First QuarterFiscal 2024 Results 2024 Walgreens Boots Alliance,Inc.All rights reserved.January 4,202.
2024-05-31
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Second QuarterFiscal 2024 Results 2024 Walgreens Boots Alliance,Inc.All rights reserved.March 28,202.
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended February 18,2024orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934Commission file number 0-20355Costco Wholesale Corporation(Exact name of registrant as specified in its charter)Washington 91-1223280(State or other jurisdiction ofincorporation or organization)(I.R.S.Employer Identification No.)999 Lake Drive,Issaquah,WA 98027(Address of principal executive offices)(Zip Code)(Registrants telephone number,including area code):(425)313-8100Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock,$.005 Par ValueCOSTThe Nasdaq Global Select MarketIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject tosuch filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required tosubmit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reportingcompany,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The number of shares outstanding of the issuers common stock as of March 6,2024 was 443,504,036.1Table of ContentsCOSTCO WHOLESALE CORPORATIONINDEX TO FORM 10-Q PagePART IFINANCIAL INFORMATIONItem 1.Financial Statements3Condensed Consolidated Statements of Income3Condensed Consolidated Statements of Comprehensive Income4Condensed Consolidated Balance Sheets5Condensed Consolidated Statements of Equity6Condensed Consolidated Statements of Cash Flows8Notes to Condensed Consolidated Financial Statements9Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations18Item 3.Quantitative and Qualitative Disclosures About Market Risk26Item 4.Controls and Procedures27PART IIOTHER INFORMATIONItem 1.Legal Proceedings27Item 1A.Risk Factors27Item 2.Unregistered Sales of Equity Securities,Use of Proceeds,and Issuer Purchases of Equity Securities27Item 3.Defaults Upon Senior Securities28Item 4.Mine Safety Disclosures28Item 5.Other Information28Item 6.Exhibits28Signatures292Table of ContentsPART IFINANCIAL INFORMATIONItem 1Financial StatementsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(amounts in millions,except per share data)(unaudited)12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023REVENUENet sales$57,331$54,239$114,048$107,676 Membership fees1,111 1,027 2,193 2,027 Total revenue58,442 55,266 116,241 109,703 OPERATING EXPENSESMerchandise costs51,140 48,423 101,597 96,192 Selling,general and administrative5,240 4,940 10,598 9,857 Operating income2,062 1,903 4,046 3,654 OTHER INCOME(EXPENSE)Interest expense(41)(34)(79)(68)Interest income and other,net216 114 376 167 INCOME BEFORE INCOME TAXES2,237 1,983 4,343 3,753 Provision for income taxes494 517 1,011 923 NET INCOME$1,743$1,466$3,332$2,830 NET INCOME PER COMMON SHARE:Basic$3.93$3.30$7.51$6.37 Diluted$3.92$3.30$7.49$6.37 Shares used in calculation(000s):Basic443,892 443,877 443,859 443,857 Diluted444,754 444,475 444,579 444,503 The accompanying notes are an integral part of these condensed consolidated financial statements.3Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(amounts in millions)(unaudited)12 Weeks Ended24 Weeks Ended February 18,2024February 12,2023February 18,2024February 12,2023NET INCOME$1,743$1,466$3,332$2,830 Foreign-currency translation adjustment and other,net1 253(37)157 COMPREHENSIVE INCOME$1,744$1,719$3,295$2,987 The accompanying notes are an integral part of these condensed consolidated financial statements.4Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(amounts in millions,except par value and share data)(unaudited)February 18,2024September 3,2023ASSETSCURRENT ASSETSCash and cash equivalents$9,095$13,700 Short-term investments1,226 1,534 Receivables,net2,779 2,285 Merchandise inventories17,075 16,651 Other current assets1,971 1,709 Total current assets32,146 35,879 OTHER ASSETSProperty and equipment,net27,601 26,684 Operating lease right-of-use assets2,740 2,713 Other long-term assets3,836 3,718 TOTAL ASSETS$66,323$68,994 LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable$17,494$17,483 Accrued salaries and benefits4,801 4,278 Accrued member rewards2,268 2,150 Deferred membership fees2,541 2,337 Current portion of long-term debt1,080 1,081 Other current liabilities6,504 6,254 Total current liabilities34,688 33,583 OTHER LIABILITIESLong-term debt,excluding current portion5,865 5,377 Long-term operating lease liabilities2,488 2,426 Other long-term liabilities2,522 2,550 TOTAL LIABILITIES45,563 43,936 COMMITMENTS AND CONTINGENCIESEQUITYPreferred stock$0.005 par value;100,000,000 shares authorized;no shares issued andoutstanding Common stock$0.005 par value;900,000,000 shares authorized;443,549,000 and442,793,000 shares issued and outstanding2 2 Additional paid-in capital7,620 7,340 Accumulated other comprehensive loss(1,842)(1,805)Retained earnings14,980 19,521 TOTAL EQUITY20,760 25,058 TOTAL LIABILITIES AND EQUITY$66,323$68,994 The accompanying notes are an integral part of these condensed consolidated financial statements.5Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)12 Weeks Ended February 18,2024 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE ATNOVEMBER 26,2023443,787$2$7,489$(1,843)$20,499$26,147$26,147 Net income 1,743 1,743 1,743 Foreign-currencytranslation adjustmentand other,net 1 1 1 Stock-basedcompensation 136 136 136 Release of vestedrestricted stock units(RSUs),including taxeffects2 Repurchases ofcommon stock(240)(5)(155)(160)(160)Cash dividend declaredand other (7,107)(7,107)(7,107)BALANCE ATFEBRUARY 18,2024443,549$2$7,620$(1,842)$14,980$20,760$20,760 12 Weeks Ended February 12,2023 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE ATNOVEMBER 20,2022443,841$2$6,982$(1,925)$16,412$21,471$5$21,476 Net income 1,466 1,466 1,466 Foreign-currencytranslation adjustmentand other,net 253 253 253 Stock-basedcompensation 148 148 148 Release of vestedRSUs,including taxeffects3 (1)(1)(1)Repurchases ofcommon stock(294)(6)(138)(144)(144)Cash dividend declared (399)(399)(399)BALANCE ATFEBRUARY 12,2023443,550$2$7,123$(1,672)$17,341$22,794$5$22,799 The accompanying notes are an integral part of these condensed consolidated financial statements.6Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)24 Weeks Ended February 18,2024 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE ATSEPTEMBER 3,2023442,793$2$7,340$(1,805)$19,521$25,058$25,058 Net income 3,332 3,332 3,332 Foreign-currencytranslation adjustmentand other,net (37)(37)(37)Stock-basedcompensation 582 582 582 Release of vestedrestricted stock units(RSUs),including taxeffects1,284 (292)(292)(292)Repurchases ofcommon stock(528)(10)(312)(322)(322)Cash dividendsdeclared and other (7,561)(7,561)(7,561)BALANCE ATFEBRUARY 18,2024443,549$2$7,620$(1,842)$14,980$20,760$20,760 24 Weeks Ended February 12,2023 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST28,2022442,664$2$6,884$(1,829)$15,585$20,642$5$20,647 Net income 2,830 2,830 2,830 Foreign-currencytranslation adjustmentand other,net 157 157 157 Stock-basedcompensation 551 551 551 Release of vestedRSUs,including taxeffects1,465 (302)(302)(302)Repurchases ofcommon stock(579)(10)(275)(285)(285)Cash dividendsdeclared (799)(799)(799)BALANCE ATFEBRUARY 12,2023443,550$2$7,123$(1,672)$17,341$22,794$5$22,799 The accompanying notes are an integral part of these condensed consolidated financial statements.7Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in millions)(unaudited)24 Weeks EndedFebruary 18,2024February 12,2023CASH FLOWS FROM OPERATING ACTIVITIESNet income$3,332$2,830 Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization1,015 917 Non-cash lease expense148 216 Stock-based compensation580 549 Impairment of assets and other non-cash operating activities,net(7)145 Changes in operating assets and liabilities:Merchandise inventories(425)1,849 Accounts payable4(1,417)Other operating assets and liabilities,net735 713 Net cash provided by operating activities5,382 5,802 CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short-term investments(719)(396)Maturities of short-term investments1,029 512 Additions to property and equipment(2,071)(1,947)Other investing activities,net9(34)Net cash used in investing activities(1,752)(1,865)CASH FLOWS FROM FINANCING ACTIVITIESRepayments of short-term borrowings(409)(520)Proceeds from short-term borrowings383 479 Proceeds from issuance of long-term debt498 Tax withholdings on stock-based awards(292)(302)Repurchases of common stock(322)(284)Cash dividend payments(8,012)(400)Financing lease payments(94)(158)Other financing activities,net(2)(30)Net cash used in financing activities(8,250)(1,215)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS15 45 Net increase in cash and cash equivalents(4,605)2,767 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR13,700 10,203 CASH AND CASH EQUIVALENTS END OF PERIOD$9,095$12,970 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the first half of the year for:Interest$62$62 Income taxes,net$1,197$636 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:Cash dividend declared,but not yet paid$399 Financing lease assets obtained in exchange for new or modified leases$97$47 Operating lease assets obtained in exchange for new or modified leases$145$131 Capital expenditures included in liabilities$144$11 The accompanying notes are an integral part of these condensed consolidated financial statements.8Table of ContentsCOSTCO WHOLESALE CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(amounts in millions,except share,per share,and warehouse count data)(unaudited)Note 1Summary of Significant Accounting PoliciesDescription of BusinessCostco Wholesale Corporation(Costco or the Company),a Washington corporation,and its subsidiaries operate membership warehousesbased on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range ofmerchandise categories will produce high sales volumes and rapid inventory turnover.At February 18,2024,Costco operated 874 warehousesworldwide:602 in the United States(U.S.)located in 47 states,Washington,D.C.,and Puerto Rico,108 in Canada,40 in Mexico,33 inJapan,29 in the United Kingdom(U.K.),18 in Korea,15 in Australia,14 in Taiwan,six in China,four in Spain,two in France,and one eachin Iceland,New Zealand,and Sweden.The Company operates e-commerce websites in the U.S.,Canada,the U.K.,Mexico,Korea,Taiwan,Japan,and Australia.Basis of PresentationThe condensed consolidated financial statements include the accounts of Costco and its wholly-owned subsidiaries.All material inter-companytransactions among the Company and its consolidated subsidiaries have been eliminated in consolidation.These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interimfinancial reporting pursuant to the rules and regulations of the Securities and Exchange Commission(SEC).While these statements reflect allnormal recurring adjustments that are,in the opinion of management,necessary for fair presentation of the results of the interim period,they donot include all of the information and footnotes required by U.S.generally accepted accounting principles(U.S.GAAP)for complete financialstatements.Therefore,the interim condensed consolidated financial statements should be read in conjunction with the consolidated financialstatements and notes included in the Companys Annual Report on Form 10-K for the fiscal year ended September 3,2023.Fiscal Year EndThe Company operates on a 52/53 week fiscal year basis,with the fiscal year ending on the Sunday closest to August 31.Fiscal 2024 is a 52-week year ending on September 1,2024.References to the second quarter of 2024 and 2023 relate to the 12-week fiscal quartersended February 18,2024,and February 12,2023.References to the first half of 2024 and 2023 relate to the 24 weeks ended February 18,2024and February 12,2023.Use of EstimatesThe preparation of financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.These estimates and assumptions take into account historical andforward-looking factors that the Company believes are reasonable.Actual results could differ from those estimates and assumptions.ReclassificationReclassifications were made to the condensed consolidated statement of cash flows for the first half of fiscal 2023 to conform with current yearpresentation.9Table of ContentsRecent Accounting Pronouncements Not Yet AdoptedIn November 2023,the Financial Accounting Standards Board(FASB)issued Accounting Standards Update(ASU)2023-07,which is intended toimprove reportable segment disclosure requirements,primarily through additional disclosures about significant segment expenses.The standardis effective for fiscal years beginning after December 15,2023,and interim periods within fiscal years beginning after December 15,2024,withearly adoption permitted.The amendments should be applied retrospectively to all prior periods presented in the financial statements.TheCompany is evaluating the new standard.In December 2023,the FASB issued ASU 2023-09,which focuses on income tax disclosures by requiring public business entities,on an annualbasis,to disclose specific categories in the rate reconciliation,provide information for reconciling items that meet a quantitative threshold,andcertain information about income taxes paid.The standard is effective for annual periods beginning after December 15,2024,with early adoptionpermitted.The amendments should be applied on a prospective basis.Retrospective application is permitted.The Company is evaluating thenew standard.Note 2InvestmentsThe Companys investments were as follows:February 18,2024:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$678$(13)$665 Held-to-maturity:Certificates of deposit561 561 Total short-term investments$1,239$(13)$1,226 September 3,2023:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$650$(17)$633 Held-to-maturity:Certificates of deposit901 901 Total short-term investments$1,551$(17)$1,534 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended February 18,2024,orSeptember 3,2023.At those dates,there were no available-for-sale securities in a material continuous unrealized-loss position.There were nosales of available-for-sale securities during the first half of 2024 or 2023.The maturities of available-for-sale and held-to-maturity securities at February 18,2024,are as follows:Available-For-SaleHeld-To-Maturity Cost BasisFair ValueDue in one year or less$136$135$561 Due after one year through five years370 365 Due after five years172 165 Total$678$665$561 10Table of ContentsNote 3Fair Value MeasurementAssets and Liabilities Measured at Fair Value on a Recurring BasisThe table below presents information regarding the Companys financial assets and financial liabilities that are measured at fair value on arecurring basis and indicates the level within the hierarchy reflecting the valuation techniques utilized.Level 2February 18,2024September 3,2023Investment in government and agency securities$669$633 Forward foreign-exchange contracts,in asset position12 18 Forward foreign-exchange contracts,in(liability)position(4)(7)Total$677$644 _(1)At February 18,2024,$4 cash and cash equivalents and$665 short-term investments are included in the accompanying condensed consolidated balance sheets.(2)The asset and liability values are included in other current assets and other current liabilities,respectively,in the accompanying condensed consolidated balance sheets.At February 18,2024,and September 3,2023,the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fairvalue on a recurring basis.There were no transfers between levels during the first half of 2024 or 2023.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisAssets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured atamortized cost and long-lived nonfinancial assets.These assets are measured at fair value if determined to be impaired.There were no materialfair value adjustments to these items during the first half of 2024.During the first quarter of 2023,the Company recognized in merchandise costsa charge of$93,primarily related to the impairment of certain leased assets associated with charter shipping activities,now discontinued.Note 4DebtThe carrying value of the Companys long-term debt consisted of the following:February 18,2024September 3,20232.750%Senior Notes due May 2024$1,000$1,000 3.000%Senior Notes due May 20271,000 1,000 1.375%Senior Notes due June 20271,250 1,250 1.600%Senior Notes due April 20301,750 1,750 1.750%Senior Notes due April 20321,000 1,000 Other long-term debt969 484 Total long-term debt6,969 6,484 Less unamortized debt discounts and issuance costs24 26 Less current portion1,080 1,081 Long-term debt,excluding current portion$5,865$5,377 _(1)Net of unamortized debt discounts and issuance costs.(1)(2)(2)(1)11Table of ContentsThe fair value of the Senior Notes is estimated using Level 2 inputs.Other long-term debt consists of Guaranteed Senior Notes issued by theCompanys Japan subsidiary,valued using Level 3 inputs.In November 2023,the Companys Japan subsidiary issued four Guaranteed SeniorNotes,totaling approximately$500,at fixed interest rates ranging from 1.400%to 2.120%.Interest is payable semi-annually,and maturity datesrange from November 7,2033,to November 7,2043.The fair value of the Companys long-term debt,including the current portion,wasapproximately$6,306 and$5,738 at February 18,2024,and September 3,2023.Note 5EquityDividendsA quarterly cash dividend of$1.02 per share was declared on January 18,2024,and paid on February 16,2024.The dividend was$0.90 pershare in the second quarter of 2023.On January 12,2024,an aggregate payment of approximately$6,655 was made in connection with aspecial cash dividend of$15.00 per share,declared on December 13,2023.Stock Repurchase ProgramsThe Companys stock repurchase program is conducted under a$4,000 authorization by the Board of Directors,which expires in January 2027.At February 18,2024,the remaining amount available under the program was$3,241.The following table summarizes the repurchase activity:Shares Repurchased(000s)Average Price per ShareTotal CostSecond quarter of 2024240$664.02$160 First half of 2024528$609.51$322 Second quarter of 2023294$488.30$144 First half of 2023579$492.06$285 These amounts may differ from the accompanying condensed consolidated statements of cash flows due to changes in unsettled stockrepurchases at the end of each quarter.Purchases are made from time to time,as conditions warrant,in the open market or in block purchasesand pursuant to plans under SEC Rule 10b5-1.Note 6Stock-Based CompensationThe 2019 Incentive Plan authorized the issuance of up to a maximum of 15,885,000 RSUs.To preserve the value of outstanding awards,thenumber of RSUs that may be granted under this Plan is subject to adjustments from changes in capital structure.The Company issues newshares of common stock upon vesting of RSUs.Shares for vested RSUs are generally delivered to participants annually,net of shares withheldfor taxes.As required by the 2019 Incentive Plan,in conjunction with the 2024 special cash dividend,the number of shares subject to outstanding RSUswas increased on the dividend record date to preserve their value.They were adjusted by multiplying the number of outstanding shares by afactor of 1.018,representing the ratio of the Nasdaq closing price of$674.62 on December 26,2023,which was the last trading day immediatelyprior to the ex-dividend date,to the Nasdaq opening price of$662.70 on the ex-dividend date,December 27,2023.The outstanding RSUsincreased by approximately 52,000.The adjustment did not result in additional stock-based compensation expense,as the fair value of theawards did not change.As further required by the 2019 Incentive Plan,the maximum number of shares issuable under the plan wasproportionally adjusted,which resulted in an additional 128,000 RSU shares available to be granted.12Table of ContentsSummary of Restricted Stock Unit ActivityAt February 18,2024,7,249,000 shares were available to be granted as RSUs,and the following awards,adjusted for the effects of the specialdividend,were outstanding:2,749,000 time-based RSUs,which vest upon continued employment over specified periods and accelerate upon achievement of a long-service term;70,000 performance-based RSUs granted to executive officers of the Company,for which the performance targets have been met.Theawards vest upon continued employment over specified periods of time and upon achievement of a long-service term;and91,000 performance-based RSUs granted to executive officers of the Company,subject to achievement of performance targets for 2024,as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year.These awards are included inthe table below.The Company recognized compensation expense for these awards in the second quarter of 2024,as it is currentlydeemed probable that the targets will be achieved.The following table summarizes RSU transactions during the first half of 2024:Number ofUnits(in 000s)Weighted-AverageGrant Date Fair ValueOutstanding at September 3,20233,045$405.63 Granted1,663 545.98 Vested and delivered(1,813)430.54 Forfeited(37)454.02 Special cash dividend52 N/AOutstanding at February 18,20242,910$462.35 The remaining unrecognized compensation cost related to RSUs unvested at February 18,2024,was$1,098,and the weighted-average periodover which this cost will be recognized is 1.8 years.Summary of Stock-Based CompensationThe following table summarizes stock-based compensation expense and the related tax benefits:12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023Stock-based compensation expense$136$147$580$549 Less recognized income tax benefits25 24 120 113 Stock-based compensation expense,net$111$123$460$436 13Table of ContentsNote 7Net Income per Common and Common Equivalent ShareThe following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and ofpotentially dilutive common shares outstanding(shares in 000s):12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023Net income$1,743$1,466$3,332$2,830 Weighted average basic shares443,892 443,877 443,859 443,857 RSUs862 598 720 646 Weighted average diluted shares444,754 444,475 444,579 444,503 Anti-dilutive RSUs 6 Anti-dilutive shares are excluded from the calculation of diluted shares and earnings per diluted share because their impact would increaseearnings per diluted shares.Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding duringthe period.Diluted earnings per share is calculated based on the dilutive effect of RSUs using the treasury stock method.Note 8Commitments and ContingenciesLegal ProceedingsThe Company is involved in many claims,proceedings and litigations arising from its business and property ownership.In accordance withapplicable accounting guidance,the Company establishes an accrual for legal proceedings if and when those matters present loss contingenciesthat are both probable and reasonably estimable.There may be losses in excess of amounts accrued.The Company monitors those matters fordevelopments that would affect the likelihood of a loss(taking into account where applicable indemnification arrangements concerning suppliersand insurers)and the accrued amount,if any,thereof,and adjusts the amount as appropriate.The Company has recorded immaterial accrualswith respect to certain matters described below,in addition to other immaterial accruals for matters not described below.If the loss contingencyat issue is not both probable and reasonably estimable,the Company does not establish an accrual,but monitors for developments that makethe contingency both probable and reasonably estimable.In each case,there is a reasonable possibility that a loss may be incurred,including aloss in excess of the applicable accrual.For matters where no accrual has been recorded,the possible loss or range of loss(including any lossin excess of the accrual)cannot,in the Companys view,be reasonably estimated because,among other things:the remedies or penaltiessought are indeterminate or unspecified;the legal and/or factual theories are not well developed;and/or the matters involve complex or novellegal theories or a large number of parties.In November 2023,a former employee filed a class action against the Company alleging claims under California law for failure to pay minimumwage,failure to pay overtime,failure to provide meal and rest breaks,failure to provide accurate wage statements,failure to reimburseexpenses,failure to pay wages when due,and failure to pay sick pay.Martin Reyes v.Costco Wholesale Corporation,Sacramento CountySuperior Court.(Case No.23cv011351).An amended complaint has been filed,as to which the Company has yet to respond.In October 2023,current and former employees filed suit against the Company asserting collective and class claims on behalf of all“JuniorManagers”under the Fair Labor Standards Act and New York Labor Law,for failure to pay overtime compensation and for inaccurate wagestatements under New York law.14Table of ContentsLock et al.v.Costco Wholesale Corp.(Case No.2:23-cv-07904;E.D.N.Y.).On February 1,2024,the Company served a motion to dismiss theinaccurate wage-statement claim.In October 2023,a current employee filed suit against the Company asserting collective and class claims on behalf of all“supervisors”employedin New Jersey,under the Fair Labor Standards Act and New Jersey Wage and Hour Law for failure to pay all hours worked.Shah v.CostcoWholesale Corp.(Case No.2:23-cv-21286;D.N.J.).On December 26,2023,the Company filed its answer,denying all claims.In July 2021,a former temporary staffing employee filed a class action against the Company and a staffing company,alleging violations of theCalifornia Labor Code regarding payment of wages,meal and rest periods,wage statements,the timeliness of wages and final wages,and forunfair business practices.Dimas v.Costco Wholesale Corp.(Case No.STK-CV-UOE-2021-0006024;San Joaquin Superior Court).TheCompany has moved to compel arbitration of the plaintiffs individual claims and to dismiss the class action complaint.On September 7,2021,the same plaintiff filed a separate representative action under the California Private Attorneys General Act,asserting the same Labor Codeviolations and seeking civil penalties and attorneys fees.The case has been stayed pending arbitration of the plaintiffs individual claims.In May 2022,an employee filed an action under the California Private Attorneys General Act against the Company,alleging claims under theCalifornia Labor Code regarding the payment of wages,meal and rest periods,the timeliness of wages and final wages,wage statements,accurate records and business expenses.Gonzalez v.Costco Wholesale Corp.(Case No.22AHCV00255;Los Angeles Superior Court).TheCompany filed an answer denying the allegations.On October 31,2023,a settlement was reached for an immaterial amount.A hearing onpreliminary approval of the settlement is scheduled for April 23,2024.Beginning in December 2017,the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts ofopioid abuses filed against various defendants by counties,cities,hospitals,Native American tribes,third-party payors,and others.In re NationalPrescription Opiate Litigation(MDL No.2804)(N.D.Ohio).Included are cases filed against the Company by counties and cities in Michigan,New Jersey,Oregon,Virginia and South Carolina,a third-party payor in Ohio,and a hospital in Texas,class actions filed on behalf of infants bornwith opioid-related medical conditions in 40 states,and class actions and individual actions filed on behalf of individuals seeking to recoveralleged increased insurance costs associated with opioid abuse in 43 states and American Samoa.Claims against the Company filed in federalcourt outside the MDL have been asserted by certain counties and cities in Florida and Georgia;claims filed by certain cities and counties inNew York are pending in state court.Claims against the Company in state courts in New Jersey,Oklahoma,Utah,and Arizona have beendismissed.The Company is defending all of the pending matters.Members of the Board of Directors,six corporate officers and the Company were defendants in a shareholder derivative action filed in June 2022related to chicken welfare and alleged breaches of fiduciary duties.Smith,et ano.v.Vachris,et al.,Superior Court of the State of Washington,County of King,No,22-2-08937-7SEA.The complaint sought from the individual defendants damages,injunctive relief,costs,and attorneysfees.On March 28,2023,the court granted the defendants motion to dismiss the action.The plaintiffs subsequently made a demand that theBoard of Directors take various actions,including among other things,pursuing claims against directors and officers of the type asserted in thelitigation.A demand review committee of the Board has been appointed to make a recommendation to the Board as to the demand.In February 2023,Go Green Norcal,LLC filed an arbitration demand against the Company.The demand alleged a breach of a supply agreementand sought unspecified damages and cancellation of a loan from the Company.In March 2023,the Company filed its answer,denying anybreach by the Company,along with counterclaims against Go Green and an affiliate for breach of contract,negligent misrepresentation,and anaccounting.In August 2023 the plaintiff asserted that its damages exceed$70 million.An award to the plaintiffs of an immaterial amount waspaid in February 2024.15Table of ContentsBetween September 25,2023,and October 31,2023,five class action suits were filed against the Company alleging various privacy lawviolations stemming from pixel trackers on C.Birdwell v.Costco Wholesale Corp.,Case No.T23-1405,Contra Costa County SuperiorCourt;and Scott v.Costco Wholesale Corp.,Case No.2:23-cv-08808(C.D.Cal.),now consolidated with R.S.v.Costco Wholesale Corp.,CaseNo.2:23-cv-01628(W.D.Wash.);Groves,et ano.v.Costco Wholesale Corp.,Case No.2:23-cv-01662(W.D.Wash.)and Castillo v.CostcoWholesale Corp.,under Case No.2:34-cv-01548(W.D.Wash.).The Castillo plaintiffs filed a consolidated complaint on January 26,2024,whichseeks damages,equitable relief and attorneys fees under various statutes,including the Washington Consumer Protection Act,WashingtonPrivacy Act,Washington Uniform Health Care Information Act,Electronic Communications Privacy Act,California Invasion of Privacy Act,andCalifornia Confidentiality of Medical Information Act.The consolidated complaint also alleges breach of implied contract,invasion of privacy,conversion and unjust enrichment.The Company filed a motion to dismiss and demurrer in Birdwell and has not responded to the Castilloconsolidated complaint.On January 2,2024,the Company received a related civil investigative demand from the Washington Attorney Generalsoffice.On January 3,2024,the Company received a related pre-litigation letter from the Los Angeles Office of the County Counsel.In October 2021 the Company received a notice that the Quebec Health Insurance Board had commenced an inquiry to determine whether theCompany had given or received improper payments for drugs that are covered by the provinces prescription drug program from drugwholesalers,generic drug manufacturers or the independent pharmacist who owns and operates the pharmacies located in the CompanysQuebec locations.The inquiry covers a period beginning January 1,2017.In January 2023 the Company received a Civil Investigative Demand from the U.S.Attorneys Office,Western District of Washington,requestingdocuments.The government is conducting a False Claims Act investigation concerning whether the Company presented or caused to bepresented to the federal government for payment false claims relating to prescription medications.The Company does not believe that any pending claim,proceeding or litigation,either alone or in the aggregate,will have a material adverseeffect on the Companys financial position,results of operations or cash flows;it is possible that an unfavorable outcome of some or all of thematters,however unlikely,could result in a charge that might be material to the results of an individual fiscal quarter or year.16Table of ContentsNote 9Segment ReportingThe Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S.,Canada,Mexico,Japan,the U.K.,Korea,Australia,Taiwan,China,Spain,France,Iceland,New Zealand,and Sweden.Reportable segments are largelybased on managements organization of the operating segments for operational decisions and assessments of financial performance,whichconsider geographic locations.The material accounting policies of the segments are as described in the notes to the consolidated financialstatements included in the Companys Annual Report filed on Form 10-K for the fiscal year ended September 3,2023,and Note 1 above.Inter-segment net sales and expenses have been eliminated in calculating total revenue and operating income.The following table provides information for the Companys reportable segments:United StatesCanadaOtherInternationalTotal12 Weeks Ended February 18,2024Total revenue$41,952$7,874$8,616$58,442 Operating income1,294 390 378 2,062 12 Weeks Ended February 12,2023Total revenue$40,145$7,299$7,822$55,266 Operating income1,295 284 324 1,903 24 Weeks Ended February 18,2024Total revenue$83,785$15,775$16,681$116,241 Operating income2,652 715 679 4,046 24 Weeks Ended February 12,2023Total revenue$80,290$14,655$14,758$109,703 Operating income2,531 572 551 3,654 53 Weeks Ended September 3,2023Total revenue$176,630$33,056$32,604$242,290 Operating income5,392 1,448 1,274 8,114 Disaggregated RevenueThe following table summarizes net sales by merchandise category;sales from e-commerce websites and business centers have been allocatedto the applicable merchandise categories:12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023Foods and Sundries$23,675$21,926$46,699$43,374 Non-Foods15,017 14,741 29,783 28,773 Fresh Foods7,996 7,376 15,324 14,093 Warehouse Ancillary and Other Businesses10,643 10,196 22,242 21,436 Total net sales$57,331$54,239$114,048$107,676 17Table of ContentsItem 2Managements Discussion and Analysis of Financial Condition and Results of Operations(amounts in millions,except per share,share,percentages and warehouse count data)FORWARD-LOOKING STATEMENTSCertain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995.For these purposes,forward-looking statements are statements that address activities,events,conditions or developmentsthat the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth,changes in comparablesales,cannibalization of existing locations by new openings,price or fee changes,earnings performance,earnings per share,stock-basedcompensation expense,warehouse openings and closures,capital spending,the effect of adopting certain accounting standards,future financialreporting,financing,margins,return on invested capital,strategic direction,expense controls,membership renewal rates,shopping frequency,litigation,and the demand for our products and services.In some cases,forward-looking statements can be identified because they containwords such as“anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“intend,”“likely,”“may,”“might,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“target,”“will,”“would,”or similar expressions and the negatives of those terms.Such forward-looking statementsinvolve risks and uncertainties that may cause actual events,results or performance to differ materially from those indicated by such statements.These risks and uncertainties include,but are not limited to,domestic and international economic conditions,including exchange rates,inflationor deflation,the effects of competition and regulation,uncertainties in the financial markets,consumer and small business spending patterns anddebt levels,breaches of security or privacy of member or business information,conditions affecting the acquisition,development,ownership oruse of real estate,capital spending,actions of vendors,rising costs associated with employees(generally including health-care costs),energyand certain commodities,geopolitical conditions(including tariffs and the Ukraine conflict),the ability to maintain effective internal control overfinancial reporting,regulatory and other impacts related to climate change,public-health related factors,and other risks identified from time totime in the Companys public statements and reports filed with the Securities and Exchange Commission.Forward-looking statements speakonly as of the date they are made,and the Company does not undertake to update these statements,except as required by law.OVERVIEWManagements Discussion and Analysis of Financial Condition and Results of Operations(MD&A)is intended to promote understanding of theresults of operations and financial condition.MD&A is provided as a supplement to,and should be read in conjunction with,our condensedconsolidated financial statements and the accompanying Notes to Financial Statements(Part I,Item 1 of this Form 10-Q),as well as ourconsolidated financial statements,the accompanying Notes to Financial Statements,and the related Managements Discussion and Analysis ofFinancial Condition and Results of Operations in our fiscal year 2023 Form 10-K,filed with the United States Securities and ExchangeCommission on October 11,2023.We operate membership warehouses and e-commerce websites based on the concept that offering members low prices on a limited selection ofnationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventory turnover.Whencombined with the operating efficiencies achieved by volume purchasing,efficient distribution and reduced handling of merchandise in no-frills,self-service warehouse facilities,these volumes and turnover enable us to operate profitably at significantly lower gross margins(net sales lessmerchandise costs)than most other retailers.We often sell inventory before we are required to pay for it,even while taking advantage of earlypayment discounts.We believe that the most important driver of our profitability is increasing net sales,particularly comparable sales.Net sales includes our coremerchandise categories(foods and sundries,non-foods,and fresh foods),warehouse ancillary(gasoline,pharmacy,optical,food court,hearingaids,and tire installation)and other businesses(e-commerce,business centers,travel,and other).Comparable sales is18Table of Contentsdefined as net sales from warehouses open for more than one year,including remodels,relocations and expansions,and sales related to e-commerce websites operating for more than one year.The measure is intended as supplemental information and is not a substitute for net salespresented in accordance with U.S.GAAP.Comparable sales growth is achieved through increasing shopping frequency from new and existingmembers and the amount they spend on each visit(average ticket).Sales comparisons can also be particularly influenced by certain factors thatare beyond our control:fluctuations in currency exchange rates(with respect to our international operations);and inflation or deflation andchanges in the cost of gasoline and associated competitive conditions.The higher our comparable sales exclusive of these items,the more wecan leverage our selling general and administrative(SG&A)expenses,reducing them as a percentage of sales and enhancing profitability.Generating comparable sales growth is foremost a question of making available the right merchandise at the right prices,a skill that we believewe have repeatedly demonstrated over the long-term.Another substantial factor in net sales growth is the health of the economies in which wedo business,including the effects of inflation or deflation,especially the United States.Net sales growth and gross margins are also impacted byour competition,which is vigorous and widespread,across a wide range of global,national and regional wholesalers and retailers,includingthose with e-commerce operations.While we cannot control or reliably predict general economic health or changes in competition,we believethat we have been successful historically in adapting our business to these changes,such as through adjustments to our pricing andmerchandise mix,including increasing the penetration of our private-label items,and through online offerings.Our philosophy is to provide our members with quality goods and services at competitive prices.We do not focus in the short-term onmaximizing prices charged,but instead seek to maintain what we believe is a perception among our members of our“pricing authority”consistently providing the most competitive values.Our investments in merchandise pricing may include reducing prices on merchandise to drivesales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members,all negativelyimpacting gross margin and gross margin as a percentage of net sales(gross margin percentage).We believe our gasoline business enhances traffic in our warehouses;it generally has a lower gross margin percentage and lower SG&Aexpense relative to our non-gasoline businesses.A higher penetration of gasoline sales will generally lower our gross margin percentage.Generally,rising gasoline prices benefit net sales growth which,given the higher sales base,negatively impacts our gross margin percentagebut decreases our SG&A expenses as a percentage of net sales.A decline in gasoline prices has the inverse effect.Government actions in various countries relating to tariffs,particularly China and the United States,have affected the costs of some of ourmerchandise.The degree of our exposure is dependent on(among other things)the type of goods,rates imposed,and timing of the tariffs.Higher tariffs could adversely impact our results.We also achieve net sales growth by opening new warehouses.As our warehouse base grows,available and desirable sites become moredifficult to secure,and square footage growth becomes a comparatively less substantial component of growth.Negative aspects of such growthinclude lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openingsoccur in existing markets.Our rate of square footage growth is generally higher in foreign markets,due to the smaller base in those markets,andwe expect that to continue.Our e-commerce business,domestically and internationally,generally has a lower gross-margin percentage than ourwarehouse operations.The membership format is an integral part of our business and has a significant effect on our profitability.This format is designed to reinforcemember loyalty and provide continuing fee revenue.The extent to which we achieve growth in our membership base,increase the penetration ofExecutive memberships,and sustain high renewal rates materially influences our profitability.Our paid-membership growth rate may beadversely impacted when warehouse openings occur in existing markets as compared to new markets.19Table of ContentsOur financial performance depends heavily on controlling costs.While we believe that we have achieved successes in this area,some significantcosts are partially outside our control,particularly health care and utility expenses.With respect to the compensation of our employees,ourphilosophy is not to seek to minimize their wages and benefits.Rather,we believe that achieving our longer-term objectives of reducingemployee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average formuch of our workforce.This may cause us,for example,to absorb costs that other employers might seek to pass through to their workforces.Because our business operates on very low margins,modest changes in various items in the consolidated statements of income,particularlymerchandise costs and SG&A expenses,can have substantial impacts on net income.Our operating model is generally the same across our U.S.,Canadian,and Other International operating segments(see Note 9 to theconsolidated financial statements included in Part I,Item 1,of this Report).Certain operations in the Other International segment have relativelyhigher rates of square footage growth,lower wage and benefit costs as a percentage of sales,less or no direct membership warehousecompetition,or lack e-commerce or business delivery.In discussions of our consolidated operating results,we refer to the impact of changes in foreign currencies relative to the U.S.dollar,which aredifferences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies intoU.S.dollars.This impact of foreign-exchange rate changes is calculated based on the difference between the current and prior periodsexchange rates.The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and priorperiods average price per gallon sold.Results expressed excluding the impacts of foreign exchange and gasoline prices are intended assupplemental information and are not a substitute for net sales presented in accordance with U.S.GAAP and should be reviewed in conjunctionwith results reported in accordance with U.S.GAAP.Our fiscal year ends on the Sunday closest to August 31.References to the second quarter of 2024 and 2023 relate to the 12-week fiscalquarters ended February 18,2024,and February 12,2023.References to the first half of 2024 and 2023 relate to the 24 weeks endedFebruary 18,2024,and February 12,2023.Certain percentages presented are calculated using actual results prior to rounding.Highlights for the second quarter of 2024 versus 2023 include:Net sales increased 6%to$57,331,driven by an increase in comparable sales and sales at 26 net new warehouses opened since theend of the second quarter of 2023;Membership fee revenue increased 8%to$1,111,driven by new member sign-ups,upgrades to Executive Membership,and a higherrenewal rate;Gross margin percentage increased eight basis points,driven primarily by our warehouse ancillary and other businesses and coremerchandise categories,partially offset by an increase in 2%rewards;SG&A expenses as a percentage of net sales increased three basis points,primarily due to increased costs in warehouse operations andother businesses,including the impact of wage increases in March and September 2023,partially offset by central operating costs;A quarterly cash dividend of$1.02 per share was declared on January 18,2024,and paid on February 16,2024.On January 12,2024,an aggregate payment of approximately$6,655 was made in connection with a special cash dividend of$15.00 per share,declared onDecember 13,2023;Our effective tax rate was 22.1%and was positively impacted by a$94 benefit,or$0.21 per diluted share,related to the special cashdividend;andNet income was$1,743,$3.92 per diluted share,compared to$1,466,$3.30 per diluted share in 2023.20Table of ContentsRESULTS OF OPERATIONSNet Sales12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023Net Sales$57,331$54,239$114,048$107,676 Changes in net sales:U.S.4%7%4%9nada8%4%8%4%Other International10%7%4%Total Company6%6%6%7%Changes in comparable sales:U.S.4%6%3%8nada9%4%8%3%Other International9%4%Total Company6%5%5%6%E-commerce18%(10)%(7)%Changes in comparable sales excluding the impact of changesin foreign-currency and gasoline prices:U.S.5%6%4%6nada9%9%9%Other International8%8%9%Total Company6%7%5%7%E-commerce18%(9)%(6)%_(1)Comparable sales for the second quarter and first half of 2024 were calculated using comparable retail weeks.Net SalesNet sales increased$3,092 or 6%,and$6,372 or 6%during the second quarter and first half of 2024.The improvement was attributable to anincrease in comparable sales of 6%and 5%in the second quarter and first half of 2024,and sales at the 26 net new warehouses opened sincethe end of the second quarter of 2023.Sales increased$2,645,or 6%and$5,566,or 6%in core merchandise categories during the secondquarter and first half of 2024,due to increases in all categories.Sales in warehouse ancillary and other businesses increased$447 or 4%,and$806,or 4%during the second quarter and first half of 2024,led by pharmacy.During the second quarter of 2024,lower gasoline prices negatively impacted net sales by$231,43 basis points,compared to 2023,with a 3crease in the average price per gallon.Changes in foreign currencies relative to the U.S.dollar positively impacted net sales by approximately$94,17 basis points,compared to the second quarter of 2023,attributable to our Canadian and Other International operations.During the first half of 2024,lower gasoline prices negatively impacted net sales by$572,53 basis points,compared to 2023,with a 4crease in the average price per gallon.Changes in foreign currencies relative to the U.S.dollar positively impacted net sales by approximately$289,27 basis points,compared to the second quarter of 2023,attributable to our Other International operations,partially offset by our Canadianoperations.