Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 _FORM 10-Q_(Mark One)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended June 30,2023orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to .Commission File No.000-22513_AMAZON.COM,INC.(Exact name of registrant as specified in its charter)_Delaware 91-1646860(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification No.)410 Terry Avenue North,Seattle,Washington 98109-5210(206)266-1000(Address and telephone number,including area code,of registrants principal executive offices)Securities registered pursuant to Section 12(b)of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock,par value$.01 per shareAMZNNasdaq Global Select Market_Indicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during thepreceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for the past90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-Tduring the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growthcompany.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No 10,317,750,796 shares of common stock,par value$0.01 per share,outstanding as of July 21,2023Table of ContentsAMAZON.COM,INC.FORM 10-QFor the Quarterly Period Ended June 30,2023INDEX PagePART I.FINANCIAL INFORMATIONItem 1.Financial Statements3Consolidated Statements of Cash Flows3Consolidated Statements of Operations4Consolidated Statements of Comprehensive Income(Loss)5Consolidated Balance Sheets6Notes to Consolidated Financial Statements7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations21Item 3.Quantitative and Qualitative Disclosures About Market Risk32Item 4.Controls and Procedures33PART II.OTHER INFORMATIONItem 1.Legal Proceedings34Item 1A.Risk Factors34Item 2.Unregistered Sales of Equity Securities and Use of Proceeds45Item 3.Defaults Upon Senior Securities45Item 4.Mine Safety Disclosures45Item 5.Other Information45Item 6.Exhibits46Signatures472Table of ContentsPART I.FINANCIAL INFORMATIONItem 1.Financial StatementsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions)(unaudited)Three Months EndedJune 30,Six Months EndedJune 30,Twelve Months EndedJune 30,202220232022202320222023CASH,CASH EQUIVALENTS,AND RESTRICTED CASH,BEGINNING OF PERIOD$36,599$49,734$36,477$54,253$40,667$37,700 OPERATING ACTIVITIES:Net income(loss)(2,028)6,750(5,872)9,922 11,607 13,072 Adjustments to reconcile net income(loss)to net cash from operating activities:Depreciation and amortization of property and equipment and capitalized content costs,operating leaseassets,and other9,716 11,589 18,909 22,712 37,748 45,724 Stock-based compensation5,209 7,127 8,459 11,875 15,319 23,037 Non-operating expense(income),net6,104 47 14,793 581 3,201 2,754 Deferred income taxes(1,955)(2,744)(3,956)(3,216)(6,670)(7,408)Changes in operating assets and liabilities:Inventories(3,890)(2,373)(6,504)(2,002)(15,478)1,910 Accounts receivable,net and other(6,799)(5,167)(8,315)(3,646)(19,761)(17,228)Accounts payable3,699 3,029(5,681)(8,235)6,140 391 Accrued expenses and other(1,412)(1,938)(7,315)(7,701)553(1,944)Unearned revenue321 156 1,657 974 2,915 1,533 Net cash provided by(used in)operating activities8,965 16,476 6,175 21,264 35,574 61,841 INVESTING ACTIVITIES:Purchases of property and equipment(15,724)(11,455)(30,675)(25,662)(65,358)(58,632)Proceeds from property and equipment sales and incentives1,626 1,043 2,835 2,180 6,297 4,669 Acquisitions,net of cash acquired,and other(259)(316)(6,600)(3,829)(7,635)(5,545)Sales and maturities of marketable securities2,608 1,551 25,361 2,666 53,706 8,906 Purchases of marketable securities(329)(496)(2,093)(834)(25,590)(1,306)Net cash provided by(used in)investing activities(12,078)(9,673)(11,172)(25,479)(38,580)(51,908)FINANCING ACTIVITIES:Common stock repurchased(3,334)(6,000)(6,000)Proceeds from short-term debt,and other4,865 4,399 18,608 17,179 23,462 40,124 Repayments of short-term debt,and other(7,610)(7,641)(13,841)(11,244)(18,417)(34,957)Proceeds from long-term debt12,824 12,824 13,200 8,342 Repayments of long-term debt(1)(2,000)(1)(3,386)(1,511)(4,643)Principal repayments of finance leases(2,059)(1,220)(4,836)(2,600)(9,789)(5,705)Principal repayments of financing obligations(59)(77)(138)(134)(205)(244)Net cash provided by(used in)financing activities4,626(6,539)6,616(185)740 2,917 Foreign currency effect on cash,cash equivalents,and restricted cash(412)69(396)214(701)(483)Net increase(decrease)in cash,cash equivalents,and restricted cash1,101 333 1,223(4,186)(2,967)12,367 CASH,CASH EQUIVALENTS,AND RESTRICTED CASH,END OF PERIOD$37,700$50,067$37,700$50,067$37,700$50,067 See accompanying notes to consolidated financial statements.3Table of ContentsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in millions,except per share data)(unaudited)Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Net product sales$56,575$59,032$113,030$116,013 Net service sales64,659 75,351 124,648 145,728 Total net sales121,234 134,383 237,678 261,741 Operating expenses:Cost of sales66,424 69,373 132,923 137,164 Fulfillment20,342 21,305 40,613 42,210 Technology and infrastructure18,072 21,931 32,914 42,381 Sales and marketing10,086 10,745 18,406 20,917 General and administrative2,903 3,202 5,497 6,245 Other operating expense(income),net90 146 339 369 Total operating expenses117,917 126,702 230,692 249,286 Operating income3,317 7,681 6,986 12,455 Interest income159 661 267 1,272 Interest expense(584)(840)(1,056)(1,663)Other income(expense),net(5,545)61(14,115)(382)Total non-operating expense(5,970)(118)(14,904)(773)Income(loss)before income taxes(2,653)7,563(7,918)11,682 Benefit(provision)for income taxes637(804)2,059(1,752)Equity-method investment activity,net of tax(12)(9)(13)(8)Net income(loss)$(2,028)$6,750$(5,872)$9,922 Basic earnings per share$(0.20)$0.66$(0.58)$0.97 Diluted earnings per share$(0.20)$0.65$(0.58)$0.95 Weighted-average shares used in computation of earnings per share:Basic10,175 10,285 10,173 10,268 Diluted10,175 10,449 10,173 10,398 See accompanying notes to consolidated financial statements.4Table of ContentsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS)(in millions)(unaudited)Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Net income(loss)$(2,028)$6,750$(5,872)$9,922 Other comprehensive income(loss):Foreign currency translation adjustments,net of tax of$76,$(22),$60,and$(32)(2,186)264(2,519)650 Net change in unrealized gains(losses)on available-for-sale debtsecurities:Unrealized gains(losses),net of tax of$0,$(5),$1,and$(34)(238)17(900)112 Reclassification adjustment for losses(gains)included in“Otherincome(expense),net,”net of tax of$0,$(5),$0,and$(15)7 12 13 45 Net unrealized gains(losses)on available-for-sale debt securities(231)29(887)157 Total other comprehensive income(loss)(2,417)293(3,406)807 Comprehensive income(loss)$(4,445)$7,043$(9,278)$10,729 See accompanying notes to consolidated financial statements.5Table of ContentsAMAZON.COM,INC.CONSOLIDATED BALANCE SHEETS(in millions,except per share data)December 31,2022June 30,2023(unaudited)ASSETSCurrent assets:Cash and cash equivalents$53,888$49,529 Marketable securities16,138 14,441 Inventories34,405 36,587 Accounts receivable,net and other42,360 39,925 Total current assets146,791 140,482 Property and equipment,net186,715 193,784 Operating leases66,123 70,332 Goodwill20,288 22,785 Other assets42,758 50,224 Total assets$462,675$477,607 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable$79,600$69,481 Accrued expenses and other62,566 64,235 Unearned revenue13,227 14,522 Total current liabilities155,393 148,238 Long-term lease liabilities72,968 75,822 Long-term debt67,150 63,092 Other long-term liabilities21,121 21,853 Commitments and contingencies(Note 4)Stockholders equity:Preferred stock($0.01 par value;500 shares authorized;no shares issued or outstanding)Common stock($0.01 par value;100,000 shares authorized;10,757 and 10,828 shares issued;10,242 and10,313 shares outstanding)108 108 Treasury stock,at cost(7,837)(7,837)Additional paid-in capital75,066 86,896 Accumulated other comprehensive income(loss)(4,487)(3,680)Retained earnings83,193 93,115 Total stockholders equity146,043 168,602 Total liabilities and stockholders equity$462,675$477,607 See accompanying notes to consolidated financial statements.6Table of ContentsAMAZON.COM,INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 1 ACCOUNTING POLICIES AND SUPPLEMENTAL DISCLOSURESUnaudited Interim Financial InformationWe have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission(the“SEC”)for interim financial reporting.These consolidated financial statements are unaudited and,in our opinion,include all adjustments,consisting ofnormal recurring adjustments and accruals necessary for a fair presentation of our consolidated cash flows,operating results,and balance sheets for the periodspresented.Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2023 due to seasonal and otherfactors.Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generallyaccepted in the United States(“GAAP”)have been omitted in accordance with the rules and regulations of the SEC.These consolidated financial statementsshould be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II,“Financial Statements andSupplementary Data,”of our 2022 Annual Report on Form 10-K.Prior Period ReclassificationsCertain prior period amounts have been reclassified to conform to the current period presentation.“Other operating expense(income),net”wasreclassified into“Depreciation and amortization of property and equipment and capitalized content costs,operating lease assets,and other”on our consolidatedstatements of cash flows.Principles of ConsolidationThe consolidated financial statements include the accounts of A,Inc.and its consolidated entities(collectively,the“Company”),consisting ofits wholly-owned subsidiaries and those entities in which we have a variable interest and of which we are the primary beneficiary,including certain entities inIndia and certain entities that support our health care services and seller lending financing activities.Intercompany balances and transactions betweenconsolidated entities are eliminated.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets andliabilities,revenues and expenses,and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes.Estimatesare used for,but not limited to,income taxes,useful lives of equipment,commitments and contingencies,valuation of acquired intangibles and goodwill,stock-based compensation forfeiture rates,vendor funding,inventory valuation,collectability of receivables,impairment of property and equipment and operatingleases,valuation and impairment of investments,self-insurance liabilities,and viewing patterns of capitalized video content.Actual results could differmaterially from these estimates.For the six months ended June 30,2023,we recorded approximately$510 million of estimated severance costs primarily related to planned roleeliminations.These charges were recorded primarily in“Sales and marketing,”“Technology and infrastructure,”and“General and administrative”on ourconsolidated statements of operations and included approximately$320 million recorded within our AWS segment.For the six months ended June 30,2022 and 2023,we recorded approximately$260 million and$250 million of impairments of property and equipmentand operating leases primarily related to physical stores in 2022 and fulfillment network facilities in 2023.These charges were recorded in“Other operatingexpense(income),net”on our consolidated statements of operations and primarily impacted our North America segment.For the six months ended June 30,2022 and 2023,we also recorded expenses of approximately$230 million and$180 million primarily in“Fulfillment”in 2022 and“Cost of sales”and“Fulfillment”in 2023,on our consolidated statements of operations primarily relating to terminating contracts for certain leases not yet commenced as well asother purchase commitments,which primarily impacted our North America segment.7Table of ContentsSupplemental Cash Flow InformationThe following table shows supplemental cash flow information(in millions):Three Months EndedJune 30,Six Months EndedJune 30,Twelve Months EndedJune 30,202220232022202320222023SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest on debt,net of capitalized interest$349$954$628$1,356$1,271$2,289 Cash paid for operating leases2,088 2,528 4,455 4,995 7,960 9,173 Cash paid for interest on finance leases95 77 202 158 437 330 Cash paid for interest on financing obligations55 41 113 100 198 194 Cash paid for income taxes,net of refunds3,145 3,735 3,598 4,354 4,682 6,791 Assets acquired under operating leases5,101 4,104 7,276 7,730 23,531 19,254 Property and equipment acquired under finance leases,net of remeasurements andmodifications61 240 227 248 3,579 696 Property and equipment recognized during the construction period of build-to-suitlease arrangements986 84 2,351 215 6,117 1,051 Property and equipment derecognized after the construction period of build-to-suitlease arrangements,with the associated leases recognized as operating1,079 1,112 720 1,243 4,766 Earnings Per ShareBasic earnings per share is calculated using our weighted-average outstanding common shares.Diluted earnings per share is calculated using ourweighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method.In periods when wehave a net loss,stock awards are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect.The following table shows the calculation of diluted shares(in millions):Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Shares used in computation of basic earnings per share10,175 10,285 10,173 10,268 Total dilutive effect of outstanding stock awards 164 130 Shares used in computation of diluted earnings per share10,175 10,449 10,173 10,398 Other Income(Expense),NetOther income(expense),net,is as follows(in millions):Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Marketable equity securities valuation gains(losses)$(4,322)$299$(12,567)$(181)Equity warrant valuation gains(losses)(1,124)(220)(1,436)(161)Upward adjustments relating to equity investments in private companies58 10 65 26 Foreign currency gains(losses)(117)9(103)79 Other,net(40)(37)(74)(145)Total other income(expense),net(5,545)61(14,115)(382)Included in other income(expense),net is a marketable equity securities valuation gain(loss)of$(3.9)billion and$187 million in Q2 2022 and Q2 2023,and$(11.5)billion and$(280)million for the six months ended June 30,2022 and 2023,from our equity investment in Rivian Automotive,Inc.(“Rivian”).Ourinvestment in Rivians preferred stock was accounted for at cost,with adjustments for observable changes in prices or impairments,prior to Rivians initialpublic offering in November 2021,which resulted in the conversion of our preferred stock to Class A common stock.As of June 30,2023,we held 158 millionshares of Rivians Class A common stock,representing an approximate 17%ownership interest,and an approximate 16%voting interest.We determined thatwe have the ability to exercise significant influence over Rivian through our equity investment,our commercial arrangement for the purchase of electricvehicles,and one of our employees serving on Rivians8Table of Contentsboard of directors.We elected the fair value option to account for our equity investment in Rivian,which is included in“Marketable securities”on ourconsolidated balance sheets,and had a fair value of$2.9 billion and$2.6 billion as of December 31,2022 and June 30,2023.The investment was subject toregulatory sales restrictions resulting in a discount for lack of marketability of approximately$800 million as of December 31,2021,which expired in Q12022.Required summarized financial information of Rivian as disclosed in its most recent SEC filings is as follows(in millions):Three Months Ended March 31,20222023Revenues$95$661 Gross profit(502)(535)Loss from operations(1,579)(1,433)Net loss(1,593)(1,349)InventoriesInventories,consisting of products available for sale,are primarily accounted for using the first-in,first-out method,and are valued at the lower of costand net realizable value.This valuation requires us to make judgments,based on currently available information,about the likely method of disposition,suchas through sales to individual customers,returns to product vendors,or liquidations,and expected recoverable values of each disposition category.Theinventory valuation allowance,representing a write-down of inventory,was$2.8 billion and$2.7 billion as of December 31,2022 and June 30,2023.Accounts Receivable,Net and OtherIncluded in“Accounts receivable,net and other”on our consolidated balance sheets are receivables primarily related to customers,vendors,and sellers,as well as prepaid expenses and other current assets.As of December 31,2022 and June 30,2023,customer receivables,net,were$26.6 billion and$25.3billion,vendor receivables,net,were$6.9 billion and$5.6 billion,seller receivables,net,were$1.3 billion and$1.3 billion,and other receivables,net,were$3.1 billion and$2.7 billion.Seller receivables are amounts due from sellers related to our seller lending program,which provides funding to sellers primarilyto procure inventory.Prepaid expenses and other current assets were$4.5 billion and$5.0 billion as of December 31,2022 and June 30,2023.We estimate losses on receivables based on expected losses,including our historical experience of actual losses.The allowance for doubtful accounts was$1.4 billion and$1.5 billion as of December 31,2022 and June 30,2023.Digital Video and Music ContentThe total capitalized costs of video,which is primarily released content,and music as of December 31,2022 and June 30,2023 were$16.7 billion and$17.8 billion.The weighted average remaining life of our capitalized video content is 3.6 years.Total video and music expense was$3.7 billion and$4.4billion in Q2 2022 and Q2 2023,and$7.3 billion and$8.4 billion for the six months ended June 30,2022 and 2023.Unearned RevenueUnearned revenue is recorded when payments are received or due in advance of performing our service obligations and is recognized over the serviceperiod.Unearned revenue primarily relates to prepayments of AWS services and Amazon Prime memberships.Our total unearned revenue as of December 31,2022 was$16.1 billion,of which$8.6 billion was recognized as revenue during the six months ended June 30,2023.Included in“Other long-term liabilities”on our consolidated balance sheets was$2.9 billion and$2.7 billion of unearned revenue as of December 31,2022 and June 30,2023.Additionally,we have performance obligations,primarily related to AWS,associated with commitments in customer contracts for future services thathave not yet been recognized in our consolidated financial statements.For contracts with original terms that exceed one year,those commitments not yetrecognized were$132.1 billion as of June 30,2023.The weighted-average remaining life of our long-term contracts is 3.6 years.However,the amount andtiming of revenue recognition is largely driven by customer usage,which can extend beyond the original contractual term.Acquisition ActivityOn February 22,2023,we acquired 1Life Healthcare,Inc.(“One Medical”),for cash consideration of approximately$3.5 billion,net of cash acquired,toprovide health care options for customers.The acquired assets primarily consist of$1.3 billion9Table of Contentsof intangible assets and$2.5 billion of goodwill,which is allocated to our North America segment.The valuation of certain assets and liabilities is preliminaryand subject to change.Pro forma results of operations have not been presented because the effects of the One Medical acquisition were not material to our consolidated resultsof operations.Acquisition-related costs were expensed as incurred and were not significant.Note 2 FINANCIAL INSTRUMENTSCash,Cash Equivalents,Restricted Cash,and Marketable SecuritiesAs of December 31,2022 and June 30,2023,our cash,cash equivalents,restricted cash,and marketable securities primarily consisted of cash,AAA-rated money market funds,U.S.and foreign government and agency securities,other investment grade securities,and marketable equity securities.Cashequivalents and marketable securities are recorded at fair value.Fair value is defined as the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at the measurement date.To increase the comparability of fair value measures,the followinghierarchy prioritizes the inputs to valuation methodologies used to measure fair value:Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.Level 2Valuations based on observable inputs other than quoted prices included in Level 1,such as quoted prices for similar assets and liabilities inactive markets,quoted prices for identical or similar assets and liabilities in markets that are not active,or other inputs that are observable or can becorroborated by observable market data.Level 3Valuations based on unobservable inputs reflecting our own assumptions,consistent with reasonably available assumptions made by othermarket participants.These valuations require significant judgment.We measure the fair value of money market funds and certain marketable equity securities based on quoted prices in active markets for identical assets orliabilities.Other marketable securities were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similarinstruments and other significant inputs derived from or corroborated by observable market data.We did not hold significant amounts of marketable securitiescategorized as Level 3 assets as of December 31,2022 and June 30,2023.10Table of ContentsThe following table summarizes,by major security type,our cash,cash equivalents,restricted cash,and marketable securities that are measured at fairvalue on a recurring basis and are categorized using the fair value hierarchy(in millions):December 31,2022June 30,2023 TotalEstimatedFair ValueCost orAmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesTotalEstimatedFair ValueCash$10,666$11,142$11,142 Level 1 securities:Money market funds27,899 29,095 29,095 Equity securities(1)3,709 3,515 Level 2 securities:Foreign government and agency securities535 273 (1)272 U.S.government and agency securities2,146 2,304 (133)2,171 Corporate debt securities22,627 16,469 (351)16,118 Asset-backed securities2,572 2,103 (101)2,002 Other debt securities237 201 (8)193$70,391$61,587$(594)$64,508 Less:Restricted cash,cash equivalents,and marketablesecurities(2)(365)(538)Total cash,cash equivalents,and marketable securities$70,026$63,970 _(1)The related unrealized gains(losses)recorded in“Other income(expense),net”were$(4.2)billion and$284 million in Q2 2022 and Q2 2023,and$(12.3)billion and$(195)million for the six months ended June 30,2022 and 2023.(2)We are required to pledge or otherwise restrict a portion of our cash,cash equivalents,and marketable debt securities primarily as collateral for real estate,amounts due to third-party sellers in certain jurisdictions,debt,and standby and trade letters of credit.We classify cash,cash equivalents,and marketabledebt securities with use restrictions of less than twelve months as“Accounts receivable,net and other”and of twelve months or longer as non-current“Other assets”on our consolidated balance sheets.See“Note 4 Commitments and Contingencies.”The following table summarizes the remaining contractual maturities of our cash equivalents and marketable debt securities as of June 30,2023(inmillions):AmortizedCostEstimatedFair ValueDue within one year$42,208$42,148 Due after one year through five years6,404 5,983 Due after five years through ten years565 534 Due after ten years1,268 1,186 Total$50,445$49,851 Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.Equity Warrants and Non-Marketable Equity InvestmentsWe hold equity warrants giving us the right to acquire stock of other companies.As of December 31,2022 and June 30,2023,these warrants had a fairvalue of$2.1 billion and$1.8 billion,and are recorded within“Other assets”on our consolidated balance sheets with gains and losses recognized in“Otherincome(expense),net”on our consolidated statements of operations.These warrants are classified as Level 2 and 3 assets.As of December 31,2022 and June 30,2023,equity investments not accounted for under the equity-method and without readily determinable fair valueshad a carrying value of$715 million and$733 million,and are recorded within“Other assets”on our consolidated balance sheets with adjustments recognizedin“Other income(expense),net”on our consolidated statements of operations.11Table of ContentsConsolidated Statements of Cash Flows ReconciliationThe following table provides a reconciliation of the amount of cash,cash equivalents,and restricted cash reported within the consolidated balance sheetsto the total of the same such amounts shown in the consolidated statements of cash flows(in millions):December 31,2022June 30,2023Cash and cash equivalents$53,888$49,529 Restricted cash included in accounts receivable,net and other358 523 Restricted cash included in other assets7 15 Total cash,cash equivalents,and restricted cash shown in the consolidated statements of cash flows$54,253$50,067 Note 3 LEASESWe have entered into non-cancellable operating and finance leases for fulfillment network,office,data center,and physical store facilities as well asserver and networking equipment,aircraft,and vehicles.Gross assets acquired under finance leases,including those where title transfers at the end of the lease,are recorded in“Property and equipment,net”and were$68.0 billion and$64.6 billion as of December 31,2022 and June 30,2023.Accumulated amortizationassociated with finance leases was$45.2 billion and$44.6 billion as of December 31,2022 and June 30,2023.Lease cost recognized in our consolidated statements of operations is summarized as follows(in millions):Three Months Ended June 30,Six Months Ended June 30,2022202320222023Operating lease cost$2,133$2,608$4,236$5,120 Finance lease cost:Amortization of lease assets1,530 1,539 3,090 3,085 Interest on lease liabilities92 76 195 156 Finance lease cost1,622 1,615 3,285 3,241 Variable lease cost471 494 940 1,012 Total lease cost$4,226$4,717$8,461$9,373 Other information about lease amounts recognized in our consolidated financial statements is as follows:December 31,2022June 30,2023Weighted-average remaining lease term operating leases11.6 years11.5 yearsWeighted-average remaining lease term finance leases10.3 years11.3 yearsWeighted-average discount rate operating leases2.8%3.1%Weighted-average discount rate finance leases2.3%2.5Table of ContentsOur lease liabilities were as follows(in millions):December 31,2022 Operating LeasesFinance LeasesTotalGross lease liabilities$81,273$18,019$99,292 Less:imputed interest(12,233)(2,236)(14,469)Present value of lease liabilities69,040 15,783 84,823 Less:current portion of lease liabilities(7,458)(4,397)(11,855)Total long-term lease liabilities$61,582$11,386$72,968 June 30,2023 Operating LeasesFinance LeasesTotalGross lease liabilities$87,753$15,533$103,286 Less:imputed interest(14,383)(2,075)(16,458)Present value of lease liabilities73,370 13,458 86,828 Less:current portion of lease liabilities(7,982)(3,024)(11,006)Total long-term lease liabilities$65,388$10,434$75,822 Note 4 COMMITMENTS AND CONTINGENCIESCommitmentsThe following summarizes our principal contractual commitments,excluding open orders for purchases that support normal operations and are generallycancellable,as of June 30,2023(in millions):Six Months EndedDecember 31,Year Ended December 31,20232024202520262027ThereafterTotalLong-term debt principal and interest$1,082$10,626$7,293$5,034$10,399$63,814$98,248 Operating lease liabilities5,624 9,649 9,024 8,334 7,602 47,520 87,753 Finance lease liabilities,including interest1,917 2,245 1,433 1,269 1,077 7,592 15,533 Financing obligations,including interest(1)234 464 457 464 471 6,712 8,802 Leases not yet commenced558 2,009 1,887 1,897 1,926 15,712 23,989 Unconditional purchase obligations(2)4,274 8,032 6,151 5,029 3,560 6,090 33,136 Other commitments(3)(4)2,153 2,247 1,246 1,102 895 8,497 16,140 Total commitments$15,842$35,272$27,491$23,129$25,930$155,937$283,601 _(1)Includes non-cancellable financing obligations for fulfillment network and data center facilities.Excluding interest,current financing obligations of$266million and$269 million are recorded within“Accrued expenses and other”and$6.7 billion and$6.6 billion are recorded within“Other long-termliabilities”as of December 31,2022 and June 30,2023.The weighted-average remaining term of the financing obligations was 17.9 years and 17.5 yearsand the weighted-average imputed interest rate was 3.1%as of December 31,2022 and June 30,2023.(2)Includes unconditional purchase obligations related to long-term agreements to acquire and license digital media content that are not reflected on theconsolidated balance sheets and certain products offered in our Whole Foods Market stores.For those digital media content agreements with variableterms,we do not estimate the total obligation beyond any minimum quantities and/or pricing as of the reporting date.Purchase obligations associated withrenewal provisions solely at the option of the content provider are included to the extent such commitments are fixed or a minimum amount is specified.(3)Includes asset retirement obligations,liabilities associated with digital media content agreements with initial terms greater than one year,and the estimatedtiming and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements that are under construction.(4)Excludes approximately$5.0 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period ofpayment,if any.13Table of ContentsIn August 2022,we entered into an agreement to acquire iRobot Corporation,as amended in July 2023,for approximately$1.7 billion,including its debt,subject to customary closing conditions.We expect to fund this acquisition with cash on hand.Other ContingenciesWe are disputing claims and denials of refunds or credits,and monitoring or evaluating potential claims,related to various non-income taxes(such assales,value added,consumption,service,and similar taxes),including in jurisdictions in which we already collect and remit these taxes.These non-income taxcontroversies typically relate to(i)the taxability of products and services,including cross-border intercompany transactions,(ii)collection and withholding ontransactions with third parties,and(iii)the adequacy of compliance with reporting obligations,including evolving documentation requirements.Due to theinherent complexity and uncertainty of these matters and the judicial and regulatory processes in certain jurisdictions,the final outcome of any suchcontroversies may be materially different from our expectations.Legal ProceedingsThe Company is involved from time to time in claims,proceedings,and litigation,including the matters described in Item 8 of Part II,“FinancialStatements and Supplementary Data Note 7 Commitments and Contingencies Legal Proceedings”of our 2022 Annual Report on Form 10-K and inItem 1 of Part I,“Financial Statements Note 4 Commitments and Contingencies Legal Proceedings”of our Quarterly Report on Form 10-Q for theperiod ended March 31,2023,as supplemented by the following:In December 2018,Kove IO,Inc.filed a complaint against Amazon Web Services,Inc.in the United States District Court for the Northern District ofIllinois.The complaint alleges,among other things,that Amazon S3 and DynamoDB infringe U.S.Patent Nos.7,814,170 and 7,103,640,both entitled“Network Distributed Tracking Wire Transfer Protocol”;and 7,233,978,entitled“Method and Apparatus for Managing Location Information in a NetworkSeparate from the Data to Which the Location Information Pertains.”The complaint seeks an unspecified amount of damages,enhanced damages,attorneysfees,costs,interest,and injunctive relief.In March 2022,the case was stayed pending resolution of review petitions we filed with the United States Patent andTrademark Office.In November 2022,the stay was lifted.In July 2023,Kove alleged in its damages report that in the event of a finding of liability AmazonWeb Services could be subject to$517 million to$1.03 billion in damages.We dispute the allegations of wrongdoing and intend to defend ourselves vigorouslyin this matter.In May 2023,Dialect,LLC filed a complaint against A,Inc.and Amazon Web Services,Inc.in the United States District Court for theEastern District for Virginia.The complaint alleges,among other things,that Amazons Alexa-enabled products and services,such as Echo devices,Firetablets,Fire TV sticks,Fire TVs,Alexa,and Alexa Voice Services,infringe U.S.Patent Nos.7,693,720 and 9,031,845,each entitled“Mobile Systems andMethods for Responding to Natural Language Speech Utterance”;8,015,006,entitled“Systems and Methods for Processing Natural Language SpeechUtterances with Context-Specific Domain Agents”;8,140,327,entitled“System and Method for Filtering and Eliminating Noise from Natural LanguageUtterances to Improve Speech Recognition and Parsing”;8,195,468 and 9,495,957,each entitled“Mobile Systems and Methods of Supporting NaturalLanguage Human-Machine Interactions”;and 9,263,039,entitled“Systems and Methods for Responding to Natural Language Speech Utterance.”Thecomplaint seeks an unspecified amount of damages,enhanced damages,attorneys fees,costs,interest,and injunctive relief.We dispute the allegations ofwrongdoing and intend to defend ourselves vigorously in this matter.In addition,we are regularly subject to claims,litigation,and other proceedings,including potential regulatory proceedings,involving patent and otherintellectual property matters,taxes,labor and employment,competition and antitrust,privacy and data protection,consumer protection,commercial disputes,goods and services offered by us and by third parties,and other matters.The outcomes of our legal proceedings and other contingencies are inherently unpredictable,subject to significant uncertainties,and could be material toour operating results and cash flows for a particular period.We evaluate,on a regular basis,developments in our legal proceedings and other contingencies thatcould affect the amount of liability,including amounts in excess of any previous accruals and reasonably possible losses disclosed,and make adjustments andchanges to our accruals and disclosures as appropriate.For the matters we disclose that do not include an estimate of the amount of loss or range of losses,suchan estimate is not possible or is immaterial,and we may be unable to estimate the possible loss or range of losses that could potentially result from theapplication of non-monetary remedies.Until the final resolution of such matters,if any of our estimates and assumptions change or prove to have beenincorrect,we may experience losses in excess of the amounts recorded,which could have a material effect on our business,consolidated financial position,results of operations,or cash flows.See also“Note 7 Income Taxes.”14Table of ContentsNote 5 DEBTAs of June 30,2023,we had$66.5 billion of unsecured senior notes outstanding(the“Notes”)and$972 million of borrowings under our credit facility.Our total long-term debt obligations are as follows(in millions):Maturities(1)Stated Interest RatesEffective Interest RatesDecember 31,2022June 30,20232014 Notes issuance of$6.0 billion2024-20443.80%-4.95%3.90%-5.12%4,000 4,000 2017 Notes issuance of$17.0 billion2024-20572.80%-5.20%2.95%-4.33,000 15,000 2020 Notes issuance of$10.0 billion2025-20600.80%-2.70%0.88%-2.77,000 9,000 2021 Notes issuance of$18.5 billion2024-20610.45%-3.25%0.57%-3.31,500 17,500 April 2022 Notes issuance of$12.8 billion2024-20622.73%-4.10%2.83%-4.15,750 12,750 December 2022 Notes issuance of$8.3 billion2024-20324.55%-4.70%4.61%-4.83%8,250 8,250 Credit Facility1,042 972 Total face value of long-term debt70,542 67,472 Unamortized discount and issuance costs,net(393)(383)Less:current portion of long-term debt(2,999)(3,997)Long-term debt$67,150$63,092 _(1)The weighted-average remaining lives of the 2014,2017,2020,2021,April 2022,and December 2022 Notes were 12.1,14.6,18.1,13.6,12.8,and 5.4years as of June 30,2023.The combined weighted-average remaining life of the Notes was 13.2 years as of June 30,2023.Interest on the Notes is payable semi-annually in arrears.We may redeem the Notes at any time in whole,or from time to time,in part at specifiedredemption prices.We are not subject to any financial covenants under the Notes.The estimated fair value of the Notes was approximately$61.4 billion and$59.5 billion as of December 31,2022 and June 30,2023,which is based on quoted prices for our debt as of those dates.In January 2023,we entered into an$8.0 billion unsecured 364-day term loan with a syndicate of lenders(the“Term Loan”),which matures in January2024 and bears interest at the Secured Overnight Financing Rate specified in the Term Loan plus 0.75%.If we exercise our option to extend the Term Loansmaturity to January 2025,the interest rate spread will increase from 0.75%to 1.05%.As of June 30,2023,$8.0 billion of the Term Loan was outstanding,which was included in“Accrued expenses and other”on our consolidated balance sheets and had an interest rate of 5.9%.We have a$1.5 billion secured revolving credit facility with a lender that is secured by certain seller receivables,which we may from time to timeincrease in the future subject to lender approval(the“Credit Facility”).The Credit Facility is available until August 2025,bears interest based on the dailySecured Overnight Financing Rate plus 1.25%,and has a commitment fee of up to 0.45%on the undrawn portion.There were$1.0 billion and$972 million ofborrowings outstanding under the Credit Facility as of December 31,2022 and June 30,2023,which had an interest rate of 5.6%and 6.3%,respectively.As ofDecember 31,2022 and June 30,2023,we have pledged$1.2 billion and$1.1 billion of our cash and seller receivables as collateral for debt related to ourCredit Facility.The estimated fair value of the Credit Facility,which is based on Level 2 inputs,approximated its carrying value as of December 31,2022 andJune 30,2023.We have U.S.Dollar and Euro commercial paper programs(the“Commercial Paper Programs”)under which we may from time to time issue unsecuredcommercial paper up to a total of$20.0 billion(including up to 3.0 billion)at the date of issue,with individual maturities that may vary but will not exceed397 days from the date of issue.There were$6.8 billion and$4.4 billion of borrowings outstanding under the Commercial Paper Programs as of December 31,2022 and June 30,2023,which were included in“Accrued expenses and other”on our consolidated balance sheets and had a weighted-average effectiveinterest rate,including issuance costs,of 4.5%and 5.0%,respectively.We use the net proceeds from the issuance of commercial paper for general corporatepurposes.We have a$10.0 billion unsecured revolving credit facility with a syndicate of lenders(the“Credit Agreement”),with a term that extends to March 2025.It may be extended for up to three additional one-year terms if approved by the lenders.The interest rate applicable to outstanding balances under the CreditAgreement is the applicable benchmark rate specified in the Credit Agreement plus 0.45%,with a commitment fee of 0.03%on the undrawn portion of thecredit facility.There were no borrowings outstanding under the Credit Agreement as of December 31,2022 and June 30,2023.15Table of ContentsWe have a$10.0 billion unsecured 364-day revolving credit facility with a syndicate of lenders(the“Short-Term Credit Agreement”),which matures inNovember 2023 and may be extended for one additional period of 364 days if approved by the lenders.The interest rate applicable to outstanding balancesunder the Short-Term Credit Agreement is the Secured Overnight Financing Rate specified in the Short-Term Credit Agreement plus 0.45%,with acommitment fee of 0.05%on the undrawn portion.There were no borrowings outstanding under the Short-Term Credit Agreement as of December 31,2022and June 30,2023.We also utilize other short-term credit facilities for working capital purposes.There were$1.2 billion and$1.1 billion of borrowings outstanding underthese facilities as of December 31,2022 and June 30,2023,which were included in“Accrued expenses and other”on our consolidated balance sheets.Inaddition,we had$7.5 billion of unused letters of credit as of June 30,2023.Note 6 STOCKHOLDERS EQUITYStock Repurchase ActivityIn March 2022,the Board of Directors authorized a program to repurchase up to$10.0 billion of our common stock,with no fixed expiration,whichreplaced the previous$5.0 billion stock repurchase authorization,approved by the Board of Directors in February 2016.We repurchased 46.2 million shares ofour common stock for$6.0 billion during the six months ended June 30,2022 under these programs.There were no repurchases of our common stock duringthe six months ended June 30,2023.As of June 30,2023,we have$6.1 billion remaining under the repurchase program.Stock Award ActivityCommon shares outstanding plus shares underlying outstanding stock awards totaled 10.6 billion and 10.8 billion as of December 31,2022 and June 30,2023.These totals include all vested and unvested stock awards outstanding,including those awards we estimate will be forfeited.Stock-based compensationexpense is as follows(in millions):Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Cost of sales$213$251$359$416 Fulfillment763 932 1,261 1,535 Technology and infrastructure2,814 4,043 4,459 6,617 Sales and marketing990 1,303 1,655 2,296 General and administrative429 598 725 1,011 Total stock-based compensation expense$5,209$7,127$8,459$11,875 The following table summarizes our restricted stock unit activity for the six months ended June 30,2023(in millions):Number of UnitsWeighted-AverageGrant-DateFair ValueOutstanding as of December 31,2022384.4$144 Units granted200.3 103 Units vested(70.1)143 Units forfeited(33.1)138 Outstanding as of June 30,2023481.5 128 Scheduled vesting for outstanding restricted stock units as of June 30,2023,is as follows(in millions):Six Months EndedDecember 31,Year Ended December 31,20232024202520262027ThereafterTotalScheduled vesting restricted stock units70.7 224.5 128.6 47.0 7.4 3.3 481.5 As of June 30,2023,there was$28.0 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements.Thiscompensation is recognized on an accelerated basis with more than half of the compensation expected to be expensed in the next twelve months,and has aremaining weighted-average recognition period of 1.0 year.The estimated forfeiture rate as of December 31,2022 and June 30,2023 was 26.5%and 26.3%.Changes in our estimates and assumptions relating to forfeitures may cause us to realize material changes in stock-based compensation expense in the future.16Table of ContentsChanges in Stockholders EquityThe following table shows changes in stockholders equity(in millions):Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Total beginning stockholders equity$134,001$154,526$138,245$146,043 Beginning common stock107 108 106 108 Stock-based compensation and issuance of employee benefit plan stock 1 Ending common stock107 108 107 108 Beginning treasury stock(4,503)(7,837)(1,837)(7,837)Common stock repurchased(3,334)(6,000)Ending treasury stock(7,837)(7,837)(7,837)(7,837)Beginning additional paid-in capital58,691 79,863 55,437 75,066 Stock-based compensation and issuance of employee benefit plan stock5,180 7,033 8,434 11,830 Ending additional paid-in capital63,871 86,896 63,871 86,896 Beginning accumulated other comprehensive income(loss)(2,365)(3,973)(1,376)(4,487)Other comprehensive income(loss)(2,417)293(3,406)807 Ending accumulated other comprehensive income(loss)(4,782)(3,680)(4,782)(3,680)Beginning retained earnings82,071 86,365 85,915 83,193 Net income(loss)(2,028)6,750(5,872)9,922 Ending retained earnings80,043 93,115 80,043 93,115 Total ending stockholders equity$131,402$168,602$131,402$168,602 Note 7 INCOME TAXESOur tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate,adjusted for discreteitems,if any,that are taken into account in the relevant period.Each quarter we update our estimate of the annual effective tax rate,and if our estimated tax ratechanges,we make a cumulative adjustment.Our quarterly tax provision,and our quarterly estimate of our annual effective tax rate,is subject to significant variation due to several factors,includingvariability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate,intercompany transactions,theapplicability of special tax regimes,changes in how we do business,acquisitions,investments,developments in tax controversies,changes in our stock price,changes in our deferred tax assets and liabilities and their valuation,foreign currency gains(losses),changes in statutes,regulations,case law,andadministrative practices,principles,and interpretations related to tax,including changes to the global tax framework,competition,and other laws andaccounting rules in various jurisdictions,and relative changes of expenses or losses for which tax benefits are not recognized.Our effective tax rate can bemore or less volatile based on the amount of pre-tax income or loss.For example,the impact of discrete items and non-deductible expenses on our effective taxrate is greater when our pre-tax income is lower.In addition,we record valuation allowances against deferred tax assets when there is uncertainty about ourability to generate future income in relevant jurisdictions.For 2023,we estimate that our effective tax rate will be favorably impacted by the foreign income deduction and U.S.federal research and developmentcredit and adversely affected by state income taxes.In addition,valuation gains and losses from our equity investment in Rivian impact our pre-tax income andmay cause variability in our effective tax rate.Our income tax benefit for the six months ended June 30,2022 was$2.1 billion,which included$3.2 billion of net discrete tax benefits primarilyattributable to a valuation loss related to our equity investment in Rivian.Our income tax provision for the six months ended June 30,2023 was$1.8 billion,which included$306 million of net discrete tax benefits,consisting of$805 million resulting from a change in the estimated qualifying expenditures associatedwith our 2022 U.S.17Table of Contentsfederal R&D credit and a related increase in our foreign income deduction tax benefit,partially offset by discrete tax expense related to shortfalls from stock-based compensation.Cash paid for income taxes,net of refunds was$3.1 billion and$3.7 billion in Q2 2022 and Q2 2023,and$3.6 billion and$4.4 billion for the six monthsended June 30,2022 and 2023.As of December 31,2022 and June 30,2023,tax contingencies were approximately$4.0 billion and$5.0 billion.Changes in tax laws,regulations,administrative practices,principles,and interpretations may impact our tax contingencies.Due to various factors,including the inherent complexities anduncertainties of the judicial,administrative,and regulatory processes in certain jurisdictions,the timing of the resolution of income tax controversies is highlyuncertain,and the amounts ultimately paid,if any,upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued.It isreasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or possibly reach resolution of incometax controversies in one or more jurisdictions.These assessments or settlements could result in changes to our contingencies related to positions on prior yearstax filings.We are under examination,or may be subject to examination,by the Internal Revenue Service for the calendar year 2016 and thereafter.Theseexaminations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examinationas well as subsequent periods.We are also subject to taxation in various states and other foreign jurisdictions including China,France,Germany,India,Japan,Luxembourg,and theUnited Kingdom.We are under,or may be subject to,audit or examination and additional assessments by the relevant authorities in respect of these particularjurisdictions primarily for 2011 and thereafter.We are currently disputing tax assessments in multiple jurisdictions,including with respect to the allocation andcharacterization of income.In September 2022,the Luxembourg tax authority(“LTA”)denied the tax basis of certain intangible assets that we distributed from Luxembourg to theU.S.in 2021.We believe the LTAs position is without merit and intend to defend ourselves vigorously in this matter.In February 2023,we received a decision by the Indian tax authority(“ITA”)that tax applies to cloud services fees paid to Amazon in the U.S.We willneed to remit taxes on the services in question,including for a portion of prior years,until this matter is resolved,which payments could be significant in theaggregate.We believe the ITAs decision is without merit,we are defending our position vigorously in the Indian courts,and we expect to recoup taxes paid.Ifthis matter is adversely resolved,we could recognize significant additional tax expense,including for taxes previously paid.In October 2014,the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg withregard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid.On October 4,2017,the EuropeanCommission announced its decision that determinations by the tax authorities in Luxembourg did not comply with European Union rules on state aid.Based onthat decision,the European Commission announced an estimated recovery amount of approximately 250 million,plus interest,for the period May 2006through June 2014,and ordered Luxembourg tax authorities to calculate the actual amount of additional taxes subject to recovery.Luxembourg computed aninitial recovery amount,consistent with the European Commissions decision,which we deposited into escrow in March 2018,subject to adjustment pendingconclusion of all appeals.In December 2017,Luxembourg appealed the European Commissions decision.In May 2018,we appealed.On May 12,2021,theEuropean Union General Court annulled the European Commissions state aid decision.In July 2021,the European Commission appealed the decision to theEuropean Court of Justice.We will continue to defend ourselves vigorously in this matter.Note 8 SEGMENT INFORMATIONWe have organized our operations into three segments:North America,International,and AWS.We allocate to segment results the operating expenses“Fulfillment,”“Technology and infrastructure,”“Sales and marketing,”and“General and administrative”based on usage,which is generally reflected in thesegment in which the costs are incurred.The majority of technology costs recorded in“Technology and infrastructure”are incurred in the U.S.and are includedin our North America and AWS segments.The majority of infrastructure costs recorded in“Technology and infrastructure”are allocated to the AWS segmentbased on usage.There are no internal revenue transactions between our reportable segments.These segments reflect the way our chief operating decisionmaker evaluates the Companys business performance and manages its operations.North AmericaThe North America segment primarily consists of amounts earned from retail sales of consumer products(including from sellers)and advertising andsubscription services through North America-focused online and physical stores.This segment includes export sales from these online stores.18Table of ContentsInternationalThe International segment primarily consists of amounts earned from retail sales of consumer products(including from sellers)and advertising andsubscription services through internationally-focused online stores.This segment includes export sales from these internationally-focused online stores(including export sales from these online stores to customers in the U.S.,Mexico,and Canada),but excludes export sales from our North America-focusedonline stores.AWSThe AWS segment consists of amounts earned from global sales of compute,storage,database,and other services for start-ups,enterprises,governmentagencies,and academic institutions.Information on reportable segments and reconciliation to consolidated net income(loss)is as follows(in millions):Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023North AmericaNet sales$74,430$82,546$143,674$159,427 Operating expenses75,057 79,335 145,869 155,318 Operating income(loss)$(627)$3,211$(2,195)$4,109 InternationalNet sales$27,065$29,697$55,824$58,820 Operating expenses28,836 30,592 58,876 60,962 Operating loss$(1,771)$(895)$(3,052)$(2,142)AWSNet sales$19,739$22,140$38,180$43,494 Operating expenses14,024 16,775 25,947 33,006 Operating income$5,715$5,365$12,233$10,488 ConsolidatedNet sales$121,234$134,383$237,678$261,741 Operating expenses117,917 126,702 230,692 249,286 Operating income3,317 7,681 6,986 12,455 Total non-operating expense(5,970)(118)(14,904)(773)Benefit(provision)for income taxes637(804)2,059(1,752)Equity-method investment activity,net of tax(12)(9)(13)(8)Net income(loss)$(2,028)$6,750$(5,872)$9,922 19Table of ContentsNet sales by groups of similar products and services,which also have similar economic characteristics,is as follows(in millions):Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Net Sales:Online stores(1)$50,855$52,966$101,984$104,062 Physical stores(2)4,721 5,024 9,312 9,919 Third-party seller services(3)27,376 32,332 52,711 62,152 Subscription services(4)8,716 9,894 17,126 19,551 Advertising services(5)8,757 10,683 16,634 20,192 AWS19,739 22,140 38,180 43,494 Other(6)1,070 1,344 1,731 2,371 Consolidated$121,234$134,383$237,678$261,741 _(1)Includes product sales and digital media content where we record revenue gross.We leverage our retail infrastructure to offer a wide selection ofconsumable and durable goods that includes media products available in both a physical and digital format,such as books,videos,games,music,andsoftware.These product sales include digital products sold on a transactional basis.Digital media content subscriptions that provide unlimited viewing orusage rights are included in“Subscription services.”(2)Includes product sales where our customers physically select items in a store.Sales to customers who order goods online for delivery or pickup at ourphysical stores are included in“Online stores.”(3)Includes commissions and any related fulfillment and shipping fees,and other third-party seller services.(4)Includes annual and monthly fees associated with Amazon Prime memberships,as well as digital video,audiobook,digital music,e-book,and other non-AWS subscription services.(5)Includes sales of advertising services to sellers,vendors,publishers,authors,and others,through programs such as sponsored ads,display,and videoadvertising.(6)Includes sales related to various other offerings,such as certain licensing and distribution of video content,health care services,and shipping services,andour co-branded credit card agreements.20Table of ContentsItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThis Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.Allstatements other than statements of historical fact,including statements regarding guidance,industry prospects,or future results of operations or financialposition,made in this Quarterly Report on Form 10-Q are forward-looking.We use words such as anticipates,believes,expects,future,intends,and similarexpressions to identify forward-looking statements.Forward-looking statements reflect managements current expectations and are inherently uncertain.Actualresults and outcomes could differ materially for a variety of reasons,including,among others,fluctuations in foreign exchange rates,changes in globaleconomic conditions and customer demand and spending,inflation,interest rates,regional labor market constraints,world events,the rate of growth of theInternet,online commerce,and cloud services,the amount that A invests in new business opportunities and the timing of those investments,the mixof products and services sold to customers,the mix of net sales derived from products as compared with services,the extent to which we owe income or othertaxes,competition,management of growth,potential fluctuations in operating results,international growth and expansion,the outcomes of claims,litigation,government investigations,and other proceedings,fulfillment,sortation,delivery,and data center optimization,risks of inventory management,variability indemand,the degree to which we enter into,maintain,and develop commercial agreements,proposed and completed acquisitions and strategic transactions,payments risks,and risks of fulfillment throughput and productivity.In addition,global economic and geopolitical conditions and additional or unforeseencircumstances,developments,or events may give rise to or amplify many of these risks.These risks and uncertainties,as well as other risks and uncertaintiesthat could cause our actual results or outcomes to differ significantly from managements expectations,are described in greater detail in Item 1A of Part II,“Risk Factors.”For additional information,see Item 7 of Part II,“Managements Discussion and Analysis of Financial Condition and Results of Operations Overview”of our 2022 Annual Report on Form 10-K.Critical Accounting EstimatesThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets andliabilities,revenues and expenses,and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes.Criticalaccounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or arereasonably likely to have a material impact on the financial condition or results of operations of the Company.Based on this definition,we have identified thecritical accounting estimates addressed below.We also have other key accounting policies,which involve the use of estimates,judgments,and assumptions thatare significant to understanding our results.For additional information,see Item 8 of Part II,“Financial Statements and Supplementary Data Note 1 Description of Business,Accounting Policies,and Supplemental Disclosures”of our 2022 Annual Report on Form 10-K and Item 1 of Part I,“FinancialStatements Note 1 Accounting Policies and Supplemental Disclosures,”of this Form 10-Q.Although we believe that our estimates,assumptions,andjudgments are reasonable,they are based upon information presently available.Actual results may differ significantly from these estimates under differentassumptions,judgments,or conditions.InventoriesInventories,consisting of products available for sale,are primarily accounted for using the first-in first-out method,and are valued at the lower of costand net realizable value.This valuation requires us to make judgments,based on currently available information,about the likely method of disposition,suchas through sales to individual customers,returns to product vendors,or liquidations,and expected recoverable values of each disposition category.Theseassumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.As a measure of sensitivity,for every 1%of additional inventory valuation allowance as of June 30,2023,we would have recorded anadditional cost of sales of approximately$385 million.In addition,we enter into supplier commitments for certain electronic device components and certain products.These commitments are based onforecasted customer demand.If we reduce these commitments,we may incur additional costs.Income TaxesWe are subject to income taxes in the U.S.(federal and state)and numerous foreign jurisdictions.Tax laws,regulations,administrative practices,principles,and interpretations in various jurisdictions may be subject to significant change,with or without notice,due to economic,political,and otherconditions,and significant judgment is required in evaluating and estimating our provision and accruals for these taxes.There are many transactions that occurduring the ordinary course of business for which the ultimate tax determination is uncertain.In addition,our actual and forecasted earnings are subject to21Table of Contentschange due to economic,political,and other conditions and significant judgment is required in determining our ability to use our deferred tax assets.Our effective tax rates could be affected by numerous factors,such as changes in our business operations,acquisitions,investments,entry into newbusinesses and geographies,intercompany transactions,the relative amount of our foreign earnings,including earnings being lower than anticipated injurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates,losses incurred injurisdictions for which we are not able to realize related tax benefits,the applicability of special tax regimes,changes in foreign exchange rates,changes in ourstock price,changes to our forecasts of income and loss and the mix of jurisdictions to which they relate,changes in our deferred tax assets and liabilities andtheir valuation,changes in the laws,regulations,administrative practices,principles,and interpretations related to tax,including changes to the global taxframework,competition,and other laws and accounting rules in various jurisdictions.In addition,a number of countries have enacted or are actively pursuingchanges to their tax laws applicable to corporate multinationals.We are also currently subject to tax controversies in various jurisdictions,and these jurisdictions may assess additional income tax liabilities against us.Developments in an audit,investigation,or other tax controversy could have a material effect on our operating results or cash flows in the period or periods forwhich that development occurs,as well as for prior and subsequent periods.We regularly assess the likelihood of an adverse outcome resulting from theseproceedings to determine the adequacy of our tax accruals.Although we believe our tax estimates are reasonable,the final outcome of audits,investigations,and any other tax controversies could be materially different from our historical income tax provisions and accruals.Liquidity and Capital ResourcesCash flow information is as follows(in millions):Three Months EndedJune 30,Six Months EndedJune 30,Twelve Months EndedJune 30,202220232022202320222023Cash provided by(used in):Operating activities$8,965$16,476$6,175$21,264$35,574$61,841 Investing activities(12,078)(9,673)(11,172)(25,479)(38,580)(51,908)Financing activities4,626(6,539)6,616(185)740 2,917 Our principal sources of liquidity are cash flows generated from operations and our cash,cash equivalents,and marketable securities balances,which,atfair value,were$70.0 billion and$64.0 billion as of December 31,2022 and June 30,2023.Amounts held in foreign currencies were$18.3 billion and$14.8billion as of December 31,2022 and June 30,2023.Our foreign currency balances include British Pounds,Canadian Dollars,Euros,Indian Rupee,andJapanese Yen.Cash provided by(used in)operating activities was$9.0 billion and$16.5 billion for Q2 2022 and Q2 2023,and$6.2 billion and$21.3 billion for the sixmonths ended June 30,2022 and 2023.Our operating cash flows result primarily from cash received from our consumer,seller,developer,enterprise,andcontent creator customers,and advertisers,offset by cash payments we make for products and services,employee compensation,payment processing andrelated transaction costs,operating leases,and interest payments.Cash received from our customers and other activities generally corresponds to our net sales.The increase in operating cash flow for the trailing twelve months ended June 30,2023,compared to the comparable prior year period,was due to changes innet income(loss),excluding non-cash expenses,and changes in working capital.Working capital at any specific point in time is subject to many variables,including variability in demand,inventory management and category expansion,the timing of cash receipts and payments,customer and vendor paymentterms,and fluctuations in foreign exchange rates.Cash provided by(used in)investing activities corresponds with cash capital expenditures,including leasehold improvements,incentives received fromproperty and equipment vendors,proceeds from asset sales,cash outlays for acquisitions,investments in other companies and intellectual property rights,andpurchases,sales,and maturities of marketable securities.Cash provided by(used in)investing activities was$(12.1)billion and$(9.7)billion for Q2 2022 andQ2 2023,and$(11.2)billion and$(25.5)billion for the six months ended June 30,2022 and 2023,with the variability caused primarily by purchases,sales,andmaturities of marketable securities.Cash capital expenditures were$14.1 billion and$10.4 billion during Q2 2022 and Q2 2023,and$27.8 billion and$23.5billion for the six months ended June 30,2022 and 2023,which primarily reflect investments in technology infrastructure(the majority of which is to supportAWS business growth)and in additional capacity to support our fulfillment network.We expect cash capital expenditures to decrease in 2023,primarily due tolower spending on our fulfillment network.We made cash payments,net of acquired cash,related to acquisition and other investment activity of$259 millionand$316 million during Q2 2022 and Q2 2023,and$6.6 billion and$3.8 billion for the six months ended June 30,2022 and 2023.We funded the acquisitionsof MGM Holdings Inc.in 2022 and One Medical in 2023 with cash on hand.We expect to fund the acquisition of iRobot Corporation with cash on hand.22Table of ContentsCash provided by(used in)financing activities was$4.6 billion and$(6.5)billion for Q2 2022 and Q2 2023,and$6.6 billion and$(185)million for thesix months ended June 30,2022 and 2023.Cash inflows from financing activities resulted from proceeds from short-term debt,and other and long-term debt of$17.7 billion and$4.4 billion for Q2 2022 and Q2 2023,and$31.4 billion and$17.2 billion for the six months ended June 30,2022 and 2023.Cash outflowsfrom financing activities resulted from repurchases of common stock in 2022,payments of short-term debt,and other,long-term debt,finance leases,andfinancing obligations of$13.1 billion and$10.9 billion in Q2 2022 and Q2 2023,and$24.8 billion and$17.4 billion for the six months ended June 30,2022and 2023.Property and equipment acquired under finance leases was$61 million and$240 million during Q2 2022 and Q2 2023,and$227 million and$248million for the six months ended June 30,2022 and 2023.We had no borrowings outstanding under the two unsecured revolving credit facilities,$4.4 billion of borrowings outstanding under the commercialpaper programs,$972 million of borrowings outstanding under our Credit Facility,and$8.0 billion of borrowings outstanding under the Term Loan as ofJune 30,2023.See Item 1 of Part I,“Financial Statements Note 5 Debt”for additional information.Certain foreign subsidiary earnings and losses are subject to current U.S.taxation and the subsequent repatriation of those earnings is not subject to tax inthe U.S.We intend to invest substantially all of our foreign subsidiary earnings,as well as our capital in our foreign subsidiaries,indefinitely outside of theU.S.in those jurisdictions in which we would incur significant,additional costs upon repatriation of such amounts.Our U.S.taxable income is reduced by accelerated depreciation deductions and increased by the impact of capitalized research and developmentexpenses.U.S.tax rules provide for enhanced accelerated depreciation deductions by allowing us to expense a portion of qualified property,primarilyequipment.These enhanced deductions are scheduled to phase out annually from 2023 through 2026.Additionally,effective January 1,2022,research anddevelopment expenses are required to be capitalized and amortized for U.S.tax purposes,which delays the deductibility of these expenses.As a result,weexpect the cash taxes we pay in 2023 to increase significantly.Cash taxes paid(net of refunds)were$3.1 billion and$3.7 billion for Q2 2022 and Q2 2023,and$3.6 billion and$4.4 billion for the six months ended June 30,2022 and 2023.As of December 31,2022 and June 30,2023,restricted cash,cash equivalents,and marketable securities were$365 million and$538 million.See Item 1of Part I,“Financial Statements Note 4 Commitments and Contingencies”and“Financial Statements Note 5 Debt”for additional discussion of ourprincipal contractual commitments,as well as our pledged assets.Additionally,we have purchase obligations and open purchase orders,including for inventoryand capital expenditures,that support normal operations and are primarily due in the next twelve months.These purchase obligations and open purchase ordersare generally cancellable in full or in part through the contractual provisions.We believe that cash flows generated from operations and our cash,cash equivalents,and marketable securities balances,as well as our borrowingarrangements,will be sufficient to meet our anticipated operating cash needs for at least the next twelve months.However,any projections of future cash needsand cash flows are subject to substantial uncertainty.See Item 1A of Part II,“Risk Factors.”We continually evaluate opportunities to sell additional equity ordebt securities,obtain credit facilities,obtain finance and operating lease arrangements,enter into financing obligations,repurchase common stock,paydividends,or repurchase,refinance,or otherwise restructure our debt for strategic reasons or to further strengthen our financial position.The sale of additional equity or convertible debt securities would be dilutive to our shareholders.In addition,we will,from time to time,consider theacquisition of,or investment in,complementary businesses,products,services,capital infrastructure,and technologies,which might affect our liquidityrequirements or cause us to secure additional financing,or issue additional equity or debt securities.There can be no assurance that additional credit lines orfinancing instruments will be available in amounts or on terms acceptable to us,if at all.In addition,economic conditions and actions by policymaking bodiesare contributing to rising interest rates and significant capital market volatility,which,along with increases in our borrowing levels,could increase our futureborrowing costs.23Table of ContentsResults of OperationsWe have organized our operations into three segments:North America,International,and AWS.These segments reflect the way the Company evaluatesits business performance and manages its operations.See Item 1 of Part I,“Financial Statements Note 8 Segment Information.”OverviewMacroeconomic factors,including inflation,increased interest rates,significant capital market and supply chain volatility,and global economic andgeopolitical developments,have direct and indirect impacts on our results of operations that are difficult to isolate and quantify.In addition,changes in fuel,utility,and food costs,rising interest rates,and recessionary fears may impact customer demand and our ability to forecast consumer spending patterns.We alsoexpect the current macroeconomic environment and enterprise customer cost optimization efforts to impact our AWS revenue growth rates.We expect some orall of these factors to continue to impact our operations into Q3 2023.Net SalesNet sales include product and service sales.Product sales represent revenue from the sale of products and related shipping fees and digital media contentwhere we record revenue gross.Service sales primarily represent third-party seller fees,which includes commissions and any related fulfillment and shippingfees,AWS sales,advertising services,Amazon Prime membership fees,and certain digital media content subscriptions.Net sales information is as follows(inmillions):Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Net Sales:North America$74,430$82,546$143,674$159,427 International27,065 29,697 55,824 58,820 AWS19,739 22,140 38,180 43,494 Consolidated$121,234$134,383$237,678$261,741 Year-over-year Percentage Growth(Decline):North America10%9%International(12)10(9)5 AWS33 12 35 14 Consolidated7 11 7 10 Year-over-year Percentage Growth(Decline),excluding the effect of foreignexchange rates:North America10%9%International(1)10 0 10 AWS33 12 35 14 Consolidated10 11 10 11 Net sales mix:North America62aa%International22 22 24 22 AWS16 17 16 17 Consolidated100000%Sales increased 11%in Q2 2023,and 10%for the six months ended June 30,2023 compared to the comparable prior year periods.Changes in foreignexchange rates reduced net sales by$285 million for Q2 2023,and by$2.7 billion for the six months ended June 30,2023.For a discussion of the effect offoreign exchange rates on sales growth,see“Effect of Foreign Exchange Rates”below.North America sales increased 11%in Q2 2023,and 11%for the six months ended June 30,2023 compared to the comparable prior year periods.Thesales growth primarily reflects increased unit sales,primarily by third-party sellers,advertising sales,and subscription services.Increased unit sales weredriven largely by our continued focus on price,selection,and convenience for our customers,including from our shipping offers.24Table of ContentsInternational sales increased 10%in Q2 2023,and 5%for the six months ended June 30,2023 compared to the comparable prior year periods,primarilydue to increased unit sales,primarily by third-party sellers,advertising sales,and subscription services,partially offset by the impact of changes in foreignexchange rates.Increased unit sales were driven largely by our continued focus on price,selection,and convenience for our customers,including from ourshipping offers.Changes in foreign exchange rates reduced International net sales by$180 million for Q2 2023,and by$2.4 billion for the six months endedJune 30,2023.AWS sales increased 12%in Q2 2023,and 14%for the six months ended June 30,2023 compared to the comparable prior year periods.The sales growthprimarily reflects increased customer usage,partially offset by pricing changes,primarily driven by long-term customer contracts.Operating Income(Loss)Operating income(loss)by segment is as follows(in millions):Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Operating Income(Loss)North America$(627)$3,211$(2,195)$4,109 International(1,771)(895)(3,052)(2,142)AWS5,715 5,365 12,233 10,488 Consolidated$3,317$7,681$6,986$12,455 Operating income increased from$3.3 billion in Q2 2022 to$7.7 billion in Q2 2023,and increased from$7.0 billion for the six months ended June 30,2022 to$12.5 billion for the six months ended June 30,2023.We believe that operating income is a more meaningful measure than gross profit and grossmargin due to the diversity of our product categories and services.The North America operating income in Q2 2023 and for the six months ended June 30,2023,as compared to the operating loss in the comparable prioryear periods,is primarily due to increased unit sales and increased advertising sales,partially offset by increased technology and infrastructure costs,increasedshipping and fulfillment costs,and growth in certain operating expenses.Changes in foreign exchange rates negatively impacted operating income by$7million for Q2 2023,and positively impacted operating income by$34 million for the six months ended June 30,2023.The decrease in International operating loss in absolute dollars in Q2 2023 and for the six months ended June 30,2023,compared to the comparable prioryear periods,is primarily due to increased unit sales and increased advertising sales,partially offset by increased fulfillment and shipping costs,increasedtechnology and infrastructure costs,and growth in certain operating expenses.Changes in foreign exchange rates positively impacted operating loss by$32 million for Q2 2023,and negatively impacted operating loss by$142 million for the six months ended June 30,2023.The decrease in AWS operating income in absolute dollars in Q2 2023 and for the six months ended June 30,2023,compared to the comparable prioryear periods,is primarily due to increased payroll and related expenses and spending on technology infrastructure,both of which were primarily driven byadditional investments to support AWS business growth,partially offset by increased sales.Changes in foreign exchange rates positively impacted operatingincome by$79 million for Q2 2023,and by$351 million for the six months ended June 30,2023.25Table of ContentsOperating ExpensesInformation about operating expenses is as follows(in millions):Three Months EndedJune 30,Six Months EndedJune 30,2022202320222023Operating expenses:Cost of sales$66,424$69,373$132,923$137,164 Fulfillment20,342 21,305 40,613 42,210 Technology and infrastructure18,072 21,931 32,914 42,381 Sales and marketing10,086 10,745 18,406 20,917 General and administrative2,903 3,202 5,497 6,245 Other operating expense(income),net90 146 339 369 Total operating expenses$117,917$126,702$230,692$249,286 Year-over-year Percentage Growth:Cost of sales4%4%5%3%Fulfillment15 5 19 4 Technology and infrastructure30 21 25 29 Sales and marketing34 7 34 14 General and administrative35 10 33 14 Other operating expense(income),net673 63 588 9 Percent of Net Sales:Cost of sales54.8Q.6U.9R.4%Fulfillment16.8 15.9 17.1 16.1 Technology and infrastructure14.9 16.3 13.8 16.2 Sales and marketing8.3 8.0 7.7 8.0 General and administrative2.4 2.4 2.3 2.4 Other operating expense(income),net0.1 0.1 0.1 0.1 Cost of SalesCost of sales primarily consists of the purchase price of consumer products,inbound and outbound shipping costs,including costs related to sortation anddelivery centers and where we are the transportation service provider,and digital media content costs where we record revenue gross,including video andmusic.The increase in cost of sales in absolute dollars in Q2 2023 and for the six months ended June 30,2023,compared to the comparable prior year periods,is primarily due to increased product and shipping costs resulting from increased sales,partially offset by fulfillment network efficiencies.Changes in foreignexchange rates reduced cost of sales by$208 million for Q2 2023,and by$1.8 billion for the six months ended June 30,2023.Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of sales upon sale of products to ourcustomers.Shipping costs,which include sortation and delivery centers and transportation costs,were$19.3 billion and$20.5 billion in Q2 2022 and Q2 2023,and$38.9 billion and$40.4 billion for the six months ended June 30,2022 and 2023.We expect our cost of shipping to continue to increase to the extent ourcustomers accept and use our shipping offers at an increasing rate,we use more expensive shipping methods,and we offer additional services.We seek tomitigate costs of shipping over time in part through achieving higher sales volumes,optimizing our fulfillment network,negotiating better terms with oursuppliers,and achieving better operating efficiencies.We believe that offering low prices to our customers is fundamental to our future success,and one waywe offer lower prices is through shipping offers.Costs to operate our AWS segment are primarily classified as“Technology and infrastructure”as we leverage a shared infrastructure that supports bothour internal technology requirements and external sales to AWS customers.FulfillmentFulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers,physicalstores,and customer service centers and payment processing costs.While AWS payment processing26Table of Contentsand related transaction costs are included in“Fulfillment,”AWS costs are primarily classified as“Technology and infrastructure.”Fulfillment costs as apercentage of net sales may vary due to several factors,such as payment processing and related transaction costs,our level of productivity and accuracy,changes in volume,size,and weight of units received and fulfilled,the extent to which third-party sellers utilize Fulfillment by Amazon services,timing offulfillment network and physical store expansion,the extent we utilize fulfillment services provided by third parties,mix of products and services sold,and ourability to affect customer service contacts per unit by implementing improvements in our operations and enhancements to our customer self-service features.Additionally,sales by our sellers have higher payment processing and related transaction costs as a percentage of net sales compared to our retail sales becausepayment processing costs are based on the gross purchase price of underlying transactions.The increase in fulfillment costs in absolute dollars in Q2 2023 and for the six months ended June 30,2023,compared to the comparable prior yearperiods,is primarily due to increased sales,partially offset by fulfillment network efficiencies.Changes in foreign exchange rates reduced fulfillment costs by$35 million for Q2 2023,and by$431 million for the six months ended June 30,2023.We seek to expand our fulfillment network to accommodate a greater selection and in-stock inventory levels and to meet anticipated shipment volumesfrom sales of our own products as well as sales by third parties for which we provide the fulfillment services.We regularly evaluate our facility requirements.Technology and InfrastructureTechnology and infrastructure costs include payroll and related expenses for employees involved in the research and development of new and existingproducts and services,development,design,and maintenance of our stores,curation and display of products and services made available in our online stores,and infrastructure costs.Infrastructure costs include servers,networking equipment,and data center related depreciation and amortization,rent,utilities,andother expenses necessary to support AWS and other Amazon businesses.Collectively,these costs reflect the investments we make in order to offer a widevariety of products and services to our customers,including expenditures related to initiatives to build and deploy innovative and efficient software andelectronic devices and the development of a satellite network for global broadband service and autonomous vehicles for ride-hailing services.We seek to invest efficiently in numerous areas of technology and infrastructure so we may continue to enhance the customer experience and improveour process efficiency through rapid technology developments,while operating at an ever increasing scale.Our technology and infrastructure investment andcapital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems andoperations.We expect spending in technology and infrastructure to increase over time as we continue to add employees and infrastructure.These costs areallocated to segments based on usage.The increase in technology and infrastructure costs in absolute dollars in Q2 2023 and for the six months ended June 30,2023,compared to the comparable prior year periods,is primarily due to increased payroll and related costs associated with technical teams responsible forexpanding our existing products and services and initiatives to introduce new products and service offerings,and an increase in spending on infrastructure.Changes in foreign exchange rates reduced technology and infrastructure costs by$95 million for Q2 2023,and by$399 million for the six months ended June30,2023.See Item 7 of Part II,“Managements Discussion and Analysis of Financial Condition and Results of Operations Overview”of our 2022 AnnualReport on Form 10-K for a discussion of how management views advances in technology and the importance of innovation.Sales and MarketingSales and marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities,including salescommissions related to AWS.We direct customers to our stores primarily through a number of marketing channels,such as our sponsored search,social andonline advertising,third-party customer referrals,television advertising,and other initiatives.Our marketing costs are largely variable,based on growth in salesand changes in rates.To the extent there is increased or decreased competition for these traffic sources,or to the extent our mix of these channels shifts,wewould expect to see a corresponding change in our marketing costs.The increase in sales and marketing costs in absolute dollars in Q2 2023 and for the six months ended June 30,2023,compared to the comparable prioryear periods,is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities.While costs associated with Amazon Prime membership benefits and other shipping offers are not included in sales and marketing expense,we viewthese offers as effective worldwide marketing tools,and intend to continue offering them indefinitely.General and AdministrativeThe increase in general and administrative costs in absolute dollars in Q2 2023 and for the six months ended June 30,2023,compared to the comparableprior year periods,is primarily due to an increase in payroll and related expenses.27Table of ContentsOther Operating Expense(Income),NetOther operating expense(income),net was$90 million and$146 million for Q2 2022 and Q2 2023,and$339 million and$369 million for the sixmonths ended June 30,2022 and 2023,and was primarily related to asset impairments for physical store closures in 2022 and for fulfillment network facilitiesin 2023,and the amortization of intangible assets.Interest Income and ExpenseOur interest income was$159 million and$661 million during Q2 2022 and Q2 2023,and$267 million and$1.3 billion for the six months ended June30,2022 and 2023,primarily due to an increase in prevailing rates.We generally invest our excess cash in AAA-rated money market funds and investmentgrade short-to intermediate-term marketable debt securities.Our interest income corresponds with the average balance of invested funds based on theprevailing rates,which vary depending on the geographies and currencies in which they are invested.Interest expense was$584 million and$840 million during Q2 2022 and Q2 2023,and$1.1 billion and$1.7 billion for the six months ended June 30,2022 and 2023,and was primarily related to debt and finance leases.See Item 1 of Part I,“Financial Statements Note 3 Leases and Note 5 Debt”foradditional information.Other Income(Expense),NetOther income(expense),net was$(5.5)billion and$61 million during Q2 2022 and Q2 2023,and$(14.1)billion and$(382)million for the six monthsended June 30,2022 and 2023.The primary components of other income(expense),net are related to equity securities valuations and adjustments,equitywarrant valuations,and foreign currency.Included in other income(expense),net is a marketable equity securities valuation gain(loss)of$(3.9)billion and$187 million in Q2 2022 and Q2 2023,and$(11.5)billion and$(280)million for the six months ended June 30,2022 and 2023,from our equity investment inRivian.Income TaxesOur income tax benefit for the six months ended June 30,2022 was$2.1 billion,which included$3.2 billion of net discrete tax benefits primarilyattributable to a valuation loss related to our equity investment in Rivian.Our income tax provision for the six months ended June 30,2023 was$1.8 billion,which included$306 million of net discrete tax benefits.See Item 1 of Part I,“Financial Statements Note 7 Income Taxes”for additional information.Non-GAAP Financial MeasuresRegulation G,Conditions for Use of Non-GAAP Financial Measures,and other SEC regulations define and prescribe the conditions for use of certainnon-GAAP financial information.Our measures of free cash flows and the effect of foreign exchange rates on our consolidated statements of operations meetthe definition of non-GAAP financial measures.We provide multiple measures of free cash flows because we believe these measures provide additional perspective on the impact of acquiring propertyand equipment with cash and through finance leases and financing obligations.Free Cash FlowFree cash flow is cash flow from operations reduced by“Purchases of property and equipment,net of proceeds from sales and incentives.”The followingis a reconciliation of free cash flow to the most comparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailingtwelve months ended June 30,2022 and 2023(in millions):Twelve Months EndedJune 30,20222023Net cash provided by(used in)operating activities$35,574$61,841 Purchases of property and equipment,net of proceeds from sales and incentives(59,061)(53,963)Free cash flow$(23,487)$7,878 Net cash provided by(used in)investing activities$(38,580)$(51,908)Net cash provided by(used in)financing activities$740$2,917 28Table of ContentsFree Cash Flow Less Principal Repayments of Finance Leases and Financing ObligationsFree cash flow less principal repayments of finance leases and financing obligations is free cash flow reduced by“Principal repayments of financeleases”and“Principal repayments of financing obligations.”Principal repayments of finance leases and financing obligations approximates the actualpayments of cash for our finance leases and financing obligations.The following is a reconciliation of free cash flow less principal repayments of financeleases and financing obligations to the most comparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailing twelvemonths ended June 30,2022 and 2023(in millions):Twelve Months EndedJune 30,20222023Net cash provided by(used in)operating activities$35,574$61,841 Purchases of property and equipment,net of proceeds from sales and incentives(59,061)(53,963)Free cash flow(23,487)7,878 Principal repayments of finance leases(9,789)(5,705)Principal repayments of financing obligations(205)(244)Free cash flow less principal repayments of finance leases and financing obligations$(33,481)1,929 Net cash provided by(used in)investing activities$(38,580)$(51,908)Net cash provided by(used in)financing activities$740$2,917 Free Cash Flow Less Equipment Finance Leases and Principal Repayments of All Other Finance Leases and Financing ObligationsFree cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations is free cash flow reduced byequipment acquired under finance leases,which is included in“Property and equipment acquired under finance leases,net of remeasurements andmodifications,”principal repayments of all other finance lease liabilities,which is included in“Principal repayments of finance leases,”and“Principalrepayments of financing obligations.”All other finance lease liabilities and financing obligations consists of property.In this measure,equipment acquiredunder finance leases is reflected as if these assets had been purchased with cash,which is not the case as these assets have been leased.The following is areconciliation of free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations to the mostcomparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailing twelve months ended June 30,2022 and 2023(inmillions):Twelve Months EndedJune 30,20222023Net cash provided by(used in)operating activities$35,574$61,841 Purchases of property and equipment,net of proceeds from sales and incentives(59,061)(53,963)Free cash flow(23,487)7,878 Equipment acquired under finance leases(1)(1,621)(269)Principal repayments of all other finance leases(2)(751)(631)Principal repayments of financing obligations(205)(244)Free cash flow less equipment finance leases and principal repayments of all other finance leases and financingobligations$(26,064)$6,734 Net cash provided by(used in)investing activities$(38,580)$(51,908)Net cash provided by(used in)financing activities$740$2,917 _(1)For the twelve months ended June 30,2022 and 2023,this amount relates to equipment included in“Property and equipment acquired under financeleases,net of remeasurements and modifications”of$3,579 million and$696 million.(2)For the twelve months ended June 30,2022 and 2023,this amount relates to property included in“Principal repayments of finance leases”of$9,789million and$5,705 million.29Table of ContentsAll of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent theresidual cash flow available for discretionary expenditures.For example,these measures of free cash flows do not incorporate the portion of paymentsrepresenting principal reductions of debt or cash payments for business acquisitions.Additionally,our mix of property and equipment acquisitions with cash orother financing options may change over time.Therefore,we believe it is important to view free cash flows measures only as a complement to our entireconsolidated statements of cash flows.Effect of Foreign Exchange RatesInformation regarding the effect of foreign exchange rates,versus the U.S.Dollar,on our net sales,operating expenses,and operating income is providedto show reported period operating results had the foreign exchange rates remained the same as those in effect in the comparable prior year period.The effect onour net sales,operating expenses,and operating income from changes in our foreign exchange rates versus the U.S.Dollar is as follows(in millions):Three Months Ended June 30,Six Months Ended June 30,2022202320222023AsReportedExchangeRateEffect(1)At PriorYearRates(2)As ReportedExchangeRateEffect(1)At PriorYearRates(2)AsReportedExchangeRateEffect(1)At PriorYearRates(2)As ReportedExchangeRateEffect(1)At PriorYearRates(2)Net sales$121,234$3,599$124,833$134,383$285$134,668$237,678$5,440$243,118$261,741$2,721$264,462 Operating expenses117,917 3,764 121,681 126,702 389 127,091 230,692 5,731 236,423 249,286 2,964 252,250 Operating income3,317(165)3,152 7,681(104)7,577 6,986(291)6,695 12,455(243)12,212 _(1)Represents the change in reported amounts resulting from changes in foreign exchange rates from those in effect in the comparable prior year period foroperating results.(2)Represents the outcome that would have resulted had foreign exchange rates in the reported period been the same as those in effect in the comparable prioryear period for operating results.30Table of ContentsGuidanceWe provided guidance on August 3,2023,in our earnings release furnished on Form 8-K as set forth below.These forward-looking statements reflectAs expectations as of August 3,2023,and are subject to substantial uncertainty.Our results are inherently unpredictable and may be materiallyaffected by many factors,such as fluctuations in foreign exchange rates,changes in global economic and geopolitical conditions and customer demand andspending(including the impact of recessionary fears),inflation,interest rates,regional labor market constraints,world events,the rate of growth of the Internet,online commerce,and cloud services,as well as those outlined in Item 1A of Part II,“Risk Factors.”Third Quarter 2023 GuidanceNet sales are expected to be between$138.0 billion and$143.0 billion,or to grow between 9%and 13%compared with third quarter 2022.Thisguidance anticipates a favorable impact of approximately 120 basis points from foreign exchange rates.Operating income is expected to be between$5.5 billion and$8.5 billion,compared with$2.5 billion in third quarter 2022.This guidance assumes,among other things,that no additional business acquisitions,restructurings,or legal settlements are concluded.31Table of ContentsItem 3.Quantitative and Qualitative Disclosures About Market RiskWe are exposed to market risk for the effect of interest rate changes,foreign currency fluctuations,and changes in the market values of our investments.Information relating to quantitative and qualitative disclosures about market risk is set forth below and in Item 2 of Part I,“Managements Discussion andAnalysis of Financial Condition and Results of Operations Liquidity and Capital Resources.”Interest Rate RiskOur exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our debt.Our long-term debt is carried atamortized cost and fluctuations in interest rates do not impact our consolidated financial statements.However,the fair value of our long-term debt,which paysint
