.3Underlying RCPBIT*$bn3Q 2022 vs 2Q 2022CustomersConvenience&mobility improved retail,midstream and B2B,and aviationperformanceCastrol lower seasonal volumes and higher input costsProductsRefining lower refining margins and higher energy pricesTrading average contribution;the second quarter benefitted from anexceptional performance(1)Castrol is included in customers convenience&mobility(2)Reported to the nearest 50(3)The RMM in the quarter is calculated based on bps current refinery portfolio.On a comparative basis,the third quarter 2021 RMM would be$15.7/bbl18183Q 2022 financial resultsbp and Archaea Energy a compelling combination1919from biogas$2bnNow expect bp bp 2030 EBITDA2030 EBITDA*1$500mRateable EBITDARateable EBITDA*growth from acquisition by 2027$10bnfrom transition growth businessesincludingin 2025Complements bps established global biogas businessExperienced management team with high-quality portfolio5x production increase by 2030 from visible and de-risked pipeline Significant integration value through trading and customer relationshipsReducing Aim 3 carbon intensityacceleratingaddingdistinctive valueremainingdisciplined $1bn growthRemain committed to disciplined financial framework$14-16bn medium term2capital expenditure*guidance unchangedDistributions guidance unchanged Accretive to EPS and FCF per share3Expected to deliver double-digit returns4(1)2030 EBITDA*aim,at$60/bbl Brent(2020,real)and bp planning assumptions(2)2023-30(3)Post integration(4)Expected full cycle return including capital expenditure*for project pipeline3Q 2022 financial results250MW gross green hydrogen*to Rotterdam Refinery Advancing H2-Fifty project plan ADNOC and Masdar to join bps UK hydrogen projectsAnnounced bp and Linde Texas Gulf Coast CCS&low carbon hydrogen production project aims to store up to 15 million metric tonnes of CO2 per year by 2026Asian Renewable Energy Hub completionDevelop 26GW of solar wind&wind powerProduce 1.6mtpa green hydrogen or 9mtpa green ammoniaH2Teesside and Net Zero Teesside Power shortlistedIn Phase 2 of UK Government process for support of CCUS1.45GW bp net ScotWind lease option award Powering Scotlands energy transitionOffshore wind bids in the Netherlands Aims to forward scalable investments to protect North Sea ecology with potential for combined 1.4GW generating capacityOffshore wind partnership with MarubeniAgreed to explore offshore wind development opportunities in JapanSAF production at bps Lingen refinery in Germany First industrial scale SAF production facility using co-processingStrategic progress transforming in 2022New exploration and access success Brazil oil discovery in the pre-salt Campos Basin Awarded oil&gas exploration blocks,Agung I and II in Indonesia Discovery in Indonesia at Timpan-1 Awarded 100%working interest in exploration block in EgyptHerschel Expansion project start upPhase 1 expected to increase gross production by 15mboed Strategic agreement with NuseedExpansion of sustainable low-carbon biofuel feedstock,Nuseed CarinataLNG agreement with Korea Gas Corporation(KOGAS)Securing the supply of 1.6mtpa of LNG to South KoreaRio Tinto and bp sign one-year trial of marine biofuels Helping reduce carbon emissions from its marine fleetbp and Clean Planet Energy agreement to advance circular plastics economy processing hard-to-recycle waste plastic into naphthaAgreed acquisition of Archaea Energy1Accelerating growth and realising distinctive value in biogasApproval of Cypre offshore gas project Trinidad subsea tie-back to Juniper platform with 250-300mmscf/d peak production(gross)EDF Energy Services acquisition1US commercial&industrial retail power and gas businessDenotes transition growth engine Acquisition of 30%stake in Green Biofuels Ltd Expanding bps biofuels portfoliobp pulse EV charging investmentPlans to invest 1 billion in EV charging in the UK over the next decadeGlobal strategic convenience delivery partnership with Uber EatsAim of 3,000 retail locations by 2025Hertz and bp pulseHertz,the largest US North America rental fleet&bp pulse plan to install a national network of EV charging solutions Strategic partnership with IberdrolaDeploying up to 11,000 fast charge points across Spain and Portugal,and green hydrogen production Partnership with REWE in GermanyInstalling fast,reliable,convenient charging for customers at REWE supermarketsStrategic collaboration with DHL ExpressSupplying SAF until 2026Development of ultra-fast charging network in China with Avatr CoRolling out more than 100 charging hubs in 19 cities by the end of 2023Castrol and Renault Group announced extension to lubricants aftermarket supply partnership until 2027 Castrol and Submer explore solutions for data centresAccelerating adoption of liquid immersion coolants for data centresRenewables pipeline growth YTD grows 3.8GW to a total of 26.9GWProgressing resilient hydrocarbon strategy with JVs In China establishing a downstream gas marketing company Suntien Green Energy Corp Ltd Basra Energy company formed to restructure business in Iraq Azule Energy Eni JV completion and start-up in Angola Solar project delivery bp 100%owned project to start 134MW construction Arche in Ohio LSbp to start construction of 106MW Milagres project in Brazil2020Divestments&portfolio high-grading Toledo refinery sale to JV partner Cenovus,with supply agreement1 Algeria asset sale to Eni including interests In Amenas and In Salah1 Canada divestment of 50%interest in Sunrise oil sands asset,and acquire 35%interest in Bay du Nord discovery(1)Deal or agreement not yet completed3Q 2022 financial results21213Q 2022 financial resultsGlossary definitions Adjusting itemsInclude gains and losses on the sale of businesses and fixed assets,impairments,environmental and other provisions,restructuring,integrationand rationalization costs,fair value accounting effects,financial impactsrelating to Rosneft for the 2022 financial reporting period and costs relating tothe Gulf of Mexico oil spill and other items.Adjusting items within equity-accounted earnings are reported net of incremental income tax reported bythe equity-accounted entity.Adjusting items are used as a reconcilingadjustment to derive underlying RC profit or loss and related underlyingmeasures which are non-GAAP measures.bp-operated plant reliabilityCalculated taking 100%less the ratio of total unplanned plant deferralsdivided by installed production capacity,excluding non-operated assets andbpx energy.Unplanned plant deferrals are associated with the topside plantand where applicable the subsea equipment(excluding wells and reservoir).Unplanned plant deferrals include breakdowns,which does not include Gulfof Mexico weather related downtime.Capital expenditureTotal cash capital expenditure as stated in the condensed group cash flowstatement.Capital expenditure for the operating segments and customers&products businesses is presented on the same basis.Consolidation adjustment UPIIUnrealised profit in inventory arising on inter-segment transactions.Developed renewables to FIDTotal generating capacity for assets developed to FID by all entities where bphas an equity share(proportionate to equity share).If asset is subsequentlysold bp will continue to record capacity as developed to FID.If bp equityshare increases developed capacity to FID will increase proportionately toshare increase for any assets where bp held equity at the point of FID.Disposal proceedsDivestments and other proceeds as per the condensed group cash flowstatement.EBITDA/adjusted EBITDARC profit before interest and tax,excluding net adjusting items*,adding backdepreciation,depletion and amortisation and exploration write-offs(net ofadjusting items).Fair value accounting effectsReflect the difference between the way bp manages the economic exposureand internally measures performance of certain activities and the way thoseactivities are measured under IFRS.Fair value accounting effects areincluded within adjusting items.HopperRenewables hopper comprises of project opportunities from the point ofinitial evaluation until they are either stopped or become part of therenewable pipeline.HydrocarbonsLiquids and natural gas.Natural gas is converted to oil equivalent at 5.8billion cubic feet=1 million barrels.Hydrogen/low carbon hydrogenHydrogen fuel with reduced carbon attributes,including renewable(green)hydrogen made from solar,wind and hydro-electricity,and(blue)made fromnatural gas in combination with carbon capture and storage.Installed renewables capacitybps share of capacity for operating assets owned by entities where bp hasan equity share.Lease paymentsLease liability payments.Net debtCalculated as finance debt,as shown in the balance sheet,plus the fair valueof associated derivative financial instruments that are used to hedge foreigncurrency exchange and interest rate risks relating to finance debt,for whichhedge accounting is applied,less cash and cash equivalents.Net debt doesnot include accrued interest,which is reported within other receivables andother payables on the balance sheet and for which the associated cash flowsare presented as operating cash flows in the group cash flow statement.22223Q 2022 financial resultsNet zeroReferences to net zero for bp in the context of our ambition and aims 1,2 and3 mean achieving a balance between(a)the relevant Scope 1 and 2emissions(for aim 1),Scope 3 emissions(for aim 2)or product lifecycleemissions(for aim 3),and(b)the aggregate of applicable deductions fromqualifying activities such as sinks under our methodology at the applicabletime.Net zero salesbps aim to reach net zero*for the greenhouse gas emissions associated withthe lifecycle(including end use)of its marketed and physically traded*energyproducts,in accordance with bps Aim 3.Any interim target or aim in respectof bps Aim 3 is defined in terms of reductions in the weighted averagegreenhouse gas emissions per unit of energy delivered(in grams CO2e/MJ)relative to the baseline year of 2019.(Work is ongoing to confirm an assuredbaseline for this Aim to incorporate the inclusion of physically traded sales.)Greenhouse gas emissions(CO2,methane,N2O)are estimated on a lifecyclebasis covering production/extraction,transportation,processing,distributionand use of the relevant products(assuming full stoichiometric combustion ofthe product to CO2).Physically traded energy productFor the purposes of Aim 3,this includes trades in energy products which arephysically settled in circumstances where bp considers their inclusion to beconsistent with the intent of the Aim.It therefore excludes,for example,financial trades,and physical trades where the purpose or effect is that thevolumes traded net off against each other.Operating cash flowNet cash provided by(used in)operating activities as stated in the condensedgroup cash flow statement.RealisationsResult of dividing revenue generated from hydrocarbon sales,excludingrevenue generated from purchases made for resale and royalty volumes,byrevenue generating hydrocarbon production volumes.Revenue generatinghydrocarbon production reflects the bp share of production as adjusted forany production which does not generate revenue.Adjustments may includelosses due to shrinkage,amounts consumed during processing,andcontractual or regulatory host committed volumes such as royalties.For thegas&low carbon energy and oil production&operations segments,realisations include transfers between businesses.Refining availabilityRepresents Solomon Associates operational availability for bp-operatedrefineries,which is defined as the percentage of the year that a unit isavailable for processing after subtracting the annualized time lost due toturnaround activity and all planned mechanical,process and regulatorydowntime.Refining marker margin(RMM)Average of regional indicator margins weighted for bps crude refiningcapacity in each region.Each regional marker margin is based on productyields and a marker crude oil deemed appropriate for the region.The regionalindicator margins may not be representative of the margins achieved by bpin any period because of bps particular refinery configurations and crude andproduct slate.Renewables pipelineRenewable projects satisfying the following criteria until the point they canbe considered developed to final investment decision(FID):Site basedprojects that have obtained land exclusivity rights,or for PPA based projectsan offer has been made to the counterparty,or for auction projects pre-qualification criteria has been met,or for acquisition projects post a bindingoffer being accepted.Replacement cost(RC)profit or lossReflects the replacement cost of inventories sold in the period and iscalculated as profit or loss attributable to bp shareholders,adjusting forinventory holding gains and losses(net of tax).Glossary definitions23233Q 2022 financial resultsRetail sitesInclude sites operated by dealers,jobbers,franchisees or brand licensees orjoint venture(JV)partners,under the bp brand.These may move to and fromthe bp brand as their fuel supply agreement or brand licence agreementexpires and are renegotiated in the normal course of business.Retail sites areprimarily branded bp,ARCO,Amoco,Aral and Thorntons,and also includessites in India through our Jio-bp JV.Retail sites in growth marketsRetail sites that are either bp branded or co-branded with our partners inChina,Mexico and Indonesia and also include sites in India through our Jio-bpJV.Rosneft underlying RCPBITbps adjusted share of Rosnefts earnings after Rosnefts own finance costs,taxation and non-controlling interests is included in the bp group incomestatement within profit before interest and taxation.For each year-to-dateperiod it is calculated by translating the amounts reported in Russian roublesinto US dollars using the average exchange rate for the year to date.Strategic convenience sitesRetail sites,within the bp portfolio,which sell bp-branded vehicle energy(e.g.bp,Aral,ARCO,Amoco,Thorntons and Pulse)and either carry one of thestrategic convenience brands(e.g.M&S,Rewe to Go)or a differentiatedconvenience offer.To be considered a strategic convenience site,theconvenience offer should have a demonstrable level of differentiation in themarket in which it operates.Strategic convenience site count includes sitesunder a pilot phase,but excludes sites in growth markets.Surplus cash flowRefers to the net surplus of sources of cash over uses of cash,after reachingthe$35 billion net debt target.Sources of cash include net cash provided byoperating activities,cash provided from investing activities and cash receiptsrelating to transactions involving non-controlling interests.Uses of cashincludeleaseliabilitypayments,paymentson perpetualhybridbond,dividends paid,cash capital expenditure,the cash cost of share buybacks tooffset the dilution from vesting of awards under employee share schemes,cash payments relating to transactions involving non-controlling interests andcurrency translation differences relating to cash and cash equivalents aspresented on the condensed group cash flow statement.Technical service contract(TSC)An arrangement through which an oil and gas company bears the risks andcosts of exploration,development and production.In return,the oil and gascompany receives entitlement to variable physical volumes of hydrocarbons,representing recovery of the costs incurred and a profit margin whichreflects incremental production added to the oilfieldUnderlying effectivetax rate(ETR)Calculated by dividing taxation on an underlying replacement cost(RC)basisby underlying RC profit or loss before tax.Taxation on an underlying RCbasis for the group is calculated as taxation as stated on the group incomestatement adjusted for taxation on inventory holding gains and losses andtotal taxation on adjusting items.Underlying production2022 underlying production,when compared with 2021,is production afteradjusting for acquisitions and divestments,curtailments,and entitlementimpactsinourproduction-sharingagreements/contractsandtechnicalservice contract*.Underlying replacement cost profitReplacement cost profit or loss*after excluding net adjusting items andrelated taxation.Underlying replacement cost profit or loss before interest and tax(RCPBIT)Underlying RC profit or loss before interest and tax for the operatingsegments or customers&products businesses is calculated as RC profit orloss including profit or loss attributable to non-controlling interests beforeinterest and tax for the operating segments and excluding net adjustingitems for the respective operating segment or business.Unit production costsCalculated as production cost divided by units of production.Production costdoes not include ad valorem and severance taxes.Units of production arebarrels for liquids and thousands of cubic feet for gas.Amounts disclosedare for bp subsidiaries only and do not include bps share of equity-accounted entities.Glossary definitions 24243Q 2022 financial resultsWorking capitalMovements in inventories and other current and non-current assets andliabilities as reported in the condensed group cash flow statement.Change in working capital adjusted for inventory holding gains/losses and fairvalue accounting effects relating to subsidiaries is a non-GAAP measure.It iscalculated by adjusting for inventory holding gains/losses reported in theperiod and from the second quarter 2021 onwards,it is also adjusted for fairvalue accounting effects relating to subsidiaries reported within adjustingitems for the period.This represents what would have been reported asmovements in inventories and other current and non-current assets andliabilities,if the starting point in determining net cash provided by operatingactivities had been underlying replacement cost profit rather than profit for theperiod.The nearest equivalent measure on an IFRS basis for this ismovements in inventories and other current and non-current assets andliabilities.In the context of describing working capital after adjusting for Gulf ofMexico oil spill outflows,change in working capital also excludes movementsin inventories and other current and non-current assets and liabilities relating tothe Gulf of Mexico oil spill.bp utilises various arrangements in order to manage its working capitalincluding discounting of receivables and,in the supply and trading business,the active management of supplier payment terms,inventory and collateral.Glossary definitions 25253Q 2022 financial resultsBarrel(bbl)159 litres,42 US gallons.CCSCarbon,capture and storage.CCUSCarbon,capture,usage and storage.DD&ADepreciation,depletion and amortisation.EPSEarnings per share.EVElectric vehicle.FCFFree cash flow.FIDFinal investment decision.GWGigawatt.JVJoint venture.LNGLiquefied natural gas.mbdThousand barrels per day.mboedThousand barrels of oil equivalent per day.Glossary-abbreviations2626MWMegawatt.mmbtuMillion British thermal units.mtpaMillion tonnes per annum.OB&COther businesses and corporate.RCReplacement cost.SAFSustainable aviation fuel.svpSenior vice president.
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 _FORM 10-Q_(Mark One)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended September 30,2022orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to.Commission File No.000-22513_AMAZON.COM,INC.(Exact name of registrant as specified in its charter)_Delaware 91-1646860(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification No.)410 Terry Avenue North,Seattle,Washington 98109-5210(206)266-1000(Address and telephone number,including area code,of registrants principal executive offices)Securities registered pursuant to Section 12(b)of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock,par value$.01 per shareAMZNNasdaq Global Select Market_Indicate 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 past90 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 of Regulation S-Tduring the preceding 12 months(or for such shorter period that the registrant was required to submit 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 reporting company,or an emerging growthcompany.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 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).Yes No 10,201,654,176 shares of common stock,par value$0.01 per share,outstanding as of October 19,2022Table of ContentsAMAZON.COM,INC.FORM 10-QFor the Quarterly Period Ended September 30,2022INDEX PagePART I.FINANCIAL INFORMATIONItem 1.Financial Statements3Consolidated Statements of Cash Flows3Consolidated Statements of Operations4Consolidated Statements of Comprehensive Income(Loss)5Consolidated Balance Sheets6Notes to Consolidated Financial Statements7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations21Item 3.Quantitative and Qualitative Disclosures About Market Risk32Item 4.Controls and Procedures33PART II.OTHER INFORMATIONItem 1.Legal Proceedings34Item 1A.Risk Factors34Item 2.Unregistered Sales of Equity Securities and Use of Proceeds44Item 3.Defaults Upon Senior Securities44Item 4.Mine Safety Disclosures44Item 5.Other Information44Item 6.Exhibits45Signatures462Table of ContentsPART I.FINANCIAL INFORMATIONItem 1.Financial StatementsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions)(unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,Twelve Months EndedSeptember 30,202120222021202220212022CASH,CASH EQUIVALENTS,AND RESTRICTED CASH,BEGINNING OF PERIOD$40,667$37,700$42,377$36,477$30,202$30,177 OPERATING ACTIVITIES:Net income(loss)3,156 2,872 19,041(3,000)26,263 11,323 Adjustments to reconcile net income(loss)to net cash from operating activities:Depreciation and amortization of property and equipment and capitalized content costs,operating leaseassets,and other8,948 10,204 24,494 28,776 32,112 38,578 Stock-based compensation3,180 5,556 9,077 14,015 11,639 17,695 Other operating expense(income),net24 123 72 460(415)525 Other expense(income),net340(1,272)(2,374)13,521(3,701)1,589 Deferred income taxes909(825)3,313(4,781)1,677(8,404)Changes in operating assets and liabilities:Inventories(7,059)732(7,572)(5,772)(7,242)(7,687)Accounts receivable,net and other(4,890)(4,794)(11,607)(13,109)(16,168)(19,665)Accounts payable3,832(1,226)(4,387)(6,907)8,863 1,082 Accrued expenses and other(1,465)(20)(7,210)(7,335)(84)1,998 Unearned revenue338 54 1,394 1,711 1,727 2,631 Net cash provided by(used in)operating activities7,313 11,404 24,241 17,579 54,671 39,665 INVESTING ACTIVITIES:Purchases of property and equipment(15,748)(16,378)(42,118)(47,053)(56,941)(65,988)Proceeds from property and equipment sales and incentives997 1,337 3,192 4,172 4,822 6,637 Acquisitions,net of cash acquired,and other(654)(885)(1,604)(7,485)(1,985)(7,866)Sales and maturities of marketable securities15,808 557 46,847 25,918 64,185 38,455 Purchases of marketable securities(15,231)(239)(51,891)(2,332)(72,692)(10,598)Net cash provided by(used in)investing activities(14,828)(15,608)(45,574)(26,780)(62,611)(39,360)FINANCING ACTIVITIES:Common stock repurchased(6,000)(6,000)Proceeds from short-term debt,and other2,187 12,338 5,289 30,946 7,724 33,613 Repayments of short-term debt,and other(1,917)(7,916)(5,094)(21,757)(7,385)(24,416)Proceeds from long-term debt176 107 18,803 12,931 19,334 13,131 Repayments of long-term debt(509)(589)(1)(703)(1,002)Principal repayments of finance leases(2,693)(1,465)(8,903)(6,301)(11,271)(8,561)Principal repayments of financing obligations(20)(48)(115)(186)(124)(233)Net cash provided by(used in)financing activities(2,776)3,016 9,391 9,632 7,575 6,532 Foreign currency effect on cash,cash equivalents,and restricted cash(199)(1,334)(258)(1,730)340(1,836)Net increase(decrease)in cash,cash equivalents,and restricted cash(10,490)(2,522)(12,200)(1,299)(25)5,001 CASH,CASH EQUIVALENTS,AND RESTRICTED CASH,END OF PERIOD$30,177$35,178$30,177$35,178$30,177$35,178 See accompanying notes to consolidated financial statements.3Table of ContentsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in millions,except per share data)(unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Net product sales$54,876$59,340$170,371$172,370 Net service sales55,936 67,761 162,039 192,409 Total net sales110,812 127,101 332,410 364,779 Operating expenses:Cost of sales62,930 70,268 189,509 203,191 Fulfillment18,498 20,583 52,666 61,196 Technology and content14,380 19,485 40,739 52,399 Sales and marketing8,010 11,014 21,741 29,420 General and administrative2,153 3,061 6,298 8,558 Other operating expense(income),net(11)165 38 504 Total operating expenses105,960 124,576 310,991 355,268 Operating income4,852 2,525 21,419 9,511 Interest income119 277 330 544 Interest expense(493)(617)(1,327)(1,673)Other income(expense),net(163)759 2,795(13,356)Total non-operating income(expense)(537)419 1,798(14,485)Income(loss)before income taxes4,315 2,944 23,217(4,974)Benefit(provision)for income taxes(1,155)(69)(4,179)1,990 Equity-method investment activity,net of tax(4)(3)3(16)Net income(loss)$3,156$2,872$19,041$(3,000)Basic earnings per share$0.31$0.28$1.88$(0.29)Diluted earnings per share$0.31$0.28$1.85$(0.29)Weighted-average shares used in computation of earnings per share:Basic10,132 10,191 10,103 10,178 Diluted10,309 10,331 10,287 10,178 See accompanying notes to consolidated financial statements.4Table of ContentsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS)(in millions)(unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Net income(loss)$3,156$2,872$19,041$(3,000)Other comprehensive income(loss):Foreign currency translation adjustments,net of tax of$39,$76,$35,and$136(537)(2,142)(752)(4,661)Net change in unrealized gains(losses)on available-for-sale debtsecurities:Unrealized gains(losses),net of tax of$3,$(4),$31,and$(3)(5)(195)(109)(1,095)Reclassification adjustment for losses(gains)included in“Otherincome(expense),net,”net of tax of$5,$0,$13,and$0(8)4(34)17 Net unrealized gains(losses)on available-for-sale debt securities(13)(191)(143)(1,078)Total other comprehensive income(loss)(550)(2,333)(895)(5,739)Comprehensive income(loss)$2,606$539$18,146$(8,739)See accompanying notes to consolidated financial statements.5Table of ContentsAMAZON.COM,INC.CONSOLIDATED BALANCE SHEETS(in millions,except per share data)December 31,2021September 30,2022(unaudited)ASSETSCurrent assets:Cash and cash equivalents$36,220$34,947 Marketable securities59,829 23,715 Inventories32,640 36,647 Accounts receivable,net and other32,891 36,154 Total current assets161,580 131,463 Property and equipment,net160,281 177,195 Operating leases56,082 62,033 Goodwill15,371 20,168 Other assets27,235 37,503 Total assets$420,549$428,362 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable$78,664$67,760 Accrued expenses and other51,775 59,974 Unearned revenue11,827 12,629 Total current liabilities142,266 140,363 Long-term lease liabilities67,651 69,332 Long-term debt48,744 58,919 Other long-term liabilities23,643 22,259 Commitments and contingencies(Note 4)Stockholders equity:Preferred stock($0.01 par value;500 shares authorized;no shares issued or outstanding)Common stock($0.01 par value;100,000 shares authorized;10,644 and 10,714 shares issued;10,175 and10,198 shares outstanding)106 107 Treasury stock,at cost(1,837)(7,837)Additional paid-in capital55,437 69,419 Accumulated other comprehensive income(loss)(1,376)(7,115)Retained earnings85,915 82,915 Total stockholders equity138,245 137,489 Total liabilities and stockholders equity$420,549$428,362 See accompanying notes to consolidated financial statements.6Table of ContentsAMAZON.COM,INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 1 ACCOUNTING POLICIES AND SUPPLEMENTAL DISCLOSURESUnaudited Interim Financial InformationWe have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission(the“SEC”)for interim financial reporting.These consolidated financial statements are unaudited and,in our opinion,include all adjustments,consisting ofnormal recurring adjustments and accruals necessary for a fair presentation of our consolidated cash flows,operating results,and balance sheets for the periodspresented.Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2022 due to seasonal and otherfactors.Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generallyaccepted in the United States(“GAAP”)have been omitted in accordance with the rules and regulations of the SEC.These consolidated financial statementsshould be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II,“Financial Statements andSupplementary Data,”of our 2021 Annual Report on Form 10-K.Common Stock SplitOn May 27,2022,we effected a 20-for-1 stock split of our common stock and proportionately increased the number of authorized shares of commonstock.All share,restricted stock unit(“RSU”),and per share or per RSU information throughout this Quarterly Report on Form 10-Q has been retroactivelyadjusted to reflect the stock split.The shares of common stock retain a par value of$0.01 per share.Accordingly,an amount equal to the par value of theincreased shares resulting from the stock split was reclassified from“Additional paid-in capital”to“Common stock.”Principles of ConsolidationThe consolidated financial statements include the accounts of A,Inc.and its consolidated entities(collectively,the“Company”),consisting ofits wholly-owned subsidiaries and those entities in which we have a variable interest and of which we are the primary beneficiary,including certain entities inIndia and certain entities that support our seller lending financing activities.Intercompany balances and transactions between consolidated entities areeliminated.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets andliabilities,revenues and expenses,and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes.Estimatesare used for,but not limited to,income taxes,useful lives of equipment,commitments and contingencies,valuation of acquired intangibles and goodwill,stock-based compensation forfeiture rates,vendor funding,inventory valuation,collectability of receivables,impairment of property and equipment and operatingleases,and valuation and impairment of investments.Actual results could differ materially from these estimates.We review the useful lives of equipment on an ongoing basis,and effective January 1,2022 we changed our estimate of the useful lives for our serversfrom four to five years and for our networking equipment from five to six years.The longer useful lives are due to continuous improvements in our hardware,software,and data center designs.The effect of this change in estimate for Q3 2022,based on servers and networking equipment that were included in“Property and equipment,net”as of June 30,2022 and those acquired during the three months ended September 30,2022,was a reduction in depreciation andamortization expense of$882 million and a benefit to net income of$665 million,or$0.07 per basic share and$0.06 per diluted share.The effect of thischange in estimate for the nine months ended September 30,2022,based on servers and networking equipment that were included in“Property and equipment,net”as of December 31,2021 and those acquired during the nine months ended September 30,2022,was a reduction in depreciation and amortization expenseof$2.8 billion and a benefit to net loss of$2.2 billion,or$0.21 per basic share and$0.21 per diluted share.7Table of ContentsSupplemental Cash Flow InformationThe following table shows supplemental cash flow information(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,Twelve Months EndedSeptember 30,202120222021202220212022SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest on debt$276$304$731$932$933$1,299 Cash paid for operating leases1,812 1,813 5,029 6,268 6,230 7,961 Cash paid for interest on finance leases121 88 407 290 535 404 Cash paid for interest on financing obligations48 39 116 152 147 189 Cash paid for income taxes,net of refunds750 742 3,354 4,340 3,774 4,674 Assets acquired under operating leases10,447 6,755 19,561 14,031 23,908 19,839 Property and equipment acquired under finance leases,net of remeasurements andmodifications1,744 131 5,453 358 8,149 1,966 Property and equipment recognized during the construction period of build-to-suitlease arrangements1,797 526 3,877 2,877 4,916 4,847 Property and equipment derecognized after the construction period of build-to-suitlease arrangements,with the associated leases recognized as operating76 2,195 174 3,307 174 3,363 Earnings Per ShareBasic earnings per share is calculated using our weighted-average outstanding common shares.Diluted earnings per share is calculated using ourweighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method.In periods when wehave a net loss,stock awards are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect.The following table shows the calculation of diluted shares(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Shares used in computation of basic earnings per share10,132 10,191 10,103 10,178 Total dilutive effect of outstanding stock awards177 140 184 Shares used in computation of diluted earnings per share10,309 10,331 10,287 10,178 Other Income(Expense),NetOther income(expense),net,is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Marketable equity securities valuation gains(losses)$(129)$1,039$(48)$(11,528)Equity warrant valuation gains(losses)(50)(170)1,194(1,606)Upward adjustments relating to equity investments in private companies155 11 1,661 76 Foreign currency gains(losses)(107)(103)(28)(206)Other,net(32)(18)16(92)Total other income(expense),net(163)759 2,795(13,356)Included in other income(expense),net is a marketable equity securities valuation gain(loss)of$1.1 billion in Q3 2022,and$(10.4)billion for the ninemonths ended September 30,2022,from our equity investment in Rivian Automotive,Inc.(“Rivian”).Our investment in Rivians preferred stock wasaccounted for at cost,with adjustments for observable changes in prices or impairments,prior to Rivians initial public offering in November 2021,whichresulted in the conversion of our preferred stock to Class A common stock.As of September 30,2022,we held 158 million shares of Rivians Class A commonstock,representing an approximate 17%ownership interest,and an approximate 16%voting interest.We determined that we have the ability to exercisesignificant influence over Rivian through our equity investment,our commercial arrangement for the purchase of electric vehicles,and one of our employeesserving on Rivians board of directors.We elected the fair value8Table of Contentsoption to account for our equity investment in Rivian,which is included in“Marketable securities”on our consolidated balance sheets.Required summarized financial information of Rivian as disclosed in its most recent SEC filings is as follows(in millions):Six Months Ended June 30,20212022Revenues$459 Gross profit(1,206)Loss from operations(990)(3,287)Net loss(994)(3,305)InventoriesInventories,consisting of products available for sale,are primarily accounted for using the first-in,first-out method,and are valued at the lower of costand net realizable value.This valuation requires us to make judgments,based on currently available information,about the likely method of disposition,suchas through sales to individual customers,returns to product vendors,or liquidations,and expected recoverable values of each disposition category.Theinventory valuation allowance,representing a write-down of inventory,was$2.6 billion and$2.3 billion as of December 31,2021 and September 30,2022.Accounts Receivable,Net and OtherIncluded in“Accounts receivable,net and other”on our consolidated balance sheets are amounts primarily related to customers,vendors,and sellers.Asof December 31,2021 and September 30,2022,customer receivables,net,were$20.2 billion and$22.8 billion,vendor receivables,net,were$5.3 billion and$4.9 billion,and seller receivables,net,were$1.0 billion and$1.4 billion.Seller receivables are amounts due from sellers related to our seller lending program,which provides funding to sellers primarily to procure inventory.We estimate losses on receivables based on expected losses,including our historical experience of actual losses.The allowance for doubtful accounts was$1.1 billion and$1.3 billion as of December 31,2021 and September 30,2022.Digital Video and Music ContentThe total capitalized costs of video,which is primarily released content,and music as of December 31,2021 and September 30,2022 were$10.7 billionand$16.3 billion.Total video and music expense was$3.3 billion and$4.2 billion in Q3 2021 and Q3 2022,and$9.4 billion and$11.4 billion for the ninemonths ended September 30,2021 and 2022.Unearned RevenueUnearned revenue is recorded when payments are received or due in advance of performing our service obligations and is recognized over the serviceperiod.Unearned revenue primarily relates to prepayments of AWS services and Amazon Prime memberships.Our total unearned revenue as of December 31,2021 was$14.0 billion,of which$10.1 billion was recognized as revenue during the nine months ended September 30,2022.Included in“Other long-termliabilities”on our consolidated balance sheets was$2.2 billion and$2.7 billion of unearned revenue as of December 31,2021 and September 30,2022.Additionally,we have performance obligations,primarily related to AWS,associated with commitments in customer contracts for future services thathave not yet been recognized in our consolidated financial statements.For contracts with original terms that exceed one year,those commitments not yetrecognized were$104.3 billion as of September 30,2022.The weighted-average remaining life of our long-term contracts is 3.8 years.However,the amountand timing of revenue recognition is largely driven by customer usage,which can extend beyond the original contractual term.Acquisition ActivityOn March 17,2022,we acquired MGM Holdings Inc.