Exhibit 99.1 FOR IMMEDIATE RELEASE Cardinal Health Reports Second Quarter Fiscal Year 2023 Results and Raises Fiscal Year 2023 Non-GAAP EPS Guidance Revenue increased 13%to$51.5 billion GAAP1 operating loss was$119 million due to a non-cash,pre-tax goodwill impairment of$709 million related to the Medical segment;GAAP diluted loss per share was$0.50 Non-GAAP operating earnings of$467 million were in-line with the second quarter of last year;non-GAAP diluted EPS increased 4%to$1.32 Fiscal year 2023 non-GAAP EPS guidance raised to$5.20 to$5.50,from$5.05 to$5.40 DUBLIN,Ohio,February 2,2023 Cardinal Health(NYSE:CAH)today reported second quarter fiscal year 2023 revenues of$51.5 billion,an increase of 13%from the second quarter of fiscal year 2022.Second quarter GAAP operating loss was$119 million due to a non-cash,pre-tax goodwill impairment of$709 million related to the Medical segment.GAAP diluted loss per share was$0.50,primarily due to this impairment,net of tax effects.Second quarter non-GAAP operating earnings of$467 million were in-line with the second quarter of last year.Non-GAAP diluted earnings per share(EPS)increased 4%to$1.32,due to lower interest expense and a lower share count,partially offset by a higher non-GAAP effective tax rate.Our second quarter results demonstrate continued momentum against our plans,led by better-than-expected performance in the Pharmaceutical segment and Medical results in-line with our prior commentary,”said Jason Hollar,CEO of Cardinal Health.With the first half of fiscal year 2023 behind us,we are pleased to raise our full year non-GAAP EPS guidance and outlook for the Pharmaceutical segment.In the Medical segment,we remain confident in our Medical Improvement Plan,including the actions we are taking to mitigate supply chain inflation and drive improved performance.Q2 FY23 summary Q2 FY23 Q2 FY22 Y/Y Revenue$51.5 billion$45.5 billion 13%Operating loss$(119)million$(950)million (87)%Non-GAAP operating earnings$467 million$467 million%Net earnings/(loss)attributable to Cardinal Health,Inc.$(130)million$49 million N.M.Non-GAAP net earnings attributable to Cardinal Health,Inc.$346 million$357 million (3)fective Tax Rate2 5.45.0%Non-GAAP Effective Tax Rate 23.0.4%Diluted EPS attributable to Cardinal Health,Inc.$(0.50)$0.17 N.M.Non-GAAP diluted EPS attributable to Cardinal Health,Inc.$1.32$1.27 4rdinal Health Page 2 Segment results Pharmaceutical segment Q2 FY23 Q2 FY22 Y/Y Revenue$47.7 billion$41.4 billion 15%Segment profit$464 million$426 million 9%Second-quarter revenue for the Pharmaceutical segment increased 15%to$47.7 billion,driven by brand and specialty pharmaceutical sales growth from existing and net new customers.Pharmaceutical segment profit increased 9%to$464 million in the second quarter,driven by a higher contribution from brand and specialty products and generics program performance,partially offset by inflationary supply chain costs.Medical segment Q2 FY23 Q2 FY22 Y/Y Revenue$3.8 billion$4.1 billion (7)%Segment profit$17 million$50 million (66)%Second-quarter revenue for the Medical segment decreased 7%to$3.8 billion,driven by lower Products and Distribution sales,including PPE pricing and volumes.Growth in at-Home Solutions partially offset this decline.Medical segment profit decreased 66%to$17 million in the second quarter,primarily due to lower Products and Distribution volumes and net inflationary impacts,partially offset by an improvement in PPE margins.Fiscal year 2023 outlook1 The company updated its fiscal year 2023 guidance range for non-GAAP diluted earnings per share attributable to Cardinal Health,Inc.to$5.20 to$5.50,from$5.05 to$5.40.This guidance includes an update to fiscal year 2023 Pharmaceutical segment profit outlook to 4%to 6.5%growth,from 2%to 5%growth.Additionally,the company updated expectations for fiscal year 2023 interest and other to$115 million to$130 million,from$140 million to$160 million.The company does not provide forward-looking guidance on a GAAP basis as certain financial information,the probable significance of which cannot be determined,is not available and cannot be reasonably estimated.See Use of Non-GAAP Measures following the attached schedules for additional explanation.Investor Day The company plans to host an Investor Day on June 8 in New York City to discuss its long-term financial outlook,growth strategies,and conclusions from the Business Review Committees comprehensive review.The event will be live-webcast and archived on Cardinal Healths Investor Relations website.Recent highlights Cardinal Health and its board of directors announced that Aaron Alt will become the companys new chief financial officer(CFO)effective February 10.Alt most recently served as EVP and CFO for Sysco Corporation,the leading global food service distribution company.Cardinal Health released its fiscal year 2022 Environmental,Social,and Governance(ESG)report which reflects significant progress in ESG efforts and highlights the companys commitment to helping build a more sustainable,equitable world,and a healthier future for employees,customers and communities.Cardinal Health completed its$1 billion dollar accelerated share repurchase(ASR)program and initiated a new$250 million dollar ASR program in the second quarter,resulting in a total of$1.25 billion year-to-date share repurchases in fiscal year 2023.Cardinal Health Page 3 Cardinal Health announced the launch of Velocare,a supply chain network and last-mile fulfillment solution capable of reaching patients in one to two hours with critical products and services required for hospital-level care at home.Through a strategic collaboration with Medically Home,Cardinal Health at-Home Solutions is now supporting a Medically Home health system customer with Velocare,collectively enabling scaled,high-acuity care in the home.Cardinal Healths U.S.Medical Products and Distribution business opened its expanded Sustainable Technologies facility in Riverview,Florida,doubling the manufacturing facility to roughly 100,000 square feet.Sustainable Technologies is a leading provider of single-use device collections,reprocessing and recycling services in the U.S.,helping to deliver supply resiliency,sustainable solutions,and cost savings for customers.Webcast Cardinal Health will host a webcast today at 8:30 a.m.Eastern to discuss second-quarter results.To access the webcast and corresponding slide presentation,go to the