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 _FORM 10-Q_(Mark One)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended September 30,2023orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to .Commission File No.000-22513_AMAZON.COM,INC.(Exact name of registrant as specified in its charter)_Delaware 91-1646860(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification No.)410 Terry Avenue North,Seattle,Washington 98109-5210(206)266-1000(Address and telephone number,including area code,of registrants principal executive offices)Securities registered pursuant to Section 12(b)of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock,par value$.01 per shareAMZNNasdaq Global Select Market_Indicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during thepreceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for the past90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-Tduring the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growthcompany.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No 10,334,030,586 shares of common stock,par value$0.01 per share,outstanding as of October 18,2023Table of ContentsAMAZON.COM,INC.FORM 10-QFor the Quarterly Period Ended September 30,2023INDEX PagePART I.FINANCIAL INFORMATIONItem 1.Financial Statements3Consolidated Statements of Cash Flows3Consolidated Statements of Operations4Consolidated Statements of Comprehensive Income(Loss)5Consolidated Balance Sheets6Notes to Consolidated Financial Statements7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations21Item 3.Quantitative and Qualitative Disclosures About Market Risk32Item 4.Controls and Procedures33PART II.OTHER INFORMATIONItem 1.Legal Proceedings34Item 1A.Risk Factors34Item 2.Unregistered Sales of Equity Securities and Use of Proceeds45Item 3.Defaults Upon Senior Securities45Item 4.Mine Safety Disclosures45Item 5.Other Information45Item 6.Exhibits46Signatures472Table of ContentsPART I.FINANCIAL INFORMATIONItem 1.Financial StatementsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions)(unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,Twelve Months EndedSeptember 30,202220232022202320222023CASH,CASH EQUIVALENTS,AND RESTRICTED CASH,BEGINNING OF PERIOD$37,700$50,067$36,477$54,253$30,177$35,178 OPERATING ACTIVITIES:Net income(loss)2,872 9,879(3,000)19,801 11,323 20,079 Adjustments to reconcile net income(loss)to net cash from operating activities:Depreciation and amortization of property and equipment and capitalized content costs,operating leaseassets,and other10,327 12,131 29,236 34,843 39,103 47,528 Stock-based compensation5,556 5,829 14,015 17,704 17,695 23,310 Non-operating expense(income),net(1,272)(990)13,521(409)1,589 3,036 Deferred income taxes(825)(1,196)(4,781)(4,412)(8,404)(7,779)Changes in operating assets and liabilities:Inventories732 808(5,772)(1,194)(7,687)1,986 Accounts receivable,net and other(4,794)(6,718)(13,109)(10,364)(19,665)(19,152)Accounts payable(1,226)2,820(6,907)(5,415)1,082 4,437 Accrued expenses and other(20)(1,321)(7,335)(9,022)1,998(3,245)Unearned revenue54(25)1,711 949 2,631 1,454 Net cash provided by(used in)operating activities11,404 21,217 17,579 42,481 39,665 71,654 INVESTING ACTIVITIES:Purchases of property and equipment(16,378)(12,479)(47,053)(38,141)(65,988)(54,733)Proceeds from property and equipment sales and incentives1,337 1,181 4,172 3,361 6,637 4,513 Acquisitions,net of cash acquired,non-marketable investments,and other(885)(1,629)(7,485)(5,458)(7,866)(6,289)Sales and maturities of marketable securities557 1,393 25,918 4,059 38,455 9,742 Purchases of marketable securities(239)(219)(2,332)(1,053)(10,598)(1,286)Net cash provided by(used in)investing activities(15,608)(11,753)(26,780)(37,232)(39,360)(48,053)FINANCING ACTIVITIES:Common stock repurchased (6,000)(6,000)Proceeds from short-term debt,and other12,338 216 30,946 17,395 33,613 28,002 Repayments of short-term debt,and other(7,916)(8,095)(21,757)(19,339)(24,416)(35,136)Proceeds from long-term debt107 12,931 13,131 8,235 Repayments of long-term debt (1)(3,386)(1,002)(4,643)Principal repayments of finance leases(1,465)(1,005)(6,301)(3,605)(8,561)(5,245)Principal repayments of financing obligations(48)(64)(186)(198)(233)(260)Net cash provided by(used in)financing activities3,016(8,948)9,632(9,133)6,532(9,047)Foreign currency effect on cash,cash equivalents,and restricted cash(1,334)(502)(1,730)(288)(1,836)349 Net increase(decrease)in cash,cash equivalents,and restricted cash(2,522)14(1,299)(4,172)5,001 14,903 CASH,CASH EQUIVALENTS,AND RESTRICTED CASH,END OF PERIOD$35,178$50,081$35,178$50,081$35,178$50,081 See accompanying notes to consolidated financial statements.3Table of ContentsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in millions,except per share data)(unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Net product sales$59,340$63,171$172,370$179,184 Net service sales67,761 79,912 192,409 225,640 Total net sales127,101 143,083 364,779 404,824 Operating expenses:Cost of sales70,268 75,022 203,191 212,186 Fulfillment20,583 22,314 61,196 64,524 Technology and infrastructure19,485 21,203 52,399 63,584 Sales and marketing11,014 10,551 29,420 31,468 General and administrative3,061 2,561 8,558 8,806 Other operating expense(income),net165 244 504 613 Total operating expenses124,576 131,895 355,268 381,181 Operating income2,525 11,188 9,511 23,643 Interest income277 776 544 2,048 Interest expense(617)(806)(1,673)(2,469)Other income(expense),net759 1,031(13,356)649 Total non-operating income(expense)419 1,001(14,485)228 Income(loss)before income taxes2,944 12,189(4,974)23,871 Benefit(provision)for income taxes(69)(2,306)1,990(4,058)Equity-method investment activity,net of tax(3)(4)(16)(12)Net income(loss)$2,872$9,879$(3,000)$19,801 Basic earnings per share$0.28$0.96$(0.29)$1.93 Diluted earnings per share$0.28$0.94$(0.29)$1.89 Weighted-average shares used in computation of earnings per share:Basic10,191 10,322 10,178 10,286 Diluted10,331 10,558 10,178 10,452 See accompanying notes to consolidated financial statements.4Table of ContentsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS)(in millions)(unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Net income(loss)$2,872$9,879$(3,000)$19,801 Other comprehensive income(loss):Foreign currency translation adjustments,net of tax of$76,$36,$136,and$4(2,142)(1,388)(4,661)(738)Net change in unrealized gains(losses)on available-for-sale debtsecurities:Unrealized gains(losses),net of tax of$(4),$(18),$(3),and$(52)(195)62(1,095)174 Reclassification adjustment for losses(gains)included in“Otherincome(expense),net,”net of tax of$0,$0,$0,and$(15)4 3 17 48 Net unrealized gains(losses)on available-for-sale debt securities(191)65(1,078)222 Total other comprehensive income(loss)(2,333)(1,323)(5,739)(516)Comprehensive income(loss)$539$8,556$(8,739)$19,285 See accompanying notes to consolidated financial statements.5Table of ContentsAMAZON.COM,INC.CONSOLIDATED BALANCE SHEETS(in millions,except per share data)December 31,2022September 30,2023(unaudited)ASSETSCurrent assets:Cash and cash equivalents$53,888$49,605 Marketable securities16,138 14,564 Inventories34,405 35,406 Accounts receivable,net and other42,360 43,420 Total current assets146,791 142,995 Property and equipment,net186,715 196,468 Operating leases66,123 70,758 Goodwill20,288 22,749 Other assets42,758 53,913 Total assets$462,675$486,883 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable$79,600$72,004 Accrued expenses and other62,566 58,812 Unearned revenue13,227 14,398 Total current liabilities155,393 145,214 Long-term lease liabilities72,968 75,891 Long-term debt67,150 61,098 Other long-term liabilities21,121 21,707 Commitments and contingencies(Note 4)Stockholders equity:Preferred stock($0.01 par value;500 shares authorized;no shares issued or outstanding)Common stock($0.01 par value;100,000 shares authorized;10,757 and 10,845 shares issued;10,242 and10,330 shares outstanding)108 108 Treasury stock,at cost(7,837)(7,837)Additional paid-in capital75,066 92,711 Accumulated other comprehensive income(loss)(4,487)(5,003)Retained earnings83,193 102,994 Total stockholders equity146,043 182,973 Total liabilities and stockholders equity$462,675$486,883 See accompanying notes to consolidated financial statements.6Table of ContentsAMAZON.COM,INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 1 ACCOUNTING POLICIES AND SUPPLEMENTAL DISCLOSURESUnaudited Interim Financial InformationWe have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission(the“SEC”)for interim financial reporting.These consolidated financial statements are unaudited and,in our opinion,include all adjustments,consisting ofnormal recurring adjustments and accruals necessary for a fair presentation of our consolidated cash flows,operating results,and balance sheets for the periodspresented.Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2023 due to seasonal and otherfactors.Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generallyaccepted in the United States(“GAAP”)have been omitted in accordance with the rules and regulations of the SEC.These consolidated financial statementsshould be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II,“Financial Statements andSupplementary Data,”of our 2022 Annual Report on Form 10-K.Prior Period ReclassificationsCertain prior period amounts have been reclassified to conform to the current period presentation.“Other operating expense(income),net”wasreclassified into“Depreciation and amortization of property and equipment and capitalized content costs,operating lease assets,and other”on our consolidatedstatements of cash flows.Principles of ConsolidationThe consolidated financial statements include the accounts of A,Inc.and its consolidated entities(collectively,the“Company”),consisting ofits wholly-owned subsidiaries and those entities in which we have a variable interest and of which we are the primary beneficiary,including certain entities inIndia and certain entities that support our health care services and seller lending financing activities.Intercompany balances and transactions betweenconsolidated entities are eliminated.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets andliabilities,revenues and expenses,and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes.Estimatesare used for,but not limited to,income taxes,useful lives of equipment,commitments and contingencies,valuation of acquired intangibles and goodwill,stock-based compensation forfeiture rates,vendor funding,inventory valuation,collectability of receivables,impairment of property and equipment and operatingleases,valuation and impairment of investments,self-insurance liabilities,and viewing patterns of capitalized video content.Actual results could differmaterially from these estimates.For the nine months ended September 30,2023,we recorded approximately$500 million of estimated severance costs primarily related to planned roleeliminations.These charges were recorded primarily in“Technology and infrastructure,”“Sales and marketing,”and“General and administrative”on ourconsolidated statements of operations and included approximately$280 million recorded within our AWS segment.For the nine months ended September 30,2022 and 2023,we recorded approximately$350 million and$420 million of impairments of property andequipment and operating leases primarily related to physical stores in 2022 and fulfillment network facilities and physical stores in 2023.These charges wererecorded in“Other operating expense(income),net”on our consolidated statements of operations and primarily impacted our North America segment.For thenine months ended September 30,2022 and 2023,we also recorded expenses of approximately$300 million and$200 million primarily in“Fulfillment”in2022 and“Cost of sales”and“Fulfillment”in 2023,on our consolidated statements of operations primarily relating to terminating contracts for certain leasesnot yet commenced as well as other purchase commitments,which primarily impacted our North America segment.7Table of ContentsSupplemental Cash Flow InformationThe following table shows supplemental cash flow information(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,Twelve Months EndedSeptember 30,202220232022202320222023SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest on debt,net of capitalized interest$304$465$932$1,821$1,299$2,450 Cash paid for operating leases1,813 2,692 6,268 7,687 7,961 10,052 Cash paid for interest on finance leases88 76 290 234 404 318 Cash paid for interest on financing obligations39 50 152 150 189 205 Cash paid for income taxes,net of refunds742 2,628 4,340 6,982 4,674 8,677 Assets acquired under operating leases6,755 3,345 14,031 11,075 19,839 15,844 Property and equipment acquired under finance leases,net of remeasurements andmodifications131 183 358 431 1,966 748 Property and equipment recognized during the construction period of build-to-suitlease arrangements526 93 2,877 308 4,847 618 Property and equipment derecognized after the construction period of build-to-suitlease arrangements,with the associated leases recognized as operating2,195 492 3,307 1,212 3,363 3,063 Earnings Per ShareBasic earnings per share is calculated using our weighted-average outstanding common shares.Diluted earnings per share is calculated using ourweighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method.In periods when wehave a net loss,stock awards are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect.The following table shows the calculation of diluted shares(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Shares used in computation of basic earnings per share10,191 10,322 10,178 10,286 Total dilutive effect of outstanding stock awards140 236 166 Shares used in computation of diluted earnings per share10,331 10,558 10,178 10,452 Other Income(Expense),NetOther income(expense),net,is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Marketable equity securities valuation gains(losses)$1,039$1,196$(11,528)$1,015 Equity warrant valuation gains(losses)(170)(27)(1,606)(188)Upward adjustments relating to equity investments in private companies11 7 76 33 Foreign currency gains(losses)(103)(94)(206)(15)Other,net(18)(51)(92)(196)Total other income(expense),net759 1,031(13,356)649 Included in other income(expense),net is a marketable equity securities valuation gain(loss)of$1.1 billion and$1.2 billion in Q3 2022 and Q3 2023,and$(10.4)billion and$926 million for the nine months ended September 30,2022 and 2023,from our equity investment in Rivian Automotive,Inc.(“Rivian”).Our investment in Rivians preferred stock was accounted for at cost,with adjustments for observable changes in prices or impairments,prior toRivians initial public offering in November 2021,which resulted in the conversion of our preferred stock to Class A common stock.As of September 30,2023,we held 158 million shares of Rivians Class A common stock,representing an approximate 17%ownership interest,and an approximate 15%voting interest.We determined that we have the ability to exercise significant influence over Rivian through our equity investment,our commercial arrangement for thepurchase of electric vehicles,and one of our employees serving on8Table of ContentsRivians board of directors.We elected the fair value option to account for our equity investment in Rivian,which is included in“Marketable securities”on ourconsolidated balance sheets,and had a fair value of$2.9 billion and$3.8 billion as of December 31,2022 and September 30,2023.The investment was subjectto regulatory sales restrictions resulting in a discount for lack of marketability of approximately$800 million as of December 31,2021,which expired in Q12022.Required summarized financial information of Rivian as disclosed in its most recent SEC filings is as follows(in millions):Six Months Ended June 30,20222023Revenues$459$1,782 Gross profit(1,206)(947)Loss from operations(3,287)(2,718)Net loss(3,305)(2,544)InventoriesInventories,consisting of products available for sale,are primarily accounted for using the first-in,first-out method,and are valued at the lower of costand net realizable value.This valuation requires us to make judgments,based on currently available information,about the likely method of disposition,suchas through sales to individual customers,returns to product vendors,or liquidations,and expected recoverable values of each disposition category.Theinventory valuation allowance,representing a write-down of inventory,was$2.8 billion and$2.6 billion as of December 31,2022 and September 30,2023.Accounts Receivable,Net and OtherIncluded in“Accounts receivable,net and other”on our consolidated balance sheets are receivables primarily related to customers,vendors,and sellers,as well as prepaid expenses and other current assets.As of December 31,2022 and September 30,2023,customer receivables,net,were$26.6 billion and$28.1 billion,vendor receivables,net,were$6.9 billion and$6.3 billion,seller receivables,net,were$1.3 billion and$1.2 billion,and other receivables,net,were$3.1 billion and$2.5 billion.Seller receivables are amounts due from sellers related to our seller lending program,which provides funding to sellersprimarily to procure inventory.Prepaid expenses and other current assets were$4.5 billion and$5.3 billion as of December 31,2022 and September 30,2023.We estimate losses on receivables based on expected losses,including our historical experience of actual losses.The allowance for doubtful accounts was$1.4 billion and$1.5 billion as of December 31,2022 and September 30,2023.Digital Video and Music ContentThe total capitalized costs of video,which is primarily released content,and music as of December 31,2022 and September 30,2023 were$16.7 billionand$18.0 billion.The weighted average remaining life of our capitalized video content is 3.6 years.Total video and music expense was$4.2 billion and$4.6billion in Q3 2022 and Q3 2023,and$11.4 billion and$13.0 billion for the nine months ended September 30,2022 and 2023.Unearned RevenueUnearned revenue is recorded when payments are received or due in advance of performing our service obligations and is recognized over the serviceperiod.Unearned revenue primarily relates to prepayments of AWS services and Amazon Prime memberships.Our total unearned revenue as of December 31,2022 was$16.1 billion,of which$10.9 billion was recognized as revenue during the nine months ended September 30,2023.Included in“Other long-termliabilities”on our consolidated balance sheets was$2.9 billion and$2.7 billion of unearned revenue as of December 31,2022 and September 30,2023.Additionally,we have performance obligations,primarily related to AWS,associated with commitments in customer contracts for future services thathave not yet been recognized in our consolidated financial statements.For contracts with original terms that exceed one year,those commitments not yetrecognized were$133.0 billion as of September 30,2023.The weighted-average remaining life of our long-term contracts is 3.5 years.However,the amountand timing of revenue recognition is largely driven by customer usage,which can extend beyond the original contractual term.9Table of ContentsAcquisition ActivityOn February 22,2023,we acquired 1Life Healthcare,Inc.(“One Medical”),for cash consideration of approximately$3.5 billion,net of cash acquired,toprovide health care options for customers.The acquired assets primarily consist of$1.3 billion of intangible assets and$2.5 billion of goodwill,which isallocated to our North America segment.Pro forma results of operations have not been presented because the effects of the One Medical acquisition were not material to our consolidated resultsof operations.Acquisition-related costs were expensed as incurred and were not significant.In August 2022,we entered into an agreement to acquire iRobot Corporation,as amended in July 2023,for approximately$1.7 billion,including its debt,subject to customary closing conditions.We expect to fund this acquisition with cash on hand.Note 2 FINANCIAL INSTRUMENTSCash,Cash Equivalents,Restricted Cash,and Marketable SecuritiesAs of December 31,2022 and September 30,2023,our cash,cash equivalents,restricted cash,and marketable securities primarily consisted of cash,AAA-rated money market funds,U.S.and foreign government and agency securities,other investment grade securities,and marketable equity securities.Cashequivalents and marketable securities are recorded at fair value.Fair value is defined as the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at the measurement date.To increase the comparability of fair value measures,the followinghierarchy prioritizes the inputs to valuation methodologies used to measure fair value:Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.Level 2Valuations based on observable inputs other than quoted prices included in Level 1,such as quoted prices for similar assets and liabilities inactive markets,quoted prices for identical or similar assets and liabilities in markets that are not active,or other inputs that are observable or can becorroborated by observable market data.Level 3Valuations based on unobservable inputs reflecting our own assumptions,consistent with reasonably available assumptions made by othermarket participants.These valuations require significant judgment.We measure the fair value of money market funds and certain marketable equity securities based on quoted prices in active markets for identical assets orliabilities.Other marketable securities were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similarinstruments and other significant inputs derived from or corroborated by observable market data.We did not hold significant amounts of marketable securitiescategorized as Level 3 assets as of December 31,2022 and September 30,2023.10Table of ContentsThe following table summarizes,by major security type,our cash,cash equivalents,restricted cash,and marketable securities that are measured at fairvalue on a recurring basis and are categorized using the fair value hierarchy(in millions):December 31,2022September 30,2023 TotalEstimatedFair ValueCost orAmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesTotalEstimatedFair ValueCash$10,666$10,090$10,090 Level 1 securities:Money market funds27,899 20,424 20,424 Equity securities(1)3,709 4,684 Level 2 securities:Foreign government and agency securities535 28 (1)27 U.S.government and agency securities2,146 3,322 (128)3,194 Corporate debt securities22,627 24,542 (287)24,255 Asset-backed securities2,572 1,892 (84)1,808 Other debt securities237 169 (6)163$70,391$60,467$(506)$64,645 Less:Restricted cash,cash equivalents,and marketablesecurities(2)(365)(476)Total cash,cash equivalents,and marketable securities$70,026$64,169 _(1)The related unrealized gains(losses)recorded in“Other income(expense),net”were$1.0 billion and$1.2 billion in Q3 2022 and Q3 2023,and$(11.3)billion and$1.0 billion for the nine months ended September 30,2022 and 2023.(2)We are required to pledge or otherwise restrict a portion of our cash,cash equivalents,and marketable debt securities primarily as collateral for real estate,amounts due to third-party sellers in certain jurisdictions,debt,and standby and trade letters of credit.We classify cash,cash equivalents,and marketabledebt securities with use restrictions of less than twelve months as“Accounts receivable,net and other”and of twelve months or longer as non-current“Other assets”on our consolidated balance sheets.See“Note 4 Commitments and Contingencies.”The following table summarizes the remaining contractual maturities of our cash equivalents and marketable debt securities as of September 30,2023(inmillions):AmortizedCostEstimatedFair ValueDue within one year$43,198$43,132 Due after one year through five years5,623 5,284 Due after five years through ten years453 429 Due after ten years1,103 1,026 Total$50,377$49,871 Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.Non-Marketable InvestmentsWe hold equity warrants giving us the right to acquire stock of other companies.As of December 31,2022 and September 30,2023,these warrants had afair value of$2.1 billion and$1.9 billion,with gains and losses recognized in“Other income(expense),net”on our consolidated statements of operations.These warrants are classified as Level 2 and 3 assets.As of December 31,2022 and September 30,2023,equity investments not accounted for under the equity-method and without readily determinable fairvalues had a carrying value of$715 million and$753 million,with adjustments recognized in“Other income(expense),net”on our consolidated statements ofoperations.Additionally,in September 2023 we invested in a$1.25 billion note from Anthropic,PBC,which is convertible to equity.We have an agreement thatexpires in Q1 2024 to invest up to an additional$2.75 billion in a second convertible note.We also have a commercial arrangement primarily for the provisionof AWS cloud services and chips.All non-marketable investments are recorded within“Other assets”on our consolidated balance sheets.11Table of ContentsConsolidated Statements of Cash Flows ReconciliationThe following table provides a reconciliation of the amount of cash,cash equivalents,and restricted cash reported within the consolidated balance sheetsto the total of the same such amounts shown in the consolidated statements of cash flows(in millions):December 31,2022September 30,2023Cash and cash equivalents$53,888$49,605 Restricted cash included in accounts receivable,net and other358 465 Restricted cash included in other assets7 11 Total cash,cash equivalents,and restricted cash shown in the consolidated statements of cash flows$54,253$50,081 Note 3 LEASESWe have entered into non-cancellable operating and finance leases for fulfillment network,office,data center,and physical store facilities as well asserver and networking equipment,aircraft,and vehicles.Gross assets acquired under finance leases,including those where title transfers at the end of the lease,are recorded in“Property and equipment,net”and were$68.0 billion and$62.7 billion as of December 31,2022 and September 30,2023.Accumulatedamortization associated with finance leases was$45.2 billion and$44.0 billion as of December 31,2022 and September 30,2023.Lease cost recognized in our consolidated statements of operations is summarized as follows(in millions):Three Months Ended September 30,Nine Months Ended September 30,2022202320222023Operating lease cost$2,236$2,679$6,472$7,799 Finance lease cost:Amortization of lease assets1,496 1,439 4,586 4,524 Interest on lease liabilities85 74 280 230 Finance lease cost1,581 1,513 4,866 4,754 Variable lease cost462 567 1,402 1,579 Total lease cost$4,279$4,759$12,740$14,132 Other information about lease amounts recognized in our consolidated financial statements is as follows:December 31,2022September 30,2023Weighted-average remaining lease term operating leases11.6 years11.4 yearsWeighted-average remaining lease term finance leases10.3 years11.7 yearsWeighted-average discount rate operating leases2.8%3.2%Weighted-average discount rate finance leases2.3%2.7Table of ContentsOur lease liabilities were as follows(in millions):December 31,2022 Operating LeasesFinance LeasesTotalGross lease liabilities$81,273$18,019$99,292 Less:imputed interest(12,233)(2,236)(14,469)Present value of lease liabilities69,040 15,783 84,823 Less:current portion of lease liabilities(7,458)(4,397)(11,855)Total long-term lease liabilities$61,582$11,386$72,968 September 30,2023 Operating LeasesFinance LeasesTotalGross lease liabilities$88,814$14,574$103,388 Less:imputed interest(14,912)(2,108)(17,020)Present value of lease liabilities73,902 12,466 86,368 Less:current portion of lease liabilities(8,092)(2,385)(10,477)Total long-term lease liabilities$65,810$10,081$75,891 Note 4 COMMITMENTS AND CONTINGENCIESCommitmentsThe following summarizes our principal contractual commitments,excluding open orders for purchases that support normal operations and are generallycancellable,as of September 30,2023(in millions):Three MonthsEnded December31,Year Ended December 31,20232024202520262027ThereafterTotalLong-term debt principal and interest$810$10,637$7,326$5,015$10,399$63,814$98,001 Operating lease liabilities3,245 9,977 9,390 8,678 7,879 49,645 88,814 Finance lease liabilities,including interest871 2,178 1,428 1,349 1,088 7,660 14,574 Financing obligations,including interest(1)118 468 461 468 476 6,765 8,756 Leases not yet commenced284 1,963 1,750 1,888 1,956 18,069 25,910 Unconditional purchase obligations(2)2,171 7,940 6,626 5,109 3,803 6,221 31,870 Other commitments(3)(4)1,415 2,549 1,448 1,282 980 8,808 16,482 Total commitments$8,914$35,712$28,429$23,789$26,581$160,982$284,407 _(1)Includes non-cancellable financing obligations for fulfillment network and data center facilities.Excluding interest,current financing obligations of$266million and$271 million are recorded within“Accrued expenses and other”and$6.7 billion and$6.6 billion are recorded within“Other long-termliabilities”as of December 31,2022 and September 30,2023.The weighted-average remaining term of the financing obligations was 17.9 years and 17.2years and the weighted-average imputed interest rate was 3.1%as of December 31,2022 and September 30,2023.(2)Includes unconditional purchase obligations related to long-term agreements to acquire and license digital media content that are not reflected on theconsolidated balance sheets and certain products offered in our Whole Foods Market stores.For those digital media content agreements with variableterms,we do not estimate the total obligation beyond any minimum quantities and/or pricing as of the reporting date.Purchase obligations associated withrenewal provisions solely at the option of the content provider are included to the extent such commitments are fixed or a minimum amount is specified.(3)Includes asset retirement obligations,liabilities associated with digital media content agreements with initial terms greater than one year,and the estimatedtiming and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements that are under construction.(4)Excludes approximately$5.0 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period ofpayment,if any.13Table of ContentsOther ContingenciesWe are disputing claims and denials of refunds or credits,and monitoring or evaluating potential claims,related to various non-income taxes(such assales,value added,consumption,service,and similar taxes),including in jurisdictions in which we already collect and remit these taxes.These non-income taxcontroversies typically relate to(i)the taxability of products and services,including cross-border intercompany transactions,(ii)collection and withholding ontransactions with third parties,and(iii)the adequacy of compliance with reporting obligations,including evolving documentation requirements.Due to theinherent complexity and uncertainty of these matters and the judicial and regulatory processes in certain jurisdictions,the final outcome of any suchcontroversies may be materially different from our expectations.Legal ProceedingsThe Company is involved from time to time in claims,proceedings,and litigation,including the matters described in Item 8 of Part II,“FinancialStatements and Supplementary Data Note 7 Commitments and Contingencies Legal Proceedings”of our 2022 Annual Report on Form 10-K and inItem 1 of Part I,“Financial Statements Note 4 Commitments and Contingencies Legal Proceedings”of our Quarterly Reports on Form 10-Q for theperiods ended March 31,2023 and June 30,2023,as supplemented by the following:Beginning in June 2019 with Wilcosky v.A,Inc.,now pending in the United States District Court for the Northern District of Illinois(“N.D.Ill.”),private litigants have filed a number of cases in U.S.federal and state courts,including Hogan v.A,Inc.(N.D.Ill.),alleging,among otherthings,that Amazons collection,storage,use,retention,and protection of biometric identifiers violated the Illinois Biometric Information Privacy Act.Thecomplaints allege purported classes of Illinois residents who had biometric identifiers collected through Amazon products or services,including AmazonPhotos,Alexa,AWS cloud services,Ring,Amazon Connect,Amazons Flex driver app,and Amazons virtual try-on technology.The complaints seekcertification as class actions,unspecified amounts of damages,injunctive relief,attorneys fees,costs,and interest.We dispute the allegations of wrongdoingand intend to defend ourselves vigorously in these matters.Beginning in March 2020,with Frame-Wilson v.A,Inc.filed in the United States District Court for the Western District of Washington(“W.D.Wash.”),private litigants have filed a number of cases in the U.S.and Canada alleging,among other things,price fixing arrangements betweenA,Inc.and vendors and third-party sellers in Amazons stores,monopolization and attempted monopolization,and consumer protection and unjustenrichment claims.Attorneys General for the District of Columbia and California brought similar suits in May 2021 and September 2022 in the Superior Courtof the District of Columbia and the California Superior Court for the County of San Francisco,respectively.Some of the private cases include allegations ofseveral distinct purported classes,including consumers who purchased a product through Amazons stores and consumers who purchased a product offered byAmazon through another e-commerce retailer.The complaints seek billions of dollars of alleged damages,treble damages,punitive damages,injunctive relief,civil penalties,attorneys fees,and costs.The Federal Trade Commission(“FTC”)and a number of state Attorneys General filed a similar lawsuit in September2023 in the W.D.Wash.alleging violations of federal antitrust and state antitrust and consumer protection laws.That complaint alleges,among other things,that Amazon has a monopoly in markets for online superstores and marketplace services,and unlawfully maintains those monopolies through anticompetitivepractices relating to our pricing policies,advertising practices,the structure of Prime,and promotion of our own products on our website.The complaint seeksinjunctive and structural relief,an unspecified amount of damages,and costs.Amazons motions to dismiss were granted in part and denied in part in Frame-Wilson in March 2022 and March 2023,De Coster v.A,Inc.(W.D.Wash.)in January 2023,and the California Attorney Generals lawsuit in March2023.All three courts dismissed claims alleging that Amazons pricing policies are inherently illegal and denied dismissal of claims alleging that Amazonspricing policies are an unlawful restraint of trade.In March 2022,the DC Superior Court dismissed the DC Attorney Generals lawsuit in its entirety;thedismissal is under appeal.We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.In addition,we are regularly subject to claims,litigation,and other proceedings,including potential regulatory proceedings,involving patent and otherintellectual property matters,taxes,labor and employment,competition and antitrust,privacy and data protection,consumer protection,commercial disputes,goods and services offered by us and by third parties,and other matters.The outcomes of our legal proceedings and other contingencies are inherently unpredictable,subject to significant uncertainties,and could be material toour operating results and cash flows for a particular period.We evaluate,on a regular basis,developments in our legal proceedings and other contingencies thatcould affect the amount of liability,including amounts in excess of any previous accruals and reasonably possible losses disclosed,and make adjustments andchanges to our accruals and disclosures as appropriate.For the matters we disclose that do not include an estimate of the amount of loss or range of losses,suchan estimate is not possible or is immaterial,and we may be unable to estimate the possible loss or range of losses that could potentially result from theapplication of non-monetary remedies.Until the final resolution of such matters,if any of our estimates and assumptions change or prove to have beenincorrect,we may experience losses in excess of the14Table of Contentsamounts recorded,which could have a material effect on our business,consolidated financial position,results of operations,or cash flows.See also“Note 7 Income Taxes.”Note 5 DEBTAs of September 30,2023,we had$66.5 billion of unsecured senior notes outstanding(the“Notes”)and$972 million of borrowings under our creditfacility.Our total long-term debt obligations are as follows(in millions):Maturities(1)Stated Interest RatesEffective Interest RatesDecember 31,2022September 30,20232014 Notes issuance of$6.0 billion2024-20443.80%-4.95%3.90%-5.12%4,000 4,000 2017 Notes issuance of$17.0 billion2024-20572.80%-5.20%2.95%-4.33,000 15,000 2020 Notes issuance of$10.0 billion2025-20600.80%-2.70%0.88%-2.77,000 9,000 2021 Notes issuance of$18.5 billion2024-20610.45%-3.25%0.57%-3.31,500 17,500 April 2022 Notes issuance of$12.8 billion2024-20622.73%-4.10%2.83%-4.15,750 12,750 December 2022 Notes issuance of$8.3 billion2024-20324.55%-4.70%4.61%-4.83%8,250 8,250 Credit Facility1,042 972 Total face value of long-term debt70,542 67,472 Unamortized discount and issuance costs,net(393)(379)Less:current portion of long-term debt(2,999)(5,995)Long-term debt$67,150$61,098 _(1)The weighted-average remaining lives of the 2014,2017,2020,2021,April 2022,and December 2022 Notes were 11.8,14.4,17.8,13.3,12.5,and 5.1 yearsas of September 30,2023.The combined weighted-average remaining life of the Notes was 12.9 years as of September 30,2023.Interest on the Notes is payable semi-annually in arrears.We may redeem the Notes at any time in whole,or from time to time,in part at specifiedredemption prices.We are not subject to any financial covenants under the Notes.The estimated fair value of the Notes was approximately$61.4 billion and$56.7 billion as of December 31,2022 and September 30,2023,which is based on quoted prices for our debt as of those dates.In January 2023,we entered into an$8.0 billion unsecured 364-day term loan with a syndicate of lenders(the“Term Loan”),which matures in January2024 and bears interest at the Secured Overnight Financing Rate specified in the Term Loan plus 0.75%.If we exercise our option to extend the Term Loansmaturity to January 2025,the interest rate spread will increase from 0.75%to 1.05%.As of September 30,2023,$5.0 billion of the Term Loan was outstanding,which was included in“Accrued expenses and other”on our consolidated balance sheets and had an interest rate of 6.2%.We have a$1.5 billion secured revolving credit facility with a lender that is secured by certain seller receivables,which we may from time to timeincrease in the future subject to lender approval(the“Credit Facility”).The Credit Facility is available until August 2025,bears interest based on the dailySecured Overnight Financing Rate plus 1.25%,and has a commitment fee of up to 0.45%on the undrawn portion.There were$1.0 billion and$972 million ofborrowings outstanding under the Credit Facility as of December 31,2022 and September 30,2023,which had an interest rate of 5.6%and 6.6%,respectively.As of December 31,2022 and September 30,2023,we have pledged$1.2 billion and$1.1 billion of our cash and seller receivables as collateral for debt relatedto our Credit Facility.The estimated fair value of the Credit Facility,which is based on Level 2 inputs,approximated its carrying value as of December 31,2022 and September 30,2023.We have U.S.Dollar and Euro commercial paper programs(the“Commercial Paper Programs”)under which we may from time to time issue unsecuredcommercial paper up to a total of$20.0 billion(including up to 3.0 billion)at the date of issue,with individual maturities that may vary but will not exceed397 days from the date of issue.There were$6.8 billion and$567 million of borrowings outstanding under the Commercial Paper Programs as ofDecember 31,2022 and September 30,2023,which were included in“Accrued expenses and other”on our consolidated balance sheets and had a weighted-average effective interest rate,including issuance costs,of 4.5%and 5.1%,respectively.We use the net proceeds from the issuance of commercial paper forgeneral corporate purposes.We have a$10.0 billion unsecured revolving credit facility with a syndicate of lenders(the“Credit Agreement”),with a term that extends to March 2025.It may be extended for up to three additional one-year terms if approved by the lenders.The15Table of Contentsinterest rate applicable to outstanding balances under the Credit Agreement is the applicable benchmark rate specified in the Credit Agreement plus 0.45%,with a commitment fee of 0.03%on the undrawn portion of the credit facility.There were no borrowings outstanding under the Credit Agreement as ofDecember 31,2022 and September 30,2023.We have a$10.0 billion unsecured 364-day revolving credit facility with a syndicate of lenders(the“Short-Term Credit Agreement”),which matures inNovember 2023 and may be extended for one additional period of 364 days if approved by the lenders.The interest rate applicable to outstanding balancesunder the Short-Term Credit Agreement is the Secured Overnight Financing Rate specified in the Short-Term Credit Agreement plus 0.45%,with acommitment fee of 0.05%on the undrawn portion.There were no borrowings outstanding under the Short-Term Credit Agreement as of December 31,2022and September 30,2023.We also utilize other short-term credit facilities for working capital purposes.There were$1.2 billion and$166 million of borrowings outstanding underthese facilities as of December 31,2022 and September 30,2023,which were included in“Accrued expenses and other”on our consolidated balance sheets.Inaddition,we had$7.8 billion of unused letters of credit as of September 30,2023.Note 6 STOCKHOLDERS EQUITYStock Repurchase ActivityIn March 2022,the Board of Directors authorized a program to repurchase up to$10.0 billion of our common stock,with no fixed expiration,whichreplaced the previous$5.0 billion stock repurchase authorization,approved by the Board of Directors in February 2016.We repurchased 46.2 million shares ofour common stock for$6.0 billion during the nine months ended September 30,2022 under these programs.There were no repurchases of our common stockduring the nine months ended September 30,2023.As of September 30,2023,we have$6.1 billion remaining under the repurchase program.Stock Award ActivityCommon shares outstanding plus shares underlying outstanding stock awards totaled 10.6 billion and 10.8 billion as of December 31,2022 andSeptember 30,2023.These totals include all vested and unvested stock awards outstanding,including those awards we estimate will be forfeited.Stock-basedcompensation expense is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Cost of sales$190$193$549$609 Fulfillment727 732 1,988 2,267 Technology and infrastructure3,036 3,284 7,495 9,901 Sales and marketing1,128 1,111 2,783 3,407 General and administrative475 509 1,200 1,520 Total stock-based compensation expense$5,556$5,829$14,015$17,704 The following table summarizes our restricted stock unit activity for the nine months ended September 30,2023(in millions):Number of UnitsWeighted-AverageGrant-DateFair ValueOutstanding as of December 31,2022384.4$144 Units granted210.9 105 Units vested(87.4)141 Units forfeited(45.8)137 Outstanding as of September 30,2023462.1 128 Scheduled vesting for outstanding restricted stock units as of September 30,2023,is as follows(in millions):Three MonthsEnded December 31,Year Ended December 31,20232024202520262027ThereafterTotalScheduled vesting restricted stock units52.7 221.2 127.0 48.4 9.7 3.1 462.1 16Table of ContentsAs of September 30,2023,there was$23.3 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements.This compensation is recognized on an accelerated basis with more than half of the compensation expected to be expensed in the next twelve months,and has aremaining weighted-average recognition period of 0.9 years.The estimated forfeiture rate as of December 31,2022 and September 30,2023 was 26.5%and26.3%.Changes in our estimates and assumptions relating to forfeitures may cause us to realize material changes in stock-based compensation expense in thefuture.Changes in Stockholders EquityThe following table shows changes in stockholders equity(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Total beginning stockholders equity$131,402$168,602$138,245$146,043 Beginning common stock107 108 106 108 Stock-based compensation and issuance of employee benefit plan stock 1 Ending common stock107 108 107 108 Beginning treasury stock(7,837)(7,837)(1,837)(7,837)Common stock repurchased (6,000)Ending treasury stock(7,837)(7,837)(7,837)(7,837)Beginning additional paid-in capital63,871 86,896 55,437 75,066 Stock-based compensation and issuance of employee benefit plan stock5,548 5,815 13,982 17,645 Ending additional paid-in capital69,419 92,711 69,419 92,711 Beginning accumulated other comprehensive income(loss)(4,782)(3,680)(1,376)(4,487)Other comprehensive income(loss)(2,333)(1,323)(5,739)(516)Ending accumulated other comprehensive income(loss)(7,115)(5,003)(7,115)(5,003)Beginning retained earnings80,043 93,115 85,915 83,193 Net income(loss)2,872 9,879(3,000)19,801 Ending retained earnings82,915 102,994 82,915 102,994 Total ending stockholders equity$137,489$182,973$137,489$182,973 Note 7 INCOME TAXESOur tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate,adjusted for discreteitems,if any,that are taken into account in the relevant period.Each quarter we update our estimate of the annual effective tax rate,and if our estimated tax ratechanges,we make a cumulative adjustment.Our quarterly tax provision,and our quarterly estimate of our annual effective tax rate,is subject to significant variation due to several factors,includingvariability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate,intercompany transactions,theapplicability of special tax regimes,changes in how we do business,acquisitions,investments,developments in tax controversies,changes in our stock price,changes in our deferred tax assets and liabilities and their valuation,foreign currency gains(losses),changes in statutes,regulations,case law,andadministrative practices,principles,and interpretations related to tax,including changes to the global tax framework,competition,and other laws andaccounting rules in various jurisdictions,and relative changes of expenses or losses for which tax benefits are not recognized.Our effective tax rate can bemore or less volatile based on the amount of pre-tax income or loss.For example,the impact of discrete items and non-deductible expenses on our effective taxrate is greater when our pre-tax income is lower.In addition,we record valuation allowances against deferred tax assets when there is uncertainty about ourability to generate future income in relevant jurisdictions.17Table of ContentsFor 2023,we estimate that our effective tax rate will be favorably impacted by the foreign income deduction and U.S.federal research and developmentcredit and adversely affected by state income taxes.In addition,valuation gains and losses from our equity investment in Rivian impact our pre-tax income andmay cause variability in our effective tax rate.Our income tax benefit for the nine months ended September 30,2022 was$2.0 billion,which included$3.3 billion of net discrete tax benefits primarilyattributable to a valuation loss related to our equity investment in Rivian.Our income tax provision for the nine months ended September 30,2023 was$4.1billion,which included$175 million of net discrete tax expense,primarily consisting of discrete tax expense related to shortfalls from stock-basedcompensation and approximately$600 million of tax benefit resulting from a change in the estimated qualifying expenditures associated with our 2022 U.S.federal R&D credit.Cash paid for income taxes,net of refunds was$742 million and$2.6 billion in Q3 2022 and Q3 2023,and$4.3 billion and$7.0 billion for the ninemonths ended September 30,2022 and 2023.As of December 31,2022 and September 30,2023,tax contingencies were approximately$4.0 billion and$5.0 billion.Changes in tax laws,regulations,administrative practices,principles,and interpretations may impact our tax contingencies.Due to various factors,including the inherent complexities anduncertainties of the judicial,administrative,and regulatory processes in certain jurisdictions,the timing of the resolution of income tax controversies is highlyuncertain,and the amounts ultimately paid,if any,upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued.It isreasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or possibly reach resolution of incometax controversies in one or more jurisdictions.These assessments or settlements could result in changes to our contingencies related to positions on prior yearstax filings.We are under examination,or may be subject to examination,by the Internal Revenue Service for the calendar year 2016 and thereafter.Theseexaminations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examinationas well as subsequent periods.We are also subject to taxation in various states and other foreign jurisdictions including China,France,Germany,India,Japan,Luxembourg,and theUnited Kingdom.We are under,or may be subject to,audit or examination and additional assessments by the relevant authorities in respect of these particularjurisdictions primarily for 2011 and thereafter.We are currently disputing tax assessments in multiple jurisdictions,including with respect to the allocation andcharacterization of income.In September 2022,the Luxembourg tax authority(“LTA”)denied the tax basis of certain intangible assets that we distributed from Luxembourg to theU.S.in 2021.When we are assessed by the LTA,we will need to remit taxes related to this matter.We believe the LTAs position is without merit,we intend todefend ourselves vigorously in this matter,and we expect to recoup taxes paid.The Indian tax authority(“ITA”)has asserted that tax applies to cloud services fees paid to Amazon in the U.S.We will need to remit taxes related to thismatter until it is resolved,which payments could be significant in the aggregate.We believe the ITAs position is without merit,we are defending our positionvigorously in the Indian courts,and we expect to recoup taxes paid.If this matter is adversely resolved,we could recognize significant additional tax expense,including for taxes previously paid.In October 2014,the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg withregard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid.On October 4,2017,the EuropeanCommission announced its decision that determinations by the tax authorities in Luxembourg did not comply with European Union rules on state aid.Based onthat decision,the European Commission announced an estimated recovery amount of approximately 250 million,plus interest,for the period May 2006through June 2014,and ordered Luxembourg tax authorities to calculate the actual amount of additional taxes subject to recovery.Luxembourg computed aninitial recovery amount,consistent with the European Commissions decision,which we deposited into escrow in March 2018,subject to adjustment pendingconclusion of all appeals.In December 2017,Luxembourg appealed the European Commissions decision.In May 2018,we appealed.On May 12,2021,theEuropean Union General Court annulled the European Commissions state aid decision.In July 2021,the European Commission appealed the decision to theEuropean Court of Justice.We will continue to defend ourselves vigorously in this matter.Note 8 SEGMENT INFORMATIONWe have organized our operations into three segments:North America,International,and AWS.We allocate to segment results the operating expenses“Fulfillment,”“Technology and infrastructure,”“Sales and marketing,”and“General and administrative”based on usage,which is generally reflected in thesegment in which the costs are incurred.The majority of technology costs recorded in“Technology and infrastructure”are incurred in the U.S.and are includedin our North America and AWS segments.The majority of infrastructure costs recorded in“Technology and infrastructure”are allocated to the AWS18Table of Contentssegment based on usage.There are no internal revenue transactions between our reportable segments.These segments reflect the way our chief operatingdecision maker evaluates the Companys business performance and manages its operations.North AmericaThe North America segment primarily consists of amounts earned from retail sales of consumer products(including from sellers)and advertising andsubscription services through North America-focused online and physical stores.This segment includes export sales from these online stores.InternationalThe International segment primarily consists of amounts earned from retail sales of consumer products(including from sellers)and advertising andsubscription services through internationally-focused online stores.This segment includes export sales from these internationally-focused online stores(including export sales from these online stores to customers in the U.S.,Mexico,and Canada),but excludes export sales from our North America-focusedonline stores.AWSThe AWS segment consists of amounts earned from global sales of compute,storage,database,and other services for start-ups,enterprises,governmentagencies,and academic institutions.Information on reportable segments and reconciliation to consolidated net income(loss)is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023North AmericaNet sales$78,843$87,887$222,517$247,314 Operating expenses79,255 83,580 225,124 238,898 Operating income(loss)$(412)$4,307$(2,607)$8,416 InternationalNet sales$27,720$32,137$83,544$90,957 Operating expenses30,186 32,232 89,062 93,194 Operating loss$(2,466)$(95)$(5,518)$(2,237)AWSNet sales$20,538$23,059$58,718$66,553 Operating expenses15,135 16,083 41,082 49,089 Operating income$5,403$6,976$17,636$17,464 ConsolidatedNet sales$127,101$143,083$364,779$404,824 Operating expenses124,576 131,895 355,268 381,181 Operating income2,525 11,188 9,511 23,643 Total non-operating income(expense)419 1,001(14,485)228 Benefit(provision)for income taxes(69)(2,306)1,990(4,058)Equity-method investment activity,net of tax(3)(4)(16)(12)Net income(loss)$2,872$9,879$(3,000)$19,801 19Table of ContentsNet sales by groups of similar products and services,which also have similar economic characteristics,is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Net Sales:Online stores(1)$53,489$57,267$155,473$161,329 Physical stores(2)4,694 4,959 14,006 14,878 Third-party seller services(3)28,666 34,342 81,377 96,494 Subscription services(4)8,903 10,170 26,029 29,721 Advertising services(5)9,548 12,060 26,182 32,252 AWS20,538 23,059 58,718 66,553 Other(6)1,263 1,226 2,994 3,597 Consolidated$127,101$143,083$364,779$404,824 _(1)Includes product sales and digital media content where we record revenue gross.We leverage our retail infrastructure to offer a wide selection ofconsumable and durable goods that includes media products available in both a physical and digital format,such as books,videos,games,music,andsoftware.These product sales include digital products sold on a transactional basis.Digital media content subscriptions that provide unlimited viewing orusage rights are included in“Subscription services.”(2)Includes product sales where our customers physically select items in a store.Sales to customers who order goods online for delivery or pickup at ourphysical stores are included in“Online stores.”(3)Includes commissions and any related fulfillment and shipping fees,and other third-party seller services.(4)Includes annual and monthly fees associated with Amazon Prime memberships,as well as digital video,audiobook,digital music,e-book,and other non-AWS subscription services.(5)Includes sales of advertising services to sellers,vendors,publishers,authors,and others,through programs such as sponsored ads,display,and videoadvertising.(6)Includes sales related to various other offerings,such as certain licensing and distribution of video content,health care services,and shipping services,andour co-branded credit card agreements.20Table of ContentsItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThis Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.Allstatements other than statements of historical fact,including statements regarding guidance,industry prospects,or future results of operations or financialposition,made in this Quarterly Report on Form 10-Q are forward-looking.We use words such as anticipates,believes,expects,future,intends,and similarexpressions to identify forward-looking statements.Forward-looking statements reflect managements current expectations and are inherently uncertain.Actualresults and outcomes could differ materially for a variety of reasons,including,among others,fluctuations in foreign exchange rates,changes in globaleconomic conditions and customer demand and spending,inflation,interest rates,regional labor market constraints,world events,the rate of growth of theInternet,online commerce,cloud services,and new and emerging technologies,the amount that A invests in new business opportunities and thetiming of those investments,the mix of products and services sold to customers,the mix of net sales derived from products as compared with services,the extentto which we owe income or other taxes,competition,management of growth,potential fluctuations in operating results,international growth and expansion,the outcomes of claims,litigation,government investigations,and other proceedings,fulfillment,sortation,delivery,and data center optimization,risks ofinventory management,variability in demand,the degree to which we enter into,maintain,and develop commercial agreements,proposed and completedacquisitions and strategic transactions,payments risks,and risks of fulfillment throughput and productivity.In addition,global economic and geopoliticalconditions and additional or unforeseen circumstances,developments,or events may give rise to or amplify many of these risks.These risks and uncertainties,as well as other risks and uncertainties that could cause our actual results or outcomes to differ significantly from managements expectations,are described ingreater detail in Item 1A of Part II,“Risk Factors.”For additional information,see Item 7 of Part II,“Managements Discussion and Analysis of Financial Condition and Results of Operations Overview”of our 2022 Annual Report on Form 10-K.Critical Accounting EstimatesThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets andliabilities,revenues and expenses,and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes.Criticalaccounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or arereasonably likely to have a material impact on the financial condition or results of operations of the Company.Based on this definition,we have identified thecritical accounting estimates addressed below.We also have other key accounting policies,which involve the use of estimates,judgments,and assumptions thatare significant to understanding our results.For additional information,see Item 8 of Part II,“Financial Statements and Supplementary Data Note 1 Description of Business,Accounting Policies,and Supplemental Disclosures”of our 2022 Annual Report on Form 10-K and Item 1 of Part I,“FinancialStatements Note 1 Accounting Policies and Supplemental Disclosures,”of this Form 10-Q.Although we believe that our estimates,assumptions,andjudgments are reasonable,they are based upon information presently available.Actual results may differ significantly from these estimates under differentassumptions,judgments,or conditions.InventoriesInventories,consisting of products available for sale,are primarily accounted for using the first-in first-out method,and are valued at the lower of costand net realizable value.This valuation requires us to make judgments,based on currently available information,about the likely method of disposition,suchas through sales to individual customers,returns to product vendors,or liquidations,and expected recoverable values of each disposition category.Theseassumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.As a measure of sensitivity,for every 1%of additional inventory valuation allowance as of September 30,2023,we would have recordedan additional cost of sales of approximately$375 million.In addition,we enter into supplier commitments for certain electronic device components and certain products.These commitments are based onforecasted customer demand.If we reduce these commitments,we may incur additional costs.Income TaxesWe are subject to income taxes in the U.S.(federal and state)and numerous foreign jurisdictions.Tax laws,regulations,administrative practices,principles,and interpretations in various jurisdictions may be subject to significant change,with or without notice,due to economic,political,and otherconditions,and significant judgment is required in evaluating and estimating our provision and accruals for these taxes.There are many transactions that occurduring the ordinary course of business for which the ultimate tax determination is uncertain.In addition,our actual and forecasted earnings are subject to21Table of Contentschange due to economic,political,and other conditions and significant judgment is required in determining our ability to use our deferred tax assets.Our effective tax rates could be affected by numerous factors,such as changes in our business operations,acquisitions,investments,entry into newbusinesses and geographies,intercompany transactions,the relative amount of our foreign earnings,including earnings being lower than anticipated injurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates,losses incurred injurisdictions for which we are not able to realize related tax benefits,the applicability of special tax regimes,changes in foreign exchange rates,changes in ourstock price,changes to our forecasts of income and loss and the mix of jurisdictions to which they relate,changes in our deferred tax assets and liabilities andtheir valuation,changes in the laws,regulations,administrative practices,principles,and interpretations related to tax,including changes to the global taxframework,competition,and other laws and accounting rules in various jurisdictions.In addition,a number of countries have enacted or are actively pursuingchanges to their tax laws applicable to corporate multinationals.We are also currently subject to tax controversies in various jurisdictions,and these jurisdictions may assess additional income tax liabilities against us.Developments in an audit,investigation,or other tax controversy could have a material effect on our operating results or cash flows in the period or periods forwhich that development occurs,as well as for prior and subsequent periods.We regularly assess the likelihood of an adverse outcome resulting from theseproceedings to determine the adequacy of our tax accruals.Although we believe our tax estimates are reasonable,the final outcome of audits,investigations,and any other tax controversies could be materially different from our historical income tax provisions and accruals.Liquidity and Capital ResourcesCash flow information is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,Twelve Months EndedSeptember 30,202220232022202320222023Cash provided by(used in):Operating activities$11,404$21,217$17,579$42,481$39,665$71,654 Investing activities(15,608)(11,753)(26,780)(37,232)(39,360)(48,053)Financing activities3,016(8,948)9,632(9,133)6,532(9,047)Our principal sources of liquidity are cash flows generated from operations and our cash,cash equivalents,and marketable securities balances,which,atfair value,were$70.0 billion and$64.2 billion as of December 31,2022 and September 30,2023.Amounts held in foreign currencies were$18.3 billion and$13.7 billion as of December 31,2022 and September 30,2023.Our foreign currency balances include British Pounds,Canadian Dollars,Euros,IndianRupees,and Japanese Yen.Cash provided by(used in)operating activities was$11.4 billion and$21.2 billion for Q3 2022 and Q3 2023,and$17.6 billion and$42.5 billion for thenine months ended September 30,2022 and 2023.Our operating cash flows result primarily from cash received from our consumer,seller,developer,enterprise,and content creator customers,and advertisers,offset by cash payments we make for products and services,employee compensation,paymentprocessing and related transaction costs,operating leases,and interest payments.Cash received from our customers and other activities generally correspondsto our net sales.The increase in operating cash flow for the trailing twelve months ended September 30,2023,compared to the comparable prior year period,was due to an increase in net income(loss),excluding non-cash expenses,and changes in working capital.Working capital at any specific point in time issubject to many variables,including variability in demand,inventory management and category expansion,the timing of cash receipts and payments,customerand vendor payment terms,and fluctuations in foreign exchange rates.Cash provided by(used in)investing activities corresponds with cash capital expenditures,including leasehold improvements,incentives received fromproperty and equipment vendors,proceeds from asset sales,cash outlays for acquisitions,investments in other companies and intellectual property rights,andpurchases,sales,and maturities of marketable securities.Cash provided by(used in)investing activities was$(15.6)billion and$(11.8)billion for Q3 2022 andQ3 2023,and$(26.8)billion and$(37.2)billion for the nine months ended September 30,2022 and 2023,with the variability caused primarily by purchases,sales,and maturities of marketable securities and cash capital expenditures.Cash capital expenditures were$15.0 billion and$11.3 billion during Q3 2022 andQ3 2023,and$42.9 billion and$34.8 billion for the nine months ended September 30,2022 and 2023,which primarily reflect investments in technologyinfrastructure(the majority of which is to support AWS business growth)and in additional capacity to support our fulfillment network.We expect cash capitalexpenditures to decrease in 2023,primarily due to lower spending on our fulfillment network.We made cash payments,net of acquired cash,related toacquisition and other investment activity of$885 million and$1.6 billion during Q3 2022 and Q3 2023,and$7.5 billion and$5.5 billion for the nine monthsended September 30,2022 and 2023.We funded the acquisitions of22Table of ContentsMGM Holdings Inc.in 2022 and One Medical in 2023 with cash on hand.We expect to fund the acquisition of iRobot Corporation with cash on hand.In Q32023,we invested$1.25 billion in a note from Anthropic,PBC,which is convertible into equity.We have an agreement that expires in Q1 2024 to invest up toan additional$2.75 billion in a second convertible note.Cash provided by(used in)financing activities was$3.0 billion and$(8.9)billion for Q3 2022 and Q3 2023,and$9.6 billion and$(9.1)billion for thenine months ended September 30,2022 and 2023.Cash inflows from financing activities resulted from proceeds from short-term debt,and other and long-termdebt of$12.4 billion and$216 million for Q3 2022 and Q3 2023,and$43.9 billion and$17.4 billion for the nine months ended September 30,2022 and 2023.Cash outflows from financing activities resulted from repurchases of common stock in 2022,payments of short-term debt,and other,long-term debt,financeleases,and financing obligations of$9.4 billion and$9.2 billion in Q3 2022 and Q3 2023,and$34.2 billion and$26.5 billion for the nine months endedSeptember 30,2022 and 2023.Property and equipment acquired under finance leases was$131 million and$183 million during Q3 2022 and Q3 2023,and$358 million and$431 million for the nine months ended September 30,2022 and 2023.We had no borrowings outstanding under the two unsecured revolving credit facilities,$567 million of borrowings outstanding under the commercialpaper programs,$972 million of borrowings outstanding under our Credit Facility,and$5.0 billion of borrowings outstanding under the Term Loan as ofSeptember 30,2023.See Item 1 of Part I,“Financial Statements Note 5 Debt”for additional information.Certain foreign subsidiary earnings and losses are subject to current U.S.taxation and the subsequent repatriation of those earnings is not subject to tax inthe U.S.We intend to invest substantially all of our foreign subsidiary earnings,as well as our capital in our foreign subsidiaries,indefinitely outside of theU.S.in those jurisdictions in which we would incur significant,additional costs upon repatriation of such amounts.Our U.S.taxable income is reduced by accelerated depreciation deductions and increased by the impact of capitalized research and developmentexpenses.U.S.tax rules provide for enhanced accelerated depreciation deductions by allowing us to expense a portion of qualified property,primarilyequipment.These enhanced deductions are scheduled to phase out annually from 2023 through 2026.Additionally,effective January 1,2022,research anddevelopment expenses are required to be capitalized and amortized for U.S.tax purposes,which delays the deductibility of these expenses.As a result,weexpect the cash taxes we pay in 2023 to increase significantly.Cash taxes paid(net of refunds)were$742 million and$2.6 billion for Q3 2022 and Q3 2023,and$4.3 billion and$7.0 billion for the nine months ended September 30,2022 and 2023.As of December 31,2022 and September 30,2023,restricted cash,cash equivalents,and marketable securities were$365 million and$476 million.SeeItem 1 of Part I,“Financial Statements Note 4 Commitments and Contingencies”and“Financial Statements Note 5 Debt”for additional discussionof our principal contractual commitments,as well as our pledged assets.Additionally,we have purchase obligations and open purchase orders,including forinventory and capital expenditures,that support normal operations and are primarily due in the next twelve months.These purchase obligations and openpurchase orders are generally cancellable in full or in part through the contractual provisions.We believe that cash flows generated from operations and our cash,cash equivalents,and marketable securities balances,as well as our borrowingarrangements,will be sufficient to meet our anticipated operating cash needs for at least the next twelve months.However,any projections of future cash needsand cash flows are subject to substantial uncertainty.See Item 1A of Part II,“Risk Factors.”We continually evaluate opportunities to sell additional equity ordebt securities,obtain credit facilities,obtain finance and operating lease arrangements,enter into financing obligations,repurchase common stock,paydividends,or repurchase,refinance,or otherwise restructure our debt for strategic reasons or to further strengthen our financial position.The sale of additional equity or convertible debt securities would be dilutive to our shareholders.In addition,we will,from time to time,consider theacquisition of,or investment in,complementary businesses,products,services,capital infrastructure,and technologies,which might affect our liquidityrequirements or cause us to secure additional financing,or issue additional equity or debt securities.There can be no assurance that additional credit lines orfinancing instruments will be available in amounts or on terms acceptable to us,if at all.In addition,economic conditions and actions by policymaking bodiesare contributing to rising interest rates and significant capital market volatility,which,along with increases in our borrowing levels,could increase our futureborrowing costs.23Table of ContentsResults of OperationsWe have organized our operations into three segments:North America,International,and AWS.These segments reflect the way the Company evaluatesits business performance and manages its operations.See Item 1 of Part I,“Financial Statements Note 8 Segment Information.”OverviewMacroeconomic factors,including inflation,increased interest rates,significant capital market and supply chain volatility,and global economic andgeopolitical developments,have direct and indirect impacts on our results of operations that are difficult to isolate and quantify.In addition,changes in fuel,utility,and food costs,rising interest rates,and recessionary fears may impact customer demand and our ability to forecast consumer spending patterns.We alsoexpect the current macroeconomic environment and enterprise customer cost optimization efforts to impact our AWS revenue growth rates.We expect some orall of these factors to continue to impact our operations into Q4 2023.Net SalesNet sales include product and service sales.Product sales represent revenue from the sale of products and related shipping fees and digital media contentwhere we record revenue gross.Service sales primarily represent third-party seller fees,which includes commissions and any related fulfillment and shippingfees,AWS sales,advertising services,Amazon Prime membership fees,and certain digital media content subscriptions.Net sales information is as follows(inmillions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Net Sales:North America$78,843$87,887$222,517$247,314 International27,720 32,137 83,544 90,957 AWS20,538 23,059 58,718 66,553 Consolidated$127,101$143,083$364,779$404,824 Year-over-year Percentage Growth(Decline):North America20%International(5)16(8)9 AWS27 12 32 13 Consolidated15 13 10 11 Year-over-year Percentage Growth,excluding the effect of foreign exchangerates:North America20%International12 11 4 10 AWS28 12 32 13 Consolidated19 11 13 11 Net Sales Mix:North America62aaa%International22 23 23 23 AWS16 16 16 16 Consolidated100000%Sales increased 13%in Q3 2023,and 11%for the nine months ended September 30,2023 compared to the comparable prior year periods.Changes inforeign exchange rates increased net sales by$1.4 billion for Q3 2023,and reduced net sales by$1.3 billion for the nine months ended September 30,2023.Fora discussion of the effect of foreign exchange rates on sales growth,see“Effect of Foreign Exchange Rates”below.North America sales increased 11%in Q3 2023,and 11%for the nine months ended September 30,2023 compared to the comparable prior year periods.The sales growth primarily reflects increased unit sales,primarily by third-party sellers,advertising sales,and subscription services.Increased unit sales weredriven largely by our continued focus on price,selection,and convenience for our customers,including from our shipping offers.24Table of ContentsInternational sales increased 16%in Q3 2023,and 9%for the nine months ended September 30,2023 compared to the comparable prior year periods,primarily due to increased unit sales,primarily by third-party sellers,advertising sales,and subscription services.Increased unit sales were driven largely byour continued focus on price,selection,and convenience for our customers,including from our shipping offers.Changes in foreign exchange rates increasedInternational net sales by$1.4 billion for Q3 2023,and reduced International net sales by$1.1 billion for the nine months ended September 30,2023.AWS sales increased 12%in Q3 2023,and 13%for the nine months ended September 30,2023 compared to the comparable prior year periods.The salesgrowth primarily reflects increased customer usage,partially offset by pricing changes,primarily driven by long-term customer contracts.Operating Income(Loss)Operating income(loss)by segment is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Operating Income(Loss)North America$(412)$4,307$(2,607)$8,416 International(2,466)(95)(5,518)(2,237)AWS5,403 6,976 17,636 17,464 Consolidated$2,525$11,188$9,511$23,643 Operating income increased from$2.5 billion in Q3 2022 to$11.2 billion in Q3 2023,and increased from$9.5 billion for the nine months endedSeptember 30,2022 to$23.6 billion for the nine months ended September 30,2023.We believe that operating income is a more meaningful measure than grossprofit and gross margin due to the diversity of our product categories and services.The North America operating income in Q3 2023,as compared to the operating loss in the comparable prior year period,is primarily due to increasedunit sales and increased advertising sales,partially offset by increased shipping and fulfillment costs.The North America operating income for the nine monthsended September 30,2023,as compared to the operating loss in the comparable prior year period,is primarily due to increased unit sales and increasedadvertising sales,partially offset by increased shipping and fulfillment costs,increased technology and infrastructure costs,and growth in certain operatingexpenses.Changes in foreign exchange rates negatively impacted operating income by$27 million for Q3 2023,and positively impacted operating income by$7 million for the nine months ended September 30,2023.The decrease in International operating loss in absolute dollars in Q3 2023,compared to the comparable prior year period,is primarily due to increasedunit sales and increased advertising sales.The decrease in International operating loss in absolute dollars for the nine months ended September 30,2023,compared to the comparable prior year period,is primarily due to increased unit sales and increased advertising sales,partially offset by increased fulfillmentand shipping costs,increased technology and infrastructure costs,and growth in certain operating expenses.Changes in foreign exchange rates positivelyimpacted operating loss by$228 million for Q3 2023,and by$86 million for the nine months ended September 30,2023.The increase in AWS operating income in absolute dollars in Q3 2023,compared to the comparable prior year period,is primarily due to increased salesand cost structure productivity,partially offset by spending on technology infrastructure,which was primarily driven by additional investments to support AWSbusiness growth.The decrease in AWS operating income in absolute dollars for the nine months ended September 30,2023,compared to the comparable prioryear period,is primarily due to increased payroll and related expenses and spending on technology infrastructure,both of which were primarily driven byadditional investments to support AWS business growth,partially offset by increased sales.Changes in foreign exchange rates negatively impacted operatingincome by$69 million for Q3 2023,and positively impacted operating income by$282 million for the nine months ended September 30,2023.25Table of ContentsOperating ExpensesInformation about operating expenses is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2022202320222023Operating Expenses:Cost of sales$70,268$75,022$203,191$212,186 Fulfillment20,583 22,314 61,196 64,524 Technology and infrastructure19,485 21,203 52,399 63,584 Sales and marketing11,014 10,551 29,420 31,468 General and administrative3,061 2,561 8,558 8,806 Other operating expense(income),net165 244 504 613 Total operating expenses$124,576$131,895$355,268$381,181 Year-over-year Percentage Growth(Decline):Cost of sales12%7%7%4%Fulfillment11 8 16 5 Technology and infrastructure35 9 29 21 Sales and marketing38(4)35 7 General and administrative42(16)36 3 Other operating expense(income),net(1,619)48 1,210 22 Percent of Net Sales:Cost of sales55.3R.4U.7R.4%Fulfillment16.2 15.6 16.8 15.9 Technology and infrastructure15.3 14.8 14.4 15.7 Sales and marketing8.7 7.4 8.1 7.8 General and administrative2.4 1.8 2.3 2.2 Other operating expense(income),net0.1 0.2 0.1 0.2 Cost of SalesCost of sales primarily consists of the purchase price of consumer products,inbound and outbound shipping costs,including costs related to sortation anddelivery centers and where we are the transportation service provider,and digital media content costs where we record revenue gross,including video andmusic.The increase in cost of sales in absolute dollars in Q3 2023 and for the nine months ended September 30,2023,compared to the comparable prior yearperiods,is primarily due to increased product and shipping costs resulting from increased sales,partially offset by fulfillment network efficiencies and lowertransportation rates.Changes in foreign exchange rates increased cost of sales by$818 million for Q3 2023,and reduced cost of sales by$1.0 billion for thenine months ended September 30,2023.Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of sales upon sale of products to ourcustomers.Shipping costs,which include sortation and delivery centers and transportation costs,were$19.9 billion and$21.8 billion in Q3 2022 and Q3 2023,and$58.8 billion and$62.2 billion for the nine months ended September 30,2022 and 2023.We expect our cost of shipping to continue to increase to theextent our customers accept and use our shipping offers at an increasing rate,we use more expensive shipping methods,and we offer additional services.Weseek to mitigate costs of shipping over time in part through achieving higher sales volumes,optimizing our fulfillment network,negotiating better terms withour suppliers,and achieving better operating efficiencies.We believe that offering low prices to our customers is fundamental to our future success,and oneway we offer lower prices is through shipping offers.Costs to operate our AWS segment are primarily classified as“Technology and infrastructure”as we leverage a shared infrastructure that supports bothour internal technology requirements and external sales to AWS customers.FulfillmentFulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers,physicalstores,and customer service centers and payment processing costs.While AWS payment processing26Table of Contentsand related transaction costs are included in“Fulfillment,”AWS costs are primarily classified as“Technology and infrastructure.”Fulfillment costs as apercentage of net sales may vary due to several factors,such as payment processing and related transaction costs,our level of productivity and accuracy,changes in volume,size,and weight of units received and fulfilled,the extent to which third-party sellers utilize Fulfillment by Amazon services,timing offulfillment network and physical store expansion,the extent we utilize fulfillment services provided by third parties,mix of products and services sold,and ourability to affect customer service contacts per unit by implementing improvements in our operations and enhancements to our customer self-service features.Additionally,sales by our sellers have higher payment processing and related transaction costs as a percentage of net sales compared to our retail sales becausepayment processing costs are based on the gross purchase price of underlying transactions.The increase in fulfillment costs in absolute dollars in Q3 2023 and for the nine months ended September 30,2023,compared to the comparable prioryear periods,is primarily due to increased sales,partially offset by fulfillment network efficiencies.Changes in foreign exchange rates increased fulfillmentcosts by$249 million for Q3 2023,and reduced fulfillment costs by$182 million for the nine months ended September 30,2023.We seek to expand our fulfillment network to accommodate a greater selection and in-stock inventory levels and to meet anticipated shipment volumesfrom sales of our own products as well as sales by third parties for which we provide the fulfillment services.We regularly evaluate our facility requirements.Technology and InfrastructureTechnology and infrastructure costs include payroll and related expenses for employees involved in the research and development of new and existingproducts and services,development,design,and maintenance of our stores,curation and display of products and services made available in our online stores,and infrastructure costs.Infrastructure costs include servers,networking equipment,and data center related depreciation and amortization,rent,utilities,andother expenses necessary to support AWS and other Amazon businesses.Collectively,these costs reflect the investments we make in order to offer a widevariety of products and services to our customers,including expenditures related to initiatives to build and deploy innovative and efficient software andelectronic devices and the development of a satellite network for global broadband service and autonomous vehicles for ride-hailing services.We seek to invest efficiently in numerous areas of technology and infrastructure so we may continue to enhance the customer experience and improveour process efficiency through rapid technology developments,while operating at an ever increasing scale.Our technology and infrastructure investment andcapital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems andoperations.We expect spending in technology and infrastructure to increase over time as we continue to add employees and infrastructure.These costs areallocated to segments based on usage.The increase in technology and infrastructure costs in absolute dollars in Q3 2023,compared to the comparable prioryear period,is primarily due to an increase in spending on infrastructure.The increase in technology and infrastructure costs in absolute dollars for the ninemonths ended September 30,2023,compared to the comparable prior year period,is primarily due to increased payroll and related costs associated withtechnical teams responsible for expanding our existing products and services and initiatives to introduce new products and service offerings,and an increase inspending on infrastructure.Changes in foreign exchange rates increased technology and infrastructure costs by$87 million for Q3 2023,and reducedtechnology and infrastructure costs by$312 million for the nine months ended September 30,2023.See Item 7 of Part II,“Managements Discussion andAnalysis of Financial Condition and Results of Operations Overview”of our 2022 Annual Report on Form 10-K for a discussion of how management viewsadvances in technology and the importance of innovation.Sales and MarketingSales and marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities,including salescommissions related to AWS.We direct customers to our stores primarily through a number of marketing channels,such as our sponsored search,social andonline advertising,third-party customer referrals,television advertising,and other initiatives.Our marketing costs are largely variable,based on growth in salesand changes in rates.To the extent there is increased or decreased competition for these traffic sources,or to the extent our mix of these channels shifts,wewould expect to see a corresponding change in our marketing costs.The decrease in sales and marketing costs in absolute dollars in Q3 2023,compared to the comparable prior year period,is primarily due to lowermarketing spend.The increase in sales and marketing costs in absolute dollars for the nine months ended September 30,2023,compared to the comparableprior year period,is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities.While costs associated with Amazon Prime membership benefits and other shipping offers are not included in sales and marketing expense,we viewthese offers as effective worldwide marketing tools,and intend to continue offering them indefinitely.27Table of ContentsGeneral and AdministrativeThe decrease in general and administrative costs in absolute dollars in Q3 2023,compared to the comparable prior year period,is primarily due to adecrease in payroll and related expenses.The increase in general and administrative costs in absolute dollars for the nine months ended September 30,2023,compared to the comparable prior year period,is primarily due to an increase in payroll and related expenses.Other Operating Expense(Income),NetOther operating expense(income),net was$165 million and$244 million for Q3 2022 and Q3 2023,and$504 million and$613 million for the ninemonths ended September 30,2022 and 2023,and was primarily related to asset impairments for physical store closures in 2022 and for fulfillment networkfacilities and physical store closures in 2023,and the amortization of intangible assets.Interest Income and ExpenseOur interest income was$277 million and$776 million during Q3 2022 and Q3 2023,and$544 million and$2.0 billion for the nine months endedSeptember 30,2022 and 2023,primarily due to an increase in prevailing rates.We generally invest our excess cash in AAA-rated money market funds andinvestment grade short-to intermediate-term marketable debt securities.Our interest income corresponds with the average balance of invested funds based onthe prevailing rates,which vary depending on the geographies and currencies in which they are invested.Interest expense was$617 million and$806 million during Q3 2022 and Q3 2023,and$1.7 billion and$2.5 billion for the nine months ended September30,2022 and 2023,and was primarily related to debt and finance leases.See Item 1 of Part I,“Financial Statements Note 3 Leases and Note 5 Debt”for additional information.Other Income(Expense),NetOther income(expense),net was$759 million and$1.0 billion during Q3 2022 and Q3 2023,and$(13.4)billion and$649 million for the nine monthsended September 30,2022 and 2023.The primary components of other income(expense),net are related to equity securities valuations and adjustments,equitywarrant valuations,and foreign currency.Included in other income(expense),net is a marketable equity securities valuation gain(loss)of$1.1 billion and$1.2billion in Q3 2022 and Q3 2023,and$(10.4)billion and$926 million for the nine months ended September 30,2022 and 2023,from our equity investment inRivian.Income TaxesOur income tax benefit for the nine months ended September 30,2022 was$2.0 billion,which included$3.3 billion of net discrete tax benefits primarilyattributable to a valuation loss related to our equity investment in Rivian.Our income tax provision for the nine months ended September 30,2023 was$4.1billion,which included$175 million of net discrete tax expense.See Item 1 of Part I,“Financial Statements Note 7 Income Taxes”for additionalinformation.Non-GAAP Financial MeasuresRegulation G,Conditions for Use of Non-GAAP Financial Measures,and other SEC regulations define and prescribe the conditions for use of certainnon-GAAP financial information.Our measures of free cash flows and the effect of foreign exchange rates on our consolidated statements of operations meetthe definition of non-GAAP financial measures.We provide multiple measures of free cash flows because we believe these measures provide additional perspective on the impact of acquiring propertyand equipment with cash and through finance leases and financing obligations.28Table of ContentsFree Cash FlowFree cash flow is cash flow from operations reduced by“Purchases of property and equipment,net of proceeds from sales and incentives.”The followingis a reconciliation of free cash flow to the most comparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailingtwelve months ended September 30,2022 and 2023(in millions):Twelve Months EndedSeptember 30,20222023Net cash provided by(used in)operating activities$39,665$71,654 Purchases of property and equipment,net of proceeds from sales and incentives(59,351)(50,220)Free cash flow$(19,686)$21,434 Net cash provided by(used in)investing activities$(39,360)$(48,053)Net cash provided by(used in)financing activities$6,532$(9,047)Free Cash Flow Less Principal Repayments of Finance Leases and Financing ObligationsFree cash flow less principal repayments of finance leases and financing obligations is free cash flow reduced by“Principal repayments of financeleases”and“Principal repayments of financing obligations.”Principal repayments of finance leases and financing obligations approximates the actualpayments of cash for our finance leases and financing obligations.The following is a reconciliation of free cash flow less principal repayments of financeleases and financing obligations to the most comparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailing twelvemonths ended September 30,2022 and 2023(in millions):Twelve Months EndedSeptember 30,20222023Net cash provided by(used in)operating activities$39,665$71,654 Purchases of property and equipment,net of proceeds from sales and incentives(59,351)(50,220)Free cash flow(19,686)21,434 Principal repayments of finance leases(8,561)(5,245)Principal repayments of financing obligations(233)(260)Free cash flow less principal repayments of finance leases and financing obligations$(28,480)15,929 Net cash provided by(used in)investing activities$(39,360)$(48,053)Net cash provided by(used in)financing activities$6,532$(9,047)Free Cash Flow Less Equipment Finance Leases and Principal Repayments of All Other Finance Leases and Financing ObligationsFree cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations is free cash flow reduced byequipment acquired under finance leases,which is included in“Property and equipment acquired under finance leases,net of remeasurements andmodifications,”principal repayments of all other finance lease liabilities,which is included in“Principal repayments of finance leases,”and“Principalrepayments of financing obligations.”All other finance lease liabilities and financing obligations consists of property.In this measure,equipment acquiredunder finance leases is reflected as if these assets had been purchased with cash,which is not the case as these assets have been leased.The following is areconciliation of free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations to the mostcomparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailing twelve months ended September 30,2022 and2023(in millions):29Table of Contents Twelve Months EndedSeptember 30,20222023Net cash provided by(used in)operating activities$39,665$71,654 Purchases of property and equipment,net of proceeds from sales and incentives(59,351)(50,220)Free cash flow(19,686)21,434 Equipment acquired under finance leases(1)(868)(239)Principal repayments of all other finance leases(2)(706)(694)Principal repayments of financing obligations(233)(260)Free cash flow less equipment finance leases and principal repayments of all other finance leases and financingobligations$(21,493)$20,241 Net cash provided by(used in)investing activities$(39,360)$(48,053)Net cash provided by(used in)financing activities$6,532$(9,047)_(1)For the twelve months ended September 30,2022 and 2023,this amount relates to equipment included in“Property and equipment acquired under financeleases,net of remeasurements and modifications”of$1,966 million and$748 million.(2)For the twelve months ended September 30,2022 and 2023,this amount relates to property included in“Principal repayments of finance leases”of$8,561million and$5,245 million.All of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent theresidual cash flow available for discretionary expenditures.For example,these measures of free cash flows do not incorporate the portion of paymentsrepresenting principal reductions of debt
2023-10-30
51页
5星级
Meta Earnings Presentation Q3 $13,094$15,062$12,024$12,788$12,766$15,005$12,710$14,131$14,956$6,821$.
