UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-Q(Mark One)QUARTERLY REPO.
2023-05-23
146页
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended April 2,2023OR TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _ to _COMMISSION FILE NUMBER 1-3619-PFIZER INC.(Exact name of registrant as specified in its charter)Delaware13-5315170(State of Incorporation)(I.R.S.Employer Identification No.)66 Hudson Boulevard East,New York,New York 10001-2192(Address of principal executive offices)(zip code)(212)733-2323(Registrants telephone number including area code)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock,$0.05 par valuePFENew York Stock Exchange1.000%Notes due 2027PFE27New York Stock ExchangeIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during thepreceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for the past 90days.YesxNoIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).YesxNoIndicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerginggrowth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 ofthe Exchange Act:Large Accelerated filer x Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company If an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).YesNoxAt May 5,2023,5,645,307,020 shares of the issuers voting common stock were outstanding.TABLE OF CONTENTSPART I.FINANCIAL INFORMATIONPageItem 1.Financial Statements Condensed Consolidated Statements of Income5Condensed Consolidated Statements of Comprehensive Income6Condensed Consolidated Balance Sheets7Condensed Consolidated Statements of Equity8Condensed Consolidated Statements of Cash Flows9Notes to Condensed Consolidated Financial Statements10Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations34Item 3.Quantitative and Qualitative Disclosures About Market Risk53Item 4.Controls and Procedures53PART II.OTHER INFORMATION Item 1.Legal Proceedings53Item 1A.Risk Factors53Item 2.Unregistered Sales of Equity Securities and Use of Proceeds54Item 3.Defaults Upon Senior SecuritiesN/AItem 4.Mine Safety DisclosuresN/AItem 5.Other InformationN/AItem 6.Exhibits54Signature54N/A=Not Applicable2DEFINED TERMSUnless the context requires otherwise,references to“Pfizer,”“the Company,”“we,”“us”or“our”in this Form 10-Q(defined below)refer to Pfizer Inc.and itssubsidiaries.Pfizers fiscal quarter-end for subsidiaries operating outside the U.S.is as of and for the three months ended February 26,2023 and February 27,2022,and for U.S.subsidiaries is as of and for the three months ended April 2,2023 and April 3,2022.References to“Notes”in this Form 10-Q are to theNotes to the Condensed or Consolidated Financial Statements in this Form 10-Q or in our 2022 Form 10-K.We also have used several other terms in this Form10-Q,most of which are explained or defined below:2022 Form 10-KAnnual Report on Form 10-K for the fiscal year ended December 31,2022ACIPAdvisory Committee on Immunization PracticesALKanaplastic lymphoma kinaseAlliance revenuesRevenues from alliance agreements under which we co-promote products discovered or developed by other companies or usArenaArena Pharmaceuticals,Inc.AstellasAstellas Pharma Inc.,Astellas US LLC and Astellas Pharma US,Inc.ATTR-CMtransthyretin amyloid cardiomyopathyBiohavenBiohaven Pharmaceutical Holding Company Ltd.BioNTechBioNTech SEBiopharmaGlobal Biopharmaceuticals BusinessBMSBristol-Myers Squibb CompanyBODBoard of DirectorsCDCU.S.Centers for Disease Control and PreventionCMAconditional marketing authorisationComirnaty*Unless otherwise noted,refers to,as applicable,and as authorized or approved,the Pfizer-BioNTech COVID-19 Vaccine,the Pfizer-BioNTech COVID-19 Vaccine,Bivalent(Original and Omicron BA.4/BA.5),the Comirnaty Original/Omicron BA.1 Vaccine,andComirnaty Original/Omicron BA.4/BA.5 Vaccine.In the U.S.,monovalent mRNA COVID-19 vaccines are no longer emergency useauthorized or CDC-recommended,although Comirnaty remains a licensed vaccine.Cond.J-NDAConditional Japan New Drug ApplicationConsumer Healthcare JVGSK Consumer Healthcare JVCOVID-19novel coronavirus disease of 2019Developed EuropeIncludes the following markets:Western Europe,Scandinavian countries and FinlandDeveloped MarketsIncludes the following markets:U.S.,Developed Europe,Japan,South Korea,Canada,Australia and New ZealandDeveloped Rest of WorldIncludes the following markets:Japan,South Korea,Canada,Australia and New ZealandECEuropean CommissionEMAEuropean Medicines AgencyEmerging MarketsIncludes,but is not limited to,the following markets:Asia(excluding Japan and South Korea),Latin America,Eastern Europe,Central Europe,the Middle East,Africa and TurkeyEPSearnings per shareESGEnvironmental,Social and GovernanceEUEuropean UnionEUAemergency use authorizationExchange ActSecurities Exchange Act of 1934,as amendedFASBFinancial Accounting Standards BoardFDAU.S.Food and Drug AdministrationFFDCAU.S.Federal Food,Drug and Cosmetic ActForm 10-QThis Quarterly Report on Form 10-Q for the quarterly period ended April 2,2023GAAPGenerally Accepted Accounting PrinciplesGBTGlobal Blood Therapeutics,Inc.GPDGlobal Product Development organizationGSKGSK plcHaleonHaleon plcHIPAAHealth Insurance Portability and Accountability Act of 1996HospiraHospira,Inc.IPR&Din-process research and developmentIRAInflation Reduction Act of 2022IRSU.S.Internal Revenue ServiceJAKJanus kinaseJVjoint ventureKingKing Pharmaceuticals LLC(formerly King Pharmaceuticals,Inc.)LIBORLondon Interbank Offered RateLOEloss of exclusivitymCRCmetastatic colorectal cancer3mCRPCmetastatic castration-resistant prostate cancermCSPCmetastatic castration-sensitive prostate cancerMD&AManagements Discussion and Analysis of Financial Condition and Results of OperationsMDLMulti-District LitigationMeridianMeridian Medical Technologies,Inc.mRNAmessenger ribonucleic acidMSAManufacturing Supply AgreementMylanMylan N.V.MyovantMyovant Sciences Ltd.NDANew Drug ApplicationNimbusNimbus Therapeutics,LLCnmCRPCnon-metastatic castration-resistant prostate cancerNSCLCnon-small cell lung cancerODToral disintegrating tabletOnoOno Pharmaceutical Co.,Ltd.OPKOOPKO Health,Inc.OTCover-the-counterPaxlovid*an oral COVID-19 treatment(nirmatrelvir PF-07321332 tablets and ritonavir tablets)PC1Pfizer CentreOnePharmaciaPharmacia CorporationPrevnar familyIncludes Prevnar 13/Prevenar 13(pediatric and adult)and Prevnar 20/Apexxnar(adult)PsApsoriatic arthritisRArheumatoid arthritisRCCrenal cell carcinomaR&Dresearch and developmentSeagenSeagen Inc.SECU.S.Securities and Exchange CommissionSI&Aselling,informational and administrativeTSAstransition service arrangementsUCulcerative colitisU.K.United KingdomU.S.United StatesUpjohn BusinessPfizers former global,primarily off-patent branded and generics business,which included a portfolio of 20 globally recognized solidoral dose brands,including Lipitor,Lyrica,Norvasc,Celebrex and Viagra,as well as a U.S.-based generics platform,Greenstone,thatwas spun-off on November 16,2020 and combined with Mylan to create ViatrisViatrisViatris Inc.ViiVViiV Healthcare LimitedVyndaqel familyIncludes Vyndaqel,Vyndamax and VynmacWRDMWorldwide Research,Development and Medical*Paxlovid and the Pfizer-BioNTech COVID-19 Vaccine,Bivalent(Original and Omicron BA.4/BA.5)have not been approved or licensed by the FDA.Paxlovid has been authorized for emergency use by theFDA under an EUA,for the treatment of mild-to-moderate COVID-19 in adults and pediatric patients(12 years of age and older weighing at least 40 kg)with a current diagnosis of mild-to-moderate COVID-19 and who are at high risk for progression to severe COVID-19,including hospitalization or death.The Pfizer-BioNTech COVID-19 Vaccine,Bivalent has been authorized by the FDA under an EUA toprevent COVID-19 in individuals aged 6 months and older.The emergency uses are only authorized for the duration of the declaration that circumstances exist justifying the authorization of emergency use ofthe medical product during the COVID-19 pandemic under Section 564(b)(1)of the FFDCA unless the declaration is terminated or authorization revoked sooner.Please see the EUA Fact Sheets and www.cvdvaccine-.This Form 10-Q includes discussion of certain clinical studies relating to various in-line products and/or product candidates.These studies typically are part ofa larger body of clinical data relating to such products or product candidates,and the discussion herein should be considered in the context of the larger body ofdata.In addition,clinical trial data are subject to differing interpretations,and,even when we view data as sufficient to support the safety and/or effectivenessof a product candidate or a new indication for an in-line product,regulatory authorities may not share our views and may require additional data or may denyapproval altogether.Some amounts in this Form 10-Q may not add due to rounding.All percentages have been calculated using unrounded amounts.All trademarks mentioned arethe property of their owners.The information contained on our website,our Facebook,Instagram,YouTube and LinkedIn pages or our Twitter accounts,or any third-party website,is notincorporated by reference into this Form 10-Q.4PART I.FINANCIAL INFORMATIONITEM 1.FINANCIAL STATEMENTSPFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)Three Months Ended(MILLIONS,EXCEPT PER SHARE DATA)April 2,2023April 3,2022Revenues$18,282$25,661 Costs and expenses:Cost of sales4,886 9,984 Selling,informational and administrative expenses3,418 2,593 Research and development expenses2,505 2,301 Acquired in-process research and development expenses21 355 Amortization of intangible assets1,103 835 Restructuring charges and certain acquisition-related costs9 192 Other(income)/deductionsnet70 350 Income from continuing operations before provision/(benefit)for taxes on income6,270 9,050 Provision/(benefit)for taxes on income715 1,172 Income from continuing operations5,555 7,879 Discontinued operationsnet of tax1(9)Net income before allocation to noncontrolling interests5,556 7,870 Less:Net income attributable to noncontrolling interests13 6 Net income attributable to Pfizer Imon shareholders$5,543$7,864 Earnings per common sharebasic:Income from continuing operations attributable to Pfizer Imon shareholders$0.98$1.40 Discontinued operationsnet of tax Net income attributable to Pfizer Imon shareholders$0.98$1.40 Earnings per common sharediluted:Income from continuing operations attributable to Pfizer Imon shareholders$0.97$1.37 Discontinued operationsnet of tax Net income attributable to Pfizer Imon shareholders$0.97$1.37 Weighted-average sharesbasic5,634 5,617 Weighted-average sharesdiluted5,727 5,758 Exclusive of amortization of intangible assets.See Accompanying Notes.(a)(a)(a)(a)5PFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)Three Months Ended(MILLIONS)April 2,2023April 3,2022Net income before allocation to noncontrolling interests$5,556$7,870 Foreign currency translation adjustments,net101(363)Unrealized holding gains/(losses)on derivative financial instruments,net2 203 Reclassification adjustments for(gains)/losses included in net income303(213)305(10)Unrealized holding gains/(losses)on available-for-sale securities,net87(133)Reclassification adjustments for(gains)/losses included in net income(509)233 (422)99 Reclassification adjustments related to amortization of prior service costs and other,net(30)(36)Reclassification adjustments related to curtailments of prior service costs and other,net(5)(11)(35)(47)Other comprehensive income/(loss),before tax(50)(321)Tax provision/(benefit)on other comprehensive income/(loss)(63)(60)Other comprehensive income/(loss)before allocation to noncontrolling interests$12$(260)Comprehensive income/(loss)before allocation to noncontrolling interests$5,569$7,610 Less:Comprehensive income/(loss)attributable to noncontrolling interests10 6 Comprehensive income/(loss)attributable to Pfizer Inc.$5,558$7,604 Reclassified into Other(income)/deductionsnet and Cost of sales.See Note 7E.Reclassified into Other(income)/deductionsnet.See Accompanying Notes.(a)(b)(a)(b)6PFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED BALANCE SHEETS(MILLIONS)April 2,2023December 31,2022(Unaudited)AssetsCash and cash equivalents$2,166$416 Short-term investments17,806 22,316 Trade accounts receivable,less allowance for doubtful accounts:2023$465;2022$44912,305 10,952 Inventories9,541 8,981 Current tax assets3,140 3,577 Other current assets5,120 5,017 Total current assets50,078 51,259 Equity-method investments11,175 11,033 Long-term investments3,568 4,036 Property,plant and equipment,less accumulated depreciation:2023$15,514;2022$15,17417,052 16,274 Identifiable intangible assets42,002 43,370 Goodwill51,476 51,375 Noncurrent deferred tax assets and other noncurrent tax assets7,302 6,693 Other noncurrent assets12,965 13,163 Total assets$195,617$197,205 Liabilities and Equity Short-term borrowings,including current portion of long-term debt:2023$3,567;2022$2,560$4,188$2,945 Trade accounts payable6,123 6,809 Dividends payable 2,303 Income taxes payable1,969 1,587 Accrued compensation and related items2,277 3,407 Deferred revenues1,750 2,520 Other current liabilities20,255 22,568 Total current liabilities36,562 42,138 Long-term debt31,704 32,884 Pension and postretirement benefit obligations2,179 2,250 Noncurrent deferred tax liabilities1,067 1,023 Other taxes payable9,860 9,812 Other noncurrent liabilities13,009 13,180 Total liabilities94,381 101,288 Commitments and ContingenciesCommon stock478 476 Additional paid-in capital92,153 91,802 Treasury stock(114,473)(113,969)Retained earnings131,102 125,656 Accumulated other comprehensive loss(8,289)(8,304)Total Pfizer Inc.shareholders equity100,970 95,661 Equity attributable to noncontrolling interests266 256 Total equity101,236 95,916 Total liabilities and equity$195,617$197,205 See Accompanying Notes.7PFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(UNAUDITED)PFIZER INC.SHAREHOLDERSCommon StockTreasury Stock(MILLIONS,EXCEPT PER SHARE DATA)SharesPar ValueAddlPaid-InCapitalSharesCostRetainedEarningsAccum.OtherComp.LossShare-holders EquityNon-controllinginterestsTotal EquityBalance,January 1,20239,519$476$91,802(3,903)$(113,969)$125,656$(8,304)$95,661$256$95,916 Net income5,543 5,543 13 5,556 Other comprehensive income/(loss),net of tax15 15(3)12 Cash dividends declared,per share:$Common stock Share-based payment transactions41 2 350(12)(504)(97)(249)(249)Other Balance,April 2,20239,560$478$92,153(3,915)$(114,473)$131,102$(8,289)$100,970$266$101,236 PFIZER INC.SHAREHOLDERSCommon StockTreasury Stock(MILLIONS,EXCEPT PER SHARE DATA)SharesPar ValueAddlPaid-InCapitalSharesCostRetainedEarningsAccum.OtherComp.LossShare-holders EquityNon-controllinginterestsTotal EquityBalance,January 1,20229,471$473$90,591(3,851)$(111,361)$103,394$(5,897)$77,201$262$77,462 Net income7,864 7,864 6 7,870 Other comprehensive income/(loss),net of tax(260)(260)(260)Cash dividends declared,per share:$Common stock Share-based payment transactions23 2 249(12)(570)(65)(383)(383)Purchases of common stock(39)(2,000)(2,000)(2,000)Other3 3(7)(4)Balance,April 3,20229,494$476$90,844(3,903)$(113,931)$111,193$(6,157)$82,424$261$82,685 See Accompanying Notes.8PFIZER INC.AND SUBSIDIARY COMPANIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)Three Months Ended(MILLIONS)April 2,2023April 3,2022Operating Activities Net income before allocation to noncontrolling interests$5,556$7,870 Discontinued operationsnet of tax1(9)Net income from continuing operations before allocation to noncontrolling interests5,555 7,879 Adjustments to reconcile net income before allocation to noncontrolling interests to net cash provided by operating activities:Depreciation and amortization1,487 1,187 Asset write-offs and impairments270 31 Deferred taxes(598)(2,321)Share-based compensation expense105 86 Benefit plan contributions in excess of expense/income(200)(404)Other adjustments,net99 815 Other changes in assets and liabilities,net of acquisitions and divestitures(5,507)(730)Net cash provided by operating activities1,212 6,541 Investing Activities Purchases of property,plant and equipment(1,139)(643)Purchases of short-term investments(6,665)(8,758)Proceeds from redemptions/sales of short-term investments6,400 13,421 Net(purchases of)/proceeds from redemptions/sales of short-term investments with original maturities of three months or less4,665 3,409 Purchases of long-term investments(51)(676)Proceeds from redemptions/sales of long-term investments124 52 Acquisition of business,net of cash acquired(6,225)Other investing activities,net(18)(13)Net cash provided by/(used in)investing activities3,315 567 Financing Activities Proceeds from short-term borrowings11 Net(payments on)/proceeds from short-term borrowings with original maturities of three months or less226(220)Payments on long-term debt(269)(1,609)Purchases of common stock(2,000)Cash dividends paid(2,303)(2,249)Other financing activities,net(436)(501)Net cash provided by/(used in)financing activities(2,771)(6,578)Effect of exchange-rate changes on cash and cash equivalents and restricted cash and cash equivalents(2)(1)Net increase/(decrease)in cash and cash equivalents and restricted cash and cash equivalents1,754 529 Cash and cash equivalents and restricted cash and cash equivalents,at beginning of period468 1,983 Cash and cash equivalents and restricted cash and cash equivalents,at end of period$2,222$2,513 Supplemental Cash Flow InformationCash paid during the period for:Income taxes$329$354 Interest paid419 453 Interest rate hedges60 26 See Accompanying Notes.9PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Note 1.Basis of Presentation and Significant Accounting PoliciesA.Basis of PresentationWe prepared these condensed consolidated financial statements in conformity with U.S.GAAP,consistent in all material respects with those applied in our2022 Form 10-K.As permitted under the SEC requirements for interim reporting,certain footnotes or other financial information have been condensed oromitted.These financial statements include all normal and recurring adjustments that are considered necessary for the fair statement of results for the interim periodspresented.The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notesincluded in our 2022 Form 10-K.Revenues,expenses,assets and liabilities can vary during each quarter of the year.Therefore,the results and trends in theseinterim financial statements may not be representative of those for the full year.Pfizers fiscal quarter-end for subsidiaries operating outside the U.S.is as of and for the three months ended February 26,2023 and February 27,2022,and forU.S.subsidiaries is as of and for the three months ended April 2,2023 and April 3,2022.We manage our commercial operations through two operating segments,each led by a single manager:Biopharma and Business Innovation.Biopharma is theonly reportable segment.See Note 13A below and Note 17A in our 2022 Form 10-K.Business development activities impacted financial results in the periods presented.See Notes 2A and 2B below as well as Notes 1A and 2 in our 2022 Form10-K.We have made certain reclassification adjustments to conform prior-period amounts to the current presentation for segment reporting.B.New Accounting Standard Adopted in 2023On January 1,2023,we adopted a new accounting standard for supplier finance programs which requires increased disclosures in the notes to our financialstatements.See Note 8C.C.Revenues and Trade Accounts ReceivableCustomersOur prescription biopharmaceutical products,with the exception of Paxlovid,are sold principally to wholesalers,but we also sell directly toretailers,hospitals,clinics,government agencies and pharmacies.We principally sell Paxlovid to government agencies and distributors.In the U.S.,weprimarily sell our vaccines directly to the federal government,CDC,wholesalers,individual provider offices,retail pharmacies and integrated delivery systems.Outside the U.S.,we primarily sell our vaccines to government and non-government institutions.Deductions from RevenuesOur accruals for Medicare,Medicaid and related state program and performance-based contract rebates,chargebacks,salesallowances and sales returns and cash discounts are as follows:(MILLIONS)April 2,2023December 31,2022Reserve against Trade accounts receivable,less allowance for doubtful accounts$1,068$1,200 Other current liabilities:Accrued rebates4,743 4,479 Other accruals521 430 Other noncurrent liabilities324 612 Total accrued rebates and other sales-related accruals$6,656$6,722 Trade Accounts ReceivableTrade accounts receivable are stated at their net realizable value.The allowance for credit losses reflects our best estimate ofexpected credit losses of the receivables portfolio determined on the basis of historical experience,current information,and forecasts of future economicconditions.In developing the estimate for expected credit losses,trade accounts receivables are segmented into pools of assets depending on market(U.S.versus international),delinquency status,and customer type(high risk versus low risk and government versus non-government),and fixed reserve percentagesare established for each pool of trade accounts receivables.In determining the reserve percentages for each pool of trade accounts receivables,we considered our historical experience with certain customers andcustomer types,regulatory and legal environments,country and political risk,and other relevant current10PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)and future forecasted macroeconomic factors.When management becomes aware of certain customer-specific factors that impact credit risk,specificallowances for these known troubled accounts are recorded.During the three months ended April 2,2023 and April 3,2022,additions to the allowance for credit losses,write-offs and recoveries of customer receivableswere not material to our condensed consolidated financial statements.For additional information on our trade accounts receivable,see Note 1G in our 2022Form 10-K.Note 2.Acquisitions,Discontinued Operations and Equity-Method InvestmentA.AcquisitionsGBTOn October 5,2022,we acquired GBT,a biopharmaceutical company dedicated to the discovery,development and delivery of life-changing treatmentsfor underserved patient communities,starting with sickle cell disease.The total fair value of the consideration transferred was$5.7 billion($5.2 billion,net ofcash acquired).In connection with this business combination,we provisionally recorded:(i)$4.4 billion in Identifiable intangible assets,consisting of$3.0billion of IPR&D and$1.4 billion of developed technology rights with a useful life of six years,(ii)$1.1 billion of Goodwill,(iii)$672 million of inventories tobe sold over approximately three years,(iv)$568 million of net deferred tax liabilities and(v)$331 million of assumed long-term debt that was paid in full inthe fourth quarter of 2022.The allocation of the consideration transferred to the assets acquired and liabilities assumed has not yet been finalized.BiohavenOn October 3,2022,we acquired Biohaven,the maker of Nurtec ODT/Vydura(rimegepant),an innovative therapy approved for both acutetreatment of migraine and prevention of episodic migraine in adults.The total fair value of the consideration transferred was$11.8 billion,which includes thefair value of Pfizers previous investment in Biohaven on the acquisition date of approximately$300 million.In connection with this business combination,weprovisionally recorded:(i)$12.1 billion in Identifiable intangible assets,consisting of$11.6 billion of developed technology rights with a useful life of 11 yearsand$450 million of IPR&D,(ii)$817 million of inventories to be sold over approximately two years,(iii)$797 million of Goodwill,(iv)$398 million of tradeaccounts receivable,(v)$1.4 billion of assumed long-term debt that was paid in full in the fourth quarter of 2022,(vi)$566 million of net deferred taxliabilities and(vii)$476 million of Other current liabilities.The allocation of the consideration transferred to the assets acquired and liabilities assumed has notyet been finalized.ArenaOn March 11,2022,we acquired Arena,a clinical stage company with development-stage therapeutic candidates in gastroenterology,dermatology andcardiology.The total fair value of the consideration transferred was$6.6 billion($6.2 billion,net of cash acquired).The final allocation of the considerationtransferred to the assets acquired and the liabilities assumed was completed in the first quarter of 2023.In connection with this business combination,werecorded:(i)$5.5 billion in Identifiable intangible assets,consisting of$5.0 billion of IPR&D and$460 million of indefinite-lived licensing agreements andother,(ii)$1.0 billion of Goodwill and(iii)$490 million of net deferred tax liabilities.B.Discontinued OperationsDiscontinued operationsnet of tax in the periods presented are post-close adjustments related to the previously disposed discontinued Meridian subsidiaryand the Upjohn Business.In the three months ended April 2,2023 and April 3,2022,amounts recorded under interim agreements,including TSAs and MSAs,associated with these disposals were not material.Under agreements related to the 2020 spin-off and the combination of the Upjohn Business with Mylan toform Viatris,net amounts due from Viatris were approximately$57 million as of April 2,2023 and net amounts due to Viatris were$94 million as of December31,2022.The cash flows associated with the agreements are included in Net cash provided by operating activities.For information about the nature of theseagreements,see Note 2B in our 2022 Form 10-K.C.Equity-Method InvestmentHaleon/Consumer Healthcare JVOn July 18,2022,GSK completed a demerger of the Consumer Healthcare JV which became Haleon,an independent,publicly traded company listed on the London Stock Exchange that holds the joint historical consumer healthcare business of GSK and Pfizer following thedemerger.We continue to own 32%of the ordinary shares of Haleon after the demerger.The carrying value of our investment in Haleon as of April 2,2023 and as of December 31,2022 is$11.0 billion and$10.8 billion,respectively,and is reportedin Equity-method investments.The fair value of our investment in Haleon as of April 2,2023,based on quoted market prices of Haleon stock,was$11.8 billion.Haleon/the Consumer Healthcare JV is a foreign investee whose reporting currency is the U.K.pound,and therefore we translate its financial statements intoU.S.dollars and recognize the impact of foreign currency translation adjustments in the carrying value of our investment and in other comprehensive income.The increase in the value of our investment from December 31,2022 is primarily due to$90 million in11PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)pre-tax foreign currency translation adjustments(see Note 6)and our share of Haleons earnings.We record our share of earnings from Haleon/the ConsumerHealthcare JV on a quarterly basis on a one-quarter lag in Other(income)/deductionsnet.Our total share of Haleons earnings generated in the fourth quarterof 2022,which we recorded in our operating results in the first quarter of 2023,was$68 million.Our total share of the JVs earnings generated in the fourthquarter of 2021,which we recorded in our operating results in the first quarter of 2022,was$185 million.The total amortization and adjustment of basisdifferences resulting from the excess of the initial fair value of our investment over the underlying equity in the carrying value of the net assets of Haleon/theConsumer Healthcare JV was not material to our results of operations in the periods presented.See Note 4.Summarized financial information for our equity-method investee,Haleon/the Consumer Healthcare JV,for the three months ending December 31,2022,the most recent period available,and for the three months ending December 31,2021,is as follows:Three Months Ended(MILLIONS)December 31,2022December 31,2021Net sales$3,261$3,420 Cost of sales(1,496)(1,312)Gross profit$1,766$2,108 Income from continuing operations225 590 Net income225 590 Income attributable to shareholders211 578 Note 3.Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity InitiativesA.Transforming to a More Focused Company ProgramIn 2019,we announced that we would be incurring costs associated with our Transforming to a More Focused Company Program,a multi-year effort to ensureour cost base aligns appropriately with our operating structure following Pfizers transformation into a more focused,innovative science-based globalbiopharmaceutical business.This program includes activities to(i)restructure our corporate enabling functions to appropriately support our operating structure;(ii)transform our commercial go-to-market model;and(iii)optimize our manufacturing network and R&D operations.The activities associated with transforming our commercial go-to-market model are substantially complete.Activities associated with restructuring ourcorporate enabling functions and optimizing our manufacturing network and R&D operations are ongoing and are expected to be substantially completed bythe end of 2023.The costs to restructure our corporate enabling functions,and to optimize our R&D operations and reduce cycle times,as well as to furtherprioritize our internal R&D portfolio,primarily include severance and implementation costs.The costs to optimize our manufacturing network largely includeseverance,implementation costs,product transfer costs,site exit costs,and accelerated depreciation.From the start of this program in the fourth quarter of 2019 through April 2,2023,we incurred costs of$3.5 billion,of which$1.4 billion($1.1 billion ofrestructuring charges)is associated with Biopharma.We have incurred approximately 85%of total expected costs to date,and we expect the remaining costs tobe substantially incurred through 2023.12PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)B.Key ActivitiesThe following summarizes costs and credits for acquisitions and cost-reduction/productivity initiatives:Three Months Ended(MILLIONS)April 2,2023April 3,2022Restructuring charges/(credits):Employee terminations$(36)$25 Asset impairments(10)8 Exit costs/(credits)2 11 Restructuring charges/(credits)(44)43 Transaction costs 6 Integration costs and other52 142 Restructuring charges and certain acquisition-related costs9 192 Net periodic benefit costs/(credits)recorded in Other(income)/deductionsnet(5)(6)Additional depreciationasset restructuring recorded in our condensed consolidated statements of income,mainly inCost of sales18 9 Implementation costs recorded in our condensed consolidated statements of income as follows:Cost of sales15 12 Selling,informational and administrative expenses59 74 Research and development expenses11 Total implementation costs85 85 Total costs associated with acquisitions and cost-reduction/productivity initiatives$107$280 Primarily represents cost reduction initiatives.Restructuring charges/(credits)associated with Biopharma:credits of$28 million for the three months ended April 2,2023 and credits of$4 millionfor the three months ended April 3,2022.Represents external costs for banking,legal,accounting and other similar services.Represents external,incremental costs directly related to integrating acquired businesses,such as expenditures for consulting and the integration of systems and processes,and certain otherqualifying costs.In the first quarter of 2022,integration costs and other were mostly related to our acquisition of Arena,including$138 million in payments to Arena employees for the fair value ofpreviously unvested long-term incentive awards that was recognized as post-closing compensation expense.Represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.Represents external,incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.The following summarizes the components and changes in restructuring accruals:(MILLIONS)EmployeeTerminationCostsAssetImpairmentChargesExit CostsAccrualBalance,December 31,2022$1,196$8$1,204 Provision/(credit)(36)(10)2(44)Utilization and other(420)10(1)(411)Balance,April 2,2023$740$9$750 Included in Other current liabilities($991 million)and Other noncurrent liabilities($213 million).Includes adjustments for foreign currency translation.Included in Other current liabilities($548 million)and Other noncurrent liabilities($202 million).