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 June 15,2024OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _ to _Commission File Number:001-39350Albertsons Companies,Inc.(Exact name of registrant as specified in its charter)Delaware47-4376911(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)250 Parkcenter Blvd.Boise,Idaho 83706(Address of principal executive offices and zip code)(208)395-6200(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 registeredClass A common stock,$0.01 par valueACINew York Stock ExchangeIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 duringthe preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements forthe past 90 days.Yes NoIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit suchfiles).Yes NoIndicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or anemerging growth company.See the definitions of large accelerated filer,accelerated filer,smaller reporting company and emerging growth company inRule 12b-2 of the Exchange Act.Large accelerated 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 orrevised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes NoAs of July 19,2024,the registrant had 579,133,695 shares of Class A common stock,par value$0.01 per share,outstanding.Albertsons Companies,Inc.and SubsidiariesPART I-FINANCIAL INFORMATIONPageItem 1-Condensed Consolidated Financial Statements(unaudited)Condensed Consolidated Balance Sheets3Condensed Consolidated Statements of Operations and Comprehensive Income4Condensed Consolidated Statements of Cash Flows5Condensed Consolidated Statements of Stockholders Equity6Notes to Condensed Consolidated Financial Statements7Item 2-Managements Discussion and Analysis of Financial Condition and Results of Operations18Item 3-Quantitative and Qualitative Disclosures About Market Risk29Item 4-Controls and Procedures29PART II-OTHER INFORMATIONItem 1-Legal Proceedings30Item 1A-Risk Factors30Item 2-Unregistered Sales of Equity Securities and Use of Proceeds30Item 3-Defaults Upon Senior Securities31Item 4-Mine Safety Disclosures31Item 5-Other Information31Item 6-Exhibits31SIGNATURES32Table of ContentsPART I-FINANCIAL INFORMATIONItem 1-Condensed Consolidated Financial Statements(unaudited)Albertsons Companies,Inc.and SubsidiariesCondensed Consolidated Balance Sheets(in millions,except share data)(unaudited)June 15,2024February 24,2024ASSETSCurrent assetsCash and cash equivalents$291.1$188.7 Receivables,net809.4 724.4 Inventories,net4,720.0 4,945.2 Other current assets387.4 429.2 Total current assets6,207.9 6,287.5 Property and equipment,net9,509.8 9,570.3 Operating lease right-of-use assets6,017.7 5,981.6 Intangible assets,net2,415.4 2,434.5 Goodwill1,201.0 1,201.0 Other assets725.2 746.2 TOTAL ASSETS$26,077.0$26,221.1 LIABILITIESCurrent liabilitiesAccounts payable$3,898.2$4,218.2 Accrued salaries and wages1,196.4 1,302.6 Current maturities of long-term debt and finance lease obligations82.6 285.2 Current maturities of operating lease obligations675.0 677.6 Other current liabilities1,213.8 974.1 Total current liabilities7,066.0 7,457.7 Long-term debt and finance lease obligations7,774.8 7,783.4 Long-term operating lease obligations5,610.3 5,493.2 Deferred income taxes754.8 807.6 Other long-term liabilities1,958.0 1,931.7 Commitments and contingenciesSTOCKHOLDERS EQUITYClass A common stock,$0.01 par value;1,000,000,000 shares authorized,597,494,242 and594,445,268 shares issued as of June 15,2024 and February 24,2024,respectively6.0 5.9 Additional paid-in capital2,126.2 2,129.6 Treasury stock,at cost,18,404,201 and 18,397,745 shares held as of June 15,2024 and February 24,2024,respectively(304.2)(304.2)Accumulated other comprehensive income86.7 88.0 Retained earnings998.4 828.2 Total stockholders equity2,913.1 2,747.5 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY$26,077.0$26,221.1 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.3Table of ContentsAlbertsons Companies,Inc.and SubsidiariesCondensed Consolidated Statements of Operations and Comprehensive Income(in millions,except per share data)(unaudited)16 weeks endedJune 15,2024June 17,2023Net sales and other revenue$24,265.4$24,050.2 Cost of sales17,526.5 17,387.5 Gross margin6,738.9 6,662.7 Selling and administrative expenses6,274.0 6,012.9 Loss on property dispositions and impairment losses,net5.3 27.6 Operating income459.6 622.2 Interest expense,net145.7 154.9 Other expense(income),net4.0(16.0)Income before income taxes309.9 483.3 Income tax expense69.2 66.1 Net income$240.7$417.2 Other comprehensive income(loss),net of taxRecognition of pension loss(1.0)(0.6)Other(0.3)1.7 Other comprehensive(loss)income$(1.3)$1.1 Comprehensive income$239.4$418.3 Net income per Class A common shareBasic net income per Class A common share$0.42$0.73 Diluted net income per Class A common share0.41 0.72 Weighted average Class A common shares outstanding(in millions)Basic578.6 573.7 Diluted581.3 580.1 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.4Table of ContentsAlbertsons Companies,Inc.and SubsidiariesCondensed Consolidated Statements of Cash Flows(in millions)(unaudited)16 weeks endedJune 15,2024June 17,2023Cash flows from operating activities:Net income$240.7$417.2 Adjustments to reconcile net income to net cash provided by operating activities:Loss on property dispositions and impairment losses,net5.3 27.6 Depreciation and amortization552.0 530.6 Operating lease right-of-use assets amortization207.6 203.6 LIFO expense14.6 34.0 Deferred income tax(56.3)(96.4)Contributions to pension and post-retirement benefit plans,net of expense(income)(10.9)(6.4)Deferred financing costs4.9 4.8 Equity-based compensation expense36.7 31.9 Other operating activities6.0(16.3)Changes in operating assets and liabilities:Receivables,net(84.5)5.2 Inventories,net210.7(96.9)Accounts payable,accrued salaries and wages and other accrued liabilities(304.0)(222.8)Operating lease liabilities(125.9)(123.4)Self-insurance assets and liabilities21.5 31.1 Other operating assets and liabilities242.5 114.5 Net cash provided by operating activities960.9 838.3 Cash flows from investing activities:Payments for property,equipment and intangibles,including lease buyouts(543.0)(622.5)Proceeds from sale of assets3.8 169.3 Other investing activities1.2(0.7)Net cash used in investing activities(538.0)(453.9)Cash flows from financing activities:Payments on long-term borrowings,including ABL facility(200.2)(500.2)Payments of obligations under finance leases(12.5)(13.0)Dividends paid on common stock(69.5)(69.0)Dividends paid on convertible preferred stock(0.8)Employee tax withholding on vesting of restricted stock units(38.6)(33.1)Other financing activities 1.1 Net cash used in financing activities(320.8)(615.0)Net increase(decrease)in cash and cash equivalents and restricted cash102.1(230.6)Cash and cash equivalents and restricted cash at beginning of period193.2 463.8 Cash and cash equivalents and restricted cash at end of period$295.3$233.2 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.5Table of ContentsAlbertsons Companies,Inc.and SubsidiariesCondensed Consolidated Statements of Stockholders Equity(in millions,except share data)(unaudited)Class A Common StockAdditionalpaid-incapitalTreasury StockAccumulatedothercomprehensiveincomeRetainedearningsTotalstockholdersequitySharesAmountSharesAmountBalance as of February 24,2024594,445,268$5.9$2,129.6 18,397,745$(304.2)$88.0$828.2$2,747.5 Equity-based compensation 34.4 34.4 Shares issued and employee taxwithholding on vesting of restrictedstock units3,048,974 0.1(38.6)(38.5)Cash dividends declared on commonstock($0.12 per common share)(69.5)(69.5)Net income 240.7 240.7 Other comprehensive loss,net of tax (1.3)(1.3)Other activity 0.8 6,456 (1.0)(0.2)Balance as of June 15,2024597,494,242$6.0$2,126.2 18,404,201$(304.2)$86.7$998.4$2,913.1 Class A Common StockAdditionalpaid-incapitalTreasury StockAccumulatedothercomprehensiveincomeRetainedearnings(accumulateddeficit)TotalstockholdersequitySharesAmountSharesAmountBalance as of February 25,2023590,968,600$5.9$2,072.7 21,300,945$(352.2)$69.3$(185.0)$1,610.7 Equity-based compensation 27.7 27.7 Shares issued and employee taxwithholding on vesting of restrictedstock units3,059,905 (33.1)(33.1)Convertible preferred stockconversions (2,903,200)48.0 (2.3)45.7 Cash dividends declared on commonstock($0.12 per common share)(69.0)(69.0)Dividends accrued on convertiblepreferred stock (0.3)(0.3)Net income 417.2 417.2 Other comprehensive income,net oftax 1.1 1.1 Other activity 1.0 (1.0)Balance as of June 17,2023594,028,505$5.9$2,068.3 18,397,745$(304.2)$70.4$159.6$2,000.0 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.6Table of ContentsAlbertsons Companies,Inc.and SubsidiariesNotes to Condensed Consolidated Financial Statements(unaudited)NOTE 1-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThe accompanying interim Condensed Consolidated Financial Statements include the accounts of Albertsons Companies,Inc.and itssubsidiaries(the Company).All significant intercompany balances and transactions were eliminated.The Condensed Consolidated BalanceSheet as of February 24,2024 is derived from the Companys annual audited Consolidated Financial Statements,which should be read inconjunction with these Condensed Consolidated Financial Statements and which are included in the Companys Annual Report on Form 10-K forthe fiscal year ended February 24,2024,filed with the Securities and Exchange Commission(the SEC)on April 22,2024.Certain informationin footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented inaccordance with accounting principles generally accepted in the United States of America(GAAP).In the opinion of management,the interimdata includes all adjustments,consisting of normal recurring adjustments,necessary for a fair statement of the results for the interim periods.Theinterim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for the year.The Companysresults of operations are for the 16 weeks ended June 15,2024 and June 17,2023.Significant Accounting PoliciesRestricted cash:Restricted cash is included in Other current assets or Other assets depending on the remaining term of the restriction andprimarily relates to surety bonds.The Company had$4.2 million and$4.5 million of restricted cash as of June 15,2024 and February 24,2024,respectively.Inventories,net:Substantially all of the Companys inventories consist of finished goods valued at the lower of cost or market and net of vendorallowances.The Company primarily uses the retail inventory or cost method to determine inventory cost before application of any last-in,first-out(LIFO)adjustment.Interim LIFO inventory costs are based on managements estimates of expected year-end inventory levels and inflationrates.The Company recorded LIFO expense of$14.6 million and$34.0 million for the 16 weeks ended June 15,2024 and June 17,2023,respectively.Equity method investments:The Companys equity method investments previously included an equity interest in Mexico Foods Parent LLCand La Fabrica Parent LLC(El Rancho),a Texas-based specialty grocer.During the first quarter of fiscal 2023,El Rancho exercised itscontractual option to repurchase the Companys 45%ownership interest in El Rancho and the Company received proceeds of$166.1 million.Asa result,the Company realized a gain of$10.5 million during the first quarter of fiscal 2023,included in Other expense(income),net.Convertible Common Stock and Preferred Stock:The Companys certificate of incorporation has authorized 150,000,000 shares of Class A-1convertible common stock,par value$0.01 per share,and 100,000,000 shares of preferred stock,par value$0.01 per share,of which 1,750,000shares of preferred stock are designated Series A convertible preferred stock(Series A preferred stock)and 1,410,000 shares of preferred stockare designated Series A-1 convertible preferred stock(Series A-1 preferred stock and together with the Series A preferred stock,theConvertible Preferred Stock).As of June 15,2024 and February 24,2024,no shares of Class A-1 convertible common stock and no shares ofpreferred stock are issued or outstanding.Income taxes:Income tax expense was$69.2 million,representing a 22.3fective tax rate,for the 16 weeks ended June 15,2024.TheCompanys effective tax rate for the 16 weeks ended June 15,2024 differs from the federal income tax statutory rate of 21%primarily due tostate income taxes,partially offset by the reduction of a reserve for an uncertain tax position due to the expiration of a state statute.Income taxexpense was$66.1 million,representing a 13.7fective tax rate,for the 16 weeks ended June 17,2023.The Companys effective tax rate forthe 16 weeks ended June 17,2023 differs from the federal income tax statutory rate of 21%primarily due to the7Table of Contentsreduction of a reserve of$49.7 million for an uncertain tax position due to the expiration of a foreign statute during the first quarter of fiscal2023.Segments:The Company and its subsidiaries offer grocery products,general merchandise,health and beauty care products,pharmacy,fuel andother items and services in its stores or through digital channels.The Companys operating divisions are geographically based,have similareconomic characteristics and similar expected long-term financial performance.The Companys operating segments and reporting units are its 12operating divisions,which are reported in one reportable segment.Each reporting unit constitutes a business for which discrete financialinformation is available and for which management regularly reviews the operating results.Across all operating segments,the Company operatesprimarily one store format.Each division offers through its stores and digital channels the same general mix of products with similar pricing tosimilar categories of customers,has similar distribution methods,operates in similar regulatory environments and purchases merchandise fromsimilar or the same vendors.Revenue recognition:Revenues from the retail sale of products are recognized at the point of sale or delivery to the customer,net of returns andsales tax.Pharmacy sales are recorded upon the customer receiving the prescription.Third-party receivables from pharmacy sales were$419.2million and$376.1 million as of June 15,2024 and February 24,2024,respectively,and are recorded in Receivables,net.For digital relatedsales,which primarily include home delivery and Drive Up&Go curbside pickup,revenues are recognized upon either pickup in store ordelivery to the customer and may include revenue for separately charged delivery services.The Company records a contract liability whenrewards are earned by customers in connection with the Companys loyalty programs.As rewards are redeemed or expire,the Company reducesthe contract liability and recognizes revenue.The contract liability balance was immaterial as of June 15,2024 and February 24,2024.The Company records a contract liability when it sells its own proprietary gift cards.The Company records a sale when the customer redeemsthe gift card.The Companys gift cards do not expire.The Company reduces the contract liability and records revenue for the unused portion ofgift cards in proportion to its customers pattern of redemption,which the Company determined to be the historical redemption rate.TheCompanys contract liability related to gift cards was$101.5 million and$111.4 million as of June 15,2024 and February 24,2024,respectively.Disaggregated RevenuesThe following table represents Net sales and other revenue by product type(dollars in millions):16 weeks endedJune 15,2024June 17,2023Amount(1)%of TotalAmount(1)%of TotalNon-perishables(2)$12,054.0 49.7%$12,086.8 50.3%Fresh(3)7,904.9 32.6 7,889.3 32.8 Pharmacy2,622.8 10.8 2,300.1 9.6 Fuel1,320.9 5.4 1,400.4 5.8 Other(4)362.8 1.5 373.6 1.5 Net sales and other revenue$24,265.4 100.0%$24,050.2 100.0%(1)Digital related sales are included in the categories to which the revenue pertains.(2)Consists primarily of general merchandise,grocery,dairy and frozen foods.(3)Consists primarily of produce,meat,deli and prepared foods,bakery,floral and seafood.(4)Consists primarily of wholesale revenue to third parties,commissions,rental income and other miscellaneous revenue.8Table of ContentsRecently issued accounting standards:In November 2023,the Financial Accounting Standards Board(FASB)issued Accounting StandardsUpdate(ASU)2023-07,Segment Reporting Topic(280):Improvements to Reportable Segment Disclosure.The ASU improves reportablesegment disclosure requirements,primarily through enhanced disclosures about significant segment expenses.The amendments in this ASU areeffective for fiscal years beginning after December 15,2023,and interim periods within fiscal years beginning after December 15,2024 on aretrospective basis.Early adoption is permitted.The Company is currently evaluating the impact of this ASU on its Consolidated FinancialStatements and related disclosures.In December 2023,the FASB issued ASU 2023-09,Income Taxes(Topic 740):Improvements to Income Tax Disclosures.The ASU enhancesthe transparency and decision usefulness of income tax disclosures and is effective for annual periods beginning after December 15,2024 on aprospective basis.Early adoption is permitted.The Company is currently evaluating the impact of this ASU on its Consolidated FinancialStatements and related disclosures.NOTE 2-MERGER AGREEMENTOn October 13,2022,the Company,The Kroger Co.(Parent)and Kettle Merger Sub,Inc.,a wholly owned subsidiary of Parent(MergerSub),entered into an Agreement and Plan of Merger(the Merger Agreement),pursuant to which Merger Sub will be merged with and into theCompany(the Merger),with the Company surviving the Merger as the surviving corporation and a direct,wholly owned subsidiary of Parent.Pursuant to the Merger Agreement,each share of Class A common stock issued and outstanding immediately prior to the effective time of theMerger(the Effective Time),shall be converted automatically at the Effective Time into the right to receive from Parent$34.10 per share incash,without interest.The$34.10 per share consideration to be paid by Parent would be reduced by the special cash dividend of$6.85 per shareof Class A common stock(the Special Dividend),which was declared on October 13,2022 and paid on January 20,2023.At the Effective Time,each outstanding equity award denominated in shares of Class A common stock will be converted into a correspondingaward with respect to shares of Parent common stock(the Converted Awards).The Converted Awards will remain outstanding and subject tothe same terms and conditions(including vesting and forfeiture terms)as were applied to the corresponding Company equity award immediatelyprior to the Effective Time;provided that any Company equity award with a performance-based vesting condition will have such vestingcondition deemed satisfied at(i)the greater of target performance and actual performance(for such awards subject to an open performanceperiod at the Effective Time)and(ii)target performance(for such awards subject to a performance period that begins after the Effective Time).For purposes of the conversion described above,the number of shares of Parent common stock subject to a Converted Award will be based uponthe number of shares of Class A common stock subject to such Company equity award immediately prior to the Effective Time multiplied by anexchange ratio equal to(i)$34.10 less the Special Dividend,divided by(ii)the average closing price of shares of Parent common stock for fivetrading days preceding the Closing.In connection with obtaining the requisite regulatory clearance necessary to consummate the Merger,the Company and Parent expect to makedivestitures of stores owned by the Company and Parent to a third party.As described in the Merger Agreement and subject to the outcome of thedivestiture process and negotiations with applicable government authorities,the Company was prepared to establish a Company subsidiary(SpinCo)as part of this process.If utilized,the common stock or interests in SpinCo would be distributed to Company stockholders no laterthan the closing of the Merger(the Closing)and SpinCo would operate as a standalone public company,or the equity of SpinCo would becontributed to a trust for later distribution to Company stockholders.As described in more detail below,on September 8,2023,the Company andKroger announced that they entered into a comprehensive divestiture plan with C&S Wholesale Grocers,LLC(C&S).As a result of thecomprehensive divestiture plan announced with C&S,Kroger has exercised its right under the Merger Agreement to sell what would have beenthe SpinCo business to C&S.Consequently,the creation of SpinCo and spin-off previously9Table of Contentscontemplated by the Company and Kroger is no longer a requirement under the Merger Agreement and will no longer be pursued by theCompany and Kroger.On September 8,2023,the Company and Kroger announced that the parties had entered into a definitive agreement,dated September 8,2023,with C&S for the sale of select stores,banners,distribution centers,offices and private label brands to C&S.On April 22,2024,the Companyand Kroger announced they had amended the definitive agreement with C&S.The amended package modifies and builds on the initialdivestiture package(collectively,the Divestiture Assets).The Divestiture Assets will be divested by Kroger following the Closing.Thedefinitive agreement has customary representations and warranties and covenants of a transaction of its type.The divestiture to C&S is subject tofulfillment of customary closing conditions,including clearance by the United States Federal Trade Commission(FTC)and the completion ofthe proposed Merger.In accordance with the Merger Agreement,the Company has extended,and may continue to extend the original outside date of January 13,2024from time to time in 30-day increments for up to 270 days in the aggregate ending on October 9,2024(the Outside Date).The Parent will beobligated to pay a termination fee of$600 million to the Company if the Merger Agreement is terminated by either party in connection with theoccurrence of the Outside Date,and,at the time of such termination,all closing conditions other than regulatory approval have been satisfied.On February 26,2024,the FTC instituted an administrative proceeding to prohibit the Merger.On the same day,the FTC(joined by nine states)filed suit in the United States District Court for the District of Oregon,requesting a preliminary injunction to enjoin the Merger(the FederalAction).On January 15,2024 and February 14,2024,the attorneys general of States of Washington and Colorado,respectively,filed suit intheir respective state courts,also seeking to enjoin the Merger.In the Federal Action,the Company and Parent have stipulated to a temporaryrestraining order that prevents the Merger from closing until 11:59 PM Eastern Time on the fifth business day after the court rules on the FTCsmotion for a preliminary injunction or until after the date set by the court,whichever is later.The FTC administrative proceeding is currentlyscheduled to begin on July 31,2024,while a preliminary injunction hearing in the Federal Action is set to begin on August 26,2024.A trial onthe State of Washingtons request for a permanent injunction is scheduled to begin on September 16,2024.In conjunction with the State ofWashingtons suit,the Company and Parent have committed that they will not close the Merger until five days after that court rules(so long asthat ruling occurs by a certain date).In the Colorado case,the court has scheduled a preliminary injunction hearing to begin on August 12,2024and a permanent injunction hearing to begin on September 30,2024.In addition to these regulatory actions,private plaintiffs have filed suit inthe United States District Court for the Northern District of California also seeking to enjoin the Merger.That case is stayed pending resolutionof the FTCs motion for a preliminary injunction.NOTE 3-FAIR VALUE MEASUREMENTSThe accounting guidance for fair value established a framework for measuring fair value and established a three-level valuation hierarchy fordisclosure of fair value measurement.The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability atthe measurement date.The three levels are defined as follows:Level 1-Quoted prices in active markets for identical assets or liabilities;Level 2-Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;andLevel 3-Unobservable inputs in which little or no market activity exists,requiring an entity to develop its own assumptions that marketparticipants would use to value the asset or liability.10Table of ContentsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date.The following table presents certain assets which were measured at fair value on a recurring basis as of June 15,2024(in millions):Fair Value MeasurementsTotalQuoted prices inactive markets for identical assets(Level 1)Significantobservableinputs(Level 2)Significantunobservableinputs(Level 3)Assets:Short-term investments(1)$22.0$5.8$16.2$Non-current investments(2)107.4 6.7 100.7 Derivative contracts(3)1.0 1.0 Total$130.4$12.5$117.9$(1)Primarily relates to Mutual Funds(Level 1)and Certificates of Deposit(Level 2).Included in Other current assets.(2)Primarily relates to investments in Exchange-Traded Funds(Level 1)and certain equity investments,U.S.Treasury Notes and Corporate Bonds(Level 2).Included in Otherassets.