2023-10-27
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2023Bridgepoint Group plc Interim Report Financial highlights Assets under management(AUM)39.5bn(YE 2022:38.0bn,HY 2022:37.1bn)Underlying profit before tax50.0m(H2 2022:68.1m,H1 2022:51.9m)Reported profit before tax53.1m(H2 2022:79.1m,H1 2022:48.3m)Underlying FRE42.9m(H2 2022*:51.8m,H1 2022*:22.5m)Total operating income137.8m(H2 2022:167.3m,H1 2022:140.1m)Underlying pro forma earnings per share5.6p(H2 2022:8.0p,H1 2022:6.0p)Reported pro forma earnings per share5.9p(H2 2022:9.3p,H1 2022:5.5p)Underlying EBITDA55.6m(H2 2022*:78.0m,H1 2022*:61.2m)An explanation of the alternative performance measures (“APMs”)used by the Group,including underlying profit before tax,underlying EBITDA and reported and underlying pro forma earnings per share,is set out on pages 19 to 20 along with a reconciliation to statutory measures.Alternative Performance MeasureKeyKey Performance IndicatorMeasure defined by IFRS*2022 EBITDA and FRE have been restated to exclude non-operating foreign exchange gains/lossesContentsChairmans statement 2KPIs:tracking our performance7CFO statement9Alternative performance measures19Required disclosures21Independent review report to BridgepointGroup plc22Condensed consolidated financial statements23Notes to the condensed consolidated financial statements28Supplementary information45ContentsBridgepoint 2023 Interim Report1Im pleased to report that Bridgepoint has enjoyed a strong first half of 2023.During the first six months of the financial year the Company recorded strong fund performance,enjoyed attractive credit deployment conditions,made positive progress on fundraisings and committed fund capital in line with original expectations by exploiting attractive buying conditions in the European Middle Market.Market conditions in H1 2023 saw extended transaction timelineswith exits,fundraising and new investments all taking longer to complete as parties undertake robust and detailed diligence.As we move into H2,we are already seeing activity increase in the M&A market.In this context,Bridgepoint remains on track to deliver full year results in line with financial guidance albeit performance is weighted to the second half of the year with transactions across the business taking longer to complete.Our confidence ahead reflects the strength of both our favourable middle market positioning and Bridgepoints business model which provides multiple routes to deliver targeted financial performance.In summary:In the first half of 2023,Bridgepoint generated management and other fees of 124.6 million(an increase of 24 per cent.from H1 2022),which included the recognition of only 2.6 million of late fees relating to BE VII,underlying FRE of 42.9 million(an increase of 91 per cent.from H1 2022)and profit before tax of 53.1 million(an increase of 10 per cent.from H1 2022);As normal we currently have several funds raising,or about to raise,new capital.The Bridgepoint Europe VII(“BE VII”)fund raise is now well on the way to completion.It received capital commitments of some 0.5 billion over the last quarter and has now exceeded its predecessor fund in size with 6 billion of commitments received to date.In slower fundraising markets the fund will remain open for commitments until early 2024 to allow investors in process to participate in the fund using both 2023 and 2024 capital allocations.Importantly from a financial perspective,investors joining in Q1 2024 pay late fees backdated to the funds first closing last year;In more favourable credit market conditions Bridgepoint Direct Lending III(“BDL III”)and associated Separately Managed Accounts(“SMAs”)held a final close in the first half of 2023 with investable capital of over 3.4 billion.This is materially larger than the predecessor vintage,underlining strong investor appetite for the Direct Lending product in the current market;Bridgepoint Credit Opportunities IV(“BCO IV”)and Bridgepoint Growth II(“BG II”)are currently in the market and due to close in the next 12 months.Bridgepoint Development Capital V(“BDC V”),Bridgepoint Direct Lending IV(“BDL IV”)and Bridgepoint Credit Opportunities V(“BCO V”)are all expected to begin fundraising in the next 12 months;Fund capital deployment remains on track across the Group with M&A markets starting to see renewed activity in the last quarter.BE VII has now committed 18 per cent.of its primary capital,as it builds a high quality portfolio of growth assets and Bridgepoint Development Capital IV(“BDC IV”)has committed 69 per cent.of its primary capital.In credit,across the Direct Lending and Credit Opportunities strategies the team has deployed around 1.7 billion of capital over the last 12 months;Bridgepoints equity funds also agreed a range of exits during the first half of the year which will return over 600 million to fund investors.These transactions have been weighted mainly to historic funds.The pipeline of exits on more recent Funds(Bridgepoint Development Capital III(“BDC III”),Bridgepoint Europe V and VI(“BE V”and“BE VI”),where the Company has a more material direct economic interest,continues to grow and a return of some 4 billion of capital is targeted over the next 18 months.We currently expect our targeted exits for 2023 will be delivered in the second half of the year,however,some of these exits may move into the 2024 financial year in current market conditions;Strong value creation has also continued across our fund portfolios,with all flagship funds enjoying trading either on or ahead of plan.Both credit and equity funds performance continue to be strong reflecting their sector positioning,low exposure to companies dependent upon discretionary spend and the start of input price deflation which we are now seeing in certain sectors.Chairmans statement William JacksonBridgepoint 2023 Interim Report2Company financial performanceThe positive performance of our credit and equity funds during the first half of 2023 and the associated Company financial performance is testament to Bridgepoints depth of business and cycle experience and the resilience and professionalism of our team against a backdrop of challenges in geopolitics,financial markets,and monetary policy responses to address inflation.In H1 2023,AUM increased by 6.5 per pared to H1 2022 to reach 39.5 billion.This represents growth of 48 per cent.since IPO when AUM(at FY 2020)was 26.6 billion.Acrossour equity and credit funds,3.3 billion was deployed innew and follow-on investments and 3.0 billion of capital was realised during this same period.With the extension to the BE VII fundraising period,late fees relating to future commitments will be charged from first close and recognised in H2 2023 or H1 2024 depending on the timing of those final commitments.As noted above,we continue to be confident in our ability to deliver investment income in line with current expectations in 2023 and 2024 in aggregate.Management fees and other fees and underlying FRE increased by 24 per cent.and 91 per cent.respectively compared to H1 2022 and profit before tax increased by 10 per cent.This performance was driven by income from recently raised funds in H1 2023 combined with carefully matching cost growth to progress in fundraising.We are well positioned to deliver performance in line with current expectations recognising volatility in the precise timing of completing exits in process which drives investment income splits between 2023 and early 2024.Commentary on fundraising marketsLong term tailwinds behind private markets remain very strong,but since March 2023 macro volatility has led to increased caution with a number of investors continuing to face allocation issues.The so-called denominator effect(falling stock market valuations mathematically increasing fund allocations to other asset classes)has been exacerbated by the relative outperformance of private assets over the last two years,whilst lower returns of capital from historic fund commitments have also constrained some LPs new commitments.With over 85 per cent.of the funds targeted capital of 7 billion now committed,the BE VII process is well on the way to completion and will round out in early 2024.Encouragingly,whilst some mature existing BE investors have faced allocation issues to date this has been compensated for by a range of investors with less mature programmes investing in BE VII including major new Limited Partners(“LPs”)from both Asia and EMEA.This significantly strengthens the firms investor base for the longer term.The BE VII process will be followed shortly by the BDC V fundraising which has already received significant LP interest reflecting the outstanding performance of our BDC funds in recent years.William JacksonChairman“Both credit and equity funds performance continue to be strong.”Bridgepoint 2023 Interim Report3Investing in current market conditionsBridgepoint has been tested through previous cycles and called the autumn of this economic cycle early.As a result,the firm has constructed credit and equity portfolios accordingly,focusing on niche sectors with significant tailwinds behind them.Our investment thesis is focused on growth middle market companies and deploys leverage prudently.This is reflected in our robust underlying fund performance with all funds on or ahead of performance plan.In particular,BE VI and BDC III remain ahead of plan and top quartile in their latest respective benchmark vintages and are well positioned to deliver meaningful investment income for the Company in the medium term.As we look forward,it is worth noting that the PE market is witnessing a new pricing paradigm with the end of low-cost debt in volume for the time being.As a result,the middle market,which does not typically use significant leverage,is currently the most active space with returns in 2023 driven by real growth and cash generation.Portfolio construction,pricing discipline and sector selection are critical in the current market,as is a hands-on approach to value creation to driving value in portfolio companies.Bridgepoint continues to focus on sectors and niches identified by our thematic origination strategy doubling down on areas where we have real conviction and companies benefit from high quality of earnings and strong net cash conversion.Once in the portfolio,value creation continues to be driven by international expansion,buy-and-build programmes and driving operational excellence from a balanced portfolio with low exposure to cyclical sectors and discretionary spend.Our Private Credit investment thesis for direct lending,also designed around the middle market,features first lien,secured,uni-tranche,floating rate credits.We are typically supporting European financial sponsors to make acquisitions in their private equity strategies where we are very often the sole lender.While our most recent fund,BDL III,was targeting 7 to 9 per cent.unlevered returns when launched,thanks to the increase in base rates since the beginning of last year,it is currently realising unlevered returns in low double digits with no realised losses in the strategy since inception.Importantly the credit quality of the portfolio provides significant comfort that this trend will continue despite the volatile macro environment.Private EquitySo far this year our Private Equity funds have committed 0.8 billion to six platform investments,and returned 0.2 billion to investors.BE VII has made good progress with its new investment activity,acquiring Vivacy,a global personal healthcare company as well as agreeing to purchase Windar,a leading global specialist manufacturer of towers and foundations for onshore and offshore wind turbines.To date the fund has made 50 add on acquisitions of which 6 have been transformational.BDC III has continued to perform well with multiple add-on acquisitions agreed in H1 2023 and continuing to rank as one of Europes highest performing private equity funds for its vintage.BDC IV has now committed 69 per cent.of its primary fund capital,providing confidence that it is positioned to complete its investment period in 2024.The outlook for portfolio exits presents both challenges and opportunities.The macro environment is complex and buyers are more cautious but the expectation gap between buyers and sellers is narrowing.Selling assets today remains more challenging than in previous periods,but the value of growth remains at a premium in the current market.Safe strategic assets remain highly sought after.Embedded and portable leverage,where available,is also highly attractive to buyers.Middle market sized companies are also more attractive to large corporates who dont want to bet the farm with large transactions in cautious times and 98 per cent.of Bridgepoint fund realisations over the last 20 years have been delivered via private transactions,so our funds are not reliant on the IPO market for returns.In that context,we have agreed two exits recently both from BE III,Diaverum,a leading operator of private kidney dialysis clinics and DMC,a leading designer and manufacturer of connector technology systems for high-voltage power infrastructure.In particular,DMC was exited at an attractive EBITDA multiple,delivering a money multiple of 21.7 times.We expect to deliver further exits in the second half of the year with work on assets in BDC III,BE V and BE VI already underway.As a result,we have a good pipeline of potential exits in H2 2023 however in current market conditions there is the possibility of some movement in exits from 2023 into 2024.Chairmans statement William Jackson continuedBridgepoint 2023 Interim Report4Private CreditBridgepoint Credit enjoyed a strong first half of 2023.AUM reached 12.0 billion,an increase of 76 per cent.since Bridgepoint acquired EQT Credit.Bridgepoint Credit funds have now invested c.8.6 billion in over 200 companies since the acquisition.It is worth noting that the mix of credit capital has moved towards SMAs and other bespoke vehicles over time.This reflects the strength of our origination and the sophistication of the platform enabling us to provide credit investors with vehicles to match their risk appetite and other investment criteria as an alternative to investing in our main funds.Overall,during 2023 credit strategies benefitted from more volatile lending markets and higher base rates.Bridgepoint Credit is using its disciplined process to build well diversified funds that deliver attractive returns to investors whilst mitigating risks.Since inception our flagship Direct Lending funds have yet to record a loss on any lending exposure.Across the Direct Lending and Credit Opportunities strategies the team deployed around 1.7 billion of capital over the last year compared to realisations of 0.6 billion.BDL III has now invested over 1.9 billion in 27 companies and with the fund 68 per cent.invested we have commenced preparations for BDL IV.BCO IV is now 67 per cent.deployed and fundraising for BCO V will commence within the next 12 months.CLO 4 closed in January 2023 and we expect to close CLO 5 in Q3 2023.Business DevelopmentAs set out at the time of our IPO in July 2021 Bridgepoint remains committed to continuing to deepen and broaden its middle market investment platform to accelerate current organic growth through selective acquisition activity.As noted in March,falling sector valuations have broadened the potential horizon for potential M&A opportunities and we are engaged in active discussions which we would expect to finalise positively or negatively by the year end.Bridgepoints day job is making good acquisitions.Not surprisingly,therefore,any acquisition for the platform will have to meet the rigorous gatekeeping metrics which have been discussed in detail in prior company announcements.These include strong industrial logic,the ability to diversify the Groups income base,the need for a strong cultural fit and the ability for an acquisition to be accretive to short and medium term shareholder returns.Turning to our current platform,alongside a rigorous focus on efficiency and prudent cost control,the Company continues to invest in its operating resources in a controlled and focused manner.During the first half of the year we have strengthened further our operating resource which drives portfolio value creation.We have also continued to expand our investor relations and solutions presence on the ground globally.In this regard we have recently made senior Investor Relations hires in the United States(replacing retirees)and we will be opening new Singapore and Seoul offices dedicated to investor services in Asia.By deepening our resource in the key area of Investor Relations and developing deeper regional coverage while deploying a number of software solutions to enable efficiency,the Company is well placed to support new products and further business development.“The BE VII fundraise is well on the way to completion.”Bridgepoint 2023 Interim Report5Dividend I am pleased to confirm that the Company will be maintaining its progressive dividend policy this year and will pay an interim dividend of 4.4p per share in September.We expect our final dividend to be not less than 4.4p per share.When combined with the capital return of ca.3.8 pence per share via share buyback in H1 2023,total capital return to shareholders in H1 2023 was more than double that in H1 2022,reflecting the Boards strong confidence in the prospects of the Company.OutlookBridgepoint is encouraged by the outlook for the full year and confirms full year guidance.Whilst some revenue recognition may be delayed by the revised BE VII timetable we expect this to be mitigated by careful cost control in the full year to December 2023.We also remain confident in completing our targeted exits for H2 2023 which drive part of the Companys investment income.However,we recognise that the precise timing of exit processes are not directly within our own control and inevitably have some unpredictability in current markets.As a result,both fundraising and exits will be subject to external market conditions not materially deteriorating from today.Looking ahead,Bridgepoint benefits from having multiple avenues for both organic and M&A growth.The Company remains asset light,with less than 1 per cent.of AUM as investments,excluding consolidated CLOs,and together with over 300 million of cash and discounted carried interest receivable represents around 38 per cent.of our current market capitalisation also providing material strength to reinforce our business growth strategy.More widely the alternative investment market continues to enjoy the prospect of significant future tailwinds with portfolio rebalancing driving increased long-term allocations as new investors continue to enter the asset class.As a result,medium term market growth potential remains unchanged,offering a significant runway of future growth for our business.BE VII is now already larger than its predecessor and has attracted strong support from both new and existing investors.In particular,we have seen a significant acceleration of our strategy for geographic expansion of the investor base which creates a strong foundation for future fund cycles.With this market background driving organic growth and with our long duration capital,strong balance sheet,asset light model,high and stable margins,strong cash generation and attractive dividend yield,Bridgepoints outlook remains attractive.This resilience was central to the Boards decision to commence a tactical share buyback programme earlier in the year which is now more than 65 per plete.Looking forward,we expect market volatility and inflation pressures to continue in the near term and have positioned our investment activity accordingly.Bridgepoint will obviously not be immune to macroeconomic events,but we are excited by the strategic growth prospects for the Group and the long term prospects for our sector as we continue to progress our business development plans and remain confident in the Companys ability to deliver attractive returns for both our fund investors and our shareholders alike.William JacksonChairmanChairmans statement William Jackson continued“We are excited by the strategic growth prospects for the Group.”Bridgepoint 2023 Interim Report654.3136.075.560.584.233.450.82021*2022*H1 202355.6139.278.061.2112.860.852.02021*2022*H1 2023KPIs:tracking our performanceDescriptionA measure of profitability prior to depreciation of property leases,amortisation of intangible assets,the cost of financing and taxationDefinitionSee page 19 for a detailed definitionDescriptionEBITDA excluding expenses related to the IPO,the acquisition of the EQT Credit business and costs relating to strategic projects,including potential acquisitions,which were not incurred in the normal course of businessDefinitionSee page 19 for a detailed definitionTotal AUM (bn)Fee Paying AUM(bn)EBITDA(m)Underlying EBITDA(m)DescriptionThe total value of assets held in the Groups funds plus the value of capital which has been committed but not yet drawnDefinitionSee page 20 for a detailed definitionDescriptionThe amount of capital held in funds,including Collateralised Loan Obligations(CLOs),which the Group manages on behalf of investors and on which it charges feesDefinitionSee page 20 for a detailed definition24.6 19.823.419.317.72021*2022*H1 202339.537.138.028.532.920212022H1 202339.5bn54.3m24.6bn55.6m*2021 and H1 2022 Fee Paying AUM has been restated to include CLO AUM*2021 and 2022 Underlying EBITDA has been restated to exclude foreign exchange gains/losses*2021 and 2022 EBITDA has been restated to exclude non-operating foreign exchange gains/lossesH2H1H2H1H2H1H2H1Bridgepoint 2023 Interim Report7DescriptionA measure of profit after expenses,depreciation and amortisation,and financing,but before tax,and excluding exceptional items and amortisation of intangiblesDefinitionSee page 19 for definitionDescriptionA statutory measure of profit after expenses,depreciation and amortisation and financing but before taxationDefinitionProfit for the year attributable to equity shareholders before taxationUnderlying FRE(m)Underlying FRE margin(%)Underlying profit before tax(m)Profit before tax(m)DescriptionUnderlying FRE margin is a measure of underlying profitability,excluding investment incomeDefinitionSee page 19 for definitionGuidance45-50%in the longer termDescriptionFee Related Earnings(“FRE”)is a measure of underlying profitability,excluding investment incomeDefinitionSee page 19 for definition42.974.351.822.547.420.926.52021*2022*H1 202334.322.236.727.719.32021*2022*H1 202353.1127.479.148.362.622.240.420212022H1 202350.0120.051.968.190.548.242.320212022H1 202350.0m53.1m34.3B.9m*2021 and 2022 Underlying FRE has been restated to exclude non-operating foreign exchange gains/losses*2021 and 2022 Underlying FRE margin has been restated to exclude non-operating foreign exchange gains/lossesH2H1H2H1H2H1H2H1KPIs:tracking our performance continuedBridgepoint 2023 Interim Report8The Groups financial results to 30 June 2023 reflect the step up in profitability from the latest flagship equity fund BE VII and prudent cost control.Underlying fee related earnings of 42.9 million compares to 22.5 million in the first half of 2022 which is driven by increased management fees of 124.6 million(including the recognition ofonly 2.6 million of late fees relating to BE VII)compared to 100.9 million in the first half of 2022.The increase of 24%reflects the start of fees from BE VII and growth of fee earning AUM in our Credit business with good momentum on deployment to take advantage of the higher interest rate environment.Thisstep up in fees deliveredan underlying FRE margin of 34%,in line with ourshort-term guidance.Total operating income of 137.8 million,a reduction of 2.3 million compared tothe comparative period,have been impacted by lower investment income of 12.7 million,due to modest changesto fund valuations and a comparatively slower period for exits.As previously advised,investment income in 2023 is expected to be heavily weighted towards the second half driven by exit activity.In 2023,we now expect investment income to be c.15%of total income versus previous guidance of c.20%,with a corresponding catch up in 2024.Costs(excluding exceptional expenses)of 82.2 million have increased modestly since the first half of 2022,largely reflecting higher premises costs of our new London office,but flat personnel expenses reflecting a deliberate phasing of investment team hires to match fundraising progress and timing of replacement hires for natural attrition.In January,we announced a 50 million share buyback programme,to reflectthe confidence we have in the resilience of our business.Weare more than 65 per cent of the way through this programme at 30 June 2023.The Groups balance sheet remains well capitalised.At 30 June 2023,the Group had a net cash position of 258.4 million(excluding cash within consolidated CLOs)and had a renewed andlarger banking facility of 200 million,which is undrawn.Furthermore,the Group holds investments in funds of 356.8 million,including the Groups exposure to CLO notes,andcarried interest at a discounted value of 47.1 million,which provides opportunity for further future profitability and conversion to cash in the medium-term.Adam JonesGroup Chief Financial Officer&Chief Operating OfficerCFO statement Guidance Fundraising:Continued progress on BE VII which is expected to hold its final close in early 2024.The target remains 7bn.BDC V,BDL IV and BCO V expected to begin fundraising within the next 12 months.Investment income:Continue to expect investment income torepresent around 20%of total income in the short term.In2023,we now expect investment income to be c.15%,with acatch up in 2024.Cost growth:Some inflationary pressures on costs in the near term and more modest growth in headcount and personnel costs over medium term.Actual cost growth in H1 was below high single digit guidance despite inflationary pressures being evident.This reflects deliberate phasing of investment team hires to match fundraising progress.FRE margin:Short term guidance remains unchanged at 30-35%.2024 expected to be slightly below the bottom of the short-term guidance,reflecting the usual margin profile of a PE cycle where continued successful divestments in 2023 and 2024 will,as expected,reduce fees recognised on invested capital ahead of BDC V generating fees from January 2025.Credit deployment:Expect to deploy at least 1bn of incremental FPAUM each year in Credit in the short term.Tax:Subject to any changes in the UK tax code,we expect our 2023 effective tax rate to be at the top end of the 5%-10%long term range.Bridgepoint 2023 Interim Report9CFO statement continuedSummaryFinancial summarySix months ended 30 June 2023Six months ended 30 June2022Six months ended 31 December 2022Change H1 23 vs H1 22 (%)Change H1 23 vs H2 22(%)Total AUM(bn)39.537.138.06.5%3.9e Paying AUM(bn)24.619.823.424.2%5.1%Management fee margin on Fee Paying AUM(%)1.16%1.17%1.16%(0.0)ppt(0.01)ppt Management and other fees(m)124.6100.9140.623.5%(11.4)%Investment income(m)12.738.726.2(67.2)%(51.5)%Total operating income(m)137.8140.1167.3(1.6)%(17.6)%Total expenses(excluding exceptional items)*(m)(82.2)(78.9)(89.3)4.2%(8.0)%Underlying EBITDA*(m)55.661.278.0(9.2)%(28.7)%Underlying EBITDA margin*(%)40.3C.7F.6%(3.3)ppt(6.3)pptUnderlying FRE*(m)42.922.551.890.7%(17.2)%Underlying FRE margin*(%)34.3.26.7.1ppt(2.4)pptUnderlying profit before tax(m)50.051.968.1(3.7)%(26.6)%Reported profit before tax(m)53.148.379.1 9.9%(32.9)%Reported profit after tax(m)48.244.975.77.3%(36.3)%Reported pro forma basic and diluted EPS(pence)5.95.59.37.3%(36.3)%Underlying pro forma basic and diluted EPS(pence)5.66.08.0(6.6)%(30.0)%*2022 total expenses(excluding exceptional items),underlying EBITDA,underlying EBITDA margin,underlying FRE and underlying FRE margin has been restated to exclude non-operating foreign exchange gains/losses.Throughout the course of this section reference is made to adjusted measures which the Company considers to be alternative performance measures(“APMs”)or key performance indicators(“KPIs”).These are not defined or recognised under International Financial Reporting Standards(“IFRS”)but are used by the Directors and management to analyse the business and financial performance,track the Groups progress and help develop long-term strategic plans.Pages 19 and 20 set out definitions of each of the APMs used within the CFO Statement and how they can be reconciled back to the condensed consolidated financial statements.The analysis below includes two periods for comparison.First,the six months ended 30 June 2022,which is required to be included within the condensed financial information.In addition,the six months ended 31 December 2022 has been included as it provides a helpful comparison to the performance in the six months to 30 June 2023 because of underlying drivers such as invested capital and headcount.Bridgepoint 2023 Interim Report10FundraisingIn 2023 to date,fundraising for BE VII continued steadily and now amounts to 6 billion of commitments(including associated vehicles)despite continued uncertainty in the fundraising market.We now expect the fund to admit final investors in early 2024.BDL III concluded fundraising in May.In total,including separately managed accounts,the strategy has raised over 3.4 billion of investable capital since its launch in 2021.Fundraising is also underway for BG II and BCO IV,with the latter expected to conclude fundraising in the second half of the year.CLO 5 is currently under construction and is expected to launch during the third quarter.Fundraising for BDC V,BDL IV and BCO V is expected to commence within the next twelve months.Total AUM development during the period billionPrivate equityCreditTotal30 June 202226.710.437.131 December 202226.811.238.030 June 202327.512.039.5Total AUM at 30 June 2023 was 39.5 billion compared to 38.0 billion at the end of the 2022,of which 27.5 billion is Private Equity and 12.0 billion in Credit.The 3.9%increase since 31 December 2022 is primarily due to additional commitments raised for BEVII.Total Fee Paying AUM development during the period billionPrivate equityCreditTotal30 June 202213.36.519.831 December 202216.47.023.430 June 202316.97.724.6Fee Paying AUM at 30 June 2023 was 24.6 billion compared to 23.4 billion at the end of 2022,with the 5.1%increase due to additional commitments raised for BE VII becoming fee paying and an increase in invested capital in our Credit strategies.In aggregate our Credit business is expected to add at least 1 billion of Fee Paying AUM growth during 2023,including the launch of new CLOs.Adam JonesGroup Chief Financial Officer&Chief Operating Officer Bridgepoint 2023 Interim Report11CFO statement continuedAbbreviated income statement millionSix months ended 30 June 2023Six months ended 30 June 2022Six months ended 31 December 2022Change H1 23 vs H1 22 (%)Change H1 23 vs H2 22 (%)Management and other fees124.6100.9140.623.5%(11.4)%Investment income 12.738.726.2(67.2)%(51.5)%Total operating income137.8 140.1167.3(1.6)%(17.6)%Total expenses*(83.5)(79.6)(91.8)4.9%(9.0)%Total expenses(excluding exceptional expenses)*(82.2)(78.9)(89.3)4.2%(8.0)ITDA*54.360.575.5(10.2)%(28.1)%Underlying EBITDA*55.661.278.0(9.2)%(28.7)%Underlying FRE*42.922.551.890.7%(17.2)preciation and amortisation(8.6)(9.1)(9.2)(5.5)%(6.5)%Net other income/(expense)*7.4(3.1)12.8(338.7)%(42.2)%Net other income/(expense)(excluding exceptional net finance expense)*1.5(1.7)(2.2)(188.2)%(168.2)%Underlying profit before tax50.051.968.1(3.7)%(26.6)%Reported profit before tax 53.148.379.19.9%(32.9)%Tax(4.9)(3.4)(3.4)44.1D.1%Reported profit after tax48.244.975.77.3%(36.3)%*2022 total expenses,total expenses(excluding exceptional expenses),EBITDA,underlying EBITDA,underlying FRE,underlying operating profit and reported operating profit has been restated to exclude non-operating foreign exchange gains/losses.*2022 net other income/(expense)and net other income/(expense)(excluding exceptional net finance expense)has been restated to include non-operating foreign exchange gains/losses.The Groups consolidated income statement has two key components:the first is the income generated from management and other fees,which are from long-term fund management contracts.The second component is the variable income from investments in funds and carried interest.Management fee income plus other operating income less costs is expressed as Fee Related Earnings(“FRE”).Underlying FRE excludes exceptional expenses and bonuses linked to investment returns.Profits from co-investment and carried interest together with FRE form the EBITDA of the business.Exceptional items are items of income or expense that are material by size or nature and are not considered to be incurred in the normal course of business.Exceptional items are classified as“exceptional”within the Group Consolidated Statement of Profit or Loss are disclosed separately to give a clearer presentation of the Groups results.In the six month periods ended 30 June 2023,30 June 2022 and 31 December 2022,exceptional expenses were recognised relating to the personnel costs in relation to the acquisition of the EQT Credit business and costs incurred in relation to potential acquisitions.Underlying profit before tax excludes the aforementioned expenses and also certain non-operating other income and expenses which have also been classified as exceptional.Exceptional net other income primarily includes the reduction in the estimated deferred contingent consideration payable to EQT AB in the six months ended 30 June 2023 and six months ended 31 December 2022 for the acquisition of the EQT Credit business,which is determined by the outcome of certain fundraising that falls within the definitions in the transaction documents(rather than total fundraising).Further explanation is included within note 6(a)of the interim financial statements(see page 32).Bridgepoint 2023 Interim Report12Total operating income millionSix months ended 30 June 2023Six months ended 30 June2022Six months ended 31 December 2022Change H1 23 vs H1 22 (%)Change H1 23 vs H2 22 (%)Management and other fees124.6100.9140.623.5%(11.4)rried interest6.414.010.2(54.3)%(37.3)ir value remeasurement of investments6.324.716.0(74.5)%(60.6)%Other operating income0.50.50.50.0%0.0%Total operating income137.8140.1167.3(1.6)%(17.6)%Total operating income was 137.8 million for the first six months ended 30 June 2023 compared with 140.1 million for the comparative period in 2022 and 167.3 million in the six months ended 31 December 2022.Management and other fees increased by 23.7 million,or 24%,from 100.9 million for the six months ended 30 June 2022.Fees for the six months ended 30 June 2023 were 16.0 million lower than the six month period ended 31 December 2022.Management and other fees by reporting segment is split out below:millionSix months ended 30 June 2023Six months ended 30 June 2022Six months ended 31 December 2022Change H1 23 vs H1 22(%)Change H1 23 vs H2 22(%)Private equity95.876.7 111.1 24.9%(13.8)%Credit27.022.728.118.9%(3.9)ntral1.81.51.420.0(.6%Management and other fees124.6100.9140.6 23.5%(11.4)%The increase in fees compared to the six month period to 30 June 2022 is principally due to the start of fees from BE VII plus fees on increased levels of invested capital in BDL III and BCO IV,and related separately managed accounts,in the Credit business.These increases are partially offset by reduced fees on older funds,which are in their divestment phase,where fees are based upon the remaining invested capital and reduce when investments are sold.Fees have reduced compared to the six months to 31 December 2023,due to the impact of late fees for BE VII for the stub period from May 2022 and the impact of a reduction of fees on older funds.Taken together,investment returns from carried interest and co-investments was 12.7 million compared to 38.7 million in the six month period ended 30 June 2022 and 26.2 million in the six month period ended 31 December 2022 due to modest changes to fund valuations and a slower period for exits.Operating expenses millionSix months ended 30 June 2023Six months ended 30 June2022Six months ended 31 December 2022Change H1 23 vs H1 22(%)Change H1 23 vs H2 22 (%)Personnel expenses(61.0)(60.9)(64.9)0.2%(6.0)%Other operating expenses(21.2)(18.0)(24.4)17.8%(13.1)%Total expenses before exceptional expenses(82.2)(78.9)(89.3)4.2%(8.0)%Exceptional expenses(1.3)(0.7)(2.5)85.7%(48.0)%Total expenses(83.5)(79.6)(91.8)4.9%(9.0)%Personnel expenses(excluding exceptional expenses)of 61.0 million were flat compared to the period ended 30 June 2022,reflecting timing of replacement hires for natural attrition and a deliberate phasing of investment team hires to match fundraising progress.Personnel expenses were 3.9 million lower than the six months ending 31 December 2022,reflecting a lower bonus accrual associated with lower investment income recognised in the period.The final annual bonus for 2023 will reflect the achievement of fundraising and exit targets.Personnel expenses(excluding exceptional expenses)as a percentage of total operating income were 44%for the six month period ended 30 June 2023,compared to 43%for the six months ended 30 June 2022 and 39%for the six months ended 31 December 2022.Bridgepoint 2023 Interim Report13CFO statement continuedOther operating expenses(excluding exceptional expenses)of 21.2 million are 3.2 million higher than the six months to 30 June 2022 due to the operating costs on the Groups new London headquarters,5 Marble Arch,and fundraising costs associated with BE VII.In comparison to the six month period ended 31 December,other operating expenses have decreased by 3.2 million due to a fall in professional fees incurred,which related to amounts paid in relation to the expansion of the Groups regulatory footprint and higher than normal premises costs during the second half of 2022 on the transfer to 5 Marble Arch.Other operating expenses(excluding exceptional expenses)as a percentage of total operating income are 15%which compares to 13%in the equivalent period in 2022 and 15%for the six months ended 31 December 2022.Foreign exchange losses of 0.3 million have been included within other income/expenses on the basis that they relate predominantly to non-operating activity.The comparative periods have been restated accordingly(0.6 million gain for the six months ended 30 June 2022 and 0.5 million gain for the six months ended 31 December 2022).EBITDA millionSix months ended 30 June 2023Six months ended 30 June2022*Six months ended 31 December 2022*Change H1 23 vs H1 22(%)Change H1 23 vs H2 22(%)Underlying EBITDA55.661.278.0(9.2)%(28.7)%Exceptional expenses within EBITDA(1.3)(0.7)(2.5)85.7%(48.0)ITDA54.360.575.5(10.2)%(28.1)%*2022 EBITDA and underlying EBITDA have been restated to exclude non-operating foreign exchange gains/(losses).Underlying EBITDA reduced to 55.6 million in the six months ended 30 June 2023,excluding exceptional expenses.Whilst management and other fees were higher than the comparative period in 2022,investment returns were lower.Investment returns were also a feature of the lower underlying EBITDA compared to the six months ended 31 December 2022.Depreciation and amortisation millionSix months ended 30 June 2023Six months ended 30 June2022Six months ended 31 December 2022Change H1 23 vs H2 22 (%)Change H1 23 vs H1 22 (%)Depreciation(7.1)(7.6)(7.7)(6.6)%(7.8)%Amortisation of intangible assets(1.5)(1.5)(1.5)0.0%0.0%Total depreciation and amortisation(8.6)(9.1)(9.2)(5.5)%(6.5)preciation and amortisation decreased from 9.1 million in the six months to 30 June 2022 to 8.6 million in the six months ended 30 June 2023.Compared to the six months ended 31 December 2022,the expense decreased by 0.6 million.This reduction is due to the cessation of legacy leases in London following the move to 5 Marble Arch.The amortisation of intangibles acquired with the EQT Credit business(fund customer relationships)of 1.5 million have been excluded from the adjusted profitability measures for all periods in order to enable a clearer analysis of underlying profitability.Bridgepoint 2023 Interim Report14Other income and expenses millionSix months ended 30 June 2023Six months ended 30 June 2022*Six months ended 31 December 2022*Change H1 23 vs H1 22 (%)Change H1 23 vs H2 22 (%)Net other income/(expense),excluding exceptional items1.5(1.7)(2.2)(188.2)%(168.2)%Exceptional net other income/(expense)5.9(1.4)15.0(521.4)%(60.7)%Net other income/(expense),including exceptional items7.4(3.1)12.8(338.7)%(42.2)%*2022 net other income/(expense)has been restated to include non-operating foreign exchange gains/(losses).Net other income/(expense),excluding exceptional items,was 1.5 million of income compared to an expense of 1.7 million for the six months ended 30 June 2022 and an expense of 2.2 million for the six months ended 31 December 2022.These movements are principally due to increased interest income from cash on deposit.Exceptional net other income primarily includes the reduction in the estimated deferred contingent consideration payable to EQT AB for the acquisition of the EQT Credit business,which is determined by the outcome of certain fundraising that falls within the definitions in the transaction documents(rather than total fundraising for the Private Credit strategy).Further explanation is included within note 6(a)of the interim financial statements(see page 32).The income is partially offset by the unwind of the discount on the corresponding payable.Profit before tax millionSix months ended 30 June 2023Six months ended 30 June 2022Six months ended 31 December 2022Change H1 23 vs H1 22 (%)Change H1 23 vs H2 22 (%)Underlying profit before tax50.051.968.1(3.7)%(26.6)%Exceptional expenses(1.3)(0.7)(2.5)85.7%(48.0)%Exceptional net other income/(expense)5.9(1.4)15.0(521.4)%(60.7)%Amortisation of intangible assets(1.5)(1.5)(1.5)0.0%0.0%Reported profit before tax53.148.379.19.9%(32.9)%Underlying profit before tax margin36.37.0.7%(0.7)%(3.7)%Underlying profit before tax of 50.0 million represents a 36.3%margin,which compares 37.0%for the six months ended 30 June 2022 and 40.7%for the six months ended 31 December 2022.Underlying profit before tax is 1.9 million lower than the six months ended 30 June 2022 and 18.1 million lower than the six months ended 31 December 2022 due to lower investment returns.Reported profit before tax of 53.1 million increased by 4.8 million from 48.3 million in the six months ended 30 June 2022 and compares to 79.1 million in the six months ended 31 December 2022.Tax millionSix months ended 30 June 2023Six months ended 30 June 2022Six months ended 31 December 2022Change H1 23 vs H1 22 (%)Change H1 23 vs H2 22 (%)Tax(4.9)(3.4)(3.4)44.1D.1%Profit after tax48.244.975.77.3%(36.3)%Tax of 4.9 million represents an effective rate of 9.2%compared to 7.0%in the six months ended 30 June 2022 and 5.4%for the full year ended 31 December 2022.The Group has a lower effective tax rate than the UK statutory rate.This is largely driven by timing differences on the taxation of management fee income and significant tax loss carry-forwards in the UK where certain forms of income are not subject to UK corporation tax.Profit after tax for the six month period ended 30 June 2023 was 48.2 million,which compares to 44.9 million for the six month period to 30 June 2022 and 75.7 million for the six month period to 31 December 2022,reflecting the reduced EBITDA from investment income.Bridgepoint 2023 Interim Report15CFO statement continuedEarnings per share and dividend per share penceSix months ended 30 June 2023Six months ended 30 June 2022Six months ended 31 December 2022Change H1 23 vs H1 22 (%)Change H1 23 vs H2 22(%)Reported pro forma earnings per share5.95.59.37.3%(36.3)%Underlying pro forma earnings per share5.66.08.0(6.6)%(30.0)%Pro forma interim dividend per share4.44.04.09.0%9.0%Reported pro forma earnings per share increased by 0.4 pence to 5.9 pence per share compared with the six month period ended 30 June 2022,which is reflective of the higher statutory profit after tax,whereas underlying pro forma earnings per share fell share fell by 0.4 pence per share,reflecting the slight decline in underlying earnings,which excludes the exceptional net other income recognised in the six months ended 30 June 2023.For the year ended 31 December 2022,the Directors proposed a final dividend of 4.0 pence per share.The cost of the dividend was 32.7 million.The Directors have announced an interim dividend of 4.4 pence per share,in respect of the first half of 2023 to be paid in September 2023.This equates to an estimated cost of 35.7 million based on the number of shares in issue at 30 June 2023,but the actual cost will depend upon the number of shares in issue when the dividend is paid.Consolidated balance sheetSummarised consolidated balance sheet millionAs at30 June 2023As at 31 December 2022Change(%)AssetsNon-current assets565.2540.04.7%Current assets1,376.81,247.810.3%Total Assets1,942.01,787.88.6%LiabilitiesNon-current liabilities962.5757.127.1%Current liabilities220.0258.0(14.7)%Total Liabilities1,182.51,015.116.5%Net Assets759.5 772.7(1.7)%EquityShare capital and premium289.9289.90.0%Other reserves10.89.118.7%Retained earnings458.8473.7(3.1%)Total Equity759.5772.7(1.7%)Net assets principally comprise cash and term deposits,the fair value of investments and carried interest receivable from private equity and credit funds and goodwill arising from the acquisition of the EQT Credit business.The Groups total assets and liabilities increased by 154.2 million and 167.4 million respectively due to an increase in CLO assets and liabilities consolidated as at 30 June 2023,which now includes CLO 4,following its format launch.This increase is offset by bonuses and dividends paid and the cash paid for the share buy backs in the period.Non-current assets increased by 4.7%from 540.0 million at 31 December 2022 to 565.2 million at 30 June 2023.Current assets increased by 10.3%from 1,247.8 million at 31 December 2022 to 1,376.8 million.The changes in non-current and current assets are primarily due to the impact of the build up of the CLO 4 portfolio following its formal launch.Bridgepoint 2023 Interim Report16At 30 June 2023,the Group had cash of 258.4 million(including amounts in term deposits,but excluding cash belonging to consolidated CLOs).The Group had no debt,but has the use of a new Revolving Credit Facility for up to 200 million for a period of three years until May 2026.Non-current liabilities increased from 757.1 million at 31 December 2022 to 962.5 million at 30 June 2022,primarily due to consolidation of the additional CLO vehicle.Current liabilities decreased by 14.7%from 258.0 million at 31 December 2022 to 220.0 million at 30 June 2023,primarily due to the payment of annual bonuses in March 2023.Excluding the impact of consolidated CLOs,non-current liabilities increased by 3%due to an increase in deferred tax liability.Total equity reduced by 1.7%due to the impact of the final dividend for 2022 and the Share Buyback Programme,offset by profits.The consolidated balance sheet includes the assets and liabilities of certain CLOs which are required under IFRS to be presented gross on the balance sheet.This could distort how a reader of the financial statements interprets the balance sheet of the Group.A summarised consolidated balance sheet,excluding third-party CLO assets and liabilities,is included below.The Groups maximum exposure to loss associated with its interest in the CLOs is limited to its investment in the relevant CLOs which at 30 June 2023 was 75.0 million and at 31 December 2022 was 60.3 million.Summarised consolidated balance sheet(excluding third party CLO assets and liabilities)1 millionAs at30 June 2023As at 31 December 2022Change(%)Total Assets(excluding third-party CLO assets)1,023.31,067.1(4.1)%Total Liabilities(excluding third-party CLO liabilities)263.8294.4(10.4)%Net Assets(excluding third-party CLO assets and liabilities)759.5772.7(1.7)%1.A full consolidated balance sheet excluding third-party CLO assets and liabilities is included on page 45.Bridgepoint 2023 Interim Report17Consolidated cash flowsSummarised consolidated cash flow statement millionSix months ended30 June 2023Six months ended 30 June 2022 Change(%)Net cash flows from operating activities74.9(33.7)(322.3)%Net cash flows from investing activities(133.8)(65.5)104.3%Net cash flows from financing activities129.0(38.2)(437.7)%Net(decrease)/increase in cash and cash equivalents70.1(137.4)(151.0)%Total cash and cash equivalents at beginning of the period220.6327.315.6fect of exchange rate changes(1.6)1.0(260.0)%Total cash and cash equivalents at the end of the period289.1190.951.4%of which:cash and cash equivalents at the end of the period(for use within the Group)258.4139.385.5%of which:CLO cash(restricted for use within relevant CLO)30.751.6(40.5)%Total cash and cash equivalents at the end of the period289.1190.951.4%Net cash flows from operating activities for the six months ended 30 June 2023 was an inflow of 74.9 million.The inflow was due to the receipt of deferred proceeds from the sale of the Groups investment in Bridgepoint Credit II,the conversion of FRE and positive net working capital movements offset against payment of annual bonuses in March 2023.Net cash flows from investing activities,including carried interest and investment income proceeds,is driven by the timing of investments and divestments by the underlying Bridgepoint funds.Net outflows from investments in the six months ended 30 June 2023 included the impact of the launch of CLO 4,which is consolidated,and resulted in a cash outflow of 204.4 million.Net investment into Bridgepoint funds as a co-investor and other investors resulted in a cash outflow of 30.4 million.For the six months ended 30 June 2023 cash inflows from investing activities also include a receipt of 100m redeemed from cash held in term deposits with an original maturity of more than three months.Net cash inflows from financing activities for the six months ended 30 June 2023 of 129.0 million primarily relate to net inflow of CLO cash from investors in CLO 4(which is consolidated)of 185.2m,offset by dividends paid to shareholders,as well as payments to acquire shares as part of the Share Buyback Programme.At 30 June 2023 the Group had 30.7 million of consolidated CLO cash which was held by the consolidated CLO vehicles,legally ringfenced and not available for use by the Group.The consolidated cash flow statement includes the gross cash inflows and outflows for the period to,and cash held at 30 June 2023 for those CLOs which are required to be consolidated.This could distort how a reader of the financial statements interprets the cash flows of the Group,therefore a cash flow statement without the consolidated CLO vehicles is presented below.Summarised consolidated cash flow statement(excluding cash flows relating to consolidated CLOs)1 millionSix months ended 30 June 2023Six months ended 30 June2022Change(%)Net cash flows from operating activities(excluding consolidated CLOs)74.9(33.7)(322.3)%Net cash flows from investing activities(excluding consolidated CLOs)54.9(117.3)(146.8)%Net cash flows from financing activities(excluding consolidated CLOs)(66.8)(33.8)97.6%Net increase in cash and cash equivalents(excluding consolidated CLOs)63.0(184.8)(134.1)sh and cash equivalents at beginning of the period(excluding consolidated CLOs)196.0323.1(39.3)fect of exchange rate changes on cash and cash equivalents(excluding consolidated CLOs)(0.6)1.0(160.0)sh and cash equivalents at the end of the period(excluding consolidated CLOs)258.4139.385.5d back:investment in term deposits with original maturities of more than three months100.0(100.0)%Net cash at the end of the period(excluding consolidated CLOs)258.4239.38.0 full condensed consolidated cash flow statement excluding third-party CLO assets and liabilities is included on page 46.CFO statement continuedBridgepoint 2023 Interim Report18Alternative Performance Measures(APMs)The use of APMsThis interim report includes several measures which are not defined or recognised under IFRS,including financial and operating measures relating to the Group which the Group considers to be APMs.These are reconciled to the IFRS results for the six month period in the table below.EBITDAEarnings before interest,taxes,depreciation and amortisation.It is calculated by reference to total operating income and deducting from it,or adding to it,as applicable,personnel expenses and other expenses.Underlying EBITDACalculated by excluding exceptional items from EBITDA.Exceptional items are items of income or expense that are material by size and/or nature,are not considered to be incurred in the normal course of business and are not expected to reoccur.A breakdown is included within note 4 to the condensed consolidated financial statements.millionSix months ended 30 June 2023Six months ended 30 June 2022*EBITDA54.360.5Add back:exceptional items1.30.7Underlying EBITDA55.661.2Underlying EBITDA marginUnderlying EBITDA as a percentage of total operating income.Underlying FRE Underlying EBITDA less carried interest and income from the fair value remeasurement of investments and adding back the cost of bonuses linked to investment profits.millionSix months ended 30 June 2023Six months ended 30 June 2022*Underlying EBITDA55.661.2Less:carried interest and income from fair value of investments(12.7)(38.7)Add back:investment linked bonusesUnderlying FRE42.922.5Underlying FRE marginUnderlying FRE as a percentage of total operating income,excluding carried interest and income from the fair value remeasurement of investments.Underlying profit before taxCalculated by excluding exceptional items and the amortisation of intangible assets from within profit before tax.Underlying profit before tax(m)Six months ended 30 June 2023Six months ended 30 June 2022Profit before tax53.148.3Add back:exceptional items within EBITDA1.30.7Add back:amortisation of intangible assets1.51.5Less/add-back:exceptional net other income/(expense)(5.9)1.4Total underlying profit before tax50.051.9*2022 EBITDA and FRE have been restated to exclude non-operating foreign exchange gains/losses.Bridgepoint 2023 Interim Report19Underlying profit before tax marginUnderlying profit before tax as a percentage of total operating income.Underlying profit after taxCalculated by excluding exceptional items and the amortisation of intangible assets from within profit before tax.Underlying profit after tax marginUnderlying profit after tax as a percentage of total operating income.Underlying pro forma basic and diluted earnings per shareCalculated by dividing underlying profit after tax by the number of shares in issue as at 30 June 2023 including the impact of the Share Buyback Programme.millionSix months ended 30 June 2023Six months ended 30 June 2022Profit after tax48.244.9Add back:exceptional items within EBITDA1.30.7Add back:amortisation of intangible assets1.51.5Less/add back:exceptional net other income/(expense)(5.9)1.4Add back:tax0.2Total underlying profit after tax45.348.5Pro forma number of shares(m)810.3810.3Underlying pro forma basic and diluted EPS(pence)5.66.0Fee Paying AUMAssets under management upon which management fees are charged by the Group,including CLOs.For all funds with private equity strategies and the Bridgepoint Credit Opportunities funds I to III,Fee Paying AUM is either based on total commitments(during the commitment period)or on net invested capital(normally during the post-commitment period).For the Bridgepoint Direct Lending funds,Bridgepoint Syndicated Debt funds and Bridgepoint Credit Opportunities IV and expected future funds,Fee Paying AUM is based on net invested capital throughout the life of the fund.Credit fee paying AUM includes separately managed accounts(SMAs)relating to the direct lending and credit opportunities strategies.Total AUMThe total value of unrealised assets as of the relevant date(as determined pursuant to the latest quarterly or semi-annual valuation for each Bridgepoint Fund conducted by the Group)plus undrawn commitments managed by the Group,inclusive of SMAs and co-investment vehicles.The valuations for Total AUM come from the Groups valuations of the investments of the Bridgepoint funds.Management fee margin on Fee Paying AUMThe underlying management fee rate in the Bridgepoint funds,excluding co-investment vehicles,calculated as the weighted average management fee rate for all Bridgepoint funds contributing to Fee Paying AUM as at the end of the accounting period.Alternative Performance Measures(APMs)continuedBridgepoint 2023 Interim Report20Principal risksThe Group believes that risk management is a fundamental part of robust corporate governance and our ongoing success.Details of the Groups response to risk management is set out within pages 78 to 83 of the 2022 Annual Report and Accounts,which is available in the shareholder section of the Bridgepoint Group plc website:bridgepoint.euThe principal risks within the 2022 Annual Report and Accounts include:fundraising challenges,law and regulation,changes in macroeconomic environment,fund under-performance,decreased pace or size of investments made by Bridgepoint funds,personnel and key people,information technology and cyber security,and third-party service providers.The directors do not consider there to have been any material changes to the principal risks since the 2022 Annual Report and Accounts were published.The principal risks and uncertainties to which the Group will be exposed in the second half of 2023 are expected to be substantially the same as those described in the 2022 Annual Report and Accounts.DirectorsThe directors of Bridgepoint Group plc at 25 July 2023 are:William Jackson Archie Norman Adam Jones Angeles Garcia-Poveda Carolyn McCall Tim Score Cyrus TaraporevalaStatement of directors responsibilitiesThe directors confirm that,to the best of their knowledge,the interim condensed consolidated financial statements:Have been prepared in accordance with UK-adopted International Accounting Standard 34“Interim Financial Reporting”,and give a true and fair view of the assets,liabilities,financial position and profit of the Group;Include a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7,namely important events that have occurred during the first six months of the financial period and their impact on the interim financial statements,as well as a description of the principal risks and uncertainties for the remaining six months of the financial year;and Include,as required by Disclosure Guidance and Transparency Rule 4.2.8,a fair review of material related party transactions that have taken place in the first six months of the financial period and any material changes to the related party transactions described in the last Annual Report and Accounts.On behalf of the BoardAdam JonesGroup Chief Financial Officer&Chief Operating Officer25 July 2023Required disclosuresBridgepoint 2023 Interim Report21ConclusionWe have been engaged by Bridgepoint Group plc(the“Company”)to review the financial information for the six months ended 30 June 2023 which comprises the condensed consolidated statement of profit or loss,the condensed consolidated statement of comprehensive income,the condensed consolidated statement of financial position,the condensed consolidated statement of changes in equity,the condensed consolidated statement of cash flows and related notes 1 to 14.We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.Based on our review,nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared,in all material respects,in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdoms Financial Conduct Authority.Basis for conclusionWe conducted our review in accordance with International Standard on Review Engagements(UK)2410(Revised),“Review of Interim Financial Information Performed by the Independent Auditor of the Entity”issued for use in the United Kingdom.A review of interim financial information consists of making enquiries,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(UK)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.As disclosed in note 1,the annual financial statements are prepared in accordance with UK-adopted international accounting standards.The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34,“Interim Financial Reporting”.Conclusions relating to Going ConcernBased on our review procedures,which are less extensive than those performed in an audit as described in the Basis of Conclusion section of this report,nothing has come to our attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified material uncertainties relating to going concern that are not appropriately disclosed.This conclusion is based on the review procedures performed in accordance with ISRE(UK)2410(Revised),however future events or conditions may cause the entity to cease to continue as a going concern.Responsibilities of directorsThe interim report,including the financial information contained therein,is the responsibility of,and has been approved by,the directors.The directors are responsible for preparing the interim report in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdoms Financial Conduct Authority,which requires that the interim report must be prepared and presented in a form consistent with that which will be adopted in the Companys annual accounts having regard to the accounting standards applicable to such annual accounts.In preparing the interim financial report,the directors are responsible for assessing the Companys ability to continue as a going concern,disclosing,as applicable,matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations,or have no realistic alternative but to do so.Our responsibilities for the review of the financial informationIn reviewing the interim report,we are responsible for expressing to the company a conclusion on the condensed set of financial statement in the half-yearly financial report.Our conclusion,including our Conclusions Relating to Going Concern,are based on procedures that are less extensive than audit procedures,as described in the Basis for Conclusion paragraph of this report.Use of the review reportThis report is made solely to the Company in accordance with International Standard on Review Engagements(UK)2410 issued by the Financial Reporting Council and our Engagement Letter dated 13 July 2023.Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose.To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the Company,for our review work,for this report,or for the conclusions we have formed.Mazars LLPChartered Accountants30 Old Bailey London EC4M 7AU25 July 2023 Notes:1.The maintenance and integrity of the Bridgepoint Group plc web site is the responsibility of the directors;the work carried out by us does not involve consideration of these matters and,accordingly,we accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the web site.2.Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.Independent Review Report to Bridgepoint Group plc Bridgepoint 2023 Interim Report22Condensed Consolidated Statement of Profit or Lossfor the six months ended 30 JuneNote 2023 m(Restated)2022 mManagement and other fees124.6100.9Carried interest6.414.0Fair value remeasurement of investments6.324.7Other operating income0.50.5Total operating income137.8140.1Personnel expenses3(61.3)(61.5)Other operating expenses(22.2)(18.1)EBITDA*54.360.5Depreciation and amortisation5(8.6)(9.1)Other income610.91.1Other expenses6(3.5)(4.2)Profit before tax*53.148.3Tax7(4.9)(3.4)Profit after tax48.244.9Attributable to:Equity holders of the parent48.244.9Basic and diluted earnings per share80.060.05*Exceptional expenses of 1.3m(2022:0.7m)are included in EBITDA.Profit before tax includes exceptional expenses of 1.3m(2022:2.1m)and exceptional income of 5.9m(2022:nil).Details of exceptional items are included in note 4 on page 31.*The Group has changed the presentation of the Condensed Consolidated Statement of Profit or Loss for the six months ended 30 June 2022 to reclassify foreign exchange gains/losses from EBITDA to other income/expenses with nil impact in profit before tax or profit after tax.Further details are provided in note 1 on page 28.The notes to the accounts form an integral part of these interim financial statements.Bridgepoint 2023 Interim Report23Condensed Consolidated Statement of Comprehensive Income for the six months ended 30 JuneNote2023 m2022 mProfit after tax48.244.9Items that may be reclassified to the statement of profit or loss in subsequent periods:Exchange differences on translation of foreign operations(8.7)6.2Change in the fair value of hedging instruments8.8(11.3)Reclassifications to the Condensed Consolidated Statement of Profit or Loss2.22.2Total tax on components of other comprehensive income(2.5)2.1Other comprehensive expense net of tax(0.2)(0.8)Total comprehensive income net of tax48.044.1Total comprehensive income attributable to:Equity holders of the parent48.044.1The notes to the accounts form an integral part of these interim financial statements.Bridgepoint 2023 Interim Report24Condensed Consolidated Statement of Financial PositionNote30 June 2023 m 31 December 2022 mAssetsNon-current assetsProperty,plant and equipment84.585.5Goodwill and intangible assets118.1119.6Carried interest receivable947.142.0Fair value of fund investments10(a)296.8273.0Trade and other receivables10(a)18.719.9Total non-current assets565.2540.0Current assetsConsolidated CLO assets*10(a)948.0741.3Trade and other receivables10(a)120.0184.9Derivative financial assets10(a)3.71.0Other investments,at fair value10(a)16.0Cash and cash equivalents10(a)258.4196.0Term deposits with original maturities of more than three months10(a)100.0Consolidated CLO cash*10(a)30.724.6Total current assets1,376.81,247.8Total assets1,942.01,787.8LiabilitiesNon-current liabilitiesTrade and other payables10(b)13.713.6Other financial liabilities10(b)50.349.5Fair value of consolidated CLO liabilities*10(b)797.4597.5Lease liabilities10(b)75.377.1Deferred tax liabilities25.819.4Total non-current liabilities962.5757.1Current liabilitiesTrade and other payables10(b)83.0115.5Lease liabilities10(b)11.36.1Derivative financial liabilities 10(b)4.413.2Consolidated CLO liabilities*10(b)5.92.6Consolidated CLO purchases awaiting settlement*10(b)115.4120.6Total current liabilities220.0258.0Total liabilities1,182.51,015.1Net assets759.5772.7EquityShare capital 13(a)0.10.1Share premium13(a)289.8289.8Capital redemption reserve13(f)Share-based payment reserve13(e)3.03.6Cash flow hedge reserve13(c)2.1(8.9)Net exchange differences reserve13(d)5.714.4Retained earnings458.8473.7Total equity759.5772.7*Detail of the Groups interest in consolidated CLOs are included in note 10.The equity holders exposure in the consolidated CLOs is 60.0m at 30 June 2023(31 December 2022:45.2m).The Groups investment in CLOs which are not consolidated is 15.0m(31 December 2022:15.1m)and are included within fair value of fund investments.ACondensed Consolidated Statement of Financial Position,excluding consolidated CLOs is presented on page 45.The notes to the accounts form an integral part of these interim financial statements.Bridgepoint 2023 Interim Report25Condensed Consolidated Statement of Changes in Equityfor the six months ended 30 JuneNoteShare capital mShare premium mCapital redemption reserve mShare-based payment reserve m Cash flow hedge reserve mNet exchange differences reserve mRetained earnings mTotal equity mAt 1 January 20230.1289.83.6(8.9)14.4473.7 772.7Profit for the period48.248.2Other comprehensive income11.0(8.7)(2.5)(0.2)Total comprehensive income11.0(8.7)45.748.0Share-based payments3 2.22.2Transfer of share-based payment reserve into retained earnings13(e)(2.8)2.8Share buyback programme13(f)(30.7)(30.7)Dividends11(32.7)(32.7)At 30 June 20230.1289.80.03.02.15.7458.8 759.5NoteShare capital mShare premium mCapital redemption reserve mShare-based payment reserve m Cash flow hedge reserve mNet exchange differences reserve mRetained earnings mTotal equity mAt 1 January 20220.1289.83.27.53.1412.6716.3Profit for the period44.944.9Other comprehensive income(9.1)6.22.1(0.8)Total comprehensive income(9.1)6.247.044.1Share-based payments30.40.4Dividends11(30.0)(30.0)At 30 June 20220.1289.83.6(1.6)9.3429.6730.8The notes to the accounts form an integral part of these interim financial statements.Bridgepoint 2023 Interim Report26Condensed Consolidated Statement of Cash Flows for the six months ended 30 JuneNote2023 m2022 mCash flows from operating activitiesCash generated from operations1277.4(32.6)Tax paid(2.5)(1.1)Net cash(outflow)/inflow from operating activities74.9(33.7)Cash flows from investing activitiesInvestment in term deposits with original maturities of more than three months10(a)100.0(100.0)Receipts from investments(non-CLO)6.428.3Purchase of investments(non-CLO)(21.3)(22.7)Purchase of other investments(non-CLO)(14.3)Interest received(non-CLO)1.60.5Payments for property,plant and equipment(2.0)(12.0)Acquisition of CLOs(15.5)(11.4)Receipts from investments(consolidated CLOs)117.576.0Purchase of investments(consolidated CLOs)(306.2)(81.0)Cash movements from the consolidation of CLOs56.8Net cash(outflow)/inflow from investing activities(133.8)(65.5)Cash flows from financing activitiesExceptional transaction costs(2.2)Dividends paid to shareholders of the Company11(32.7)(30.0)Share buyback(30.7)Drawings from related party investors in intermediate fund holding entities3.5Principal elements of lease payments(1.0)(2.8)Drawn funding(consolidated CLOs)26.1Repayment of CLO borrowings(consolidated CLOs)(101.7)(4.4)Cash from CLO investors(consolidated CLOs)271.4Interest paid(non-CLO)(2.4)(2.3)Net cash(outflow)/inflow from financing activities129.0(38.2)Net increase/(decrease)in cash and cash equivalents70.1(137.4)Total cash and cash equivalents at the beginning of the period220.6327.3Effect of exchange rate changes on cash and cash equivalents(1.6)1.0Total cash and cash equivalents at the end of period289.1190.9Cash and cash equivalents(for use within the Group)10(a)258.4139.3Consolidated CLO cash(restricted for use within relevant CLO)10(a)30.751.6Total cash and cash equivalents at the end of period289.1190.91.The Condensed Consolidated Statement of Cash Flows includes the cash flows of consolidated CLOs.A Condensed Consolidated Statement of Cash Flows excluding the impact of consolidating CLOs is included on page 46.The notes to the accounts form an integral part of these interim financial statements.Bridgepoint 2023 Interim Report27Notes to the condensed consolidated interim financial statements 1 General information and basis of preparationGeneral informationBridgepoint Group plc(the“Company”)is a public company limited by shares,incorporated,domiciled and registered in England and Wales.The Companys registration number is 11443992 and the address of its registered office is 5 Marble Arch,London,W1H 7EJ.The principal activity of the Company and entities controlled by the Company(collectively,the“Group”)is to act as a private equity and credit fund manager.Basis of preparationThe condensed consolidated interim financial statements(“interim financial statements”)for the six months ended 30 June 2023 have been prepared in accordance with UK-adopted IAS 34“Interim Financial Reporting”and the Disclosure Guidance and Transparency Rules of the United Kingdoms Financial Conduct Authority.The interim financial statements should be read in conjunction with the Annual Report and Accounts for the year ended 31 December 2022 including the statutory accounts for the year to 31 December 2022(the“2022 financial statements”).TheGroups accounting policies,areas of significant judgement and the key sources of estimation uncertainty are consistent with those applied to the 2022 financial statements.The financial information contained within this half year financial report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.The 2022 financial statements have been reported on by Mazars LLP and delivered to the Registrar of Companies.The report of the auditors was(i)unqualified,(ii)did not include a reference to any matters which the auditors drew attention by way of emphasis without qualifying their report,and(iii)did not contain a statement under section 498(2)or(3)of the Companies Act 2006.Financial information dated 30 June 2023 and comparative financial information dated 30 June 2022 has not been audited,while comparative financial information dated 31 December 2022 has been audited as part of the 2022 financial statements unless noted.The consolidated financial statements of Bridgepoint Group plc and entities controlled by the Company forthe year ended 31 December 2022 were prepared in accordance with UK-adopted International Accounting Standards(“IAS”)and the legal requirements of the Companies Act 2006 and have been prepared under the historical cost convention,except for financial instruments measured at fair value and are available on the Groups website:www.bridgepoint.eu.The 2023 financial statements will be prepared in a consistent manner.Future accounting developmentsThe Group has not early adopted any standard,interpretation or amendment that has been issued but is not yet effective.No other standards or interpretations have been issued that are expected to have a material impact on the Groups interim financial statements.Change to comparative period financial information The following change has been made to the comparative period presented within these financial statements:The presentation of foreign exchange gains has been changed in the Condensed Consolidated Statement of Profit or Loss as it primarily relates to non-operating activities.As a result the comparative information for the affected line items for the six months ended 30 June 2022 has been restated to reclassify foreign exchange gains of 0.6m into other income.The restatement will also impact the prior period EBITDA and FRE subtotals throughout the report but there is no impact on net profit in either period.Related party transactionsAll related party transactions that took place in the six months ended 30 June 2023 are consistent in nature with the disclosures in note 25 to the 2022 financial statements.There have been no material changes to the nature or size of related party transactions since 31 December 2022.2 Operating segmentsOperating segments are the components of the Group whose results are regularly reviewed by the Groups chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.The Executive Directors are considered to be the chief operating decision maker of the Group,which is divided into operating segments based on how key management reviews and evaluates the operation and performance of the business.Bridgepoint 2023 Interim Report28The Groups operations are divided into two groups,the core business,consisting of the Private Equity and Private Credit fund management and associated Central support,and Other.Other includes the Groups procurement consulting business,PEPCO Services LLP,and costs relating tostrategic projects.The Groups core operations are divided into two business segments:Private Equity and Private Credit.The operations of both business segments consist of providing investment management services to the underlying funds and their investors.The investment management services comprise of identification and structuring of new investments,the monitoring of investments and the sale and exit from investments.The two business segments are supported by the Central support functions which include investor relations,head office,finance,human resources,ITand marketing.In 2022 certain investor relations and legal related costs were reclassified to Central from Credit reflecting team restructuring.Segmental income and profit before tax analysisThe Executive Directors assess the operating segments based on the line items below,primarily on operating income and underlying EBITDA.The EBITDA for each segment,together with depreciation and amortisation and net other income or expenses forms profit before tax.Depreciation and amortisation,net other income or expense and exceptional expenses are not allocated to operating segments and are included in the Group total.Six months ended 30 June 2023Private Equity mPrivate Credit mCentral mTotal Core mTotal Other mTotal Group mManagement and other fees95.827.01.8124.6124.6Carried interest6.46.46.4Fair value remeasurement of investments4.91.46.36.3Other operating income0.50.5Total operating income107.128.41.8137.30.5137.8Personnel expenses(34.1)(10.7)(15.7)(60.5)(0.5)(61.0)Other operating expenses(8.1)(4.1)(8.9)(21.1)(0.1)(21.2)Underlying EBITDA(excluding exceptional expenses)64.913.6(22.8)55.7(0.1)55.6Exceptional expenses(1.3)EBITDA(including exceptional expenses)54.3Depreciation and amortisation(8.6)Other income and expenses7.4Profit before tax53.1Six months ended 30 June 2022(Restated)Private Equity mPrivate Credit mCentral mTotal Core mTotal Other mTotal Group mManagement and other fees76.622.81.5100.9100.9Carried interest14.014.014.0Fair value remeasurement of investments22.81.924.724.7Other operating income0.50.5Total operating income113.424.71.5139.60.5140.1Personnel expenses(30.6)(11.5)(18.3)(60.4)(0.5)(60.9)Other operating expenses(5.5)(3.8)(8.6)(17.9)(0.1)(18.0)Underlying EBITDA(excluding exceptional expenses)77.39.4(25.4)61.3(0.1)61.2Exceptional expenses(0.7)EBITDA(including exceptional expenses)60.5Depreciation and amortisation(9.1)Other income and expenses(3.1)Profit before tax48.3Bridgepoint 2023 Interim Report29Notes to the condensed consolidated interim financial statements continuedAssets and liabilities analysisThe Groups Condensed Consolidated Statement of Financial Position is managed as a single unit rather than by segment.The only distinction for the business segments relates to the Groups investments in funds,carried interest receivable and other investments,which can be split between Private Equity and Private Credit(split between that attributable to the Group and to third party investors).30 June 2023 m31 December 2022 mInvestmentsPrivate equity256.6241.3Private equity-other investments 16.0Private credit(assets attributable to the Group)100.276.9Private credit(CLO assets attributable to third party investors)888.0696.1Total investments1,260.81,014.3Carried interest receivablePrivate equity44.539.4Private credit2.62.6Total carried interest receivable47.142.03 Operating expensesOperating expenses include:Six months ended 30 June2023 m2022 mWages and bonuses(44.9)(47.7)Social security costs(8.9)(7.9)Pensions(1.0)(1.0)Share-based payments(2.2)(0.4)Other employee expenses(4.3)(4.5)Personnel expenses(61.3)(61.5)Total personnel expenses include 0.3m(2022:0.6m)of exceptional expenses,and accordingly are excluded from the calculation of underlying profitability measures(see note 4 for further details).a)Long-term incentive plansA new long-term incentive plan(“LTIP”)was granted to qualifying employees on 31 March 2023,of total value of the awards of 5.6m on grant date.The Group will settle the awards,vesting over the period 30 June 2023 to 31 March 2025 either in Bridgepoint Group plc shares or an equivalent cash payment,with no consideration paid by the participants.As the LTIP awards vest subject to the achievement of certain service conditions,namely the