(a)(b)(c)(d)(e)(a)(b)(c)(d)(e)(a)(b)(c)(a)(b)(c)13PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Note 4.Other(Income)/DeductionsNetComponents of Other(income)/deductionsnet include:Three Months Ended(MILLIONS)April 2,2023April 3,2022Interest income$(177)$(14)Interest expense318 322 Net interest expense141 308 Royalty-related income(204)(173)Net(gains)/losses on asset disposals(7)(1)Net(gains)/losses recognized during the period on equity securities451 699 Income from collaborations,out-licensing arrangements and sales of compound/product rights(68)(9)Net periodic benefit costs/(credits)other than service costs(80)(283)Certain legal matters,net36 79 Certain asset impairments264 Haleon/Consumer Healthcare JV equity method(income)/loss(68)(184)Other,net(396)(88)Other(income)/deductionsnet$70$350 The losses in the first quarter of 2023 include,among other things,unrealized losses of$363 million related to our investments in Cerevel Therapeutics Holdings,Inc.and BioNTech.The losses inthe first quarter of 2022 included,among other things,unrealized losses of$473 million related to our investment in BioNTech.The first quarter of 2023 primarily includes certain product liability expenses related to products discontinued and/or divested by Pfizer.The first quarter of 2022 includes certain product liabilityexpenses related to products discontinued and/or divested by Pfizer,and to a lesser extent,legal obligations related to pre-acquisition commitments.The first quarter of 2023 primarily represents intangible asset impairment charges,including$128 million associated with Other business activities,related to IPR&D and developed technologyrights for acquired software assets and reflects unfavorable pivotal trial results and updated commercial forecasts,and$120 million associated with our Biopharma segment due to thediscontinuation of a study related to an out-licensed IPR&D asset for the treatment of prostate cancer,acquired in our Array BioPharma Inc.acquisition.See Note 2C.The first quarter of 2023 primarily includes,among other things,dividend income of$211 million from our investment in Nimbus resulting from Takeda Pharmaceutical Company Limitedsacquisition of Nimbuss oral,selective allosteric tyrosine kinase 2(TYK2)inhibitor program subsidiary,and$92 million from our investment in ViiV.Additional information about the intangible assets that were impaired during 2023 follows:Three Months EndedFair ValueApril 2,2023(MILLIONS)AmountLevel 1Level 2Level 3ImpairmentIntangible assetsLicensing agreements and other$120 Intangible assetsIPR&D 94 Intangible assetsDeveloped technology rights 34 Total$248 The fair value amount is presented as of the date of impairment,as this asset is not measured at fair value on a recurring basis.See also Note 1E in our 2022 Form 10-K.Reflects intangible assets written down to fair value in 2023.Fair value was determined using the income approach,specifically the multi-period excess earnings method,also known as thediscounted cash flow method.We started with a forecast of all the expected net cash flows for the asset and then applied an asset-specific discount rate to arrive at a net present value amount.Someof the more significant estimates and assumptions inherent in this approach include:the amount and timing of the projected net cash flows,which includes the expected impact of competitive,legaland/or regulatory forces on the product;the discount rate,which seeks to reflect the various risks inherent in the projected cash flows;and the tax rate,which seeks to incorporate the geographicdiversity of the projected cash flows.Note 5.Tax MattersA.Taxes on Income from Continuing OperationsOur effective tax rate for continuing operations was 11.4%for the first quarter of 2023,compared to 12.9%for the first quarter of 2022.The lower effective taxrate for the first quarter of 2023,was due to a favorable change in the jurisdictional mix of earnings.(a)(b)(c)(d)(e)(a)(b)(c)(d)(e)(a)(b)(b)(b)(a)(b)14PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)We elected,with the filing of our 2018 U.S.Federal Consolidated Income Tax Return,to pay our initial estimated$15 billion repatriation tax liability onaccumulated post-1986 foreign earnings over eight years through 2026.The fifth annual installment of this liability was paid by its April 18,2023 due date andis reported in current Income taxes payable and the remaining liability is reported in noncurrent Other taxes payable as of April 2,2023.Our obligations mayvary as a result of changes in our uncertain tax positions and/or availability of attributes such as foreign tax and other credit carryforwards.B.Tax ContingenciesWe are subject to income tax in many jurisdictions,and a certain degree of estimation is required in recording the assets and liabilities related to income taxes.All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction.These tax audits can involve complex issues,interpretationsand judgments and the resolution of matters may span multiple years,particularly if subject to negotiation or litigation.The U.S.is one of our major tax jurisdictions,and we are regularly audited by the IRS.With respect to Pfizer,tax years 2016-2018 are under audit.Tax years2019-2023 are open but not under audit.All other tax years are closed.In addition to the open audit years in the U.S.,we have open audit years and certainrelated audits,appeals and investigations in certain major international tax jurisdictions dating back to 2012.See Note 5D in our 2022 Form 10-K.C.Tax Provision/(Benefit)on Other Comprehensive Income/(Loss)Components of Tax provision/(benefit)on other comprehensive income/(loss)include:Three Months Ended(MILLIONS)April 2,2023April 3,2022Foreign currency translation adjustments,net$(25)$(72)Unrealized holding gains/(losses)on derivative financial instruments,net3 32 Reclassification adjustments for(gains)/losses included in net income21(22)24 10 Unrealized holding gains/(losses)on available-for-sale securities,net11(17)Reclassification adjustments for(gains)/losses included in net income(64)29(53)12 Reclassification adjustments related to amortization of prior service costs and other,net(7)(9)Reclassification adjustments related to curtailments of prior service costs and other,net(1)(2)(9)(11)Tax provision/(benefit)on other comprehensive income/(loss)$(63)$(60)Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that we intend to hold indefinitely.Note 6.Accumulated Other Comprehensive Loss,Excluding Noncontrolling InterestsThe following summarizes the changes,net of tax,in Accumulated other comprehensive loss:Net Unrealized Gains/(Losses)Benefit Plans(MILLIONS)Foreign CurrencyTranslationAdjustmentsDerivativeFinancialInstrumentsAvailable-For-Sale SecuritiesPrior Service(Costs)/Credits andOtherAccumulated OtherComprehensiveIncome/(Loss)Balance,December 31,2022$(8,360)$(412)$220$248$(8,304)Other comprehensive income/(loss)129 281(369)(27)15 Balance,April 2,2023$(8,231)$(131)$(149)$222$(8,289)Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests.Foreign currency translation adjustments include net gains related to our equity-method investment in Haleon(see Note 2C)and the impact of our net investment hedging program.(a)(a)(a)(b)(a)(b)15PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Note 7.Financial InstrumentsA.Fair Value MeasurementsFinancial Assets and Liabilities Measured at Fair Value on a Recurring Basis and Fair Value Hierarchy,using a Market Approach:April 2,2023December 31,2022(MILLIONS)TotalLevel 1Level 2TotalLevel 1Level 2Financial assets:Short-term investmentsEquity securities with readily determinable fair values:Money market funds$1,165$1,165$1,588$1,588 Available-for-sale debt securities:Government and agencynon-U.S.13,278 13,278 15,915 15,915 Government and agencyU.S.927 927 1,313 1,313 Corporate and other1,914 1,914 1,514 1,514 16,118 16,118 18,743 18,743 Total short-term investments17,283 17,283 20,331 20,331 Other current assetsDerivative assets:Foreign exchange contracts734 734 714 714 Total other current assets734 734 714 714 Long-term investmentsEquity securities with readily determinable fair values2,355 2,348 7 2,836 2,823 13 Available-for-sale debt securities:Government and agencynon-U.S.261 261 280 280 Corporate and other72 72 72 72 333 333 352 352 Total long-term investments2,688 2,348 340 3,188 2,823 365 Other noncurrent assetsDerivative assets:Foreign exchange contracts295 295 364 364 Total derivative assets295 295 364 364 Insurance contracts700 700 665 665 Total other noncurrent assets995 995 1,028 1,028 Total assets$21,699$2,348$19,352$25,261$2,823$22,439 Financial liabilities:Other current liabilitiesDerivative liabilities:Interest rate contracts$10$10 Foreign exchange contracts382 382 694 694 Total other current liabilities383 383 704 704 Other noncurrent liabilitiesDerivative liabilities:Interest rate contracts274 274 321 321 Foreign exchange contracts832 832 864 864 Total other noncurrent liabilities1,105 1,105 1,185 1,185 Total liabilities$1,488$1,488$1,889$1,889 Long-term equity securities of$115 million as of April 2,2023 and$143 million as of December 31,2022 were held in restricted trusts for U.S.non-qualified employee benefit plans.Includes life insurance policies held in restricted trusts for U.S.non-qualified employee benefit plans.The underlying invested assets in these contracts are marketable securities,which are carriedat fair value,with changes in fair value recognized in Other(income)/deductionsnet(see Note 4).Financial Assets and Liabilities Not Measured at Fair Value on a Recurring BasisThe carrying value of Long-term debt,excluding the current portion was$32 billion as of April 2,2023 and$33 billion as of December 31,2022.The estimated fair value of such debt,using a market approach and Level 2 inputs,was$30 billion as of April 2,2023 and$30 billion as of December 31,2022.The differences between the estimated fair values and carrying values of held-to-maturity debt securities,private equity securities,long-term receivables andshort-term borrowings not measured at fair value on a recurring basis were not significant(a)(b)(a)(b)16PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)as of April 2,2023 and December 31,2022.The fair value measurements of our held-to-maturity debt securities and short-term borrowings are based on Level2 inputs.The fair value measurements of our long-term receivables and private equity securities are based on Level 3 inputs.B.InvestmentsTotal Short-Term,Long-Term and Equity-Method InvestmentsThe following summarizes our investments by classification type:(MILLIONS)April 2,2023December 31,2022Short-term investmentsEquity securities with readily determinable fair values$1,165$1,588 Available-for-sale debt securities16,118 18,743 Held-to-maturity debt securities523 1,985 Total Short-term investments$17,806$22,316 Long-term investmentsEquity securities with readily determinable fair values$2,355$2,836 Available-for-sale debt securities333 352 Held-to-maturity debt securities52 48 Private equity securities at cost828 800 Total Long-term investments$3,568$4,036 Equity-method investments11,175 11,033 Total long-term investments and equity-method investments$14,743$15,069 Held-to-maturity cash equivalents$436$679 Includes money market funds primarily invested in U.S.Treasury and government debt.Represent investments in the life sciences sector.Debt SecuritiesOur investment portfolio consists of investment-grade debt securities issued across diverse governments,corporate and financial institutions:April 2,2023December 31,2022Gross UnrealizedContractual or Estimated Maturities(inYears)Gross Unrealized(MILLIONS)AmortizedCostGainsLossesFair ValueWithin 1Over 1to 5Over 5AmortizedCostGainsLossesFair ValueAvailable-for-sale debt securitiesGovernment and agencynon-U.S.$13,702$51$(214)$13,539$13,278$261$15,946$297$(48)$16,195 Government and agencyU.S.927 927 927 1,313 1,313 Corporate and other1,992 (7)1,985 1,914 72 1,584 7(4)1,586 Held-to-maturity debt securitiesTime deposits and other936 936 888 34 14 1,171 1,171 Government and agencynon-U.S.75 75 71 3 1 1,542 1,542 Total debt securities$17,632$51$(221)$17,462$17,077$371$15$21,556$304$(53)$21,807 Any expected credit losses to these portfolios would be immaterial to our financial statements.Equity SecuritiesThe following presents the calculation of the portion of unrealized(gains)/losses that relates to equity securities,excluding equity-method investments,held atthe reporting date:Three Months Ended(MILLIONS)April 2,2023April 3,2022Net(gains)/losses recognized during the period on equity securities$451$699 Less:Net(gains)/losses recognized during the period on equity securities sold during the period(33)(11)Net unrealized(gains)/losses during the reporting period on equity securities still held at the reporting date$485$710 Reported in Other(income)/deductionsnet.See Note 4.(a)(b)(b)(a)(b)(a)(b)(a)17PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Included in net unrealized(gains)/losses are observable price changes on equity securities without readily determinable fair values.As of April 2,2023,there were cumulative impairments anddownward adjustments of$171 million and upward adjustments of$203 million.Impairments,downward and upward adjustments were not significant in the first quarters of 2023 and 2022.C.Short-Term BorrowingsShort-term borrowings include:(MILLIONS)April 2,2023December 31,2022Current portion of long-term debt,principal amount$3,550$2,550 Other short-term borrowings,principal amount622 385 Total short-term borrowings,principal amount4,172 2,935 Net fair value adjustments17 10 Total Short-term borrowings,including current portion of long-term debt,carried at historical proceeds,asadjusted$4,188$2,945 Primarily includes cash collateral.See Note 7F.D.Long-Term DebtThe following summarizes the aggregate principal amount of our senior unsecured long-term debt,and adjustments to report our aggregate long-term debt:(MILLIONS)April 2,2023December 31,2022Total long-term debt,principal amount$30,909$32,080 Net fair value adjustments related to hedging and purchase accounting966 959 Net unamortized discounts,premiums and debt issuance costs(171)(175)Other long-term debt 20 Total long-term debt,carried at historical proceeds,as adjusted$31,704$32,884 E.Derivative Financial Instruments and Hedging ActivitiesForeign Exchange RiskA significant portion of our revenues,earnings and net investments in foreign affiliates is exposed to changes in foreign exchangerates.Where foreign exchange risk is not offset by other exposures,we manage our foreign exchange risk principally through the use of derivative financialinstruments and foreign currency debt.These financial instruments serve to mitigate the impact on net income as a result of remeasurement into anothercurrency,or against the impact of translation into U.S.dollars of certain foreign exchange-denominated transactions.The derivative financial instruments primarily hedge or offset exposures in the euro,U.K.pound,Japanese yen,Chinese renminbi,Canadian dollar andSingapore dollar,and include a portion of our forecasted foreign exchange-denominated intercompany inventory sales hedged up to two years.We may seek toprotect against possible declines in the reported net investments of our foreign business entities.Interest Rate RiskOur interest-bearing investments and borrowings are subject to interest rate risk.Depending on market conditions,we may change theprofile of our outstanding debt or investments by entering into derivative financial instruments like interest rate swaps,either to hedge or offset the exposure tochanges in the fair value of hedged items with fixed interest rates,or to convert variable rate debt or investments to fixed rates.The derivative financialinstruments primarily hedge U.S.dollar fixed-rate debt.(b)(a)(a)18PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)The following summarizes the fair value of the derivative financial instruments and notional amounts:April 2,2023December 31,2022Fair ValueFair Value(MILLIONS)NotionalAssetLiabilityNotionalAssetLiabilityDerivatives designated as hedging instruments:Foreign exchange contracts$26,179$809$1,038$26,603$838$1,196 Interest rate contracts2,250 274 2,250 331 809 1,311 838 1,527 Derivatives not designated as hedging instruments:Foreign exchange contracts$21,870 220 177$29,814 240 362 Total$1,029$1,488$1,078$1,889 The notional amount of outstanding foreign exchange contracts hedging our intercompany forecasted inventory sales was$4.5 billion as of April 2,2023 and$4.4 billion as of December 31,2022.The following summarizes information about the gains/(losses)incurred to hedge or offset operational foreign exchange or interest rate risk exposures:Gains/(Losses)Recognized in OIDGains/(Losses)Recognized in OCIGains/(Losses)Reclassified fromOCI into OID and COSThree Months Ended(MILLIONS)April 2,2023April 3,2022April 2,2023April 3,2022April 2,2023April 3,2022Derivative Financial Instruments in Cash Flow HedgeRelationships:Foreign exchange contracts$(53)$187$(356)$195 Amount excluded from effectiveness testing andamortized into earnings 55 16 53 18 Derivative Financial Instruments in Fair Value HedgeRelationships:Interest rate contracts48(156)Hedged item(48)156 Derivative Financial Instruments in Net Investment HedgeRelationships:Foreign exchange contracts (213)259 Amount excluded from effectiveness testing andamortized into earnings 67(74)34 30 Non-Derivative Financial Instruments in Net InvestmentHedge Relationships:Foreign currency short-term borrowings 26 Foreign currency long-term debt (16)23 Derivative Financial Instruments Not Designated as Hedges:Foreign exchange contracts17(19)$17$(19)$(160)$436$(269)$243 OID=Other(income)/deductionsnet,included in Other(income)/deductionsnet in the condensed consolidated statements of income.COS=Cost of Sales,included in Cost of sales in thecondensed consolidated statements of income.OCI=Other comprehensive income/(loss),included in the condensed consolidated statements of comprehensive income.The amounts reclassified from OCI into COS were a net gain of$91 million in the first quarter of 2023 and a net gain of$34 million in the first quarter of 2022.The remaining amounts werereclassified from OCI into OID.Based on quarter-end foreign exchange rates that are subject to change,we expect to reclassify a pre-tax gain of$235 million within the next 12 months intoincome.The maximum length of time over which we are hedging our exposure to the variability in future foreign exchange cash flows is approximately 20 years and relates to foreign currencydebt.The amounts reclassified from OCI were reclassified into OID.Short-term borrowings and long-term debt include foreign currency borrowings,which are used in net investment hedges.The related long-term debt carrying values as of April 2,2023 andDecember 31,2022 were$811 million and$795 million,respectively.(a)(a)(a)(a)(a)(b)(c)(c)(d)(a)(b)(c)(d)19PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)The following summarizes cumulative basis adjustments to our debt in fair value hedges:April 2,2023December 31,2022Cumulative Amount of Fair ValueHedging AdjustmentIncrease/(Decrease)toCarrying AmountCumulative Amount of Fair ValueHedging AdjustmentIncrease/(Decrease)toCarrying Amount(MILLIONS)Carrying Amount ofHedgedAssets/LiabilitiesActive HedgingRelationshipsDiscontinuedHedgingRelationshipsCarrying Amount ofHedgedAssets/LiabilitiesActive HedgingRelationshipsDiscontinuedHedgingRelationshipsShort-term borrowings,including currentportion of long-term debt$12$10 Long-term debt$2,236$(274)$1,014$2,235$(321)$1,042 Carrying amounts exclude the cumulative amount of fair value hedging adjustments.F.Credit RiskA significant portion of our trade accounts receivable balances are due from wholesalers and governments.For additional information on our trade accountsreceivables with significant customers,see Note 13C below and Note 17C in our 2022 Form 10-K.As of April 2,2023,the largest investment exposures in our portfolio represent primarily sovereign debt instruments issued by Canada,Japan,Germany,France,the U.S.,and the U.K.With respect to our derivative financial instrument agreements with financial institutions,we do not expect to incur a significant loss from failure of anycounterparty.Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements with credit-supportannexes that contain zero threshold provisions requiring collateral to be exchanged daily depending on levels of exposure.As a result,there are no significantconcentrations of credit risk with any individual financial institution.As of April 2,2023,the aggregate fair value of these derivative financial instruments thatare in a net payable position was$763 million,for which we have posted collateral of$831 million with a corresponding amount reported in Short-terminvestments.As of April 2,2023,the aggregate fair value of our derivative financial instruments that are in a net receivable position was$715 million,forwhich we have received collateral of$530 million with a corresponding amount reported in Short-term borrowings,including current portion of long-termdebt.Note 8.Other Financial InformationA.InventoriesThe following summarizes the components of Inventories:(MILLIONS)April 2,2023December 31,2022Finished goods$2,657$2,603 Work-in-process6,129 5,519 Raw materials and supplies755 859 Inventories$9,541$8,981 Noncurrent inventories not included above$5,616$5,827 The increase from December 31,2022 reflects higher inventory levels for Paxlovid and increases for certain products due to supply recovery and inventory build,partially offset by decreases due tomarket demand.Included in Other noncurrent assets.Based on our current estimates and assumptions,there are no recoverability issues for these amounts,which are primarily related to Paxlovid.B.Other Current LiabilitiesOther current liabilities includes,among other things,amounts payable to BioNTech for the gross profit split for Comirnaty,which totaled$4.7 billion as ofApril 2,2023 and$5.2 billion as of December 31,2022.C.Supplier Finance Program ObligationWe maintain voluntary supply chain finance agreements with several participating financial institutions.Under these agreements,participating suppliers mayvoluntarily elect to sell their accounts receivable with Pfizer to these financial institutions.Our suppliers negotiate their financing agreements directly with therespective financial institutions and we are not a party to these agreements.We have no economic interest in our suppliers decision to participate and we paythe financial institutions the stated amount of confirmed invoices on the original maturity dates,which is generally within 90 to 120 days of(a)(a)(a)(a)(b)(a)(b)20PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)the invoice date.The agreements with the financial institutions do not require Pfizer to provide assets pledged as security or other forms of guarantees for thesupplier finance program.All outstanding amounts related to suppliers participating in such financing arrangements are recorded within trade payables in ourconsolidated balance sheet.As of April 2,2023 and December 31,2022,respectively,$755 million and$849 million of our trade payables to suppliers whoparticipate in these financing arrangements are outstanding.Note 9.Identifiable Intangible AssetsA.Identifiable Intangible AssetsThe following summarizes the components of Identifiable intangible assets:April 2,2023December 31,2022(MILLIONS)GrossCarryingAmountAccumulatedAmortizationIdentifiableIntangibleAssets,lessAccumulatedAmortizationGrossCarryingAmountAccumulatedAmortizationIdentifiableIntangibleAssets,lessAccumulatedAmortizationFinite-lived intangible assetsDeveloped technology rights$84,973$(56,887)$28,086$85,604$(56,307)$29,297 Brands922(854)68 922(844)78 Licensing agreements and other2,420(1,433)987 2,237(1,397)841 88,315(59,174)29,141 88,763(58,548)30,215 Indefinite-lived intangible assetsBrands827 827 827 827 IPR&D11,269 11,269 11,357 11,357 Licensing agreements and other764 764 971 971 12,860 12,860 13,155 13,155 Identifiable intangible assets$101,176$(59,174)$42,002$101,919$(58,548)$43,370 The decrease is primarily due to amortization expense and impairments(see Note 4).Note 10.Pension and Postretirement Benefit PlansThe following summarizes the components of net periodic benefit cost/(credit):Pension Plans U.S.InternationalPostretirementPlansThree Months Ended(MILLIONS)April 2,2023April 3,2022April 2,2023April 3,2022April 2,2023April 3,2022Service cost$22$30$3$7 Interest cost148 118 71 42 5 7 Expected return on plan assets(194)(245)(76)(79)(11)(12)Amortization of prior service cost/(credit)(30)(36)Actuarial(gains)/losses9(65)3 Curtailments (1)(5)(13)Special termination benefits2 6 Net periodic benefit cost/(credit)reported in income$(36)$(186)$18$(8)$(37)$(46)The components of net periodic benefit cost/(credit)other than the service cost component are primarily included in Other(income)/deductionsnet(see Note4).For the three months ended April 2,2023,we contributed$85 million,$39 million,and$20 million to our U.S.Pension Plans,International Pension Plans,andPostretirement Plans,respectively,from our general assets,which include direct employer benefit payments.(a)(a)21PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Note 11.Earnings Per Common Share Attributable to Pfizer Inc.Common ShareholdersThe following presents the detailed calculation of EPS:Three Months Ended(MILLIONS)April 2,2023April 3,2022EPS NumeratorBasicIncome from continuing operations attributable to Pfizer Imon shareholders$5,542$7,872 Discontinued operationsnet of tax1(9)Net income attributable to Pfizer Imon shareholders$5,543$7,864 EPS NumeratorDiluted Income from continuing operations attributable to Pfizer Imon shareholders and assumed conversions$5,542$7,872 Discontinued operationsnet of tax,attributable to Pfizer Imon shareholders and assumed conversions1(9)Net income attributable to Pfizer Imon shareholders and assumed conversions$5,543$7,864 EPS Denominator Weighted-average number of common shares outstandingBasic5,634 5,617 Common-share equivalents93 141 Weighted-average number of common shares outstandingDiluted5,727 5,758 Anti-dilutive common stock equivalents2 These common stock equivalents were outstanding for the periods presented,but were not included in the computation of diluted EPS for those periods because their inclusion would have had ananti-dilutive effect.Note 12.Contingencies and Certain CommitmentsWe and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business,including tax and legal contingencies,guarantees and indemnifications.The following outlines our legal contingencies,guarantees and indemnifications.For a discussion of our tax contingencies,see Note 5B.A.Legal ProceedingsOur legal contingencies include,but are not limited to,the following:Patent litigation,which typically involves challenges to the coverage and/or validity of patents on various products,processes or dosage forms.An adverseoutcome could result in loss of patent protection for a product,a significant loss of revenues from a product or impairment of the value of associated assets.We are the plaintiff in the majority of these actions.Product liability and other product-related litigation related to current or former products,which can include personal injury,consumer,off-label promotion,securities,antitrust and breach of contract claims,among others,and often involves highly complex issues relating to medical causation,label warnings andreliance on those warnings,scientific evidence and findings,actual,provable injury and other matters.Commercial and other asserted or unasserted matters,which can include acquisition-,licensing-,intellectual property-,collaboration-or co-promotion-related and product-pricing claims and environmental claims and proceedings,and can involve complexities that will vary from matter to matter.Government investigations,which often are related to the extensive regulation of pharmaceutical companies by national,state and local government agenciesin the U.S.and in other jurisdictions.Certain of these contingencies could result in increased expenses and/or losses,including damages,royalty payments,fines and/or civil penalties,which couldbe substantial,and/or criminal charges.We believe that our claims and defenses in matters in which we are a defendant are substantial,but litigation is inherently unpredictable and excessive verdictsdo occur.We do not believe that any of these matters will have a material adverse effect on our financial position.However,we could incur judgments,enterinto settlements or revise our expectations regarding the outcome of matters,which could have a material adverse effect on our results of operations and/or ourcash flows in the period in which the amounts are accrued or paid.We have accrued for losses that are both probable and reasonably estimable.Substantially all of our contingencies are subject to significant uncertainties and,therefore,determining the likelihood of a loss and/or the measurement of any loss can be complex.(a)(a)22PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Consequently,we are unable to estimate the range of reasonably possible loss in excess of amounts accrued.Our assessments,which result from a complexseries of judgments about future events and uncertainties,are based on estimates and assumptions that have been deemed reasonable by management,but thatmay prove to be incomplete or inaccurate,and unanticipated events and circumstances may occur that might cause us to change those estimates andassumptions.Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can relyheavily on estimates and assumptions.For proceedings under environmental laws to which a governmental authority is a party,we have adopted a disclosurethreshold of$1 million in potential or actual governmental monetary sanctions.The principal pending matters to which we are a party are discussed below.In determining whether a pending matter is a principal matter,we consider bothquantitative and qualitative factors to assess materiality,such as,among others,the amount of damages and the nature of other relief sought,if specified;ourview of the merits of the claims and of the strength of our defenses;whether the action purports to be,or is,a class action and,if not certified,our view of thelikelihood that a class will be certified by the court;the jurisdiction in which the proceeding is pending;whether related actions have been transferred tomultidistrict litigation;any experience that we or,to our knowledge,other companies have had in similar proceedings;whether disclosure of the action wouldbe important to a reader of our financial statements,including whether disclosure might change a readers judgment about our financial statements in light ofall of the information that is available to the reader;the potential impact of the proceeding on our reputation;and the extent of public interest in the matter.Inaddition,with respect to patent matters in which we are the plaintiff,we consider,among other things,the financial significance of the product protected by thepatent(s)at issue.Some of the matters discussed below include those which management believes that the likelihood of possible loss in excess of amountsaccrued is remote.A1.Legal ProceedingsPatent LitigationWe are involved in suits relating to our patents(or those of our collaboration/licensing partners to which we have licenses or co-promotion rights),includingbut not limited to,those discussed below.We face claims by generic drug manufacturers that patents covering our products(or those of ourcollaboration/licensing partners to which we have licenses or co-promotion rights and to which we may or may not be a party),processes or dosage forms areinvalid and/or do not cover the product of the generic drug manufacturer.Also,counterclaims,as well as various independent actions,have been filed allegingthat our assertions of,or attempts to enforce,patent rights with respect to certain products constitute unfair competition and/or violations of antitrust laws.Inaddition to the challenges to the U.S.patents that are discussed below,patent rights to certain of our products or those of our collaboration/licensing partnersare being challenged in various other jurisdictions.Some of our collaboration or licensing partners face challenges to the validity of their patent rights in non-U.S.jurisdictions.For example,in April 2022,the U.K.High Court issued a judgment finding invalid a BMS patent related to Eliquis due to expire in 2026.InNovember 2022,BMS received permission to appeal the High Courts decision and the appeal hearing was held in April 2023.In May 2023,the Court ofAppeal dismissed the appeal.Additional challenges are pending in other jurisdictions.Also,in July 2022,CureVac AG(CureVac)brought a patent infringementaction against BioNTech and certain of its subsidiaries in the German Regional Court alleging that Comirnaty infringes certain German utility model patentsand certain expired and unexpired European patents.Additional challenges involving Comirnaty patents may be filed against us and/or BioNTech in otherjurisdictions in the future.Adverse decisions in these matters could have a material adverse effect on our results of operations.We are also party to patentdamages suits in various jurisdictions pursuant to which generic drug manufacturers,payers,governments or other parties are seeking damages from us forallegedly causing delay of generic entry.We also are often involved in other proceedings,such as inter partes review,post-grant review,re-examination or opposition proceedings,before the U.S.Patent and Trademark Office,the European Patent Office,or other foreign counterparts,as well as court proceedings relating to our intellectual property or theintellectual property rights of others,including challenges to such rights initiated by us.Also,if one of our patents(or one of our collaboration/licensingpartners patents)is found to be invalid by such proceedings,generic or competitive products could be introduced into the market resulting in the erosion ofsales of our existing products.For example,several of the patents in our pneumococcal vaccine portfolio have been challenged in inter partes review and post-grant review proceedings in the U.S.Patent and Trademark Office,as well as outside the U.S.The invalidation of any of the patents in our pneumococcalportfolio could potentially allow additional competitor vaccines,if approved,to enter the marketplace earlier than anticipated.In the event that any of thepatents are found valid and infringed,a competitors vaccine,if approved,might be prohibited from entering the market or a competitor might be required topay us a royalty.We are also subject to patent litigation pursuant to which one or more third parties seek damages and/or injunctive relief to compensate for allegedinfringement of its patents by our commercial or other activities.If one of our marketed products(or a product of our collaboration/licensing partners to whichwe have licenses or co-promotion rights)is found to infringe valid patent rights of a third party,such third party may be awarded significant damages or royaltypayments,or we may be23PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)prevented from further sales of that product.Such damages may be enhanced as much as three-fold if we or one of our subsidiaries is found to have willfullyinfringed valid patent rights of a third party.Actions In Which We Are The PlaintiffXeljanz(tofacitinib)Beginning in 2017,we brought patent-infringement actions against several generic manufacturers that filed separate abbreviated new drug applications(ANDAs)with the FDA seeking approval to market their generic versions of tofacitinib tablets in one or both of 5 mg and 10 mg dosage strengths,and in bothimmediate and extended release forms.To date,we have settled actions with several manufacturers on terms not material to us.The remaining action continuesin the U.S.District Court for the District of Delaware as described below.In October 2021,we brought a separate patent-infringement action against Sinotherapeutics Inc.(Sinotherapeutics)asserting the infringement and validity ofour patent covering extended release formulations of tofacitinib that was challenged by Sinotherapeutics in its ANDA seeking approval to market a genericversion of tofacitinib 11 mg extended release tablets.In November 2022,we filed an additional patent-infringement action against Sinotherapeutics relating toits challenge of our extended release formulation and method of treatment patents in its ANDA seeking approval to market a generic version of tofacitinib 22mg extended release tablets.Ibrance(palbociclib)Beginning in January 2021,several generic companies notified us that they had filed ANDAs with the FDA seeking approval to market generic versions ofIbrance tablets.The generic companies challenged some or all of the following patents:(i)the composition of matter patent expiring in 2027;(ii)thecomposition of matter patent expiring in 2023;(iii)the method of use patent expiring in 2023;(iv)the crystalline form patent expiring in 2034;and(v)a tabletformulation patent expiring in 2036.We brought patent infringement actions against each of the generic filers in various U.S.federal courts,asserting thevalidity and infringement of the patents challenged by the generic companies.We have settled with one of these generic companies on terms not material to us,and we dismissed the patent infringement actions relating to the crystalline form of patent,the composition of matter patent expiring in 2023,the method of usepatent,and the tablet formulation patent against the generic companies that had challenged these patents.The composition of matter patent expiring in 2027remains in suit.EucrisaBeginning in September 2021,several generic companies notified us that they had filed ANDAs with the FDA seeking approval to market generic versions ofEucrisa.The companies assert the invalidity and non-infringement of a composition of matter patent expiring in 2026,two method of use patents expiring in2027,and one other method of use patent expiring in 2030.In September 2021,we brought patent infringement actions against the generic filers in the U.S.District Court for the District of Delaware,asserting the validity and infringement of the patents challenged by the generic companies.Mektovi(binimetinib)Beginning in August 2022,several generic companies notified us that they had filed ANDAs with the FDA seeking approval to market generic versions ofMektovi.The companies assert the invalidity and non-infringement of two method of use patents expiring in 2030,a method of use patent expiring in 2031,two method of use patents expiring in 2033,and a product by process patent expiring in 2033.Beginning in September 2022,we brought patent infringementactions against the generic filers in the U.S.District Court for the District of Delaware,asserting the validity and infringement of all six patents.Actions in Which We are the DefendantComirnatyIn March 2022,Alnylam Pharmaceuticals,Inc.(Alnylam)filed a complaint in the U.S.District Court for the District of Delaware against Pfizer and Pharmacia&Upjohn Co.LLC,our wholly owned subsidiary,alleging that Comirnaty infringes U.S.Patent No.11,246,933,which was issued in February 2022,andseeking unspecified monetary damages.In July 2022,Alnylam filed a second complaint in the U.S.District Court for the District of Delaware against Pfizer,Pharmacia&Upjohn Co.LLC,BioNTech and BioNTech Manufacturing GmbH,alleging that Comirnaty infringes U.S.Patent No.11,382,979,which wasissued in July 2022,and seeking unspecified monetary damages.In August 2022,ModernaTX,Inc.(ModernaTX)and Moderna US,Inc.(Moderna)sued Pfizer,BioNTech,BioNTech Manufacturing GmbH and BioNTech USInc.in the U.S.District Court for the District of Massachusetts,alleging that Comirnaty infringes three U.S.patents.In its complaint,Moderna stated that it isseeking damages for alleged infringement occurring after March 7,2022.In August 2022,ModernaTX filed a patent infringement action in Germany against Pfizer and certain subsidiary companies,as well as BioNTech and certainsubsidiary companies,alleging that Comirnaty infringes two European patents.In September 2022,ModernaTX filed patent infringement actions in the U.K.and in the Netherlands against Pfizer and certain subsidiary24PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)companies,as well as BioNTech and certain subsidiary companies,on the same two patents.In its complaints,ModernaTX stated that it is seeking damages foralleged infringement occurring after March 7,2022.In the U.K.,Pfizer and BioNTech have brought an action against ModernaTX seeking to revoke theseEuropean patents,which was consolidated with the September 2022 action filed by ModernaTX.In April 2023,Arbutus Biopharma Corp.(Arbutus)and Genevant Sciences GmbH(Genevant)filed a complaint in the U.S.District Court for the District ofNew Jersey against Pfizer and BioNTech alleging that Comirnaty and its manufacture infringe five U.S.patents,and seeking unspecified monetary damages.PaxlovidIn June 2022,Enanta Pharmaceuticals,Inc.filed a complaint in the U.S.District Court for the District of Massachusetts against Pfizer alleging that the activeingredient in Paxlovid,nirmatrelvir,infringes U.S.Patent No.11,358,953,which was issued in June 2022,and seeking unspecified monetary damages.Matters Involving Pfizer and its Collaboration/Licensing PartnersComirnatyIn July 2022,Pfizer,BioNTech and BioNTech Manufacturing GmbH filed a declaratory judgment complaint against CureVac in the U.S.District Court for theDistrict of Massachusetts seeking a judgment of non-infringement for the following three patents relating to Comirnaty:U.S.Patent Nos.11,135,312,11,149,278,and 11,241,493.Outside of the U.S.,in the U.K.,Pfizer and BioNTech have sued CureVac seeking a judgment of invalidity of several patents andCureVac has made certain infringement counterclaims.Xtandi(enzalutamide)In July 2022,Medivation LLC and Medivation Prostate Therapeutics LLC(wholly owned subsidiaries of Pfizer);Astellas Pharma Inc.,Astellas US LLC andAstellas Pharma US,Inc.;and The Regents of the University of California filed a patent-infringement suit in the U.S.District Court for the District of NewJersey against Zydus Pharmaceuticals(USA)Inc.and Zydus Lifesciences Ltd.;and in December 2022,the same entities filed a patent-infringement suit in theU.S.District Court for the District of New Jersey against Sun in connection with those companies respective ANDAs seeking approval to market genericversions of enzalutamide.The generic manufacturers are challenging the composition of matter patent,which expires in 2027,covering enzalutamide andpharmaceutical compositions thereof,for treating prostate cancer.EliquisIn April 2023,we and BMS brought separate patent-infringement actions in Federal Court in Delaware against each of Biocon Pharma Limited(Biocon)andScieGen Pharmaceuticals Inc.(ScieGen)asserting the infringement and validity of the formulation patent for Eliquis,expiring in 2031,challenged by Bioconand ScieGen in their respective ANDAs seeking approval to market generic versions of Eliquis.In April 2023,we settled our action against ScieGen on termsnot material to us.A2.Legal ProceedingsProduct LitigationWe are defendants in numerous cases,including but not limited to those discussed below,related to our pharmaceutical and other products.Plaintiffs in thesecases seek damages and other relief on various grounds for alleged personal injury and economic loss.AsbestosBetween 1967 and 1982,Warner-Lambert owned American Optical Corporation(American Optical),which manufactured and sold respiratory protectivedevices and asbestos safety clothing.In connection with the sale of American Optical in 1982,Warner-Lambert agreed to indemnify the purchaser for certainliabilities,including certain asbestos-related and other claims.Warner-Lambert was acquired by Pfizer in 2000 and is a wholly owned subsidiary of Pfizer.Warner-Lambert is actively engaged in the defense of,and will continue to explore various means of resolving,these claims.Numerous lawsuits against American Optical,Pfizer and certain of its previously owned subsidiaries are pending in various federal and state courts seekingdamages for alleged personal injury from exposure to products allegedly containing asbestos and other allegedly hazardous materials sold by Pfizer and certainof its previously owned subsidiaries.There also are a small number of lawsuits pending in various federal and state courts seeking damages for alleged exposure to asbestos in facilities owned orformerly owned by Pfizer or its subsidiaries.EffexorBeginning in 2011,actions,including purported class actions,were filed in various federal courts against Wyeth and,in certain of the actions,affiliates ofWyeth and certain other defendants relating to Effexor XR,which is the extended-release formulation of Effexor.The plaintiffs in each of the class actions seekto represent a class consisting of all persons in the U.S.and its territories who directly purchased,indirectly purchased or reimbursed patients for the purchaseof Effexor XR or generic25PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)Effexor XR from any of the defendants from June 14,2008 until the time the defendants allegedly unlawful conduct ceased.The plaintiffs in all of the actionsallege delay in the launch of generic Effexor XR in the U.S.and its territories,in violation of federal antitrust laws and,in certain of the actions,the antitrust,consumer protection and various other laws of certain states,as the result of Wyeth fraudulently obtaining and improperly listing certain patents for Effexor XRin the Orange Book,enforcing certain patents for Effexor XR and entering into a litigation settlement agreement with a generic drug manufacturer with respectto Effexor XR.Each of the plaintiffs seeks treble damages(for itself in the individual actions or on behalf of the putative class in the purported class actions)for alleged price overcharges for Effexor XR or generic Effexor XR in the U.S.and its territories since June 14,2008.All of these actions have beenconsolidated in the U.S.District Court for the District of New Jersey.In 2014,the District Court dismissed the direct purchaser plaintiffs claims based on the litigation settlement agreement,but declined to dismiss the other directpurchaser plaintiff claims.In 2015,the District Court entered partial final judgments as to all settlement agreement claims,including those asserted by directpurchasers and end-payer plaintiffs,which plaintiffs appealed to the U.S.Court of Appeals for the Third Circuit.In 2017,the U.S.Court of Appeals for theThird Circuit reversed the District Courts decisions and remanded the claims to the District Court.LipitorBeginning in 2011,purported class actions relating to Lipitor were filed in various federal courts against,among others,Pfizer,certain Pfizer affiliates,and,inmost of the actions,Ranbaxy Laboratories Ltd.(Ranbaxy)and certain Ranbaxy affiliates.The plaintiffs in these various actions seek to represent nationwide,multi-state or statewide classes consisting of persons or entities who directly purchased,indirectly purchased or reimbursed patients for the purchase of Lipitor(or,in certain of the actions,generic Lipitor)from any of the defendants from March 2010 until the cessation of the defendants allegedly unlawful conduct(theClass Period).The plaintiffs allege delay in the launch of generic Lipitor,in violation of federal antitrust laws and/or state antitrust,consumer protection andvarious other laws,resulting from(i)the 2008 agreement pursuant to which Pfizer and Ranbaxy settled certain patent litigation involving Lipitor and Pfizergranted Ranbaxy a license to sell a generic version of Lipitor in various markets beginning on varying dates,and(ii)in certain of the actions,the procurementand/or enforcement of certain patents for Lipitor.Each of the actions seeks,among other things,treble damages on behalf of the putative class for alleged priceovercharges for Lipitor(or,in certain of the actions,generic Lipitor)during the Class Period.In addition,individual actions have been filed against Pfizer,Ranbaxy and certain of their affiliates,among others,that assert claims and seek relief for the plaintiffs that are substantially similar to the claims asserted andthe relief sought in the purported class actions described above.These various actions have been consolidated for pre-trial proceedings in a MDL in the U.S.District Court for the District of New Jersey.In September 2013 and 2014,the District Court dismissed with prejudice the claims of the direct purchasers.In October and November 2014,the District Courtdismissed with prejudice the claims of all other MDL plaintiffs.All plaintiffs appealed the District Courts orders dismissing their claims with prejudice to theU.S.Court of Appeals for the Third Circuit.In addition,the direct purchaser class plaintiffs appealed the order denying their motion to amend the judgment andfor leave to amend their complaint to the Court of Appeals.In 2017,the Court of Appeals reversed the District Courts decisions and remanded the claims tothe District Court.Also,in 2013,the State of West Virginia filed an action in West Virginia state court against Pfizer and Ranbaxy,among others,that asserts claims and seeksrelief on behalf of the State of West Virginia and residents of that state that are substantially similar to the claims asserted and the relief sought in the purportedclass actions described above.EpiPen(Direct Purchaser)In February 2020,a lawsuit was filed in the U.S.District Court for the District of Kansas against Pfizer,its current and former affiliates King and Meridian,andvarious Mylan entities,on behalf of a purported U.S.nationwide class of direct purchaser plaintiffs who purchased EpiPen devices directly from thedefendants.Plaintiffs in this action generally allege that Pfizer and Mylan conspired to delay market entry of generic EpiPen through the settlement of patentlitigation regarding EpiPen,and thereby delayed market entry of generic EpiPen in violation of federal antitrust law.Plaintiffs seek treble damages for allegedovercharges for EpiPen since 2011.In July 2021,the District Court granted defendants motion to dismiss the direct purchaser complaint,without prejudice.InSeptember 2021,plaintiffs filed an amended complaint.In August 2022,the District Court granted Pfizers motion to dismiss the complaint,and plaintiffs haveappealed to the U.S.Court of Appeals for the Tenth Circuit.Nexium 24HR and ProtonixA number of individual and multi-plaintiff lawsuits have been filed against Pfizer,certain of its subsidiaries and/or other pharmaceutical manufacturers invarious federal and state courts alleging that the plaintiffs developed kidney-related injuries purportedly as a result of the ingestion of certain proton pumpinhibitors.The cases against Pfizer involve Protonix and/or Nexium 24HR and seek compensatory and punitive damages and,in some cases,treble damages,restitution or disgorgement.In 2017,the federal actions were ordered transferred for coordinated pre-trial proceedings to a MDL in the U.S.District Court for26PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)the District of New Jersey.As part of the combination of our and GSKs consumer healthcare businesses to form Haleon,Haleon assumed,and agreed toindemnify Pfizer for,liabilities arising out of such litigation to the extent related to Nexium 24HR.Docetaxel Personal Injury ActionsA number of lawsuits have been filed against Hospira and Pfizer in various federal and state courts alleging that plaintiffs who were treated with Docetaxeldeveloped permanent hair loss.The significant majority of the cases also name other defendants,including the manufacturer of the branded product,Taxotere.Plaintiffs seek compensatory and punitive damages.Additional lawsuits have been filed in which plaintiffs allege they developed blocked tear ducts followingtheir treatment with Docetaxel.In 2016,the federal cases were transferred for coordinated pre-trial proceedings to a MDL in the U.S.District Court for the Eastern District of Louisiana.In2022,the eye injury cases were transferred for coordinated pre-trial proceedings to a MDL in the U.S.District Court for the Eastern District of Louisiana.Mississippi Attorney General Government ActionIn 2018,the Attorney General of Mississippi filed a complaint in Mississippi state court against the manufacturer of the branded product and eight othermanufacturers including Pfizer and Hospira,alleging,with respect to Pfizer and Hospira,a failure to warn about a risk of permanent hair loss in violation of theMississippi Consumer Protection Act.The action seeks civil penalties and injunctive relief.ZantacA number of lawsuits have been filed against Pfizer in various federal and state courts alleging that plaintiffs developed various types of cancer,or face anincreased risk of developing cancer,purportedly as a result of the ingestion of Zantac.The significant majority of these cases also name other defendants thathave historically manufactured and/or sold Zantac.Pfizer has not sold Zantac since 2006,and only sold an OTC version of the product.In 2006,Pfizer sold theconsumer business that included its Zantac OTC rights to Johnson&Johnson and transferred the assets and liabilities related to Zantac OTC to Johnson&Johnson in connection with the sale.Plaintiffs in these cases seek compensatory and punitive damages.In February 2020,the federal actions were transferred for coordinated pre-trial proceedings to a MDL in the U.S.District Court for the Southern District ofFlorida(the Federal MDL Court).Plaintiffs in the MDL have filed against Pfizer and many other defendants a master personal injury complaint,asserting aconsolidated consumer class action alleging,among other things,claims under consumer protection statutes of all 50 states,and a medical monitoringcomplaint seeking to certify medical monitoring classes under the laws of 13 states.In December 2022,the Federal MDL Court granted defendants Daubertmotions to exclude plaintiffs expert testimony and motion for summary judgment on general causation,and dismissed the litigation.In addition,(i)Pfizer has received service of Canadian class action complaints naming Pfizer and other defendants,and seeking compensatory and punitivedamages for personal injury and economic loss,allegedly arising from the defendants sale of Zantac in Canada;and(ii)the State of New Mexico and theMayor and City Council of Baltimore separately filed civil actions against Pfizer and many other defendants in state courts,alleging various state statutory andcommon law claims in connection with the defendants alleged sale of Zantac in those jurisdictions.In April 2021,a Judicial Council Coordinated Proceedingwas created in the Superior Court of California in Alameda County to coordinate personal injury actions against Pfizer and other defendants filed in Californiastate court.Coordinated proceedings have also been created in other state courts.ChantixBeginning in August 2021,a number of putative class actions have been filed against Pfizer in various U.S.federal courts following Pfizers voluntary recall ofChantix due to the presence of a nitrosamine,N-nitroso-varenicline.Plaintiffs assert that they suffered economic harm purportedly as a result of purchasingChantix or generic varenicline medicines sold by Pfizer.Plaintiffs seek to represent nationwide and state-specific classes and seek various remedies,includingdamages and medical monitoring.In December 2022,the federal actions were transferred for coordinated pre-trial proceedings to a MDL in the U.S.DistrictCourt for the Southern District of New York.Similar putative class actions have been filed in Canada and Israel,where the product brand is Champix.A3.Legal ProceedingsCommercial and Other MattersMonsanto-Related MattersIn 1997,Monsanto Company(Former Monsanto)contributed certain chemical manufacturing operations and facilities to a newly formed corporation,SolutiaInc.(Solutia),and spun off the shares of Solutia.In 2000,Former Monsanto merged with Pharmacia&Upjohn Company to form Pharmacia.Pharmacia thentransferred its agricultural operations to a newly created27PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)subsidiary,named Monsanto Company(New Monsanto),which it spun off in a two-stage process that was completed in 2002.Pharmacia was acquired byPfizer in 2003 and is a wholly owned subsidiary of Pfizer.In connection with its spin-off that was completed in 2002,New Monsanto assumed,and agreed to indemnify Pharmacia for,any liabilities related toPharmacias former agricultural business.New Monsanto has defended and/or is defending Pharmacia in connection with various claims and litigation arisingout of,or related to,the agricultural business,and has been indemnifying Pharmacia when liability has been imposed or settlement has been reached regardingsuch claims and litigation.In connection with its spin-off in 1997,Solutia assumed,and agreed to indemnify Pharmacia for,liabilities related to Former Monsantos chemical businesses.As the result of its reorganization under Chapter 11 of the U.S.Bankruptcy Code,Solutias indemnification obligations relating to Former Monsantos chemicalbusinesses are primarily limited to sites that Solutia has owned or operated.In addition,in connection with its spin-off that was completed in 2002,NewMonsanto assumed,and agreed to indemnify Pharmacia for,any liabilities primarily related to Former Monsantos chemical businesses,including,but notlimited to,any such liabilities that Solutia assumed.Solutias and New Monsantos assumption of,and agreement to indemnify Pharmacia for,these liabilitiesapply to pending actions and any future actions related to Former Monsantos chemical businesses in which Pharmacia is named as a defendant,including,without limitation,actions asserting environmental claims,including alleged exposure to polychlorinated biphenyls.Solutia and/or New Monsanto aredefending Pharmacia in connection with various claims and litigation arising out of,or related to,Former Monsantos chemical businesses,and have beenindemnifying Pharmacia when liability has been imposed or settlement has been reached regarding such claims and litigation.Environmental MattersIn 2009,as part of our acquisition of Wyeth,we assumed responsibility for environmental remediation at the Wyeth Holdings LLC(formerly known as,WyethHoldings Corporation and American Cyanamid Company)discontinued industrial chemical facility in Bound Brook,New Jersey.Since that time,we haveexecuted or have become a party to a number of administrative settlement agreements,orders on consent,and/or judicial consent decrees,with the U.S.Environmental Protection Agency and/or New Jersey Department of Environmental Protection to perform remedial design,removal and remedial actions,andrelated environmental remediation activities at the Bound Brook facility.We have accrued for the currently estimated costs of these activities.We are a party to a number of other proceedings brought under the Comprehensive Environmental Response,Compensation,and Liability Act of 1980,asamended,and other state,local or foreign laws in which the primary relief sought is the cost of past and/or future remediation.Contracts with Iraqi Ministry of HealthIn 2017,a number of U.S.service members,civilians,and their families brought a complaint in the U.S.District Court for the District of Columbia against anumber of pharmaceutical and medical devices companies,including Pfizer and certain of its subsidiaries,alleging that the defendants violated the U.S.Anti-Terrorism Act.The complaint alleges that the defendants provided funding for terrorist organizations through their sales practices pursuant to pharmaceuticaland medical device contracts with the Iraqi Ministry of Health,and seeks monetary relief.In July 2020,the District Court granted defendants motions todismiss and dismissed all of plaintiffs claims.In January 2022,the Court of Appeals reversed the District Courts decision.In February 2022,the defendantsfiled for en banc review of the Court of Appeals decision.In February 2023,the Court of Appeals denied defendants en banc petitions.Allergan Complaint for IndemnityIn 2019,Pfizer was named as a defendant in a complaint,along with King,filed by Allergan Finance LLC(Allergan)in the Supreme Court of the State of NewYork,asserting claims for indemnity related to Kadian,which was owned for a short period by King in 2008,prior to Pfizers acquisition of King in 2010.Thissuit was voluntarily discontinued without prejudice in January 2021.Viatris Securities LitigationIn October 2021,a putative class action was filed in the Court of Common Pleas of Allegheny County,Pennsylvania on behalf of former Mylan N.V.shareholders who received Viatris common stock in exchange for Mylan shares in connection with the spin-off of the Upjohn Business and its combinationwith Mylan(the Transactions).Viatris,Pfizer,and certain of each companys current and former officers,directors and employees are named as defendants.Anamended complaint was filed in January 2023,and alleges that the defendants violated certain provisions of the Securities Act of 1933 in connection withcertain disclosures made in or omitted from the registration statement and related prospectus issued in connection with the Transactions,as well as relatedcommunications.Plaintiff seeks damages,costs and expenses and other equitable and injunctive relief.28PFIZER INC.AND SUBSIDIARY COMPANIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)A4.Legal ProceedingsGovernment InvestigationsWe are subject to extensive regulation by government agencies in the U.S.,other developed markets and multiple emerging markets in which we operate.Criminal charges,substantial fines and/or civil penalties,limitations on our ability to conduct business in applicable jurisdictions,corporate integrity ordeferred prosecution agreements,as well as reputational harm and increased public interest in the matter could result from government investigations in theU.S.and other jurisdictions in which we do business.These matters often involve government requests for information on a voluntary basis or throughsubpoenas after which the government may seek additional information through follow-up requests or additional subpoenas.In addition,in a qui tam lawsuit inwhich the government declines to intervene,the relator may still pursue a suit for the recovery of civil damages and penalties on behalf of the government.Among the investigations by government agencies are the matters discussed below.Greenstone Investigations U.S.Department of Justice Antitrust Division InvestigationSince July 2017,the U.S.Department of Justices Antitrust Division has been investigating our former Greenstone generics business.We believe this is relatedto an ongoing broader antitrust investigation of the generic pharmaceutical industry.We have produced records relating to this investigation.State Attorneys General and Multi-District Generics Antitrust LitigationIn April 2018,Greenstone received requests for information from the Antitrust Department of the Connecticut Office of the Attorney General.In May 2019,Attorneys General of more than 40 states plus the District of Columbia and Puerto Rico filed a complaint against a number of pharmaceutical companies,including Greenstone and Pfizer.The matter has been consolidated with a MDL in the Eastern District of Pennsylvania.As to Greenstone and Pfizer,thecomplaint alleges anticompetitive conduct in violation of federal and state antitrust laws and state consumer protection laws.In June 2020,the State AttorneysGeneral filed a new complaint against a large number of companies,including Greenstone and Pfizer,making similar allegations,but concerning a new set ofdrugs.This complaint was transferred to the MDL in July 2020.The MDL also includes civil complaints filed by private plaintiffs and state counties againstPfizer,Greenstone and a significant number of other defendants asserting allegations that generally overlap with those asserted by the State Attorneys General.Subpoena&Civil Investigative Demand relating to Tris Pharma/Quillivant XRIn October 2018,we received a subpoena from the U.S.Attorneys Office for the Southern District of New York(SDNY)seeking records relating to ourrelationship with anot
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K id UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-Q(Mark One)QUARTERL.