(1)(1)21Table of ContentsComparable SalesComparable sales increased 6%and 5%in the second quarter and first half of 2024 and were positively impacted by increased shoppingfrequency and a slightly higher average ticket.Membership Fees12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023Membership fees$1,111$1,027$2,193$2,027 Membership fees increase8%6%8%6%Total paid members(000s)73,400 68,100 Total cardholders(000s)132,000 123,000 Membership fee revenue increased 8%in both the second quarter and first half of 2024,driven by new member sign-ups,upgrades to ExecutiveMembership,and a higher renewal rate.At the end of the second quarter of 2024,our renewal rates were 92.9%in the U.S.and Canada and90.5%worldwide.Renewal rates benefited from higher penetration of Executive members.Our renewal rate,which excludes affiliates ofBusiness members,is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date.We account for membership fee revenue on a deferred basis,recognized ratably over the one-year membership period.Gross Margin12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023Net sales$57,331$54,239$114,048$107,676 Less merchandise costs51,140 48,423 101,597 96,192 Gross margin$6,191$5,816$12,451$11,484 Gross margin percentage10.80.72.92.67%Quarterly ResultsGross margin percentage increased eight basis points.Excluding the impact of gasoline price deflation on net sales,gross margin percentagewas 10.76%,an increase of four basis points.The four basis-point increase was positively impacted by:six basis points due to warehouseancillary and other businesses,primarily e-commerce;three basis points due to a LIFO benefit;and two basis points due to core merchandisecategories.This increase was partially offset by seven basis points due to increased 2%rewards.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),increased 25 basis points.The increase was primarily due to non-foods and foods and sundries,partially offset by fresh foods.This measureeliminates the impact of changes in sales penetration and gross margin from our warehouse ancillary and other businesses.Gross margin percentage on a segment basis,when expressed as a percentage of the segments own sales and excluding the impact ofchanges in gasoline prices on net sales(segment gross margin percentage),decreased in our U.S.segment due to core merchandisecategories and increased 2%rewards,partially offset by warehouse ancillary and other businesses and a LIFO benefit.Gross margin increasedin our Canadian segment,largely due to core merchandise categories.Gross margin decreased in our Other International segment,primarilydue to increased 2%rewards and warehouse ancillary and other businesses,partially offset by increases in core merchandise categories.22Table of ContentsYear-to-date ResultsGross margin percentage increased 25 basis points.Excluding the impact of gasoline price deflation on net sales,gross margin percentage was10.86%,an increase of 19 basis points.The 19 basis-point increase was positively impacted by:15 basis points due to warehouse ancillary andother business,primarily e-commerce;nine basis points due to the absence of a charge related to the discontinuation of our charter shippingactivities that was recorded in the first quarter of 2023;and two basis points due to a LIFO benefit.This increase was partially offset by five basispoints due to increased 2%rewards and two basis points due to core merchandise categories.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),increased 14 basis points.The increase was primarily due to non-foods,partially offset by fresh foods.Segment gross margin percentage increased in our U.S.and Canadian segments.Our U.S.segment performed similarly to the consolidatedresults above.Our Canadian segment gross margin increased at a greater rate compared to our consolidated results,primarily due to increasesin core merchandise categories,partially offset by increased 2%rewards.Gross margin percentage was flat in our Other International segment,positively impacted by core merchandise categories,offset by increased 2%rewards.Selling,General and Administrative Expenses12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023SG&A expenses$5,240$4,940$10,598$9,857 SG&A expenses as a percentage of net sales9.14%9.11%9.29%9.15%Quarterly ResultsSG&A expenses as a percentage of net sales increased three basis points.SG&A expenses as a percentage of net sales excluding the impactof gasoline price deflation was 9.10%,a decrease of one basis point.The comparison to last year was favorably impacted by five basis pointsdue to central operating costs and four basis points due to lower stock compensation expense.Warehouse operations and other businesseswere higher by eight basis points,driven by our U.S.operations,which included the impact of wage increases in March and September 2023.SG&A expenses as a percentage of net sales were lower in our Canadian and Other International operations.Year-to-date ResultsSG&A expenses as a percentage of net sales increased 14 basis points.SG&A expenses as a percentage of net sales excluding the impact ofgasoline price deflation was 9.25%,an increase of 10 basis points.The comparison to last year was negatively impacted by 11 basis points inwarehouse operations and other businesses,driven by our U.S.operations,which included the impact of wage increases in March andSeptember 2023.Preopening costs were also higher by one basis point.SG&A was positively impacted by two basis points due to centraloperating costs.SG&A expenses as a percentage of net sales were lower in our Canadian and Other International operations.Interest Expense12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023Interest expense$41$34$79$68 Interest expense is primarily related to Senior Notes and financing leases.23Table of ContentsInterest Income and Other,Net12 Weeks Ended24 Weeks EndedFebruary 18,2024February 12,2023February 18,2024February 12,2023Interest income$147$105$301$159 Foreign-currency transaction gains(losses),net31 3 34(6)Other,net38 6 41 14 Interest income and other,net$216$114$376$167 The increase in interest income in the second quarter and first half of 2024 was due to higher global interest rates and higher average cash andinvestment balances,prior to the payment of the special cash dividend.Foreign-currency transaction gains(losses),net,include revaluation orsettlement of monetary assets and liabilities by our Canadian and Other International operations and mark-to-market adjustments for forwardforeign-exchange contracts.See Derivatives and Foreign Currency sections in Item 8,Note 1 of our Annual Report on Form 10-K,for the fiscalyear ended September 3,2023.Provision for Income Taxes 12 Weeks Ended24 Weeks Ended February 18,2024February 12,2023February 18,2024February 12,2023Provision for income taxes$494$517$1,011$923 Effective tax rate22.1&.1#.3$.6%The effective tax rate for the first half of 2024 was favorably impacted by net discrete tax benefits of$139.This included$94 related to theportion of the special cash dividend payable through our 401(k)plan in the second quarter and$44 of excess tax benefits related to stockcompensation in the first quarter.Excluding discrete net tax benefits,the tax rate was 26.5%.The effective tax rate for the first half of 2023 was impacted by net discrete tax benefits of$57,primarily due to excess tax benefits related tostock compensation in the first quarter.Excluding discrete net tax benefits,the tax rate was 26.1%.LIQUIDITY AND CAPITAL RESOURCESThe following table summarizes our significant sources and uses of cash and cash equivalents:24 Weeks EndedFebruary 18,2024February 12,2023Net cash provided by operating activities$5,382$5,802 Net cash used in investing activities(1,752)(1,865)Net cash used in financing activities(8,250)(1,215)Our primary sources of liquidity are cash flows from operations,cash and cash equivalents,and short-term investments.Cash and cashequivalents and short-term investments were$10,321 and$15,234 at February 18,2024,and September 3,2023.Of these balances,unsettledcredit and debit card receivables represented approximately$2,069 and$2,282 at February 18,2024,and September 3,2023.Thesereceivables generally settle within four days.Material contractual obligations arising in the normal course of business primarily consist of purchase obligations,long-term debt and relatedinterest payments,leases,and construction and land purchase obligations.24Table of ContentsPurchase obligations consist of contracts primarily related to merchandise,equipment,and third-party services,the majority of which are due inthe next 12 months.Construction and land purchase obligations consist of contracts primarily related to the development and opening of newand relocated warehouses,the majority of which(other than leases)are due in the next 12 months.Management believes that our cash and investment position and operating cash flows with capacity under existing and available creditagreements will be sufficient to meet our liquidity and capital requirements for the foreseeable future.We believe that our U.S.current andprojected asset position is sufficient to meet our U.S.liquidity requirements.Cash Flows from Operating ActivitiesNet cash provided by operating activities totaled$5,382 in the first half of 2024,compared to$5,802 in the first half of 2023.Our cash flowprovided by operations is primarily from net sales and membership fees.Cash flow used in operations generally consists of payments tomerchandise suppliers,warehouse operating costs,including payroll and employee benefits,utilities,and credit and debit card processing fees.Cash used in operations also includes payments for income taxes.Changes in our net investment in merchandise inventories(the differencebetween merchandise inventories and accounts payable)is impacted by several factors,including inventory levels and turnover,the forwarddeployment of inventory to accelerate delivery times,payment terms with suppliers,and early payments to obtain discounts.Cash Flows from Investing ActivitiesNet cash used in investing activities totaled$1,752 in the first half of 2024,compared to$1,865 in the first half of 2023,and is primarily related tocapital expenditures.Net cash from investing activities also includes purchases and maturities of short-term investments.Capital Expenditure PlansOur primary requirements for capital are acquiring land,buildings,and equipment for new and remodeled warehouses.Capital is also requiredfor information systems,manufacturing and distribution facilities,initial warehouse operations,and working capital.In the first half of 2024,wespent$2,071 on capital expenditures,and it is our current intention to spend a total of approximately$4,400 to$4,600 during fiscal 2024.Theseexpenditures are expected to be financed with cash from operations,existing cash and cash equivalents,and short-term investments.Weopened 14 new warehouses,including one relocation,in the first half of 2024 and plan to open 16 additional new warehouses,including onerelocation,in the remainder of fiscal 2024.There can be no assurance that current expectations will be realized,and plans are subject to changeupon further review of our capital expenditure needs and the economic environment.Cash Flows from Financing ActivitiesNet cash used in financing activities totaled$8,250 in the first half of 2024,compared to$1,215 in the first half of 2023.Cash flow used infinancing activities during the first half of 2024 was primarily related to the payment of dividends,repayments of short-term borrowings,andrepurchases of common stock.In November 2023,the Companys Japan subsidiary issued four Guaranteed Senior Notes totaling approximately$500 at fixed interest rates ranging from 1.400%to 2.120%.DividendsA quarterly cash dividend of$1.02 per share was declared on January 18,2024,payable to shareholders of record on February 2,2024,whichwas paid on February 16,2024.On January 12,2024,an aggregate payment of approximately$6,655 was made in connection with a specialcash dividend of$15.00 per share,declared on December 13,2023.25Table of ContentsShare Repurchase ProgramOn January 19,2023,the Board of Directors authorized a share repurchase program in the amount of$4,000,which expires in January 2027.During the first half of 2024 and 2023,we repurchased 528,000 and 579,000 shares of common stock,at an average price per share of$609.51and$492.06,totaling approximately$322 and$285.These amounts may differ from the accompanying condensed consolidated statements ofcash flows due to changes in unsettled repurchases at the end of a quarter.Purchases are made from time to time,as conditions warrant,in theopen market or in block purchases,pursuant to plans under SEC Rule 10b5-1.Repurchased shares are retired,in accordance with theWashington Business Corporation Act.The remaining amount available to be purchased under our approved plan was$3,241 at the end of thesecond quarter.Bank Credit Facilities and Commercial Paper ProgramsWe maintain bank credit facilities for working capital and general corporate purposes.At February 18,2024,we had borrowing capacity underthese facilities of$1,237.Our international operations maintain$748 of this capacity under bank credit facilities,of which$164 is guaranteed bythe Company.Short-term borrowings outstanding under the bank credit facilities,which are included in other current liabilities on theconsolidated balance sheets,were immaterial at the end of the second quarter of 2024 and at the end of fiscal 2023.The Company has letter of credit facilities,for commercial and standby letters of credit,totaling$210.The outstanding commitments under thesefacilities at the end of the second quarter of 2024 totaled$184,most of which were standby letters of credit that do not expire or have expirationdates within one year.The bank credit facilities have various expiration dates,most within one year,and we generally intend to renew thesefacilities.The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercialletters of credit outstanding.Critical Accounting EstimatesThe preparation of our consolidated financial statements in accordance with U.S.GAAP requires that we make estimates and judgments.Webase these on historical experience and on assumptions that we believe to be reasonable.Our critical accounting policies are discussed in PartII,Item 7,“Managements Discussion and Analysis of Financial Condition and Results of Operations”section of our Annual Report on Form 10-K,for the fiscal year ended September 3,2023.There have been no material changes to the critical accounting estimates previously disclosed inthat Report.Recent Accounting PronouncementsSee discussion of Recent Accounting Pronouncements in Note 1 to the condensed consolidated financial statements included in Part I,Item 1 ofthis Report.Item 3Quantitative and Qualitative Disclosures about Market RiskOur direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates.There have been nomaterial changes to our market risks as disclosed in our Annual Report on Form 10-K,for the fiscal year ended September 3,2023.26Table of ContentsItem 4Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur disclosure controls and procedures(as defined in Rules 13a-15(e)or 15d-15(e)under the Securities Exchange Act of 1934,as amended)are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded,processed,summarized,and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission andto ensure that information required to be disclosed is accumulated and communicated to management,including our principal executive andfinancial officers,to allow timely decisions regarding disclosure.The Chief Executive Officer and the Chief Financial Officer,with assistance fromother members of management,have reviewed the effectiveness of our disclosure controls and procedures as of February 18,2024,and,basedon their evaluation,have concluded the disclosure controls and procedures were effective as of such date.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting(as defined in Rules 13a-15(f)or 15d-15(f)of the Exchange Act)thatoccurred during the second quarter of fiscal 2024 that have materially affected,or are reasonably likely to materially affect,the Companysinternal control over financial reporting.PART IIOTHER INFORMATIONItem 1Legal ProceedingsSee discussion of Legal Proceedings in Note 8 to the condensed consolidated financial statements included in Part I,Item 1 of this Report.Item 1ARisk FactorsIn addition to the other information set forth in the Quarterly Report on Form 10-Q,you should carefully consider the factors discussed in Part I,Item 1A,“Risk Factors”in our Annual Report on Form 10-K,for the fiscal year ended September 3,2023.There have been no material changesin our risk factors from those disclosed in our Annual Report on Form 10-K.Item 2Unregistered Sales of Equity Securities,Use of Proceeds,and Issuer Purchases of Equity SecuritiesThe following table sets forth information on our common stock repurchase program activity for the second quarter of 2024(amounts in millions,except share and per share data):PeriodTotal Number ofSharesPurchasedAverage PricePaid Per ShareTotal Number of SharesPurchased as Part ofPublicly AnnouncedProgramsMaximum Dollar Value ofShares that May Yet bePurchased Under theProgramsNovember 27,2023 December 24,202389,000$624.76 89,000$3,345 December 25,2023 January 21,202471,000 667.23 71,000 3,297 January 22,2024 February 18,202480,000 705.31 80,000 3,241 Total second quarter240,000$664.02 240,000 _(1)Our share repurchase program is conducted under a$4,000 authorization approved by our Board of Directors in January 2023,which expires in January 2027.(1)(1)27Table of ContentsItem 3Defaults Upon Senior SecuritiesNone.Item 4Mine Safety DisclosuresNot applicable.Item 5Other InformationNone.Item 6ExhibitsThe following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.Incorporated by ReferenceExhibitNumberExhibit DescriptionFiledHerewithFormPeriod EndingFiling Date3.1Articles of Incorporation as amended of CostcoWholesale Corporation10-K8/28/202210/5/20223.2Bylaws as amended of Costco Wholesale Corporation8-K8/10/202310.1Executive Employment Agreement effective January 1,2024,between Ron Vachris and Costco WholesaleCorporation10-Q11/26/202312/20/202331.1Rule 13(a)14(a)Certificationsx32.1Section 1350 Certificationsx101.INSInline XBRL Instance Documentx101.SCHInline XBRL Taxonomy Extension Schema Documentx101.CALInline XBRL Taxonomy Extension Calculation LinkbaseDocumentx101.DEFInline XBRL Taxonomy Extension Definition LinkbaseDocumentx101.LABInline XBRL Taxonomy Extension Label LinkbaseDocumentx101.PREInline XBRL Taxonomy Extension Presentation LinkbaseDocumentx104Cover Page Interactive Data File(formatted as inlineXBRL and contained in Exhibit 101)x28Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Report to be signed on its behalf by theundersigned,thereunto duly authorized.COSTCO WHOLESALE CORPORATION(Registrant)March 13,2024By/s/RON M.VACHRISDateRon M.VachrisChief Executive Officer,President and DirectorMarch 13,2024By/s/RICHARD A.GALANTIDateRichard A.GalantiExecutive Vice President,Chief Financial Officer and Director29Exhibit 31.1CERTIFICATIONSI,Ron M.Vachris,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.March 13,2024/s/RON M.VACHRISRon M.VachrisChief Executive Officer,President and DirectorCERTIFICATIONSI,Richard A.Galanti,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.March 13,2024/s/RICHARD A.GALANTIRichard A.GalantiExecutive Vice President,Chief Financial Officer and DirectorExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended February 18,2024,as filed with the Securities and Exchange Commission(the Report),I,Ron M.Vachris,Chief Executive Officer,President and Director ofthe Company,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/RON M.VACHRIS Date:March 13,2024Ron M.Vachris Chief Executive Officer,President and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended February 18,2024,as filed with the Securities and Exchange Commission(the Report),I,Richard A.Galanti,Executive Vice President,Chief Financial Officerand Director of the Company,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/RICHARD A.GALANTI Date:March 13,2024Richard A.Galanti Executive Vice President,Chief Financial Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.
2024-05-30
33页
5星级
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-Q(Mark One)QUARTERLY REPO.
2024-05-29
44页
5星级
PDD Holdings Announces First Quarter 2024 Unaudited Financial ResultsMay 22,2024DUBLIN and SHANGHAI,.
2024-05-28
6页
5星级
Aramco announces first quarter 2024 resultsQ1 net income remains robust as Company progresses its growth strategy Key financial resultsFirst quarter ended March 31SARUSD*All amounts in millions unless otherwise stated2024202320242023Net income 102,271119,54227,27231,878EBIT1201,384221,54853,70259,079Capital expenditures40,62132,79710,8328,746Free cash flow185,348115,85022,76030,894Dividends paid116,50373,15031,06719,507ROACE1,321.7).3!.7).3%Average realized crude oil price($/barrel)n/an/a83.081.0*Supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only.1.Non-IFRS measure:refer to Non-IFRS measures reconciliations and definitions section for further details.2.Includes dividends already declared in Q1 2024 and Q2 2024.Exact amounts and eligibility dates for the remaining dividends to be declared in 2024 will be announced,if and when declared at the Boards sole discretion,after considering the Companys financial position and ability to fund commitments including growth capital plans,in accordance with the Companys dividend distribution policy.3.Calculated on a 12-month rolling basis.“Our first quarter performance reflects the resilience and strength of Aramco,reinforcing our position as a leading supplier of energy to economies,to industries and to people worldwide.“We also continue to execute our long-term strategy,and in the first quarter made significant progress on expanding our gas business and growing our globally-integrated downstream value chain,while maintaining our focus on consistently delivering value for our shareholders.“Looking ahead,I expect our portfolio to continue to evolve as we aim to contribute to an energy transition that offers solutions to climate challenges,but at the same time recognizes the need for affordable,reliable,and flexible energy supplies.”Amin H.NasserPresident and CEO Net income:$27.3 billion(Q1 2023:$31.9 billion)Cash flow from operating activities:$33.6 billion(Q1 2023:$39.6 billion)Free cash flow1:$22.8 billion(Q1 2023:$30.9 billion)Gearing ratio1:-3.8%as at March 31,2024,compared to-6.3%at end of 2023 Q1 2024 base dividend of$20.3 billion and the fourth performance-linked dividend distribution of$10.8 billion to be paid in the second quarter Company expects total dividends of$124.3 billion2 to be declared in 2024,including base dividend of$81.2 billion2 and performance-linked dividend of$43.1 billion2$7.7 billion of engineering,procurement,and construction contracts awarded for Fadhili Gas Plant expansion,which is expected to add 1.5 bscfd of processing capacity Company announced addition of 15 tscf to proven gas reserves and two billion stock tank barrels of condensate at Jafurah unconventional field Aramco completed its acquisition of a 100%equity stake in Chilean retailer Esmax,supporting the Companys downstream expansion Overall venture capital funding to more than double to$7.5 billion,expanding the Companys ability to finance disruptive new technologies in a variety of sectors,including the digital and sustainability fields2Saudi AramcoFirst quarter interim report 2024First quarter highlightsGlobal market conditions in the first quarter of 2024 improved compared to the previous quarter,driven by increased crude oil prices as a result of lower global oil inventories and higher forecasted demand.Through its low-cost upstream operations and strategically integrated Downstream business,Aramco captured value from these market conditions and delivered robust earnings and free cash flow.In line with its aim to maximize value for shareholders,the Board declared a base dividend of SAR 76.1 billion($20.3 billion)and the fourth distribution of the performance-linked dividends of SAR 40.4 billion($10.8 billion),bringing the total declared dividends for the first quarter to SAR 116.5 billion($31.1 billion).Aramco believes it is well positioned to help meet the worlds growing need for affordable and reliable energy,and that oil and gas will continue to be an important part of the global energy mix.The Company continues to implement its capital program,with the growth in capital spending directed mainly towards upstream liquids and gas,downstream liquids to chemicals,and new energies such as renewables,lower-carbon fuels,and blue ammonia and hydrogen.Capital expenditures in the first quarter were SAR 40.6 billion($10.8 billion),reflecting the Companys intention to increase investment to capture unique growth opportunities and create long-term value for shareholders.During the quarter,the Company announced the expansion of its venture capital funding available to Aramco Ventures by SAR 15.0 billion($4.0 billion).Half of the new funding will be directed toward disruptive technologies outside the energy sector,with the remaining portion earmarked for late-stage,larger-ticket ventures in the sustainability and digital domains.The increased funding will bring the total investment funds in Aramcos venture capital programs to SAR 28.1 billion($7.5 billion),including Waed Ventures.In March 2024,the Government announced it had transferred 8.0%of the Companys issued shares to PIFs wholly-owned companies.This private transfer did not affect the Companys total number of issued shares and has no impact on the Companys operations,strategy,dividend distribution policy,or governance framework.The Government remains Aramcos largest shareholder,retaining an 82.19%direct shareholding.In April 2024,Aramco announced a four-year global partnership to become FIFAs Major Worldwide Partner with rights across multiple events,including the FIFA World Cup 26 and FIFA Womens World Cup 2027.The partnership,which runs until the end of 2027,builds on a shared commitment to innovation and development,and will combine footballs unique global reach with Aramcos history of championing innovation and community engagement.Through the partnership,Aramco aims to create impactful social initiatives and enable vibrant communities.UpstreamAramco achieved total hydrocarbon production of 12.4 mmboed in the first quarter,reflecting its safe,reliable operations and unique operational flexibility.In January 2024,the Government directed Aramco to maintain MSC at 12.0 mmbpd.This directive will have no impact on announced,near-term projects including the Dammam development and the Marjan,Berri,and Zuluf crude oil increments.Production from these projects will be used to maintain MSC at 12.0 mmbpd,which provides operational flexibility to increase production and supports Aramcos unique ability to rapidly respond to changing market conditions.Key developments during the quarter for these projects include the following:Construction activities continued for the Dammam development project,which is expected to add crude oil production of 25 mbpd in 2024 and 50 mbpd in 2027;Construction and procurement activities continued on the Marjan and Berri crude oil increments,which are expected to be onstream by 2025 and add crude oil production capacity of 300 mbpd and 250 mbpd,respectively;and,Construction and engineering work progressed at the Zuluf crude oil increment,which is expected to process 600 mbpd of crude oil from the Zuluf field through a central facility by 2026.Consistent with the Companys strategy to increase gas production by more than 60%over 2021 production levels by 2030,subject to domestic demand,and to develop an integrated global LNG business,Aramco delivered a number of key developments in the quarter:Announced the addition of 15 tscf of raw gas and two billion stock tank barrels of condensate as proven reserves at the Jafurah unconventional field.Progressed design,procurement,and construction activities at the Jafurah Gas Plant,part of the Jafurah unconventional gas field development that is expected to commence production in 2025 and gradually increase natural gas deliveries to reach a sustainable rate of 2.0 bscfd by 2030;Continued construction and procurement activities at the Tanajib Gas Plant,part of the Marjan development program.The Plant is expected to be onstream by 2025,adding 2.6 bscfd of additional processing capacity from the Marjan and Zuluf fields;Awarded SAR 28.9 billion($7.7 billion)of engineering,procurement,and construction contracts for the expansion of the Fadhili Gas Plant,which is expected to add additional processing capacity of 1.5 bscfd by 2027;and,Completed the acquisition of a minority stake in MidOcean,which subsequently acquired interests in a portfolio of integrated Australian LNG projects.3Saudi AramcoFirst quarter interim report 2024DownstreamAramco continued to enhance its global Downstream business during the quarter by expanding its presence in key high-growth geographies,positioning itself to meet anticipated demand for petrochemical products,and growing its global brand presence.The Company again demonstrated its excellent track record of dependable operations,achieving 99.7%supply reliability.In the first quarter of the year,the crude oil utilized by Aramcos downstream operations accounted for 51%of the Aramcos crude oil production.Key Downstream developments include the following:A groundbreaking ceremony was held by SABIC and Fujian Energy and Petrochemical Group Co.Ltd.to mark the start of construction at the SABIC Fujian Petrochemical Complex in Chinas Fujian province.With an estimated total investment of SAR 24.0 billion($6.4 billion),the complex will consist of a mixed-feed steam cracker and world-class downstream facilities,with an expected annual ethylene capacity of up to 1.8 million tons.The project aims to support SABICs goal to diversify its feedstock sources and expand its manufacturing presence in Asia as a key market for a wide range of products.The project is expected to be completed in 2027;and,Aramco completed its acquisition of a 100%equity stake in Esmax,a leading diversified downstream fuels and lubricants retailer in Chile with retail fuel stations,airport operations,fuel distribution terminals,and a lubricant blending plant,for a purchase consideration of SAR 1.4 billion($0.37 billion),subject to customary adjustments.The transaction represents Aramcos first downstream retail investment in South America and is expected to secure outlets for its refined products,including fuel placement from Motiva.The acquisition is also expected to create a platform to launch the Aramco brand in South America while strengthening the Companys downstream value chain and unlocking new market opportunities for its Valvoline-branded lubricants.Sustainability Aramcos response to climate change is embedded in its business strategy,supported by its climate change and energy transition framework and five GHG mitigation levers:energy efficiency,flaring and methane reduction,carbon capture and storage,renewables,and natural climate solutions and offsets.One of its five decarbonization levers is renewables,where Aramco aims to increase its use of renewable energy sources and invest in up to 12 GW of solar PV and wind projects by 2030.In January 2024,the Sudair Solar PV Plant,one of the largest solar plants in the region with a capacity of 1.5 GW,reached full capacity operation.The project is jointly owned by Aramco(30%),PIF(35%),and ACWA Power Company(35%),and reflects Aramcos efforts to address climate change and the energy transition.In its full capacity,the Plant will support the Kingdoms ambition to generate part of the nations power needs from renewable energy by 2030.Aramco has played a central role in the localization of the supply chain and developing a Saudi-based energy ecosystem.In February 2024,Aramco signed 40 corporate procurement agreements worth SAR 22.5 billion($6.0 billion)with suppliers in Saudi Arabia.The agreements are expected to strengthen Aramcos domestic supply chain ecosystem,enhancing the Companys resilience,reliability,and ability to meet the evolving needs of its customers,while boosting the Kingdoms economic development and providing suppliers with long-term visibility of expected future demand.Additionally,Aramco signed two Memoranda of Understanding with strategic partners to collaborate on localization and supply chain development.These combined efforts support Aramcos iktva objective of having 70.0%of all procurement spend remain in-Kingdom by the end of 2025,and demonstrate its commitment toward growing societal value,a key focus area under the Companys sustainability framework.4Saudi AramcoFirst quarter interim report 2024All amounts in millions unless otherwise statedFinancial performance Summary of financial performanceFirst quarterSARUSD*All amounts in millions unless otherwise stated2024202320242023%changeIncome before income taxes and zakat205,014229,23454,67061,129(10.6)%Income taxes and zakat(102,743)(109,692)(27,398)(29,251)(6.3)%Net income102,271119,54227,27231,878(14.4)%*Supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only.Financial ResultsKey factors affecting Aramcos financial results Aramcos results of operations and cash flows are primarily driven by market prices and volumes sold of hydrocarbons as well as refined and chemicals products.During the first quarter,the Company paid a 2023 fourth quarter base dividend of SAR 76.1 billion($20.3 billion),an increase of 4.0%compared to the previous quarter.In addition,the Company paid the third performance-linked dividend distribution of SAR 40.4 billion($10.8 billion),representing a 9.0%increase from the previous quarter.These dividends payments,totaling SAR 116.5 billion($31.1 billion),resulted in a decrease in cash and cash equivalents and a corresponding reduction in shareholders equity in the consolidated balance sheet and statement of changes in equity.In March 2024,Aramco completed the acquisition of a 100%equity stake in Esmax for a purchase consideration of SAR 1.4 billion($0.37 billion),subject to customary adjustments.This resulted in a decrease in cash and cash equivalents and a corresponding increase in the net assets in the consolidated balance sheet as a result of the first time consolidation of the acquired entity.Income before income taxes and zakat for the first quarter of 2024 was SAR 205,014($54,670),compared to SAR 229,234($61,129)for the same quarter in 2023.The decrease was primarily a result of lower crude oil volumes sold,weakening refining and chemicals margins,and lower finance and other income.This was partially offset by lower production royalties and an increase in crude oil prices compared to the same period last year.Income taxes and zakat for the first quarter of 2024 were SAR 102,743($27,398),compared to SAR 109,692($29,251)for the same quarter in 2023.The decrease predominantly reflects the impact of lower earnings in the first quarter of 2024.For non-IFRS measures,refer to the Non-IFRS measures reconciliations and definitions section.5Saudi AramcoFirst quarter interim report 2024 All amounts in millions unless otherwise statedUpstream financial performanceFirst quarterSARUSD*All amounts in millions unless otherwise stated2024202320242023%changeEarnings before interest,income taxes and zakat205,342215,27854,75857,407(4.6)pital expenditures-cash basis33,11425,3328,8306,75530.7%*Supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only.Earnings before interest,income taxes and zakat(EBIT)for the first quarter of 2024 totaled SAR 205,342($54,758),compared to SAR 215,278($57,407)for the same quarter in 2023.The decrease in EBIT is primarily related to lower crude oil volumes sold,partially offset by higher crude oil prices compared to the same period last year,and lower production royalties.Capital expenditures for the first quarter of 2024 were SAR 33,114($8,830),an increase of 30.7%compared to SAR 25,332($6,755)for the same period in 2023.This increase reflects progress associated with crude oil increments to maintain MSC at 12.0 mmbpd and increased development activity to support further expansion of the Companys gas business.Downstream financial performance First quarterSARUSD*All amounts in millions unless otherwise stated2024202320242023%changeEarnings before interest,income taxes and zakat4,61512,8301,2313,421(64.0)pital expenditures-cash basis6,8827,1471,8351,906(3.7)%*Supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only.Earnings before interest,income taxes and zakat(EBIT)for the first quarter of 2024 was SAR 4,615($1,231),compared to SAR 12,830($3,421)for the same quarter in 2023,a decrease of 64.0%.This decrease largely reflects weakening refining and chemicals margins,partially offset by inventory valuation movement.Capital expenditures for the first quarter of 2024 were SAR 6,882($1,835),mainly in line with expenditures of SAR 7,147($1,906)for the same period in 2023.6Saudi AramcoFirst quarter interim report 2024All amounts in millions unless otherwise statedNon-IFRS measures reconciliations and definitionsThis Interim Report includes certain non-IFRS financial measures(ROACE,free cash flow,gearing,and EBIT),which Aramco uses to make informed decisions about its financial position and operating performance or liquidity.These non-IFRS financial measures have been included in this Interim Report to facilitate a better understanding of Aramcos historical trends of operation and financial position.Aramco uses non-IFRS financial measures as supplementary information to its IFRS-based operating performance and financial position.The non-IFRS financial measures are not defined by,or presented in accordance with,IFRS.The non-IFRS financial measures are not measurements of Aramcos operating performance or liquidity under