continued employment in the Group,they are accounted for as either equity-settled or cash-settled share-based payment transactions under the Groups accounting policy in line with IFRS 2“Share-based Payment”.This requires each award to be measured at fair value on its grant date,and in the case of the cash-settled share-based payments revalued at each reporting date.The fair value is calculated based on the market value of the shares at the grant date,adjusted for any market or non-vesting conditions of the shares.A share-based payment is recognised over the applicable vesting period as a personnel expense,with a corresponding entry in the share-based payment reserve within equity for equity-settled awards or as a liability for cash-settled awards,along with any employment taxes to be incurred by the Group.Bridgepoint 2023 Interim Report30Number of sharesWeighted average fair value per share granted()30 June 202330 June 202230 June 202330 June 2022Rights outstanding at beginning of the periodGranted2,777,4532.15Forfeited(28,506)2.17Vested(743,473)2.17Rights outstanding(unvested)at end of the period2,005,4742.14b)Restricted share planOn 31 March 2023,a director of the Company was granted a conditional share award of 114,953 shares at a value of 2.17 per share,with total value 250,000,vesting on 31 March 2026.As of 30 June 2023,the Group recognised 2.1m in personnel expenses related to these new awards and a further 0.1m relating to previous awards for which there have been no changes in the period.4 Exceptional itemsExceptional items are material items of income or expenditure that are not considered to be incurred in the normal course of business and without separate disclosure could distort an understanding of the financial statements.Accordingly,exceptional items are excluded from the calculation of underlying profitability measures.Six months ended 30 June2023 m2022 mPersonnel expenses(0.3)(0.6)Other operating expenses(1.0)(0.1)Total exceptional expenses within EBITDA(1.3)(0.7)Other expenses-(1.4)Total exceptional expenses(1.3)(2.1)Six months ended 30 June2023 m2022 mOther income5.9Total exceptional income5.9a)Exceptional personnel expensesIn 2023 and 2022,exceptional personnel expenses include deferred transaction related bonuses and associated social security costs from the acquisition of EQT Credit in 2020.Specific bonus payments payable to employees in relation to the EQT acquisition are exceptional as similar awards were only granted once.The awards incentivise employees to align their goals with those of the business through being awarded over multiple periods,hence such expenses will continue to be recognised until 2025.b)Exceptional other operating expensesIn 2022 and 2023,exceptional other operating expenses include costs incurred in relation to strategic projects,including potential acquisitions.c)Exceptional other incomeExceptional other income of 5.9m(2022:nil)relates to remeasurement and revaluation of the deferred contingent consideration payable and associated unwind of discount to EQT AB in relation to the acquisition of EQT Credit in 2020.The deferred consideration payable to EQT AB was recognised upon acquisition and is considered exceptional as there are no similar contractual liabilities with EQT AB.Due to the contractual arrangement underlying the deferred consideration,which is a payable in a future accounting period,there have been exceptional items related to the valuation in multiple periods.Bridgepoint 2023 Interim Report315 Depreciation and amortisationThe following table summarises the depreciation and amortisation charge during the period.Six months ended 30 June 2023 m 2022 mDepreciation on property,plant and equipment(7.1)(7.6)Amortisation of intangible assets(1.5)(1.5)Total depreciation and amortisation(8.6)(9.1)The amortisation of intangible assets is excluded from the calculation of underlying profitability measures in order to enhance the understanding of the underlying performance.6 Other income and expensesSix months ended 30 June2023 m(Restated)2022 mInterest income on term deposits4.4Finance income on subleases0.30.5Foreign exchange gainsFinance income on amounts receivable from related party investors0.30.6Other income5.9Total other income10.91.1Interest expense on bank overdrafts and borrowings(0.7)(0.7)Interest expense on lease liabilities(2.0)(1.7)Other expenses(0.4)(1.7)Finance expense on amounts payable to related party investors(0.1)(0.1)Foreign exchange losses(0.3)Total other expenses(3.5)(4.2)Net other income/(expense),including exceptional items7.4(3.1)a)Other incomeOther income in 2023 primarily relates to the remeasurement and revaluation of the deferred contingent consideration payable and associated unwind of discount to EQT AB of 5.9m(2022:nil).The deferred contingent consideration is payable to EQT AB and relates to the outcome of certain fundraising for the Bridgepoint Direct Lending III and Bridgepoint Credit Opportunities IV funds that falls within the definitions applying to deferred consideration in the transaction documents.These fundraises have either completed or are expected to complete during 2023.At 30 June 2023,the Group remeasured the expected liability at that point,which equated to 10.4m(2022:16.7m),through the profit and loss.This income is considered exceptional income,and accordingly is excluded from the calculation of underlying profitability measures.b)Other expensesOther expenses of 0.4m(2022:0.2m)include borrowing facility fees which are being amortised over the term of a new 200m facility with a duration of three years and the accelerated amortisation of a previous capitalised borrowing facility fee,which related to the pre-existing facility,which was terminated on the commencement of the new facility.Further detail is included in note 10(b).In the six months ended 30 June 2022,other expenses of 1.5m related to the unwind of discounting of the deferred contingent payable to EQT AB and is considered an exceptional expense,and accordingly excluded from the calculation of underlying profitability measures.c)Finance income and expense on amounts with related party investorsFinance income and expense represent amounts due to or from related party investors in Opal Investments LP,BE VI(French)Co-Invest LP,BDC IV(French)Co-Investment LP and Maple Tree VII LP under the limited partnership agreements.Notes to the condensed consolidated interim financial statements continuedBridgepoint 2023 Interim Report327 Tax expenseAnalysis of tax expense reported in the income statement:Six months ended 30 June2023 m2022 mCurrent tax(1.1)(1.0)Deferred tax(3.8)(2.4)Total tax expense(4.9)(3.4)The tax expense for the half year to 30 June 2023 is calculated based on a forecast full year effective tax rate for the Group which is then applied to the actual profit before tax for the half year.8 Earnings per shareSix months ended 30 June20232022Profit attributable to equity holders of the Company(m)48.244.9Weighted average number of ordinary shares for purposes of basic and diluted EPS(m)816.8823.3Basic and diluted earnings per share()0.060.05The adjusted earnings per share on underlying profit after tax of 45.3m(2022:48.5m)based on the number of shares in issue at 30 June 2023 is 0.06(2022:0.06 on underlying profit after tax of 48.5m based on the number of shares in issue at 30 June 2022).The underlying profit after tax is calculated by excluding exceptional items and the amortisation of intangible assets from within profit after tax.The number of ordinary shares used in the calculation of earnings per share excludes shares held by the Group itself and those subject to the Share Buyback Programme.Further detail is included in note 13(f).9 Carried interest receivableThe carried interest receivable relates to revenue which has been recognised by the Group relating to its share of fund profits through its holdings in Carried Interest Partnerships(“CIPs”).Revenue is only recognised to the extent it is highly probable that the revenue recognised would not result in significant revenue reversal of any accumulated revenue recognised on the completion of a fund.The reversal risk is mitigated through the application of discounts.If adjustments to the carried interest receivable recognised in previous periods are required,they are adjusted through revenue.As at 30 June 2023,the undiscounted carried interest asset is 113.8m(2022:103.5m).30 June 2023 m31 December 2022 mOpening balance42.038.9Income recognised in the period/year5.723.1Foreign exchange movements recognised as profit or loss(0.5)1.1Foreign exchange movements recognised as other comprehensive income(0.1)0.1Receipts of carried interest(21.2)Closing balance47.142.0Bridgepoint 2023 Interim Report3310 Financial assets and liabilities(a)Classification of financial assetsThe following tables analyse the Groups assets in accordance with the categories of financial instruments in IFRS 9“Financial Instruments”(“IFRS 9”).Assets which are not considered as financial assets,for example prepayments and lease receivables,under IFRS 9 are also shown in the table in a separate column in order to reconcile to the face of the Condensed Consolidated Statement of Financial Position.As at 30 June 2023Fair value through profit or loss mHedging derivatives mFinancial assets at amortised cost mAssets which are not financial assets mTotal mFair value of fund investments296.8296.8Consolidated CLO assets925.122.9948.0Trade and other receivables107.930.8138.7Derivative financial instruments3.73.7Other investments,at fair value*16.016.0Cash and cash equivalents258.4258.4Term deposits with original maturities of more than three monthsConsolidated CLO cash30.730.7Total 1,237.93.7419.930.81,692.3As at 31 December 2022Fair value through profit or loss mHedging derivatives mFinancial assets at amortised cost mAssets which are not financial assets mTotal mFair value of fund investments273.0273.0Consolidated CLO assets726.315.0741.3Trade and other receivables181.623.2204.8Derivative financial instruments1.01.0Cash and cash equivalents196.0196.0Term deposits with original maturities of more than three months100.0100.0Consolidated CLO cash24.624.6Total 999.31.0517.223.21,540.7*Other investments have been designated as financial assets at fair value through profit or loss upon initial recognition.There are no material differences between the above amounts for trade and other receivables and their fair value.i)Fair value of fund investmentsInvestments representing the Groups interests in private equity and credit funds are initially recognised at fair value and subsequently remeasured at fair value through profit or loss within operating income.The investments primarily consist of loans or commitments made in relation to the Bridgepoint Europe VI,V and III,Bridgepoint Development Capital IV and III private equity funds,the Bridgepoint Credit I,Direct Lending II and I,and Credit Opportunities IV and III credit funds.The fund investments are measured at fair value through profit or loss as the business model of each vehicle is to manage the assets and to evaluate their performance on a fair value basis.Notes to the condensed consolidated interim financial statements continuedBridgepoint 2023 Interim Report34ii)Other investments,at fair valueOther investments include,but is not limited to,loans made to a Group portfolio company.The Group elected the fair value option on these loans.Interest income is accrued on the principal amount of the loans based on its contractual interest rate.Other income is reported in other operating income within the Condensed Consolidated Statements of Profit or Loss.Changes in the value of other investments are measured at fair value through profit and loss.iii)CLO assetsThe balance shown includes the gross value of the assets held by CLO 1,CLO 3,CLO 4 and CLO 5(2022:CLO 1,CLO3 and CLO 4),which are consolidated by the Group,but of which the Group only holds the rights and liabilities in relation to a small portion.The CLO assets are measured at fair value through profit or loss as the business model of each vehicle is to manage the assets and to evaluate their performance on a fair value basis.30 June 2023 m31 December 2022 mConsolidated CLO assets consolidated by the Group948.0741.3Consolidated CLO assets attributable to third party investors(888.0)(696.1)Groups exposure to consolidated CLO assets60.045.2iv)Cash and term deposits30 June 2023 m31 December 2022 mCash at bank and in hand41.878.3Money market funds116.617.7Term deposits with original maturities of less than three months100.0100.0Total cash and cash equivalents258.4196.0Term deposits with original maturities of more than three months100.0Consolidated CLO cash30.724.6Total cash and term deposits289.1320.6Cash and cash equivalents comprise cash in hand and call deposits,and other short-term highly liquid investments including term deposits with original maturities of three months or less and money market funds,which are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.Term deposits represent fixed term deposits placed with banks and financial institutions.Consolidated CLO cash is cash held by CLO vehicles consolidated by the Group and is not available for the Groups operating activities.There are no material differences between the carrying amounts and fair values of cash and cash equivalents,term deposits with original maturities of more than three months and consolidated CLO cash.Credit risk exposure on cash and term deposits is managed in accordance with the Groups Treasury&Risk Management Policy which provides limits on exposures with any single financial institution.The Groups surplus cash is held with financial institutions or money market funds which are rated as investment grade by third party rating agencies.As at 30 June 2023,100%of cash and term deposits were held with institutions or funds that are rated investment grade or above and all money market funds are AAA rated.Bridgepoint 2023 Interim Report35(b)Classification of financial liabilitiesThe following tables analyse the Group and Companys financial liabilities in accordance with the categories of financial instruments defined in IFRS 9.Liabilities such as deferred income,long-term employee benefits,social security and other taxes are excluded as they do not constitute a financial liability and are shown in the table in a separate column in order to reconcile to the face of the Condensed Consolidated Statement of Financial Position.As at 30 June 2023Fair value through profit or loss mHedging derivatives mFinancial liabilities at amortised cost mLiabilities which are not financial liabilities mTotal mTrade and other payables10.425.460.996.7Other financial liabilities50.350.3Lease liabilities86.686.6Derivative financial instruments4.44.4Consolidated CLO liabilities797.45.9803.3Consolidated CLO purchases awaiting settlement115.4115.4Total 858.14.4233.360.91,156.7As at 31 December 2022Fair value through profit or loss mHedging derivatives mFinancial liabilities at amortised cost mLiabilities which are not financial liabilities mTotal mTrade and other payables16.751.860.6129.1Other financial liabilities49.549.5Lease liabilities83.283.2Derivative financial instruments13.213.2Consolidated CLO liabilities597.52.6600.1Consolidated CLO purchases awaiting settlement120.6120.6Total 663.713.2258.260.6995.7The carrying amount of financial liabilities carried at amortised cost approximates their fair value,and therefore have not been included in the disclosure within this section.i)Borrowing On 1 June 2023,the Company entered into a new Revolving Facility Agreement for 200m for a period of three years.At 30 June 2023,there were no drawn amounts on the facility.This new borrowing arrangement replaced a 125m facility held by another Group entity,which was terminated on the same date.(c)Fair value measurementFair 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 in the principal,or in its absence,the most advantageous market to which the Group has access to at that date.The fair value of a liability reflects its non-performance risk.The Group discloses fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:Quoted prices(unadjusted)in active markets(level 1);Inputs other than quoted prices included within level 1 that are observable for assets or liabilities,either directly(as prices)or indirectly(derived from prices)(level 2);Inputs for assets or liabilities that are not based on observable market data(level 3).Notes to the condensed consolidated interim financial statements continuedBridgepoint 2023 Interim Report36Investments in funds,which hold portfolios of private equity and credit assets are valued in line with the International Private Equity and Venture Capital Valuation(“IPEV”)Guidelines using a variety of methodologies.These investments are classified as level 3 financial assets due to the level of unobservable inputs within the determination of the valuation of individual assets within each fund and the lack of an observable price for each investment in a fund.The assets of the CLO vehicles,which are fully consolidated by the Group,are classified as level 2 fair values as they are priced using independent loan pricing sources.These sources consolidate broker quotes where depth represents the number of quotes supporting the price provided.Further details of the valuation methodologies,process and governance for investments in funds and investments held by consolidated CLOs is set out within the notes to the 2022 financial statements.Derivatives used for hedging,which are fair valued,are classified as level 2 fair values as the inputs are observable.Financial AssetsFinancial Liabilities30 June 2023 m31 December 2022 m30 June 2023 m31 December 2022 mFinancial assets and liabilities at fair value through profit or lossLevel 1Level 2953.6727.34.413.2Level 3288.0273.0858.1663.7Total1,241.61,000.3862.5676.9i)Reconciliation of level 3 fair value measurements of financial assets A reconciliation of level 3 fair values for financial assets which represent the Groups interest in private equity and credit funds,including the Groups investment in CLOs which are not consolidated,is set out in the table below:30 June 2023 m31 December 2022 mLevel 3 financial assets at fair value through profit or lossOpening balance273.0313.7Additions21.338.5Change in fair value5.132.9Foreign exchange mov
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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30,2023 ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number:0-50231 Federal National Mortgage Association(Exact name of registrant as specified in its charter)Fannie MaeFederally chartered corporation52-08831071100 15th Street,NW800232-6643Washington,DC 20005(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification No.)(Address of principal executive offices,including zip code)(Registrants telephone number,including area code)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredNoneN/AN/AIndicate 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 was required to file such reports),and(2)has been subject to such filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or 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 filer Accelerated 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 the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No As of July 14,2023,there were 1,158,087,567 shares of common stock of the registrant outstanding.TABLE OF CONTENTSPagePART IFinancial Information .1Item 1.Financial StatementsCondensed Consolidated Balance Sheets .63Condensed Consolidated Statements of Operations and Comprehensive Income .64Condensed Consolidated Statements of Cash Flows .65Condensed Consolidated Statements of Changes in Equity .66Note 1Summary of Significant Accounting Policies .68Note 2Consolidations and Transfers of Financial Assets .71Note 3Mortgage Loans .73Note 4Allowance for Loan Losses .88Note 5Investments in Securities .90Note 6Financial Guarantees .92Note 7Short-Term and Long-Term Debt .93Note 8Derivative Instruments .94Note 9Segment Reporting .98Note 10Concentrations of Credit Risk .100Note 11Netting Arrangements .104Note 12Fair Value .105Note 13Commitments and Contingencies .114Note 14Regulatory Capital Requirements .115Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations .1Introduction .1Executive Summary .2Summary of Our Financial Performance .2Liquidity Provided in the First Half of 2023 .3Legislation and Regulation .4Key Market Economic Indicators .5Consolidated Results of Operations .9Consolidated Balance Sheet Analysis .18Retained Mortgage Portfolio .19Guaranty Book of Business .21Business Segments .22Single-Family Business .22Single-Family Mortgage Market .22Single-Family Mortgage-Related Securities Issuances Share .23Single-Family Business Metrics .23Single-Family Business Financial Results .25Single-Family Mortgage Credit Risk Management .26Multifamily Business .37Multifamily Mortgage Market .38Multifamily Business Metrics .38Multifamily Business Financial Results .40Multifamily Mortgage Credit Risk Management .41Consolidated Credit Ratios and Select Credit Information .45Liquidity and Capital Management .46Risk Management .54Market Risk Management,including Interest-Rate Risk Management .54Critical Accounting Estimates .56Impact of Future Adoption of New Accounting Guidance .59Forward-Looking Statements .59Fannie Mae Second Quarter 2023 Form 10-QiItem 3.Quantitative and Qualitative Disclosures about Market Risk .117Item 4.Controls and Procedures .117PART IIOther Information .119Item 1.Legal Proceedings .119Item 1A.Risk Factors .120Item 2.Unregistered Sales of Equity Securities and Use of Proceeds .120Item 3.Defaults Upon Senior Securities .122Item 4.Mine Safety Disclosures .122Item 5.Other Information .122Item 6.Exhibits .122Fannie Mae Second Quarter 2023 Form 10-QiiPART IFINANCIAL INFORMATIONItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsWe have been under conservatorship,with the Federal Housing Finance Agency(“FHFA”)acting as conservator,since September 6,2008.As conservator,FHFA succeeded to all rights,titles,powers and privileges of the company,and of any shareholder,officer or director of the company with respect to the company and its assets.The conservator has since provided for the exercise of certain functions and authorities by our Board of Directors.Our directors owe their fiduciary duties of care and loyalty solely to the conservator.Thus,while we are in conservatorship,the Board has no fiduciary duties to the company or its stockholders.We do not know when or how the conservatorship will terminate,what further changes to our business will be made during or following conservatorship,what form we will have and what ownership interest,if any,our current common and preferred stockholders will hold in us after the conservatorship is terminated or whether we will continue to exist following conservatorship.We are not currently permitted to pay dividends or other distributions to stockholders.Our agreements with the U.S.Department of the Treasury(“Treasury”)include a commitment from Treasury to provide us with funds to maintain a positive net worth under specified conditions;however,the U.S.government does not guarantee our securities or other obligations.Our agreements with Treasury also include covenants that significantly restrict our business activities.For additional information on the conservatorship,the uncertainty of our future,and our agreements with Treasury,see“BusinessConservatorship and Treasury Agreements”and“Risk FactorsGSE and Conservatorship Risk”in our Form 10-K for the year ended December 31,2022(“2022 Form 10-K”).You should read this Managements Discussion and Analysis of Financial Condition and Results of Operations(“MD&A”)in conjunction with our unaudited condensed consolidated financial statements and related notes in this report and the more detailed information in our 2022 Form 10-K.You can find a“Glossary of Terms Used in This Report”in MD&A in our 2022 Form 10-K.Forward-looking statements in this report are based on managements current expectations and are subject to significant uncertainties and changes in circumstances,as we describe in“Forward-Looking Statements.”Future events and our future results may differ materially from those reflected in our forward-looking statements due to a variety of factors,including those discussed in“Risk Factors”in our 2022 Form 10-K and elsewhere in our 2022 Form 10-K and in this report.IntroductionFannie Mae is a leading source of financing for mortgages in the United States.Organized as a government-sponsored enterprise,Fannie Mae is a shareholder-owned corporation.We were chartered by Congress to provide liquidity and stability to the residential mortgage market and to promote access to mortgage credit.Our revenues are primarily driven by guaranty fees we receive for assuming the credit risk on loans underlying the mortgage-backed securities we issue.We do not originate mortgage loans or lend money directly to borrowers.Rather,we work primarily with lenders who originate mortgage loans to borrowers.We acquire and securitize those loans into mortgage-backed securities that we guarantee(which we refer to as Fannie Mae MBS or our MBS).MD&A|IntroductionFannie Mae Second Quarter 2023 Form 10-Q1Executive SummarySummary of Our Financial PerformanceQuarterly Condensed Consolidated Results(Dollars in billions)$7.9$7.1$4.7$5.0Net revenuesNet incomeQ2 2022Q2 2023Net revenues decreased$784 million in the second quarter of 2023 compared with the second quarter of 2022,primarily due to lower net amortization income,partially offset by higher income from portfolios.Lower amortization income was driven by a higher interest-rate environment in the second quarter of 2023,which significantly slowed refinancing activity,driving lower loan prepayment volumes compared with the second quarter of 2022.Higher income from portfolios was primarily driven by higher interest rates in the second quarter of 2023 than in the second quarter of 2022 on securities in our other investments portfolio.Net income increased$341 million for the second quarter of 2023 compared with the second quarter of 2022,driven primarily by a shift to benefit for credit losses in the second quarter of 2023 from provision for credit losses in the second quarter of 2022,partially offset by a decrease in net revenues.Our benefit for credit losses in the second quarter of 2023 was driven primarily by increases in actual and forecasted single-family home prices.Net worth increased to$69.0 billion as of June 30,2023 from$64.0 billion as of March 31,2023.The increase is attributable to$5.0 billion of comprehensive income for the second quarter of 2023.MD&A|Executive SummaryFannie Mae Second Quarter 2023 Form 10-Q2Year-to-Date Condensed Consolidated Results(Dollars in billions)$15.4$14.0$9.1$8.8Net revenuesNet incomeFirst Half 2022First Half 2023Net revenues decreased$1.4 billion in the first half of 2023 compared with the first half of 2022,primarily due to lower net amortization income,partially offset by higher income from portfolios.Lower amortization income was driven by a higher interest-rate environment in the first half of 2023,which significantly slowed refinancing activity,driving lower loan prepayment volumes compared with the first half of 2022.Higher income from portfolios was primarily driven by higher interest rates in the first half of 2023 than in the first half of 2022 on securities in our other investments portfolio.Net income decreased$295 million for the first half of 2023 compared with the first half of 2022,driven primarily by lower net revenues and a decrease in fair value gains,partially offset by a shift to benefit for credit losses in the first half of 2023 from provision for credit losses in the first half of 2022 due to increases in actual and forecasted single-family home prices.Net worth increased to$69.0 billion as of June 30,2023 from$60.3 billion as of December 31,2022.The increase is attributable to$8.8 billion of comprehensive income for the first half of 2023.Liquidity Provided in the First Half of 2023Through our single-family and multifamily business segments,we provided$182 billion in liquidity to the mortgage market in the first half of 2023,enabling the financing of approximately 726,000 home purchases,refinancings and rental units.Fannie Mae Provided$182 Billion in Liquidity in the First Half of 2023Unpaid Principal BalanceUnits$133B397KSingle-Family Home Purchases$24B99KSingle-Family Refinancings$25B230KMultifamily Rental UnitsMD&A|Executive SummaryFannie Mae Second Quarter 2023 Form 10-Q3Legislation and RegulationThe information in this section updates and supplements information regarding legislative,regulatory,conservatorship and other developments affecting our business set forth in“BusinessConservatorship and Treasury Agreements”and“BusinessLegislation and Regulation”in our 2022 Form 10-K,as well as in“MD&ALegislation and Regulation”in our Form 10-Q for the quarter ended March 31,2023(“First Quarter 2023 Form 10-Q”).Also see“Risk Factors”in our 2022 Form 10-K for discussions of risks relating to legislative and regulatory matters.Middle Class Borrower Protection Act of 2023On May 1,2023,Fannie Mae implemented changes to our single-family pricing framework that introduced redesigned and recalibrated upfront fee matrices for purchase,rate-term refinance,and cash-out refinance loans.These changes are described in“MD&ASingle-Family BusinessSingle-Family Business MetricsRecent and Future Price Changes”in our 2022 Form 10-K and“Single-Family BusinessSingle-Family Business MetricsRecent Price Changes”in this report.On June 23,2023,the House of Representatives passed the Middle Class Borrower Protection Act of 2023.If enacted,the bill would require the Director of FHFA to revise Fannie Mae and Freddie Macs(together,referred to as the“Enterprises”)single-family pricing framework to the version that was in effect immediately before May 1,2023,and to maintain the revised framework without further adjustment until 90 days after the Government Accountability Office submits a report to Congress on its analysis of the May 1,2023 pricing changes.After this period,the bill would restrict FHFAs authority to engage in future pricing changes,including prohibiting any loan-level pricing adjustments based on debt-to-income ratio and requiring FHFA to follow procedures similar to those required for a federal agency issuing a rule under the Administrative Procedure Act when proposing adjustments to the Enterprises single-family pricing framework.In addition,the bill would extend by one year(to October 1,2033)the Enterprises obligations under the Temporary Payroll Tax Cut Continuation Act of 2011 to collect 10 basis points in guaranty fees on single-family residential mortgages delivered to us and pay the associated revenue to Treasury.A companion bill has been introduced in the Senate;however,as of the date of this filing,neither the House nor Senate bill has been considered by the Senate.If either bill is enacted,our single-family guaranty fees on new acquisitions could decline,which could adversely affect our revenues,our ability to improve our capital position and our ability to meet FHFAs minimum return on equity targets for single-family acquisitions.In addition,the changes in our pricing could significantly affect our single-family loan acquisition volumes,the credit risk profile of our single-family acquisitions,our competitive position,and the type and mix of loans we acquire.Single-Family Pricing Request for InputIn May 2023,FHFA issued a request for input(“RFI”)on the Enterprises single-family pricing framework.The RFI seeks public feedback on the goals and policy priorities that FHFA should pursue in its oversight of the pricing framework,as well as input on the process for setting the Enterprises single-family upfront guaranty fees.Specific topics on which FHFA requested input included,among other things,the appropriate long-term commercially reasonable return on capital threshold for the Enterprises to achieve,whether upfront guaranty fees should be eliminated,and whether risk-based pricing should be calibrated to the enterprise regulatory capital framework.As described in“Risk FactorsGSE and Conservatorship Risk”in our 2022 Form 10-K,FHFAs control over our guaranty fee pricing can constrain our ability to address changing market conditions,pursue certain strategic objectives,or manage the mix of loans we acquire.Multifamily Tenant Protections Request for InputIn May 2023,FHFA issued an RFI to gather input on tenant protections at multifamily properties with mortgages backed by the Enterprises.The RFI states that FHFA is soliciting public input on issues faced by tenants in multifamily properties,and on any opportunities and potential impacts associated with requiring or encouraging specific tenant protections at multifamily properties backed by the Enterprises.Stress TestingThe Dodd-Frank Wall Street Reform and Consumer Protection Act(the“Dodd-Frank Act”)requires certain financial companies to conduct annual stress tests to determine whether the companies have the capital necessary to absorb losses as a result of adverse economic conditions.Under FHFA regulations implementing this requirement,each year we are required to conduct a stress test using two different scenarios of financial conditions provided by FHFAbaseline and severely adverseand to publish a summary of our stress test results for the severely adverse scenario by August 15.MD&A|Legislation and RegulationFannie Mae Second Quarter 2023 Form 10-Q4Following our publication of our 2022 stress test results on our website in August 2022,we discovered errors in a model we use to prepare our annual stress test results that affected these results for 2022 and prior years.We have completed our evaluation of the errors relating to our stress test results for 2018 to 2022.We have posted corrected 2022 and 2021 stress test results for the severely adverse scenario on our website.We posted 2022 results on June 12,2023 and 2021 results on July 27,2023.We determined the errors for 2018,2019 and 2020 were not material and therefore will not post revised stress test results for these years.Quality Control Standards for Automated Valuation Models Proposed RuleIn June 2023,FHFA and five other federal regulatory agencies issued a proposed rule to implement the quality control standards mandated by the Dodd-Frank Act for the use of automated valuation models(referred to as“AVMs”)by mortgage originators and secondary market issuers in determining the collateral worth of a mortgage secured by a consumers principal dwelling.Under the proposed rule,the agencies would require institutions that engage in certain credit decisions or securitization determinations to adopt policies,practices,procedures and control systems to:ensure that AVMs used to determine the value of mortgage collateral in these transactions adhere to quality control standards designed to ensure a high level of confidence in the estimates produced by AVMs;protect against the manipulation of data;seek to avoid conflicts of interest;require random sample testing and reviews;and comply with applicable nondiscrimination laws.Key Market Economic IndicatorsBelow we discuss how varying macroeconomic conditions can influence our financial results across different business and economic environments.Our forecasts and expectations are based on many assumptions,subject to many uncertainties and may change,perhaps substantially,from our current forecasts and expectations.See“Risk Factors”in our 2022 Form 10-K and“Forward-Looking Statements”in this report for a discussion of factors that could cause actual results to differ materially from our current forecasts and expectations.For further discussion on housing activity,see“Single-Family BusinessSingle-Family Mortgage Market”and“Multifamily BusinessMultifamily Mortgage Market.”Selected Benchmark Interest Rates3.02%5.70%6.71%1.83%4.38%5.63%1.47%3.01%3.84%1.43%3.09%3.86%0.15%2.29%5.55%0.05%1.50%5.090-year FRM rate 30-year Fannie Mae MBS par coupon rate10-year Treasury rate10-year swap rate3-month London Inter-Bank Offered Rate(LIBOR)Secured Overnight Financing Rate(SOFR)06/30/2109/30/2112/31/2103/31/2206/30/2209/30/2212/31/2203/31/236/30/2023(1)Refers to the U.S.weekly average fixed-rate mortgage rate according to Freddie Macs Primary Mortgage Market Survey.These rates are reported using the latest available data for a given period.(2)According to Bloomberg.The final U.S.dollar LIBOR bank panel ended on June 30,2023.(3)Refers to the daily rate per the Federal Reserve Bank of New York.MD&A|Legislation and RegulationFannie Mae Second Quarter 2023 Form 10-Q5How Interest Rates Can Affect Our Financial ResultsNet interest income.In a rising interest-rate environment,our mortgage loans generally prepay more slowly as borrowers are less likely to refinance.We amortize various cost basis adjustments over the life of the mortgage loan,including those relating to certain upfront fees we receive at the time we acquire single-family loans.As a result,prepayment of a loan results in an accelerated realization of those upfront fees as income.Therefore,as loan prepayments slow,the accelerated realization of amortization income also slows.Conversely,in a declining interest-rate environment,our mortgage loans generally prepay faster as borrowers are more likely to refinance,typically resulting in the opposite trend of higher amortization income from cost basis adjustments on mortgage loans.Interest rates also affect the amount of interest income we earn on our assets.Our other investments portfolio and our retained mortgage portfolio typically earn more interest income in a higher interest-rate environment and less interest income in a lower interest-rate environment,which,depending on the size of these portfolios,can impact the amount of interest income we recognize during the period.See“Consolidated Results of OperationsNet Interest Income”for a discussion of how interest rate changes impacted our financial results.Fair value gains(losses).We have exposure to fair value gains and losses resulting from changes in interest rates,primarily through our mortgage commitment derivatives and risk management derivatives,which we mark to market through earnings.Fair value gains and losses on our mortgage commitment derivatives fluctuate depending on how interest rates and prices move between the time a commitment is opened and when it settles.The net position and composition across the yield curve of our risk management derivatives changes over time.As a result,interest rate changes(increases or decreases)and yield curve changes(parallel,steepening or flattening shifts)will generate varying amounts of fair value gains or losses in a given period.For more information about fair value gains(losses),including the impact of hedge accounting,see“Consolidated Results of OperationsFair Value Gains,Net.”Benefit(provision)for credit losses.Increases in mortgage interest rates tend to lengthen the expected lives of our loans as borrowers are less likely to refinance,which generally increases the expected impairment and provision for credit losses on loans.Decreases in mortgage interest rates tend to shorten the expected lives of our loans as borrowers are more likely to refinance,which generally reduces the impairment and provision for credit losses on such loans.For more information on benefit(provision)for credit losses,see“Consolidated Results of OperationsBenefit(Provision)for Credit Losses.”Single-Family Quarterly Home Price Growth(Decline)Rate(1)5.4%(0.6)%(1.3)%1.4%3.6nnie Mae national home price index2Q223Q224Q221Q232Q23(1)Calculated internally using property data on loans purchased by Fannie Mae,Freddie Mac and other third-party home sales data.Fannie Maes home price index is a weighted repeat-transactions index,measuring average price changes in repeat sales on the same properties.Fannie Maes home price index excludes prices on properties sold in foreclosure.Fannie Maes home price estimates are based on non-seasonally adjusted preliminary data and are subject to change as additional data becomes available.How Home Prices Can Affect Our Financial ResultsActual and forecasted home prices impact our provision or benefit for credit losses as well as the growth and size of our guaranty book of business.Changes in home prices affect the amount of equity that borrowers have in their homes.Borrowers with less equity typically have higher delinquency and default rates,particularly in times of economic stress.MD&A|Key Market Economic IndicatorsFannie Mae Second Quarter 2023 Form 10-Q6As home prices increase,the severity of losses we incur on defaulted loans that we hold or guarantee decreases because the amount we can recover from the properties securing the loans increases.Declines in home prices increase the losses we incur on defaulted loans.As home prices rise,the principal balance of loans associated with newly acquired purchase loans may increase,causing growth in the size of our guaranty book.Additionally,rising home prices can increase the amount of equity borrowers have in their home,which may lead to an increase in origination volumes for cash-out refinance loans with higher principal balances than the existing loan.Replacing existing loans with newly acquired cash-out refinances can affect the growth and size of our guaranty book.Home prices on a national basis grew by 5.0%in the first half of 2023.We forecast home prices will decline in the second half of 2023;however,as a result of the strong home price growth in the first half of the year,we forecast national home price growth of 3.9%for the full year of 2023.We expect regional variation in home price changes.New Housing Starts(1)1,6351,4461,4061,3861,4471,084901850834929551545556552518(8.3)%(16.9)%(5.7)%(1.9).4%3.0%(1.1)%2.0%(0.7)%(6.1)%quarterly change in multifamily housing starts%quarterly change in single-family housing startsMultifamily starts(in thousands of units)Single-family starts(in thousands)2Q223Q224Q221Q232Q23(1)According to the U.S.Census Bureau and subject to revision.How Housing Activity Can Affect Our Financial ResultsHousing is among the most interest-rate sensitive sectors of the economy.In addition to interest rates,two key aspects of economic activity that can impact supply and demand for housing,and thus our business and financial results,are the rates of household formation and housing construction.Household formation is a key driver of demand for both single-family and multifamily housing as a newly formed household will either rent or purchase a home.Thus,changes in the pace of household formation can affect home prices,multifamily property values and credit performance as well as the degree of loss on defaulted loans.Growth of household formation stimulates homebuilding.Homebuilding has typically been a cyclical leader,weakening prior to a slowdown in U.S.economic activity and accelerating prior to a recovery,which contributes to the growth of U.S.gross domestic product(“GDP”)and employment.A decline in housing starts results in fewer new homes being available for purchase and potentially a lower volume of mortgage originations.Construction activity can also affect credit losses through its impact on home prices.If the growth of demand exceeds the growth of supply,prices will appreciate and impact the risk profile of newly originated home purchase mortgages,depending on where in the housing cycle the market is.A MD&A|Key Market Economic IndicatorsFannie Mae Second Quarter 2023 Form 10-Q7reduced pace of construction is often associated with a broader economic slowdown and may signal expected increases in delinquency and losses on defaulted loans.Although we expect continued increases in new home construction and new home sales over the short term,we expect total home sales to decrease due to a decline in sales of existing homes.We expect existing home sales to decline due to the reluctance of existing homeowners to give up their low mortgage rates and the likelihood of a recession beginning in the fourth quarter of 2023 or the first quarter of 2024.GDP,Unemployment Rate and Personal Consumption12.1%3.0%3.1%1.3%2.0%2.3%1.0%4.2%1.6%7.0%2.7%7.0%(1.6)%(0.6)%3.2%2.6%2.0%2.4%5.9%4.8%3.9%3.6%3.6%3.5%3.5%3.5%3.6%Growth(decline)in U.S.personal consumption,annualized percentage changeGrowth(decline)in GDP,annualized percentage changeU.S.unemployment rate,as of period end2Q213Q214Q211Q222Q223Q224Q221Q232Q23(1)Real GDP growth(decline)and personal consumption growth(decline)are based on the quarterly series calculated by the Bureau of Economic Analysis and are subject to revision.(2)According to the U.S.Bureau of Labor Statistics and subject to revision.How GDP,the Unemployment Rate and Personal Consumption Can Affect Our Financial ResultsChanges in GDP,the unemployment rate and personal consumption can affect several mortgage market factors,including the demand for both single-family and multifamily housing and the level of loan delinquencies,which impacts credit losses.Economic growth is a key factor for the performance of mortgage-related assets.In a growing economy,employment and income are typically rising,thus allowing borrowers to meet payment requirements,existing homeowners to consider purchasing and moving to another home,and renters to consider becoming homeowners.Homebuilding typically increases to meet the rise in demand.Mortgage delinquencies typically fall in an expanding economy,thereby decreasing credit losses.In a slowing economy,income growth and housing activity typically slow as an early indicator of reduced economic activity,followed by slowing employment.Typically,as an economic slowdown intensifies,households reduce their spending.This reduction in consumption then accelerates the slowdown.An economic slowdown can lead to employment losses,impairing the ability of borrowers and renters to meet mortgage and rental payments,thus causing loan delinquencies to rise.Home sales and mortgage originations also typically fall in a slowing economy.GDP increased in the first half of 2023.We expect that a modest recession is likely to occur beginning in the fourth quarter of 2023 or the first quarter of 2024,resulting in an increase in the unemployment rate.We expect our economic outlook will be influenced by a number of factors that are subject to change,such as the persistence of inflationary pressures,the speed at which expected monetary policy tightening is adjusted and the risk of further financial market disruptions.MD&A|Key Market Economic IndicatorsFannie Mae Second Quarter 2023 Form 10-Q8Stress in the banking sector,particularly for regional banks with significant exposure to commercial real estate,could further tighten bank credit conditions,dampen consumer and business confidence,and lead to reduced consumer spending,business investment,and hiring activity.See“Market and Industry Risk”and“Credit Risk”in“Risk Factors”in our 2022 Form 10-K for further discussion of risks to our business and financial results associated with interest rates,home prices,housing activity,economic conditions,and our reliance on institutional counterparties and mortgage servicers.Consolidated Results of OperationsThis section discusses our condensed consolidated results of operations and should be read together with our condensed consolidated financial statements and the accompanying notes.Summary of Condensed Consolidated Results of OperationsFor the Three Months Ended June 30,For the Six Months Ended June 30,20232022Variance20232022Variance(Dollars in millions)Net interest income$7,035$7,808$(773)$13,821$15,207$(1,386)Fee and other income 70 81 (11)133 164 (31)Net revenues 7,105 7,889 (784)13,954 15,371 (1,417)Investment gains(losses),net 25 (49)74 (42)(151)109 Fair value gains,net 404 529 (125)608 1,009 (401)Administrative expenses(864)(795)(69)(1,732)(1,603)(129)Benefit(provision)for credit losses 1,266 (218)1,484 1,134 (458)1,592 TCCA fees(1)(856)(841)(15)(1,711)(1,665)(46)Credit enhancement expense(2)(384)(332)(52)(725)(610)(115)Change in expected credit enhancement recoveries(3)(160)(47)(113)(40)13 (53)Other expenses,net(4)(257)(261)4 (387)(458)71 Income before federal income taxes 6,279 5,875 404 11,059 11,448 (389)Provision for federal income taxes(1,285)(1,222)(63)(2,293)(2,387)94 Net income$4,994$4,653$341$8,766$9,061$(295)Total comprehensive income$4,995$4,649$346$8,767$9,050$(283)(1)TCCA fees refers to the expense recognized as a result of the 10 basis point increase in guaranty fees on all single-family residential mortgages delivered to us on or after April 1,2012 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 and as extended by the Infrastructure Investment and Jobs Act,which we remit to Treasury.For more information on TCCA fees,see“Note 1,Summary of Significant Accounting PoliciesRelated PartiesTransactions with Treasury”in our 2022 Form 10-K.(2)Consists of costs associated with our freestanding credit enhancements,which primarily include our Connecticut Avenue Securities(“CAS”)and Credit Insurance Risk TransferTM(“CIRTTM”)programs,enterprise-paid mortgage insurance and certain lender risk-sharing programs.(3)Includes estimated changes in benefits,as well as any realized amounts,from our freestanding credit enhancements.(4)Consists of debt extinguishment gains and losses,foreclosed property income(expense),gains and losses from partnership investments,housing trust fund expenses,loan subservicing costs,and servicer fees paid in connection with certain loss mitigation activities.Net Interest IncomeOur primary source of net interest income is guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties.Guaranty fees consist of two primary components:base guaranty fees that we receive over the life of the loan;andupfront fees that we receive at the time of loan acquisition primarily related to single-family loan-level price adjustments and other fees we receive from lenders,which are amortized into net interest income as cost basis adjustments over the contractual life of the loan.We refer to this as amortization income.MD&A|Key Market Economic IndicatorsFannie Mae Second Quarter 2023 Form 10-Q9We recognize almost all of our guaranty fee revenue in net interest income because we consolidate the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts in our condensed consolidated balance sheets.Guaranty fees from these loans account for the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.The timing of when we recognize the upfront fees received on loan acquisitions as amortization income can vary based on a number of factors,the most significant of which is a change in mortgage interest rates.Although we amortize these upfront fees over the contractual life of the mortgage loan,when a loan prepays,the remaining upfront fees on the loan are recognized as income in that period.As a result,in a declining interest-rate environment,our mortgage loans generally prepay faster as borrowers are more likely to refinance,typically resulting in higher amortization income as it accelerates the realization of those upfront fees as income.Conversely,in a rising interest-rate environment,our mortgage loans generally prepay more slowly as borrowers are less likely to refinance,which typically results in lower amortization income as those upfront fees are amortized over a longer period of time.We also recognize net interest income on the difference between interest income earned on the assets in our retained mortgage portfolio and our other investments portfolio(collectively,our“portfolios”)and the interest expense associated with the debt that funds those assets.See“Retained Mortgage Portfolio”and“Liquidity and Capital ManagementLiquidity ManagementOther Investments Portfolio”for more information about our portfolios.We recognize the effects of hedge accounting as a component of net interest income,as demonstrated in the table below.As of June 30,2023,we had$4.2 billion in net cumulative fair value hedge basis adjustments,which will be amortized as net expenses over the remaining contractual life of the respective hedged items in the“Income(expense)from hedge accounting”line item in the table below.The substantial majority of these hedge basis adjustments relate to our funding debt.See“Fair Value Gains,Net”below and“Note 8,Derivative Instruments”in this report for more information about our hedge accounting program,as well as“Note 1,Summary of Significant Accounting Policies”in our 2022 Form 10-K.MD&A|Consolidated Results of OperationsFannie Mae Second Quarter 2023 Form 10-Q10The table below displays the components of our net interest income from our guaranty book of business,which we discuss in“Guaranty Book of Business,”and from our portfolios,as well as from hedge accounting.Components of Net Interest IncomeFor the Three Months Ended June 30,For the Six Months Ended June 30,20232022Variance20232022Variance(Dollars in millions)Net interest income from guaranty book of business:Base guaranty fee income(1)$4,025$4,078$(53)$8,017$7,975$42 Base guaranty fee income related to TCCA(2)856 841 15 1,711 1,665 46 Net amortization income(3)888 2,121 (1,233)1,669 4,495 (2,826)Total net interest income from guaranty book of business 5,769 7,040 (1,271)11,397 14,135 (2,738)Net interest income from portfolios(4)1,568 711 857 2,958 953 2,005 Income(expense)from hedge accounting(302)57 (359)(534)119 (653)Total net interest income$7,035$7,808$(773)$13,821$15,207$(1,386)Income(expense)from hedge accounting included in net interest income:Fair value losses on designated risk management derivatives in fair value hedges$(371)$(231)$(140)$(153)$(1,528)$1,375 Fair value gains on hedged mortgage loans held for investment and debt of Fannie Mae(5)525 404 121 463 1,789 (1,326)Contractual interest income(expense)accruals related to interest-rate swaps designated as hedging instruments(266)(2)(264)(469)37 (506)Discontinued hedge-related basis adjustment amortization(190)(114)(76)(375)(179)(196)Total income(expense)from hedge accounting in net interest income$(302)$57$(359)$(534)$119$(653)(1)Excludes revenues generated by the 10 basis point guaranty fee increase we implemented pursuant to the TCCA,the incremental revenue from which is remitted to Treasury and not retained by us.(2)Represents revenues generated by the 10 basis point guaranty fee increase we implemented pursuant to the TCCA,the incremental revenue from which is remitted to Treasury and not retained by us.(3)Net amortization income refers primarily to the amortization of premiums and discounts on mortgage loans and debt of consolidated trusts.These cost basis adjustments represent the difference between the initial fair value and the carrying value of these instruments as well as upfront fees we receive at the time of loan acquisition.It does not include the amortization of cost basis adjustments resulting from hedge accounting,which is included in income(expense)from hedge accounting.(4)Includes interest income from assets held in our retained mortgage portfolio and our other investments portfolio,as well as other assets used to support lender liquidity.Also includes interest expense associated with the debt that funds those assets and our outstanding Connecticut Avenue Securities debt.(5)Amounts are recorded as cost basis adjustments on the hedged loans or debt and amortized over the hedged items remaining contractual life beginning at the termination of the hedging relationship.See“Note 8,Derivative Instruments”for additional information on the effect of our fair value hedge accounting program and related disclosures.Net interest income decreased in the second quarter and first half of 2023 compared with the second quarter and first half of 2022,primarily as a result of lower net amortization income partially offset by higher income from portfolios.Lower net amortization income.Throughout the second quarter and first half of 2023,we were in a higher interest-rate environment and observed significantly lower volumes of refinancing activity compared with the second quarter and first half 2022,which drove fewer loan prepayments.As a result,we had lower amortization income in the second quarter and first half of 2023 compared with the second quarter and first half of 2022.MD&A|Consolidated Results of OperationsFannie Mae Second Quarter 2023 Form 10-Q11Higher income from portfolios.Higher income from portfolios in the second quarter and first half of 2023 compared with the second quarter and first half of 2022 was primarily driven by higher interest rates in the first half of 2023 than in the first half of 2022 on securities in our other investments portfolio,primarily U.S.Treasuries and securities purchased under agreements to resell.This was partially offset by higher interest expense on funding debt,also as a result of higher interest rates.See“Liquidity and Capital ManagementLiquidity ManagementOther Investments Portfolio”for more information about our other investments portfolio.We expect significantly lower amortization income in 2023 compared with 2022,driven by our expectation that refinancing activity will remain low,as we expect most single-family loans in our guaranty book of business will continue to have interest rates significantly lower than current market rates.However,we expect the decline in our amortization income in 2023 to be partially offset by higher interest income on our other investments portfolio.As of June 29,2023,the U.S.weekly average interest rate for a single-family 30-year fixed-rate mortgage was 6.71%,according to Freddie Macs Primary Mortgage Market Survey.Ninety percent of our single-family conventional guaranty book of business as of June 30,2023 had an interest rate below 5.50%,resulting in a low likelihood these loans would refinance at current rates.In addition,over 70%of our single-family conventional guaranty book of business as of June 30,2023 had an interest rate below 4.00%.Accordingly,even if interest rates decline meaningfully from current levels,most of the borrowers whose loans are in our single-family conventional guaranty book of business still would not be incentivized to refinance.Analysis of Net Interest IncomeThe table below displays an analysis of our net interest income,average balances and related yields earned on assets and incurred on liabilities.For most components of the average balances,we use a daily weighted average of unpaid principal balance net of unamortized cost basis adjustments.When daily average balance information is not available,such as for mortgage loans,we use monthly averages.Analysis of Net Interest Income and Yield(1)For the Three Months Ended June 30,20232022Average Balance Interest Income/(Expense)Average Rates Earned/PaidAverage BalanceInterest Income/(Expense)Average Rates Earned/Paid(Dollars in millions)Interest-earning assets:Mortgage loans of Fannie Mae$51,961$611 4.70%$63,702$945 5.93%Mortgage loans of consolidated trusts 4,075,543 32,044 3.15 4,021,070 28,137 2.80 Total mortgage loans(2)4,127,504 32,655 3.16 4,084,772 29,082 2.85 Investments in securities(3)117,921 1,101 3.73 136,680 318 0.93 Securities purchased under agreements to resell 41,131 524 5.10 16,171 28 0.69 Advances to lenders 3,798 60 6.32 5,508 27 1.96 Total interest-earning assets$4,290,354$34,340 3.20%$4,243,131$29,455 2.78%Interest-bearing liabilities:Short-term funding debt$14,841$(183)4.93%$3,125$(5)0.64%Long-term funding debt 119,572 (936)3.13 143,064 (539)1.51 CAS debt 4,319 (109)10.09 10,046 (128)5.10 Total debt of Fannie Mae 138,732 (1,228)3.54 156,235 (672)1.72 Debt securities of consolidated trusts held by third parties 4,078,979 (26,077)2.56 4,024,468 (20,975)2.08 Total interest-bearing liabilities$4,217,711$(27,305)2.59%$4,180,703$(21,647)2.07%Net interest income/net interest yield$7,035 0.66%$7,808 0.74%MD&A|Consolidated Results of OperationsFannie Mae Second Quarter 2023 Form 10-Q12For the Six Months Ended June 30,20232022Average Balance Interest Income/(Expense)Average Rates Earned/PaidAverage BalanceInterest Income/(Expense)Average Rates Earned/Paid(Dollars in millions)Interest-earning assets:Mortgage loans of Fannie Mae$52,251$1,218 4.66%$65,006$1,574 4.84%Mortgage loans of consolidated trusts 4,074,813 63,574 3.12 3,983,347 54,650 2.74 Total mortgage loans(2)4,127,064 64,792 3.14 4,048,353 56,224 2.78 Investments in securities(3)116,882 2,082 3.54 146,941 484 0.66 Securities purchased under agreements to resell 38,951 942 4.81 18,260 34 0.37 Advances to lenders 3,082 94 6.07 6,233 53 1.69 Total interest-earning assets$4,285,979$67,910 3.17%$4,219,787$56,795 2.69%Interest-bearing liabilities:Short-term funding debt$12,733$(302)4.72%$4,019$(6)0.30%Long-term funding debt 119,016 (1,744)2.93 158,158 (1,089)1.38 CAS debt 4,727 (232)9.82 10,444 (247)4.73 Total debt of Fannie Mae 136,476 (2,278)3.34 172,621 (1,342)1.55 Debt securities of consolidated trusts held by third parties 4,078,066 (51,811)2.54 3,995,645 (40,246)2.01 Total interest-bearing liabilities$4,214,542$(54,089)2.57%$4,168,266$(41,588)2.00%Net interest income/net interest yield$13,821 0.64%$15,207 0.72%(1)Includes the effects of discounts,premiums and other cost basis adjustments.(2)Average balance includes mortgage loans on nonaccrual status.Interest income from yield maintenance revenue and the amortization of loan fees,primarily consisting of upfront cash fees,was$746 million and$1.4 billion,respectively,for the second quarter of 2023 and first half of 2023,compared with$1.4 billion and$3.2 billion,respectively,for the second quarter of 2022 and first half of 2022.(3)Consists of cash,cash equivalents,U.S.Treasury securities and mortgage-related securities.Deferred Amortization IncomeWe initially recognize mortgage loans and debt of consolidated trusts in our condensed consolidated balance sheets at fair value.The difference between the initial fair value and the carrying value of these instruments is recorded as a cost basis adjustment,either as a premium or a discount,in our condensed consolidated balance sheets.We amortize these cost basis adjustments over the contractual lives of the loans or debt.On a net basis,for mortgage loans and debt of consolidated trusts,we are in a premium position with respect to debt of consolidated trusts,which represents deferred income we will recognize in our condensed consolidated statements of operations and comprehensive income as amortization income in future periods.Deferred Amortization Income Represented by Net Premium Positionon Debt of Consolidated Trusts(Dollars in billions)$23.4$22.4$21.56/30/202212/31/20226/30/2023MD&A|Consolidated Results of OperationsFannie Mae Second Quarter 2023 Form 10-Q13Fair Value Gains,NetThe estimated fair value of our derivatives,trading securities and other financial instruments carried at fair value may fluctuate substantially from period to period because of changes in interest rates,the yield curve,spreads and implied volatility,as well as activity related to these financial instruments.We apply fair value hedge accounting to reduce earnings volatility in our financial statements driven by changes in benchmark interest rates.Accordingly,we recognize the fair value gains and losses and the contractual interest income and expense associated with risk management derivatives designated in qualifying hedging relationships in net interest income.For more information about our hedge accounting program,see“Impact of Hedge Accounting on Fair Value Gains(Losses),Net”below and“Note 8,Derivative Instruments”in this report,as well as“Market Risk Management,including Interest-Rate Risk Management”and“Note 1,Summary of Significant Accounting Policies”in our 2022 Form 10-K.The table below displays the components of our fair value gains and losses.Fair Value Gains,NetFor the Three Months Ended June 30,For the Six Months Ended June 30,2023202220232022(Dollars in millions)Risk management derivatives fair value gains(losses)attributable to:Net contractual interest expense on interest-rate swaps$(394)$(30)$(775)$(2)Net change in fair value during the period 505 (219)692 (1,702)Impact of hedge accounting(1)637 233 622 1,491 Risk management derivatives fair value gains(losses),net 748 (16)539 (213)Mortgage commitment derivatives fair value gains,net 198 844 84 2,416 Credit enhancement derivatives fair value gains(losses),net 29 (29)14 (51)Total derivatives fair value gains,net 975 799 637 2,152 Trading securities gains(losses),net(723)(665)23 (2,435)Long-term debt fair value gains(losses),net 219 558 (50)1,637 Other,net(2)(67)(163)(2)(345)Fair value gains,net$404$529$608$1,009(1)The“Impact of hedge accounting”reflected in this table shows the net gain or loss from swaps in hedging relationships plus any accrued interest during the applicable periods.(2)Consists primarily of fair value gains and losses on mortgage loans held at fair value.Fair value gains,net in the second quarter of 2023 were primarily driven by gains on:risk management derivatives due to rising interest rates;andlong-term debt of consolidated trusts held at fair value due to rising interest rates and widening of the secondary spread,which is the spread between the 30-year MBS current coupon yield and 10-year U.S.Treasury rate.These gains were partially offset by losses on trading securities,primarily driven by rising interest rates,which resulted in losses on fixed-rate securities as prices fell.Fair value gains,net in the first half of 2023 were primarily driven by rising interest rates,which drove gains on risk management derivatives.Fair value gains,net in the second quarter and first half of 2022 were primarily driven by:increases in the fair value of mortgage commitment derivatives due to gains on commitments to sell mortgage-related securities as prices decreased during the commitment period due to rising interest rates and widening of the secondary spread;and gains on the fair value of long-term debt of consolidated trusts held at fair value,also due to rising interest rates and widening of the secondary spread.MD&A|Consolidated Results of OperationsFannie Mae Second Quarter 2023 Form 10-Q14These gains were partially offset by fair value losses in the second quarter and first half of 2022 on trading securities,primarily driven by increases in U.S.Treasury yields,which resulted in losses on fixed-rate securities held in our other investments portfolio.Impact of Hedge Accounting on Fair Value Gains(Losses),NetOur earnings can experience volatility due to interest-rate changes and differing accounting treatments that apply to certain financial instruments on our balance sheet.To help address this volatility,we apply hedge accounting to reduce the current-period impact on our earnings related to changes in specified benchmark interest rates.Hedge accounting aligns the timing of when we recognize fair value changes in hedged items attributable to these benchmark interest-rate movements with fair value changes in the hedging instrument.For additional information on our hedge accounting program,see“Risk ManagementMarket Risk Management,including Interest-Rate Risk ManagementEarnings Exposure to Interest-Rate Risk”in our 2022 Form 10-K and in this report and“Note 8,Derivative Instruments”in this report.For additional discussion of our fair value hedge accounting policy,see“Note 1,Summary of Significant Accounting Policies”in our 2022 Form 10-K.The table below displays the amount of contractual interest accruals and fair value gains and losses related to designated interest-rate swaps in qualifying hedging relationships that are recognized in“Net interest income”rather than“Fair value gains,net”in our condensed consolidated statements of operations and comprehensive income as a result of hedge accounting.Derivatives not in hedging relationships are not affected.Impact of Hedge Accounting on Fair Value Gains(Losses),NetFor the Three Months Ended June 30,For the Six Months Ended June 30,2023202220232022(Dollars in millions)Net contractual interest income(expense)accruals related to interest-rate swaps designated as hedging instruments recognized in net interest income$(266)$(2)$(469)$37 Fair value losses on derivatives designated as hedging instruments recognized in net interest income(371)(231)(153)(1,528)Fair value losses,net recognized in net interest income(expense)from hedge accounting$(637)$(233)$(622)$(1,491)Benefit(Provision)for Credit LossesOur benefit or provision for credit losses can vary substantially from period to period based on a number of factors,such as changes in actual and forecasted home prices or property valuations,fluctuations in actual and forecasted interest rates,borrower payment behavior,events such as natural disasters or pandemics,the types,volume and effectiveness of our loss mitigation activities,including forbearances and loan modifications,the volume of foreclosures completed and the volume and pricing of loans redesignated from held for investment(“HFI”)to held for sale(“HFS”).The benefit or provision for credit losses includes our benefit or provision for loan losses,accrued interest receivable losses,our guaranty loss reserves and credit losses on our available-for-sale(“AFS”)debt securities.Our benefit or provision for credit losses and our related loss reserves can also be impacted by updates to the models,assumptions and data used in determining our allowance for loan losses.Although we believe the estimates underlying our allowance as of June 30,2023 are reasonable,they are subject to uncertainty.Changes in future economic conditions and loan performance from our current expectations may result in volatility in our allowance for loan losses and,as a result,our benefit or provision for credit losses.See“Critical Accounting Estimates”for additional information about how our estimate of credit losses is subject to uncertainty.MD&A|Consolidated Results of OperationsFannie Mae Second Quarter 2023 Form 10-Q15The table below provides a quantitative analysis of the drivers of our single-family and multifamily benefit or provision for credit losses and the change in expected credit enhancement recoveries.Many of the drivers that contribute to our benefit or provision for credit losses overlap or are interdependent.The attribution shown below is based on internal allocation estimates.Components of Benefit(Provision)for Credit Losses and Change in Expected Credit Enhancement RecoveriesFor the Three Months Ended June 30,For the Six Months Ended June 30,2023202220232022(Dollars in millions)Single-family benefit(provision)for credit losses:Changes in loan activity(1)$(390)$(252)$(740)$(591)Redesignation of loans from HFI to HFS (54)(4)Actual and forecasted home prices 1,724 272 2,104 538 Actual and projected interest rates(146)(288)(24)(891)Release of economic concessions(2)17 203 44 603 Other(3)213 (87)81 (131)Single-family benefit(provision)for credit losses 1,418 (206)1,465 (476)Multifamily benefit(provision)for credit losses:Changes in loan activity(1)(74)21 (84)11 Actual and projected interest rates(65)(112)8 (161)Actual and projected economic data(4)(121)82 (303)88 Other(3)108 (3)48 80 Multifamily benefit(provision)for credit losses(152)(12)(331)18 Total benefit(provision)for credit losses(5)$1,266$(218)$1,134$(458)Change in expected credit enhancement recoveries for active loans:Single-family$(223)$(43)$(128)$26 Multifamily 63 (4)81 (13)Change in expected credit enhancement recoveries for active loans$(160)$(47)$(47)$13(1)Primarily consists of loan acquisitions,liquidations and amortization of modification concessions granted to borrowers and write-offs of amounts determined to be uncollectible.For multifamily,“Changes in loan activity”also includes changes in the allowance due to loan delinquencies and the impact of changes in debt service coverage ratios(“DSCRs”)based on updated property financial information,which is used to assess loan credit quality.(2)Represents the benefit from the release of economic concessions related to loans previously designated as troubled debt restructurings that received loss mitigation arrangements during the period.(3)Includes provision for allowance on accrued interest receivable.For single-family,also includes any benefit or provision for our guaranty loss reserves that are not separately included in the other components.(4)Primarily consists of changes attributed to projected property net operating income,actual and projected property values,and labor market forecasts.(5)For purposes of this attribution table,credit losses on AFS securities are excluded.MD&A|Consolidated Results of OperationsFannie Mae Second Quarter 2023 Form 10-Q16Single-Family Benefit(Provision)for Credit Losses Our single-family benefit for credit losses in the second quarter and first half of 2023 was primarily driven by a benefit from actual and forecasted home price growth,partially offset by a provision from changes in loan activity,as described in more detail below:Benefit from actual and forecasted home price growth.During the second quarter and first half of 2023,we observed strong actual home price appreciation.In addition,our updated 2023 home price forecast changed from our prior estimate,resulting in a shift to positive home price appreciation for the year.Higher home prices decrease the likelihood that loans will default and reduce the amount of losses on loans that do default,which impacts our estimate of losses and ultimately reduces our loss reserves and provision for credit losses.See“Key Market Economic Indicators”for additional information about how home prices affect our credit loss estimates,including a discussion of home price growth and declines,and our home price forecast.Also see“Critical Accounting Estimates”for more information about our home price forecast.Provision from changes in loan activity,which includes provision on newly acquired loans.The portion of our single-family acquisitions consisting of purchase loans increased in the second quarter and first half of 2023 compared with the second quarter and first half of 2022.As our acquisitions consisted of a greater percentage of purchase loans,which generally have higher origination loan to value(“LTV”)ratios than refinance loans,the credit profile of our acquisitions weakened.This factor drove a higher estimated risk of default and loss severity in the allowance and therefore a higher credit loss provision for those loans at the time of acquisition.See“Single-Family BusinessSingle-Family Mortgage Credit Risk Management”for more information on our single-family loan acquisitions in the second quarter and first half of 2023.The largest driver of our single-family provision for credit losses in the second quarter and first half of 2022 was an increase in actual and projected interest rates as of June 30,2022 compared with March 31,2022 and December 31,2021.As mortgage rates increased,we expected a decrease in future prepayments on single-family loans,including modified loans accounted for as troubled debt restructurings(“TDRs”).Lower expected prepayments extended the expected lives of these TDR loans,which increased the expected impairment relating to economic concessions provided on them,resulting in a provision for credit losses.Some of the provision from increased actual and projected interest rates in the first half of 2022 was offset by a benefit from actual and forecasted home price growth.While home price growth was strong in the second quarter and first half of 2022,some market indicators at that time suggested that home price growth may have been moderating at a faster pace than indicated by our home price forecast,which reduced the benefit from home price growth recognized in the second quarter and first half of 2022.Multifamily Benefit(Provision)for Credit LossesOur multifamily provision for credit losses for the second quarter and first half of 2023 was primarily driven by decreases in estimated multifamily property values.This resulted in higher estimated LTV ratios on the loans in our multifamily guaranty book of business,which increased our estimate of expected credit losses on these loans.This provision is included in the“actual and projected economic data”line item in the table above.See“Multifamily BusinessMultifamily Mortgage Credit Risk ManagementMultifamily Portfolio Monitoring”for a discussion of risks within specific property types that we are monitoring,including a discussion of seniors housing loans and loans with adjustable-rates.The primary factor that contributed to our multifamily provision for credit losses in the second quarter of 2022 was a provision for higher actual and projected interest rates.This provision was partially offset by a benefit from actual and projected economic data,including strong property value growth,driven by continued demand for multifamily housing.The primary factor that contributed to our multifamily benefit for credit losses in the first half of 2022 was a benefit from actual and projected economic data.This benefit was partially offset by a provision from higher actual and projected interest rates.MD&A|Consolidated Results of OperationsFannie Mae Second Quarter 2023 Form 10-Q17Consolidated Balance Sheet AnalysisThis section discusses our condensed consolidated balance sheets and should be read together with our condensed consolidated financial statements and the accompanying notes.Summary of Condensed Consolidated Balance SheetsAs of June 30,2023December 31,2022Variance(Dollars in millions)Assets Cash and cash equivalents and securities purchased under agreements to resell$85,279$72,552$12,727 Restricted cash and cash equivalents 27,206 29,854 (2,648)Investments in securities,at fair value 51,231 50,825 406 Mortgage loans:Of Fannie Mae 50,293 54,085 (3,792)Of consolidated trusts 4,080,814 4,071,698 9,116 Allowance for loan losses(9,982)(11,347)1,365 Mortgage loans,net of allowance for loan losses 4,121,125 4,114,436 6,689 Deferred tax assets,net 11,990 12,911 (921)Other assets 26,879 24,710 2,169 Total assets$4,323,710$4,305,288$18,422 Liabilities and equityDebt:Of Fannie Mae$137,696$134,168$3,528 Of consolidated trusts 4,094,654 4,087,720 6,934 Other liabilities 22,316 23,123 (807)Total liabilities 4,254,666 4,245,011 9,655 Fannie Mae stockholders equity:Senior preferred stock 120,836 120,836 Other net deficit(51,792)(60,559)8,767 Total equity 69,044 60,277 8,767 Total liabilities and equity$4,323,710$4,305,288$18,422 Cash and Cash Equivalents and Securities Purchased Under Agreements to ResellCash and cash equivalents and securities purchased under agreements to resell increased from December 31,2022 to June 30,2023 primarily driven by our corporate debt issuances outpacing maturities,proceeds from the sale of securities and loans,and the continued accumulation of earnings retained from our operations.For further discussion,see“Liquidity and Capital ManagementLiquidity Management.”Mortgage Loans,Net of Allowance The mortgage loans reported in our condensed consolidated balance sheets are classified as either HFS or HFI and include loans owned by Fannie Mae and loans held in consolidated trusts.Mortgage loans,net of allowance for loan losses modestly increased from December 31,2022 to June 30,2023,driven primarily by acquisition volumes being higher than loan paydowns during the first half of 2023,as well as a decline in our allowance for loan losses.For additional information on our mortgage loans,see“Note 3,Mortgage Loans,”and for additional information on changes in our allowance for loan losses,see“Note 4,Allowance for Loan Losses.”Debt The increase in debt of Fannie Mae from December 31,2022 to June 30,2023 was due to new issuances outpacing redemptions.The increase in debt of consolidated trusts from December 31,2022 to June 30,2023 was primarily driven MD&A|Consolidated Balance Sheet AnalysisFannie Mae Second Quarter 2023 Form 10-Q18by sales of Fannie Mae MBS,which also includes sales of Fannie Mae MBS that were previously held in our retained mortgage portfolio.Sales of Fannie Mae MBS are accounted for as issuances of debt of consolidated trusts in our condensed consolidated balance sheets,since the MBS certificate ownership is transferred from us to a third party.See“Liquidity and Capital ManagementLiquidity ManagementDebt Funding”for a summary of activity in short-term and long-term debt of Fannie Mae.Also see“Note 7,Short-Term and Long-Term Debt”for additional information on our total outstanding debt.Stockholders EquityOur stockholders equity(also referred to as our net worth)increased to$69.0 billion as of June 30,2023,compared with$60.3 billion as of December 31,2022,due to the$8.8 billion in comprehensive income recognized during the first half of 2023.The aggregate liquidation preference of the senior preferred stock increased to$185.5 billion as of June 30,2023 from$181.8 billion as of March 31,2023,due to the$3.8 billion increase in our net worth in the first quarter of 2023.The aggregate liquidation preference of the senior preferred stock will further increase to$190.5 billion as of September 30,2023 due to the$5.0 billion increase in our net worth in the second quarter of 2023.For more information about how this liquidation preference is determined,see“BusinessConservatorship and Treasury AgreementsTreasury AgreementsSenior Preferred Stock”in our 2022 Form 10-K and“Liquidity and Capital ManagementCapital ManagementCapital Activity”in this report.Retained Mortgage PortfolioWe use our retained mortgage portfolio primarily to provide liquidity to the mortgage market through our whole loan conduit and to support our loss mitigation activities,particularly in times of economic stress when other sources of liquidity to the mortgage market may decrease or withdraw.Our retained mortgage portfolio consists of mortgage loans and mortgage-related securities that we own,including Fannie Mae MBS and non-Fannie Mae mortgage-related securities.Assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties are not included in our retained mortgage portfolio.The chart below separates the instruments within our retained mortgage portfolio,measured by unpaid principal balance,into three categories based on each instruments use:Lender liquidity,which includes balances related to our whole loan conduit activity,supports our efforts to provide liquidity to the single-family and multifamily mortgage markets.Loss mitigation supports our loss mitigation efforts through the purchase of delinquent loans from our MBS trusts.Other represents assets that were previously purchased for investment purposes.The majority of the balance of“Other”as of June 30,2023 consisted of Fannie Mae reverse mortgage securities and reverse mortgage loans.We expect the amount of assets in“Other”will continue to decline over time as they liquidate,mature or are sold.Retained Mortgage Portfolio(Dollars in billions)$23.7$30.6$38.5$36.5$15.5$12.4$77.7$79.5Lender liquidityLoss mitigationOther12/31/20226/30/2023MD&A|Consolidated Balance Sheet AnalysisFannie Mae Second Quarter 2023 Form 10-Q19The table below displays the components of our retained mortgage portfolio,measured by unpaid principal balance.Based on the nature of the asset,these balances are included in either“Investments in securities,at fair value”or“Mortgage loans,net of allowance for loan losses”in our“Summary of Condensed Consolidated Balance Sheets”table above.Retained Mortgage PortfolioAs ofJune 30,2023December 31,2022(Dollars in millions)Lender liquidity:Agency securities(1)$23,367$16,410 Mortgage loans 7,256 7,329 Total lender liquidity 30,623 23,739 Loss mitigation mortgage loans(2)36,510 38,458 Other:Reverse mortgage loans(3)4,755 6,565 Mortgage loans 3,306 3,365 Reverse mortgage securities(4)3,600 4,811 Other(5)690 804 Total other 12,351 15,545 Total retained mortgage portfolio$79,484$77,742 Retained mortgage portfolio by segment:Single-family mortgage loans and mortgage-related securities$74,019$73,769 Multifamily mortgage loans and mortgage-related securities$5,465$3,973(1)Consists of Fannie Mae,Freddie Mac and Ginnie Mae mortgage-related securities,including Freddie Mac securities guaranteed by Fannie Mae.Excludes Fannie Mae and Ginnie Mae reverse mortgage securities and Fannie Mae-wrapped private-label securities.