(3)Primarily relates to energy derivative contracts.Included in Other assets.The following table presents certain assets which were measured at fair value on a recurring basis as of February 24,2024(in millions):Fair Value MeasurementsTotalQuoted prices inactive markets for identical assets(Level 1)Significantobservableinputs(Level 2)Significantunobservableinputs(Level 3)Assets:Short-term investments(1)$23.3$5.3$18.0$Non-current investments(2)107.3 6.4 100.9 Derivative contracts(3)1.5 1.5 Total$132.1$11.7$120.4$Liabilities:Derivative contracts(3)$0.8$0.8$Total$0.8$0.8$(1)Primarily relates to Mutual Funds(Level 1)and Certificates of Deposit(Level 2).Included in Other current assets.(2)Primarily relates to investments in Exchange-Traded Funds(Level 1)and certain equity investments,U.S.Treasury Notes and Corporate Bonds(Level 2).Included in Otherassets.(3)Primarily relates to energy derivative contracts.Included in Other assets or Other current liabilities.The Company records cash and cash equivalents,restricted cash,accounts receivable and accounts payable at cost.The recorded values of thesefinancial instruments approximate fair value based on their short-term nature.The estimated fair value of the Companys debt,including current maturities,was based on Level 2 inputs,being market quotes or values forsimilar instruments,and interest rates currently available to the Company for the issuance of debt with similar terms and remaining maturities asa discount rate for the remaining principal payments.As of June 15,2024,the fair value of total debt was$7,263.9 million compared to thecarrying value of$7,484.0 million,excluding debt discounts and deferred financing costs.As of February 24,2024,the fair value of11Table of Contentstotal debt was$7,457.2 million compared to the carrying value of$7,684.2 million,excluding debt discounts and deferred financing costs.Assets Measured at Fair Value on a Non-Recurring BasisThe Company measures certain assets at fair value on a non-recurring basis,including long-lived assets and goodwill,which are evaluated forimpairment.Long-lived assets include store-related assets such as property and equipment,operating lease assets and certain intangible assets.The inputs used to determine the fair value of long-lived assets and a reporting unit are considered Level 3 measurements due to their subjectivenature.NOTE 4-LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONSThe Companys long-term debt and finance lease obligations as of June 15,2024 and February 24,2024,net of unamortized debt discounts of$31.9 million and$33.3 million,respectively,and deferred financing costs of$39.3 million and$42.7 million,respectively,consisted of thefollowing(in millions):June 15,2024February 24,2024Senior Unsecured Notes due 2026 to 2030,interest rate range of 3.25%to 7.50%$6,509.7$6,506.4 New Albertsons L.P.Notes due 2026 to 2031,interest rate range of 6.52%to 8.70H1.4 480.1 Safeway Inc.Notes due 2027 to 2031,interest rate range of 7.25%to 7.4575.5 375.4 ABL Facility 200.0 Other financing obligations29.8 29.9 Mortgage notes payable,secured16.4 16.4 Finance lease obligations444.6 460.4 Total debt7,857.4 8,068.6 Less current maturities(82.6)(285.2)Long-term portion$7,774.8$7,783.4 ABL FacilityAs of June 15,2024,there were no amounts outstanding under the ABL Facility as the Company repaid$200.0 million during the 16 weeksended June 15,2024,and letters of credit(LOC)issued under the LOC sub-facility was$45.8 million.As of February 24,2024,there was$200.0 million outstanding under the ABL Facility and LOC issued under the LOC sub-facility was$48.3 million.12Table of ContentsNOTE 5-EMPLOYEE BENEFIT PLANSPension and Other Post-Retirement BenefitsThe following table provides the components of net pension and post-retirement expense(income)(in millions):16 weeks endedPensionOther post-retirement benefitsJune 15,2024June 17,2023June 15,2024June 17,2023Estimated return on plan assets$(28.1)$(30.3)$Service cost5.1 5.3 Interest cost25.9 25.7 0.2 0.2 Amortization of prior service cost0.1 0.1 Amortization of net actuarial gain(1.2)(0.6)(0.2)(0.3)Expense(income),net$1.8$0.2$(0.1)The Company contributed$12.7 million and$6.5 million to its defined pension plans and post-retirement benefit plans during the 16 weeksended June 15,2024 and June 17,2023,respectively.At the Companys discretion,additional funds may be contributed to the defined benefitpension plans that are determined to be beneficial to the Company.The Company currently anticipates contributing an additional$72.7 millionto these plans for the remainder of fiscal 2024.NOTE 6-COMMITMENTS AND CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTSGuaranteesLease Guarantees:The Company may have liability under certain operating leases that were assigned to third parties.If any of these thirdparties fail to perform their obligations under the leases,the Company could be responsible for the lease obligation.Because of the widedispersion among third parties and the variety of remedies available,the Company believes that if an assignee became insolvent,it would nothave a material effect on the Companys financial condition,results of operations or cash flows.The Company also provides guarantees,indemnifications and assurances to others in the ordinary course of its business.Legal ProceedingsThe Company is subject from time to time to various claims and lawsuits,including matters involving trade,business and operational practices,personnel and employment issues,lawsuits alleging violations of state and/or federal wage and hour laws,real estate disputes,personal injury,antitrust claims,packaging or product claims,claims related to the sale of drug or pharmacy products,such as opioids,intellectual propertyclaims and other proceedings arising in or outside of the ordinary course of business.Some of these claims or suits purport or may be determinedto be class actions and/or seek substantial damages.It is the opinion of the Companys management that although the amount of liability withrespect to certain of the matters described herein cannot be ascertained at this time,any resulting liability of these and other matters,includingany punitive damages,will not have a material adverse effect on the Companys business or overall financial condition.The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has madeprovisions where the loss contingency is probable and can be reasonably estimated.Nonetheless,assessing and predicting the outcomes of thesematters involves substantial uncertainties.While13Table of Contentsmanagement currently believes that the aggregate estimated liabilities currently recorded are reasonable,it remains possible that differences inactual outcomes or changes in managements evaluation or predictions could arise that could be material to the Companys results of operationsor cash flows.False Claims Act:Two qui tam actions alleging violations of the False Claims Act(FCA)have been filed against the Company and itssubsidiaries.Violations of the FCA are subject to treble damages and penalties of up to a specified dollar amount per false claim.In United States ex rel.Proctor v.Safeway,filed in the United States District Court for the Central District of Illinois,the relator alleges thatSafeway overcharged federal government healthcare programs by not providing the federal government,as part of its usual and customaryprices,the benefit of discounts given to customers in pharmacy membership discount and price-matching programs.The relator filed hiscomplaint under seal on November 11,2011,and the complaint was unsealed on August 26,2015.The relator amended the complaint on March31,2016.On June 12,2020,the District Court granted Safeways motion for summary judgment,holding that the relator could not prove thatSafeway acted with the intent required under the FCA,and judgment was issued on June 15,2020.On July 10,2020,the relator filed a motion toalter or amend the judgment and to supplement the record,which Safeway opposed.On November 13,2020,the District Court denied relatorsmotion,and on December 11,2020,relator filed a notice of appeal.The Seventh Circuit Court of Appeals affirmed the judgment in theCompanys favor on April 5,2022.On August 3,2022,relators filed a petition seeking review by the U.S.Supreme Court.In United States ex rel.Schutte and Yarberry v.SuperValu,New Albertsons,Inc.,et al.,also filed in the Central District of Illinois,the relatorsallege that defendants(including various subsidiaries of the Company)overcharged federal government healthcare programs by not providingthe federal government,as a part of usual and customary prices,the benefit of discounts given to customers who requested that defendants matchcompetitor prices.The complaint was originally filed under seal and amended on November 30,2015.On August 5,2019,the District Courtgranted relators motion for partial summary judgment,holding that price-matched prices are the usual and customary prices for those drugs.OnJuly 1,2020,the District Court granted the defendants motions for summary judgment and dismissed the case,holding that the relator could notprove that defendants acted with the intent required under the FCA.Judgment was issued on July 2,2020.On July 9,2020,the relators filed anotice of appeal.On August 12,2021,the Court of Appeals for the Seventh Circuit affirmed the grant of summary judgment in the Companysfavor.On September 23,2021,the relators filed a petition for rehearing en banc with the Seventh Circuit.On December 3,2021,the SeventhCircuit denied relators petition.On April 1,2022,relators filed a petition seeking review by the U.S.Supreme Court.The U.S.Supreme Court decided to hear the appeals filed by the relators in Proctor and Schutte.The Supreme Court consolidated the two casesfor the purpose of hearing the appeal.The Supreme Court heard oral arguments on April 18,2023.On June 1,2023,the Supreme Court issued anopinion adverse to the Company that reversed the lower courts rulings.On July 3,2023,the Supreme Court issued the order remanding bothcases back to the Court of Appeals for the Seventh Circuit for further review.On July 27,2023,the Court of Appeals remanded both cases backto the U.S.District Court for the Central District of Illinois.On August 22,2023,the District Court-as to Schutte-set a pretrial conference forMarch 4,2024,and a trial date of April 29,2024.At the same July 27 hearing,the District Court also gave the defendants leave to file motionsfor summary judgment on a schedule to be agreed upon.On October 11,2023,the Company and co-defendant filed a motion for summaryjudgment.On the same day,the relators filed motions for partial summary judgment.Both sides motions are pending.On February 16,2024,theCompany and co-defendant filed a motion to reconsider a prior grant of partial summary judgment against the defendants,and also a motion tocontinue the trial.On February 27,2024,the District Court granted the motion to continue and vacated the April 29,2024 trial date.At a pretrialconference on March 4,2024,the District Court reset the trial for September 30,2024.On May 20,2024,the District Court heard oral argumenton the pending motions.On May 22,2024,the Company and co-defendant filed a motion to continue the trial to January 2025,but14Table of Contentsin any event no earlier than November 2024.The District Court has not set any trial date for Proctor as of yet,and no motions are pending in thatcase.In both of the above cases,the federal government previously investigated the relators allegations and declined to intervene.The relators electedto pursue their respective cases on their own and in each case have alleged FCA damages in excess of$100 million before trebling and excludingpenalties.The Company is vigorously defending each of these matters.The Company has recorded an estimated liability for these matters.Pharmacy Benefit Manager(PBM)Litigation:The Company(including its subsidiary,Safeway Inc.)is a defendant in a lawsuit filed onJanuary 21,2021,in Minnesota state court,captioned Health Care Service Corp.et al.v.Albertsons Companies,LLC,et al.The actionchallenges certain prescription-drug prices reported by the Company to a pharmacy benefit manager,Prime Therapeutics LLC(Prime),whichin turn contracted with the health-insurer plaintiffs to adjudicate and process prescription-drug reimbursement claims.On December 7,2021,the Company filed a motion to dismiss the complaint.On January 14,2022,the court denied the Companys motion todismiss as to all but one count,plaintiffs claim of negligent misrepresentation.On January 21,2022,the Company and co-defendantSUPERVALU,Inc.(SUPERVALU)filed a third-party complaint against Prime,asserting various claims,including:indemnification,fraud andunjust enrichment.On February 17,2022,the Company filed in the Minnesota Court of Appeals an interlocutory appeal of the denial of theirmotion to dismiss on personal jurisdiction grounds(the Jurisdictional Appeal).On February 24,2022,the Company and SUPERVALU filed inthe trial court an unopposed motion to stay proceedings,pending the resolution of the Jurisdictional Appeal.The parties agreed on March 6,2022,to an interim stay in the trial court pending a ruling on the unopposed motion to stay proceedings.On September 6,2022,the MinnesotaCourt of Appeals denied the Jurisdictional Appeal and affirmed the trial courts denial of the Companys motion to dismiss.On October 6,2022,the Company and SUPERVALU filed a petition seeking review by the Minnesota Supreme Court.On November 23,2022,the MinnesotaSupreme Court denied that petition.The Company and co-defendant SUPERVALU filed an answer to the complaint on January 23,2023.OnMarch 9,2023,Prime moved to dismiss the third-party complaint filed by the Company and SUPERVALU.The court heard oral arguments onthe motion on May 11,2023.On August 9,2023,the court denied Primes motion as to 16 of the 17 counts in the third-party complaint,anddismissed one count without prejudice.On September 18,2023,the Company and SUPERVALU filed an amended third-party complaint,whichrepleaded the one count that had been dismissed(in addition to the other claims asserted in the initial third-party complaint).On October 2,2023,Prime filed an answer to the amended third-party complaint.The parties are presently engaged in discovery.The case is currentlyscheduled to be ready for trial on or after September 29,2025.The Company is vigorously defending the claims filed against it,and the Company also intends to prosecute its claims against Prime with equalvigor.The Company has recorded an estimated liability for this matter.Opioid Litigation:The Company is one of dozens of companies that have been named as defendants in lawsuits filed by various plaintiffs,including states,counties,cities,Native American tribes,and hospitals,alleging that defendants contributed to the national opioid epidemic.Atpresent,the Company is named in approximately 85 suits pending in various state courts as well as in the United States District Court for theNorthern District of Ohio,where over 2,000 cases against various defendants have been consolidated as Multi-District Litigation pursuant to 28U.S.C.1407.Most of the cases naming the Company have been stayed pending multiple bellwether trials,including three involving theCompany in Tarrant County(Texas),Town of Hull(Massachusetts)and Monterey County(California).All three bellwether matters are currentlyin discovery.The relief sought by the various plaintiffs in these matters includes compensatory damages,abatement and punitive damages aswell as injunctive relief.Prior to the start of a state-court trial that was scheduled for September 6,2022,the Company reached an agreement to settle with the State ofNew Mexico.The New Mexico counties and municipal entities that filed 14 additional15Table of Contentslawsuits,including Santa Fe County,agreed to the terms of the settlement.Thus,all 15 cases filed by New Mexico entities have been dismissedas a result of the settlement.The Company executed an agreement to settle three matters pending in Nevada state court.The Company recorded aliability of$21.5 million for the settlements of the cases in New Mexico and Nevada which was paid by our insurers in the fourth quarter offiscal 2022.With respect to the remaining pending state court claims,which may not be covered by insurance,three claims are currentlyproceeding through discovery,with trial dates scheduled in 2025.Those matters are pending in Dallas County(Texas),the State of Washingtonand the City of Philadelphia(Pennsylvania).The Company believes that it has substantial factual and legal defenses to these claims,and isvigorously defending these matters.At this stage in the proceedings,the Company is unable to determine the probability of the outcome of theseremaining matters or the range of reasonably possible loss.The Company has also received,subpoenas,Civil Investigative Demands and other requests for documents and information from the U.S.Department of Justice(DOJ)and certain state Attorneys General,and has had preliminary discussions with the DOJ with respect to purportedviolations of the federal Controlled Substances Act and the FCA in dispensing prescriptions.The Company has been cooperating with thegovernment with respect to these requests for information.Other CommitmentsIn the ordinary course of business,the Company enters into various supply contracts to purchase products for resale and purchase and servicecontracts for fixed asset and information technology commitments.These contracts typically include volume commitments or fixed expirationdates,termination provisions and other standard contractual considerations.NOTE 7-OTHER COMPREHENSIVE INCOME OR LOSSTotal comprehensive earnings are defined as all changes in stockholders equity during a period,other than those from investments by ordistributions to the stockholders.Generally,for the Company,total comprehensive income equals net income plus or minus adjustments forpension and other post-retirement liabilities.Total comprehensive earnings represent the activity for a period,net of tax.While total comprehensive earnings are the activity in a period and are largely driven by net earnings in that period,accumulated othercomprehensive income or loss(AOCI)represents the cumulative balance of other comprehensive income,net of tax,as of the balance sheetdate.Changes in the AOCI balance by component are shown below(in millions):16 weeks ended June 15,2024TotalPension and Post-retirement benefitplansOtherBeginning AOCI balance$88.0$87.5$0.5 Other comprehensive income before reclassifications(0.1)(0.1)Amounts reclassified from accumulated other comprehensive income(1)(1.3)(1.3)Tax benefit(expense)0.1 0.3(0.2)Current-period other comprehensive loss,net of tax(1.3)(1.0)(0.3)Ending AOCI balance$86.7$86.5$0.2 16Table of Contents16 weeks ended June 17,2023TotalPension and Post-retirement benefitplansOtherBeginning AOCI balance$69.3$71.7$(2.4)Other comprehensive loss before reclassifications2.3 2.3 Amounts reclassified from accumulated other comprehensive income(1)(0.8)(0.8)Tax(expense)benefit(0.4)0.2(0.6)Current-period other comprehensive income(loss),net of tax1.1(0.6)1.7 Ending AOCI balance$70.4$71.1$(0.7)(1)These amounts are included in the computation of net pension and post-retirement expense(income).For additional information,see Note 5-Employee Benefit Plans.NOTE 8-NET INCOME PER CLASS A COMMON SHAREThe Company calculates basic and diluted net income per Class A common share using the two-class method.The two-class method is anallocation formula that determines net income per Class A common share for each share of Class A common stock and Convertible PreferredStock,a participating security,according to dividends declared and participation rights in undistributed earnings.Under this method,all earnings(distributed and undistributed)are allocated to Class A common shares and Convertible Preferred Stock based on their respective rights toreceive dividends.The holders of Convertible Preferred Stock participate in cash dividends that the Company pays on its common stock to theextent that such cash dividends exceed$206.25 million per fiscal year and shares of Convertible Preferred Stock remain outstanding as of theapplicable record date to participate in such dividends.As of June 17,2023,100%of the originally issued Convertible Preferred Stock had beenconverted into Class A common stock and no shares of Convertible Preferred Stock are outstanding.In applying the two-class method to interimperiods,the Company allocates income to its quarterly periods independently and discretely from its year-to-date and annual periods.Basic netincome per Class A common share is computed by dividing net income allocated to Class A common stockholders by the weighted averagenumber of Class A common shares outstanding for the period,including Class A common shares to be issued with no prior remainingcontingencies prior to issuance.Diluted net income per Class A common share is computed based on the weighted average number of shares ofClass A common stock outstanding during each period,plus potential Class A common shares considered outstanding during the period,as longas the inclusion of such awards is not antidilutive.Potential Class A common shares consist of unvested restricted stock units(RSUs),restricted common stock(RSAs)and Convertible Preferred Stock,using the more dilutive of either the two-class method or as-converted stockmethod.Performance-based RSUs are considered dilutive when the related performance criterion has been met.17Table of ContentsThe components of basic and diluted net income per Class A common share were as follows(in millions,except per share data):16 weeks endedJune 15,2024June 17,2023Basic net income per Class A common shareNet income$240.7$417.2 Accrued dividends on Convertible Preferred Stock(0.3)Earnings allocated to Convertible Preferred Stock(0.4)Net income allocated to Class A common stockholders-Basic$240.7$416.5 Weighted average Class A common shares outstanding-Basic(1)578.6 573.7 Basic net income per Class A common share$0.42$0.73 Diluted net income per Class A common shareNet income allocated to Class A common stockholders-Basic$240.7$416.5 Accrued dividends on Convertible Preferred Stock 0.3 Earnings allocated to Convertible Preferred Stock 0.4 Net income allocated to Class A common stockholders-Diluted$240.7$417.2 Weighted average Class A common shares outstanding-Basic(1)578.6 573.7 Dilutive effect of:Restricted stock units and awards2.7 5.3 Convertible Preferred Stock(2)1.1 Weighted average Class A common shares outstanding-Diluted(3)581.3 580.1 Diluted net income per Class A common share$0.41$0.72(1)The number of Class A common shares remaining to be issued for the 16 weeks ended June 15,2024 and June 17,2023 were not material.(2)Reflects the number of shares of Convertible Preferred Stock issued,if converted into common stock for the period outstanding.