IFRS and should not be used instead of,or considered as alternatives to,any measures of performance or liquidity under IFRS.The non-IFRS financial measures relate to the reporting periods described in this Interim Report and are not intended to be predictive of future results.In addition,other companies,including those in Aramcos industry,may calculate similarly titled non-IFRS financial measures differently from Aramco.Because companies do not necessarily calculate these non-IFRS financial measures in the same manner,Aramcos presentation of such non-IFRS financial measures may not be comparable to other similarly titled non-IFRS financial measures used by other companies.Twelve months ended March 31SARUSD*All amounts in millions unless otherwise stated2024202320242023Net income437,493575,521116,665153,473Finance costs,net of income taxes and zakat4,0174,8631,0721,297Net income before finance costs,net of income taxes and zakat441,510580,384117,737154,770As at period start:Non-current borrowings268,544410,41271,612109,443Current borrowings76,92071,14120,51218,970Total equity1,706,8201,426,846455,152380,492Capital employed 2,052,2841,908,399547,276508,905As at period end:Non-current borrowings240,310268,54464,08371,612Current borrowings51,52176,92013,73920,512Total equity1,722,3751,706,820459,300455,152Capital employed2,014,2062,052,284537,122547,276Average capital employed2,033,2451,980,342542,199528,091ROACE21.7).3!.7).3%*Supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only.ROACEROACE measures the efficiency of Aramcos utilization of capital.Aramco defines ROACE as net income before finance costs,net of income taxes and zakat,as a percentage of average capital employed,calculated on a 12-month rolling basis.Average capital employed is the average of total borrowings plus total equity at the beginning and end of the applicable period.Aramco utilizes ROACE to evaluate managements performance and demonstrate to its shareholders that capital has been used effectively.ROACE for the 12 months ended March 31,2024,was 21.7%compared to 29.3%for the same period in 2023.The decrease in ROACE,calculated on a 12-month rolling basis,was mainly attributable to lower earnings,primarily reflecting lower crude oil prices and volumes sold and weakening refining and chemical margins.7Saudi AramcoFirst quarter interim report 2024 All amounts in millions unless otherwise statedAramco uses free cash flow to evaluate its cash available for financing activities,including dividend payments.Aramco defines free cash flow as net cash provided by operating activities less capital expenditures.Free cash flow for the first quarter of 2024 was SAR 85,348($22,760),compared to SAR 115,850($30,894)for the same quarter in 2023,a decrease of SAR 30,502($8,134).This decrease largely reflects lower operating cash flows as a result of lower earnings and unfavorable movements in working capital,partially offset by a reduction in cash paid for the settlement of income,zakat and other taxes.Capital expenditures increased by SAR 7,824($2,086)in the first quarter of 2024 compared to the same period in 2023,mainly driven by progress associated with crude oil increments to maintain MSC at 12.0 mmbpd,and increased development activity to support further expansion of the Companys gas business.Free cash flowFirst quarterSARUSD*All amounts in millions unless otherwise stated2024202320242023Net cash provided by operating activities125,969148,64733,59239,640Capital expenditures(40,621)(32,797)(10,832)(8,746)Free cash flow85,348115,85022,76030,894*Supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only.GearingGearing is a measure of the degree to which Aramcos operations are financed by debt and reflects available liquidity held in current and non-current investments and cash management instruments.Aramco defines gearing as the ratio of net(cash)/debt(total borrowings less cash and cash equivalents,short-term investments,investments in debt securities(current and non-current),and non-current cash investments)to total equity and net(cash)/debt.Management believes that gearing is widely used by analysts and investors in the oil and gas industry to indicate a companys financial health and flexibility.Aramcos gearing ratio as at March 31,2024,was(3.8)%,compared to(6.3)%as at December 31,2023.The increase in gearing is primarily driven by a lower net cash position largely due to lower short-term investments,partially offset by higher cash and cash equivalents.The higher cash and cash equivalents balance reflects operating cash inflows and reduction in short-term investments,partially offset by dividend payments and capital expenditures during the period.SARUSD*All amounts in millions unless otherwise statedMarch 31,2024December 31,2023March 31,2024December 31,2023Total borrowings(current and non-current)291,831290,14777,82277,373Cash and cash equivalents(243,972)(198,973)(65,059)(53,059)Short-term investments(100,758)(184,343)(26,869)(49,158)Investments in debt securities(current and non-current)1(9,593)(9,584)(2,557)(2,556)Non-current cash investments-Net(cash)(62,492)(102,753)(16,663)(27,400)Total equity1,722,3751,737,092459,300463,225Total equity and net(cash)1,659,8831,634,339442,637435,825Gearing(3.8)%(6.3)%(3.8)%(6.3)%*Supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only.1.As at March 31,2024,investments in debt securities(current and non-current)are comprised of SAR 1,097($293)and SAR 8,496($2,264),which form part of other assets and receivables under current assets,and investments in securities under non-current assets,respectively.As at December 31,2023,the investments in debt securities(current and non-current)are comprised of SAR 1,249($333)and SAR 8,335($2,223),which form part of other assets and receivables under current assets,and investments in securities under non-current assets,respectively.8Saudi AramcoFirst quarter interim report 2024All amounts in millions unless otherwise statedEarnings before interest,income taxes and zakat(EBIT)Aramco defines EBIT as net income plus finance costs and income taxes and zakat,less finance income.Aramco believes EBIT provides useful information regarding its financial performance to analysts and investors.EBIT for the first quarter ended March 31,2024,was SAR 201,384($53,702),compared to SAR 221,548($59,079)for the same quarter in 2023.This decrease of SAR 20,164($5,377)mainly represents the impact of lower crude oil volume sold and weakening refining and chemicals margins.This was partially offset by lower production royalties and an increase in crude oil prices compared to the same period last year.First quarterSARUSD*All amounts in millions unless otherwise stated2024202320242023Net income 102,271119,54227,27231,878Finance income(6,655)(10,863)(1,775)(2,897)Finance costs3,0253,177807847Income taxes and zakat102,743109,69227,39829,251Earnings before interest,income taxes and zakat201,384221,54853,70259,079*Supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only.9Saudi AramcoFirst quarter interim report 2024Terms and abbreviations Currencies SAR/Saudi RiyalSaudi Arabian Riyal,the lawful currency of the Kingdom$/USD/Dollar U.S.dollarUnits of measurement Barrel(bbl)Barrels of crude oil,condensate or refined products boe Barrels of oil equivalent bpd Barrels per day bscf Billion standard cubic feet bscfd Billion standard cubic feet per day GWGigawatts mboed Thousand barrels of oil equivalent per day mbpd Thousand barrels per day mmbbl Million barrels mmboe Million barrels of oil equivalent mmboed Million barrels of oil equivalent per day mmbpd Million barrels per day mmBTU Million British thermal unitsmmscf Million standard cubic feet mmscfd Million standard cubic feet per daymmtpa Million metric tonnes per annumper day Volumes are converted into a daily basis using a calendar year(Gregorian)scf Standard cubic feettscf Trillion standard cubic feetTechnical termsCO2Carbon dioxide.CondensateLight hydrocarbon substances produced with raw gas which condenses into liquid at normal temperatures and pressures associated with surface production equipment.HydrocarbonsCrude oil and other hydrogen and carbon compounds in liquid or gaseous state.LiquidsCrude oil,condensate,and NGL.LNGLiquefied natural gas.MSC Maximum Sustainable Capacity the average maximum number of barrelsper day of crude oil that can be produced for one year during any future planning period,after taking into account all planned capital expenditures and maintenance,repair and operating costs,and after being given three months to make operational adjustments.The MSC excludes AGOCs crude oil production capacity.Natural gasMethane produced at Aramcos gas plants and sold within the Kingdom as sales gas.NGLNatural gas liquids,which are liquid orliquefied hydrocarbons produced in themanufacture,purification,andstabilization of natural gas.For thereporting of reserves,ethane is includedin NGL.For the reporting of production,NGL is included in total liquids,andethane is reported as a component oftotal gas.ReliabilityTotal products volume shipped/delivered within 24 hours of the scheduled time,divided by the total products volume committed.Any delays caused by factors that are under the Companys control(e.g.terminal,pipeline,stabilization,or production)negatively affect the score,whereas delays caused by conditions that are beyond the Companys control,such as adverse weather,are not considered.A score of less than 100 percent indicates there were issues that negatively impacted reliability.10Saudi AramcoFirst quarter interim report 2024GlossaryAffiliate Except with respect to financial information,the term affiliate means a person who controls another person or is controlled by that other person,or who is under common control with that person by a third person.In any of the preceding,control could be direct or indirect.With respect to financial information,the term affiliate means the Companys subsidiaries,joint arrangements and associates,each as defined by IFRS.AGOCAramco Gulf Operations Company Ltd.AssociateWith respect to financial information,the term Associate,as defined by IFRS,means an entity over which the Company has significant influence but not control,generally reflected by a shareholding of between 20%and 50%of the voting rights.Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.AuditorAn auditor is a person or entity authorized to review and verify the accuracy of financial records and ensure that companies comply with tax laws.Aramco is audited by an independent external auditor,PricewaterhouseCoopers(PwC)Public Accountants,the independent external auditor of Aramco.BoardThe Board of Directors of the Company.CompanySaudi Arabian Oil Company(The Company).ControlExcept with respect to financial information,the term“Control”means the ability to influence the actions or decisions of another person through,whether directly or indirectly,alone or with a relative or affiliate(a)holding 30%or more of the voting rights in a company,or(b)having the right to appoint 30%or more of the Board of a company;“controller”shall be construed accordingly.With respect to financial information,the term“Control”is defined by IFRS:The Company controls an entity when it is exposed to,or has rights to,variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.EBITEarnings(losses)before interest,income taxes and zakat.ESGEnvironmental,social,and governance.EsmaxEsmax Distribucin SpA.GovernmentThe Government of the Kingdom(and“Governmental”shall be interpreted accordingly).HHijri calendar.IAS International Accounting Standard(s).IFRS International Financial Reporting Standard(s)that are endorsed in the Kingdom and other standards and pronouncements endorsed by SOCPA.iktvaIn-Kingdom Total Value Add.Joint arrangement The term joint arrangement,as defined by IFRS,refers to either a joint operation or a joint venture.Joint operation The term joint operation,as defined by IFRS,means a type of joint arrangement whereby the parties that have joint control of the agreement have rights to the assets and obligations for the liabilities relating to the arrangement.Joint ventureThe term joint venture,as defined by IFRS,means a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement.KingdomKingdom of Saudi Arabia.MENAMiddle East and North Africa.MidOceanMidOcean Holdings II,L.P.MotivaMotiva Enterprises LLC.PIFPublic Investment Fund of Saudi Arabia.ROACEReturn on average capital employed.SABICSaudi Basic Industries Corporation.Saudi Aramco/Aramco/GroupSaudi Arabian Oil Company,together with its consolidated subsidiaries,and where the context requires,its joint operations,joint ventures and associates.Any reference to“us”,“we”or“our”refers to Saudi Aramco/Aramco except where otherwise stated.Unless otherwise stated,the text does not distinguish between the activities and operations of the Company and those of its subsidiaries.ShareholderAny holder of shares.SOCPA Saudi Organization for Chartered and Professional Accountants.SubsidiariesExcept with respect to financial information,the term subsidiaries mean the companies that Aramco controls through its ability to influence the actions or decisions of another person through,whether directly or indirectly,alone or with a relative or affiliate(i)holding 30%or more of the voting rights in a company or(ii)having the right to appoint 30%or more of the Board of a company.With respect to financial information,the term subsidiaries is defined by IFRS,meaning entities over which the Company has control.11Saudi AramcoFirst quarter interim report 2024Disclaimer This Interim Report may contain certain forward-looking statements with respect to Aramcos financial position,results of operations and business and certain of Aramcos plans,intentions,expectations,assumptions,goals and beliefs regarding such items.These statements include all matters that are not historical fact and generally,but not always,may be identified by the use of words such as“believes”,“expects”,“are expected to”,“anticipates”,“intends”,“estimates”,“should”,“will”,“shall”,“may”,“is likely to”,“plans”,“outlook”or similar expressions,including variations and the negatives thereof or comparable terminology.Investors and prospective investors should be aware that forward-looking statements are not guarantees of future performance and that Aramcos actual financial position,results of operations and business and the development of the industries in which it operates may differ significantly from those made in or suggested by these forward-looking statements.In addition,even if Aramcos financial position,results of operations and business and the development of the industries in which it operates are consistent with these forward-looking statements,those results or developments may not be indicative of results or developments in subsequent periods.Factors that could cause actual results to differ materially from Aramcos expectations are contained in cautionary statements in this Interim Report and include,among other things,the following:Global supply,demand and price fluctuations of oil,gas and petrochemicals;Global economic conditions;Competition in the industries in which Aramco operates;Climate change concerns,weather conditions and related impacts on the global demand for hydrocarbons and hydrocarbon-based products,as well as risks related to Aramcos ESG goals and targets;Conditions affecting the transportation of products;Operational risk and hazards common in the oil and gas,refining and petrochemicals industries;The cyclical nature of the oil and gas,refining and petrochemicals industries;Political and social instability and unrest,and actual or potential armed conflicts in the MENA region and other areas;Natural disasters and public health pandemics or epidemics;The management of Aramcos growth;The management of the Companys subsidiaries,joint operations,joint ventures,associates and entities in which it holds a minority interest;Aramcos exposure to inflation,interest rate risk and foreign exchange risk;Risks related to operating in a regulated industry and changes to oil,gas,environmental or other regulations that impact the industries in which Aramco operates;Legal proceedings,international trade matters,and other disputes or agreements;and Risks related to the Kingdom.For a discussion of our risk factors,please see Aramcos Annual Report 2023,available through the investor relations section of Aramcos website at forward-looking statements speak as of the date of this report or the date they are made,and we undertake no obligation to update or revise any forward-looking statement,whether as a result of new information,future events or otherwise.All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and our risk factors in our Annual Report and statements contained elsewhere in this Interim Report.Aramcos financial information herein has been extracted from Aramcos condensed consolidated interim financial report for the three-month period ended March 31,2024,which is prepared and presented in accordance with IAS 34,that is endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by the Saudi Organization for Chartered and Professional Accountants(“SOCPA”).In addition,this document includes certain“non-IFRS financial measures”.These measures are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS.Rather,these measures are provided as additional information to complement IFRS measures by providing further understanding of Aramcos results of operations,cash flow and financial position from managements perspective.Accordingly,they should not be considered in isolation or as a substitute for analysis of Aramcos financial information reported under IFRS.A reconciliation of non-IFRS measures is included in the Non-IFRS measures reconciliations and definitions section of this Interim Report.12Saudi AramcoFirst quarter interim report 2024Independent auditors review report.13Condensed consolidated statement of income.14Condensed consolidated statement of comprehensive income.15Condensed consolidated balance sheet.16Condensed consolidated statement of changes in equity.17Condensed consolidated statement of cash flows.18Notes to the condensed consolidated interim financial report.19Condensed consolidated interim financial reportFor the three-month period ended March 31,2024(unaudited)12 PricewaterhouseCoopers,License No.25,Saudi Aramco,P.O.Box 1659,Dhahran 31311,Kingdom of Saudi Arabia T: 966(13)873-6800,F: 966(13)873-8883, Report on review of the condensed consolidated interim financial report To the shareholders of Saudi Arabian Oil Company Introduction We have reviewed the accompanying condensed consolidated balance sheet of Saudi Arabian Oil Company and its subsidiaries as at March 31,2024 and the related condensed consolidated statements of income,comprehensive income,changes in equity and cash flows for the three-month period then ended and other explanatory notes(the“condensed consolidated interim financial report”).Management is responsible for the preparation and presentation of this condensed consolidated interim financial report in accordance with International Accounting Standard 34,Interim Financial Reporting,that is endorsed in the Kingdom of Saudi Arabia.Our responsibility is to express a conclusion on this condensed consolidated interim financial report based on our review.Scope of review We conducted our review in accordance with International Standard on Review Engagements 2410,Review of interim financial information performed by the independent auditor of the entity,that is endorsed in the Kingdom of Saudi Arabia.A review of interim financial information consists of making inquiries,primarily of persons responsible for financial and accounting matters,and applying analytical and other review procedures.A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing,that are endorsed in the Kingdom of Saudi Arabia,and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.Accordingly,we do not express an audit opinion.Conclusion Based on our review,nothing has come to our attention that causes us to believe that the accompanying condensed consolidated interim financial report is not prepared,in all material respects,in accordance with International Accounting Standard 34,Interim Financial Reporting,that is endorsed in the Kingdom of Saudi Arabia.PricewaterhouseCoopers Omar M.Al Sagga License No.369 May 6,2024 Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated Amin H.Nasser Director,President&Chief Executive Officer Ziad T.Al Murshed Executive Vice President&Chief Financial Officer Bassam M.Asiri Senior Vice President&Controller 14 Condensed consolidated statement of income SAR USD*1st quarter 1st quarter 1st quarter 1st quarter Note 2024 2023 2024 2023 Revenue 10 402,037 417,460 107,210 111,323 Other income related to sales 35,810 42,373 9,549 11,299 Revenue and other income related to sales 437,847 459,833 116,759 122,622 Royalties and other taxes(52,232)(68,242)(13,928)(18,198)Purchases(110,011)(106,369)(29,336)(28,365)Producing and manufacturing(24,271)(23,133)(6,473)(6,169)Selling,administrative and general(22,109)(15,247)(5,896)(4,066)Exploration(2,593)(1,752)(691)(467)Research and development(1,156)(931)(308)(248)Depreciation and amortization 5,6(23,427)(21,975)(6,247)(5,860)Operating costs(235,799)(237,649)(62,879)(63,373)Operating income 202,048 222,184 53,880 59,249 Share of results of joint ventures and associates(778)(741)(208)(198)Finance and other income 6,769 10,968 1,805 2,925 Finance costs(3,025)(3,177)(807)(847)Income before income taxes and zakat 205,014 229,234 54,670 61,129 Income taxes and zakat 7(102,743)(109,692)(27,398)(29,251)Net income 102,271 119,542 27,272 31,878 Net income(loss)attributable to Shareholders equity 103,356 117,471 27,562 31,326 Non-controlling interests(1,085)2,071(290)552 102,271 119,542 27,272 31,878 Earnings per share(basic and diluted)0.43 0.49 0.11 0.13*This supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only,and is presented in millions of U.S.dollars.Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated Amin H.Nasser Director,President&Chief Executive Officer Ziad T.Al Murshed Executive Vice President&Chief Financial Officer Bassam M.Asiri Senior Vice President&Controller 15 Condensed consolidated statement of comprehensive income SAR USD*1st quarter 1st quarter 1st quarter 1st quarter Note 2024 2023 2024 2023 Net income 102,271 119,542 27,272 31,878 Other comprehensive income(loss),net of tax 8 Items that will not be reclassified to net income Remeasurement of post-employment benefits 2,298(2,153)613(574)Share of post-employment benefits remeasurement from joint ventures and associates(57)100(15)27 Changes in fair value of equity investments classified as fair value through other comprehensive income 1,110(247)296(66)Items that may be reclassified subsequently to net income Cash flow hedges and other 39(25)10(7)Changes in fair value of debt securities classified as fair value through other comprehensive income 30 63 8 17 Share of other comprehensive income of joint ventures and associates(1,233)1,013(329)270 Currency translation differences(824)(935)(219)(249)1,363(2,184)364(582)Total comprehensive income 103,634 117,358 27,636 31,296 Total comprehensive income(loss)attributable to Shareholders equity 105,296 115,577 28,079 30,821 Non-controlling interests(1,662)1,781(443)475 103,634 117,358 27,636 31,296*This supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only,and is presented in millions of U.S.dollars.Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated Amin H.Nasser Director,President&Chief Executive Officer Ziad T.Al Murshed Executive Vice President&Chief Financial Officer Bassam M.Asiri Senior Vice President&Controller 16 Condensed consolidated balance sheet SAR USD*At March 31,At December 31,At March 31,At December 31,Note 2024 2023 2024 2023 Assets Non-current assets Property,plant and equipment 5 1,411,857 1,384,717 376,495 369,258 Intangible assets 6 165,785 164,554 44,209 43,881 Investments in joint ventures and associates 68,405 69,474 18,241 18,526 Deferred income tax assets 21,532 20,560 5,742 5,483 Post-employment benefits 28,599 24,661 7,627 6,576 Other assets and receivables 51,377 48,265 13,701 12,871 Investments in securities 35,660 33,974 9,509 9,060 1,783,215 1,746,205 475,524 465,655 Current assets Inventories 94,203 85,951 25,121 22,920 Trade receivables 176,276 163,919 47,007 43,712 Due from the Government 38,474 49,378 10,260 13,168 Other assets and receivables 30,107 33,747 8,028 8,999 Short-term investments 100,758 184,343 26,869 49,158 Cash and cash equivalents 243,972 198,973 65,059 53,059 683,790 716,311 182,344 191,016 Assets classified as held for sale 14,134 15,424 3,769 4,113 697,924 731,735 186,113 195,129 Total assets 2,481,139 2,477,940 661,637 660,784 Equity and liabilities Shareholders equity Share capital 90,000 90,000 24,000 24,000 Additional paid-in capital 26,981 26,981 7,195 7,195 Treasury shares(1,009)(1,362)(269)(363)Retained earnings:Unappropriated 1,400,235 1,411,474 373,396 376,394 Appropriated 6,000 6,000 1,600 1,600 Other reserves 8 1,503 1,514 401 403 1,523,710 1,534,607 406,323 409,229 Non-controlling interests 198,665 202,485 52,977 53,996 1,722,375 1,737,092 459,300 463,225 Non-current liabilities Borrowings 9 240,310 226,481 64,083 60,395 Deferred income tax liabilities 149,441 142,449 39,851 37,986 Post-employment benefits 26,249 26,147 7,000 6,973 Provisions and other liabilities 28,633 28,205 7,635 7,521 444,633 423,282 118,569 112,875 Current liabilities Trade payables and other liabilities 151,010 151,553 40,269 40,414 Obligations to the Government:Income taxes and zakat 7 86,531 82,539 23,075 22,010 Royalties 19,839 14,107 5,290 3,762 Borrowings 9 51,521 63,666 13,739 16,978 308,901 311,865 82,373 83,164 Liabilities directly associated with assets classified as held for sale 5,230 5,701 1,395 1,520 314,131 317,566 83,768 84,684 Total liabilities 758,764 740,848 202,337 197,559 Total equity and liabilities 2,481,139 2,477,940 661,637 660,784*This supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only,and is presented in millions of U.S.dollars.Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated Amin H.Nasser Director,President&Chief Executive Officer Ziad T.Al Murshed Executive Vice President&Chief Financial Officer Bassam M.Asiri Senior Vice President&Controller 17 Condensed consolidated statement of changes in equity SAR USD*Shareholders equity Retained earnings Share capital Additional paid-in capital Treasury shares Unappropriated Appropriated Other reserves(Note 8)Non-controlling interests Total Total Balance at January 1,2023 75,000 26,981(2,236)1,339,892 6,000 3,279 217,231 1,666,147 444,306 Net income(loss)117,471 2,071 119,542 31,878 Other comprehensive income(loss)(1,894)(290)(2,184)(582)Total comprehensive income(loss)117,471 (1,894)1,781 117,358 31,296 Transfer of post-employment benefits remeasurement (2,054)2,054 Transfer of share of post-employment benefits remeasurement from joint ventures and associates 100 (100)Treasury shares issued to employees 305(126)(20)159 43 Share-based compensation (1)108 107 28 Dividends(Note 17)(73,150)(73,150)(19,507)Dividends to non-controlling interests and other (3,801)(3,801)(1,014)Balance at March 31,2023 75,000 26,981(1,931)1,382,132 6,000 3,427 215,211 1,706,820 455,152 Balance at January 1,2024 90,000 26,981(1,362)1,411,474 6,000 1,514 202,485 1,737,092 463,225 Net income(loss)103,356 (1,085)102,271 27,272 Other comprehensive income(loss)1,940(577)1,363 364 Total comprehensive income(loss)103,356 1,940(1,662)103,634 27,636 Transfer of post-employment benefits remeasurement(Note 8)2,124 (2,124)Transfer of share of post-employment benefits remeasurement from joint ventures and associates(Note 8)(57)57 Treasury shares issued to employees 353(158)(10)185 49 Share-based compensation (1)126 125 33 Dividends(Note 17)(116,503)(116,503)(31,067)Dividends to non-controlling interests and other (2,158)(2,158)(576)Balance at March 31,2024 90,000 26,981(1,009)1,400,235 6,000 1,503 198,665 1,722,375 459,300*This supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only,and is presented in millions of U.S.dollars.Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated Amin H.Nasser Director,President&Chief Executive Officer Ziad T.Al Murshed Executive Vice President&Chief Financial Officer Bassam M.Asiri Senior Vice President&Controller 18 Condensed consolidated statement of cash flows SAR USD*1st quarter 1st quarter 1st quarter 1st quarter Note 2024 2023 2024 2023 Income before income taxes and zakat 205,014 229,234 54,670 61,129 Adjustments to reconcile income before income taxes and zakat to net cash provided by operating activities Depreciation and amortization 5,6 23,427 21,975 6,247 5,860 Exploration and evaluation costs written off 739 516 197 138 Loss on disposal of property,plant and equipment 364 620 97 166 Loss on fair value measurement of assets classified as held for sale 366 97 Inventory movement 565 936 151 250 Share of results of joint ventures and associates 778 741 208 198 Finance and other income(6,769)(10,968)(1,805)(2,925)Finance costs 3,025 3,177 807 847 Change in fair value of investments through profit or loss(98)(93)(26)(25)Change in joint ventures and associates inventory profit elimination 590 8 157 2 Other 95 870 26 232 Change in working capital Inventories(8,472)13,893(2,260)3,705 Trade receivables(11,693)1,713(3,118)456 Due from the Government 10,904 9,885 2,908 2,636 Other assets and receivables 3,151 1,929 841 514 Trade payables and other liabilities(3,736)(8,227)(996)(2,193)Royalties payable 5,732 1,241 1,528 331 Other changes Other assets and receivables(3,850)(4,348)(1,027)(1,159)Provisions and other liabilities(61)232(16)61 Post-employment benefits 29 305 7 82 Settlement of income,zakat and other taxes(94,131)(114,992)(25,101)(30,665)Net cash provided by operating activities 125,969 148,647 33,592 39,640 Capital expenditures 4(40,621)(32,797)(10,832)(8,746)Acquisition of affiliates,net of cash acquired 16(1,267)(9,886)(338)(2,636)Additional investments in joint ventures and associates(1,548)(104)(413)(28)Distributions from joint ventures and associates 1,009 1,322 269 352 Dividends from investments in securities 12 21 3 6 Interest received 7,216 6,813 1,925 1,816 Investments in securities-net(356)(656)(95)(175)Net maturities of short-term investments 83,585 125,611 22,289 33,497 Net cash provided by investing activities 48,030 90,324 12,808 24,086 Dividends paid to shareholders of the Company 17(116,503)(73,150)(31,067)(19,507)Dividends paid to non-controlling interests in subsidiaries(4,214)(1,856)(1,124)(495)Proceeds from issue of treasury shares 186 155 50 41 Proceeds from borrowings 2,788 15,708 743 4,188 Repayments of borrowings(4,838)(59,851)(1,290)(15,960)Principal portion of lease payments(3,641)(3,146)(971)(839)Interest paid(2,778)(2,204)(741)(587)Net cash used in financing activities(129,000)(124,344)(34,400)(33,159)Net increase in cash and cash equivalents 44,999 114,627 12,000 30,567 Cash and cash equivalents at beginning of the period 198,973 226,047 53,059 60,279 Cash and cash equivalents at end of the period 243,972 340,674 65,059 90,846*This supplementary information is converted at a fixed rate of U.S.dollar 1.00=SAR 3.75 for convenience only,and is presented in millions of U.S.dollars.Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 19 Notes to the condensed consolidated interim financial report 1.General information The Saudi Arabian Oil Company(the“Company”),with headquarters located in Dhahran,Kingdom of Saudi Arabia(the“Kingdom”),is engaged in prospecting,exploring,drilling and extracting hydrocarbon substances(“Upstream”)and processing,manufacturing,refining and marketing these hydrocarbon substances(“Downstream”).The Company was formed on November 13,1988 by Royal Decree No.M/8;however,its history dates back to May 29,1933 when the Saudi Arabian Government(the“Government”)granted a concession to the Companys predecessor for the right to,among other things,explore the Kingdom for hydrocarbons.Effective January 1,2018,Council of Ministers Resolution No.180,dated 1/4/1439H(December 19,2017),converted the Company to a Saudi Joint Stock Company with new Bylaws.On December 11,2019,the Company completed its Initial Public Offering(“IPO”)and its ordinary shares were listed on the Saudi Exchange.In connection with the IPO,the Government,being the sole owner of the Companys shares at such time,sold an aggregate of 3.45 billion ordinary shares,or 1.73%of the Companys share capital.On February 13,2022,the Government transferred 4%of the Companys issued shares to the Public Investment Fund(PIF),the sovereign wealth fund of the Kingdom,followed by another transfer of 4%on April 16,2023 to Saudi Arabian Investment Company(Sanabil Investments),a wholly-owned company of PIF.Further,on March 7,2024,the Government announced the transfer of an additional 8%of the Companys issued shares to PIFs wholly-owned companies.Following the transfers,the Government remains the Companys largest shareholder,retaining a 82.19%direct shareholding.The condensed consolidated interim financial report of the Company and its subsidiaries(together“Saudi Aramco”)was approved by the Board of Directors on May 6,2024.2.Basis of preparation and material accounting policy information The condensed consolidated interim financial report has been prepared in accordance with International Accounting Standard 34(“IAS 34”),Interim Financial Reporting,that is endorsed in the Kingdom,and other standards and pronouncements issued by the Saudi Organization for Chartered and Professional Accountants(“SOCPA”).This condensed consolidated interim financial report is consistent with the accounting policies and methods of computation and presentation set out in Saudi Aramcos consolidated financial statements for the year ended December 31,2023.The results for the interim periods are unaudited and include all adjustments necessary for a fair presentation of the results for the periods presented.This condensed consolidated interim financial report should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31,2023,which have been prepared in accordance with International Financial Reporting Standards(“IFRS”)that are endorsed in the Kingdom,and other standards and pronouncements issued by SOCPA.The consolidated financial statements for the year ended December 31,2023 are also in compliance with IFRS as issued by the International Accounting Standards Board(“IASB”).Translations from SAR to USD presented as supplementary information in the condensed consolidated statement of income,condensed consolidated statement of comprehensive income,condensed consolidated balance sheet,condensed consolidated statement of changes in equity,and condensed consolidated statement of cash flows at March 31,2024 and December 31,2023 and for the three-month periods ended March 31,2024 and 2023,are for convenience and were calculated at the rate of USD 1.00=SAR 3.75 representing the exchange rate at the balance sheet dates.New or amended standards There are no amendments or interpretations that are effective for annual periods beginning on or after January 1,2024 that have a material impact on the condensed consolidated interim financial report.Saudi Aramco has not early adopted any new accounting standards,interpretations or amendments that are issued but not yet effective.Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 20 3.Fair value estimation Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or,in the absence of a principal market,in the most advantageous market for the asset or liability.Management believes that the fair values of Saudi Aramcos financial assets and liabilities that are measured and recognized at amortized cost are not materially different from their carrying amounts at the end of the reporting period.The following table presents Saudi Aramcos assets and liabilities measured and recognized at fair value at March 31,2024 and December 31,2023,based on the prescribed fair value measurement hierarchy on a recurring basis.Saudi Aramco did not measure any financial assets or financial liabilities at fair value on a non-recurring basis at March 31,2024 and December 31,2023.There were no changes made to any of the valuation techniques and valuation processes applied as of December 31,2023 and changes in unobservable inputs are not expected to materially impact the fair values.Assets Level 1i Level 2ii Level 3iii Total At March 31,2024 Investments in securities:Equity securities at Fair Value Through Other Comprehensive Income(FVOCI)14,551 37 2,121 16,709 Debt securities at FVOCI 87 8,862 8,949 Equity securities at Fair Value Through Profit or Loss(FVPL)564 1,717 8,172 10,453 Debt securities at FVPL 188 188 15,202 10,804 10,293 36,299 Other assets and receivables:Interest rate swaps 842 842 Commodity derivative contracts 2,901 2,901 Currency forward contracts 41 41 Financial assets-option rights 4,059 4,059 3,784 4,059 7,843 Trade receivables related to contracts with provisional pricing arrangements 123,837 123,837 Total assets 15,202 14,588 138,189 167,979 At December 31,2023 Investments in securities:Equity securities at FVOCI 13,376 36 2,143 15,555 Debt securities at FVOCI 75 8,884 8,959 Equity securities at FVPL 548 1,628 7,908 10,084 Debt securities at FVPL 176 176 13,999 10,724 10,051 34,774 Other assets and receivables:Interest rate swaps 556 556 Commodity derivative contracts 3,651 486 4,137 Currency forward contracts 80 80 Financial assets-option rights 3,745 3,745 4,287 4,231 8,518 Trade receivables related to contracts with provisional pricing arrangements 98,978 98,978 Total assets 13,999 15,011 113,260 142,270 Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 21 3.Fair value estimation continued Liabilities Level 1i Level 2ii Level 3iii Total At March 31,2024 Trade payables and other liabilities:Interest rate swaps 6 6 Commodity derivative contracts 3,488 3,488 Currency forward contracts 86 86 Trade payables related to contracts with provisional pricing arrangements 38,794 38,794 3,580 38,794 42,374 Provisions and other liabilities:Financial liabilities-options and forward contracts 2,135 2,135 Total liabilities 3,580 40,929 44,509 At December 31,2023 Trade payables and other liabilities:Interest rate swaps 21 21 Commodity derivative contracts 225 2,776 126 3,127 Currency forward contracts 49 49 Trade payables related to contracts with provisional pricing arrangements 35,598 35,598 225 2,846 35,724 38,795 Provisions and other liabilities:Financial liabilities-options and forward contracts 2,011 2,011 Total liabilities 225 2,846 37,735 40,806 i.Quoted prices(unadjusted)in active markets for identical assets or liabilities.ii.Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.iii.Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.The changes in Level 3 investments in securities for the three-month period ended March 31,2024 and the year ended December 31,2023 are as follows:March 31,December 31,2024 2023 Beginning 10,051 8,490 Net additions 247 1,633 Net unrealized fair value loss(9)(64)Realized gain(loss)4(8)Ending 10,293 10,051 The movement in trade receivables and trade payables related to contracts with provisional pricing arrangements mainly arises from sales and purchase transactions made during the period,net of settlements.Unrealized fair value movements on these trade receivables and trade payables are not significant.The change in the carrying amount of commodity derivative contracts primarily relates to purchase and sales of derivative contracts,including recognition of a gain or loss that results from adjusting a derivative to fair value.Fair value movements on commodity derivative contracts are not significant.The movements in financial assets option rights and financial liabilities options and forward contracts,being put,call and forward contracts on equity instruments of certain non-wholly-owned subsidiaries,are mainly due to changes in the unrealized fair values of those contracts during the period.Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 22 4.Operating segments Saudi Aramco is engaged in prospecting,exploring,drilling,extracting,processing,manufacturing,refining and marketing hydrocarbon substances within the Kingdom and has interests in refining,petrochemical,distribution,marketing and storage facilities outside the Kingdom.Saudi Aramcos operating segments are established on the basis of those components that are evaluated regularly by the President&CEO,considered to be the Chief Operating Decision Maker.The Chief Operating Decision Maker monitors the operating results of Saudi Aramcos operating segments separately for the purpose of making decisions about resource allocation and performance assessment.Segment performance is evaluated based on revenues,costs and a broad range of key performance indicators in addition to segment profitability.For management purposes,Saudi Aramco is organized into business units based on the main types of activities.At March 31,2024,Saudi Aramco had two reportable segments,Upstream and Downstream,with all other supporting functions aggregated into a Corporate segment.Upstream activities include crude oil,natural gas and natural gas liquids exploration,field development and production.Downstream activities consist primarily of refining and petrochemical manufacturing,supply and trading,distribution and power generation,logistics,and marketing of crude oil and related services to international and domestic customers.Corporate activities include primarily supporting services,including Human Resources,Finance and IT not allocated to Upstream and Downstream.Transfer prices between operating segments are on an arms length basis in a manner similar to transactions with third parties.There are no differences from the consolidated financial statements for the year ended December 31,2023 in the basis of segmentation or in the basis of measurement of segment earnings before interest,income taxes and zakat.Information by segments for the three-month period ended March 31,2024 is as follows:Upstream Downstream Corporate Eliminations Consolidated External revenue 186,415 214,888 734 402,037 Other income related to sales 10,422 25,388 35,810 Inter-segment revenue 94,683 9,088 77(103,848)Earnings(losses)before interest,income taxes and zakat 205,342 4,615(3,725)(4,848)201,384 Finance income 6,655 Finance costs (3,025)Income before income taxes and zakat 205,014 Capital expenditures-cash basis 33,114 6,882 625-40,621 Information by segments for the three-month period ended March 31,2023 is as follows:Upstream Downstream Corporate Eliminations Consolidated External revenue 201,239 215,778 443 417,460 Other income related to sales 12,896 29,477 42,373 Inter-segment revenue 87,779 8,707 61(96,547)Earnings(losses)before interest,income taxes and zakat 215,278 12,830(2,849)(3,711)221,548 Finance income 10,863 Finance costs (3,177)Income before income taxes and zakat 229,234 Capital expenditures-cash basis 25,332 7,147 318-32,797 Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 23 5.Property,plant and equipment Land and land improvements Buildings Oil and gas properties Plant,machinery and equipment Depots,storage tanks and pipelines Fixtures,IT and office equipment Construction-in-progress Total Cost January 1,2024 52,179 91,438 693,089 979,354 109,506 20,935 305,724 2,252,225 Additions1 310 609 13 6,936 523 57 43,319 51,767 Acquisition(Note 16(a)1,019 103 173 23 47 1,365 Construction completed 265 773 13,508 7,839 2,452 228(25,065)Currency translation differences(285)(266)(2,324)(265)(51)(380)(3,571)Transfers and adjustments (356)(98)(263)7 54(101)(757)Transfer of exploration and evaluation assets 155 155 Retirements and sales(5)(92)(1,298)(77)(50)(28)(1,550)March 31,2024 53,483 92,209 706,512 990,417 112,146 21,196 323,671 2,299,634 Accumulated depreciation January 1,2024(21,148)(43,341)(266,274)(474,771)(48,597)(13,377)(867,508)Charge for the period(366)(824)(5,672)(14,842)(864)(384)(22,952)Currency translation differences 7 163 1,411 125 39 1,745 Transfers and adjustments(5)3(38)(149)(28)(31)(248)Retirements and sales 4 53 1,057 26 46 1,186 March 31,2024(21,508)(43,946)(271,984)(487,294)(49,338)(13,707)(887,777)Property,plant and equipment-net,March 31,2024 31,975 48,263 434,528 503,123 62,808 7,489 323,671 1,411,857 1.Additions include borrowing costs capitalized during the three-month period ended March 31,2024,amounting to SAR 2,329,which were calculated using an average annualized capitalization rate of 5.51%.Additions to right-of-use assets during the three-month period ended March 31,2024 were SAR 7,819.Acquisition of right-of-use assets during the three-month period ended March 31,2024 were SAR 981.The following table presents depreciation charges and net carrying amounts of right-of-use assets by class of assets.Depreciation expense for the three-month period ended March 31,2024 Net carrying amount at March 31,2024 Land and land improvements 56 6,505 Buildings 120 3,643 Oil and gas properties 4 8 Plant,machinery and equipment 3,497 54,725 Depots,storage tanks and pipelines 124 2,524 Fixtures,IT and office equipment 31 238 3,832 67,643 Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 24 6.Intangible assets Goodwill Exploration and evaluation Brands and trademarks Franchise/customer relationships Computer software Other1 Total Cost January 1,2024 101,010 20,013 24,982 21,701 4,233 3,876 175,815 Additions 1,977 16 24 2,017 Acquisition(Note 16(a)657 1 3 661 Currency translation differences(7)(88)(47)(10)(44)(196)Transfers and adjustments (44)24 (20)Transfer of exploration and evaluation assets (155)(155)Retirements and write offs (739)(44)(783)March 31,2024 101,660 21,096 24,895 21,654 4,154 3,880 177,339 Accumulated amortization January 1,2024 (2,795)(4,465)(2,681)(1,320)(11,261)Charge for the period (46)(287)(72)(70)(475)Currency translation differences 56 44 9 34 143 Transfers and adjustments (5)(5)Retirements and write offs 44 44 March 31,2024 (2,785)(4,708)(2,700)(1,361)(11,554)Intangible assets-net,March 31,2024 101,660 21,096 22,110 16,946 1,454 2,519 165,785 1.Other intangible assets with a net book value of SAR 2,519 as at March 31,2024 comprise of processing and offtake agreements,licenses,technology,usage rights,patents and intellectual property.7.Income taxes and zakat(a)Kingdom income tax rates The Company is subject to an income tax rate of 20%on its Downstream activities and on the activities of exploration and production of non-associated natural gas,including gas condensates,as well as the collection,treatment,processing,fractionation and transportation of associated and non-associated natural gas and their liquids,gas condensates and other associated elements.All other activities are subject to an income tax rate of 50%,in accordance with the Saudi Arabian Income Tax Law of 2004 and its amendments(the“Tax Law”).The 20%income tax rate applicable to the Companys Downstream activities,which came into effect on January 1,2020,is conditional on the Company separating its Downstream activities under the control of one or more separate wholly-owned subsidiaries before December 31,2024,otherwise the Companys Downstream activities will be retroactively taxed at 50%.The Company expects to transfer its Downstream activities in line with the applicable requirements.Additionally,according to the Tax Law,shares held directly or indirectly in listed companies on the Saudi Exchange by taxpayers engaged in oil and hydrocarbon activities are exempt from the application of corporate income tax.As a result,the Companys ownership interests in such companies are subject to zakat.The reconciliation of tax charge at the Kingdom statutory rates to consolidated tax and zakat expense is as follows:1st quarter 1st quarter 2024 2023 Income before income taxes and zakat 205,014 229,234 Less:Income subject to zakat (1,355)(2,941)Income subject to income tax 203,659 226,293 Income taxes at the Kingdoms statutory tax rates 99,323 112,099 Tax effect of:Loss(income)not subject to tax at statutory rates and other 3,045(2,933)Income tax expense 102,368 109,166 Zakat expense 375 526 Total income tax and zakat expense 102,743 109,692 Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 25 7.Income taxes and zakat continued(b)Income tax and zakat expense 1st quarter 1st quarter 2024 2023 Current income tax-Kingdom 96,810 104,400 Current income tax-Foreign 1,300 1,837 Deferred income tax-Kingdom 4,668 3,071 Deferred income tax-Foreign(410)(142)Zakat-Kingdom 375 526 102,743 109,692 (c)Income tax and zakat obligation to the Government 2024 2023 January 1 82,539 104,978 Provided during the period 97,185 104,926 Payments during the period by the Company(Note 14)(38,575)(56,728)Payments during the period by subsidiaries and joint operations(1,435)(560)Settlements of due from the Government(49,757)(53,709)Other settlements(3,426)(1,211)March 31 86,531 97,696 8.Other reserves Share of other comprehensive income(loss)of joint ventures and associates Currency translation differences Investments in securities at FVOCI Post-employment benefits Share-based compensation reserve Cash flow hedges and other Foreign currency translation gains(losses)Cash flow hedges and other Total January 1,2024(3,840)3,979 331 25 1,172(153)1,514 Current period change(824)1,199 126 39(1,335)102 (693)Remeasurement gain(loss)1 3,893 (57)3,836 Transfer to retained earnings (2,124)(10)57 (2,077)Tax effect (59)(1,595)(1,654)Less:amounts related to non-controlling interests 344 2(174)5 400 577 March 31,2024(4,320)5,121 447 69 237(51)1,503 1.The remeasurement gain(loss)is primarily due to the net impact arising from changes in discount rates used to determine the present value of the post-employment benefit obligations and changes in the fair value of post-employment benefit plan assets.9.Borrowings At March 31,2024 At December 31,2023 Non-current Current Total Non-current Current Total Conventional:Debentures 80,999 10,283 91,282 81,092 9,683 90,775 Bank borrowings 23,589 4,530 28,119 22,853 3,630 26,483 Short-term borrowings 16,347 16,347 18,378 18,378 Revolving credit facilities 1,237 1,237 Export credit agencies 895 703 1,598 941 656 1,597 Public Investment Fund 416 404 820 455 365 820 Other financing arrangements 36,003 243 36,246 36,070 200 36,270 141,902 32,510 174,412 141,411 34,149 175,560 Sharia compliant:Sukuk(Note 9(a)29,944 3,750 33,694 18,689 15,000 33,689 Murabaha(Note 9(b)12,888 2,032 14,920 13,830 2,089 15,919 Saudi Industrial Development Fund 2,879 257 3,136 3,057 281 3,338 Ijarah/Procurement 3,517 13 3,530 3,499 13 3,512 Wakala 771 27 798 771 27 798 49,999 6,079 56,078 39,846 17,410 57,256 Borrowings other than leases 191,901 38,589 230,490 181,257 51,559 232,816 Lease liabilities 48,409 12,932 61,341 45,224 12,107 57,331 Total borrowings 240,310 51,521 291,831 226,481 63,666 290,147 Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 26 9.Borrowings continued(a)Sukuk On March 28,2024,the maturity date of the Sukuk issued on April 10,2017,with a par value of SAR 11,250,was extended by one year from its original maturity date of April 10,2024,subject to an early redemption option.(b)Murabaha Murabaha borrowings of a subsidiary amounting to SAR 938,repayable in semi-annual installments until 2029,were early settled by the subsidiary on March 28,2024.10.Revenue 1st quarter 1st quarter 2024 2023 Revenue from contracts with customers 397,281 415,937 Movement between provisional and final prices 2,122(857)Other revenue 2,634 2,380 402,037 417,460 Disaggregation of revenue from contracts with customers Saudi Aramcos revenue from contracts with customers according to product type and source is as follows:1st quarter 2024 Upstream Downstream Corporate Total Crude oil 173,780 26,054 199,834 Refined and chemical products 182,231 182,231 Natural gas and NGLs 10,523 1,405 11,928 Metal products 3,288 3,288 Revenue from contracts with customers 184,303 212,978 397,281 Movement between provisional and final prices 2,017 105 2,122 Other revenue 95 1,805 734 2,634 External revenue 186,415 214,888 734 402,037 1st quarter 2023 Upstream Downstream Corporate Total Crude oil 191,828 21,338 213,166 Refined and chemical products 188,312 188,312 Natural gas and NGLs 10,063 1,135 11,198 Metal products 3,261 3,261 Revenue from contracts with customers 201,891 214,046 415,937 Movement between provisional and final prices(749)(108)(857)Other revenue 97 1,840 443 2,380 External revenue 201,239 215,778 443 417,460 11.Non-cash investing and financing activities Investing and financing activities for the three-month period ended March 31,2024 include additions to right-of-use assets of SAR 7,819(March 31,2023:SAR 3,309),asset retirement provisions of nil(March 31,2023:SAR 95)and equity awards issued to employees of SAR 167(March 31,2023:SAR 149).12.Commitments Capital commitments Capital expenditures contracted for but not yet incurred were SAR 216,885 and SAR 222,938 at March 31,2024 and December 31,2023,respectively.In addition,leases contracted for but not yet commenced were SAR 32,187 and SAR 26,369 at March 31,2024 and December 31,2023,respectively.Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 27 13.Contingencies Saudi Aramco has contingent assets and liabilities with respect to certain disputed matters,including claims by and against contractors and lawsuits and arbitrations involving a variety of issues.These contingencies arise in the ordinary course of business.It is not anticipated that any material adjustments will result from these contingencies.14.Payments to the Government by the Company 1st quarter 1st quarter 2024 2023 Income taxes(Note 7(c)38,575 56,728 Royalties 44,659 51,009 Dividends 95,766 68,918 15.Related party transactions and balances(a)Transactions 1st quarter 1st quarter 2024 2023 Joint ventures:Revenue from sales 5,805 5,569 Other revenue 30 4 Interest income 53 38 Purchases 7,526 6,510 Service expenses 26 4 Associates:Revenue from sales 19,740 18,675 Other revenue 64 68 Interest income 116 83 Purchases 11,250 14,993 Service expenses 64 26 Government,semi-Government and other entities with Government ownership or control:Revenue from sales 6,611 5,486 Other income related to sales 35,810 42,373 Other revenue 184 210 Purchases 2,378 2,633 Service expenses 124 98 Lease expenses 319 244 (b)Balances At March 31,At December 31,2024 2023 Joint ventures:Other assets and receivables 5,179 5,378 Trade receivables 5,704 4,976 Interest receivable 503 581 Trade payables and other liabilities 7,894 6,236 Associates:Other assets and receivables 5,524 4,882 Trade receivables 12,330 12,971 Trade payables and other liabilities 6,450 6,139 Government,semi-Government and other entities with Government ownership or control:Other assets and receivables 829 1,151 Trade receivables 3,480 2,606 Due from the Government 38,474 49,378 Trade payables and other liabilities 1,380 1,448 Borrowings 7,481 7,736 (c)Compensation of key management personnel Compensation policies for and composition of key management personnel remain consistent with 2023.Saudi Aramco First quarter interim report 2024 All amounts in millions of Saudi Riyals unless otherwise stated 28 16.Investments in affiliates(a)Esmax Distribucin SpA(“Esmax”)On March 1,2024,the Company announced the completion of the acquisition of a 100%equity stake in Esmax Distribucin SpA(“Esmax”),through its wholly-owned subsidiary,Aramco Overseas Company B.V.(“AOC”),from Southern Cross Group,a Latin America-focused private equity company,for a purchase consideration of SAR 1,373,subject to customary adjustments.Esmax is one of the leading diversified downstream fuels and lubricants retailers in Chile,and its operations include retail fuel stations,airport operations,fuel distribution terminals and a lubricant blending plant.The transaction represents Saudi Aramcos first downstream retail investment in South America and enables it to secure outlets for its refined products,including fuel placement from Motiva.It also creates a platform to launch the Aramco brand in South America while strengthening its downstream value chain and unlocks new market opportunities for its Valvoline-branded lubricants.The transaction resulted in Saudi Aramco obtaining control of Esmax.Saudi Aramco accounts for acquisitions of subsidiaries using the acquisition method of accounting.This requires recognition of the assets acquired and liabilities assumed at fair value as of the acquisition date.The purchase price allocation,as performed by an independent valuer,has not been concluded.Based on the preliminary purchase price allocation,total identifiable net assets of SAR 716 and goodwill of SAR 657 have been recognized at the acquisition date.Post-acquisition,Esmax contributed revenues of SAR 829 and net income of SAR 26,which are included in the condensed consolidated statement of income.If the acquisition had occurred on January 1,2024,management estimates that consolidated revenue and net income for the three-month period ended March 31,2024 would have been higher by SAR 1,564 and SAR 15,respectively.(b)MidOcean Holdings II,L.P.On September 27,2023,AOC,a wholly-owned subsidiary of the Company,entered into definitive agreements to acquire a strategic minority stake in MidOcean Holdings II,L.P.,which in turn owns MidOcean Energy,LLC(“MidOcean Energy”).MidOcean Energy is a Liquefied Natural Gas(“LNG”)company,formed and managed by EIG Global Energy Partners with the objective of building a high-quality,long term LNG portfolio,and has recently acquired interests in a portfolio of Australian LNG projects.This strategic partnership marks Saudi Aramcos first international investment in LNG.The transaction closed on March 21,2024,with Saudi Aramco investing SAR 195,which has been accounted for as an investment in associate.As part of the transaction,Saudi Aramco has an option to increase its equity interest and associated rights in the future.17.Dividends Dividends declared and paid on ordinary shares are as follows:SAR per share 1st quarter 1st quarter 1st quarter 1st quarter 2024 2023 2024 2023 Dividends declared and paid in the quarter:March 116,503 73,150 0.4815 0.3326 Total1 116,503 73,150 0.4815 0.3326 Dividends declared on May 6,2024 and May 8,20232 116,509 73,160 0.4815 0.3024 1.Includes SAR 40,407(SAR 0.1670 per share)of performance-linked dividend,which was first declared and paid in the third quarter of 2023.2.Dividend of SAR 116,509(SAR 0.4815 per share)represents a base dividend of SAR 76,100(SAR 0.3145 per share)and a performance-linked dividend of SAR 40,409(SAR 0.1670 per share).These dividends are not reflected in the condensed consolidated interim financial report and will be deducted from unappropriated retained earnings in the second quarter of 2024.29Saudi AramcoFirst quarter interim report 2024Aramco,headquartered in the city of Dhahran,is one of the worlds largest integrated energy and chemicals companies;its Upstream operations are primarily based in the Kingdom of Saudi Arabia while the Downstream business is Investor overview: media:Domestic media:Investor relations:
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JANUARY MARCH 2024INTERIM REPORT1 1 2 8 8 10 22 29 Updated InformationKey FiguresKey FactsGroup NewsInterim GroupManagement ReportVolkswagen Shares Business DevelopmentResults of Operations,Financial Position and Net AssetsOutlook31 Brands andBusiness Fields35Interim Consolidated Financial Statement(Condensed)35 36 37 38 39 40 61 Income StatementStatement of Comprehensive IncomeBalance SheetStatement of Changes in EquityCash Flow StatementNotesReview ReportThis document is an English translation of the original report written in German.In case of discrepancies,the German version shall take precedence.All figures shown in the report are rounded,so minor discrepancies may arise from addition of these amounts.The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period.Specified vehicle ranges correspond to results obtained through the Worldwide Harmonized Light Vehicles Test Procedure(WLTP)on the chassis dynamometer.WLTP value ranges for series-produced vehicles may vary depending on the equipment.The actual range will deviate in practice depending on various other factors.This Interim Report is also available on the Internet,in German and English,at:www.volkswagen- 1 Key Figures Updated Information VOLKSWAGEN GROUP AUTOMOTIVE DIVISION Volume data also includes the unconsolidated Chinese joint ventures(Chin.JVs);prior-year deliveries have been updated to reflect subsequent statistical trends.The allocation of consolidation adjustments between the Automotive and Financial Services divisions is included in the Automotive Division.Jan.-Mar.2023Jan.-Mar.20242,0412,104 396491,515Jan.-Mar.20231,432Jan.-Mar.20242,1242,081-5%-2%Jan.-Mar.2023Jan.-Mar.202476.275.5-1%Jan.-Mar.2023Jan.-Mar.20245.74.6-20%7.5%6.1liveries to customersin thousand unitsVehicle salesin thousand unitsOperating return on salesin billionOperating Result&Sales revenuein billionexcl.Chin.JVsJan.-Mar.2023Jan.-Mar.202411.914.4Jan.-Mar.2023-3.0Jan.-Mar.20242.2-235c.31,2023Mar.31,202440.337.2-8%Investment ratioin%Net cash flowin billionNet liquidityin billionKey Figures 3 2 Key Facts Updated Information Deliveries to Volkswagen Group customers,including the Chinese joint ventures,increase to 2.1(2.0)million vehicles in the first three months of 2024;Western Europe at the prior-year level;growth in all other sales regions worldwide Deliveries of all-electric vehicles to customers down slightly year-on-year(3.3%)due to market-related factors and parts supply shortages;share of Group deliveries at 6.5(6.9)%Group sales revenue down slightly year-on-year at 75.5(76.2)billion Operating result down at 4.6(5.7)billion,due mainly to factors related to unit sales and mix and to higher interest expenses in the Financial Services Division;effects from the fair value measurement of derivatives to which hedge accounting is not applied of 0.4(1.3)billion Earnings before tax decrease to 5.2(6.5)billion;earnings after tax decline by 1.0 billion to 3.7 billion Automotive Divisions net cash flow amounts to 3.0(2.2)billion;automotive investment ratio at 14.4(11.9)%Net liquidity in the Automotive Division at robust level of 37.2 billion Key Facts 3 Group News Updated Information PRESENTATION OF NEW PRODUCTS AND TECHNOLOGIES The Volkswagen Group and its brands showcased a variety of new vehicles and technologies in the first quarter of 2024.At the Consumer Electronics Show(CES)in Las Vegas in early January 2024,the Volkswagen brand presented a Golf in which the chatbot ChatGPT,which is based on artificial intelligence(AI),is integrated into the IDA voice assistant.Current Volkswagen models and models of other Group brands based on the Modular Electric Drive Toolkit(MEB)and the enhanced Modular Transverse Toolkit(MQB Evo)and equipped with voice assistants including vehicles already in customers hands will gain access to the chatbot in the future.This will allow users to access the ever-growing database of artificial intelligence,to have information researched during the journey read aloud to them,and to interact with the vehicle using natural language.The new function,which is based on the Cerence Chat Pro program from our technology partner Cerence Inc.,will gain no access whatsoever to vehicle data.The Volkswagen Passenger Cars brand celebrated the world premiere of the ID.7 Tourer in February 2024.The new crown jewel of the all-electric ID.family sets new standards in comfort and functionality with its high-performance drivetrain,long ranges,and spacious luggage compartment.The progressive fastback saloon is one of the first all-electric estate cars in the upper middle class.It offers space for five people and more than 600 liters of luggage.A high-quality cockpit,new automatic air conditioning system and climate-controlled seats with a pressure-point massage function offer a premium-class experience.In addition,the new Wellness In-Car app allows various vehicle functions to be adjusted by means of three preconfigured programs(Fresh Up,Calm Down and Power Break)that can help to enhance wellbeing during the journey or breaks.Depending on the vehicles equipment,the app uses the ambient lighting,sound system,climate control,smart glass function,seat air conditioning and seat massage as well as the ID.LIGHT and the infotainment screen for this purpose.The ID.7 Tourer will be available with two battery sizes.The top-of-the-range version is expected to achieve ranges of up to 685 km.Inspired by the dynamic GTI,GTD and GTE models,Volkswagen is continuing to expand the range of sporty GTX variants in its all-electric ID.family.The highly dynamic ID.3 GTX and ID.7 GTX Tourer models will come with high-performance drivetrains,bespoke exterior design including their own front end and lighting signatures,and sporty interior design details.The ID.Buzz GTX will be available with a choice of two wheelbases and will offer optimal pulling power and traction in every driving situation thanks to the powerful 4MOTION all-wheel drive.To mark the 50th birthday of its iconic compact car,the Golf,the Volkswagen Passenger Cars brand presented an enhanced version of its bestseller.The new Golf impresses with a next-generation infotainment system,intuitive controls,the IDA voice assistant with integrated AI,a sharper front and rear end design,and efficient drivetrains.These include plug-in hybrid drives with an increased all-electric range of up to approximately 100 km.In addition,and for the first time on a Golf,the front of the vehicle is adorned with an illuminated Volkswagen Group News 4 Group News Updated Information logo.The exclusive Golf Edition 50 special-edition model rounds off the range and captivates with its 18-inch alloy wheels,tinted rear windows,an illuminated grill and 3D“50”badges on the B pillars.Inside,the exclusivity is underlined by details such as the“Edition 50”emblem in the front door sills and bottom steering wheel trim,pedal caps in brushed stainless steel and a black headliner.koda presented an enhanced version of its bestseller,the Octavia,in the first quarter of 2024.The update to the fourth generation of the brands biggest seller by far comes with a fresh design,a new grill and matrix LED headlights.The interior boasts an array of impressive equipment such as a 10-inch digital cockpit,a 13-inch infotainment display,the dual-zone Climatronic system and design features produced using even more sustain-able materials.The AI chatbot ChatGPT is to be integrated as a standard feature in future.Additional safety and assistance systems optimize active and passive safety.With four petrol versions and two diesel engines plus mild hybrid options,power outputs range from 85 kW(115 PS)to 195 kW(265 PS).The Octavia remains available in hatchback and estate versions.kodas flagship combustion-engine model has entered a new generation;the new Superb Combi offers enlarged dimensions and a host of new technologies.The vehicle impresses customers with its clean and practical interior design produced using sustainable materials,along with its intuitive controls and AI-supported infotainment.Innovative assistance systems,a new generation of matrix LED main headlights and Dynamic Chassis Control(DCC Plus)elevate safety.With improved aerodynamics and six modern drivetrain variants,the Superb Combi is more efficient than its predecessor.Power outputs range from 110 kW(150 PS)to 195 kW(265 PS).The powertrain line-up also includes a plug-in-hybrid with an electric range of up to around 100 km and a 1.5 l TSI with mild-hybrid technology.koda has also extensively refreshed its successful compact models.Redesigned front and rear aprons give the Scala an even sportier appearance and the Kamiq a stronger SUV presence.The sharply drawn matrix LED headlights are available on both compact models for the first time.On top of this,both product lines feature a new interior design with sustainable materials.Three efficient combustion engines and a comprehensive portfolio of safety features and assistance systems round off the model upgrade.SEAT celebrated the Ibizas 40th birthday with another special-edition model:The Ibiza FR Anniversary Edition captivates in its exclusive Graphene Grey bodywork and Cosmo Grey 18-inch alloy wheels along with the“Anniversary Limited Edition”logo lasered on the B pillar.Inside,textile bucket seats offer a new level of dynamism and comfort.Other stand-out features are the dark aluminum matt surfaces on the doors and center console and the“Anniversary Limited Edition”logo lasered on the door sill.CUPRA has taken things to a new level with a more powerful version of its all-electric Born model.The Born VZ delivers 240 kW(326 PS)of power to the tarmac an increase of 40%over the previous e-Boost version.Torque has been upped by 75%to an impressive 545 Nm,allowing the vehicle to sprint from 0 to 100 km/h in just 5.7 seconds.Its top speed is 200 km/h.New adaptive DCC Sport suspension,responsive steering behavior and a more direct brake feel combine to deliver a dynamic driving experience,whilst new colors and 20-inch alloy wheels define the exterior design.Inside,the highlights are CUP bucket seats made from sustainable material and recuperation paddle shifts on the steering wheel that allow the driver to choose between three different levels of energy recuperation.In March,the Audi brand celebrated the debut of the Q6 e-tron,the new technological spearhead of the Audi portfolio.The all-electric SUV is the first production model based on the Premium Platform Electric(PPE)and the E3 1.2 electronic architecture.It therefore represents the next step in the companys transformation into a provider of premium electric mobility.The model embodies high everyday practicality and sporty,dynamic SUV styling with Audis further refined design language for electric-powered models.The Q6 e-tron sets standards in electric performance,range and charging.Thanks to 800-volt technology and a maximum DC charging capacity of 270 kW as standard,up to 255 km of range can be recharged in just ten minutes at a suitable fast-charging station.The battery charge level increases from 10%to 80%in around 21 minutes.Intelligent,high-performing and predictive thermal management is a key factor in this impressive charging performance.Powerful,compact and highly 5 Group News Updated Information efficient electric motors and a newly developed lithium-ion battery with a total gross capacity of 100 kWh provide a range of up to 625 km.The system power output of 285 kW(387 PS)offers the sporty performance that Audi is known for and a top speed of 210 km/h.The heart of the new Digital Stage display and control system is the free-standing Audi MMI panoramic display in a curved design,consisting of an 11.9-inch virtual cockpit and 14.5-inch touch display as well as a 10.9-inch MMI passenger display.The Q6 e-trons active digital light signature is a world first in lighting technology;thanks to its software module,the matrix LED headlights and OLED taillights appear livelier and more intelligent,whilst also boosting safety.Audi put its successful A3 model through an extensive upgrade in the first quarter:the new A3 is sportier,more comfortable and comes with more digital features than ever before.This is thanks to the more progressive design as well as the expanded standard equipment,new materials and functions.Apps that can be used directly on the vehicle display,a choice of daytime running light signatures,and the flexible addition of functions on demand offer a high level of customization.The A3 allstreet,the distinctive crossover in the A3 family,is set to be a completely new arrival on the market.With its off-road character,greater ground clearance than the A3 Sportback,and raised seating position,the vehicle offers an SUV-like driving experience combined with high functionality.Audi also upgraded the Q7,its flagship family SUV,with a clean design and further enhanced technology.A fresh exterior design with a new front and rear end accentuates the powerful character of the Q7,which offers first-class versatility and generous space for up to seven passengers.HD matrix LED headlights with an additional laser high beam are now available on the Q7 for the first time,as are digital daytime running lights with selectable light signatures.Digital OLED taillights with four selectable rear light designs complete the lighting technology on offer.New wheels,colors,decorative inlays and seats with contrast stitching enable even greater customization of the most versatile SUV among Audis Q models.At Porsche,the Macan entered its second model generation,now in all-electric form.With its progressive,timeless design,characteristic Porsche performance,a range suitable for long-distance driving and high everyday practicality,it is designed to completely fulfill the requirements of Porsche customers opting for a sporty SUV.The new Macan is the first model from Porsche to be based on the newly developed Premium Platform Electric(PPE)with 800-volt architecture.The battery has a DC charging capacity of up to 270 kW and can charge from 10%to 80%in around 21 minutes at a suitable fast-charging station.The vehicle has a range of up to 591 km.Electri-fication has allowed for increased luggage space in the Macan;depending on the model and the equipment fitted,the luggage capacity behind the rear seat bench is up to 540 liters.The Macans display and control system features up to three screens,including the free-standing,12.6-inch,curved-design instrument cluster and the 10.9-inch central display.For the first time ever,there is a head-up display with augmented reality technology.This displays virtual elements such as navigation arrows,which appear to the driver to be located around ten meters in front of the vehicle.The new-generation infotainment system suggests routes,including charging stops,via voice assistant.In the new Porsche App Center,passengers can access apps from third-party providers and install them in the Macan.Porsche has also extensively updated the body variants available for the Taycan:the Taycan sports saloon,the versatile Taycan Cross Turismo and the sporty yet practical Taycan Sport Turismo.New front and rear-end styling and new headlights and taillights have further sharpened the clean,purist design of the Taycan.The new front wing panels and flatter headlights emphasize the vehicles width.The main headlights with high-resolution HD matrix technology feature detailed optics and display the brands characteristic four-point graphics.The new versions of the Taycan have greater power and range along with faster acceleration and charging.The improve-ment of performance and efficiency is down to a number of factors:an advanced powertrain with a new,up to 80 kW more powerful rear-axle motor,a modified pulse inverter with optimized software,more powerful batteries,revised thermal management,a next-generation heat pump and a modified recuperation and all-wheel-drive strategy.Depending on the body variant and powertrain,the range has been extended to up to 678 km,an increase of 35%.Four powertrain options are available,with rear-and all-wheel-drive variants.All Taycan versions feature an even more extensive standard equipment list and come with the latest generation of the Porsche Driver Experience with a display and control system that has been improved in many areas.6 Group News Updated Information AWARDS Numerous Volkswagen Group models won categories in the“Best Cars 2024”awards from auto motor sport magazine in February 2024.The Volkswagen Passenger Cars brand impressed with the T-Roc in the small SUVs/crossovers category.The Polo from Volkswagen Passenger Cars prevailed against the competition in the overall rankings in the small cars category.The koda Fabia won the import rankings in this category.koda also took victory in the import ranking for the compact class with the Octavia.The Bentley Continental GT was the winner of the import rankings in the luxury class.In addition,the Porsche brand secured top place in the sports cars category with the 911 and in the convertibles category with the 911 Cabrio.The Porsche Macan won the large SUVs/off-roaders category in the overall rankings.Volkswagen Commercial Vehicles took the top spot in the vans category with the ID.Buzz.The Lamborghini Urus came top among import vehicles in the luxury SUVs/off-roaders category.The 48th edition of the awards saw a total of over 90,000 readers choose their favorites in 13 vehicle categories.At the end of February 2024,the CUPRA brand won Top Brand Desire in the inaugural“Car Loyalty Awards 2024”.Based on the Car Loyalty Report,CUPRA gained more new customers in percentage terms than any other brand on the German market in 2023.The analysis was performed using data on vehicle registrations from Germanys Federal Motor Transport Authority.The award was presented by the magazine Automobilwoche and the market research institute Dataforce.In early March 2024,Bentley Motors won the“Britains Most Admired Companies Award”.This was already the third time in five years that Bentley has received the British award organized by the international market research company Echo Research.Bentley took top place in the automotive manufacturers category in the comprehensive study of 250 leading British brands across 25 industries.Also in March 2024,the ID.Buzz Cargo and Caddy Cargo models from the Volkswagen Commercial Vehicles brand were awarded platinum and gold in the Euro NCAP safety ratings.Both vehicles delivered impressive performances in the braking tests and with their lane-keeping capabilities and assistance systems.The test pro-cedure examines and rates the safety aspects of new vehicles.ANNIVERSARIES In mid-January 2024,the Volkswagen Passat Estate celebrated its 50th birthday.Ever since it launched on the market,the Passat Estate has offered a particularly large luggage compartment and high level of comfort.Volks-wagens plant in Bratislava has been busy building the ninth generation of the Passat since the beginning of the year.Volkswagen de Mxico will be celebrating its 60th anniversary in 2024.Its headquarters at the Puebla plant is the largest car plant in Mexico.The engine factory is located at the Silao plant.Volkswagen de Mxico employs approximately 13,500 people.Volkswagen do Brasil celebrated 25 years of its Curitiba site in early February 2024.The plant has already manufactured three million vehicles for the Volkswagen and Audi brands.Approximately 2,000 employees work at the site.At the end of February 2024,Volkswagen Group Africa reached the production milestone of 1.5 million export vehicles at the Kariega plant.The milestone vehicle was a Polo GTI for the United Kingdom.Volkswagen Group Africa has been manufacturing vehicles for export since 1992.Also in February 2024,SEAT celebrated 40 years of the Ibiza.Since its launch,more than six million units have been sold over five generations of this model,making it the brands top-selling vehicle.A limited special-edition model SEAT Ibiza FR“Anniversary Edition”is available to mark the anniversary.koda hit the production milestone of 200,000 Enyaqs and Enyaq Coups at the end of February 2024.The milestone vehicle was a white Enyaq Coup Sportline.The model family is expected to drive forward the koda brands e-mobility offensive with improved ranges,new software and intuitive control interfaces.The Volkswagen Passenger Cars brand celebrated 50 years of the Golf in February 2024.With over 37 million vehicles sold,the Golf is the most widely produced Volkswagen of all time.Today,the eighth generation of the Golf is being manufactured.An exclusive special-edition model the Golf“Edition 50”is available to mark the anniversary.7 Group News Updated Information COOPERATION AND INVESTMENTS In February 2024,Volkswagen and XPeng in China signed a framework agreement regarding a platform and software collaboration,marking an important milestone in this strategic partnership that was announced in July 2023.The agreement centers on the joint development of two all-electric mid-size vehicles for the Volkswagen Passenger Cars brand,beginning with an SUV.The two jointly developed models are to be equipped with state-of-the-art software and hardware and offer Chinese customers an intuitive,connected,digital experience and automated driving functions.They are due to arrive on the market in 2026.In February 2024,the Volkswagen Group and the Indian company Mahindra&Mahindra Ltd.signed the first contract to supply MEB components for the INGLO electric platform developed by Mahindra.The supply agreement provides for the delivery of unified cells,the core element of Volkswagens battery strategy,and will have a total volume of 50 GWh and a term of several years.One of the aims of the agreement is to strengthen e-mobility in the Indian automotive market.In March 2024,the Volkswagen Group and the Israeli company Mobileye Vision Technologies Ltd.announced that they would intensify their long-standing cooperation in the field of automated driving.The partners intend to introduce Level 4-enabled vehicles for passenger and goods transport within just a few years,and to rapidly bring new automated driver assist functions to series production at multiple Group brands.These functions include advanced assist systems for highway and urban driving,such as automated overtaking in permitted areas on multi-lane highways,automatic stopping at red lights and stop signs,and assistance at intersections and round-abouts.FOUNDATIONS LAID FOR SCOUT PRODUCTION Scout Motors Inc.broke ground on a new production center in the US town of Blythewood,South Carolina,in February 2024.Strategically located conveniently close to several major cities,the site is due to commence vehicle production by the end of 2026.It will have the capacity for up to 200,000 vehicles per year.Scout Motors was founded to manufacture all-electric pick-up trucks and rugged SUVs that bring the character of the original commercial vehicle from the traditional US marque Scout into the present day.SUSTAINABILITY STRATEGY REGENERATE In March 2024,the Volkswagen Group presented its new,holistic sustainability strategy regenerate .This is based on the goal of making a positive contribution to nature and society that is measurable and comprehensible as a mobility provider of the future.It focuses on four dimensions:nature,our employees,society and business.Regenerate applies across the Group and forms the basis for ambitious sustainability programs at all Group brands and locations.SUPERVISORY BOARD MATTERS Mr.Peter Mosch,Chair of the General Works Council of AUDI AG,resigned from the Supervisory Board of Volks-wagen AG with effect from December 31,2023.Ms.Rita Beck,Deputy Chair of the General Works Council of AUDI AG at the Ingolstadt plant,was appointed by the court as his successor with effect from January 9,2024.8 Volkswagen Shares Interim Group Management Report The international stock markets recorded a strong first quarter in 2024.Driven in particular by the hope that central banks would cut their key rates of interest later in the year,they continued the upward trend that started in October 2023 and soared to new record levels.Economic growth ahead of expectations,a normalization of inflation,and developments in the field of artificial intelligence in the USA also had a positive impact.After a favorable year on the stock markets in 2023,which saw the German stock index(DAX)rise by 20%,the new year started with sideways movement.An upward trend in the DAX then began at the end of January 2024,during which the index hit several new all-time highs.The German stock market barometer benefited particularly from positive corporate data in the reporting season and market participants expectations of an imminent turnaround in interest rates.At the end of the first quarter of 2024,the DAX was up 10.4%on the 2023 year-end figure,marking a new high.80100120140DJFMAMJJASONDPRICE DEVELOPMENT FROM DECEMBER 2023 TO MARCH 2024Index based on month-end prices:December 31,2023=100 Volkswagen ordinary share 19.5%Volkswagen preferred share 9.9X 10.4%EURO STOXX Automobiles&Parts 16.1%Volkswagen Shares 9 Volkswagen Shares Interim Group Management Report The prices of Volkswagen AGs preferred and ordinary shares initially saw a slight downward trend at the beginning of the reporting period.At the end of January,expectations of positive business figures for the final quarter of 2023 and the confidence regarding volume development in 2024 initially led to growth in share value.In early March,amid the publication of positive key figures for the 2023 fiscal year and the Companys 2024 outlook,the capital market critically assessed the continuously high investment requirements,extending among other things to the construction of battery cell factories,vehicle development as part of the Companys trans-formation,and provisions for acquisitions.The further intensification of competition in the automotive sector,expectations of falling margins and lower demand at the start of the year,particularly for electric vehicles,also put a damper on the share price.The same was true of the decline in profits expected by the Company for the joint ventures in its largest single market,China,where competition is intense.The share price began to recover in an improving stock market environment at the end of the quarter,and as a result Volkswagen shares were signifi-cantly up on the level recorded at the end of 2023.At the end of the first quarter of 2024,preferred shares were up 9.9%and ordinary shares up 19.5%compared to the end of 2023.Information and explanations on earnings per share can be found in the notes to the interim consolidated financial statements.Additional Volkswagen share data,plus corporate news,reports and presentations,is available on our website www.volkswagen- SHARE KEY FIGURES AND MARKET INDICES FROM JANUARY 1 TO MARCH 31,2024 High Low Closing Ordinary share Price()145.55 115.35 141.60 Date Feb.28 Jan.3 Mar.28 Preferred share Price()125.88 106.88 122.84 Date Feb.28 Jan.19 Mar.28 DAX Price 18,492 16,432 18,492 Date Mar.28 Jan.17 Mar.28 ESTX Auto&Parts Price 705 575 704 Date Mar.27 Jan.19 Mar.28 10 Business Development Interim Group Management Report GENERAL ECONOMIC DEVELOPMENT The world economy remained on a recovery path in the first quarter of 2024 with similar momentum to the previous year.This trend was seen in both the advanced