(“MGM”),for cash consideration of approximately$6.1 billion,net of cash acquired,to providemore digital media content options for customers.We also assumed$2.5 billion of debt,which we repaid immediately after closing.The acquired assetsprimarily consist of$3.4 billion of video content and$4.9 billion of goodwill,the majority of which is allocated to our North America segment.Pro forma results of operations have not been presented because the effects of the MGM acquisition were not material to our consolidated results ofoperations.Acquisition-related costs were expensed as incurred and were not significant.9Table of ContentsNote 2 FINANCIAL INSTRUMENTSCash,Cash Equivalents,Restricted Cash,and Marketable SecuritiesAs of December 31,2021 and September 30,2022,our cash,cash equivalents,restricted cash,and marketable securities primarily consisted of cash,AAA-rated money market funds,U.S.and foreign government and agency securities,other investment grade securities,and marketable equity securities.Cashequivalents and marketable securities are recorded at fair value.Fair value is defined as the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at the measurement date.To increase the comparability of fair value measures,the followinghierarchy prioritizes the inputs to valuation methodologies used to measure fair value:Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.Level 2Valuations based on observable inputs other than quoted prices included in Level 1,such as quoted prices for similar assets and liabilities inactive markets,quoted prices for identical or similar assets and liabilities in markets that are not active,or other inputs that are observable or can becorroborated by observable market data.Level 3Valuations based on unobservable inputs reflecting our own assumptions,consistent with reasonably available assumptions made by othermarket participants.These valuations require significant judgment.We measure the fair value of money market funds and certain marketable equity securities based on quoted prices in active markets for identical assets orliabilities.Other marketable securities were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similarinstruments and other significant inputs derived from or corroborated by observable market data.We did not hold significant amounts of marketable securitiescategorized as Level 3 assets as of December 31,2021 and September 30,2022.The following table summarizes,by major security type,our cash,cash equivalents,restricted cash,and marketable securities that are measured at fairvalue on a recurring basis and are categorized using the fair value hierarchy(in millions):December 31,2021September 30,2022 TotalEstimatedFair ValueCost orAmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesTotalEstimatedFair ValueCash$10,942$10,720$10,720 Level 1 securities:Money market funds20,312 16,697 16,697 Equity securities(1)(3)1,646 5,988 Level 2 securities:Foreign government and agency securities181 141(2)139 U.S.government and agency securities4,300 2,301(169)2,132 Corporate debt securities35,764 20,229(799)19,430 Asset-backed securities6,738 3,578(191)3,387 Other fixed income securities686 403(22)381 Equity securities(1)(3)15,740 19$96,309$54,069$(1,183)$58,893 Less:Restricted cash,cash equivalents,and marketablesecurities(2)(260)(231)Total cash,cash equivalents,and marketable securities$96,049$58,662 _(1)The related unrealized gain(loss)recorded in“Other income(expense),net”was$(116)million and$1.0 billion in Q3 2021 and Q3 2022,and$6 millionand$(11.3)billion for the nine months ended September 30,2021 and 2022.(2)We are required to pledge or otherwise restrict a portion of our cash,cash equivalents,and marketable fixed income securities primarily as collateral forreal estate,amounts due to third-party sellers in certain jurisdictions,debt,and standby and trade letters of credit.We classify cash,cash equivalents,andmarketable fixed income securities with use restrictions of less than twelve months as“Accounts receivable,net and other”and of twelve months or longeras non-current“Other assets”on our consolidated balance sheets.See“Note 4 Commitments and Contingencies.”(3)Our equity investment in Rivian had a fair value of$15.6 billion and$5.2 billion as of December 31,2021 and September 30,2022,respectively.Theinvestment was subject to regulatory sales restrictions resulting in a discount for lack of marketability of approximately$800 million as of December 31,2021,which expired in Q1 2022.10Table of ContentsThe following table summarizes the remaining contractual maturities of our cash equivalents and marketable fixed income securities as of September 30,2022(in millions):AmortizedCostEstimatedFair ValueDue within one year$26,797$26,738 Due after one year through five years13,757 12,807 Due after five years through ten years772 728 Due after ten years2,023 1,893 Total$43,349$42,166 Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.Equity Warrants and Non-Marketable Equity InvestmentsWe hold equity warrants giving us the right to acquire stock of other companies.As of December 31,2021 and September 30,2022,these warrants had afair value of$3.4 billion and$2.5 billion,and are recorded within“Other assets”on our consolidated balance sheets with gains and losses recognized in“Otherincome(expense),net”on our consolidated statements of operations.These warrants are primarily classified as Level 2 assets.As of December 31,2021 and September 30,2022,equity investments not accounted for under the equity-method and without readily determinable fairvalues had a carrying value of$603 million and$831 million,and are recorded within“Other assets”on our consolidated balance sheets with adjustmentsrecognized in“Other income(expense),net”on our consolidated statements of operations.Consolidated Statements of Cash Flows ReconciliationThe following table provides a reconciliation of the amount of cash,cash equivalents,and restricted cash reported within the consolidated balance sheetsto the total of the same such amounts shown in the consolidated statements of cash flows(in millions):December 31,2021September 30,2022Cash and cash equivalents$36,220$34,947 Restricted cash included in accounts receivable,net and other242 224 Restricted cash included in other assets15 7 Total cash,cash equivalents,and restricted cash shown in the consolidated statements of cash flows$36,477$35,178 Note 3 LEASESWe have entered into non-cancellable operating and finance leases for fulfillment,delivery,office,physical store,data center,and sortation facilities aswell as server and networking equipment,vehicles,and aircraft.Gross assets acquired under finance leases,inclusive of those where title transfers at the end ofthe lease,are recorded in“Property and equipment,net”and were$72.2 billion and$66.6 billion as of December 31,2021 and September 30,2022.Accumulated amortization associated with finance leases was$43.4 billion as of December 31,2021 and September 30,2022.Lease cost recognized in our consolidated statements of operations is summarized as follows(in millions):Three Months Ended September 30,Nine Months Ended September 30,2021202220212022Operating lease cost$1,911$2,236$5,129$6,472 Finance lease cost:Amortization of lease assets2,497 1,496 7,442 4,586 Interest on lease liabilities114 85 365 280 Finance lease cost2,611 1,581 7,807 4,866 Variable lease cost372 462 1,135 1,402 Total lease cost$4,894$4,279$14,071$12,740 11Table of ContentsOther information about lease amounts recognized in our consolidated financial statements is as follows:December 31,2021September 30,2022Weighted-average remaining lease term operating leases11.3 years11.4 yearsWeighted-average remaining lease term finance leases8.1 years9.8 yearsWeighted-average discount rate operating leases2.2%2.6%Weighted-average discount rate finance leases2.0%2.3%Our lease liabilities were as follows(in millions):December 31,2021 Operating LeasesFinance LeasesTotalGross lease liabilities$66,269$25,866$92,135 Less:imputed interest(7,939)(2,113)(10,052)Present value of lease liabilities58,330 23,753 82,083 Less:current portion of lease liabilities(6,349)(8,083)(14,432)Total long-term lease liabilities$51,981$15,670$67,651 September 30,2022 Operating LeasesFinance LeasesTotalGross lease liabilities$75,495$18,838$94,333 Less:imputed interest(10,712)(2,207)(12,919)Present value of lease liabilities64,783 16,631 81,414 Less:current portion of lease liabilities(7,046)(5,036)(12,082)Total long-term lease liabilities$57,737$11,595$69,332 12Table of ContentsNote 4 COMMITMENTS AND CONTINGENCIESCommitmentsThe following summarizes our principal contractual commitments,excluding open orders for purchases that support normal operations and are generallycancellable,as of September 30,2022(in millions):Three MonthsEnded December31,Year Ended December 31,20222023202420252026ThereafterTotalLong-term debt principal and interest$1,886$4,789$8,993$5,995$4,563$67,529$93,755 Operating lease liabilities2,664 8,380 7,918 7,327 6,747 42,459 75,495 Finance lease liabilities,including interest1,616 4,523 2,137 1,345 1,188 8,029 18,838 Financing obligations,including interest(1)115 462 462 456 463 7,177 9,135 Leases not yet commenced213 1,562 2,158 2,126 2,153 19,497 27,709 Unconditional purchase obligations(2)1,721 7,102 6,296 4,984 4,335 9,405 33,843 Other commitments(3)(4)1,191 2,485 1,586 1,006 1,063 9,716 17,047 Total commitments$9,406$29,303$29,550$23,239$20,512$163,812$275,822 _(1)Includes non-cancellable financing obligations for fulfillment,sortation,and data center facilities.Excluding interest,current financing obligations of$196million and$254 million are recorded within“Accrued expenses and other”and$6.2 billion and$6.7 billion are recorded within“Other long-termliabilities”as of December 31,2021 and September 30,2022.The weighted-average remaining term of the financing obligations was 18.8 years and 18.2years and the weighted-average imputed interest rate was 3.2%as of December 31,2021 and September 30,2022.(2)Includes unconditional purchase obligations related to long-term agreements to acquire and license digital media content that are not reflected on theconsolidated balance sheets and certain products offered in our Whole Foods Market stores.For those digital media content agreements with variableterms,we do not estimate the total obligation beyond any minimum quantities and/or pricing as of the reporting date.Purchase obligations associated withrenewal provisions solely at the option of the content provider are included to the extent such commitments are fixed or a minimum amount is specified.(3)Includes asset retirement obligations,the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit leasearrangements that are under construction,and liabilities associated with digital media content agreements with initial terms greater than one year.(4)Excludes approximately$3.4 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period ofpayment,if any.In addition,we are paying the previously disclosed 1.13 billion fine imposed by the Italian Competition Authority in December 2021,which we willseek to recover pending conclusion of all appeals.In July 2022,we entered into an agreement to acquire 1Life Healthcare,Inc.(One Medical)for approximately$3.9 billion,including its debt,subject tocustomary closing conditions.In August 2022,we entered into an agreement to acquire iRobot Corporation for approximately$1.7 billion,including its debt,subject to customary closing conditions.We expect to fund these acquisitions with cash on hand.Other ContingenciesWe are disputing claims and denials of refunds or credits related to various non-income taxes(such as sales,value added,consumption,service,andsimilar taxes),including in jurisdictions in which we already collect and remit these taxes.These non-income tax controversies typically relate to(i)thetaxability of products and services,including cross-border intercompany transactions,(ii)collection and withholding on transactions with third parties,and(iii)the adequacy of compliance with reporting obligations,including evolving documentation requirements.Due to the inherent complexity and uncertainty ofthese matters and the judicial and regulatory processes in certain jurisdictions,the final outcome of any such controversies may be materially different from ourexpectations.13Table of ContentsLegal ProceedingsThe Company is involved from time to time in claims,proceedings,and litigation,including the matters described in Item 8 of Part II,“FinancialStatements and Supplementary Data Note 7 Commitments and Contingencies Legal Proceedings”of our 2021 Annual Report on Form 10-K and inItem 1 of Part I,“Financial Statements Note 4 Commitments and Contingencies Legal Proceedings”of our Quarterly Reports on Form 10-Q for theperiods ended March 31,2022 and June 30,2022,as supplemented by the following:Beginning in March 2020,with Frame-Wilson v.A,Inc.filed in the United States District Court for the Western District of Washington,private litigants have filed a number of cases in the U.S.and Canada alleging,among other things,price fixing arrangements between A,Inc.andvendors and third-party sellers in Amazons stores,monopolization and attempted monopolization,and consumer protection and unjust enrichment claims.Attorneys General for the District of Columbia and California brought similar suits in May 2021 and September 2022 in the Superior Court of the District ofColumbia and the California Superior Court for the County of San Francisco,respectively.Some of the private cases include allegations of several distinctpurported classes,including consumers who purchased a product through Amazons stores and consumers who purchased a product offered by Amazonthrough another e-commerce retailer.The complaints seek billions of dollars of alleged actual damages,treble damages,punitive damages,injunctive relief,civil penalties,attorneys fees,and costs.In March 2022,the court in the Frame-Wilson case granted Amazons motion to dismiss claims alleging thatAmazons pricing policies are inherently illegal under federal law and claims alleging competition and consumer protection violations under state law,anddenied Amazons motion to dismiss claims alleging that Amazons pricing policies are an unlawful restraint of trade under federal law.In the same month,theDC Superior Court dismissed the DC Attorney Generals lawsuit in its entirety;the dismissal is subject to appeal.We dispute the allegations of wrongdoing andintend to defend ourselves vigorously in these matters.In October 2020,BroadbandiTV,Inc.filed a complaint against A,Inc.,A Services LLC,and Amazon Web Services,Inc.in theUnited States District Court for the Western District of Texas.The complaint alleges,among other things,that certain Amazon Prime Video features andservices infringe U.S.Patent Nos.9,648,388,10,546,750,and 10,536,751,each entitled“Video-On-Demand Content Delivery System For Providing Video-On-Demand Services To TV Services Subscribers”;10,028,026,entitled“System For Addressing On-Demand TV Program Content On TV Services PlatformOf A Digital TV Services Provider”;and 9,973,825,entitled“Dynamic Adjustment Of Electronic Program Guide Displays Based On Viewer Preferences ForMinimizing Navigation In VOD Program Selection.”The complaint seeks an unspecified amount of damages.In April 2022,BroadbandiTV alleged in itsdamages report that,in the event of a finding of liability,A,Inc.,A Services LLC,and Amazon Web Services,Inc.could be subject to$166-$986 million in damages.In September 2022,the court granted summary judgment,holding that the patents are invalid.This decision is subject to appeal.We dispute the allegations of wrongdoing and will continue to defend ourselves vigorously in this matter.In January 2022,VideoLabs,Inc.and VL Collective IP LLC filed a complaint against A,Inc.and Amazon Web Services,Inc.in the UnitedStates District Court for the Western District of Texas.The complaint alleges,among other things,that Amazon Prime Video,Amazon Glow,Amazon EchoShow,Fire TV,Fire TV Cube,Fire TV Stick,Fire Tablets,AWS Elemental MediaConvert,AWS Elemental Live,AWS Elemental Server,AWS ElementalMediaPackage,AWS Elemental MediaLive,and Amazon Elastic Transcoder infringe U.S.Patent Nos.7,769,238 and 8,139,878;both entitled“Picture CodingMethod and Picture Decoding Method”,and 7,970,059,entitled“Variable Length Coding Method and Variable Length Decoding Method”;that Amazon PrimeVideo,AWS Elemental MediaConvert,AWS Elemental Live,AWS Elemental Server,AWS Elemental MediaPackage,AWS Elemental MediaLive,AmazonElastic Transcoder,and Amazon Kinesis Video Streams infringe U.S.Patent No.8,605,794,entitled“Method for Synchronizing Content-Dependent DataSegments of Files”;that Amazon Echo Show,Amazon Echo Spot,Amazon Connect,Amazon Chime,and Amazon Kinesis Video Streams infringe U.S.PatentNo.7,266,682,entitled“Method and System for Transmitting Data from a Transmitter to a Receiver and Transmitter and Receiver Therefore”;that AWS AutoScaling and Amazon EC2 Auto Scaling infringe U.S.Patent No.6,880,156,entitled“Demand Responsive Method and Apparatus to Automatically ActivateSpare Servers”;and that Amazon Prime Video infringes U.S.Patent No.7,440,559,entitled“System and Associated Terminal,Method and Computer ProgramProduct for Controlling the Flow of Content.”The complaint seeks an unspecified amount of damages,enhanced damages,attorneys fees,costs,interest,andinjunctive relief.In October 2022,the case was transferred to the United States District Court for the Western District of Washington.We dispute theallegations of wrongdoing and intend to defend ourselves vigorously in this matter.In addition,we are regularly subject to claims,litigation,and other proceedings,including potential regulatory proceedings,involving patent and otherintellectual property matters,taxes,labor and employment,competition and antitrust,privacy and data protection,consumer protection,commercial disputes,goods and services offered by us and by third parties,and other matters.The outcomes of our legal proceedings and other contingencies are inherently unpredictable,subject to significant uncertainties,and could be material toour operating results and cash flows for a particular period.We evaluate,on a regular14Table of Contentsbasis,developments in our legal proceedings and other contingencies that could affect the amount of liability,including amounts in excess of any previousaccruals and reasonably possible losses disclosed,and make adjustments and changes to our accruals and disclosures as appropriate.For the matters wedisclose that do not include an estimate of the amount of loss or range of losses,such an estimate is not possible or is immaterial,and we may be unable toestimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies.Until the final resolution of suchmatters,if any of our estimates and assumptions change or prove to have been incorrect,we may experience losses in excess of the amounts recorded,whichcould have a material effect on our business,consolidated financial position,results of operations,or cash flows.See also“Note 7 Income Taxes.”Note 5 DEBTAs of September 30,2022,we had$62.5 billion of unsecured senior notes outstanding(the“Notes”),including$12.8 billion issued in April 2022 forgeneral corporate purposes,and$1.0 billion of borrowings under our credit facility.Our total long-term debt obligations are as follows(in millions):Maturities(1)Stated Interest RatesEffective Interest RatesDecember 31,2021September 30,20222012 Notes issuance of$3.0 billion20222.50%2.66%1,250 1,250 2014 Notes issuance of$6.0 billion2024-20443.80%-4.95%3.90%-5.12%4,000 4,000 2017 Notes issuance of$17.0 billion2023-20572.40%-5.20%2.56%-4.33,000 16,000 2020 Notes issuance of$10.0 billion2023-20600.40%-2.70%0.56%-2.77,000 10,000 2021 Notes issuance of$18.5 billion2023-20610.25%-3.25%0.35%-3.31,500 18,500 2022 Notes Issuance of$12.8 billion2024-20622.73%-4.10%2.83%-4.15,750 Credit Facility803 1,041 Total face value of long-term debt50,553 63,541 Unamortized discount and issuance costs,net(318)(375)Less:current portion of long-term debt(1,491)(4,247)Long-term debt$48,744$58,919 _(1)The weighted-average remaining lives of the 2012,2014,2017,2020,2021,and 2022 Notes were 0.2,12.8,14.5,17.0,13.6,and 13.5 years as ofSeptember 30,2022.The combined weighted-average remaining life of the Notes was 14.0 years as of September 30,2022.Interest on the Notes is payable semi-annually in arrears.We may redeem the Notes at any time in whole,or from time to time,in part at specifiedredemption prices.We are not subject to any financial covenants under the Notes.The estimated fair value of the Notes was approximately$53.3 billion and$53.7 billion as of December 31,2021 and September 30,2022,which is based on quoted prices for our debt as of those dates.We have a$1.5 billion secured revolving credit facility with a lender that is secured by certain seller receivables,which we increased from$1.0 billion to$1.5 billion in August 2022 and we may from time to time increase in the future subject to lender approval(the“Credit Facility”).The Credit Facility isavailable until August 2025,bears interest based on the daily Secured Overnight Financing Rate plus 1.25%,and has a commitment fee of up to 0.45%on theundrawn portion.There were$803 million and$1.0 billion of borrowings outstanding under the Credit Facility as of December 31,2021 and September 30,2022,which had a weighted-average interest rate of 2.7%.As of December 31,2021 and September 30,2022,we have pledged$918 million and$1.2 billionof our cash and seller receivables as collateral for debt related to our Credit Facility.The estimated fair value of the Credit Facility,which is based on Level 2inputs,approximated its carrying value as of December 31,2021 and September 30,2022.We have U.S.Dollar and Euro commercial paper programs(the“Commercial Paper Programs”)under which we may from time to time issue unsecuredcommercial paper up to a total of$20.0 billion(including up to 3.0 billion)at the date of issue,with individual maturities that may vary but will not exceed397 days from the date of issue.In March 2022,we increased the size of the Commercial Paper Programs from$10.0 billion to$20.0 billion.There were$725million and$11.7 billion of borrowings outstanding under the Commercial Paper Programs as of December 31,2021 and September 30,2022,which wereincluded in“Accrued expenses and other”on our consolidated balance sheets and had a weighted-average effective interest rate,including issuance costs,of0.08%and 2.54%,respectively.We use the net proceeds from the issuance of commercial paper for general corporate purposes.15Table of ContentsWe also have a$10.0 billion unsecured revolving credit facility with a syndicate of lenders(the“Credit Agreement”),which was amended and restated inMarch 2022 to increase the borrowing capacity from$7.0 billion to$10.0 billion and to extend the term to March 2025.It may be extended for up to threeadditional one-year terms if approved by the lenders.The interest rate applicable to outstanding balances under the Credit Agreement is the applicablebenchmark rate specified in the Credit Agreement plus 0.45%,with a commitment fee of 0.03%on the undrawn portion of the credit facility.There were noborrowings outstanding under the Credit Agreement as of December 31,2021 and September 30,2022.We also utilize other short-term credit facilities for working capital purposes.There were$318 million and$1.1 billion of borrowings outstanding underthese facilities as of December 31,2021 and September 30,2022,which were included in“Accrued expenses and other”on our consolidated balance sheets.Inaddition,we had$10.0 billion of unused letters of credit as of September 30,2022.Note 6 STOCKHOLDERS EQUITYStock Repurchase ActivityIn March 2022,the Board of Directors authorized a program to repurchase up to$10.0 billion of our common stock,with no fixed expiration,whichreplaced the previous$5.0 billion stock repurchase authorization,approved by the Board of Directors in February 2016.We repurchased 46.2 million shares ofour common stock for$6.0 billion during the nine months ended September 30,2022 under these programs.As of September 30,2022,we have$6.1 billionremaining under the repurchase program.Stock Award ActivityCommon shares outstanding plus shares underlying outstanding stock awards totaled 10.5 billion and 10.6 billion as of December 31,2021 andSeptember 30,2022.These totals include all vested and unvested stock awards outstanding,including those awards we estimate will be forfeited.Stock-basedcompensation expense is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Cost of sales$126$190$361$549 Fulfillment473 727 1,381 1,988 Technology and content1,627 3,036 4,742 7,495 Sales and marketing657 1,128 1,804 2,783 General and administrative297 475 789 1,200 Total stock-based compensation expense$3,180$5,556$9,077$14,015 The following table summarizes our restricted stock unit activity for the nine months ended September 30,2022(in millions):Number of UnitsWeighted-AverageGrant-DateFair ValueOutstanding as of December 31,2021279.9$134 Units granted224.1 150 Units vested(69.1)109 Units forfeited(35.6)143 Outstanding as of September 30,2022399.3 147 Scheduled vesting for outstanding restricted stock units as of September 30,2022,is as follows(in millions):Three MonthsEnded December 31,Year Ended December 31,20222023202420252026ThereafterTotalScheduled vesting restricted stock units44.0 137.2 133.0 56.5 24.7 3.9 399.3 As of September 30,2022,there was$26.9 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements.This compensation is recognized on an accelerated basis with more than half of the compensation expected to be expensed in the next twelve months,and has aremaining weighted-average recognition period of 1.1 years.The16Table of Contentsestimated forfeiture rate as of December 31,2021 and September 30,2022 was 27%and 26%.Changes in our estimates and assumptions relating to forfeituresmay cause us to realize material changes in stock-based compensation expense in the future.Changes in Stockholders EquityThe following table shows changes in stockholders equity(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Total beginning stockholders equity$114,803$131,402$93,404$138,245 Beginning common stock106 107 105 106 Stock-based compensation and issuance of employee benefit plan stock 1 1 Ending common stock106 107 106 107 Beginning treasury stock(1,837)(7,837)(1,837)(1,837)Common stock repurchased(6,000)Ending treasury stock(1,837)(7,837)(1,837)(7,837)Beginning additional paid-in capital48,623 63,871 42,765 55,437 Stock-based compensation and issuance of employee benefit plan stock3,155 5,548 9,013 13,982 Ending additional paid-in capital51,778 69,419 51,778 69,419 Beginning accumulated other comprehensive income(loss)(525)(4,782)(180)(1,376)Other comprehensive income(loss)(550)(2,333)(895)(5,739)Ending accumulated other comprehensive income(loss)(1,075)(7,115)(1,075)(7,115)Beginning retained earnings68,436 80,043 52,551 85,915 Net income(loss)3,156 2,872 19,041(3,000)Ending retained earnings71,592 82,915 71,592 82,915 Total ending stockholders equity$120,564$137,489$120,564$137,489 Note 7 INCOME TAXESOur tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate,adjusted for discreteitems,if any,that are taken into account in the relevant period.Each quarter we update our estimate of the annual effective tax rate,and if our estimated tax ratechanges,we make a cumulative adjustment.Our quarterly tax provision,and our quarterly estimate of our annual effective tax rate,is subject to significant variation due to several factors,includingvariability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate,intercompany transactions,theapplicability of special tax regimes,changes in how we do business,acquisitions,investments,developments in tax controversies,changes in our stock price,changes in our deferred tax assets and liabilities and their valuation,foreign currency gains(losses),changes in statutes,regulations,case law,andadministrative practices,principles,and interpretations related to tax,including changes to the global tax framework,competition,and other laws andaccounting rules in various jurisdictions,and relative changes of expenses or losses for which tax benefits are not recognized.Our effective tax rate can bemore or less volatile based on the amount of pre-tax income or loss.For example,the impact of discrete items and non-deductible expenses on our effective taxrate is greater when our pre-tax income is lower.In addition,we record valuation allowances against deferred tax assets when there is uncertainty about ourability to generate future income in relevant jurisdictions.For 2022,we estimate that our effective tax rate will be favorably impacted by the U.S.federal research and development credit.In addition,valuationgains and losses from our equity investment in Rivian impact our pre-tax income and may cause variability in our effective tax rate.17Table of ContentsOur income tax provision for the nine months ended September 30,2021 was$4.2 billion,which included$1.7 billion of net discrete tax benefitsprimarily attributable to excess tax benefits from stock-based compensation and audit-related developments.Our income tax benefit for the nine months endedSeptember 30,2022 was$2.0 billion,which included$3.3 billion of net discrete tax benefits primarily attributable to a valuation loss related to our equityinvestment in Rivian.Cash paid for income taxes,net of refunds was$750 million and$742 million in Q3 2021 and Q3 2022,and$3.4 billion and$4.3 billion for the ninemonths ended September 30,2021 and 2022.As of December 31,2021 and September 30,2022,tax contingencies were approximately$3.2 billion and$3.4 billion.Changes in tax laws,regulations,administrative practices,principles,and interpretations may impact our tax contingencies.Due to various factors,including the inherent complexities anduncertainties of the judicial,administrative,and regulatory processes in certain jurisdictions,the timing of the resolution of income tax controversies is highlyuncertain,and the amounts ultimately paid,if any,upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued.It isreasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or possibly reach resolution of incometax controversies in one or more jurisdictions.These assessments or settlements could result in changes to our contingencies related to positions on prior yearstax filings.We are under examination,or may be subject to examination,by the Internal Revenue Service for the calendar year 2016 and thereafter.Theseexaminations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examinationas well as subsequent periods.We are also subject to taxation in various states and other foreign jurisdictions including China,France,Germany,India,Japan,Luxembourg,and theUnited Kingdom.We are under,or may be subject to,audit or examination and additional assessments by the relevant authorities in respect of these particularjurisdictions primarily for 2009 and thereafter.We are currently disputing tax assessments in multiple jurisdictions,including with respect to the allocation andcharacterization of income.In September 2022,the Luxembourg Tax Authority(“LTA”)denied the tax basis of certain intangible assets that we distributed from Luxembourg to theU.S.in 2021.We believe the LTAs position is without merit and intend to defend ourselves vigorously in this matter.In October 2014,the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg withregard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid.On October 4,2017,the EuropeanCommission announced its decision that determinations by the tax authorities in Luxembourg did not comply with European Union rules on state aid.Based onthat decision,the European Commission announced an estimated recovery amount of approximately 250 million,plus interest,for the period May 2006through June 2014,and ordered Luxembourg tax authorities to calculate the actual amount of additional taxes subject to recovery.Luxembourg computed aninitial recovery amount,consistent with the European Commissions decision,which we deposited into escrow in March 2018,subject to adjustment pendingconclusion of all appeals.In December 2017,Luxembourg appealed the European Commissions decision.In May 2018,we appealed.On May 12,2021,theEuropean Union General Court annulled the European Commissions state aid decision.In July 2021,the European Commission appealed the decision to theEuropean Court of Justice.We will continue to defend ourselves vigorously in this matter.Note 8 SEGMENT INFORMATIONWe have organized our operations into three segments:North America,International,and AWS.We allocate to segment results the operating expenses“Fulfillment,”“Technology and content,”“Sales and marketing,”and“General and administrative”based on usage,which is generally reflected in the segmentin which the costs are incurred.The majority of technology infrastructure costs are allocated to the AWS segment based on usage.The majority of theremaining non-infrastructure technology costs are incurred in the U.S.and are allocated to our North America segment.There are no internal revenuetransactions between our reportable segments.These segments reflect the way our chief operating decision maker evaluates the Companys businessperformance and manages its operations.North AmericaThe North America segment primarily consists of amounts earned from retail sales of consumer products(including from sellers)and subscriptionsthrough North America-focused online and physical stores.This segment includes export sales from these online stores.18Table of ContentsInternationalThe International segment primarily consists of amounts earned from retail sales of consumer products(including from sellers)and subscriptions throughinternationally-focused online stores.This segment includes export sales from these internationally-focused online stores(including export sales from theseonline stores to customers in the U.S.,Mexico,and Canada),but excludes export sales from our North America-focused online stores.AWSThe AWS segment consists of amounts earned from global sales of compute,storage,database,and other services for start-ups,enterprises,governmentagencies,and academic institutions.Information on reportable segments and reconciliation to consolidated net income(loss)is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022North AmericaNet sales$65,557$78,843$197,473$222,517 Operating expenses64,677 79,255 189,996 225,124 Operating income(loss)$880$(412)$7,477$(2,607)InternationalNet sales$29,145$27,720$90,515$83,544 Operating expenses30,056 30,186 89,812 89,062 Operating income(loss)$(911)$(2,466)$703$(5,518)AWSNet sales$16,110$20,538$44,422$58,718 Operating expenses11,227 15,135 31,183 41,082 Operating income$4,883$5,403$13,239$17,636 ConsolidatedNet sales$110,812$127,101$332,410$364,779 Operating expenses105,960 124,576 310,991 355,268 Operating income4,852 2,525 21,419 9,511 Total non-operating income(expense)(537)419 1,798(14,485)Benefit(provision)for income taxes(1,155)(69)(4,179)1,990 Equity-method investment activity,net of tax(4)(3)3(16)Net income(loss)$3,156$2,872$19,041$(3,000)19Table of ContentsNet sales by groups of similar products and services,which also have similar economic characteristics,is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Net Sales:Online stores(1)$49,942$53,489$156,000$155,473 Physical stores(2)4,269 4,694 12,387 14,006 Third-party seller services(3)24,252 28,666 73,046 81,377 Subscription services(4)8,148 8,903 23,645 26,029 Advertising services(5)7,612 9,548 21,444 26,182 AWS16,110 20,538 44,422 58,718 Other(6)479 1,263 1,466 2,994 Consolidated$110,812$127,101$332,410$364,779 _(1)Includes product sales and digital media content where we record revenue gross.We leverage our retail infrastructure to offer a wide selection ofconsumable and durable goods that includes media products available in both a physical and digital format,such as books,videos,games,music,andsoftware.These product sales include digital products sold on a transactional basis.Digital product subscriptions that provide unlimited viewing or usagerights are included in“Subscription services.”(2)Includes product sales where our customers physically select items in a store.Sales to customers who order goods online for delivery or pickup at ourphysical stores are included in“Online stores.”(3)Includes commissions and any related fulfillment and shipping fees,and other third-party seller services.(4)Includes annual and monthly fees associated with Amazon Prime memberships,as well as digital video,audiobook,digital music,e-book,and other non-AWS subscription services.(5)Includes sales of advertising services to sellers,vendors,publishers,authors,and others,through programs such as sponsored ads,display,and videoadvertising.(6)Includes sales related to various other offerings,such as certain licensing and distribution of video content and shipping services,and our co-branded creditcard agreements.20Table of ContentsItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThis Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.Allstatements other than statements of historical fact,including statements regarding guidance,industry prospects,or future results of operations or financialposition,made in this Quarterly Report on Form 10-Q are forward-looking.We use words such as anticipates,believes,expects,future,intends,and similarexpressions to identify forward-looking statements.Forward-looking statements reflect managements current expectations and are inherently uncertain.Actualresults and outcomes could differ materially for a variety of reasons,including,among others,fluctuations in foreign exchange rates,changes in globaleconomic conditions and customer spending,inflation,interest rates,regional labor market and global supply chain constraints,world events,the rate ofgrowth of the Internet,online commerce,and cloud services,the amount that A invests in new business opportunities and the timing of thoseinvestments,the mix of products and services sold to customers,the mix of net sales derived from products as compared with services,the extent to which weowe income or other taxes,competition,management of growth,potential fluctuations in operating results,international growth and expansion,the outcomesof claims,litigation,government investigations,and other proceedings,fulfillment,sortation,delivery,and data center optimization,risks of inventorymanagement,variability in demand,the degree to which we enter into,maintain,and develop commercial agreements,proposed and completed acquisitionsand strategic transactions,payments risks,and risks of fulfillment throughput and productivity.In addition,global economic and geopolitical conditions andadditional or unforeseen effects from the COVID-19 pandemic amplify many of these risks.These risks and uncertainties,as well as other risks anduncertainties that could cause our actual results or outcomes to differ significantly from managements expectations,are described in greater detail in Item 1Aof Part II,“Risk Factors.”For additional information,see Item 7 of Part II,“Managements Discussion and Analysis of Financial Condition and Results of Operations Overview”of our 2021 Annual Report on Form 10-K.Critical Accounting JudgmentsThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets andliabilities,revenues and expenses,and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes.The SEChas defined a companys critical accounting policies as the ones that are most important to the portrayal of the companys financial condition and results ofoperations,and which require the company to make its most difficult and subjective judgments,often as a result of the need to make estimates of matters thatare inherently uncertain.Based on this definition,we have identified the critical accounting policies and judgments addressed below.We also have other keyaccounting policies,which involve the use of estimates,judgments,and assumptions that are significant to understanding our results.For additionalinformation,see Item 8 of Part II,“Financial Statements and Supplementary Data Note 1 Description of Business,Accounting Policies,andSupplemental Disclosures”of our 2021 Annual Report on Form 10-K and Item 1 of Part I,“Financial Statements Note 1 Accounting Policies andSupplemental Disclosures,”of this Form 10-Q.Although we believe that our estimates,assumptions,and judgments are reasonable,they are based uponinformation presently available.Actual results may differ significantly from these estimates under different assumptions,judgments,or conditions.InventoriesInventories,consisting of products available for sale,are primarily accounted for using the first-in first-out method,and are valued at the lower of costand net realizable value.This valuation requires us to make judgments,based on currently available information,about the likely method of disposition,suchas through sales to individual customers,returns to product vendors,or liquidations,and expected recoverable values of each disposition category.Theseassumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.As a measure of sensitivity,for every 1%of additional inventory valuation allowance as of September 30,2022,we would have recordedan additional cost of sales of approximately$405 million.In addition,we enter into supplier commitments for certain electronic device components and certain products.These commitments are based onforecasted customer demand.If we reduce these commitments,we may incur additional costs.Income TaxesWe are subject to income taxes in the U.S.