2023-05-18
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Q4FY2023FinancialpresentationtoaccompanymanagementcommentaryThispresentationcontainsstatementsormayi.
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2022INTERIM REPORTFOR THE SIX-MONTH PERIOD ENDED 31 MARCH 2022 TRAFIGURA GROUP PTE.LTD.Financial and.
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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 November 20,2022orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934Commission file number 0-20355Costco Wholesale Corporation(Exact name of registrant as specified in its charter)Washington 91-1223280(State or other jurisdiction ofincorporation or organization)(I.R.S.Employer Identification No.)999 Lake Drive,Issaquah,WA 98027(Address of principal executive offices)(Zip Code)(Registrants telephone number,including area code):(425)313-8100Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock,$.005 Par ValueCOSTThe Nasdaq Global Select MarketIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject tosuch filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required tosubmit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reportingcompany,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The number of shares outstanding of the issuers common stock as of December 22,2022 was 443,729,036.1Table of ContentsCOSTCO WHOLESALE CORPORATIONINDEX TO FORM 10-Q PagePART IFINANCIAL INFORMATIONItem 1.Financial Statements3Condensed Consolidated Statements of Income3Condensed Consolidated Statements of Comprehensive Income4Condensed Consolidated Balance Sheets5Condensed Consolidated Statements of Equity6Condensed Consolidated Statements of Cash Flows7Notes to Condensed Consolidated Financial Statements8Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations17Item 3.Quantitative and Qualitative Disclosures About Market Risk25Item 4.Controls and Procedures25PART IIOTHER INFORMATIONItem 1.Legal Proceedings25Item 1A.Risk Factors25Item 2.Unregistered Sales of Equity Securities and Use of Proceeds26Item 3.Defaults Upon Senior Securities26Item 4.Mine Safety Disclosures26Item 5.Other Information26Item 6.Exhibits27Signatures282Table of ContentsPART IFINANCIAL INFORMATIONItem 1Financial StatementsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(amounts in millions,except per share data)(unaudited)12 Weeks EndedNovember 20,2022November 21,2021REVENUENet sales$53,437$49,417 Membership fees1,000 946 Total revenue54,437 50,363 OPERATING EXPENSESMerchandise costs47,769 43,952 Selling,general and administrative4,917 4,718 Operating income1,751 1,693 OTHER INCOME(EXPENSE)Interest expense(34)(39)Interest income and other,net53 42 INCOME BEFORE INCOME TAXES1,770 1,696 Provision for income taxes406 351 Net income including noncontrolling interests1,364 1,345 Net income attributable to noncontrolling interests(21)NET INCOME ATTRIBUTABLE TO COSTCO$1,364$1,324 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:Basic$3.07$2.99 Diluted$3.07$2.98 Shares used in calculation(000s):Basic443,837 443,377 Diluted444,531 444,604 The accompanying notes are an integral part of these condensed consolidated financial statements.3Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(amounts in millions)(unaudited)12 Weeks Ended November 20,2022November 21,2021NET INCOME INCLUDING NONCONTROLLING INTERESTS$1,364$1,345 Foreign-currency translation adjustment and other,net(96)(72)Comprehensive income1,268 1,273 Less:Comprehensive income attributable to noncontrolling interests 23 COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO$1,268$1,250 The accompanying notes are an integral part of these condensed consolidated financial statements.4Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(amounts in millions,except par value and share data)(unaudited)November 20,2022August 28,2022ASSETSCURRENT ASSETSCash and cash equivalents$10,856$10,203 Short-term investments817 846 Receivables,net2,312 2,241 Merchandise inventories18,571 17,907 Other current assets1,594 1,499 Total current assets34,150 32,696 OTHER ASSETSProperty and equipment,net25,144 24,646 Operating lease right-of-use assets2,787 2,774 Other long-term assets3,946 4,050 TOTAL ASSETS$66,027$64,166 LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable$18,348$17,848 Accrued salaries and benefits4,317 4,381 Accrued member rewards1,959 1,911 Deferred membership fees2,322 2,174 Current portion of long-term debt71 73 Other current liabilities6,050 5,611 Total current liabilities33,067 31,998 OTHER LIABILITIESLong-term debt,excluding current portion6,472 6,484 Long-term operating lease liabilities2,503 2,482 Other long-term liabilities2,509 2,555 TOTAL LIABILITIES44,551 43,519 COMMITMENTS AND CONTINGENCIESEQUITYPreferred stock$0.005 par value;100,000,000 shares authorized;no shares issued andoutstanding Common stock$0.005 par value;900,000,000 shares authorized;443,841,000 and442,664,000 shares issued and outstanding2 2 Additional paid-in capital6,982 6,884 Accumulated other comprehensive loss(1,925)(1,829)Retained earnings16,412 15,585 Total Costco stockholders equity21,471 20,642 Noncontrolling interests5 5 TOTAL EQUITY21,476 20,647 TOTAL LIABILITIES AND EQUITY$66,027$64,166 The accompanying notes are an integral part of these condensed consolidated financial statements.5Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)12 Weeks Ended November 20,2022 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST28,2022442,664$2$6,884$(1,829)$15,585$20,642$5$20,647 Net income 1,364 1,364 1,364 Foreign-currencytranslation adjustmentand other,net (96)(96)(96)Stock-basedcompensation 403 403 403 Release of vestedrestricted stock units(RSUs),including taxeffects1,462 (301)(301)(301)Repurchases ofcommon stock(285)(4)(137)(141)(141)Cash dividend declared (400)(400)(400)BALANCE ATNOVEMBER 20,2022443,841$2$6,982$(1,925)$16,412$21,471$5$21,476 12 Weeks Ended November 21,2021 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST29,2021441,825$4$7,031$(1,137)$11,666$17,564$514$18,078 Net income 1,324 1,324 21 1,345 Foreign-currencytranslation adjustmentand other,net (74)(74)2(72)Stock-basedcompensation 389 389 389 Release of vestedRSUs,including taxeffects1,686 (355)(355)(355)Repurchases ofcommon stock(77)(1)(34)(35)(35)Cash dividend declared (350)(350)(350)BALANCE ATNOVEMBER 21,2021443,434$4$7,064$(1,211)$12,606$18,463$537$19,000 The accompanying notes are an integral part of these condensed consolidated financial statements.6Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in millions)(unaudited)12 Weeks EndedNovember 20,2022November 21,2021CASH FLOWS FROM OPERATING ACTIVITIESNet income including noncontrolling interests$1,364$1,345 Adjustments to reconcile net income including noncontrolling interests to net cash provided byoperating activities:Depreciation and amortization447 432 Non-cash lease expense111 72 Stock-based compensation402 388 Other non-cash operating activities,net123 111 Deferred income taxes(2)(2)Changes in operating assets and liabilities:Merchandise inventories(737)(2,760)Accounts payable487 3,389 Other operating assets and liabilities,net415 283 Net cash provided by operating activities2,610 3,258 CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short-term investments(253)(258)Maturities of short-term investments274 444 Additions to property and equipment(1,057)(1,055)Other investing activities,net(21)(43)Net cash used in investing activities(1,057)(912)CASH FLOWS FROM FINANCING ACTIVITIESTax withholdings on stock-based awards(301)(355)Repurchases of common stock(141)(37)Cash dividend payments(400)(350)Other financing activities,net(21)(97)Net cash used in financing activities(863)(839)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS(37)(14)Net change in cash and cash equivalents653 1,493 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR10,203 11,258 CASH AND CASH EQUIVALENTS END OF PERIOD$10,856$12,751 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the first 12 weeks of the year for:Interest$52$64 Income taxes,net$214$206 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:Financing lease assets obtained in exchange for new or modified leases$49$118 Operating lease assets obtained in exchange for new or modified leases$68$61 The accompanying notes are an integral part of these condensed consolidated financial statements.7Table of ContentsCOSTCO WHOLESALE CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(amounts in millions,except share,per share,and warehouse count data)(unaudited)Note 1Summary of Significant Accounting PoliciesDescription of BusinessCostco Wholesale Corporation(Costco or the Company),a Washington corporation,and its subsidiaries operate membership warehousesbased on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range ofmerchandise categories will produce high sales volumes and rapid inventory turnover.At November 20,2022,Costco operated 845 warehousesworldwide:582 in the United States(U.S.)located in 46 states,Washington,D.C.,and Puerto Rico,107 in Canada,40 in Mexico,31 inJapan,29 in the United Kingdom(U.K.),18 in Korea,14 in Taiwan,13 in Australia,four in Spain,two each in France and China,and one eachin Iceland,New Zealand,and Sweden.The Company operates e-commerce websites in the U.S.,Canada,U.K.,Mexico,Korea,Taiwan,Japan,and Australia.Basis of PresentationThe condensed consolidated financial statements include the accounts of Costco,its wholly-owned subsidiaries,and a subsidiary in which it hasa controlling interest.All material inter-company transactions among the Company and its consolidated subsidiaries have been eliminated inconsolidation.Unless otherwise noted,references to net income relate to net income attributable to Costco.These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interimfinancial reporting pursuant to the rules and regulations of the Securities and Exchange Commission(SEC).While these statements reflect allnormal recurring adjustments that are,in the opinion of management,necessary for fair presentation of the results of the interim period,they donot include all of the information and footnotes required by U.S.generally accepted accounting principles(U.S.GAAP)for complete financialstatements.Therefore,the interim condensed consolidated financial statements should be read in conjunction with the consolidated financialstatements and notes included in the Companys Annual Report on Form 10-K for the fiscal year ended August 28,2022.Fiscal Year EndThe Company operates on a 52/53 week fiscal year basis,with the fiscal year ending on the Sunday closest to August 31.Fiscal 2023 is a 53-week year ending on September 3,2023.References to the first quarter of 2023 and 2022 relate to the 12-week fiscal quartersended November 20,2022,and November 21,2021.Use of EstimatesThe preparation of financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.These estimates and assumptions take into account historical andforward-looking factors that the Company believes are reasonable.Actual results could differ from those estimates and assumptions.8Table of ContentsReclassificationReclassifications were made to the condensed consolidated statement of cash flows for the first quarter of 2022 to conform with current yearpresentation.LeasesThe Company leases land,buildings,equipment,and other assets at warehouses,offices,or within the operations that support supply chain anddistribution channels.The Company reviews lease right-of-use assets for impairment when events or changes in circumstances indicate that thecarrying amount of the asset group may not be fully recoverable.The Company also occasionally revisits and modifies the terms of its leasingarrangements.During the first quarter of 2023,the Company recognized a charge of$93,primarily related to the termination costs andimpairment of certain leased assets associated with charter shipping activities.This charge is included in merchandise costs.Note 2InvestmentsThe Companys investments were as follows:November 20,2022:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$570$(12)$558 Held-to-maturity:Certificates of deposit259 259 Total short-term investments$829$(12)$817 August 28,2022:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$534$(5)$529 Held-to-maturity:Certificates of deposit317 317 Total short-term investments$851$(5)$846 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended November 20,2022,andAugust 28,2022.At those dates,there were no available-for-sale securities in a material continuous unrealized-loss position.There were nosales of available-for-sale securities during the first quarter of 2023 or 2022.The maturities of available-for-sale and held-to-maturity securities at November 20,2022 are as follows:Available-For-SaleHeld-To-Maturity Cost BasisFair ValueDue in one year or less$220$217$259 Due after one year through five years264 259 Due after five years86 82 Total$570$558$259 9Table of ContentsNote 3Fair Value MeasurementAssets and Liabilities Measured at Fair Value on a Recurring BasisThe table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicatesthe level within the fair-value hierarchy reflecting the valuation techniques utilized.Level 2November 20,2022August 28,2022Investment in government and agency securities$558$529 Forward foreign-exchange contracts,in asset position19 34 Forward foreign-exchange contracts,in(liability)position(25)(2)Total$552$561 _(1)The asset and liability values are included in other current assets and other current liabilities,respectively,in the accompanying condensed consolidated balance sheets.At November 20,2022,and August 28,2022,the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fairvalue on a recurring basis.There were no transfers between levels during the first quarter of 2023 or 2022.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisAssets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured atamortized cost and long-lived nonfinancial assets.These assets are measured at fair value if determined to be impaired.Please see Note 1 foradditional information.Note 4DebtThe carrying value of the Companys long-term debt consisted of the following:November 20,2022August 28,20222.750%Senior Notes due May 2024$1,000$1,000 3.000%Senior Notes due May 20271,000 1,000 1.375%Senior Notes due June 20271,250 1,250 1.600%Senior Notes due April 20301,750 1,750 1.750%Senior Notes due April 20321,000 1,000 Other long-term debt574 590 Total long-term debt6,574 6,590 Less unamortized debt discounts and issuance costs31 33 Less current portion71 73 Long-term debt,excluding current portion$6,472$6,484 _(1)Net of unamortized debt discounts and issuance costs.The fair value of the Senior Notes is estimated using Level 2 inputs.Other long-term debt consists of Guaranteed Senior Notes issued by theCompanys Japan subsidiary,valued using Level 3 inputs.The fair value of the Companys long-term debt,including the current portion,wasapproximately$5,816 and$6,033 at November 20,2022,and August 28,2022.(1)(1)(1)10Table of ContentsNote 5EquityDividendsOn October 12,2022,the Board of Directors declared a quarterly cash dividend in the amount of$0.90 per share,which was paid onNovember 10,2022.Share Repurchase ProgramThe Companys share repurchase program is conducted under a$4,000 authorization by the Board of Directors,which expires in April 2023.AtNovember 20,2022,the remaining amount available under the plan was$2,667.The following table summarizes the Companys stockrepurchase activity:Shares Repurchased(000s)Average Price per ShareTotal CostFirst quarter of 2023285$495.94$141 First quarter of 202277$455.08$35 These amounts may differ from repurchases of common stock in the accompanying condensed consolidated statements of cash flows due tochanges in unsettled stock repurchases at the end of each quarter.Purchases are made from time to time,as conditions warrant,in the openmarket or in block purchases and pursuant to plans under SEC Rule 10b5-1.Note 6Stock-Based CompensationThe 2019 Incentive Plan authorized the issuance of 17,500,000 shares(10,000,000 RSUs)of common stock for future grants,plus theremaining shares that were available for grant and the future forfeited shares from grants under the previous plan,up to a maximum of27,800,000 shares(15,885,000 RSUs).The Company issues new shares of common stock upon vesting of RSUs.Shares for vested RSUs aregenerally delivered to participants annually,net of shares withheld for taxes.Summary of Restricted Stock Unit ActivityAt November 20,2022,8,652,000 shares were available to be granted as RSUs,and the following awards were outstanding:2,976,000 time-based RSUs,which vest upon continued employment over specified periods and accelerate upon achievement of thelong-service term;41,000 performance-based RSUs,granted to executive officers of the Company,for which the performance targets have been met.Theawards vest upon continued employment over specified periods of time and upon achievement of the long-service term;and135,000 performance-based RSUs,granted to executive officers of the Company,subject to achievement of performance targets forfiscal 2023,as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year.These awards arenot included in the table below or in the amount of unrecognized compensation cost.11Table of ContentsThe following table summarizes RSU transactions during the first quarter of 2023:Number ofUnits(in 000s)Weighted-AverageGrant Date Fair ValueOutstanding at August 28,20223,449$338.41 Granted1,678 470.47 Vested and delivered(2,090)352.56 Forfeited(20)385.02 Outstanding at November 20,20223,017$401.75 The remaining unrecognized compensation cost related to RSUs unvested at November 20,2022,was$1,139,and the weighted-average periodover which this cost will be recognized is 1.8 years.Summary of Stock-Based CompensationThe following table summarizes stock-based compensation expense and the related tax benefits:12 Weeks EndedNovember 20,2022November 21,2021Stock-based compensation expense$402$388 Less recognized income tax benefits89 85 Stock-based compensation expense,net$313$303 Note 7Net Income per Common and Common Equivalent ShareThe following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and ofpotentially dilutive common shares outstanding(shares in 000s):12 Weeks EndedNovember 20,2022November 21,2021Net income attributable to Costco$1,364$1,324 Weighted average basic shares443,837 443,377 RSUs694 1,227 Weighted average diluted shares444,531 444,604 12Table of ContentsNote 8Commitments and ContingenciesLegal ProceedingsThe Company is involved in a number of claims,proceedings and litigations arising from its business and property ownership.In accordancewith applicable accounting guidance,the Company establishes an accrual for legal proceedings if and when those matters present losscontingencies that are both probable and reasonably estimable.There may be exposure to loss in excess of amounts accrued.The Companymonitors those matters for developments that would affect the likelihood of a loss(taking into account where applicable indemnificationarrangements concerning suppliers and insurers)and the accrued amount,if any,thereof,and adjusts the amount as appropriate.The Companyhas recorded immaterial accruals with respect to certain matters described below,in addition to other immaterial accruals for matters notdescribed below.If the loss contingency at issue is not both probable and reasonably estimable,the Company does not establish an accrual,butwill monitor the matter for developments that will make the contingency both probable and reasonably estimable.In each case,there is areasonable possibility that a loss may be incurred,including a loss in excess of the applicable accrual.For matters where no accrual has beenrecorded,the possible loss or range of loss(including any loss in excess of the accrual)cannot,in the Companys view,be reasonably estimatedbecause,among other things:(i)the remedies or penalties sought are indeterminate or unspecified;(ii)the legal and/or factual theories are notwell developed;and/or(iii)the matters involve complex or novel legal theories or a large number of parties.The Company is a defendant in an action commenced in July 2013 under the California Labor Code Private Attorneys General Act(PAGA)alleging violation of California Wage Order 7-2001 for failing to provide seating to employees who work at entrance and exit doors in Californiawarehouses.Canela v.Costco Wholesale Corp.(Case No.2013-1-CV-248813;Santa Clara Superior Court).The complaint seeks relief underthe California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denying the material allegations of thecomplaint.A bench trial was held in June and July;no decision has been issued.In June 2022,a business center employee raised similar claims alleging failure to provide seating to employees who work at membership refunddesks in California warehouses and business centers.Rodriguez v.Costco Wholesale Corp.(Case No.22CV012847;Alameda Superior Court).The complaint seeks relief under the California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denyingthe material allegations of the complaint.In December 2018,a depot employee raised similar claims,alleging that depot employees in California did not receive suitable seating orreasonably comfortable workplace temperature conditions.Lane v.Costco Wholesale Corp.(Case No.CIVDS 1908816;San BernardinoSuperior Court).The Company filed an answer denying the material allegations of the complaint.In October 2019,the parties settled for animmaterial amount the seating claims on a representative basis,which received court approval in February 2020.The parties settled thetemperature claims for an immaterial amount in April 2022,and court approval was received in May 2022.A February 2023 hearing has been setfor a final report on the settlement.In March 2019,employees filed a class action against the Company alleging claims under California law for failure to pay overtime,to providemeal and rest periods and itemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfairbusiness practices.Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Nevarez v.Costco WholesaleCorp.(Case No.2:19-cv-03454;C.D.Cal.).The Company filed an answer denying the material allegations of the complaint.In December 2019,the court issued an order denying class certification.In January 2020,the plaintiffs dismissed their Labor Code claims without prejudice,and thecourt remanded the action to state court.Settlement for an immaterial amount was agreed upon in February 2021.Final court approval of thesettlement was granted on May 3,2022.A proposed intervenor has appealed the denial of her motion to intervene.13Table of ContentsIn May 2019,an employee filed a class action against the Company alleging claims under California law for failure to pay overtime,to provideitemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfair business practices.Roughv.Costco Wholesale Corp.(Case No.2:19-cv-01340;E.D.Cal.).Relief is sought under the California Labor Code,including civil penalties andattorneys fees.In September 2021,the court granted Costcos motion for partial summary judgment and denied class certification.In August2019,the plaintiff filed a companion case in state court seeking penalties under PAGA.Rough v.Costco Wholesale Corp.(Case No.FCS053454;Sonoma County Superior Court).Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Thestate court action has been stayed pending resolution of the federal action.In December 2020,a former employee filed suit against the Company asserting collective and class claims on behalf of non-exempt employeesunder the Fair Labor Standards Act and New York Labor Law for failure to pay for all hours worked,failure to pay certain non-exempt employeeson a weekly basis,and failure to provide proper wage statements and notices.The plaintiff also asserted individual retaliation claims.Cappadorav.Costco Wholesale Corp.(Case No.1:20-cv-06067;E.D.N.Y.).An amended complaint was filed,and the Company denied the materialallegations of the amended complaint.Based on an agreement in principle concerning settlement of the matter,involving a proposed payment bythe Company of an immaterial amount,the federal action has been dismissed.In April 2022,Cappadora and a second plaintiff filed an actionagainst the Company in New York state court,asserting the same class claims asserted in the federal action under the New York Labor Law andseeking preliminary approval of the class settlement.Cappadora and Sancho v.Costco Wholesale Corp.(Index No.604757/2022;NassauCounty Supreme Court).The state court granted preliminary approval of the settlement in October 2022.In August 2021,a former employee filed a similar suit,asserting class claims on behalf of certain non-exempt employees under New York LaborLaw for failure to pay on a weekly basis.Umadat v.Costco Wholesale Corp.(Case No.2:21-cv-4814;E.D.N.Y.).The Company filed an answer,denying the material allegations of the complaint.In April 2022,a former employee filed a similar suit,asserting class claims on behalf of certainnon-exempt employees under New York Labor Law,as well as under the Fair Labor Standards Act,for failure to pay on a weekly basis andfailure to pay overtime.Burian v.Costco Wholesale Corp.(Case No.2:22-cv-02108;E.D.N.Y.).In September 2022,an amended complaint wasfiled,asserting class claims on behalf of certain non-exempt employees under New York Labor Law for failure to pay on a weekly basis.TheCompany responded by requesting permission to file a motion to dismiss.The court has not responded.In February 2021,a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment ofwages,meal and rest periods,wage statements,reimbursement of expenses,payment of final wages to terminated employees,and for unfairbusiness practices.Edwards v.Costco Wholesale Corp.(Case No.5:21-cv-00716:C.D.Cal.).In May 2021,the Company filed a motion todismiss the complaint,which was granted with leave to amend.In June 2021,the plaintiff filed an amended complaint,which the Companymoved to dismiss later that month.The court granted the motion in part in July 2021 with leave to amend.In August 2021,the plaintiff filed asecond amended complaint and filed a separate representative action under PAGA asserting the same Labor Code claims and seeking civilpenalties and attorneys fees.The Company filed an answer to the second amended class action complaint,denying the material allegations.The Company also filed an answer to the PAGA representative action,denying the material allegations.On September 27,2022,the partiesreached a settlement for an immaterial amount.The settlement requires court approval.In July 2021,a former temporary staffing employee filed a class action against the Company and a staffing company alleging violations of theCalifornia Labor Code regarding payment of wages,meal and rest periods,wage statements,the timeliness of wages and final wages,and forunfair business practices.Dimas v.Costco Wholesale Corp.(Case No.STK-CV-UOE-2021-0006024;San Joaquin Superior Court).TheCompany has moved to compel arbitration of the plaintiffs individual claims and to dismiss the class action complaint.On September 7,2021,the same former employee filed a separate representative14Table of Contentsaction under PAGA,asserting the same Labor Code violations and seeking civil penalties and attorneys fees.The case has been stayedpending the motion to compel in the related case.In September 2021,an employee filed a class action against the Company alleging violations of the California Labor Code regarding the allegedfailure to provide sick pay,failure to timely pay wages due at separation from employment,and for violations of Californias unfair competitionlaw.De Benning v.Costco Wholesale Corp.(Case No.34-2021-00309030-CU-OE-GDS;Sacramento Superior Court).The Company answeredthe complaint in January 2022,denying its material allegations.In April 2022,a settlement for an immaterial amount was agreed upon,subject tocourt approval.The court granted preliminary approval of the settlement on October 28,2022.A final approval hearing is set for February 10,2023.In March 2022,an employee filed a class action against the Company alleging violations of the California Labor Code regarding the failure to:pay wages,provide meal and rest periods,provide accurate wage statements,timely pay final wages,and reimburse business expenses.Diaz v.Costco Wholesale Corp.(Case No.22STCV09513;Los Angeles Superior Court).The Company filed an answer denying the material allegations.In May 2022,an employee filed a PAGA-only representative action against the Company alleging claims under the California Labor Coderegarding the payment of wages,meal and rest periods,the timeliness of wages and final wages,wage statements,accurate records andbusiness expenses.Gonzalez v.Costco Wholesale Corp.(Case No.22AHCV00255;Los Angeles Superior Court).Beginning in December 2017,the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts ofopioid abuses filed against various defendants by counties,cities,hospitals,Native American tribes,third-party payors,and others.In re NationalPrescription Opiate Litigation(MDL No.2804)(N.D.Ohio).Included are cases that name the Company,including actions filed by counties andcities in Michigan,New Jersey,Oregon,Virginia and South Carolina,a third-party payor in Ohio,and a hospital in Texas,class actions filed onbehalf of infants born with opioid-related medical conditions in 40 states,and class actions and individual actions filed on behalf of individualsseeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa.Claims against theCompany in state courts in New Jersey,Oklahoma,Utah,and Arizona have been dismissed.The Company is defending all of the pendingmatters.Members of the Board of Directors,six corporate officers and the Company are defendants in a shareholder derivative action related to chickenwelfare and alleged breaches of fiduciary duties.Smith,et ano.v.Vachris,et al.,Superior Court of the State of Washington,County of King,No,22-2-08937-7SEA,(filed 6/14/22,as amended,6/30/22);The complaint seeks from the individual defendants damages,injunctive relief,costs,and attorneys fees.A motion to dismiss the amended complaint has been filed.The Company does not believe that any pending claim,proceeding or litigation,either alone or in the aggregate,will have a material adverseeffect on the Companys financial position,results of operations or cash flows;it is possible that an unfavorable outcome of some or all of thematters,however unlikely,could result in a charge that might be material to the results of an individual fiscal quarter or year.15Table of ContentsNote 9Segment ReportingThe Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S.,Canada,Mexico,Japan,U.K.,Korea,Taiwan,Australia,Spain,France,China,Iceland,New Zealand,and Sweden.Reportable segments are largelybased on managements organization of the operating segments for operational decisions and assessments of financial performance,whichconsiders geographic locations.The material accounting policies of the segments are as described in the notes to the consolidated financialstatements included in the Companys Annual Report filed on Form 10-K for the fiscal year ended August 28,2022,and Note 1 above.Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income.The following table provides information for the Companys reportable segments:United StatesOperationsCanadianOperationsOtherInternationalOperationsTotal12 Weeks Ended November 20,2022Total revenue$40,145$7,356$6,936$54,437 Operating income1,236 288 227 1,751 12 Weeks Ended November 21,2021Total revenue$36,317$7,121$6,925$50,363 Operating income1,118 293 282 1,693 52 Weeks Ended August 28,2022Total revenue$165,294$31,675$29,985$226,954 Operating income5,268 1,346 1,179 7,793 Disaggregated RevenueThe following table summarizes net sales by merchandise category;sales from e-commerce websites and business centers have been allocatedto the applicable merchandise categories:12 Weeks EndedNovember 20,2022November 21,2021Foods and Sundries$21,448$19,563 Non-Foods14,032 14,162 Fresh Foods6,717 6,439 Warehouse Ancillary and Other Businesses11,240 9,253 Total net sales$53,437$49,417 16Table of ContentsItem 2Managements Discussion and Analysis of Financial Condition and Results of Operations(amounts in millions,except per share,share,percentages and warehouse count data)FORWARD-LOOKING STATEMENTSCertain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995.For these purposes,forward-looking statements are statements that address activities,events,conditions or developmentsthat the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth,changes in comparablesales,cannibalization of existing locations by new openings,price or fee changes,earnings performance,earnings per share,stock-basedcompensation expense,warehouse openings and closures,capital spending,the effect of adopting certain accounting standards,future financialreporting,financing,margins,return on invested capital,strategic direction,expense controls,membership renewal rates,shopping frequency,litigation,and the demand for our products and services.In some cases,forward-looking statements can be identified because they containwords such as“anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“intend,”“likely,”“may,”“might,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“target,”“will,”“would,”or similar expressions and the negatives of those terms.Such forward-looking statementsinvolve risks and uncertainties that may cause actual events,results,or performance to differ materially from those indicated by suchstatements.These risks and uncertainties include,but are not limited to,domestic and international economic conditions,including exchangerates,inflation or deflation,the effects of competition and regulation,uncertainties in the financial markets,consumer and small-businessspending patterns and debt levels,breaches of security or privacy of member or business information,conditions affecting the acquisition,development,ownership or use of real estate,capital spending,actions of vendors,rising costs associated with employees(generally includinghealth-care costs),energy and certain commodities,geopolitical conditions(including tariffs and the Ukraine conflict),the ability to maintaineffective internal control over financial reporting,regulatory and other impacts related to climate change,COVID-19 related factors andchallenges,and other risks identified from time to time in the Companys public statements and reports filed with the Securities and ExchangeCommission(SEC).Forward-looking statements speak only as of the date they are made,and the Company does not undertake to update thesestatements,except as required by law.OVERVIEWThe following Managements Discussion and Analysis of Financial Condition and Results of Operations(MD&A)is intended to promoteunderstanding of the results of operations and financial condition.MD&A is provided as a supplement to,and should be read in conjunction with,our condensed consolidated financial statements and the accompanying Notes to Financial Statements(Part I,Item 1 of this Form 10-Q),as wellas our consolidated financial statements,the accompanying Notes to Financial Statements,and the related Managements Discussion andAnalysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K,filed with the United States Securities andExchange Commission(SEC)on October 5,2022.We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limitedselection of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventoryturnover.When combined with the operating efficiencies achieved by volume purchasing,efficient distribution and reduced handling ofmerchandise in no-frills,self-service warehouse facilities,these volumes and turnover enable us to operate profitably at significantly lower grossmargins(net sales less merchandise costs)than most other retailers.We often sell inventory before we are required to pay for it,even whiletaking advantage of early payment discounts.We believe that the most important driver of our profitability is increasing net sales,particularly comparable sales.Net sales includes our coremerchandise categories(foods and sundries,non-foods,and fresh foods),warehouse ancillary(gasoline,pharmacy,optical,food court,hearingaids,and tire installation)and other businesses(e-commerce,business centers,travel and other).We define17Table of Contentscomparable sales as net sales from warehouses open for more than one year,including remodels,relocations and expansions,and sales relatedto e-commerce websites operating for more than one year.Comparable sales growth is achieved through increasing shopping frequency fromnew and existing members and the amount they spend on each visit(average ticket).Sales comparisons can also be particularly influenced bycertain factors that are beyond our control:fluctuations in currency exchange rates(with respect to our international operations);inflation andchanges in the cost of gasoline and associated competitive conditions.The higher our comparable sales exclusive of these items,the more wecan leverage our SG&A expenses,reducing them as a percentage of sales and enhancing profitability.Generating comparable sales growth isforemost a question of making available to our members the right merchandise at the right prices,a skill that we believe we have repeatedlydemonstrated over the long-term.Another substantial factor in net sales growth is the health of the economies in which we do business,including the effects of inflation or deflation,especially the United States.Net sales growth and gross margins are also impacted by ourcompetition,which is vigorous and widespread,across a wide range of global,national and regional wholesalers and retailers,including thosewith e-commerce operations.While we cannot control or reliably predict general economic health or changes in competition,we believe that wehave been successful historically in adapting our business to these changes,such as through adjustments to our pricing and merchandise mix,including increasing the penetration of our private-label items,and through online offerings.Our philosophy is to provide our members with quality goods and services at competitive prices.We do not focus in the short-term onmaximizing prices charged,but instead seek to maintain what we believe is a perception among our members of our“pricing authority”consistently providing the most competitive values.Merchandise costs in the first quarter of 2023 was impacted by inflation higher than what wehave experienced in recent years.The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategiesin response to cost increases.Those strategies can include,but are not limited to,working with our suppliers to share in absorbing costincreases,earlier-than-usual purchasing and in greater volumes,offering seasonal merchandise outside its season,as well as passing costincreases on to our members.Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meetcompetition and holding prices steady despite cost increases instead of passing the increases on to our members,all negatively impacting grossmargin and gross margin as a percentage of net sales(gross margin percentage).We believe our gasoline business enhances traffic in our warehouses,but it generally has a lower gross margin percentage relative to our non-gasoline businesses.It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline businesses.A higher penetrationof gasoline sales will generally lower our gross margin percentage.Rapidly changing gasoline prices may significantly impact our near-term netsales growth.Generally,rising gasoline prices benefit net sales growth which,given the higher sales base,negatively impacts our gross marginpercentage but decreases our SG&A expenses as a percentage of net sales.A decline in gasoline prices has the inverse effect.Additionally,government actions in various countries,particularly China and the United States,have affected the costs of some of our merchandise.Thedegree of our exposure is dependent on(among other things)the type of goods,rates imposed,and timing of the tariffs.Higher tariffs couldadversely impact our results.We also achieve net sales growth by opening new warehouses.As our warehouse base grows,available and desirable sites become moredifficult to secure,and square footage growth becomes a comparatively less substantial component of growth.The negative aspects of suchgrowth,however,including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouseswhen openings occur in existing markets,are continuing to decline in significance as they relate to the results of our total operations.Our rate ofsquare footage growth is generally higher in foreign markets,due to the smaller base in those markets,and we expect that to continue.Our e-commerce business,domestically and internationally,generally has a lower gross margin percentage than our warehouse operations.The membership format is an integral part of our business and has a significant effect on our profitability.This format is designed to reinforcemember loyalty and provide continuing fee revenue.The extent to18Table of Contentswhich we achieve growth in our membership base,increase the penetration of our Executive members,and sustain high renewal rates materiallyinfluences our profitability.Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets ascompared to new markets.Our financial performance depends heavily on controlling costs.While we believe that we have achieved successes in this area,some significantcosts are partially outside our control,particularly health care and utility expenses.With respect to the compensation of our employees,ourphilosophy is not to seek to minimize their wages and benefits.Rather,we believe that achieving our longer-term objectives of reducingemployee turnover and enhancing employee satisfaction require maintaining compensation levels that are better than the industry average formuch of our workforce.This may cause us,for example,to absorb costs that other employers might seek to pass through to their workforces.Because our business operates on very low margins,modest changes in various items in the consolidated statements of income,particularlymerchandise costs and SG&A expenses,can have substantial impacts on net income.Our operating model is generally the same across our U.S.,Canadian,and Other International operating segments(see Note 9 to thecondensed consolidated financial statements included in Part I,Item 1,of this Report).Certain operations in the Other International segmenthave relatively higher rates of square footage growth,lower wage and benefit costs as a percentage of sales,less or no direct membershipwarehouse competition,or lack e-commerce or business delivery.In discussions of our consolidated operating results,we refer to the impact of changes in foreign currencies relative to the U.S.dollar,which aredifferences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies intoU.S.dollars.This impact of foreign-exchange rate changes is calculated based on the difference between the current and prior periods currencyexchange rates.The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and priorperiods average price per gallon sold.Our fiscal year ends on the Sunday closest to August 31.References to the first quarter of 2023 and 2022 relate to the 12-week fiscal quartersended November 20,2022,and November 21,2021.Certain percentages presented are calculated using actual results prior to rounding.Unlessotherwise noted,references to net income relate to net income attributable to Costco.Highlights for the first quarter of 2023 versus 2022 include:Net sales increased 8%to$53,437,driven by an increase in comparable sales of 7%and sales at 22 net new warehouses opened sincethe end of the first quarter of 2022;Membership fee revenue increased 6%to$1,000,driven by new member sign-ups,upgrades to Executive Membership,and an increasein our renewal rate;Gross margin percentage decreased 45 basis points,driven primarily by our core merchandise categories and a charge of$93,$0.15 perdiluted share,predominantly related to downsizing our charter shipping activities.This was partially offset by increases in warehouseancillary and other businesses;SG&A expenses as a percentage of net sales decreased 35 basis points,primarily due to a write-off of information technology assets of$118,$0.20 per diluted share,recorded in the first quarter of 2022,and leveraging increased sales in the first quarter of 2023.The provision for income taxes in the first quarter of 2023 was positively impacted by a benefit related to stock compensation of$53,$0.12 per diluted share,compared to$91,$0.21 per diluted share,in the first quarter of 2022.Net income was$1,364,$3.07 per diluted share,compared to$1,324,$2.98 per diluted share in 2022;andOn October 12,2022,our Board declared a quarterly cash dividend of$0.90 per share,which was paid on November 10,2022.19Table of ContentsRESULTS OF OPERATIONSNet Sales12 Weeks EndedNovember 20,2022November 21,2021Net Sales$53,437$49,417 Changes in net sales:U.S11nada3%Other International%Total Company8%Changes in comparable sales:U.S9nada2%Other International(3)%Total Company7%E-commerce(4)%Changes in comparable sales excluding the impact of changes in foreign-currencyand gasoline prices:U.S7nada8%8%Other International9%Total Company7%E-commerce(2)%Net SalesNet sales increased$4,020 or 8%during the first quarter of 2023.This improvement was attributable to an increase in comparable sales of 7%and sales at the 22 net new warehouses opened since the end of the first quarter of 2022.Sales increased$2,033,or 5.1%in core merchandisecategories,led by foods and sundries and fresh foods;while non-foods decreased slightly.Sales increased$1,987,or 21.5%in warehouseancillary and other businesses,led by gasoline,business centers and travel businesses.During the first quarter of 2023,higher gasoline prices positively impacted net sales by$1,216,246 basis points,compared to 2022,with a 17%increase in the average price per gallon.The volume of gasoline sold increased approximately 10%,positively impacting net sales by$650,131basis points.Changes in foreign currencies relative to the U.S.dollar negatively impacted net sales by approximately$1,534,310 basis points,compared to the first quarter of 2022,attributable to our Canadian and Other International operations.Comparable SalesComparable sales increased 7%in the first quarter of 2023 and were positively impacted by increases in shopping frequency and the averageticket,which includes the effects of inflation and changes in foreign currency.20Table of ContentsMembership Fees12 Weeks EndedNovember 20,2022November 21,2021Membership fees$1,000$946 Membership fees increase6%Total paid members(000s)66,900 62,500 Total cardholders(000s)120,900 113,100 Membership fee revenue increased 6%in the first quarter of 2023,driven by sign-ups,upgrades to Executive Membership,and an increase inour renewal rate.Changes in foreign currencies relative to the U.S.dollar negatively impacted membership fees by$32,compared to the firstquarter of 2022.At the end of the first quarter of 2023,our member renewal rates were 93%in the U.S.and Canada and 90%worldwide.Renewal rates continue to benefit from more members auto renewing and increased penetration of Executive members,who on average renewat a higher rate.Our renewal rate,which excludes affiliates of Business members,is a trailing calculation that captures renewals during theperiod seven to eighteen months prior to the reporting date.We account for membership fee revenue on a deferred basis,recognized ratably over the one-year membership period.Our membership countsinclude active memberships and memberships that have not renewed within the 12 months prior to the reporting date.Gross Margin12 Weeks EndedNovember 20,2022November 21,2021Net sales$53,437$49,417 Less merchandise costs47,769 43,952 Gross margin$5,668$5,465 Gross margin percentage10.61.06%Total gross margin percentage decreased 45 basis points compared to the first quarter of 2022.Excluding the impact of gasoline price inflationon net sales,gross margin percentage was 10.85%,a decrease of 21 basis points.This was primarily due to a 31 basis-point decrease in coremerchandise categories,predominantly in non-foods and fresh foods,and an 18 basis-point charge,primarily related to downsizing our chartershipping activities.Gross margin was also negatively impacted by five basis points due to increased 2%rewards.Warehouse ancillary and otherbusinesses positively impacted gross margin by 30 basis points,predominantly gasoline,partially offset by e-commerce.A smaller LIFO chargein the first quarter of 2023 compared to the first quarter of 2022 positively contributed three basis points.Changes in foreign currencies relativeto the U.S.dollar negatively impacted gross margin by approximately$153,compared to the first quarter of 2022,attributable to our Canadianand Other International operations.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),decreased 31 basis points.The decrease was primarily due to fresh foods and non-foods,partially offset by foods and sundries.This measureeliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.21Table of ContentsGross margin on a segment basis,when expressed as a percentage of the segments own sales and excluding the impact of changes ingasoline prices on net sales(segment gross margin percentage),decreased across all segments.All segments were negatively impacted bydecreases in core merchandise categories as described above and increased 2%rewards,partially offset by increases in warehouse ancillaryand other businesses.Gross margin in our U.S.segment was also negatively impacted by the charge primarily related to the downsizing of ourcharter shipping activities,partially offset by a lower LIFO charge.Selling,General and Administrative Expenses12 Weeks EndedNovember 20,2022November 21,2021SG&A expenses$4,917$4,718 SG&A expenses as a percentage of net sales9.20%9.55%SG&A expenses as a percentage of net sales decreased 35 basis points.SG&A expenses as a percentage of net sales excluding the impact ofgasoline price inflation was 9.42%,a decrease of 13 basis points.The comparison to last year was favorably impacted by 24 basis points from awrite-off of certain information technology assets in the prior year.Stock compensation was also lower by one basis point.Warehouse operationsand other businesses were higher by nine basis points,largely attributable to the wage increases we instituted in 2022.Central operating costswere higher by three basis points.Changes in foreign currencies relative to the U.S.dollar decreased SG&A expenses by approximately$121compared to the first quarter of 2022.Interest Expense12 Weeks EndedNovember 20,2022November 21,2021Interest expense$34$39 Interest expense is primarily related to Senior Notes and financing leases.Interest expense decreased in the first quarter of 2023 due torepayment of the 2.300%Senior Notes on December 1,2021.Interest Income and Other,Net12 Weeks EndedNovember 20,2022November 21,2021Interest income$54$8 Foreign-currency transaction gains(losses),net(9)26 Other,net8 8 Interest income and other,net$53$42 The increase in interest income in the first quarter of 2023 was primarily due to higher global interest rates.Foreign-currency transaction gains(losses),net include the mark-to-market adjustments for forward foreign-exchange contracts and the revaluation or settlement of monetaryassets and liabilities by our Canadian and Other International operations.See Derivatives and Foreign Currency sections in Item 8,Note 1 of ourAnnual Report on Form 10-K,for the fiscal year ended August 28,2022.22Table of ContentsProvision for Income Taxes 12 Weeks Ended November 20,2022November 21,2021Provision for income taxes$406$351 Effective tax rate23.0 .7%The effective tax rate for the first quarter of 2023 was impacted by net discrete tax benefits of$56,primarily attributable to$53 in excess taxbenefits related to stock compensation.Excluding discrete net tax benefits,the tax rate was 26.1%for the first quarter of 2023.The effective tax rate for the first quarter of 2022 was impacted by net discrete tax benefits of$97,primarily attributable to$91 in excess taxbenefits related to stock compensation.Excluding discrete net tax benefits,the tax rate was 26.4%for the first quarter of 2022.LIQUIDITY AND CAPITAL RESOURCESThe following table summarizes our significant sources and uses of cash and cash equivalents:12 Weeks EndedNovember 20,2022November 21,2021Net cash provided by operating activities$2,610$3,258 Net cash used in investing activities(1,057)(912)Net cash used in financing activities(863)(839)Our primary sources of liquidity are cash flows from our operations,cash and cash equivalents,and short-term investments.Cash and cashequivalents and short-term investments were$11,673 and$11,049 at November 20,2022,and August 28,2022.Of these balances,unsettledcredit and debit card receivables represented approximately$2,488 and$2,010 at November 20,2022,and August 28,2022.These receivablesgenerally settle within four days.Material contractual obligations arising in the normal course of business primarily consist of purchase obligations,long-term debt and relatedinterest payments,leases,and construction and land purchase obligations.Purchase obligations consist of contracts primarily related to merchandise,equipment,and third-party services,the majority of which are due inthe next 12 months.Construction and land purchase obligations consist of contracts primarily related to the development and opening of newand relocated warehouses,the majority of which(other than leases)are due in the next 12 months.Management believes that our cash and investment position and operating cash flows with capacity under existing and available creditagreements will be sufficient to meet our liquidity and capital requirements for the foreseeable future.We believe that our U.S.current andprojected asset position is sufficient to meet our U.S.liquidity requirements.Cash Flows from Operating ActivitiesNet cash provided by operating activities totaled$2,610 in the first quarter of 2023,compared to$3,258 in the first quarter of 2022.Our cashflow provided by operations is primarily from net sales and membership fees.Cash flow used in operations generally consists of payments tomerchandise suppliers,warehouse operating costs,including payroll and employee benefits,utilities,and credit and debit card processing fees.Cash used in operations also includes payments for income taxes.Changes in our net investment in merchandise inventories(the differencebetween merchandise inventories and accounts payable)is23Table of Contentsimpacted by several factors,including inventory turnover,the forward deployment of inventory to accelerate delivery times,payment terms withsuppliers,and early payments to obtain discounts.Cash Flows from Investing ActivitiesNet cash used in investing activities totaled$1,057 in the first quarter of 2023,compared to$912 in the first quarter of 2022,and is primarilyrelated to capital expenditures.Net cash from investing activities also includes purchases and maturities of short-term investments.Capital Expenditure PlansOur primary requirements for capital are acquiring land,buildings,and equipment for new and remodeled warehouses.Capital is also requiredfor information systems,manufacturing and distribution facilities,initial warehouse operations,and working capital.In the first quarter of 2023,we spent$1,057 on capital expenditures,and it is our current intention to spend approximately$3,800 to$4,000 during fiscal 2023.Theseexpenditures are expected to be financed with cash from operations,existing cash and cash equivalents,and short-term investments.Weopened eight new warehouses,including one relocation,in the first quarter of 2023 and plan to open 19 additional new warehouses,includingtwo relocations,in the remainder of fiscal 2023.There can be no assurance that current expectations will be realized,and plans are subject tochange upon further review of our capital expenditure needs and the economic environment.Cash Flows from Financing ActivitiesNet cash used in financing activities totaled$863 in the first quarter of 2023,compared to$839 in the first quarter of 2022.Cash flow used infinancing activities was primarily related to the payment of dividends,withholding taxes on stock-based awards,and repurchases of commonstock.DividendsOn October 12,2022,our Board declared a quarterly cash dividend of$0.90 per share,payable to shareholders of record on October 28,2022,which was paid on November 10,2022.Share Repurchase ProgramDuring the first quarter of 2023 and 2022,we repurchased 285,000 and 77,000 shares of common stock,at an average price per share of$495.94 and$455.08,totaling approximately$141 and$35.These amounts may differ from the repurchase balances in the accompanyingcondensed consolidated statements of cash flows due to changes in unsettled repurchases at the end of a quarter.Purchases are made fromtime to time,as conditions warrant,in the open market or in block purchases,pursuant to plans under SEC Rule 10b5-1.Repurchased sharesare retired,in accordance with the Washington Business Corporation Act.Bank Credit Facilities and Commercial Paper ProgramsWe maintain bank credit facilities for working capital and general corporate purposes.At November 20,2022,we had borrowing capacity underthese facilities of$1,244.Our international operations maintain$756 of this capacity under bank credit facilities,of which$171 is guaranteed bythe Company.Short-term borrowings outstanding under the bank credit facilities were$37 and$88 at the end of the first quarter of 2023 and atthe end of fiscal 2022.The Company has letter of credit facilities,for commercial and standby letters of credit,totaling$226.The outstanding commitments under thesefacilities at the end of the first quarter of 2023 totaled$187,most of which were standby letters of credit that do not expire or have expirationdates within one year.The bank credit facilities have various expiration dates,most within one year,and we generally intend to renew thesefacilities.The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercialletters of credit outstanding.24Table of ContentsCritical Accounting EstimatesThe preparation of our consolidated financial statements in accordance with U.S.GAAP requires that we make estimates and judgments.Webase these on historical experience and on assumptions that we believe to be reasonable.Our critical accounting policies are discussed in PartII,Item 7,“Managements Discussion and Analysis of Financial Condition and Results of Operations”section of our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes to the critical accounting estimates previously disclosed in thatReport.Recent Accounting PronouncementsThere have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form10-K,for the fiscal year ended August 28,2022.Item 3Quantitative and Qualitative Disclosures about Market RiskOur direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates.There have been nomaterial changes to our market risks as disclosed in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.Item 4Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur disclosure controls and procedures(as defined in Rules 13a-15(e)or 15d-15(e)under the Securities Exchange Act of 1934,as amended)are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded,processed,summarized,and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission andto ensure that information required to be disclosed is accumulated and communicated to management,including our principal executive andfinancial officers,to allow timely decisions regarding disclosure.The Chief Executive Officer and the Chief Financial Officer,with assistance fromother members of management,have reviewed the effectiveness of our disclosure controls and procedures as of November 20,2022 and,based on their evaluation,have concluded the disclosure controls and procedures were effective as of such date.