economies and the emerging markets.The declining but still relatively high inflation rate in many countries,combined with a continuation of the restrictive monetary policies imposed by major central banks,put a damper on economic growth in many places.Western Europe posted an economic growth rate that was positive yet very low in the first quarter of 2024,representing a decrease compared to the prior-year level.This trend was seen in many countries in Northern and Southern Europe.The declining but still relatively high inflation rates,combined with the continued restrictive monetary policy measures to tackle inflation,had a negative impact on both consumer spending and business investment.Consumer and business sentiment therefore remained at a relatively low level in some sectors of the European Union.Germany registered negative economic growth in the reporting period.Compared with the same period of the prior year,the seasonally adjusted unemployment figures rose on average.After reaching historically high levels in late 2022 and early 2023,monthly inflation rates have fallen ever since.95100105110DJFMAMJJASONDEXCHANGE RATE MOVEMENTS FROM DECEMBER 2023 TO MARCH 2024Index based on month-end prices:as of December 31,2023=100 EUR to GBP EUR to USD EUR to CNY EUR to JPYBusiness Development 11 Business Development Interim Group Management Report The economies in Central and Eastern Europe recorded growth in real gross domestic product(GDP)overall in the first three months of 2024 that was significantly higher than in the prior-year period.In the USA,the pace of growth in gross domestic product in the reporting period exceeded that of the prior-year period.This was despite the US Federal Reserve maintaining its restrictive monetary policy due to relatively high inflation and a tight labor market.Economic output also grew year-on-year in Brazil,albeit more slowly than in the prior-year quarter.Economic growth in China was at a high level compared with other parts of the world and improved year-on-year in the reporting period.TRENDS IN THE MARKETS FOR PASSENGER CARS AND LIGHT COMMERCIAL VEHICLES In the first quarter of 2024,the volume of the passenger car market worldwide was noticeably higher than the equivalent figure for 2023.The performance of the major passenger car markets was largely positive.The supply situation for intermediates continued to return to normal and the affordability of vehicles improved in many places thanks to lower prices and increased sales incentives.The global volume of new registrations of light commercial vehicles between January and March 2024 was on a level with the previous year.In Western Europe,the number of new passenger car registrations in the first quarter of the 2024 reporting year increased slightly year-on-year.The performance of the large individual passenger car markets in this region was positive across the board.The volume of new registrations for light commercial vehicles in Western Europe was noticeably higher in the reporting period than for the same period of the previous year.The number of new passenger car registrations in Germany from January to March 2024 was slightly up on the previous years low level.The change in electric vehicle subsidies at the end of 2023 weighed on new registrations.Despite this,registrations increased year-on-year due to base effects given the relatively low prior-year figures.Production in Germany fell to 1.0 million vehicles(8.8%)in the first three months of 2024,while passenger car exports declined to 0.8 million units(4.7%).The number of light commercial vehicle sales in Germany in the first three months of 2024 was significantly up on the 2023 figure.In the Central and Eastern Europe region,there was a strong increase in the volume of the passenger car market in the reporting period.Largely positive movement was recorded in the number of vehicles sold in the individual markets of Central Europe.From January to March 2024,the market volume of light commercial vehicles in Central and Eastern Europe was noticeably up on the prior-year level.Sales of passenger cars and light commercial vehicles(up to 6.35 tonnes)in the North America region were noticeably higher.As a result of an average level of improvement in the availability and affordability of new vehicles,the volume of the US market in the first quarter of 2024 saw noticeable growth,albeit lower than that of the region as a whole.In the South America region,the volume of new vehicle registrations for passenger cars and light commercial vehicles in the first three months of 2024 was slightly below the comparative prior-year period.In Brazil,the number of new registrations was significantly higher than in the same quarter of the previous year.12 Business Development Interim Group Management Report In the Asia-Pacific region,the volume of the passenger car market in the first quarter of 2024 was noticeably higher than the previous years figure.The trend in demand for passenger cars in the region was largely determined by developments in the Chinese passenger car market.Here,state subsidies expired at the end of 2022,causing pull-forward effects in vehicle purchases and consequently reducing the number of vehicle registrations at the beginning of 2023.As a result of this,the base figure from the 2023 period for comparison with the first quarter of 2024 was relatively weak.Overall,demand in China was therefore significantly up on the prior-year level.The volume of demand for light commercial vehicles in the Asia-Pacific region in the first three months of 2024 was slightly below the level for the prior-year period.Registration volumes in China,the regions dominant market and the largest market worldwide,also tapered off slightly compared with the period one year earlier.TRENDS IN THE MARKETS FOR PASSENGER CARS AND LIGHT COMMERCIAL VEHICLES FROM JANUARY 1 TO MARCH 31 MARKET VOLUME CHANGE Thousand Units 2024 2023(%)Europe/Other Markets Western Europe 3,065 2,931 4.6 of which:Germany 695 667 4.2 France 445 421 5.7 United Kingdom 544 494 10.0 Italy 453 429 5.5 Spain 255 246 3.7 Central and Eastern Europe 592 488 21.3 of which:Czech Republic 58 56 2.2 Poland 139 123 12.6 Other Markets 1,125 1,056 6.5 of which:Trkiye 233 175 33.0 South Africa 85 93 9.0 North America 4,552 4,256 7.0 of which:USA 3,801 3,593 5.8 Canada 401 348 15.3 Mexico 350 315 11.0 South America 820 840 2.4 of which:Brazil 484 437 10.8 Argentina 80 114 29.8 Asia-Pacific 8,427 8,003 5.3 of which:China 4,961 4,404 12.6 India 1,111 995 11.6 Japan 968 1,152 16.0 Worldwide 18,581 17,574 5.7 Markets for light commercial vehicles Western Europe 456 415 9.9 of which:Germany 72 65 11.5 Central and Eastern Europe 63 59 5.8 Asia-Pacific 1,285 1,325 3.0 of which:China 621 638 2.6 Worldwide 2,007 1,991 0.8 13 Business Development Interim Group Management Report TRENDS IN THE MARKETS FOR COMMERCIAL VEHICLES In the markets that are relevant for the Volkswagen Group,demand for mid-sized and heavy trucks with a gross weight of more than six tonnes was noticeably lower in the reporting period than in the same period of 2023.Truck markets globally were also noticeably down on the previous year.This was due to a comparatively weak start to the year in some markets,for example in South America,which had benefited in the first quarter of the previous year from a non-recurring item attributable to pull-forward effects in connection with the introduction of a new emissions standard.Sales volume in the 27 EU states excluding Malta,but including the United Kingdom,Norway and Switzerland(EU27 3),was slightly lower in the first three months of 2024 than in the prior year.There was a similar slight decrease in registrations in Germany,the largest market in this region.Demand in the United Kingdom was also down slightly year-on-year,while demand was slightly higher in France.Trkiye recorded a significant increase in new registrations compared with the previous year.There was a noticeable rise in demand in the South African market.The truck market in North America is divided into weight classes 1 to 8.In the segments relevant for Volkswagen Class 6 to 8(8.85 tonnes or heavier)new registrations were down noticeably on the previous year.In Brazil,the largest market in the South America region,demand for trucks in the first three months of the year was down slightly on the prior-year figure.In the first three months of 2024,demand in the bus markets that are relevant for the Volkswagen Group was noticeably below the level recorded in the same period of the prior year.Demand for buses in the EU27 3 markets in the reporting period was up significantly on the previous year,with the picture varying from country to country.The school bus segment in the US and Canada was on a level with the prior year.Demand for buses in Mexico was significantly lower than in the previous year.In Brazil,where the non-recurring item described above had a particularly pronounced impact,demand was down very sharply on the high level recorded in the prior year.TRENDS IN THE MARKETS FOR POWER ENGINEERING The markets for power engineering are influenced by varying regional and economic factors.Consequently,the business growth trends of the respective markets develop mostly independently of one another.In the first quarter of 2024,the marine market remained at a similar level to the previous year.Demand in merchant shipping declined slightly.In this segment,the market for tankers and LNG tankers recorded a positive year-on-year trend,whereas the markets for container ships and bulk cargo carriers continued their decline.The market for cruise ships was particularly affected by inconsistent project awards but generally remained at a stable level.Activity increased in the market for passenger ferries.The special market for government vessels,which is funded by state investments,continued to be active due to the current geopolitical situation.The uncertainty regarding future fuel and emissions regulations persisted in the marine market,but the trend toward new fuel technologies continued unabated.There was reticence again in the market for energy generation in the first quarter of 2024,particularly in Europe.This was due to the fact that policymakers have still not completely finalized the regulations regarding invest-ments.The current focus on the expansion of renewable energy sources was reflected in corresponding potential in the demand for grid balancing facilities.Such facilities are used to meet power requirements if the share of renewables is not sufficient to ensure security of supply.It remains unclear when decarbonized fuels will be available in sufficient volume and at marketable prices.A very positive trend was observed in the demand for power-to-methane plants.In the engines segment,there is a continuously rising demand for flexible dual-fuel and liquid engines.There is also a clear demand on the market for engines that can be converted for use with future fuels such as hydrogen and green ammonia.In connection with the continued use of the existing infrastructure,there is perceptible demand for e-methane,which is produced in power-to-methane plants.In addition to the risks 14 Business Development Interim Group Management Report of a lack of price stability in the markets and bottlenecks in supply chains,the strong competitive and price pressure also continued unabated in the reporting period.Demand for emergency units(emergency gensets)remained at a stable level in the first quarter of 2024.The turbomachinery market remained on the same level year-on-year in the first quarter of 2024.The slight fall in energy prices reduced demand for turbo compressors in oil and gas production.Sales of turbo compressors in the raw materials and processing industry slightly exceeded the previous years level.There was also increased demand for turbomachinery in the new business fields in the area of decarbonization.Demand for steam turbines to generate power in decentralized power stations was below the prior-year comparison period.The after-sales market for engines in the marine and power plant business in the first three months of 2024 was up on the previous years high level.Demand in the after-sales market for turbomachinery in the first quarter of 2024 also exceeded the prior-year period.TRENDS IN THE MARKETS FOR FINANCIAL SERVICES Automotive financial services were in high demand in the first quarter of 2024.The European passenger car market was characterized by positive demand in the reporting period.Sales of financial services products also increased and were up on the equivalent figure for 2023 as a percentage of vehicle deliveries.The positive trend in the financing of used vehicles continued.The sale of after-sales products such as servicing,maintenance and spare parts agreements continued to expand.In Germany,deliveries of new vehicles and the volume of contracts in the financial services business in the first quarter of 2024 were slightly higher year-on-year.New vehicle penetration was also up on the comparative figure for 2023.New contracts for used vehicles were on a level with the previous year.The number of new after-sales contracts increased and,in the reporting period,was above the level seen in the first three months of 2023.Despite a further hike in the key rate of interest,which now stands at 50%,inflation in Trkiye remained at a very high level.To curb inflation,the government further tightened restrictions on lending,which hit the devel-opment of financial services.The continued depreciation of the Turkish lira also did not improve the situation.Vehicle sales in South Africa declined year-on-year in the first quarter of 2024.As a result,the number of financed vehicles purchased also decreased.The decline was due to the continuing subdued economic conditions and high energy and vehicle prices.In the period from January to March 2024,the markets for financial services in the North America region developed positively on the whole,compared with the previous year.In the USA,Canada and Mexico,the number of leasing and financing contracts,new vehicle penetration and new contracts for after-sales products were all up on the prior-year figures.In the South America region,the volume of new vehicle sales slightly decreased.The market for financial services recorded an increase in financing contracts.In Brazil,the number of new contracts rose thanks to the range of attractive financial services offered and increased deliveries.The number of car subscriptions entered into also rose.In Argentina,the level of financing contracts was stable in spite of challenging macroeconomic conditions.The Chinese automotive market witnessed a further rise in demand for electrified and used vehicles in the reporting period.In addition,banks with attractive products are gaining a foothold in the market.This,in turn,also affected demand for automotive financial services.In Japan,demand for automotive financial services slowed in the first quarter of 2024 due to a negative trend in vehicle sales,even though the market benefited from comparatively low interest rates and attractive products.The Japanese central bank also decided to discontinue its loose monetary policy.15 Business Development Interim Group Management Report The financial services business for heavy commercial vehicles was slightly down on the prior-year level in the first quarter of 2024 on account of a decrease in deliveries to customers.The lengthy delivery times for commercial vehicles continued to return to normal as supply chains stabilized.The decision on financing is moving closer to the time of vehicle delivery because customers are counting on falling interest rates.VOLKSWAGEN GROUP DELIVERIES The Volkswagen Group delivered 2,104,348 vehicles to customers worldwide in the first quarter of 2024.This was 3.1%or 63,673 units more than in the same period of the prior year.While passenger car sales were up year-on-year,sales of commercial vehicles were down on the prior-year figure.The chart in this section shows the trend in deliveries worldwide for the individual months compared with the previous year.In the following,we report separately on deliveries in the Passenger Cars Business Area and the Commercial Vehicles Business Area.VOLKSWAGEN GROUP DELIVERIES FROM JANUARY 1 TO MARCH 311 2024 2023%Passenger Cars 2,023,199 1,956,087 3.4 Commercial Vehicles 81,149 84,588 4.1 Total 2,104,348 2,040,675 3.1 1 The figures include the equity-accounted Chinese joint ventures.Prior-year deliveries have been updated to reflect subsequent statistical trends.GLOBAL DELIVERIES BY THE PASSENGER CARS BUSINESS AREA Sales of Volkswagen Group passenger cars and light commercial vehicles worldwide from January to March 2024 increased by 3.4%year-on-year to 2,023,199 units.With the exception of Audi,Bentley and Porsche,all Volks-wagen Group brands delivered more vehicles to customers than in the same period of the previous year.While our sales figures in the Western Europe region came in at the prior-year level,deliveries to customers rose in all other sales regions around the world.Demand for the Volkswagen Groups electrified vehicles was adversely affected by general buyer reluctance in particular:we delivered 136,436 all-electric vehicles to customers worldwide in the first three months of this year.This was 4,587 fewer units or 3.3%less than in the same period of the previous year.Their share of the Groups total deliveries stood at 6.5(6.9)%.Deliveries to customers of our plug-in hybrid models amounted to 71,372( 27.5%)units.As a result,total electrified vehicle deliveries went up by 5.5%;their share of total Group deliveries rose year-on-year to 9.9(9.7)%.The Groups highest-volume all-electric vehicles included the ID.4 and ID.3 from the Volkswagen Passenger Cars brand,the Audi Q4 e-tron and Audi Q8 e-tron,the koda Enyaq iV,the CUPRA Born,the ID.Buzz from Volkswagen Commercial Vehicles and the Porsche Taycan and Taycan Cross Turismo.In an overall global market experiencing noticeable growth,we achieved a passenger car market share of 10.4(10.6)%.The table that follows in this section provides an overview of passenger car and light commercial vehicle deliveries to customers by market in the reporting period.Sales trends in the individual markets are described below.16 Business Development Interim Group Management Report Deliveries in Europe/Other Markets In Western Europe,the Volkswagen Group delivered 759,383 vehicles to customers in the first quarter of this year in an overall market that was at a slightly higher level than in the previous year.This was 0.5%less than in the same period of the prior year.Customer interest in the Volkswagen Groups electrified vehicles was strongest in Western Europe,where we delivered more than 50%of our all-electric models or 72,351 units to customers in the reporting period.Their share of Group deliveries in this region fell to 9.2(11.9)%.The number of all-electric models handed over to customers was down 23.8%year-on-year,reflecting the general market trend and parts supply shortages.However,incoming orders for Volkswagen Group all-electric models developed encouragingly in Western Europe,more than doubling compared with the prior-year period.The Group vehicles with the highest sales volume were the T-Roc,Golf hatchback and Tiguan models from the Volkswagen Passenger Cars brand.Other models that recorded encouraging demand included the Golf Estate and ID.7 from Volkswagen Passenger Cars,the Octavia Combi,Fabia hatchback and Karoq from koda,the SEAT Leon and SEAT Ibiza,the CUPRA Leon and CUPRA Ateca,the Amarok from Volkswagen Commercial Vehicles,the A3 Sportback,A4 Avant,Q8 e-tron and Q2 from Audi,as well as the Porsche Cayenne.The T-Cross,Tiguan and Passat from the Volkswagen Passenger Cars brand,the Scala,Kamiq and Superb Combi from koda,the Audi Q7 and the Porsche Panamera were among the successor models launched on the market during the reporting period.The Volkswagen Groups share of the passenger car market in Western Europe stood at 22.3(23.6)%.In Germany,261,897 vehicles were delivered to Volkswagen Group customers between January and March 2024 in an overall market registering slight growth;this was 0.5%less than the prior-year figure.The Group models with the highest sales volume were the Golf hatchback,T-Roc and Tiguan from the Volkswagen Passenger Cars brand.In addition,the Golf Estate from Volkswagen Passenger Cars,the koda Karoq and koda Fabia hatchback,the SEAT Ibiza,the CUPRA Leon and CUPRA Ateca,the Audi A4 Avant and the Porsche Cayenne,among others,saw encouraging demand.Seven Group models led the Kraftfahrt-Bundesamt(KBA German Federal Motor Transport Authority)registration statistics in their respective segments:the Golf,T-Roc,Tiguan,Passat,Touran,Multivan/Transporter and Porsche 911.The Golf was again the most popular passenger car in Germany in terms of registrations in the first quarter of 2024.In the Central and Eastern Europe region,the number of Volkswagen Group vehicles handed over to customers in the reporting period was up 2.0%year-on-year.The overall market experienced strong growth in the same period.Demand developed encouragingly for a number of models,including kodas Octavia Combi and Octavia saloon.The Volkswagen Groups share of the passenger car market in the Central and Eastern Europe region declined to 17.2(20.7)%.4005006007008009001,0001,100JFMAMJJASONDVOLKSWAGEN GROUP DELIVERIES BY MONTHVehicles in thousands 2024 2023 17 Business Development Interim Group Management Report In Trkiye,the Volkswagen Group delivered 11.4%more vehicles to customers between January and March 2024 than in the prior-year period in a market experiencing very strong growth overall.The T-Roc from Volkswagen Passenger Cars was the most sought-after Group model there.In the South African market,the number of Group models sold decreased by 2.3%,while the overall market experienced a noticeable contraction.The Polo from the Volkswagen Passenger Cars brand was the most sought-after Group model in this region.Deliveries in North America In North America,the number of Volkswagen Group models delivered to customers from January to March 2024 increased by 7.1%year-on-year.The overall market grew noticeably in this period.The share of all-electric vehicles in the Groups total deliveries decreased to 7.2(8.2)%in this region.The Tiguan Allspace,Taos and Atlas from the Volkswagen Passenger Cars brand were the most sought-after Group models in North America.The Audi Q8 and the Porsche Panamera were among the successor models launched on the market during the reporting period.The Groups share of the market in this region amounted to 4.5(4.5)%.In the first quarter of 2024,the Volkswagen Group sold 0.9%more vehicles to customers in the US,a market that is experiencing noticeable growth,than in the same period of the previous year.The Group models to record the greatest increases in absolute terms included the Jetta and Atlas from Volkswagen Passenger Cars and the Audi Q3.In Canada,the number of deliveries to Volkswagen Group customers increased by 26.8%year-on-year in the reporting period.The overall market recorded significant growth during this period.The Group models with the highest volume of demand were the Taos,Tiguan Allspace and the ID.4 from the Volkswagen Passenger Cars brand.In Mexico,where the overall market is seeing significant growth,we delivered 21.2%more vehicles to custom-ers in the first three months of this year than in the prior-year period.Demand developed encouragingly for,among others,the Virtus and Polo from Volkswagen Passenger Cars.Deliveries in South America In the South American market for passenger cars and light commercial vehicles,which was slightly down on the prior-year level,the number of Group models handed over to customers between January and March 2024 increased by 14.4%year-on-year.The Polo,T-Cross and Saveiro from Volkswagen Passenger Cars were the Group models with the highest sales volumes.The Groups share of the market in South America rose to 12.4(10.6)%.In the first three months of 2024,the Volkswagen Group delivered 27.6%more vehicles to customers in the Brazilian market,which recorded significant growth,than in the prior-year period.The development of the sales of the Polo,Virtus and Saveiro models from Volkswagen Passenger Cars was particularly encouraging.In Argentina,the number of Group models sold in the reporting period decreased by 13.9%in comparison with the previous year in an overall market that was contracting sharply.Group models with the highest sales volume were the Taos from Volkswagen Passenger Cars and the Amarok from Volkswagen Commercial Vehicles.Deliveries in the Asia-Pacific Region In the first three months of 2024,the Volkswagen Group increased its sales volume in the Asia-Pacific region by 4.9%.This was approximately in line with the overall market trend.The Groups share of the passenger car market in this region amounted to 9.0(9.0)%.Chinas overall market recorded significant growth in the reporting period compared with the previous year.The Volkswagen Group delivered 7.7%more vehicles to customers there than in the preceding year.The increasing intensity of competition,especially for electrified vehicles,continued to have a negative impact.At 41,033 units,the number of all-electric vehicles delivered to customers in China was 91.2%higher than the weak prior-year figure.Their share of the Groups total deliveries in China rose to 5.9(3.3)%.The Group models with the highest sales volume were the Sagitar,Passat and Lavida from Volkswagen Passenger Cars and the Audi A6.In addition,18 Business Development Interim Group Management Report the Lavida XR,Tiguan Allspace and ID.3 from Volkswagen Passenger Cars and the Q5,A4 saloon and A6 saloon from Audi were among the models that saw an encouraging increase in demand.The Porsche Panamera was among the successor models launched on the market during the reporting period.In the Indian passenger car market,which grew significantly,the Volkswagen Group sold 23.3wer vehicles in the first three months of this year than in the prior-year period.The Virtus and Taigun from the Volkswagen Passenger Cars brand and the Kushaq from koda were the most sought-after Group models there.In Japan,the number of Group models delivered to customers between January and March 2024 increased by 3.8%year-on-year in a significantly declining overall market.The Group models with the highest sales volume were the Golf hatchback and T-Roc from the Volkswagen Passenger Cars brand.PASSENGER CAR DELIVERIES TO CUSTOMERS BY MARKET FROM JANUARY 1 TO MARCH 311 DELIVERIES(UNITS)CHANGE 2024 2023(%)Europe/Other Markets 951,720 947,077 0.5 Western Europe 759,383 762,947 0.5 of which:Germany 261,897 263,309 0.5 France 58,901 62,033 5.0 United Kingdom 125,251 120,902 3.6 Italy 73,951 70,569 4.8 Spain 60,369 59,763 1.0 Central and Eastern Europe 109,866 107,685 2.0 of which:Czech Republic 27,109 28,799 5.9 Russia 1,688 x Poland 36,276 32,297 12.3 Other Markets 82,471 76,445 7.9 of which:Trkiye 37,092 33,305 11.4 South Africa 16,478 16,858 2.3 North America 206,819 193,178 7.1 of which:USA 141,218 139,961 0.9 Canada 24,670 19,458 26.8 Mexico 40,931 33,759 21.2 South America 102,054 89,186 14.4 of which:Brazil 79,505 62,288 27.6 Argentina 12,141 14,099 13.9 Asia-Pacific 762,606 726,646 4.9 of which:China 693,329 643,954 7.7 India 19,327 25,214 23.3 Japan 16,077 15,494 3.8 Worldwide 2,023,199 1,956,087 3.4 Volkswagen Passenger Cars 1,079,689 1,021,537 5.7 koda 220,473 209,553 5.2 SEAT/CUPRA 138,550 125,217 10.6 Volkswagen Commercial Vehicles 104,799 97,189 7.8 Audi 396,912 415,684 4.5 Lamborghini 2,630 2,623 0.3 Bentley 2,506 3,517 28.7 Porsche 77,640 80,767 3.9 1 The figures include the equity-accounted Chinese joint ventures.Prior-year deliveries have been updated to reflect subsequent statistical trends.19 Business Development Interim Group Management Report COMMERCIAL VEHICLE DELIVERIES Between January and March 2024,the Volkswagen Group delivered 4.1wer commercial vehicles to customers worldwide than in the same period of the previous year.We handed over a total of 81,149 commercial vehicles to customers in the first quarter of the year.Trucks accounted for 68,773 units(2.0%)and buses for 5,032(33.9%).Deliveries of the MAN TGE van series to customers saw a noticeable increase compared with the prior-year period,rising to 7,344( 8.6%)vehicles.In the 27 EU states,excluding Malta but including the United Kingdom,Norway and Switzerland(EU27 3),sales from January to March 2024 were down by 4.1%on the same period of the previous year and amounted to a total of 36,597 units,of which 27,879 were trucks and 1,435 were buses.7,283 MAN TGE van series units were delivered to customers.In the first three months of the year,deliveries to customers in Trkiye rose significantly to 1,651 vehicles.Of the vehicles sold,1,541 units were trucks,50 were buses and 60 were MAN TGE vans.In South Africa,the number of Volkswagen Group commercial vehicles delivered to customers amounted to 1,018 units,a noticeable increase compared with the previous year.Of the units sold,876 were trucks and 142 were buses.Sales in North America declined in the first quarter of 2024 to 20,233(14.2%)vehicles,of which 19,247 were trucks and 986 were buses.Deliveries to customers in South America increased to a total of 16,468 vehicles( 14.0%)in the reporting period;14,488 of these were trucks and 1,980 were buses.In Brazil,sales in the first three months of 2024 rose significantly by 19.0%to 13,989 units.Of the units delivered,12,387 were trucks and 1,602 were buses.In the Asia-Pacific region,the Volkswagen Group sold 2,233 vehicles in the reporting period,including 2,061 trucks and 172 buses.Overall,this was 13.8%less than in the previous year.COMMERCIAL VEHICLE DELIVERIES TO CUSTOMERS BY MARKET FROM JANUARY 1 TO MARCH 311 DELIVERIES(UNITS)CHANGE 2024 2023(%)Europe/Other Markets 42,215 43,978 4.0 of which:EU27 3 36,597 38,161 4.1 of which:Germany 9,256 11,678 20.7 Trkiye 1,651 1,391 18.7 South Africa 1,018 958 6.3 North America 20,233 23,575 14.2 of which:USA 14,633 18,778 22.1 Mexico 4,136 3,571 15.8 South America 16,468 14,444 14.0 of which:Brazil 13,989 11,754 19.0 Asia-Pacific 2,233 2,591 13.8 Worldwide 81,149 84,588 4.1 Scania 26,433 22,626 16.8 MAN 23,909 27,266 12.3 Navistar 19,280 22,548 14.5 Volkswagen Truck&Bus 11,527 12,148 5.1 1 Prior-year deliveries have been updated to reflect subsequent statistical trends.20 Business Development Interim Group Management Report DELIVERIES IN THE POWER ENGINEERING SEGMENT Orders in the Power Engineering segment are usually a part of larger investment projects,for which lead times typically range from just under one year to several years,and partial deliveries as construction progresses are common.Accordingly,there is a time lag between incoming orders and sales revenue from the new construction business.In the period from January to March 2024,sales revenue in the Power Engineering segment was largely driven by Engines&Marine Systems and Turbomachinery,which together generated more than three quarters of total sales revenue.VOLKSWAGEN GROUP FINANCIAL SERVICES The activities in the Financial Services Division cover the Volkswagen Groups dealer and customer financing,leasing,banking and insurance activities,fleet management and mobility services.The division comprises the financial services activities of Volkswagen Group Mobility(formerly:Volkswagen Financial Services),Scania,Navistar and Porsche Holding Salzburg and also extends to the contracts concluded by our international joint ventures.The Financial Services Divisions products and services were popular in the period from January to March 2024.The number of new financing,leasing,service and insurance contracts signed worldwide increased by 16.3%to 2.6 million.Since January 1,2024,other types of insurance contracts have also been taken into account;the number of contracts as of December 31,2023 has been adjusted.The ratio of leased and financed vehicles to Group deliveries(penetration rate)in the Financial Services Divisions markets stood at 34.6(34.5)%in the reporting period.The total number of contracts stood at 27.1 million on March 31,2024,3.8low the adjusted figure at the end of the previous year.In Europe/Other Markets,1.8 million new contracts were signed,10.8%more than the comparative prior-year figure.At 19.2(20.1)million,the total number of contracts at the end of the reporting period fell short of the figure for December 31,2023.The customer financing/leasing area was responsible for 7.1(7.1)million of these contracts.The number of new contracts signed in North America in the first quarter of 2024 increased to 356(218)thou-sand.At 4.0(4.1)million,the number of contracts as of March 31,2024 was below the level at the end of the previous year.The customer financing/leasing area recorded 1.6(1.6)million contracts.In the South America region,185(102)thousand new contracts were concluded in the period from January to March of this year.The total number of contracts at the end of the reporting period was unchanged from Decem-ber 31,2023,at 1.4(1.4)million;0.6(0.6)million of these contracts related to the customer financing/leasing area.The number of new contracts signed in the Asia-Pacific region in the first three months of 2024 declined to 190(231)thousand,falling short of the comparative prior-year figure.At the end of March 2024,the total number of contracts stood at 2.5(2.5)million.The customer financing/leasing area was responsible for 1.5(1.5)million of these contracts.21 Business Development Interim Group Management Report SALES TO THE DEALER ORGANIZATION The Volkswagen Groups unit sales to the dealer organization decreased in the reporting period by 2.0%to 2,081,279 units(including the equity-accounted companies in China).This was partly due to the high volumes of unit sales at the end of 2023.Unit sales outside Germany fell by 2.2%to 1,796,403 vehicles.Growth was recorded particularly in China,Brazil and the United Kingdom.In contrast,fewer vehicles were sold especially in the USA.Unit sales in Germany decreased by 1.1%year-on-year.The proportion of the Groups total unit sales attributable to Germany increased to 13.7(13.6)%.PRODUCTION At 2,266,441 vehicles,the Volkswagen Groups production in the first quarter of 2024(including the equity-accounted companies in China)was on a level with the previous year(0.3%).Production in Germany declined by 16.9%to 457,802 vehicles.The proportion of the Groups total production accounted for by Germany decreased to 20.2(24.2)%.INVENTORIES Global inventories of new vehicles at Group companies and in the dealer organization at the end of March 2024 were higher than at year-end 2023 and above the corresponding prior-year figure.EMPLOYEES At 656,134( 0.3%),the number of active employees in the Volkswagen Group at the end of March 2024 was on a level with the figure as of December 31,2023.In addition,12,400 employees were in the passive phase of their partial retirement and 15,655 young people were in vocational traineeships.At the close of the reporting period,the Volkswagen Group had a total of 684,189 employees worldwide,matching the level recorded at the end of 2023.A total of 297,009 people were employed in Germany(0.6%)and a further 387,180 were employed outside Germany( 0.5%).VOLUME DATA OF THE VOLKSWAGEN GROUP FROM JANUARY 1 TO MARCH 311 in thousands 2024 2023%Vehicle sales(units)2,081 2,124 2.0 Production(units)2,266 2,273 0.3 Employees(as of March 31,2024/Dec.31,2023)684.2 684.0 0.0 1 Including the unconsolidated Chinese joint ventures.22 Results of Operations,Financial Position and Net Assets Interim Group Management Report RESULTS OF OPERATIONS Results of operations of the Group The Volkswagen Group generated sales revenue of 75.5(76.2)billion in the first quarter of 2024.The slight decline was mainly the result of lower vehicle sales and adverse mix and exchange rate effects;in contrast,sales revenue performance in the Financial Services Division was positive.The Volkswagen Group generated 79.3 (81.5)%of its sales revenue outside Germany.Gross profit decreased by 1.6 billion to 13.5 billion.The gross margin stood at 18.0(19.9)%.The Volkswagen Groups operating result amounted to 4.6(5.7)billion in the first three months of 2024.The operating return on sales was 6.1(7.5)%.The lower result was due mainly to an unfavorable trend related to unit sales and the mix,higher upfront expenditures for new products,and a rise in interest expenses in the Financial Services Division.The fair value measurement of derivatives to which hedge accounting is not applied,which resulted in a loss of 0.4(1.3)billion,weighed less strongly on the operating result than in the prior-year period.The financial result was down on the previous year,at 0.6(0.7)billion.The decline in the share of the result of equity-accounted investments was set against positive effects in the interest result and the other financial result.The improvement in the other financial result was attributable in particular to the positive performance of the net income from securities and funds in the first quarter of 2024.The Volkswagen Groups earnings before tax decreased by 1.3 billion to 5.2 billion in the first quarter of 2024.At 3.7 billion,earnings after tax declined by 1.0 billion on the previous year.Results of operations in the Automotive Division The Automotive Divisions sales revenue was down 4.3%to 60.7 billion in the period from January to March 2024.The decline was mainly the result of lower vehicle sales as well as negative mix and exchange rate effects.Sales revenue in the Passenger Cars Business Area decreased noticeably,while it was up slightly in the Commercial Vehicles Business Area and noticeably higher in the Power Engineering Business Area.As our Chinese joint ventures are accounted for using the equity method,the Groups business performance in the Chinese passenger car market is essentially reflected in the Groups sales revenue only through deliveries of vehicles and vehicle parts.Cost of sales increased between January and March 2024,as did the ratio of cost of sales to sales revenue.This was due to a strong rise in research and development costs recognized in profit or loss.The research and development ratio(R&D ratio),which is defined as total research and development costs as a share of the Automotive Divisions sales revenue,amounted to 9.9(8.0)%in the first quarter of 2024,up on the same period a year earlier.Results of Operations,Financial Position and Net Assets 23 Results of Operations,Financial Position and Net Assets Interim Group Management Report In the first three months of 2024,there was a year-on-year increase in distribution expenses as well as in administrative expenses;their respective share of sales revenue also went up.The other operating result stood at 0.3(1.3)billion.It was weighed down by adverse effects from the fair value measurement of derivatives to which hedge accounting is not applied,although their impact was less severe than in the prior-year period.Exchange rate movements had a favorable impact.In the period from January to March 2024,the Automotive Divisions operating result amounted to 3.7 billion,down 0.9 billion on the previous year;this was attributable to an unfavorable trend related to unit sales and the mix and to higher upfront expenditures for new products.Measurement of derivatives to which hedge accounting is not applied had a less adverse effect than in the prior-year period.The operating return on sales stood at 6.1(7.2)%.Our operating result largely benefits from the business performance of our equity-accounted Chinese joint ventures only through deliveries of vehicles and vehicle parts and through license income,as these joint ventures are included in the financial result.RESULTS OF OPERATIONS IN THE PASSENGER CARS,COMMERCIAL VEHICLES AND POWER ENGINEERING BUSINESS AREAS FROM JANUARY 1 TO MARCH 31 million 2024 2023 Passenger Cars Sales revenue 48,276 51,623 Operating result 2,574 3,611 Operating return on sales(%)5.3 7.0 Commercial Vehicles Sales revenue 11,477 10,938 Operating result 1,038 872 Operating return on sales(%)9.0 8.0 Power Engineering Sales revenue 971 901 Operating result 96 100 Operating return on sales(%)9.8 11.1 01,5003,0004,5006,0007,5009,000Q1Q2Q3Q4OPERATING RETURN BY QUARTERVolkswagen Group in million20242023 24 Results of Operations,Financial Position and Net Assets Interim Group Management Report Results of operations in the Financial Services Division In the period from January to March 2024,the Financial Services Divisions sales revenue amounted to 14.7 billion,an increase of 15.7%year-on-year.Compared with the previous year,cost of sales increased faster than sales revenue,driven in particular by a very strong rise in interest expenses and higher depreciation of the residual values of leased vehicles.As a result,gross profit went down by 0.2 billion to 2.0 billion.The Financial Services Divisions operating result of 0.9(1.2)billion was down on the first quarter of 2023.The decline was mainly the result of higher interest expenses.The operating return on sales decreased to 6.0(9.1)%.FINANCIAL POSITION Financial position of the Group In the period from January to March 2024,the Volkswagen Groups gross cash flow decreased by 1.7 billion to 10.5 billion year-on-year,driven among other things by earnings-related factors.The change in working capital amounted to 8.7(6.2)billion and was primarily attributable to a higher increase in lease assets and inventories as well as a smaller rise in liabilities and other provisions compared to the prior year.A smaller rise in receivables had an offsetting effect.Cash flows from operating activities went down by 4.2 billion to 1.8 billion in the first quarter of 2024.The Volkswagen Groups investing activities attributable to operating activities grew by 0.6 billion to 6.0 billion in the reporting period,mainly as a result of higher investments in property,plant and equipment,investment property and intangible assets,excluding capitalized development costs(capex)and additions to capitalized development costs.The Volkswagen Groups financing activities generated a cash inflow of 12.0 billion.In the prior-year period,there had been a cash outflow of 3.9 billion.Financing activities primarily include the issuance and redemption of bonds as well as changes in other financial liabilities.At the end of March 2024,the Volkswagen Group reported cash and cash equivalents of 51.2(36.9)billion in its cash flow statement.On March 31,2024,the Volkswagen Groups net liquidity stood at 153.0 billion,compared with 147.4 bil-lion at the end of 2023.Financial position of the Automotive Division In the first quarter of 2024,the Automotive Division recorded a gross cash flow of 7.1 billion,down 2.3 billion on the prior-year figure for reasons such as lower earnings and higher income tax payments.The non-cash measurement effects in connection with hedging transactions,which are included in earnings,must be eliminated from the cash flow statement.The change in working capital amounted to 4.6(1.9)billion.The change compared to the prior year was mainly attributable to higher growth in inventories and receivables and a smaller