(federal and state)and numerous foreign jurisdictions.Tax laws,regulations,administrative practices,principles,and interpretations in various jurisdictions may be subject to significant change,with or without notice,due to economic,political,and otherconditions,and significant judgment is required in evaluating and estimating our provision and accruals for these taxes.There are many transactions that occurduring the ordinary course of business for which the ultimate tax determination is uncertain.In addition,our actual and forecasted earnings are subject to21Table of Contentschange due to economic,political,and other conditions and significant judgment is required in determining our ability to use our deferred tax assets.Our effective tax rates could be affected by numerous factors,such as changes in our business operations,acquisitions,investments,entry into newbusinesses and geographies,intercompany transactions,the relative amount of our foreign earnings,including earnings being lower than anticipated injurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates,losses incurred injurisdictions for which we are not able to realize related tax benefits,the applicability of special tax regimes,changes in foreign currency exchange rates,changes in our stock price,changes to our forecasts of income and loss and the mix of jurisdictions to which they relate,changes in our deferred tax assets andliabilities and their valuation,changes in the laws,regulations,administrative practices,principles,and interpretations related to tax,including changes to theglobal tax framework,competition,and other laws and accounting rules in various jurisdictions.In addition,a number of countries have enacted or are activelypursuing changes to their tax laws applicable to corporate multinationals.We are also currently subject to tax controversies in various jurisdictions,and these jurisdictions may assess additional income tax liabilities against us.Developments in an audit,investigation,or other tax controversy could have a material effect on our operating results or cash flows in the period or periods forwhich that development occurs,as well as for prior and subsequent periods.We regularly assess the likelihood of an adverse outcome resulting from theseproceedings to determine the adequacy of our tax accruals.Although we believe our tax estimates are reasonable,the final outcome of audits,investigations,and any other tax controversies could be materially different from our historical income tax provisions and accruals.Liquidity and Capital ResourcesCash flow information is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,Twelve Months EndedSeptember 30,202120222021202220212022Cash provided by(used in):Operating activities$7,313$11,404$24,241$17,579$54,671$39,665 Investing activities(14,828)(15,608)(45,574)(26,780)(62,611)(39,360)Financing activities(2,776)3,016 9,391 9,632 7,575 6,532 Our principal sources of liquidity are cash flows generated from operations and our cash,cash equivalents,and marketable securities balances,which,atfair value,were$96.0 billion and$58.7 billion as of December 31,2021 and September 30,2022.Amounts held in foreign currencies were$22.7 billion and$11.6 billion as of December 31,2021 and September 30,2022.Our foreign currency balances include British Pounds,Canadian Dollars,Euros,and JapaneseYen.Cash provided by(used in)operating activities was$7.3 billion and$11.4 billion for Q3 2021 and Q3 2022,and$24.2 billion and$17.6 billion for thenine months ended September 30,2021 and 2022.Our operating cash flows result primarily from cash received from our consumer,seller,developer,enterprise,and content creator customers,and advertisers,offset by cash payments we make for products and services,employee compensation,paymentprocessing and related transaction costs,operating leases,and interest payments on our long-term obligations.Cash received from our customers and otheractivities generally corresponds to our net sales.Because consumers primarily use credit cards to buy from us,our receivables from consumers settle quickly.The decrease in operating cash flow for the trailing twelve months ended September 30,2022,compared to the comparable prior year period,was primarilydue to changes in working capital,as well as changes in net income(loss),excluding non-cash expenses.Working capital at any specific point in time is subjectto many variables,including variability in demand,inventory management and category expansion,the timing of cash receipts and payments,vendor paymentterms,and fluctuations in foreign exchange rates.Cash provided by(used in)investing activities corresponds with cash capital expenditures,including leasehold improvements,incentives received fromproperty and equipment vendors,proceeds from asset sales,cash outlays for acquisitions,investments in other companies and intellectual property rights,andpurchases,sales,and maturities of marketable securities.Cash provided by(used in)investing activities was$(14.8)billion and$(15.6)billion for Q3 2021 andQ3 2022,and$(45.6)billion and$(26.8)billion for the nine months ended September 30,2021 and 2022,with the variability caused primarily by purchases,sales,and maturities of marketable securities.Cash capital expenditures were$14.8 billion and$15.0 billion during Q3 2021 and Q3 2022,and$38.9 billionand$42.9 billion for the nine months ended September 30,2021 and 2022,which primarily reflect investments in technology infrastructure(the majority ofwhich is to support AWS business growth)and in additional capacity to support our fulfillment network.We expect to continue these investments over time,with increased spending on technology infrastructure and decreased spending on our fulfillment network in 2022.We made cash payments,net of acquiredcash,related to acquisition and other investment activity of$654 million and$885 million during Q3 2021 and Q3 2022,and$1.6 billion and$7.5 billion forthe nine months ended September 30,2021 and 2022.We funded the22Table of Contentsacquisition of MGM Holdings Inc.with cash on hand.We expect to fund the acquisitions of 1Life Healthcare,Inc.(One Medical)and iRobot Corporation withcash on hand.Cash provided by(used in)financing activities was$(2.8)billion and$3.0 billion for Q3 2021 and Q3 2022,and$9.4 billion and$9.6 billion for the ninemonths ended September 30,2021 and 2022.Cash inflows from financing activities resulted from proceeds from short-term debt,and other and long-term debtof$2.4 billion and$12.4 billion for Q3 2021 and Q3 2022,and$24.1 billion and$43.9 billion for the nine months ended September 30,2021 and 2022.Cashoutflows from financing activities resulted from repurchases of common stock,payments of short-term debt,and other,long-term debt,finance leases,andfinancing obligations of$5.1 billion and$9.4 billion in Q3 2021 and Q3 2022,and$14.7 billion and$34.2 billion for the nine months ended September 30,2021 and 2022.Property and equipment acquired under finance leases was$1.7 billion and$131 million during Q3 2021 and Q3 2022,and$5.5 billion and$358 million for the nine months ended September 30,2021 and 2022.We had no borrowings outstanding under the Credit Agreement,$11.7 billion of borrowings outstanding under the Commercial Paper Programs,and$1.0billion of borrowings outstanding under our Credit Facility as of September 30,2022.See Item 1 of Part I,“Financial Statements Note 5 Debt”foradditional information.Certain foreign subsidiary earnings and losses are subject to current U.S.taxation and the subsequent repatriation of those earnings is not subject to tax inthe U.S.We intend to invest substantially all of our foreign subsidiary earnings,as well as our capital in our foreign subsidiaries,indefinitely outside of theU.S.in those jurisdictions in which we would incur significant,additional costs upon repatriation of such amounts.Our U.S.taxable income is reduced by tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions andincreased by the impact of capitalized research and development expenses.U.S.tax rules provide for enhanced accelerated depreciation deductions by allowingthe election of full expensing of qualified property,primarily equipment,through 2022.Effective January 1,2022,research and development expenses arerequired to be capitalized and amortized for U.S.tax purposes,which delays the deductibility of these expenses.Cash taxes paid(net of refunds)were$750million and$742 million for Q3 2021 and Q3 2022,and$3.4 billion and$4.3 billion for the nine months ended September 30,2021 and 2022.As of December 31,2021 and September 30,2022,restricted cash,cash equivalents,and marketable securities were$260 million and$231 million.SeeItem 1 of Part I,“Financial Statements Note 4 Commitments and Contingencies”and“Financial Statements Note 5 Debt”for additional discussionof our principal contractual commitments,as well as our pledged assets.Additionally,we have purchase obligations and open purchase orders,including forinventory and capital expenditures,that support normal operations and are primarily due in the next twelve months.These purchase obligations and openpurchase orders are generally cancellable in full or in part through the contractual provisions.We believe that cash flows generated from operations and our cash,cash equivalents,and marketable securities balances,as well as our borrowingarrangements,will be sufficient to meet our anticipated operating cash needs for at least the next twelve months.However,any projections of future cash needsand cash flows are subject to substantial uncertainty.See Item 1A of Part II,“Risk Factors.”We continually evaluate opportunities to sell additional equity ordebt securities,obtain credit facilities,obtain finance and operating lease arrangements,enter into financing obligations,repurchase common stock,paydividends,or repurchase,refinance,or otherwise restructure our debt for strategic reasons or to further strengthen our financial position.The sale of additional equity or convertible debt securities would be dilutive to our shareholders.In addition,we will,from time to time,consider theacquisition of,or investment in,complementary businesses,products,services,capital infrastructure,and technologies,which might affect our liquidityrequirements or cause us to secure additional financing,or issue additional equity or debt securities.There can be no assurance that additional credit lines orfinancing instruments will be available in amounts or on terms acceptable to us,if at all.In addition,economic conditions and actions by policymaking bodiesare contributing to rising interest rates,which,along with increases in our borrowing levels,could increase our future borrowing costs.23Table of ContentsResults of OperationsWe have organized our operations into three segments:North America,International,and AWS.These segments reflect the way the Company evaluatesits business performance and manages its operations.See Item 1 of Part I,“Financial Statements Note 8 Segment Information.”OverviewMacroeconomic factors,including increased inflation and interest rates,the prolonged COVID-19 pandemic,global supply chain constraints,and globaleconomic and geopolitical developments,have direct and indirect impacts on our results of operations that are difficult to isolate and quantify.These factorscontributed to increases in our operating costs during Q3 2022,particularly across our North America and International segments,primarily due to a return tomore normal,seasonal demand volumes in relation to our fulfillment network fixed costs,increased transportation and utility costs,and increased wage rates.In addition,rising fuel,utility,and food costs,rising interest rates,and recessionary fears may impact customer demand.We expect some or all of these factorsto continue to impact our operations into Q4 2022.Net SalesNet sales include product and service sales.Product sales represent revenue from the sale of products and related shipping fees and digital media contentwhere we record revenue gross.Service sales primarily represent third-party seller fees,which includes commissions and any related fulfillment and shippingfees,AWS sales,advertising services,Amazon Prime membership fees,and certain digital content subscriptions.Net sales information is as follows(inmillions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Net Sales:North America$65,557$78,843$197,473$222,517 International29,145 27,720 90,515 83,544 AWS16,110 20,538 44,422 58,718 Consolidated$110,812$127,101$332,410$364,779 Year-over-year Percentage Growth(Decline):North America10 #%International16(5)35(8)AWS39 27 36 32 Consolidated15 15 28 10 Year-over-year Percentage Growth,excluding the effect of foreign exchangerates:North America10 %International15 12 29 4 AWS39 28 36 32 Consolidated15 19 26 13 Net sales mix:North America59ba%International26 22 27 23 AWS15 16 13 16 Consolidated100000%Sales increased 15%in Q3 2022,and 10%for the nine months ended September 30,2022 compared to the comparable prior year periods.Changes inforeign currency exchange rates impacted net sales by$(5.0)billion for Q3 2022 and by$(10.5)billion for the nine months ended September 30,2022.For adiscussion of the effect of foreign exchange rates on sales growth,see“Effect of Foreign Exchange Rates”below.North America sales increased 20%in Q3 2022,and 13%for the nine months ended September 30,2022 compared to the comparable prior year periods.The sales growth primarily reflects increased unit sales,including sales by third-party sellers,and advertising sales.Increased unit sales were driven largely byour continued focus on price,selection,and convenience for our customers,including from our shipping offers.24Table of ContentsInternational sales decreased 5%in Q3 2022,and 8%for the nine months ended September 30,2022,compared to the comparable prior year periods,primarily due to the impact of foreign currency exchange rates,partially offset by increased unit sales,including sales by third-party sellers,advertising sales,and subscription services.Increased unit sales were driven largely by our continued focus on price,selection,and convenience for our customers,includingfrom our shipping offers.Changes in foreign currency exchange rates impacted International net sales by$(4.9)billion for Q3 2022,and by$(10.2)billion forthe nine months ended September 30,2022.AWS sales increased 27%in Q3 2022,and 32%for the nine months ended September 30,2022 compared to the comparable prior year periods.The salesgrowth primarily reflects increased customer usage,partially offset by pricing changes,primarily driven by long-term customer contracts.Operating Income(Loss)Operating income(loss)by segment is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Operating Income(Loss)North America$880$(412)$7,477$(2,607)International(911)(2,466)703(5,518)AWS4,883 5,403 13,239 17,636 Consolidated$4,852$2,525$21,419$9,511 Operating income decreased from$4.9 billion in Q3 2021 to$2.5 billion in Q3 2022,and decreased from$21.4 billion for the nine months endedSeptember 30,2021 to$9.5 billion for the nine months ended September 30,2022.We believe that operating income is a more meaningful measure than grossprofit and gross margin due to the diversity of our product categories and services.The North America operating loss in Q3 2022,as compared to the operating income in the comparable prior year period,is primarily due to increasedshipping and fulfillment costs,due in part to increased investments in our fulfillment network and increased transportation costs,and growth in certainoperating expenses,partially offset by increased unit sales,including sales by third-party sellers,and advertising sales.The North America operating loss forthe nine months ended September 30,2022,as compared to the operating income in the comparable prior year period,is primarily due to increased shippingand fulfillment costs,due in part to increased investments in our fulfillment network,increased transportation costs,increased wage rates and incentives,andfulfillment network inefficiencies,and growth in certain operating expenses,partially offset by increased unit sales,including sales by third-party sellers,andadvertising sales.Changes in foreign exchange rates positively impacted operating income(loss)by$95 million for Q3 2022,and by$198 million for the ninemonths ended September 30,2022.The increase in International operating loss in absolute dollars in Q3 2022,compared to the comparable prior year period,is primarily due to increasedshipping and fulfillment costs,due in part to increased investments in our fulfillment network and increased transportation costs,and growth in certainoperating expenses,partially offset by increased unit sales,including sales by third-party sellers,and advertising sales.The International operating loss for thenine months ended September 30,2022,as compared to the operating income in the comparable prior year period,is primarily due to increased shipping andfulfillment costs,due in part to increased investments in our fulfillment network,increased transportation costs,and increased wage rates and incentives,andgrowth in certain operating expenses,partially offset by increased advertising sales.Changes in foreign exchange rates negatively impacted operating income(loss)by$216 million for Q3 2022,and by$526 million for the nine months ended September 30,2022.The increase in AWS operating income in absolute dollars in Q3 2022 and for the nine months ended September 30,2022,compared to the comparableprior year periods,is primarily due to increased sales and cost structure productivity,including a reduction in depreciation and amortization expense from ourchange in the estimated useful lives of our servers and networking equipment,partially offset by increased payroll and related expenses and spending ontechnology infrastructure,all of which were primarily driven by additional investments to support AWS business growth.Changes in foreign exchange ratespositively impacted operating income by$478 million for Q3 2022,and by$976 million for the nine months ended September 30,2022.25Table of ContentsOperating ExpensesInformation about operating expenses is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Operating expenses:Cost of sales$62,930$70,268$189,509$203,191 Fulfillment18,498 20,583 52,666 61,196 Technology and content14,380 19,485 40,739 52,399 Sales and marketing8,010 11,014 21,741 29,420 General and administrative2,153 3,061 6,298 8,558 Other operating expense(income),net(11)165 38 504 Total operating expenses$105,960$124,576$310,991$355,268 Year-over-year Percentage Growth(Decline):Cost of sales10#%7%Fulfillment26 11 32 16 Technology and content31 35 33 29 Sales and marketing47 38 49 35 General and administrative29 42 34 36 Other operating expense(income),net(118)(1,619)(91)1,210 Percent of Net Sales:Cost of sales56.8U.3W.0U.7%Fulfillment16.7 16.2 15.8 16.8 Technology and content13.0 15.3 12.3 14.4 Sales and marketing7.2 8.7 6.5 8.1 General and administrative1.9 2.4 1.9 2.3 Other operating expense(income),net0.0 0.1 0.0 0.1 Cost of SalesCost of sales primarily consists of the purchase price of consumer products,inbound and outbound shipping costs,including costs related to sortation anddelivery centers and where we are the transportation service provider,and digital media content costs where we record revenue gross,including video andmusic.The increase in cost of sales in absolute dollars in Q3 2022,compared to the comparable prior year period,is primarily due to increased product andshipping costs resulting from increased sales,increased investments in our fulfillment network,increased transportation costs,and increased wage rates.Theincrease in cost of sales in absolute dollars for the nine months ended September 30,2022,compared to the comparable prior year period,is primarily due toincreased product and shipping costs resulting from increased sales,increased investments in our fulfillment network,increased transportation costs,increasedwage rates and incentives,and fulfillment network inefficiencies.Changes in foreign exchange rates reduced cost of sales by$3.6 billion for Q3 2022,and by$7.4 billion for the nine months ended September 30,2022.Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of sales upon sale of products to ourcustomers.Shipping costs,which include sortation and delivery centers and transportation costs,were$18.1 billion and$19.9 billion in Q3 2021 and Q3 2022,and$53.0 billion and$58.8 billion for the nine months ended September 30,2021 and 2022.We expect our cost of shipping to continue to increase to theextent our customers accept and use our shipping offers at an increasing rate,we use more expensive shipping methods,including faster delivery,and we offeradditional services.We seek to mitigate costs of shipping over time in part through achieving higher sales volumes,optimizing our fulfillment network,negotiating better terms with our suppliers,and achieving better operating efficiencies.We believe that offering low prices to our customers is fundamental toour future success,and one way we offer lower prices is through shipping offers.Costs to operate our AWS segment are primarily classified as“Technology and content”as we leverage a shared infrastructure that supports both ourinternal technology requirements and external sales to AWS customers.26Table of ContentsFulfillmentFulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers,physicalstores,and customer service centers and payment processing costs.While AWS payment processing and related transaction costs are included in“Fulfillment,”AWS costs are primarily classified as“Technology and content.”Fulfillment costs as a percentage of net sales may vary due to several factors,such as paymentprocessing and related transaction costs,our level of productivity and accuracy,changes in volume,size,and weight of units received and fulfilled,the extentto which third party sellers utilize Fulfillment by Amazon services,timing of fulfillment network and physical store expansion,the extent we utilize fulfillmentservices provided by third parties,mix of products and services sold,and our ability to affect customer service contacts per unit by implementingimprovements in our operations and enhancements to our customer self-service features.Additionally,sales by our sellers have higher payment processing andrelated transaction costs as a percentage of net sales compared to our retail sales because payment processing costs are based on the gross purchase price ofunderlying transactions.The increase in fulfillment costs in absolute dollars in Q3 2022,compared to the comparable prior year period,is primarily due to increased investmentsin our fulfillment network and variable costs corresponding with increased product and service sales volume and inventory levels.The increase in fulfillmentcosts in absolute dollars for the nine months ended September 30,2022,compared to the comparable prior year period,is primarily due to increasedinvestments in our fulfillment network and variable costs corresponding with increased product and service sales volume and inventory levels,and increasedwage rates and incentives.Changes in foreign exchange rates reduced fulfillment costs by$810 million for Q3 2022,and by$1.7 billion for the nine monthsended September 30,2022.We seek to expand our fulfillment network to accommodate a greater selection and in-stock inventory levels and to meet anticipated shipment volumesfrom sales of our own products as well as sales by third parties for which we provide the fulfillment services.We regularly evaluate our facility requirements.Technology and ContentTechnology and content costs include payroll and related expenses for employees involved in the research and development of new and existing productsand services,development,design,and maintenance of our stores,curation and display of products and services made available in our online stores,andinfrastructure costs.Infrastructure costs include servers,networking equipment,and data center related depreciation and amortization,rent,utilities,and otherexpenses necessary to support AWS and other Amazon businesses.Collectively,these costs reflect the investments we make in order to offer a wide variety ofproducts and services to our customers.We seek to invest efficiently in numerous areas of technology and content so we may continue to enhance the customer experience and improve ourprocess efficiency through rapid technology developments,while operating at an ever increasing scale.Our technology and content investment and capitalspending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems andoperations.We expect spending in technology and content to increase over time as we continue to add employees and technology infrastructure.These costs areallocated to segments based on usage.The increase in technology and content costs in absolute dollars in Q3 2022 and for the nine months ended September30,2022,compared to the comparable prior year periods,is primarily due to increased payroll and related costs associated with technical teams responsible forexpanding our existing products and services and initiatives to introduce new products and service offerings,and an increase in spending on technologyinfrastructure,partially offset by a reduction in depreciation and amortization expense from our change in the estimated useful lives of our servers andnetworking equipment.See Item 7 of Part II,“Managements Discussion and Analysis of Financial Condition and Results of Operations Overview”of our2021 Annual Report on Form 10-K for a discussion of how management views advances in technology and the importance of innovation.See Item 1 of Part I,“Financial Statements Note 1 Accounting Policies and Supplemental Disclosures Use of Estimates”for additional information on the change inestimated useful lives of our servers and networking equipment.Sales and MarketingSales and marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities,including salescommissions related to AWS.We direct customers to our stores primarily through a number of marketing channels,such as our sponsored search,social andonline advertising,third party customer referrals,television advertising,and other initiatives.Our marketing costs are largely variable,based on growth in salesand changes in rates.To the extent there is increased or decreased competition for these traffic sources,or to the extent our mix of these channels shifts,wewould expect to see a corresponding change in our marketing costs.The increase in sales and marketing costs in absolute dollars in Q3 2022 and for the nine months ended September 30,2022,compared to the comparableprior year periods,is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities and higher marketingspend.27Table of ContentsWhile costs associated with Amazon Prime membership benefits and other shipping offers are not included in sales and marketing expense,we viewthese offers as effective worldwide marketing tools,and intend to continue offering them indefinitely.General and AdministrativeThe increase in general and administrative costs in absolute dollars in Q3 2022 and for the nine months ended September 30,2022,compared to thecomparable prior year periods,is primarily due to increases in payroll and related expenses and professional fees.Other Operating Expense(Income),NetOther operating expense(income),net was$(11)million and$165 million for Q3 2021 and Q3 2022,and$38 million and$504 million for the ninemonths ended September 30,2021 and 2022,and was primarily related to impairments of property and equipment and operating leases in 2022 and theamortization of intangible assets.Interest Income and ExpenseOur interest income was$119 million and$277 million during Q3 2021 and Q3 2022,and$330 million and$544 million for the nine months endedSeptember 30,2021 and 2022.We generally invest our excess cash in AAA-rated money market funds and investment grade short-to intermediate-term fixedincome securities.Our interest income corresponds with the average balance of invested funds based on the prevailing rates,which vary depending on thegeographies and currencies in which they are invested.Interest expense was$493 million and$617 million during Q3 2021 and Q3 2022,and$1.3 billion and$1.7 billion for the nine months ended September30,2021 and 2022,and was primarily related to debt and finance leases.Other Income(Expense),NetOther income(expense),net was$(163)million and$759 million during Q3 2021 and Q3 2022,and$2.8 billion and$(13.4)billion for the nine monthsended September 30,2021 and 2022.The primary components of other income(expense),net are related to equity securities valuations and adjustments,equitywarrant valuations,and foreign currency.Included in other income(expense),net is a marketable equity securities valuation gain(loss)of$1.1 billion in Q32022,and$(10.4)billion for the nine months ended September 30,2022,from our equity investment in Rivian.Income TaxesOur income tax provision for the nine months ended September 30,2021 was$4.2 billion,which included$1.7 billion of net discrete tax benefitsprimarily attributable to excess tax benefits from stock-based compensation and audit-related developments.Our income tax benefit for the nine months endedSeptember 30,2022 was$2.0 billion,which included$3.3 billion of net discrete tax benefits primarily attributable to a valuation loss related to our equityinvestment in Rivian.See Item 1 of Part I,“Financial Statements Note 7 Income Taxes”for additional information.Non-GAAP Financial MeasuresRegulation G,Conditions for Use of Non-GAAP Financial Measures,and other SEC regulations define and prescribe the conditions for use of certainnon-GAAP financial information.Our measures of free cash flows and the effect of foreign exchange rates on our consolidated statements of operations meetthe definition of non-GAAP financial measures.We provide multiple measures of free cash flows because we believe these measures provide additional perspective on the impact of acquiring propertyand equipment with cash and through finance leases and financing obligations.28Table of ContentsFree Cash FlowFree cash flow is cash flow from operations reduced by“Purchases of property and equipment,net of proceeds from sales and incentives.”The followingis a reconciliation of free cash flow to the most comparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailingtwelve months ended September 30,2021 and 2022(in millions):Twelve Months EndedSeptember 30,20212022Net cash provided by(used in)operating activities$54,671$39,665 Purchases of property and equipment,net of proceeds from sales and incentives(52,119)(59,351)Free cash flow$2,552$(19,686)Net cash provided by(used in)investing activities$(62,611)$(39,360)Net cash provided by(used in)financing activities$7,575$6,532 Free Cash Flow Less Principal Repayments of Finance Leases and Financing ObligationsFree cash flow less principal repayments of finance leases and financing obligations is free cash flow reduced by“Principal repayments of financeleases”and“Principal repayments of financing obligations.”Principal repayments of finance leases and financing obligations approximates the actualpayments of cash for our finance leases and financing obligations.The following is a reconciliation of free cash flow less principal repayments of financeleases and financing obligations to the most comparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailing twelvemonths ended September 30,2021 and 2022(in millions):Twelve Months EndedSeptember 30,20212022Net cash provided by(used in)operating activities$54,671$39,665 Purchases of property and equipment,net of proceeds from sales and incentives(52,119)(59,351)Free cash flow2,552(19,686)Principal repayments of finance leases(11,271)(8,561)Principal repayments of financing obligations(124)(233)Free cash flow less principal repayments of finance leases and financing obligations$(8,843)(28,480)Net cash provided by(used in)investing activities$(62,611)$(39,360)Net cash provided by(used in)financing activities$7,575$6,532 Free Cash Flow Less Equipment Finance Leases and Principal Repayments of All Other Finance Leases and Financing ObligationsFree cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations is free cash flow reduced byequipment acquired under finance leases,which is included in“Property and equipment acquired under finance leases,net of remeasurements andmodifications,”principal repayments of all other finance lease liabilities,which is included in“Principal repayments of finance leases,”and“Principalrepayments of financing obligations.”All other finance lease liabilities and financing obligations consists of property.In this measure,equipment acquiredunder finance leases is reflected as if these assets had been purchased with cash,which is not the case as these assets have been leased.The following is areconciliation of free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations to the mostcomparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailing twelve months ended September 30,2021 and2022(in millions):29Table of Contents Twelve Months EndedSeptember 30,20212022Net cash provided by(used in)operating activities$54,671$39,665 Purchases of property and equipment,net of proceeds from sales and incentives(52,119)(59,351)Free cash flow2,552(19,686)Equipment acquired under finance leases(1)(5,738)(868)Principal repayments of all other finance leases(2)(582)(706)Principal repayments of financing obligations(124)(233)Free cash flow less equipment finance leases and principal repayments of all other finance leases and financingobligations$(3,892)$(21,493)Net cash provided by(used in)investing activities$(62,611)$(39,360)Net cash provided by(used in)financing activities$7,575$6,532 _(1)For the twelve months ended September 30,2021 and 2022,this amount relates to equipment included in“Property and equipment acquired under financeleases,net of remeasurements and modifications”of$8,149 million and$1,966 million.(2)For the twelve months ended September 30,2021 and 2022,this amount relates to property included in“Principal repayments of finance leases”of$11,271 million and$8,561 million.All of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent theresidual cash flow available for discretionary expenditures.For example,these measures of free cash flows do not incorporate the portion of paymentsrepresenting principal reductions of debt or cash payments for business acquisitions.Additionally,our mix of property and equipment acquisitions with cash orother financing options may change over time.Therefore,we believe it is important to view