(3)The number of potential Class A common shares outstanding related to RSUs and RSAs that were antidilutive for the 16 weeks ended June 15,2024 and June 17,2023 werenot material.Item 2-Managements Discussion and Analysis of Financial Condition and Results of OperationsFORWARD-LOOKING STATEMENTS AND FACTORS THAT IMPACT OUR OPERATING RESULTS AND TRENDSThis Form 10-Q contains forward-looking statements within the meaning of the federal securities laws.The forward-looking statementsinclude our current expectations,assumptions,estimates and projections about our business,our industry and the outcome of the Merger.Theyinclude statements relating to our future operating or financial performance which the Company believes to be reasonable at this time.You canidentify forward-looking statements by the use of words such as outlook,may,should,could,estimates,predicts,potential,continue,anticipates,believes,plans,expects,future and intends and similar expressions which are intended to identify forward-looking statements.These statements are not guarantees of future performance and are subject to numerous risks and uncertainties which are beyond our control anddifficult to predict and could cause actual results to differ materially from the results expressed or implied by the statements.Risks anduncertainties that could cause actual results to differ materially from such statements include:18Table of Contents uncertainties related to the Merger,including our ability to close the transactions contemplated by the Merger Agreement,and the impactof the costs related to the Merger;erosion of consumer confidence in our business as a result of the Merger;restrictions on our ability to operate as a result of the Merger Agreement;challenges in retaining and motivating our associates until the closing of the Merger,particularly following the public announcement ofthe locations to be divested,with difficulties in attracting new employees during the pendency of the Merger;litigation related to the transactions contemplated by the Merger Agreement;changes in macroeconomic conditions such as rates of food price inflation or deflation,fuel and commodity prices and expiration ofstudent loan payment deferments;changes in consumer behavior and spending due to the impact of macroeconomic factors;failure to achieve productivity initiatives,unexpected changes in our objectives and plans,inability to implement our strategies,plans,programs and initiatives,or enter into strategic transactions,investments or partnerships in the future on terms acceptable to us,or at all;changes in wage rates,ability to attract and retain qualified associates and negotiate acceptable contracts with labor unions;availability and cost of goods used in our food products;challenges with our supply chain;operational and financial effects resulting from cyber incidents at the Company or at a third party,including outages in the cloudenvironment and the effectiveness of business continuity plans during a ransomware or other cyber incident;and changes in tax rates,tax laws,and regulations that directly impact our business or our customers may adversely impact our financialcondition and results of operations.All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionarystatements and risk factors.Forward-looking statements contained in this Form 10-Q reflect our view only as of the date of this Form 10-Q.Weundertake no obligation,other than as required by law,to update or revise any forward-looking statements,whether as a result of newinformation,future events or otherwise.In evaluating our financial results and forward-looking statements,you should carefully consider the risks and uncertainties more fully describedin the Risk Factors section or other sections in our reports filed with the SEC including the most recent annual report on Form 10-K and anysubsequent periodic reports on Form 10-Q and current reports on Form 8-K.As used in this Form 10-Q,unless the context otherwise requires,references to Albertsons,the Company,we,us and our refer toAlbertsons Companies,Inc.and,where appropriate,its subsidiaries.NON-GAAP FINANCIAL MEASURESWe define EBITDA as GAAP earnings(net loss)before interest,income taxes,depreciation and amortization.We define Adjusted EBITDA asearnings(net loss)before interest,income taxes,depreciation and amortization,further adjusted to eliminate the effects of items managementdoes not consider in assessing our ongoing core performance.We define Adjusted net income as GAAP Net income adjusted to eliminate theeffects of items management does not consider in assessing our ongoing core performance.We define Adjusted net income per Class A commonshare as Adjusted net income divided by the weighted average diluted Class A common shares outstanding,as adjusted to reflect all RSUs andRSAs outstanding at the end of the period,as well as the conversion of Convertible Preferred19Table of ContentsStock when it is antidilutive for GAAP.See Results of Operations for further discussion and a reconciliation of Adjusted EBITDA,Adjustednet income and Adjusted net income per Class A common share.EBITDA,Adjusted EBITDA,Adjusted net income and Adjusted net income per Class A common share(collectively,the Non-GAAPMeasures)are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate ourongoing results of operations,when considered alongside other GAAP measures such as net income,operating income,gross margin and netincome per Class A common share.These Non-GAAP Measures exclude the financial impact of items management does not consider inassessing our ongoing core operating performance,and thereby provide useful measures to analysts and investors of our operating performanceon a period-to-period basis.Other companies may have different definitions of Non-GAAP Measures and provide for different adjustments,andcomparability to our results of operations may be impacted by such differences.We also use Adjusted EBITDA for board of director and bankcompliance reporting.Our presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffectedby unusual or non-recurring items.Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business.Wecompensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes.20Table of ContentsFIRST QUARTER OF FISCAL 2024 OVERVIEWWe are one of the largest food retailers in the United States,with 2,269 stores across 34 states and the District of Columbia as of June 15,2024.We operate more than 20 well known banners including Albertsons,Safeway,Vons,Pavilions,Randalls,Tom Thumb,Carrs,Jewel-Osco,Acme,Shaws,Star Market,United Supermarkets,Market Street,Haggen,Kings Food Markets and Balduccis Food Lovers Market,withapproximately 285,000 talented and dedicated employees,as of June 15,2024,who serve on average 36.3 million customers each week.Additionally,as of June 15,2024,we operated 1,725 pharmacies,1,346 in-store branded coffee shops,403 associated fuel centers,22 dedicateddistribution centers,19 manufacturing facilities and various digital platforms.Merger AgreementOn October 13,2022,the Company,The Kroger Co.(Parent)and Kettle Merger Sub,Inc.,a wholly owned subsidiary of Parent(MergerSub),entered into an Agreement and Plan of Merger(the Merger Agreement),pursuant to which Merger Sub will be merged with and into theCompany(the Merger),with the Company surviving the Merger as the surviving corporation and a direct,wholly owned subsidiary of Parent.For additional information about the Merger,see Note 2-Merger Agreement in the unaudited interim Condensed Consolidated FinancialStatements located elsewhere in this Form 10-Q.The Company has filed with the SEC a definitive information statement on Schedule 14C with respect to the approval of the Merger and hasmailed the definitive information statement to the Companys stockholders.You may obtain copies of all documents filed by the Company withthe SEC regarding this transaction,free of charge,at the SECs website,www.sec.gov or from the Companys website athttps:/ quarter of fiscal 2024 highlightsIn summary,our financial and operating highlights for the first quarter of fiscal 2024 include:Identical sales increased 1.4%Digital sales increased 23%Loyalty members increased 15%to 41.4 millionNet income of$241 million,or$0.41 per Class A common shareAdjusted net income of$392 million,or$0.66 per Class A common shareAdjusted EBITDA of$1,184 million21Table of ContentsStoresThe following table shows stores operating,opened and closed during the periods presented:16 weeks endedJune 15,2024June 17,2023Stores,beginning of period2,269 2,271 Opened1 2 Closed(1)(1)Stores,end of period2,269 2,272 The following table summarizes our stores by size:Number of storesPercent of TotalRetail Square Feet(1)Square FootageJune 15,2024June 17,2023June 15,2024June 17,2023June 15,2024June 17,2023Less than 30,000217 218 9.6%9.6%4.9 4.9 30,000 to 50,000777 780 34.24.32.6 32.7 More than 50,0001,275 1,274 56.2V.1u.3 75.3 Total Stores2,269 2,272 100.00.02.8 112.9(1)In millions,reflects total square footage of retail stores operating at the end of the period.RESULTS OF OPERATIONSComparison of the First Quarter of Fiscal 2024 to the First Quarter of Fiscal 2023.The following tables and related discussion set forth certain information and comparisons regarding the components of our CondensedConsolidated Statements of Operations for the 16 weeks ended June 15,2024(first quarter of fiscal 2024 and first 16 weeks of fiscal 2024)and 16 weeks ended June 17,2023(first quarter of fiscal 2023 and first 16 weeks of fiscal 2023)(dollars in millions,except per share data).16 weeks endedJune 15,2024%of SalesJune 17,2023%of SalesNet sales and other revenue$24,265.4 100.0%$24,050.2 100.0%Cost of sales17,526.5 72.2 17,387.5 72.3 Gross margin6,738.9 27.8 6,662.7 27.7 Selling and administrative expenses6,274.0 25.9 6,012.9 25.0 Loss on property dispositions and impairment losses,net5.3 27.6 0.1 Operating income459.6 1.9 622.2 2.6 Interest expense,net145.7 0.6 154.9 0.6 Other expense(income),net4.0 (16.0)(0.1)Income before income taxes309.9 1.3 483.3 2.1 Income tax expense69.2 0.3 66.1 0.3 Net income$240.7 1.0%$417.2 1.8sic net income per Class A common share$0.42$0.73 Diluted net income per Class A common share0.41 0.72 22Table of ContentsNet Sales and Other RevenueNet sales and other revenue increased 0.9%to$24,265.4 million for the first quarter of fiscal 2024 from$24,050.2 million for the first quarter offiscal 2023.The increase in Net sales and other revenue was driven by our 1.4%increase in identical sales,with strong growth in pharmacy salesdriving the identical sales increase.We also continued to grow our digital sales during the first quarter of fiscal 2024.The increase in Net salesand other revenue was partially offset by lower fuel sales.Identical Sales,Excluding FuelIdentical sales include stores operating during the same period in both the current year and the prior year,comparing sales on a daily basis.Direct to consumer digital sales are included in identical sales,and fuel sales are excluded from identical sales.Acquired stores become identicalon the one-year anniversary date of the acquisition.Identical sales for the 16 weeks ended June 15,2024 and the 16 weeks ended June 17,2023,respectively,were:16 weeks endedJune 15,2024June 17,2023Identical sales,excluding fuel1.4%4.9%The following table represents Net sales and other revenue by product type(dollars in millions):16 weeks endedJune 15,2024June 17,2023Amount(1)%of TotalAmount(1)%of TotalNon-perishables(2)$12,054.0 49.7%$12,086.8 50.3%Fresh(3)7,904.9 32.6 7,889.3 32.8 Pharmacy2,622.8 10.8 2,300.1 9.6 Fuel1,320.9 5.4 1,400.4 5.8 Other(4)362.8 1.5 373.6 1.5 Net sales and other revenue$24,265.4 100.0%$24,050.2 100.0%(1)Digital related sales are included in the categories to which the revenue pertains.(2)Consists primarily of general merchandise,grocery,dairy and frozen foods.(3)Consists primarily of produce,meat,deli and prepared foods,bakery,floral and seafood.(4)Consists primarily of wholesale revenue to third parties,commissions,rental income and other miscellaneous revenue.Gross MarginGross margin represents the portion of Net sales and other revenue remaining after deducting Cost of sales during the period,including purchaseand distribution costs.These costs include,among other things,purchasing and sourcing costs,inbound freight costs,product quality testingcosts,warehouse and distribution costs,Own Brands program costs and digital-related delivery and handling costs.Advertising,promotionalexpenses and vendor allowances are also components of Cost of sales.Gross margin rate increased to 27.8%during the first quarter of fiscal 2024 compared to 27.7%during the first quarter of fiscal 2023.Excludingthe impact of fuel and LIFO expense,gross margin rate decreased 22 basis points compared to the first quarter of fiscal 2023.The strong growthin pharmacy sales,which carries an overall lower gross margin rate,increases in shrink,and increases in picking and delivery costs related to thecontinued growth in23Table of Contentsour digital sales were the primary drivers of the decrease,partially offset by our procurement and sourcing productivity initiatives.Selling and Administrative ExpensesSelling and administrative expenses consist primarily of store level costs,including wages,employee benefits,rent,depreciation and utilities,inaddition to certain back-office expenses related to our corporate and division offices.Selling and administrative expenses increased to 25.9%of Net sales and other revenue during the first quarter of fiscal 2024 compared to 25.0%during the first quarter of fiscal 2023.Excluding the impact of fuel,Selling and administrative expenses as a percentage of Net sales and otherrevenue increased 79 basis points.The increase in Selling and administrative expenses as a percentage of Net sales and other revenue wasprimarily attributable to an increase in operating expenses related to the ongoing development of our digital and omnichannel capabilities,Merger-related costs,higher employee costs,increased store occupancy costs and additional third-party store security services,partially offset bythe benefit of productivity initiatives.Loss on Property Dispositions and Impairment Losses,NetFor the first quarter of fiscal 2024,net loss on property dispositions and impairment losses was$5.3 million,primarily driven by the impairmentof certain technology assets.For the first quarter of fiscal 2023,net loss on property dispositions and impairment losses was$27.6 million,primarily driven by the impairment and disposal of certain technology assets.Interest Expense,NetInterest expense,net was$145.7 million during the first quarter of fiscal 2024 compared to$154.9 million during the first quarter of fiscal 2023.The decrease in interest expense,net was primarily attributable to lower average outstanding borrowings.The weighted average interest rateduring both the first quarter of fiscal 2024 and the first quarter of fiscal 2023 was 5.6%,excluding deferred financing costs and original issuediscount.Other Expense(Income),NetFor the first quarter of fiscal 2024,other expense,net was$4.0 million compared to other income,net of$16.0 million for the first quarter offiscal 2023.Other expense,net during the first quarter of fiscal 2024 was primarily driven by unrealized losses from non-operating investments,partially offset by non-service cost components of net pension and post-retirement income.Other income,net during the first quarter of fiscal2023 was primarily driven by income related to our equity interest and gain on sale of El Rancho,as well as non-service cost components of netpension and post-retirement income,partially offset by realized losses from non-operating investments.Income TaxesIncome tax expense was$69.2 million,representing a 22.3fective tax rate,for the first quarter of fiscal 2024.Income tax expense was$66.1million,representing a 13.7fective tax rate,for the first quarter of fiscal 2023.The increase in the effective income tax rate in the firstquarter of fiscal 2024 was primarily driven by the reduction of a reserve of$49.7 million for an uncertain tax position due to the expiration of aforeign statute during the first quarter of fiscal 2023.Net Income and Adjusted Net IncomeNet income was$240.7 million,or$0.41 per Class A common share,during the first quarter of fiscal 2024 compared to$417.2 million,or$0.72per Class A common share,during the first quarter of fiscal 2023.The first24Table of Contentsquarter of fiscal 2023 included the$49.7 million or$0.09 per share benefit related to the reduction in the reserve for an uncertain tax position.Adjusted net income was$391.6 million,or$0.66 per Class A common share,during the first quarter of fiscal 2024 compared to$545.7 million,or$0.93 per Class A common share(which includes the tax benefit discussed above),during the first quarter of fiscal 2023.Adjusted EBITDAFor the first quarter of fiscal 2024,Adjusted EBITDA was$1,183.9 million,or 4.9%of Net sales and other revenue,compared to$1,318.5million,or 5.5%of Net sales and other revenue,for the first quarter of fiscal 2023.Reconciliation of Non-GAAP MeasuresThe following tables reconcile Net income to Adjusted net income,and Net income per Class A common share to Adjusted net income per ClassA common share(in millions,except per share data):16 weeks endedJune 15,2024June 17,2023Numerator:Net income$240.7$417.2 Adjustments:Gain on energy hedges,net(d)(0.8)(0.6)Business transformation(1)(b)17.3 12.1 Equity-based compensation expense(b)36.7 31.9 Loss on property dispositions and impairment losses,net5.3 27.6 LIFO expense(a)14.6 34.0 Merger-related costs(2)(b)92.3 47.1 Certain legal and regulatory accruals and settlements,net(b)(8.9)Amortization of debt discount and deferred financing costs(c)4.9 4.7 Amortization of intangible assets resulting from acquisitions(b)14.7 15.4 Miscellaneous adjustments(3)(f)19.8(2.4)Tax impact of adjustments to Adjusted net income(45.0)(41.3)Adjusted net income$391.6$545.7 Denominator:Weighted average Class A common shares outstanding-diluted581.3 580.1 Adjustments:Restricted stock units and awards(4)9.3 6.7 Adjusted weighted average Class A common shares outstanding-diluted590.6 586.8 Adjusted net income per Class A common share-diluted$0.66$0.93 25Table of Contents16 weeks endedJune 15,2024June 17,2023Net income per Class A common share-diluted$0.41$0.72 Non-GAAP adjustments(5)0.26 0.22 Restricted stock units and awards(4)(0.01)(0.01)Adjusted net income per Class A common share-diluted$0.66$0.93 The following table is a reconciliation of Adjusted net income to Adjusted EBITDA:16 weeks endedJune 15,2024June 17,2023Adjusted net income(6)$391.6$545.7 Tax impact of adjustments to Adjusted net income45.0 41.3 Income tax expense69.2 66.1 Amortization of debt discount and deferred financing costs(c)(4.9)(4.7)Interest expense,net145.7 154.9 Amortization of intangible assets resulting from acquisitions(b)(14.7)(15.4)Depreciation and amortization(e)552.0 530.6 Adjusted EBITDA$1,183.9$1,318.5(1)Includes costs associated with third-party consulting fees related to our operational priorities and associated business transformation.(2)Primarily relates to third-party legal and advisor fees and retention program expense related to the proposed Merger.(3)Miscellaneous adjustments include the following(see table below):16 weeks endedJune 15,2024June 17,2023Non-cash lease-related adjustments$1.0$Lease and lease-related costs for surplus and closed stores5.4 6.6 Net realized and unrealized loss(gain)on non-operating investments3.2(4.6)Other(i)10.2(4.4)Total miscellaneous adjustments$19.8$(2.4)(i)Primarily includes adjustments for unconsolidated equity investments and other costs not considered in our core performance.(4)Represents incremental unvested RSUs and unvested RSAs to adjust the diluted weighted average Class A common shares outstanding during each respective period to thefully outstanding RSUs and RSAs as of the end of each respective period.(5)Reflects the per share impact of Non-GAAP adjustments for each period.See the reconciliation of Net income to Adjusted net income above for further details.(6)See the reconciliation of Net income to Adjusted net income above for further details.Non-GAAP adjustment classifications within the Condensed Consolidated Statements of Operations:(a)Cost of sales(b)Selling and administrative expenses(c)Interest expense,net26Table of Contents(d)Gain on energy hedges,net:16 weeks endedJune 15,2024June 17,2023Cost of sales$0.1$1.3 Selling and administrative expenses(0.9)(1.9)Total Gain on energy hedges,net$(0.8)$(0.6)(e)Depreciation and amortization:16 weeks endedJune 15,2024June 17,2023Cost of sales$53.6$46.7 Selling and administrative expenses498.4 483.9 Total Depreciation and amortization$552.0$530.6(f)Miscellaneous adjustments:16 weeks endedJune 15,2024June 17,2023Selling and administrative expenses$12.4$10.0 Other expense(income),net7.4(12.4)Total Miscellaneous adjustments$19.8$(2.4)LIQUIDITY AND CAPITAL RESOURCESThe following table sets forth the major sources and uses of cash and cash equivalents and restricted cash for each period(in millions):16 weeks endedJune 15,2024June 17,2023Cash and cash equivalents and restricted cash at end of period$295.3$233.2 Cash flows provided by operating activities960.9 838.3 Cash flows used in investing activities(538.0)(453.9)Cash flows used in financing activities(320.8)(615.0)Net Cash Provided by Operating ActivitiesNet cash provided by operating activities was$960.9 million for the first 16 weeks of fiscal 2024 compared to$838.3 million for the first 16weeks of fiscal 2023.The increase in cash flow from operations compared to the first 16 weeks of fiscal 2023 was due to changes in workingcapital,primarily related to lower inventory,and less cash paid for taxes and interest,partially offset by a decrease in Adjusted EBITDA andhigher Merger-related costs during the first 16 weeks of fiscal 2024.Net Cash Used in Investing ActivitiesNet cash used in investing activities was$538.0 million for the first 16 weeks of fiscal 2024 compared to$453.9 million for the first 16 weeks offiscal 2023.For the first 16 weeks of fiscal 2024,cash used in investing activities consisted primarily of payments for property,equipment and intangibles of$543.0 million,partially offset by proceeds from the sale of assets of$3.8 million,27Table of Contentsprimarily related to real estate.Payments for property,equipment and intangibles in the first 16 weeks of fiscal 2024 included the completion of17 remodels,the opening of one new store and continued investment in our digital and technology platforms.For the first 16 weeks of fiscal2023,cash used in investing activities consisted primarily of payments for property,equipment and intangibles of$622.5 million,partially offsetby proceeds from the sale of assets of$169.3 million,primarily related to the sale of our equity interest in El Rancho.Payments for property,equipment and intangibles in the first 16 weeks of fiscal 2023 included the completion of 43 remodels,the opening of two new stores andcontinued investment in our digital and technology platforms.Net Cash Used in Financing ActivitiesNet cash used in financing activities was$320.8 million during the first 16 weeks of fiscal 2024 compared to net cash used in financing activitiesof$615.0 million during the first 16 weeks of fiscal 2023.Net cash used in financing activities during the first 16 weeks of fiscal 2024 consisted primarily of the$200.0 million repayment of the ABLFacility,dividends paid on our Class A common stock and tax withholding payments on vesting of restricted stock units.Net cash used infinancing activities during the first 16 weeks of fiscal 2023 consisted primarily of the$500.0 million partial repayment of the ABL Facility,dividends paid on our Class A common stock and tax withholding payments on vesting of restricted stock units.DividendsWe have established a dividend policy pursuant to which we intend to pay a quarterly dividend on our Class A common stock.Cash dividendspaid on our Class A common stock were$69.5 million($0.12 per common share)and$69.0 million($0.12 per common share)during the first 16weeks of fiscal 2024 and first 16 weeks of fiscal 2023,respectively.On July 11,2024,we announced the next quarterly dividend payment of$0.12 per share of Class A common stock to be paid on August 9,2024 to stockholders of record as of the close of business on July 26,2024.LiquidityBased on current operating trends,we believe that we have significant sources of cash to meet our liquidity needs for the next 12 months and forthe foreseeable future,including cash on hand,cash flows from operating activities and other sources of liquidity,including the ABL Facility.Weestimate our liquidity needs over the next 12 months to be approximately$5.1 billion,which includes anticipated requirements for workingcapital,Merger costs,capital expenditures,pension obligations,interest payments,quarterly dividends on Class A common stock,operatingleases and finance leases.In addition,we may enter into refinancing and sale leaseback transactions from time to time.We believe we haveadequate cash flow to continue to maintain our current debt ratings and to respond effectively to competitive conditions.As of June 15,2024,we had no borrowings outstanding under our ABL Facility and total availability of$3,954.2 million(net of letter of creditusage).CRITICAL ACCOUNTING POLICIESThe preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated FinancialStatements and the reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.Wehave chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position,andwe apply those accounting policies in a fair and consistent manner.See the Critical Accounting28Table of ContentsPolicies section included in our Annual Report on Form 10-K for the fiscal year ended February 24,2024,filed with the SEC on April 22,2024,for a discussion of our significant accounting policies.RECENTLY ISSUED AND RECENTLY ADOPTED ACCOUNTING STANDARDSSee Note 1-Basis of Presentation and Summary of Significant Accounting Policies of our unaudited interim Condensed Consolidated FinancialStatements located elsewhere in this Form 10-Q.Item 3-Quantitative and Qualitative Disclosures About Market RiskThere have been no material changes in our exposure to market risk from the information provided in our Annual Report on Form 10-K for thefiscal year ended February 24,2024,filed with the SEC on April 22,2024.Item 4-Controls and ProceduresBased on their evaluation of our disclosure controls and procedures(as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of1934(the Exchange Act)as of the end of the period covered by this Form 10-Q,our Principal Executive Officer and Principal FinancialOfficer concluded our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded,processed,summarized and reported within the time periods specified in the SECs rulesand forms and is accumulated and communicated to management,including our Principal Executive Officer and Principal Financial Officer,asappropriate,to allow timely decisions regarding required disclosure.