increase in other provisions.Consequently,cash flows from operating activities decreased by 5.0 billion to 2.5 billion.In the period from January to March 2024,investing activities attributable to operating activities rose to 5.6(5.3)billion.Within this figure,investments in property,plant and equipment,investment property and intangible assets,excluding capitalized development costs(capex)increased by 0.3 billion to 2.7 billion.The capex ratio was 4.5(3.9)%.A considerable portion of capex was allocated primarily to our production facilities and to models launched or to be launched this year and next,the electrification and digitalization of our products,technologies of the future,and enhancements of our modular and all-electric toolkits and platforms.Additions to capitalized development costs were up 0.3 billion to 2.8 billion in the first three months of 2024.The auto-motive investment ratio,which combines the R&D and capex ratios,amounted to 14.4(11.9)%in the reporting period.The“Acquisition and disposal of equity investments”item amounted to 0.2(0.4)billion;it included primarily strategic investments in a variety of companies.25 Results of Operations,Financial Position and Net Assets Interim Group Management Report The Automotive Divisions net cash flow declined by 5.3 billion to 3.0 billion.The Automotive Divisions financing activities led to a cash inflow of 1.6 billion in the reporting period.They primarily include the issuance and redemption of bonds and changes in other financial liabilities.In the previous year,there had been a cash outflow of 10.1 billion,which had also included the payment of a special dividend to the shareholders of Volkswagen AG in connection with the IPO of Porsche AG.At the end of the first quarter of 2024,the Automotive Division reported a solid net liquidity of 37.2 billion,compared with 40.3 billion at the end of December 2023.Financial position of the Financial Services Division In the first three months of 2024,the Financial Services Division recorded gross cash flow of 3.4(2.7)billion.The change in working capital amounted to 4.1(4.3)billion.A smaller increase in receivables and a reduction in inventories were set against a larger rise in lease assets and a smaller expansion of liabilities;in combination,this led to a decrease in funds tied up in working capital compared to the previous year.As a result,cash flows from operating activities amounted to 0.8(1.6)billion.As a result of strategic investments,investing activities attributable to operating activities grew to 0.4(0.0)billion.The Financial Services Divisions financing activities generated a cash inflow of 10.4(6.2)billion in the first quarter of 2024.This figure relates primarily to the issuance and redemption of bonds and to other financial liabilities.At the end of March 2024,the Financial Services Divisions negative net liquidity,which is common in the industry,was 190.2 billion as against 187.7 billion on December 31,2023.FINANCIAL POSITION IN THE PASSENGER CARS,COMMERCIAL VEHICLES AND POWER ENGINEERING BUSINESS AREAS FROM JANUARY 1 TO MARCH 31 million 2024 2023 Passenger Cars Gross cash flow 5,577 8,101 Change in working capital 3,991 1,163 Cash flows from operating activities 1,586 6,938 Cash flows from investing activities attributable to operating activities 5,085 5,332 Net cash flow 3,499 1,606 Commercial Vehicles Gross cash flow 1,397 1,186 Change in working capital 573 549 Cash flows from operating activities 824 638 Cash flows from investing activities attributable to operating activities 440 22 Net cash flow 383 660 Power Engineering Gross cash flow 151 156 Change in working capital 32 156 Cash flows from operating activities 119 0 Cash flows from investing activities attributable to operating activities 30 22 Net cash flow 89 22 26 Results of Operations,Financial Position and Net Assets Interim Group Management Report NET ASSETS Consolidated balance sheet structure At the end of the first quarter of 2024,the Volkswagen Group had total assets of 622.2 billion,3.6%more than at the end of 2023.Equity stood at 194.5 billion,4.6 billion higher than at the end of 2023,primarily for earnings-related reasons.The equity ratio was 31.3(31.6)%.Automotive Division balance sheet structure The Automotive Divisions intangible assets were up slightly compared with the end of 2023,driven in particular by additions and a rise in capitalized development costs.Property,plant and equipment was almost unchanged from the figure at December 31,2023.There was a slight rise in equity-accounted investments.Total non-current assets amounted to 188.3(186.0)billion.Current assets stood at 127.9(120.2)billion on March 31,2024,up from the figure at the end of 2023.Inven-tories expanded significantly.Current other receivables and financial assets went up,buoyed primarily by the rise in trade receivables.Cash and cash equivalents were down by 2.0 billion to 26.7 billion.At 150.0 billion,the Automotive Divisions equity at the end of the first quarter of 2024 was 2.5%higher than at the end of 2023.The main contributing factors were earnings performance,lower actuarial losses from the remeasurement of pension plans because of the change in the discount rate,and beneficial effects arising from currency translation and from derivatives measured through other comprehensive income.Non-controlling interests,which increased slightly,were mostly attributable to the non-controlling interest shareholders of the Porsche AG Group and of the TRATON Group.The equity ratio was 47.4(47.8)%.Non-current liabilities were up slightly on the previous year,amounting to 88.3(86.9)billion at the end of the reporting period.Non-current financial liabilities grew,while pension provisions decreased slightly,driven primarily by actuarial remeasurement following a change in the discount rate.Current liabilities rose noticeably from the end of 2023,to 77.9(73.1)billion at the end of the first three months of 2024.Current financial liabilities climbed to 9.3(8.6)billion.The figures for the Automotive Division also contain the elimination of intragroup transactions between the Automotive and Financial Services divisions.As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division,a negative amount was disclosed in both periods.Trade payables went up,and current other liabilities also expanded.At the end of the reporting period,the Automotive Division had total assets of 316.1 billion,3.2%more than at the end of 2023.27 Results of Operations,Financial Position and Net Assets Interim Group Management Report Financial Services Division balance sheet structure On March 31,2024,the Financial Services Divisions total assets were 306.1 billion,4.1%more than at the end of 2023.Total non-current assets grew to 177.8(174.7)billion.The property,plant and equipment included in this item was unchanged from the end of 2023.Lease assets and non-current financial services receivables were higher than in the prior-year period.Current assets climbed by 7.4%to 128.2 billion.The Financial Services Divisions cash and cash equivalents included in this item amounted to 24.5(14.8)billion,up by around two thirds compared to the previous balance sheet date.At the end of the first quarter,the Financial Services Division accounted for around 49.2(49.0)%of the Volks-wagen Groups assets.Equity in the Financial Services Division stood at 44.5 billion at the end of March 2024,2.1%more than at the end of the previous year.The equity ratio was 14.5(14.8)%.At 119.1(117.7)billion,the Financial Services Divisions non-current liabilities were approximately on the level recorded at the end of 2023.The non-current financial liabilities included in this item increased slightly.Current liabilities rose,driven above all by noticeably higher current financial liabilities.Deposits from the direct banking business amounted to 49.2 billion on March 31,2024,compared with 38.8 billion at the end of 2023.BALANCE SHEET STRUCTURE OF THE PASSENGER CARS,COMMERCIAL VEHICLES AND POWER ENGINEERING BUSINESS AREAS million Mar.31,2024 Dec.31,2023 Passenger Cars Non-current assets 147,132 149,881 Current assets 102,072 100,013 Total assets 249,203 249,894 Equity 130,797 127,684 Non-current liabilities 64,616 69,259 Current liabilities 53,790 52,952 Commercial Vehicles Non-current assets 39,558 34,530 Current assets 21,865 16,237 Total assets 61,423 50,767 Equity 16,430 15,918 Non-current liabilities 23,157 17,077 Current liabilities 21,836 17,772 Power Engineering Non-current assets 1,595 1,631 Current assets 3,923 3,955 Total assets 5,518 5,585 Equity 2,749 2,703 Non-current liabilities 496 532 Current liabilities 2,273 2,350 28 Results of Operations,Financial Position and Net Assets Interim Group Management Report REPORT ON EXPECTED DEVELOPMENTS,RISKS AND OPPORTUNITIES The forecast for our core performance indicators remains unchanged.The outlook for fiscal year 2024 can be found on page 29.Litigation Diesel issue 1.Product-related lawsuits worldwide(excluding the USA/Canada)In April 2024,the Superior Court of Justice rejected the appeal filed by the plaintiff against the June 2023 appellate court decision,in the second consumer protection class action in Brazil,which pertains to roughly 67 thousand Amarok vehicles.The plaintiff is now permitted to file an“interlocutory appeal”against this decision with the Superior Court of Justice.2.Proceedings in the USA/Canada In March 2024,Volkswagen Group of America Finance,LLC(VWGoAF)submitted to the United States Securities and Exchange Commission(SEC)an executed consent to enter into a final judgment,without admitting or denying the allegations of the SECs amended complaint filed in September 2020,which requires,among other things,payment in the amount of about$49 million.Subsequently,the SEC and VWGoAF filed a motion for entry of final judgment as to VWGoAF requesting the U.S.District Court for the Northern District of California to enter final judgment that would fully resolve the SECs claims against VWGoAF.In April 2024,the court granted the motion and entered final judgment as to VWGoAF,and issued an order dismissing with prejudice all claims against Volkswagen AG and a former Chair of the Board of Management of Volkswagen AG.Accordingly the SECs claims against all defendants in this lawsuit have been fully resolved.In line with IAS 37.92,no further statements have been made concerning estimates of financial impact or regarding uncertainty as to the amount or maturity of provisions and contingent liabilities in relation to additional important legal cases.This is so as to not compromise the results of the proceedings or the interests of the Company.Beyond these events,there were no significant changes in the reporting period compared with the disclosure on the Volkswagen Groups expected development in fiscal year 2024 contained in the combined management report of the 2023 Annual Report in the sections“Report on Expected Developments”and“Report on Risks and Opportunities”,including in section“Legal Risks”.29 Outlook for 2024 Interim Group Management Report Our planning is based on the assumption that global economic output will grow overall in 2024 at a similar pace as in 2023.The persistently high,albeit declining,inflation in major economic regions and the resulting restrictive monetary policy measures taken by central banks are expected to dampen consumer demand.However,we anticipate a gradual reduction in the key interest rates by Western central banks during the current year,which should have a bolstering effect on overall demand.We continue to believe that risks will arise from protectionist tendencies,turbulence in the financial markets and structural deficits in individual countries.In addition,continuing geopolitical tensions and conflicts are weighing on growth prospects;risks are associated in particular with the Russia-Ukraine conflict and the confrontations in the Middle East.We assume that the advanced economies,on average,will show positive momentum on a level with the previous year,while economic growth in the emerging markets will slow slightly.The trend in the automotive industry closely follows global economic developments.We assume that competition in the international automotive markets will intensify further.Crisis-related disruption to the global supply chain and the resulting impact on vehicle availability may weigh on the volume of new registrations.Uncertainty may also arise from shortages of intermediates and commodities.These may be further exacerbated by the consequences of the Russia-Ukraine conflict and the confrontations in the Middle East and may,in particular,lead to rising prices for materials and a declining availability of energy.We predict that trends in the markets for passenger cars in the individual regions will be mixed but predominantly positive in 2024.Overall,the global volume of new car sales is expected to be slightly higher than in the previous year.For 2024,we anticipate that the volume of new passenger car registrations in Western Europe will be slightly higher than that recorded in the reporting year.In the German passenger car market,we expect the volume of new registrations in 2024 to also be slightly up on the prior-year level.Sales of passenger cars in 2024 are expected to significantly exceed the prior-year figures overall in markets in Central and Eastern Europe subject to the further development of the Russia-Ukraine conflict.The volume of sales in the markets for passenger cars and light commercial vehicles(up to 6.35 tonnes)in North America in 2024 is forecast to be slightly higher than the level seen the previous year.We also anticipate a slight increase in new registrations in the South American markets in 2024 compared with the previous year.Likewise,the passenger car markets in the Asia-Pacific region are expected to be slightly up on the prior-year level in 2024.Trends in the markets for light commercial vehicles in the individual regions will be mixed;on the whole,we expect the sales volume for 2024 to be slightly above the previous years figure.Outlook for 2024 30 Outlook for 2024 Interim Group Management Report For 2024,we expect to see a slight downward trend in new registrations for mid-sized and heavy trucks with a gross weight of more than six tonnes compared with the previous year in the markets that are relevant for the Volkswagen Group,with variations from region to region.A noticeable year-on-year increase in demand is anticipated for 2024 in the bus markets relevant for the Volkswagen Group,whereby this will vary depending on the region.We assume that automotive financial services will prove highly important to global vehicle sales in 2024.In a challenging market environment,we anticipate that deliveries to customers by the Volkswagen Group in 2024 will increase by up to 3%compared to the previous year.Challenges will arise in particular from the economic situation,the increasing intensity of competition,volatile commodity,energy and foreign exchange markets,and more stringent emissions-related requirements.We expect the sales revenue of the Volkswagen Group and the Passenger Cars Business Area to exceed the previous years figure by up to 5%in 2024.The operating return on sales for the Volkswagen Group and the Passenger Cars Business Area is likely to be between 7.0%and 7.5%.For the Commercial Vehicles Business Area,we anticipate an operating return on sales of 8.5%to 9.5%,also amid a year-on-year increase of up to 5%in sales revenue.In the Power Engineering Business Area,we expect sales revenue to be up to 2ove the prior-year figure and operating profit to be in the low three-digit-million euro range.For the Financial Services Division,we forecast an increase of 37%in sales revenue compared with the prior year and an operating result in the range of 4.0 billion.In the Automotive Division,we are assuming an investment ratio of between 13.5%and 14.5%in 2024.We expect net cash flow in 2024 to be between 4.5 billion and 6.5 billion.This will include in particular investments for the future and cash outflows from mergers and acquisitions for the battery business field,which are a vital pillar of the Volkswagen Groups transformation.Net liquidity in the Automotive Division in 2024 is expected to be between 39 billion and 41 billion.Our goal remains unchanged,namely,to continue with our robust financing and liquidity policy.This report contains forward-looking statements on the business development of the Volkswagen Group.These statements are based on assumptions relating to the development of the economic,political and legal environment in individual countries,economic regions and markets,and in particular for the automotive industry,which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press.The estimates given entail a degree of risk,and actual developments may differ from those forecast.Any changes in significant parameters relating to our key sales markets,or any significant shifts in exchange rates,energy and other commodities or the supply of parts relevant to the Volkswagen Group will have a corresponding effect on the development of our business.In addition,there may also be departures from our expected business development if the assessments of the factors influencing sustainable value enhancement and of risks and opportunities presented in the 2023 annual report develop in a way other than we are currently expecting,or if additional risks and opportunities or other factors emerge that affect the development of our business.31 Brands and Business Fields SALES REVENUE AND OPERATING RESULT BY BRAND AND BUSINESS FIELD The Volkswagen Group generated sales revenue of 75.5(76.2)billion in the period from January to March 2024.The operating result stood at 4.6(5.7)billion.The Core brand group sold 1.2(1.2)million vehicles in the reporting period.Sales revenue amounted to 32.8(33.2)billion.The operating result increased to 2.1(1.7)billion.Unit sales by the Volkswagen Passenger Cars brand fell by 5.0%to 695 thousand vehicles in the first three months of 2024.Demand rose for the Polo and the Golf.The new Passat and the new Tiguan were successfully launched on the market.Sales revenue decreased by 5.9%to 19.3 billion.The operating result stood at 770(608)million.Mix and exchange rate effects had a positive impact,and increased fixed costs a negative impact on this figure.The koda brand sold 268 thousand vehicles in the reporting period,2.5%less than in the previous year.Its best-selling model was once again the Octavia,which recorded growth.Sales revenue amounted to 6.6(6.8)bil-lion.The operating result fell to 535(542)million.Higher product and fixed costs were set against positive mix effects.REPORTING STRUCTURE OF THE VOLKSWAGEN GROUP Brands and Business Fields 32 Brands and Business Fields KEY FIGURES BY BRAND GROUP AND BUSINESS FIELD FROM JANUARY 1 TO MARCH 31 VEHICLE SALES SALES REVENUE OPERATING RESULT Thousand vehicles/million 2024 2023 2024 2023 2024 2023 Core brand group 1,192 1,193 32,773 33,163 2,110 1,742 Progressive brand group 243 323 13,725 16,883 466 1,816 Sport Luxury brand group1 71 85 8,144 9,333 1,207 1,727 CARIAD 179 168 552 429 Battery 0 0 79 72 TRATON Commercial Vehicles 81 85 11,477 10,938 1,037 875 MAN Energy Solutions 971 901 96 101 Equity-accounted companies in China2 649 609 Volkswagen Group Mobility 13,780 11,980 786 985 Other3 155 171 5,589 7,168 483 997 Volkswagen Group 2,081 2,124 75,461 76,198 4,588 5,747 1 Including Porsche Financial Services:sales revenue 9,011(10,097)million,operating result 1,282(1,840)million.2 The sales revenue and operating result of the equity-accounted companies in China are not included in the consolidated figures;the share of the operating result generated by these companies amounted to 429(625)million.3 In the operating result,mainly intragroup items recognized in profit or loss,in particular from the elimination of intercompany profits;the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation,as well as companies not allocated to the brands.KEY FIGURES FOR THE CORE BRAND GROUP FROM JANUARY 1 TO MARCH 31 VEHICLE SALES SALES REVENUE OPERATING RESULT Thousand vehicles/million 2024 2023 2024 2023 2024 2023 Volkswagen Passenger Cars 695 731 19,264 20,464 770 608 koda 268 275 6,574 6,794 535 542 SEAT/CUPRA 164 155 3,803 3,562 226 144 Volkswagen Commercial Vehicles 122 104 4,170 3,599 400 171 Tech.Components 5,418 6,028 208 237 Consolidation 57 72 6,456 7,284 29 39 Core brand group 1,192 1,193 32,773 33,163 2,110 1,742 KEY FIGURES BY DIVISION FROM JANUARY 1 TO MARCH 31 VEHICLE SALES SALES REVENUE OPERATING RESULT Thousand vehicles/million 2024 2023 2024 2023 2024 2023 Passenger Cars Business Area 2,000 2,039 48,276 51,623 2,574 3,611 Commercial Vehicles Business Area 81 85 11,477 10,938 1,038 872 Power Engineering Business Area 971 901 96 100 Automotive Division1 2,081 2,124 60,725 63,463 3,707 4,583 Financial Services Division 14,736 12,736 881 1,164 Volkswagen Group 2,081 2,124 75,461 76,198 4,588 5,747 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.33 Brands and Business Fields Amid a challenging environment,unit sales at SEAT/CUPRA increased to 164 thousand vehicles in the period from January to March of this year,6.2%more than a year earlier.The figure includes the A1 manufactured for Audi.The CUPRA Formentor and the Leon family were particularly popular.At 3.8 billion,sales revenue was up 6.8%year-on-year.Buoyed in particular by higher volumes and by the success of CUPRA,the operating result rose by 57.0%compared with the previous year to 226 million.Unit sales by Volkswagen Commercial Vehicles rose to 122(104)thousand vehicles globally in the first quarter of 2024,with the Multivan/Transporter and Amarok models making a particular contribution to the increase.Consequently,sales revenue improved to 4.2(3.6)billion.The operating result improved to 400(171)million.In addition to the higher volume,price effects had a particularly positive impact.In the first three months of this year,Tech.Components generated sales revenue of 5.4(6.0)billion.At 208(237)million,the operating result was lower than in the previous year,due mainly to negative commodity price effects in product costs and to lower revenues from recyclable materials.Unit sales at the Progressive brand group(Audi,Bentley,Lamborghini,Ducati)came to 243(323)thousand vehicles globally in the reporting period.The Audi A3 and Q3 recorded growth.A further 140(128)thousand Audi vehicles were sold by the Chinese joint ventures FAW-Volkswagen and SAIC VOLKSWAGEN,with unit sales of the A6 increasing in particular.Sales revenue amounted to 13.7(16.9)billion.The operating result fell to 0.5(1.8)billion due to volume and mix effects.Ducati sold 14,398(18,498)motorcycles in the first three months of this year.The Sport Luxury brand group(Porsche Automotive)sold 71(85)thousand vehicles globally in the reporting period.The Macan and Cayenne models were particularly popular.Sales revenue decreased to 8.1(9.3)billion and the operating result contracted to 1.2(1.7)billion.The lower volumes,stemming from two model series start-ups and customs-related delays in the delivery of several models,along with the development of digitalization and the product portfolio weighed on earnings.CARIAD pools the Volkswagen Groups software expertise.The business model comprises the development and operation of standardized software platforms for current and future vehicle models.Sales revenue rose to 179(168)million in the period from January to March 2024,due mainly to a rise in license fees thanks to a higher volume of vehicles fitted with CARIAD software.Upfront development expenditure resulted in an operating loss of 0.6(0.4)billion.The Battery business field brings together the Groups global battery activities,which relate to the future manufacture of battery cells and other activities along the battery value chain.Due to the effect of fixed costs incurred during the establishment of the business,the operating result in the Battery business field in the reporting period amounted to 79(72)million.At 81(85)thousand vehicles,unit sales by TRATON Commercial Vehicles(Scania,MAN,Navistar,Volkswagen Truck&Bus)fell short of the prior-year figure.Nevertheless,sales revenue was up by 4.9%to 11.5 billion.The operating result improved to 1.0(0.9)billion.The increase is mainly attributable to a favorable product mix and improved price positioning.MAN Energy Solutions generated sales revenue of 1.0(0.9)billion in the period from January to March 2024.The operating result amounted to 96(101)million.The number of new financing,leasing,service and insurance contracts signed with Volkswagen Group Mobility(formerly Volkswagen Financial Services)in the reporting period stood at 2.4 million( 20.1%).Since January 1,2024,other types of insurance contracts have also been taken into account;the number of contracts as of December 31,2023 has been adjusted.With credit eligibility criteria remaining unchanged,the penetration rate,expressed as the ratio of leased or financed vehicles to relevant Group delivery volumes,stood at 34.5(34.4)%.At 25.3(25.8)million,the total number of contracts at the end of March 2024 was almost as high as the figure for December 31,2023.The number of contracts in the customer financing/leasing area amounted to 10.1(10.2)mil-lion,and in the service/insurance area to 15.2(15.6)million.As of March 31 of this year,Volkswagen Bank managed 1.8(1.8)million deposit accounts.The operating result contracted to 0.8(1.0)billion.The decline was mainly the result of higher interest expenses.34 Brands and Business Fields UNIT SALES AND SALES REVENUE BY MARKET The Volkswagen Group sold 1.0 million vehicles in the Europe/Other Markets region in the first three months of this year,5.2%less than in the previous year.Sales revenue rose to 47.5(45.7)billion,due mainly to improved price positioning and higher sales revenue in the Financial Service Division.The Volkswagen Groups unit sales in the North American markets decreased by 9.9%to 0.2 thousand vehicles in the reporting period.Sales revenue fell to 13.9(15.8)billion due to lower volumes.Unit sales in South America rose year-on-year to 120(101)thousand vehicles in the period from January to March 2024.As a result,the operating result improved to 4.1(3.4)billion.In the Asia-Pacific region,the unit sales of the Volkswagen Group including those of the equity-accounted companies in China increased by 2.3%to 0.8 million vehicles in the reporting period.Sales revenue amounted to 10.2(11.6)billion.This figure does not include sales revenue from our equity-accounted companies in China.The decline was due to the fall in sales units,excluding the Chinese joint ventures,and negative exchange rate effects.Hedging transactions relating to the Volkswagen Groups sales revenue in foreign currency made a negative contribution of 0.1(0.4)billion in the first quarter of 2024.KEY FIGURES BY MARKET FROM JANUARY 1 TO MARCH 31 VEHICLE SALES SALES REVENUE Thousand vehicles/million 2024 2023 2024 2023 Europe/Other Markets 995 1,050 47,489 45,729 North America 214 238 13,854 15,817 South America 120 101 4,067 3,413 Asia-Pacific1 752 735 10,151 11,618 Hedges on sales revenue 99 379 Volkswagen Group1 2,081 2,124 75,461 76,198 1 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market.35 Interim Consolidated Financial Statements(Condensed)Income Statement Interim Consolidated Financial Statements(Condensed)Income Statement for the Period January 1 to March 31 VOLKSWAGEN GROUP DIVISIONS AUTOMOTIVE FINANCIAL SERVICES million 2024 2023 2024 2023 2024 2023 Sales revenue 75,461 76,198 60,725 63,463 14,736 12,736 Cost of sales 61,915 61,005 49,160 50,434 12,755 10,571 Gross result 13,546 15,193 11,565 13,029 1,981 2,165 Distribution expenses 5,103 4,836 4,830 4,524 273 311 Administrative expenses 3,358 3,241 2,683 2,594 675 647 Other operating result 497 1,370 345 1,328 152 42 Operating result 4,588 5,747 3,707 4,583 881 1,164 Share of the result of equity-accounted investments 259 535 310 542 51 7 Interest result and other financial result 334 171 350 221 16 50 Financial result 593 706 659 762 67 57 Earnings before tax 5,181 6,453 4,367 5,345 815 1,107 Income tax expense 1,471 1,723 1,281 1,404 190 319 Earnings after tax 3,710 4,730 3,085 3,941 624 788 of which attributable to Non-controlling interests 281 382 257 350 24 32 Volkswagen AG hybrid capital investors 163 138 163 138 Volkswagen AG shareholders 3,266 4,209 2,666 3,453 600 756 Basic/diluted earnings per ordin
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-Q(Mark One)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31,2024ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _ to _Commission file number 001-40653Duolingo,Inc.(Exact name of registrant as specified in its charter)Delaware45-3055872(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)5900 Penn AvenuePittsburgh,Pennsylvania 15206(412)567-6602(Address,Including Zip Code,and Telephone Number,IncludingArea Code,of Registrants Principal Executive Offices)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredClass A common stock,$0.0001 per shareDUOL The Nasdaq Stock Market LLCIndicate by check mark whether the registrant:(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant wasrequired to file such reports);and(2)has been subject to such filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or forsuch shorter period that the registrant was required to submit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer”,“smaller reporting company”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)of theExchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Act).Yes No As of May 7,2024,36,989,041 shares of the registrants Class A common stock were outstanding,and 6,133,077 shares of the registrants Class B common stock were outstanding.Table of Contents PageSpecial Note Regarding Forward-Looking Statements2Special Note Regarding Key Operating Metrics4Risk Factors Summary4Part I Financial Information6Item 1.Financial Statements(Unaudited)6Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations23Item 3.Quantitative and Qualitative Disclosures About Market Risk35Item 4.Controls and Procedures36Part II Other Information37Item 1.Legal Proceedings37Item 1A.Risk Factors37Item 2.Unregistered Sales of Equity Securities and Use of Proceeds80Item 3.Defaults Upon Senior Securities80Item 4.Mine Safety Disclosures80Item 5.Other Information80Item 6.Exhibits82Signatures831Special Note Regarding Forward-Looking StatementsThis Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.We intend suchforward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933,asamended(the“Securities Act”)and Section 21E of the Securities Exchange Act of 1934,as amended(the“Exchange Act”).All statements other than statements ofhistorical facts contained in this Quarterly Report on Form 10-Q,including without limitation,statements regarding our business model and strategic plans,includingthe introduction of new brands or products,and our implementation thereof;statements regarding our expectations,beliefs,plans,objectives,prospects,assumptions,future events or expected performance,including our ability to compete in our industry;the sufficiency of our cash,cash equivalents and investments;and the plans and objectives of management for future operations and capital expenditures are forward-looking statements.Without limiting the generality of the foregoing,you can identify forward-looking statements because they contain words such as“may,”“will,”“shall,”“should,”“expects,”“plans,”“anticipates,”“could,”“intends,”“target,”“projects,”“contemplates,”“believes,”“estimates,”“predicts,”“potential,”“goal,”“objective,”“seeks,”or“continue”or the negative of these words or other similar terms or expressions that concern our expectations,strategy,plans,or intentions.Such forward-lookingstatements are neither promises nor guarantees,but involve a number of known and unknown risks,uncertainties and assumptions that may cause our actualresults,performance or achievements to differ materially from those expressed or implied in the forward-looking statements due to various factors,including,but notlimited to:our ability to retain and grow our users and sustain their engagement with our products;competition in the online language learning industry;our limited operating history;our ability to maintain profitability;our ability to manage our growth and operate at such scale;the success of our investments;our reliance on third-party platforms to store and distribute our products and collect revenue;our reliance on third-party hosting and cloud computing providers;our ability to compete for advertisements;acceptance by educational organizations of technology-based education;changes in our business and macroeconomic conditions;andthose identified in Part I,Item 2.“Managements Discussion and Analysis of Financial Condition and Results of Operations and Part II,Item 1A.“RiskFactors”in this Quarterly Report on Form 10-Q,and in Part II,Item 7.“Managements Discussion and Analysis of Financial Condition and Results ofOperations”in our Annual Report on Form 10-K for the fiscal year ended December 31,2023(the“Annual Report on Form 10-K”).We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.You should not rely upon forward-looking statements as predictions of future events.We have based the forward-looking statements contained in this QuarterlyReport on Form 10-Q primarily on our current2expectations,estimates,forecasts,and projections about future events and trends that we believe may affect our business,financial condition,results of operationsand prospects.These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q and,although we believe that wehave a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q,such information may be limited or incomplete,andour statements should not be read to indicate that we have conducted an exhaustive inquiry into,or review of,all potentially available relevant information.Wecannot guarantee that the future results,levels of activity,performance,or events and circumstances reflected in the forward-looking statements will be achieved oroccur at all.Moreover,we operate in a very competitive and rapidly changing environment.New risks and uncertainties emerge from time to time,and it is notpossible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q.The results,events,and circumstances reflected in the forward-looking statements may not be achieved or occur,and actual results,events,or circumstances coulddiffer materially from those described in the forward-looking statements.You should not place undue reliance on our forward-looking statements.The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made.While we mayelect to update such forward-looking statements at some point in the future,we disclaim any obligation to do so,even if subsequent events cause our views tochange.You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q completely and with theunderstanding that our actual future results may be materially different from what we expect.We qualify all of the forward-looking statements in this Quarterly Reporton Form 10-Q by these cautionary statements.Unless the context otherwise requires,all references in this Quarterly Report on Form 10-Q to“Duolingo,”the“Company”,“we,”“our,”“us,”or similar terms refer toDuolingo,Inc.and its subsidiaries.3Special Note Regarding Key Operating MetricsWe manage our business by tracking several operating metrics,including monthly active users(MAUs),daily active users(DAUs),paid subscribers,subscriptionbookings,and total bookings.We believe each of these operating metrics provides useful information to investors and others.For information concerning thesemetrics as measured by us,see Part I,Item 2.“Managements Discussion and Analysis of Financial Condition and Results of Operations-Key Operating Metricsand Non-GAAP Financial Measures.”While these metrics are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement,there are inherentchallenges in measuring how our platform is used.These metrics are determined by using internal data gathered on an analytics platform that we developed andoperate and have not been validated by an independent third party.This platform tracks user account and session activity.If we fail to maintain an effective analyticsplatform,our metrics calculations may be inaccurate.We believe that these metrics are reasonable estimates of our user base for the applicable period of measurement,and that the methodologies we employ andupdate from time-to-time to create these metrics are reasonable bases to identify trends in user behavior.Because we update the methodologies we employ tocreate metrics,our operating metrics may not be comparable to those in prior periods.See the section titled“Risk FactorsOur user metrics and other operatingmetrics are subject to inherent challenges in measurement,and real or perceived inaccuracies in those metrics may negatively affect our reputation and ourbusiness”.Other companies,including companies in our industry,may calculate these metrics differently.Risk Factors SummaryThe following is a summary of the principal risks that could materially adversely affect our business,financial condition,and results of operations,all of which aremore fully described in Part II,Item 1A.“Risk Factors.”This summary should be read in conjunction with Part II,Item 1A.“Risk Factors”and should not be reliedupon as an exhaustive summary of the material risks facing our business.If we fail to keep existing users or add new users,or if our users decrease their level of engagement with our products or do not convert to or remain payingusers,our revenue,financial results and business may be significantly harmed.The online language learning industry is highly competitive,with low switching costs and a consistent stream of new products and entrants,and innovationby our competitors may disrupt our business.Changes to our existing brand and products,or the introduction of a new brand or products,could fail to attract or keep users or generate revenue andprofits.We have had operating losses in the past and we may not be able to achieve or maintain profitability in the future.Our costs are continuing to grow,and some of our investments have the effect of reducing our operating margin and profitability.If our investments are notsuccessful,our business and financial performance could be harmed.Our quarterly operating results and other operating metrics may fluctuate from quarter to quarter,which makes these metrics difficult to predict.Our user metrics and other operating metrics are subject to inherent challenges in measurement,and real or perceived inaccuracies in those metrics maynegatively affect our reputation and our business.4We rely on third-party platforms such as the Apple App Store and the Google Play Store to distribute our products and collect payments.If we are unable tomaintain a good relationship with such platform providers,if their terms and conditions or pricing changed to our detriment,if we violate,or if a platformprovider believes that we have violated,the terms and conditions of its platform,or if any of these platforms loses market share or falls out of favor or isunavailable for a prolonged period of time,our business will suffer.We rely on third-party hosting and cloud computing providers,like Amazon Web Services(“AWS”)and Google Cloud,to operate certain aspects of ourbusiness.A significant portion of our product traffic is hosted by a limited number of vendors,and any failure,disruption or significant interruption in ournetwork or hosting and cloud services could adversely impact our operations and harm our business.If we are not able to maintain the value and reputation of our brand,our ability to expand our base of users may be impaired,and our business and financialresults may be harmed.Our business is subject to complex and evolving U.S.and international laws and regulations.Many of these laws and regulations are subject to change anduncertain interpretation,and could result in claims,changes to our business practices,monetary penalties,increased cost of operations,or declines in usergrowth or engagement,or otherwise harm our business.Our success depends,in part,on our ability to access,protect,collect,and use personal data,and our failure to comply with the varying and rapidly-evolvingregulatory framework on privacy and data protection across jurisdictions could result in claims or other forms of liability,increased costs of operations,reputational harm,or decline in user growth or engagement,or otherwise have a material adverse effect on our business.Regulatory and legislative developments on the use of artificial intelligence(“AI”)and machine learning could adversely affect our use of such technologies inour products and services.From time to time,we may be party to intellectual property-related litigation and proceedings that are expensive and time consuming to defend,and,ifresolved adversely,could materially adversely impact our business,financial condition and results of operations.We may fail to adequately obtain,protect and maintain our intellectual property rights or prevent third parties from making unauthorized use of such rights.The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to thelisting of our Class A common stock on the Nasdaq Global Select Market,including our directors,executive officers,and 5%stockholders and theirrespective affiliates,who held in the aggregate 79.3%of the voting power of our outstanding capital stock as of March 31,2024.This ownership will limit orpreclude your ability to influence corporate matters,including the election of directors,amendments of our organizational documents,and any merger,consolidation,sale of all or substantially all of our assets,or other major corporate transaction requiring stockholder approval.5Part I Financial InformationItem 1.Financial Statements(Unaudited)DUOLINGO,INC.AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS(Amounts in thousands,except par value amounts)March 31,2024December 31,2023ASSETSCurrent assetsCash and cash equivalents$829,713$747,610 Accounts receivable76,421 88,975 Deferred cost of revenues60,397 53,931 Prepaid expenses and other current assets10,747 7,282 Total current assets977,278 897,798 Operating lease right-of-use assets49,785 19,103 Intangible assets,net18,595 15,995 Property and equipment,net13,209 11,792 Goodwill4,050 4,050 Restricted cash2,735 2,735 Deferred tax assets,net766 766 Other assets2,249 1,718 Total assets$1,068,667$953,957 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesDeferred revenues$279,313$249,192 Accounts payable2,625 2,447 Income tax payable362 792 Accrued expenses and other current liabilities21,422 24,931 Total current liabilities303,722 277,362 Long-term obligation under operating leases53,893 21,094 Total liabilities357,615 298,456 Commitments and contingencies(Note 9)Stockholders equityClass A common stock,$0.0001 par value;2,000,000 shares authorized as of March 31,2024 and December 31,2023;36,904 and 36,311 issued and outstanding at March 31,2024 and December 31,2023,respectivelyClass B common stock,$0.0001 par value;30,000 shares authorized as of March 31,2024 and December 31,2023;6,153 and 6,215 issued and outstanding at March 31,2024 and December 31,2023,respectively4 4 Additional paid-in capital898,513 869,918 Accumulated deficit(187,465)(214,421)Total stockholders equity711,052 655,501 Total liabilities and stockholders equity$1,068,667$953,957 See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.6DUOLINGO,INC.AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(LOSS)(Amounts in thousands,except per share amounts)Three Months Ended March 31,20242023Revenues$167,553$115,661 Cost of revenues45,191 31,492 Gross profit122,362 84,169 Operating expenses:Research and development50,878 45,844 Sales and marketing19,931 16,601 General and administrative35,114 30,243 Total operating expenses105,923 92,688 Income(loss)from operations16,439(8,519)Other(expense)income,net(621)182 Income(loss)before interest income and income taxes15,818(8,337)Interest income10,033 5,639 Income(loss)before income taxes25,851(2,698)Benefit from income taxes(1,105)(116)Net income(loss)and comprehensive income(loss)$26,956$(2,582)Net income(loss)per share attributable to Class A and Class B common stockholders,basic$0.63$(0.06)Net income(loss)per share attributable to Class A and Class B common stockholders,diluted$0.57$(0.06)See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.7DUOLINGO,INC.AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY(Amounts in thousands)Common StockSharesAmountAdditional Paid-InCapitalAccumulatedDeficitTotalBALANCEJanuary 1,202340,361$4$772,562$(230,488)$542,078 Stock-based compensation expense 21,073 21,073 Stock options exercised542 4,619 4,619 Release of restricted stock units115 Net loss (2,582)(2,582)BALANCEMarch 31,202341,018$4$798,254$(233,070)$565,188 BALANCEJanuary 1,202442,526$4$869,918$(214,421)$655,501 Stock-based compensation expense 24,985 24,985 Stock options exercised326 3,610 3,610 Release of restricted stock units205 Net income 26,956 26,956 BALANCEMarch 31,202443,057$4$898,513$(187,465)$711,052 See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.8DUOLINGO,INC.AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)Three Months Ended March 31,20242023Cash flows from operating activities:Net income(loss)$26,956$(2,582)Adjustments to reconcile net income(loss)to net cash provided by operating activities:Depreciation and amortization2,074 1,762 Stock-based compensation expense24,985 21,073 Gain on sale of capitalized software(100)Changes in assets and liabilities:Deferred revenue30,121 24,392 Accounts receivable12,554(5,781)Deferred cost of revenues(6,466)(5,096)Prepaid expenses and other current assets(3,465)(263)Accounts payable(398)(345)Accrued expenses and other current liabilities(4,514)(3,201)Noncurrent assets and liabilities1,667(255)Net cash provided by operating activities83,514 29,604 Cash flows from investing activities:Capitalized software expense and purchases of intangible assets(3,607)(731)Purchase of property and equipment(1,414)(681)Proceeds from sale of capitalized software100 Net cash used for investing activities(5,021)(1,312)Cash flows from financing activities:Proceeds from exercise of stock options3,610 4,619 Net cash provided by financing activities3,610 4,619 Net increase in cash,cash equivalents and restricted cash82,103 32,911 Cash,cash equivalents and restricted cash-Beginning of period750,345 608,180 Cash,cash equivalents and restricted cash-End of period$832,448$641,091 See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.9DUOLINGO,INC.AND SUBSIDIARIESSUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION(Amounts in thousands)Three Months Ended March 31,20242023Supplemental disclosure of cash flow information:Cash paid for interest$Cash paid for income taxes$28 Supplemental disclosure of noncash investing activities:Property and equipment included in Current liabilities$1,070$201 Right of use assets obtained in exchange for new operating lease liabilities$31,358$Right of use assets disposed or adjusted modifying operating leases liabilities$1,303$See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.10DUOLINGO,INC.AND SUBSIDIARIESNOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS1.DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATIONDuolingo,Inc.