(2)Includes single-family loans on nonaccrual status of$6.8 billion and$7.1 billion as of June 30,2023 and December 31,2022,respectively.Also includes multifamily loans on nonaccrual status of$1.0 billion and$243 million as of June 30,2023 and December 31,2022,respectively.(3)We stopped acquiring newly originated reverse mortgage loans in 2010.(4)Consists of Fannie Mae and Ginnie Mae reverse mortgage securities.(5)Consists of private-label and other securities,Fannie Mae-wrapped private-label securities and mortgage revenue bonds.The amount of mortgage assets that we may own is capped at$225 billion under the terms of our senior preferred stock purchase agreement with Treasury.In addition,we are currently required to cap our mortgage assets at$202.5 billion per instructions from FHFA.See“BusinessConservatorship and Treasury Agreements”in our 2022 Form 10-K for additional information on our mortgage assets cap.We include 10%of the notional value of the interest-only securities we hold in calculating the size of the retained portfolio for the purpose of determining compliance with the senior preferred stock purchase agreement retained portfolio limits and associated FHFA guidance.As of June 30,2023,10%of the notional value of our interest-only securities was$1.6 billion,which is not included in the table above.Under the terms of our MBS trust documents,we have the option or,in some instances,the obligation,to purchase mortgage loans that meet specific criteria from an MBS trust.The purchase price for these loans is the unpaid principal balance of the loan plus accrued interest.If a delinquent loan remains in a single-family MBS trust,the servicer is responsible for advancing the borrowers missed scheduled principal and interest payments to the MBS holders for up to four months,after which time we must make these missed payments.In addition,we must reimburse servicers for advanced principal and interest payments.In support of our loss mitigation strategies,we purchased$4.5 billion of loans from our single-family MBS trusts in the first half of 2023,the substantial majority of which were delinquent,compared with$11.2 billion of loans purchased from single-family MBS trusts in the first half of 2022.We expect the amount of loans we buy out of trusts will decrease in 2023 relative to the prior year as loans exiting COVID-19-related forbearance drove a higher number of loan modifications in 2022.The size of our retained mortgage portfolio will be impacted by the volume of loans we ultimately buy,the timing of those purchases,and the length of time those loans remain in our retained mortgage portfolio.MD&A|Retained Mortgage PortfolioFannie Mae Second Quarter 2023 Form 10-Q20Guaranty Book of BusinessOur“guaranty book of business”consists of:Fannie Mae MBS outstanding,excluding the portions of any structured securities we issue that are backed by Freddie Mac securities;mortgage loans of Fannie Mae held in our retained mortgage portfolio;and other credit enhancements that we provide on mortgage assets.“Total Fannie Mae guarantees”consists of:our guaranty book of business;and the portions of any structured securities we issue that are backed by Freddie Mac securities.We and Freddie Mac issue single-family uniform mortgage-backed securities,or“UMBS.”In this report,we use the term“Fannie Mae-issued UMBS”to refer to single-family Fannie Mae MBS that are directly backed by fixed-rate mortgage loans and generally eligible for trading in the to-be-announced(“TBA”)market.We use the term“Fannie Mae MBS”or“our MBS”to refer to any type of mortgage-backed security that we issue,including UMBS,Supers,Real Estate Mortgage Investment Conduit securities(“REMICs”)and other types of single-family or multifamily mortgage-backed securities.Some Fannie Mae MBS that we issue are backed in whole or in part by Freddie Mac securities.When we resecuritize Freddie Mac securities into Fannie Mae-issued structured securities,such as Supers and REMICs,our guaranty of principal and interest extends to the underlying Freddie Mac securities.However,Freddie Mac continues to guarantee the payment of principal and interest on the underlying Freddie Mac securities that we have resecuritized.See“BusinessMortgage SecuritizationsUniform Mortgage-Backed Securities,or UMBSUMBS and Structured Securities”in our 2022 Form 10-K for information regarding the upfront fee we charge to include Freddie Mac securities in our structured securities.Effective April 1,2023,the upfront fee for commingled securities decreased from 50 basis points to 9.375 basis points on the portion of the securities made up of Freddie Mac-issued collateral.References to our single-family guaranty book of business exclude Freddie Mac-acquired mortgage loans underlying Freddie Mac securities that we have resecuritized.Our issuance of structured securities backed in whole or in part by Freddie Mac securities creates additional off-balance sheet exposure.Our guaranty extends to the underlying Freddie Mac security included in the structured security,but we do not have control over the Freddie Mac mortgage loan securitizations.Because we do not have the power to direct matters(primarily the servicing of mortgage loans)that impact the credit risk to which we are exposed,which constitute control of these securitization trusts,we do not consolidate these trusts in our condensed consolidated balance sheet,giving rise to off-balance sheet exposure.See“Liquidity and Capital ManagementLiquidity ManagementOff-Balance Sheet Arrangements”and“Note 6,Financial Guarantees”for information regarding our maximum exposure to loss on unconsolidated Fannie Mae MBS and Freddie Mac securities.The table below displays the composition of our guaranty book of business based on unpaid principal balance.Composition of Fannie Mae Guaranty Book of BusinessAs ofJune 30,2023December 31,2022Single-Family Multifamily Total Single-Family Multifamily Total(Dollars in millions)Conventional guaranty book of business(1)$3,649,552$456,029$4,105,581$3,646,981$442,067$4,089,048 Government guaranty book of business(2)9,879 550 10,429 12,450 572 13,022 Guaranty book of business 3,659,431 456,579 4,116,010 3,659,431 442,639 4,102,070 Freddie Mac securities guaranteed by Fannie Mae(3)224,877 224,877 234,023 234,023 Total Fannie Mae guarantees$3,884,308$456,579$4,340,887$3,893,454$442,639$4,336,093(1)Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured,in whole or in part,by the U.S.government.(2)Refers to mortgage loans and mortgage-related securities guaranteed or insured,in whole or in part,by the U.S.government.(3)Consists of off-balance sheet arrangements of approximately(i)$186.6 billion and$193.9 billion in unpaid principal balance of Freddie Mac-issued UMBS backing Fannie Mae-issued Supers as of June 30,2023 and December 31,2022,respectively;and(ii)$38.3 billion and$40.1 billion in unpaid principal balance of Freddie Mac securities backing Fannie Mae-issued REMICs as of June 30,2023 and December 31,2022,respectively.See“Liquidity and Capital ManagementLiquidity ManagementOff-Balance Sheet Arrangements”for more information regarding our maximum exposure to loss on consolidated Fannie Mae MBS and Freddie Mac securities.MD&A|Guaranty Book of BusinessFannie Mae Second Quarter 2023 Form 10-Q21The Federal Housing Enterprises Financial Safety and Soundness Act of 1992,as amended,including by the Housing and Economic Recovery Act of 2008(together,the“GSE Act”)requires us to set aside each year an amount equal to 4.2 basis points of the unpaid principal balance of our new business purchases and to pay this amount to specified U.S.Department of Housing and Urban Development(“HUD”)and Treasury funds in support of affordable housing.In March 2023,we paid$287 million to the funds based on our new business purchases in 2022.For the first half of 2023,we recognized an expense of$77 million related to this obligation based on$182.2 billion in new business purchases during the period.We expect to pay this amount to the funds in 2024,plus additional amounts to be accrued based on our new business purchases in the second half of 2023.See“BusinessLegislation and RegulationGSE-Focused MattersAffordable Housing Allocations”in our 2022 Form 10-K for more information regarding this obligation.Business SegmentsWe have two reportable business segments:Single-Family and Multifamily.The Single-Family business operates in the secondary mortgage market relating to single-family mortgage loans,which are secured by properties containing four or fewer residential dwelling units.The Multifamily business operates in the secondary mortgage market relating primarily to multifamily mortgage loans,which are secured by properties containing five or more residential units.The chart below displays net revenues and net income for each of our business segments for the first half of 2023 compared with the first half of 2022.Net revenues consist of net interest income and fee and other income.Business Segment Net Revenues and Net Income(Dollars in billions)$13.0$11.7$7.6$7.5Single-Family net revenuesSingle-Family net incomeFirst Half 2022First Half 2023$2.4$2.3$1.5$1.2Multifamily net revenuesMultifamily net incomeFirst Half 2022First Half 2023In the following sections,we describe each segments business metrics,financial results and credit performance.Single-Family BusinessThis section supplements and updates information regarding our Single-Family business segment in our 2022 Form 10-K.See“MD&ASingle-Family Business”in our 2022 Form 10-K for additional information regarding the primary business activities,lenders,investors and competition of our Single-Family business.Single-Family Mortgage MarketHousing activity was relatively flat in the second quarter of 2023 compared with the first quarter of 2023.Total existing home sales averaged 4.25 million units annualized in the second quarter of 2023,compared with 4.33 million units in the first quarter of 2023,according to data from the National Association of REALTORS.According to the U.S.Census Bureau,new single-family home sales averaged an annualized rate of approximately 694,000 units in the second quarter of 2023,compared with approximately 638,000 units in the first quarter of 2023.The 30-year fixed mortgage rate was 6.71%as of June 29,2023,compared with 6.32%as of March 31,2023,and averaged 6.51%in the second quarter of 2023,compared with 6.37%in the first quarter of 2023,according to Freddie Macs Primary Mortgage Market Survey.Single-family mortgage market originations declined from an estimated$683 billion in the second quarter of 2022 to an estimated$443 billion in the second quarter of 2023.According to the July forecast from our Economic and Strategic Research Group,total originations in the U.S.single-family mortgage market in 2023 are forecasted to decrease from 2022 levels by approximately 32%,from an estimated$2.39 trillion in 2022 to$1.62 trillion in 2023,and the amount of MD&A|Guaranty Book of BusinessFannie Mae Second Quarter 2023 Form 10-Q22refinance originations in the U.S.single-family mortgage market will decrease from an estimated$753 billion in 2022 to$264 billion in 2023.Our Economic and Strategic Research Groups July forecast is based on data available as of July 10,2023.See“Key Market Economic Indicators”for additional discussion of how housing activity can affect our financial results and the uncertainties that may affect our forecasts and expectations.Single-Family Mortgage-Related Securities Issuances ShareOur single-family Fannie Mae MBS issuances were$91.6 billion for the second quarter of 2023,compared with$174.5 billion for the second quarter of 2022.This decrease was primarily driven by lower volumes of refinance and purchase lending in the second quarter of 2023 due to higher mortgage rates.Based on the latest data available,the chart below displays our estimated share of single-family mortgage-related securities issuances in the second quarter of 2023 as compared with that of our primary competitors for the issuance of single-family mortgage-related securities.Single-Family Mortgage-Related Securities Issuances ShareSecond Quarter 2023 Fannie Mae:32%Freddie Mac:28%Ginnie Mae:36%Private-label securities:4%We estimate our share of single-family mortgage-related securities issuances was 31%in the first quarter of 2023 and 36%in the second quarter of 2022.Presentation of Our Single-Family Conventional Guaranty Book of BusinessFor purposes of the information reported in this“Single-Family Business”section,we measure the single-family conventional guaranty book of business using the unpaid principal balance of our mortgage loans underlying Fannie Mae MBS outstanding.By contrast,the single-family conventional guaranty book of business presented in the“Composition of Fannie Mae Guaranty Book of Business”table in the“Guaranty Book of Business”section is based on the unpaid principal balance of the Fannie Mae MBS outstanding,rather than the unpaid principal balance of the underlying mortgage loans.These amounts differ primarily as a result of payments we receive on underlying loans that have not yet been remitted to the MBS holders or instances where we have advanced missed borrower payments on mortgage loans to make required distributions to related MBS holders.As measured for purposes of the information reported below,our single-family conventional guaranty book of business was$3,632.4 billion as of June 30,2023 and$3,635.2 billion as of December 31,2022.Single-Family Business Metrics Select Business MetricsNet interest income for our Single-Family business is driven by the guaranty fees we charge and the size of our single-family conventional guaranty book of business.The guaranty fees we charge are based on the characteristics of the loans we acquire.We may adjust our guaranty fees in light of market conditions and to achieve return targets.As a result,the average charged guaranty fee on new acquisitions may fluctuate based on the credit quality and product mix of loans acquired,as well as market conditions and other factors.MD&A|Single-Family Business|Single-Family Mortgage MarketFannie Mae Second Quarter 2023 Form 10-Q23The charts below display our average charged guaranty fees,net of TCCA fees,on our single-family conventional guaranty book of business and on new single-family conventional loan acquisitions,along with our average single-family conventional guaranty book of business and our single-family conventional loan acquisitions for the periods presented.Select Single-Family Business Metrics(Dollars in billions)46.1 bps46.8 bps49.6 bps52.2 bpsQ2 2022Q2 2023$3,590.6$3,630.4$172.3$89.2Q2 2022Q2 2023Average charged guaranty fee on single-family conventional guaranty book of business,net of TCCA fees(1)(3)Average single-family conventional guaranty book of business(2)Average charged guaranty fee on new single-family conventional acquisitions,net of TCCA fees(1)(3)Single-family conventional acquisitions(1)Excludes the impact of a 10 basis point guaranty fee increase implemented pursuant to the TCCA,the incremental revenue from which is remitted to Treasury and not retained by us.(2)Our single-family conventional guaranty book of business primarily consists of single-family conventional mortgage loans underlying Fannie Mae MBS outstanding.It also includes single-family conventional mortgage loans of Fannie Mae held in our retained mortgage portfolio,and other credit enhancements that we provide on single-family conventional mortgage assets.Our single-family conventional guaranty book of business does not include:(a)mortgage loans guaranteed or insured,in whole or in part,by the U.S.government;(b)Freddie Mac-acquired mortgage loans underlying Freddie Mac-issued UMBS that we have resecuritized;or(c)non-Fannie Mae single-family mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.Our average single-family conventional guaranty book of business is based on quarter-end balances.(3)In the fourth quarter of 2022,we enhanced the method we use to estimate average loan life at acquisition.Charged fees reported in prior periods have been updated in this report to reflect this updated methodology.Our single-family conventional loan acquisition volumes remained near historically low levels in the second quarter of 2023.This was primarily driven by historically low refinance volumes due to continued higher interest rates in the second quarter of 2023,as few borrowers could benefit from refinancing.In addition,housing affordability constraints and limited supply continued to put downward pressure on the volume of purchase loans we acquired.Average charged guaranty fee on newly acquired conventional single-family loans is a metric management uses to measure the price we earn as compensation for the credit risk we manage and to assess our return.Average charged guaranty fee represents,on an annualized basis,the average of the base guaranty fees charged during the period for our single-family conventional guaranty arrangements,which we receive monthly over the life of the loan,plus the recognition of any upfront cash payments,including loan-level price adjustments,based on an estimated average life at the time of acquisition.Our average charged guaranty fees on newly acquired conventional single-family loans are sensitive to changes in inputs used in the calculation,including assumptions about the weighted average life of the loans,therefore changes in these charged guaranty fees are not always a result of a change in pricing.Our average charged guaranty fee on newly acquired conventional single-family loans,net of TCCA fees,increased in the second quarter of 2023 compared with the second quarter of 2022,primarily driven by the overall weaker credit risk profile of our second quarter 2023 acquisitions.We generally charge higher guaranty fees on loans with weaker credit risk characteristics.Loans we acquired in the second quarter of 2023 had a weaker credit profile than loans we acquired in the second quarter of 2022 because a significantly larger share of our second quarter 2023 acquisitions were purchase loans,which generally have higher origination LTV ratios than refinance loans.In addition,a greater portion of our second quarter 2023 acquisitions were long-term fixed-rate loans,which generally have higher charged guaranty fees than intermediate-term fixed-rate loans.See“Single-Family Mortgage Credit Risk ManagementSingle-Family Portfolio Diversification and Monitoring”below for a description of key risk characteristics of our single-family acquisitions in the second quarter of 2023 and second quarter of 2022.MD&A|Single-Family Business|Single-Family Business MetricsFannie Mae Second Quarter 2023 Form 10-Q24Recent Price ChangesIn January 2023,FHFA announced changes to our single-family pricing framework by introducing redesigned and recalibrated upfront fee matrices for purchase,rate-term refinance,and cash-out refinance loans,in addition to a new upfront fee for certain borrowers with debt-to-income ratios above 40%.These price changes took effect on May 1,2023,with the exception of the new upfront fee for certain borrowers with debt-to-income ratios above 40%,which FHFA rescinded.See“MD&ASingle-Family BusinessSingle-Family Business Metrics”in our 2022 Form 10-K for more information on the recent price changes on our single-family loan acquisitions.See“Legislation and Regulation”in this report for a description of potential future single-family loan price changes that may result from recent bills introduced in Congress and FHFAs request for input on Fannie Mae and Freddie Macs single-family pricing framework.Single-Family Business Financial ResultsThis section provides a discussion of the primary components of net income for our Single-Family business.This information complements the discussion of financial results in“Consolidated Results of Operations.”Single-Family Business Financial Results(1)For the Three Months Ended June 30,For the Six Months Ended June 30,20232022Variance20232022Variance(Dollars in millions)Net interest income(2)$5,917$6,573$(656)$11,589$12,828$(1,239)Fee and other income 52 60 (8)100 121 (21)Net revenues 5,969 6,633 (664)11,689 12,949 (1,260)Investment gains(losses),net 27 (27)54 (44)(93)49 Fair value gains,net 460 543 (83)626 1,070 (444)Administrative expenses(718)(671)(47)(1,438)(1,354)(84)Benefit(provision)for credit losses 1,418 (206)1,624 1,465 (476)1,941 TCCA fees(2)(856)(841)(15)(1,711)(1,665)(46)Credit enhancement expense(327)(270)(57)(614)(480)(134)Change in expected credit enhancement recoveries(3)(223)(43)(180)(128)26 (154)Other expenses,net(4)(203)(224)21 (319)(388)69 Income before federal income taxes 5,547 4,894 653 9,526 9,589 (63)Provision for federal income taxes(1,153)(1,008)(145)(2,000)(1,994)(6)Net income$4,394$3,886$508$7,526$7,595$(69)(1)See“Note 9,Segment Reporting”for information about our segment allocation methodology.(2)Reflects the impact of a 10 basis point guaranty fee increase implemented pursuant to the TCCA,the incremental revenue from which is remitted to Treasury.The resulting revenue is included in“Net interest income”and the expense is recognized as“TCCA fees.”(3)Includes estimated changes in benefits,as well as any realized amounts,from our single-family freestanding credit enhancements,which primarily relate to our CAS and CIRTTM programs.(4)Consists of debt extinguishment gains and losses,foreclosed property income(expense),gains and losses from partnership investments,housing trust fund expenses,loan subservicing costs,and servicer fees paid in connection with certain loss mitigation activities.Net Interest IncomeThe decrease in single-family net interest income in the second quarter and first half of 2023 compared with the second quarter and first half of 2022 was primarily the result of lower net amortization income,partially offset by higher income from portfolios.The drivers of net interest income for the Single-Family segment are consistent with the drivers of net interest income in our condensed consolidated statements of operations and comprehensive income,which we discuss in“Consolidated Results of OperationsNet Interest Income.”Fair Value Gains,NetFair value gains,net in the second quarter of 2023 were primarily driven by gains on risk management derivatives and long-term debt of consolidated trusts held at fair value,partially offset by losses on trading securities.MD&A|Single-Family Business|Single-Family Business MetricsFannie Mae Second Quarter 2023 Form 10-Q25Fair value gains,net in the first half of 2023 were primarily driven by gains on risk management derivatives.Fair value gains,net in the second quarter and first half of 2022 were driven by gains as a result of increases in the fair value of mortgage commitment derivatives and gains on the fair value of long-term debt of consolidated trusts held at fair value,which were partially offset by fair value losses on trading securities.The drivers of fair value gains,net for the Single-Family segment are consistent with the drivers of fair value gains,net in our condensed consolidated statements of operations and comprehensive income,which we discuss in“Consolidated Results of OperationsFair Value Gains,Net.”Benefit(Provision)for Credit LossesOur single-family benefit for credit losses in the second quarter and first half of 2023 was primarily driven by a benefit from actual and forecasted home prices,partially offset by a provision from changes in loan activity,which includes provision on newly acquired loans.The largest driver of provision for credit losses for the second quarter and first half of 2022 was a provision for higher actual and projected interest rates due to interest rate increases in the first half of 2022.Some of the provision from increased actual and projected interest rates in the second quarter and first half of 2022 was offset by a benefit from actual and forecasted home price growth.See“Consolidated Results of OperationsBenefit(Provision)for Credit Losses”for more information on the primary factors that contributed to our single-family benefit or provision for credit losses.Single-Family Mortgage Credit Risk ManagementThis section updates our discussion of single-family mortgage credit risk management in our 2022 Form 10-K.For additional information on our acquisition and servicing policies,underwriting and servicing standards,quality control process,repurchase requests,and representation and warranty framework,see“MD&ASingle-Family BusinessSingle-Family Mortgage Credit Risk Management”in our 2022 Form 10-K.Single-Family Portfolio Diversification and MonitoringThe following table displays our single-family conventional business volumes and our single-family conventional guaranty book of business,based on certain key risk characteristics that we use to evaluate the risk profile and credit quality of our single-family loans.We provide additional information on the credit characteristics of our single-family loans in quarterly financial supplements,which we furnish to the Securities and Exchange Commission(the“SEC”)with current reports on Form 8-K and make available on our website.MD&A|Single-Family Business|Single-Family Business Financial ResultsFannie Mae Second Quarter 2023 Form 10-Q26Key Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)Percent of Single-Family Conventional Business Volume at Acquisition(2)Percent of Single-Family ConventionalGuaranty Book of Business(3)As ofFor the Three Months Ended June 30,For the Six Months Ended June 30,2023202220232022June 30,2023December 31,2022Original loan-to-value(“LTV”)ratio:(4)=60!%&.01%to 70 12 10 14 14 15 70.01%to 803 33 33 33 33 33 80.01%to 90 12 16 10 11 10 90.01%to 95 17 19 13 11 11 95.01%to 100%7 5 6 5 4 4 Greater than 100%*1 1 Total 10000000%Weighted average 78uxssr%Average loan amount$317,748$300,556$316,117$299,852$206,929$206,049 Loan count(in thousands)281 573 496 1,373 17,554 17,643 Estimated mark-to-market LTV ratio:(5)=60hf.01%to 70 16 70.01%to 80 10 80.01%to 90%5 5 90.01%to 100%2 3 Greater than 100%*Total 1000%Weighted average 51R%FICO credit score at origination:(6)620*%*%*%*%*%1b0 to 660 2 4 3 4 4 4 660 to 680 3 5 3 5 4 4 680 to 700 5 8 6 8 6 6 700 to=740 70 61 67 62 66 66 Total 10000000%Weighted average 756 746 753 747 752 752 Debt-to-income(“DTI”)ratio at origination:(7)=43fhepuuC.01%to 45 10 10 10 9 9 Greater than 45$ 22 25 20 16 16 Total 10000000%Weighted average 3878655%MD&A|Single-Family Business|Single-Family Mortgage Credit Risk ManagementFannie Mae Second Quarter 2023 Form 10-Q27Percent of Single-Family Conventional Business Volume at Acquisition(2)Percent of Single-Family ConventionalGuaranty Book of Business(3)As ofFor the Three Months Ended June 30,For the Six Months Ended June 30,2023202220232022June 30,2023December 31,2022Product type:Fixed-rate:(8)Long-term 95%Intermediate-term 4 8 4 11 12 13 Total fixed-rate 99 99 99 99 99 99 Adjustable-rate 1 1 1 1 1 1 Total 10000000%Number of property units:1 unit 98%2-4 units 2 2 2 2 2 2 Total 10000000%Property type:Single-family homes 91%Condo/Co-op 9 9 9 9 9 9 Total 10000000%Occupancy type:Primary residence 92%Second/vacation home 2 2 2 3 3 3 Investor 6 7 6 6 6 6 Total 10000000%Loan purpose:Purchase 86dRBsh-out refinance 10 26 10 30 21 22 Other refinance 4 10 5 18 37 38 Total 10000000%Geographic concentration:(9)Midwest 14%Northeast 12 12 12 13 16 16 Southeast 30 27 29 26 23 23 Southwest 24 24 25 22 19 19 West 20 24 21 27 28 28 Total 10000000%Origination year:2017 and prior 20 18 2 2 2019 4 5 2020 25 25 2021 31 32 2022 14 14 2023 4 Total 1000%*Represents less than 0.5%of single-family conventional business volume or guaranty book of business.MD&A|Single-Family Business|Single-Family Mortgage Credit Risk ManagementFannie Mae Second Quarter 2023 Form 10-Q28(1)Second-lien mortgage loans held by third parties are not reflected in the original LTV or the estimated mark-to-market LTV ratios in this table.(2)Calculated based on the unpaid principal balance of single-family loans for each category at time of acquisition.(3)Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of the end of each period.(4)The original LTV ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value reported to us at the time of acquisition of the loan.Excludes loans for which this information is not readily available.(5)The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property,which we calculate using an internal valuation model that estimates periodic changes in home value.Excludes loans for which this information is not readily available.(6)Loans with unavailable FICO credit scores represent less than 0.5%of single-family conventional business volume or guaranty book of business,and therefore are not presented separately in this table.(7)Excludes loans for which this information is not readily available.(8)Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years,while intermediate-term fixed-rate loans have maturities equal to or less than 15 years.(9)Midwest consists of IL,IN,IA,MI,MN,NE,ND,OH,SD and WI.Northeast consists of CT,DE,ME,MA,NH,NJ,NY,PA,PR,RI,VT and VI.Southeast consists of AL,DC,FL,GA,KY,MD,MS,NC,SC,TN,VA and WV.Southwest consists of AZ,AR,CO,KS,LA,MO,NM,OK,TX and UT.West consists of AK,CA,GU,HI,ID,MT,NV,OR,WA and WY.Characteristics of our New Single-Family Loan AcquisitionsRefinancing activity was significantly lower in the second quarter of 2023 compared with the second quarter of 2022 as the sharp rise in interest rates over the last year resulted in fewer borrowers who could benefit from refinancing.Accordingly,the share of our single-family loan acquisitions consisting of refinance loans(versus home purchase loans)decreased to 14%in the second quarter of 2023 compared with 36%in the second quarter of 2022.Typically,home purchase loans have higher LTV ratios than refinance loans.This trend contributed to an increase in the percentage of our single-family loan acquisitions with LTV ratios over 80%,from 34%in the second quarter of 2022 to 41%in the second quarter of 2023.Our share of acquisitions of loans with DTI ratios above 45%increased to 24%in the second quarter of 2023 compared with 22%in the second quarter of 2022.This increase was also driven by the higher share of home purchase acquisitions,which tend to have higher DTI ratios than refinance loan acquisitions.It also reflects the impact of higher interest rates and inflation on borrowers monthly obligations.For a discussion of factors that may impact the volume and credit characteristics of loans we acquire in the future,see“MD&ASingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Portfolio Diversification and Monitoring”in our 2022 Form 10-K.In this section of our 2022 Form 10-K,we also provide more information on the credit characteristics of loans in our single-family conventional guaranty book of business,including high-balance loans and adjustable-rate mortgages.Single-Family Credit Enhancement and Transfer of Mortgage Credit RiskOur charter generally requires credit enhancement on any single-family conventional mortgage loan that we purchase or securitize if it has an LTV ratio over 80%at the time of purchase.
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549_FORM 10-Q _(Mark One)QUARTERLY R.
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549_FORM 10-Q_(Mark One)QUARTERLY RE.
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Half-Year Financial Report2023BASF Group Half-Year Financial ReportOn the cover and this page:BASF i.
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2023Interim ReportStock Code:1398Industrial and Commercial Bank of China was established on 1 Januar.
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Performing while transformingFinancial summarySecondFirstSecondFirstFirstquarterquarterquarterhalfha.
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Shell plc|July 27,2023Strong operational and cash performance,enhanced distributions Second quarter 2023 resultsShell plcJuly 27,2023Shell plc|July 27,20232This presentation includes certain measures that are calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles(GAAP)such as IFRS,including Adjusted Earnings,Adjusted EBITDA,CFFO excluding working capital movements,Cash capital expenditure,free cash flow,Divestment proceeds and Net debt.This information,along with comparable GAAP measures,is useful to investors because it provides a basis for measuring Shell plcs operating performance and ability to retire debt and invest in new business opportunities.Shell plcs management uses these financial measures,along with the most directly comparable GAAP financial measures,in evaluating the business performance.This presentation contains a forward-looking non-GAAP measure for cash capital expenditure and divestments.We are unable to provide a reconciliation of this forward-looking non-GAAP measure to the most comparable GAAP financial measure because certain information needed to reconcile the non-GAAP measure to the most comparable GAAP financial measure is dependent on future events some of which are outside the control of the company,such as oil and gas prices,interest rates and exchange rates.Moreover,estimating such GAAP measure with the required precision necessary to provide a meaningful reconciliation is extremely difficult and could not be accomplished without unreasonable effort.Non-GAAP measures in respect of future periods which cannot be reconciled to the most comparable GAAP financial measure are estimated in a manner which is consistent with the accounting policies applied in Shell plcs consolidated financial statements.“Adjusted Earnings”is the income attributable to Shell plc shareholders for the period,adjusted for the after-tax effect of oil price changes on inventory and for identified items,and excludes earnings attributable to non-controlling interest.In this presentation,“earnings”refers to“Adjusted Earnings”unless stated otherwise.We define“Adjusted EBITDA“as“Income/(loss)for the period“adjusted for current cost of supplies;identified items;tax charge/(credit);depreciation,amortisation and depletion;exploration well write-offs and net interest expense.All items include the non-controlling interest component.In this presentation,“operating expenses”,“costs”and“underlying costs”refer to“Underlying operating expenses”unless stated otherwise.Underlying operating expenses represent“operating expenses excluding identified items”.Operating expenses consist of the following lines in the Consolidated Statement of Income:(i)production and manufacturing expenses;(ii)selling,distribution and administrative expenses;and(iii)research and development expenses.Cash flow from operating activities excluding working capital movements is defined as“Cash flow from operating activities”less the sum of the following items in the Consolidated Statement of Cash Flows:(i)(increase)/decrease in inventories,(ii)(increase)/decrease in current receivables,and(iii)increase/(decrease)in current payables.In this presentation,“capex”refers to“Cash capital expenditure”unless stated otherwise.Cash capital expenditure comprises the following lines from the Consolidated Statement of Cash Flows:Capital expenditure,Investments in joint ventures and associates and Investments in equity securities.Free cash flow is defined as the sum of“Cash flow from operating activities”and“Cash flow from investing activities”.Organic free cash flow is defined as free cash flow excluding inorganic cash capital expenditure,divestment proceeds,and tax paid on divestments.In this presentation,“divestments”refers to“divestment proceeds”unless stated otherwise.Divestment proceeds are defined as the sum of(i)proceeds from sale of property,plant and equipment and businesses,(ii)proceeds from sale of joint ventures and associates,and(iii)proceeds from sale of equity securities.Net debt is defined as the sum of current and non-current debt,less cash and cash equivalents,adjusted for the fair value of derivative financial instruments used to hedge foreign exchange and interest rate risks relating to debt,and associated collateral balances.Reconciliations of the above non-GAAP measures are included in the Shell plc Unaudited Condensed Financial Report for the second quarter and half year ended June 30,2023.The companies in which Shell plc directly and indirectly owns investments are separate legal entities.In this presentation“Shell”,“Shell Group”and“Group”are sometimes used for convenience where references are made to Shell plc and its subsidiaries in general.Likewise,the words“we”,“us”and“our”are also used to refer to Shell plc and its subsidiaries in general or to those who work for them.These terms are also used where no useful purpose is served by identifying the particular entity or entities.“Subsidiaries”,“Shell subsidiaries”and“Shell companies”as used in this presentation refer to entities over which Shell plc either directly or indirectly has control.Entities and unincorporated arrangements over which Shell has joint control are generally referred to as“joint ventures”and“joint operations”,respectively.“Joint ventures”and“joint operations”are collectively referred to as“joint arrangements”.Entities over which Shell has significant influence but neither control nor joint control are referred to as“associates”.The term“Shell interest”is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement,after exclusion of all third-party interest.This presentation contains forward-looking statements(within the meaning of the U.S.Private Securities Litigation Reform Act of 1995)concerning the financial condition,results of operations and businesses of Shell.All statements other than statements of historical fact are,or may be deemed to be,forward-looking statements.Forward-looking statements are statements of future expectations that are based on managements current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results,performance or events to differ materially from those expressed or implied in these statements.Forward-looking statements include,among other things,statements concerning the potential exposure of Shell to market risks and statements expressing managements expectations,beliefs,estimates,forecasts,projections and assumptions.These forward-looking statements are identified by their use of terms and phrases such as“aim”,“ambition”,“anticipate”,“believe”,“could”,“estimate”,“expect”,“goals”,“intend”,“may”,“milestones”,“objectives”,“outlook”,“plan”,“probably”,“project”,“risks”,“schedule”,“seek”,“should”,“target”,“will”and similar terms and phrases.There are a number of factors that could affect the future operations of Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this presentation,including(without limitation):(a)price fluctuations in crude oil and natural gas;(b)changes in demand for Shells products;(c)currency fluctuations;(d)drilling and production results;(e)reserves estimates;(f)loss of market share and industry competition;(g)environmental and physical risks;(h)risks associated with the identification of suitable potential acquisition properties and targets,and successful negotiation and completion of such transactions;(i)the risk of doing business in developing countries and countries subject to international sanctions;(j)legislative,judicial,fiscal and regulatory developments including regulatory measures addressing climate change;(k)economic and financial market conditions in various countries and regions;(l)political risks,including the risks of expropriation and renegotiation of the terms of contracts with governmental entities,delays or advancements in the approval of projects and delays in the reimbursement for shared costs;(m)risks associated with the impact of pandemics,such as the COVID-19(coronavirus)outbreak;and(n)changes in trading conditions.No assurance is provided that future dividend payments will match or exceed previous dividend payments.All forward-looking statements contained in this presentation are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.Readers should not place undue reliance on forward-looking statements.Additional risk factors that may affect future results are contained in Shell plcs Form 20-F for the year ended December 31,2022(available at and www.sec.gov).These risk factors also expressly qualify all forward-looking statements contained in this presentation and should be considered by the reader.Each forward-looking statement speaks only as of the date of this presentation,July 27,2023.Neither Shell plc nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information,future events or other information.In light of these risks,results could differ materially from those stated,implied or inferred from the forward-looking statements contained in this presentation.All amounts shown throughout this presentation are unaudited.The numbers presented throughout this presentation may not sum precisely to the totals provided and percentages may not precisely reflect the absolute figures,due to rounding.Also,in this presentation we may refer to Shells“Net Carbon Intensity”,which includes Shells carbon emissions from the production of our energy products,our suppliers carbon emissions in supplying energy for that production and our customers carbon emissions associated with their use of the energy products we sell.Shell only controls its own emissions.The use of the term Shells“Net Carbon Intensity”is for convenience only and not intended to suggest these emissions are those of Shell plc or its subsidiaries.Shells operating plan,outlook and budgets are forecasted for a ten-year period and are updated every year.They reflect the current economic environment and what we can reasonably expect to see over the next ten years.Accordingly,they reflect our Scope 1,Scope 2 and Net Carbon Intensity(NCI)targets over the next ten years.However,Shells operating plans cannot reflect our 2050 net-zero emissions target and 2035 NCI target,as these targets are currently outside our planning period.In the future,as society moves towards net-zero emissions,we expect Shells operating plans to reflect this movement.However,if society is not net zero in 2050,as of today,there would be significant risk that Shell may not meet this target.The content of websites referred to in this presentation does not form part of this presentation.We may have used certain terms,such as resources,in this presentation that the United States Securities and Exchange Commission(SEC)strictly prohibits us from including in our filings with the SEC.Investors are urged to consider closely the disclosure in our Form 20-F,File No 1-32575,available on the SEC website www.sec.gov.The financial information presented in this presentation does not constitute statutory accounts within the meaning of section 434(3)of the Companies Act 2006(“the Act”).Statutory accounts for the year ended December 31,2022,were published in Shells Annual Report and Accounts,a copy of which was delivered to the Registrar of Companies for England and Wales,and in Shells Form 20-F.The auditors report on those accounts was unqualified,did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain a statement under sections 498(2)or 498(3)of the Act.The information in this presentation does not constitute the unaudited condensed consolidated financial statements which are contained in Shells second quarter 2023 and half year 2023 unaudited results available on 207 934 5550;USA 1 832 337 4355Definitions&cautionary note Shell plc|July 27,20233Key messages 1Income attributable to shareholders is$3.1 billion in Q2 2023.APM reconciliations available in the Q2 2023 Quarterly Databook here.2Subject to Board approval,expected to be completed by the Q4 2023 results announcement.3For the next three monthsQ2 2023 PerformanceStrong operational performance Lower margins with lower oil and gas prices,refining margins and LNG trading seasonalityStrong cash performance,with$4.8 billion working capital inflow Lower 2023 Cash capex outlook,including inorganicStrong balance sheet$0.331 dividend per share for Q2 2023Buyback programme of at least$2.5 billion at the Q3 2023 results announcement2NYSE$23-26 billion2023 Cash capex$40.3 billionNet debt$5.1 billionAdjusted Earnings1$15.1 billionCFFO 15%Dividend per share$3 billionBuyback programme3DisciplineShareholder returnsShell plc|July 27,20234Performing with purposeGeneratingshareholder valuePoweringlivesAchieving net-zeroemissionsRespectingnatureUnderpinned by our core values and our focus on safetyOur purpose is topower progress together by providing more and cleaner energy solutionsPowering ProgressShell plc|July 27,20235The investment case through the energy transition 1 12023-2025 2 2Includes infrastructure&assets($20 billion)and lowcarbon energy solutions($10-15 billion)3 32022 to 2025,for price assumptions see CMD 23 materials4 4Subject to Board approval 5 5Share buyback programmes for the second half of 2023 will be announced at the Q2 and Q3 results announcements and are expected to be completed by the Q4 2023 results announcement.Providing Energy SecurityEnabling the Energy TransitionPerformance,Discipline,Simplification Committed to Enhancing Shareholder ReturnsReduce structural cost by$2-3 billion by end-2025&lower capital spend to$22-25 billion p.a.in 2024 and 2025Grow FCF/share 10%p.a.through 20253 3Shareholder returns increased to 30-40%of CFFO through the cycleDividend per share increase of 15%at Q2 2023&second half 2023 buybacks of at least$5 billion4,5Providing molecules to decarbonise the transport and industry sectors,while high-grading the Downstream businessInvesting$35 billion1,21,2into Downstream and Renewable&Energy Solutions,of which$10-15 billion1 1is directly into low-carbon energy solutions.Committed to oil and gas,with a focus on LNG growthInvesting$40 billion1 1in Leading Integrated Gas&Advantaged Upstream Shell plc|July 27,20236A pragmatic approach to capital allocation1 1Subject to Board approvalFinancial framework3040%of CFFO through the cycle4%progressive dividend annually1 1Balanced Capital AllocationEnhanced Shareholder DistributionsDisciplinedInvestmentStrong Balance SheetCash capex:$2225 billion p.a.for 2024 and 2025AA credit metricsthrough the cycleShell plc|July 27,20237Enhanced shareholder distributions 1 1Subject to Board approval,expected to be completed by the Q4 2023 results announcement.Financial framework$4 billion dividend paid$8 billion buybacks completed$0.331 Dividend per share for Q2$3 billion buyback programme announced for the next three monthsDividend per shareincrease of 15%A minimum of$5 billion buybacks for H2 20231 1H1 2023H2 2023CMD 2023announcements Distributing 3040%of CFFO through the cycleBuyback programme of at least$2.5 billion at the Q3 2023 results announcement1 1Shell plc|July 27,20238Lower commodity pricesData based on monthly averages.Macro6080100120140BrentJCC-3020406080Henry HubEU TTF-1000100200300400-10010203040IRMICM(RHS)$/bbl$/MMBtu$/tonne$/bblOilShell Indicative Refining Margin(IRM)and Indicative Chemical Margin(ICM)GasShell plc|July 27,20239Resilient financial performanceAPM reconciliations available in the Q2 2023 Quarterly Databook here.Financial results$3.1 billionIncome attributable to Shell plc shareholdersAdjusted EarningsAdjusted EBITDACash flow from operationsCash capital expenditureFree cash flow Net debt$11.8 billion$5.1 billion$14.7 billion$14.4 billion$35.9 billion$15.1 billion$29.3 billion$5.1 billion$11.6 billion$12.1 billion$22.0 billion$40.3 billion$40.3 billionQ2 2023H1 2023Shell plc|July 27,202310Resilient financial performance1Non-controlling interestAPM reconciliations available in the Q2 2023 Quarterly Databook here.Financial resultsAdjusted EarningsAdjusted EBITDACFFO$billionQ2 2023Q1 2023Q2 2023Q1 2023Q2 2023Q1 2023Integrated Gas2.54.94.87.53.66.3Upstream1.72.86.48.84.55.8Marketing0.90.91.61.61.41.1Chemicals&Products0.41.81.33.12.12.3R&ES0.20.40.40.73.21.1Corporate&NCI1(0.7)(1.1)(0.2)(0.2)0.3(2.4)Total5.19.69.614.421.421.415.114.214.2Additional information available in the Q2 2023 Quarterly Press ReleaseShell plc|July 27,2023Strong cash generation5.114.415.104812162011Cash conversion Q2 2023$billion1Non-controlling interest2AR/AP&Other includes initial margin.Financial results9.65.10246810Adjusted Earnings Q1 2023 to Q2 2023$billion0.65.92.80.3(0.8)(3.7)1.5(0.3)3.7(2.4)(1.1)0.0(1.3)(0.2)0.4Prices&margins:$(4.1)billion Volume&mix:$(0.9)billion Other:$0.3 billion$4.8 billionworking capital movement Shell plc|July 27,202312Higher Adjusted Earnings and FCFWith lower production and refinery intake$billion$/boekboe/dValue over volume1Total production(oil and gas)includes Integrated Gas,Upstream and Oil Sands.Financial results02040608010012014002468101214Adjusted EarningsFCFBrent(RHS)05001,0001,5002,0002,5003,0003,5004,000Total productionRefinery intake-24%production and-49%refinery intake vs Q2 2019 47justed Earnings and 76F vs Q2 20191Shell plc|July 27,202313Injuries(TRCF)per million working hoursMillion working hoursOperational spillsThousand tonnesNumber of spillsGHG emissionsMillion tonnes CO2eMillion tonnes CO2eProcess safetyNumber of incidentsGoal Zero on safetyHSSE performanceAll information on this slide relates to assets and activities under Shell operational control.Preliminary H1 2023 results TRCFWorking hours(RHS)Volume of spillsNumber of spills(RHS)0400800012201420152016201720182019202020212022H1 20230100200012201420152016201720182019202020212022H1 20230240501002016201720182019202020212022H1 2023EScope 1Scope 1-Methane only(RHS)Scope 2Tier 1 Tier 20150300201420152016201720182019202020212022H1 2023Shell plc|July 27,202314Portfolio updatesClick on the icons on map for further details on the deal/project.2023 deliveryGrowthFor additional portfolio information visit our investors page on Volta acquisitionVito start-upAera Energy divestmentShell home energy retail businesses(UK,NL and Germany)exit announcedPierce redevelopmentNature Energy acquisition Shell Pakistan Limited(SPL)divestment announcedQatar North Field South expansion Strategic review of Singapore Energy&Chemicals ParkBaram Delta divestmentLongevityHigh-gradingMap not to scaleSprng Energy investment funnelSavion investment funnel Masela PSC/Abadi divestment announced Shell plc|July 27,2023Corporate Reports:Annual Report 2022Energy Transition Progress Report 2022 Payments to Governments Report 2022Sustainability Report 2022Nigeria briefing notes 2022Useful links:Capital Markets DayAnnual and Quarterly DatabookShell Energy Transition StrategyESG performance dataWar in Ukraine:Shells ResponseUpcoming events:Nov 2,2023Q3 2023 resultsShell plc|July 27,202317Pipeline of major projects KEYLow-carbon fuelsMap not to scaleProjects under constructionPeak production/Capacity/ProductsShell share%CountryStart-up 2023-2024Mero 2 A180 kboe/d19.3BrazilMero 3 A180 kboe/d19.3BrazilWhale100 kboe/d60USASprng Energy(multiple)B1,045 MW100IndiaSavion(multiple)B616 MW100USACrosswind/HKN B759 MW79.9The NetherlandsShell Bovarius400,000 MMBtu RNG100USAShell Galloway500,000 MMBtu RNG100USANorthern Lights JV(Phase 1)1.5 mtpa CO2captured and/or stored33.3NorwayStart-up 2025 Mero 4 A180 kboe/d19.3 BrazilMarjoram/Rosmari100 kboe/d80MalaysiaLNG Canada T1-214 mtpa40CanadaNLNG T77.6 mtpa26NigeriaNorth Field East expansion JV8 mtpa25*QatarNorth Field South expansion JV6 mtpa25*QatarBiofuels Plant Rotterdam820,000 tonnes of renewable diesel 100The NetherlandsHolland Hydrogen I200 MW100The NetherlandsEcowende/HKW B760 MW60The NetherlandsSouthCoast Wind Project 1 B1,209 MW50USAAtlantic Shores-Project 1 B1,509 MW50USAUpstreamLiquefaction plantsHydrogen electrolyser.CCSSolarOffshore wind.A Subject to unitisation agreements,data shown as per operator.B Renewable generation capacity under construction and/or committed for sale,with multiple start-up dates.*A 25%share in a JV company which will own 25%of the North Field East(NFE)expansion project and a 25%share in a JV company which will own 37.5%of the North Field South(NFS)expansion projectFurther details available on our investors page on Q2 2023 updates:Participation in the Qatar North Field South expansion finalisedShell plc|July 27,20232016baseline202120222023202420252030203520502016 baseline202120222030E2050E41018Our progress1Measured by our Net Carbon Footprint(NCF)methodology,available on our website.CarbonNet-zero emissions energy business by 2050 including all emissions(Scopes 1,2 and 3)NET ZERO BY 2050Covers emissions associated with the production,processing,transport and end-use of our productsWe believe Shells total carbon emissions from energy sold peaked in 2018 at around 1.7 gtpa and will be brought down to net-zero by 2050.In 2022 the total emissions were 1.2 gtpaFROM 1.7 GTPA TO ZEROUN PARIS AGREEMENTStrategy aligns with goal to limit the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levelsNet Carbon Intensity1(Scope 1,2 and 3)Net Carbon Intensity1targetActualsCovers all Scope 1 and 2 emissions under Shells operational controlAbsolute emissions(Scope 1 and 2)83mtpa CO2e68Scope 1Scope 258gCO2e/MJ-6-8%-20%-45%-100%-9-12%-3.8%-2.5y-9-13%
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#PoweringProgressFIRST QUARTER 2023 RESULTSStrong results underpinned by robust performanceMay 4,2023Shell plcShell plc|May 4,20232This presentation includes certain measures that are calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles(GAAP)such as IFRS,including Adjusted Earnings,Adjusted EBITDA,CFFO excluding working capital movements,Cash capital expenditure,free cash flow,Divestment proceeds and Net debt.This information,along with comparable GAAP measures,is useful to investors because it provides a basis for measuring Shell plcs operating performance and ability to retire debt and invest in new business opportunities.Shell plcs management uses these financial measures,along with the most directly comparable GAAP financial measures,in evaluating the business performance.This presentation contains a forward-looking non-GAAP measure for cash capital expenditure and divestments.We are unable to provide a reconciliation of this forward-looking non-GAAP measure to the most comparable GAAP financial measure because certain information needed to reconcile the non-GAAP measure to the most comparable GAAP financial measure is dependent on future events some of which are outside the control of the company,such as oil and gas prices,interest rates and exchange rates.Moreover,estimating such GAAP measure with the required precision necessary to provide a meaningful reconciliation is extremely difficult and could not be accomplished without unreasonable effort.Non-GAAP measures in respect of future periods which cannot be reconciled to the most comparable GAAP financial measure are estimated in a manner which is consistent with the accounting policies applied in Shell plcs consolidated financial statements.“Adjusted Earnings”is the income attributable to Shell plc shareholders for the period,adjusted for the after-tax effect of oil price changes on inventory and for identified items,and excludes earnings attributable to non-controlling interest.In this presentation,“earnings”refers to“Adjusted Earnings”unless stated otherwise.We define“Adjusted EBITDA“as“Income/(loss)for the period“adjusted for current cost of supplies;identified items;tax charge/(credit);depreciation,amortisation and depletion;exploration well write-offs and net interest expense.All items include the non-controlling interest component.In this presentation,“operating expenses”,“costs”and“underlying costs”refer to“Underlying operating expenses”unless stated otherwise.Underlying operating expenses represent“operating expenses excluding identified items”.Operating expenses consist of the following lines in the Consolidated Statement of Income:(i)production and manufacturing expenses;(ii)selling,distribution and administrative expenses;and(iii)research and development expenses.Cash flow from operating activities excluding working capital movements is defined as“Cash flow from operating activities”less the sum of the following items in the Consolidated Statement of Cash Flows:(i)(increase)/decrease in inventories,(ii)(increase)/decrease in current receivables,and(iii)increase/(decrease)in current payables.In this presentation,“capex”refers to“Cash capital expenditure”unless stated otherwise.Cash capital expenditure comprises the following lines from the Consolidated Statement of Cash Flows:Capital expenditure,Investments in joint ventures and associates and Investments in equity securities.Free cash flow is defined as the sum of“Cash flow from operating activities”and“Cash flow from investing activities”.Organic free cash flow is defined as free cash flow excluding inorganic cash capital expenditure,divestment proceeds,and tax paid on divestments.In this presentation,“divestments”refers to“divestment proceeds”unless stated otherwise.Divestment proceeds are defined as the sum of(i)proceeds from sale of property,plant and equipment and businesses,(ii)proceeds from sale of joint ventures and associates,and(iii)proceeds from sale of equity securities.Net debt is defined as the sum of current and non-current debt,less cash and cash equivalents,adjusted for the fair value of derivative financial instruments used to hedge foreign exchange and interest rate risks relating to debt,and associated collateral balances.Reconciliations of the above non-GAAP measures are included in the Shell plc Unaudited Condensed Financial Report for the first quarter ended March 31,2023.The companies in which Shell plc directly and indirectly owns investments are separate legal entities.In this presentation“Shell”,“Shell Group”and“Group”are sometimes used for convenience where references are made to Shell plc and its subsidiaries in general.Likewise,the words“we”,“us”and“our”are also used to refer to Shell plc and its subsidiaries in general or to those who work for them.These terms are also used where no useful purpose is served by identifying the particular entity or entities.“Subsidiaries”,“Shell subsidiaries”and“Shell companies”as used in this presentation refer to entities over which Shell plc either directly or indirectly has control.Entities and unincorporated arrangements over which Shell has joint control are generally referred to as“joint ventures”and“joint operations”,respectively.“Joint ventures”and“joint operations”are collectively referred to as“joint arrangements”.Entities over which Shell has significant influence but neither control nor joint control are referred to as“associates”.The term“Shell interest”is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement,after exclusion of all third-party interest.This presentation contains forward-looking statements(within the meaning of the U.S.Private Securities Litigation Reform Act of 1995)concerning the financial condition,results of operations and businesses of Shell.All statements other than statements of historical fact are,or may be deemed to be,forward-looking statements.Forward-looking statements are statements of future expectations that are based on managements current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results,performance or events to differ materially from those expressed or implied in these statements.Forward-looking statements include,among other things,statements concerning the potential exposure of Shell to market risks and statements expressing managements expectations,beliefs,estimates,forecasts,projections and assumptions.These forward-looking statements are identified by their use of terms and phrases such as“aim”,“ambition”,“anticipate”,“believe”,“could”,“estimate”,“expect”,“goals”,“intend”,“may”,“milestones”,“objectives”,“outlook”,“plan”,“probably”,“project”,“risks”,“schedule”,“seek”,“should”,“target”,“will”and similar terms and phrases.There are a number of factors that could affect the future operations of Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this presentation,including(without limitation):(a)price fluctuations in crude oil and natural gas;(b)changes in demand for Shells products;(c)currency fluctuations;(d)drilling and production results;(e)reserves estimates;(f)loss of market share and industry competition;(g)environmental and physical risks;(h)risks associated with the identification of suitable potential acquisition properties and targets,and successful negotiation and completion of such transactions;(i)the risk of doing business in developing countries and countries subject to international sanctions;(j)legislative,judicial,fiscal and regulatory developments including regulatory measures addressing climate change;(k)economic and financial market conditions in various countries and regions;(l)political risks,including the risks of expropriation and renegotiation of the terms of contracts with governmental entities,delays or advancements in the approval of projects and delays in the reimbursement for shared costs;(m)risks associated with the impact of pandemics,such as the COVID-19(coronavirus)outbreak;and(n)changes in trading conditions.No assurance is provided that future dividend payments will match or exceed previous dividend payments.All forward-looking statements contained in this presentation are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.Readers should not place undue reliance on forward-looking statements.Additional risk factors that may affect future results are contained in Shell plcs Form 20-F for the year ended December 31,2022(available at and www.sec.gov).These risk factors also expressly qualify all forward-looking statements contained in this presentation and should be considered by the reader.Each forward-looking statement speaks only as of the date of this presentation,May 4,2023.Neither Shell plc nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information,future events or other information.In light of these risks,results could differ materially from those stated,implied or inferred from the forward-looking statements contained in this presentation.All amounts shown throughout this presentation are unaudited.The numbers presented throughout this presentation may not sum precisely to the totals provided and percentages may not precisely reflect the absolute figures,due to rounding.Also,in this presentation we may refer to Shells“Net Carbon Intensity”,which includes Shells carbon emissions from the production of our energy products,our suppliers carbon emissions in supplying energy for that production and our customers carbon emissions associated with their use of the energy products we sell.Shell only controls its own emissions.The use of the term Shells“Net Carbon Intensity”is for convenience only and not intended to suggest these emissions are those of Shell plc or its subsidiaries.Shells operating plan,outlook and budgets are forecasted for a ten-year period and are updated every year.They reflect the current economic environment and what we can reasonably expect to see over the next ten years.Accordingly,they reflect our Scope 1,Scope 2 and Net Carbon Intensity(NCI)targets over the next ten years.However,Shells operating plans cannot reflect our 2050 net-zero emissions target and 2035 NCI target,as these targets are currently outside our planning period.In the future,as society moves towards net-zero emissions,we expect Shells operating plans to reflect this movement.However,if society is not net zero in 2050,as of today,there would be significant risk that Shell may not meet this target.The content of websites referred to in this presentation does not form part of this presentation.We may have used certain terms,such as resources,in this presentation that the United States Securities and Exchange Commission(SEC)strictly prohibits us from including in our filings with the SEC.Investors are urged to consider closely the disclosure in our Form 20-F,File No 1-32575,available on the SEC website www.sec.gov.The financial information presented in this presentation does not constitute statutory accounts within the meaning of section 434(3)of the Companies Act 2006(“the Act”).Statutory accounts for the year ended December 31,2022,were published in Shells Annual Report and Accounts,a copy of which was delivered to the Registrar of Companies for England and Wales,and in Shells Form 20-F.The auditors report on those accounts was unqualified,did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain a statement under sections 498(2)or 498(3)of the Act.The information in this presentation does not constitute the unaudited condensed consolidated financial statements which are contained in Shells first quarter 2023 unaudited results available on 207 934 5550;USA 1 832 337 4355Definitions&cautionary note Shell plc|May 4,2023Shell plc|May 4,20233Key messages 1Income attributable to shareholders is$8.7 billion in Q1 2023Q1 2023 PerformanceDisciplineShareholder returnsAdjusted Earnings1of$9.6 billion,Adjusted EBITDA of$21.4 billion and CFFO of$14.2 billion Controllable availability in Gulf of Mexico equaling best in a decade and higher uptime at Prelude,AustraliaHigher Products margins,supported by lower refining unplanned downtimeUnchanged 2023 cash capex outlook:$23-27 billion,including inorganicAera Energy,USA and Baram Delta,Malaysia divestments completedStable net debt:$44 billion Share buybacks:$4 billion programme announcedDividend$0.2875 per shareShareholder distributions well over 30%of CFFOShell plc|May 4,2023Shell plc|May 4,20234Disciplined focus on value creationFINANCIAL FRAMEWORK Significant shareholder distributionsResilient balance sheet Capital discipline4%annual growth in dividend per share,subject to Board approval2023 cash capex within$23-27 billionIncludes inorganic capexTargeting AA credit metrics through the cycleContinued focus on net debt reduction in upcycleDivest for value Sustainable progressive dividendTotal shareholder distributions 20-30%of CFFOTotal shareholder distributions(dividends share buybacks)based on cash generation,macro-outlook and balance sheet trajectory$4 billion share buybacks announced,expected to be completed by Q2 2023 results announcementShell plc|May 4,2023Shell plc|May 4,20235Delivering strong resultsAPM reconciliations available in the Q1 2023 Quarterly Databook Q1 2023 Quarterly Databook here.Q1 2023 FINANCIAL RESULTSAdjusted EBITDACash flow from operationsCash capital expenditureFree cash flow Income attributable to Shell plc shareholdersAdjusted EarningsNet debt$21.4 billion$14.2 billion$6.5 billion$9.9 billion$8.7 billion$9.6 billion$44.2 billionQ1 2023Q4 2022$20.6 billion$22.4 billion$7.3 billion$15.5 billion$10.4 billion$9.8 billion$44.8 billionShell plc|May 4,2023Shell plc|May 4,2023Lower prices offset by improved performance 9.621.414.204812162024286Cash conversion Q1 2023$billion1Non-controlling interest2AR/AP&Other includes initial margin.Q1 2023 reflects outflow from temporary deposits by JVs received in Q4 2022.Q1 2023 FINANCIAL RESULTS9.89.6024681012Adjusted Earnings Q4 2022 to Q1 2023$billion0.75.95.2(0.5)$(0.8)billionworking capital movement(1.8)(4.2)2.12.2(5.0)(1.1)(0.3)0.41.00.1(0.4)Shell plc|May 4,2023Shell plc|May 4,20237IG Adjusted Earnings trending with LNG price markersOptimizing portfolio for demand in Northern Hemisphere winter$billion$/bblNet Term VolumesDelivering results from leading LNG portfolioNet Term Volumes(Term Purchases-Term Sales)excludes JV marketed volumes.INTEGRATED GAS02040608010001234567Adjusted EarningsAvg 4Q rolling,Adjusted Earnings70%JCC-3/30%JKM(RHS)Leading global portfolio in a growing LNG market Record results with Adjusted Earnings of$11 billion over the last 2 quarters,during the winter seasonImproved performance at Prelude with a continued focus on feedgas supply and operational performance across the portfolioShell plc|May 4,2023Shell plc|May 4,20238Focused portfolio,value over volume2023 DeliveryHigh-gradingGrowthFor additional portfolio information visit our investors page on Baram Delta divestment(Malaysia)Simplifying the Upstream portfolioAera Energy divestment(USA)Focusing on positions with high growth potential and a strong integrated value chainNature Energy acquisition(Denmark)Building an integrated Renewable Natural Gas value chain at a global scale EV charging growthAcquisition of Volta(USA)and evpass(Switzerland)LongevityVito start-up(USA)Our first deep-water platform to employ a simplified,cost-efficient host designPierce redevelopment(UK)Helping to meet the UK energy demands of today and tomorrowShell plc|May 4,2023Shell plc|May 4,202310Strong results,differentiated portfolio1Non-controlling interestAPM reconciliations available in the Q1 2023 Quarterly Databook Q1 2023 Quarterly Databook here.Q1 2023 FINANCIAL RESULTSAdjusted EarningsAdjusted EBITDACFFO$billionQ1 2023Q4 2022Q1 2023Q4 2022Q1 2023Q4 2022Integrated Gas4.96.07.58.36.36.4Upstream2.83.18.89.45.87.2Marketing0.90.41.61.01.11.1Chemicals&Products1.80.73.11.62.33.1R&ES0.40.30.70.41.12.7Corporate&NCI1(1.1)(0.7)(0.2)(0.2)(2.4)1.9Total9.69.89.821.420.620.614.222.422.4Additional information available in the Q1 2023 Quarterly Press ReleaseShell plc|May 4,2023Shell plc|May 4,20232016baseline202120222023202420252030203520502016 baseline202120222030E2050E41011Our progress1Measured by our Net Carbon Footprint(NCF)methodology,available on our website.CARBONNet-zero emissions energy business by 2050 including all emissions(Scopes 1,2 and 3)NET ZERO BY 2050Covers emissions associated with the production,processing,transport and end-use of our productsWe believe Shells total carbon emissions from energy sold peaked in 2018 at around 1.7 gtpa and will be brought down to net-zero by 2050.In 2022 the total emissions were 1.2 gtpaFROM 1.7 GTPA TO ZEROUN PARIS AGREEMENTStrategy aligns with goal to limit the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levelsNet Carbon Intensity1(Scope 1,2 and 3)Net Carbon Intensity1targetActualsCovers all Scope 1 and 2 emissions under Shells operational controlAbsolute emissions(Scope 1 and 2)83mtpa CO2e68Scope 1Scope 258gCO2e/MJ-6-8%-20%-45%-100%-9-12%-3.8%-2.5y-9-13%Shell plc|May 4,2023Shell plc|May 4,202312Pipeline of major projects KEYLow-carbon fuelsMap not to scaleProjects under constructionPeak production/Capacity/ProductsShell share%CountryStart-up 2023-2024Mero 2 A180 kboe/d19.3BrazilMero 3 A180 kboe/d19.3BrazilWhale100 kboe/d60USASprng Energy(multiple)B456 MW100IndiaCrosswind/HKN B760 MW80The NetherlandsShell Bovarius400,000 MMBtu RNG100USAShell Galloway500,000 MMBtu RNG100USANorthern Lights JV(Phase 1)1.5 mtpa CO2captured and/or stored33.3NorwayStart-up 2025 Mero 4 A180 kboe/d19.3 BrazilMarjoram/Rosmari100 kboe/d80MalaysiaLNG Canada T1-214 mtpa40CanadaNLNG T77.6 mtpa26NigeriaNorth Field East Expansion32 mtpa6.25*QatarBiofuels Plant Rotterdam820,000 tonnes of renewable diesel 100The NetherlandsHolland Hydrogen I200 MW100The NetherlandsEcowende/HKW B794 MW60The NetherlandsSouthCoast Wind Project 1 B1,200 MW50USAAtlantic Shores-Project 1 B1,509 MW50USAUpstreamLiquefaction plantsHydrogen electrolyser.CCSSolarOffshore wind.A Subject to unitisation agreements,data shown as per operator.B Renewable generation capacity under construction and/or committed for sale.*25%share in a JV company which will own 25%of the North Field East expansion project.On October 23,2022,Shell announced its selection as partner in the 16 mtpa North Field South LNG project in Qatar with 9.375%participating interest.Further details available on our investors page on 2023 updates:Vito(USA)and Pierce(UK)start-ups,driving resource longevityShell plc|May 4,2023Shell plc|May 4,202313Upcoming events:Corporate Reports:Annual Report 2022Energy Transition Progress Report 2022 Payments to Governments Report 2022Sustainability Report 2022Nigeria briefing notes 2022Useful links:Annual and Quarterly DatabookShell Energy Transition StrategyESG performance dataWar in Ukraine:Shells ResponseJul 27,2023Q2 2023 resultsNov 2,2023Q3 2023 resultsJun 14,2023Capital Markets Day 2023May 23,2023Annual General Meeting