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INTERIM REPORT 2022CONTENTS2Company Profile4Principal Financial Data and Indicators8Business Review and Prospects12Managements Discussion and Analysis23Corporate Governance26Environment and Social Responsibilities28Significant Events36Changes in Share Capital and Shareholdings of Shareholders37Bond General Information40Financial Statements144Index of Documents for InspectionThis interim report contains forward-looking statements.Except for statements of historical facts,all statements contained herein that address business activities,events or developments that the Company expects or anticipates will or may occur in the future(including,but not limited to projections,targets,reserves and other estimates and business plans)are forward-looking statements.The actual results or developments of the Company in future periods may differ materially from those anticipated in such statements as a result of various factors and uncertainties.None of such forward-looking statements shall be deemed or construed to constitute or imply any commitment of substance on the part of the Company to investors.Investors and relevant parties are cautioned to maintain due awareness of potential risks and to distinguish the difference among plans,projections and commitments.The Company made the forward-looking statements referred to herein as at 26 August 2022 and undertakes no obligation to update these statements except as required by relevant regulatory authorities.Company Profile2CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022COMPANY PROFILEIMPORTANT NOTICE:THE BOARD OF DIRECTORS(BOARD)AND THE BOARD OF SUPERVISORS OF CHINA PETROLEUM&CHEMICAL CORPORATION(SINOPEC CORP.)AND ITS DIRECTORS,SUPERVISORS AND SENIOR MANAGEMENT WARRANT THAT THERE ARE NO FALSE REPRESENTATIONS,MISLEADING STATEMENTS OR MATERIAL OMISSIONS CONTAINED IN THIS INTERIM REPORT,AND SEVERALLY AND JOINTLY ACCEPT FULL RESPONSIBILITY FOR THE AUTHENTICITY,ACCURACY AND COMPLETENESS OF THE INFORMATION CONTAINED IN THIS INTERIM REPORT.THERE IS NO OCCUPANCY OF NON-OPERATING FUNDS BY THE CONTROLLING SHAREHOLDERS OF SINOPEC CORP.Mr.MA YONGSHENG,CHAIRMAN OF THE BOARD,MR.YU BAOCAI,DIRECTOR AND PRESIDENT,AND MS.SHOU DONGHUA,CHIEF FINANCIAL OFFICER AND HEAD OF CORPORATE ACCOUNTING DEPARTMENT WARRANT THE AUTHENTICITY,ACCURACY AND COMPLETENESS OF THE INTERIM FINANCIAL STATEMENTS CONTAINED IN THIS INTERIM REPORT.THE AUDIT COMMITTEE OF SINOPEC CORP.HAS REVIEWED THE INTERIM REPORT OF SINOPEC CORP.FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 2022.THE INTERIM FINANCIAL STATEMENTS OF THE COMPANY,PREPARED IN ACCORDANCE WITH THE ACCOUNTING STANDARDS FOR BUSINESS ENTERPRISES(CASs)OF THE PEOPLES REPUBLIC OF CHINA(PRC),AND INTERNATIONAL FINANCIAL REPORTING STANDARDS(IFRS),HAVE NOT BEEN AUDITED.COMPANY PROFILESinopec H shares were listed on stock exchanges in Hong Kong,New York and London on 18 and 19 October 2000,respectively,and A shares were listed on the Shanghai Stock Exchange on 8 August 2001.Sinopec Corp.is one of the largest integrated energy and chemical companies in China.Its principal operations include the exploration and production,pipeline transportation and sale of petroleum and natural gas;the production,sale,storage and transportation of refinery products,petrochemical products,coal chemical products,synthetic fibre,and other chemical products;the import and export,including an import and export agency business,of petroleum,natural gas,petroleum products,petrochemical and chemical products,and other commodities and technologies;and research,development and application of technologies and information;hydrogen energy business and related services such as hydrogen production,storage,transportation and sales;battery charging and swapping,solar energy,wind energy and other new energy business and related services.DEFINITIONSIn this interim report,unless the context otherwise requires,the following terms shall have the meaning set out below:Sinopec Corp.:China Petroleum&Chemical Corporation;Company:Sinopec Corp.and its subsidiaries;China Petrochemical Corporation:The controlling shareholder of Sinopec Corp.,China Petrochemical Corporation;Sinopec Group:China Petrochemical Corporation and its subsidiaries;Sinopec Finance Co.:Sinopec Finance Co.,Ltd.;Century Bright:Sinopec Century Bright Capital Investment Ltd.;CSRC:China Securities Regulatory Commission;Hong Kong Stock Exchange:The Stock Exchange of Hong Kong Limited;Hong Kong Listing Rules:Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.CONVERSIONSThe conversion factors for production volume of crude oil and natural gas and crude oil processing volume are set out as follows:For domestic production of crude oil:1 tonne=7.1 barrels;For overseas production of crude oil:1 tonne=7.26 barrels in the first half of 2022,1 tonne=7.21 barrels in the first half of 2021;For production of natural gas:1 cubic meter=35.31 cubic feet;Refinery throughput:1 tonne=7.35 barrels.Company Profile3CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022BASIC INFORMATIONLEGAL NAME中國石油化工股份有限公司CHINESE ABBREVIATION中國石化ENGLISH NAMEChina Petroleum&Chemical CorporationENGLISH ABBREVIATIONSinopec Corp.LEGAL REPRESENTATIVEMr.Ma YongshengAUTHORISED REPRESENTATIVES UNDER THE HONG KONG LISTING RULESMr.Yu BaocaiMr.Huang WenshengSECRETARY TO THE BOARDMr.Huang WenshengREPRESENTATIVE ON SECURITIES MATTERSMr.Zhang ZhengREGISTERED ADDRESS,PLACE OF BUSINESS AND CORRESPONDENCE ADDRESS22 Chaoyangmen North Street,Chaoyang District,Beijing,ChinaPostcode:100728Tel:86-10-59960028Fax:86-10-59960386Website:http:/E-mail:CHANGE OF INFORMATION DISCLOSURE MEDIA AND ACCESS PLACESThere was no change to Sinopec Corp.s information disclosure media and access place during the reporting period.PLACES OF LISTING OF SHARES,STOCK NAMES AND STOCK CODESA Shares:Shanghai Stock Exchange Stock name:中國石化 Stock code:600028H Shares:Hong Kong Stock Exchange Stock code:00386ADRs:New York Stock Exchange Stock code:SNP London Stock Exchange Stock code:SNPCHANGE OF REGISTERED ADDRESS IN THE REPORTING PERIODThere was no change to the registered address in the reporting period.Principal Financial Data and Indicators4CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022PRINCIPAL FINANCIAL DATA AND INDICATORS1 FINANCIAL DATA AND INDICATORS PREPARED IN ACCORDANCE WITH CASs(1)Principal accounting dataItemsSix-month period ended 30 JuneChanges over the same period of the preceding year(%)2022 RMB million2021 RMB million(adjusted)2021 RMB million(before adjustment)Operating income1,612,1261,260,7731,261,60327.9Net profit attributable to equity shareholders of the Company43,53039,42639,15310.4Net profit attributable to equity shareholders of the Company excluding extraordinary gains and losses42,96038,42038,42011.8Net cash flow from operating activities4,94748,34747,736(89.8)As of 30 June 2022 RMB millionAs of 31 December 2021 RMB millionChanges from the end of last year(%)Total equity attributable to shareholders of the Company787,134775,1021.6Total assets2,059,8141,889,2559.0Note:The Company has completed the purchase of certain assets and equity of Sinopec Group on 1 July 2021 and 1 December 2021,for details please refer to Sinopec Corp.s related announcements.The transactions described above have been accounted as business combination under common control,thus,the Company retroactively adjusted the relevant financial data.(2)Principal financial indicatorsItemsSix-month period ended 30 JuneChanges over the same period of the preceding year(%)2022 RMB2021 RMB(adjusted)2021 RMB(before adjustment)Basic earnings per share0.3600.3260.32310.4Diluted earnings per share0.3600.3260.32310.4Basic earnings per share(excluding extraordinary gains and losses)0.3550.3170.31712.0Weighted average return on net assets(%)5.57 5.20 5.19 0.37 percentage pointsWeighted average return(excluding extraordinary gains and losses)on net assets(%)5.50 5.06 5.10 0.44 percentage points(3)Extraordinary items and corresponding amountsItemsSix-month period ended 30 June 2022(income)/expensesRMB millionNet gain on disposal of non-current assets(135)Donations101Government grants(1,340)Gain on holding and disposal of various investments(125)Other extraordinary income/(expenses),net288Subtotal(1,211)Tax effect475Total(736)Attributable to:Equity shareholders of the Company(570)Minority interests(166)Principal Financial Data and Indicators5CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022(4)Significant changes of items in the financial statementsThe table below sets forth reasons for those changes where the fluctuation was more than 30%during the reporting period:Items of Consolidated Balance SheetAs of 30 June 2022RMB millionAs of 31 December 2021RMB millionIncrease/(Decrease)Main reasons for changesAmountRMB millionPercentage(%)Financial assets held for trading1,012 1,012 The increase of structured deposits in the first half of 2022.Derivative financial assets 40,389 18,371 22,018 119.9 Impact of changes in profit and loss of crude oil and other products hedging business.Derivative financial liabilities 15,367 3,223 12,144 376.8 Accounts receivable 63,717 34,861 28,856 82.8 Increase in accounts receivable resulting from increased prices of crude oil and refined oil products.Prepayments 13,011 9,267 3,744 40.4 Prepayment for goods increased year-on-year.Inventories 285,032 207,433 77,599 37.4 Increase in inventory value of crude oil and refined oil products resulting from the significant increase of international crude oil prices.Short-term loans 43,169 27,366 15,803 57.7 The Company increased short-term loans for supplementary of liquidity during the reporting period.Employee benefits payable 23,000 14,048 8,952 63.7 The impact of increase in payable performance-based income.Taxes payable 36,566 81,267(44,701)(55.0)The impact of centralized payment for deferred taxes happened in the fourth quarter of last year.Non-current liabilities due within one year66,409 28,651 37,758 131.8 Increase in debentures payable and long-term loans due within one year.Other current liabilities 114,002 31,762 82,240 258.9 Increase in low-interest debentures for supplementary of liquidity during the reporting period.Long-term loans 77,556 49,341 28,215 57.2 Increase in project loan of holding subsidiaries for capitalised expenditures.Debentures payable 14,868 42,649(27,781)(65.1)Some of the amounts were reclassified to the item of non-current liabilities due within one year.Other comprehensive income 6,557(690)7,247 The impact on translation of foreign currency statements and changes in effective hedging business.Specific reserve 3,566 2,664 902 33.9 The impact of changes in the balance of safety fund reserve.Principal Financial Data and Indicators6CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022PRINCIPAL FINANCIAL DATA AND INDICATORS(CONTINUED)Items of Consolidated Income StatementFor six-month period ended 30 June 2022 RMB MillionFor six-month period ended 30 June 2021 RMB MillionIncrease/(Decrease)Main reasons for changesAmount RMB MillionPercentage(%)Operating costs 1,330,825 998,286 332,539 33.3 Increase in procurement cost of crude oil due to the increased international oil prices.Other income 2,121 1,244 877 70.5 Increase in VAT refunds on imported LNG.Investment(loss)/income(10,307)4,890(15,197)Decrease in investment income of associates and joint ventures and the impact of profit and loss of derivative financial instruments.(losses)/gains from changes in fair value(1,558)116(1,674)Impact of floating profit and loss of derivative financial instruments.Impairment losses(1,456)(926)(530)57.2 Allowance for diminution in value of inventories increased year-on-year.Items of Consolidated Cash Flow StatementFor six-month period ended 30 June 2022 RMB MillionFor six-month period ended 30 June 2021 RMB MillionIncrease/(Decrease)Main reasons for changesAmount RMB MillionPercentage(%)Cash received from sale of goods and rendering of services1,704,813 1,310,197 394,616 30.1 Increase in sales revenue due to the higher prices of petroleum and petrochemical products.Refund of taxes and levies 3,442 788 2,654 336.8 Increase in VAT refunds on imported LNG.Other cash received relating to operating activities128,034 65,782 62,252 94.6 Increase in derivative margins received.Cash paid for goods and services(1,420,335)(1,030,400)(389,935)37.8 Increase in procurement cost of crude oil and other feedstocks.Other cash paid relating to operating activities(159,834)(64,700)(95,134)147.0 Increase in payment of derivative margins.Cash received from disposal of investments442 3,341(2,899)(86.8)Decrease in structured deposits received year-over-year.Net cash received from disposal of subsidiaries and other business entities 1 4,296(4,295)(100.0)Payment of pipeline transaction received in the same period of 2021 and no such item in the reporting period.Other cash received relating to investing activities 37,189 21,019 16,170 76.9 Increase in amount received of time deposits with maturities over three months.Net cash paid for the acquisition of subsidiaries and other business entities(7,628)(7,628)Cash paid for the prior year-end asset acquisition.Other cash paid relating to investing activities(16,544)(33,016)16,472(49.9)Decrease in time deposits with maturities over three months year-on-year.Cash received from borrowings348,900170,144178,756105.1Increase in loans.Cash repayments of borrowings(224,161)(130,857)(93,304)71.3 The scale of interest-bearing expanded and the corresponding repayment of borrowings increased.Cash paid for dividends,profits distribution or interest(41,606)(19,559)(22,047)112.7 The payment of dividends for the period increased year on year.Principal Financial Data and Indicators7CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 20222 FINANCIAL DATA AND INDICATORS PREPARED IN ACCORDANCE WITH IFRS(1)Principal accounting dataItemsSix-month period ended 30 JuneChanges over the same period of the preceding year(%)2022 RMB million2021 RMB million(adjusted)2021 RMB million(before adjustment)Operating profit62,92458,48658,1097.6Profit attributable to shareholders of the Company44,45140,22739,95410.5Net cash generated from operating activities4,94748,34747,736(89.8)As of 30 June 2022 RMB millionAs of 31 December 2021 RMB millionChanges from the end of last year(%)Total equity attributable to shareholders of the Company786,249774,1821.6Total assets2,059,8141,889,2559.0Note:The Company has completed the purchase of certain assets and equity of Sinopec Group on 1 July 2021 and 1 December 2021,for details please refer to Sinopec Corp.s related announcements.The transactions described above have been accounted as business combination under common control,thus,the Company retroactively adjusted the relevant financial data.(2)Principal financial indicatorsItemsSix-month period ended 30 JuneChanges over the same period of the preceding year(%)2022 RMB2021 RMB(adjusted)2021 RMB(before adjustment)Basic earnings per share0.3670.3320.33010.5Diluted earnings per share0.3670.3320.33010.5Return on capital employed(%)5.75 6.14 6.14(0.39)percentage pointsBusiness Review and Prospects8CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022BUSINESS REVIEW AND PROSPECTSBUSINESS REVIEWIn the first half of 2022,the world economic growth slowed down.China effectively coordinated pandemic prevention and control with economic and social development,registering a GDP growth of 2.5%year-on-year.Domestic demand for natural gas remained stable.Based on the statistics of the Company,the overall domestic demand for refined oil products was weak due to high crude oil price and the pandemic,with a slight increase in the first quarter and a sharp decrease in the second quarter,compared with the same period of last year.The demand for major chemical products in China remained stable,and the ethylene equivalent consumption increased by 0.1%compared with that of the previous year.In the first half of 2022,international crude oil prices rose sharply and fluctuated drastically.The average spot price of Platts Brent was USD107.69 per barrel,up by 66%year-on-year.January-21April-21July-21October-21January-22April-22July-22507090110130WTI-NYMEXBRENT DTDDUBAIBRENT ICEMovement of International Crude Oil PricesUSD/BarrelConfronted with severe and complex environment of production and operation,the Company gave full play to its integration advantages,actively responded to market changes,carried out in-depth optimisation of the whole industrial chain,enhanced production and marketing coordination,endeavoured to expand the market and sales,and achieved high-quality results.1 PRODUCTION&OPERATIONS REVIEW(1)Exploration and ProductionIn the first half of 2022,the Company seized the favourable opportunity of high oil price,intensified efforts in exploration and development,consolidated the foundation of resources,improved operational performance,and realised growth in production and profit.In terms of exploration,we enhanced basic research,strengthened risk exploration and trap pre-exploration in new regions and areas,and achieved a number of oil and gas discoveries,including breakthroughs in Shunbei oil and gas in Tarim Basin,shale oilfield exploration in Bohai Bay Basin and Subei Basin,deep exploration of natural gas in Sichuan Basin and continental facies shale gas exploration in Puguang.In terms of development,we accelerated the capacity building of major oilfields,such as Shunbei,Tahe and offshore blocks,and strengthened efficiency adjustment and fine-tuned development of mature oil fields.We also actively promoted the capacity building of key natural gas blocks in Sichuan and Erdos Basin,and enhanced optimisation and profitability improvement of whole natural gas business chain.In the first half of the year,the Companys production of oil and gas reached 242 million barrels of oil equivalent,up by 2.9%year-on-year,with domestic crude oil production reaching 124.6 million barrels,up by 0.8%and natural gas production totalled 613.92 billion cubic feet,up by 5.4%year-on-year.Business Review and Prospects9CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022In the first half of 2022,facing the challenges brought by high crude oil price and the pandemic,the Company insisted on optimisation and integration of production and marketing,flexibly adjusted the utilisation rate and product structure,and maintained stable operation.In the first quarter,we seized the good opportunity with high refining margin and comprehensively increased utilisation rate.In the second quarter,we adjusted the structure and increased exports of refined oil products in line with the pandemic situation.The Company optimised the crude oil procurement and resource allocation to reduce procurement costs.We expedited adjustment to increase the yield of chemical feedstock and refining specialities with proportion of high-grade lubricants further increased.We accelerated the construction of advanced capacity and promoted structural adjustment projects in an orderly manner.The Company ensured the supply of hydrogen for the Beijing Winter Olympic Games and the Winter Paralympic Games and continued to promote the hydrogen supply projects.In the first half,the Company processed 121 million tonnes of crude oil,down by 4.2%year-on-year,yielding 68.99 million tonnes of refined oil products,among which diesel output increased by 7.4%year-on-year.Exploration and Production:Summary of OperationsSix-month period ended 30 JuneChanges20222021(%)Oil and gas production(mmboe)242.01235.292.9Crude oil production(mmbbls)139.65138.151.1China124.63123.620.8Overseas15.0214.533.4Natural gas production(bcf)613.92582.605.4(2)Refining(3)Marketing and DistributionIn the first half of 2022,facing fierce market competition and once severe pandemic situation,the Company strengthened the integration of production and marketing,adjusted business strategy in a timely manner,dynamically optimised the allocation of resources,and spared no effort to expand sales and increase profitability.We focused on customer experience and carried out targeted marketing strategies.We actively expanded the low-sulphur bunker fuel market and further consolidated our market position.We also promoted company branding products and improved the quality and profitability of non-fuel business.In addition,Efforts were made to accelerate sales network development,digitisation and transformation to an integrated energy service provider of petrol,gas,hydrogen,power and services.In the first half,total sales volume of refined oil products was 98.42 million tonnes,of which total domestic sales volume accounted for 78.46 million tonnes.Refining:Summary of Operations Unit:million tonnesSix-month period ended 30 JuneChanges20222021(%)Refinery throughput120.76126.11(4.2)Gasoline,diesel and kerosene production68.9972.19(4.4)Gasoline30.0332.40(7.3)Diesel30.6528.547.4Kerosene8.3111.24(26.1)Light chemical feedstock production22.0122.26(1.1)Note:Includes 100%of production of domestic joint ventures.Business Review and Prospects10CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022BUSINESS REVIEW AND PROSPECTS(CONTINUED)(4)ChemicalsIn the first half of 2022,facing difficult situation of high cost,high inventory,low utilisation and low margin in domestic chemical industry,the Company optimised the structure of facilities,feedstock and products,properly scheduled maintenance operations,and maintained high utilisation rate in profitable facilities,responding to market demand.We comprehensively promoted the construction of advanced capacity in Zhenhai,Jiujiang,Tianjin Nangang and Hainan.We also promoted operation stabling and production increasing in coal chemical business,and its profits realised an significant increase.The proportion of high value-added products continued to increase,with ratio of new and specialty products of synthetic resin reached 69.5%,increased by 1.4 percentage points year-on-year,ratio of high-value-added products of synthetic rubber and fibre reached 36.8%and 40.7%,increased by 0.7 and 6.8 percentage points year-on-year respectively,and ratio of fine chemicals reached 35.8%,increased by 1.1 percentage points over the previous year.Ethylene production in the first half was 6.85 million tonnes,with a year-on-year increase of 5.9%.We made full efforts to ensure sufficient supply to our strategic customers,actively increased export,and vigorously expanded high-end markets.In the first half,the total sales volume of chemical products was 40.38 million tonnes,up by 1%year-on-year.Marketing and Distribution:Summary of OperationsSix-month period ended 30 JuneChange20222021(%)Total sales volume of refined oil products(million tonnes)98.42109.13(9.8)Total domestic sales volume of refined oil products(million tonnes)78.4684.01(6.6)Retail(million tonnes)51.2355.50(7.7)Direct sales and Distribution(million tonnes)27.2328.51(4.5)Annualised average throughput per station(tonne/station)3,3333,614(7.8)Note:The total sales volume of refined oil products includes the amount of refined oil marketing and trading sales volume.As of 30 June 2022As of 31 December 2021Change from the end of last year(%)Total number of Sinopec-branded service stations30,74030,7250.05Number of convenience stores27,95027,6181.2Major Chemical Products:Summary of Operations Unit:1,000 tonnesSix-month period ended 30 JuneChanges20222021(%)Ethylene6,8466,4635.9Synthetic resin9,2759,292(0.2)Synthetic fiber monomer and polymer4,6564,5073.3Synthetic fiber555676(17.9)Synthetic rubber6465948.8Note:Includes 100%of production of domestic joint ventures.2 HEALTH AND SAFETYIn the first half of 2022,the Company spared no effort to promote the HSE management system,further promoted the centralised management of safety risks and gas safety,and put in place special programme of contractors safety management.We strengthened pandemic prevention and control,continuously consolidated the foundation of employee health management,and safeguarded the occupational,physical and psychological health of employees at home and abroad.3 SCIENCE AND TECHNOLOGY INNOVATIONIn the first half of 2022,the Company deepened the reform of its science and technology system and mechanism,enhanced investment in science and technology,and strengthened the protection of intellectual property rights,leading to the overall results of science and technology innovation continuing to improve and scientific research payoffs emerging.In upstream,breakthroughs were made in the geological theory and exploration and production of continental facies shale oil,high-efficiency exploration and production of ultra-deep oil and gas,and EOR in mature oilfields.In refining,new progress was made in core technologies such as direct crude oil cracking to ethylene,high-end carbon materials,high-end lubricants,and catalytic materials for fuel cells.In chemicals,the first unit of the third generation aromatics was completed and put into operation.New progress was made in the research and development of key technologies,such as the high isotactic polybutene-1.The one-million-tonne CCUS project was completed and commissioned.Bio-jet fuel achieved large-scale trial production.National pilot demonstration projects such as“Industrial Internet ”and the construction of smart“fields,plants,stations and institutes”progressed smoothly.Business Review and Prospects11CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 20224 CAPITAL EXPENDITURESThe Company continued to optimise its investment management and focused on improving the quality and return of its investments.Capex in the first half of 2022 was RMB64.65 billion,of which RMB33.34 billion was spent in the E&P segment,mainly on the crude oil production capacity building in Shunbei and Tahe,natural gas capacity building in western Sichuan and Dongsheng,and the construction of storage and transportation facilities such as the relocation of Dongying crude oil depot and Longkou LNG projects;RMB8.93 billion was spent in the refining segment,mainly for Anqing and Yangzi refining upgrading projects and the second phase of Zhenhai refining and chemical project;RMB3.07 billion was spent in the marketing and distribution segment,mainly for the construction of gas stations,integrated energy stations covering gasoline,gas,hydrogen,power and service and logistics facilities;RMB18.21 billion was spent in the chemicals segment,mainly for Hainan and Tianjin Nangang ethylene projects,Jiujiang aromatics project,Zhenhai Refining and Chemical project Phase II and Yizheng PTA project;RMB1.10 billion was used on corporate and others,mainly for science and technology research and IT.BUSINESS OUTLOOKLooking ahead to the second half of the year,the risk of stagflation in the global economy is expected to rise,while Chinas economic growth is anticipated to rebound and remain within a reasonable range.Domestic demands for refined oil products and chemical products are expected to pick up,and demand for natural gas will maintain growth.Taking into account the comprehensive impact of geopolitics and changes in global supply and demand,international crude oil prices are expected to remain high and volatile.In the face of the current situation,the Company will pay more attention to enhancing market foresight,strengthening operational synergies,prioritising innovation and development,synergy and optimisation,market expansion,reform management and safety and environmental protection.We will focus on the following aspects:In E&P,the Company will continue to increase exploration efforts,strive to achieve strategic breakthroughs in exploration and increase reserves with scale and profit,boost oil and gas production and profitability,and lower the oil and gas break-even point.We will accelerate the oil and gas production capacity building in Shunbei,Tahe,western Sichuan and Zhongjiang,promote the construction of the national demonstration area for continental shale oil in Jiyang,strengthen the research and application of EOR technologies,and continue to promote profitable oil and gas production.In the second half of the year,we plan to produce 141 million barrels of crude oil and 642.9 billion cubic feet of natural gas.In refining,the Company will integrate and coordinate production and marketing,optimise utilisation rate closely in line with the market and flexibly adjust the product slate.We will dynamically optimise the procurement structure and pace and strive to reduce procurement cost.We will vigorously shift from producing refined oil products to chemicals and specialty products,increase production of high value-added products and specialty products,and promote the growth of lubricants,sulphur and asphalt.In the second half of the year,we plan to process 120 million tonnes of crude oil.In marketing and distribution,the Company will seize the opportunity of rebounding market demand,with leverage on our integration advantages,to precisely implement targeted marketing strategy,improve retail volume and profits,provide tailor-made services for direct sale and distribution customers,and strive to increase the total sales volume and market share.We will further optimise the network layout and consolidate and reinforce network advantages,seize market opportunities and further expand low-sulphur bunker fuel sales,enhance the comprehensive service capability and synergy of non-fuel business.In the second half of the year,we plan to sell 87.1 million tonnes of refined oil products in domestic market.In chemicals,the Company will closely follow market demand,optimise feedstocks,products,facilities and regional resources,and strive to achieve efficient plant operation.We will integrate production,marketing,research and application,strengthen the research and development of high-end products and new materials.We will improve the quality and profitability of coal chemical business and maintain good profit momentum.We will also strengthen the integration of internal and external resources,improve export business and make every effort to expand the market and increase the volume.In the second half of the year,we plan to produce 7.2 million tonnes of ethylene.In Capex,the Company plans to spend RMB133.35 billion in the second half of the year,and will dynamically optimise and adjust its investment projects in the future in accordance with market changes.RMB48.16 billion will be spent in the E&P segment,mainly for the crude oil production capacity building in Shunbei and Tahe,natural gas production capacity building in western Sichuan and Dongsheng,and LNG storage and transportation facilities.RMB11.47 billion will be spent in the refining segment,mainly for Anqing and Yangzi refining upgrading projects and the second phase of Zhenhai refining and chemical project.RMB20.63 billion will be spent in the marketing and distribution segment,mainly for the construction of gas stations,“petrol,gas,hydrogen,power and services”integrated energy stations and logistics facilities.RMB47.89 billion will be spent in the chemicals segment,mainly for the construction of ethylene projects in Hainan and Tianjin Nangang,the second phase of Zhenhai refining and chemical project and the PTA project in Yizheng.RMB5.20 billion will be spent for corporate and others,mainly for the scientific and technological research and IT.Managements Discussion and Analysis12CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022MANAGEMENTS DISCUSSION AND ANALYSIS1 CONSOLIDATED RESULTS OF OPERATIONSIn the first half of 2022,facing the situation of significant increase and drastic fluctuation of international crude oil price,resurging of domestic pandemic,and weak demand for petroleum and petrochemical products,the Company fully leveraged on the advantages of integration and coordination,flexibly adjusted structure of feedstock,products and facilities,expanded market and sales,and realised revenue and operating profit of RMB1,612.1 billion and RMB62.9 billion,increased by 27.9%and 7.6%year-on-year respectively.The following table sets forth the principal revenue and expense items from the Companys consolidated income statement for the first half of 2022 and the corresponding period in 2021:Six-month period ended 30 June20222021ChangeRMB millionRMB million(%)Revenue1,612,1261,260,77327.9Revenue from primary business1,582,2361,231,52328.5Other operating revenues29,89029,2502.2Operating expenses(1,549,202)(1,202,287)28.9Purchased crude oil,products and operating supplies and expenses(1,262,183)(945,555)33.5Selling,general and administrative expenses(26,797)(25,810)3.8Depreciation,depletion and amortisation(53,638)(54,466)(1.5)Exploration expenses,including dry holes(5,738)(4,846)18.4Personnel expenses(49,223)(45,195)8.9Taxes other than income tax(134,409)(120,900)11.2Impairment reversal on trade and other receivables725530.9Other operating expenses,net(17,286)(5,570)210.3Operating profit62,92458,4867.6Net finance costs(5,337)(4,902)8.9Investment income and share of profits less losses from associates and joint ventures7,45311,247(33.7)Profit before taxation65,04064,8310.3Income tax expense(14,461)(15,052)(3.9)Profit for the period50,57949,7791.6Attributable to:Shareholders of the Company44,45140,22710.5Non-controlling interests6,1289,552(35.8)(1)RevenueIn the first half of 2022,the Companys revenue from primary business was RMB1,582.2 billion,representing an increase of 28.5%year-on-year.This was mainly due to the increased prices of major refined oil and chemical products and the increased sales volume of some petroleum and petrochemical products.THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE COMPANYS INTERIM FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES.PARTS OF THE FOLLOWING FINANCIAL DATA,UNLESS OTHERWISE STATED,WERE CONSISTENT WITH THE COMPANYS INTERIM FINANCIAL STATEMENTS THAT HAVE BEEN PREPARED ACCORDING TO THE IFRS.THE PRICES IN THE FOLLOWING DISCUSSION DO NOT INCLUDE VALUE-ADDED TAX.Managements Discussion and Analysis13CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022The following table sets forth the external sales volume,average realised prices and respective change rates of the Companys major products in the first half of 2022 as compared with the first half of 2021.Sales Volume(thousand tonnes)Average realised price(VAT excluded)(RMB/tonne,RMB/thousand cubic meters)Six-month period ended 30 JuneChangeSix-month period ended 30 JuneChange20222021(%)20222021(%)Crude oil4,2803,53721.04,5132,79461.5Natural gas(million cubic meters)14,82414,3713.21,7361,52214.1Gasoline39,52545,597(13.3)9,2727,30726.9Diesel36,66834,6485.87,5585,38840.3Kerosene8,57511,016(22.2)5,7713,39769.9Basic chemical feedstock18,06317,6652.36,4755,15925.5Synthetic fibre monomer and polymer3,8123,40811.96,6076,2166.3Synthetic resin8,5958,652(0.7)8,6628,1746.0Synthetic fibre588714(17.6)8,3477,35613.5Synthetic rubber6636226.611,72010,58410.7Most of the crude oil and a small portion of natural gas produced by the Company were internally used for refining and chemical production with the remaining sold to other customers.In the first half of 2022,the revenue from crude oil,natural gas and other upstream products sold externally amounted to RMB95.8 billion,up by 41.5%year-on-year,accounting for 5.9%of the Companys revenue from primary business and other operating revenues.This change was mainly due to the increased crude oil and natural gas prices and sales volume.Petroleum products(mainly consisting of refined oil products and other refined petroleum products)sold externally by the refining segment and the marketing and distribution segment achieved external sales revenues of RMB866.1 billion,representing an increase of 24.9%year-on-year and accounting for 53.7%of the Companys revenue from primary business and other operating revenues.This change was mainly due to the increased price of refined oil products and the increased diesel sales volume.The sales revenue of gasoline,diesel and kerosene was RMB693.1 billion,representing an increase of 24.4%year-on-year,accounting for 80.0%of the total sales revenue of petroleum products.The sales revenue of other refined petroleum products was RMB173.0 billion,accounting for 20.0%of the sales revenue of petroleum products,up by 27.2%year-on-year.The Companys external sales revenue of chemical products was RMB234.2 billion,accounting for 14.5%of its revenue from primary business and other operating revenues,up by 18.4%year-on-year.The change was mainly due to the increased chemical products price and sales volume of some chemical products.Managements Discussion and Analysis14CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022MANAGEMENTS DISCUSSION AND ANALYSIS(CONTINUED)(2)Operating expensesIn the first half of 2022,the Companys operating expenses were RMB1,549.2 billion,up by 28.9%year-on-year,mainly due to the increased price of outsourced crude oil,refined oil products and chemical feedstock resulting from the significant increase in international commodities and raw materials price.The operating expenses mainly consisted of the following:Purchased crude oil,products and operating supplies and expenses were RMB1,262.2 billion,representing an increase of 33.5%year-on-year,accounting for 81.5%of total operating expenses,of which:Crude oil purchasing expenses were RMB471.6 billion,representing an increase of 57.2%year-on-year.Throughput of outsourced crude oil in the first half of 2022 was 112.79 million tonnes(excluding the volume processed for third parties),down by 4.4%year-on-year.The average unit processing cost of outsourced crude oil was RMB4,649 per tonne,up by 63.3%year-on-year.The Companys purchasing expenses of refined oil products were RMB138.2 billion,up by 1.7%year-on-year.The Companys purchasing expenses related to trading activities were RMB354.7 billion,up by 36.4%year-on-year,mainly due to the increased prices of outsourced crude oil and refined oil products.Other purchasing expenses were RMB297.7 billion,up by 19.3%year-on-year,mainly due to the increased price of raw materials.Selling,general and administrative expenses of the Company totalled RMB26.8 billion,representing an increase of 3.8%year-on-year.Depreciation,depletion and amortisation of the Company were RMB53.6 billion,representing a decrease of 1.5%year-on-year.This was mainly due to the decreased depreciation and depletion of oil and gas assets resulting from the increase of proved reserves.Exploration expenses were RMB5.7 billion,representing an increase of 18.4%year-on-year.This was mainly because the Company accordingly increased high efficient exploration investment for discovering good quality reserves.Personnel expenses were RMB49.2 billion,representing an increase of 8.9%year-on-year.This was mainly due to the increased payment base,which led to the increase in social insurance and other wage surcharges,and the increased performance wages.Taxes other than income tax were RMB134.4 billion,representing an increase of 11.2%year-on-year,mainly due to the increased special oil income levy,as well as the increase of resource tax on oil and gas products and consumption tax on refined oil products.Other operating expenses,net was RMB17.3 billion,representing an increase of RMB11.7 billion over the same period of 2021,mainly due to the loss on derivative financial instruments.(3)Operating profitIn the first half of 2022,the Companys operating profit was RMB62.9 billion,representing an increase of 7.6%year-on-year.This was mainly due to the significant improve in upstream profitability.In addition,the Company fully leveraged on its integration advantages,strengthened optimisation of industrial chain,and maintained stable operation in downstream business.(4)Net finance costsIn the first half of 2022,the Companys net finance costs were RMB5.3 billion,up by RMB0.4 billion or 8.9%over the same period of last year,mainly due to the increased interest-bearing debt scale led to the increase of interest expenses year-on-year.(5)Profit before taxationIn the first half of 2022,the Companys profit before taxation amounted to RMB65.0 billion,representing an increase of 0.3%year-on-year.(6)Income tax expenseIn the first half of 2022,the Companys income tax expense totalled RMB14.5 billion,representing a decrease of 3.9%year-on-year.(7)Profit attributable to non-controlling interests of the CompanyIn the first half of 2022,profit attributable to non-controlling interests was RMB6.1 billion,representing a decrease of RMB3.4 billion and 35.8%year-on-year,mainly due to the decreased profits of non-controlling enterprises of the Company.