(the“Company”or“Duolingo”)was formed on August 18,2011,and the Duolingo App was launched to the general public on June 19,2012.TheCompanys headquarters are located in Pittsburgh,Pennsylvania.Duolingo is a US-based mobile learning platform,as well as a digital language proficiency assessment exam.The Company has a freemium business model:theapp and the website are accessible free of charge,although Duolingo also offers premium services for a subscription fee.As of the date of this filing,Duolingo offerscourses in over 40 different languages,including Spanish,English,French,German,Italian,Portuguese,Japanese and Chinese.We have locations in the U.S.,China and Germany.Principles of ConsolidationThe Unaudited Condensed Consolidated Financial Statements include the accounts of the Company and subsidiaries over which theCompany has control.All intercompany transactions and balances have been eliminated.Basis of PresentationThe accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally acceptedaccounting principles in the U.S.(“GAAP”)from the Companys accounting records and reflect the consolidated financial position and results of operations for thethree months ended March 31,2024 and 2023.Unless otherwise specified,all dollar amounts(other than per share amounts)are referred to in thousands.The Unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and ExchangeCommission(“SEC”).Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensedor omitted pursuant to such SEC rules.We believe that the disclosures made are adequate to make the information presented not misleading.In our opinion,alladjustments considered necessary for a fair presentation of the financial statements have been included,and all adjustments are of a normal and recurring nature.We consistently applied the accounting policies consistent with the annual Unaudited Condensed Consolidated Financial Statements elsewhere in this QuarterlyReport on Form 10-Q,in preparing these Unaudited Condensed Consolidated Financial Statements.These Unaudited Condensed Consolidated FinancialStatements should be read in conjunction with the audited financial statements and the notes for the fiscal year ended December 31,2023 included in the AnnualReport on Form 10-K and filed with the SEC.2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESAccounting PrinciplesThe Unaudited Condensed Consolidated Financial Statements and accompanying notes are prepared in accordance with GAAP.Use of EstimatesThe preparation of Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimatesand assumptions that affect the amounts reported in the Unaudited Condensed Consolidated Financial Statements and accompanying notes.Significant estimatesand assumptions reflected in the Unaudited Condensed Consolidated Financial Statements include,but are not limited to,useful lives of property and equipment,valuation of deferred tax assets and liabilities,stock-based compensation,common stock valuation,operating lease right-of-use assets and liabilities,capitalization ofinternally developed software and associated useful lives and contingent liabilities.Actual results may differ materially from such estimates.Management believesthat the estimates,and judgments upon which they rely,are reasonable based upon information available to11them at the time that these estimates and judgments are made.To the extent that there are material differences between these estimates and actual results,theCompanys Unaudited Condensed Consolidated Financial Statements will be affected.Cash and Cash EquivalentsCash consists primarily of cash on hand and bank deposits.Cash equivalents consist primarily of money market accounts withmaturities of three months or less at the date of acquisition and are stated at cost,which approximates fair value.The Company maintains cash deposits withfinancial institutions that may exceed federally insured limits at times.The following table shows the breakout between cash and money market funds.(In thousands)March 31,2024December 31,2023Cash$47,917$50,373 Money market funds781,796 697,237 Total$829,713$747,610 The Money market funds are considered Level 1 financial assets.Level 1 financial assets use inputs that are the unadjusted,quoted prices in active markets foridentical assets or liabilities at the measurement date.Advertising Costs Advertising costs were approximately$14,020 and$11,093 for the three months ended March 31,2024 and 2023,respectively,and areincluded within Sales and marketing in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income(Loss).Income TaxesThe Companys provision for income taxes is computed by using an estimate of the annual effective tax rate,adjusted for discrete items taken intoaccount in the relevant period,if any.Each quarter,the annual effective income tax rate is recomputed and if there are material changes in the estimate,a cumulativeadjustment is made.Concentration of Credit RiskThe Companys concentration of credit risk relates to financial institutions holding the Companys cash and cash equivalents andplatforms with significant accounts receivable balances and revenue transactions.The Company maintains cash deposits with financial institutions that may exceed federally insured limits at times.Management believes that the financial institutionsthat hold the Companys deposits are financially credit worthy and,accordingly,minimal credit risk exists with respect to those balances.The majority of our revenue comes through our subscriptions and advertising streams,and payments are made to Duolingo through service providers.Three serviceproviders,Apple,Google,and Stripe accounted for 68.1%,16.0%,and 10.8%of total Accounts receivable as of March 31,2024,respectively.Three serviceproviders,Apple,Google,and Stripe accounted for 65.2%,20.7%,and 10.7%of total Accounts receivable as of December 31,2023,respectively.Impairment of long-lived assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.If the sum of the estimated undiscounted future cash flows expected to result from the use and eventualdisposition of an asset is less than the carrying amount of the asset,an impairment loss is recognized.Measurement of an impairment loss is based on the fair valueof the asset.No assets were impaired during the three months ended March 31,2024 and 2023.Recently Issued Pronouncements Not Yet Adopted12In November 2023,the Financial Accounting Standards Board(“FASB”)issued Accounting Standards Update(“ASU”)2023-07,Segment Reporting(Topic 280),which improves reportable segment disclosure requirements,primarily through enhanced disclosures about significant segment expenses.The standard is effectivefor fiscal years beginning after December 15,2023,and interim periods within fiscal years beginning after December 15,2024.Early adoption is permitted.TheCompany does not expect the adoption of the new guidance will have a material impact on the Companys consolidated financial statements and related disclosures.In December 2023,the FASB issued ASU 2023-09,Income Taxes(Topic 740),which includes improvements to income tax disclosures.The standard is effective forpublic entities in fiscal years beginning after December 15,2024.Early adoption is permitted.The Company does not expect the adoption of the new guidance willhave a material impact on the Companys consolidated financial statements and related disclosures.Recently Adopted Accounting PronouncementsThere are no recently adopted accounting pronouncements.3.REVENUEThe Company has four predominant sources of revenues;time-based subscriptions,in-app advertising placement by third parties,the Duolingo English Test,and In-App Purchases.Revenue is recognized upon transfer of control of promised products or services to users in an amount that reflects the consideration the Companyexpects to receive in exchange for those services.The Company does not enter into contracts with a customer that contain multiple promises that result in multipleperformance obligations.Revenue is recorded net of taxes assessed by a government authority that are both imposed on and concurrent with specific revenuetransactions between us and our users.Revenue from time-based subscriptions includes a stand-ready obligation to provide hosting services that are consumed by the customer over the subscriptionperiod.Users can purchase Duolingo monthly or they can purchase a year-long subscription and pay for the subscription at the time of purchase.Under the year-long subscription,users can also purchase a single plan or a family plan.The family plan includes up to six users on one subscription.Such payments are initiallyrecorded to deferred revenue.The user has the ability to download limited content offline.However,as there is a significant level of integration and interdependencywith the online functionality,the Company considers the service to be a single performance obligation for the online and offline content.The Company enters into arrangements with advertising networks to monetize the in-app advertising inventory.Revenue from in-app advertising placement isrecognized at a point in time when the advertisement is placed and is based upon the amount received.Duolingo English Test revenue is generally recognized once the tests have gone through the proctoring process and a certification decision has been made.Thisprocess usually takes less than 48 hours after the test has been completed and uploaded.Customers have 21 days from the date of purchase to take the exam ortheir purchase will expire and revenue will be recognized.Virtually all customers complete their exams prior to expiration.Sometimes organizations may purchasetests in bulk via coupons with a one year expiration date.The Company will defer revenue from all tests that have neither been proctored nor expired.The Companys users have the option to purchase consumable in-app virtual goods.The Company recognizes revenue over the period in which the user consumesthe virtual good,which is generally within a month.13The Company also recognizes revenue from Duos Taquera,a restaurant that opened during 2022,in the space adjacent to our headquarters in Pittsburgh.Revenue from Duos Taquera is recognized at a point in time when the sales are made.Principal Agent ConsiderationsThe Company makes its application available to be downloaded through third-party digital distribution service providers.Userswho purchase subscriptions also pay through the respective app stores.The Company evaluates the purchases via third-party payment processors to determinewhether its revenues should be reported gross or net of fees retained by the payment processor.The Company is the principal in the transaction with the end user asa result of controlling,hosting,and integrating the delivery of the virtual items to the end user.The Company records revenue gross as a principal and records feespaid to third-party payment processors as Cost of revenues.Contract BalancesDeferred revenue mostly consists of payments we receive in advance of revenue recognition,and is mostly related to time-basedsubscriptions,which will be recognized into revenue over the course of the upcoming year(recognized over 12 months or less).Additionally,the Duolingo EnglishTest has deferred revenue related to tests that have been purchased,but will not be recognized until the tests have been proctored.Disaggregation of RevenueIn accordance with ASC 606,Revenue from Contracts with Customers,the Company disaggregates revenue from contracts with customers into revenue streams,which most closely depicts how the nature,amount,timing and uncertainty of revenue and cash flows are affected by economic factors.Three Months Ended March 31,(In thousands)20242023Revenues:Subscription$131,688$86,185 Advertising12,952 11,635 Duolingo English Test12,755 9,972 In-App Purchases9,924 7,852 Other(1)234 17 Total revenues$167,553$115,661 _(1)Other revenue is mainly comprised of revenue from Duos Taquera.Three service providers,Apple,Google and Stripe,processed 59.3%,23.7%,and 12.9%of total Revenues for the three months ended March 31,2024,respectively.Three services providers,Apple,Google,and Stripe processed 57.1%,26.2%and 11.9%of total Revenues for the three months ended March 31,2023,respectively.14Changes in deferred revenues were as follows:Three Months Ended March 31,(In thousands)20242023Beginning balanceJanuary 1$249,192$157,550 Amount from beginning balance recognized into revenue(102,257)(65,492)Recognition of deferred revenue(40,907)(30,129)Deferral of revenue173,285 120,013 Ending balanceMarch 31$279,313$181,942 4.PROPERTY and EQUIPMENT,netProperty and equipment consists of the following as of March 31,2024 and December 31,2023:(In thousands)20242023Leasehold improvements$20,616$18,191 Furniture,fixtures and equipment5,928 5,869 Total property and equipment26,544 24,060 Less:accumulated depreciation(13,335)(12,268)Total property and equipment,net$13,209$11,792 Depreciation expense is included within the following financial statement line items within the Companys Unaudited Condensed Consolidated Statements ofOperations and Comprehensive Income(Loss).Three Months Ended March 31,(In thousands)20242023Research and development$440$407 Sales and marketing52 48 General and administrative575 554 Total$1,067$1,009 5.INTANGIBLE ASSETS AND GOODWILLIntangible assets consist of the following as of March 31,2024 and December 31,2023:(In thousands)20242023Capitalized software$30,502$26,895 Other intangible assets117 117 Total intangible assets30,619 27,012 Less:accumulated amortization(12,024)(11,017)Intangible assets,net$18,595$15,995 The Company capitalized$3,607 and$731 of software development costs,with the majority of the costs being employee wages,during the three months endedMarch 31,2024 and 2023,respectively.Amortization expense is included within the following financial statement line items within the Companys UnauditedCondensed Consolidated Statements of Operations and Comprehensive Income(Loss).15Three Months Ended March 31,(In thousands)20242023Cost of revenues$848$403 Sales and marketing159 350 Total$1,007$753 The estimated future amortization expense of capitalized software with definite lives as of March 31,2024 was as follows:(In thousands)Amortization ExpenseRemainder of 2024$4,339 20256,423 20265,150 20272,344 2028 222 Total estimated future amortization expense$18,478 _(1)All capitalized software is expected to be fully amortized by December 31,2028,therefore there is no estimated amortization for the year 2029.Goodwill was$4,050 at March 31,2024 and December 31,2023.As of March 31,2024 and December 31,2023,$3,645 and$3,713 of goodwill is deductible for taxpurposes,respectively.6.LEASESThe Company has entered into various operating leases for its office space expiring between fiscal 2024 and 2036.Certain lease agreements contain an option forthe Company to renew a lease for a term of up to five years.The Company considers these options,which may be elected at the Companys sole discretion,indetermining the lease term on a lease-by-lease basis.On December 18,2023,the Company entered into an Agreement of Sub-Sublease,with Spotify USA Inc.,as Sub-Sublandlord for 85,666 square feet of office spacein the building located at 4 World Trade Center,150 Greenwich Street,New York,New York 10007 for use as additional office space.The term of the Sub-Sublease commenced on January 8,2024 and will expire on April 29,2034The initial base rent is$442 per month on a triple net basis,increasing to$478 per month at the beginning of the sixth year of the lease term.Payment of rent willcommence 20 months after commencement of the Sub-Sublease.In lieu of a security deposit,the Company is obligated to provide an irrevocable stand-by letter of credit to the Sub-Sublandlord.This letter of credit acts as securityfor the faithful performance by the Company of all terms,covenants and conditions of the lease agreement.The cash collateral and deposits for the letters of credithave been recognized as restricted cash in the unaudited condensed consolidated balance sheets and totaled$2,735 as of March 31,2024 and December 31,2023.(1)16In February 2024,the Company signed a lease with Bullitt Center LLC for 7,940 square feet of office space in Seattle,Washington.The term of the lease is 63months beginning on March 1,2024 and expiring on May 31,2029.In March 2024,the Company entered into the First and Second Amendments(“the Amendments”)to the Office Lease Agreement with 5704 Penn Office,LLC(theLandlord)for office space located at Liberty East(the“Premise)at 141 South Saint Clair Street,Pittsburgh,Pennsylvania,which,among other things,increased theleased square footage by 110,008 square feet to a total of 148,266 square feet beginning on August 1,2025,with an expiration date of April 30,2036.Under theAmendments,the monthly fixed base rent for the initial square footage increases to approximately$188 per month for the period commencing June 16,2035 andending April 30,2036.The initial base rent of the additional square footage is approximately$394 per month and will increase by approximately 2%per annum,withthe exception of the third and fifth years,which have increases of approximately 9%related to additional parking access.Under the terms of the Amendments,theLandlord will provide the Company with an improvement allowance of up to approximately$6,800 for costs relating to the design,permitting,and construction ofimprovements to the Premise.The following represents the components of lease cost for the three months ended March 31,2024 and 2023 along with supplemental disclosures of cash flowinformation,lease term and discount rate:Three Months Ended March 31,20242023Operating lease cost$2,990$1,861 Short term lease cost8 3 Variable lease cost147 33 Total lease cost$3,145$1,897 Cash paid for amounts included in the measurement of lease liabilities$2,039$1,749 Right-of-use assets obtained in exchange for new operating lease liabilities$31,358$Right of use assets disposed or adjusted,modifying operating leases liabilities$1,303$623 Gain from termination of leases$8$Weighted-average remaining lease term10 years9 yearsWeighted-average discount rate7.19%6.53%Sublease income was immaterial for the three months ended March 31,2024 and 2023.The following table reconciles future minimum undiscounted rental commitments for operating leases to operating lease liabilities recorded on the UnauditedCondensed Consolidated Balance Sheet as of March 31,2024:17Fiscal yearRemainder of 2024$3,524 20253,648 20268,944 20279,158 20289,299 Thereafter48,482 Total undiscounted lease payments$83,055 Present value adjustment(26,412)Operating lease liabilities$56,643 Current lease liabilities of$2,750 and$3,944 are presented within Accrued expenses and other liabilities while non-current lease liabilities of$53,893 and$21,094are presented within Long-term obligation under operating leases on the Unaudited Condensed Consolidated Balance Sheet as of March 31,2024 and the AuditedConsolidated Balance Sheet as of December 31,2023,respectively.7.INCOME TAXESYear-to-date income tax expense or benefit is the product of the most current projected annual effective tax rate(“PAETR”)and the actual year-to-date pretax income(loss)adjusted for any discrete items.The income tax expense or benefit for a particular quarter,is the difference between the year-to-date calculation of income taxexpense or benefit and the year-to-date calculation for the prior year period.Items unrelated to current period ordinary income or loss are recognized entirely in theperiod identified as a discrete item of tax.The Companys PAETR differs from the U.S.federal statutory rate of 21.0%during the three months ended March 31,2024 and 2023 primarily due to the impact ofmaintaining a U.S.valuation allowance provided on U.S.deferred tax assets.The Companys income before taxes,income tax provision or benefit and effective tax rates were as follows:Three Months Ended March 31,(In thousands,except percentages)20242023Income(loss)before income taxes$25,851$(2,698)Benefit from income taxes(1,105)(116)Effective tax rate(4.3)%4.3%During the three months ended March 31,2024,the Company recognized a discrete tax benefit attributable to the excess tax benefits of stock-based compensation.This discrete benefit was the primary driver of the three months ended March 31,2024 tax benefit recorded as well as changes to the effective tax rate as comparedto the prior year.The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence,both positive and negative.The realization of netdeferred tax assets is dependent on the Companys ability to generate sufficient future taxable income to fully utilize these assets.As of March 31,2024,theCompany continues to maintain a full allowance against its U.S.federal and state net deferred tax assets.188.STOCK-BASED COMPENSATIONPrior to the IPO,the Company granted options to purchase shares of the Companys common stock and restricted stock units(“RSU”)in respect of shares of theCompanys common stock to employees,directors and consultants under the Companys 2011 Equity Incentive Plan.In July 2021,Duolingo adopted the 2021Incentive Award Plan(“2021 Plan”)and the 2021 Employee Stock Purchase Plan(“ESPP”),each of which became effective on July 26,2021 in connection with theIPO.An aggregate of 7,946 shares and 1,119 shares of Class A common stock were made available for future issuance under the 2021 Plan and ESPP,respectively.Pursuant to the terms of the plan,on each January 1 through January 1,2031,the number of shares of the Companys Class A common stock available for issuanceautomatically increases by the lesser of(i)5%of the shares outstanding on the preceding December 31(calculated on an as-converted basis)and(ii)such smallernumber of shares of common stock as determined by the Board or the Committee(as defined in the 2021 Plan).Pursuant to the terms of the ESPP,on each January1 through January 1,2031,the number of shares of the Companys Class A common stock available for issuance automatically increases by the lesser of(i)1%ofthe shares outstanding on the preceding December 31 and(ii)such smaller number of shares of common stock as determined by the Board or the Committee(asdefined in the ESPP).On January 1,2024,the number of Class A shares available under the 2021 Plan was increased by 2,126 shares of common stock.The Boardwaived the 2024 automatic annual increase of shares available for future issuance under the ESPP,and the Company intends to waive such automatic annualincrease for all applicable future periods.The Companys stock options vest based on terms in the stock option agreements,which generally provide for vesting over four years based on continued service tothe Company and its subsidiaries.Each option has a term of ten years.Stock options granted under the 2021 Plan must generally have an exercise price of not lessthan the estimated fair market value of the underlying Class A common stock at the date of the grant.No options have been granted under the 2021 Plan.A summary of stock option activity under the Plans was as follows:(In thousands,except prices and years)Number of optionsWeighted-average exercise priceWeighted-averageremaining contractual life(years)Aggregate intrinsic valueOptions outstanding at January 1,20242,985$16.04 5.60$629,865 Granted(1)Exercised(326)11.21 Forfeited and expired(2)16.27 Options outstanding at March 31,20242,659$16.63 5.40$543,789 Options exercisable at March 31,20242,578$16.34 5.36$526,630 _(1)There were no stock options granted during the three months ended March 31,2024.(2)There was a nominal amount of forfeitures and expirations during the three months ended March 31,2024.The total intrinsic value of options exercised was approximately$64,343 and$55,062 for the periods ended March 31,2024 and 2023,respectively.19A summary of RSU activity under the Plans was as follows:(In thousands,except prices)Restricted stock unitsWeighted-average grant date fair value pershareOutstanding at January 1,20242,027$106.32 Granted51 188.43 Released(205)94.95 Forfeited(29)96.78 Outstanding at March 31,20241,844$110.00 As of March 31,2024,there was approximately$710 of unrecognized stock-based compensation expense related to stock options granted under the plans with aweighted-average period of approximately six months.The amount of unrecognized stock-based compensation expense for RSUs as of March 31,2024 was$188,559 with a weighted-average period of approximately three years.Total unrecognized compensation expense as of March 31,2024 was$189,269.There were 9,382 shares available for grant at March 31,2024.Performance-based RSUsIn June 2021,the Company granted an aggregate of 1,800 performance-based RSUs(the“Founder Awards”)to the Companys founders.The Founder Awards vestupon the satisfaction of both a service-based condition and a performance-based condition and generally are settled one year after vesting.The service-basedcondition is satisfied as to 25%of the Founder Awards on each anniversary of the IPO on July 27,2021,subject to the continuous service of the founders throughthe applicable date.The performance-based condition will be satisfied with respect to each of 10 equal tranches only if the trailing 60-calendar day volume-weighted-average closing trading price of the Companys Class A common stock reaches certain stock-price hurdles for each such tranche,as set forth below,over a period of10 years from the date of grant.Any RSUs associated with stock-price hurdles not achieved by the tenth anniversary of the date of grant will terminate and be canceled for no additionalconsideration to the founders.The stock-price hurdles and number of RSUs eligible to vest will be adjusted to reflect any stock splits,stock dividends,combinations,reorganizations,reclassifications,or similar events under the 2021 Plan.The Founder Awards will be settled in shares of the Companys Class B common stock.TrancheCompany Stock Price HurdleNumber of RSUs Eligible to Vest1$127.50 90 2$153.00 90 3$178.50 90 4$204.00 180 5$255.00 180 6$306.00 180 7$357.00 180 8$408.00 180 9$612.00 270 10$816.00 360 20The Company estimated the grant date fair value of the Founder Awards using a model based on multiple stock-price paths developed through the use of a MonteCarlo simulation that incorporates into the valuation the possibility that the stock-price hurdles may not be satisfied.The weighted-average grant date fair value of theFounder Awards was estimated to be$61.56 per share and the Company estimates that it will recognize total stock-based compensation expense of approximately$110,817 over the derived service period of each of the ten separate tranches which is between 3.58 5.92 years.If the stock-price hurdles are met sooner than therequisite service period,the stock-based compensation expense will be adjusted to prospectively recognize the remaining expense over the remaining derivedservice period.Provided that the founders continue to provide services to the Company,stock-based compensation expense is recognized over the derived serviceperiod,regardless of whether the stock-price hurdles are achieved.The stock-price hurdles for the third and fourth tranches were met during the three months ended December 31,2023.As of the date of this Quarterly Report onForm 10-Q,no additional stock-price hurdles have been met.The Company recognized$5,540 and$7,140 of stock-based compensation expense related to performance-based RSUs for the three months ended March 31,2024 and 2023,respectively,which is included within General and administrative in the Unaudited Condensed Consolidated Statements of Operations andComprehensive Income(Loss).As of March 31,2024,there is$31,195 of unrecognized stock-based compensation expense related to these awards.Total stock-based compensation expense was$24,985 and$21,073 for the three months ended March 31,2024 and 2023,respectively.Stock-based compensation expense is included in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income(Loss)as shownin the following table:Three Months Ended March 31,(In thousands)20242023Cost of revenues$16$11 Research and development13,006 9,346 Sales and marketing1,054 779 General and administrative10,909 10,937 Total$24,985$21,073 Nominal amounts of stock-based compensation expense is capitalized into intangible assets for the three months ended March 31,2024 and 2023.9.COMMITMENTS AND CONTINGENCIESLegal Proceedings From time to time,the Company may become involved in various legal proceedings in the ordinary course of its business and may be subjectto third-party infringement claims.The outcome of any such claims or proceedings,regardless of the merits,is inherently uncertain.The Company is not currentlyparty to any material legal proceedings.Related Parties The Company has determined that there were no transactions with related parties as of or during the three months ended March 31,2024 and2023.Letters of Credit The Company has a standby letter of credit obtained in connection with an operating lease.This letter of credit acts as security for the faithfulperformance by us of all terms,covenants and conditions of the lease agreement.The amount of the letter of credit is equal to six months rent of$442,21totaling$2,656.The cash collateral for the letter of credit has been recognized as restricted cash in the Unaudited Condensed Consolidated Balance Sheet and isequivalent to 103%of the letter of credit and totaled$2,735.For more information,refer to Note 6,Leases.10.EMPLOYEE BENEFIT PLANThe Company sponsors a profit sharing plan with a 401(k)feature,the Duolingo Retirement Plan(the“Plan”),for eligible employees.The current Plan,effectiveJanuary 1,2021,provides for Company safe harbor matching contributions of 100%of the first 4%of the employees elective deferrals and 50%of the next 2%,withvesting starting upon the first day of employment.The Company also has the option to make discretionary matching or profit sharing contributions.The Companymade safe harbor matching contributions of approximately$1,583 and$1,397 during the three months ended March 31,2024 and 2023,respectively.The Companydid not make any discretionary matching or profit sharing contributions during the three months ended March 31,2024 or 2023.11.EARNINGS(LOSS)PER SHAREBasic and diluted net income(loss)per share attributable to common stockholders is presented in conformity with the two-class method required for participatingsecurities.Basic net income(loss)per share attributable to common stockholders is calculated by dividing the net income(loss)by the weighted-average number of shares ofcommon stock outstanding during the period,less shares subject to repurchase.The diluted net income per share attributable to common stockholders is calculatedby giving effect to all potential dilutive common stock equivalents outstanding for the period.The rights,including the liquidation and dividend rights,of the holders ofClass A and Class B common stock are identical,except with respect to voting and conversion.Each share of Class A common stock is entitled to one vote pershare and each share of Class B common stock is entitled to 20 votes per share.Each share of Class B common stock is convertible into a share of Class Acommon stock voluntarily at any time by the holder,and automatically upon certain events.The Class A common stock has no conversion rights.As the liquidationand dividend rights are identical for Class A and Class B common stock,the undistributed earnings are allocated on a proportional basis and the resulting net income(loss)per share attributable to common stockholders will,therefore,be the same for both Class A and Class B common stock on an individual or combined basis.Three Months Ended March 31,(In thousands,except per share data)20242023Numerator:Net income(loss)attributable to Class A and Class B common stockholders$26,956$(2,582)Denominator:Weighted-average shares in computing net income(loss)per share attributable to Class A and Class B commonstockholders,basic and diluted42,780 40,618 Effect of dilutive securitiesFounder awards where performance has been met270 Dilutive effect of stock options outstanding(1)2,459 RSUs outstanding1,844 Denominator for dilutive net income per common share-weighted-average shares47,353 40,618 Basic income(loss)per common share$0.63$(0.06)Diluted income(loss)per common share$0.57$(0.06)22_(1)The Company had 2.7 million options outstanding as of March 31,2024.The estimated dilutive effect is calculated as the number of shares expected to be issued upon vesting or exercise,adjusted forthe strike price proceeds that are received by the Company and assumed to be used to repurchase shares of Duolingo common stock.Since the Company was in a net loss position for the three months ended March 31,2023 there is no difference between the number of shares used to calculatebasic and diluted loss per share.The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to commonstockholders for the period presented because including them would have been antidilutive are as follows:Three Months Ended March31,(In thousands)2023Stock options outstanding3,865 RSUs outstanding2,048 Founder awards where performance has been met180 Total6,093 Founder awards of 1,620,where the performance criteria has not been satisfied,are excluded from the above table because the stock-price hurdles for those awardshad not been met as of March 31,2023.12.SUBSEQUENT EVENTSNone.Item 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed ConsolidatedFinancial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q,the audited consolidated financial statements and related notesincluded in our Annual Report on Form 10-K and in Part II,Item 7.“Managements Discussion and Analysis of Financial Condition and Results of Operations”of ourAnnual Report on Form 10-K.The following discussion contains forward-looking statements,such as those relating to our plans,objectives,expectations,intentions,and beliefs,that involve risks,uncertainties and assumptions.Our actual results could differ materially from these forward-looking statements as a result of manyfactors,including those discussed in Part II,Item 1A.“Risk Factors,”“Special Note Regarding Forward-Looking Statements,”and included elsewhere in this QuarterlyReport on Form 10-Q,and in in Part II,Item 7.