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting(as defined in Rules 13a-15(f)or 15d-15(f)of the Exchange Act)thatoccurred during the first quarter of fiscal 2023 that have materially affected,or are reasonably likely to materially affect,the Companys internalcontrol over financial reporting.PART IIOTHER INFORMATIONItem 1Legal ProceedingsSee discussion of Legal Proceedings in Note 8 to the condensed consolidated financial statements included in Part I,Item 1 of this Report.Item 1ARisk FactorsIn addition to the other information set forth in the Quarterly Report on Form 10-Q,you should carefully consider the factors discussed in Part I,Item 1A,“Risk Factors”in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes inour risk factors from those disclosed in our Annual Report on Form 10-K.25Table of ContentsItem 2Unregistered Sales of Equity Securities and Use of ProceedsThe following table sets forth information on our common stock repurchase program activity for the first quarter of 2023(amounts in millions,except share and per share data):PeriodTotal Number ofSharesPurchasedAverage PricePaid Per ShareTotal Number of SharesPurchased as Part ofPublicly AnnouncedProgramsMaximum Dollar Value ofShares that May Yet bePurchased Under theProgramsAugust 29,2022 September 25,202289,000$513.91 89,000$2,762 September 26,2022 October 23,2022101,000 473.85 101,000 2,714 October 24,2022 November 20,202295,000 502.66 95,000 2,667 Total first quarter285,000$495.94 285,000 _(1)Our share repurchase program is conducted under a$4,000 authorization approved by our Board of Directors in April 2019,which expires in April 2023.Item 3Defaults Upon Senior SecuritiesNone.Item 4Mine Safety DisclosuresNot applicable.Item 5Other Information(amounts in whole dollars)Disclosure pursuant to Section 2019 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r)of the SecuritiesExchange Act of 1934,as amended.During the first quarter of 2023,we had as cardholders at our subsidiary in Mexico three individuals under a business membership in the nameof the Embassy of the Islamic Republic of Iran.Gross revenue in the first quarter of 2023 attributable to the membership was approximately$1,131,and our estimated profit on these transactions was less than$100.The membership was canceled during the second quarter of 2023.The Company does not intend to continue these activities.(1)(1)26Table of ContentsItem 6ExhibitsThe following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.Incorporated by ReferenceExhibitNumberExhibit DescriptionFiledHerewithFormPeriod EndingFiling Date3.1Articles of Incorporation as amended of CostcoWholesale Corporation10-K8/28/202210/5/20223.2Bylaws as amended of Costco Wholesale Corporation10-Q5/8/20226/2/202210.1*Fiscal 2023 Executive Bonus Plan8-K11/9/202210.2*Extension of the Term of the Executive EmploymentAgreement effective January 1,2023,between W.CraigJelinek and Costco Wholesale Corporationx10.3Ninth Amendment to Citi,N.A.Co-Branded Credit CardAgreementx10.4Tenth Amendment to Citi,N.A.Co-Branded Credit CardAgreementx31.1Rule 13(a)14(a)Certificationsx32.1Section 1350 Certificationsx101.INSInline XBRL Instance Documentx101.SCHInline XBRL Taxonomy Extension Schema Documentx101.CALInline XBRL Taxonomy Extension Calculation LinkbaseDocumentx101.DEFInline XBRL Taxonomy Extension Definition LinkbaseDocumentx101.LABInline XBRL Taxonomy Extension Label LinkbaseDocumentx101.PREInline XBRL Taxonomy Extension Presentation LinkbaseDocumentx104Cover Page Interactive Data File(formatted as inlineXBRL and contained in Exhibit 101)x _*Management contract,compensatory plan or arrangement.27Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Report to be signed on its behalf by theundersigned,thereunto duly authorized.COSTCO WHOLESALE CORPORATION(Registrant)December 29,2022By/s/W.CRAIG JELINEKDateW.Craig JelinekChief Executive Officer and DirectorDecember 29,2022By/s/RICHARD A.GALANTIDateRichard A.GalantiExecutive Vice President,Chief Financial Officer and Director28Exhibit 10.2December 14,2022Hamilton E.JamesChairman of the BoardCostco Wholesale CorporationRE:Executive Employment AgreementDear Tony:As provided for under section 7(b)of the Executive Employment Agreement,effective January 1,2017,between Costco Wholesale Corporationand me,this letter will confirm an extension of the term through and including December 31,2023.Consistent with the prior decisions of theCompensation Committee:section 1(a)is amended to change the Annual Base Salary to$1,150,000;and section 1(h)is amended to changethe Target Bonus to$600,000.The reference in the first whereas clause to my serving as President shall be deemed omitted.Pleasecountersign below to indicate acceptance on behalf of the Company.Very truly yours,By:/s/W.Craig JelinekW.Craig JelinekChief Executive OfficerCostco Wholesale CorporationBy:/s/Hamilton JamesHamilton E.JamesChairman of the Boardcc:John StantonExhibit 10.3NINTH AMENDMENT TO THECO-BRANDED CREDIT CARD PROGRAM AGREEMENTThis Ninth Amendment(Amendment)is between Citibank,N.A.(Bank)and Costco Wholesale Corporation(Costco),is effective as ofAugust 13,2022,and amends that certain Co-Branded Credit Card Program Agreement,by and between Bank and Costco,dated February 27,2015(the Agreement).Pursuant to Section 16.10 of the Agreement,the Bank and Costco agree as follows:1.Defined Terms.All capitalized terms used but not defined in this Amendment will have the meanings ascribed to such terms in theAgreement.2.Amendments.a.Schedule 4.06(a).Schedule 4.06(a)is deleted in its entirety and replaced with the attached Schedule 4.06(a).b.Schedule 7.05(a).The bullet for“Purchases and transactions at Costco(gas only)”is amended to read,“Purchases andtransactions at Costco(gas and electric vehicle charging only)”.The bullet under“Purchases transactions outside Costco by type”isamended to add a bullet that says,“Electric vehicle charging”.3.Full Force and Effect.The Agreement,as modified hereby,will remain in full force and effect and this Amendment will not be deemedto be an amendment or a waiver of any other provision of the Agreement except as expressly stated herein.All such other provisions ofthe Agreement will also be deemed to apply to this Amendment.4.No Modification or Waiver;Incorporation.No modification,amendment or waiver of this Amendment will be effective or bindingunless made in writing and signed by the Parties.The Parties agree that,except for those modifications expressly set forth in thisAmendment,all terms and provisions of the Agreement will remain unchanged and in full force and effect.This Amendment and theAgreement will hereafter be read and construed together as a single document,and all references to the Agreement will hereafter referto the Agreement as amended by this Amendment.5.Counterparts.This Amendment may be executed in counterparts and if so executed will be enforceable and effective upon theexchange of executed counterparts,including by facsimile or electronic transmissions of executed counterparts.Signature page followsDuly authorized representatives of the Parties have executed this Amendment.COSTCO WHOLESALE CORPORATIONCITIBANK,N.A.By:/s/Sandy TorreyBy:/s/Matthew BremName:Sandy TorreyName:Matthew BremTitle:SVP,Corporate MarketingTitle:Vice President,Citibank N.A.Schedule 4.06(a)Loyalty Program and RewardsConsumer Card Loyalty Program(Cash Rebate portion only)Co-Branded Cardholders will earn an annual reward based on the eligible purchases on their Co-Branded Card from Costco and Citi during anannual reward period.An annual reward period is 12 billing periods,starting with the one that begins in February.Eligible purchases arepurchases for goods and services minus returns and other credits.Eligible purchases do NOT include fees or interest charges,balancetransfers,cash advances,purchases of travelers checks,purchases or reloading of prepaid cards,or purchases of any cash equivalents.Additional terms and restrictions apply.Co-Branded Cardholders will earn an annual reward of:4%on the first$7,000 of purchases each annualreward period(1%thereafter)of gasoline and electric vehicle charging transactions at Costco,gas stations and electric vehicle charginglocations in the U.S.(excluding superstores,supermarkets,convenience stores,and warehouse clubs other than Costco);3%at restaurantslocated in the U.S.;3%for eligible travel purchases(eligible travel purchases are:airfare for a scheduled flight on a passenger carrier,hotelstays(excluding timeshares,banquets and events),car rentals from select major car rental companies listed athttps:/ other purchases from Costco Travel,cruise lines,travel agencies and tour operators);2%on eligiblepurchases at Costco Locations(unless a higher reward applies,such as at Costco gas,Costco electric vehicle charging,or Costco travel);and1%on all other eligible purchases.Bank is obligated to fund the annual rewards up to the Loyalty Funding Cap.Merchants are assigned codes based on what they primarily sell.A purchase will not earn a higher percentage reward if the merchants code isnot eligible.Purchases made through a third-party payment account or on an online marketplace(with multiple retailers)will not earn a higherpercentage reward.A purchase may not earn a higher percentage reward if the merchant submits the purchase using a mobile or wireless cardreader or if the Co-Branded Cardholder uses a mobile or digital wallet.Reward is distributed and valid at any U.S.Costco warehouse,including Puerto Rico,for merchandise or cash.Requests for cash may befulfilled in the form of a check at the Costco warehouses discretion.Coupon must be redeemed in person prior to its expiration date ofDecember 31st in the year in which it is issued.Additional terms and conditions apply.See Co-Branded Cardholder Agreement for full terms andconditions.Small Business Loyalty Program(Cash Rebate portion only)Co-Branded Cardholders will earn an annual reward based on eligible purchases on their small business Co-Branded Cards from Costco duringan annual reward period.An annual reward period is 12 billing periods,starting with the one that begins in February.Eligible purchases arepurchases for goods and services minus returns and other credits.Eligible purchases do NOT include fees or interest charges,balancestransfers,cash advances,purchases of travelers checks,purchases or reloading of prepaid cards,or purchases of any cash equivalents.Additional terms and restrictions apply.Co-Branded Cardholders will earn an annual reward of:4%on the first$7,000 of purchases each annualreward period(1%thereafter)of gasoline and electric vehicle charging transactions at Costco,gas stations and electric vehicle charginglocations in the U.S.(excluding superstores,supermarkets,convenience stores,and warehouse clubs other than Costco);3%at restaurantslocated in the U.S.;3%for eligible travel purchases(eligible travel purchases are:airfare for a scheduled flight on a passenger carrier,hotelstays(excluding timeshares,banquets and events),car rentals from select major car rental companies listed athttps:/ other purchases from Costco Travel,cruise lines,travel agencies and tour operators);2%on eligiblepurchases at Costco Locations(unless a higher reward applies,such as at Costco gas,Costco electric vehicle charging,or Costco travel);and1%on all other eligible purchases.Bank is obligated to fund the annual rewards up to the Loyalty Funding Cap.Merchants are assigned codes based on what they primarily sell.A purchase will not earn a higher percentage reward if the merchants code isnot eligible.Purchases made through a third-party payment account or on an online marketplace(with multiple retailers)will not earn a higherpercentage reward.A purchase may not earn a higher percentage reward if the merchant submits the purchase using a mobile or wireless cardreader or if the Co-Branded Cardholder uses a mobile or digital wallet.Reward is distributed and valid at any U.S.Costco warehouse,including Puerto Rico,for merchandise or cash.Requests for cash may befulfilled in the form of a check at the Costco warehouses discretion.Coupon must be redeemed in person on or prior to its expiration dateof December 31st in the year in which it is issued.Additional terms and conditions apply.See Co-Branded Cardholder Agreement for fullterms and conditions.Exhibit 10.4TENTH AMENDMENT TO THECO-BRANDED CREDIT CARD PROGRAM AGREEMENTThis Tenth Amendment(Amendment)is between Citibank,N.A.(Bank)and Costco Wholesale Corporation(Costco),is effective as ofNovember 11,2022,and amends that certain Co-Branded Credit Card Program Agreement,by and between Bank and Costco,dated February27,2015(the Agreement).Pursuant to Section 16.10 of the Agreement,the Bank and Costco agree as follows:1.Defined Terms.All capitalized terms used but not defined in this Amendment will have the meanings ascribed to such terms in theAgreement.2.Amendments.a.Section 4.06(a)-1.Schedule 4.06(a)-1 is deleted in its entirety and replaced with the attached Schedule 4.06-1.3.Full Force and Effect.The Agreement,as modified hereby,will remain in full force and effect and this Amendment will not be deemedto be an amendment or a waiver of any other provision of the Agreement except as expressly stated herein.All such other provisions ofthe Agreement will also be deemed to apply to this Amendment.4.No Modification or Waiver;Incorporation.No modification,amendment or waiver of this Amendment will be effective or bindingunless made in writing and signed by the Parties.The Parties agree that,except for those modifications expressly set forth in thisAmendment,all terms and provisions of the Agreement will remain unchanged and in full force and effect.This Amendment and theAgreement will hereafter be read and construed together as a single document,and all references to the Agreement will hereafter referto the Agreement as amended by this Amendment.5.Counterparts.This Amendment may be executed in counterparts and if so executed will be enforceable and effective upon theexchange of executed counterparts,including by facsimile or electronic transmissions of executed counterparts.Signature page followsDuly authorized representatives of the Parties have executed this Amendment.COSTCO WHOLESALE CORPORATION CITIBANK,N.A.By:/s/Sandy TorreyBy:/s/Jennifer LonginoName:Sandy TorreyName:Jennifer LonginoTitle:SVP,Corporate MarketingTitle:Vice PresidentSchedule 4.06(a)-1Additional Co-Branded Cardholder BenefitsCar RentalNo country exclusions.No vehicle exclusionsDamage&TheftPurchase ProtectionUp to 120 days post purchase.Up to$1,000 per claim,$50,000 per year.Travel AccidentUp to$250,000Travel&EmergencyAssistanceEmergency travel arrangements,cash transfers,medicalreferrals,etc.Roadside AssistanceDispatch service for roadside support.Exhibit 31.1CERTIFICATIONSI,W.Craig Jelinek,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.December 29,2022/s/W.CRAIG JELINEKW.Craig JelinekChief Executive Officer and DirectorCERTIFICATIONSI,Richard A.Galanti,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.December 29,2022/s/RICHARD A.GALANTIRichard A.GalantiExecutive Vice President,Chief Financial Officer and DirectorExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended November 20,2022,as filed with the Securities and Exchange Commission(the Report),I,W.Craig Jelinek,Chief Executive Officer and Director of theCompany,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/W.CRAIG JELINEK Date:December 29,2022W.Craig Jelinek Chief Executive Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended November 20,2022,as filed with the Securities and Exchange Commission(the Report),I,Richard A.Galanti,Executive Vice President,Chief Financial Officerand Director of the Company,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/RICHARD A.GALANTI Date:December 29,2022Richard A.Galanti Executive Vice President,Chief Financial Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended February 12,2023orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934Commission file number 0-20355Costco Wholesale Corporation(Exact name of registrant as specified in its charter)Washington 91-1223280(State or other jurisdiction ofincorporation or organization)(I.R.S.Employer Identification No.)999 Lake Drive,Issaquah,WA 98027(Address of principal executive offices)(Zip Code)(Registrants telephone number,including area code):(425)313-8100Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock,$.005 Par ValueCOSTThe Nasdaq Global Select MarketIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject tosuch filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required tosubmit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reportingcompany,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The number of shares outstanding of the issuers common stock as of March 1,2023 was 443,483,205.1Table of ContentsCOSTCO WHOLESALE CORPORATIONINDEX TO FORM 10-Q PagePART IFINANCIAL INFORMATIONItem 1.Financial Statements3Condensed Consolidated Statements of Income3Condensed Consolidated Statements of Comprehensive Income4Condensed Consolidated Balance Sheets5Condensed Consolidated Statements of Equity6Condensed Consolidated Statements of Cash Flows8Notes to Condensed Consolidated Financial Statements9Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations18Item 3.Quantitative and Qualitative Disclosures About Market Risk27Item 4.Controls and Procedures27PART IIOTHER INFORMATIONItem 1.Legal Proceedings27Item 1A.Risk Factors27Item 2.Unregistered Sales of Equity Securities and Use of Proceeds28Item 3.Defaults Upon Senior Securities28Item 4.Mine Safety Disclosures28Item 5.Other Information28Item 6.Exhibits29Signatures302Table of ContentsPART IFINANCIAL INFORMATIONItem 1Financial StatementsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(amounts in millions,except per share data)(unaudited)12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022REVENUENet sales$54,239$50,937$107,676$100,354 Membership fees1,027 967 2,027 1,913 Total revenue55,266 51,904 109,703 102,267 OPERATING EXPENSESMerchandise costs48,423 45,517 96,192 89,469 Selling,general and administrative4,940 4,575 9,857 9,293 Operating income1,903 1,812 3,654 3,505 OTHER INCOME(EXPENSE)Interest expense(34)(36)(68)(75)Interest income and other,net114 25 167 67 INCOME BEFORE INCOME TAXES1,983 1,801 3,753 3,497 Provision for income taxes517 481 923 832 Net income including noncontrolling interests1,466 1,320 2,830 2,665 Net income attributable to noncontrolling interests(21)(42)NET INCOME ATTRIBUTABLE TO COSTCO$1,466$1,299$2,830$2,623 NET INCOME PER COMMON SHARE ATTRIBUTABLETO COSTCO:Basic$3.30$2.93$6.37$5.91 Diluted$3.30$2.92$6.37$5.90 Shares used in calculation(000s):Basic443,877 443,623 443,857 443,500 Diluted444,475 444,916 444,503 444,760 The accompanying notes are an integral part of these condensed consolidated financial statements.3Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(amounts in millions)(unaudited)12 Weeks Ended24 Weeks Ended February 12,2023February 13,2022February 12,2023February 13,2022NET INCOME INCLUDING NONCONTROLLINGINTERESTS$1,466$1,320$2,830$2,665 Foreign-currency translation adjustment and other,net253(35)157(107)Comprehensive income1,719 1,285 2,987 2,558 Less:Comprehensive income attributable tononcontrolling interests 21 44 COMPREHENSIVE INCOME ATTRIBUTABLE TOCOSTCO$1,719$1,264$2,987$2,514 The accompanying notes are an integral part of these condensed consolidated financial statements.4Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(amounts in millions,except par value and share data)(unaudited)February 12,2023August 28,2022ASSETSCURRENT ASSETSCash and cash equivalents$12,970$10,203 Short-term investments735 846 Receivables,net2,714 2,241 Merchandise inventories16,081 17,907 Other current assets1,830 1,499 Total current assets34,330 32,696 OTHER ASSETSProperty and equipment,net25,724 24,646 Operating lease right-of-use assets2,859 2,774 Other long-term assets3,935 4,050 TOTAL ASSETS$66,848$64,166 LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable$16,407$17,848 Accrued salaries and benefits4,483 4,381 Accrued member rewards2,016 1,911 Deferred membership fees2,412 2,174 Current portion of long-term debt76 73 Other current liabilities7,122 5,611 Total current liabilities32,516 31,998 OTHER LIABILITIESLong-term debt,excluding current portion6,506 6,484 Long-term operating lease liabilities2,557 2,482 Other long-term liabilities2,470 2,555 TOTAL LIABILITIES44,049 43,519 COMMITMENTS AND CONTINGENCIESEQUITYPreferred stock$0.005 par value;100,000,000 shares authorized;no shares issued andoutstanding Common stock$0.005 par value;900,000,000 shares authorized;443,550,000 and442,664,000 shares issued and outstanding2 2 Additional paid-in capital7,123 6,884 Accumulated other comprehensive loss(1,672)(1,829)Retained earnings17,341 15,585 Total Costco stockholders equity22,794 20,642 Noncontrolling interests5 5 TOTAL EQUITY22,799 20,647 TOTAL LIABILITIES AND EQUITY$66,848$64,166 The accompanying notes are an integral part of these condensed consolidated financial statements.5Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)12 Weeks Ended February 12,2023 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE ATNOVEMBER 20,2022443,841$2$6,982$(1,925)$16,412$21,471$5$21,476 Net income 1,466 1,466 1,466 Foreign-currencytranslation adjustmentand other,net 253 253 253 Stock-basedcompensation 148 148 148 Release of vestedrestricted stock units(RSUs),including taxeffects3 (1)(1)(1)Repurchases ofcommon stock(294)(6)(138)(144)(144)Cash dividend declared (399)(399)(399)BALANCE ATFEBRUARY 12,2023443,550$2$7,123$(1,672)$17,341$22,794$5$22,799 12 Weeks Ended February 13,2022 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE ATNOVEMBER 21,2021443,434$4$7,064$(1,211)$12,606$18,463$537$19,000 Net income 1,299 1,299 21 1,320 Foreign-currencytranslation adjustmentand other,net (35)(35)(35)Stock-basedcompensation 129 129 129 Release of vestedRSUs,including taxeffects4 (4)(4)(4)Repurchases ofcommon stock(159)(3)(80)(83)(83)Cash dividend declared (351)(351)(351)BALANCE ATFEBRUARY 13,2022443,279$4$7,186$(1,246)$13,474$19,418$558$19,976 The accompanying notes are an integral part of these condensed consolidated financial statements.6Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)24 Weeks Ended February 12,2023 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST28,2022442,664$2$6,884$(1,829)$15,585$20,642$5$20,647 Net income 2,830 2,830 2,830 Foreign-currencytranslation adjustmentand other,net 157 157 157 Stock-basedcompensation 551 551 551 Release of vestedrestricted stock units(RSUs),including taxeffects1,465 (302)(302)(302)Repurchases ofcommon stock(579)(10)(275)(285)(285)Cash dividendsdeclared (799)(799)(799)BALANCE ATFEBRUARY 12,2023443,550$2$7,123$(1,672)$17,341$22,794$5$22,799 24 Weeks Ended February 13,2022 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST29,2021441,825$4$7,031$(1,137)$11,666$17,564$514$18,078 Net income 2,623 2,623 42 2,665 Foreign-currencytranslation adjustmentand other,net (109)(109)2(107)Stock-basedcompensation 518 518 518 Release of vestedRSUs,including taxeffects1,690 (359)(359)(359)Repurchases ofcommon stock(236)(4)(114)(118)(118)Cash dividendsdeclared (701)(701)(701)BALANCE ATFEBRUARY 13,2022443,279$4$7,186$(1,246)$13,474$19,418$558$19,976 The accompanying notes are an integral part of these condensed consolidated financial statements.7Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in millions)(unaudited)24 Weeks EndedFebruary 12,2023February 13,2022CASH FLOWS FROM OPERATING ACTIVITIESNet income including noncontrolling interests$2,830$2,665 Adjustments to reconcile net income including noncontrolling interests to net cash provided byoperating activities:Depreciation and amortization917 868 Non-cash lease expense216 145 Stock-based compensation549 516 Other non-cash operating activities,net163 104 Deferred income taxes(18)(15)Changes in operating assets and liabilities:Merchandise inventories1,849(2,322)Accounts payable(1,417)970 Other operating assets and liabilities,net713 728 Net cash provided by operating activities5,802 3,659 CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short-term investments(396)(325)Maturities of short-term investments512 753 Additions to property and equipment(1,947)(1,778)Other investing activities,net(34)(43)Net cash used in investing activities(1,865)(1,393)CASH FLOWS FROM FINANCING ACTIVITIESRepayments of short-term borrowings(520)(87)Proceeds from short-term borrowings479 80 Repayments of long-term borrowings(800)Tax withholdings on stock-based awards(302)(359)Repurchases of common stock(284)(115)Cash dividend payments(400)(350)Other financing activities,net(188)(36)Net cash used in financing activities(1,215)(1,667)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS45(38)Net increase in cash and cash equivalents2,767 561 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR10,203 11,258 CASH AND CASH EQUIVALENTS END OF PERIOD$12,970$11,819 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the first half of the year for:Interest$62$76 Income taxes,net$636$469 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:Cash dividend declared,but not yet paid$399$351 Financing lease assets obtained in exchange for new or modified leases$47$172 Operating lease assets obtained in exchange for new or modified leases$131$60 The accompanying notes are an integral part of these condensed consolidated financial statements.8Table of ContentsCOSTCO WHOLESALE CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(amounts in millions,except share,per share,and warehouse count data)(unaudited)Note 1Summary of Significant Accounting PoliciesDescription of BusinessCostco Wholesale Corporation(Costco or the Company),a Washington corporation,and its subsidiaries operate membership warehousesbased on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range ofmerchandise categories will produce high sales volumes and rapid inventory turnover.At February 12,2023,Costco operated 848 warehousesworldwide:584 in the United States(U.S.)located in 46 states,Washington,D.C.,and Puerto Rico,107 in Canada,40 in Mexico,31 inJapan,29 in the United Kingdom(U.K.),18 in Korea,14 in Taiwan,14 in Australia,four in Spain,two each in France and China,and one eachin Iceland,New Zealand,and Sweden.The Company operates e-commerce websites in the U.S.,Canada,U.K.,Mexico,Korea,Taiwan,Japan,and Australia.Basis of PresentationThe condensed consolidated financial statements include the accounts of Costco,its wholly-owned subsidiaries,and a subsidiary in which it hasa controlling interest.All material inter-company transactions among the Company and its consolidated subsidiaries have been eliminated inconsolidation.Unless otherwise noted,references to net income relate to net income attributable to Costco.These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interimfinancial reporting pursuant to the rules and regulations of the Securities and Exchange Commission(SEC).While these statements reflect allnormal recurring adjustments that are,in the opinion of management,necessary for fair presentation of the results of the interim period,they donot include all of the information and footnotes required by U.S.generally accepted accounting principles(U.S.GAAP)for complete financialstatements.Therefore,the interim condensed consolidated financial statements should be read in conjunction with the consolidated financialstatements and notes included in the Companys Annual Report on Form 10-K for the fiscal year ended August 28,2022.Fiscal Year EndThe Company operates on a 52/53 week fiscal year basis,with the fiscal year ending on the Sunday closest to August 31.Fiscal 2023 is a 53-week year ending on September 3,2023.References to the second quarter of 2023 and 2022 relate to the 12-week fiscal quartersended February 12,2023,and February 13,2022.References to the first half of 2023 and 2022 relate to the 24 weeks ended February 12,2023and February 13,2022.Use of EstimatesThe preparation of financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.These estimates and assumptions take into account historical andforward-looking factors that the Company believes are reasonable.Actual results could differ from those estimates and assumptions.9Table of ContentsReclassificationReclassifications were made to the condensed consolidated statement of cash flows for the first half of 2022 to conform with current yearpresentation.LeasesThe Company leases land,buildings,equipment,and other assets at warehouses,offices,or within the operations that support supply chain anddistribution channels.The Company reviews lease right-of-use assets for impairment when events or changes in circumstances indicate that thecarrying amount of the asset group may not be fully recoverable.The Company also occasionally revisits and modifies the terms of its leasingarrangements.During the first quarter of 2023,the Company recognized a charge of$93,primarily related to the termination costs andimpairment of certain leased assets associated with charter shipping activities.This charge is included in merchandise costs.Note 2InvestmentsThe Companys investments were as follows:February 12,2023:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$595$(11)$584 Held-to-maturity:Certificates of deposit151 151 Total short-term investments$746$(11)$735 August 28,2022:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$534$(5)$529 Held-to-maturity:Certificates of deposit317 317 Total short-term investments$851$(5)$846 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended February 12,2023,andAugust 28,2022.At those dates,there were no available-for-sale securities in a material continuous unrealized-loss position.There were nosales of available-for-sale securities during the first half of 2023 or 2022.The maturities of available-for-sale and held-to-maturity securities at February 12,2023 are as follows:Available-For-SaleHeld-To-Maturity Cost BasisFair ValueDue in one year or less$177$175$151 Due after one year through five years287 282 Due after five years131 127 Total$595$584$151 10Table of ContentsNote 3Fair Value MeasurementAssets and Liabilities Measured at Fair Value on a Recurring BasisThe table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicatesthe level within the fair-value hierarchy reflecting the valuation techniques utilized.Level 2February 12,2023August 28,2022Investment in government and agency securities$584$529 Forward foreign-exchange contracts,in asset position6 34 Forward foreign-exchange contracts,in(liability)position(18)(2)Total$572$561 _(1)The asset and liability values are included in other current assets and other current liabilities,respectively,in the accompanying condensed consolidated balance sheets.At February 12,2023,and August 28,2022,the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fairvalue on a recurring basis.There were no transfers between levels during the first half of 2023 or 2022.