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting during the first quarter of fiscal 2024 that have materially affected,or arereasonably likely to materially affect,our internal control over financial reporting.29Table of ContentsPART II-OTHER INFORMATIONItem 1-Legal ProceedingsThe Company is subject from time to time to various claims and lawsuits arising in the ordinary course of business,including lawsuits involvingtrade practices,lawsuits alleging violations of state and/or federal wage and hour laws(including alleged violations of meal and rest period lawsand alleged misclassification issues),real estate disputes and other matters.Some of these claims or suits purport or may be determined to beclass actions and/or seek substantial damages.It is the opinion of the Companys management that although the amount of liability with respectto certain of the matters described in this Form 10-Q cannot be ascertained at this time,any resulting liability of these and other matters,including any punitive damages,will not have a material adverse effect on the Companys business or overall financial condition.See the mattersunder the caption Legal Proceedings in Note 6-Commitments and Contingencies and Off Balance Sheet Arrangements in the unaudited interimCondensed Consolidated Financial Statements located elsewhere in this Form 10-Q.The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has madeprovisions where the loss contingency is probable and can be reasonably estimated.Nonetheless,assessing and predicting the outcomes of thesematters involves substantial uncertainties.While management currently believes that the aggregate estimated liabilities currently recorded arereasonable,it remains possible that differences in actual outcomes or changes in managements evaluation or predictions could arise that could bematerial to the Companys results of operations or cash flows.Environmental MattersOur operations are subject to regulation under environmental laws,including those relating to waste management,air emissions and undergroundstorage tanks.In addition,as an owner and operator of commercial real estate,we may be subject to liability under applicable environmentallaws for clean-up of contamination at our facilities.SEC regulations require us to disclose certain environmental matters arising under federal,state or local environmental provisions if we reasonably believe that such proceedings may result in monetary sanctions above a stated threshold.Pursuant to SEC regulations,we use a threshold of$1 million for purposes of determining whether disclosure of any such proceedings isrequired.Item 1A-Risk FactorsThere have been no material changes to the risk factors previously included in our Annual Report on Form 10-K for the fiscal year endedFebruary 24,2024,filed with the SEC on April 22,2024,under the heading Risk Factors.Item 2-Unregistered Sales of Equity Securities and Use of Proceeds(a)Unregistered Sales of Equity SecuritiesNone.(b)Use of ProceedsNone.(c)Purchases of Equity SecuritiesNone.30Table of ContentsItem 3-Defaults Upon Senior SecuritiesNone.Item 4-Mine Safety DisclosuresNot Applicable.Item 5-Other InformationIn the first quarter of fiscal 2024,none of the Companys directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement,as defined in Item 408(a)of Regulation S-K.Item 6-Exhibits31.1 Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification of the Principal Executive Officer and of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002EXHIBIT 101.INS-Inline XBRL Instance DocumentEXHIBIT 101.SCH-Inline XBRL Taxonomy Extension Schema DocumentEXHIBIT 101.CAL-Inline XBRL Taxonomy Extension Calculation Linkbase DocumentEXHIBIT 101.DEF-Inline XBRL Taxonomy Extension Definition Linkbase DocumentEXHIBIT 101.LAB-Inline XBRL Taxonomy Extension Label Linkbase DocumentEXHIBIT 101.PRE-Inline XBRL Taxonomy Extension Presentation Linkbase DocumentEXHIBIT 104-Cover Page Interactive Data File(embedded within the Inline XBRL document)31Table 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.Albertsons Companies,Inc.(Registrant)Date:July 23,2024By:/s/Vivek SankaranVivek SankaranChief Executive Officer and Director(Principal Executive Officer)Date:July 23,2024By:/s/Sharon McCollamSharon McCollamPresident and Chief Financial Officer(Principal Financial Officer)32Exhibit 31.1Certification of the Principal Executive Officer pursuantto Section 302 of the Sarbanes-Oxley Act of 2002I,Vivek Sankaran,certify that:1.I have reviewed this Quarterly Report on Form 10-Q of Albertsons Companies,Inc.;2.Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3.Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4.The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed under oursupervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is made knownto 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 on suchevaluation;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 and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting,whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.Date:July 23,2024/s/Vivek SankaranVivek SankaranChief Executive Officer and Director(Principal Executive Officer)Exhibit 31.2Certification of the Principal Financial Officer pursuantto Section 302 of the Sarbanes-Oxley Act of 2002I,Sharon McCollam,certify that:1.I have reviewed this Quarterly Report on Form 10-Q of Albertsons Companies,Inc.;2.Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3.Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4.The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed under oursupervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is made knownto 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 on suchevaluation;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 and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting,whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.Date:July 23,2024/s/Sharon McCollamSharon McCollamPresident and Chief Financial Officer(Principal Financial Officer)Exhibit 32.1Certification Pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002In connection with the Quarterly Report of Albertsons Companies,Inc.(the“Company”)on Form 10-Q for the period ended June 15,2024as filed with the Securities and Exchange Commission on the date hereof(the“Report”),each of the undersigned certifies,pursuant to 18 U.S.C.1350,as adopted pursuant to 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;and2.The information contained in the Report fairly presents,in all material respects,the financial condition and results ofoperations of the Company.Date:July 23,2024/s/Vivek SankaranVivek SankaranChief Executive Officer and Director(Principal ExecutiveOfficer)/s/Sharon McCollamSharon McCollamPresident and Chief Financial Officer(Principal FinancialOfficer)
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Proprietary business information of ADM.Proprietary business information of ADM.First Quarter 2024Earnings Conference CallApril 30,2024Proprietary business information of ADM.|2This presentation contains“forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties.All statements,other than statements of historical fact included in this release,are forward-looking statements.You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts.These statements may include words such as“anticipate,”“estimate,”“expect,”“project,”“plan,”“intend,”“believe,”“may,”“outlook,”“will,”“should,”“can have,”“likely,”and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.All forward-looking statements are subject to significant risks,uncertainties and changes in circumstances that could cause actual results and outcomes to differ materially from the forward-looking statements.These forward-looking statements are not guarantees of future performance and involve risks,assumptions and uncertainties,including,without limitation,those that are described in the Companys most recent Annual Report on Form 10-K and in other documents that the Company files or furnishes with the Securities and Exchange Commission.Should one or more of these risks or uncertainties materialize,or should underlying assumptions prove incorrect,actual outcomes may vary materially from those indicated or anticipated by such forward-looking statements.Accordingly,you are cautioned not to place undue reliance on these forward-looking statements,which speak only as of the date they are made.Except to the extent required by law,ADM does not undertake,and expressly disclaims,any duty or obligation to update publicly any forward-looking statement after the date of this announcement,whether as a result of new information,future events,changes in assumptions or otherwise.Cautionary Note Regarding Forward-Looking StatementsProprietary business information of ADM.|3The Company uses certain“Non-GAAP”financial measures as defined by the Securities and Exchange Commission.These are measures of performance not defined by accounting principles generally accepted in the United States,and should be considered in addition to,not in lieu of,GAAP reported measures.Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in this presentation.1.Adjusted net earnings and Adjusted earnings per share(EPS):Adjusted net earnings reflects ADMs reported net earnings after removal of the effect on net earnings of specified items as more fully described in the reconciliation tables.Adjusted EPS reflects ADMs fully diluted EPS after removal of the effect on EPS as reported of specified items as more fully described in the reconciliation tables.Management believes that Adjusted net earnings and Adjusted EPS are useful measures of ADMs performance because they provide investors additional information about ADMs operations allowing better evaluation of underlying business performance and better period-to-period comparability.These non-GAAP financial measures are not intended to replace or be alternatives to net earnings and EPS as reported,the most directly comparable GAAP financial measures,or any other measures of operating results under GAAP.Earnings amounts described above have been divided by the companys diluted shares outstanding for each respective period in order to arrive at an adjusted EPS amount for each specified item.2.Segment operating profit and adjusted segment operating profit:Segment operating profit is ADMs consolidated income from operations before income tax excluding corporate items.Adjusted segment operating profit,a non-GAAP measure,is segment operating profit excluding specified items.Management believes that segment operating profit and adjusted segment operating profit are useful measures of ADMs performance because they provide investors information about ADMs business unit performance excluding corporate overhead costs as well as specified items.Segment operating profit and adjusted segment operating profit are not measures of consolidated operating results under U.S.GAAP and should not be considered alternatives to income before income taxes,the most directly comparable GAAP financial measure,or any other measure of consolidated operating results under U.S.GAAP.3.Adjusted Return on Invested Capital(ROIC):Adjusted ROIC is Adjusted ROIC earnings divided by adjusted invested capital.Adjusted ROIC earnings is ADMs net earnings adjusted for the after-tax effects of interest expense on borrowings,changes in the LIFO reserve and other specified items.Adjusted invested capital is the sum of ADMs equity(excluding noncontrolling interests)and interest-bearing liabilities adjusted for the after-tax effect of the LIFO reserve,and other specified items.Management believes Adjusted ROIC is a useful financial measure because it provides investors information about ADMs returns excluding the impacts of LIFO inventory reserves and other specified items and increases period-to-period comparability of underlying business performance.Management uses Adjusted ROIC to measure ADMs performance by comparing Adjusted ROIC to its weighted average cost of capital(WACC).Adjusted ROIC,Adjusted ROIC earnings and Adjusted invested capital are non-GAAP financial measures and are not intended to replace or be alternatives to GAAP financial measures.4.Average ROIC:Average ROIC is ADMs trailing 4-quarter net earnings adjusted for the after-tax effects of interest expense on borrowings,and changes in the LIFO reserve divided by the sum of ADMs equity(excluding non-controlling interests)and interest-bearing liabilities adjusted for the after-tax effect of the LIFO reserve.Management uses average ROIC for investors as additional information about ADMs returns.Average ROIC is a non-GAAP financial measure and is not intended to replace or be an alternative to GAAP financial measures.5.Adjusted Economic Value Added:Adjusted economic value added is ADMs trailing 4-quarter economic value added adjusted for specified items.The Company calculates economic value added by comparing ADMs trailing 4-quarter adjusted returns to its Annual WACC multiplied by adjusted invested capital.Adjusted economic value added is a non-GAAP financial measure and is not intended to replace or be an alternative to GAAP financial measures.6.Adjusted EBITDA:Adjusted EBITDA is defined as earnings before interest,taxes,depreciation,and amortization,adjusted for specified items.The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense on borrowings and depreciation and amortization to earnings before income taxes.Management believes that adjusted EBITDA is a useful measure of the Companys performance because it provides investors additional information about the Companys operations allowing better evaluation of underlying business performance and better period-to-period comparability.Adjusted EBITDA is a non-GAAP financial measure and is not intended to replace or be an alternative to net earnings,the most directly comparable GAAP financial measure.7.Forecasted GAAP Earnings Reconciliation:ADM is not presenting forecasted GAAP earnings per diluted share or a quantitative reconciliation to forecasted adjusted earnings per diluted share in reliance on the unreasonable efforts exemption provided under Item 10(e)(1)(i)(B)of Regulation S-K.ADM is unable to predict with reasonable certainty and without unreasonable effort the impact of any impairment and timing of restructuring-related and other charges,along with acquisition-related expenses and the outcome of certain regulatory,legal and tax matters.The financial impact of these items is uncertain and is dependent on various factors,including timing,and could be material to our Consolidated Statements of Earnings.Non-GAAP Financial Measures Proprietary business information of ADM.|41.Non-GAAP measures-see notes on page 32.See earnings per share,the most directly comparable GAAP measure,on page 213.See segment operating profit as reported on page 174.Cash from operations before working capital is total operating activities of$0.7 billion plus the changes in working capital of$0.2 billionPRIVILEGED AND CONFIDENTIAL|DRAFTFinancial HighlightsAdjusted Earnings Per Share1,2$1.46Adjusted Segment Operating Profit1,3$1.3BTRAILING 4-QUARTER Adjusted ROIC111.2%Reported Earnings Per Share$1.42Cash Flow from Operations Before Working Capital4$0.9BReturn of Cash to Shareholders$1.6BQ1 2024(Unless otherwise stated)Proprietary business information of ADM.|5Making Progress on Our Value Creation Priorities for the YearStrategic InitiativesStrategic Initiatives Delivered 10%volume growth in BioSolutions Exceeded 2023 regenerative ag acre target and increasing 2025 goal from 4M to 5M acres New CapacitiesNew Capacities Increased volume and utilization rate at Green Bison JVDrive for ExcellenceDrive for Excellence Nearly 1,200 initiatives in the pipeline focused on$500M in cost reduction over 2 years Operational ChangesOperational Changes Debottlenecked EMEA demand fulfillment challenges post-1ADM go-liveSimplificationSimplification Continuing SKU reduction effortsPortfolio OptimizationPortfolio Optimization M&A integration playbook driving results ahead of model in new acquisitionsDemand CreationDemand Creation Fine-tuned go-to-market teams to better align to customer demand and drive stronger pipeline wins and conversion rates Enhanced Return of Cash to Enhanced Return of Cash to ShareholdersShareholders Completed$1B in share repurchases through the Accelerated Share Repurchase program announced in March Plan to complete over$2B in share repurchases in 2024Q1 2024 AccomplishmentsProprietary business information of ADM.|6Adjusted Earnings Per Share1(dollars per share)Adjusted Segment Operating Profit1,2(in millions of dollars)AS&O margin normalizationCarb Sol lower on pressured domestic ethanol margins1.Non-GAAP measures-see notes on page 3Lower pricing and execution margins,primarily in AS&OImprovement in AS&O volumesLower manufacturing costs in AS&O and Carb SolShare repurchases drove improvement in other2.See segment operating profit as reported on page 17Nutrition down due headwinds in Specialty IngredientsOther business up on higher captive insuranceTotal Consolidated Operating Profit and Earnings Per ShareQ1 2024 versus Prior Year QuarterEarnings declined due to lower margins partially offset by improvements in processed volumes and costsProprietary business information of ADM.|7Risk managementGlobal Trade marginsSA origination volumes and margins$75M timing impactsNA biodiesel margins$205M timing impactsGlobal soy crush marginsManufacturing costsProcessed volumesAg Services&Oilseeds Operating ProfitQ1 2024 versus Prior Year QuarterStabilization of trade flows have led to lower risk management results and Global Trade margins compared to an outsized 1Q 2023Lower South American origination volumes and margins in Ag ServicesImproved cost position and processed volumes in CrushingLower global soy crush margins partially offset by improved processed oilseeds volumesSignificant negative year-over-year timing impacts in Crushing and RPOHigher equity earnings results in WilmarSegment Operating Profit(in millions of dollars)Higher processed volumes and improved manufacturing costs partially supported earnings as margins declined1.2023 Ag Services&Oilseeds segment operating profits has been revised to reflect immaterial error corrections with no change to total Adjusted Segment Operating Profit.See Note 13,Segment Information of the Companys consolidated financial statements included in the Quarterly Report on Form 10-Q for the quarter ended March 31,2024.1Proprietary business information of ADM.|8In S&S,lower domestic ethanol margins and moderating margins in EMEA were partially offset by lower manufacturing and input costsIn VCP,strong export demand for sustainably certified ethanol supported strong volumes and improved marginsManufacturing costsDomestic ethanol marginsEMEA marginsExport ethanol volumes and marginsCarbohydrate Solutions Operating ProfitQ1 2024 versus Prior Year QuarterSegment Operating Profit(in millions of dollars)Lower manufacturing costs partially offset lower domestic ethanol margins and lower EMEA margins1.2023 Carbohydrate Solutions segment operating profits has been revised to reflect immaterial error corrections with no change to total Adjusted Segment Operating Profit.See Note 13,Segment Information of the Companys consolidated financial statements included in the Quarterly Report on Form 10-Q for the quarter ended March 31,2024.1Proprietary business information of ADM.|9Nutrition RevenueQ1 2024 versus Prior Year QuarterOverall,Nutrition revenue declined 1%In Human Nutrition,recent M&A and strong Flavors performance more than offset lower volumes in plant-based proteins and lower texturants pricingIn Animal Nutrition,lower price and mix was partially offset by currency benefitsSegment Revenue(in millions of dollars)M&A contributionsPlant-based protein volumes Texturants pricing Flavors price/mix and volumesNutrition revenue declined due to headwinds in Specialty Ingredients and lower pricing in Animal NutritionPrice/mixFXProprietary business information of ADM.|10Segment Operating Profit(in millions of dollars)Nutrition Operating ProfitQ1 2024 versus Prior Year QuarterFlavors operating profit was down slightly relative to last year as demand fulfillment challenges in EMEA offset volume and price improvement in NAIn Specialty Ingredients,unplanned downtime at Decatur East resulted in higher fixed cost absorption Lower texturants pricing due to market normalization was a headwind to Specialty Ingredients operating profit in the quarterIn Animal Nutrition,cost optimization actions and lower commodity prices supported improved margins,partially offsetting lower volumesHeadwinds from Specialty Ingredients business led to significant decline in operating profitUnplanned downtime at Decatur EastTexturants pricingMarginsVolumes1.2023 Nutrition segment operating profits has been revised to reflect immaterial error corrections with no change to total Adjusted Segment Operating Profit.See Note 13,Segment Information of the Companys consolidated financial statements included in the Quarterly Report on Form 10-Q for the quarter ended March 31,2024.1Proprietary business information of ADM.|11Other Business Results and CorporateQ1 2024 versus Prior Year Quarter Increased spend related to 1ADM to support digital transformation and legal feesOther includes impacts of$18M related to valuation losses associated with ADM Ventures investmentsCaptive Insurance results supported by higher program premiums and lower claimsOther Business Segment Operating Profit(in millions of dollars)Corporate and Other Costs(in millions of dollars)Proprietary business information of ADM.|12Cash Flow from Operations and Cash Deployment Cash from Operations Before Working Capital1(in billions of dollars)Q1 2023$1.3BQ1 2024$0.9B1.Cash from operations before working capital is total operating activities of$0.7 billion plus the changes in working capital of$0.2 billionQ1 2024 versus Prior Year Cash Deployment(in billions of dollars)Q1 2023Q1 2024Share Repurchase$1.3B$0.3BDividendCapex$0.3BShare Repurchase$0.4B$0.2BDividendCapex$0.3B$0.9B$1.9BContinued strong cash flow creates opportunity to return excess cash to shareholdersProprietary business information of ADM.|13MetricFY 2023FY 2024 Guidance1Q1 2024Adjusted EPS1,3$6.98$5.25$6.25$1.46Corporate Costs*$1.6 billion$1.8 billion$426 millionCorporate Net Interest Expense$431 million$525 million$110 millionCapital Expenditures$1.5 billion$1.3 billion$328 millionDepreciation&Amortization$1.1 billion$1.2 billion$280 millionEffective Tax Rate19.3!.8%Diluted Weighted Avg.Shares Outstanding542 million shares495 million shares513 million sharesAdjusted Net Debt2/Adjusted EBITDA10.9x1.5x 2.0 x1.5x*includes corporate net interest expense1.Non-GAAP measures-see notes on page 32.see calculation on page 253.See earnings per share,the most directly comparable GAAP measure,on page 21Consolidated OutlookProprietary business information of ADM.|14Operating ProfitQ2 2024FY 2024Full Year Planning AssumptionsAS&OExpect to be significantly lower versus prior yearExpect to be lower versus prior yearAnticipate easing global supply environment with another year of strong South American cropsExpect global soybean crush margin in the range of$35/metric ton to$60/metric tonExpect operational excellence leading to mid to high single digit processed volume improvementExpect significantly lower biodiesel margins Carbohydrate SolutionsExpect to be slightly higher versus prior yearExpect to be slightly lower versus prior yearStrong volumes and lower energy costs to support margin expansion in starches and sweetenersExpect lower wheat milling marginsRobust export opportunities in ethanol,but lower domestic marginsNutritionExpect to be lower versus prior yearExpect to be higher versus prior yearExpect mid-single digit revenue growth,led by strong pipeline conversionTexturants market normalization expected to be a headwindSegment OutlookQ2 2024 and FY 2024Proprietary business information of ADM.|1516AppendixProprietary business information of ADM.|17Quarter Ended Mar.31Quarter Ended Mar.31(Amounts in millions)2024202420232023ChangeChangeTotal Segment Operating Profit$1,311$1,719$(408)Specified items:(Gain)loss on sale of assets(1)1 Impairment and restructuring charges6 7(1)Adjusted Segment Operating Profit(1)(2)$1,317$1,725$(408)Ag Services and Oilseeds$864$1,211$(347)Ag Services232 348(116)Crushing313 427(114)Refined Products and Other170 327(157)Wilmar149 109 40 Carbohydrate Solutions$248$279$(31)Starches and Sweeteners261 313(52)Vantage Corn Processors(13)(34)21 Nutrition$84$138$(54)Human Nutrition76 138(62)Animal Nutrition8 8 Other Business$121$97$24 Total Segment Operating Profit$1,311$1,719$(408)Corporate$(426)$(322)$(104)Interest expense net(110)(103)(7)Unallocated corporate costs(304)(248)(56)Other 24(24)Specified Items:Gain on debt conversion option 5(5)Restructuring charges(12)(12)Earnings Before Income Taxes$885$1,397$(512)Segment Operating Profit and Corporate Results1.Non-GAAP measure-see notes on page 32.Adjusted segment operating profit equals total segment operating profit excluding specified items.Proprietary business information of ADM.|18MarchMarch 3131(Amounts in millions)2022024 42022023 3Cash(1)$830$899 Net property,plant,and equipment10,596 10,071 Operating working capital(2)10,181 13,457-Total inventories11,634 14,771 Total debt9,980 10,506-CP outstanding884845 Shareholders equity23,232 24,896 MemosMemosAvailable credit capacity March 31-CP$4.1 bil$4.2 bil-Other$4.7 bil$4.7 bil Readily marketable inventory$6.7 bil$9.2 bil Balance Sheet Highlights1.Cash=cash and cash equivalents and short-term marketable securities 2.Current assets(excluding cash and cash equivalents and short-term marketable securities less current liabilities(excluding short-term debt and current maturities of long-term debt).Proprietary business information of ADM.|19Three Months Ended Mar.31Three Months Ended Mar.31(Amounts in millions)2024202420232023Cash from operations before working capital changes$882$1,310 Changes in working capital(182)(2,920)Purchases of property,plant,and equipment(328)(327)Net assets of businesses acquired(915)Sub-total(543)(1,937)Other investing activities 13(1)Debt increase/(decrease)1,619 1,304 Dividends(257)(248)Stock buyback(1,327)(351)Other(50)(113)Increase(decrease)in cash,cash equivalents,restricted cash,and restricted cash equivalents$(545)$(1,346)Cash Flow HighlightsProprietary business information of ADM.