“Managements Discussion and Analysis of Financial Condition and Results of Operations”of our Annual Report onForm 10-K.Our historical results are not necessarily indicative of the results that may be expected for any periods in the future.Amounts reported in millions are rounded based on the amounts in thousands.As a result,the sum of the components reported in millions may not equal the totalamount reported in millions due to rounding.In addition,percentages presented are calculated from the underlying numbers in thousands and may not add to theirrespective totals due to rounding.OverviewOur flagship app has organically become the worlds most popular way to learn languages and the top-grossing Education app in the App Stores,offering courses inover 40 languages to over 95 million monthly active users for the three months ended March 31,2024.We believe that we have become the23preeminent online destination for language learning due to our beautifully designed products,exceptional user engagement,and demonstrated learning efficacy.Key Operating Metrics and Non-GAAP Financial MeasuresWe regularly review a number of key operating metrics and non-GAAP financial measures to evaluate our business,measure our performance,identify trends,prepare financial projections and make business decisions.The measures set forth below should be considered in addition to,not as a substitute for or in isolationfrom,our financial results prepared in accordance with GAAP.Monthly active users(MAUs)and daily active users(DAUs),along with paid subscribers,subscriptionbookings and total bookings,are operating metrics that help inform management about the underlying growth in users of our platform,and are a measure of ourmonetization efforts.To calculate the year-over-year change in MAUs and DAUs for a given period,we subtract the average for the same period in the previous yearfrom the average for the same period in the current year and divide the result by the average for the same period in the previous year.Other companies,includingcompanies in our industry,may calculate these measures differently or not at all,which reduces their usefulness as comparative measures.Three Months Ended March 31,(In millions)20242023Operating MetricsMonthly active users(MAUs)97.6 72.6 Daily active users(DAUs)31.4 20.3 Paid subscribers(at period end)7.4 4.8 Three Months Ended March 31,(In thousands)20242023Operating MetricsSubscription bookings$161,466$110,122 Total bookings$197,452$140,054 Non-GAAP Financial MeasuresNet income(loss)(GAAP)$26,956$(2,582)Adjusted EBITDA$44,005$15,111 Net cash provided by operating activities(GAAP)$83,514$29,604 Free cash flow$79,621$28,792 Operating MetricsMonthly active users(MAUs).MAUs are defined as unique users who engage with our Duolingo App or the learning section of our website each month.MAUs arereported for a measurement period by taking the average of the MAUs for each calendar month in that measurement period.The measurement period for MAUs isthe three months ended March 31,2024 and the same period in the prior year where applicable,and the analysis of results is based on those periods.MAUs are ameasure of the size of our global active user community on Duolingo.We had approximately 97.6 million and 72.6 million MAUs for the three months ended March 31,2024 and 2023,respectively,representing an increase of 35%fromthe prior year period.We grew MAUs through product initiatives designed to make the app more social and engaging,through marketing,and24through improving our courses,all of which we believe helped us attract new users,retain existing users,and reengage the millions of former users who return to ourDuolingo App.Daily active users(DAUs).DAUs are defined as unique users who engage with our Duolingo App or the learning section of our website each calendar day.DAUsare reported for a measurement period by taking the average of the DAUs for each day in that measurement period.The measurement period for DAUs is the threemonths ended March 31,2024 and the same period in the prior year where applicable,and the analysis of results is based on those periods.DAUs are a measure ofthe consistent engagement of our global user community on Duolingo.We had approximately 31.4 million and 20.3 million DAUs for the three months ended March 31,2024 and 2023,respectively,representing an increase of 54%fromthe prior year period.The DAU/MAU ratio,which we believe is an indicator of user engagement,increased to 32.1%from 28.0%a year ago.We grew DAUsthrough many of the same product initiatives as we grew MAUs,such as making the product more fun and engaging.Paid Subscribers.Paid subscribers are defined as users who pay for access to any Duolingo subscription offering and had an active subscription as of the end ofthe measurement period.Each unique user account is treated as a single paid subscriber regardless of whether such user purchases multiple subscriptions,and thecount of paid subscribers does not include users who are currently on a free trial or who are non-paying members of a family plan.As of March 31,2024 and 2023,we had approximately 7.4 million and 4.8 million paid subscribers,respectively,representing an increase of 54%from the prior yearperiod.We grew paid subscribers through product initiatives designed to make Duolingo subscription offerings more appealing which we believe helped us attractnew subscribers and retain existing subscribers.Subscription Bookings and Total Bookings.Subscription bookings represent the amounts we receive from a purchase of any Duolingo subscription offering.Totalbookings include subscription bookings,income from advertising networks for advertisements served to our users,purchases of the Duolingo English Test,and in-app purchases of virtual goods.We believe bookings provide an indication of trends in our operating results,including cash flows,that are not necessarily reflected inour revenues because we recognize subscription revenues ratably over the lifetime of a subscription,which is generally from one to twelve months.For the three months ended March 31,2024 and 2023,we generated$161.5 million and$110.1 million of subscription bookings,respectively,representing anincrease of 47%from the prior year period.We grew subscription bookings by selling more first-time and renewal subscriptions.For the three months ended March 31,2024 and 2023,we generated$197.5 million and$140.1 million total bookings,respectively,representing an increase of 41%from the prior year period.We grew total bookings through growth in subscription bookings noted above,in addition to growth in the Duolingo English Test,advertising and in-app purchases.Non-GAAP Financial MeasuresWe use certain non-GAAP financial measures to supplement our Unaudited Condensed Consolidated Financial Statements,which are presented in accordance withGAAP.These non-GAAP financial measures include Adjusted EBITDA and free cash flow.We use these non-GAAP financial measures for financial and operationaldecision-making and as a means to evaluate period-to-period comparisons.By excluding certain items that may not be indicative of our recurring core operatingresults,we believe that Adjusted EBITDA and free cash flow provide meaningful supplemental information regarding our performance.Accordingly,we believe thesenon-GAAP financial measures are useful to investors and others because they allow for additional information with respect to financial measures used by25management in its financial and operational decision-making and they may be used by our institutional investors and the analyst community to help them analyze thehealth of our business.However,there are a number of limitations related to the use of non-GAAP financial measures,and these non-GAAP financial measuresshould be considered in addition to,not as a substitute for or in isolation from,our financial results prepared in accordance with GAAP.Other companies,includingcompanies in our industry,may calculate these non-GAAP financial measures differently or not at all,which reduces their usefulness as comparative measures.The effect of currency exchange rates on our business is an important factor in understanding period to period comparisons.We use non-GAAP percentage changein constant currency revenues,which exclude the impact of fluctuations in foreign currency exchange rates,for financial and operational decision-making and as ameans to evaluate period-to-period comparisons.We believe this information is useful to investors to facilitate comparisons and better identify trends in our business.The impact of changes in foreign currency may vary significantly from period to period,and such changes generally are outside of the control of our management.We calculate constant currency revenues by using current period foreign currency revenues and translating them to constant currency using prior year comparableperiod exchange rates for the entire period of related bookings.Constant currency revenue percentage change is calculated by dividing the difference betweenconstant currency revenue and the prior year comparable period revenue by the prior year comparable period revenue.Adjusted EBITDA.Adjusted EBITDA is defined as net income(loss)excluding interest income,income taxes,depreciation and amortization,stock-basedcompensation expenses related to equity awards,acquisition earn-out costs,and gain on sale of capitalized software.Adjusted EBITDA is used by management toevaluate the financial performance of our business and we present Adjusted EBITDA because we believe it is helpful in highlighting trends in our operating resultsand that it is frequently used by analysts,investors and other interested parties to evaluate companies in our industry.The following table presents a reconciliation ofour net income(loss),the most directly comparable financial measure presented in accordance with GAAP,to Adjusted EBITDA.Three Months Ended March 31,(In thousands)20242023Net income(loss)$26,956$(2,582)Add(deduct):Interest income(10,033)(5,639)Benefit from income taxes(1,105)(116)Depreciation and amortization2,074 1,762 Stock-based compensation expenses related to equity awards(1)26,113 21,673 Acquisition earn-out costs(2)113 Gain on sale of capitalized software(3)(100)Adjusted EBITDA$44,005$15,111 _26(1)In addition to stock-based compensation expense of$25.0 million and$21.1 million for the three months ended March 31,2024 and 2023,this includes costs incurred related to taxes paid on equitytransactions as follows:Three Months Ended March 31,(In thousands)20242023Research and development$536$240 Sales and marketing29 14 General and administrative563 346 Total$1,128$600(2)Represents costs incurred related to the earn-out payment on an acquisition,which is included within General and administrative within our Unaudited Condensed Consolidated Statements ofOperations and Comprehensive Income(Loss).(3)Represents proceeds from a sale of capitalized software,which is included within Other(expense)income,net within our Unaudited Condensed Consolidated Statements of Operations andComprehensive Income(Loss).For the three months ended March 31,2024 and 2023,we generated net income of$27.0 million and net loss of$2.6 million,respectively.Our generation of netincome as compared to a net loss in the comparative period was due to a combination of our growth in revenue,a reduction in operating expenses as a percentageof revenue as compared to the prior year period,and an increase in interest income of$4.4 million during the three months ended March 31,2024.For the three months ended March 31,2024 and 2023,we generated Adjusted EBITDA of$44.0 million and$15.1 million,respectively.Adjusted EBITDA increaseddue to a combination of our growth in revenue and a reduction in operating expenses as a percentage of revenue as compared to the prior year periods.Free Cash Flow.Free cash flow represents net cash provided by operating activities,reduced by capitalized software development costs and purchases of propertyand equipment and increased by taxes paid related to stock-based compensation equity awards as we believe they are not indicative of future liquidity.We believethat free cash flow is a measure of liquidity that provides useful information to our management,investors and others in understanding and evaluating the strength ofour liquidity and future ability to generate cash that can be used for strategic opportunities or investing in our business.Free cash flow has certain limitations in that itdoes not represent our residual cash flow for discretionary expenditures and our non-discretionary commitments.The following table presents a reconciliation of netcash provided by operating activities,the most directly comparable financial measure calculated in accordance with GAAP,to free cash flow:Three Months Ended March 31,(In thousands)20242023Net cash provided by operating activities$83,514$29,604 Less:Capitalized software development costs and purchases of intangible assets(3,607)(731)Less:Purchases of property and equipment(1,414)(681)Plus:Taxes paid related to stock-based compensation equity awards1,128 600 Free cash flow$79,621$28,792 For the three months ended March 31,2024 and 2023,we generated$83.5 million and$29.6 million of net cash provided by operating activities,respectively.Theincrease in net cash provided by operating activities was mainly due to our generation of positive net income as discussed under the heading Adjusted EBITDAabove and timing of amounts received from our payment service providers in the current period as compared to the same period in the prior year.27For the three months ended March 31,2024 and 2023,we generated$79.6 million and$28.8 million of free cash flow,respectively.The increase in free cash flowwas mainly attributable to the increase in net cash provided by operating activities.Constant Currency.The effect of currency exchange rates on our business is an important factor in understanding period to period comparisons.We use non-GAAP constant currency revenues and non-GAAP percentage change in constant currency revenues for financial and operational decision-making and as a meansto evaluate period-to-period comparisons.Total revenues were$167.6 million for the three months ended March 31,2024,which represents an increase of 45%(on both a reported and constant currencybasis)over the three months ended March 31,2023.Subscription revenues totaled$131.7 million for the three months ended March 31,2024,which represented anincrease of 53%(on both a reported and constant currency basis)over the three months ended March 31,2023.Components of Our Results of OperationsRevenueWe generate revenues primarily from the sale of subscriptions.The term-length of our subscription agreements are primarily monthly or annual,with the family planoffered as an annual subscription.We also generate revenue from advertising,the in-app sale of virtual goods,and the Duolingo English Test.Cost of RevenuesCost of revenues predominantly consists of third-party payment processing fees charged by various distribution channels,and also includes hosting fees.To a muchlesser extent,cost of revenues includes costs for contractors,wages and stock-based compensation for certain employees in the capacity of customer support,amortization of revenue generating capitalized software,and depreciation of certain property and equipment.We intend to continue to invest additional resources in our infrastructure and our customer support and success organization to expand the capabilities of ourplatform and ensure that our users are realizing the full benefit of our products.The level,timing,and relative investment in these areas could affect our cost ofrevenues in the future.Gross Profit and Gross MarginGross profit represents revenues less cost of revenues.Gross margin is gross profit expressed as a percentage of revenues.Our gross profit may fluctuate fromperiod to period as our revenues fluctuate,and also as a result of the timing and amount of investments we make in items related to cost of revenues.Operating ExpensesOur operating expenses consist of research and development,sales and marketing,and general and administrative expenses.Personnel costs are the mostsignificant component of operating expenses and consist of salaries,benefits,and stock-based compensation expense.Operating expenses also include overheadcosts for facilities,including depreciation expense.Research and Development.We invest heavily in research and development to create new products and product features that help us grow our user base,engageour users,monetize our users,and teach our users.This,in turn,drives additional growth in,and better lifetime value of,our paid subscribers,as well as increasedadvertising revenue from impressions from our free users.Expenses are primarily made28up of costs incurred for the development of new and improved products and features in our applications.Such expenses include employee-related compensation,including stock-based compensation,of engineers,designers,and product managers,in addition to materials,travel and direct costs associated with the design andrequired testing of our platform.We expect engineers,designers,and product managers to represent a significant portion of our employees for the foreseeablefuture.We typically capitalize a small portion of research and development costs,mostly consisting of wages,each period into capitalized software when the work isspecific to launching a new product,or making major upgrades to our existing products or platforms.We regularly test product improvements with our users.Many ofthese tests start by making small changes in the product that affect small numbers of users.As the tests evolve,they can require increasing investment and canimpact more users.This process of constant testing is how we implement many of our new products and improvements to our platform and,in total,require largeinvestments and involve substantial time and risks to develop and launch.Some of these products and product improvements may not be well received or may takea long time for users to adopt.As a result,the benefits of our research and development investments may be difficult to forecast.We expect research anddevelopment to continue to be our largest operating expense,but expect that it will decline as a percentage of revenues over the long-term.Sales and Marketing.Sales and marketing expenses are expensed as incurred and consists primarily of brand advertising,marketing,digital and social mediaspend,field marketing,travel,trade show sponsorships and events,conferences,and employee-related compensation,including stock-based compensation forpersonnel engaged in sales and marketing functions,and amortization of non-revenue generating capitalized software used to promote Duolingo.We expect oursales and marketing expenses will decline as a percentage of revenues over the near-term.General and Administrative.General and administrative expenses primarily consist of employee-related compensation,including stock-based compensation,formanagement and administrative functions,including our finance and accounting,legal,and people teams.General and administrative expenses also include certainprofessional services fees,general corporate and director and officer insurance,our facilities costs,public company costs to comply with the rules and regulations ofthe SEC and the Listing Rules of the Nasdaq Global Select Market,and other general overhead costs that support our operations.We expect that our general andadministrative expenses will increase in absolute dollars as our business grows.However,we expect that our general and administrative expenses will decrease as apercentage of our revenues as our revenues grow faster than these expenses over the long-term.Interest IncomeInterest income consists of income earned on our money market funds included in cash and cash equivalents and on our marketable securities.Other(expense)income,netOther(expense)income,net consists primarily of foreign currency exchange gains and losses.Benefit from income taxesThe benefit for income taxes represents the income tax provision associated with our operations based on the tax laws of the jurisdictions in which we operate.Inaddition to the U.S.,we also operate in foreign jurisdictions that have different statutory rates.Our effective tax rates will vary depending on the relative proportion offoreign to domestic income,changes in the valuation of our deferred tax assets and liabilities,and changes in tax laws.29Results of OperationsComparison of the three months ended March 31,2024 and 2023The following table sets forth our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income(Loss)data,including year-over-yearchange,for the periods indicated:Three Months Ended March 31,(In thousands)20242023%ChangeRevenues$167,553$115,661 45%Cost of revenues(1)(2)45,191 31,492 43Gross profit122,362 84,169 45Operating expenses:Research and development(1)(2)50,878 45,844 11Sales and marketing(1)(2)19,931 16,601 20General and administrative(1)(2)35,114 30,243 16Total operating expenses105,923 92,688 14Income(loss)from operations16,439(8,519)nmOther(expense)income,net(621)182 nmIncome(loss)before interest income and income taxes15,818(8,337)nmInterest income10,033 5,639 78Income(loss)before income taxes25,851(2,698)nmBenefit from income taxes(1,105)(116)100Net income(loss)and comprehensive income(loss)$26,956$(2,582)nm_(1)Includes stock-based compensation expenses as follows:Three Months Ended March 31,(In thousands)20242023Cost of revenues$16$11 Research and development13,006 9,346 Sales and marketing1,054 779 General and administrative10,909 10,937 Total$24,985$21,073(2)Includes amortization of capitalized software and depreciation of property and equipment as follows:Three Months Ended March 31,(In thousands)20242023Cost of revenues(a)$848$403 Research and development440 407 Sales and marketing(a)211 398 General and administrative575 554 Total$2,074$1,762 _(a)Amortization of capitalized software is recorded to Cost of revenue and Sales and marketing for revenue and non-revenue generating capitalized software,respectively.30The following table sets forth the components of our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income(Loss)for each ofthe periods presented as a percentage of revenue.Three Months Ended March 31,20242023Revenues1000%Cost of revenues27 27 Gross profit73 73 Operating expenses:Research and development30 40 Sales and marketing12 14 General and administrative21 26 Total operating expenses63 80 Income(loss)from operations10(7)Other(expense)income,net Income(loss)before interest income and income taxes9(7)Interest income6 5 Income(loss)before income taxes15(2)Benefit from income taxes(1)Net income(loss)and comprehensive income(loss)16%(2)%RevenuesRevenues increased$51.9 million,or 45%,to$167.6 million during the three months ended March 31,2024,from revenues of$115.7 million during the three monthsended March 31,2023.The main drivers of the increase were:Subscription revenue increased by$45.5 million during the three months ended March 31,2024,primarily due to an increase in the average number of paidsubscribers during the period;Advertising revenue increased by$1.3 million during the three months ended March 31,2024.This increase was driven by the increase in DAUs,whichresulted in increased advertisements served,offset by decreases in average revenue per DAU.Duolingo English Test revenue increased by$2.8 million during the three months ended March 31,2024.The increase was primarily driven by increases inthe average revenue per test;In-App Purchases revenue increased by$2.1 million during the three months ended March 31,2024.This increase was primarily driven by the increase inDAUs;andOther revenue increased by$0.2 million during the three months ended March 31,2024,primarily due to increases in revenue from Duos Taquera.31The following table provides the changes in revenues by product type:Three Months Ended March 31,(in thousands)20242023Change%ChangeSubscription$131,688$86,185$45,503 53vertising12,952 11,635 1,317 11Duolingo English Test12,755 9,972 2,783 28In-App Purchases9,924 7,852 2,072 26Other234 17 217 100Total revenues$167,553$115,661$51,892 45%Cost of Revenues and Gross Margin.Total gross margin increased slightly to 73.0%from 72.8%during the three months ended March 31,2024 and 2023.Thiswas primarily due to higher subscription gross margin contribution from an increase in subscriber revenue as a percentage of total revenue,partially offset by adecline in Advertising margins,which was due to decreases in average revenue per DAU and increased amortization of capitalized software.The following table provides the change in cost of revenues,along with related gross margins:Three Months Ended March 31,20242023Change%Change(In thousands,except gross margin)CostsGross MarginCostsGross MarginCostsGross MarginTotal cost of revenues$45,191 73.0%$31,492 72.8%$13,699 0.2%Operating ExpensesResearch and Development.Research and development expense increased by$5.0 million,or 11%,to$50.9 million during the three months ended March 31,2024 from$45.8 million during the three months ended March 31,2023.The increase was mainly due to:Increased net personnel costs of$5.7 million.Total gross personnel costs increased by$8.3 million,of which$4.0 million of the increase was related tostock-based compensation expense.This increase was reduced by an additional$2.6 million wages recorded as capitalized software as compared to thesame period in the prior year;Increased web services and technology costs of$0.5 million;andIncreased travel and meal costs of$0.1 million;The above increases were partially offset by a decrease in net contractor costs of$1.3 million.Research and development continues to be our largest operating expense as we test and experiment with new products and product features and improve existingones to drive engagement and efficacy of our products.Increased engagement and efficacy,we believe,help drive organic growth in MAUs and DAUs,growth in,and better retention of,paid subscribers,as well as increased advertising opportunities with free users.Sales and Marketing.Sales and marketing expense increased by$3.3 million,or 20%,to$19.9 million during the three months ended March 31,2024 from$16.6 million during the three months ended March 31,2023.This increase was mainly due to:32Increased direct marketing and other expenses of$2.8 million;andIncreased personnel costs of$0.5 million driven primarily by the growth in headcount,including increased stock-based compensation expense of$0.3 million.Direct marketing spend and other marketing expenses as a percentage of revenue decreased as a result of applying learnings from past years,which enabled us toleverage marketing expenses more efficiently.General and Administrative.General and administrative expense increased by$4.9 million,or 16%,to$35.1 million during the three months ended March 31,2024from$30.2 million during the three months ended March 31,2023.This increase was mainly due to:Increased personnel costs of$1.8 million,including increased stock-based compensation expense of$0.2 million;Increased facility-related costs of$1.2 million;Increased professional fees of$0.9 million;Increased web services and technology costs of$0.6 million;Increased travel and meals expenses of$0.4 million;andIncreased sales and VAT taxes and other expenses of$0.4 million.The above increases were partially offset by decreases in insurance costs and other costs of$0.4 million.Interest IncomeInterest income increased by$4.4 million,or 78%,to$10.0 million during the three months ended March 31,2024,from$5.6 million during the three months endedMarch 31,2023 due to an increase in interest rates earned on our money market funds and higher average balances.Other(expense)income,netOther(expense)income,net decreased by$0.8 million,during the three months ended March 31,2024,mainly from the impact from changes in foreign currencyrates.Benefit from income taxesBenefit for income taxes increased$1.0 million,to$1.1 million during the three months ended March 31,2024,from$0.1 million during the three months endedMarch 31,2023,primarily attributable to the excess tax benefits of stock-based compensation activity which occurred during the period.Liquidity and Capital ResourcesSince inception,we have financed operations primarily through revenues and the net proceeds we have received from the issuance of equity.As of March 31,2024,we had$829.7 million in cash and cash equivalents.Our cash and cash equivalents primarily consist of bank deposits and money marketfunds.Our marketable securities consist of U.S.government treasury and agency securities.We believe that our existing cash and cash equivalents,and cash flow from operations will be sufficient to support working capital and capital expenditurerequirements for at least the next 12 months.Our future capital requirements will depend on many factors,including our subscription growth rate and renewal activity,the timing of cash received from our payment processing platforms,the expansion of our sales33and marketing activities,the introduction of new products and the enhancements to existing products,and the current uncertainty in the global markets impacting,forexample,consumer spending,inflation and foreign currency exchange rates.If we cannot meet our future capital requirements,we may be required to seekadditional liquidity.If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation,we maynot be able to compete successfully,which would harm our business and financial condition and results of operations.A substantial source of our cash from operations comes from deferred revenue,which is included in the liabilities section of our Unaudited Condensed ConsolidatedBalance Sheet.Deferred revenues consists of the unearned portion of customer billings,which is recognized as revenue in accordance with our revenue recognitionpolicy.As of March 31,2024,we had deferred revenues of$279.3 million,which is recorded as a current liability and expected to be recognized as revenue in thenext 12 months,provided all other revenue recognition criteria have been met.The following table summarizes our cash flows for the periods presented:Three Months Ended March 31,(In thousands)20242023Net cash provided by operating activities$83,514$29,604 Net cash used for investing activities(5,021)(1,312)Net cash provided by financing activities3,610 4,619 Net increase in cash,cash equivalents and restricted cash$82,103$32,911 Operating ActivitiesCash flows from operating activities can fluctuate significantly from period to period due to timing of payments and cash collections.Our largest source of operatingcash is cash collection from sales of subscriptions to our users.Our primary uses of cash from operating activities are for personnel expenses,marketing expenses,hosting expenses,and overhead expenses.Cash provided by operating activities increased by$53.9 million,or 182%,to$83.5 million for the three months ended March 31,2024 from$29.6 million for thethree months ended March 31,2023.This increase was mainly due to generation of net income during the current period and the timing of amounts received fromour payment service providers in the current period as compared to the same period in the prior year.Investing ActivitiesCash used for investing activities increased by$3.7 million,or 283%,to$5.0 million for the three months ended March 31,2024,from$1.3 million for the threemonths ended March 31,2023.The increase was due to the increases in costs from capitalization of software development and purchases of property andequipment as compared to the prior period.Financing ActivitiesCash provided by financing activities decreased by$1.1 million,or 24%,to$3.6 million for the three months ended March 31,2024 from$4.6 million for the threemonths ended March 31,2023.The decrease was due to a decrease in proceeds from exercises of stock options.Critical Accounting Estimates34Our Unaudited Condensed Consolidated Financial Statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are preparedin accordance with GAAP.The preparation of Unaudited Condensed Consolidated Financial Statements also requires us to make estimates and assumptions thataffect the reported amounts of assets,liabilities,revenue,costs and expenses,and related disclosures.We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under the circumstances.Actual results could differ significantly from the estimates made bymanagement.To the extent that there are differences between our estimates and actual results,our future financial statement presentation,financial condition,results of operations,and cash flows will be affected.There have been no material changes to our critical accounting policies and estimates as compared to those described in“Managements Discussion and Analysis ofFinancial Condition and Results of Operations”set forth in our Annual Report on Form 10-K.Recent Accounting PronouncementsSee Note 1.Description of the Business and Basis of Presentation and Note 2.Summary of Significant Accounting Policies in the notes to our Unaudited CondensedConsolidated Financial Statements included in Part I,Item I of this Quarterly Report on Form 10-Q for a discussion of Recent Accounting Pronouncements.Item 3.Quantitative and Qualitative Disclosures About Market RiskInterest Rate RiskAs of March 31,2024,we had$781.8 million of cash equivalents invested in money market funds.Our cash and cash equivalents are held for working capitalpurposes in addition to future investments in our product.We do not enter into investments for trading or speculative purposes.Our investments are exposed tomarket risk due to a fluctuation in interest rates,which may affect our interest income and the fair market value of our investments.As of March 31,2024,ahypothetical 10%relative change in interest rates would not have a material impact on our Unaudited Condensed Consolidated Financial Statements.Foreign Currency Exchange RiskOur reporting currency and the functional currency of our wholly owned foreign subsidiaries is the U.S.dollar.Certain of our payment providers translate ourpayments from local currency into USD at time of settlement,which means that during periods of a strengthening U.S.dollar,our international receipts could bereduced.Our operating expenses are denominated in the currencies of the countries in which our operations are located,which are primarily in the U.S.,China andGermany.Our consolidated results of operations and cash flows are,therefore,subject to fluctuations due to changes in foreign currency exchange rates and maybe adversely affected in the future due to changes in foreign exchange rates.In addition,as foreign currency exchange rates fluctuate,the translation of ourinternational receipts into U.S.dollars affects the period-over-period comparability of our operating results and can result in foreign currency exchange gains andlosses.To date,we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments,although we maychoose to do so in the future.A hypothetical 10%increase or decrease in the relative value of the U.S.dollar to other currencies would not have a material effect onour operating results.Inflation RiskInflationary factors such as increases in costs may adversely affect our results of operations.We do not believe that inflation has had a material effect on ourbusiness,financial condition or results of operations to date.If our costs were to become subject to significant inflationary pressures,we may not be able to35fully offset such higher costs through price increases.Our inability or failure to do so could harm our business,financial condition or results of operations.Item 4.Controls and ProceduresLimitations on Effectiveness of Controls and ProceduresOur disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their desiredobjectives.Management does not expect,however,that our disclosure controls and procedures or our internal control over financial reporting will prevent or detectall error and fraud.Any control system,no matter how well designed and operated,is based upon certain assumptions and can provide only reasonable,notabsolute,assurance that its objectives will be met.Further,no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will notoccur or that all control issues and instances of fraud,if any,within the Company have been detected.Evaluation of Disclosure Controls and ProceduresOur management,with the participation of our principal executive officer and principal financial officer,conducted an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures,as defined in Rules 13a-15(e)and 15d-15(e)under the Exchange Act,as of the end of the period covered bythis Quarterly Report on Form 10-Q.Based on that evaluation,our principal executive officer and principal financial officer have concluded that our disclosurecontrols and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to provide reasonable assurance that informationrequired to be disclosed by us in reports that we file or submit under the Exchange Act is(i)recorded,processed,summarized and reported within the time periodsspecified in the SEC rules and forms and(ii)accumulated and communicated to our management,including our principal executive officer and principal financialofficer,as appropriate to allow timely decisions regarding required disclosure.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting,as defined in Rules 13a-15(f)and 15d-15(f)under the Exchange Act,during the three monthsended March 31,2024 that materially affected,or are reasonably likely to materially affect,our internal control over financial reporting.36Part II Other InformationItem 1.Legal ProceedingsFrom time to time we may be involved in claims and proceedings arising in the course of our business.The outcome of any such claims or proceedings,regardlessof the merits,is inherently uncertain.We are not currently party to any material legal proceedings.Item 1A.Risk FactorsOur business,operations and financial results are subject to various risks and uncertainties that could materially adversely affect our business,financial condition,results of operations and the trading price of our Class A common stock.You should carefully consider the risks and uncertainties described below,together with allof the other information contained in this Quarterly Report on Form 10-Q,including Part I,Item 2.Managements Discussion and Analysis of Financial Condition andResults of Operations and the financial statements and the related notes.If any of the following risks actually occur,it could harm our business,prospects,financialcondition,and results of operations and future prospects.In such an event,the market price of our Class A common stock could decline and you could lose all or partof your investment.This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties.Our actual results could differmaterially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Quarterly Report.Risks Related to Our Business and IndustryIf we fail to keep existing users or add new users,or if our users decrease their level of engagement with our products or do not convert to paying users,our revenue,financial results and business may be significantly harmed.The size of our user base and our users level of engagement and paid conversion are critical to our success.Our financial performance has been and will continueto be significantly determined by our success in adding,keeping and engaging users of our products and converting them into paying subscribers who remaincontinuing paying subscribers.We expect that the size of our user base will fluctuate or decline in one or more markets from time to time.If people do not perceiveour products to be useful,effective,reliable,and/or trustworthy,we may not be able to attract or keep users or otherwise maintain or increase the frequency andduration of their engagement or the percentage of users that are converted into or remain paying subscribers.There is no guarantee that we will not experience anerosion of our user or subscriber base or engagement levels.User engagement can be difficult to measure,particularly as we introduce new and different productsand services.Any number of factors can negatively affect user stickiness,growth,engagement and conversion,including if:users increasingly engage with other competitive products or services instead of our own;user behavior on any of our products changes,including decreases in the frequency and duration of use of our products and services;users feel that their experience is diminished as a result of the decisions we make with respect to the frequency,prominence,format,size and quality of adsthat we display;users become concerned about our user data practices or other matters related to privacy,security and the sharing of user data;users lose confidence in our ability to teach language or there is a decrease in user stickiness as a result of users no longer being interested in pursuingonline language learning or reaching a point where they feel our product cannot advance their language ability;37users are no longer willing to pay for subscriptions or in-app purchases or we are unable to increase the price of our subscriptions or in-app purchases;users have difficulty installing,updating or otherwise accessing our products on mobile devices as a result of actions by us or third parties that we rely on todistribute our products and deliver our services;we fail to introduce new features,products or services that users find engaging or that are well received,or if we introduce new products or services,or makechanges to existing products and services,that are not favorably received or that we are not able to monetize;initiatives designed to attract and keep users and increase engagement are unsuccessful or discontinued,whether as a result of actions by us,third partiesor otherwise;third-party initiatives that may enable greater use of our products,including low-cost or discounted data plans,are discontinued;we adopt terms,policies or procedures related to areas such as user data or advertising that are perceived negatively by our users or the general public;we fail to combat inappropriate or abusive activity on our platform;we fail to provide adequate customer service to users,marketers or other partners;we fail to protect our brand image or reputation;we,our partners,or companies in our industry are the subject of adverse media reports or other negative publicity,including as a result of our or their userdata practices;technical or other problems prevent us from delivering our products in a rapid an
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Unleash InnovationTSMC,Ltd02024TSMC PropertyUnleash Innovation2024 First Quarter Earnings Conference April 18,2024Unleash InnovationTSMC,Ltd12024TSMC PropertyAgendaWelcomeJeff Su,IR Director1Q24 Financial Results and 2Q24 OutlookWendell Huang,CFOKey Messages Wendell Huang,CFO C.C.Wei,CEOQ&AUnleash InnovationTSMC,Ltd22024TSMC PropertySafe Harbor NoticeTSMCs statements of its current expectations are forward-looking statements subject to significant risks and uncertainties and actual results may differ materially from those contained in the forward-looking statements.Information as to those factors that could cause actual results to vary can be found in TSMCs 2022 Annual Report on Form 20-F filed with the United States Securities and Exchange Commission(the“SEC”)on April 20,2023 and such other documents as TSMC may file with,or submit to,the SEC from time to time.Except as required by law,we undertake no obligation to update any forward-looking statement,whether as a result of new information,future events,or otherwise.Unleash InnovationTSMC,Ltd32024TSMC PropertyStatements of Comprehensive IncomeSelected Items from Statements of Comprehensive Income 1Q24(In NT$billions unless otherwise noted)GuidanceNet Revenue(US$billions)18.8718.0-18.819.6216.72-3.8% 12.9%Net Revenue592.64625.53508.63-5.3% 16.5%Gross Margin53.1R%-54S.0V.3% 0.1 ppt-3.2 pptsOperating Expenses(65.36)(71.62)(55.31)-8.7% 18.2%Operating Margin42.0%-42A.6E.5% 0.4 ppt-3.5 pptsNon-Operating Items17.5218.0713.04-3.0% 34.4%Net Income Attributable to Shareholders of the Parent Company225.49238.71206.99-5.5% 8.9%Net Profit Margin38.08.2.7%-0.2 ppt-2.7 pptsEPS(NT Dollar)8.709.217.98-5.5% 8.9%ROE25.4(.1.5%-2.7 ppts-2.1 pptsShipment(Kpcs,12-equiv.Wafer)3,0302,9573,227 2.5%-6.1%Average Exchange Rate-USD/NTD31.4031.1031.8830.42-1.5% 3.2%*Diluted weighted average outstanding shares were 25,930mn units in 1Q24*ROE figures are annualized based on average equity attributable to shareholders of the parent company1Q244Q231Q231Q24Over4Q231Q24Over1Q23Unleash InnovationTSMC,Ltd42024TSMC Property-50 100 150 200 250 300 350 400Revenue(NT$B)7nm5nm3nm1Q24 Revenue by Technology7nm and Below Revenue0.11/0.13um 3nm 1%0.25um and above 1/45nm 5(nm8nm 9%0.15/0.18um 4enm 4%7nm19%5nm37%3nm9%Unleash InnovationTSMC,Ltd52024TSMC Property1Q24 Revenue by Platform 3%-16% 5% 0% 33%-8%Growth Rate by Platform(QoQ)Automotive6E2%Others2%IoT6%SmartphoneAutomotiveOthersHPCIoTDCEHPC46%Smartphone38%Unleash InnovationTSMC,Ltd62024TSMC PropertyBalance Sheets&Key IndicesSelected Items from Balance Sheets(In NT$billions)Amount%Amount%Amountsh&Marketable Securities1,922.66 33.2%1,687.65 30.5%1,589.19 31.6counts Receivable201.98 3.5 1.943.78.052.9%Inventories267.124.6%0.994.5!6.074.3%Long-term Investments138.472.49.442.3i.911.4%Net PP&E3,051.85 52.7%3,064.48 55.4%2,833.40 56.1%Total Assets5,787.89 100.0%5,532.37 100.0%5,045.84 100.0%Current Liabilities1,026.18 17.73.5816.53.0917.3%Long-term Interest-bearing Debts965.5616.78.2816.64.7916.9%Total Liabilities2,122.18 36.7%2,049.11 37.0%1,952.95 38.7%Total Shareholders Equity3,665.71 63.3%3,483.26 63.0%3,092.89 61.3%Key IndicesA/R Turnover DaysInventory Turnover DaysCurrent Ratio(x)Asset Productivity(x)*Total outstanding shares were 25,934mn units at 3/31/24*Asset productivity=Annualized net revenue/Average net PP&E2.42.42.30.80.80.7901Q244Q231Q233131348596Unleash InnovationTSMC,Ltd72024TSMC PropertyCash Flows*Free cash flow =Cash from operating activities Capital expenditures(In NT$billions)1Q244Q231Q23Beginning Balance1,465.431,311.811,342.81Cash from operating activities436.31394.83385.24Capital expenditures(181.30)(170.16)(302.50)Cash dividends(77.80)(77.80)(71.30)Bonds payable22.809.807.30Investments and others32.76(3.05)23.68Ending Balance1,698.201,465.431,385.23Free Cash Flow255.01224.6782.74*Unleash InnovationTSMC,Ltd82024TSMC Property2Q24 GuidanceRevenue to be between US$19.6 billion and US$20.4 billionBased on our current business outlook,management expects:And,based on the exchange rate assumption of 1 US dollar to 32.3 NT dollars,management expects:Gross profit margin to be between 51%and 53%Operating profit margin to be between 40%and 42%Unleash InnovationTSMC,Ltd92024TSMC PropertyPlease visit TSMCs website(https:/)and Market Observation Post System(https:/.tw)for details and other announcementsTSMC Announces Candidates for Board of Directors(2024/04/12)TSMC Arizona and U.S.Department of Commerce Announce up to US$6.6 Billion in Proposed CHIPS Act Direct Funding,the Company Plans Third Leading-Edge Fab in Phoenix(2024/04/08)TSMC Board of Directors Hold a Special Meeting and Approve the Appointment of Senior Vice President of R&D Dr.Y.J.Mii and Senior Vice President of Operations Mr.Y.P.Chyn as Executive Vice Presidents and Co-Chief Operating Officers of TSMC(2024/02/29)TSMC Celebrates the Opening of JASM in Kumamoto,Japan(2024/02/24)JASM Set to Expand in Kumamoto,Japan(2024/02/06)TSMC Board of Directors Approved NT$3.50 Cash Dividend for the Fourth Quarter of 2023 and Set June 13,2024 as Ex-Dividend Date,June 19,2024 as the Record Date,and July 11,2024 as the Distribution Date(2024/02/06)TSMC Board of Directors Approved the Convening of the 2024 Annual Shareholders Meeting on June 4,2024,at Which an Election for its Ten-Member Board of Directors Will Be Held(2024/02/06)Recap of Recent Major EventsUnleash InnovationTSMC,Ltd102024TSMC Propertyhttps:/
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