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisAssets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured atamortized cost and long-lived nonfinancial assets.These assets are measured at fair value if determined to be impaired.Please see Note 1 foradditional information.Note 4DebtThe carrying value of the Companys long-term debt consisted of the following:February 12,2023August 28,20222.750%Senior Notes due May 2024$1,000$1,000 3.000%Senior Notes due May 20271,000 1,000 1.375%Senior Notes due June 20271,250 1,250 1.600%Senior Notes due April 20301,750 1,750 1.750%Senior Notes due April 20321,000 1,000 Other long-term debt612 590 Total long-term debt6,612 6,590 Less unamortized debt discounts and issuance costs30 33 Less current portion76 73 Long-term debt,excluding current portion$6,506$6,484 _(1)Net of unamortized debt discounts and issuance costs.The fair value of the Senior Notes is estimated using Level 2 inputs.Other long-term debt consists of Guaranteed Senior Notes issued by theCompanys Japan subsidiary,valued using Level 3 inputs.The fair value of the Companys long-term debt,including the current portion,wasapproximately$5,895 and$6,033 at February 12,2023,and August 28,2022.(1)(1)(1)11Table of ContentsNote 5EquityDividendsA quarterly cash dividend of$0.90 per share was declared on January 19,2023 and paid on February 17,2023.The Companys quarterlydividend was$0.79 per share in the second quarter of 2022 and dividends totaled$1.80 and$1.58 per share in the first half of 2023 and 2022.Share Repurchase ProgramOn January 19,2023,the Board of Directors authorized a new share repurchase program in the amount of$4,000,which expires in January2027.This authorization revoked previously authorized but unused amounts,totaling$2,568.At February 12,2023,the remaining amountavailable under the program was$3,955.The following table summarizes the Companys stock repurchase activity:Shares Repurchased(000s)Average Price per ShareTotal CostSecond quarter of 2023294$488.30$144 First half of 2023579$492.06$285 Second quarter of 2022159$518.73$83 First half of 2022236$498.00$118 These amounts may differ from the accompanying condensed consolidated statements of cash flows due to changes in unsettled stockrepurchases at the end of each quarter.Purchases are made from time to time,as conditions warrant,in the open market or in block purchasesand pursuant to plans under SEC Rule 10b5-1.Note 6Stock-Based CompensationThe 2019 Incentive Plan authorized the issuance of 17,500,000 shares(10,000,000 RSUs)of common stock for future grants,plus theremaining shares that were available for grant and the future forfeited shares from grants under the previous plan,up to a maximum of27,800,000 shares(15,885,000 RSUs).The Company issues new shares of common stock upon vesting of RSUs.Shares for vested RSUs aregenerally delivered to participants annually,net of shares withheld for taxes.Summary of Restricted Stock Unit ActivityAt February 12,2023,8,703,000 shares were available to be granted as RSUs,and the following awards were outstanding:2,921,000 time-based RSUs,which vest upon continued employment over specified periods and accelerate upon achievement of a long-service term;41,000 performance-based RSUs granted to executive officers of the Company,for which the performance targets have been met.Theawards vest upon continued employment over specified periods of time and upon achievement of a long-service term;and135,000 performance-based RSUs granted to executive officers of the Company,subject to achievement of performance targets for fiscal2023,as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year.These awards areincluded in the table below.The Company recognized compensation expense for these awards in the second quarter of 2023,as it iscurrently deemed probable that the targets will be achieved.12Table of ContentsThe following table summarizes RSU transactions during the first half of 2023:Number ofUnits(in 000s)Weighted-AverageGrant Date Fair ValueOutstanding at August 28,20223,449$338.41 Granted1,814 471.47 Vested and delivered(2,094)352.57 Forfeited(72)394.40 Outstanding at February 12,20233,097$405.46 The remaining unrecognized compensation cost related to RSUs unvested at February 12,2023,was$1,031,and the weighted-average periodover which this cost will be recognized is 1.8 years.Summary of Stock-Based CompensationThe following table summarizes stock-based compensation expense and the related tax benefits:12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Stock-based compensation expense$147$128$549$516 Less recognized income tax benefits24 23 113 108 Stock-based compensation expense,net$123$105$436$408 Note 7Net Income per Common and Common Equivalent ShareThe following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and ofpotentially dilutive common shares outstanding(shares in 000s):12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Net income attributable to Costco$1,466$1,299$2,830$2,623 Weighted average basic shares443,877 443,623 443,857 443,500 RSUs598 1,293 646 1,260 Weighted average diluted shares444,475 444,916 444,503 444,760 Anti-dilutive RSUs6 Anti-dilutive shares are excluded from the calculation of diluted shares and earnings per diluted share because their impact would increaseearnings per diluted shares.13Table of ContentsNote 8Commitments and ContingenciesLegal ProceedingsThe Company is involved in a number of claims,proceedings and litigations arising from its business and property ownership.In accordancewith applicable accounting guidance,the Company establishes an accrual for legal proceedings if and when those matters present losscontingencies that are both probable and reasonably estimable.There may be exposure to loss in excess of amounts accrued.The Companymonitors those matters for developments that would affect the likelihood of a loss(taking into account where applicable indemnificationarrangements concerning suppliers and insurers)and the accrued amount,if any,thereof,and adjusts the amount as appropriate.The Companyhas recorded immaterial accruals with respect to certain matters described below,in addition to other immaterial accruals for matters notdescribed below.If the loss contingency at issue is not both probable and reasonably estimable,the Company does not establish an accrual,butwill monitor the matter for developments that will make the contingency both probable and reasonably estimable.In each case,there is areasonable possibility that a loss may be incurred,including a loss in excess of the applicable accrual.For matters where no accrual has beenrecorded,the possible loss or range of loss(including any loss in excess of the accrual)cannot,in the Companys view,be reasonably estimatedbecause,among other things:(i)the remedies or penalties sought are indeterminate or unspecified;(ii)the legal and/or factual theories are notwell developed;and/or(iii)the matters involve complex or novel legal theories or a large number of parties.The Company is a defendant in an action commenced in July 2013 under the California Labor Code Private Attorneys General Act(PAGA)alleging violation of California Wage Order 7-2001 for failing to provide seating to employees who work at entrance and exit doors in Californiawarehouses.Canela v.Costco Wholesale Corp.(Case No.2013-1-CV-248813;Santa Clara Superior Court).The complaint seeks relief underthe California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denying the material allegations of thecomplaint.On January 19,2023,the court issued a Proposed/Tentative Statement of Decision Following Court Trial finding in favor of Costco.The plaintiff filed a request for further statement of decision and objections to the tentative decision.The parties are awaiting the courts review ofplaintiffs filings and Costcos response thereto,after which the court will decide if it requires a hearing before a final decision issues.In December 2018,a depot employee raised similar claims,alleging that depot employees in California did not receive suitable seating orreasonably comfortable workplace temperature conditions.Lane v.Costco Wholesale Corp.(Case No.CIVDS 1908816;San BernardinoSuperior Court).In October 2019,the parties settled for an immaterial amount the seating claims on a representative basis,which received courtapproval in February 2020.The parties settled the temperature claims for an immaterial amount in April 2022,and court approval was receivedin May 2022.In June 2022,a business center employee raised similar claims,alleging failure to provide seating to employees who work at membership refunddesks in California warehouses and business centers.Rodriguez v.Costco Wholesale Corp.(Case No.22CV012847;Alameda Superior Court).The complaint seeks relief under the California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denyingthe material allegations of the complaint.In March 2019,employees filed a class action against the Company alleging claims under California law for failure to pay overtime,to providemeal and rest periods and itemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfairbusiness practices.Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Nevarez v.Costco WholesaleCorp.(Case No.2:19-cv-03454;C.D.Cal.).The Company filed an answer denying the material allegations of the complaint.In December 2019,the court issued an order denying class certification.In January 2020,the plaintiffs dismissed their Labor Code claims without prejudice,and thecourt remanded the action to state court.Settlement for an immaterial amount was agreed upon in14Table of ContentsFebruary 2021.Final court approval of the settlement was granted on May 3,2022.A proposed intervenor appealed the denial of her motion tointervene.Her appeal was dismissed on February 15,2023.In May 2019,an employee filed a class action against the Company alleging claims under California law for failure to pay overtime,to provideitemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfair business practices.Roughv.Costco Wholesale Corp.(Case No.2:19-cv-01340;E.D.Cal.).Relief is sought under the California Labor Code,including civil penalties andattorneys fees.In September 2021,the court granted Costcos motion for partial summary judgment and denied class certification.In August2019,the plaintiff filed a companion case in state court seeking penalties under PAGA.Rough v.Costco Wholesale Corp.(Case No.FCS053454;Sonoma County Superior Court).Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Thestate court action has been stayed pending resolution of the federal action.In December 2020,a former employee filed suit against the Company asserting collective and class claims on behalf of non-exempt employeesunder the Fair Labor Standards Act and New York Labor Law for failure to pay for all hours worked,failure to pay certain non-exempt employeeson a weekly basis,and failure to provide proper wage statements and notices.The plaintiff also asserted individual retaliation claims.Cappadorav.Costco Wholesale Corp.(Case No.1:20-cv-06067;E.D.N.Y.).An amended complaint was filed,and the Company denied the materialallegations of the amended complaint.Based on an agreement in principle concerning settlement of the matter,involving a proposed payment bythe Company of an immaterial amount,the federal action has been dismissed.In April 2022,Cappadora and a second plaintiff filed an actionagainst the Company in New York state court,asserting the same class claims asserted in the federal action under the New York Labor Law andseeking preliminary approval of the class settlement.Cappadora and Sancho v.Costco Wholesale Corp.(Index No.604757/2022;NassauCounty Supreme Court).The state court granted preliminary approval of the settlement in October 2022.A final approval hearing is set for March27,2023.In August 2021,a former employee filed a similar suit,asserting class claims on behalf of certain non-exempt employees under New York LaborLaw for failure to pay on a weekly basis.Umadat v.Costco Wholesale Corp.(Case No.2:21-cv-4814;E.D.N.Y.).The Company filed an answer,denying the material allegations of the complaint.In April 2022,a former employee filed a similar suit,asserting class claims on behalf of certainnon-exempt employees under New York Labor Law,as well as under the Fair Labor Standards Act,for failure to pay on a weekly basis andfailure to pay overtime.Burian v.Costco Wholesale Corp.(Case No.2:22-cv-02108;E.D.N.Y.).In September 2022,an amended complaint wasfiled,asserting class claims on behalf of certain non-exempt employees under New York Labor Law for failure to pay on a weekly basis.TheCompany responded by requesting permission to file a motion to dismiss.The court stayed the action pending the class settlement in theCappadora matter noted above.In February 2021,a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment ofwages,meal and rest periods,wage statements,reimbursement of expenses,payment of final wages to terminated employees,and for unfairbusiness practices.Edwards v.Costco Wholesale Corp.(Case No.5:21-cv-00716:C.D.Cal.).In May 2021,the Company filed a motion todismiss the complaint,which was granted with leave to amend.In June 2021,the plaintiff filed an amended complaint,which the Companymoved to dismiss.The court granted the motion in part in July 2021 with leave to amend.In August 2021,the plaintiff filed a second amendedcomplaint and filed a separate representative action under PAGA asserting the same Labor Code claims and seeking civil penalties andattorneys fees.The Company filed an answer to the second amended class action complaint,denying the material allegations.The Companyalso filed an answer to the PAGA representative action,denying the material allegations.On September 27,2022,the parties reached asettlement for an immaterial amount.The settlement requires court approval.In July 2021,a former temporary staffing employee filed a class action against the Company and a staffing company alleging violations of theCalifornia Labor Code regarding payment of wages,meal and rest periods,wage statements,the timeliness of wages and final wages,and forunfair business practices.Dimas v.Costco Wholesale Corp.(Case No.STK-CV-UOE-2021-0006024;San Joaquin Superior Court).15Table of ContentsThe Company has moved to compel arbitration of the plaintiffs individual claims and to dismiss the class action complaint.On September 7,2021,the same former employee filed a separate representative action under PAGA,asserting the same Labor Code violations and seeking civilpenalties and attorneys fees.The case has been stayed pending resolution of the motion to compel in the related case.In September 2021,an employee filed a class action against the Company alleging violations of the California Labor Code regarding failure toprovide sick pay,failure to timely pay wages due at separation from employment,and for violations of Californias unfair competition law.DeBenning v.Costco Wholesale Corp.(Case No.34-2021-00309030-CU-OE-GDS;Sacramento Superior Court).The Company answered thecomplaint in January 2022,denying its material allegations.In April 2022,a settlement for an immaterial amount was agreed upon,subject tocourt approval.Final approval of the settlement was granted on February 10,2023.In March 2022,an employee filed a class action against the Company alleging violations of the California Labor Code regarding the failure to:pay wages,provide meal and rest periods,provide accurate wage statements,timely pay final wages,and reimburse business expenses.Diaz v.Costco Wholesale Corp.(Case No.22STCV09513;Los Angeles Superior Court).The Company filed an answer denying the material allegations.In December 2022,the case was settled for an immaterial amount.In May 2022,an employee filed a PAGA-only representative action against the Company alleging claims under the California Labor Coderegarding the payment of wages,meal and rest periods,the timeliness of wages and final wages,wage statements,accurate records andbusiness expenses.Gonzalez v.Costco Wholesale Corp.(Case No.22AHCV00255;Los Angeles Superior Court).The Company filed ananswer denying the allegations.Beginning in December 2017,the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts ofopioid abuses filed against various defendants by counties,cities,hospitals,Native American tribes,third-party payors,and others.In re NationalPrescription Opiate Litigation(MDL No.2804)(N.D.Ohio).Included are cases that name the Company,including actions filed by counties andcities in Michigan,New Jersey,Oregon,Virginia and South Carolina,a third-party payor in Ohio,and a hospital in Texas,class actions filed onbehalf of infants born with opioid-related medical conditions in 40 states,and class actions and individual actions filed on behalf of individualsseeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa.Claims against theCompany in state courts in New Jersey,Oklahoma,Utah,and Arizona have been dismissed.The Company is defending all of the pendingmatters.Members of the Board of Directors,six corporate officers and the Company are defendants in a shareholder derivative action filed in June 2022related to chicken welfare and alleged breaches of fiduciary duties.Smith,et ano.v.Vachris,et al.,Superior Court of the State of Washington,County of King,No,22-2-08937-7SEA.The complaint seeks from the individual defendants damages,injunctive relief,costs,and attorneys fees.A motion to dismiss the amended complaint has been filed.The Company does not believe that any pending claim,proceeding or litigation,either alone or in the aggregate,will have a material adverseeffect on the Companys financial position,results of operations or cash flows;it is possible that an unfavorable outcome of some or all of thematters,however unlikely,could result in a charge that might be material to the results of an individual fiscal quarter or year.16Table of ContentsNote 9Segment ReportingThe Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S.,Canada,Mexico,Japan,U.K.,Korea,Taiwan,Australia,Spain,France,China,Iceland,New Zealand,and Sweden.Reportable segments are largelybased on managements organization of the operating segments for operational decisions and assessments of financial performance,whichconsiders geographic locations.The material accounting policies of the segments are as described in the notes to the consolidated financialstatements included in the Companys Annual Report filed on Form 10-K for the fiscal year ended August 28,2022,and Note 1 above.Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income.The following table provides information for the Companys reportable segments:United StatesOperationsCanadianOperationsOtherInternationalOperationsTotal12 Weeks Ended February 12,2023Total revenue$40,145$7,299$7,822$55,266 Operating income1,295 284 324 1,903 12 Weeks Ended February 13,2022Total revenue$37,567$7,017$7,320$51,904 Operating income1,179 301 332 1,812 24 Weeks Ended February 12,2023Total revenue$80,290$14,655$14,758$109,703 Operating income2,531 572 551 3,654 24 Weeks Ended February 13,2022Total revenue$73,884$14,138$14,245$102,267 Operating income2,297 594 614 3,505 52 Weeks Ended August 28,2022Total revenue$165,294$31,675$29,985$226,954 Operating income5,268 1,346 1,179 7,793 Disaggregated RevenueThe following table summarizes net sales by merchandise category;sales from e-commerce websites and business centers have been allocatedto the applicable merchandise categories:12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Foods and Sundries$21,926$19,489$43,374$39,052 Non-Foods14,741 15,105 28,773 29,267 Fresh Foods7,376 6,959 14,093 13,398 Warehouse Ancillary and Other Businesses10,196 9,384 21,436 18,637 Total net sales$54,239$50,937$107,676$100,354 17Table of ContentsItem 2Managements Discussion and Analysis of Financial Condition and Results of Operations(amounts in millions,except per share,share,percentages and warehouse count data)FORWARD-LOOKING STATEMENTSCertain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995.For these purposes,forward-looking statements are statements that address activities,events,conditions or developmentsthat the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth,changes in comparablesales,cannibalization of existing locations by new openings,price or fee changes,earnings performance,earnings per share,stock-basedcompensation expense,warehouse openings and closures,capital spending,the effect of adopting certain accounting standards,future financialreporting,financing,margins,return on invested capital,strategic direction,expense controls,membership renewal rates,shopping frequency,litigation,and the demand for our products and services.In some cases,forward-looking statements can be identified because they containwords such as“anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“intend,”“likely,”“may,”“might,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“target,”“will,”“would,”or similar expressions and the negatives of those terms.Such forward-looking statementsinvolve risks and uncertainties that may cause actual events,results,or performance to differ materially from those indicated by suchstatements.These risks and uncertainties include,but are not limited to,domestic and international economic conditions,including exchangerates,inflation or deflation,the effects of competition and regulation,uncertainties in the financial markets,consumer and small businessspending patterns and debt levels,breaches of security or privacy of member or business information,conditions affecting the acquisition,development,ownership or use of real estate,capital spending,actions of vendors,rising costs associated with employees(generally includinghealth-care costs),energy and certain commodities,geopolitical conditions(including tariffs and the Ukraine conflict),the ability to maintaineffective internal control over financial reporting,regulatory and other impacts related to climate change,public-health related factors,and otherrisks identified from time to time in the Companys public statements and reports filed with the Securities and Exchange Commission.Forward-looking statements speak only as of the date they are made,and the Company does not undertake to update these statements,except asrequired by law.OVERVIEWThe following Managements Discussion and Analysis of Financial Condition and Results of Operations(MD&A)is intended to promoteunderstanding of the results of operations and financial condition.MD&A is provided as a supplement to,and should be read in conjunction with,our condensed consolidated financial statements and the accompanying Notes to Financial Statements(Part I,Item 1 of this Form 10-Q),as wellas our consolidated financial statements,the accompanying Notes to Financial Statements,and the related Managements Discussion andAnalysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K,filed with the United States Securities andExchange Commission on October 5,2022.We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limitedselection of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventoryturnover.When combined with the operating efficiencies achieved by volume purchasing,efficient distribution and reduced handling ofmerchandise in no-frills,self-service warehouse facilities,these volumes and turnover enable us to operate profitably at significantly lower grossmargins(net sales less merchandise costs)than most other retailers.We often sell inventory before we are required to pay for it,even whiletaking advantage of early payment discounts.We believe that the most important driver of our profitability is increasing net sales,particularly comparable sales.Net sales includes our coremerchandise categories(foods and sundries,non-foods,and fresh foods),warehouse ancillary(gasoline,pharmacy,optical,food court,hearingaids,and tire installation)and other businesses(e-commerce,business centers,travel and other).We define18Table of Contentscomparable sales as net sales from warehouses open for more than one year,including remodels,relocations and expansions,and sales relatedto e-commerce websites operating for more than one year.Comparable sales growth is achieved through increasing shopping frequency fromnew and existing members and the amount they spend on each visit(average ticket).Sales comparisons can also be particularly influenced bycertain factors that are beyond our control:fluctuations in currency exchange rates(with respect to our international operations);inflation andchanges in the cost of gasoline and associated competitive conditions.The higher our comparable sales exclusive of these items,the more wecan leverage our SG&A expenses,reducing them as a percentage of sales and enhancing profitability.Generating comparable sales growth isforemost a question of making available to our members the right merchandise at the right prices,a skill that we believe we have repeatedlydemonstrated over the long-term.Another substantial factor in net sales growth is the health of the economies in which we do business,including the effects of inflation or deflation,especially the United States.Net sales growth and gross margins are also impacted by ourcompetition,which is vigorous and widespread,across a wide range of global,national and regional wholesalers and retailers,including thosewith e-commerce operations.While we cannot control or reliably predict general economic health or changes in competition,we believe that wehave been successful historically in adapting our business to these changes,such as through adjustments to our pricing and merchandise mix,including increasing the penetration of our private-label items,and through online offerings.Our philosophy is to provide our members with quality goods and services at competitive prices.We do not focus in the short-term onmaximizing prices charged,but instead seek to maintain what we believe is a perception among our members of our“pricing authority”consistently providing the most competitive values.Merchandise costs in the second quarter of 2023 continued to be impacted by inflation.Theimpact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to cost increases.Thosestrategies can include,but are not limited to,working with our suppliers to share in absorbing cost increases,earlier-than-usual purchasing andin greater volumes,offering seasonal merchandise outside its season,as well as passing cost increases on to our members.Our investments inmerchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite costincreases instead of passing the increases on to our members,all negatively impacting gross margin and gross margin as a percentage of netsales(gross margin percentage).We believe our gasoline business enhances traffic in our warehouses,but it generally has a lower gross margin percentage relative to our non-gasoline businesses.It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline businesses.A higher penetrationof gasoline sales will generally lower our gross margin percentage.Rapidly changing gasoline prices may significantly impact our near-term netsales growth.Generally,rising gasoline prices benefit net sales growth which,given the higher sales base,negatively impacts our gross marginpercentage but decreases our SG&A expenses as a percentage of net sales.A decline in gasoline prices has the inverse effect.Additionally,government actions in various countries relating to tariffs,particularly China and the United States,have affected the costs of some of ourmerchandise.The degree of our exposure is dependent on(among other things)the type of goods,rates imposed,and timing of the tariffs.Higher tariffs could adversely impact our results.We also achieve net sales growth by opening new warehouses.As our warehouse base grows,available and desirable sites become moredifficult to secure,and square footage growth becomes a comparatively less substantial component of growth.The negative aspects of suchgrowth,however,including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouseswhen openings occur in existing markets,are continuing to decline in significance as they relate to the results of our total operations.Our rate ofsquare footage growth is generally higher in foreign markets,due to the smaller base in those markets,and we expect that to continue.Our e-commerce business,domestically and internationally,generally has a lower gross margin percentage than our warehouse operations.19Table of ContentsThe membership format is an integral part of our business and has a significant effect on our profitability.This format is designed to reinforcemember loyalty and provide continuing fee revenue.The extent to which we achieve growth in our membership base,increase the penetration ofour Executive members,and sustain high renewal rates materially influences our profitability.Our paid-membership growth rate may beadversely impacted when warehouse openings occur in existing markets as compared to new markets.Our financial performance depends heavily on controlling costs.While we believe that we have achieved successes in this area,some significantcosts are partially outside our control,particularly health care and utility expenses.With respect to the compensation of our employees,ourphilosophy is not to seek to minimize their wages and benefits.Rather,we believe that achieving our longer-term objectives of reducingemployee turnover and enhancing employee satisfaction require maintaining compensation levels that are better than the industry average formuch of our workforce.This may cause us,for example,to absorb costs that other employers might seek to pass through to their workforces.Because our business operates on very low margins,modest changes in various items in the consolidated statements of income,particularlymerchandise costs and SG&A expenses,can have substantial impacts on net income.Our operating model is generally the same across our U.S.,Canadian,and Other International operating segments(see Note 9 to thecondensed consolidated financial statements included in Part I,Item 1,of this Report).Certain operations in the Other International segmenthave relatively higher rates of square footage growth,lower wage and benefit costs as a percentage of sales,less or no direct membershipwarehouse competition,or lack e-commerce or business delivery.In discussions of our consolidated operating results,we refer to the impact of changes in foreign currencies relative to the U.S.dollar,which aredifferences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies intoU.S.dollars.This impact of foreign-exchange rate changes is calculated based on the difference between the current