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news releaseChevron Reports Second Quarter 2023 Results Reported earnings of$6.0 billion;adjusted earnings of$5.8 billion Record Permian Basin production,11 percent higher than the year-ago period Record shareholder distributions of$7.2 billion PDC Energy,Inc.acquisition expected to close in August 2023San Ramon,Calif.,July 28,2023 Chevron Corporation(NYSE:CVX)reported earnings of$6.0 billion($3.20 per share-diluted)for second quarter 2023,compared with$11.6 billion($5.95 per share-diluted)in second quarter 2022.Included in the current quarter was a one-time tax benefit of$225 million related to impairments that were recognized in prior periods.Foreign currency effects increased earnings by$10 million.Adjusted earnings of$5.8 billion($3.08 per share-diluted)in second quarter 2023 compared to adjusted earnings of$11.4 billion($5.82 per share-diluted)in second quarter 2022.For a reconciliation of adjusted earnings,see Attachment 4.Earnings&Cash Flow SummaryYTDUnit2Q 20231Q 20232Q 20222Q 20232Q 2022Total Earnings/(Loss)$MM$6,010$6,574$11,622$12,584$17,881 Upstream$MM$4,936$5,161$8,558$10,097$15,492 Downstream$MM$1,507$1,800$3,523$3,307$3,854 All Other$MM$(433)$(387)$(459)$(820)$(1,465)Earnings Per Share-Diluted$/Share$3.20$3.46$5.95$6.66$9.17 Adjusted Earnings(1)$MM$5,775$6,744$11,365$12,519$17,908 Adjusted Earnings Per Share-Diluted(1)$/Share$3.08$3.55$5.82$6.63$9.18 Cash Flow From Operations(CFFO)$B$6.3$7.2$13.8$13.5$21.8 CFFO Excluding Working Capital(1)$B$9.4$9.0$13.3$18.5$22.2(1)See non-GAAP reconciliation in attachments“Our quarterly financial results remain strong,and we returned record cash to shareholders,”said Mike Wirth,Chevrons chairman and chief executive officer.The company has delivered more than 12 percent ROCE for eight straight quarters and returned$7.2 billion to shareholders in the quarter,an increase of 37 percent from the year-ago period.“Strong execution resulted in record Permian Basin production this quarter,”Wirth continued.Chevron plans to further increase its investments in the United States with the announced agreement to acquire PDC Energy,Inc.“Our consistent performance and disciplined use of capital are driving superior value for our shareholders,”Wirth concluded.-MORE-Financial and Business HighlightsYTDUnit2Q 20231Q 20232Q 20222Q 20232Q 2022Return on Capital Employed(ROCE).4.6&.5.1 .7pital Expenditures(Capex)$B$3.8$3.0$3.2$6.8$5.1 Affiliate Capex$B$1.0$0.9$0.8$1.8$1.5 Free Cash Flow(1)$B$2.5$4.2$10.6$6.7$16.7 Free Cash Flow ex.working capital(1)$B$5.7$6.0$10.1$11.7$17.1 Debt Ratio(end of period).0.7.6.0.6%Net Debt Ratio(1)(end of period)%7.0%4.4%8.3%7.0%8.3%Net Oil-Equivalent ProductionMBOED 2,959 2,979 2,896 2,968 2,978(1)See non-GAAP reconciliation in attachmentsFinancial HighlightsSecond quarter 2023 earnings decreased compared to second quarter 2022 primarily due to lower upstream realizations and lower margins on refined product sales.Sales and other operating revenues in second quarter 2023 were$47.2 billion,down from$65.4 billion in the year-ago period primarily due to lower commodity prices.Worldwide net oil-equivalent production was up 2 percent from the year-ago quarter primarily due to record Permian Basin production of 772,000 barrels of oil equivalent per day.Capex in the second quarter of 2023 was up 18 percent from a year ago primarily due to higher investment in the United States.Quarterly shareholder distributions were a record$7.2 billion during the quarter,including dividends of$2.8 billion and share repurchases of$4.4 billion(over 27 million shares repurchased during the quarter and nearly 50 million shares year-to-date).The companys Board of Directors declared a quarterly dividend of one dollar and fifty-one cents($1.51)per share,payable September 11,2023,to all holders of common stock as shown on the transfer records of the corporation at the close of business on August 18,2023.Business Highlights Announced an agreement to acquire PDC Energy,Inc.in an all-stock transaction,with closing anticipated in August 2023.This acquisition is expected to add$1 billion to annual free cash flow.Achieved first natural gas production from the Gorgon Stage 2 development in Australia,supporting long-term energy supply in the Asia-Pacific region.Received approvals to extend Block 0 concession in Angola through 2050.Reached final investment decision with partners to build a third gathering pipeline that is expected to increase production capacity from approximately 1.2 to nearly 1.4 billion cubic feet per day at the Leviathan field in Israel.Announced agreements to conduct pilot tests on advanced closed loop geothermal technology in Japan.-2-MORE-Segment Highlights UpstreamYTDU.S.UpstreamUnit2Q 20231Q 20232Q 20222Q 20232Q 2022Earnings/(Loss)$MM$1,640$1,781$3,367$3,421$6,605 Net Oil-Equivalent ProductionMBOED 1,219 1,167 1,172 1,193 1,178 Liquids ProductionMBD 916 877 888 896 884 Natural Gas ProductionMMCFD 1,817 1,742 1,705 1,780 1,766 Liquids Realization$/BBL$56$59$89$58$83 Natural Gas Realization$/MCF$1.23$2.58$6.22$1.88$5.13 U.S.upstream earnings were lower than a year ago,primarily on lower realizations,partially offset by lower operating expenses due to the absence of a 2022 early contract termination and higher sales volumes.U.S.net oil-equivalent production was up from second quarter 2022 and set a new quarterly record primarily due to growth in the Permian Basin.YTDInternational UpstreamUnit2Q 20231Q 20232Q 20222Q 20232Q 2022Earnings/(Loss)(1)$MM$3,296$3,380$5,191$6,676$8,887 Net Oil-Equivalent ProductionMBOED 1,740 1,812 1,724 1,775 1,800 Liquids ProductionMBD 827 849 799 838 828 Natural Gas ProductionMMCFD 5,478 5,775 5,548 5,624 5,832 Liquids Realization$/BBL$68$69$102$68$98 Natural Gas Realization$/MCF$7.50$9.00$9.23$8.25$9.04(1)Includes foreign currency effects$MM$10$(56)$603$(46)$459 International upstream earnings were lower than a year ago primarily due to lower realizations and lower foreign currency effects,partially offset by favorable tax items and higher sales volumes.Net oil-equivalent production was up 16,000 barrels per day from a year earlier primarily due to lower impacts from turnarounds in Australia,partially offset by shutdowns in Canada due to wildfires.-3-MORE-DownstreamYTDU.S.DownstreamUnit2Q 20231Q 20232Q 20222Q 20232Q 2022Earnings/(Loss)$MM$1,081$977$2,440$2,058$2,926 Refinery Crude Oil InputsMBD 962 890 881 926 898 Refined Product SalesMBD 1,295 1,252 1,210 1,274 1,214 U.S.downstream earnings were lower compared to a year ago primarily due to lower margins on refined product sales and higher operating expenses.Refinery crude oil inputs increased 9 percent compared to a year ago,primarily due to the absence of 2022 turnaround activity at the Richmond,California refinery.Refinery product sales were up 7 percent from a year ago,primarily due to higher renewable fuel sales following the Renewable Energy Group,Inc.acquisition and higher demand for gasoline and jet fuel.YTDInternational DownstreamUnit2Q 20231Q 20232Q 20222Q 20232Q 2022Earnings/(Loss)(1)$MM$426$823$1,083$1,249$928 Refinery Crude Oil InputsMBD 623 628 634 625 626 Refined Product SalesMBD 1,453 1,460 1,337 1,456 1,332(1)Includes foreign currency effects$MM$4$18$145$22$168 International downstream earnings were lower compared to a year ago primarily due to lower margins on refined product sales and lower foreign currency effects.Refinery crude oil inputs decreased 2 percent from the year-ago period as refinery runs decreased due to planned turnarounds.Refined product sales increased 9 percent from the year-ago period,primarily due to higher demand for jet fuel as air travel increased in Asia.All OtherYTDAll OtherUnit2Q 20231Q 20232Q 20222Q 20232Q 2022Net charges(1)$MM$(433)$(387)$(459)(820)(1,465)(1)Includes foreign currency effects$MM$(4)$(2)$(80)$(6)$(177)All Other consists of worldwide cash management and debt financing activities,corporate administrative functions,insurance operations,real estate activities and technology companies.Net charges decreased slightly compared to a year ago primarily due to higher interest income and a favorable swing in foreign currency effects,partially offset by higher employee benefit costs.-4-MORE-Chevron is one of the worlds leading integrated energy companies.We believe affordable,reliable and ever-cleaner energy is essential to enabling human progress.Chevron produces crude oil and natural gas;manufactures transportation fuels,lubricants,petrochemicals and additives;and develops technologies that enhance our business and the industry.We aim to grow our traditional oil and gas business,lower the carbon intensity of our operations and grow new lower carbon businesses in renewable fuels,hydrogen,carbon capture,offsets and other emerging technologies.More information about Chevron is available at .#Contact:Randy Stuart - 1 713-283-8609-5-MORE-NOTICEChevrons discussion of second quarter 2023 earnings with security analysts will take place on Friday,July 28,2023,at 8:00 a.m.PT.A webcast of the meeting will be available in a listen-only mode to individual investors,media,and other interested parties on Chevrons website at under the“Investors”section.Prepared remarks for todays call,additional financial and operating information and other complementary materials will be available prior to the call at approximately 3:30 a.m.PT and located under“Events and Presentations”in the“Investors”section on the Chevron website.As used in this news release,the term“Chevron”and such terms as“the company,”“the corporation,”“our,”“we,”“us”and“its”may refer to Chevron Corporation,one or more of its consolidated subsidiaries,or to all of them taken as a whole.All of these terms are used for convenience only and are not intended as a precise description of any of the separate companies,each of which manages its own affairs.Please visit Chevrons website and Investor Relations page at and Instagram: Chevron often discloses important information about the company,its business,and its results of operations.Non-GAAP Financial Measures-This news release includes adjusted earnings/(loss),which reflect earnings or losses excluding significant non-operational items including impairment charges,write-offs,severance costs,gains on asset sales,unusual tax items,effects of pension settlements and curtailments,foreign currency effects and other special items.We believe it is useful for investors to consider this measure in comparing the underlying performance of our business across periods.The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income(loss)as prepared in accordance with U.S.GAAP.A reconciliation to net income(loss)attributable to Chevron Corporation is shown in Attachment 4.This news release also includes cash flow from operations excluding working capital,free cash flow and free cash flow excluding working capital.Cash flow from operations excluding working capital is defined as net cash provided by operating activities less net changes in operating working capital,and represents cash generated by operating activities excluding the timing impacts of working capital.Free cash flow is defined as net cash provided by operating activities less capital expenditures and generally represents the cash available to creditors and investors after investing in the business.Free cash flow excluding working capital is defined as net cash provided by operating activities excluding working capital less capital expenditures and generally represents the cash available to creditors and investors after investing in the business excluding the timing impacts of working capital.The company believes these measures are useful to monitor the financial health of the company and its performance over time.Reconciliations of cash flow from operations excluding working capital,free cash flow and free cash flow excluding working capital are shown in Attachment 3.This news release also includes net debt ratio.Net debt ratio is defined as total debt less cash and cash equivalents and marketable securities as a percentage of total debt less cash and cash equivalents and marketable securities,plus Chevron Corporation stockholders equity,which indicates the companys leverage,net of its cash balances.The company believes this measure is useful to monitor the strength of the companys balance sheet.A reconciliation of net debt ratio is shown in Attachment 2.Expected incremental annual free cash flow of$1 billion following the PDC Energy,Inc.acquisition is a forward-looking non-GAAP measure.It assumes Brent oil price of$70 per barrel,Henry Hub gas price of$3.50 per MCF,approximately$100 million of annual operating expense synergies and approximately$400 million of annual capex efficiencies.However,due to its forward-looking nature,management cannot reliably predict certain other necessary components of the most directly comparable forward-looking GAAP measure and is therefore unable to provide a quantitative reconciliation.-6-MORE-CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF“SAFE HARBOR”PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995This news release contains forward-looking statements relating to Chevrons operations and energy transition plans that are based on managements current expectations,estimates and projections about the petroleum,chemicals and other energy-related industries.Words or phrases such as“anticipates,”“expects,”“intends,”“plans,”“targets,”“advances,”“commits,”“drives,”“aims,”“forecasts,”“projects,”“believes,”“approaches,”“seeks,”“schedules,”“estimates,”“positions,”“pursues,”“progress,”“may,”“can,”“could,”“should,”“will,”“budgets,”“outlook,”“trends,”“guidance,”“focus,”“on track,”“goals,”“objectives,”“strategies,”“opportunities,”“poised,”“potential,”“ambitions,”“aspires”and similar expressions are intended to identify such forward-looking statements.These statements are not guarantees of future performance and are subject to certain risks,uncertainties and other factors,many of which are beyond the companys control and are difficult to predict.Therefore,actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.The reader should not place undue reliance on these forward-looking statements,which speak only as of the date of this news release.Unless legally required,Chevron undertakes no obligation to update publicly any forward-looking statements,whether as a result of new information,future events or otherwise.Among important factors that could cause actual results to differ materially from those in the forward-looking statements are:changing crude oil and natural gas prices and demand for the companys products,and production curtailments due to market conditions;crude oil production quotas or other actions that might be imposed by the Organization of Petroleum Exporting Countries and other producing countries;technological advancements;changes to government policies in the countries in which the company operates;public health crises,such as pandemics(including coronavirus(COVID-19)and epidemics,and any related government policies and actions;disruptions in the companys global supply chain,including supply chain constraints and escalation of the cost of goods and services;changing economic,regulatory and political environments in the various countries in which the company operates;general domestic and international economic,market and political conditions,including the military conflict between Russia and Ukraine and the global response to such conflict;changing refining,marketing and chemicals margins;actions of competitors or regulators;timing of exploration expenses;timing of crude oil liftings;the competitiveness of alternate-energy sources or product substitutes;development of large carbon capture and offset markets;the results of operations and financial condition of the companys suppliers,vendors,partners and equity affiliates;the inability or failure of the companys joint-venture partners to fund their share of operations and development activities;the potential failure to achieve expected net production from existing and future crude oil and natural gas development projects;potential delays in the development,construction or start-up of planned projects;the potential disruption or interruption of the companys operations due to war,accidents,political events,civil unrest,severe weather,cyber threats,terrorist acts,or other natural or human causes beyond the companys control;the potential liability for remedial actions or assessments under existing or future environmental regulations and litigation;significant operational,investment or product changes undertaken or required by existing or future environmental statutes and regulations,including international agreements and national or regional legislation and regulatory measures to limit or reduce greenhouse gas emissions;the potential liability resulting from pending or future litigation;the ability to successfully satisfy the requisite closing conditions and consummate the proposed acquisition of PDC Energy,Inc.;the ability to successfully integrate the operations of Chevron and PDC Energy and achieve the anticipated benefits from the transaction,including the expected incremental annual free cash flow;the companys future acquisitions or dispositions of assets or shares or the delay or failure of such transactions to close based on required closing conditions;the potential for gains and losses from asset dispositions or impairments;government mandated sales,divestitures,recapitalizations,taxes and tax audits,tariffs,sanctions,changes in fiscal terms or restrictions on scope of company operations;foreign currency movements compared with the U.S.dollar;higher inflation and related impacts;material reductions in corporate liquidity and access to debt markets;the receipt of required Board authorizations to implement capital allocation strategies,including future stock repurchase programs and dividend payments;the effects of changed accounting rules under generally accepted accounting principles promulgated by rule-setting bodies;the companys ability to identify and mitigate the risks and hazards inherent in operating in the global energy industry;and the factors set forth under the heading“Risk Factors”on pages 20 through 26 of the companys 2022 Annual Report on Form 10-K and in subsequent filings with the U.S.Securities and Exchange Commission.Other unpredictable or unknown factors not discussed in this news release could also have material adverse effects on forward-looking statements.-7-MORE-CHEVRON CORPORATION-FINANCIAL REVIEWAttachment 1(Millions of Dollars,Except Per-Share Amounts)(unaudited)CONSOLIDATED STATEMENT OF INCOME(1)Three Months Ended June 30,Six Months EndedJune 30,REVENUES AND OTHER INCOME2023202220232022Sales and other operating revenues$47,216$65,372$96,058$117,686 Income(loss)from equity affiliates 1,240 2,467 2,828 4,552 Other income(loss)440 923 803 897 Total Revenues and Other Income 48,896 68,762 99,689 123,135 COSTS AND OTHER DEDUCTIONSPurchased crude oil and products 28,984 40,684 58,391 74,095 Operating expenses(2)7,224 7,168 14,164 13,837 Exploration expenses 169 196 359 405 Depreciation,depletion and amortization 3,521 3,700 7,047 7,354 Taxes other than on income 1,041 882 2,137 2,122 Interest and debt expense 120 129 235 265 Total Costs and Other Deductions 41,059 52,759 82,333 98,078 Income(Loss)Before Income Tax Expense 7,837 16,003 17,356 25,057 Income tax expense(benefit)1,829 4,288 4,743 7,065 Net Income(Loss)6,008 11,715 12,613 17,992 Less:Net income(loss)attributable to noncontrolling interests(2)93 29 111 NET INCOME(LOSS)ATTRIBUTABLE TO CHEVRON CORPORATION$6,010$11,622$12,584$17,881(1)Prior year data has been reclassified in certain cases to conform to the 2023 presentation basis.(2)Includes operating expense,selling,general and administrative expense,and other components of net periodic benefit costs.PER SHARE OF COMMON STOCKNet Income(Loss)Attributable to Chevron Corporation-Basic$3.22$5.98$6.70$9.21 -Diluted$3.20$5.95$6.66$9.17 Weighted Average Number of Shares Outstanding(000s)-Basic 1,867,165 1,947,703 1,879,363 1,941,719-Diluted 1,875,508 1,957,109 1,888,077 1,950,860 Note:Shares outstanding(excluding 14 million associated with Chevrons Benefit Plan Trust)were 1,853 million and 1,901 million at June 30,2023,and December 31,2022,respectively.EARNINGS BY MAJOR OPERATING AREAThree Months Ended June 30,Six Months EndedJune 30,2023202220232022UpstreamUnited States$1,640$3,367$3,421$6,605 International 3,296 5,191 6,676 8,887 Total Upstream 4,936 8,558 10,097 15,492 DownstreamUnited States 1,081 2,440 2,058 2,926 International 426 1,083 1,249 928 Total Downstream 1,507 3,523 3,307 3,854 All Other(433)(459)(820)(1,465)NET INCOME(LOSS)ATTRIBUTABLE TO CHEVRON CORPORATION$6,010$11,622$12,584$17,881-8-MORE-CHEVRON CORPORATION-FINANCIAL REVIEWAttachment 2(Millions of Dollars)(unaudited)SELECTED BALANCE SHEET ACCOUNT DATA(Preliminary)June 30,2023December 31,2022Cash and cash equivalents$9,292$17,678 Marketable securities$318$223 Total assets$251,779$257,709 Total debt$21,514$23,339 Total Chevron Corporation stockholders equity$158,325$159,282 Noncontrolling interests$973$960 SELECTED FINANCIAL RATIOSTotal debt plus total stockholders equity$179,839$182,621 Debt ratio(Total debt/Total debt plus stockholdersequity)12.0.8justed debt(Total debt less cash and cash equivalents and marketable securities)$11,904$5,438 Adjusted debt plus total stockholders equity$170,229$164,720 Net debt ratio(Adjusted debt/Adjusted debt plus total stockholders equity)7.0%3.3%RETURN ON CAPITAL EMPLOYED(ROCE)Three Months Ended June 30,Six Months EndedJune 30,2023202220232022Total reported earnings$6,010$11,622$12,584$17,881 Non-controlling interest(2)93 29 111 Interest expense(A/T)111 120 217 246 ROCE earnings 6,119 11,835 12,830 18,238 Annualized ROCE earnings 24,476 47,340 25,660 36,476 Average capital employed*182,226 178,615 182,197 176,053 ROCE 13.4&.5.1 .7%*Capital employed is the sum of Chevron Corporation stockholders equity,total debt and noncontrolling interest.Average capital employed is computed by averaging the sum of capital employed at the beginning and the end of the period.Three Months Ended June 30,Six Months EndedJune 30,CAPEX BY SEGMENT2023202220232022United StatesUpstream$2,296$1,549$4,214$2,836 Downstream 379 715 710 838 Other 90 86 121 128 Total United States 2,765 2,350 5,045 3,802 InternationalUpstream 940 621 1,662 1,101 Downstream 48 208 78 235 Other 4 5 10 6 Total International 992 834 1,750 1,342 CAPEX$3,757$3,184$6,795$5,144 AFFILIATE CAPEX(not included above):Upstream$615$602$1,254$1,179 Downstream 361 207 591 355 AFFILIATE CAPEX$976$809$1,845$1,534-9-MORE-CHEVRON CORPORATION-FINANCIAL REVIEWAttachment 3(Billions of Dollars)(unaudited)SUMMARIZED STATEMENT OF CASH FLOWS(Preliminary)(1)Three Months Ended June 30,Six Months EndedJune 30,OPERATING ACTIVITIES2023202220232022Net Income(Loss)$6.0$11.7$12.6$18.0 AdjustmentsDepreciation,depletion and amortization 3.5 3.7 7.0 7.4 Distributions more(less)than income from equity affiliates(0.5)(1.7)(1.4)(3.2)Loss(gain)on asset retirements and sales (0.4)(0.5)Net foreign currency effects 0.1 (0.5)0.1 (0.2)Deferred income tax provision 0.7 0.7 1.5 1.3 Net decrease(increase)in operating working capital(3.1)0.5 (4.9)(0.4)Other operating activity(0.4)(0.3)(1.4)(0.6)Net Cash Provided by Operating Activities$6.3$13.8$13.5$21.8 INVESTING ACTIVITIESAcquisition of businesses,net of cash acquired (2.9)(2.9)Capital expenditures(Capex)(3.8)(3.2)(6.8)(5.1)Proceeds and deposits related to asset sales and returns of investment 0.1 1.1 0.3 2.3 Other investing activity(0.3)(0.3)Net Cash Used for Investing Activities$(3.9)$(5.0)$(6.8)$(5.6)FINANCING ACTIVITIESNet change in debt(1.6)(3.7)(1.7)(5.7)Cash dividends common stock(2.8)(2.8)(5.7)(5.5)Shares issued for share-based compensation 0.8 0.2 5.5 Shares repurchased(4.4)(2.5)(8.1)(3.8)Distributions to noncontrolling interests Net Cash Provided by(Used for)Financing Activities$(8.7)$(8.1)$(15.3)$(9.5)EFFECT OF EXCHANGE RATE CHANGES ON CASH,CASH EQUIVALENTS AND RESTRICTED CASH(0.1)(0.1)(0.2)(0.1)NET CHANGE IN CASH,CASH EQUIVALENTS AND RESTRICTED CASH$(6.5)$0.6$(8.7)$6.6 RECONCILIATION OF NON-GAAP MEASURES(1)Net Cash Provided by Operating Activities$6.3$13.8$13.5$21.8 Less:Net decrease(increase)in operating working capital(3.1)0.5 (4.9)(0.4)Cash Flow from Operations Excluding Working Capital$9.4$13.3$18.5$22.2 Net Cash Provided by Operating Activities$6.3$13.8$13.5$21.8 Less:Capital expenditures 3.8 3.2 6.8 5.1 Free Cash Flow$2.5$10.6$6.7$16.7 Less:Net decrease(increase)in operating working capital(3.1)0.5 (4.9)(0.4)Free Cash Flow Excluding Working Capital$5.7$10.1$11.7$17.1(1)Totals may not match sum of parts due to presentation in billions.-10-MORE-CHEVRON CORPORATION-FINANCIAL REVIEWAttachment 4(Millions of Dollars)(unaudited)RECONCILIATION OF NON-GAAP MEASURESThree Months Ended June 30,2023Three Months Ended June 30,2022Six Months EndedJune 30,2023Six Months EndedJune 30,2022REPORTED EARNINGSPre-TaxIncome TaxAfter-TaxPre-TaxIncome TaxAfter-TaxPre-TaxIncome TaxAfter-TaxPre-TaxIncome TaxAfter-TaxU.S.Upstream$1,640$3,367$3,421$6,605 Intl Upstream 3,296 5,191 6,676 8,887 U.S.Downstream 1,081 2,440 2,058 2,926 Intl Downstream 426 1,083 1,249 928 All Other(433)(459)(820)(1,465)Net Income(Loss)Attributable to Chevron$6,010$11,622$12,584$17,881 SPECIAL ITEMSU.S.UpstreamEarly contract termination$(765)$165$(600)$(765)$165$(600)Intl UpstreamAsset sale gains 328 (128)200 328 (128)200 Tax items 225 225 95 95 All OtherPension settlement costs (12)1 (11)(98)21 (77)Total Special Items$225$225$(449)$38$(411)$95$95$(535)$58$(477)FOREIGN CURRENCY EFFECTSIntl Upstream$10$603$(46)$459 Intl Downstream 4 145 22 168 All Other(4)(80)(6)(177)Total Foreign Currency Effects$10$668$(30)$450 ADJUSTED EARNINGS/(LOSS)*U.S.Upstream$1,640$3,967$3,421$7,205 Intl Upstream 3,061 4,388 6,627 8,228 U.S.Downstream 1,081 2,440 2,058 2,926 Intl Downstream 422 938 1,227 760 All Other(429)(368)(814)(1,211)Total Adjusted Earnings/(Loss)$5,775$11,365$12,519$17,908 Total Adjusted Earnings/(Loss)per share$3.08$5.82$6.63$9.18*Adjusted Earnings/(Loss)is defined as Net Income(loss)attributable to Chevron Corporation excluding special items and foreign currency effects.-11-
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2023INTERIM REPORTTRAFIGURA GROUP PTE.LTD.H1 2023 financial and business highlights1The companies in which Trafigura Group Pte.Ltd.directly or indirectly owns investments are each separate legal entities and should not be considered or construed otherwise.This report refers to:(i)certain subsidiaries over which Trafigura Group Pte.Ltd.has direct or indirect control;(ii)certain joint venture entities and arrangements where Trafigura Group Pte.Ltd.has direct or indirect joint control;and(iii)certain other investments where Trafigura Group Pte.Ltd.has neither control nor joint control and may or may not have influence.For the avoidance of doubt,references to“Trafigura”,“Trafigura Group”,“the company”,“the Group”,“we”,“us”,“our”and“ourselves”may be used for convenience(not for legal)purposes to refer to Trafigura Group Pte.Ltd.,its subsidiaries,and/or its joint ventures.1.For the six-month period ended 31 March 2023.2.For the six-month period ended 31 March 2022.3.For the six-month period ended 31 March 2021.4.As at year end 30 September.Group revenue$131.3bn$170.6 bn in H1 20222$98.4 bn in H1 20213Underlying EBITDA$8.1bn$4.7 bn in H1 20222$3.7 bn in H1 20213Net profit$5.5bn$2.7 bn in H1 20222$2.1 bn in H1 20213Total non-current assets$16.2bn$19.4 bn in 20224$15.1 bn in 20214Total assets$90.5bn$98.6 bn in 20224$90.2 bn in 20214Total Group equity$17.7bn$15.1 bn in 20224$10.6 bn in 20214Management review02 Statement from the Executive Chairman and Chief Executive Officer04 Financial review08 Marketplace review Financial statements12 A.Interim consolidated statement of income12 B.Supplementary statement of income information13 C.Interim consolidated statement of other comprehensive income14 D.Interim consolidated statement of financial position15 E.Interim consolidated statement of changes in equity16 F.Interim consolidated statement of cash flows17 G.Notes to the interim consolidated financial statementsContentsIn spite of our strong performance,we did have a major issue in our nickel business,uncovering a significant fraud against the company,and resulting in a write-off of close to USD600 million,mainly in inventories.This systematic fraud against our company,which involved widespread falsification of documents and misrepresentations by counterparties,is extremely disappointing and something we take very seriously.While there was no wholesale failure of systems or processes across Trafigura,and no evidence of complicity by any of our employees,we have,of course,needed to make a number of improvements.We have appointed new Co-Heads of Battery Metals and made several changes to the management structure of our operational teams to further improve oversight.We are also continuing to undertake a thorough review to identify opportunities to tighten our systems and processes.Fraud has no place in our industry and we believe it is important to share information about alleged fraudsters to prevent further malfeasance or illegal activity unfortunately,something that all too often does not happen.We continue to pursue the perpetrators of this fraud through the courts.At a divisional level,our Oil and Petroleum Products teams delivered another robust performance.They were quick in adapting to changing market conditions and trade flows.During the period,we secured a deal to provide crude oil for one of the biggest refineries in southern Europe,the ISAB operation in Sicily,including an agreement to market the refined fuels it produces.The transaction is a good example of the supply chain and logistics solutions we can provide.The six-month period to the end of March 2023 saw our teams continue to work hard to help reconfigure supply chains after the disruptions of recent years.We continued to experience strong demand for our services from a global customer base that relies on us to help secure access to vital resources in an increasingly complex world.As we have highlighted in previous reports,our core business of moving commodities from where they are produced to where they are needed has become more complex but also more critical and more in demand than ever before.Indeed,many of the trends that characterised markets in the last six months of our 2022 financial year continued into this period,which also saw Chinas economy re-open after three years of isolation due to the pandemic.All this came against a backdrop of rising interest rates,as central banks attempted to quell inflationary pressures and a series of bank failures in the US that spilled over into Europe.The switch to cleaner forms of energy,which are highly metals intensive,also continued to gather momentum with the launch of new policies such as the EUs Net Zero Industry Act.By drawing on the experience and capabilities that we have built up over the past three decades,we were able to deliver a high level of service to our clients and achieve a net profit of USD5,544 million for the period.Jeremy WeirExecutive Chairman and Chief Executive OfficerStatement from the Executive Chairman and Chief Executive OfficerStrong performance as our services remained in high demand2Statement from the Executive Chairman and Chief Executive OfficerOur natural gas and LNG teams had a strong half year,working hard to provide security of supply to customers in a stressed market environment.This was highlighted by a long-term agreement we signed to deliver a substantial amount of gas to Securing Energy for Europe(SEFE),including a guarantee from the German Federal government export credit agency.Our power trading activities continued to gain momentum and recorded a significantly higher profit during the period.There was also a strong contribution from our Shipping and Chartering team,which used its fleet expertly in one of the strongest tanker markets in recent history to help our commercial teams and external customers.I am also pleased to report that our Shipping and Chartering division managed to reduce the intensity of its carbon emissions and is on track to meet its long-term environmental targets.As part of our wider Group sustainability commitments,and following on from pledges to uphold commitments in the Shipping and Aluminium sectors,in January 2023,we joined other leading companies in the First Movers Coalition with a pledge to purchase at least 50,000 tonnes of durable and scalable net carbon dioxide removal credits by the end of 2030 generated through advanced carbon dioxide removal technologies.In Metals and Minerals,our teams across non-ferrous metals and bulk minerals delivered a robust performance overall in challenging market conditions.During the first half of the year,as part of a consortium,we signed a concession agreement with the Angolan government to refurbish and operate the 1,300km Lobito rail corridor,which offers a western route to market for crucial energy transition metals from the African Copperbelt that is quicker and less carbon intensive than long-distance road transport.We also completed the acquisition of the Stolberg multi-metals smelter in Germany,adding another strategic processing asset to Nyrstars portfolio of metals processing operations in Europe.This year marks the 30th anniversary since Trafigura was founded.In that time,we have built a global,resilient and successful business.It is becoming increasingly clear that our industry will need to play an important role to facilitate the shift to a low-carbon economy.Our insights and expertise in managing global supply chains and developing new markets and investments in new supply of low-carbon fuels such as hydrogen and key transition metals,mean that we are well placed to play a crucial role in this transition.At the same time,we also have a responsibility to provide energy and power to meet the needs of a growing global population.All of that makes me very confident in our prospects over the medium and long term.In the near term,however,we do not expect the extraordinary conditions that have characterised global commodity markets in 2022 and the first half of 2023 to continue in the remainder of this year.The impact of tighter monetary policy on the global economy,a less stressed environment for commodity supply chains and seasonal factors that affect demand for commodities such as gas,are all helping to moderate volatile conditions and are likely to see the pace of our growth slow compared to the previous 12 months.Trafigura has signed a concession agreement with the Angolan government to refurbish and operate the 1,300km Lobito rail corridor,offering a western route to market for crucial energy transition metals produced in the DRC.Trafigura Interim Report 20233Total assets$90.5bn90.51202398.632022Financial reviewReconfiguring global supply chains Trafigura delivered a strong performance in the first half of its 2023 financial year,covering the six months to the end of March,with net profit for the period of USD5,544 million.Christophe SalmonGroup Chief Financial OfficerStrong demand for our services amid challenging market conditions and continued disruption to the movement of vital resources around the world,enabled Trafigura Group to report a strong performance for the six-month period ended in March.Net profit for the period was USD5,544 million,more than double the figure of USD2,659 million registered at the same time a year earlier.This result was driven by our ability to help our customer base adapt to changing trade flows,particularly in natural gas and shipping,as many of the complex issues that defined commodity markets in our 2022 financial year persisted.As has been observed repeatedly in recent years,these types of conditions play directly to the strength of companies such as Trafigura,with deep knowledge of markets and logistics backed up by infrastructure and with access to liquidity.The Groups underlying earnings before interest,tax,depreciation and amortisation(EBITDA)rose 73 percent to USD8,136 million,up from USD4,713 million in the first half of 2022.Revenues were 23 percent lower at USD131,335 million,down from USD170,609 million.This was a result of lower average commodity prices and trading volumes.In the financial year to date,Trafigura has traded an average of 6.3 million barrels per day of oil and petroleum products,compared to an average of 7.3 million barrels per day in the first six months of the 2022 financial year.In non-ferrous metals and bulk minerals,volumes fell by 8 percent to 54.4 million tonnes in the six months to the end of March,compared with the corresponding period a year ago.In spite of our strong performance,as referenced in the CEO statement,we did encounter a serious fraud in our nickel business,which we disclosed in February.Although many of the shipments were in transit and awaiting inspection,we nevertheless decided to record a charge of almost USD600 million in the first half of 2023 related to the fraud.The charge is predominantly presented in the consolidated statement of income under materials,transportation and storage.Group revenue$131.3bn131.31170.6220232022Underlying EBITDA$8.1bn8.114.7220232022Non-current assets$16.2bn16.21202319.432022Net profit$5.5bn5.5120232.722022Total Group equity$17.7bn17.7115.13202320221 For the six-month period ended 31 March 2023.2 For the six-month period ended 31 March 2022.3 As at 30 September 2022.4Financial reviewTurning to our industrial assets,in January 2023 we completed the sale of our minority interest in Nayara Energy,which operates one of the largest refineries in India,while in October 2022,Puma Energy completed the sale of 19 infrastructure and storage assets.Consolidated statement of incomeRevenue fell 23 percent year-on-year due to lower trading volumes and weaker commodity prices.However,our operating profit before depreciation and amortisation was up 74 percent to USD8,088 million,compared to USD4,648 million a year ago,as a result of strong demand for our supply chain services.Of total revenue,the Energy segment,which also includes our gas and power businesses,contributed USD89,162 million,21 percent less than the USD112,903 million generated in the first half of 2022.Operating profit before depreciation and amortisation in the Energy segment was USD7,284 million,compared to USD2,889 million in the same period a year earlier.In Metals and Minerals,revenue dropped 27 percent to USD42,173 million from USD57,706 million,and divisional operating profit before depreciation and amortisation fell 54 percent to USD813 million mostly due to the USD590 million charge taken in relation to the nickel fraud.Lower traded volumes and prices resulted in the cost of materials,transportation and storage falling to USD121,597 million from USD164,191 million.Our net finance expense increased to USD995 million,from USD689 million because of the sharp rise in base rates.However,it is important to note that these costs are passed through to our supply chain services.The result from equity-accounted investees and investments rose sharply to USD169.7 million,from USD3.8 million,mainly because of the Nayara sale transaction.Balance sheetAt the end of the period,our total balance sheet was USD90,451 million,down 8 percent from USD98,634 million at the end of September 2022.The reduction was driven by lower financing needs for our trading activity,primarily thanks to lower commodity prices.Lower trading volumes and prices were reflected by the drop in current assets to USD74,020 million at the end of March 2023,down from USD78,767 million six months earlier.Total non-current assets were also lower,down 17 percent from the corresponding period six months ago at USD16,174 million.Current loans and borrowing dropped by 3 percent to USD28,699 million as a result of slightly lower working capital needs.Our ratio of adjusted debt to Group equity stood at minus 0.22,significantly below our financial policy on leverage target of 1 times Group equity.Due to our strong profitability,Group equity at the end of the period was USD17,654 million,17 percent up from USD15,079 million at the end of September 2022.A USD2,985 million dividend was declared by Trafigura in March 2023.In accordance with its financial policy,Trafigura can declare and pay dividends subject to maintaining the Groups liquidity and financial leverage at an adequate level.This dividend forms part of our balance sheet management,along with the deleveraging achieved over the past few years as reflected in our adjusted debt ratio.In February 2023,Trafigura completed the acquisition of the Stolberg multi-metals smelter in Germany,adding another strategic processing asset to Nyrstars portfolio of metals processing operations in Europe.Trafigura Interim Report 20235Liquidity and financingTrafigura secured increased access to financing lines,throughout the half year,strengthening our ample liquidity buffer to manage potential future spikes of volatility in commodity markets.Total credit lines reached a level of USD75 billion,excluding Puma Energy,from a network of around 150 financial institutions.Overall,our funding position leaves us very well placed to cope with increased market volatility and continue to meet the needs of our customer base.The majority of our day-to-day trading activity is financed through uncommitted,self-liquidating trade finance facilities,while we use corporate credit facilities to finance other short-term liquidity requirements,such as margin calls or bridge financing.This funding model gives us the necessary flexibility to cope with periods of enhanced price volatility as utilisation of the trade finance facilities increases or decreases to reflect the volumes traded and underlying prices.We also maintain a debt capital markets presence to secure longer-term finance in support of our investments.In October 2022,the Group refinanced its Asian Syndicated Revolving Credit Facility(RCF)and Term Loan Facilities(TLF)at USD2.4 billion equivalent,with 28 banks participating in the transaction,including three new lenders.The new facilities comprised a 365-day USD RCF(USD685 million),a one-year CNH TLF(c.USD1,217 million-equivalent)and a three-year USD TLF(USD469 million).In line with our European RCF from March 2022,we updated the set of key performance indicators(KPIs)of the sustainability-linked loan structure.Also,in October 2022,we entered into a USD3.0 billion four-year loan agreement guaranteed by the government of Germany acting through the German Export Credit Agency(ECA).This loan supports the commitment by Trafigura to deliver substantial volumes of gas to Securing Energy for Europe(SEFE),over the next four years.In January 2023,we continued growing our portfolio of ECA financing lines with a USD135 million two-year facility with Abu Dhabi Exports Office(ADEX),the export financing arm of Abu Dhabi Fund for Development.The financing will support Trafiguras continued procurement of metals,minerals and refined hydrocarbons from the UAE.In March 2023,we refinanced our flagship 365-day European multi-currency syndicated revolving credit facilities(ERCF)totalling USD1.9 billion,while extending and increasing our USD3.5 billion three-year RCF.In line with the last two years,we structured these facilities as sustainability-linked loans,with an updated set of KPIs,including a new target on the reduction of lost time incident rate(LTIR).The new 365-day ERCF was initially launched at USD1.5 billion and closed substantially oversubscribed.Finally,in March 2023,Trafigura closed a USD225 million US Private Placement(USPP)across seven-and ten-year tenors.The deal was our seventh in this market following our first issuance in 2006,and was timed to refinance USD110.5 million USPP maturities.The transaction was upsized from an initial USD100 million following strong investor demand,with almost two-thirds of the total amount raised in the ten-year tranche.The issuance was Trafiguras second largest USPP to date and our first USPP without a tranche of five years or less,as investors focused towards longer tenors.In October 2022,Trafigura entered into a USD3 billion four-year loan agreement to deliver substantial volumes of gas to the German government.Financial review6Cash flow Our performance over the first half of the year resulted in a rise in operating cash flow before working capital changes by 73 percent to USD8,112 million from USD4,677 million.We believe operating cash flow before working capital changes is the most reliable measure of Trafiguras financial performance because the level of working capital is predominantly driven by prevailing commodity prices and is financed under the Groups self-liquidating finance lines.Net cash from operating activities was USD5,695 million,as net financing costs increased while working capital requirements remained fairly stable over the period.Investing activities resulted in a net cash use of USD763 million,compared to a cash inflow of USD506 million in the first half of 2022.Net cash used in financing activities was a net outflow of USD3,132 million,with the overall balance of cash and cash equivalents standing at USD16,681 million as of 31 March 2023,up 12 percent compared to 30 September 2022.The Pearl Kate bunkering barge in Singapore.Outlook The profitability of the Group during the first half of the year is a testament to the resilient,global business that we have built up since we were founded in 1993.While we expect our supply chain management services to remain in demand during the second half of the year,we are seeing a return to more normal market conditions.Therefore we expect the pace of our growth to slow compared to the previous 12 months.We are also conscious that there are a growing number of headwinds,including inflationary pressures,higher interest rates and ongoing geopolitical tensions,which could impact global economic growth.To that end,we will maintain a sharp focus on credit risk amid a shortage of US dollars in some parts of the developing world.The Group will also maintain a disciplined approach to acquisitions.While we will continue to invest in assets that support our core supply chain activities,this will be done in a very measured way and only when it can deliver acceptable rates of return.Looking further ahead,we remain positive about the long-term prospects for the Group,as the world shifts away from getting the vast majority of its energy from fossil fuels to cleaner forms of energy.Trafigura Interim Report 20237Marketplace review Commodity markets:Macro headwinds clash with micro tailwindsMany of the key themes that defined commodity markets since the onset of the war in Ukraine continued during the six months to the end of March 2023.At the start of our financial year,inflation remained high and central banks continued to raise interest rates to levels that are now proving restrictive for growth.The turmoil seen earlier this year in the banking sector,primarily in the US but with some spill-over into Europe,has been one of the direct results of tighter monetary policy.The idea that looser credit conditions in China,combined with the re-opening of the country late last year after the end of its zero-COVID-19 policy,would offset the impact of tighter financial conditions in the West,has yet to play out.Unlike previous periods of weakness,it appears that Chinas problem is not the supply of credit.Rather,it is the demand for credit,as repeated lockdowns,high youth unemployment and shaken faith in real estate developers are combining to keep consumer confidence,and therefore spending,low.Facing those macroeconomic headwinds,commodity prices unsurprisingly struggled so far in 2023,even though some OPEC members cut oil production which should support the market later this year and stockpiles of metal have continued to draw in China.At the time of writing,Brent crude oil,which was close to USD90 per barrel in January 2023,was trading at USD75 per barrel,while copper was just above USD8,300 per tonne,compared to USD9,400 per tonne in January 2023.During the reporting period,gas and power prices in Europe were volatile,swinging from over EUR200 per megawatt hour in Autumn,to below EUR30 per megawatt hour,helped by a mild winter and demand reduction measures,particularly in the industrial sector.Higher LNG prices also allowed Europe to attract more cargoes,away from other markets.In shipping,longer transit times due to the sanctions levied on Russian oil effectively removed tankers from the market and saw so-called“oil-on-water”volumes increase materially.Looking forward,the most recent data points to a US economy that is still running hot,especially in terms of employment and in the services sector.As such,commodity prices may struggle in the months ahead,especially if higher interest rates slow growth,the US dollar continues to rise and downbeat sentiment around China persists.Manufacturing globally is already contracting.Still,across the major economies there are significant shock absorbers in the form of savings built up over the last three years that should provide some support.Consumers in the US,Europe and China still have around USD4-5 trillion of excess savings thanks to stimulus efforts and deferred consumption during COVID-19.The situation is therefore very different to the run-up to the 2007-08 financial crisis when savings were stretched and consumers had taken on significant amounts of debt.An eventual end to the rate hiking cycle should allow consumers to deploy pent-up savings and growth to resume.Saad RahimChief Economist 8Marketplace reviewMarketplace reviewOil marketsLast year,oil markets were buffeted by the threat of Russian disruptions,Chinas zero-COVID-19 policy and record oil releases from strategic reserves in the US and its allies.In the end,lockdowns resulted in China exporting significant volumes of refined products,particularly diesel,to the rest of the world,more than offsetting any possible disruptions.The fact that there were no real disturbances to Russian flows meant that markets ended up being quite well supplied,especially as there were large releases from strategic petroleum reserves(SPR).The US SPR,for example,released 200 million barrels of crude oil following the invasion of Ukraine.Despite higher prices for most of the year and Chinas lockdowns,global demand still grew by a very healthy 2.3 million barrels per day in 2022.Given that the International Energy Agency reported Chinas demand contracting by 0.4 million barrels per day over the course of 2022,that meant global demand excluding China grew by over 2.7 million barrels per day,which would be one of the strongest increments of recent years.Even with the US and Europe seeing demand falter slightly due to higher interest rates and rising recession risk,Chinas re-opening at the turn of the year has helped support demand.Demand growth projections for 2023 are again above 2.0 million barrels per day,led by China,which is expected to account for almost half of that gain.Much of that global demand comes from demand recovery in jet fuel,as air travel has picked up.Looking back to the financial crisis,global oil demand contracted by 2.0 million barrels per day over 2008-09.Despite concerns about an economic slowdown,the forecast is for something much milder in 2023.Set against any demand losses,voluntary production cuts announced by some key OPEC members that are in theory as high as 2.0 million barrels per day,although in reality will probably be around half that.However,Saudi Arabia continues to make additional voluntary cuts,including those announced at the June OPEC meeting.Those supply cuts plus emerging market demand growth should still point towards material draws in inventories later this year.For over a decade,tightening oil markets could always rely on the US shale industry to ramp up production to bring markets back into balance.However,it is difficult to see how US production is going to increase this year given lower oil prices,higher interest rates and rising costs and certainly not by the levels many forecasters were projecting coming into the year,in some cases as high as 1.0 million barrels per day.We can already see that in the number of oil rigs being deployed,which has fallen steadily by a total of 72 rigs since the most recent peak in November 2022(which in itself was down almost 1,000 rigs from the all-time peak in 2014).But it is not just the US;across the globe,oil companies have slashed exploration and production spending,dropping to levels that are 40 percent or less of the last peak of spending in 2014.Thus,while refining capacity,which has previously been a bottleneck,is now starting to expand,led by extra capacity in China and the Middle East,there will likely be a structural dearth of crude oil in the coming years to feed both these refineries and any future demand growth needed to meet the needs of a growing global population.This raises the prospect of higher prices and heightened volatility in the years ahead,despite the rapidly increasing adoption of electric vehicles.0.0070.0080.0090.010.0110.0120.0130.0142.533.544.555.5Jun.2022Jul.2022Aug.2022Sep.2022Oct.2022Nov.2022Dec.2022Jan.2023Feb.2023Mar.2023Source:Bloomberg ResearchOil market challenged by macro-economic headwindsUS Two-year Treasury YieldStated in%yieldBrent Crude Oil(inverted)Stated in USD/barrelBaker Hughes US oil rig countStated in number of rigs1,00002004006008002016201720182019202020212022Source:Baker Hughes,Bloomberg,Trafigura ResearchH1 22: 105Jun-Nov 22: 19Nov 22-May 23:-72Trafigura Interim Report 20239Global visible stocks for base metalsStated in weeks of global use0123456782008200920102011201220132014201520162017201820192020202120222023Source:LME,SMM,COMEX,SHFE,Trafigura ResearchCuAlPbZnMetals marketsFor most of last year,tightening fundamentals,highlighted by stock levels,which declined to historically low levels in many cases,did not translate into higher prices for metals,as normally would be the case.This unusual dynamic was driven in large part by investment flows;specifically,the strength of the US dollar,which meant capital flowed into that market and out of other assets,in particular commodities.At the same time,there was also a view that Chinas COVID-19 lockdowns and property woes meant that metals demand was weak.The reality was actually quite different,with China seeing record levels of demand for copper,aluminium,stainless steel and other metals.Much of this growth was due to government-driven spending on infrastructure,especially the build-out of the electrical grid,but also the production of electric vehicles,which exceeded expectations by a wide margin.As regards the electrical grid,it has not just been an increase in overall capacity,but specifically more renewable capacity,which is metals intensive.China added 125 gigawatts of installed renewable power generation capacity in 2022,with wind growing by 38 gigawatts and solar capacity by 87 gigawatts.Added to the growth seen in the first quarter of the 2023 calendar year,we could potentially see these numbers grow by over 30 percent and 150 percent respectively over the next six months,bringing the total to over 170 gigawatts for the 2023 calendar year.That said,we are seeing relatively high inventories of finished goods in China,mainly as the result of consumer demand shifting from goods to services,but also due to the debottlenecking of disrupted supply chains.A persistent overhang of real estate inventory in China is also contributing to a weaker recovery than would have been hoped for,although the trajectory is still positive.The important point to note for both metals and energy is that any economic growth slowdown this year will not just impact demand but will also further depress investment in the supply of commodities which are needed for the energy transition and to meet the needs of a growing global population.As such,when demand recovers it will do so quickly,and run up against short stocks,low spare capacity and few response mechanisms,with new project pipelines running dry.10Marketplace reviewUnaudited interim consolidated financial statementsFor the six-month period ended 31 March 2023ContentsA.Interim consolidated statement of income 12B.Supplementary statement of income information 12C.Interim consolidated statement of other comprehensive income 13D.Interim consolidated statement of financial position 14E.Interim consolidated statement of changes in equity 15F.Interim consolidated statement of cash flows 16G.Notes to the interim consolidated financial statements 17 11Trafigura Interim Report 2023A.Interim consolidated statement of income For the six-month period ended 31 March 2023Note20232022USDMUSDMRevenue4 131,334.5 170,609.1 Materials,transportation and storage (121,597.0)(164,191.0)Employee benefits32(734.8)(829.7)Services and other(914.9)(940.4)Operating profit or(loss)before depreciation and amortisation4 8,087.8 4,648.0 Depreciation(right-of-use assets)13(778.5)(582.7)Depreciation and amortisation(PP&E and intangible fixed assets)11/12(305.6)(286.2)Impairments(fixed assets)7(19.9)(0.9)Reversal of impairments(financial assets and prepayments)7 12.0 19.4 Operating profit or(loss)6,995.8 3,797.6 Share of profit/(loss)of equity-accounted investees8 31.2 23.4 Disposal results and impairments of equity-accounted investees8 127.8 (17.6)Income/(expenses)from investments8 10.7 (2.0)Result from equity-accounted investees and investments 169.7 3.8 Finance income 957.2 216.2 Finance expense(1,952.5)(905.5)Result from financing activities(995.3)(689.3)Profit before tax 6,170.2 3,112.1 Income tax9(626.5)(452.7)Profit for the period 5,543.7 2,659.4 Profit attributable to:Owners of the Company 5,534.5 2,654.3 Non-controlling interests 9.2 5.1 Profit for the period 5,543.7 2,659.4 See accompanying notes.Note20232022Reconciliation to Underlying EBITDAUSDMUSDMOperating profit or(loss)before depreciation and amortisation4 8,087.8 4,648.0 Adjustments10 47.9 64.6 Underlying EBITDA10 8,135.7 4,712.6 See accompanying notes.B.Supplementary statement of income informationFor the six-month period ended 31 March 2023Financial statements12C.Interim consolidated statement of other comprehensive incomeFor the six-month period ended 31 March 2023Note20232022USDMUSDMProfit for the period 5,543.7 2,659.4 Other comprehensive incomeItems that are or may be reclassified to profit or loss:Gain/(loss)on cash flow hedges30 1.5 108.9 Effect from hyperinflation adjustment 21.0 6.8 Tax on other comprehensive income 13.6 (42.8)Exchange gain/(loss)on translation of foreign operations 67.8 11.6 Share of comprehensive income/(loss)from associates 11.7 (1.4)Recycling of FCTR on disposal of equity-accounted investee8(176.7)Recycling of CFHR on disposal of equity-accounted investee8 55.1 Items that will not be reclassified to profit or loss:Net change in fair value through other comprehensive income,net of tax 15.5 (0.2)Defined benefit plan actuarial gains/(losses),net of tax(0.5)(1.9)Other comprehensive income for the period,net of tax 9.0 81.0 Total comprehensive income for the period 5,552.7 2,740.4 Total comprehensive income attributable to:Owners of the Company 5,546.6 2,734.2 Non-controlling interests 6.1 6.2 Total comprehensive income for the period 5,552.7 2,740.4 See accompanying notes.Trafigura Interim Report 202313D.Interim consolidated statement of financial positionAs at 31 March 2023Note 31 March 2023 30 September 2022 USDMUSDM AssetsProperty,plant and equipment 11 4,619.5 4,377.1 Intangible assets 12 1,596.3 2,112.7 Right-of-use assets 13 4,132.1 3,904.5 Equity-accounted investees 14 973.1 979.6 Prepayments 15 1,429.4 1,534.1 Loans receivable 15 714.8 307.5 Other investments 15 835.3 595.5 Derivatives 30 672.9 1,125.2 Deferred tax assets 161.1 210.4 Other non-current assets 16 1,039.5 4,285.9 Total non-current assets 16,174.0 19,432.5 Inventories 17 22,492.1 22,583.6 Trade and other receivables 18 26,093.1 27,630.5 Derivatives 30 4,531.1 7,179.0 Prepayments 15 2,317.6 2,117.2 Income tax receivable 403.4 311.4 Other current assets 20 1,443.0 3,422.3 Deposits 21 59.5 642.0 Cash and cash equivalents 21 16,680.5 14,881.3 Total current assets 74,020.3 78,767.3 Assets classified as held for sale 22 256.6 434.1 Total assets 90,450.9 98,633.9 Note 31 March 2023 30 September 2022 USDMUSDM Equity Share capital 23 1,503.7 1,503.7 Capital securities 23 671.5 654.1 Reserves 23 (545.8)(537.5)Retained earnings 23 15,859.4 13,288.4 Equity attributable to the owners of the Company 17,488.8 14,908.7 Non-controlling interests 165.4 169.9 Total group equity 17,654.2 15,078.6 LiabilitiesLoans and borrowings 24 11,415.9 9,614.5 Long term lease liabilities 13 2,630.7 2,817.1 Derivatives 30 354.8 2,723.7 Provisions 453.0 474.2 Other non-current liabilities 520.1 521.9 Deferred tax liabilities 310.4 380.4 Total non-current liabilities 15,684.9 16,531.8 Loans and borrowings 24 28,698.8 29,663.6 Short term lease liabilities 13 1,586.6 1,170.1 Trade and other payables 25 22,363.0 25,649.5 Current tax liabilities 1,274.8 1,037.9 Other current liabilities 26 885.8 1,562.1 Derivatives 30 2,290.2 7,910.9 Total current liabilities 57,099.2 66,994.1 Liabilities classified as held for sale 22 12.6 29.4 Total group equity and liabilities 90,450.9 98,633.9 See accompanying notes.Financial statements14E.Interim consolidated statement of changes in equityFor the six-month period ended 31 March 2023Equity attributable to the owners of the CompanyUSDMNoteShare capitalCurrency translation reserveRevaluation reserveCash flow hedge reserveCapital securitiesRetained earningsProfit for the periodTotalNon-controlling interestsTotal Group equityBalance at 1 October 2022 1,503.7 (420.2)(79.9)(37.4)654.1 6,294.2 6,994.2 14,908.7 169.9 15,078.6 Profit for the period 5,534.5 5,534.5 9.2 5,543.7 Other comprehensive income(93.7)15.5 69.8 20.5 12.1 (3.1)9.0 Total comprehensive income for the period(93.7)15.5 69.8 20.5 5,534.5 5,546.6 6.1 5,552.7 Profit appropriation 6,994.2 (6,994.2)Dividend23(2,985.0)(2,985.0)(17.5)(3,002.5)Acquisition of non-controlling interest in subsidiary5(1.3)(1.3)(6.0)(7.3)Share-based payments32 47.9 47.9 47.9 Purchase of capital securities23(5.0)(5.0)(5.0)Capital securities (currency translation)23 27.6 (27.6)Capital securities dividend23(24.0)(24.0)(24.0)Divestment and deconsolidation of subsidiary 13.0 13.0 Other 0.1(5.2)6.0 0.9 (0.1)0.8 Balance at 31 March 2023 1,503.7(513.8)(64.4)32.4 671.5 10,324.9 5,534.5 17,488.8 165.4 17,654.2 Equity attributable to the owners of the CompanyUSDMNoteShare capitalCurrency translation reserveRevaluation reserveCash flow hedge reserveCapital securitiesRetained earningsProfit for the periodTotalNon-controlling interestsTotal Group equityBalance at 1 October 2021 1,503.7 (79.4)(34.9)(175.2)1,173.9 4,814.8 3,100.0 10,302.9 242.7 10,545.6 Profit for the period 2,654.3 2,654.3 5.1 2,659.4 Other comprehensive income 6.8 (0.2)68.3 5.0 79.9 1.1 81.0 Total comprehensive income for the period 6.8 (0.2)68.3 5.0 2,654.3 2,734.2 6.2 2,740.4 Profit appropriation 3,100.0 (3,100.0)Dividend23(12.1)(12.1)Acquisition of non-controlling interest in subsidiary5(32.4)(32.4)(29.0)(61.4)Share-based payments32 64.6 64.6 64.6 Capital securities issuedRepayment of capital securities23(479.2)(479.2)(479.2)Capital securities (currency translation)23(12.3)12.3 Capital securities dividend23(40.5)(40.5)(40.5)Divestment and deconsolidation of subsidiary(66.1)(66.1)Other 2.3 (0.1)2.2 2.2 Balance at 31 March 2022 1,503.7 (72.6)(35.1)(106.9)684.7 7,923.7 2,654.3 12,551.8 141.7 12,693.5 See accompanying notes.Trafigura Interim Report 202315F.Interim consolidated statement of cash flowsFor the six-month period ended 31 March 2023Note20232022USDMUSDMCash flows from operating activitiesProfit before tax 6,170.2 3,112.1 Adjustments for:Depreciation and amortisation11/12/13 1,084.1 868.9 Impairments(included in operating profit or loss)7 7.9 (18.5)Result from equity-accounted investees and investments8(169.7)(3.8)Result from financing activities 995.3 689.3 Equity-settled share-based payment transactions 47.9 64.6 Provisions(10.7)3.8(Gain)/loss on sale of fixed assets(included in services and other)(13.3)(39.2)Operating cash flows before working capital changes 8,111.7 4,677.2 Changes in:Inventories17 182.2 (396.6)Trade and other receivables and derivatives1810,797.3(17,314.6)Prepayments15(85.2)(170.4)Trade and other payables and derivatives25(11,819.3)10,160.6 Cash generated from/(used in)operating activities7,186.7(3,043.8)Interest paid(1,939.2)(893.7)Interest received 936.2 190.4 Dividends(paid)/received 6.6 14.2 Tax(paid)/received(495.7)(292.7)Net cash flows from/(used in)operating activities5,694.6(4,025.6)Cash flows from investing activitiesAcquisition of property,plant and equipment11(354.4)(551.8)Proceeds from sale of property,plant and equipment11 26.7 363.2 Disposal of assets/liabilities held for sale22 166.1 34.9 Acquisition of intangible assets12(112.7)(36.4)Proceeds from sale of intangible assets 12 0.2 Acquisition of equity-accounted investees14(22.6)(24.0)Disposal of equity-accounted investees14 709.6 Loans receivable and advances granted15(279.6)(6.2)Repayment of loans receivable and advances granted15 4.0 5.8 Acquisition of other investments15(225.1)(0.4)Disposal of other investments15 71.0 10.8 Acquisition of subsidiaries,net of cash acquired5(36.8)Net cash flows from/(used in)investing activities(763.2)505.5 Cash flows from financing activitiesPayment of capital securities dividend23(18.6)(34.7)Dividend and payments in relation to the share redemption by the direct parent company23(2,985.0)Purchase/repayment of capital securities23(5.0)(479.2)Acquisition of non-controlling interest(3.9)Dividend non-controlling interest(16.4)Increase in long-term loans and borrowings24 3,278.6 1,742.3(Decrease)in long-term loans and borrowings24(566.3)(123.5)Payment of leases13(772.4)(579.9)Net increase/(decrease)in short-term bank financing24(2,043.2)2,605.2 Net cash flows from/(used in)financing activities(3,132.2)3,130.2 Net increase/(decrease)in cash and cash equivalents 1,799.2 (389.9)Cash and cash equivalents at 1 October 14,881.3 10,677.5 Cash and cash equivalents at 31 March21 16,680.5 10,287.6 See accompanying notes.Financial statements161.Corporate informationThe principal business activities of Trafigura Group Pte.Ltd.(Trafigura or the Company)and its subsidiaries(the Group)are trading in crude and petroleum products,power and renewables,non-ferrous concentrates,refined metals and bulk commodities such as coal and iron ore.The Group also invests in assets,including through investments in associates,which have strong synergies with its core trading activities.These include storage terminals,service stations,metal warehouses,industrial facilities and mines.The Company is incorporated in Singapore and its principal business office is at 10 Collyer Quay,Ocean Financial Centre,#29-01/05,Singapore,049315.The Companys immediate holding company is Trafigura Beheer B.V.,a company incorporated in the Netherlands.Trafigura Beheer B.V.is ultimately controlled by Farringford Foundation,which is established under the laws of Panama.The interim consolidated financial statements for the six-month period ended 31 March 2023 were authorised for issue by the Board of Directors on 7 June 2023.2.Basis of preparation2.1 Statement of complianceThe Companys interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards(IFRS)as issued by the International Accounting Standards Board(IASB).The interim consolidated financial statements have not been audited.2.2 Basis of measurementThe interim consolidated financial statements have been prepared under the historical cost convention except for inventories,derivatives and certain other financial instruments that have been measured at fair value.The consolidated financial statements have been prepared on a going concern basis.2.3 Functional and presentation currencyThe Groups presentation currency is the US dollar(USD)and all values are rounded to the nearest tenth of a million(USDM 0.1)unless otherwise indicated.The US dollar is the functional currency of most of the Groups principal operating subsidiaries.Most of the markets in which the Group is involved are USD denominated.2.4 Accounting policiesThe interim consolidated financial statements for the first half of 2023 financial year follow the same accounting policies as described in the Groups consolidated financial statements for the financial year ended 30 September 2022,except for any new,amended,or revised accounting standard and interpretations endorsed by the IASB,effective for the accounting period beginning on 1 October 2022.Any new or amended standards and interpretations that may impact Trafigura are presented in the next section.These interim financial statements contain selected accounting policies and should therefore be read in conjunction with the Groups consolidated financial statements for the financial year ended 30 September 2022.2.5 Key accounting estimates and judgementsPreparing the interim consolidated financial statements in compliance with IFRS requires management to make judgements,estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances,and are used to judge the carrying amount of assets and liabilities that are not readily apparent from other sources.Actual outcomes could differ from those estimates.Existing circumstances and assumptions about future developments,however,may change due to market changes or circumstances arising beyond the control of the Group.Such changes are reflected in the assumptions when they occur.For the areas the Group identified as being critical to understanding its financial position,reference is made to the 2022 annual report.2.6 Going concernTrafigura assessed the going-concern assumptions,during the preparation of the Groups consolidated financial statements.The Group believes that no events or conditions including those related to the Ukraine war,give rise to doubt about the ability of the Group to continue in operation in the next reporting period.This conclusion is drawn based on the knowledge of the Group,the estimated economic outlook and identified risks and uncertainties in relation thereto.Furthermore,this conclusion is based on review of the current cash balance,and expected developments in liquidity and capital.The Group has sufficient cash and headroom in its credit facilities.Therefore,it expects that it will be able to meet contractual and expected maturities and covenants.Consequently,it has been concluded that it is reasonable to apply the going-concern concept as the underlying assumption for the financial statements.G.Notes to the interim consolidated financial statementsTrafigura Interim Report 2023173.Adoption of new and revised standards3.1 New and amended standards or interpretations adoptedIn the current period,the Group adopted the following new and amended standards or interpretations:Standard/InterpretationName of standard/interpretation or amendmentsDate of publicationEffective as ofAmendments to IAS 16Property,Plant and Equipment(Proceeds before Intended Use)14 May 2020 1 January 2022 Amendments to IAS 37Provisions,Contingent Liabilities and Contingent Assets (Onerous Contracts,Settlement Costs from Contracts)14 May 2020 1 January 2022 Amendments to IFRS 3Business Combinations(Amendment to References to the Conceptual Framework)14 May 2020 1 January 2022 Annual improvements to IFRS 2018-2020Amendments to:IFRS 1(Subsidiary as a First-Time Adopter)IFRS 9(Fees in the“10%Test”Regarding Derecognition of Financial Liabilities)IFRS 16(Lease Incentives)IAS 41(Taxation in Fair Value Measurements)14 May 2020 1 January 2022 The amendments shown in the table had no material effect on the interim consolidated financial statements.3.2 New standard and interpretations not yet adoptedCertain new accounting standards and interpretations have been published that are not mandatory for the 2023 financial year reporting periods and have not been early adopted by the Group:Standard/InterpretationName of standard/interpretation or amendmentsDate of publicationExpected date of initial application(financial years starting as of)Amendments to IFRS 17Insurance Contracts(including amendments to the standard)25 June 2020 1 January 2023 Amendments to IAS 1Presentation of Financial Statements(Classification of Liabilities as Current or Non-current)(including Deferral of Effective Date)23 January 2020(15 July 2020)1 January 2023 Amendments to IAS 1 and IFRS Practice Statement 2Presentation of Financial Statements and Making Materiality Judgements (Presentation of Key Accounting Policies)12 February 2021 1 January 2023 Amendments to IAS 8Accounting Policies,Changes in Accounting Estimates and Errors (Definition of Changes in Accounting Policies and Accounting Estimates)12 February 2021 1 January 2023 Amendments to IAS 12Income Taxes(Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction)7 May 2021 1 January 2023 Amendments to IFRS16Lease Liability in a Sale and Leaseback Amendments to IFRS 22 September 2022 1 January 2024 Amendments to IAS 1Non-current liabilities with Covenants 31 October 2022 1 January 2024 The Group does not expect that these new standards,amendments and interpretations not yet adopted will have a material effect on its reporting.4.Operating segments First half of financial year 2023 First half of financial year 2022 EnergyMetals and MineralsCorporate and OtherTotalEnergyMetals and MineralsCorporate and OtherTotalUSDMUSDMUSDMUSDMUSDMUSDMUSDMUSDMSales revenue from external customers 87,061.3 41,861.3 128,922.6 112,156.5 57,420.3 169,576.8 Service revenue from external customers 2,100.6 311.3 2,411.9 746.6 285.7 1,032.3 Revenue 89,161.9 42,172.6 131,334.5 112,903.1 57,706.0 170,609.1 Operating expenses(81,878.4)(41,359.3)(9.0)(123,246.7)(110,013.9)(55,927.4)(19.8)(165,961.1)Operating profit or(loss)before depreciation and amortisation 7,283.5 813.3 (9.0)8,087.8 2,889.2 1,778.6 (19.8)4,648.0 The basis of the segmentation of the Company has not changed compared to the annual consolidated financial statements.A fraud involving misrepresentation and presentation of false documentation has been perpetrated against Trafigura.The fraud is isolated to a specific line of business.Trafigura believed it had paid for a significant quantity of LME grade nickel but subsequent inspections have indicated otherwise.Legal proceedings have been commenced against the counterparties involved.The Group has recorded a USD590 million charge,which is predominantly presented under Materials,transportation and storage in the consolidated statement of income for the six-month period ended 31 March 2023.G.Notes to the interim consolidated financial statementsFinancial statements185.Business combinations and non-controlling interests5.1 First half of financial year 2023In February 2023,the Group completed the acquisition of the Ecobat Resources Stolberg GmbH business following the satisfaction of customary conditions precedent including the receipt of regulatory approvals.Stolberg is a multi-metals processing plant and acquired for a preliminary purchase price of EUR34.3 million.The final purchase price will be determined during the second half of financial year 2023.5.2 Financial year 20225.2.1 Acquisition of additional shareholding in Puma EnergyTrafiguras share in Puma Energy increased from 93.4 percent to 96.7 percent as per 30 September 2022 as Cochan Holdings LLC ceased to be a shareholder in Puma Energy in December 2021.6.Deconsolidation of subsidiariesThere was no significant deconsolidation of subsidiaries and non-controlling interest during the six-month period ended 31 March 2023 and the financial year ended 30 September 2022.7.Impairments20232022USDMUSDM(Reversal of)Impairments of property,plant and equipment 20.6 (0.4)(Reversal of)Impairments of right-of-use assets(0.7)Impairments of intangible assets 1.3 Impairments of fixed assets 19.9 0.9(Reversal of)Impairments of financial assets(1.7)(15.5)(Reversal of)Impairments of prepayments(10.3)(3.9)(Reversal of)Impairments of financial assets and prepayments(12.0)(19.4)Total(reversal of)impairments included in operating profit or loss7.9(18.5)(Reversal of)Impairments of equity-accounted investees(6.3)0.2(Reversal of)Impairments of equity-accounted investees(6.3)0.2 Total(Reversal of)impairments1.6(18.3)7.1 First half of financial year 2023There were no significant impairments or reversals of impairments during the six-month period ended 31 March 2023.7.2 First half of financial year 2022There were no significant impairments or reversals of impairments during the six-month period ended 31 March 2022.Trafigura Interim Report 202319G.Notes to the interim consolidated financial statements8.Result from equity-accounted investees and investments20232022USDMUSDMShare of profit/(loss)of equity-accounted investees 31.2 23.4 Disposal result of equity-accounted investees 121.5 (17.4)Reversal of(Impairments)of equity accounted investees 6.3 (0.2)Disposal results and impairments of equity-accounted investees 127.8 (17.6)Income/(expenses)from equity-accounted investees 159.0 5.8 Gain/(loss)on fair value through profit and loss instruments(2.2)2.4 Gain/(loss)on divestment of subsidiaries(4.1)Gain/(loss)from disposal of other investments 7.8 (1.2)Dividend income 5.1 0.9 Income/(expenses)from investments 10.7 (2.0)Result from equity-accounted investees and investments 169.7 3.8 8.1 First half of financial year 2023In January 2023,the Group completed the sale of its investment in Tendril Ventures Pte Ltd to Hara Capital Sarl for a consideration of USD168.9 million.Hara Capital is a wholly owned subsidiary of Mareterra Group Holding,an energy investment group with a focus on energy and carbon efficiency infrastructure.Upon the disposal of the investment,the Group recycled the related foreign currency translation reserve and cashflow hedge reserve balances from Consolidated Statement of Other Comprehensive Income to the Consolidated Statement of Income.Although the net impact on equity is nil this resulted in a USD121.5 million gain on the income statement for the first half year.8.2 First half of financial year 2022In September 2021,the Group sold its 50 percent stake in Minas de Aguas Tenidas SA(MATSA)to Sandfire Resources Limited for a total expected consideration of USD777.8 million.The sale was agreed in partnership with the Groups former joint-venture partner,Mubadala Investment Company PJSC,which received the same corresponding consideration,making Sandfire Spain Holdings Limited the new sole owner of MATSA.In the first half of 2022 financial year an adjustment has been made to the contingent consideration,which was recorded under the disposal result of equity-accounted investees.9 Income tax9.1 Tax expenseIncome tax expense recognised in the Consolidated Statement of Income consists of the following:20232022USDMUSDMCurrent income tax expense 630.9 467.6 Adjustments in relation to current income tax of previous periods 6.1 10.0 Deferred tax expense/(income)(12.6)(33.8)Withholding tax in the current period 2.1 8.9 Total 626.5 452.7 10 Underlying EBITDAAccounting policyThe Group believes that the supplemental presentation of underlying EBITDA provides useful information on the Groups financial performance,its ability to service debt,to fund capital expenditures and to provide a helpful measure for comparing its operating performance with that of other companies.Underlying EBITDA,when used by Trafigura,means operating profit or loss before depreciation and amortisation excluding share-based payments and other adjustments.In addition to share-based payments,the adjustments made to arrive at underlying EBITDA are considered exceptional and/or non-operational from a management perspective based on their size or nature.They can be either favourable or unfavourable.These items include for example:Significant restructuring costs and other associated costs arising from significant strategy changes that are not considered by the Group to be part of the normal operating costs of the business;Significant acquisition and similar costs related to business combinations such as transaction costs;Provisions that are considered to be exceptional and/or non-operational in nature and/or size to the financial performance of the business;and Various legal settlements that are significant to the result of the Group.From time to time,it may be appropriate to disclose further items as exceptional or non-operational items in order to reflect the underlying performance of the Group.Underlying EBITDA is not a defined term under IFRS and may therefore not be comparable with similarly-titled profit measures and disclosures reported by other companies.It is not intended to be a substitute for,or superior to,GAAP measures.20232022USDMUSDMOperating profit or(loss)before depreciation and amortisation8,087.84,648.0AdjustmentsShare-based payments47.964.6Adjustments47.964.6Underlying EBITDA8,135.74,712.6As percentage of revenue6.2%2.8%Share-based payments have been excluded due to their non-cash nature.Financial statements2011.Property,plant and equipmentUSDM Land and buildings Machinery and equipment Barges and vessels Mine property and development Other fixed assets Total CostBalance at 1 October 2022 2,254.8 3,140.1 703.1 113.6 1,224.2 7,435.8 Additions 23.6 38.7 8.1 4.4 279.6 354.4 Acquired in business combination 28.1 6.6 5.6 40.3 Reclassifications 35.8 115.4 (4.9)8.2 (172.4)(17.9)Effect of movements in exchange rates,including hyperinflation adjustment 37.4 86.8 0.7 0.9 21.1 146.9 Disposals (7.7)(10.1)(5.8)(3.1)(26.7)Balance at 31 March 2023 2,372.0 3,377.5 701.2 127.1 1,355.0 7,932.8 Depreciation and impairment lossesBalance at 1 October 2022 781.3 1,393.7 312.8 21.5 549.4 3,058.7 Depreciation 48.9 132.2 18.3 6.9 39.4 245.7 Impairment losses 2.8 0.2 17.620.6Reclassifications(7.2)(11.4)(7.1)3.8(21.9)Effect of movements in exchange rates,including hyperinflation adjustment 20.2 3.8 0.7 0.2 (0.4)24.5 Disposals (3.3)(8.0)(1.3)(1.7)(14.3)Balance at 31 March 2023 842.7 1,510.5 323.4 28.6 608.1 3,313.3 Net book value at 31 March 2023 1,529.3 1,867.0 377.8 98.5 746.9 4,619.5 Total additions for the period(USD354.4 million)mainly relate to investments in Nyrstar industrial facilities(USD138.7 million),the Puma Energy retail network(USD68.9 million)and various individually smaller projects.The investments in Nyrstar predominantly relate to sustaining capital expenditures,with investments split across the Groups global operations.Included in the Other fixed assets category are assets under construction,which relates to assets not yet in use,and some Nyrstar related assets.Net book value as at 31 March 2023 of assets under construction amounted to USD441.9 million(30 September 2022:USD415.4 million).Once the assets under construction come into operation they are reclassified to the appropriate asset category and from that point they are depreciated.Depreciation is included in depreciation and amortisation.Impairment charges are separately disclosed in the Consolidated Statement of Income.Please refer to Note 7 for details on impairments.Trafigura Interim Report 20232112.Intangible fixed assetsUSDM GoodwillBrand name and customer relationships Other intangible assets Total CostBalance at 1 October 2022 1,203.7 427.6 1,209.1 2,840.4 Additions 4.9 107.8 112.7 Acquired in business combination 2.1 2.1 Reclassifications 1.6 (69.0)(67.4)Effect of movements in exchange rates,including hyperinflation adjustment 4.2 (8.5)3.7 (0.6)Disposals (306.5)(306.5)Balance at 31 March 2023 1,214.4 419.1 947.2 2,580.7 Amortisation and impairment lossesBalance at 1 October 2022 196.9 39.4 491.4 727.7 Amortisation 18.4 41.5 59.9 Effect of movements in exchange rates,including hyperinflation adjustment 1.1 0.8 1.9 Reclassifications 1.6 (2.3)(0.7)Disposals (0.2)(0.2)Balance at 31 March 2023 198.5 58.9 531.2 788.6 Net book value at 31 March 2023 1,015.9 360.2 416.0 1,792.1 Non-current 1,015.9 360.2 220.2 1,596.3 Current(Note 20)195.8 195.8 Balance at 31 March 2023 1,015.9 360.2 416.0 1,792.1 Additions in first half of the 2023 financial year primarily result from environmental emission credits and allowances for own use(USD81.1 million),which are acquired for the purpose of settling emission obligations in the ordinary course of business.Disposals under Other intangible assets refer to retirement of environmental emission credits and allowances during the period.G.Notes to the interim consolidated financial statementsFinancial statements2213.LeasesThe Group leases various assets including land and buildings,storage facilities,vessels and service stations.Leases are negotiated on an individual basis and contain a wide range of different terms and conditions,including termination and renewal rights.The Group,as a lessor,only has finance leases.The lease agreements do not impose any covenants,but leased assets may not be used as security for borrowing purposes.13.1 Right-of-use assets 20232022USDMUSDMFreight 2,862.8 2,544.7 Storage 491.4 521.2 Land and buildings 299.5 295.2 Service stations 149.2 155.8 Other 329.2 387.6 Total 4,132.1 3,904.5 USDMFreightStorageLand and buildingsService stationsOther Total Balance at 1 October 2022 2,544.7 521.2 295.2 155.8 387.6 3,904.5 Additions/remeasurements 1,107.7 11.9 20.0 7.4 6.6 1,153.6 Reclassifications(2.5)2.1 0.4 Disposals (158.3)(0.1)(0.2)(158.6)Reversal of(Impairment losses)0.7 0.7 Depreciation(637.0)(45.1)(20.8)(13.5)(62.1)(778.5)Effect of movement in exchange rates 1.3 4.1 (0.3)0.2 5.3 Other8.2 1.1 (4.2)5.1Balance at 31 March 2023 2,862.8 491.4 299.5 149.2 329.2 4,132.1 During the first half of the 2023 financial year,both the additions and disposals in the Freight category primarily relate to vessels.The Other category mainly includes assets located in Corpus Christi,Texas,that enable transportation,storing,processing,and vessel loading of crude oil and crude oil products.Trafigura Interim Report 20232313.2 Lease liabilities20232022USDMUSDMOpening balance 3,987.2 2,572.1Interest104.9 134.7 Additions/remeasurements1,187.2 3,067.9 Disposals (181.2)(314.6)Payments(903.1)(1,438.9)Effect of movement in exchange rates 17.0 (48.3)Other 5.3 14.3Closing balance 4,217.3 3,987.2 Current 1,586.6 1,170.1 Non-current 2,630.7 2,817.1 Closing balance 4,217.3 3,987.2 The following table sets out a maturity analysis of the lease liabilities at 31 March 2023 and 30 September 2022,indicating the undiscounted lease amounts to be paid:20232022Less than one year 1,672.8 1,355.3 Later than one year and less than five years 2,526.6 2,558.4 Later than five years 750.7 604.1 Total undiscounted lease payable 4,950.1 4,517.8 Future finance costs(732.8)(530.6)Lease liabilities included in the statement of financial position 4,217.3 3,987.2 14.Equity-accounted investees20232022USDMUSDMOpening balance 979.6 842.2 Effect of movements in exchange rates 12.6 (34.2)Additions 22.6 150.9 Disposals(7.2)(10.4)(Impairments)/reversals6.3(34.9)Share of net profit/(loss)31.2 54.2 Dividends/Repayment of capital(71.2)(21.4)Reclassification to assets held for sale(9.4)Other(0.8)42.6 Total973.1 979.6 Corporate guarantees in favour of associates and joint ventures as at 31 March 2023 amount to USD160.0 million(30 September 2022:USD151.1 million).14.1 First half of financial year 2023Additions for the first half of 2023 financial year consist of various small investments.During the period,Nala Lux Holdco S.r.l transferred its stake in Swift Current Energy to Trafigura which was settled via repayment of capital(USD69.7 million).Trafiguras pro-rata share of Swift Current Energy was subsequently sold to Buckeye Partners,L.P.,the majority owner of Swift Current Energy.The share of net profit from investments amounts to USD31.2 million.This is predominantly the result of profits in Guangxi Jinchuan(USD15.7 million),Minerao Morro do Ip S.A.