(8)Profit attributable to shareholders of the CompanyIn the first half of 2022,profit attributable to shareholders of the Company was RMB44.5 billion,representing an increase of 10.5%year-on-year.Managements Discussion and Analysis15CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 20222 RESULTS OF SEGMENT OPERATIONSThe Company manages its operations by four business segments,namely exploration and production segment,refining segment,marketing and distribution segment and chemicals segment,as well as corporate and others.Unless otherwise specified,the inter-segment transactions have not been eliminated from financial data discussed in this section.In addition,the operating revenue data of each segment includes other operating revenues.The following table shows the operating revenues by each segment,the contribution of external sales and inter-segment sales as a percentage of operating revenues before elimination of inter-segment sales,and the contribution of external sales as a percentage of consolidated operating revenues(i.e.after elimination of inter-segment sales)for the periods indicated.Operating revenuesAs a percentage of consolidated operating revenues before elimination of inter-segment salesAs a percentage of consolidated operating revenues after elimination of inter-segment salesSix-month period ended 30 JuneSix-month period ended 30 JuneSix-month period ended 30 June202220212022202120222021RMB million(%)(%)Exploration and Production Segment External sales*97,85470,1353.43.26.15.6Inter-segment sales60,31439,3912.11.8 Operating revenues158,168109,5265.55.0 Refining Segment External sales*100,84582,1843.53.76.36.5Inter-segment sales674,791543,68123.024.5 Operating revenues775,636625,86526.528.2 Marketing and Distribution Segment External sales*787,077632,20327.028.548.850.1Inter-segment sales4,9162,9670.20.1 Operating revenues791,993635,17027.228.6 Chemicals Segment External sales*239,121202,6138.29.114.816.1Inter-segment sales39,08930,0301.31.4 Operating revenues278,210232,6439.510.5 Corporate and Others External sales*387,229273,63813.312.324.021.7Inter-segment sales525,043340,70118.015.4 Operating revenues912,272614,33931.327.7 Operating revenue before elimination of inter-segment sales2,916,2792,217,543100.0100.0 Elimination of inter-segment sales(1,304,153)(956,770)Consolidated operating revenues1,612,1261,260,773 100.0100.0*Other operating revenues are included.Managements Discussion and Analysis16CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022MANAGEMENTS DISCUSSION AND ANALYSIS(CONTINUED)The following table sets forth the operating revenues,operating expenses and operating profit/(loss)by each segment before elimination of the inter-segment transactions for the periods indicated,and the percentage change between the first half of 2022 and the first half of 2021.Six-month period ended 30 June20222021ChangeRMB million(%)Exploration and Production Segment Operating revenues158,168109,52644.4Operating expenses131,866103,29327.7Operating profit26,3026,233322.0Refining Segment Operating revenues775,636625,86523.9Operating expenses745,868586,46727.2Operating profit29,76839,398(24.4)Marketing and Distribution Segment Operating revenues791,993635,17024.7Operating expenses775,138619,10225.2Operating profit16,85516,0684.9Chemicals Segment Operating revenues278,210232,64319.6Operating expenses277,400219,26126.5Operating profit81013,382(93.9)Corporate and Others Operating revenues912,272614,33948.5Operating expenses911,873618,07447.5Operating profit/(loss)399(3,735)Elimination(11,210)(12,860)In the first half of 2022,the oil and gas lifting cost was RMB767.08 per tonne,representing an increase of 3.6%year-on-year.This was mainly due to the increased cost of outsourced raw materials and fuel.In the first half of 2022,the segment seized the opportunity of high oil price,enhanced exploration and production,accelerated capacity building,strengthened optimisation of the whole natural gas industry chain,and improved profitability.In the first half,the segment realised an operating profit of RMB26.3 billion,representing an increase of RMB20.1 billion or 322.0%year-on-year.(2)Refining SegmentBusiness activities of the refining segment include purchasing crude oil from third parties and the exploration and production segment of the Company as well as processing crude oil into refined petroleum products.Gasoline,diesel and kerosene are sold internally to the marketing and distribution segment of the Company,part of the chemical feedstock is sold internally to the chemicals segment of the Company,and other refined petroleum products are sold to both domestic and overseas customers through the refining segment.In the first half of 2022,operating revenues of the segment were RMB775.6 billion,representing an increase of 23.9%year-on-year.This was mainly because of an increase in price of refined oil products,as well as an increase in diesel sales volume.(1)Exploration and Production SegmentMost of the crude oil and a small portion of the natural gas produced by the exploration and production segment were used for the Companys refining and chemical operations.Most of the natural gas and a small portion of the crude oil produced by the Company were sold to external customers.In the first half of 2022,operating revenues of the segment were RMB158.2 billion,representing an increase of 44.4%year-on-year.This was mainly due to the increased sales prices and volume of domestic crude oil and natural gas.In the first half of 2022,the segment sold 16.97 million tonnes of crude oil,representing an increase of 0.2%year-on-year.Natural gas sales volume was 15.3 bcm,representing an increase of 3.3%year-on-year.Regasified LNG sales volume was 11.2 bcm,representing an increase of 20.3%year-on-year.LNG sales volume was 0.91 million tonnes,representing a decrease of 72.6%year-on-year.This was mainly because the Company flexibly adjusted marketing strategy in line with market demand and resource situation.Average realised prices of crude oil,natural gas,regasified LNG,and LNG were RMB4,391 per tonne,RMB1,743 per thousand cubic meters,RMB3,037 per thousand cubic meters,and RMB5,695 per tonne respectively,representing an increase of 64.1%,14.5%,57.1%and 83.3%year-on-year respectively.In the first half of 2022,the operating expenses of the segment were RMB131.9 billion,representing an increase of 27.7%year-on-year.This was mainly because that LNG procurement cost increased by RMB16.4 billion year-on-year,special oil income levy and resource tax increased by RMB9.8 billion year-on-year,personnel expenses increased by RMB2.2 billion year-on-year,exploration expenses increased by RMB900 million year-on-year,and depreciation,depletion and amortization decreased by RMB2.1 billion year-on-year resulting from increased proved reserves.Managements Discussion and Analysis17CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022In the first half of 2022,the sales revenues of gasoline were RMB258.2 billion,representing an increase of 19.6%year-on-year,accounting for 33.3%of the segments operating revenues.In the first half of 2022,the sales revenues of diesel were RMB215.0 billion,representing an increase of 51.8%year-on-year,accounting for 27.7%of the segments operating revenues.In the first half of 2022,the sales revenues of kerosene were RMB37.5 billion,representing an increase of 23.9%year-on-year,accounting for 4.8%of the segments operating revenues.In the first half of 2022,the sales revenues of chemical feedstock were RMB111.0 billion,representing an increase of 37.7%year-on-year,accounting for 14.3%of the segments operating revenues.In the first half of 2022,the sales revenues of refined petroleum products other than gasoline,diesel,kerosene and chemical feedstock were RMB152.0 billion,representing a decrease of 2.0%year-on-year,accounting for 19.6%of the segments operating revenues.In the first half of 2022,the segments operating expenses were RMB745.9 billion,representing an increase of 27.2%year-on-year,which was mainly attributable to the significant increase in the cost of outsourced crude,fuels and power resulting from increased international crude oil price.In the first half of 2022,the average processing cost of refining feedstock was RMB4,754 per tonne,representing an increase of 60.7%year-on-year.Total refining feedstock throughput was 123.07 million tonnes(excluding volume processed for third parties),representing a decrease of 5.5%year-on-year.In the first half of 2022,the total processing cost for crude oil was RMB585.1 billion,representing an increase of 51.8%year-on-year.This was mainly due to the increased crude procurement cost.In the first half of 2022,the refining margin was RMB533 per tonne,decreased by RMB28 per tonne year-on-year,representing a decrease of 5.1%year-on-year.This was mainly due to the increased crude procurement cost,overseas transportation and insurance cost,and decreased refined oil products margin ratio under the high crude price circumstance.In the first half of 2022,the unit refining cash operating cost(defined as operating expenses less cost of crude oil and refining feedstock,depreciation and amortisation,taxes other than income tax and other operating expenses,divided by the throughput of crude oil and refining feedstock)was RMB222.76 per tonne,representing an increase of 18.2%year-on-year,which was mainly due to the increased cost of auxiliary material and fuels resulting from increased international commodity prices.In the first half of 2022,the segment proactively reduced the utilisation rate to address the resurging pandemic and weak demand of refined oil products,but impacted by the increased processing cost of crude oil and shrank margin ratio,operating profit was RMB29.8 billion,decreased by RMB9.6 billion or 24.4%year-on-year.(3)Marketing and Distribution SegmentThe business activities of the marketing and distribution segment include purchasing refined oil products from the refining segment and the third parties,conducting wholesale and direct sales to domestic customers and retailing,distributing oil products through the segments retail and distribution network,as well as providing related services.The following table sets forth the sales volumes,average realised prices and the respective changes of the Companys major refined oil products of the segment in the first half of 2022 and that of the same period of 2021.Sales Volume(thousand tonnes)Average realised price(VAT excluded)(RMB/tonne)Six-month period ended 30 JuneChangeSix-month period ended 30 JuneChange20222021(%)20222021(%)Gasoline28,94531,795(9.0)8,9196,78631.4Diesel29,38828,0214.97,3175,05644.7Kerosene6,6298,991(26.3)5,6623,37168.0Chemical feedstock20,90222,337(6.4)5,3113,60947.2Other refined petroleum products32,78533,752(2.9)4,6374,5960.9Managements Discussion and Analysis18CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022MANAGEMENTS DISCUSSION AND ANALYSIS(CONTINUED)In the first half of 2022,the operating expenses of this segment were RMB775.1 billion,representing an increase of RMB156.0 billion,up by 25.2%year-on-year.This was mainly due to increased procurement cost of refined oil products resulting from increased international crude oil price.In the first half of 2022,the segments marketing cash operating cost(defined as the operating expenses less the purchase costs,taxed other than income tax,depreciation and amortization,divided by sales volume)was RMB198.71 per tonne,up by 13.0%year-on-year.This was mainly attributable to the increased unit fixed cost as a result of resurging pandemic,weak demand for refined oil products and decreased sales volume.In the first half of 2022,the operating revenues of non-fuel business of this segment were RMB19.3 billion,representing an increase of RMB1.3 billion year-on-year,and the profit of non-fuel business was RMB2.6 billion,representing an increase of RMB300 million year-on-year.This was mainly because the Company proactively promoted the sales volume of company branding products and expanded new business models.In the first half of 2022,the segment proactively integrated and coordinated production and marketing,expanded market to address the severe situation of resurging pandemic,and realised an operating profit of RMB16.9 billion,representing an increase of RMB800 million or 4.9%year-on-year.(4)ChemicalsThe business activities of the chemicals segment include purchasing chemical feedstock from the refining segment and third parties and producing,marketing and distributing petrochemical and inorganic chemical products.In the first half of 2022,the operating revenues of this segment were RMB278.2 billion,increased by 19.6%year-on-year.This was mainly due to the increased chemical prices,as well as sales volume growth of some products.In the first half of 2022,the operating revenue generated by the segments six major categories of chemical products(namely basic organic chemicals,synthetic resin,synthetic fiber monomer and polymer,synthetics fibre,synthetic rubber and chemical fertiliser)was RMB262.4 billion,increased by 18.5%year-on-year,accounting for 94.3%of the operating revenues of the segment.In the first half of 2022,the operating revenues of this segment were RMB792.0 billion,increased by 24.7%year-on-year.This was mainly attributable to increased prices of refined oil products.Among which,sales revenues of gasoline were RMB366.7 billion,increased by 10.0%year-on-year,sales revenues of diesel were RMB278.0 billion,increased by 48.5%year-on-year and sales revenues of kerosene were RMB49.5 billion,increased by 32.2%year-on-year.The following table sets forth the sales volume,average realised prices and respective changes of the segments four major refined oil products in the first half of 2022 and 2021,including the detailed information about the retail,direct sales and distribution of gasoline and diesel.Sales volume(thousand tonnes)Average realised price(VAT excluded,RMB/tonne)Six-month period ended 30 JuneChangeSix-month period ended 30 JuneChange20222021(%)20222021(%)Gasoline39,55445,606(13.3)9,2717,30726.9Retail28,66932,383(11.5)9,7837,80725.3Direct sales and distribution10,88513,222(17.7)7,9256,08230.3Diesel36,79234,7425.97,5565,38840.2Retail15,21215,0651.08,0726,07932.8Direct sales and distribution21,58019,6779.77,1924,86048.0Kerosene8,57511,016(22.2)5,7713,39769.9Fuel oil11,15912,751(12.5)5,1223,10365.1Managements Discussion and Analysis19CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022In the first half of 2022,the operating expenses of this segment were RMB277.4 billion,increased by 26.5%year-on-year,mainly due to the increased cost of outsourced feedstock and fuels as a result of increased international crude oil price.In the first half of 2022,The segment vigorously optimised structural of feedstock,product and facilities,increased production of high value-added products,but impacted by significant decrease in chemical margin,resulting from significant increase of naphtha and other feedstock prices,weak chemical demand,and relatively low downstream utilisation rate,operating profit was RMB800 million,decreased by RMB12.6 billion year-on-year.(5)Corporate and OthersThe business activities of corporate and others mainly consists of import and export business activities of Sinopec Corp.s subsidiaries,research and development activities of the Company,and managerial activities of the headquarters.In the first half of 2022,the operating revenue generated from the corporate and others was RMB912.3 billion,increased by 48.5%year-on-year,mainly due to a significant increase in the trading prices of crude oil and refined oil products.In the first half of 2022,the operating expenses for corporate and others were RMB911.9 billion,increased by 47.5%year-on-year.In the first half of 2022,the segments operating profit was RMB400 million.The following table sets forth the sales volume,average realised prices and respective changes of each of the segments six categories of chemical products in the first half of 2022 and 2021.Sales volume(thousand tonnes)Average realised price(VAT excluded,RMB/tonne)Six-month period ended 30 JuneChangeSix-month period ended 30 JuneChange20222021(%)20222021(%)Basic organic chemicals23,10523,377(1.2)6,4234,96129.5Synthetic fibre monomer and polymer3,8433,43212.06,6336,2536.1Synthetic resin8,5968,652(0.6)8,6628,1746.0Synthetics fibre588714(17.7)8,3507,35613.5Synthetic rubber6646246.511,72810,58910.8Chemical fertiliser408505(19.3)3,3292,66624.93 ASSETS,LIABILITIES,EQUITY AND CASH FLOWSThe major funding resources of the Company are its operating activities,short-term and long-term loans.The major use of funds includes operating expenses,capital expenditures,and repayment of short-term and long-term debts.(1)Assets,Liabilities and Equity Unit：RMB millionAs of 30 June 2022As of 31 December 2021ChangeTotal assets2,059,8141,889,255170,559Current assets706,433558,024148,409Non-current assets1,353,3811,331,23122,150Total liabilities1,129,073974,181154,892Current liabilities793,623641,280152,343Non-current liabilities335,450332,9012,549Total equity attributable to the shareholders of the Company786,249774,18212,067Share capital121,071121,071Reserves665,178653,11112,067Non-controlling interests144,492140,8923,600Total equity930,741915,07415,667Managements Discussion and Analysis20CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022MANAGEMENTS DISCUSSION AND ANALYSIS(CONTINUED)As of 30 June 2022,the Companys total assets were RMB2,059.8 billion,representing an increase of RMB170.6 billion compared with the 2021 year-end balance,of which:Current assets were RMB706.4 billion,representing an increase of RMB148.4 billion compared with the 2021 year-end balance,mainly because inventories and accounts receivable increased by RMB77.6 billion and RMB28.9 billion respectively resulting from the increase of international crude oil price,as well as cash and cash equivalents increased by RMB30.6 billion.Non-current assets were RMB1,353.4 billion,representing an increase of RMB22.2 billion compared with the 2021 year-end balance,mainly because construction in progress increased by RMB13.1 billion and interest in associates increased by RMB9.6 billion.As of 30 June 2022,the Companys total liabilities were RMB1,129.1 billion,representing an increase of RMB154.9 billion compared with the end of last year,of which:Current liabilities were RMB793.6 billion,representing an increase of RMB152.3 billion compared with the 2021 year-end balance,mainly because short-term debts increased by RMB124.3 billion and accounts payable and bills payable increased by RMB32.6 billion.Non-current liabilities were RMB335.5 billion,representing an increase of RMB2.5 billion compared with the 2021 year-end balance.As of 30 June 2022,total equity attributable to shareholders of the Company was RMB786.2 billion,representing an increase of RMB12.1 billion compared with the 2021 year-end balance.(2)Cash FlowsThe following table sets forth the major items in the consolidated cash flow statements for the first half of 2022 and of 2021:Unit:RMB millionMajor items of cash flowsSix-month period ended 30 JuneChange20222021Net cash generated from operating activities4,94748,347(43,400)Net cash used in investing activities(51,138)(65,990)14,852Net cash generated from financing activities75,2128,65066,562Net increase/(decrease)in cash and cash equivalents29,021(8,993)38,014In the first half of 2022,net cash generated from operating activities was RMB4.9 billion,representing a decrease of RMB43.4 billion year-on-year,mainly due to net change of inventories increasing the outflow of cash by RMB31.0 billion,net change of accounts payable and other current liabilities decreasing inflow of cash by RMB22.5 billion,net change of income tax paid decreasing outflow of cash by RMB6.2 billion and share of profits from associates and joint ventures decreasing outflow of cash by RMB3.8 billion.In the first half of 2022,the Companys net cash used in investing activities was RMB51.1 billion,representing a decrease of cash outflow of RMB14.9 billion year-on-year,mainly due to a year-on-year decrease of cash outflow of RMB34.2 billion in time deposits with maturities over three months,an increased cash outflow of RMB7.6 billion used to pay for acquisition of subsidiaries,an increase of cash outflow RMB5.3 billion in capital expenditures and a decrease of cash inflow of RMB4.5 billion in the proceeds from sale of investments.In the first half of 2022,the Companys net cash generated from financing activities was RMB75.2 billion,representing an increase of cash inflow of RMB66.6 billion year-on-year,mainly due to proceeds from bank and other loans increased by RMB178.8 billion,repayments of bank and other loans increased by RMB93.3 billion and dividends distribution increased by RMB21.8 billion.As of 30 June 2022,the Companys cash and cash equivalents were RMB139.2 billion.(3)Contingent LiabilitiesPlease refer to“Material Guarantee Contracts and Performance Thereof”in the“Significant Events”section of this report.(4)Capital ExpenditurePlease refer to“Capital Expenditures”in the“Business Review and Prospects”section of this report.(5)Research&Development and Environmental ExpenditureResearch and Development expenditures referred to fees incurred in the period and recognised as expenses.In the first half of 2022,the Companys research and development expenditure amounted to RMB9.48 billion,of which expenditure was RMB6.31 billion and capitalised expenditure was RMB3.17 billion.Environmental expenditures refer to the routine pollutant cleaning fees paid by the Company,excluding capitalised cost of pollutant treatment facilities.In the first half of 2022,the environmental expenditures amounted to RMB4.355 billion.Managements Discussion and Analysis21CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 20224 ANALYSIS OF FINANCIAL STATEMENTS PREPARED UNDER CASsThe major differences between the Companys financial statements prepared under CASs and IFRS are set out in Section C of the financial statements of the Company on page 143 of this report.(1)Under CASs,the operating income and operating profit or loss by reportable segments were as follows:Six-month period ended 30 June20222021RMB millionRMB millionOperating income Exploration and Production Segment158,168109,526Refining Segment775,636625,865Marketing and Distribution Segment791,993635,170Chemicals Segment278,210232,643Corporate and Others912,272614,339Elimination of inter-segment sales(1,304,153)(956,770)Consolidated operating income1,612,1261,260,773Operating profit/(loss)Exploration and Production Segment25,3585,218Refining Segment28,75139,177Marketing and Distribution Segment17,96416,583Chemicals Segment12012,845Corporate and Others18,1641,646Elimination(11,210)(12,860)Financial expenses,losses/gains from changes in fair value,investment income and disposal income(17,067)385Other income2,1211,244Consolidated operating profit64,20164,238Net profit attributable to equity shareholders of the Company43,53039,426Operating profit:In the first half of 2022,the operating profit of the Company was RMB64.2 billion,representing a decrease of 0.1%year-on-year.Net profit:In the first half of 2022,net profit attributable to the equity shareholders of the Company was RMB43.5 billion,representing an increase of 10.4%year-on-year.(6)Measurement of Fair Values of Derivatives and Relevant SystemThe Company has established sound decision-making mechanism,business process and internal control systems relevant to financial instrument accounting and information disclosure.The following table sets forth items relevant to measurement of fair values.Items relevant to measurement of fair values Unit:RMB millionItemsBeginning ofthe reporting periodEnd of thereporting periodProfits and losses from variation of fairvalues in thecurrent reporting periodAccumulated variationof fair valuesrecorded as equityImpairment loss provisionof the currentreporting periodFunding sourceFinancial assets held for trading1,0129Self-owned fundStructured deposit1,0099Self-owned fundFund3Self-owned fundDerivative financial instruments1,3501,038(19,312)Cash flow hedges15,14825,023(16)2,330 Receivables financing5,9395,889 Other equity instrument investments767771(14)Total23,20433,733(19,319)2,316 Managements Discussion and Analysis22CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022MANAGEMENTS DISCUSSION AND ANALYSIS(CONTINUED)(2)Financial data prepared under CASs:At 30 JuneAt 31 December20222021ChangesRMB millionRMB millionRMB millionTotal assets2,059,8141,889,255170,559Non-current liabilities334,519331,9342,585Shareholders equity931,672916,04115,631Changes analysis:Total assets:As of 30 June 2022,the Companys total assets were RMB2,059.8 billion,representing an increase of RMB170.6 billion compared with the 2021 year-end balance.This was mainly due to inventories increased by RMB77.6 billion,accounts receivable increased by RMB28.9 billion,cash at bank and on hand increased by RMB11.9 billion,derivative financial assets increased by RMB22.0 billion,other receivables increased by RMB9.0 billion,long-term equity investments increased by RMB10.2 billion and construction in progress increased by RMB13.1 billion.Non-current liabilities:As of 30 June 2022,the Companys non-current liabilities were RMB334.5 billion,representing an increase of RMB2.6 billion compared with the 2021 year-end balance.Shareholders equity:As of 30 June 2022,total shareholders equity of the Company was RMB931.7 billion,representing an increase of RMB15.6 billion compared with the 2021 year-end balance.(3)The results of the principal operations by segmentsSegmentsOperatingincome(RMB million)Operating cost(RMB million)Gross profitmargin*(%)Increase ofoperatingincome ona year-on-yearbasis(%)Increase ofoperatingcost ona year-on-yearbasis(%)Increase of gross profitmargin ona year-on-yearbasis(percentagepoints)Exploration and Production158,168105,87923.944.420.68.4Refining775,636622,9794.623.935.1(3.7)Marketing and Distribution791,993742,2586.124.726.8(1.5)Chemicals278,210268,0753.019.631.5(8.7)Corporate and Others912,272884,5773.048.546.41.4Elimination of inter-segment sales(1,304,153)(1,292,943)N/AN/AN/AN/ATotal1,612,1261,330,8259.127.933.3(2.1)*Gross profit margin=(Operating income Operating cost taxes and surcharges)/Operating income5.THE CAUSE AND IMPACT OF THE CHANGE IN THE COMPANYS ACCOUNTING POLICY,ACCOUNTING ESTIMATES AND ACCOUNTING METHODSFor details,please refer to Note 3(26)to the financial statements prepared in accordance with CASs and Note 2 to the financial statement prepared in accordance with IFRS.23CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022Corporate GovernanceCORPORATE GOVERNANCE1.IMPROVEMENTS IN CORPORATE GOVERNANCEDuring the reporting period,Sinopec Corp.adhered to the standard operation,complied with the Articles of Association as well as domestic and applicable overseas laws and regulations on securities,and strengthened the edifice of the fundamental system of corporate governance by revising several internal rules according to the updated securities regulations.The Board fulfilled its duties,strengthened its strategic planning roles,and formulated medium-term and long-term development plans.The Company continuously promoted the execution effectiveness of internal control policy and strengthened compliance management and risk control,so as to improve enterprise management.The Party participated in the corporate governance of the Company,which promoted the effective implementation of the decisions of the Board.The Company continuously conducted the information disclosure and investor relations work with high quality,strengthened communication with stakeholders,and fulfilled the social responsibilities to contribute to economic growth and social progress by ensuring a stable supply of oil and gas and supporting the actions fighting against the pandemic,etc.2.GENERAL MEETINGSDuring the reporting period,Sinopec Corp.convened the annual general meeting for 2021,the first A shareholders class meeting for 2022,and the first H shareholders class meeting for 2022 on 18 May 2022 in Beijing,China,strictly in compliance with the relevant laws,regulations,and the notice requirement,convening and holding procedures under the Articles of Association.The annual general meeting for 2021 approved the proposals in relation to the following matters:(i)Report of the Board of Directors for 2021;(ii)Report of the Board of Supervisors for 2021;(iii)The audited financial reports of Sinopec Corp.for the year ended 31 December 2021 prepared by KPMG Huazhen(Special General Partnership)and KPMG;(iv)The profit distribution plan of Sinopec Corp.for 2021;(v)To authorise the Board to determine the interim profit distribution plan for 2022;(vi)To re-appoint KPMG Huazhen(Special General Partnership)and KPMG as the external auditors of Sinopec Corp.for the year 2022,and to authorise the Board to determine their remunerations;(vii)To authorise the Board to determine the proposed plan for issuance of debt financing instrument(s);(viii)To grant to the Board a general mandate to issue new domestic shares and/or overseas-listed foreign shares of Sinopec Corp.;(ix)To grant to the Board a mandate to buy back domestic shares and/or overseas-listed foreign shares of Sinopec Corp.;(x)Resolutions on the election of supervisors(excluding employee representative supervisors).The first A shareholders class meeting for 2022 and the first H shareholders class meeting for 2022 approved respectively the proposal on granting to the Board a mandate to buy back domestic shares and/or overseas-listed foreign shares of Sinopec Corp.For details of the meetings,please refer to the poll results announcement published on China Securities Journal,Shanghai Securities News,and Securities Times and on the websites of Shanghai Stock Exchange and Hong Kong Stock Exchange after the meetings.3.DIRECTORS,SUPERVISORS AND OTHER SENIOR MANAGEMENT(1)Information on Appointment or TerminationOn 18 May 2022,Mr.Jiang Zhenying resigned as Supervisor of Sinopec Corp.due to a change of working arrangement.Mr.Li Defang and Mr.Lv Dapeng resigned as Employee Representative Supervisors due to age.Mr.Guo Hongjin and Mr.Yin Zhaolin were re-designated from Non-employee Representative Supervisors to Employee Representative Supervisors.On the same day,Mr.Qiu Fasen,Mr.Lv Lianggong,Mr.Wu Bo and Mr.Zhai Yalin were elected as Supervisors of Sinopec Corp.On 2 June 2022,Mr.Zhao Dong was appointed as the President of China Petrochemical Corporation.On 18 July 2022,Mr.Ng,Kar Ling Johnny resigned as Independent Non-executive Director of Fangdd Network Group Ltd.On 20 July 2022,Mr.Chen Ge resigned as Senior Vice President due to age.(2)Equity Interests of Directors,Supervisors,and Other Senior ManagementAs of 30 June 2022,Mr.Ling Yiqun,Director and Senior Vice President,held 13,000 A shares of Sinopec Corp.,and Mr.Li Defang,the former Supervisor,held 40,000 A shares of Sinopec Corp.(held by his spouse).Save as disclosed above,as of 30 June 2022,none of the Directors,Supervisors and Senior Management of Sinopec Corp.and their respective associates had any interests or short positions(including any interests or short positions that are regarded or treated as being held in accordance with the SFO)in any shares,underlying shares or debentures of Sinopec Corp.or any associated corporations(as defined in Part XV of SFO),as recorded in the registry pursuant to Section 352 of the SFO or as otherwise notified to Sinopec Corp.and the Hong Kong Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies(Model Code)contained in the Hong Kong Listing Rules.As required under the related Hong Kong regulations,Sinopec Corp.has formulated the Rules Governing Shares and Changes in Shares Held by Company Directors,Supervisors and Senior Management and the Model Code of Securities Transactions by Company Employees(the Rules and the Code)to regulate securities transactions by relevant personnel.The standards of the Rules and the Code are no less strict than those set out in the Model Code.Upon the specific inquiries made by Sinopec Corp.,all the directors confirmed that they had complied with the required standards in the Model Code as well as those set out in the Rules and the Code during the reporting period.24CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022Corporate GovernanceCORPORATE GOVERNANCE(CONTINUED)4 DIVIDEND(1)Dividend distribution for the year ended 31 December 2021Upon the approval at its annual general meeting for 2021,Sinopec Corp.distributed the final cash dividend of RMB0.31 per share(tax inclusive)for 2021.The final dividend for 2021 has been distributed on or before 23 June 2022 to shareholders whose names appeared on the register of members of Sinopec Corp.on 9 June 2022.Combined with the 2021 interim cash dividend of RMB0.16 per share(tax inclusive),the total cash dividend for the whole year of 2021 amounted to RMB0.47 per share(tax inclusive).(2)Interim dividend distribution plan for the six months ended 30 June 2022As approved at the 12th meeting of the eighth session of the Board,the interim dividend of RMB0.16 per share(tax inclusive)for the six months ended 30 June 2022 will be distributed based on the total number of shares as of 16 September 2022(record date)in cash.The 2022 interim dividend distribution plan of Sinopec Corp.,having considered the interest of shareholders and development of the Company,is in compliance with the Articles of Association and relevant procedures.The independent non-executive directors have issued independent opinions on such plan.The interim dividend will be distributed on or before 29 September 2022 to all shareholders whose names appear on the register of members of Sinopec Corp.on the record date of 16 September 2022.In order to be qualified for the interim dividend,holders of H shares shall lodge their share certificates and transfer documents with Hong Kong Registrars Limited at 1712-1716,17th floor,Hopewell Centre,No.183 Queens Road East,Wanchai,Hong Kong,for registration,no later than 4:30 p.m.on 9 September 2022.The register of members of H shares of Sinopec Corp.will be closed from 10 September 2022 to 16 September 2022(both days inclusive).The dividend will be denominated and declared in RMB and distributed to domestic shareholders and shareholders under Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect Program in RMB and to the overseas shareholders in Hong Kong Dollars.The exchange rate for dividend to be paid in Hong Kong Dollars is based on the average benchmark exchange rate of Hong Kong Dollar against RMB as published by the Peoples Bank of China one week ahead of the date of declaration of the interim dividend(1 Hong Kong dollar=RMB0.864426).In accordance with the Enterprise Income Tax Law of the Peoples Republic of China and its implementation regulations which came into effect on 1 January 2008,Sinopec Corp.is required to withhold and pay enterprise income tax at the rate of 10%on behalf of the non-resident enterprise shareholders whose names appear on the register of members for H Shares of Sinopec Corp.when distributing the cash dividends or issuing bonus shares by way of capitalisation from retained earnings.Any H Shares of the Sinopec Corp.which are not registered under the name of an individual shareholder,including those registered under HKSCC Nominees Limited,other nominees,agents or trustees,or other organisations or groups,shall be deemed as shares held by non-resident enterprise shareholders.On such basis,enterprise income tax shall be withheld from dividends payable to such shareholders.If holders of H Shares intend to change their shareholder status,please enquire about the relevant procedures with your agents or trustees.Sinopec Corp.will strictly comply with the law or the requirements of the relevant government authority to withhold and pay enterprise income tax on behalf of the relevant shareholders based on the registration of members for H shares of Sinopec Corp.as at the record date.If the individual holders of H shares are residents of Hong 25CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022Corporate GovernanceKong,Macau or countries which had an agreed tax rate of 10%for cash dividends or bonus shares by way of capitalisation from retained earnings with China under the relevant tax agreement,Sinopec Corp.should withhold and pay individual income tax on behalf of the relevant shareholders at a rate of 10%.If the individual holders of H Shares are residents of countries which had an agreed tax rate of less than 10%with China under relevant tax agreement,Sinopec Corp.shall withhold and pay individual income tax on behalf of the relevant shareholders at a rate of 10%.In that case,if the relevant individual holders of H Shares wish to reclaim the extra amount withheld due to the application of 10%tax rate,Sinopec Corp.would apply for the relevant agreed preferential tax treatment pursuant to the relevant tax agreement provided that the relevant shareholders submit the evidence required by the notice of the tax agreement to the share register of H shares of Sinopec Corp.in a timely manner.Sinopec Corp.will assist with the tax refund after the approval of the competent tax authority.If the individual holders of H Shares are residents of countries which had an agreed tax rate of over 10%but less than 20%with China under the tax agreement,Sinopec Corp.shall withhold and pay the individual income tax at the agreed actual rate in accordance with the relevant tax agreements.If the individual holders of H Shares are residents of countries which had an agreed tax rate of 20%with China,or which had not entered into any tax agreement with China,or otherwise,Sinopec Corp.shall withhold and pay the individual income tax at a rate of 20%.Pursuant to the Notice on the Tax Policies Related to the Pilot Program of the Shanghai-Hong Kong Stock Connect(關於滬港股票市場交易互聯互通機制試點有關稅收政策的通知)(Caishui 2014 No.81)and the Notice on the Tax Policies Related to the Pilot Program of the Shenzhen-Hong Kong Stock Connect(關於深港股票市場交易互聯互通機制試點有關稅收政策的通知)(Caishui2016 No.127):For dividend of domestic investors investing in the H Shares of Sinopec Corp.through Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect Program,the Company shall withhold and pay income tax at the rate of 20%on behalf of individual investors and securities investment funds.The Company will not withhold or pay the income tax of dividends for domestic enterprise investors and those domestic enterprise investors shall report and pay the relevant tax by themselves.For dividends of investors of the Hong Kong Stock Exchange(including enterprises and individuals)investing in the A Shares of Sinopec Corp.through Shanghai-Hong Kong Stock Connect Program,the Company will withhold and pay income taxes at the rate of 10%on behalf of those investors and will report to the competent tax authorities for the withholding.For investors who are tax residents of other countries which have entered into a tax treaty with the PRC stipulating a dividend tax rate of lower than 10%,the enterprises and individuals may,or may entrust a withholding agent to,apply to the competent tax authorities for the entitlement of the rate under such tax treaty.Upon approval by the tax authorities,the amount paid in excess of the tax payable based on the tax rate according to such tax treaty will be refunded.5 DETAILED IMPLEMENTATION OF THE SHARE INCENTIVE SCHEMESinopec Corp.and its subsidiaries did not implement any share incentive scheme during the reporting period.6 COMPLIANCE WITH THE CORPORATE GOVERNANCE CODEDuring the reporting period,Sinopec Cplied with all the code provisions of the Corporate Governance Code set out in Appendix 14 of the Hong Kong Listing Rules.7 REVIEW OF THE INTERIM REPORTThe Audit Committee of the Board of Sinopec Corp.has reviewed and confirmed the Interim Report.26CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022Environment and Social ResponsibilitiesENVIRONMENT AND SOCIAL RESPONSIBILITIES1 WORK CONDUCTED IN ECOLOGICAL PROTECTION,POLLUTION PREVENTION AND ENVIRONMENTAL RESPONSIBILITIES PERFORMANCE IN THE REPORTING PERIODIn the reporting period,the Company actively practiced the green and clean development strategy,comprehensively promoted the construction and operation of HSE system,persistently carried out Green Enterprise Action,deepened the campaign of pollution prevention,enhanced ecological environment protection of enterprises in key river basins such as the Yangtze River and Yellow River,kept environment risk from occurring,thus no substantial or sudden environmental incident happened.The COD and sulphur dioxide emissions decreased by 2.1%and 4.1%respectively,and the solid waste was 100%properly treated.2 MEASURES TAKEN TO MITIGATE CARBON EMISSION AND ITS EFFECT IN THE REPORTING PERIODIn the reporting period,the Company,guided by the carbon peak and carbon neutrality target,advanced the Energy Efficiency Improvement Plan in depth,actively implemented emissions reduction measures of GHG,such as CO2 and methane,and continuously promoted the clean utilisation of fossil energy,scaling up of clean energy,and low-carbon of production process.In the first half of 2022,the Company continuously promoted energy conservation and consumption reduction and GHG emissions decreased by 1.59 million tonnes of CO2 equivalent,745 thousand tonnes of CO2 were recycled,390 million cubic meters of methane were recovered which was equivalent to reducing 5.85 million tonnes of CO2 emissions.3 ENVIRONMENTAL PROTECTION SOLUTIONS OF COMPANIES AND THEIR SUBSIDIARIES AS MAJOR POLLUTANT DISCHARGING COMPANIES IDENTIFIED BY ENVIRONMENTAL PROTECTION DEPARTMENTS(1)Pollutant discharge informationIn the reporting period,certain subsidiaries of Sinopec Corp.listed as major pollutant discharge units announced by national or local ecological and environmental authorities have acquired their pollutant discharge license in accordance with the requirements of the national list of fixed pollution source emission permit classification management and disclosed environmental information as required by the relevant authorities and local government.The details of such information was published on national pollutant discharge license management information platform(http:/the local government website.