|20GAAP Statement of Earnings SummaryQuarter Ended Mar.31Quarter Ended Mar.31(Amounts in millions except per share data)2024202420232023ChangeChangeRevenues$21,847$24,072$(2,225)Gross profit1,6592,080(421)Selling,general and administrative expenses95188170 Asset impairment,exit,and restructuring charges18711 Equity in(earnings)losses of unconsolidated affiliates(212)(174)(38)Interest and investment income(123)(134)11 Interest expense16614719 Other(income)expense net(26)(44)18 Earnings before income taxes8851,397(512)Income tax expense(benefit)166225(59)Net earnings including noncontrolling interests7191,172(453)Less:Net earnings(losses)attributable to noncontrolling interests(10)2(12)Net earnings attributable to ADM$729$1,170$(441)Earnings per share(fully diluted)$1.42$2.12$(0.70)Proprietary business information of ADM.|21Reconciliation of Adjusted Earnings Per Share(EPS)1.Non-GAAP measure-see notes on page 3Quarter Ended Mar.3120242023In millionsPer shareIn millionsPer shareNet earnings and EPS(fully diluted)as reported$729$1.42$1,170$2.12 AdjustmentsAdjustments(Gain)loss on sales of assets(1)Impairment and restructuring charges180.0350.01Gain on debt conversion option(5)(0.01)Tax adjustment30.01(18)(0.03)Adjusted net earnings and adjusted EPS(non-GAAP)(1)$750$1.46$1,151$2.09 Proprietary business information of ADM.|22Q1 CY24Q1 CY24Trailing 4Q Average Adjusted ROIC(1)(2)11.2%Annual WACC8.00%Trailing 4Q Average Adjusted EVA$1.1B Long-Term WACC7.0%Trailing 4Q Average ROIC(1)(3)10.2%ROIC versus WACCLT ROIC Objective:10%1.Non-GAAP measure-see notes on page 32.Adjusted for LIFO and specified items see notes on page 33.Adjusted for LIFO see notes on page 3Proprietary business information of ADM.|23Adjusted ROIC EarningsAdjusted ROIC Earnings(1)(1)(Amounts in millions)Four Quarters Four Quarters Ended Ended Quarter EndedQuarter EndedJun.30,2023Jun.30,2023Sep.30,2023Sep.30,2023Dec.31,2023Dec.31,2023Mar.31,2024Mar.31,2024Mar.31,2024Mar.31,2024Net earnings attributable to ADM$927$821$565$729$3,042 AdjustmentsInterest expense124 97 109 115 445 Other adjustments130 76 167 21 394 Total adjustments254 173 276 136 839 Tax on adjustments(52)(40)(38)(27)(157)Net adjustments202 133 238 109 682 Total Adjusted ROIC Earnings$1,129$954$803$838$3,724 Adjusted Invested CapitalAdjusted Invested Capital(1)(1)(Amounts in millions)Trailing Trailing Four QuarterFour QuarterAverage Average Quarter EndedQuarter EndedJun.30,2023Jun.30,2023Sep.30,2023Sep.30,2023Dec.31,2023Dec.31,2023Mar.31,2024Mar.31,2024Equity(2)$24,939$25,228$24,132$23,219$24,380 Interest-bearing liabilities(3)8,675 8,346 8,370 9,995 8,847 Other adjustments(net of tax)108 59 155 21 86 Total Adjusted Invested Capital$33,722$33,633$32,657$33,235$33,313 Reconciliation of Return on Invested Capital1.Non-GAAP measure see notes on page 32.Excludes noncontrolling interests 3.Includes short-term debt,current maturities of long-term debt,finance lease obligations,and long-term debtProprietary business information of ADM.|24Adjusted EBITDAAdjusted EBITDA(1)(1)(Amounts in millions)Four Quarters Four Quarters Ended Ended Quarter EndedQuarter EndedJun.30,2023Jun.30,2023Sep.30,2023Sep.30,2023Dec.31,2023Dec.31,2023Mar.31,2024Mar.31,2024Mar.31,2024Mar.31,2024Net earnings$927$821$565$729$3,042 Net earnings attributable to noncontrolling interests1 3(23)(10)(29)Income tax expense204 207 192 166 769 Interest expense124 97 109 115 445 Depreciation and amortization262 261 277 280 1,080 EBITDA1,5181,3891,1201,2805,307(Gain)loss on sales of assets and businesses(11)2(7)(16)Impairment and restructuring charges and settlement contingencies117 71 172 18 378Railroad maintenance expense2 26 39 67 Expenses related to acquisitions3 3 1 7 Adjusted EBITDA$1,629$1,491$1,325$1,298$5,743 Adjusted EBITDAAdjusted EBITDA(1)(1)by Segmentby Segment(Amounts in millions)Four QuartersFour QuartersEndedEndedQuarter EndedQuarter EndedJun.30,2023Jun.30,2023Sep.30,2023Sep.30,2023Dec.31,2023Dec.31,2023Mar.31,2024Mar.31,2024Mar.31,2024Mar.31,2024Ag Services and Oilseeds$1,143$937$1,053$959$4,092 Carbohydrate Solutions397 546 387 325 1,655 Nutrition237 197 58 158 650 Other Business84 44 143 119 390 Corporate(232)(233)(316)(263)(1,044)Adjusted EBITDA$1,629$1,491$1,325$1,298$5,743 Reconciliation of Adjusted Earnings Before Interest,Taxes,and Depreciation and Amortization(EBITDA)(1)Four Quarters Ended March 31,20241.Non-GAAP measure see notes on page 3Proprietary business information of ADM.|25Adjusted Net DebtAdjusted Net DebtMarch 31March 31(Amounts in millions)2024202420232023Short-term debt$1,734$1,809 Current maturities of long-term debt1 952 Long-term debt8,245 7,745 Total Debt9,980 10,506 Cash and cash equivalents(830)(899)Net Debt$9,150$9,607 Adjustments:Readily marketable inventories(RMI)$(6,707)$(9,157)x RMI factor40%RMI adjustment(2,683)(3,663)Accounts receivable transferred against the securitization programs facility2,271 2,630 Total adjustments$(412)$(1,033)Adjusted Net Debt$8,738$8,574 Trailing Four Quarters Adjusted EBITDA(1,2)$5,743$6,951 Adjusted Net Debt/Adjusted EBITDA1.5x1.2xReconciliation of Adjusted Net Debt to Total Debt and to Adjusted EBITDA1.Non-GAAP measure-see notes on page 32.See net earnings,the most directly comparable GAAP measure,reconciliation on page 24
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Table of ContentsUNITED STATES SECURITIES 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 OF 1934For the quarterly period ended June 29,2024ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number:001-07882ADVANCED MICRO DEVICES,INC.(Exact name of registrant as specified in its charter)Delaware94-1692300(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification No.)2485 Augustine DriveSanta Clara,California 95054(Address of principal executive offices)(Zip Code)(408)749-4000(Registrants telephone number,including area code)N/A(Former name,former address and former fiscal year,if changed since last report)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock,$0.01 par value per shareAMDThe 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 of 1934(the Exchange Act)during the preceding 12months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer or a smaller reporting company.See definition of“large accelerated filer,”“accelerated filer,”“smaller reporting company”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standardsprovided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined by Rule 12b-2 of the Exchange Act).Yes No Indicate the number of shares outstanding of the registrants common stock,$0.01 par value per share,as of July 24,2024:1,618,481,845Table of ContentsINDEX Page No.Part I Financial InformationItem 1Condensed Consolidated Financial Statements(Unaudited)Condensed Consolidated Statements of Operations3Condensed Consolidated Statements of Comprehensive Income(Loss)4Condensed Consolidated Balance Sheets5Condensed Consolidated Statements of Cash Flows6Condensed Consolidated Statements of Stockholders Equity8Notes to Condensed Consolidated Financial Statements9Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations19Item 3Quantitative and Qualitative Disclosures about Market Risk26Item 4Controls and Procedures26Part II Other InformationItem 1Legal Proceedings27Item 1ARisk Factors27Item 2Unregistered Sales of Equity Securities and Use of Proceeds52Item 5Other Information53Item 6Exhibits54Signature552Table of ContentsPART I.FINANCIAL INFORMATION ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTSAdvanced Micro Devices,Inc.Condensed Consolidated Statements of Operations(Unaudited)Three Months EndedSix Months Ended June 29,2024July 1,2023June 29,2024July 1,2023(In millions,except per share amounts)Net revenue$5,835$5,359$11,308$10,712 Cost of sales2,740 2,704 5,423 5,393 Amortization of acquisition-related intangibles231 212 461 517 Total cost of sales2,971 2,916 5,884 5,910 Gross profit2,864 2,443 5,424 4,802 Research and development1,583 1,443 3,108 2,854 Marketing,general and administrative650 547 1,270 1,132 Amortization of acquisition-related intangibles372 481 764 999 Licensing gain(10)(8)(23)(18)Operating income(loss)269(20)305(165)Interest expense(25)(28)(50)(53)Other income(expense),net55 46 108 89 Income(loss)before income taxes and equity income299(2)363(129)Income tax provision(benefit)41(23)(11)(10)Equity income in investee7 6 14 7 Net income(loss)$265$27$388$(112)Earnings(loss)per shareBasic$0.16$0.02$0.24$(0.07)Diluted$0.16$0.02$0.24$(0.07)Shares used in per share calculationBasic1,618 1,612 1,617 1,612 Diluted1,637 1,627 1,638 1,612 See accompanying notes.3Table of ContentsAdvanced Micro Devices,Inc.Condensed Consolidated Statements of Comprehensive Income(Loss)(Unaudited)Three Months EndedSix Months Ended June 29,2024July 1,2023June 29,2024July 1,2023(In millions)Net income(loss)$265$27$388$(112)Other comprehensive income(loss),net of tax:Net change in unrealized gains(losses)on cash flowhedges(1)(11)(19)9 Total comprehensive income(loss)$264$16$369$(103)See accompanying notes.4Table of ContentsAdvanced Micro Devices,Inc.Condensed Consolidated Balance Sheets(Unaudited)June 29,2024December 30,2023(In millions,except par value amounts)ASSETSCurrent assets:Cash and cash equivalents$4,113$3,933 Short-term investments1,227 1,840 Accounts receivable,net5,749 5,376 Inventories4,991 4,351 Receivables from related parties24 9 Prepaid expenses and other current assets1,361 1,259 Total current assets17,465 16,768 Property and equipment,net1,666 1,589 Operating lease right-of-use assets635 633 Goodwill24,262 24,262 Acquisition-related intangibles,net20,138 21,363 Investment:equity method113 99 Deferred tax assets617 366 Other non-current assets2,990 2,805 Total assets$67,886$67,885 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable$1,699$2,055 Payables to related parties420 363 Accrued liabilities3,629 3,082 Current portion of long-term debt,net 751 Other current liabilities447 438 Total current liabilities6,195 6,689 Long-term debt,net of current portion1,719 1,717 Long-term operating lease liabilities526 535 Deferred tax liabilities1,192 1,202 Other long-term liabilities1,716 1,850 Commitments and contingencies(See Note 12)Stockholders equity:Capital stock:Common stock,par value$0.01;shares authorized:2,250;shares issued:1,668 and 1,663;sharesoutstanding:1,618 and 1,61617 17 Additional paid-in capital60,542 59,676 Treasury stock,at cost(shares held:50 and 47)(5,103)(4,514)Retained earnings1,111 723 Accumulated other comprehensive loss(29)(10)Total stockholders equity56,538 55,892 Total liabilities and stockholders equity$67,886$67,885 See accompanying notes.5Table of ContentsAdvanced Micro Devices,Inc.Condensed Consolidated Statements of Cash Flows(Unaudited)Six Months Ended June 29,2024July 1,2023(In millions)Cash flows from operating activities:Net income(loss)$388$(112)Adjustments to reconcile net income(loss)to net cash provided by operating activities:Depreciation and amortization1,553 1,831 Stock-based compensation717 657 Amortization of operating lease right-of-use assets52 48 Deferred income taxes(256)(582)Inventory loss at contract manufacturer65 Other(37)(8)Changes in operating assets and liabilitiesAccounts receivable,net(373)(186)Inventories(710)(796)Prepaid expenses and other assets(234)(237)Receivables from and payables to related parties,net42(150)Accounts payable(356)309 Accrued and other liabilities263 91 Net cash provided by operating activities1,114 865 Cash flows from investing activities:Purchases of property and equipment(296)(283)Purchases of short-term investments(565)(2,816)Proceeds from maturity of short-term investments1,202 1,171 Proceeds from sale of short-term investments2 248 Other(92)5 Net cash provided by(used in)investing activities251(1,675)Cash flows from financing activities:Repayment of debt(750)Proceeds from sales of common stock through employee equity plans148 144 Repurchases of common stock(356)(241)Common stock repurchases for tax withholding on employee equity plans(226)(87)Other(1)Net cash used in financing activities(1,185)(184)Net increase(decrease)in cash and cash equivalents180(994)Cash and cash equivalents at beginning of period3,933 4,835 Cash and cash equivalents at end of period$4,113$3,841 6Table of ContentsAdvanced Micro Devices,Inc.Condensed Consolidated Statements of Cash Flows(Unaudited)Six Months EndedJune 29,2024July 1,2023(In millions)Supplemental cash flow information:Cash paid for taxes,net of refunds$311$46 Non-cash investing and financing activities:Purchases of property and equipment,accrued but not paid$110$99 Non-cash activities for leases:Operating lease right-of-use assets acquired by assuming related liabilities$53$50 See accompanying notes.7Table of ContentsAdvanced Micro Devices,Inc.Condensed Consolidated Statements of Stockholders Equity(Unaudited)Three Months EndedSix Months EndedJune 29,2024July 1,2023June 29,2024July 1,2023(In millions)Capital stock:Common stock,par valueBalance,beginning of period$17$16$17$16 Balance,end of period$17$16$17$16 Additional paid-in capitalBalance,beginning of period$60,053$58,331$59,676$58,005 Common stock issued under employee equity plans143 145 149 149 Stock-based compensation346 348 717 657 Issuance of common stock to settle convertible debt 1 1 Issuance of common stock warrants 13 Balance,end of period$60,542$58,825$60,542$58,825 Treasury stockBalance,beginning of period$(4,690)$(3,362)$(4,514)$(3,099)Repurchases of common stock(352)(356)(241)Common stock repurchases for tax withholding on employee equity plans(61)(68)(233)(90)Balance,end of period$(5,103)$(3,430)$(5,103)$(3,430)Retained earnings(Accumulated deficit):Balance,beginning of period$846$(270)$723$(131)Net income(loss)265 27 388(112)Balance,end of period$1,111$(243)$1,111$(243)Accumulated other comprehensive loss:Balance,beginning of period$(28)$(21)$(10)$(41)Other comprehensive income(loss)(1)(11)(19)9 Balance,end of period$(29)$(32)$(29)$(32)Total stockholders equity$56,538$55,136$56,538$55,136 See accompanying notes.8Table of ContentsNotes to Condensed Consolidated Financial Statements(Unaudited)NOTE 1 The CompanyAdvanced Micro Devices,Inc.is a global semiconductor company.References herein to AMD or the Company mean Advanced Micro Devices,Inc.and itsconsolidated subsidiaries.AMDs products include x86 microprocessors(CPUs)and graphics processing units(GPUs),as standalone devices or asincorporated into accelerated processing units(APUs),chipsets,data center and professional GPUs,embedded processors,semi-custom System-on-Chip(SoC)products,microprocessor and SoC development services and technology,data processing units(DPUs),Field Programmable Gate Arrays(FPGAs),System on Modules(SOMs),Smart Network Interface Cards(SmartNICs),Artificial Intelligence(AI)Accelerators and Adaptive SoC products.From time totime,the Company may also sell or license portions of its intellectual property(IP)portfolio.NOTE 2 Basis of Presentation and Significant Accounting PoliciesBasis of Presentation.The accompanying unaudited condensed consolidated financial statements of AMD have been prepared in accordance with U.S.generally accepted accounting principles(U.S.GAAP)for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.Theresults of operations for the three and six months ended June 29,2024 shown in this report are not necessarily indicative of results to be expected for the fullyear ending December 28,2024 or any other future period.In the opinion of the Companys management,the information contained herein reflects alladjustments necessary for a fair presentation of the Companys results of operations,financial position,cash flows and stockholders equity.All suchadjustments are of a normal,recurring nature.The unaudited condensed consolidated financial statements should be read in conjunction with the auditedconsolidated financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended December 30,2023.Certain immaterial prior periodamounts have been reclassified to conform to current period presentation.The Company uses a 52-or 53-week fiscal year ending on the last Saturday in December.The three and six months ended June 29,2024 and July 1,2023each consisted of 13 weeks and 26 weeks,respectively.Use of Estimates.The preparation of consolidated financial statements in conformity with U.S.GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting periods.Actual results are likely to differ from those estimates,and such differencesmay be material to the financial statements.Areas where management uses judgment include,but are not limited to,revenue allowances,inventory valuation,valuation of goodwill,long-lived and intangible assets,and income taxes.Significant Accounting Policies.There have been no material changes to the Companys significant accounting policies in Note 2-Basis of Presentation andSignificant Accounting Policies,of the Notes to Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the fiscal yearended December 30,2023.NOTE 3 Supplemental Financial Statement InformationAccounts Receivable,netAs of June 29,2024 and December 30,2023,Accounts receivable,net included unbilled accounts receivable of$1.7 billion and$1.1 billion,respectively.Unbilled accounts receivable primarily represent work completed on development services and on custom products for which revenue has beenrecognized but not yet invoiced.Unbilled accounts receivable that are included in Accounts receivable,net are expected to be billed and collected within 12months.9Table of ContentsInventoriesJune 29,2024December 30,2023(In millions)Raw materials$338$279 Work in process3,727 3,260 Finished goods926 812 Total inventories$4,991$4,351 Property and Equipment,netJune 29,2024December 30,2023(In millions)Land,building and leasehold improvements$834$821 Equipment2,603 2,346 Construction in progress217 209 Property and equipment,gross3,654 3,376 Accumulated depreciation(1,988)(1,787)Total property and equipment,net$1,666$1,589 Accrued LiabilitiesJune 29,2024December 30,2023(In millions)Customer-related liabilities$1,402$788 Accrued marketing programs828 827 Accrued compensation and benefits755 884 Other accrued liabilities644 583 Total accrued liabilities$3,629$3,082 RevenueRevenue allocated to remaining performance obligations that are unsatisfied(or partially unsatisfied)include amounts received from customers and amountsthat will be invoiced and recognized as revenue in future periods for development services,IP licensing and product revenue.As of June 29,2024,theaggregate transaction price allocated to remaining performance obligations under contracts with an original expected duration of more than one year was$76million,of which$42 million is expected to be recognized in the next 12 months.The revenue allocated to remaining performance obligations does not includeamounts which have an original expected duration of one year or less.Revenue recognized over time associated with custom products and development services accounted for 8%and 12%of the Companys revenue for the threeand six months ended June 29,2024,respectively and 27%and 28%of the Companys revenue for the three and six months ended July 1,2023,respectively.NOTE 4 Segment ReportingManagement,including the Chief Operating Decision Maker(CODM),who is the Companys Chief Executive Officer,reviews and assesses operatingperformance using segment net revenue and operating income(loss).These performance measures include the allocation of expenses to the reportablesegments based on managements judgment.10Table of ContentsThe Companys four reportable segments are:the Data Center segment,which primarily includes server microprocessors(CPUs),graphics processing units(GPUs),accelerated processing units(APUs),data processing units(DPUs),Field Programmable Gate Arrays(FPGAs),Smart Network Interface Cards(SmartNICs),Artificial Intelligence(AI)accelerators and Adaptive System-on-Chip(SoC)products for data centers;the Client segment,which primarily includes CPUs,APUs,and chipsets for desktop,notebook and handheld personal computers;the Gaming segment,which primarily includes discrete GPUs,and semi-custom SoC products and development services;andthe Embedded segment,which primarily includes embedded CPUs,GPUs,APUs,FPGAs,System on Modules(SOMs),and Adaptive SoC products.From time to time,the Company may also sell or license portions of its IP portfolio.In addition to these reportable segments,the Company has an All Other category,which is not a reportable segment.This category primarily includes certainexpenses and credits that are not allocated to any of the reportable segments because the CODM does not consider these expenses and credits in evaluatingthe performance of the reportable segments.This category primarily includes amortization of acquisition-related intangibles,employee stock-basedcompensation expense,inventory loss at contract manufacturer,acquisition-related and other costs,and licensing gain.Acquisition-related and other costsprimarily include transaction costs,purchase price adjustments for inventory,certain compensation charges,contract termination and workforce rebalancingcharges.The following table provides a summary of net revenue and operating income(loss)by segment:Three Months EndedSix Months EndedJune 29,2024July 1,2023June 29,2024July 1,2023(In millions)Net revenue:Data Center$2,834$1,321$5,171$2,616 Client1,492 998 2,860 1,737 Gaming648 1,581 1,570 3,338 Embedded861 1,459 1,707 3,021 Total net revenue$5,835$5,359$11,308$10,712 Operating income(loss):Data Center$743$147$1,284$295 Client89(69)175(241)Gaming77225 228539 Embedded345757 6871,555 All Other(985)(1,080)(2,069)(2,313)Total operating income(loss)$269$(20)$305$(165)(1)For the three and six months ended June 29,2024,all other operating losses primarily included$603 million and$1.2 billion of amortization of acquisition-relatedintangibles,and$346 million and$717 million of stock-based compensation expense,respectively.For the three and six months ended July 1,2023,all other operating losses primarily included$693 million and$1.5 billion of amortization of acquisition-relatedintangibles,and$348 million and$657 million of stock-based compensation expense,respectively.(1)11Table of ContentsNOTE 5 Acquisition-related Intangibles,netAcquisition-related intangibles,net were as follows:June 29,2024December 30,2023Gross CarryingAmountAccumulatedAmortizationNet CarryingAmountGross CarryingAmountAccumulatedAmortizationNet CarryingAmount(In millions)(In millions)Developed technology$13,390$(2,045)$11,345$13,390$(1,583)$11,807 Customer relationships12,324(4,479)7,845 12,324(3,755)8,569 Customer backlog809(809)809(809)Corporate trade name65(65)65(65)Product trademarks914(186)728 914(147)767 Identified intangible assets subject toamortization27,502(7,584)19,918 27,502(6,359)21,143 In-process research and development(IPR&D)not subject to amortization220 220 220 220 Total acquisition-related intangible assets$27,722$(7,584)$20,138$27,722$(6,359)$21,363 Developed technology and customer relationships were acquired primarily from the Xilinx acquisition on February 14,2022.Acquisition-related intangibleamortization expense was$603 million and$1.2 billion for the three and six months ended June 29,2024,and$693 million and$1.5 billion for the three and sixmonths ended July 1,2023,respectively.Based on the carrying value of acquisition-related intangibles recorded as of June 29,2024,and assuming no subsequent impairment of the underlying assets,the estimated annual amortization expense for acquisition-related intangibles is expected to be as follows:Fiscal Year(In millions)Remainder of 2024$1,146 20252,145 20262,034 20271,922 20281,846 2029 and thereafter10,825 Total$19,918 NOTE 6 Related Parties Equity Joint VenturesATMP Joint VenturesThe Company holds a 15%equity interest in two joint ventures(collectively,the ATMP JV)with affiliates of Tongfu Microelectronics Co.,Ltd,a Chinese jointstock company.The Company has no obligation to fund the ATMP JV.The Company accounts for its equity interests in the ATMP JV under the equity method ofaccounting due to its significant influence over the ATMP JV.The ATMP JV provides assembly,testing,marking and packaging(ATMP)services to the Company.The Company assists the ATMP JV in its management ofcertain raw material inventory.The purchases from and resales to the ATMP JV of inventory under the Companys inventory management program are reportedwithin purchases and resales with the ATMP JV and do not impact the Companys condensed consolidated statements of operations.12Table of ContentsThe Companys purchases from the ATMP JV during the three and six months ended June 29,2024 were$389 million and$839 million,respectively.TheCompanys purchases from the ATMP JV during the three and six months ended July 1,2023 were$412 million and$779 million,respectively.As of June 29,2024 and December 30,2023,the amounts payable to the ATMP JV were$420 million and$363 million,respectively,and are reflected as Payables to relatedparties on the Companys condensed consolidated balance sheets.The Companys resales to the ATMP JV during the three and six months ended June 29,2024 were$30 million and$70 million,respectively.The Companys resales to the ATMP JV during the three and six months ended July 1,2023 were$1million and$3 million,respectively.As of June 29,2024 and December 30,2023,the Companys receivables from the ATMP JV were$24 million and$9 million,respectively,and are reflected as Receivables from related parties on the Companys condensed consolidated balance sheets.During the three and six months ended June 29,2024,the Company recorded a gain of$7 million and$14 million,in Equity income in investee on itscondensed consolidated statements of operations,respectively.During the three and six months ended July 1,2023,the Company recorded a gain of$6 millionand$7 million,in Equity income in investee on its condensed consolidated statements of operations,respectively.As of June 29,2024 and December 30,2023,the carrying value of the Companys investment in the ATMP JV was$113 million and$99 million,respectively.THATIC Joint VenturesThe Company holds equity interests in two joint ventures(collectively,the THATIC JV)with Higon Information Technology Co.,Ltd.