(USD10.5 million)and Nala Lux HoldCo S.r.l.(USD8.0 million)and partly offset by Empresa Minera del Caribe S.A.(a loss of USD8.5 million)and Porto Sudeste do Brasil(a loss of USD3.9 million).14.2 Financial year 2022The additions to equity-accounted investees amounted to USD150.9 million.As Nala Renewables is expanding,a new holding company has been incorporated,Nala Lux HoldCo S.r.l.,and additional investments have been made(USD112.0 million).Also,various other investments were made in financial year 2022.The share of net profit from investments amounts to USD54.2 million.This is predominantly the result of profits in ITG S.r.l.(USD25.7 million),Atalaya Mining PLC(USD23.4 million)and Guangxi Jinchuan(USD17.1 million),and partly offset by Porto Sudeste do Brasil(a loss of USD23.6 million).During the 2022 financial year,the Group received USD21.4 million in dividends from various equity-accounted investees.G.Notes to the interim consolidated financial statementsFinancial statements2415.Prepayments and financial assets15.1 Prepayments20232022USDMUSDMCurrent 2,317.6 2,117.2 Non-current 1,429.4 1,534.1 Total 3,747.0 3,651.3 Prepayments relate to prepayments of commodity deliveries,and are split into non-current prepayments(due 1 year)and current prepayments(due 1 year).A significant portion of the non-current prepayments,as well as current prepayments,are either financed on a non-recourse basis or insured.Out of the total current prepayments balance,an amount of USD0.8 billion(30 September 2022:USD1.3 billion)relates to prepayments which are made for specifically identified cargos.The contractually outstanding prepayments amount decreases in size with each cargo that is delivered,until maturity.Once the contractually agreed total cargo has been fully delivered,the prepayment agreement falls away leaving no remaining contractual obligations on Trafigura or the supplier.The Group monitors the commodity prices in relation to the prepayment contracts and manages the credit risk together with its financial assets as described in Note 29.A portion of the long-term prepayments,as well as short-term prepayments,is on a limited recourse basis.Interest on the prepayments is added to the prepayment balance.The Group has calculated expected credit losses on the outstanding prepayments as from the 2020 financial year onwards.The methodology of the expected credit loss calculation is similar to the methodology used in the expected credit loss calculations on loans receivable.Based upon the individual analysis of the prepayments,the cumulated expected credit losses on these prepayments recorded by the Group amount to USD110.0 million(30 September 2022:USD133.3 million).The following table explains the movements of the expected credit loss between the beginning and the end of the reporting period and the gross carrying amounts of the prepayments by credit risk category:31 March 202330 September 2022PerformingUnderperformingTotalPerformingUnder-performingTotal12-months ECLLifetime ECL12-months ECLLifetime ECLUSDMUSDMUSDMUSDMUSDMUSDMExpected credit loss(ECL)provisionOpening balance 1 October 44.0 89.3 133.3 24.7 99.4 124.1 ECL on prepayments recognised during the period 1.1 1.1 3.9 12.4 16.3 ECL on prepayments derecognised during the period(0.1)(5.9)(6.0)(0.5)(0.5)Changes in PD/LGD/EAD(13.8)(4.6)(18.4)15.4 (22.0)(6.6)Closing balance 31.2 78.8 110.0 44.0 89.3 133.3 Carrying amountCurrent 2,129.1 188.5 2,317.6 2,060.9 56.3 2,117.2 Non-current 700.6 728.8 1,429.4 385.0 1,149.1 1,534.1 Total 2,829.7 917.3 3,747.0 2,445.9 1,205.4 3,651.3 Trafigura Interim Report 20232515.2 Loans and other receivables20232022USDMUSDMLoans to associates and related parties 46.4 43.2 Other non-current loans receivable 668.4 264.3 Total 714.8 307.5 Other non-current loans receivables include various loans that are granted to counterparties that the Group trades with.This line also includes the debt agreement with the Ministry of Finance of Angola,which relates to compensation for iron ore investments made by the Group following the liquidation of a consolidated Angolan subsidiary in 2016.During the first half of the 2023 financial year,the Ministry of Finance continued regular repayments of the debt which amounted to USD17.2 million in aggregate.In addition,this line also includes a series of financial instruments provided to Wolverine Fuels LLC(Wolverine)with a total carrying value of USD371.2 million as per 31 March 2023(30 September 2022:USD87.9 million).Wolverines liquidity became severe during 2022 as labour shortages and logistical issues involving Wolverines rail provider severely affected Wolverines ability to move coal tonnage and deliver against its customers obligations.As a result,an impairment amounting to USD154.3 million was recorded during the 2022 financial year.During the first half of the 2023 financial year a secured loan of USD272.6 million has been granted to Wolverine.Based upon the individual analysis of these loans,the recorded expected credit losses on these loans amount to USD307.1 million(30 September 2022:USD282.7 million).The following table explains the movements of the expected credit loss between the beginning and the end of the reporting period and the gross carrying amounts of the loan receivables by credit risk category:31 March 202330 September 2022PerformingUnder-performingTotalPerformingUnder-performingTotal12-months ECLLifetime ECL12-months ECLLifetime ECLUSDMUSDMUSDMUSDMUSDMUSDMExpected credit loss(ECL)provisionOpening balance 1 October 3.1 279.6 282.7 2.4 134.2 136.6 ECL on new loans originated during the period 9.1 9.1 56.6 56.6 Changes in PD/LGD/EAD 4.3 11.0 15.3 0.7 88.8 89.5 Closing balance at 30 September 7.4 299.7 307.1 3.1 279.6 282.7 Carrying amountCurrent(Note 18)172.7 5.5 178.2 211.1 3.8 214.9 Non-current(Note 15)442.4 272.4 714.8 144.9 162.6 307.5 Total 615.1 277.9 893.0 356.0 166.4 522.4 15.3 Other investments20232022USDMUSDMListed equity securities Fair value through OCI 0.7 0.9 Listed equity securities Fair value through profit or loss 299.9 63.2 Listed debt securities Fair value through profit or loss 186.4 203.0 Unlisted equity investments Fair value through profit or loss133.9 130.1 Unlisted equity investments Fair value through OCI 214.4 198.3 Total835.3 595.5 The Groups long-term investments consist of listed equity securities,listed debt securities and unlisted equity securities.The listed equity securities have no fixed maturity or coupon rate.The fair values of listed equity investments are based on quoted market prices,while the fair value of the unlisted equity securities is determined based on a Level 3 valuation as prepared by management.Additions for the first half of the 2023 financial year consist of investment in Korea Zinc Company Limited(USD147.5 million),Saras S.p.A(USD64.6 million)and various small investments.G.Notes to the interim consolidated financial statementsFinancial statements2616.Other non-current assets20232022USDMUSDMNon-financial hedged items 643.4 3,821.6 Restricted deposits 33.7 94.7 Other 362.4 369.6 Total 1,039.5 4,285.9 For further information on the non-financial hedged items,please refer to Note 30.2.The restricted deposits mainly represent amounts placed on deposit accounts relating to Puma Energy and Nyrstar mining operations.17.Inventories20232022USDMUSDMStorage inventories 13,180.0 11,477.7 Floating inventories 8,250.5 10,194.8 Work-in-progress inventories 771.6 752.9 Supplies and other 290.0 158.2 Total 22,492.1 22,583.6 Trafigura policy provides that the inventory(except the item Supplies and other)has either been pre-sold or hedged.Part of the inventory has been pledged for securitisation purposes.Work-in-progress inventories predominantly relate to intermediate inventories being processed at the Nyrstar smelters.18.Trade and other receivables20232022USDMUSDMTrade debtors 10,849.2 10,472.6 Provision for bad and doubtful debts(132.2)(94.2)Accrued turnover 10,492.9 8,638.0 Broker balances 2,748.2 2,550.5 Other debtors 1,113.4 3,965.8 Loans to third parties 40.0 185.9 Loans to related parties 138.2 29.0 Other taxes 619.3 545.9 Related parties 224.1 1,337.0 Total 26,093.1 27,630.5 All financial instruments included in trade and other receivables are held to collect the contractual cash flows.Furthermore,the cash flows that the Group receives on these instruments are solely payments of principal and interest except for trade and other receivables related to contracts including provisional pricing features.The Group entered into a number of dedicated financing facilities,which finance a portion of its receivables.Part of these facilities meet the criteria of derecognition of the receivables according to IFRS.As at 31 March 2023,an amount of USD6,066.8 million (30 September 2022:USD8,147.3 million)of trade debtors has been discounted.Of this amount,USD5,043.3 million(30 September 2022:USD6,566.0 million)has been derecognised,as the Group has transferred substantially all the risks and rewards of ownership of the financial asset with non-recourse.The remaining part of discounted receivables which does not meet the criteria for derecognition amounting to USD1,023.5 million(30 September 2022:USD1,581.2 million),continues to be recognised as trade debtors.For the received amount of cash of these items the Group has recognised a liability under current loans and borrowings.Of USD10,849.2 million trade debtors(30 September 2022:USD10,472.6 million),USD3,149.2 million had been sold on a non-recourse basis under the receivables securitisation programmes(30 September 2022:USD4,095.1 million).Of the USD224.1 million receivables on related parties(30 September 2022:USD1,337.0 million),USD12.1 million had been sold on a non-recourse basis under the receivables securitisation programmes(30 September 2022:USD30.9 million).Please refer to Note 19.As at 31 March 2023,11.9 percent(30 September 2022:10.7 percent)of receivables were between 1-60 days overdue,and 5.1 percent(30 September 2022:4.9 percent)were greater than 60 days overdue.Trafigura applied the simplified method in assessing expected credit losses.The accounts receivables have been divided in aging buckets and based on an analysis on historical defaults and recovery rates,and considering forward looking information,a percentage for expected credit losses has been determined.Trafigura manages to limit credit losses by renegotiating contracts in the case of a default.From the above analysis,an expected credit loss as at 31 March 2023 amounting to USD3.1 million(30 September 2022:USD3.8 million)has been recorded.The loss allowance provision as at 31 March 2023 amounts to USD132.2 million(30 September 2022:USD94.2 million).The provision mostly relates to demurrage claims and commercial disputes with our clients.Accrued turnover represents receivable balances for sales which have not yet been invoiced.They have similar risks and characteristics as trade debtors.Trade debtors and accrued turnover have similar cash flow characteristics and are therefore considered to be a homogeneous group of financial assets.Total trade and other receivables related to contracts including provisional pricing features amount to USD8.0 billion(30 September 2022:USD6.5 billion).Other debtors primarily relate to collateral for OTC derivatives.Trafigura Interim Report 202327G.Notes to the interim consolidated financial statements19.Securitisation programmesThe Group operates various securitisation programmes:Trafigura Securitisation Finance plc.(TSF)and Argonaut Receivables Company S.A.(Argonaut)enable the Group to sell eligible receivables,and an inventory securitisation programme,through Trafigura Commodities Funding Pte.Ltd.(TCF),and Trafigura Global Commodities Funding Pte.Ltd.(TGCF),enables Trafigura to sell and repurchase eligible inventories.Those securitisation vehicles are consolidated and consequently the securitised receivables and inventories are included within the consolidated trade debtor and inventory balances.19.1 Receivables securitisationOver time the external funding of TSF has increased significantly in size,mostly through Variable Funding Notes(VFN)purchased by bank sponsored conduits,while incorporating a longer term committed funding element,in the form of Medium Term Notes(MTN).Argonaut is funded through short-term VFN only.The available external funding of the receivables securitisation programmes consists of:20232022Interest rateMaturityUSDMUSDMTSF AAA MTNLibor 0.53 24 July 139.5 139.5 TSF AAA MTN1.09 24 July 139.5 139.5 TSF BBB MTN1.79 24 July 21.0 21.0 TSF AAA VFNVariousVarious throughout the year 4,129.9 4,798.3 TSF BBB VFNVariousVarious throughout the year 310.8 361.2 Argonaut Receivables SecuritisationVariousVarious throughout the year 300.0 300.0 TSF senior subordinated debt2026 March 237.5 225.7Total 5,278.2 5,985.2The rate of interest applied to the TSF AAA and BBB VFN is principally determined by the demand for commercial paper issued by ten bank-sponsored conduits and the liquidity of the interbank market.The Group benchmarks the rate provided against Libor and SOFR rates.The maturity of the TSF AAA and BBB VFNs has been staggered to diversify the maturity profile of the notes.This is aimed at mitigating the liquidity wall risk associated with a single maturity date for a significant funding amount.19.2 Inventory securitisationThe available external funding of the inventory securitisation programme consists of:20232022Interest rateMaturityUSDMUSDMTCF/TGCF VFN SOFR 1.0 23 November 355.0 465.0 TCF/TGCF MLFSOFR 0.5 23 November 45.0 50.0 Total 400.0 515.0 20.Other current assets20232022USDMUSDMNon-financial hedged items 943.4 3,064.9 Prepaid expenses 257.2 326.7 Current intangible assets 195.8 Other 46.6 30.7 Total 1,443.0 3,422.3 Please refer to Note 30.2 for further information on the non-financial hedged items.Prepaid expenses relate to prepayments other than those made for physical commodities.Financial statements2821.Cash and cash equivalents,and deposits20232022USDMUSDMCash at bank and in hand 12,534.7 11,766.6 Short-term deposits 4,145.8 3,114.7 Cash and cash equivalents 16,680.5 14,881.3 Cash at bank earns interest at floating rates based on daily bank deposit rates.Short-term deposits are made for varying periods between one day and three months depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates.The fair value of cash and cash equivalents approximates the carrying value.An amount of USD102.0 million(30 September 2022:USD102.4 million)of cash at bank is restricted,including restrictions that require the funds to be used for a specified purpose and restrictions that limit the purpose for which the funds can be used,unless fixed asset construction invoices are presented to the banks.As at 31 March 2023,the Group had USD15.4 billion(30 September 2022:USD12.7 billion)of committed unsecured syndicated loans,of which USD6.4 billion(30 September 2022:USD6.3 billion)remained unutilised.The Group had USD11.8 billion(30 September 2022:USD8.6 billion)of immediately(same day)available cash in liquidity funds.Therefore,the Group had immediate access to available liquidity balances from liquidity funds and corporate facilities in excess of USD18.2 billion(30 September 2022:USD14.9 billion).21.1 DepositsShort-term deposits made for periods longer than three months are shown separately in the Consolidated Statement of Financial Position and earn interest at the respective short-term deposit rates.22.Assets classified as held for sale and discontinued operations20232022USDMUSDMAssets classified as held for sale 256.6 434.1 Liabilities classified as held for sale(12.6)(29.4)Net assets classified as held for sale 244.0 404.7 The net assets classified as held for sale as per 31 March 2023 predominantly relates to the remaining part of the Puma Infrastructure business.Compared to 30 September 2022,the balance of the net assets classified as held for sale decreased by USD160.7 million.This decrease is mostly attributable to the disposal of the Groups equity investment in Tendril Ventures(Nayara)(30 September 2022:USD165.9 million).The Group expects to complete the disposal of the remaining assets classified as held for sale within the next twelve months.Puma Energy decided to divest its Infrastructure division at the end of the 2021 financial year,resulting in its classification as held for sale at 30 September 2021.This asset held for sale was based on its fair value less cost of disposal as part of the purchase price allocation.During the 2022 financial year,the Group signed a Share Sales Agreement with ITG S.r.l.,parent company of Impala Terminals Group(ITG).Before completion,Pumas Infrastructure business was required to be carved out into a separate entity.Given the different pace of progress in the various jurisdictions,completion of the transaction has been staggered such that the majority of the terminals would be transferred at Main Completion,with the remaining terminals being transferred at a subsequent completion date.At 30 September 2022,all of the completion conditions for Main Completion were satisfied.As a consequence,the assets held for sale related to Main Completion were derecognised.The reported balances as at 30 September 2022 as well as 31 March 2023 relate to the remaining terminals.During the first half of the 2023 financial year,the valuation changed predominantly as a result of working capital movements between the held-for-sale perimeter and the remaining Group without material impact on the Groups Consolidated Statement of Income.Trafigura Interim Report 20232923.Capital and reserves23.1 Share capitalAs at 31 March 2023,the Company has 25,000,000 ordinary shares outstanding and a capital of USD1,503.7 million.During the six-month period ended 31 March 2023,no changes took place in the outstanding share capital.The holders of ordinary shares are entitled to receive dividends as and when declared by the Company.All ordinary shares carry one vote per share without restriction.The ordinary shares have no par value.23.2 Capital securitiesAs part of the financing of the Company and its subsidiaries,the Company has two capital securities instruments with a total carrying value of USD671.5 million as at 31 March 2023(30 September 2022:two capital securities instruments amounting to USD654.1 million).These two capital securities have a par value of EUR262.5 million and USD400.0 million respectively(30 September 2022:EUR262.5 million and USD400.0 million respectively).These two capital securities are perpetual in respect of which there is no fixed redemption date.The distribution on the capital securities is payable semi-annually in arrears from the date of issue.The Company may elect to defer(in whole but not in part except for the USD400.0 million capital security where partial interest deferral is allowed)any distribution in respect of these capital securities by providing no more than 30 or less than five business days notice,unless a compulsory interest payment event has occurred,including amongst others the occurrence of a dividend payment in respect of subordinated obligations of the Company.Any interest deferred shall constitute arrears of interest and shall bear interest.In the event of a winding-up,the rights and claims of the holders in respect of the capital securities shall rank ahead of claims in respect of the Companys shareholders,but shall be subordinated in right of payment to the claims of all present and future senior obligations,except for obligations of the Company that are expressed to rank pari passu with,or junior to,its obligations under the capital securities.The EUR262.5 million capital security was issued on 31 July 2019 and is listed on the Singapore Stock Exchange.The distribution on the capital security is 7.5 percent per annum until the distribution payment date in July 2024.The capital security may be redeemed at the Companys option in whole,but not in part,in the period starting 90 calendar days before,and ending at,the distribution payment date in July 2024 or any distribution date thereafter upon giving not less than 30 nor more than 60 days notice to the holders.The early redemption amount payable by the Company shall be the principal amount of the capital security,together with any interest accrued to the date fixed for redemption,all arrears of interest and all additional interest amounts.The USD400.0 million capital security was issued on 24 September 2021 and is listed on the Singapore Stock Exchange.The distribution on the capital security is 5.875 percent per annum until the distribution payment date in September 2027.The capital security may be redeemed at the Companys option in whole,but not in part,in the period starting 90 calendar days before,and ending at,the distribution payment date in September 2027 or any distribution date thereafter upon giving not less than 30 nor more than 60 days notice to the holders.The early redemption amount payable by the Company shall be the principal amount of the capital security,together with any interest accrued to the date fixed for redemption,all arrears of interest and all additional interest amounts.23.3 Currency translation reserveThe currency translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations,as well as from the translation of liabilities that hedge the Companys net investment in a foreign operation.23.4 Revaluation reserveThe revaluation reserve comprises the fair value measurements movements of the equity investments which are accounted for at fair value through other comprehensive income.On realisation of these gains or losses,for example the sale of an equity instrument,the cumulative amounts of this reserve are transferred to retained earnings.Included in the revaluation reserve is a loss of USD64.4 million(30 September 2022:a loss of USD79.9 million)related to the mark-to-market valuation of equity investments.23.5 Cash flow hedge reserveThe Group has elected not to apply the cost of hedging option.A change in the fair value of derivatives designated as a cash flow hedge is initially recognised as a cash flow hedge reserve in other comprehensive income.The deferred amount is then released to the Consolidated Statement of Income in the same period during which the hedged transaction affects the Consolidated Statement of Income.Included in the cash flow hedge reserve is a gain of USD32.4 million(30 September 2022:a loss of USD37.4 million)related to the effective portion of the changes in fair value of cash flow hedges,net of tax.These cash flow hedges predominantly relate to hedging of interest and currency exposure on corporate loans,currency exposure on future capital and operational expenditures,expected electricity consumption,and price exposure on highly probable future production,purchases and sales of commodities.The cash flow hedge positions on hedging derivatives currently shown in the cash flow hedge reserve will be recycled to the statement of income in the period where the hedged item are recognised.Over time,the overall net impact of the hedged items and hedging instruments together to the Consolidated Statement of Income and other comprehensive income will be minimal.The cash flow hedge reserves as at 31 March 2023 includes a positive reserve of USD2.5 million relating to the Groups share in the cash flow hedge reserves of equity-accounted investees(30 September 2022:USD52.2 million negative).23.6 DividendsThe value of the dividends declared on the ordinary shares for the period ending 31 March 2023 amount to USD2,985.0 million(30 September 2022:USD1,721.2 million),representing USD119.4 per share(30 September 2022:USD68.8 per share).Dividend payments are mostly made in relation to the share redemption by the immediate holding company.G.Notes to the interim consolidated financial statementsFinancial statements3024.Loans and borrowingsThis note provides information about the contractual terms of the Groups interest-bearing loans and borrowings,which are measured at amortised cost.For more information about the Groups exposure to interest rate,foreign currency and liquidity risk,please refer to Note 29.20232022USDMUSDMNon-currentCommitted unsecured syndicated loans 5,591.5 3,933.7 Private placements 1,382.6 1,052.2 Listed bonds 1,180.7 1,134.2 Securitisation programmes 537.5 300.0 Puma Energy financing*1,409.8 1,459.1 Other loans 1,313.8 1,735.3 Total non-current 11,415.9 9,614.5 CurrentCommitted unsecured syndicated loans 2,484.0 1,263.0 Private placements170.9118.1Listed bonds 180.5 635.7 Securitisation programmes 3,555.3 5,191.5 Puma Energy financing*153.5 652.3 Other loans 1,135.6 1,313.6 Current bank borrowings 21,019.0 20,489.4 Total current 28,698.8 29,663.6 Total 40,114.7 39,278.1 Outstanding debt 19,095.7 18,788.7 Current bank borrowings 21,019.0 20,489.4 Total 40,114.7 39,278.1*Loans and borrowings issued by Puma Energy have not been guaranteed by other Trafigura entitiesDuring the six-month period ended 31 March 2023,a number of important transactions for the Group were completed:Refinancing of its Asian syndicated revolving credit and term loan facilities of USD2.4 billion-equivalent in October 2022.Similar to previous year,the facilities include a sustainability-linked loan structure,with an updated set of key performance indicators(KPIs).Closing of a USD3.0 billion four-year loan agreement,guaranteed by the Government of Germany,acting through the German Export Credit Agency in October 2022.Closing of a USD135 million two-year facility with Abu Dhabi Exports Office(ADEX),the export financing arm of Abu Dhabi Fund for Development in January 2023.Refinancing of its 365-day European multi-currency syndicated revolving credit facility totalling USD1.9 billion as well as the extension and increase of its USD3.5 billion three-year facility in March 2023.The facilities include a sustainability-linked loan structure,with an updated set of KPIs.Closing of a USD225 million US Private Placement across seven-and ten-year tenors in March 2023.The Group was in compliance with all its corporate and financial covenants as at 31 March 2023.Trafigura Interim Report 20233124.1 Terms and debt repayment scheduleThe terms and conditions of the outstanding debt(excluding short-term bank borrowings)as at 31 March 2023 are as follows:PrincipalInterest rateMaturityFloating/fixed rate debt 5 yearsTotalUSDMUSDMUSDMUSDMCNH 1,571.6 CNH Hibor 0.90 23 OctoberFloating 228.6 228.6 CNH 7,261.6 3.25 23 OctoberFixed 1,057.4 1,057.4 USD 288.0 SOFR 1.20 23 OctoberFloating 288.0 288.0 USD 810.5 SOFR 1.20 24 OctoberFloating 810.5 810.5 USD 135.0 SOFR 1.15 25 JanuaryFloating 135.0 135.0 USD 120.0 Libor 0.80 25 JanuaryFloating 120.0 120.0 USD 30.0 Libor 0.45 25 JanuaryFloating 30.0 30.0 JPY 84,750.0 JPY TONA 0.85 25 MarchFloating 638.3 638.3 JPY 9,000.0 JPY TONA 1.00 25 MarchFloating 67.8 67.8 USD 469.0 SOFR 1.20 25 OctoberFloating 469.0 469.0 USD 3,000.0 SOFR 1.50 26 OctoberFloating 750.0 2,250.0 3,000.0 USD 800.0 SOFR 1.15 27 SeptemberFloating 160.0 560.0 720.0 USD 375.0 SOFR 1.40 27 SeptemberFloating 375.0 375.0 EUR 125.0 EURIBOR 0.85 27 SeptemberFloating 135.9 135.9 Committed unsecured syndicated loans 2,484.0 5,591.5 8,075.5 USD 53.0 5.55 23 MayFixed 53.0 53.0 EUR 101.5 3.50 24 FebruaryFixed 110.3 110.3 CNH 700.0 5.00 24 DecemberFixed 101.9 101.9 USD 35.0 4.01 25 MarchFixed 35.0 35.0 USD 67.0 5.72 25 MayFixed 67.0 67.0 EUR 8.5 4.00 26 FebruaryFixed 9.2 9.2 USD 37.5 3.87 26 AprilFixed 37.5 37.5 USD 83.0 4.17 27 MarchFixed 83.0 83.0 USD 48.5 4.41 28 AprilFixed 48.5 48.5 USD 20.0 5.86 28 MayFixed 20.0 20.0 USD 400.0 6.00 29 SeptemberFixed 400.0 400.0 USD 85.0 4.60 30 MarchFixed 85.0 85.0 USD 81.0 7.21 30 MarchFixed 81.0 81.0 USD 117.5 4.89 31 AprilFixed 117.5 117.5 USD 144.0 7.34 33 MarchFixed 144.0 144.0 USD 200.0 6.33 36 JulyFixed 7.6 29.8 123.2 160.6 Private placements 170.9 363.4 1,019.2 1,553.5 CHF 165.0 2.25 23 MayFixed 180.5 180.5 CHF 55.0 3.25 24 SeptemberFixed 60.2 60.2 USD 500.0 5.88 25 SeptemberFixed 493.5 493.5 EUR 500.0 3.88 26 FebruaryFixed 542.5 542.5 USD 138.5 2026 JulyFixed 84.5 84.5 Listed bonds 180.5 1,180.7 1,361.2 USD 355.0 SOFR 1.00 23 NovemberFloating 167.5 167.5 USD 45.0 SOFR 0.50 23 NovemberFloating 10.0 10.0 USD 139.5 Libor 0.53 24 JulyFloating 139.5 139.5 USD 139.5 1.09 24 JulyFixed 139.5 139.5 USD 21.0 1.79 24 JulyFixed 21.0 21.0 USD 237.5 SOFR 4.25 26 MarchFloating 237.5 237.5 USD 4,740.7 VariousVariousFloating 3,377.8 3,377.8 Securitisation programmes 3,555.3 537.5 4,092.8 USD 105.0 SOFR 2.00 24 MayFloating 105.0 105.0 EUR 50.0 2.65 24 MayFixed 34.5 18.2 52.7 USD 600.0 5.13 24 OctoberFixed 556.4 556.4 USD 750.0 5.00 26 JanuaryFixed 729.1 729.1 USD 104.1 VariousVariousVarious 60.9 1.1 62.0 Other short term loans 58.1 58.1 Puma Energy financing(not guaranteed by other Trafigura entities)153.5 1,409.8 1,563.3 Other Loans 1,135.6 1,300.3 13.5 2,449.4 Total 7,679.8 10,383.2 1,032.7 19,095.7 G.Notes to the interim consolidated financial statementsFinancial statements3225.Trade and other payables20232022USDMUSDMTrade creditors 4,868.5 5,367.9 Accrued costs and expenses 15,456.7 17,192.2 Broker balances 188.3 Related parties 117.8 107.9 Other creditors 1,731.7 2,981.5 Total 22,363.0 25,649.5 The Groups exposure to currency and liquidity risk related to trade and other payables is disclosed in Note 29.Total trade and other payables related to contracts including provisional pricing features amount to USD8.7 billion(30 September 2022:USD8.7 billion).Other creditors primarily relate to collateral for OTC derivatives.26.Other current liabilities20232022USDMUSDMNon-financial hedged items 133.9 89.5 Deferred revenue 386.5 679.3 Other 365.4 793.3 Total 885.8 1,562.1 Please refer to Note 30.2 for further information on the non-financial hedged items.As per 30 September 2022,Other includes payables relating to the receipt of certain commodities that are due to be repaid within one year.27.Offsetting of financial assets and liabilitiesIn accordance with IAS 32,the Group reports financial assets and liabilities on a net basis in the Consolidated Statement of Financial Position only if there is a legally enforceable right to set off the recognised amounts and there is intention to settle on a net basis,or to realise the asset and settle the liability simultaneously.The financial assets and liabilities subject to offsetting,enforceable master netting and similar agreements as at 31 March 2023 and 30 September 2022 were as follows:31 March 2023Amounts eligible for set off under netting agreementsAmounts not subject to netting agreementsNet amounts presented in the statement of financial positionGross amountAmounts offsetNet amountUSDMUSDMUSDMUSDMUSDMRelated parties 301.5 (77.4)224.1 224.1 Derivative assets 6,866.9 (2,508.7)4,358.2 845.8 5,204.0 Related parties(195.2)77.4 (117.8)(117.8)Derivative liabilities(4,720.5)2,508.7 (2,211.8)(433.2)(2,645.0)30 September 2022Amounts eligible for set off under netting agreementsAmounts not subject to netting agreementsNet amounts presented in the statement of financial positionGross amountAmounts offsetNet amountUSDMUSDMUSDMUSDMUSDMRelated parties 1,415.1 (78.1)1,337.0 1,337.0 Derivative assets 11,358.4 (5,899.9)5,458.5 2,845.7 8,304.2 Related parties(186.0)78.1 (107.9)(107.9)Derivative liabilities(15,000.7)5,899.9 (9,100.8)(1,533.8)(10,634.6)For the financial assets and liabilities subject to enforceable master netting or similar arrangements above,each agreement between the Group and the counterparty allows for net settlement of the relevant financial assets and liabilities in the ordinary course of business.Where practical reasons may prevent net settlement,financial assets and liabilities may be settled on a gross basis.However,each party to the master netting or similar agreement will have the option to settle all such amounts on a net basis in the event of default of the other party.Trafigura Interim Report 20233328.Commitments and contingenciesThe Company and its subsidiaries are party to a number of legal claims and proceedings arising out of their business operations.The Company believes that the ultimate resolution of these claims and proceedings will not,in the aggregate,have a material adverse effect on the Groups financial position,income or cash flows.Such legal claims and proceedings,however,are subject to inherent uncertainties and the outcome of individual matters is unpredictable.It is possible that the Group could be required to make expenditures,in excess of established provisions,in amounts that cannot be reasonably estimated.The total contingent liabilities related to trade finance instruments,such as letters of credit and guarantees,as at 31 March 2023 amount to USD7,849.6 million(30 September 2022:USD9,980.7 million).The Group had outstanding commitments at the end of 31 March 2023 and 30 September 2022 as follows:20232022USDMUSDMService arrangement contracts 1,725.2 1,880.1 Long-term lease commitments Not yet started 606.6 476.8 Short-term lease contracts 500.5 515.7 Subtotal commitments 2,832.3 2,872.6 Assets under construction93.2 114.4 Total commitments2,925.5 2,987.0 20232022USDMUSDMLess than one year 1,115.6 995.1 Later than one year and less than five years 1,321.2 1,301.3 Later than five years 395.5 576.2 Commitments excluding assets under construction 2,832.3 2,872.6 Guarantees include guarantees to trading partners in the normal course of business.29.Financial risk management objectives and policiesThe Group is exposed to a number of different financial risks arising from normal business exposures as well as its use of financial instruments,including market risks relating to commodity prices,foreign currency exchange rates,interest rates and equity prices,credit risk,and liquidity risk.Prudently managing these risks is an integral element of the Groups business and has been institutionalised since the Groups foundation.Risk management guidelines are established at senior management level.The various risks the Group is exposed to are managed through a combination of internal procedures,such as strict control mechanisms and policies,as well as external third parties such as the derivative,insurance and bank markets.As a rule,the Group actively manages and lays off where possible a large majority of the risks inherent to its activity.The Groups conservative risk management process is designed to:Provide a full and accurate awareness of risks throughout the Group;Professionally evaluate and monitor these risks through a range of risk metrics;Limit risks via a dynamic limit setting framework;Manage risks using a wide range of hedging instruments and strategies;and Ensure a constant dialogue between trading desks,risk managers and senior management.The three main reinforcing components of the Groups risk management process are the Chief Risk Officer,the Risk Committee and the trading teams.The Chief Risk Officer is independent of the revenue-producing units and reports to the Chief Operating Officer and the Management Committee.The Chief Risk Officer has primary responsibility for assessing and monitoring the Groups market risks.The Chief Risk Officers team liaises directly with the trading teams to analyse new opportunities and ensure that risk assessments adapt to changing market conditions.The Chief Risk Officers team also ensures the Groups risk management capabilities incorporate ongoing advances in technology and risk management modelling capabilities.The Risk Committee,which comprises members of the Management Committee and the Chief Risk Officer,is responsible for applying the Groups risk management capabilities towards improving the overall performance of the Group.In the reporting period,the Risk Committee met at least weekly to discuss and set risk and concentration limits,review changing market conditions and analyse new market risks and opportunities.The Groups trading teams provide deep expertise in hedging and risk management in the specific markets each team operates in.While the trading teams have front line responsibility for managing the risks arising from their activities,the Groups process ensures a strong culture of escalation and accountability,with well-defined limits,automatic notifications of limit overages and regular dialogue with the Chief Risk Officer and Risk Committee.G.Notes to the interim consolidated financial statementsFinancial statements3429.1 Market riskMarket risk is the risk of loss in the value of the Groups positions as a result of changes in market prices.The Group holds positions primarily to ensure the Groups ability to meet physical supply commitments to the Groups customers,to hedge exposures arising from these commitments and to support the Groups investment activities.The Groups positions change due to changing customer requirements and investment opportunities.The value of the Groups positions is accounted for at fair value and therefore fluctuates on a daily basis due to changes in market prices.Categories of market risk the Group is exposed to include:Commodity price risk,resulting from expo
2023-10-09
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JD.com,Inc.Financial and Operational HighlightsAug 2023DisclaimerThe following document has been pre.
2023-10-08
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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 AUGUST 31,2023OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO .Commission File No.1-10635NIKE,Inc.(Exact name of Registrant as specified in its charter)Oregon93-0584541(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)One Bowerman Drive,Beaverton,Oregon 97005-6453(Address of principal executive offices and zip code)(503)671-6453(Registrants telephone number,including area code)SECURITIES REGISTERED PURSUANT TO SECTION 12(B)OF THE ACT:Class B Common StockNKENew York Stock Exchange(Title of each class)(Trading symbol)(Name of each exchange on which registered)Indicate by check mark:YESNOwhether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for thepast 90 days.whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growth company.See the definitions of large accelerated filer,accelerated filer,smaller reporting company,and emerging growth company in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filer Non-accelerated filerSmaller reporting companyEmerging growth companyif an emerging growth company,if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a)of the Exchange Act.whether the registrant is a shell company(as defined in Rule 12b-2 of the Act).As of September 30,2023,the number of shares of the Registrants Common Stock outstanding were:Class A297,897,252 Class B1,224,012,873 1,521,910,125 Table of ContentsNIKE,INC.FORM 10-QTABLE OF CONTENTSPAGEPART I-FINANCIAL INFORMATION1ITEM 1.Financial Statements1Unaudited Condensed Consolidated Statements of Income1Unaudited Condensed Consolidated Statements of Comprehensive Income2Unaudited Condensed Consolidated Balance Sheets3Unaudited Condensed Consolidated Statements of Cash Flows4Unaudited Condensed Consolidated Statements of Shareholders Equity5Notes to the Unaudited Condensed Consolidated Financial Statements6ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations21ITEM 3.Quantitative and Qualitative Disclosures about Market Risk36ITEM 4.Controls and Procedures36PART II-OTHER INFORMATION38ITEM 1.Legal Proceedings38ITEM 1A.Risk Factors38ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds39ITEM 5.Other Information40ITEM 6.Exhibits41Signatures42Table of ContentsPART I-FINANCIAL INFORMATIONITEM 1.FINANCIAL STATEMENTSNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOMETHREE MONTHS ENDED AUGUST 31,(In millions,except per share data)20232022Revenues$12,939$12,687 Cost of sales7,219 7,072 Gross profit5,720 5,615 Demand creation expense1,069 943 Operating overhead expense3,047 2,977 Total selling and administrative expense4,116 3,920 Interest expense(income),net(34)13 Other(income)expense,net(10)(146)Income before income taxes1,648 1,828 Income tax expense198 360 NET INCOME$1,450$1,468 Earnings per common share:Basic$0.95$0.94 Diluted$0.94$0.93 Weighted average common shares outstanding:Basic1,528.4 1,567.1 Diluted1,543.3 1,585.8 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.1Table of ContentsNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMETHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022Net income$1,450$1,468 Other comprehensive income(loss),net of tax:Change in net foreign currency translation adjustment36(226)Change in net gains(losses)on cash flow hedges(134)555 Change in net gains(losses)on other3(11)Total other comprehensive income(loss),net of tax(95)318 TOTAL COMPREHENSIVE INCOME$1,355$1,786 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.2Table of ContentsNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSAUGUST 31,MAY 31,(In millions)20232023ASSETSCurrent assets:Cash and equivalents$6,178$7,441 Short-term investments2,612 3,234 Accounts receivable,net4,749 4,131 Inventories8,698 8,454 Prepaid expenses and other current assets2,013 1,942 Total current assets24,250 25,202 Property,plant and equipment,net5,109 5,081 Operating lease right-of-use assets,net2,939 2,923 Identifiable intangible assets,net272 274 Goodwill281 281 Deferred income taxes and other assets3,935 3,770 TOTAL ASSETS$36,786$37,531 LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt$Notes payable6 6 Accounts payable2,738 2,862 Current portion of operating lease liabilities435 425 Accrued liabilities4,987 5,723 Income taxes payable295 240 Total current liabilities8,461 9,256 Long-term debt8,929 8,927 Operating lease liabilities2,807 2,786 Deferred income taxes and other liabilities2,618 2,558 Commitments and contingencies(Note 11)Redeemable preferred stock Shareholders equity:Common stock at stated value:Class A convertible 298 and 305 shares outstanding Class B 1,226 and 1,227 shares outstanding3 3 Capital in excess of stated value12,590 12,412 Accumulated other comprehensive income(loss)136 231 Retained earnings1,242 1,358 Total shareholders equity13,971 14,004 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY$36,786$37,531 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.3Table of ContentsNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSTHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022Cash provided(used)by operations:Net income$1,450$1,468 Adjustments to reconcile net income to net cash provided(used)by operations:Depreciation191 169 Deferred income taxes(68)(43)Stock-based compensation196 170 Amortization,impairment and other(5)(9)Net foreign currency adjustments(7)16 Changes in certain working capital components and other assets and liabilities:(Increase)decrease in accounts receivable(621)(415)(Increase)decrease in inventories(263)(1,363)(Increase)decrease in prepaid expenses,operating lease right-of-use assets and other current and non-currentassets(225)(128)Increase(decrease)in accounts payable,accrued liabilities,operating lease liabilities and other current and non-current liabilities(714)492 Cash provided(used)by operations(66)357 Cash provided(used)by investing activities:Purchases of short-term investments(1,144)(2,469)Maturities of short-term investments778 1,432 Sales of short-term investments1,038 948 Additions to property,plant and equipment(253)(264)Other investing activities(1)139 Cash provided(used)by investing activities418(214)Cash provided(used)by financing activities:Increase(decrease)in notes payable,net(1)Proceeds from exercise of stock options and other stock issuances99 82 Repurchase of common stock(1,133)(983)Dividends common and preferred(524)(480)Other financing activities(41)(22)Cash provided(used)by financing activities(1,599)(1,404)Effect of exchange rate changes on cash and equivalents(16)(87)Net increase(decrease)in cash and equivalents(1,263)(1,348)Cash and equivalents,beginning of period7,441 8,574 CASH AND EQUIVALENTS,END OF PERIOD$6,178$7,226 Supplemental disclosure of cash flow information:Non-cash additions to property,plant and equipment$148$124 Dividends declared and not paid519 482 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.4Table of ContentsNIKE,INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYCOMMON STOCKCAPITAL INEXCESSOF STATEDVALUEACCUMULATEDOTHERCOMPREHENSIVEINCOME(LOSS)RETAINEDEARNINGSTOTALCLASS ACLASS B(In millions,except per share data)SHARESAMOUNTSHARESAMOUNTBalance at May 31,2023305$1,227$3$12,412$231$1,358$14,004 Stock options exercised2 106 106 Conversion to Class B Common Stock(7)7 Repurchase of Class B Common Stock(10)(85)(1,047)(1,132)Dividends on common stock($0.340 per share)and preferred stock$0.10 per share)(519)(519)Issuance of shares to employees,net of shareswithheld for employee taxes(39)(39)Stock-based compensation196 196 Net income1,450 1,450 Other comprehensive income(loss)(95)(95)Balance at August 31,2023298$1,226$3$12,590$136$1,242$13,971 COMMON STOCKCAPITAL INEXCESSOF STATEDVALUEACCUMULATEDOTHERCOMPREHENSIVEINCOME(LOSS)RETAINEDEARNINGSTOTALCLASS ACLASS B(In millions,except per share data)SHARESAMOUNTSHARESAMOUNTBalance at May 31,2022305$1,266$3$11,484$318$3,476$15,281 Stock options exercised2 80 80 Repurchase of Class B Common Stock(9)(66)(925)(991)Dividends on common stock($0.305 per share)and preferred stock($0.10 per share)(482)(482)Issuance of shares to employees,net of shareswithheld for employee taxes(20)(2)(22)Stock-based compensation170 170 Net income1,468 1,468 Other comprehensive income(loss)318 318 Balance at August 31,2022305$1,259$3$11,648$636$3,535$15,822 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.5Table of ContentsNOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTSNOTE 1Summary of Significant Accounting Policies7NOTE 2Accrued Liabilities7NOTE 3Fair Value Measurements8NOTE 4Income Taxes9NOTE 5Stock-Based Compensation10NOTE 6Earnings Per Share11NOTE 7Risk Management and Derivatives11NOTE 8Accumulated Other Comprehensive Income(Loss)15NOTE 9Revenues17NOTE 10Operating Segments18NOTE 11Contingencies206Table of ContentsNOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBASIS OF PRESENTATIONThe Unaudited Condensed Consolidated Financial Statements include the accounts of NIKE,Inc.and its subsidiaries(the Company or NIKE)and reflect all normalrecurring adjustments which are,in the opinion of management,necessary for a fair statement of the results of operations for the interim period.The year-end CondensedConsolidated Balance Sheet data as of May 31,2023,was derived from audited financial statements,but does not include all disclosures required by accountingprinciples generally accepted in the United States of America(U.S.GAAP).The interim financial information and notes thereto should be read in conjunction with theCompanys latest Annual Report on Form 10-K for the fiscal year ended May 31,2023(the Annual Report).The results of operations for the three months ended August31,2023,are not necessarily indicative of results to be expected for the entire fiscal year.RECENTLY ADOPTED ACCOUNTING STANDARDSIn September 2022,the Financial Accounting Standards Board(the FASB)issued Accounting Standards Update 2022-04,Liabilities Supplier Finance Programs(Subtopic 405-50):Disclosure of Supplier Finance Program Obligations.The new guidance requires qualitative and quantitative disclosure sufficient to enable users of thefinancial statements to understand the nature,activity during the period,changes from period to period and potential magnitude of such programs.The amendments areeffective for fiscal years beginning after December 15,2022,including interim periods within those fiscal periods,except for the amendment on rollforward information,which is effective for fiscal years beginning after December 15,2023.The Company adopted the required guidance in the first quarter of fiscal 2024.Certain financial institutions offer voluntary supplier finance programs facilitated through a third-party platform that provide participating suppliers the option to financevalid payment obligations from the Company.The Company is not a party to agreements negotiated between participating suppliers and third-party financial institutions.The Companys obligations to its suppliers,including amounts due and payment terms,are not affected by a suppliers decision to participate in these programs and theCompany does not provide guarantees to third parties in connection with these programs.As of August 31,2023 and May 31,2023,the Company had$953 million and$834 million,respectively,of outstanding supplier obligations confirmed as valid under these programs.These amounts are included within Accounts payable on theUnaudited Condensed Consolidated Balance Sheets.NOTE 2 ACCRUED LIABILITIESAccrued liabilities included the following:AUGUST 31,MAY 31,(Dollars in millions)20232023Compensation and benefits,excluding taxes$1,133$1,737 Sales-related reserves1,003 994 Dividends payable526 529 Import and logistics439 370 Endorsement compensation303 552 Other1,583 1,541TOTAL ACCRUED LIABILITIES$4,987$5,723 7Table of ContentsNOTE 3 FAIR VALUE MEASUREMENTSThe Company measures certain financial assets and liabilities at fair value on a recurring basis,including derivatives,equity securities and available-for-sale debtsecurities.For additional information about the Companys fair value policies,refer to Note 1 Summary of Significant Accounting Policies within the Annual Report.The following tables present information about the Companys financial assets measured at fair value on a recurring basis as of August 31,2023 and May 31,2023,andindicate the level in the fair value hierarchy in which the Company classifies the fair value measurement:AUGUST 31,2023(Dollars in millions)ASSETS AT FAIR VALUECASH AND EQUIVALENTSSHORT-TERM INVESTMENTSCash$1,432$1,432$Level 1:U.S.Treasury securities2,022 4 2,018 Level 2:Commercial paper and bonds549 13 536 Money market funds4,154 4,154 Time deposits581 575 6 U.S.Agency securities52 52 Total Level 25,336 4,742 594 TOTAL$8,790$6,178$2,612 MAY 31,2023(Dollars in millions)ASSETS AT FAIR VALUECASH AND EQUIVALENTSSHORT-TERM INVESTMENTSCash$1,767$1,767$Level 1:U.S.Treasury securities2,655 2,655 Level 2:Commercial paper and bonds543 15 528 Money market funds5,157 5,157 Time deposits507 502 5 U.S.Agency securities46 46 Total Level 26,253 5,674 579 TOTAL$10,675$7,441$3,234 As of August 31,2023,the Company held$1,945 million of available-for-sale debt securities with maturity dates within one year and$667 million with maturity datesgreater than one year and less than five years in Short-term investments on the Unaudited Condensed Consolidated Balance Sheets.The fair value of the Companysavailable-for-sale debt securities approximates their amortized cost.Included in Interest expense(income),net was interest income related to the Companys investment portfolio of$99 million and$65 million for the three months endedAugust 31,2023 and 2022,respectively.8Table of ContentsThe following tables present information about the Companys derivative assets and liabilities measured at fair value on a recurring basis and indicate the level in the fairvalue hierarchy in which the Company classifies the fair value measurement:AUGUST 31,2023DERIVATIVE ASSETSDERIVATIVE LIABILITIES(Dollars in millions)ASSETS ATFAIR VALUEOTHERCURRENTASSETSOTHER LONG-TERM ASSETSLIABILITIESAT FAIRVALUEACCRUEDLIABILITIESOTHER LONG-TERMLIABILITIESLevel 2:Foreign exchange forwards and options$491$420$71$235$177$58(1)If the foreign exchange derivative instruments had been netted on the Unaudited Condensed Consolidated Balance Sheets,the asset and liability positions each would have been reduced by$233million as of August 31,2023.As of that date,the Company received$7 million of cash collateral from counterparties related to foreign exchange derivative instruments.No amount of collateral wasposted on the derivative liability balance as of August 31,2023.MAY 31,2023DERIVATIVE ASSETSDERIVATIVE LIABILITIES(Dollars in millions)ASSETS ATFAIR VALUEOTHERCURRENTASSETSOTHER LONG-TERM ASSETSLIABILITIESAT FAIRVALUEACCRUEDLIABILITIESOTHER LONG-TERMLIABILITIESLevel 2:Foreign exchange forwards and options$557$493$64$180$128$52(1)If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets,the asset and liability positions each would have been reduced by$178 million as of May 31,2023.As of that date,the Company received$36 million of cash collateral from counterparties related to foreign exchange derivative instruments.No amount of collateral was posted on the derivative liabilitybalance as of May 31,2023.For additional information related to the Companys derivative financial instruments and credit risk,refer to Note 7 Risk Management and Derivatives.The carrying amounts of other current financial assets and other current financial liabilities approximate fair value.FINANCIAL ASSETS AND LIABILITIES NOT RECORDED AT FAIR VALUEThe Companys Long-term debt is recorded at adjusted cost,net of unamortized premiums,discounts and debt issuance costs.The fair value of long-term debt isestimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets(Level 2).The fair value of the Companys Long-term debt,including the current portion,was approximately$7,768 million at August 31,2023 and$7,889 million at May 31,2023.The carrying amounts reflected on the Unaudited Condensed Consolidated Balance Sheets for Notes payable approximate fair value.NOTE 4 INCOME TAXESThe effective tax rate was 12.0%and 19.7%for the three months ended August 31,2023 and 2022,respectively.The decrease in the Companys effective tax rate wasprimarily due to the impact of temporary relief provided by the Internal Revenue Service(IRS)relating to U.S.foreign tax credit regulations.On July 21,2023,the IRSissued Notice 2023-55 which specifically delayed the application of certain U.S.foreign tax credit regulations that had previously limited the Companys ability to claimcredits on certain foreign taxes for the fiscal year ended May 31,2023.As a result of this new guidance,the Company recognized a one-time tax benefit related to prioryear tax positions in the first three months of fiscal 2024.On August 16,2022,the U.S.government enacted the Inflation Reduction Act of 2022 that included,among other provisions,changes to the U.S.corporate income taxsystem,including a fifteen percent minimum tax based on adjusted financial statement income,which was effective for the Company beginning June 1,2023.Based onthe Companys current analysis of the provisions,these tax law changes are not expected to have a material impact on the Companys financial statements for fiscal2024.As of August 31,2023,total gross unrecognized tax benefits,excluding related interest and penalties,were$931 million,$644 million of which would affect the Companyseffective tax rate if recognized in future periods.The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferred incometaxes and other liabilities on the Unaudited Condensed Consolidated Balance Sheets.As of May 31,2023,total gross unrecognized tax benefits,excluding related interestand penalties,were$936 million.As of August 31,2023 and May 31,2023,accrued interest and penalties related(1)(1)9Table of Contentsto uncertain tax positions were$274 million and$268 million,respectively,(excluding federal benefit)and included within Deferred income taxes and other liabilities on theUnaudited Condensed Consolidated Balance Sheets.The Company is subject to taxation in the U.S.,as well as various state and foreign jurisdictions.The Company is currently under audit by the U.S.IRS for fiscal years2017 through 2019.The Company has closed all U.S.federal income tax matters through fiscal 2016,with the exception of certain transfer pricing adjustments.Tax years after 2011 remain open in certain major foreign jurisdictions.Although the timing of resolution of audits is not certain,the Company evaluates all domestic andforeign audit issues in the aggregate,along with the expiration of applicable statutes of limitations,and estimates that it is reasonably possible the total grossunrecognized tax benefits could decrease by up to$20 million within the next 12 months.In January 2019,the European Commission opened a formal investigation toexamine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company.The Company believes the investigation is withoutmerit.If this matter is adversely resolved,the Netherlands may be required to assess additional amounts with respect to prior periods,and the Companys income taxesrelated to prior periods in the Netherlands could increase.NOTE 5 STOCK-BASED COMPENSATIONSTOCK-BASED COMPENSATIONThe NIKE,Inc.Stock Incentive Plan(the Stock Incentive Plan)provides for the issuance of up to 798 million previously unissued shares of Class B Common Stock inconnection with equity awards granted under the Stock Incentive Plan.The Stock Incentive Plan authorizes the grant of non-statutory stock options,incentive stockoptions,stock appreciation rights and stock awards,including restricted stock and restricted stock units.Restricted stock units include both time-vesting restricted stockunits(RSUs)as well as performance-based restricted stock units(PSUs).In addition to the Stock Incentive Plan,the Company gives employees the right to purchaseshares at a discount from the market price under employee stock purchase plans(ESPPs).For additional information,refer to Note 9 Common Stock and Stock-Based Compensation within the Annual Report.The following table summarizes the Companys total stock-based compensation expense recognized in Cost of sales or Operating overhead expense,as applicable:THREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022Stock options$76$75 ESPPs21 15 Restricted stock and restricted stock units99 80 TOTAL STOCK-BASED COMPENSATION EXPENSE$196$170(1)Expense for stock options includes the expense associated with stock appreciation rights.Accelerated stock option expense is primarily recorded for employees meeting certain retirement eligibilityrequirements.(2)Restricted stock units include RSUs and PSUs.The income tax benefit related to stock-based compensation expense was$17 million and$20 million for the three months ended August 31,2023 and 2022,respectively,and reported within Income tax expense.STOCK OPTIONSThe weighted average fair value per share of stock options granted during the three months ended August 31,2023 and 2022,computed as of the grant date using theBlack-Scholes pricing model,was$34.79 and$32.13,respectively.The weighted average assumptions used to estimate these fair values were as follows:THREE MONTHS ENDED AUGUST 31,20232022Dividend yield1.1%0.8%Expected volatility29.2.0%Weighted average expected life(in years)5.85.8Risk-free interest rate4.2%2.7%Expected volatilities are based on an analysis of the historical volatility of the Companys common stock,the implied volatility in market-traded options on the Companyscommon stock with a term greater than one year,as well as other factors.The weighted average expected life of stock options is based on an analysis of historical andexpected future exercise patterns.The interest(1)(1)(2)10Table of Contentsrate is based on the U.S.Treasury(constant maturity)risk-free rate in effect at the date of grant for periods corresponding with the expected term of the stock options.As of August 31,2023,the Company had$387 million of unrecognized compensation costs from stock options,net of estimated forfeitures,to be recognized in Cost ofsales or Operating overhead expense,as applicable,over a weighted average remaining period of 2.4 years.RESTRICTED STOCK AND RESTRICTED STOCK UNITSThe weighted average fair value per share of restricted stock and restricted stock units granted for the three months ended August 31,2023 and 2022,computed as of thegrant date,was$106.85 and$127.16,respectively.As of August 31,2023,the Company had$676 million of unrecognized compensation costs from restricted stock and restricted stock units,net of estimated forfeitures,tobe recognized in Cost of sales or Operating overhead expense,as applicable,over a weighted average remaining period of 2.3 years.NOTE 6 EARNINGS PER SHAREThe following is a reconciliation from basic earnings per common share to diluted earnings per common share.The computations of diluted earnings per common shareexclude restricted stock,restricted stock units and options,including shares under ESPPs,to purchase an estimated additional 33.7 million and 23.8 million shares ofcommon stock outstanding for the three months ended August 31,2023 and 2022,respectively,because the awards were assumed to be anti-dilutive.THREE MONTHS ENDED AUGUST 31,(In millions,except per share data)20232022Net income available to common stockholders$1,450$1,468 Determination of shares:Weighted average common shares outstanding1,528.4 1,567.1 Assumed conversion of dilutive stock options and awards14.9 18.7 DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING1,543.3 1,585.8 Earnings per common share:Basic$0.95$0.94 Diluted$0.94$0.93 NOTE 7 RISK MANAGEMENT AND DERIVATIVESThe Company is exposed to global market risks,including the effect of changes in foreign currency exchange rates and interest rates,and uses derivatives to managefinancial exposures that occur in the normal course of business.As of and for the three months ended August 31,2023,there have been no material changes to theCompanys hedging program or strategy from what was disclosed within the Annual Report.For additional information about the Companys derivatives and hedgingpolicies,refer to Note 1 Summary of Significant Accounting Policies and Note 12 Risk Management and Derivatives within the Annual Report.The majority of derivatives outstanding as of August 31,2023,are designated as foreign currency cash flow hedges,primarily for Euro/U.S.Dollar,British Pound/Euro,Chinese Yuan/U.S.Dollar and Japanese Yen/U.S.Dollar currency pairs.All derivatives are recognized on the Unaudited Condensed Consolidated Balance Sheets at fairvalue and classified based on the instruments maturity date.The following tables present the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets:11Table of Contents DERIVATIVE ASSETSBALANCE SHEET LOCATIONAUGUST 31,MAY 31,(Dollars in millions)20232023Derivatives formally designated as hedging instruments:Foreign exchange forwards and optionsPrepaid expenses and other current assets$406$480 Foreign exchange forwards and optionsDeferred income taxes and other assets71 64 Total derivatives formally designated as hedging instruments477 544 Derivatives not designated as hedging instruments:Foreign exchange forwards and optionsPrepaid expenses and other current assets14 13 Total derivatives not designated as hedging instruments14 13 TOTAL DERIVATIVE ASSETS$491$557 DERIVATIVE LIABILITIESBALANCE SHEET LOCATIONAUGUST 31,MAY 31,(Dollars in millions)20232023Derivatives formally designated as hedging instruments:Foreign exchange forwards and optionsAccrued liabilities$142$93 Foreign exchange forwards and optionsDeferred income taxes and other liabilities58 52 Total derivatives formally designated as hedging instruments200 145 Derivatives not designated as hedging instruments:Foreign exchange forwards and optionsAccrued liabilities35 35 Total derivatives not designated as hedging instruments35 35 TOTAL DERIVATIVE LIABILITIES$235$180 The following tables present the amounts in the Unaudited Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded and theeffects of cash flow hedge activity on these line items:THREE MONTHS ENDED AUGUST 31,20232022(Dollars in millions)TOTALAMOUNT OF GAIN(LOSS)ON CASH FLOWHEDGE ACTIVITYTOTALAMOUNT OF GAIN(LOSS)ON CASH FLOWHEDGE ACTIVITYRevenues$12,939$1$12,687$(9)Cost of sales7,219 86 7,072 109 Demand creation expense1,069 943(1)Other(income)expense,net(10)35(146)82 Interest expense(income),net(34)(2)13(2)12Table of ContentsThe following tables present the amounts affecting the Unaudited Condensed Consolidated Statements of Income:(Dollars in millions)AMOUNT OF GAIN(LOSS)RECOGNIZED IN OTHERCOMPREHENSIVE INCOME(LOSS)ON DERIVATIVESAMOUNT OF GAIN(LOSS)RECLASSIFIED FROM ACCUMULATEDOTHER COMPREHENSIVEINCOME(LOSS)INTO INCOMETHREE MONTHS ENDED AUGUST31,LOCATION OF GAIN(LOSS)RECLASSIFIED FROM ACCUMULATEDOTHER COMPREHENSIVE INCOME(LOSS)INTO INCOMETHREE MONTHS ENDEDAUGUST 31,2023202220232022Derivatives designated as cash flowhedges:Foreign exchange forwards and options$(18)$25 Revenues$1$(9)Foreign exchange forwards and options(2)487 Cost of sales86 109 Foreign exchange forwards and options(5)Demand creation expense(1)Foreign exchange forwards and options(10)293 Other(income)expense,net35 82 Interest rate swaps Interest expense(income),net(2)(2)TOTAL DESIGNATED CASH FLOWHEDGES$(30)$800$120$179(1)For the three months ended August 31,2023 and 2022,the amounts recorded in Other(income)expense,net as a result of the discontinuance of cash flow hedges because the forecasted transactionswere no longer probable of occurring were immaterial.(2)Gains and losses associated with terminated interest rate swaps,which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income(loss),will bereleased through Interest expense(income),net over the term of the issued debt.AMOUNT OF GAIN(LOSS)RECOGNIZEDIN INCOME ON DERIVATIVESLOCATION OF GAIN(LOSS)RECOGNIZED IN INCOMEON DERIVATIVESTHREE MONTHS ENDED AUGUST31,(Dollars in millions)20232022Derivatives not designated as hedging instruments:Foreign exchange forwards and options and embedded derivatives$(27)$61 Other(income)expense,netCASH FLOW HEDGESAll changes in fair value of derivatives designated as cash flow hedge instruments are recorded in Accumulated other comprehensive income(loss)until Net income isaffected by the variability of cash flows of the hedged transaction.Effective hedge results are classified in the Unaudited Condensed Consolidated Statements of Incomein the same manner as the underlying exposure.When it is no longer probable the forecasted hedged transaction will occur in the initially identified time period,hedgeaccounting is discontinued and the Company accounts for the associated derivative as an undesignated instrument as discussed below.Additionally,the gains and lossesassociated with derivatives no longer designated as cash flow hedge instruments in Accumulated other comprehensive income(loss)are recognized immediately in Other(income)expense,net,if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-monthperiod thereafter.In rare circumstances,the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecastedtransaction that are outside the control or influence of the Company.The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was approximately$18.3 billion as of August 31,2023.Approximately$313 million of deferred net gains(net of tax)on both outstanding and matured derivatives in Accumulated other comprehensive income(loss)as ofAugust 31,2023,are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Netincome.Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature.As ofAugust 31,2023,the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 27 months.(1)(1)(2)13Table of ContentsUNDESIGNATED DERIVATIVE INSTRUMENTSThe Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Unaudited CondensedConsolidated Balance Sheets.These undesignated instruments are recorded at fair value as a derivative asset or liability on the Unaudited Condensed ConsolidatedBalance Sheets with their corresponding change in fair value recognized in Other(income)expense,net,together with the remeasurement gain or loss from the hedgedbalance sheet position.The total notional amount of outstanding undesignated derivative instruments was$3.7 billion as of August 31,2023.CREDIT RISKThe Companys bilateral credit-related contingent features generally require the owing entity,either the Company or the derivative counterparty,to post collateral for theportion of the fair value in excess of$50 million should the fair value of outstanding derivatives per counterparty be greater than$50 million.Additionally,a certain level ofdecline in credit rating of either the Company or the counterparty could trigger collateral requirements.As of August 31,2023,the Company was in compliance with allcredit risk-related contingent features,and derivative instruments with such features were in a net asset position of approximately$256 million.Accordingly,the Companywas not required to post cash collateral as a result of these contingent features.Further,$7 million of collateral was received on the Companys derivative asset balanceas of August 31,2023.The Company considers the impact of the risk of counterparty default to be immaterial.For additional information related to the Companys derivative financial instruments and collateral,refer to Note 3 Fair Value Measurements.14Table of ContentsNOTE 8 ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS)The changes in Accumulated other comprehensive income(loss),net of tax,were as follows:(Dollars in millions)FOREIGNCURRENCYTRANSLATIONADJUSTMENTCASH FLOWHEDGESNETINVESTMENTHEDGESOTHERTOTALBalance at May 31,2023$(253)$431$115$(62)$231 Other comprehensive income(loss):Other comprehensive gains(losses)before reclassifications36(23)13 Reclassifications to net income of previously deferred(gains)losses(111)3(108)Total other comprehensive income(loss)36(134)3(95)Balance at August 31,2023$(217)$297$115$(59)$136(1)The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or uponcomplete or substantially complete liquidation of the respective entity.(2)Net of tax benefit(expense)of$0 million,$7 million,$0 million,$0 million and$7 million,respectively.(3)Net of tax(benefit)expense of$0 million,$9 million,$0 million,$(1)million and$8 million,respectively.(Dollars in millions)FOREIGNCURRENCYTRANSLATIONADJUSTMENTCASH FLOWHEDGESNETINVESTMENTHEDGESOTHERTOTALBalance at May 31,2022$(520)$779$115$(56)$318 Other comprehensive income(loss):Other comprehensive gains(losses)before reclassifications(272)716 (3)441 Reclassifications to net income of previously deferred(gains)losses46(161)(8)(123)Total other comprehensive income(loss)(226)555 (11)318 Balance at August 31,2022$(746)$1,334$115$(67)$636(1)The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or uponcomplete or substantially complete liquidation of the respective entity.(2)Net of tax benefit(expense)of$0 million,$(84)million,$0 million,$1 million and$(83)million,respectively.(3)Net of tax(benefit)expense of$0 million,$18 million,$0 million,$3 million and$21 million,respectively.(1)(1)(2)(3)(1)(1)(2)(3)15Table of ContentsThe following table summarizes the reclassifications from Accumulated other comprehensive income(loss)to the Unaudited Condensed Consolidated Statements ofIncome:AMOUNT OF GAIN(LOSS)RECLASSIFIED FROMACCUMULATED OTHERCOMPREHENSIVE INCOME(LOSS)INTO INCOMELOCATION OF GAIN(LOSS)RECLASSIFIED FROM ACCUMULATEDOTHER COMPREHENSIVE INCOME(LOSS)INTO INCOMETHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022Gains(losses)on foreign currency translation adjustment$(46)Other(income)expense,netTotal before tax(46)Tax(expense)benefit Gain(loss)net of tax(46)Gains(losses)on cash flow hedges:Foreign exchange forwards and options1(9)RevenuesForeign exchange forwards and options86 109 Cost of salesForeign exchange forwards and options(1)Demand creation expenseForeign exchange forwards and options35 82 Other(income)expense,netInterest rate swaps(2)(2)Interest expense(income),netTotal before tax120 179 Tax(expense)benefit(9)(18)Gain(loss)net of tax111 161 Gains(losses)on other(4)11 Other(income)expense,netTotal before tax(4)11 Tax(expense)benefit1(3)Gain(loss)net of tax(3)8 Total net gain(loss)reclassified for the period$108$123 16Table of ContentsNOTE 9 REVENUESDISAGGREGATION OF REVENUESThe following tables present the Companys Revenues disaggregated by reportable operating segment,major product line and distribution channel:THREE MONTHS ENDED AUGUST 31,2023(Dollars in millions)NORTHAMERICAEUROPE,MIDDLEEAST&AFRICAGREATERCHINAASIAPACIFIC&LATINAMERICAGLOBALBRANDDIVISIONSTOTALNIKEBRANDCONVERSECORPORATETOTALNIKE,INC.Revenues by:Footwear$3,733$2,260$1,287$1,141$8,421$522$8,943 Apparel1,479 1,137 401 371 3,388 20 3,408 Equipment211 213 47 60 531 11 542 Other 13 13 35(2)46 TOTAL REVENUES$5,423$3,610$1,735$1,572$13$12,353$588$(2)$12,939 Revenues by:Sales to Wholesale Customers$2,772$2,379$895$937$6,983$329$7,312 Sales through Direct to Consumer2,651 1,231 840 635 5,357 224 5,581 Other 13 13 35(2)46 TOTAL REVENUES$5,423$3,610$1,735$1,572$13$12,353$588$(2)$12,939 THREE MONTHS ENDED AUGUST 31,2022(Dollars in millions)NORTHAMERICAEUROPE,MIDDLEEAST&AFRICAGREATERCHINAASIAPACIFIC&LATINAMERICAGLOBALBRANDDIVISIONSTOTALNIKEBRANDCONVERSECORPORATETOTALNIKE,INC.Revenues by:Footwear$3,805$2,012$1,233$1,064$8,114$577$8,691 Apparel1,494 1,153 374 413 3,434 20 3,454 Equipment211 168 49 58 486 8 494 Other 14 14 38(4)48 TOTAL REVENUES$5,510$3,333$1,656$1,535$14$12,048$643$(4)$12,687 Revenues by:Sales to Wholesale Customers$3,027$2,203$839$914$6,983$344$7,327 Sales through Direct to Consumer2,483 1,130 817 621 5,051 261 5,312 Other 14 14 38(4)48 TOTAL REVENUES$5,510$3,333$1,656$1,535$14$12,048$643$(4)$12,687 For the three months ended August 31,2023 and 2022,Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are notpart of a geographic operating segment.Converse Other revenues were primarily attributable to licensing businesses.Corporate revenues primarily consisted of foreigncurrency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse,but managed throughthe Companys central foreign exchange risk management program.As of August 31,2023 and May 31,2023,the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued liabilitieson the Unaudited Condensed Consolidated Balance Sheets.17Table of ContentsNOTE 10 OPERATING SEGMENTSThe Companys operating segments are evidence of the structure of the Companys internal organization.The NIKE Brand segments are defined by geographic regionsfor operations participating in NIKE Brand sales activity.Each NIKE Brand geographic segment operates predominantly in one industry:the design,development,marketing and selling of athletic footwear,apparel andequipment.The Companys reportable operating segments for the NIKE Brand are:North America;Europe,Middle East&Africa(EMEA);Greater China;and AsiaPacific&Latin America(APLA),and include results for the NIKE and Jordan brands.The Companys NIKE Direct operations are managed within each NIKE Brand geographic operating segment.Converse is also a reportable segment for the Companyand operates in one industry:the design,marketing,licensing and selling of athletic lifestyle sneakers,apparel and accessories.Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company.Global Brand Divisionsrevenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.Global Brand Divisions costs representdemand creation and operating overhead expense that include product creation and design expenses centrally managed for the NIKE Brand,as well as costs associatedwith NIKE Direct global digital operations and enterprise technology.Corporate consists primarily of unallocated general and administrative expenses,including expenses associated with centrally managed departments;depreciation andamortization related to the Companys headquarters;unallocated insurance,benefit and compensation programs,including stock-based compensation;and certainforeign currency gains and losses,including certain hedge gains and losses.The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes(EBIT),whichrepresents Net income before Interest expense(income),net,and Income tax expense in the Unaudited Condensed Consolidated Statements of Income.As part of the Companys centrally managed foreign exchange risk management program,standard foreign currency rates are assigned twice per year to each NIKEBrand entity in the Companys geographic operating segments and to Converse.These rates are set approximately nine and twelve months in advance of the futureselling seasons to which they relate(specifically,for each currency,one standard rate applies to the fall and holiday selling seasons,and one standard rate applies to thespring and summer selling seasons)based on average market spot rates in the calendar month preceding the date they are established.Inventories and Cost of sales forgeographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entitys functionalcurrency.Differences between assigned standard foreign currency rates and actual market rates are included in Corporate,together with foreign currency hedge gainsand losses generated from the Companys centrally managed foreign exchange risk management program and other conversion gains and losses.Accounts receivable,net,Inventories and Property,plant and equipment,net for operating segments are regularly reviewed by management and are therefore providedbelow.18Table of Contents THREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022REVENUESNorth America$5,423$5,510 Europe,Middle East&Africa3,610 3,333 Greater China1,735 1,656 Asia Pacific&Latin America1,572 1,535 Global Brand Divisions13 14 Total NIKE Brand12,353 12,048 Converse588 643 Corporate(2)(4)TOTAL NIKE,INC.REVENUES$12,939$12,687 EARNINGS BEFORE INTEREST AND TAXESNorth America$1,434$1,377 Europe,Middle East&Africa930 975 Greater China525 541 Asia Pacific&Latin America414 500 Global Brand Divisions(1,205)(1,187)Converse167 209 Corporate(651)(574)Interest expense(income),net(34)13 TOTAL NIKE,INC.INCOME BEFORE INCOME TAXES$1,648$1,828 AUGUST 31,MAY 31,(Dollars in millions)20232023ACCOUNTS RECEIVABLE,NETNorth America$1,932$1,653 Europe,Middle East&Africa1,562 1,197 Greater China161 162 Asia Pacific&Latin America687 700 Global Brand Divisions84 96 Total NIKE Brand4,426 3,808 Converse240 235 Corporate83 88 TOTAL ACCOUNTS RECEIVABLE,NET$4,749$4,131 INVENTORIESNorth America$3,761$3,806 Europe,Middle East&Africa2,220 2,167 Greater China1,182 973 Asia Pacific&Latin America1,072 894 Global Brand Divisions222 232 Total NIKE Brand8,457 8,072 Converse300 305 Corporate(59)77 TOTAL INVENTORIES$8,698$8,454(1)Inventories as of August 31,2023 and May 31,2023,were substantially all finished goods.(1)19Table of ContentsAUGUST 31,MAY 31,(Dollars in millions)20232023PROPERTY,PLANT AND EQUIPMENT,NETNorth America$792$794 Europe,Middle East&Africa1,043 1,009 Greater China276 292 Asia Pacific&Latin America275 279 Global Brand Divisions889 840 Total NIKE Brand3,275 3,214 Converse36 38 Corporate1,798 1,829 TOTAL PROPERTY,PLANT AND EQUIPMENT,NET$5,109$5,081 NOTE 11 CONTINGENCIESIn the ordinary course of business,the Company is subject to various legal proceedings,claims and government investigations relating to its business,products andactions of its employees and representatives,including contractual and employment relationships,product liability,antitrust,customs,tax,intellectual property and othermatters.The outcome of these legal matters is inherently uncertain,and the Company cannot predict the eventual outcome of currently pending matters,the timing oftheir ultimate resolution or the eventual losses,fines,penalties or consequences relating to those matters.When a loss related to a legal proceeding or claim is probableand reasonably estimable,the Company accrues its best estimate for the ultimate resolution of the matter.If one or more legal matters were to be resolved against theCompany in a reporting period for amounts above managements expectations,the Companys financial position,operating results and cash flows for that reporting periodcould be materially adversely affected.In the opinion of management,based on its current knowledge and after consultation with counsel,the Company does not believeany currently pending legal matters will have a material adverse impact on the Companys results of operations,financial position or cash flows,except as describedbelow.BELGIAN CUSTOMS CLAIMThe Company has received claims for certain years from Belgian Customs and other government authorities for alleged underpaid duties related to products importedbeginning in fiscal 2018.The Company disputes these claims and has engaged in the appellate process.The Company has issued bank guarantees in order to appealthe claims.At this time,the Company is unable to estimate the range of loss and cannot predict the final outcome as it could take several years to reach a resolution onthis matter.If this matter is ultimately resolved against the Company,the amounts owed,including fines,penalties and other consequences relating to the matter,couldhave a material adverse effect on the Companys results of operations,financial position and cash flows.20Table of ContentsITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONSOVERVIEWNIKE designs,develops,markets and sells athletic footwear,apparel,equipment,accessories and services worldwide.We are the largest seller of athletic footwear andapparel in the world.We sell our products through NIKE Direct operations,which is comprised of both NIKE-owned retail stores and sales through our digital platforms(also referred to as NIKE Brand Digital),to wholesale accounts and to a mix of independent distributors,licensees and sales representatives in nearly all countriesaround the world.Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear,apparel,equipment and accessoriesbusinesses.Our strategy is to achieve long-term revenue growth by creating innovative,must-have products,building deep personal consumer connections with ourbrands and delivering compelling consumer experiences through digital platforms and at retail.Through the Consumer Direct Acceleration strategy,we are focused on creating the marketplace of the future with more premium,consistent and seamless consumerexperiences,leading with digital and our owned stores,as well as select wholesale partners.In addition,our product creation and marketing organizations are aligned to aconsumer construct focused on sports dimensions through Mens,Womens and Kids,which allows us to better serve consumer needs.We continue to invest in a newEnterprise Resource Planning Platform,data and analytics,demand sensing,insight gathering and other areas to create an end-to-end technology foundation,which webelieve will further accelerate our digital transformation.We believe this unified approach will accelerate growth and unlock more efficiency for our business,while drivingspeed and responsiveness as we serve consumers globally.FINANCIAL HIGHLIGHTS NIKE,Inc.Revenues for the first quarter of fiscal 2024 were$12.9 billion,an increase of 2%on both a reported and currency-neutral basis,compared to the firstquarter of fiscal 2023 NIKE Direct revenues grew 6%from$5.1 billion for the first quarter of fiscal 2023 to$5.4 billion for the first quarter of fiscal 2024,and represented approximately 43%of total NIKE Brand revenues for the first quarter of fiscal 2024 Gross margin for the first quarter of fiscal 2024 decreased 10 basis points to 44.2%,primarily driven by higher product costs and unfavorable changes in foreigncurrency exchange rates,largely offset by strategic pricing actions Inventories as of August 31,2023,were$8.7 billion,an increase of 3%compared to May 31,2023,primarily driven by product mix and lower inventory obsolescencereserves We returned$1.7 billion to our shareholders in the first quarter of fiscal 2024 through share repurchases and dividendsECONOMIC CONDITIONS AND MARKET DYNAMICS Consumer Spending:Our growth in Revenues for the first quarter of fiscal 2024 reflects ongoing demand for our products despite ongoing uncertainty in the globaleconomy.We will continue to closely monitor macroeconomic conditions,including the potential impacts of inflation and rising interest rates on consumer behavior.Inflationary Pressures:Inflationary pressures,including higher product costs,negatively impacted gross margin for the first quarter of fiscal 2024.The strategicpricing actions we have taken more than offset the impact of these higher product costs on gross margin in the first quarter of fiscal 2024.Supply Chain Conditions:During the first quarter of fiscal 2024 and as of August 31,2023,our inventory levels were healthy as we continue to experiencenormalized inventory transit times and flow of seasonal product.Foreign Currency Impacts:As a global company with significant operations outside the United States,we are exposed to risk arising from changes in foreigncurrency exchange rates.For additional information,refer to Foreign Currency Exposures and Hedging Practices.We continue to be confident in our brand strength.We are focused on scaling a deep,diverse and distinct product portfolio as well as deepening our consumerconnections,while carefully managing the health of our most iconic product franchises.However,the operating environment could remain volatile in fiscal 2024 as the riskexists that worsening macroeconomic conditions could have a material adverse impact on our future revenue growth as well as overall profitability.21Table of ContentsUSE OF NON-GAAP FINANCIAL MEASURESThroughout this Quarterly Report on Form 10-Q,we discuss non-GAAP financial measures,which should be considered in addition to,and not in lieu of,the financialmeasures calculated and presented in accordance with U.S.GAAP.References to these measures should not be considered in isolation or as a substitute for otherfinancial measures calculated and presented in accordance with U.S.GAAP and may not be comparable to similarly titled measures used by other companies.Management uses these non-GAAP measures when evaluating the Companys performance,including when making financial and operating decisions.Additionally,management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing ourunderlying business performance and trends.Earnings Before Interest and Taxes(EBIT):Calculated as Net income before Interest expense(income),net and Income tax expense in the Consolidated Statementsof Income.Total NIKE,Inc.EBIT for the three months ended August 31,2023 and 2022 are as follows:THREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022Net income$1,450$1,468 Add:Interest expense(income),net(34)13 Add:Income tax expense198 360 Earnings before interest and taxes$1,614$1,841 EBIT margin:Calculated as total NIKE,Inc.EBIT divided by total NIKE,Inc.Revenues.Our EBIT margin calculation for the three months ended August 31,2023 and2022 are as follows:THREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022NumeratorEarnings before interest and taxes$1,614$1,841 DenominatorTotal NIKE,Inc.Revenues$12,939$12,687 EBIT margin12.5.5%Currency-neutral revenues:Currency-neutral revenues enhance visibility to underlying business trends,excluding the impact of translation arising from foreign currencyexchange rate fluctuations.Currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period in place of theexchange rates in use during the current period.Wholesale equivalent revenues:References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint ifwe had no NIKE Direct operations.NIKE Brand wholesale equivalent revenues consist of(1)sales to external wholesale customers and(2)internal sales from ourwholesale operations to our NIKE Direct operations,which are charged at prices comparable to those charged to external wholesale customers.COMPARABLE STORE SALESComparable store sales:This key metric,which excludes NIKE Brand Digital sales,comprises revenues from NIKE-owned in-line and factory stores for which all three ofthe following requirements have been met:(1)the store has been open at least one year,(2)square footage has not changed by more than 15%within the past year and(3)the store has not been permanently repositioned within the past year.Comparable store sales includes revenues from stores that were temporarily closed during theperiod as a result of COVID-19.Comparable store sales represents a performance metric that we believe is useful information for management and investors inunderstanding the performance of our established NIKE-owned in-line and factory stores.Management considers this metric when making financial and operatingdecisions.The method of calculating comparable store sales varies across the retail industry.As a result,our calculation of this metric may not be comparable to similarlytitled metrics used by other companies.22Table of ContentsRESULTS OF OPERATIONSTHREE MONTHS ENDED AUGUST 31,(Dollars in millions,except per share data)20232022%CHANGERevenues$12,939$12,687 2%Cost of sales7,219 7,072 2%Gross profit5,720 5,615 2%Gross margin44.2D.3mand creation expense1,069 943 13%Operating overhead expense3,047 2,977 2%Total selling and administrative expense4,116 3,920 5%of revenues31.80.9%Interest expense(income),net(34)13 Other(income)expense,net(10)(146)Income before income taxes1,648 1,828-10%Income tax expense198 360-45fective tax rate12.0.7%NET INCOME$1,450$1,468-1%Diluted earnings per common share$0.94$0.93 1%CONSOLIDATED OPERATING RESULTSREVENUESTHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESNIKE,Inc.Revenues:NIKE Brand Revenues by:Footwear$8,421$8,114 4%4%Apparel3,388 3,434-1%-1%Equipment531 486 9%9%Global Brand Divisions13 14-7%1%Total NIKE Brand Revenues12,353 12,048 3%3%Converse588 643-9%-9%Corporate(2)(4)TOTAL NIKE,INC.REVENUES$12,939$12,687 2%2%Supplemental NIKE Brand Revenues Details:NIKE Brand Revenues by:Sales to Wholesale Customers$6,983$6,983 0%1%Sales through NIKE Direct5,357 5,051 6%6%Global Brand Divisions13 14-7%1%TOTAL NIKE BRAND REVENUES$12,353$12,048 3%3%(1)The percent change excluding currency changes represents a non-GAAP financial measure.For additional information,see Use of Non-GAAP Financial Measures.(2)Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.(3)Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse,butmanaged through our central foreign exchange risk management program.(1)(2)(3)(2)23Table of ContentsFIRST QUARTER OF FISCAL 2024 COMPARED TO FIRST QUARTER OF FISCAL 2023 NIKE,Inc.Revenues were$12.9 billion for the first quarter of fiscal 2024,which increased 2%compared to the first quarter of fiscal 2023 on a reported and currency-neutral basis.The increase,on a currency-neutral basis,was driven by higher revenues in Europe,Middle East&Africa(EMEA)and Greater China,whichcontributed approximately 2 and 1 percentage points to NIKE,Inc.Revenues,respectively.Lower revenues in North America reduced NIKE,Inc.Revenues byapproximately 1 percentage point.NIKE Brand revenues,which represented over 90%of NIKE,Inc.Revenues,increased 3%on a reported and currency-neutral basis.This increase was primarily dueto higher revenues in the Jordan Brand and Womens,partially offset by lower revenues in Mens and Kids.NIKE Brand footwear revenues increased 4%on a currency-neutral basis due to higher revenues in the Jordan Brand,Womens and Mens,partially offset bylower revenues in Kids.Unit sales of footwear decreased 1%,while higher average selling price(ASP)per pair contributed approximately 5 percentagepoints of footwear revenue growth.Higher ASP per pair was primarily due to higher full-price ASP,net of discounts,on a wholesale equivalent basis,andgrowth in the size of our NIKE Direct business,partially offset by lower NIKE Direct ASP.NIKE Brand apparel revenues decreased 1%on a currency-neutral basis,primarily due to lower revenues in Mens,Womens and the Jordan Brand.Unitsales of apparel decreased 12%,while higher ASP per unit contributed approximately 11 percentage points of apparel revenue growth.Higher ASP per unitwas primarily due to higher full-price and NIKE Direct ASPs.NIKE Direct revenues increased 6%from$5.1 billion in the first quarter of fiscal 2023 to$5.4 billion in the first quarter of fiscal 2024.On a currency-neutral basis,NIKE Direct revenues increased 6%,driven by comparable store sales growth of 8%,the addition of new stores and NIKE Brand Digital sales growth of 2%.Foradditional information regarding comparable store sales,including the definition,see Comparable Store Sales.NIKE Brand Digital sales were$2.9 billion for the firstquarter of fiscal 2024 compared to$2.8 billion for the first quarter of fiscal 2023.Within NIKE Direct revenues,there were certain reclassifications made betweenNIKE-owned retail stores and NIKE Brand Digital in the prior period to conform to current period presentation.The reclassifications did not have a material impact onour Unaudited Condensed Consolidated Financial Statements.GROSS MARGINTHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGEGross profit$5,720$5,615 2%Gross margin44.2D.3%(10)bpsFor the first quarter of fiscal 2024,our consolidated gross margin was 10 basis points lower than the prior year primarily due to:Higher NIKE Brand product costs,on a wholesale equivalent basis(decreasing gross margin approximately 180 basis points);Unfavorable changes in net foreign currency exchange rates,including hedges(decreasing gross margin approximately 90 basis points);and Lower off-price margin,on a wholesale equivalent basis(decreasing gross margin approximately 30 basis points).This was partially offset by:Higher NIKE Brand full-price ASP,net of discounts,on a wholesale equivalent basis(increasing gross margin approximately 300 basis points)due primarily tostrategic pricing actions;and Higher margin in our NIKE Direct business(increasing gross margin approximately 10 basis points).24Table of ContentsTOTAL SELLING AND ADMINISTRATIVE EXPENSETHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGEDemand creation expense$1,069$943 13%Operating overhead expense3,047 2,977 2%Total selling and administrative expense$4,116$3,920 5%of revenues31.80.9 bps(1)Demand creation expense consists of advertising and promotion costs,including costs of endorsement contracts,complimentary products,television,digital and print advertising and media costs,brandevents and retail brand presentation.FIRST QUARTER OF FISCAL 2024 COMPARED TO FIRST QUARTER OF FISCAL 2023Demand creation expense increased 13%primarily due to an increase in advertising and marketing expense.Changes in foreign currency exchange rates did not have amaterial impact on Demand creation expense.Operating overhead expense increased 2%primarily due to higher wage-related expenses and NIKE Direct variable costs,partially offset by lower technology spend.Changes in foreign currency exchange rates did not have a material impact on Operating overhead expense.OTHER(INCOME)EXPENSE,NETTHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022Other(income)expense,net$(10)$(146)Other(income)expense,net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments,as well as unusual or non-operating transactions that are outside the normalcourse of business.For the first quarter of fiscal 2024,Other(income)expense,net decreased from$146 million of other income,net,to$10 million of other income,net,in the current year,primarily due to a net unfavorable change in foreign currency conversion gains and losses,including hedges,as well as net favorable settlements of legal matters in theprior year.We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreigncurrency-related gains and losses included in Other(income)expense,net had unfavorable impacts of approximately$65 million on our Income before income taxes forthe first quarter of fiscal 2024.INCOME TAXESTHREE MONTHS ENDED AUGUST 31,20232022%CHANGEEffective tax rate12.0.7%(770)bpsOur effective tax rate was 12.0%for the first quarter of fiscal 2024 compared to 19.7%for the first quarter of fiscal 2023,primarily due to a one-time benefit provided bythe recent delay of the effective date of certain U.S.foreign tax credit regulations.For additional information,refer to Note 4 Income Taxes within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.(1)25Table of ContentsOPERATING SEGMENTSAs discussed in Note 10 Operating Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements,our operating segmentsare evidence of the structure of the Companys internal organization.The NIKE Brand segments are defined by geographic regions for operations participating in NIKEBrand sales activity.The breakdown of Revenues is as follows:THREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESNorth America$5,423$5,510-2%-1%Europe,Middle East&Africa3,610 3,333 8%6%Greater China1,735 1,656 5%Asia Pacific&Latin America1,572 1,535 2%3%Global Brand Divisions13 14-7%1%TOTAL NIKE BRAND12,353 12,048 3%3%Converse588 643-9%-9%Corporate(2)(4)TOTAL NIKE,INC.REVENUES$12,939$12,687 2%2%(1)The percent change excluding currency changes represents a non-GAAP financial measure.For additional information,see Use of Non-GAAP Financial Measures.(2)Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.(3)Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse,butmanaged through our central foreign exchange risk management program.The primary financial measure used by the Company to evaluate performance of individual operating segments is EBIT,which represents Net income before Interestexpense(income),net and Income tax expense in the Unaudited Condensed Consolidated Statements of Income.As discussed in Note 10 Operating Segments in theaccompanying Notes to the Unaudited Condensed Consolidated Financial Statements,certain corporate costs are not included in EBIT of our operating segments.The breakdown of EBIT is as follows:THREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGENorth America$1,434$1,377 4%Europe,Middle East&Africa930 975-5%Greater China525 541-3%Asia Pacific&Latin America414 500-17%Global Brand Divisions(1,205)(1,187)-2%TOTAL NIKE BRAND2,098 2,206-5%Converse167 209-20%Corporate(651)(574)-13%TOTAL NIKE,INC.EARNINGS BEFORE INTEREST AND TAXES1,614 1,841-12IT margin12.5.5%Interest expense(income),net(34)13 TOTAL NIKE,INC.INCOME BEFORE INCOME TAXES$1,648$1,828-10%(1)Total NIKE Brand EBIT,Total NIKE,Inc.EBIT and EBIT margin represent non-GAAP financial measures.For further information,see Use of Non-GAAP Financial Measures.(1)(2)(3)(1)(1)(1)26Table of ContentsNORTH AMERICATHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESRevenues by:Footwear$3,733$3,805-2%-2%Apparel1,479 1,494-1%-1%Equipment211 211 0%0%TOTAL REVENUES$5,423$5,510-2%-1%Revenues by:Sales to Wholesale Customers$2,772$3,027-8%-8%Sales through NIKE Direct2,651 2,483 7%7%TOTAL REVENUES$5,423$5,510-2%-1RNINGS BEFORE INTEREST AND TAXES$1,434$1,377 4%FIRST QUARTER OF FISCAL 2024 COMPARED TO FIRST QUARTER OF FISCAL 2023 North America revenues decreased 1%on a currency-neutral basis,due to lower revenues in Mens,Womens and Kids,largely offset by higher revenues in theJordan Brand.Wholesale revenues decreased 8%,reflecting our proactive decisions to manage inventory supply and prioritize marketplace health.NIKE Directrevenues increased 7%,driven by comparable store sales growth of 6%,the addition of new stores and digital sales growth of 4%.Footwear revenues decreased 2%on a currency-neutral basis,due to lower revenues in Mens,Kids and Womens,largely offset by higher revenues in the JordanBrand.Unit sales of footwear decreased 10%,while higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth.Higher ASP perpair was primarily due to higher full-price ASP and growth in NIKE Direct.Apparel revenues decreased 1%on a currency-neutral basis,primarily due to lower revenues in Womens,Mens and the Jordan Brand.Unit sales of appareldecreased 11%,while higher ASP per unit contributed 10 percentage points of apparel revenue growth.Higher ASP per unit was primarily due to higher full-price andNIKE Direct ASP.Reported EBIT increased 4%reflecting lower revenues and the following:Gross margin expansion of 240 basis points primarily due to higher full-price ASP,net of discounts,largely due to strategic pricing actions and higher margin in NIKEDirect.This was partially offset by higher product costs and a lower mix of full-price sales.Selling and administrative expense increase of 4%driven by higher operating overhead expense.The increase in operating overhead expense was primarily due tohigher wage-related expenses and NIKE Direct variable costs.Demand creation expense was flat as lower advertising and marketing expense was offset by higherdigital marketing.27Table of ContentsEUROPE,MIDDLE EAST&AFRICATHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESRevenues by:Footwear$2,260$2,012 12%Apparel1,137 1,153-1%-3%Equipment213 168 27#%TOTAL REVENUES$3,610$3,333 8%6%Revenues by:Sales to Wholesale Customers$2,379$2,203 8%7%Sales through NIKE Direct1,231 1,130 9%6%TOTAL REVENUES$3,610$3,333 8%6RNINGS BEFORE INTEREST AND TAXES$930$975-5%FIRST QUARTER OF FISCAL 2024 COMPARED TO FIRST QUARTER OF FISCAL 2023 EMEA revenues increased 6%on a currency-neutral basis due to higher revenues in Mens and Womens,partially offset by lower revenues in the Jordan Brand.NIKE Direct revenues increased 6%due to comparable store sales growth of 14%and the addition of new stores,partially offset by digital sales declines of 2%.Footwear revenues increased 10%on a currency-neutral basis,primarily due to higher revenues in Mens and Womens.Unit sales of footwear increased 2%,whilehigher ASP per pair contributed approximately 8 percentage points of footwear revenue growth.Higher ASP per pair was primarily due to higher full-price and NIKEDirect ASPs.Apparel revenues decreased 3%on a currency-neutral basis due to lower revenues in Mens,the Jordan Brand and Womens.Unit sales of apparel decreased 15%,while higher ASP per unit contributed approximately 12 percentage points of apparel revenue growth.Higher ASP per unit was primarily due to higher full-price andNIKE Direct ASPs,as well as growth in NIKE Direct.Reported EBIT decreased 5%reflecting higher revenues and the following:Gross margin contraction of 310 basis points primarily due to unfavorable changes in standard foreign currency exchange rates,partially offset by higher full-priceASP,net of discounts,primarily due to strategic pricing actions.Selling and administrative expense increase of 11%due to higher operating overhead and demand creation expense.Operating overhead expense increasedprimarily due to higher wage-related expenses,other administrative costs and unfavorable changes in foreign currency exchange rates.Demand creation expenseincreased primarily due to higher sports marketing expense and unfavorable changes in foreign currency exchange rates.28Table of ContentsGREATER CHINATHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESRevenues by:Footwear$1,287$1,233 4%Apparel401 374 7%Equipment47 49-4%2%TOTAL REVENUES$1,735$1,656 5%Revenues by:Sales to Wholesale Customers$895$839 7%Sales through NIKE Direct840 817 3%TOTAL REVENUES$1,735$1,656 5RNINGS BEFORE INTEREST AND TAXES$525$541-3%FIRST QUARTER OF FISCAL 2024 COMPARED TO FIRST QUARTER OF FISCAL 2023 Greater China revenues increased 12%on a currency-neutral basis due to higher revenues in Womens,the Jordan Brand,Mens and Kids.NIKE Direct revenuesincreased 10%due to comparable store sales growth of 7nefiting from improved physical retail traffic post COVID-19 related disruptions,the addition of newstores and digital sales growth of 6%.Footwear revenues increased 11%on a currency-neutral basis due to higher revenues in the Jordan Brand,Womens,Mens and Kids.Unit sales of footwearincreased 9%,while higher ASP per pair contributed approximately 2 percentage points of footwear revenue growth.Higher ASP per pair was primarily due to higherfull-price ASP,partially offset by lower NIKE Direct ASP.Apparel revenues increased 14%on a currency-neutral basis,primarily due to higher revenues in Womens.Unit sales of apparel decreased 2%,while higher ASPper unit contributed approximately 16 percentage points of apparel revenue growth.Higher ASP per unit was primarily due to higher NIKE Direct and full-price ASPs,as well as a higher mix of full-price sales,partially offset by lower off-price ASP.Reported EBIT decreased 3%reflecting higher revenues and the following:Gross margin contraction of approximately 80 basis points,primarily due to higher product costs and unfavorable changes in standard foreign currency exchangerates.This was partially offset by higher full-price ASP,net of discounts,and a higher mix of full-price sales.Selling and administrative expense increase of 6%primarily due to higher demand creation expense.Demand creation expense increased primarily due to higheradvertising and marketing expense,partially offset by favorable changes in foreign currency exchange rates.Operating overhead expense was flat as favorablechanges in foreign currency exchanges rates were offset by higher wage-related expenses and NIKE Direct variable costs.29Table of ContentsASIA PACIFIC&LATIN AMERICATHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESRevenues by:Footwear$1,141$1,064 7%7%Apparel371 413-10%-9%Equipment60 58 3%3%TOTAL REVENUES$1,572$1,535 2%3%Revenues by:Sales to Wholesale Customers$937$914 3%3%Sales through NIKE Direct635 621 2%3%TOTAL REVENUES$1,572$1,535 2%3RNINGS BEFORE INTEREST AND TAXES$414$500-17%We completed the sale of our entity in Chile and our entities in Argentina and Uruguay to third-party distributors in the first and second quarters of fiscal 2023,respectively.The impacts from closing these transactions are included within Corporate and are not reflected in the Asia Pacific&Latin America(APLA)operating segment results.This completed the transition of our NIKE Brand businesses within our Central and South America(CASA)marketplace,which now reflects a full distributor operatingmodel.FIRST QUARTER OF FISCAL 2024 COMPARED TO FIRST QUARTER OF FISCAL 2023 APLA revenues increased 3%on a currency-neutral basis due to higher revenues across most territories,led by Japan,Southeast Asia&India and Mexico,partiallyoffset by lower revenues in CASA and Korea.Within our CASA territory,the transition of our Chile,Argentina and Uruguay entities to a third-party distributor operatingmodel reduced APLA revenue growth by approximately 3 percentage points.Revenues increased due to overall growth in Womens,the Jordan Brand and Kids.NIKE Direct revenues increased 3%,driven by comparable store sales growth of 12%and the addition of new stores,partially offset by digital sales declines of 3%.Footwear revenues increased 7%on a currency-neutral basis due to higher revenues in Mens,Womens,the Jordan Brand and Kids.Unit sales of footwearincreased 7%and ASP per pair was slightly up,as higher full-price ASP was largely offset by lower NIKE Direct ASP.Apparel revenues decreased 9%on a currency-neutral basis,primarily due to lower revenues in Mens and Womens.Unit sales of apparel decreased 17%,whilehigher ASP per unit contributed approximately 8 percentage points of apparel revenue growth.Higher ASP per unit was primarily due to higher full-price ASP,growthin NIKE Direct and higher off-price ASP.Reported EBIT decreased 17%reflecting higher revenues and the following:Gross margin contraction of approximately 410 basis points primarily due to higher product costs,as well as unfavorable changes in standard foreign currencyexchange rates and lower margin in NIKE Direct.This was partially offset by higher full-price ASP,net of discounts.Selling and administrative expense increase of 14%due to higher demand creation and operating overhead expense.Demand creation expense increased primarilydue to higher advertising and marketing expense as well as higher digital marketing expense.Operating overhead expense increased primarily due to higher wage-related expenses.30Table of ContentsGLOBAL BRAND DIVISIONSTHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESRevenues$13$14-7%1rnings(Loss)Before Interest and Taxes$(1,205)$(1,187)-2%Global Brand Divisions primarily represent demand creation and operating overhead expense,including product creation and design expenses that are centrally managedfor the NIKE Brand,as well as costs associated with NIKE Direct global digital operations and enterprise technology.Global Brand Divisions revenues include NIKE Brandlicensing and other miscellaneous revenues that are not part of a geographic operating segment.FIRST QUARTER OF FISCAL 2024 COMPARED TO FIRST QUARTER OF FISCAL 2023Global Brand Divisions loss before interest and taxes increased 2%primarily due to higher demand creation partially offset by lower operating overhead expense.Higherdemand creation expense was primarily due to higher advertising and marketing expense.Lower operating overhead expense was primarily due to lower technologyspend.CONVERSETHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGE%CHANGEEXCLUDINGCURRENCYCHANGESRevenues by:Footwear$522$577-10%-10%Apparel20 20 0%1%Equipment11 8 382%Other35 38-8%-8%TOTAL REVENUES$588$643-9%-9%Revenues by:Sales to Wholesale Customers$329$344-4%-5%Sales through Direct to Consumer224 261-14%-14%Other35 38-8%-8%TOTAL REVENUES$588$643-9%-9RNINGS BEFORE INTEREST AND TAXES$167$209-20%(1)Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights.We do not own theConverse trademarks in Japan and accordingly do not earn revenues in Japan.FIRST QUARTER OF FISCAL 2024 COMPARED TO FIRST QUARTER OF FISCAL 2023 Converse revenues decreased 9%on a currency-neutral basis as revenue declines in North America were partially offset by an increase in Asia.Combined unit saleswithin the wholesale and direct to consumer channels decreased 6%and ASP decreased 3%,reflecting promotional activity in digital.Direct to consumer revenues decreased 14%on a currency-neutral basis due to reduced traffic in North America and Western Europe.Wholesale revenues decreased 5%on a currency-neutral basis,as declines in North America were partially offset by growth in Western Europe due to supply chainnormalization.Reported EBIT decreased 20%reflecting lower revenues and the following:Gross margin contraction of approximately 200 basis points due to promotional activity and unfavorable changes in standard foreign currency exchange rates.Selling and administrative expense was flat as lower operating overhead was offset by higher demand creation expense.Operating overhead expense decreasedprimarily as a result of lower professional service and administrative costs.Demand creation expense increased as a result of higher advertising and marketing aswell as brand event expenses.(1)(1)31Table of ContentsCORPORATETHREE MONTHS ENDED AUGUST 31,(Dollars in millions)20232022%CHANGERevenues$(2)$(4)Earnings(Loss)Before Interest and Taxes$(651)$(574)-13%Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operatingsegments and Converse,but managed through our central foreign exchange risk management program.The Corporate loss before interest and taxes primarily consists of unallocated general and administrative expenses,including expenses associated with centrallymanaged departments;depreciation and amortization related to our corporate headquarters;unallocated insurance,benefit and compensation programs,including stock-based compensation;and certain foreign currency gains and losses.In addition to the foreign currency gains and losses recognized in Corporate revenues,foreign currency results in Corporate include gains and losses resulting from thedifference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKEBrand geographic operating segments and Converse;related foreign currency hedge results;conversion gains and losses arising from remeasurement of monetaryassets and liabilities in non-functional currencies;and certain other foreign currency derivative instruments.FIRST QUARTER OF FISCAL 2024 COMPARED TO FIRST QUARTER OF FISCAL 2023Corporates loss before interest and taxes increased$77 million for the first quarter of fiscal 2024,primarily due to the following:an unfavorable change of$117 million related to the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impactof certain foreign currency derivative instruments,as well as net favorable settlements of legal matters in the prior year,reported as a component of consolidatedOther(income)expense,net;an unfavorable change of$59 million primarily related to increased wage-related expenses and other professional services,reported as a component ofconsolidated Operating overhead expense;anda favorable change of$105 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange ratesassigned to the NIKE Brand geographic operating segments and Converse,net of hedge gains and losses;these results are reported as a component ofconsolidated gross margin.FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICESOVERVIEWAs a global company with significant operations outside the United States,in the normal course of business we are exposed to risk arising from changes in currencyexchange rates.Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreigncurrency denominated results of operations,financial position and cash flows into U.S.Dollars.Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results ofoperations,financial position and cash flows.We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE,Inc.Ourhedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged.Where exposures arehedged,our program has the effect of delaying the impact of exchange rate movements on our Unaudited Condensed Consolidated Financial Statements;the length ofthe delay is dependent upon hedge horizons.We do not hold or issue derivative instruments for trading or speculative purposes.As of and for the three months endedAugust 31,2023,there have been no material changes to the Companys hedging program or strategy from what was disclosed within the Annual Report on Form 10-Kfor the fiscal year ended May 31,2023(the Annual Report)Refer to Note 3 Fair Value Measurements and Note 7 Risk Management and Derivatives in the accompanying Notes to the Unaudited Condensed ConsolidatedFinancial Statements for additional description of outstanding derivatives at each reported period end.For additional information about our Foreign Currency Exposuresand Hedging Practices,refer to Part II,Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations within the Annual Report.32Table of ContentsTRANSACTIONAL EXPOSURESWe conduct business in various currencies and have transactions which subject us to foreign currency risk.Our most significant transactional foreign currency exposuresare:Product Costs Product purchases denominated in currencies other than the functional currency of the transacting entity and factory input costs from theforeign currency adjustments program with certain factories.Non-Functional Currency Denominated External Sales A portion of our NIKE Brand and Converse revenues associated with European operations are earnedin currencies other than the Euro(e.g.,the British Pound)but are recognized at a subsidiary that uses the Euro as its functional currency.These sales generatea foreign currency exposure.Other Costs Non-functional currency denominated costs,such as endorsement contracts,also generate foreign currency risk,though to a lesser extent.Non-Functional Currency Denominated Monetary Assets and Liabilities Our global subsidiaries have various monetary assets and liabilities,primarilyreceivables and payables,including intercompany receivables and payables,denominated in currencies other than their functional currencies.These balancesheet items are subject to remeasurement which may create fluctuations in Other(income)expense,net within our consolidated results of operations.MANAGING TRANSACTIONAL EXPOSURESTransactional exposures are managed on a portfolio basis within our foreign currency risk management program.We manage these exposures by taking advantage ofnatural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect ofexchange rate fluctuations on probable forecasted future cash flows,including certain product cost exposures,non-functional currency denominated external sales andother costs described above.Generally,these are accounted for as cash flow hedges.Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject toremeasurement are not formally designated as hedging instruments.Accordingly,changes in fair value of these instruments are recognized in Other(income)expense,net and are intended to offset the foreign currency impact of the remeasurement of the related non-functional currency denominated asset or liability being hedged.TRANSLATIONAL EXPOSURESMany of our foreign subsidiaries operate in functional currencies other than the U.S.Dollar.Fluctuations in currency exchange rates create volatility in our reported resultsas we are required to translate the balance sheets,operational results and cash flows of these subsidiaries into U.S.Dollars for consolidated reporting.The translation offoreign subsidiaries non-U.S.Dollar denominated balance sheets into U.S.Dollars for consolidated reporting results in a cumulative translation adjustment toAccumulated other comprehensive income(loss)within Shareholders equity.The impact of foreign exchange rate fluctuations on the translation of our consolidatedRevenues was a detriment of approximately$57 million and$823 million for the three months ended August 31,2023 and 2022,respectively.The impact of foreignexchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately$2 million and$253 million for the three months endedAugust 31,2023 and 2022,respectively.MANAGING TRANSLATIONAL EXPOSURESTo minimize the impact of translating foreign currency denominated revenues and expenses into U.S.Dollars for consolidated reporting,certain foreign subsidiaries useexcess cash to purchase U.S.Dollar denominated available-for-sale investments.The variable future cash flows associated with the purchase and subsequent sale ofthese U.S.Dollar denominated investments at non-U.S.Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accountingunder U.S.GAAP.We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S.Dollar investments.Thecombination of the purchase and sale of the U.S.Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currencytranslation impact on net earnings in the period the investments are sold.Hedges of the purchase of U.S.Dollar denominated available-for-sale investments areaccounted for as cash flow hedges.We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currencyrelated gains and losses included in Other(income)expense,net had an unfavorable impact of approximately$65 million and$234 million in our Income before incometaxes for the three months ended August 31,2023 and 2022,respectively.33Table of ContentsLIQUIDITY AND CAPITAL RESOURCESCASH FLOW ACTIVITYCash provided(used)by operations was an outflow of$66 million for the first three months of fiscal 2024,compared to an inflow of$357 million for the first three monthsof fiscal 2023.Net income,adjusted for non-cash items,generated$1,757 million of operating cash inflow for the first three months of fiscal 2024,compared to$1,771million for the first three months of fiscal 2023.The net change in working capital and other assets and liabilities resulted in a decrease to Cash provided(used)byoperations of$1,823 million for the first three months of fiscal 2024 compared to a decrease of$1,414 million for the first three months of fiscal 2023.The net change inworking capital was primarily impacted by unfavorable changes in Accrued liabilities,primarily due to net unfavorable changes in cash collateral with derivativecounterparties as a result of hedging transactions.The net change in working capital was also impacted by favorable changes to Inventories due to improved lead timesand flow of seasonal product in the current period.Further impacting the net change in working capital was an unfavorable change in Accounts receivable,in part due tothe timing of wholesale shipments in the current period.Cash provided(used)by investing activities was an inflow of$418 million for the first three months of fiscal 2024,compared to an outflow of$214 million for the first threemonths of fiscal 2023,primarily driven by the net change in short-term investments.For the first three months of fiscal 2024,the net change in short-term investments(including sales,maturities and purchases)resulted in a cash inflow of$672 million compared to a cash outflow of$89 million for the first three months of fiscal 2023.Cash provided(used)by financing activities was an outflow of$1,599 million for the first three months of fiscal 2024 compared to$1,404 million for the first three monthsof fiscal 2023.The increased outflow in the first three months of fiscal 2024 was driven by higher share repurchases of$1,133 million for the first three months of fiscal2024 compared to$983 million in the first three months of fiscal 2023,as well as higher dividend payments of$524 million for the first three months of fiscal 2024compared to$480 million in the first three months of fiscal 2023.During the first three months of fiscal 2024,we repurchased a total of 10.5 million shares of NIKEs Class B Common Stock for$1,132 million(an average price of$108.12 per share)under the four-year,$18 billion share repurchase plan authorized by the Board of Directors in June 2022.As of August 31,2023,we have repurchased54.0 million shares at a cost of approximately$5.9 billion(an average price of$109.94 per share)under this$18 billion share repurchase program.We continue to expectfunding of share repurchases will come from operating cash flows and excess cash.The timing and the amount of share repurchases will be dictated by our capital needsand stock market conditions.CAPITAL RESOURCESOn July 21,2022,we filed a shelf registration statement(the Shelf)with the U.S.Securities and Exchange Commission(the SEC)which permits us to issue anunlimited amount of debt securities from time to time.The Shelf expires on July 21,2025.As of August 31,2023,our committed credit facilities were unchanged from the information previously reported within the Annual Report.We currently have long-termdebt ratings of AA-and A1 from Standard and Poors Corporation and Moodys Investor Services,respectively.Any changes to these ratings could result in interest rateand facility fee changes.As of August 31,2023,we were in full compliance with the covenants under our facilities and believe it is unlikely we will fail to meet any of thecovenants in the foreseeable future.As of August 31,2023 and May 31,2023,no amounts were outstanding under our committed credit facilities.Liquidity is also provided by our$3 billion commercial paper program.As of and for the three months ended August 31,2023,we did not have any borrowings outstandingunder our$3 billion program.We may issue commercial paper or other debt securities depending on general corporate needs.To date,in fiscal 2024,we have not experienced difficulty accessing the capital or credit markets;however,future volatility may increase costs associated with issuingcommercial paper or other debt instruments or affect our ability to access those markets.As of August 31,2023,we had Cash and equivalents and Short-term investments totaling$8.8 billion,primarily consisting of commercial paper,corporate notes,depositsheld at major banks,money market funds,U.S.Treasury obligations and other investment grade fixed-income securities.Our fixed-income investments are exposed toboth credit and interest rate risk.All of our investments are investment grade to minimize our credit risk.While individual securities have varying durations,as ofAugust 31,2023,the weighted average days to maturity of our cash equivalents and short-term investments portfolio was 100 days.We believe that existing Cash and equivalents,Short-term investments and cash generated by operations,together with access to external sources of funds as describedabove,will be sufficient to meet our domestic and foreign capital needs in the foreseeable future.There have been no significant changes to the material cash requirements reported within the Annual Report.34Table of ContentsOFF-BALANCE SHEET ARRANGEMENTSAs of August 31,2023,we did not have any off-balance sheet arrangements that have,or are reasonably likely to have,a material effect on our current or future financialcondition,results of operations,liquidity,capital expenditures or capital resources.NEW ACCOUNTING PRONOUNCEMENTSRefer to Note 1 Summary of Significant Accounting Policies within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements forrecently adopted and issued accounting standards.CRITICAL ACCOUNTING ESTIMATESOur discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements,which havebeen prepared in accordance with accounting principles generally accepted in the United States of America.The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities,revenues and expenses and related disclosure of contingent assets and liabilities.We believe the assumptions and judgments involved in the accounting estimates described in the Managements Discussion and Analysis of Financial Condition andResults of Operations section of the Annual Report have the greatest potential impact on our financial statements,so we consider these to be our critical accountingestimates.Actual results could differ from these estimates.We are not currently aware of any reasonably likely events or circumstances that would result in materiallydifferent amounts being reported.35Table of ContentsITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISKThere have been no material changes from the information previously reported under Part II,Item 7A within our Annual Report on Form 10-K for the fiscal year endedMay 31,2023.ITEM 4.CONTROLS AND PROCEDURESWe maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities ExchangeAct of 1934,as amended(the Exchange Act)reports is recorded,processed,summarized and reported within the time periods specified in the SECs rules and formsand that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer,as appropriate,toallow for timely decisions regarding required disclosure.In designing and evaluating the disclosure controls and procedures,management recognizes that any controlsand procedures,no matter how well designed and operated,can provide only reasonable assurance of achieving the desired control objectives,and management isrequired to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.We carry out a variety of ongoing procedures,under the supervision and with the participation of our management,including our Chief Executive Officer and ChiefFinancial Officer,to evaluate the effectiveness of the design and operation of our disclosure controls and procedures.Based on the foregoing,our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of August 31,2023.We are continuing several transformation initiatives to centralize and simplify our business processes and systems.These are long-term initiatives,which we believe willenhance our internal control over financial reporting due to increased automation and further integration of related processes.We will continue to monitor our internalcontrol over financial reporting for effectiveness throughout these transformation initiatives.There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected,or are reasonably likelyto materially affect,our internal control over financial reporting.36Table of ContentsSPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS AND ANALYST REPORTSCertain written and oral statements,other than purely historic information,including estimates,projections,statements relating to NIKEs business plans,objectives andexpected operating or financial results and the assumptions upon which those statements are based,made or incorporated by reference from time to time by NIKE or itsrepresentatives in this report,other reports,filings with the SEC,press releases,conferences or otherwise,are forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 and Section 21E of the Exchange Act.Forward-looking statements include,without limitation,any statement that maypredict,forecast,indicate or imply future results,performance or achievements,and may contain the words believe,anticipate,expect,estimate,project,will be,will continue,will likely result or words or phrases of similar meaning.Forward-looking statements involve risks and uncertainties which may cause actual results todiffer materially from the forward-looking statements.The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC,including reports filedon Forms 8-K,10-Q and 10-K,and include,among others,the following:international,national and local political,civil,economic and market conditions,including high,and increases in,inflation and interest rates;the size and growth of the overall athletic or leisure footwear,apparel and equipment markets;intense competition amongdesigners,marketers,distributors and sellers of athletic or leisure footwear,apparel and equipment for consumers and endorsers;demographic changes;changes inconsumer preferences;popularity of particular designs,categories of products and sports;seasonal and geographic demand for NIKE products;difficulties in anticipatingor forecasting changes in consumer preferences,consumer demand for NIKE products and the various market factors described above;our ability to execute on oursustainability strategy and achieve our sustainability-related goals and targets,including sustainable product offerings;difficulties in implementing,operating andmaintaining NIKEs increasingly complex information technology systems and controls,including,without limitation,the systems related to demand and supply planningand inventory control;interruptions in data and information technology systems;consumer data security;fluctuations and difficulty in forecasting operating results,including,without limitation,the fact that advance orders may not be indicative of future revenues due to changes in shipment timing,the changing mix of orders withshorter lead times,and discounts,order cancellations and returns;the ability of NIKE to sustain,manage or forecast its growth and inventories;the size,timing and mix ofpurchases of NIKEs products;increases in the cost of materials,labor and energy used to manufacture products;new product development and introduction;the ability tosecure and protect trademarks,patents and other intellectual property;product performance and quality;customer service;adverse publicity and an inability to maintainNIKEs reputation and brand image,including without limitation,through social media or in connection with brand damaging events;the loss of significant customers orsuppliers;dependence on distributors and licensees;business disruptions;increased costs of freight and transportation to meet delivery deadlines;increases in borrowingcosts due to any decline in NIKEs debt ratings;changes in business strategy or development plans;general risks associated with doing business outside of the UnitedStates,including,without limitation,exchange
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Deutsche TelekomQ2 2023 resultsInvestor and Analyst Conference CallAugust 10,202314:00 CEST,13:00 BST,8:00 EDT,5:00 PDT,21:00 JSTDisclaimerThis presentation contains forward-looking statements that reflect the current views of Deutsche Telekom management with respectto future events.These forward-looking statements include statements with regard to the expected development of revenue,earnings,profits from operations,depreciation and amortization,cash flows and personnel-related measures.You should consider them with caution.Such statements are subject to risks and uncertainties,most of which are difficult to predict and are generally beyond Deutsche Telekoms control.Among the factors that might influence our ability to achieve our objectives are the progress of our workforce reduction initiative and other cost-saving measures,and the impact of other significant strategic,labor or business initiatives,including acquisitions,dispositions and business combinations,and our network upgrade and expansion initiatives.In addition,stronger than expected competition,technological change,legal proceedings and regulatory developments,among other factors,may have a material adverse effect on our costs and revenue development.Further,the economic downturn in our markets,and changes in interest and currency exchange rates,may also have an impact on our business development and the availability of financing on favorable conditions.Changes to our expectations concerning futurecash flows may lead to impairment write downs of assets carried at historical cost,which may materially affect our results at the group and operating segment levels.If these or other risks and uncertainties materialize,or if the assumptions underlying any of these statements prove incorrect,our actual performance may materially differ from the performance expressed or implied by forward-looking statements.We can offer no assurance that our estimates or expectations will be achieved.Without prejudice to existing obligations under capital market law,we do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.In addition to figures prepared in accordance with IFRS,Deutsche Telekom also presents alternative performance measures,including,among others,EBITDA,EBITDA margin,adjusted EBITDA,adjusted EBITDA after leases,adjusted EBITDA margin,Core EBITDA,adjusted EBIT,adjusted net income,free cash flow,free cash flow after leases,gross debt,net debt after leases and net debt.These alternative performance measures should be considered in addition to,but not as a substitute for,the information prepared in accordance with IFRS.Alternative performance measures are not subject to IFRS orany other generally accepted accounting principles.Other companies may define these terms in different ways.2H1 2023 resultsGroupH1/2023 resultscontinued growthH1/2023 Highlights Organic growth:Group service revenues growing 2.9%,Group adj.core EBITDA 5.8%.FCF AL 10.9%Guidance for 2023 EBITDA AL growth raised on both sides of the Atlantic TM US increases outlook for 2023 customer growth Around 15mn European households passed with FTTH DT and GdW agree on FTTH roll-out blueprint for housing associations in Germany DT stake in TM US increased to 51.3%end of June S&P has raised DTs rating to“BBB ”with stable outlook4H1/23 Adj.EBITDA ALgrowth yoy,organicH1/23 Key Financials%growth yoy,organicH1/23 Adj.EBITDA AL2 mnFinancials H1/2023 organicstrong organic growth6013,0905,0162,0071593.1% 396 mn3.0% 148 mn1.9% 37 mn3.2% 5 mnGERTMUSEUSYSSYSGDTMUSGEREUAdj.Core EBITDA AL growth of 8.5x US Service revenuesGroup revenuesGroup adj.Core EBITDAGroup service revenuesGroup adj.EBITDA AL-0.4%ex US adj.EBITDA AL2.9%2.4%5.8%2.4%1.1ccording to IFRS.US GAAP growth is 10.0%.Adj.Core EBITDA excludes decreasing handset leasing revenues(US$-0.6 bn yoy)2Excl.GHS.Group EBITDA AL 20,002 mnIn this presentation the Group is presented in accordance with the management view:certain key performance indicators like revenue and adj.EBITDA AL are presented as if Group Development still would be fully consolidated.This view is different to the consolidated financial statements of DT where Group Development is treated as a discontinued operation.For more details,please refer to the back-up to this presentation,respectively the interim report of DT both available at by lower equipment revenues5FTTH(1 Gbps)Fiber homesmn5G TM USUltra capacity 5G1mn POPs5G ex USGermany%of POPsNetworksleading with 5G,FTTH on track7.43.9H1/228.56.2H1/2311.314.7 3.4EUGER9395H1/22H1/23 2235285H1/22H1/23 50GER Mobile network wins“connect”best network award for the 25thconsecutive yearEU Leap in 5G coverage:59%POP coverage end of Q2/23.Up 8pp sequentiallyNetwork Leader TM US wins in every category for overall network performance from Ookla5G 5G network coverage 98%of AmericansGER On track for 2.5mn new HHs in 2023 German fixed network:DT No.1 in“connect”fixed network test EU On track for 10mn HHs with 1Gbps by 2024.Coverage now at 33%of HHs1Ultra capacity on 2.5 GHz6Mobile net adds000Fixed line net adds2000Customersgrowing stronglyH1/22H1/232,9742,854781870H1/22H1/23H1/22H1/2324024186149H1/22H1/23US(postpaid)Ex US(contract)1BroadbandTV1GER EU.GER:own brand only 2GER EU 7DT climate targetssharpened ambitionsClimate ambitions(in line with SBTi requirements)Drivers of CO2 emissions(FY 2022)Energy consumptionmn MWh4.22.4H1/223.82.3H1/23USex US6.56.0-8 21Renewable electricity as of 20212025Reduce direct and indirect emissions from within our company to net-zero(Scope 1 2)2030Reduce Scope 1 3 Emissions by 55%against 2020 by 2030.2040Climate-neutral companyReduce Scope 1 3 Emissions to Net Zero(with at least 90%reduction)NEW1NEW1Scope 1:own activities212 ktons(-10%since 2020)Scope 2:purchased activities21 ktons(-99%since 2020)Scope 3:value chain12,287 ktons21%downstream:customers79%upstream:supply chain1announced in April 20238FCF AL1 bn7.63.6FY 2022 pro forma12.73.54Guidance 202312.83.54Guidance update Q211.21616Adj.EBITDA AL1 bn25.613.7FY 2022 pro forma27.013.9Guidance 202327.114.0Guidance Update Q239.340.841.0Adj.EPS/shareCore EBITDA AL Adj.1 bnUpdated Guidance 2023continued growth 2ndupgrade24.313.7FY 2022 pro forma26.713.9Guidance 202326.814.0Guidance Update Q238.040.540.71.51FY/22 reported3Guidance 20231.831.60TM USDT Ex USTM USDT Ex US 7% 40% 4% 6%2Non-recurringRecurringTM USDT Ex US1 TM US guidance is based on midpoint of US GAAP guidance of US$29.2-29.5 bn adj.EBITDA;of US$28.9 29.2 bn core adj.EBITDA and of US$13.2 13.6 bn FCF.Guidance assumes a negative bridge of US$0.8 0.85 bn on adj.EBITDA and core adj.EBITDA upon translation into IFRS.Based on 1=US$1.05.2On recurring basis 3Non-recurring elements in adj.EPS include gains from financial instruments,the contribution from T-Mobile NL in Q1/22,the held-for-sale effect Towers and the interest effect on the valuation of the civil service health insurance fund.4Includes 0.2 bn of cash returns and 0.15 bn cash taxes related to tower transaction9Q2 2023 resultsReview segments and financialsService revenue(US GAAP)%yoyRevenues(IFRS)US$bnCore adj.EBITDA(US GAAP)%yoyAdj.EBITDA AL(IFRS)2US$bnT-Mobile USstrong financial growthQ2/22Q3/22Q4/22Q1/23Q2/23 10.4% 11.4% 15.9% 9.1% 10.8%Q2/22Q2/236.77.1 5.8%yoy decline in handset leasing revenuesUS$0.3 bn11 TM US has refocused its distribution policy towards Equipment Installment Plans,which results in a decrease of handset leasing revenues and a corresponding decline in revenue and EBITDA AL.Service revenues are not impacted.2For IFRS bridge please refer to appendix.Q2/22Q3/22Q4/22Q1/23Q2/23 5.7% 4.3% 3.7% 2.8% 2.8%4.415.3Q2/223.415.7Q2/23Other revenuesService revenues19.619.1-2.6%Higher postpaid upgrades incl.from Sprint customers in prior year and lower lease revenuesPostpaid growth of 5.5%,offset by US$0.2 bn lower other revenues11Total postpaid net additions1mnHigh Speed Internet net additions2000723854927538760Q2/22Q3/22Q4/22Q1/23Q2/23T-Mobile USconsistent growth in all customer categoriesQ2/22Q3/22Q4/22Q1/23Q2/230.800.880.920.890.775G EXTENDED RANGE5G ULTRA CAPACITYPostpaid phone net additions1000Postpaid phone churn%Q2/22Q3/22Q4/22Q1/23Q2/231.71.61.81.31.6560578524523509Q2/22Q3/22Q4/22Q1/23Q2/23More than AT&T and Verizon combined,FY guidance raisedTotal customer base at 3.7mn,on track for 2025 target of 7 8mnIndustry leading and best Q2 in 8 yearsBest in industry for the first time ever and a record low121 Net adds are excluding the following base adjustments:customers impacted by the decommissioning of the legacy Sprint CDMA and LTE and T-Mobile UMTS networks have been excluded from our customer base resulting in the removal of 284,000 postpaid phone customers,946,000 postpaid other customers and 28,000 prepaid customers in the second quarter of 2022.Certain customers now serviced through reseller contracts were removed from our reported postpaid customer base resulting in the removal of 42,000 postpaid phone customers and 20,000 postpaid other customers in the second quarter of 2022.2Postpaid PrepaidRevenues(as reported)mnRevenue growth(organic)%yoyGermany27thconsecutive quarter of EBITDA growthAdj.EBITDA AL(as reported)mnAdj.EBITDA AL(organic)%yoyQ2/22Q2/232,4292,528 4.1%Q2/22Q3/22Q4/22Q1/23Q2/232.7%2.7%1.1%2.3%1.1%Q2/22Q3/22Q4/22Q1/23Q2/233.0%3.0%3.0%3.1%3.0%Q2/22Q2/236,0386,150 1.9%As of Q1/23 the Multimedia Solutions unit(MMS)was transferred from the Systems Solutions segment to the Germany segment impacting revenue and EBITDA AL.In addition,the sale of the tower business impacted EBITDA AL.The organic trend is adjusted for these changes.Organic growth rates for 2022 were not re-stated and remain as previously disclosed.Impacted by lower equipment revenues.Service revenues 1.6Total service revenue growth(organic)1%yoyMobile service revenue growth(organic)%yoyFixed service revenue growth(organic)1%yoyGermanyservice revenues:growing across the boardQ1/23Q4/221.8%1.6%Q2/22Q3/22Q2/231.2%1.7%1.6%2.0%Q2/23Q1/23Q2/22Q3/223.5%Q4/222.7%1.7%2.1%0.8%Q2/22Q3/22Q1/231.0%Q4/22Q2/231.4%1.6%1.4%Revenue growth(reported)%yoy Reported Total Service revenue growth 2.4%Reported Fixed Service revenue growth 2.5%Reported Mobile Service revenue growth 2.1%1)As of Q1/23 the Multimedia Solutions unit(MMS)was transferred from the Systems Solutions segment to the Germany segment impacting revenue(Total and Fixed Service revenue).The organic trend is adjusted for these changes.Organic growth rates for 2022 were not re-stated and remain as previously disclosed.14Retail fixed revenues(as reported)mnRetail fixed revenue growth(organic)%yoy Germanyfixed revenues:strong broadband growthBroadband revenue growth(organic)%yoyWholesale access revenues(organic)%growth yoy1,7211,381Q2/221,7901,401Q2/233,1023,191 2.9%Q1/23Q2/224.7%Q3/22Q4/22Q2/235.0%4.7%4.7%4.0%Q2/220.1%Q3/22Q4/22Q1/231.5%Q2/23-0.7%-3.0%1.0%Q2/221.2%Q1/23Q3/221.7%1.2%Q4/22Q2/232.2%1.5% 4.0% 1.4%Broadband revenuesSingle play andother revenuesAs of Q1/23 the Multimedia Solutions unit(MMS)was transferred from the Systems Solutions segment to the Germany segment impacting revenue(Retail Fixed revenue).The organic trend is adjusted for these changes.Organic growth rates for 2022 were not re-stated and remain as previously disclosed.Content contract re-negotiation in Q2/22(impact on growth rate approx.50bps)On track for stable FY revenues15Retail customers with 100Mbit/s tariffmn/%of customer baseBroadband net adds000Germanyfixed KPIs:net adds improved,strong upselling continuesTV net adds000FTTH Customers0004563747467Q2/22Q3/22Q4/22Q1/23Q2/232132515036Q2/22Q3/22Q4/22Q1/23Q2/23impact of TKGimpact of TKG379BC%Q2/22Q3/22Q4/22Q1/23Q2/235.45.75.96.26.4602704769833Q2/22Q3/22Q4/22Q1/23Q2/23647In addition:650k pre-marketed16Germanymobile KPIs:strong customer intakeData usage2GB per monthMagenta EINS share(mobile)3%Branded contract net adds1000Churn2%Q2/22Q2/238.012.063d%Q2/22Q2/23Q2/22Q2/231.0%0.84368225274319Q2/22Q3/22Q4/22Q1/23Q2/23 51%yoy1Own branded retail customers excl.multibrand,consumer IoT and“Schnellstarter”2Of B2C T-branded contract customers 3Of B2C T-branded contract customersNormalization post TKG change in 202217Adj.EBITDA AL(as reported)mnRevenues(as reported)mnAdj.EBITDA AL(organic)%growth yoyRevenues(organic)%growth yoyEurope22ndconsecutive quarter of organic EBITDA growthQ2/22Q2/232,7292,899 6.26Q2/22Q2/231,024 3.9%Q2/22Q3/22Q4/22Q1/23Q2/234.0%5.5%2.2%4.9%5.1%Q2/22Q3/22Q4/22Q1/23Q2/234.5%0.5%0.9%1.2%2.6%As of Q3/22 the revenue recognition for certain customer transactions(principal agent)was changed.Growth rates for 2022 are presented on a re-stated basis.18Broadband net adds000Mobile contract net adds000TV net adds000FMC net adds000Europestrong commercial performance1732322934Q2/22Q3/22Q4/22Q1/23Q2/237076928372Q2/22Q3/22Q4/22Q1/23Q2/23186173185169152Q2/22Q3/22Q4/22Q1/23Q2/23243251179104173Q2/22Q3/22Q4/22Q1/231Q2/23191Q1/23 Mobile contract net adds negatively impacted by 33k re-classifications from contract to prepay in HungaryAdj.EBITDA AL(as reported)mnRevenues(organic)%growth yoyAdj.EBITDA AL(organic)%growth yoyRevenues(as reported)mnSystems Solutionson track for stated targetsQ2/22Q2/233.93.5-9.42959Q2/22Q2/23 1.8y84Q2/22Q2/23 6.3%Q2/22Q3/22Q4/22Q1/23Q2/23-0.8%0.5%5.3%4.5%4.8%Q2/22Q3/22Q4/22Q1/23Q2/2316.4%2.3%-25.8%4.6%2.0%Order entry(LTM)bn Order entry driven by phasing Revenue driven by strong momentum in digital solutions compensating classic IT business run downAs of Q3/22 the Security services were transferred from the Systems Solutions segment to the Germany segment and the revenue recognition for certain customer transactions(principal agent)was changed.Growth rates for 2022 are presented on a re-stated basis.20Financials H1/2023 reporteddriven by phasing and tower sale1 Decline due to de-consolidation of Group development.Organic growth rate of 1.6%in Q2.2 Free cash flow AL before dividend and before spectrum investments.Cash capex before spectrum investment.Spectrum:Q2/22:102 mn;Q2/23:189 mn.H1/22:2,616 mn;H1/23 255 mnIn this presentation the Group is presented in accordance with the management view:certain key performance indicators like revenue and adj.EBITDA AL are presented as if Group Development still would be fully consolidated.This view is different to the consolidated financial statements of DT where Group Development is treated as a discontinued operation.For more details,please refer to the back-up to this presentation,respectively the interim report of DT both available at mnQ2H120222023Change20222023ChangeRevenue27,88827,221-2.4U,63455,060-1.0j.EBITDA AL9,89110,038 1.5,76320,002 1.2j.EBITDA AL(excl.US)13,5543,484-2.0%7,2556,911-4.7j.Net profit2,4451,887-22.8%4,6833,846-17.9%Net profit1,4601,539 5.4%5,40916,899 212.4j.EPS(in)0.490.38-22.4%0.940.77-18.1%Free cash flow AL22,7593,522 27.7%6.5407,101 8.6sh capex24,9844,422-11.3%9,6429,181-4.8%Net debt excl.leases(AL)106,28997,174-8.66,28997,174-8.6%Net debt incl.leases(IFRS 16)146,104136,893-6.36,104136,893-6.3!A profit mnFree Cash Flow AL1 mnFCF AL and net profitfree cash flow driven by lower US capex and EBITDA growth685562Q2/22Net CF from ops.-484Leasing paymentsCapex(excl.spectrum)2Q2/232,7593,522 27.72Q2/22146Adj.EBITDAD&A-975Financial result-7Taxes-323MinoritiesQ2/232,4451,887-22.8%Recurring adjusted EPS growth in H1 9%(from 0.70 to 0.77)Expected decrease in the US1Free cash flow and FCF AL before dividend payments and spectrum investment.2Spectrum:Q2/22:102 mn;Q2/23:189 mn.In this presentation the Group is presented in accordance with the management view:certain key performance indicators like revenue and adj.EBITDA AL are presented as if Group Development still would be fully consolidated.This view is different to the consolidated financial statements of DT where Group Development is treated as a discontinued operation.For more details,please refer to the back-up to this presentation,respectively the interim report of DT both available at by TM US phasing and GD Tower salePrimarily driven by the strong positive financial result of 678mn in Q2/22.22Net debt excl.leases(AL)bnNet debtleverage ex leases at 2.40 xQ1/23-3.5FCF AL3.6Dividends3.3SBB TM US0.7F/X and othersQ2/2393.097.2 4.1Leverage ratios20212022H1/233.062.703.072.582.942.40Incl.LeasesExcl.LeasesFollowing upgrade by S&P all 3 rating agencies back to BBB and stable outlook23H1 2023 resultsMain takeaways2022 results/CMD targets 20241Adj.EPS in/shareH1 2023 Key messagesdelivering reliable and consistent growth Commercial performance continues unabated in all markets Germany on 27,EU on 22 successive quarters of organic EBITDA AL growth despite significant headwinds in H1 FY 2023 Guidance raised on both sides of the Atlantic Fiber roll-out on track for medium term targets Further executing on TM US buyback;DT stake 50%Ex lease leverage down to 2.40 by end of June.All 3 rating agencies now back to BBB and stable outlook Well on track for targets from 2021 CMD1.511.600.321.831.201.75202020222023202420206.311.516.018202220232024FCF AL in bnRecurring EPS12024e guidance based on 1=1.14 US$,2023e based on 1=1.05 US$25Q2 2023 resultsAppendixOrganic growth rates1adj.EBITDA AL excl.TM US handset leasesIn this presentation the Group is presented in accordance with the management view:certain key performance indicators like revenue and adj.EBITDA AL are presented as if Group Development still would be fully consolidated.This view is different to the consolidated financial statements of DT where Group Development is treated as a discontinued operation.For more details,please refer to the back-up to this presentation,respectively the interim report of DT both available at over Q2/22H1/23 over H1/22Group revenues-0.4-0.4Group service revenue 3.2 2.9Service revenue excl.US 2.6 2.4Group Adj.EBITDA AL 3.8 2.4Adj.EBITDA AL excl.US 1.6 1.1Group adj.Core EBITDA AL1 7.1 5.827H1/23US$mnH1/22US$mnTM US:EBITDA reconciliationAdj.Core EBITDA216Leasing RevenuesAdj.EBITDA(US GAAP)-448BridgeAdj.EBITDA AL(IFRS)14,38814,60414,156Adj.Core EBITDA873Leasing RevenuesAdj.EBITDA(US GAAP)-280BridgeAdj.EBITDA AL(IFRS)13,08113,95413,674 10.0%yoy 4.7%yoy 3.5%yoyQ2/23US$mnQ2/22US$mnAdj.Core EBITDA69Leasing RevenuesAdj.EBITDA(US GAAP)-263BridgeAdj.EBITDA AL(IFRS)7,3367,4057,142Adj.Core EBITDA386Leasing RevenuesAdj.EBITDA(US GAAP)-256BridgeAdj.EBITDA AL(IFRS)6,6187,0046,748 10.8%yoy 5.7%yoy 5.8%yoy28FCF AL excl.US bnH1 2022H1 2023Adj.EBITDA AL7.36.9Cash Capex-3.2-3.8Proceeds from sale of fixed assets 0.1 0.0Special Factors Cash-0.6-0.5Interest ex leasing-0.4-0.5Cash Taxes-0.2-0.4Other(working capital etc.) 0.3 0.5FCF AL3.32.2adj.EBITDA AL due to de-consolidation of the Dutch business and GD Towers.Organic growth rate of 1.1pex front-loaded in 2023 vs.202229Ex US liquidity position bnEx US bonds maturing bnFinancialswell balanced maturity profile with strong liquidity reserve2023202420252026 1.901.02.61.42.6Maturities 2023Maturities 2024Maturities H1/25Total maturitiesnext 24 months1.02.60.44.112.02.7Liquidity reserveQ2/2314.7 Additional$1.5 bn of outstanding TM US shareholder loans(to be repaid by 2028 at the latest)Credit linesLiquid assets30Balance sheet deleveraging as promised bn30/06/202230/09/202231/12/202231/03/202330/06/2023Balance sheet total301.7321.4298.6303.8299.7Shareholders equity88.594.587.398.794.4Net debt excl.leases(AL)106.3109.5103.793.097.2Net debt excl.leases(AL)/adj.EBITDA AL12.772.792.582.312.40Net debt incl.leases(IFRS 16)146.1151.7142.4133.5136.9Net debt incl.leases IFRS 16/adj.EBITDA13.283.343.072.872.94Equity ratio29.3).4).22.51.5%Comfort zone ratios Rating:A/BBB2.25 2.75 Net debt IFRS 16/Adj.EBITDA25 35%equity ratioLiquidity reserve covers redemptions of the next 24 monthsCurrent rating Fitch:BBB stable outlookMoodys:Baa1stable outlookS&P:BBB stable outlook1Ratios for the interim quarters calculated on the basis of previous 4 quarters.31Guidance 2023compared to consensusex US includes one month of GD Towers in 2023.Guidance is without GD.Consensus uses 0.7bn bridge on TM US.Guidance assumes US$0.8 to 0.85 bn US GAAP to IFRS bridge.bnGuidance 2023 in 1.05Guidance 2023 in 1.09Consensus in 1.09Adj.EBITDA AL Group41.040.040.4thereof ex US 14.014.014.1thereof TM US27.126.126.3Adj.Core EBITDA Group40.739.739.8thereof ex US 14.014.014.0thereof TM US26.825.825.93FCF AL161616.0thereof ex US 3.513.513.5thereof TM US12.812.512.52Adj.EPS1.60n.a.1.601Includes 0.2 bn of cash returns and 0.15 bn cash taxes related to tower transaction.2Calculated by using the DT pre-results Group consensus of 16.3bn and subtracting ex US contribution.3Calculated by using the DT pre-results consensus of US$28,988 bn core adj.EBITDA and subtracting implied consensus bridge of 0.7bn32Outlook 2022/23 as per annual report 2022(1/2)1 bn2022 pro forma2023e2024eRevenue Group113.7Slight increaseSlight IncreaseGermany24.7Slight increaseIncreaseUS(in US$)79.3Slight increaseSlight increaseEurope11.2IncreaseSlight increaseSystems Solutions3.7StableSlight increaseService Revs Group91.6IncreaseIncreaseGermany21.7Slight increaseSlight increaseUS(in US$)61.2IncreaseIncreaseEurope9.3IncreaseSlight increaseSystems Solutions3.6StableSlight increaseAdj.EBITDA AL Group39.3Around 40.8Strong IncreaseGermany9.910.2IncreaseUS(in US$)27.028.4Strong IncreaseEurope4.04.0IncreaseSystems Solutions0.30.3Increase1See annual report 2022 for additional details33Outlook 2022/23 as per annual report 2022(2/2)1 bn2022 pro forma2023e2024eCash Capex Group20.716.8StableGermany4.4Slight increaseSlight increaseUS(in US$)14.0Strong decreaseStableEurope1.8StableStableSystems Solutions0.2StableStableFCF AL Group11.216Strong increaseAdj.EPS1.831.60Strong increaseNet debt/adj.EBITDA3.07x2.75x2.75x1See annual report 2022 for additional details.Adj.EPS and Net debt/adj.EBITDA as reported34Investor Analyst Webcast with Q&A sessionThe conference call will be held on August 10 at 14:00 CEST,13:00 BST,08:00 EDT,05:00 PDT,21:00 JSTDT Participants:Tim Httges(CEO),Christian Illek(CFO),Hannes Wittig(Head of IR)https:/ To ask a question,click the“lift hand”function.If you would like to cancel your question,click it again.DE 49 69 791 2290,UK 44 203 630 1290,US 1 331 214 7999Meeting-ID:2732 621 9461To ask a question,press“star 3”.If you would like to cancel your question,press“star 3”again.Dial-in Live webcast Instant replay Available on all devices Detailed time stamps in video description for slides Q&A:35Investor Relations Contact detailsFurther questions please contact the IR departmentPhone 49 228 181 8 88 details for all IR representatives:Follow us on DT_IR YouTube ChannelIR WebpageIR Twitter A
2023-09-28
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2023-09-28
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