(2)Construction and operation of pollution prevention facilitiesIn the reporting period,the Company built prevention and control facilities for sewage,flue gas,solid waste and noise in accordance with the requirements of the national and local pollution prevention and environmental protection standards,kept effective and stable operation of pollution prevention and control facilities.(3)Environmental influence evaluation for construction projects and other administrative permit for environmental protectionIn the reporting period,the Company standardized environmental protection management for construction projects,enforced whole process construction and operation management,with measures of the“simultaneous three”implemented,all new projects have acquired approval for environmental evaluation from government.(4)Contingent scheme for sudden environmental incidentIn the reporting period,the Company complied with the requirements for environmental incident contingent scheme by the State and persistently improved its contingent scheme against sudden environmental incidents of enterprises and severe pollution weather.(5)Scheme for environment self-monitoringIn the reporting period,the Company improved its self-monitoring scheme in accordance with the industry guideline,enforced the new requirements for sewage,flue gas and noise monitoring,and disclosed the monitor information as required.27CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022Environment and Social Responsibilities(6)Administrative penalties due to environmental problems in the reporting periodIn the reporting period,no penalty for significant environmental protection incident was imposed on the Company.The Company and its subsidiaries administrative penalties have been disclosed on the website of environment departments and other related departments of local government.(7)Other environmental information to be disclosedIn the reporting period,for subsidiaries not listed as major pollution units,the Company has acquired related permissions from national and local government,and enforces environmental protection measures.The above mentioned subsidiaries are not obliged to disclose in accordance with the requirements of national and local ecological environment authorities.4 EXPAND THE ACHIEVEMENTS IN POVERTY-ALLEVIATION AND RURAL REVITALIZATIONDuring the reporting period,the Company earnestly implemented the decisions and plans of rural revitalization of the State and coordinated to promote the support of industry,education and consumption and employment.According to the actual needs of rural revitalization,the Company persistently supported the revitalization of talents and conducted 5,037 person-times of training for village cadres,revitalization leaders and professionals.The Company constantly promoted the industry&consumption mode of support with production leading sales and sales promoting production and supported local consumption by RMB359 million in the first half of the year.5 SUPPORT THE WINTER OLYMPIC AND PARALYMPIC GAMES BEIJING 2022In the first half of 2022,as an official sponsor for Winter Olympic and Paralympic Games Beijing 2022,Sinopec Corp.proactively implemented its concept of clean energy,serve the Winter Olympic Games,dedicated itself to service,supply and promotion for the Olympic Games.Sinopec Corp.developed and manufactured the carbon fibre synthetic material used in the Flying Upward torch,supplied clean energy for the Games and actively promoted the construction of service stations integrated with oil,gas and hydrogen.During the period of Winter Olympic and Paralympic Games Beijing 2022,Sinopec Corp.built 4 hydrogen service stations for the Games and cumulatively served 12.6 thousand vehicles for the Winter Olympics.28CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022Significant EventsSIGNIFICANT EVENTS1.MAJOR PROJECTS(1)Zhenhai Refining&Chemical expansion project(phase 2)Zhenhai Refining&Chemical expansion project(phase 2)consists of building a 11 million tpa refinery project and a 600,000 tpa propane dehydrogenatin and downstream projects.The refinery project began construction in June 2022 and is expected to achieve mechanical completion by December of 2024.The Companys self-owned fund accounts for 30%of the project investment,and bank loan is the main source of the remaining 70%.As of 30 June 2022,the aggregate investment was RMB3.3 billion.(2)Tianjin Nangang ethylene and downstream high-end new material industry cluster projectTianjin Nangang Ethylene and downstream High-End New Material Industry Cluster Project consists of 1.2 million tpa ethylene project and downstream processing units.The project began in May 2021 and is expected to achieve mechanical completion by the end of 2023.The Companys self-owned fund accounts for approximately 30%of the project investment and bank loan is the main source of the remaining funds.As of 30 June 2022,the aggregate investment was RMB6.4 billion.(3)Hainan Refining&Chemical 1 million tpa ethylene and refinery revamping and expansion projectHainan Ethylene and Refining Expansion project mainly consists of 1 million tpa ethylene and auxiliary units.The project started in December 2018 and achieved the mechanical completion in June 2022.The Companys self-owned fund accounts for approximately 30%of the project investment and bank loan is the main source of the remaining funds.As of 30 June 2022,the aggregate investment was RMB23.8 billion.(4)Jiujiang Refining&Chemical PX projectJiujiang Refining&Chemical PX project mainly consists of aromatics extraction,xylene fractionation,disproportionation and transalkylation,adsorption separation and isomerization units.Aromatics production capacity will increase 0.89 million tons per year after the project is completed.The project started construction in May 2020 and was put into operation in June 2022.The main source of the investment funds is bank loans.As of 30 June 2022,the aggregate investment was RMB3.5 billion.(5)Yizheng Chemical Fiber PTA projectYizheng Chemical Fiber 3 million tpa PTA project mainly consists of oxidation,purification units and auxiliary units.The project started in July 2021 and is expected to achieve mechanical completion in August 2023.The Companys self-owned fund accounts for 30%of the project investment and bank loan is the main source of the remaining funds.As of 30 June 2022,the aggregate investment was RMB1.3 billion.(6)Weirong shale gas project(phase 1 and phase 2)Under the guidance of the principle of“overall deployment,stage-wise implementation and fully consideration”,the capacity construction was promoted comprehensively from August 2018.The construction of phase 1 project with a production capacity of 1 billion cubic meters per year was completed and put into operation in December 2020.The phase 2 project with a production capacity of 2 billion cubic meters per year is expected to be completed and put into operation in December 2022.The Companys self-owned fund accounts for 30%of the project investment and bank loan is the main source of the remaining 70%.As of 30 June 2022,the aggregate investment was RMB7.0 billion.(7)Tianjin LNG project(phase 2)Tianjin LNG project(phase 2)mainly consists of a new wharf,five new 220,000-cubic-meter storage tanks etc.LNG processing capacity will reach 11 million tpa after phase 2 expansion project is completed.The project started in January 2019 and is expected to be put into operation in August 2023.The Companys self-owned fund accounts for approximately 30%of the project investment and bank loan is the main source of the remaining 70%.As of 30 June 2022,the aggregate investment was RMB3.5 billion.(8)Longkou LNG projectLongkou LNG project mainly consists of a wharf,terminal and power plant warm drainage and water Intake.The first phase designed LNG capacity is 6 million tons per year.One LNG berth with 0.266 million cubic meter capacity will be modified and four 0.22 million cubic meter capacity storage tanks will be newly built up.The project started in November 2021 and is expected to put into operation in November 2024.The Companys self-owned fund accounts for approximately 30%of the project investment and bank loan is the main source of the remaining funds.As of 30 June 2022,the aggregate investment was RMB2.4 billion.2.CORE COMPETITIVENESS ANALYSISThe Company is a large-scale integrated energy and petrochemical company with upstream,mid-stream and downstream operations.The Company is a large oil and gas producer in China with the largest refining capacity in China.The Company is equipped with a well-developed refined oil products sales network,being the largest supplier of refined oil products in China.The Company ranks first in terms of ethylene production and marketing capacity and has a well-established marketing network for chemical products.The integrated business structure of the Company carries strong advantages in synergy among its various business segments,enabling the Company to continuously tap onto potentials in attaining an efficient and comprehensive utilisation of its resources,and endowed the Company with strong resistance against risks,as well as remarkable capabilities in sustaining profitability.29CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022Significant EventsThe Company enjoys a favourable positioning with its operations located close to the consumer markets.The steady growth in the Chinese economy is helpful to the development of both refined oil business and chemical business of the Company;through continuous and specialised marketing efforts,the Companys capability in international operations and market expansion has been further enhanced.The Company owns a team of professionals with expertise in the production of oil and gas,operation of refineries and chemical plants,as well as marketing activities.The Company applies outstanding fine management measures with its remarkable capabilities in management of operations,and enjoys a favourable operational cost advantage in its downstream businesses.The Company has formulated a well-established technology system and mechanism,and owns competent teams specialised in R&D covering a wide range of subjects;the four platforms for technology advancement are taking shape,which includes exploration and development of oil and gas,refining,petrochemicals and strategic emerging technology.With its overall technologies reaching state of the art level in the global arena,and some of the technologies taking the lead globally,the Company enjoys a strong technical strength.The Company always attaches great importance to the fulfilment of social responsibilities and carries out the green and low carbon development strategy to pursue a sustainable development.Moreover,the Company enjoys an outstanding“Sinopec”brand name,plays an important role in the national economy and is a renowned and reputable company in China.3.INTENTION TO DELIST AMERICAN DEPOSITARY SHARES FROM THE NEW YORK STOCK EXCHANGEBased on several comprehensive considerations,including the small volume of the underlying H Shares of its outstanding American depositary shares(“ADSs”)compared to the total volume of its H Shares,the limited trading volume of its ADSs relative to the worldwide trading volume of its H Shares and the considerable administrative burden of maintaining the listing of the ADSs on the New York Stock Exchange(“NYSE”),the registration of the ADSs and the underlying H Shares with the United States Securities and Exchange Commission and complying with the periodic reporting and related obligations of the U.S.Securities Exchange Act of 1934(as amended)in the long term,Sinopec Corp.determined to apply for the voluntary delisting of its ADSs from the NYSE and notified the NYSE on 12 August 2022(Eastern Time in the U.S.).For details,please refer to the announcements published by Sinopec Corp.on China Securities Journal,Shanghai Securities News,Securities Times,and on the website of Shanghai Stock Exchange on 13 August 2022,and on the website of Hong Kong Stock Exchange on 12 August 2022.4.ASSET TRANSACTIONS WITH INEOSOn 28 July 2022,the Company entered into transaction documents with certain of subsidiaries of INEOS Limited(“INEOS”)with respect to the cooperation on Shanghai SECCO Petrochemical Co.,Ltd.(“Shanghai SECCO”)and other projects.Pursuant to the relevant transaction documents,the Company conditionally agreed to sell,and INEOS Investment(Shanghai)Company Limited conditionally agreed to purchase,50%equity interest in Shanghai SECCO;Sinopec Corp.agreed to purchase,and INEOS Styrolution APAC Pte Limited agreed to sell,50%equity interest in INEOS Styrolution Advanced Materials(Ningbo)Pte Ltd(“Ningbo Styrolution”)and Sinopec Corp.agreed to provide corresponding shareholders loans to Ningbo Styrolution;Sinopec Corp.and INEOS Tianjin Holdings Limited also agreed to form the INEOS Sinopec HDPE(Tianjin)Limited(tentative name)as a joint venture on a 50:50 basis,for the construction of a 500,000 tonnes/year High Density Polyethylene(HDPE)project in Tianjin.For details and definitions,please refer to the announcements published by Sinopec Corp.on China Securities Journal,Shanghai Securities News,Securities Times,and on the website of Shanghai Stock Exchange on 29 July 2022,and on the website of Hong Kong Stock Exchange on 28 July 2022.5.ACTUAL CONTINUING CONNECTED TRANSACTIONS ENTERED INTO BY THE COMPANY DURING THE REPORTING PERIODSinopec Corp.and China Petrochemical Corporation entered into a number of continuing connected transactions agreements,including the mutual supply agreement,the land use rights leasing agreement,the properties leasing agreement,the intellectual property license agreement and safety production insurance fund document.In the reporting period,purchases expenses of the actual continuing connected transactions of the Company were RMB112.784 billion,representing 7.05%of the total amount of this type of transactions for the reporting period,including purchases of products and services(procurement,storage,transportation,exploration and production services,and production-related services)of RMB106.529 billion,payment of property rent of RMB470 million(the annual value of right-of-use assets relating to property lease of RMB2,570 million),payment of land rent of RMB5.568 billion(annual value of right-of-use assets relating to land lease of RMB30.468 billion),and interest expenses of RMB217 million.The sales income from continuing connected transactions amounted to RMB69.714 billion,representing 4.16%of the total amount of this type of transactions for the reporting period,including sales of products of RMB69.290 billion,agency commission income of RMB40 million,and interest income of RMB384 million.In addition,entrusted loan provided by the Company to the connected subsidiaries was RMB850 million.For definitions,please refer to the announcements published by Sinopec Corp.on China Securities Journal,Shanghai Securities News,Securities Times and on the website of Shanghai Stock Exchange on 30 August 2021 and on the website of Hong Kong Stock Exchange on 29 August 2021 and 3 September 2021.The amounts of continuing connected transactions between the Company and Sinopec Group did not exceed the relevant caps for the continuing connected transactions as approved by the general meeting of shareholders and the Board.30CHINA PETROLEUM&CHEMICAL CORPORATIONInterim Report 2022Significant EventsSIGNIFICANT EVENTS(CONTINUED)6.FUNDS PROVIDED BETWEEN RELATED PARTIESUnit:RMB millionFunds to related partiesFunds from related partiesRelated partiesRelationsBalance at the beginning of the reporting periodAmount incurredBalance at the end of the reporting periodBalance at the beginning of the reporting periodAmount incurredBalance at the end of the reporting periodSinopec Group Parent company and affiliated companies9,797 2,007 11,804 30,682 1,823 32,505 Other related partiesAssociates and joint ventures7,1432897,4323,5931,0864,679Total 16,9402,29619,23634,2752,90937,184Reason for provision of funds between related partiesLoans and other accounts receivable and payableImpacts of the provision of funds on the CompanyNo material negative impactNote:Affiliated companies include subsidiaries,associates and joint ventures.7.ACTUAL DAILY RELATED TRANSACTIONS ENTERED INTO BY THE COMPANY AND CHINA OIL&GAS PIPELINE NETWORK CORPORATION(PIPECHINA)DURING THE REPORTING PERIODOn 27 January 2022,the Board of Sinopec Corp.approved the daily related transaction cap in relation to refined oil pipeline transportation services between Sinopec Marketing Company Limited and China Oil&Gas Pipeline Network Corporation for the period from 1 January 2022 to 31 December 2022.The actual executed amount of the daily related transaction of th
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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 December 31,2022or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to.Commission File Number:001-36743Apple Inc.(Exact name of Registrant as specified in its charter)California94-2404110(State or other jurisdictionof incorporation or organization)(I.R.S.Employer Identification No.)One Apple Park WayCupertino,California95014(Address of principal executive offices)(Zip Code)(408)996-1010(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,$0.00001 par value per shareAAPLThe Nasdaq Stock Market LLC1.375%Notes due 2024The Nasdaq Stock Market LLC0.000%Notes due 2025The Nasdaq Stock Market LLC0.875%Notes due 2025The Nasdaq Stock Market LLC1.625%Notes due 2026The Nasdaq Stock Market LLC2.000%Notes due 2027The Nasdaq Stock Market LLC1.375%Notes due 2029The Nasdaq Stock Market LLC3.050%Notes due 2029The Nasdaq Stock Market LLC0.500%Notes due 2031The Nasdaq Stock Market LLC3.600%Notes due 2042The Nasdaq Stock Market LLCIndicate 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 the preceding 12months(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 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 of Regulation S-T(232.405 ofthis chapter)during the preceding 12 months(or for such shorter period that the Registrant was required to submit 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 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 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 or revised financialaccounting 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 15,821,946,000 shares of common stock were issued and outstanding as of January 20,2023.Apple Inc.Form 10-QFor the Fiscal Quarter Ended December 31,2022TABLE OF CONTENTSPagePart IItem 1.Financial Statements1Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations15Item 3.Quantitative and Qualitative Disclosures About Market Risk20Item 4.Controls and Procedures20Part IIItem 1.Legal Proceedings21Item 1A.Risk Factors21Item 2.Unregistered Sales of Equity Securities and Use of Proceeds21Item 3.Defaults Upon Senior Securities21Item 4.Mine Safety Disclosures22Item 5.Other Information22Item 6.Exhibits22PART I FINANCIAL INFORMATIONItem 1.Financial StatementsApple Inc.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)(In millions,except number of shares which are reflected in thousands and per share amounts)Three Months EndedDecember 31,2022December 25,2021Net sales:Products$96,388$104,429 Services20,766 19,516 Total net sales117,154 123,945 Cost of sales:Products60,765 64,309 Services6,057 5,393 Total cost of sales66,822 69,702 Gross margin50,332 54,243 Operating expenses:Research and development7,709 6,306 Selling,general and administrative6,607 6,449 Total operating expenses14,316 12,755 Operating income36,016 41,488 Other income/(expense),net(393)(247)Income before provision for income taxes35,623 41,241 Provision for income taxes5,625 6,611 Net income$29,998$34,630 Earnings per share:Basic$1.89$2.11 Diluted$1.88$2.10 Shares used in computing earnings per share:Basic15,892,723 16,391,724 Diluted15,955,718 16,519,291 See accompanying Notes to Condensed Consolidated Financial Statements.Apple Inc.|Q1 2023 Form 10-Q|1Apple Inc.CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Unaudited)(In millions)Three Months EndedDecember 31,2022December 25,2021Net income$29,998$34,630 Other comprehensive income/(loss):Change in foreign currency translation,net of tax(14)(360)Change in unrealized gains/losses on derivative instruments,net of tax:Change in fair value of derivative instruments(988)362 Adjustment for net(gains)/losses realized and included in net income(1,766)93 Total change in unrealized gains/losses on derivative instruments(2,754)455 Change in unrealized gains/losses on marketable debt securities,net of tax:Change in fair value of marketable debt securities900(1,176)Adjustment for net(gains)/losses realized and included in net income65(9)Total change in unrealized gains/losses on marketable debt securities965(1,185)Total other comprehensive income/(loss)(1,803)(1,090)Total comprehensive income$28,195$33,540 See accompanying Notes to Condensed Consolidated Financial Statements.Apple Inc.|Q1 2023 Form 10-Q|2Apple Inc.CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(In millions,except number of shares which are reflected in thousands and par value)December 31,2022September 24,2022ASSETS:Current assets:Cash and cash equivalents$20,535$23,646 Marketable securities30,820 24,658 Accounts receivable,net23,752 28,184 Inventories6,820 4,946 Vendor non-trade receivables30,428 32,748 Other current assets16,422 21,223 Total current assets128,777 135,405 Non-current assets:Marketable securities114,095 120,805 Property,plant and equipment,net42,951 42,117 Other non-current assets60,924 54,428 Total non-current assets217,970 217,350 Total assets$346,747$352,755 LIABILITIES AND SHAREHOLDERS EQUITY:Current liabilities:Accounts payable$57,918$64,115 Other current liabilities59,893 60,845 Deferred revenue7,992 7,912 Commercial paper1,743 9,982 Term debt9,740 11,128 Total current liabilities137,286 153,982 Non-current liabilities:Term debt99,627 98,959 Other non-current liabilities53,107 49,142 Total non-current liabilities152,734 148,101 Total liabilities290,020 302,083 Commitments and contingenciesShareholders equity:Common stock and additional paid-in capital,$0.00001 par value:50,400,000 shares authorized;15,842,407and 15,943,425 shares issued and outstanding,respectively66,399 64,849 Retained earnings/(Accumulated deficit)3,240(3,068)Accumulated other comprehensive income/(loss)(12,912)(11,109)Total shareholders equity56,727 50,672 Total liabilities and shareholders equity$346,747$352,755 See accompanying Notes to Condensed Consolidated Financial Statements.Apple Inc.|Q1 2023 Form 10-Q|3Apple Inc.CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY(Unaudited)(In millions,except per share amounts)Three Months EndedDecember 31,2022December 25,2021Total shareholders equity,beginning balances$50,672$63,090 Common stock and additional paid-in capital:Beginning balances64,849 57,365 Common stock withheld related to net share settlement of equity awards(1,434)(1,263)Share-based compensation2,984 2,322 Ending balances66,399 58,424 Retained earnings/(Accumulated deficit):Beginning balances(3,068)5,562 Net income29,998 34,630 Dividends and dividend equivalents declared(3,712)(3,665)Common stock withheld related to net share settlement of equity awards(978)(1,730)Common stock repurchased(19,000)(20,362)Ending balances3,240 14,435 Accumulated other comprehensive income/(loss):Beginning balances(11,109)163 Other comprehensive income/(loss)(1,803)(1,090)Ending balances(12,912)(927)Total shareholders equity,ending balances$56,727$71,932 Dividends and dividend equivalents declared per share or RSU$0.23$0.22 See accompanying Notes to Condensed Consolidated Financial Statements.Apple Inc.|Q1 2023 Form 10-Q|4Apple Inc.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In millions)Three Months EndedDecember 31,2022December 25,2021Cash,cash equivalents and restricted cash,beginning balances$24,977$35,929 Operating activities:Net income29,998 34,630 Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization2,916 2,697 Share-based compensation expense2,905 2,265 Other(317)849 Changes in operating assets and liabilities:Accounts receivable,net4,275(3,934)Inventories(1,807)681 Vendor non-trade receivables2,320(9,812)Other current and non-current assets(4,099)(4,921)Accounts payable(6,075)19,813 Deferred revenue131 462 Other current and non-current liabilities3,758 4,236 Cash generated by operating activities34,005 46,966 Investing activities:Purchases of marketable securities(5,153)(34,913)Proceeds from maturities of marketable securities7,127 11,309 Proceeds from sales of marketable securities509 10,675 Payments for acquisition of property,plant and equipment(3,787)(2,803)Other(141)(374)Cash used in investing activities(1,445)(16,106)Financing activities:Payments for taxes related to net share settlement of equity awards(2,316)(2,888)Payments for dividends and dividend equivalents(3,768)(3,732)Repurchases of common stock(19,475)(20,478)Repayments of term debt(1,401)Repayments of commercial paper,net(8,214)(1,000)Other(389)(61)Cash used in financing activities(35,563)(28,159)Increase/(Decrease)in cash,cash equivalents and restricted cash(3,003)2,701 Cash,cash equivalents and restricted cash,ending balances$21,974$38,630 Supplemental cash flow disclosure:Cash paid for income taxes,net$828$5,235 Cash paid for interest$703$531 See accompanying Notes to Condensed Consolidated Financial Statements.Apple Inc.|Q1 2023 Form 10-Q|5Apple Inc.Notes to Condensed Consolidated Financial Statements(Unaudited)Note 1 Summary of Significant Accounting PoliciesBasis of Presentation and PreparationThe condensed consolidated financial statements include the accounts of Apple Inc.and its wholly owned subsidiaries(collectively“Apple”or the“Company”).Intercompany accounts and transactions have been eliminated.In the opinion of the Companys management,the condensed consolidated financial statementsreflect all adjustments,which are normal and recurring in nature,necessary for fair financial statement presentation.The preparation of these condensedconsolidated financial statements and accompanying notes in conformity with U.S.generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported.Actual results could differ materially from those estimates.Certain prior period amounts in thecondensed consolidated financial statements and accompanying notes have been reclassified to conform to the current periods presentation.These condensedconsolidated financial statements and accompanying notes should be read in conjunction with the Companys annual consolidated financial statements andaccompanying notes included in its Annual Report on Form 10-K for the fiscal year ended September 24,2022.The Companys fiscal year is the 52-or 53-week period that ends on the last Saturday of September.An additional week is included in the first fiscal quarterevery five or six years to realign the Companys fiscal quarters with calendar quarters,which occurred in the first fiscal quarter of 2023.The Companys fiscalyears 2023 and 2022 span 53 and 52 weeks,respectively.Unless otherwise stated,references to particular years,quarters,months and periods refer to theCompanys fiscal years ended in September and the associated quarters,months and periods of those fiscal years.Earnings Per ShareThe following table shows the computation of basic and diluted earnings per share for the three months ended December 31,2022 and December 25,2021(netincome in millions and shares in thousands):Three Months EndedDecember 31,2022December 25,2021Numerator:Net income$29,998$34,630 Denominator:Weighted-average basic shares outstanding15,892,723 16,391,724 Effect of dilutive securities62,995 127,567 Weighted-average diluted shares15,955,718 16,519,291 Basic earnings per share$1.89$2.11 Diluted earnings per share$1.88$2.10 Approximately 89 million restricted stock units(“RSUs”)were excluded from the computation of diluted earnings per share for the three months endedDecember 31,2022 because their effect would have been antidilutive.Apple Inc.|Q1 2023 Form 10-Q|6Note 2 RevenueNet sales disaggregated by significant products and services for the three months ended December 31,2022 and December 25,2021 were as follows(inmillions):Three Months EndedDecember 31,2022December 25,2021iPhone$65,775$71,628 Mac 7,735 10,852 iPad9,396 7,248 Wearables,Home and Accessories 13,482 14,701 Services 20,766 19,516 Total net sales$117,154$123,945(1)Products net sales include amortization of the deferred value of unspecified software upgrade rights,which are bundled in the sales price of the respectiveproduct.(2)Wearables,Home and Accessories net sales include sales of AirPods,Apple TV,Apple Watch,Beats products,HomePod mini and accessories.(3)Services net sales include sales from the Companys advertising,AppleCare,cloud,digital content,payment and other services.Services net sales also includeamortization of the deferred value of services bundled in the sales price of certain products.(4)Includes$3.4 billion of revenue recognized in the three months ended December 31,2022 that was included in deferred revenue as of September 24,2022 and$3.0 billion of revenue recognized in the three months ended December 25,2021 that was included in deferred revenue as of September 25,2021.The Companys proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 9,“Segment Informationand Geographic Data”for the three months ended December 31,2022 and December 25,2021,except in Greater China,where iPhone revenue represented amoderately higher proportion of net sales.As of December 31,2022 and September 24,2022,the Company had total deferred revenue of$12.6 billion and$12.4 billion,respectively.As of December 31,2022,the Company expects 63%of total deferred revenue to be realized in less than a year,27%within one-to-two years,8%within two-to-three years and 2%in greater than three years.(1)(1)(1)(1)(2)(3)(4)Apple Inc.|Q1 2023 Form 10-Q|7Note 3 Financial InstrumentsCash,Cash Equivalents and Marketable SecuritiesThe following tables show the Companys cash,cash equivalents and marketable securities by significant investment category as of December 31,2022 andSeptember 24,2022(in millions):December 31,2022AdjustedCostUnrealizedGainsUnrealizedLossesFairValueCash andCashEquivalentsCurrentMarketableSecuritiesNon-CurrentMarketableSecuritiesCash$17,908$17,908$17,908$Level 1:Money market funds818 818 818 Mutual funds330 2(40)292 292 Subtotal1,148 2(40)1,110 818 292 Level 2:U.S.Treasury securities24,128 1(1,576)22,553 13 9,105 13,435 U.S.agency securities5,743(643)5,100 310 4,790 Non-U.S.government securities17,778 14(1,029)16,763 9,907 6,856 Certificates of deposit and time deposits2,025 2,025 1,795 230 Commercial paper237 237 237 Corporate debt securities85,895 14(7,039)78,870 1 10,377 68,492 Municipal securities864(26)838 278 560 Mortgage-and asset-backed securities22,448 3(2,405)20,046 84 19,962 Subtotal159,118 32(12,718)146,432 1,809 30,528 114,095 Total$178,174$34$(12,758)$165,450$20,535$30,820$114,095 September 24,2022AdjustedCostUnrealizedGainsUnrealizedLossesFairValueCash andCashEquivalentsCurrentMarketableSecuritiesNon-CurrentMarketableSecuritiesCash$18,546$18,546$18,546$Level 1:Money market funds2,929 2,929 2,929 Mutual funds274(47)227 227 Subtotal3,203(47)3,156 2,929 227 Level 2:U.S.Treasury securities25,134(1,725)23,409 338 5,091 17,980 U.S.agency securities5,823(655)5,168 240 4,928 Non-U.S.government securities16,948 2(1,201)15,749 8,806 6,943 Certificates of deposit and time deposits2,067 2,067 1,805 262 Commercial paper718 718 28 690 Corporate debt securities87,148 9(7,707)79,450 9,023 70,427 Municipal securities921(35)886 266 620 Mortgage-and asset-backed securities22,553(2,593)19,960 53 19,907 Subtotal161,312 11(13,916)147,407 2,171 24,431 120,805 Total$183,061$11$(13,963)$169,109$23,646$24,658$120,805(1)Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.(2)Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities,quoted prices foridentical or similar assets or liabilities in inactive markets,or other inputs that are observable or can be corroborated by observable market data for substantiallythe full term of the assets or liabilities.(3)As of December 31,2022 and September 24,2022,total marketable securities included$13.6 billion and$12.7 billion,respectively,that were restricted fromgeneral use,related to the European Commission decision finding that Ireland granted state aid to the Company,and other agreements.(1)(2)(3)(1)(2)(3)Apple Inc.|Q1 2023 Form 10-Q|8The following table shows the fair value of the Companys non-current marketable debt securities,by contractual maturity,as of December 31,2022(in millions):Due after 1 year through 5 years$82,497 Due after 5 years through 10 years14,243 Due after 10 years17,355 Total fair value$114,095 Derivative Instruments and HedgingThe Company may use derivative instruments to partially offset its business exposure to foreign exchange and interest rate risk.However,the Company maychoose not to hedge certain exposures for a variety of reasons,including accounting considerations or the prohibitive economic cost of hedging particularexposures.There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange orinterest rates.Foreign Exchange RiskTo protect gross margins from fluctuations in foreign currency exchange rates,the Company may enter into forward contracts,option contracts or otherinstruments,and may designate these instruments as cash flow hedges.The Company generally hedges portions of its forecasted foreign currency exposureassociated with revenue and inventory purchases,typically for up to 12 months.To protect the Companys foreign currencydenominated term debt or marketable securities from fluctuations in foreign currency exchange rates,the Companymay enter into forward contracts,cross-currency swaps or other instruments.The Company designates these instruments as either cash flow or fair valuehedges.As of December 31,2022,the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for termdebtrelated foreign currency transactions is 20 years.The Company may also enter into derivative instruments that are not designated as accounting hedges to protect gross margins from certain fluctuations inforeign currency exchange rates,as well as to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certainassets and liabilities denominated in non-functional currencies.Interest Rate RiskTo protect the Companys term debt or marketable securities from fluctuations in interest rates,the Company may enter into interest rate swaps,options or otherinstruments.The Company designates these instruments as either cash flow or fair value hedges.The notional amounts of the Companys outstanding derivative instruments as of December 31,2022 and September 24,2022 were as follows(in millions):December 31,2022September 24,2022Derivative instruments designated as accounting hedges:Foreign exchange contracts$66,054$102,670 Interest rate contracts$20,125$20,125 Derivative instruments not designated as accounting hedges:Foreign exchange contracts$134,971$185,381 Apple Inc.|Q1 2023 Form 10-Q|9The gross fair values of the Companys derivative assets and liabilities as of September 24,2022 were as follows(in millions):September 24,2022Fair Value ofDerivatives Designatedas Accounting HedgesFair Value ofDerivatives Not Designatedas Accounting HedgesTotalFair ValueDerivative assets:Foreign exchange contracts$4,317$2,819$7,136 Derivative liabilities:Foreign exchange contracts$2,205$2,547$4,752 Interest rate contracts$1,367$1,367(1)Derivative assets are measured using Level 2 fair value inputs and are included in other current assets and other non-current assets in the CondensedConsolidated Balance Sheet.