(THATIC),a third-partyChinese entity.As of both June 29,2024 and December 30,2023,the carrying value of the investment was zero.The Company licenses certain of itsintellectual property(Licensed IP)to the THATIC JV and receives royalties based on sales of the THATIC JVs products,which is recorded within operatingincome as licensing gain.During the three and six months ended June 29,2024,the Company recognized$10 million and$23 million of licensing gain fromroyalties associated with Licensed IP,respectively.During the three and six months ended July 1,2023,the Company recognized$8 million and$18 million oflicensing gain from royalties associated with Licensed IP,respectively.As of June 29,2024 and December 30,2023,the Company had no receivables from theTHATIC JV.In June 2019,the Bureau of Industry and Security of the United States Department of Commerce added certain Chinese entities to the Entity List,including THATIC and the THATIC JV.The Company is complying with U.S.law pertaining to the Entity List designation.NOTE 7 Debt,Revolving Credit Facility and Commercial Paper ProgramDebtThe Companys total debt as of June 29,2024 and December 30,2023 consisted of the following:June 29,2024December 30,2023(In millions)2.95%Senior Notes Due 2024(2.95%Notes)$750 2.375%Senior Notes Due 2030(2.375%Notes)750 750 3.924%Senior Notes Due 2032(3.924%Notes)500 500 4.393%Senior Notes Due 2052(4.393%Notes)500 500 Total debt(principal amount)1,750 2,500 Unamortized debt discount and issuance costs(31)(32)Total debt(net)1,719 2,468 Less:current portion of long-term debt and related unamortized debt premium and issuance costs(751)Total long-term debt$1,719$1,717 2.95%Senior Notes Due 2024The 2.95%Notes with a principal amount of$750 million were repaid in June 2024.13Table of Contents2.375%Senior Notes Due 2030,3.924%Senior Notes Due 2032 and 4.393%Senior Notes Due 2052The 2.375%Notes,3.924%Notes and 4.393%Notes are general unsecured senior obligations of the Company with semi-annual fixed interest payments dueon June 1 and December 1.As of June 29,2024,the Company was in compliance with the covenants associated with its debt.Revolving Credit FacilityThe Company has$3.0 billion available under a revolving credit facility that expires on April 29,2027.During the three and six months ended June 29,2024,the Company did not borrow under the revolving credit facility and as of June 29,2024 and December 30,2023,the Company had no outstanding borrowingsunder the revolving credit facility.As of June 29,2024,the Company was in compliance with the covenants under the revolving credit facility.Commercial Paper ProgramThe Company has a commercial paper program under which it can issue unsecured commercial paper notes up to$3.0 billion.During the three and six monthsended June 29,2024,the Company did not issue any commercial paper under the program and as of June 29,2024 and December 30,2023,the Companyhad no commercial paper outstanding.NOTE 8 Financial InstrumentsFair Value MeasurementsThe Companys financial instruments are measured and recorded at fair value on a recurring basis,except for non-marketable equity investments in privately-held companies.These equity investments are generally accounted for under the measurement alternative,defined as cost,less impairments,adjusted forsubsequent observable price changes and are periodically assessed for impairment when events or circumstances indicate that a decline in value may haveoccurred.Financial Instruments Recorded at Fair Value on a Recurring BasisJune 29,2024December 30,2023(In millions)Level 1Level 2TotalLevel 1Level 2TotalCash equivalentsMoney market funds$1,229$1,229$969$969 Corporate debt securities 995 995 753 753 U.S.government and agency securities724 724 1,252 1,252 Non-U.S.government and agency securities 149 149 135 135 Time deposits and certificates of deposits 151 151 205 205 Short-term investmentsCorporate debt securities 302 302 506 506 Time deposits and certificates of deposits 10 10 9 9 Asset-backed and mortgage-backed securities 31 31 34 34 U.S.government and agency securities818 43 861 1,209 28 1,237 Non-U.S.government and agency securities 23 23 54 54 Other non-current assetsDeferred compensation plan investments153 153 133 133 Total assets measured at fair value$2,924$1,704$4,628$3,563$1,724$5,287 Deferred compensation plan investments are primarily mutual fund investments held in a Rabbi trust established to maintain the Companys executive deferredcompensation plan.14Table of ContentsThe following is a summary of cash equivalents and short-term investments:June 29,2024December 30,2023Cost/AmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesEstimated FairValueCost/AmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesEstimated FairValue(in millions)(in millions)Asset-backed and mortgage-backed securities$33$(2)$31$35$(2)$33 Corporate debt securities1,298 (1)1,297 1,259 1,259 Money market funds1,229 1,229 969 969 Time deposits and certificates ofdeposits161 161 214 214 U.S.government and agencysecurities1,586 (1)1,585 2,487 3 2,490 Non-U.S.government and agencysecurities172 172 189 189$4,479$(4)$4,475$5,153$3$(2)$5,154 As of June 29,2024 and December 30,2023,the Company did not have material available-for-sale debt securities which had been in a continuous unrealizedloss position of more than twelve months.The contractual maturities of cash equivalents and investments classified as available-for-sale are as follows:June 29,2024December 30,2023Amortized CostFair ValueAmortized CostFair Value(In millions)(In millions)Due within 1 year$2,762$2,762$3,792$3,792 Due in 1 year through 5 years459 457 361 364 Due in 5 years and later29 27 32 30$3,250$3,246$4,185$4,186 Financial Instruments Not Recorded at Fair ValueThe Company carries its financial instruments at fair value except for its debt.The carrying amounts and estimated fair values of the Companys debt are asfollows:June 29,2024December 30,2023 CarryingAmountEstimatedFair ValueCarryingAmountEstimatedFair Value(In millions)(In millions)Current portion of long-term debt,net$751$741 Long-term debt,net of current portion$1,719$1,537$1,717$1,630 The estimated fair value of the Companys long-term debt is based on Level 2 inputs of quoted prices for the Companys debt and comparable instruments ininactive markets.The fair value of the Companys accounts receivable,accounts payable and other short-term obligations approximate their carrying value based on existingterms.15Table of ContentsFinancial Instruments Measured at Fair Value on a Non-Recurring BasisThe Companys investments in non-marketable securities in privately-held companies are recorded using a measurement alternative that adjusts the securitiesto fair value when the Company recognizes an observable price adjustment or an impairment.As of June 29,2024 and December 30,2023,the Company hadnon-marketable securities in privately-held companies of$245 million and$155 million,respectively,that are recorded under Other non-current assets in thebalance sheet.Impairment losses or observable price adjustments were not material during the three and six months ended June 29,2024 and July 1,2023.Hedging Transactions and Derivative Financial InstrumentsForeign Currency Forward Contracts Designated as Accounting HedgesThe Company enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate risk related to future forecastedtransactions denominated in currencies other than the U.S.Dollar.These contracts generally mature within 24 months and are designated as accountinghedges.As of June 29,2024 and December 30,2023,the notional value of the Companys outstanding foreign currency forward contracts designated as cashflow hedges was$2.1 billion and$2.4 billion,respectively.The fair value of these contracts,recorded as a liability,was$14 million as of June 29,2024 and asan asset was$6 million as of December 30,2023.Foreign Currency Forward Contracts Not Designated as Accounting HedgesThe Company also enters into foreign currency forward contracts to reduce the short-term effects of foreign currency fluctuations on certain receivables orpayables denominated in currencies other than the U.S.Dollar.These forward contracts generally mature within 3 months and are not designated asaccounting hedges.As of June 29,2024 and December 30,2023,the notional value of these outstanding contracts was$460 million and$568 million,respectively.The fair value of these contracts was not material as of June 29,2024 and December 30,2023.NOTE 9 Earnings(Loss)Per ShareThe following table sets forth the components of basic and diluted earnings(loss)per share:Three Months EndedSix Months EndedJune 29,2024July 1,2023June 29,2024July 1,2023(In millions,except per share amounts)NumeratorNet income(loss)for basic earnings per share$265$27$388$(112)DenominatorBasic weighted average shares1,618 1,612 1,617 1,612 Potentially dilutive shares from employee equity plans19 15 21 Diluted weighted average shares1,637 1,627 1,638 1,612 Earnings(loss)per share:Basic$0.16$0.02$0.24$(0.07)Diluted$0.16$0.02$0.24$(0.07)Securities which would have been anti-dilutive are not material and are excluded from the computation of diluted earnings per share for all periods presented.16Table of ContentsNOTE 10 Common Stock and Stock-based CompensationCommon StockShares of common stock outstanding were as follows:Three Months EndedSix Months EndedJune 29,2024July 1,2023June 29,2024July 1,2023(In millions)Balance,beginning of period1,618 1,609 1,616 1,612 Common stock issued under employee equity plans2 4 5 5 Common stock repurchases for tax withholding on equity awards (1)(1)Issuance of common stock upon warrant exercise 1 1 Repurchases of common stock(2)(2)(3)Balance,end of period1,618 1,614 1,618 1,614 Stock Repurchase ProgramThe Company has an approved stock repurchase program authorizing repurchases of up to$12 billion of the Companys common stock(RepurchaseProgram).During the three and six months ended June 29,2024,the Company returned$352 million and$356 million,respectively,to shareholders throughthe repurchase of its common stock under the Repurchase Program.As of June 29,2024,$5.2 billion remains available for future stock repurchases under theRepurchase Program.The Repurchase Program does not obligate the Company to acquire any common stock,has no termination date and may besuspended or discontinued at any time.Stock-based CompensationStock-based compensation expense recorded in the condensed consolidated statements of operations was as follows:Three Months EndedSix Months EndedJune 29,2024July 1,2023June 29,2024July 1,2023(In millions)Cost of sales$5$10$11$18 Research and development262 247 541 461 Marketing,general and administrative79 91 165 178 Total$346$348$717$657 NOTE 11 Income TaxesThe Company determines its income taxes for interim reporting periods by applying the Companys estimated annual effective tax rate to the year-to-dateresults,adjusted for tax items discrete to each period.For the three and six months ended June 29,2024,the Company recorded an income tax provision of$41 million and an income tax benefit of$11 millionrepresenting an effective tax rate of 13.4%and(2.9)%,respectively.The difference between the U.S.federal statutory tax rate of 21%and the Companysestimated annual effective tax rate was primarily due to the income tax benefit from foreign-derived intangible income(FDII)and research and development(R&D)tax credits.The tax provision for the three months ended June 29,2024 reflected a discrete tax expense of$21 million,primarily related to interest andpenalties accrued for uncertain tax positions partially offset by the tax effects of stock-based compensation.The tax benefit for the six months ended June 29,2024 reflected a discrete tax benefit of$40 million,primarily related to stock-based compensation.17Table of ContentsFor the three months and six months ended July 1,2023,the Company recorded an income tax benefit of$23 million and$10 million representing an effectivetax rate of(511.4)%and 8.0%,respectively.The difference between the U.S.federal statutory tax rate of 21%and the Companys estimated annual effectivetax rate was primarily due to the income tax benefit from FDII and R&D tax credits.The tax benefit for the three months ended July 1,2023 reflected a discretetax benefit of$34 million that had a disproportionate impact on the effective tax rate because the pre-tax income was close to breakeven for the period.The taxbenefit for the six months ended July 1,2023,reflected a discrete tax benefit of$12 million which was not material to the total tax expense or the effective taxrate.As of June 29,2024 and December 30,2023,the Company had long-term income tax liabilities related to unrecognized tax benefits of$1.5 billion and$1.4 billion,respectively,recorded under Other long-term liabilities in the balance sheet.NOTE 12 Commitments and ContingenciesCommitments The Companys purchase commitments primarily include obligations to purchase wafers and substrates from third parties.These purchase obligations weremade under noncancellable purchase orders or contractual obligations requiring minimum purchases for which cancellation would lead to significant penalties.Purchase commitments also include future payments related to certain software,technology and IP licenses.Total future unconditional purchase commitments as of June 29,2024 were as follows:Fiscal Year(In millions)Remainder of 2024$3,056 2025371 2026268 202744 202844 2029 and thereafter95 Total unconditional purchase commitments$3,878 On an ongoing basis,the Company works with suppliers on timing of payments and deliveries of purchase commitments,taking into account businessconditions.ContingenciesDuring the quarterly period ended June 29,2024,there were no material legal proceedings.The Company is a defendant or plaintiff in various actions thatarose in the normal course of business.With respect to these matters,based on managements current knowledge,the Company believes that the amount orrange of reasonably possible loss,if any,will not,either individually or in the aggregate,have a material adverse effect on the Companys financial position,results of operations,or cash flows.NOTE 13 Subsequent EventOn July 9,2024,the Company entered into a definitive agreement to acquire Silo AI Oy,an AI lab based in Helsinki,Finland,in an all-cash transaction valued atapproximately$665 million.The transaction is subject to customary closing conditions and is expected to close in the second half of fiscal year 2024.18Table of ContentsITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe statements in this report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differmaterially from expectations.These forward-looking statements speak only as of the date hereof or as of the dates indicated in the statements and should notbe relied upon as predictions of future events,as we cannot assure you that the events or circumstances reflected in these statements will be achieved or willoccur.You can identify forward-looking statements by the use of forward-looking terminology including“believes,”“expects,”“may,”“will,”“should,”“seeks,”“intends,”“plans,”“pro forma,”“estimates,”“anticipates,”or the negative of these words and phrases,other variations of these words and phrases orcomparable terminology.The forward-looking statements relate to,among other things:possible impact of future accounting rules on AMDs condensedconsolidated financial statements;demand for AMDs products;AMDs strategy and expected benefits;the growth,change and competitive landscape of themarkets in which AMD participates;international sales will continue to be a significant portion of total sales in the foreseeable future;that AMDs cash,cashequivalents and short-term investment balances,together with the availability under that certain revolving credit facility made available to AMD and certain of itssubsidiaries,our commercial paper program,and our cash flows from operations will be sufficient to fund AMDs operations including capital expenditures andpurchase commitments over the next 12 months and beyond;AMDs ability to access capital markets;AMDs ability to obtain sufficient external financing onfavorable terms,or at all;AMDs expectation that based on managements current knowledge,the potential liability related to AMDs current litigation will nothave a material adverse effect on its financial positions,results of operation or cash flows;anticipated ongoing and increased costs related to enhancing andimplementing information security controls;all unbilled accounts receivables are expected to be billed and collected within 12 months;revenue allocated toremaining performance obligations that are unsatisfied which will be recognized in the next 12 months;a small number of customers will continue to account fora substantial part of AMDs revenue in the future;the expected implications from the development of the legal and regulatory environment relating to emergingtechnologies,such as AI;AMDs ability to achieve its corporate responsibility initiatives;expected future AI trends and developments;AMDs acquisition of SiloAI Oy is expected to close in the second half of fiscal year 2024;and AMD expects to fund stock repurchases through cash generated from operations.For adiscussion of the factors that could cause actual results to differ materially from the forward-looking statements,see“Part II,Item 1ARisk Factors”and the“Financial Condition”section set forth in“Part I,Item 2-Managements Discussion and Analysis of Financial Condition and Results of Operations,”or MD&A,and such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission(SEC)reports and filings.We assume no obligation to update forward-looking statements.References in this Quarterly Report on Form 10-Q to“AMD,”“we,”“us,”“management,”“our”or the“Company”mean Advanced Micro Devices,Inc.and ourconsolidated subsidiaries.AMD,the AMD Arrow logo,EPYC,Radeon,Ryzen,Xilinx and combinations thereof are trademarks of Advanced Micro Devices,Inc.Other names are forinformational purposes only and are used to identify companies and products and may be trademarks of their respective owners.“Zen”is a codename for anAMD architecture and is not a product name.The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this reportand our audited consolidated financial statements and related notes as of December 30,2023 and December 31,2022,and for each of the three years for theperiod ended December 30,2023 as filed in our Annual Report on Form 10-K for the fiscal year ended December 30,2023.19Table of ContentsOverview and Recent DevelopmentsWe are a global semiconductor company primarily offering:server microprocessors(CPUs),graphics processing units(GPUs),accelerated processing units(APUs),data processing units(DPUs),FieldProgrammable Gate Arrays(FPGAs),Smart Network Interface Cards(SmartNICs),Artificial Intelligence(AI)accelerators and Adaptive System-on-Chip(SoC)products for data centers;CPUs,APUs and chipsets for desktop,notebook,and handheld personal computers;discrete GPUs,and semi-custom SoC products and development services;andembedded CPUs,GPUs,APUs,FPGAs,System on Modules(SOMs),and Adaptive SoC products.From time to time,we may also sell or license portions of our intellectual property(IP)portfolio.In this section,we will describe the general financial condition and the results of operations of Advanced Micro Devices,Inc.and its wholly-owned subsidiaries(collectively,“us,”“our”or“AMD”),including a discussion of our results of operations for the three and six months ended June 29,2024 compared to the prioryear period and an analysis of changes in our financial condition.Net revenue for the three months ended June 29,2024 was$5.8 billion,a 9%increase compared to the prior year period.The increase in net revenue wasdriven by an increase in Data Center segment revenue primarily driven by the steep ramp of AMD Instinct GPU shipments and strong growth in 4th Gen AMDEPYC CPU sales,and an increase in Client segment revenue primarily driven by higher sales of AMD Ryzen processors,partially offset by a decrease inGaming segment revenue primarily due to lower semi-custom revenue,and a decrease in Embedded segment revenue due to customers continuing tonormalize their inventory levels.Gross margin for the three months ended June 29,2024 was 49%compared to gross margin of 46%for the prior year period.The increase in gross marginwas primarily driven by higher Data Center segment revenue.Operating income for the three months ended June 29,2024 was$269 million compared to operating loss of$20 million for the prior year period.Net incomefor the three months ended June 29,2024 was$265 million compared to net income of$27 million for the prior year period.The increase in operating and netincome was primarily driven by higher revenue and gross margin,and lower amortization of acquisition-related intangible assets,partially offset by increasedoperating expenses.As of June 29,2024,our cash,cash equivalents and short-term investments were$5.3 billion compared to$5.8 billion as of December 30,2023.During thethree and six months ended June 29,2024,we generated$593 million and$1.1 billion of cash,respectively,from operating activities,and we returned$352million and$356 million,respectively,to shareholders through the repurchase of common stock under our Repurchase Program.During the quarter,we alsoused available cash to repay$750 million of debt that matured in June 2024.We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our financialstatements,the changes in certain key items in those financial statements from period to period,the primary factors that resulted in those changes,and howcertain accounting principles,policies and estimates affect our financial statements.Critical Accounting Policies and EstimatesOur discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements,which havebeen prepared in accordance with U.S.generally accepted accounting principles(U.S.GAAP).The preparation of our financial statements requires us to makeestimates and judgments that affect the reported amounts in our consolidated financial statements.We evaluate our estimates on an ongoing basis,includingthose related to our revenue,inventories,goodwill,long-lived and intangible assets,and income taxes.We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under the circumstances,the results of which form the basis for making judgments about thecarrying values of assets and liabilities.Although actual results have historically been reasonably consistent with managements expectations,the actual resultsmay differ from these estimates or our estimates may be affected by different assumptions or conditions.20Table of ContentsManagement believes there have been no significant changes for the three and six months ended June 29,2024 to the items that we disclosed as our criticalaccounting estimates in the 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 December 30,2023.Results of OperationsOur operating results tend to vary seasonally.Historically,our net revenue has been generally higher in the second half of the year than in the first half of theyear,although market conditions and product transitions could impact this trend.The following table provides a summary of net revenue and operating income(loss)by segment:Three Months EndedSix Months EndedJune 29,2024July 1,2023June 29,2024July 1,2023(In millions)Net revenue:Data Center$2,834$1,321$5,171$2,616 Client1,492 998 2,860 1,737 Gaming648 1,581 1,570 3,338 Embedded861 1,459 1,707 3,021 Total net revenue$5,835$5,359$11,308$10,712 Operating income(loss):Data Center$743$147$1,284$295 Client89(69)175(241)Gaming77225 228539 Embedded345757 6871,555 All Other(985)(1,080)(2,069)(2,313)Total operating income(loss)$269$(20)$305$(165)Data CenterData Center net revenue of$2.8 billion for the three months ended June 29,2024 increased by 115%,compared to net revenue of$1.3 billion for the prior yearperiod.Data Center net revenue of$5.2 billion for the six months ended June 29,2024 increased by 98%,compared to net revenue of$2.6 billion for the prioryear period.The increase in both periods was primarily driven by the steep ramp of AMD Instinct GPU shipments and strong growth in 4th Gen AMD EPYCCPU sales.Data Center operating income was$743 million for the three months ended June 29,2024,compared to operating income of$147 million for the prior yearperiod.Data Center operating income was$1.3 billion for the six months ended June 29,2024,compared to operating income of$295 million for the prior yearperiod.The increase in operating income in both periods was primarily driven by higher revenue.ClientClient net revenue of$1.5 billion for the three months ended June 29,2024 increased