and prior periods currencyexchange rates.The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and priorperiods average price per gallon sold.Our fiscal year ends on the Sunday closest to August 31.References to the second quarter of 2023 and 2022 relate to the 12-week fiscalquarters ended February 12,2023,and February 13,2022.References to the first half of 2023 and 2022 relate to the 24 weeks endedFebruary 12,2023,and February 13,2022.Certain percentages presented are calculated using actual results prior to rounding.Unlessotherwise noted,references to net income relate to net income attributable to Costco.Highlights for the second quarter of 2023 versus 2022 include:Net sales increased 6%to$54,239,driven by an increase in comparable sales of 5%and sales at 20 net new warehouses opened sincethe end of the second quarter of 2022;Membership fee revenue increased 6%to$1,027,driven by new member sign-ups,upgrades to Executive Membership,and a higherrenewal rate;Gross margin percentage increased eight basis points,driven primarily by a LIFO charge recorded in the second quarter of 2022.Thiswas partially offset by decreases in core merchandise categories;SG&A expenses as a percentage of net sales increased 13 basis points,primarily due to central operating costs;Net income was$1,466,$3.30 per diluted share,compared to$1,299,$2.92 per diluted share in 2022;andA quarterly cash dividend of$0.90 per share was declared on January 19,2023 and paid on February 17,2023.20Table of ContentsRESULTS OF OPERATIONSNet Sales12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Net Sales$54,239$50,937$107,676$100,354 Changes in net sales:U.S7%9nada4%4%Other International7%4%Total Company6%7%Changes in comparable sales:U.S6%8nada4%3%Other International4%6%Total Company5%6%E-commerce(10)%(7)%Changes in comparable sales excluding the impact of changesin foreign-currency and gasoline prices:U.S6%6nada10%9%Other International10%9%9%Total Company7%7%E-commerce(9)%(6)%Net SalesNet sales increased$3,302 or 6%,and$7,322 or 7%during the second quarter and first half of 2023.This improvement was attributable to anincrease in comparable sales of 5%and 6%in the second quarter and first half of 2023,and sales at the 20 net new warehouses opened sincethe end of the second quarter of 2022.Sales increased$2,490,or 6%and$4,523,or 6%in core merchandise categories during the secondquarter and first half of 2023,led by foods and sundries and fresh foods;while non-foods decreased.Sales increased$812,or 9%and$2,799,or 15%in warehouse ancillary and other businesses during the second quarter and first half of 2023,led by gasoline,pharmacy and travel.During the second quarter of 2023,changes in foreign currencies relative to the U.S.dollar negatively impacted net sales by approximately$937,184 basis points,compared to the second quarter of 2022,attributable to our Canadian and Other International operations.The volume ofgasoline sold increased approximately 9%,positively impacting net sales by$565,111 basis points.Changes in gasoline prices did notmaterially impact net sales for the current quarter.During the first half of 2023,changes in foreign currencies relative to the U.S.dollar negatively impacted net sales by approximately$2,471,246basis points,compared to the first half of 2022,attributable to our Canadian and Other International Operations.Higher gasoline prices positivelyimpacted net sales by$1,254,125 basis points,compared to 2022,with a 9%increase in the average price per gallon.The volume of gasolinesold increased approximately 10%,positively impacting net sales by$1,215,121 basis points.21Table of ContentsComparable SalesComparable sales increased 5%and 6%in the second quarter and first half of 2023 and were positively impacted by increases in shoppingfrequency and the average ticket,which includes the effects of inflation and changes in foreign currency.Membership Fees12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Membership fees$1,027$967$2,027$1,913 Membership fees increase6%6%Total paid members(000s)68,100 63,400 Total cardholders(000s)123,000 114,800 Membership fee revenue increased 6%in both the second quarter and first half of 2023,driven by sign-ups,upgrades to Executive Membership,and a higher renewal rate.Changes in foreign currencies relative to the U.S.dollar negatively impacted membership fees by$20 and$52 in thesecond quarter and first half of 2023.At the end of the second quarter of 2023,our renewal rates were 92.6%in the U.S.and Canada and 90.5%worldwide.Renewal rates continue to benefit from more members auto renewing and increased penetration of Executive members,who onaverage renew at a higher rate.Our renewal rate,which excludes affiliates of Business members,is a trailing calculation that captures renewalsduring the period seven to eighteen months prior to the reporting date.We account for membership fee revenue on a deferred basis,recognized ratably over the one-year membership period.Our membership countsinclude active memberships and memberships that have not renewed within the 12 months prior to the reporting date.Gross Margin12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Net sales$54,239$50,937$107,676$100,354 Less merchandise costs48,423 45,517 96,192 89,469 Gross margin$5,816$5,420$11,484$10,885 Gross margin percentage10.72.64.67.85%Quarterly ResultsTotal gross margin percentage increased eight basis points compared to the second quarter of 2022.Excluding the impact of gasoline priceinflation on net sales,gross margin percentage was 10.73%,an increase of nine basis points.This was driven primarily by a 14 basis-pointincrease due to a LIFO charge recorded in the second quarter of 2022.Warehouse ancillary and other business also positively impacted grossmargin by three basis points,predominantly gasoline,partially offset by e-commerce and pharmacy.Core merchandise categories negativelyimpacted gross margin by six basis points,predominantly in non-foods and fresh foods,partially offset by foods and sundries.Gross margin wasnegatively impacted by two basis points due to increased 2%rewards.Changes in foreign currencies relative to the U.S.dollar negativelyimpacted gross margin by approximately$91,compared to the second quarter of 2022,attributable to our Canadian and Other Internationaloperations.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),decreased 26 basis points.The decrease was across all categories,most significantly in fresh foods.This measure eliminates the impact ofchanges in sales penetration and gross margins from our warehouse ancillary and other businesses.22Table of ContentsGross margin on a segment basis,when expressed as a percentage of the segments own sales and excluding the impact of changes ingasoline prices on net sales(segment gross margin percentage),increased in our U.S.segment,largely due to the LIFO charge discussedabove and an increase in our warehouse ancillary and other businesses,predominantly gasoline,partially offset by e-commerce.Gross marginpercentage decreased in our Canadian and Other International segment due to decreases in core merchandise categories and increased 2%rewards,partially offset by warehouse ancillary and other businesses.Year-to-date ResultsTotal gross margin percentage decreased 18 basis points compared to the first half of 2022.Excluding the impact of gasoline price inflation onnet sales,gross margin percentage was 10.79%,a decrease of six basis points.This was primarily due to an 18 basis-point decrease in coremerchandise categories,predominantly in non-foods and fresh foods,partially offset by foods and sundries,and a nine basis-point chargeprimarily related to downsizing our charter shipping activities during the first quarter of 2023.Gross margin was also negatively impacted bythree basis points due to increased 2%rewards.Warehouse ancillary and other businesses positively impacted gross margin by 16 basis points,predominantly gasoline,partially offset by e-commerce.A smaller LIFO charge in the first half of 2023 compared to the first half of 2022positively contributed eight basis points.Changes in foreign currencies relative to the U.S.dollar negatively impacted gross margin byapproximately$244,compared to the first half of 2022,attributable to our Canadian and Other International operations.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),decreased 29 basis points.The decrease was primarily due to fresh foods and non-foods.This measure eliminates the impact of changes insales penetration and gross margins from our warehouse ancillary and other businesses.Segment gross margin percentage increased in our U.S.segment,due to warehouse ancillary and other businesses and a smaller LIFO charge,partially offset by the charge related to downsizing our charter shipping activities and decreases in certain core merchandise categories,non-foods and fresh foods,partially offset by foods and sundries.Gross margin decreased in our Canadian and Other International segment due todecreases in core merchandise categories,partially offset by warehouse ancillary and other businesses.All segments were negatively impactedby increased 2%rewards.Selling,General and Administrative Expenses12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022SG&A expenses$4,940$4,575$9,857$9,293 SG&A expenses as a percentage of net sales9.11%8.98%9.15%9.26%Quarterly ResultsSG&A expenses as a percentage of net sales increased 13 basis points.The effect of gasoline price inflation had no impact on SG&A expensesas a percentage of sales.The comparison to last year was negatively impacted by nine basis points in central operating costs partiallyattributable to a charge related to a tax audit covering multiple years.Warehouse operations and other businesses and stock compensation wereboth higher by two basis points.Changes in foreign currencies relative to the U.S.dollar decreased SG&A expenses by approximately$75compared to the second quarter of 2022.23Table of ContentsYear-to-date ResultsSG&A expenses as a percentage of net sales decreased 11 basis points.SG&A expenses as a percentage of net sales excluding the impact ofgasoline price inflation was flat compared to the first half of 2022.The comparison to last year was favorably impacted by 12 basis points from awrite-off of certain information technology assets in the prior year.Warehouse operations and other businesses were higher by six basis points,largely attributable to the wage increases we instituted in 2022.Central operating costs were also higher by six basis points.Changes in foreigncurrencies relative to the U.S.dollar decreased SG&A expenses by approximately$196 compared to the first half of 2022.Interest Expense12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Interest expense$34$36$68$75 Interest expense is primarily related to Senior Notes and financing leases.The decrease in interest expense for the first half of 2023 was due torepayment of the 2.300%Senior Notes on December 1,2021.Interest Income and Other,Net12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Interest income$105$6$159$15 Foreign-currency transaction gains(losses),net3 12(6)38 Other,net6 7 14 14 Interest income and other,net$114$25$167$67 The increase in interest income in the second quarter and first half of 2023 was due to higher global interest rates.Foreign-currency transactiongains(losses),net,include mark-to-market adjustments for forward foreign-exchange contracts and the revaluation or settlement of monetaryassets and liabilities by our Canadian and Other International operations.See Derivatives and Foreign Currency sections in Item 8,Note 1 of ourAnnual Report on Form 10-K,for the fiscal year ended August 28,2022.Provision for Income Taxes 12 Weeks Ended24 Weeks Ended February 12,2023February 13,2022February 12,2023February 13,2022Provision for income taxes$517$481$923$832 Effective tax rate26.1&.7$.6#.8%The effective tax rate for the first half of 2023 was impacted by net discrete tax benefits of$57,primarily due to excess tax benefits related tostock compensation.Excluding discrete net tax benefits,the tax rate was 26.1%for the first half of 2023.The effective tax rate for the first half of 2022 was impacted by net discrete tax benefits of$91,primarily due to excess tax benefits related tostock compensation.Excluding discrete net tax benefits,the tax rate was 26.4%for the first half of 2022.24Table of ContentsLIQUIDITY AND CAPITAL RESOURCESThe following table summarizes our significant sources and uses of cash and cash equivalents:24 Weeks EndedFebruary 12,2023February 13,2022Net cash provided by operating activities$5,802$3,659 Net cash used in investing activities(1,865)(1,393)Net cash used in financing activities(1,215)(1,667)Our primary sources of liquidity are cash flows from operations,cash and cash equivalents,and short-term investments.Cash and cashequivalents and short-term investments were$13,705 and$11,049 at February 12,2023,and August 28,2022.Of these balances,unsettledcredit and debit card receivables represented approximately$2,083 and$2,010 at February 12,2023,and August 28,2022.These receivablesgenerally settle within four days.Material contractual obligations arising in the normal course of business primarily consist of purchase obligations,long-term debt and relatedinterest payments,leases,and construction and land purchase obligations.Purchase obligations consist of contracts primarily related to merchandise,equipment,and third-party services,the majority of which are due inthe next 12 months.Construction and land purchase obligations consist of contracts primarily related to the development and opening of newand relocated warehouses,the majority of which(other than leases)are due in the next 12 months.Management believes that our cash and investment position and operating cash flows with capacity under existing and available creditagreements will be sufficient to meet our liquidity and capital requirements for the foreseeable future.We believe that our U.S.current andprojected asset position is sufficient to meet our U.S.liquidity requirements.Cash Flows from Operating ActivitiesNet cash provided by operating activities totaled$5,802 in the first half of 2023,compared to$3,659 in the first half of 2022.Our cash flowprovided by operations is primarily from net sales and membership fees.Cash flow used in operations generally consists of payments tomerchandise suppliers,warehouse operating costs,including payroll and employee benefits,utilities,and credit and debit card processing fees.Cash used in operations also includes payments for income taxes.Changes in our net investment in merchandise inventories(the differencebetween merchandise inventories and accounts payable)is impacted by several factors,including inventory turnover,the forward deployment ofinventory to accelerate delivery times,payment terms with suppliers,and early payments to obtain discounts.Cash Flows from Investing ActivitiesNet cash used in investing activities totaled$1,865 in the first half of 2023,compared to$1,393 in the first half of 2022,and is primarily related tocapital expenditures.Net cash from investing activities also includes purchases and maturities of short-term investments.25Table of ContentsCapital Expenditure PlansOur primary requirements for capital are acquiring land,buildings,and equipment for new and remodeled warehouses.Capital is also requiredfor information systems,manufacturing and distribution facilities,initial warehouse operations,and working capital.In the first half of 2023,wespent$1,947 on capital expenditures,and it is our current intention to spend approximately$3,800 to$4,200 during fiscal 2023.Theseexpenditures are expected to be financed with cash from operations,existing cash and cash equivalents,and short-term investments.Weopened 12 new warehouses,including two relocations,in the first half of 2023 and plan to open 15 additional new warehouses,including onerelocation,in the remainder of fiscal 2023.There can be no assurance that current expectations will be realized,and plans are subject to changeupon further review of our capital expenditure needs and the economic environment.Cash Flows from Financing ActivitiesNet cash used in financing activities totaled$1,215 in the first half of 2023,compared to$1,667 in the first half of 2022.Cash flow used infinancing activities during the first half of 2023 was primarily related to the payment of dividends,withholding taxes on stock-based awards,andrepurchases of common stock.In the first half of 2022,cash flow used in financing activities was primarily due to the repayment of our 2.300%Senior Notes.DividendsA quarterly cash dividend of$0.90 per share was declared on January 19,2023,payable to shareholders of record on February 3,2023,whichwas paid on February 17,2023.Share Repurchase ProgramOn January 19,2023,the Board of Directors authorized a new share repurchase program in the amount of$4,000,which expires in January2027.During the first half of 2023 and 2022,we repurchased 579,000 and 236,000 shares of common stock,at an average price per share of$492.06 and$498.00,totaling approximately$285 and$118.These amounts may differ from the accompanying condensed consolidatedstatements of cash flows due to changes in unsettled repurchases at the end of a quarter.Purchases are made from time to time,as conditionswarrant,in the open market or in block purchases,pursuant to plans under SEC Rule 10b5-1.Repurchased shares are retired,in accordancewith the Washington Business Corporation Act.The remaining amount available to be purchased under our approved plan was$3,955 at the endof the second quarter.Bank Credit Facilities and Commercial Paper ProgramsWe maintain bank credit facilities for working capital and general corporate purposes.At February 12,2023,we had borrowing capacity underthese facilities of$1,269.Our international operations maintain$781 of this capacity under bank credit facilities,of which$177 is guaranteed bythe Company.Short-term borrowings outstanding under the bank credit facilities were$45 and$88 at the end of the second quarter of 2023 andat the end of fiscal 2022.The Company has letter of credit facilities,for commercial and standby letters of credit,totaling$231.The outstanding commitments under thesefacilities at the end of the second quarter of 2023 totaled$191,most of which were standby letters of credit that do not expire or have expirationdates within one year.The bank credit facilities have various expiration dates,most within one year,and we generally intend to renew thesefacilities.The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercialletters of credit outstanding.26Table of ContentsCritical Accounting EstimatesThe preparation of our consolidated financial statements in accordance with U.S.GAAP requires that we make estimates and judgments.Webase these on historical experience and on assumptions that we believe to be reasonable.Our critical accounting policies are discussed in PartII,Item 7,“Managements Discussion and Analysis of Financial Condition and Results of Operations”section of our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes to the critical accounting estimates previously disclosed in thatReport.Recent Accounting PronouncementsThere have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form10-K,for the fiscal year ended August 28,2022.Item 3Quantitative and Qualitative Disclosures about Market RiskOur direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates.There have been nomaterial changes to our market risks as disclosed in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.Item 4Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur disclosure controls and procedures(as defined in Rules 13a-15(e)or 15d-15(e)under the Securities Exchange Act of 1934,as amended)are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded,processed,summarized,and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission andto ensure that information required to be disclosed is accumulated and communicated to management,including our principal executive andfinancial officers,to allow timely decisions regarding disclosure.The Chief Executive Officer and the Chief Financial Officer,with assistance fromother members of management,have reviewed the effectiveness of our disclosure controls and procedures as of February 12,2023 and,basedon their evaluation,have concluded the disclosure controls and procedures were effective as of such date.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting(as defined in Rules 13a-15(f)or 15d-15(f)of the Exchange Act)thatoccurred during the second quarter of fiscal 2023 that have materially affected,or are reasonably likely to materially affect,the Companysinternal control over financial reporting.PART IIOTHER INFORMATIONItem 1Legal ProceedingsSee discussion of Legal Proceedings in Note 8 to the condensed consolidated financial statements included in Part I,Item 1 of this Report.Item 1ARisk FactorsIn addition to the other information set forth in the Quarterly Report on Form 10-Q,you should carefully consider the factors discussed in Part I,Item 1A,“Risk Factors”in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes inour risk factors from those disclosed in our Annual Report on Form 10-K.27Table of ContentsItem 2Unregistered Sales of Equity Securities and Use of ProceedsThe following table sets forth information on our common stock repurchase program activity for the second quarter of 2023(amounts in millions,except share and per share data):PeriodTotal Number ofSharesPurchasedAverage PricePaid Per ShareTotal Number of SharesPurchased as Part ofPublicly AnnouncedProgramsMaximum Dollar Value ofShares that May Yet bePurchased Under theProgramsNovember 21,2022 December 18,202291,000$499.57 91,000$2,621 December 19,2022 January 15,202396,000 465.99 96,000 2,576 January 16,2023 February 12,2023107,000 498.61 107,000 3,955 Total second quarter294,000$488.30 294,000 _(1)Our share repurchase program is conducted under a$4,000 authorization approved by our Board of Directors in January 2023,which expires in January 2027.Thisauthorization revoked previously authorized but unused amounts,totaling$2,568.Item 3Defaults Upon Senior SecuritiesNone.Item 4Mine Safety DisclosuresNot applicable.Item 5Other Information(amounts in whole dollars)Disclosure pursuant to Section 2019 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r)of the SecuritiesExchange Act of 1934,as amended.During the second quarter of 2023,we had two individual cardholders under a business membership in the name of the Embassy of the IslamicRepublic of Iran at our subsidiary in Mexico.Gross revenue in the second quarter of 2023 attributable to the membership was approximately$145,and our estimated profit on these transactions was less than$10.The membership was canceled during the second quarter of 2023.TheCompany does not intend to continue these activities.(1)(1)28Table of ContentsItem 6ExhibitsThe following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.Incorporated by ReferenceExhibitNumberExhibit DescriptionFiledHerewithFormPeriod EndingFiling Date3.1Articles of Incorporation as amended of CostcoWholesale Corporation10-K8/28/202210/5/20223.2Bylaws as amended of Costco Wholesale Corporation10-Q5/8/20226/2/202210.1Eleventh Amendment to Citi,N.A.Co-Branded CreditCard Agreementx31.1Rule 13(a)14(a)Certificationsx32.1Section 1350 Certificationsx101.INSInline XBRL Instance Documentx101.SCHInline XBRL Taxonomy Extension Schema Documentx101.CALInline XBRL Taxonomy Extension Calculation LinkbaseDocumentx101.DEFInline XBRL Taxonomy Extension Definition LinkbaseDocumentx101.LABInline XBRL Taxonomy Extension Label LinkbaseDocumentx101.PREInline XBRL Taxonomy Extension Presentation LinkbaseDocumentx104Cover Page Interactive Data File(formatted as inlineXBRL and contained in Exhibit 101)x29Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Report to be signed on its behalf by theundersigned,thereunto duly authorized.COSTCO WHOLESALE CORPORATION(Registrant)March 8,2023By/s/W.CRAIG JELINEKDateW.Craig JelinekChief Executive Officer and DirectorMarch 8,2023By/s/RICHARD A.GALANTIDateRichard A.GalantiExecutive Vice President,Chief Financial Officer and Director30Exhibit 10.1ELEVENTH AMENDMENT TO THECO-BRANDED CREDIT CARD PROGRAM AGREEMENTThis Eleventh Amendment(Amendment)is between Citibank,N.A.(Bank)and Costco Wholesale Corporation(Costco),is effective as ofFebruary 6,2023,and amends that certain Co-Branded Credit Card Program Agreement,by and between Bank and Costco,dated February 27,2015(the Agreement).Pursuant to Section 16.10 of the Agreement,Bank and Costco agree as follows:1.Defined Terms.All capitalized terms used but not defined in this Amendment will have the meanings ascribed to such terms in theAgreement.2.Amendments.a.Section 9.05 Manner and Timing of Payments.Section 9.05(c)is amended by replacing“LIBOR”with“SOFR plus twenty-oneand four tenths basis points(0.214%)”.b.Section 14.02 Payment of Fees Upon Termination.Section 14.02(a)is amended by replacing“LIBOR”with“SOFR plustwenty-one and four tenths basis points(0.214%)”.c.Exhibit A Definitional Supplement.Exhibit A is amended by deleting LIBOR and the corresponding definition in their entiretyand adding the following in their place:“SOFR”means a rate equal to the secured overnight financing rate as administered by the SOFR Administrator(Federal ReserveBank of New York or successor).For purposes of this Agreement,the 3 month average SOFR rate will be used,as published byBloomberg under ticker“USOSFRC BGN Curncy”,on the applicable due date.d.Schedule 7.05(a).The bullet for“Money cost(split by actual 1-Month LIBOR and spread)”is amended to read,“Money cost(split by actual SOFR and spread)”.e.Schedule 9.07(a)(v)-1.Schedule 9.07(a)(v)-2 is deleted in its entirety and replaced with the attached Schedule 9.07(a)(v)-1.3.Full Force and Effect.The Agreement,as modified hereby,will remain in full force and effect and this Amendment will not be deemedto be an amendment or a waiver of any other provision of the Agreement except as expressly stated herein.All such other provisions ofthe Agreement will also be deemed to apply to this Amendment.4.No Modification or Waiver;Incorporation.No modification,amendment or waiver of this Amendment will be effective or bindingunless made in writing and signed by the Parties.The Parties agree that,except for those modifications expressly set forth in thisAmendment,all terms and provisions of the Agreement will remain unchanged and in full force and effect.This Amendment and theAgreement will hereafter be read and construed together as a single document,and all references to the Agreement will hereafter referto the Agreement as amended by this Amendment.5.Counterparts.This Amendment may be executed in counterparts and if so executed will be enforceable and effective upon theexchange of executed counterparts,including by facsimile or electronic transmissions of executed counterparts.Signature page followsDuly authorized representatives of the Parties have executed this Amendment.COSTCO WHOLESALE CORPORATION CITIBANK,N.A.By:/s/Sandy TorreyBy:/s/Jennifer LonginoName:Sandy TorreyName:Jennifer LonginoTitle:SVP,Corporate MarketingTitle:Vice PresidentSchedule 9.07(a)(v)-1Money Cost CalculationThe funding rates for each balance category of asset will be calculated as follows:Variable Revolving Balances:1 month SOFR Spread 19.5 basis points,or1 month SOFR,whichever is higherPromotional Balances:10%of balance at 6 month SOFR Caterpillar Spread10%of balance at 1 year SOFR Caterpillar Spread80%of balance at 5 year SOFR Caterpillar SpreadTransactor/Intro Rate Balances:5%of balance at 1 month SOFR Spread95%of balance at 5 year SOFR Caterpillar SpreadThe Bloomberg tickers for the SOFR rates are as follows:1-month SOFR:USOSFRA BGN Curncy6-month SOFR:USOSFRF BGN Curncy1-year SOFR:USOSFR1 BGN Curncy5-year SOFR:USOSFR5 BGN CurncyAll SOFR rates will be sourced from Bloomberg on the last Business Day of the month.Funding costs will be applied to balances based on theActual/365 day count convention;i.e.Monthly funding cost=Balance*Rate*Actual/365.The“Spread”means the months average spread,weighted 80%as the AAA 7-year Credit Card Asset Backed Security spread,and 20%as theBBB 7-year Credit Card Asset Backed Security spread,in each case,using an average(excluding the high and the low)from major third partysecuirty dealers(e.g.,BAC,MUFG,BARC,RBC,BNP,WFC).The weighted-average spread will be capped at one hundred and forty-five(145)basis points.The“Caterpillar”will comprise a strip of equally-weighted funding tickets of the targeted tenor.For example,a 5-year SOFR Caterpillar willhave sixty(60)tickets,which are the previous sixty(60)months actual 5-year SOFR rates.The 5-year SOFR Caterpillar rate will be the simpleaverage of those sixty(60)tickets.Each month,the oldest funding ticket will drop out of the Caterpillar,and will be replaced with a new ticket atthe current rate.For example,the 5-year SOFR Caterpillar would have the 5-year SOFR rate from sixty(60)months ago drop out,and thatwould be replaced with the current 5-year SOFR rate.Exhibit 31.1CERTIFICATIONSI,W.Craig Jelinek,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.March 8,2023/s/W.CRAIG JELINEKW.Craig JelinekChief Executive Officer and DirectorCERTIFICATIONSI,Richard A.Galanti,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.March 8,2023/s/RICHARD A.GALANTIRichard A.GalantiExecutive Vice President,Chief Financial Officer and DirectorExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended February 12,2023,as filed with the Securities and Exchange Commission(the Report),I,W.Craig Jelinek,Chief Executive Officer and Director of theCompany,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/W.CRAIG JELINEK Date:March 8,2023W.Craig Jelinek Chief Executive Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended February 12,2023,as filed with the Securities and Exchange Commission(the Report),I,Richard A.Galanti,Executive Vice President,Chief Financial Officerand Director of the Company,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/RICHARD A.GALANTI Date:March 8,2023Richard A.Galanti Executive Vice President,Chief Financial Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.
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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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