(2)Derivative liabilities are measured using Level 2 fair value inputs and are included in other current liabilities and other non-current liabilities in the CondensedConsolidated Balance Sheet.The derivative assets above represent the Companys gross credit exposure if all counterparties failed to perform.To mitigate credit risk,the Company generallyenters into collateral security arrangements that provide for collateral to be received or posted when the net fair values of certain derivatives fluctuate fromcontractually established thresholds.To further limit credit risk,the Company generally enters into master netting arrangements with the respectivecounterparties to the Companys derivative contracts,under which the Company is allowed to settle transactions with a single net amount payable by one partyto the other.As of September 24,2022,the potential effects of these rights of set-off associated with the Companys derivative contracts,including the effects ofcollateral,would be a reduction to both derivative assets and derivative liabilities of$7.8 billion,resulting in a net derivative asset of$412 million.The carrying amounts of the Companys hedged items in fair value hedges as of December 31,2022 and September 24,2022 were as follows(in millions):December 31,2022September 24,2022Hedged assets/(liabilities):Current and non-current marketable securities$14,311$13,378 Current and non-current term debt$(18,731)$(18,739)Accounts ReceivableTrade ReceivablesThe Company has considerable trade receivables outstanding with its third-party cellular network carriers,wholesalers,retailers,resellers,small and mid-sizedbusinesses and education,enterprise and government customers.The Company generally does not require collateral from its customers;however,theCompany will require collateral or third-party credit support in certain instances to limit credit risk.In addition,when possible,the Company attempts to limit creditrisk on trade receivables with credit insurance for certain customers or by requiring third-party financing,loans or leases to support credit exposure.These credit-financing arrangements are directly between the third-party financing company and the end customer.As such,the Company generally does not assume anyrecourse or credit risk sharing related to any of these arrangements.As of both December 31,2022 and September 24,2022,the Company had one customer that represented 10%or more of total trade receivables,whichaccounted for 11%and 10%,respectively.The Companys cellular network carriers accounted for 43%and 44%of total trade receivables as of December 31,2022 and September 24,2022,respectively.Vendor Non-Trade ReceivablesThe Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacturesubassemblies or assemble final products for the Company.The Company purchases these components directly from suppliers.As of December 31,2022,theCompany had two vendors that individually represented 10%or more of total vendor non-trade receivables,which accounted for 54%and 16%.As ofSeptember 24,2022,the Company had two vendors that individually represented 10%or more of total vendor non-trade receivables,which accounted for 54%and 13%.(1)(2)Apple Inc.|Q1 2023 Form 10-Q|10Note 4 Condensed Consolidated Financial Statement DetailsThe following tables show the Companys condensed consolidated financial statement details as of December 31,2022 and September 24,2022(in millions):InventoriesDecember 31,2022September 24,2022Components$2,513$1,637 Finished goods4,307 3,309 Total inventories$6,820$4,946 Property,Plant and Equipment,NetDecember 31,2022September 24,2022Gross property,plant and equipment$110,995$114,457 Accumulated depreciation and amortization(68,044)(72,340)Total property,plant and equipment,net$42,951$42,117 Other Income/(Expense),NetThe following table shows the detail of other income/(expense),net for the three months ended December 31,2022 and December 25,2021(in millions):Three Months EndedDecember 31,2022December 25,2021Interest and dividend income$868$650 Interest expense(1,003)(694)Other expense,net(258)(203)Total other income/(expense),net$(393)$(247)Note 5 DebtCommercial PaperThe Company issues unsecured short-term promissory notes(“Commercial Paper”)pursuant to a commercial paper program.The Company uses net proceedsfrom the commercial paper program for general corporate purposes,including dividends and share repurchases.As of December 31,2022 and September 24,2022,the Company had$1.7 billion and$10.0 billion of Commercial Paper outstanding,respectively.The following table provides a summary of cash flowsassociated with the issuance and maturities of Commercial Paper for the three months ended December 31,2022 and December 25,2021(in millions):Three Months EndedDecember 31,2022December 25,2021Maturities 90 days or less:Proceeds from/(Repayments of)commercial paper,net$(5,569)$1,339 Maturities greater than 90 days:Proceeds from commercial paper 1,191 Repayments of commercial paper(2,645)(3,530)Repayments of commercial paper,net(2,645)(2,339)Total repayments of commercial paper,net$(8,214)$(1,000)Apple Inc.|Q1 2023 Form 10-Q|11Term DebtAs of December 31,2022 and September 24,2022,the Company had outstanding fixed-rate notes with varying maturities for an aggregate carrying amount of$109.4 billion and$110.1 billion,respectively(collectively the“Notes”).As of December 31,2022 and September 24,2022,the fair value of the CompanysNotes,based on Level 2 inputs,was$98.0 billion and$98.8 billion,respectively.Note 6 Shareholders EquityShare Repurchase ProgramDuring the three months ended December 31,2022,the Company repurchased 133 million shares of its common stock for$19.0 billion under a sharerepurchase program authorized by the Board of Directors(the“Program”).The Program does not obligate the Company to acquire a minimum amount of shares.Under the Program,shares may be repurchased in privately negotiated and/or open market transactions,including under plans complying with Rule 10b5-1under the Securities Exchange Act of 1934,as amended.Note 7 Benefit PlansRestricted Stock UnitsA summary of the Companys RSU activity and related information for the three months ended December 31,2022 is as follows:Number ofRSUs(in thousands)Weighted-AverageGrant Date FairValue Per RSUAggregateFair Value(in millions)Balance as of September 24,2022201,501$109.48 RSUs granted82,123$149.85 RSUs vested(47,298)$84.46 RSUs canceled(2,958)$120.26 Balance as of December 31,2022233,368$128.62$30,322 The fair value as of the respective vesting dates of RSUs was$6.8 billion and$8.5 billion for the three months ended December 31,2022 and December 25,2021,respectively.Share-Based CompensationThe following table shows share-based compensation expense and the related income tax benefit included in the Condensed Consolidated Statements ofOperations for the three months ended December 31,2022 and December 25,2021(in millions):Three Months EndedDecember 31,2022December 25,2021Share-based compensation expense$2,905$2,265 Income tax benefit related to share-based compensation expense$(1,178)$(1,536)As of December 31,2022,the total unrecognized compensation cost related to outstanding RSUs and stock options was$25.5 billion,which the Companyexpects to recognize over a weighted-average period of 3.0 years.Apple Inc.|Q1 2023 Form 10-Q|12Note 8 Commitments and ContingenciesUnconditional Purchase ObligationsThe Company has entered into certain offbalance sheet commitments that require the future purchase of goods or services(“unconditional purchaseobligations”).The Companys unconditional purchase obligations primarily consist of supplier arrangements,licensed content and distribution rights.Futurepayments under noncancelable unconditional purchase obligations with a remaining term in excess of one year as of December 31,2022,are as follows(inmillions):2023(remaining nine months)$2,899 20242,897 20251,584 20266,554 2027348 Thereafter444 Total$14,726 ContingenciesThe Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully resolved.Theoutcome of litigation is inherently uncertain.In the opinion of management,there was not at least a reasonable possibility the Company may have incurred amaterial loss,or a material loss greater than a recorded accrual,concerning loss contingencies for asserted legal and other claims.Note 9 Segment Information and Geographic DataThe following table shows information by reportable segment for the three months ended December 31,2022 and December 25,2021(in millions):Three Months EndedDecember 31,2022December 25,2021Americas:Net sales$49,278$51,496 Operating income$17,864$19,585 Europe:Net sales$27,681$29,749 Operating income$10,017$11,545 Greater China:Net sales$23,905$25,783 Operating income$10,437$11,183 Japan:Net sales$6,755$7,107 Operating income$3,236$3,349 Rest of Asia Pacific:Net sales$9,535$9,810 Operating income$3,851$3,995 Apple Inc.|Q1 2023 Form 10-Q|13A reconciliation of the Companys segment operating income to the Condensed Consolidated Statements of Operations for the three months ended December31,2022 and December 25,2021 is as follows(in millions):Three Months EndedDecember 31,2022December 25,2021Segment operating income$45,405$49,657 Research and development expense(7,709)(6,306)Other corporate expenses,net(1,680)(1,863)Total operating income$36,016$41,488 Apple Inc.|Q1 2023 Form 10-Q|14Item 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsThis section and other parts of this Quarterly Report on Form 10-Q(“Form 10-Q”)contain forward-looking statements,within the meaning of the PrivateSecurities Litigation Reform Act of 1995,that involve risks and uncertainties.Forward-looking statements provide current expectations of future events based oncertain assumptions and include any statement that does not directly relate to any historical or current fact.For example,statements in this Form 10-Q regardingthe potential future impact of the COVID-19 pandemic on the Companys business and results of operations are forward-looking statements.Forward-lookingstatements can also be identified by words such as“future,”“anticipates,”“believes,”“estimates,”“expects,”“intends,”“plans,”“predicts,”“will,”“would,”“could,”“can,”“may,”and similar terms.Forward-looking statements are not guarantees of future performance and the Companys actual results may differ significantlyfrom the results discussed in the forward-looking statements.Factors that might cause such differences include,but are not limited to,those discussed in Part I,Item 1A of the Companys Annual Report on Form 10-K for the fiscal year ended September 24,2022(the“2022 Form 10-K”)under the heading“Risk Factors.”The Company assumes no obligation to revise or update any forward-looking statements for any reason,except as required by law.Unless otherwise stated,all information presented herein is based on the Companys fiscal calendar,and references to particular years,quarters,months orperiods refer to the Companys fiscal years ended in September and the associated quarters,months and periods of those fiscal years.Each of the terms the“Company”and“Apple”as used herein refers collectively to Apple Inc.and its wholly owned subsidiaries,unless otherwise stated.The following discussion should be read in conjunction with the 2022 Form 10-K filed with the U.S.Securities and Exchange Commission(the“SEC”)and thecondensed consolidated financial statements and accompanying notes included in Part I,Item 1 of this Form 10-Q.Available InformationThe Company periodically provides certain information for investors on its corporate website,and its investor relations website,.This includes press releases and other information about financial performance,information on environmental,social and governancematters,and details related to the Companys annual meeting of shareholders.The information contained on the websites referenced in this Form 10-Q is notincorporated by reference into this filing.Further,the Companys references to website URLs are intended to be inactive textual references only.Business Seasonality and Product IntroductionsThe Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holidaydemand.Additionally,new product and service introductions can significantly impact net sales,cost of sales and operating expenses.The timing of productintroductions can also impact the Companys net sales to its indirect distribution channels as these channels are filled with new inventory following a productlaunch,and channel inventory of an older product often declines as the launch of a newer product approaches.Net sales can also be affected when consumersand distributors anticipate a product introduction.Fiscal PeriodThe Companys fiscal year is the 52-or 53-week period that ends on the last Saturday of September.An additional week is included in the first fiscal quarterevery five or six years to realign the Companys fiscal quarters with calendar quarters,which occurred in the first quarter of 2023.The Companys fiscal years2023 and 2022 span 53 and 52 weeks,respectively.Quarterly HighlightsTotal net sales decreased 5%or$6.8 billion during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness in foreign currenciesrelative to the U.S.dollar.The weakness in foreign currencies contributed to lower net sales of iPhone and Mac,which was partially offset by higher net sales ofiPad.During the first quarter of 2023,the Company announced a new iPad,a new iPad Pro powered by the Apple M2 chip,and a new Apple TV 4K.The Company repurchased$19.0 billion of its common stock and paid dividends and dividend equivalents of$3.8 billion during the first quarter of 2023.Apple Inc.|Q1 2023 Form 10-Q|15COVID-19The COVID-19 pandemic has had,and continues to have,a significant impact around the world,prompting governments and businesses to take unprecedentedmeasures,such as restrictions on travel and business operations,temporary closures of businesses,and quarantine and shelter-in-place orders.The COVID-19pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets.The COVID-19pandemic and the measures taken by many countries in response have affected and could in the future materially impact the Companys business,results ofoperations and financial condition.Certain of the Companys outsourcing partners,component suppliers and logistical service providers have experienced,and could in the future experience,disruptions related to the COVID-19 pandemic,resulting in supply shortages.During the first quarter of 2023,COVID-related impacts temporarily affected theCompanys primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou,China.The facility operated at significantly reduced capacity,impacting iPhone 14 Pro and iPhone Pro Max shipments.Macroeconomic ConditionsMacroeconomic conditions,including inflation,rising interest rates and currency fluctuations,have direct and indirect impacts on the Companys business.TheCompany believes these factors have impacted,and could in the future materially impact,the Companys results of operations and financial condition.Segment Operating PerformanceThe Company manages its business primarily on a geographic basis.The Companys reportable segments consist of the Americas,Europe,Greater China,Japan and Rest of Asia Pacific.Americas includes both North and South America.Europe includes European countries,as well as India,the Middle East andAfrica.Greater China includes China mainland,Hong Kong and Taiwan.Rest of Asia Pacific includes Australia and those Asian countries not included in theCompanys other reportable segments.Although the reportable segments provide similar hardware and software products and similar services,each one ismanaged separately to better align with the location of the Companys customers and distribution partners and the unique market dynamics of each geographicregion.Further information regarding the Companys reportable segments can be found in Part I,Item 1 of this Form 10-Q in the Notes to CondensedConsolidated Financial Statements in Note 9,“Segment Information and Geographic Data.”The following table shows net sales by reportable segment for the three months ended December 31,2022 and December 25,2021(dollars in millions):Three Months EndedDecember 31,2022December 25,2021ChangeNet sales by reportable segment:Americas$49,278$51,496(4)%Europe27,681 29,749(7)%Greater China23,905 25,783(7)%Japan6,755 7,107(5)%Rest of Asia Pacific9,535 9,810(3)%Total net sales$117,154$123,945(5)%AmericasAmericas net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales of iPhone and Mac,partiallyoffset by higher net sales of Services and iPad.The weakness of the Canadian dollar relative to the U.S.dollar had an unfavorable year-over-year impact onAmericas net sales during the first quarter of 2023.EuropeEurope net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness in foreign currencies relative to the U.S.dollar,which contributed to lower net sales of iPhone and Mac.Apple Inc.|Q1 2023 Form 10-Q|16Greater ChinaGreater China net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness of the renminbi relative to theU.S.dollar.The weakness of the renminbi contributed to lower net sales of iPhone,which was partially offset by higher net sales of iPad.JapanJapan net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness of the yen relative to the U.S.dollar,which contributed to lower net sales of Services and Mac.Rest of Asia PacificRest of Asia Pacific net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due to the weakness in foreign currencies relativeto the U.S.dollar.The weakness in foreign currencies contributed to lower net sales of iPhone and Mac,which was partially offset by higher net sales of Servicesand iPad.Products and Services PerformanceThe following table shows net sales by category for the three months ended December 31,2022 and December 25,2021(dollars in millions):Three Months EndedDecember 31,2022December 25,2021ChangeNet sales by category:iPhone$65,775$71,628(8)%Mac 7,735 10,852(29)%iPad9,396 7,248 30%Wearables,Home and Accessories 13,482 14,701(8)%Services 20,766 19,516 6%Total net sales$117,154$123,945(5)%(1)Products net sales include amortization of the deferred value of unspecified software upgrade rights,which are bundled in the sales price of the respectiveproduct.(2)Wearables,Home and Accessories net sales include sales of AirPods,Apple TV,Apple Watch,Beats products,HomePod mini and accessories.(3)Services net sales include sales from the Companys advertising,AppleCare,cloud,digital content,payment and other services.Services net sales also includeamortization of the deferred value of services bundled in the sales price of certain products.iPhoneiPhone net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales from the Companys newiPhone models launched in the fourth quarter of 2022.MacMac net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales of MacBook Pro.iPadiPad net sales increased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to higher net sales of iPad and iPad Air.(1)(1)(1)(1)(2)(3)Apple Inc.|Q1 2023 Form 10-Q|17Wearables,Home and AccessoriesWearables,Home and Accessories net sales decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to lower net sales ofAirPods,partially offset by higher net sales of Watch.ServicesServices net sales increased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to higher net sales from cloud services,the AppStore and music.Gross MarginProducts and Services gross margin and gross margin percentage for the three months ended December 31,2022 and December 25,2021 were as follows(dollars in millions):Three Months EndedDecember 31,2022December 25,2021Gross margin:Products$35,623$40,120 Services14,709 14,123 Total gross margin$50,332$54,243 Gross margin percentage:Products37.08.4%Services70.8r.4%Total gross margin percentage43.0C.8%Products Gross MarginProducts gross margin decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to the weakness in foreign currenciesrelative to the U.S.dollar and lower Products volume.Products gross margin percentage decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to the weakness in foreigncurrencies relative to the U.S.dollar.Services Gross MarginServices gross margin increased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to higher Services net sales,partially offsetby the weakness in foreign currencies relative to the U.S.dollar.Services gross margin percentage decreased during the first quarter of 2023 compared to the same quarter in 2022 due primarily to the weakness in foreigncurrencies relative to the U.S.dollar and higher Services costs,partially offset by improved leverage.The Companys future gross margins can be impacted by a variety of factors,as discussed in Part I,Item 1A of the 2022 Form 10-K under the heading“RiskFactors.”As a result,the Company believes,in general,gross margins will be subject to volatility and downward pressure.Apple Inc.|Q1 2023 Form 10-Q|18Operating ExpensesOperating expenses for the three months ended December 31,2022 and December 25,2021 were as follows(dollars in millions):Three Months EndedDecember 31,2022December 25,2021Research and development$7,709$6,306 Percentage of total net sales7%5%Selling,general and administrative$6,607$6,449 Percentage of total net sales6%5%Total operating expenses$14,316$12,755 Percentage of total net sales12%Research and DevelopmentThe growth in research and development(“R&D”)expense during the first quarter of 2023 compared to the same quarter in 2022 was driven primarily byincreases in headcount-related expenses.Selling,General and AdministrativeThe growth in selling,general and administrative expense during the first quarter of 2023 compared to the same quarter in 2022 was driven primarily byincreases in headcount-related expenses.Provision for Income TaxesProvision for income taxes,effective tax rate and statutory federal income tax rate for the three months ended December 31,2022 and December 25,2021 wereas follows(dollars in millions):Three Months EndedDecember 31,2022December 25,2021Provision for income taxes$5,625$6,611 Effective tax rate15.8.0%Statutory federal income tax rate21!%The Companys effective tax rate for the first quarter of 2023 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate onforeign earnings,tax benefits from share-based compensation,and the U.S.federal R&D credit,partially offset by state income taxes.The Companys effective tax rate for the first quarter of 2023 was lower compared to the same quarter in 2022 due primarily to a higher U.S.federal R&D credit,lower state income taxes and a lower effective tax rate on foreign earnings,largely offset by lower tax benefits from share-based compensation.Liquidity and Capital ResourcesThe Company believes its balances of cash,cash equivalents and unrestricted marketable securities,along with cash generated by ongoing operations andcontinued access to debt markets,will be sufficient to satisfy its cash requirements and capital return program over the next 12 months and beyond.The Companys contractual cash requirements have not changed materially since the 2022 Form 10-K,except for commercial paper and manufacturingpurchase obligations.Commercial PaperThe Company issues unsecured short-term promissory notes(“Commercial Paper”)pursuant to a commercial paper program.As of December 31,2022,theCompany had$1.7 billion of Commercial Paper outstanding,all of which was payable within 12 months.Apple Inc.|Q1 2023 Form 10-Q|19Manufacturing Purchase ObligationsThe Company utilizes several outsourcing partners to manufacture subassemblies for the Companys products and to perform final assembly and testing offinished products.The Company also obtains individual components for its products from a wide variety of individual suppliers.Outsourcing partners acquirecomponents and build product based on demand information supplied by the Company,which typically covers periods up to 150 days.As of December 31,2022,the Company had manufacturing purchase obligations of$55.1 billion,with$54.8 billion payable within 12 months.The Companys manufacturing purchaseobligations are primarily noncancelable.In addition to its contractual cash requirements,the Company has a capital return program authorized by the Board of Directors.The share repurchase program(the“Program”)does not obligate the Company to acquire a minimum amount of shares.As of December 31,2022,the Companys quarterly cash dividend was$0.23 per share.The Company intends to increase its dividend on an annual basis,subject to declaration by the Board of Directors.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”of the Notes to condensed consolidated Financial Statements in Part I,Item 1 of thisForm 10-Q and in the Notes to Consolidated Financial Statements in Part II,Item 8 of the 2022 Form 10-K describe the significant accounting policies andmethods used in the preparation of the Companys condensed consolidated financial statements.There have been no material changes to the Companyscritical accounting estimates since the 2022 Form 10-K.Item 3.Quantitative and Qualitative Disclosures About Market RiskThere have been no material changes to the Companys market risk during the first three months of 2023.For a discussion of the Companys exposure tomarket risk,refer to the Companys market risk disclosures set forth in Part II,Item 7A,“Quantitative and Qualitative Disclosures About Market Risk”of the 2022Form 10-K.Item 4.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresBased on an evaluation under the supervision and with the participation of the Companys management,the Companys principal executive officer and principalfinancial officer have concluded that the Companys disclosure controls and procedures as defined in Rules 13a-15(e)and 15d-15(e)under the SecuritiesExchange Act of 1934,as amended(the“Exchange Act”)were effective as of December 31,2022 to provide reasonable assurance that information required tobe disclosed by the Company in reports that it files or submits under the Exchange Act is(i)recorded,processed,summarized and reported within the timeperiods specified in the SEC rules and forms and(ii)accumulated and communicated to the Companys management,including its principal executive officerand principal financial officer,as appropriate to allow timely decisions regarding required disclosure.Changes in Internal Control over Financial ReportingThere were no changes in the Companys internal control over financial reporting during the first quarter of 2023,which were identified in connection withmanagements evaluation required by paragraph(d)of Rules 13a-15 and 15d-15 under the Exchange Act,that have materially affected,or are reasonably likelyto materially affect,the Companys internal control over financial reporting.Apple Inc.|Q1 2023 Form 10-Q|20PART II OTHER INFORMATIONItem 1.Legal ProceedingsEpic GamesEpic Games,Inc.(“Epic”)filed a lawsuit in the U.S.District Court for the Northern District of California(the“Northern California District Court”)against theCompany alleging violations of federal and state antitrust laws and Californias unfair competition law based upon the Companys operation of its App Store.TheCompany filed a counterclaim for breach of contract.On September 10,2021,the Northern California District Court ruled in favor of the Company with respect tonine out of the ten counts included in Epics claim,and in favor of the Company with respect to the Companys claims for breach of contract.The NorthernCalifornia District Court found that certain provisions of the Companys App Store Review Guidelines violate Californias unfair competition law and issued aninjunction.Epic appealed the decision.The Company filed a cross-appeal and has been granted a stay pending the appeal.Other Legal ProceedingsThe Company is subject to other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business.TheCompany settled certain matters during the first quarter of 2023 that did not individually or in the aggregate have a material impact on the Companys financialcondition or operating results.The outcome of litigation is inherently uncertain.If one or more legal matters were resolved against the Company in a reportingperiod for amounts above managements expectations,the Companys financial condition and operating results for that reporting period could be materiallyadversely affected.Item 1A.Risk FactorsThe Companys business,reputation,results of operations,financial condition and stock price can be affected by a number of factors,whether currently knownor unknown,including those described in Part I,Item 1A of the 2022 Form 10-K under the heading“Risk Factors.”When any one or more of these risksmaterialize from time to time,the Companys business,reputation,results of operations,financial condition and stock price can be materially and adverselyaffected.There have been no material changes to the Companys risk factors since the 2022 Form 10-K.Item 2.Unregistered Sales of Equity Securities and Use of ProceedsPurchases of Equity Securities by the Issuer and Affiliated PurchasersShare repurchase activity during the three months ended December 31,2022 was as follows(in millions,except number of shares,which are reflected inthousands,and per share amounts):PeriodsTotal Numberof SharesPurchasedAverage PricePaid PerShareTotal Number ofSharesPurchased as Partof PubliclyAnnounced Plans orProgramsApproximate DollarValue ofShares That May Yet BePurchasedUnder the Plans orPrograms September 25,2022 to October 29,2022:Open market and privately negotiated purchases69,169$144.57 69,169 October 30,2022 to November 26,2022:Open market and privately negotiated purchases23,113$149.26 23,113 November 27,2022 to December 31,2022:Open market and privately negotiated purchases40,557$136.85 40,557 Total132,839$41,665(1)On April 28,2022,the Board of Directors authorized the purchase of an additional$90 billion of the Companys common stock under the Program.As ofDecember 31,2022,total utilization under the April 2022 authorization was$48.3 billion.The Program does not obligate the Company to acquire a minimumamount of shares.Under the Program,shares may be repurchased in privately negotiated and/or open market transactions,including under plans complyingwith Rule 10b5-1 under the Exchange Act.Item 3.Defaults Upon Senior SecuritiesNone.(1)Apple Inc.|Q1 2023 Form 10-Q|21Item 4.Mine Safety DisclosuresNot applicable.Item 5.Other InformationRule 10b5-1 Trading PlansDuring the three months ended December 31,2022,Katherine L.Adams,Timothy D.Cook,Luca Maestri,Deirdre OBrien and Jeffrey Williams,each an officerfor purposes of Section 16 of the Exchange Act,had equity trading plans in place in accordance with Rule 10b5-1(c)(1)under the Exchange Act.An equitytrading plan is a written document that preestablishes the amounts,prices and dates(or formula for determining the amounts,prices and dates)of futurepurchases or sales of the Companys stock,including sales of shares acquired under the Companys employee and director equity plans.Item 6.ExhibitsIncorporated by ReferenceExhibitNumberExhibit DescriptionFormExhibitFiling Date/Period EndDate10.1*Form of CEO Restricted Stock Unit Award Agreement under 2022 Employee Stock Plan effective asof September 25,2022.10.2*Form of CEO Performance Award Agreement under 2022 Employee Stock Plan effective as ofSeptember 25,2022.31.1*Rule 13a-14(a)/15d-14(a)Certification of Chief Executive Officer.31.2*Rule 13a-14(a)/15d-14(a)Certification of Chief Financial Officer.32.1*Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.101*Inline XBRL Document Set for the condensed consolidated financial statements and accompanyingnotes in Part I,Item 1,“Financial Statements”of this Quarterly Report on Form 10-Q.104*Inline XBRL for the cover page of this Quarterly Report on Form 10-Q,included in the Exhibit 101Inline XBRL Document Set.*Filed herewith.*Furnished herewith.Apple Inc.|Q1 2023 Form 10-Q|22SIGNATUREPursuant 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.Date:February 2,2023Apple Inc.By:/s/Luca MaestriLuca MaestriSenior Vice President,Chief Financial OfficerApple Inc.|Q1 2023 Form 10-Q|23Exhibit 10.1APPLE INC.2022 EMPLOYEE STOCK PLANRESTRICTED STOCK UNIT AWARD AGREEMENTNOTICE OF GRANTName:(the“Participant”)Employee ID:Grant Number:No.of Units Subject to Award:Award Date:(the“Award Date”)Vesting Commencement Date:(the“Vesting Commencement Date”)Vesting Schedule:This restricted stock unit award(the“Award”)is granted under and governed by the terms and conditions of the Apple Inc.2022Employee Stock Plan and the Terms and Conditions of Restricted Stock Unit Award,which are incorporated herein by reference.You do not have to accept the Award.If you wish to decline your Award,you should promptly notify Apple Inc.s Stock Plan Group of yourdecision at.If you do not provide such notification by the last day of the calendar month prior to the first Vesting Date,you will be deemed to have accepted your Award on the terms and conditions set forth herein.APPLE INC.2022 EMPLOYEE STOCK PLANRESTRICTED STOCK UNIT AWARD AGREEMENTTERMS AND CONDITIONS OF RESTRICTED STOCK UNIT AWARD1.General.These Terms and Conditions of Restricted Stock Unit Award(these“Terms”)apply to a particular restricted stock unitaward(the“Award”)granted by Apple Inc.,a California corporation(the“Company”),and are incorporated by reference in the Notice of Grant(the“Grant Notice”)corresponding to that particular grant.The recipient of the Award identified in the Grant Notice is referred to as the“Participant.”The effective date of grant of the Award as set forth in the Grant Notice is referred to as the“Award Date.”The Award was grantedunder and is subject to the provisions of the Apple Inc.2022 Employee Stock Plan,as amended from time to time(the“Plan”).Capitalized termsare defined in the Plan if not defined herein.The Award is discretionary and has been granted to the Participant in addition to,and not in lieu of,any other form of compensation otherwise payable or to be paid to the Participant.The Grant Notice and these Terms are collectively referred toas the“Award Agreement”applicable to the Award.2.RSUs.As used herein,the term“RSU”shall mean a non-voting unit of measurement which is deemed for bookkeeping purposes tobe equivalent to one outstanding Share solely for purposes of the Plan and this Award Agreement.RSUs shall be used solely as a device for thedetermination of the payment to eventually be made to the Participant if such RSUs vest pursuant to this Award Agreement.The RSUs shall notbe treated as property or as a trust fund of any kind.3.Vesting.Subject to Sections 4 and 8 below,the Award shall vest and become nonforfeitable as set forth in the Grant Notice.(Eachvesting date set forth in the Grant Notice is referred to herein as a“Vesting Date.”)Unless and until the Company elects to issue fractionalShares in settlement of a vested RSU,any fractional RSUs that vest on a Vesting Date shall be carried forward and vest when such combinedfractional RSUs result in a full RSU and any fractional RSU that is not carried forward as a result of a termination of the Award prior to the nextsubsequent Vesting Date shall be forfeited.4.Continuance of Employment.Except as provided in this Section 4 and in Section 8 below,vesting of the Award requires continuedactive employment or service through each applicable Vesting Date as a condition to the vesting of the applicable installment of the Award andthe rights and benefits under this Award Agreement.Employment or service for only a portion of the period between the Vesting CommencementDate and the first Vesting Date or between subsequent Vesting Dates,even if a substantial portion,will not entitle the Participant to anyproportionate vesting of the Award.For purposes of this Award Agreement,active service shall include(a)the duration of an approved leave ofabsence(other than a personal leave of absence)and(b)the first thirty(30)days of an approved personal leave of absence,in each case asapproved by the Company,in its sole discretion.The vesting of the Award shall be tolled beginning on the thirty-first(31st)day of a personalleave of absence.Nothing contained in this Award Agreement or the Plan constitutes an employment or service commitment by the Company,affects theParticipants status as an employee at will who is subject to termination with or without cause,confers upon the Participant any right to remainemployed by or in service to the Company or any Subsidiary,interferes in any way with the right of the Company or any Subsidiary at any time toterminate such employment or service,or affects the right of the Company or any Subsidiary to increase or decrease the Participants othercompensation or benefits.Nothing in this Section 4,however,is intended to adversely affect any independent contractual right of the Participantwithout the Participants consent thereto.15.Dividend and Voting Rights.(a)Limitations on Rights Associated with RSUs.The Participant shall have no rights as a shareholder of the Company,nodividend rights(except as expressly provided in Section 5(b)with respect to Dividend Equivalent Rights)and no voting rights,with respect to theRSUs or any Shares underlying or issuable in respect of such RSUs until such Shares are actually issued to and held of record by theParticipant.No adjustments will be made for dividends or other rights of a holder for which the record date is prior to the date of issuance of thestock as reflected in the book entry evidencing such Shares.