by 49%,compared to net revenue of$1.0 billion for the prior year period,primarily driven by a 34%increase in unit shipments and a 12%increase in average selling price of Ryzen mobile and desktop processors.Client net revenueof$2.9 billion for the six months ended June 29,2024 increased by 65%,compared to net revenue of$1.7 billion for the prior year period,primarily driven by a44%increase in unit shipments and a 14%increase in average selling price of Ryzen mobile and desktop processors.The increase in both periods was drivenby a recovery from weak PC market conditions and inventory corrections across the PC supply chain experienced in the first half of fiscal year 2023.21Table of ContentsClient operating income was$89 million for the three months ended June 29,2024,compared to operating loss of$69 million for the prior year period.Clientoperating income was$175 million for the six months ended June 29,2024,compared to operating loss of$241 million for the prior year period.The increase inoperating income in both periods was primarily driven by higher revenue,partially offset by higher operating expenses.GamingGaming net revenue of$648 million for the three months ended June 29,2024 decreased by 59%,compared to net revenue of$1.6 billion for the prior yearperiod.Gaming net revenue of$1.6 billion for the six months ended June 29,2024 decreased by 53%,compared to net revenue of$3.3 billion for the prior yearperiod.The decrease in both periods was primarily due to lower semi-custom revenue.Gaming operating income was$77 million for the three months ended June 29,2024,compared to operating income of$225 million for the prior year period.Gaming operating income was$228 million for the six months ended June 29,2024,compared to operating income of$539 million for the prior year period.The decrease in operating income in both periods was primarily due to lower revenue.EmbeddedEmbedded net revenue of$861 million for the three months ended June 29,2024 decreased by 41%,compared to net revenue of$1.5 billion for the prior yearperiod.Embedded net revenue of$1.7 billion for the six months ended June 29,2024 decreased by 43%,compared to net revenue of$3.0 billion for the prioryear period.The decrease in both periods was primarily due to customers continuing to normalize their inventory levels.Embedded operating income was$345 million for the three months ended June 29,2024,compared to operating income of$757 million for the prior yearperiod.Embedded operating income was$687 million for the six months ended June 29,2024,compared to operating income of$1.6 billion for the prior yearperiod.The decrease in operating income in both periods was primarily due to lower revenue.All OtherAll Other operating loss of$985 million for the three months ended June 29,2024 primarily consisted of$603 million of amortization of acquisition-relatedintangibles and$346 million of stock-based compensation expense.All Other operating loss of$1.1 billion for the prior year period primarily consisted of$693 million of amortization of acquisition-related intangibles and$348 million of stock-based compensation expense.All Other operating loss of$2.1 billion for the six months ended June 29,2024 primarily consisted of$1.2 billion of amortization of acquisition-related intangiblesand$717 million of stock-based compensation expense.All Other operating loss of$2.3 billion for the prior year period primarily consisted of$1.5 billion ofamortization of acquisition-related intangibles and$657 million of stock-based compensation expense.International SalesInternational sales as a percentage of net revenue were 60%and 66%for the three months ended June 29,2024 and July 1,2023,respectively.Internationalsales as a percentage of net revenue were 60%and 67%for the six months ended June 29,2024 and July 1,2023,respectively.We expect that internationalsales will continue to be a significant portion of total sales in the foreseeable future.Substantially all of our sales transactions were denominated in U.S.dollars.22Table of ContentsComparison of Gross Margin,Expenses,Licensing Gain,Interest Expense,Other Income(Expense)and Income TaxesThe following is a summary of certain condensed consolidated statement of operations data for the periods indicated:Three Months EndedSix Months Ended June 29,2024July 1,2023June 29,2024July 1,2023 In millions,except percentagesNet revenue$5,835$5,359$11,308$10,712 Cost of sales2,740 2,704 5,423 5,393 Amortization of acquisition-related intangibles231 212 461 517 Gross profit2,864 2,443 5,424 4,802 Gross margin49FHE%Research and development1,583 1,443 3,108 2,854 Marketing,general and administrative650 547 1,270 1,132 Amortization of acquisition-related intangibles372 481 764 999 Licensing gain(10)(8)(23)(18)Interest expense(25)(28)(50)(53)Other income(expense),net55 46 108 89 Income tax provision(benefit)41(23)(11)(10)Equity income in investee7 6 14 7 Gross MarginGross margin was 49%and 46%for the three months ended June 29,2024 and July 1,2023,respectively.Gross margin was 48%and 45%for the six monthsended June 29,2024 and July 1,2023,respectively.The increase in both periods was primarily driven by higher Data Center segment revenue.ExpensesResearch and Development ExpensesResearch and development expenses of$1.6 billion for the three months ended June 29,2024 increased by$140 million,or 10%,compared to$1.4 billion forthe prior year period.Research and development expenses of$3.1 billion for the six months ended June 29,2024 increased by$254 million,or 9%,comparedto$2.9 billion for the prior year period.The increase in both periods was primarily due to higher employee-related costs from an increase in headcount insupport of our continued focus on our AI strategy.Marketing,General and Administrative ExpensesMarketing,general and administrative expenses of$650 million for the three months ended June 29,2024 increased by$103 million,or 19%,compared to$547 million for the prior year period.Marketing,general and administrative expenses of$1.3 billion for the six months ended June 29,2024 increased by$138 million,or 12%,compared to$1.1 billion for the prior year period.The increase in both periods was primarily due to an increase in go-to market activities.Amortization of Acquisition-Related IntangiblesAmortization of acquisition-related intangibles of$603 million for the three months ended June 29,2024 decreased by$90 million,or 13%,compared to$693 million for the prior year period.Amortization of acquisition-related intangibles of$1.2 billion for the six months ended June 29,2024 decreased by$291 million,or 19%,compared to$1.5 billion for the prior year period.The decrease was primarily due to certain acquisition-related intangibles that were fullyamortized in the prior fiscal year.23Table of ContentsInterest ExpenseInterest expense for the three and six months ended June 29,2024 was$25 million and$50 million,respectively,compared to$28 million and$53 million,respectively,for the prior year period.Our 2.95%Notes with a principal amount of$750 million were repaid in June 2024.Other Income(Expense),NetOther income(expense),net is primarily comprised of interest income from short-term investments,changes in valuation of equity investments,and foreigncurrency transaction gains and losses.Other income(expense),net for the three and six months ended June 29,2024 was$55 million and$108 million,respectively.Other income(expense),net forthe prior year period was$46 million and$89 million,respectively.The increase was primarily driven by interest income from higher interest rates.Income Tax Provision(Benefit)We determine income taxes for interim reporting periods by applying our estimated annual effective tax rate to the year-to-date results and adjusted for taxitems discrete to each period.For the three and six months ended June 29,2024,we recorded an income tax provision of$41 million and income tax benefit of$11 million representing aneffective tax rate of 13.4%and(2.9)%,respectively.The difference between the U.S.federal statutory tax rate of 21%and our estimated annual effective taxrate was primarily due to the income tax benefit from foreign-derived intangible income(FDII)and research and development(R&D)tax credits.The taxprovision for the three months ended June 29,2024 reflected a discrete tax expense of$21 million,primarily related to interest and penalties accrued foruncertain tax positions,partially offset by the tax effects of stock-based compensation.The tax benefit for the six months ended June 29,2024 reflected adiscrete tax benefit of$40 million,primarily related to stock-based compensation.For the three months and six months ended July 1,2023,we recorded an income tax benefit of$23 million and$10 million representing an effective tax rate of(511.4)%and 8.0%,respectively.The difference between the U.S.federal statutory tax rate of 21%and our estimated annual effective tax rate was primarilydue to the income tax benefit from FDII and R&D tax credits.The tax benefit for the three months ended July 1,2023 reflected a discrete tax benefit of$34million that had a disproportionate impact on the effective tax rate because the pre-tax income was close to breakeven for the period.The tax benefit for the sixmonths ended July 1,2023 reflected a discrete tax benefit of$12 million which was not material to the total expense or the effective tax rate.FINANCIAL CONDITIONLiquidity and Capital Resources As of June 29,2024 and December 30,2023,our cash,cash equivalents and short-term investments were$5.3 billion and$5.8 billion,respectively.Thepercentage of cash,cash equivalents and short-term investments held domestically as of June 29,2024 and December 30,2023 were 88%and 77%,respectively.Our operating,investing and financing activities for the six months ended June 29,2024 compared to the prior year period are as described below:Six Months Ended June 29,2024July 1,2023(In millions)Net cash provided by(used in):Operating activities$1,114$865 Investing activities251(1,675)Financing activities(1,185)(184)Net(decrease)increase in cash and cash equivalents$180$(994)We have$3.0 billion available under an unsecured revolving credit facility that expires on April 29,2027.We also have$3.0 billion available under ourcommercial paper program.24Table of ContentsAs of June 29,2024,our principal debt obligations were$1.75 billion.Our 2.95%Notes with a principal amount of$750 million were repaid in June 2024 andour remaining debt will mature starting in 2030.As of June 29,2024,we had unconditional purchase commitments of approximately$3.9 billion,of which$3.1 billion are for the remainder of fiscal year 2024.On an ongoing basis,we work with our suppliers on the timing of payments and deliveries of purchase commitments,taking into account business conditions.We believe our cash,cash equivalents,short-term investments and cash flows from operations along with our revolving credit facility and commercial paperprogram will be sufficient to fund operations,including capital expenditures,and purchase commitments,over the next 12 months and beyond.We believe wewill be able to access the capital markets should we require additional funds.However,we cannot assure that such funds will be available on favorable terms,or at all.Operating ActivitiesOur working capital cash inflows and outflows from operations are primarily cash collections from our customers,payments for inventory purchases andpayments for employee-related expenditures.Net cash provided by operating activities was$1.1 billion in the six months ended June 29,2024,primarily due to our net income of$388 million,adjusted fornon-cash and non-operating charges of$2.1 billion and net cash outflows of$1.4 billion from changes in our operating assets and liabilities.The primary driversof the change in operating assets and liabilities was a$710 million increase in inventory primarily to support the continued ramp of Data Center and Clientproducts in advanced process nodes,and a$373 million increase in accounts receivable due to timing of customer payments.Net cash provided by operating activities was$865 million in the six months ended July 1,2023,primarily due to our net loss of$112 million,adjusted for non-cash and non-operating charges of$1.9 billion and net cash outflows of$1.0 billion from changes in our operating assets and liabilities.The primary driver ofthe change in operating assets and liabilities was a$796 million increase in inventory primarily to support the continued ramp of Data Center and Clientproducts in advanced process technology nodes,and a$237 million increase in prepaid expenses and other assets primarily driven by the purchase oftechnology licenses,partially offset by a$309 million increase in accounts payable due to the timing of payments.Investing ActivitiesNet cash provided by investing activities was$251 million for the six months ended June 29,2024 which primarily consisted of$1.2 billion of proceeds from thematurity and sale of short-term investments,partially offset by cash used in the purchases of short-term investments of$565 million and purchases of propertyand equipment of$296 million.Net cash used in investing activities was$1.7 billion for the six months ended July 1,2023 which primarily consisted of cash used in the purchases of short-term investments of$2.8 billion and purchases of property and equipment of$283 million,partially offset by$1.4 billion of proceeds from the maturity and saleof short-term investments.Financing ActivitiesNet cash used in financing activities was$1.2 billion for the six months ended June 29,2024,which primarily consisted of repayment of the 2.95%Notes of$750 million,common stock repurchase of$356 million,and repurchases for tax withholding on employee equity plans of$226 million.Net cash used in financing activities was$184 million for the six months ended July 1,2023,which primarily consisted of common stock repurchases of$241million and repurchases for tax withholding on employee equity plans of$87 million,partially offset by a cash inflow of$144 million from issuance of commonstock under our employee equity plans.25Table of ContentsITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKReference is made to“Part II,Item 7A,Quantitative and Qualitative Disclosures About Market Risk,”in our Annual Report on Form 10-K for the fiscal yearended December 30,2023.There have not been any material changes in interest rate risk,default risk or foreign exchange risk since December 30,2023.ITEM 4.CONTROLS AND PROCEDURESWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports made under the SecuritiesExchange Act of 1934,as amended,is recorded,processed,summarized and reported within the time periods specified in SEC rules and forms,and that suchinformation is accumulated and communicated to our management,including our Chief Executive Officer(CEO)and Chief Financial Officer(CFO)asappropriate,to allow for timely decisions regarding required disclosure.In designing and evaluating our disclosure controls and procedures,our managementrecognizes that any controls and procedures,no matter how well designed and operated,can provide only reasonable assurance of achieving the desiredcontrol objectives,and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.As of June 29,2024,the end of the period covered by this report,we carried out an evaluation under the supervision and with the participation of ourmanagement,including our CEO and CFO,of the effectiveness of the design and operation of our disclosure controls and procedures.Based on the foregoing,our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level.There were no changes in our internal controls over financial reporting for the three months ended June 29,2024 that materially affected,or are reasonablylikely to materially affect,our internal controls over financial reporting.26Table of ContentsPART II.OTHER INFORMATIONITEM 1.LEGAL PROCEEDINGSFor a discussion of our legal proceedings,refer to Note 12Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements(Part I,Item 1 of this Form 10-Q).ITEM 1A.RISK FACTORSThe risks and uncertainties described below are not the only ones we face.If any of the following risks actually occurs,our business,financial condition orresults of operations could be materially adversely affected.In addition,you should consider the interrelationship and compounding effects of two or more risksoccurring simultaneously.Risk Factors SummaryThe following is a summary of the principal risks that could adversely affect our business,financial condition and results of operations.Economic and Strategic RisksIntel Corporations dominance of the microprocessor market and its aggressive business practices may limit our ability to compete effectively on a levelplaying field.Nvidias dominance in the graphics processing unit market and its aggressive business practices may limit our ability to compete effectively on a levelplaying field.The markets in which our products are sold are highly competitive and rapidly evolving.The semiconductor industry is highly cyclical and has experienced severe downturns.The demand for our products depends in part on the market conditions in the industries into which they are sold.There may be fluctuations in demand forour products or a market decline in any of these industries.The success of our business depends on our ability to introduce products on a timely basis with features and performance levels that provide value to ourcustomers while supporting significant industry transitions.The loss of a significant customer may have a material adverse effect on us.Economic and market uncertainty may adversely impact our business and operating results.Our operating results are subject to quarterly and seasonal sales patterns.If we cannot adequately protect our technology or other intellectual property through patents,copyrights,trade secrets,trademarks and other measures,wemay lose a competitive advantage and incur significant expenses.Unfavorable currency exchange rate fluctuations could adversely affect us.Operational and Technology RisksWe rely on third parties to manufacture our products,and if they are unable to do so on a timely basis in sufficient quantities and using competitivetechnologies,our business could be materially adversely affected.Essential equipment,materials,substrates or manufacturing processes may not be available to us.We may fail to achieve expected manufacturing yields for our products.Our revenue from our semi-custom System-on-Chip(SoC)products is dependent upon our semi-custom SoC products being incorporated into customersproducts and the success of those products.Our products may be subject to security vulnerabilities that could have a material adverse effect on us.27Table of ContentsIT outages,data loss,data breaches and cyberattacks could disrupt operations and compromise our intellectual property or other sensitive information,becostly to remediate or cause significant damage to our business,reputation,financial condition and results of operations.Uncertainties involving the ordering and shipment of our products could materially adversely affect us.Our ability to design and introduce new products includes the use of third-party intellectual property.We depend on third-party companies for the design,manufacture and supply of motherboards,software,memory and other computer platform componentsto support our business and products.If we lose Microsoft Corporations support for our products or other software vendors do not design and develop software to run on our products,our abilityto sell our products could be materially adversely affected.Our reliance on third-party distributors and add-in-board(AIB)partners subjects us to certain risks.Our business depends on the proper functioning of our internal business processes and information systems.Our products may not be compatible with some or all industry-standard software and hardware.Costs related to defective products could have a material adverse effect on us.We may fail to maintain the efficiency of our supply chain as we respond to changes in customer demand.We outsource to third parties certain supply-chain logistics functions.We may be unable to effectively control the sales of our products on the gray market.Climate change may have a long-term impact on our business.Legal and Regulatory RisksGovernment actions and regulations may limit our ability to export our products to certain customers.If we cannot realize our deferred tax assets,our results of operations could be adversely affected.Our business is subject to potential tax liabilities,including as a result of tax regulation changes.We are party to litigation and may become a party to other claims or litigation.We are subject to environmental laws,conflict minerals regulations,as well as a variety of other laws or regulations.Evolving expectations from governments,investors,customers and other stakeholders regarding corporate responsibility matters could result in additionalcosts,harm to our reputation and a loss of customers.Issues related to the responsible use of AI may result in reputational,competitive and financial harm and liability.The agreements governing our notes,our guarantee of Xilinxs notes,and our Revolving Credit Agreement impose restrictions on us that may adverselyaffect our ability to operate our business.Merger,Acquisition and Integration RisksAcquisitions,joint ventures,and/or investments,and the failure to integrate acquired businesses may fail to materialize their anticipated benefits and disruptour business.Any impairment of our tangible,definite-lived intangible or indefinite-lived intangible assets,including goodwill,may adversely impact our financial positionand results of operations.General RisksOur worldwide operations are subject to political,legal and economic risks and natural disasters.We may incur future impairments of our technology license purchases.Our inability to continue to attract and retain qualified personnel may hinder our business.Our stock price is subject to volatility.For a more complete discussion of the material risks facing our business,see below.28Table of ContentsEconomic and Strategic RisksIntel Corporations dominance of the microprocessor market and its aggressive business practices may limit our ability to compete effectively on alevel playing field.Intels microprocessor market share position,significant financial resources,introduction of competitive new products,and existing relationships with top-tierOEMs have enabled it to market and price its products aggressively,to target our customers and our channel partners with special incentives and to influencecustomers who do business with us.These aggressive activities have in the past resulted in lower unit sales and a lower average selling price for many of ourproducts and adversely affected our margins and profitability.Intel also dominates the computer system platform and has a heavy influence on PCmanufacturers,other PC industry participants,and benchmarks.It is able to drive de facto standards and specifications for x86 microprocessors that couldcause us and other companies to have delayed access to such standards.We may be materially adversely affected by Intels business practices,includingrebating and allocation strategies and pricing actions,designed to limit our market share and margins;product mix and introduction schedules;productbundling,marketing and merchandising strategies;and exclusivity payments to its current and potential customers,retailers and channel partners.We expectIntel to continue to heavily invest substantial resources in marketing,research and development,new manufacturing facilities and other technology companies.Nvidias dominance in the graphics processing unit market and its aggressive business practices may limit our ability to compete effectively on alevel playing field.Nvidias Data Center GPU market share position,significant financial resources,introduction of competitive new products and proprietary software ecosystemhave enabled it to market and price its products in a manner,to encourage the selection of Nvidia-based systems and to influence customers who do businesswith us.We may be materially adversely affected by Nvidias business practices,including allocation strategies and pricing actions;product mix and introductionschedules;and product bundling strategies.Nvidias practices can limit customers ability to choose non-Nvidia products,including our products,and in turn,may limit our market share and decrease our margins and profitability,which could have a material adverse effect on our business.We expect Nvidia tocontinue to heavily invest substantial resources in research and development,marketing and other technology companies.The markets in which our products are sold are highly competitive and rapidly evolving.The markets in which our products are sold are highly competitive and rapidly evolving.We expect that competition will continue to be intense due to rapidtechnological changes,new and evolving industry standards,changing customer preferences and requirements,and frequent product introductions by ourcompetitors or new competitors of products that may provide better performance/experience or that may include additional features that render our productscomparatively less competitive.In addition,we are entering markets with current and new competitors who may be able to adapt more quickly to customer requirements and emergingtechnologies.For