(b)Dividend Equivalent Rights Distributions.As of any date that the Company pays an ordinary cash dividend on itsShares,the Company shall credit the Participant with a dollar amount equal to(i)the per share cash dividend paid by the Company on itsShares on such date,multiplied by(ii)the total number of RSUs(with such total number adjusted pursuant to Section 11 of the Plan)subject tothe Award that are outstanding immediately prior to the record date for that dividend(a“Dividend Equivalent Right”).Any Dividend EquivalentRights credited pursuant to the foregoing provisions of this Section 5(b)shall be subject to the same vesting,payment and other terms,conditions and restrictions as the original RSUs to which they relate,including the obligation to satisfy the Tax-Related Items;provided,however,that the amount of any vested Dividend Equivalent Rights shall be paid in cash.No crediting of Dividend Equivalent Rights shall be madepursuant to this Section 5(b)with respect to any RSUs which,immediately prior to the record date for that dividend,have either been paidpursuant to Section 7 or terminated pursuant to Section 8.6.Restrictions on Transfer.Except as provided in Section 4(c)of the Plan,the Award,the Dividend Equivalent Rights and anyinterest therein or amount or Shares payable in respect thereof shall not be sold,assigned,transferred,pledged or otherwise disposed of,alienated or encumbered,either voluntarily or involuntarily.7.Timing and Manner of Payment of RSUs.On or as soon as administratively practical following each Vesting Date determinedpursuant to Section 3 or Section 8 or following the Participants death as specified in Section 8(d)(and in all events not later than two and one-half(2)months after such Vesting Date or the date of the Participants death,as applicable),the Company shall deliver to the Participant anumber of Shares(either by delivering one or more certificates for such Shares or by entering such Shares in book entry form,as determined bythe Company in its discretion)equal to the number of RSUs subject to the Award that vest(or,in the case of the Participants Retirement,deathor Disability,are treated as vesting)on the applicable Vesting Date or the Participants death,as applicable,less Tax-Related Items,unless suchRSUs terminate prior to the given Vesting Date pursuant to Section 8.The Companys obligation to deliver Shares or otherwise make paymentwith respect to vested RSUs is subject to the condition precedent that the Participant or other person entitled under the Plan to receive anyShares with respect to the vested RSUs deliver to the Company any representations or other documents or assurances required pursuant toSection 13(c)of the Plan.The Participant shall have no further rights with respect to any RSUs that are paid or that terminate pursuant toSection 8.8.Effect of Termination of Service.(a)Except as expressly provided in Section 4 or this Section 8,the Participants RSUs(as well as the related DividendEquivalent Rights)shall terminate to the extent such RSUs have not become vested prior to the Participants Termination of Service,meaningthe first date the Participant is no longer employed by or providing services to the Company or one of its Subsidiaries(the“Severance Date”),regardless of the reason for the Participants Termination of Service,whether with or without cause,voluntarily or involuntarily,or whether theParticipant was employed or provided services for a portion of the vesting period prior to a Vesting Date.2(b)Notwithstanding the foregoing,and except as otherwise provided by the Committee,in the event of the ParticipantsTermination of Service due to the Participants Retirement(defined below)on or after the first anniversary of the Award Date,any unvestedRSUs shall continue to be eligible to vest on a pro rata basis(in accordance with the schedule set forth in the Grant Notice and Section 8(d)without regard to the Participants Termination of Service,determined by multiplying(i)the number of RSUs eligible to vest on the applicableVesting Date,by(ii)a fraction,the numerator of which shall be the number of days that have elapsed between the Award Date and theParticipants Retirement date,and the denominator of which shall be the total number of days contained in the period between the Award Dateand the applicable Vesting Date.For purposes of this Award Agreement,“Retirement”means the Participants Termination of Service on or afterthe Participant both has reached the age of sixty(60)and has completed ten(10)years of service with the Company,or any Subsidiary(including service with any entity acquired by the Company)as of the Severance Date,as determined in the sole discretion of the Committee.Inthe event the Participants Termination of Service occurs prior to the first anniversary of the Award Date,this Section 8(b)shall not apply,unlessthe Committee shall otherwise determine.For purposes of this Section 8(b),a Termination of Service shall not include the ParticipantsTermination of Service resulting from the Participants Disability or death(in which case Section 8(c)or 8(d),as applicable,will apply).(c)In the event of the Participants Termination of Service due to the Participants Disability,any unvested RSUs shall continueto be eligible to vest in full(in accordance with the schedule set forth in the Grant Notice and Section 8(d)without regard to the ParticipantsTermination of Service.(d)In the event of the Participants Termination of Service due to the Participants death,all unvested RSUs eligible to vest onVesting Date(s)subsequent to the Participants death shall accelerate and vest immediately,and upon the Participants death following theParticipants Termination of Service due to Disability or Retirement any RSUs that were eligible to vest in full,or pro rata in the case ofRetirement,will be settled as soon as administratively practicable after the Participants death in accordance with Section 7.(e)If any unvested RSUs are terminated hereunder,such RSUs(as well as the related Dividend Equivalent Rights)shallautomatically terminate and be cancelled as of the applicable Severance Date without payment of any consideration by the Company andwithout any other action by the Participant or the Participants personal representative,as the case may be.9.Recoupment.Notwithstanding any other provision herein,the Award and any Shares or other amount or property that may beissued,delivered or paid in respect of the Award,as well as any consideration that may be received in respect of a sale or other disposition ofany such Shares or property,shall be subject to any recoupment,“clawback”or similar provisions of applicable law.In addition,the Companymay require the Participant to deliver or otherwise repay to the Company the Award and any Shares or other amount or property that may beissued,delivered or paid in respect of the Award,as well as any consideration that may be received in respect of a sale or other disposition ofany such Shares or property,if the Company reasonably determines that one or more of the following has occurred:(a)during the period of the Participants employment or service with the Company or any of its Subsidiaries(the“EmploymentPeriod”),the Participant has committed a felony(under the laws of the United States or any relevant state,or a similar crime or offenseunder the applicable laws of any relevant foreign jurisdiction);3(b)during the Employment Period or at any time thereafter,the Participant has committed or engaged in a breach ofconfidentiality,or an unauthorized disclosure or use of inside information,customer lists,trade secrets or other confidential information ofthe Company or any of its Subsidiaries;(c)during the Employment Period or at any time thereafter,the Participant has committed or engaged in an act of theft,embezzlement or fraud,or materially breached any agreement to which the Participant is a party with the Company or any of itsSubsidiaries.For purposes of the foregoing,the Participant expressly and explicitly authorizes the Company to issue instructions,on the Participantsbehalf,to any brokerage firm or third party administrator holding the Participants Shares and other amounts acquired under the Plan to re-convey,transfer,or otherwise return such Shares and other amounts to the Company.This Section 9 is not the Companys exclusive remedywith respect to such matters.10.Adjustments Upon Specified Events.Upon the occurrence of certain events relating to the Companys stock contemplated bySection 11 of the Plan(including,without limitation,an extraordinary cash dividend on such stock),the Committee shall make adjustments inaccordance with such section in the number of RSUs then outstanding and the number and kind of securities that may be issued in respect ofthe Award.No such adjustment shall be made with respect to any ordinary cash dividend for which Dividend Equivalent Rights are creditedpursuant to Section 5(b).11.Responsibility for Taxes.The Participant acknowledges that,regardless of any action the Company or the Participants employer(“Employer”)take with respect to any Tax-Related Items,the ultimate liability for all Tax-Related Items is and remains the Participantsresponsibility and may exceed the amount,if any,actually withheld by the Company or the Employer.The Participant further acknowledges thatthe Company and the Employer(i)make no representations or undertakings regarding the treatment of any Tax-Related Items in connection withany aspect of the Award,including the grant of the RSUs,the vesting of the RSUs,the delivery of Shares,the subsequent sale of any Sharesacquired at vesting,and the receipt of any dividends or Dividend Equivalent Rights;and(ii)do not commit to and are under no obligation tostructure the terms of the grant or any aspect of the Award to reduce or eliminate the Participants liability for Tax-Related Items or achieve anyparticular tax result.Further,if the Participant is or becomes subject to tax in more than one jurisdiction,the Participant acknowledges that theCompany or the Employer(or former employer,as applicable)may be required to withhold or account for Tax-Related Items in more than onejurisdiction.Prior to the relevant taxable or tax withholding event,as applicable,the Participant shall pay or make arrangements satisfactory to theCompany or the Employer to satisfy all Tax-Related Items.In this regard,the Participant authorizes the Company or the Employer,or theirrespective agents,at their discretion and pursuant to such procedures as they may specify from time to time,to satisfy any applicablewithholding obligations with regard to all Tax-Related Items by one or a combination of the following:(a)withholding from any wages or other cash compensation,including short-term cash incentives,payable to the Participantby the Company or the Employer;(b)withholding otherwise deliverable Shares and from otherwise payable Dividend Equivalent Rights to be issued or paidupon vesting/settlement of the Award;(c)arranging for the sale of Shares otherwise deliverable to the Participant(on the Participants behalf and at the Participantsdirection pursuant to this authorization),including selling Shares as part of a block trade with other Participants in the Plan;4(d)withholding from the proceeds of the sale of Shares acquired upon vesting/settlement of the Award;or(e)any other method of withholding determined by the Company to be permitted under the Plan and,to the extent required byApplicable Law or under the Plan,approved by the Committee.Notwithstanding the foregoing,if the Participant is an officer of the Company who is subject to Section 16 of the Exchange Act,thenthe Company must satisfy any withholding obligations arising upon the occurrence of a taxable or tax withholding event,as applicable,by withholding Shares otherwise deliverable or an amount otherwise payable upon settlement of Dividend Equivalent Rights pursuant to method(b),unless the Board or the Committee determines in its discretion to satisfy the obligation for Tax-Related Items by one or a combination ofmethods(a),(b),(c),and(d)above.The Company may withhold or account for Tax-Related Items by considering statutory withholding amounts or other withholding rates,including maximum rates applicable in the Participants jurisdiction(s).If the maximum rate is used,any over-withheld amount may be refundedto the Participant in cash by the Company or Employer(with no entitlement to the Share equivalent)or if not refunded,the Participant may seeka refund from the local tax authorities.In the event of under-withholding,the Participant may be required to pay additional Tax-Related Itemsdirectly to the applicable tax authority or to the Company or Employer.If the obligation for Tax-Related Items is satisfied by withholding a numberof Shares as described herein,for tax purposes,the Participant is deemed to have been issued the full number of Shares subject to the vestedRSUs,notwithstanding that a number of the Shares are held back solely for the purpose of paying the Tax-Related Items.The Company mayrefuse to issue or deliver to the Participant any Shares or the proceeds of the sale of Shares if the Participant fails to comply with theParticipants obligations in connection with the Tax-Related Items.12.Electronic Delivery and Acceptance.The Company may,in its sole discretion,deliver any documents related to the Award byelectronic means or request the Participants consent to participate in the Plan by electronic means.The Participant hereby consents to receiveall applicable documentation by electronic delivery and to participate in the Plan through an on-line or voice activated system established andmaintained by the Company or a third party vendor designated by the Company.13.Data Privacy.By participating in the Plan,the Participant acknowledges and consents to the collection,use,processing andtransfer of personal data as described in this Section 13.The Company,its related entities,and the Employer hold certain personal informationabout the Participant,including the Participants name,home address and telephone number,email address,date of birth,social securitynumber or other employee identification number,salary,nationality,job title,any Shares or directorships held in the Company,details of all RSUsor any other entitlement to Shares or equivalent benefits awarded,canceled,purchased,vested,unvested or outstanding in the Participantsfavor,for the purpose of managing and administering the Plan(“Data”).The Company and its related entities may transfer Data amongstthemselves as necessary for the purpose of implementation,administration,and management of the Participants participation in the Plan,andthe Company and its related entities may each further transfer Data to any third parties assisting the Company or any such related entity in theimplementation,administration,and management of the Plan.The Participant acknowledges that the transferors and transferees of such Datamay be located anywhere in the world and hereby authorizes each of them to receive,possess,use,retain and transfer the Data,in electronic orother form,for the purposes of implementing,administering,and managing the Participants participation in the Plan,including any transfer ofsuch Data as may be required for the administration of the Plan and the subsequent holding of Shares on the Participants behalf to a broker orto other third party with whom the Participant may elect to deposit any Shares acquired under the Plan(whether pursuant to the Award orotherwise).514.Notices.Any notice to be given under the terms of this Award Agreement shall be in writing and addressed to the Company at itsprincipal office to the attention of the Secretary,and to the Participant at the Participants last address reflected on the Companys records,or atsuch other address as either party may hereafter designate in writing to the other.Any such notice shall be given only when received,but if theParticipant is no longer an employee of the Company,shall be deemed to have been duly given by the Company when enclosed in a properlysealed envelope addressed as aforesaid,registered or certified,and deposited(postage and registry or certification fee prepaid)in a post officeor branch post office regularly maintained by the United States Government.15.Plan.The Award and all rights of the Participant under this Award Agreement are subject to the terms and conditions of theprovisions of the Plan,incorporated herein by reference.The Participant agrees to be bound by the terms of the Plan and this Award Agreement.The Participant acknowledges having read and understood the Plan,the Prospectus for the Plan,and this Award Agreement.Unless otherwiseexpressly provided in other sections of this Award Agreement,provisions of the Plan that confer discretionary authority on the Board or theCommittee do not(and shall not be deemed to)create any rights in the Participant unless such rights are expressly set forth herein or areotherwise in the sole discretion of the Board or the Committee so conferred by appropriate action of the Board or the Committee under the Planafter the date hereof.16.Entire Agreement.This Award Agreement and the Plan together constitute the entire agreement and supersede all priorunderstandings and agreements,written or oral,of the parties hereto with respect to the subject matter hereof.The Plan and this AwardAgreement may be amended pursuant to Section 15 of the Plan.Such amendment must be in writing and signed by the Company.TheCompany may,however,unilaterally waive any provision hereof in writing to the extent such waiver does not adversely affect the interests of theParticipant hereunder,but no such waiver shall operate as or be construed to be a subsequent waiver of the same provision or a waiver of anyother provision hereof.17.Limitation on the Participants Rights.Participation in the Plan confers no rights or interests other than as herein provided.ThisAward Agreement creates only a contractual obligation on the part of the Company as to amounts payable and shall not be construed ascreating a trust.Neither the Plan nor any underlying program,in and of itself,has any assets.The Participant shall have only the rights of ageneral unsecured creditor of the Company with respect to amounts credited and benefits payable,if any,with respect to the RSUs,and rightsno greater than the right to receive the Shares as a general unsecured creditor with respect to RSUs,as and when payable hereunder.18.Section Headings.The section headings of this Award Agreement are for convenience of reference only and shall not be deemedto alter or affect any provision hereof.19.Governing Law.This Award Agreement shall be governed by and construed and enforced in accordance with the laws of theState of California and applicable U.S.federal laws without regard to conflict of law principles thereunder.20.Choice of Venue.For purposes of litigating any dispute that arises directly or indirectly from the relationship of the partiesevidenced by this grant or this Award Agreement,the parties hereby submit to the exclusive jurisdiction of the State of California and agree thatsuch litigation shall be conducted only in the courts of Santa Clara County,California,or the federal courts for the Northern District of California,and no other courts,where this grant is made or to be performed.21.Construction.It is intended that the terms of the Award will not result in the imposition of any tax liability pursuant to Section 409Aof the Code.This Award Agreement shall be construed and interpreted with that intent.622.Severability.The provisions of this Award Agreement are severable and if any one of more provisions are determined to be illegalor otherwise unenforceable,in whole or in part,the remaining provisions shall nevertheless be binding and enforceable.23.Imposition of Other Requirements.The Company reserves the right to impose other requirements on the Participantsparticipation in the Plan,on the RSUs and on any Shares acquired under the Plan,to the extent the Company determines it is necessary oradvisable for legal or administrative reasons,and to require the Participant to sign any additional agreements or undertakings that may benecessary to accomplish the foregoing.7Exhibit 10.2APPLE INC.2022 EMPLOYEE STOCK PLANRESTRICTED STOCK UNIT AWARD AGREEMENTPERFORMANCE AWARDNOTICE OF GRANTName:(the“Participant”)Employee ID:Grant Number:Target No.of UnitsSubject to Award:Award Date:(the“Award Date”)Vesting Date:Performance Period:This restricted stock unit award(the“Award”)is granted under and governed by the terms and conditions of the Apple Inc.2022Employee Stock Plan and the Terms and Conditions of Restricted Stock Unit Award-Performance Award(including Exhibit A thereto),which areincorporated herein by reference.You do not have to accept the Award.If you wish to decline your Award,you should promptly notify Apple Inc.s Stock Plan Group of yourdecision at.If you do not provide such notification by the last day of the calendar month prior to the Vesting Date,youwill be deemed to have accepted your Award on the terms and conditions set forth herein.APPLE INC.2022 EMPLOYEE STOCK PLANRESTRICTED STOCK UNIT AWARD AGREEMENTTERMS AND CONDITIONS OF RESTRICTED STOCK UNIT AWARDPERFORMANCE AWARD1.General.These Terms and Conditions of Restricted Stock Unit Award-Performance Award(these“Terms”)apply to a particularrestricted stock unit award(the“Award”)granted by Apple Inc.,a California corporation(the“Company”),and are incorporated by reference inthe Notice of Grant(the“Grant Notice”)corresponding to that particular grant.The recipient of the Award identified in the Grant Notice isreferred to as the“Participant.”The effective date of grant of the Award as set forth in the Grant Notice is referred to as the“Award Date.”TheAward was granted under and is subject to the provisions of the Apple Inc.2022 Employee Stock Plan,as amended from time to time(the“Plan”).Capitalized terms are defined in the Plan if not defined herein.The Award is discretionary and has been granted to the Participant inaddition to,and not in lieu of,any other form of compensation otherwise payable or to be paid to the Participant.The Grant Notice and theseTerms(including Exhibit A hereto,incorporated herein by this reference)are collectively referred to as the“Award Agreement”applicable to theAward.2.RSUs.As used herein,the term“RSU”shall mean a non-voting unit of measurement which is deemed for bookkeeping purposes tobe equivalent to one outstanding Share solely for purposes of the Plan and this Award Agreement.The RSUs shall be used solely as a devicefor the determination of the payment to eventually be made to the Participant if such RSUs vest pursuant to this Award Agreement.The RSUsshall not be treated as property or as a trust fund of any kind.3.Vesting.Subject to Sections 4 and 8 below,the Award shall vest and become nonforfeitable as set forth in the Grant Notice andExhibit A hereto.(The vesting date set forth in the Grant Notice is referred to herein as a“Vesting Date”).4.Continuance of Employment.Except as provided in this Section 4 and in Section 8 below,vesting of the Award requires continuedactive employment or service through the Vesting Date as a condition to the vesting of the Award and the rights and benefits under this AwardAgreement.Employment or service for only a portion of the vesting period,even if a substantial portion,will not entitle the Participant to anyproportionate vesting of the Award.For purposes of this Award Agreement,active service shall include(a)the duration of an approved leave ofabsence(other than a personal leave of absence)and(b)the first thirty(30)days of an approved personal leave of absence,in each case asapproved by the Company,in its sole discretion.The vesting of the Award shall be tolled beginning on the thirty-first(31st)day of a personalleave of absence.Nothing contained in this Award Agreement or the Plan constitutes an employment or service commitment by the Company,affects theParticipants status as an employee at will who is subject to termination with or without cause,confers upon the Participant any right to remainemployed by or in service to the Company or any Subsidiary,interferes in any way with the right of the Company or any Subsidiary at any time toterminate such employment or services,or affects the right of the Company or any Subsidiary to increase or decrease the Participants othercompensation or benefits.Nothing in this Section 4,however,is intended to adversely affect any independent contractual right of the Participantwithout the Participants consent thereto.15.Dividend and Voting Rights.(a)Limitations on Rights Associated with RSUs.The Participant shall have no rights as a shareholder of the Company,nodividend rights(except as expressly provided in Section 5(b)with respect to Dividend Equivalent Rights)and no voting rights,with respect to theRSUs or any Shares underlying or issuable in respect of such RSUs until such Shares are actually issued to and held of record by theParticipant.No adjustments will be made for dividends or other rights of a holder for which the record date is prior to the date of issuance of thebook entry evidencing such Shares.(b)Dividend Equivalent Rights Distributions.As of any date that the Company pays an ordinary cash dividend on itsShares,the Company shall credit the Participant with a dollar amount equal to(i)the per share cash dividend paid by the Company on itsShares on such date,multiplied by(ii)the total target number of RSUs(with such total number adjusted pursuant to Section 11 of the Plan)subject to the Award that are outstanding immediately prior to the record date for that dividend(a“Dividend Equivalent Right”).Any DividendEquivalent Rights credited pursuant to the foregoing provisions of this Section 5(b)shall be subject to the same vesting,payment and otherterms,conditions and restrictions as the original RSUs to which they relate,including the obligation to satisfy the Tax-Related Items;provided,however,that the amount of any vested Dividend Equivalent Rights shall be paid in cash.For purposes of clarity,the percentage of the DividendEquivalent Rights that are paid will correspond to the percentage of the total target number of RSUs that vest on the Vesting Date,after givingeffect to Exhibit A.No crediting of Dividend Equivalent Rights shall be made pursuant to this Section 5(b)with respect to any RSUs which,immediately prior to the record date for that dividend,have either been paid pursuant to Section 7 or terminated pursuant to Section 8 or ExhibitA.6.Restrictions on Transfer.Except as provided in Section 4(c)of the Plan,the Award,the Dividend Equivalent Rights and anyinterest therein or amount or Shares payable in respect thereof shall not be sold,assigned,transferred,pledged or otherwise disposed of,alienated or encumbered,either voluntarily or involuntarily.7.Timing and Manner of Payment of RSUs.On or as soon as administratively practical following the Vesting Date pursuant toSection 3 or Section 8(and in all events not later than two and one-half(2)months after such Vesting Date),the Company shall deliver to theParticipant a number of Shares(either by delivering one or more certificates for such Shares or by entering such Shares in book entry form,asdetermined by the Company in its discretion)equal to the number of RSUs subject to the Award that vest(or,in the case of the ParticipantsRetirement,death or Disability,are treated as vesting)on the Vesting Date,less Tax-Related Items,unless such RSUs terminate prior to theVesting Date pursuant to Section 8.The Companys obligation to deliver Shares or otherwise make payment with respect to vested RSUs issubject to the condition precedent that the Participant or other person entitled under the Plan to receive any Shares with respect to the vestedRSUs deliver to the Company any representations or other documents or assurances required pursuant to Section 13(c)of the Plan.TheParticipant shall have no further rights with respect to any RSUs that are paid or that terminate pursuant to Section 8.8.Effect of Termination of Service.(a)Except as expressly provided in Section 4 or this Section 8,the Participants RSUs(as well as the related DividendEquivalent Rights)shall terminate to the extent such RSUs have not become vested prior to the Participants Termination of Service,meaningthe first date the Participant is no longer employed by or providing services to the Company or one of its Subsidiaries(the“Severance Date”),regardless of the reason for the Participants Termination of Service,whether with or without cause,voluntarily or involuntarily or whether theParticipant was employed or provided services for a portion of the vesting period prior to a Vesting Date.2(b)Notwithstanding the foregoing,and except as otherwise provided by the Committee,in the event of the ParticipantsTermination of Service due to the Participants Retirement(defined below)on or after the first anniversary of the Award Date,death or Disability,any unvested RSUs shall continue to be eligible to vest on the Vesting Date without regard to the Participants Termination of Service.Forpurposes of this Award Agreement,“Retirement”means the Participants Termination of Service on or after the Participant both has reached theage of sixty(60)and has completed ten(10)years of service with the Company,or any Subsidiary(including service with any entity acquired bythe Company),as of the Severance Date,as determined in the sole discretion of the Committee.In the event the Participants Termination ofService occurs due to Retirement prior to the first anniversary of the Award Date,this Section 8(b)shall not apply,unless the Committee shallotherwise determine.(c)If any unvested RSUs are terminated pursuant to this Award Agreement,such RSUs(as well as the related DividendEquivalent Rights)shall automatically terminate and be cancelled as of the applicable Severance Date(or,to the extent that any RSUs remainoutstanding following the Severance Date by reason of Section 8(b)but the applicable performance-based vesting conditions are not satisfied,such RSUs shall automatically terminate and be cancelled as of the Vesting Date,as provided in Exhibit A)without payment of any considerationby the Company and without any other action by the Participant,or the Participants beneficiary or personal representative,as the case may be.9.Recoupment.Notwithstanding any other provision herein,the Award and any Shares or other amount or property that may beissued,delivered or paid in respect of the Award,as well as any consideration that may be received in respect of a sale or other disposition ofany such Shares or property,shall be subject to any recoupment,“clawback”or similar provisions of applicable law.In addition,the Companymay require the Participant to deliver or otherwise repay to the Company the Award and any Shares or other amount or property that may beissued,delivered or paid in respect of the Award,as well as any consideration that may be received in respect of a sale or other disposition ofany such Shares or property,if the Company reasonably determines that one or more of the following has occurred:(a)during the period of the Participants employment or service with the Company or any of its Subsidiaries(the“EmploymentPeriod”),the Participant has committed a felony(under the laws of the United States or any relevant state,or a similar crime or offenseunder the applicable laws of any relevant foreign jurisdiction);(b)during the Employment Period or at any time thereafter,the Participant has committed or engaged in a breach ofconfidentiality,or an unauthorized disclosure or use of inside information,customer lists,trade secrets or other confidential information ofthe Company or any of its Subsidiaries;(c)during the Employment Period or at any time thereafter,the Participant has committed or engaged in an act of theft,embezzlement or fraud,or materially breached any agreement to which the Participant is a party with the Company or any of itsSubsidiaries.For purposes of the foregoing,the Participant expressly and explicitly authorizes the Company to issue instructions,on the Participantsbehalf,to any brokerage firm and/or third party administrator engaged by the Company to hold the Participants Shares and other amountsacquired under the Plan to re-convey,transfer or otherwise return such Shares and/or other amounts to the Company.This Section 9 is not theCompanys exclusive remedy with respect to such matters.10.Adjustments Upon Specified Events.Upon the occurrence of certain events relating to the Companys stock contemplated bySection 11 of the Plan(including,without limitation,an extraordinary cash dividend on such stock),the Committee shall make adjustments inaccordance with such section in the number of RSUs then outstanding and the number and kind of securities that may be3issued in respect of the Award.No such adjustment shall be made with respect to any ordinary cash dividend for which Dividend EquivalentRights are credited pursuant to Section 5(b).11.Responsibility for Taxes.The Participant acknowledges that,regardless of any action the Company and/or the Participantsemployer(“Employer”)take with respect to any Tax-Related Items,the ultimate liability for all Tax-Related Items is and remains the Participantsresponsibility and may exceed the amount,if any,actually withheld by the Company or the Employer.The Participant further acknowledges thatthe Company and/or the Employer(i)make no representations or undertakings regarding the treatment of any Tax-Related Items in connectionwith any aspect of the Award,including the grant of the RSUs,the vesting of the RSUs,the delivery of Shares,the subsequent sale of anyShares acquired at vesting and the receipt of any dividends and/or Dividend Equivalent Rights;and(ii)do not commit to and are under noobligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Participants liability for Tax-Related Items orachieve any particular tax result.Further,if the Participant is or becomes subject to tax in more than one jurisdiction,the Participantacknowledges that the Company and/or the Employer(or former employer,as applicable)may be required to withhold or account for Tax-Related Items in more than one jurisdiction.Prior to the relevant taxable or tax withholding event,as applicable,the Participant shall pay or make arrangements satisfactory to theCompany and/or the Employer to satisfy all Tax-Related Items.In this regard,the Participant authorizes the Company and/or the Employer,ortheir respective agents,at their discretion and pursuant to such procedures as they may specify from time to time,to satisfy any applicablewithholding obligations with regard to all Tax-Related Items by one or a combination of the following:(a)withholding from any wages or other cash compensation,including short-term cash incentives,payable to the Participantby the Company and/or the Employer;(b)withholding otherwise deliverable Shares and/or from otherwise payable Dividend Equivalent Rights to be issued or paidupon vesting/settlement of the Award;(c)arranging for the sale of Shares otherwise deliverable to the Participant(on the Participants behalf and at the Participantsdirection pursuant to this authorization),including selling Shares as part of a block trade with other Participants in the Plan;(d)withholding from the proceeds of the sale of Shares acquired upon vesting/settlement of the Award;or(e)any other method of withholding determined by the Company to be permitted under the Plan and,to the extent required byApplicable Law or under the Plan,approved by the Committee.Notwithstanding the foregoing,if the Participant is an officer of the Company who is subject to Section 16 of the Exchange Act,thenthe Company must satisfy any withholding obligations arising upon the occurrence of a taxable or tax withholding event,as applicable,by withholding Shares otherwise deliverable or an amount otherwise payable upon settlement of Dividend Equivalent Rights pursuant to method(b),unless the Board or the Committee determines in its discretion to satisfy the obligation for Tax-Related Items by one or a combination ofmethods(a),(b),(c),and(d)above.The Company may withhold or account for Tax-Related Items by considering statutory withholding amounts or other withholding rates,including maximum rates applicable in the Participants jurisdictions(s).If the maximum rate is used,any over-withheld amount may be refundedto the Participant in cash by the Company or Employer(with no entitlement to the Share equivalent)or if not refunded,the Participant may seeka refund from the local tax authorities.In the event of under-withholding,the Participant may be required to pay additional Tax-Related Itemsdirectly to the applicable4tax authority or to the Company or Employer.If the obligation for Tax-Related Items is satisfied by withholding a number of Shares as describedherein,for tax purposes,the Participant is deemed to have been issued the full number of Shares subject to the vested RSUs,notwithstandingthat a number of the Shares are held back solely for the purpose of paying the Tax-Related Items.The Company may refuse to issue or deliverto the Participant any Shares or the proceeds of the sale of Shares if the Participant fails to comply with the Participants obligations inconnection with the Tax-Related Items.12.Electronic Delivery and Acceptance.The Company may,in its sole discretion,deliver any documents related to the Award byelectronic means or request the Participants consent to participate in the Plan by electronic means.The Participant hereby consents to receiveall applicable documentation by electronic delivery and to participate in the Plan through an on-line(and/or voice activated)system establishedand maintained by the Company or a third party vendor designated by the Company.13.Data Privacy.The Participant acknowledges and consents to the collection,use,processing and transfer of personal data asdescribed in this Section 13.The Company,its related entities,and the Employer hold certain personal information about the Participant,including the Participants name,home address and telephone number,email address,date of birth,social security number or other employeeidentification number,salary,nationality,job title,any Shares or directorships held in the Company,details of all RSUs or any other entitlement toShares or equivalent benefits awarded,canceled,purchased,vested,unvested or outstanding in the Participants favor,for the purpose ofmanaging and administering the Plan(“Data”).The Company and its related entities may transfer Data amongst themselves as necessary forthe purpose of implementation,administration and management of the Participants participation in the Plan,and the Company and its relatedentities may each further transfer Data to any third parties assisting the Company or any such related entity in the implementation,administrationand management of the Plan.The Participant acknowledges that the transferors and transferees of such Data may be located anywhere in theworld and hereby authorizes each of them to receive,possess,use,retain and transfer the Data,in electronic or other form,for the purposes ofimplementing,administering and managing the Participants participation in the Plan,including any transfer of such Data as may be required forthe administration of the Plan and/or the subsequent holding of Shares on the Participants behalf to a broker or to other third party with whomthe Participant may elect to deposit any Shares acquired under the Plan(whether pursuant to the Award or otherwise).14.Notices.Any notice to be given under the terms of this Award Agreement shall be in writing and addressed to the Company at itsprincipal office to the attention of the Secretary,and to the Participant at the Participants
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2023-04-14
46页
5星级
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