example,the AI market is subject to rapid technological change,product obsolescence,frequent new product introductions and featureenhancements,changes in end-user requirements and evolving industry trends and legal standards.We cannot guarantee that we will be able to competesuccessfully against current or new competitors who may have stronger positions in these new markets or superior ability to anticipate customer requirementsand emerging industry trends.While we see significant opportunity in AI,we expect intense competition from companies such as Nvidia in the supply of GPUsand other accelerators for the AI market.We may face competition from some of our customers who internally develop the same products as us.Increasedadoption of ARM-based semiconductor designs could lead to further growth and development of the ARM ecosystem.We may also face delays or disruptions inresearch and development efforts,or we may be required to invest significantly greater resources in research and development than anticipated.In addition,thesemiconductor industry has seen several mergers and acquisitions over the last number of years.Further consolidation could adversely impact our businessdue to there being fewer suppliers,customers and partners in the industry.29Table of ContentsWe believe that the main factors that determine our product competitiveness are total cost of ownership,timely product introductions,product quality,productfeatures and capabilities(including accelerations for key workloads such as AI,energy efficiency(including power consumption and battery life,given theirimpact on total cost of ownership),reliability,processor clock speed,performance,size(or form factor),selling price,cost,adherence to industry standards(andthe creation of open industry standards),level of integration,software and hardware compatibility,ease of use and functionality of software design tools,completeness of applicable software solutions,security and stability,brand recognition and availability.If competitors introduce competitive new products intothe market before us,demand for our products could be adversely impacted and our business could be adversely affected.Further,our competitors havesignificant marketing and sales resources which could increase the competitive environment in a declining market or during challenging economic times,leading to lower prices and a reduction in our margins.To the extent our competitors introduce competitive new products and technologies into the marketbefore we do,introduce products and technologies that provide better performance/experience or at better prices,our products and technologies may becomparatively less competitive and our competitive position may weaken,which could adversely harm our business and results of operations.From time to time,governments provide incentives or make other investments that could benefit and give a competitive advantage to our competitors.Forexample,the United States government enacted the Creating Helpful Incentives to Produce Semiconductors for America and Science Act(CHIPS Act)of 2022to provide financial incentives to the U.S.semiconductor industry.Government incentives,including the CHIPS Act,may not be available to us on acceptableterms or at all.If our competitors can benefit from such government incentives and we cannot,it could strengthen our competitors relative position and have amaterial adverse effect on our business.The semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected,and may continue tomaterially adversely affect,our business in the future.The semiconductor industry is highly cyclical and has experienced significant downturns,often in conjunction with constant and rapid technological change,wide fluctuations in supply and demand,continuous new product introductions,price erosion and declines in general economic conditions.We have incurredsubstantial losses in previous downturns,due to substantial declines in average selling prices;the cyclical nature of supply and demand imbalances in thesemiconductor industry;a decline in demand for end-user products that incorporate our products;and excess inventory levels and periods of inventoryadjustment.Such industry-wide fluctuations may materially adversely affect us in the future.Global economic uncertainty and weakness have in the pastimpacted the semiconductor market as consumers and businesses have deferred purchases,which negatively impacted demand for our products.Our financialperformance has been,and may in the future be,negatively affected by these downturns.The growth of our business is also dependent on continued demandfor our products from high-growth adjacent emerging global markets.Our ability to be successful in such markets depends in part on our ability to establishadequate local infrastructure,as well as our ability to cultivate and maintain local relationships in these markets.If demand from these markets is below ourexpectations,sales of our products may decrease,which would have a material adverse effect on us.The demand for our products depends in part on the market conditions in the industries into which they are sold.Fluctuations in demand for ourproducts or a market decline in any of these industries could have a material adverse effect on our results of operations.Industry-wide fluctuations in the computer marketplace have materially adversely affected us in the past and may materially adversely affect us in the future.We offer products that are used in different end markets and the demand for our products can vary among our Data Center,Client,Gaming and Embedded endmarkets.For instance,in our Data Center segment,we offer products that are optimized for generative AI applications and since the fourth quarter of 2023,wehave experienced significant demand for our AI accelerators.The demand for such products in part will depend on the extent to which our customers utilizegenerative AI solutions in a wide variety of applications,and both the near-term and long-term trajectory of such generative AI solutions is unknown.Also,ourClient segment revenue is focused on the consumer desktop and notebook PC segments,each of which decreased in the first half of 2023 due to a decline inthe PC market.Client segment revenue will depend in part on the markets adoption of AI PCs.We are actively building AI capabilities into all our Clientproducts,such as Ryzen AI PC processors,but there can be no assurance about the rate and pace of adoption of such product offerings.In the past,revenuesfrom the Client and Gaming segments have experienced a decline driven by,among other factors,the adoption of smaller and other form factors,increasedcompetition and changes in replacement cycles.30Table of ContentsIn addition,our GPU revenue in the past has been affected in part by the volatility of the cryptocurrency mining market.If we are unable to manage the risksrelated to the volatility of the cryptocurrency mining market(including potential actions by global monetary authorities),our GPU business could be materiallyadversely affected.The success of our semi-custom SoC products in our Gaming segment is dependent on securing customers for our semi-custom designpipeline and consumer market conditions,including the success of game console systems and next generation consoles for Sony and Microsoft.OurEmbedded segment primarily includes embedded CPUs and GPUs,APUs,FPGAs and Adaptive SoC products some of which are subject to macroeconomictrends and volatile business conditions.To the extent our embedded customers are faced with higher inventory levels,they may choose to draw down theirexisting inventory and order less of our products.Our Embedded segment revenue decreased as a result of an inventory correction in several end markets inthe second half of 2023 and the first half of 2024.The success of our business depends on our ability to introduce products on a timely basis with features and performance levels that provide valueto our customers while supporting and coinciding with significant industry transitions.Our success depends to a significant extent on the development,qualification,implementation and acceptance of new product designs and improvements thatprovide value to our customers.Our ability to identify industry changes,and adapt our strategy to develop,qualify and distribute,and have manufactured,newproducts and related technologies to meet evolving industry trends and requirements,at prices acceptable to our customers and on a timely basis,aresignificant factors in determining our competitiveness in our target markets.We cannot assure you that we will be able to meet the evolving needs of industrychanges or that our efforts to execute our product roadmap will result in innovative products and technologies that provide value to our customers.If we fail toor are delayed in identifying,developing,qualifying or shipping new products or technologies that provide value to our customers and address these newtrends,or if we fail to predict which new form factors,product features preferences or requirements consumers will adopt and adapt our business accordingly,we may lose competitive positioning,which could cause us to lose market share and require us to discount the selling prices of our products.Although we makesubstantial investments in research and development,we cannot be certain that we will be able to develop,obtain or successfully implement new products andtechnologies on a timely basis or that they will be well-received by our customers.Moreover,our investments in new products and technologies involve certainrisks and uncertainties and could disrupt our ongoing business.New investments may not generate sufficient revenue,may incur unanticipated liabilities andmay divert our limited resources and distract management from our current operations.We cannot be certain that our ongoing investments in new products andtechnologies will be successful,will meet our expectations and will not adversely affect our reputation,financial condition and operating results.For example,aspart of our pervasive AI strategy,we have a portfolio of hardware products and software tools to allow our customers to develop scalable and pervasive AIsolutions.We are actively building AI capabilities into our products,but there can be no assurance about the rate and pace of adoption of such productofferings.In our Data Center segment,we offer products that are optimized for generative AI applications and since the fourth quarter of 2023,we haveexperienced significant demand for our AI accelerators.The demand for such products in part will depend on the extent to which our customers utilizegenerative AI solutions in a wide variety of applications,and both the near-term and long-term trajectory of such generative AI solutions is unknown.If we fail todevelop and timely offer or deploy such products and technologies,keep pace with the product offerings of our competitors,or adapt to unexpected changes inindustry standards or disruptive technological innovation,our business could be adversely affected.Additionally,our efforts in developing new AI technologysolutions are inherently risky and may not always succeed.We may incur significant costs,resources,investments and delays and not achieve a return oninvestment or capitalize on the opportunities presented by demand for AI solutions.Moreover,while AI adoption is likely to continue and may accelerate,thelong-term trajectory of this technological trend is uncertain.31Table of ContentsDelays in developing,qualifying or shipping new products can also cause us to miss our customers product design windows or,in some cases,breachcontractual obligations or cause us to pay penalties.If our customers do not include our products in the initial design of their computer systems or products,they will typically not use our products in their systems or products until at least the next design configuration.The process of being qualified for inclusion in acustomers system or product can be lengthy and could cause us to further miss a cycle in the demand of end-users,which also could result in a loss of marketshare and harm our business.We also depend on the success and timing of our customers platform launches.If our customers delay their product launches orif our customers do not effectively market their platforms with our products,it could result in a delay in bringing our products to market and cause us to miss acycle in the demand of end-users,which could materially adversely affect our business.The increasing frequency and complexity of our newly introducedproducts may result in unanticipated quality or production issues that could result in product delays.In addition,market demand requires that productsincorporate new features and performance standards on an industry-wide basis.Over the life of a specific product,the sale price is typically reduced over time.The introduction of new products and enhancements to existing products is necessary to maintain the overall corporate average selling price.If we are unableto introduce new products with sufficiently high sale prices or to increase unit sales volumes capable of offsetting the reductions in the sale prices of existingproducts over time,our business could be materially adversely affected.The loss of a significant customer may have a material adverse effect on us.We depend on a small number of customers for a substantial portion of our business and we expect that a small number of customers will continue to accountfor a significant part of our revenue in the future.If one of our key customers decides to stop buying our products,materially reduces its operations or itsdemand for our products,or has operations that are materially impaired for a significant period of time such that it is unable to receive or utilize our products,our business would be materially adversely affected.Economic and market uncertainty may adversely impact our business and operating results.Uncertain global or regional economic conditions have and may in the future adversely impact our business.Uncertainty in the economic environment or otherunfavorable changes in economic conditions,such as inflation,higher interest rates,recession,slowing growth,increased unemployment,tighter creditmarkets,changes in fiscal monetary or trade policy,or currency fluctuations,may negatively impact consumer confidence and spending causing our customersto stop or postpone purchases.For example,our Client segment revenue decreased in the first half of 2023,and our Embedded segment revenue decreasedas a result of an inventory correction in several end markets in the second half of 2023 and the first half of 2024.During challenging economic times,ourcurrent or potential future customers may experience cash flow problems and as a result may modify,delay or cancel plans to purchase our products.Additionally,if our customers are not successful in generating sufficient revenue or are unable to secure financing,they may not be able to pay,or may delaypayment of,accounts receivable that they owe us.The risk related to our customers potentially defaulting on or delaying payments to us is increased becausewe expect that a small number of customers will continue to account for a substantial part of our revenue.Any inability of our current or potential futurecustomers to pay us for our products may adversely affect our earnings and cash flow.Moreover,our key suppliers may reduce their output or becomeinsolvent,thereby adversely impacting our ability to manufacture our products.Adverse changes in economic conditions could increase costs of memory,equipment,materials or substrates and other supply chain expenses.If we are not able to procure a stable supply of materials on an ongoing basis and atreasonable costs to meet our production requirements,we could experience a supply shortage or an increase in production costs,which could negativelyimpact our gross margin and materially adversely affect our business.Our ability to forecast our operating results,make business decisions and execute ourbusiness strategy could be adversely impacted by challenging macroeconomic conditions.In addition,uncertain economic conditions could lead to higherborrowing costs and reduced availability of capital and credit markets,making it more difficult for us to raise funds through borrowings or private or public salesof debt or equity securities.An economic downturn or increased uncertainty could also lead to failures of counterparties including financial institutions andinsurers,asset impairments and declines in the value of our financial instruments.If a banking institution in which we hold funds fails or is subject to significantadverse conditions in the financial or credit markets,we could be subject to a risk of loss of all or a portion of such uninsured funds or be subject to a delay inaccessing all or a portion of such uninsured funds,which in turn could adversely impact our short-term liquidity and ability to meet our operating expenseobligations.32Table of ContentsOur operating results are subject to quarterly and seasonal sales patterns.The profile of our sales may be weighted differently during the year.A large portion of our quarterly sales have historically been made in the last month of thequarter.This uneven sales pattern makes prediction of revenue for each financial period difficult and increases the risk of unanticipated variations in quarterlyresults and financial condition.In addition,our operating results tend to vary seasonally with the markets in which our products are sold.For example,historically,our net revenue has been generally higher in the second half of the year than in the first half of the year,although market conditions and producttransitions could impact these trends.Many of the factors that create and affect quarterly and seasonal trends are beyond our control.If we cannot adequately protect our technology or other intellectual property in the United States and abroad,through patents,copyrights,tradesecrets,trademarks and other measures,we may lose a competitive advantage and incur significant expenses.We rely on a combination of protections provided by contracts,including confidentiality and nondisclosure agreements,copyrights,patents,trademarks andcommon law rights,such as trade secrets,to protect our intellectual property.However,we cannot assure you that we will be able to adequately protect ourtechnology or other intellectual property from third-party infringement or from misappropriation in the United States and abroad.Any patent licensed by us orissued to us could be challenged,invalidated,expire,or circumvented or rights granted thereunder may not provide a competitive advantage to us.Furthermore,patent applications that we file may not result in issuance of a patent or,if a patent is issued,the patent may not be issued in a form that isadvantageous to us.Despite our efforts to protect our intellectual property rights,others may independently develop similar products,duplicate our products ordesign around our patents and other rights.In addition,it is difficult to monitor compliance with,and enforce,our intellectual property on a worldwide basis in acost-effective manner.In jurisdictions where foreign laws provide less intellectual property protection than afforded in the U.S.and abroad,our technology orother intellectual property may be compromised,and our business would be materially adversely affected.Unfavorable currency exchange rate fluctuations could adversely affect us.We have costs,assets and liabilities that are denominated in foreign currencies.As a consequence,movements in exchange rates could cause our foreigncurrency denominated expenses to increase as a percentage of revenue,affecting our profitability and cash flows.Whenever we believe appropriate,we hedgea portion of our foreign currency exposure to protect against fluctuations in currency exchange rates.We determine our total foreign currency exposure usingprojections of long-term expenditures for items such as payroll.We cannot assure you that these activities will be effective in reducing foreign exchange rateexposure.Failure to do so could have an adverse effect on our business,financial condition,results of operations and cash flow.In addition,the majority of ourproduct sales are denominated in U.S.dollars.Fluctuations in the exchange rate between the U.S.dollar and the local currency can cause increases ordecreases in the cost of our products in the local currency of such customers.An appreciation of the U.S.dollar relative to the local currency could reduce salesof our products.Operational and Technology RisksWe rely on third parties to manufacture our products,and if they are unable to do so on a timely basis in sufficient quantities and using competitivetechnologies,our business could be materially adversely affected.We utilize third-party wafer foundries to fabricate the silicon wafers for all of our products.We rely on Taiwan Semiconductor Manufacturing Company Limited(TSMC)for the production of all wafers for microprocessor and GPU products at 7 nanometer(nm)or smaller nodes,and we rely primarily onGLOBALFOUNDRIES Inc.(GF)for wafers for microprocessor and GPU products manufactured at process nodes larger than 7 nm.We also utilize TSMC,United Microelectronics Corporation(UMC)and Samsung Electronics Co.,Ltd.for our integrated circuits(IC)in the form of programmable logic devices.Wealso rely on third-party manufacturers to assemble,test,mark and pack(ATMP)our products.Our third-party package assembly partners are responsible forpackaging technology used to fabricate our products.It is important to have reliable relationships with all of these third-party manufacturing suppliers to ensureadequate product supply to respond to customer demand.33Table of ContentsWe cannot guarantee that these manufacturers or our other third-party manufacturing suppliers will be able to meet our near-term or long-term manufacturingrequirements.If we experience supply constraints from our third-party manufacturing suppliers,we may be required to allocate the reduced quantities ofaffected products amongst our customers,which could have a material adverse effect on our relationships with these customers and on our financial condition.In addition,if we are unable to meet customer demand due to fluctuating or late supply from our manufacturing suppliers,it could result in lost sales and have amaterial adverse effect on our business.For example,if TSMC is not able to manufacture wafers for our microprocessor and GPU products at 7 nm or smallernodes and our newest IC products in sufficient quantities to meet customer demand,it could have a material adverse effect on our business.We do not have long-term commitment contracts with some of our third-party manufacturing suppliers.We obtain many of these manufacturing services on apurchase order basis and these manufacturers are not required to provide us with any specified minimum quantity of product beyond the quantities in anexisting purchase order.Accordingly,we depend on these suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs,toproduce products of acceptable quality and at acceptable manufacturing yields and to deliver those products to us on a timely basis and at acceptable prices.The manufacturers we use also fabricate wafers and ATMP products for other companies,including certain of our competitors.They could choose to prioritizecapacity for other customers,increase the prices that they charge us on short notice,require onerous prepayments,or reduce or eliminate deliveries to us,which could have a material adverse effect on our business.If we overestimate our customer demand or experience a decrease in customer demand,eithercould result in excess inventory and an increase in our production costs.We are party to a wafer supply agreement with GF where GF will provide a minimumannual capacity allocation to us and set pricing through 2026.If our actual wafer requirements are less than the number of wafers required to meet theapplicable annual wafer purchase target,we could have excess inventory or higher inventory unit costs,both of which may adversely impact our gross marginand our results of operations.Other risks associated with our dependence on third-party manufacturers include limited control over delivery schedules,yield,cycle times,quality assurance,price increases,lack of capacity in periods of excess demand,misappropriation of our intellectual property,dependence on several subcontractors,and limitedability to manage inventory and parts.Moreover,if any of our third-party manufacturers(or their subcontractors)suffer any damage to facilities,lose benefitsunder material agreements,experience power outages,water shortages,or high heat events,lack sufficient capacity to manufacture our products,encounterfinancial difficulties,are unable to secure necessary raw materials from their suppliers,suffer any other disruption or reduction in efficiency,or experienceuncertain environmental,social,atmospheric or natural,economic or political circumstances or conditions,we may encounter supply delays or disruptions.Forexample,in the first quarter of 2024,we experienced some inventory loss due to an incident at a contract manufacturer.If we are unable to secure sufficient orreliable supply of products,our ability to meet customer demand may be adversely affected and this could materially affect our 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