Investor Relations page at .No access code is required.Presentation slides and a webcast replay will be available on the Investor Relations page for 12 months.About Cardinal Health Cardinal Health is a distributor of pharmaceuticals,a global manufacturer and distributor of medical and laboratory products,and a provider of performance and data solutions for health care facilities.With more than 50 years in business,operations in more than 30 countries and approximately 46,500 employees globally,Cardinal Health is essential to care.Information about Cardinal Health is available at .Contacts Media:Erich Timmerman, and 614.757.8231 Investors:Kevin Moran, and 614.757.7942 1GAAP refers to U.S.generally accepted accounting principles.This news release includes GAAP financial measures as well as non-GAAP financial measures,which are financial measures not calculated in accordance with GAAP.See Use of Non-GAAP Measures following the attached schedules for definitions of the non-GAAP financial measures presented in this news release and see the attached schedules for reconciliations of the differences between the non-GAAP financial measures and their most directly comparable GAAP financial measures.2The second quarter fiscal year 2022 and 2023 GAAP effective tax rates reflect the tax effects of the goodwill impairment charge included in the companys estimated annual effective tax rate for each year.Cardinal Health uses its website as a channel of distribution for material company information.Important information,including news releases,financial information,earnings and analyst presentations,and information about upcoming presentations and events is routinely posted and accessible on the Investor Relations page at .In addition,the website allows investors and other interested persons to sign up automatically to receive email alerts when the company posts news releases,SEC filings and certain other information on its website.Cardinal Health Page 4 Cautions Concerning Forward-Looking Statements This release contains forward-looking statements addressing expectations,prospects,estimates and other matters that are dependent upon future events or developments.These statements may be identified by words such as expect,anticipate,intend,plan,believe,“will,should,could,would,project,continue,”likely,and similar expressions,and include statements reflecting future results or guidance,statements of outlook and various accruals and estimates.These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected,anticipated or implied.These risks and uncertainties include risks arising from ongoing inflationary pressures and supply chain constraints,including the risk that our plans to mitigate such effects may not be as successful as we anticipate and the possibility that costs to source certain personal protective or other equipment,increased costs for transportation,shipping,freight and commodities,reduced price or demand for certain products may result in additional inventory reserves or disruptions and may negatively impact our ability to meet our long-term guidance;the possibility that our Medical unit goodwill could be further impaired due to the increase in global interest rates,possible unfavorable changes in the U.S.statutory tax rate or additional changes to our long-term financial plan;competitive pressures in Cardinal Healths various lines of business;the performance of our generics program,including the amount or rate of generic deflation and our ability to offset generic deflation and maintain other financial and strategic benefits through our generic sourcing venture or other components of our generics programs;ongoing risks associated with the distribution of opioids,including the financial impact associated with the settlements with governmental authorities,the risk that challenges to our plans to take tax deductions for opioid-related losses could adversely impact our financial results;risks arising from the Department of Justice investigation which we believe concerns our anti-diversion program and risks associated with the injunctive relief requirements under the national settlement,including the risk that we may incur higher costs or operational challenges in the implementation and maintenance of the required changes;risks associated with the manufacture and sourcing of certain products,including risks related to our ability and the ability of third-party manufacturers to import or export certain products or component parts and to comply with applicable regulations;our ability to manage uncertainties associated with the pricing of branded pharmaceuticals;and risks associated with our cost savings initiatives or other business initiatives,such as the Medical Improvement Plan,including the possibility that they could fail to achieve the intended results.Cardinal Health is subject to additional risks and uncertainties described in Cardinal Healths Form 10-K,Form 10-Q and Form 8-K reports and exhibits to those reports.This release reflects managements views as of February 2,2023.Except to the extent required by applicable law,Cardinal Health undertakes no obligation to update or revise any forward-looking statement.Forward-looking statements are aspirational and not guarantees or promises that goals,targets or projections will be met,and no assurance can be given that any commitment,expectation,initiative or plan in this report can or will be achieved or completed.Cardinal Health provides definitions and reconciliations of non-GAAP financial measures and their most directly comparable GAAP financial measures at .Schedule 1 Cardinal Health,Inc.and Subsidiaries Condensed Consolidated Statements of Earnings(Unaudited)Second Quarter Year-to-Date(in millions,except per common share amounts)2023 2022%Change 2023 2022%Change Revenue$51,469$45,457 13%$101,072$89,425 13%Cost of products sold 49,806 43,841 14,795 86,167 13%Gross margin 1,663 1,616 3%3,277 3,258 1%Operating expenses:Distribution,selling,general and administrative expenses 1,191 1,151 3%2,388 2,265 5%Restructuring and employee severance 17 7 46 25 Amortization and other acquisition-related costs 71 79 142 158 Impairments and(gain)/loss on disposal of assets,net1 710 1,295 863 1,293 Litigation(recoveries)/charges,net (207)34 (180)52 Operating earnings/(loss)(119)(950)(87) (535)N.M.Other(income)/expense,net (7)(13)(5)(17)Interest expense,net 25 37 (32)P 77 (35)%Loss on early extinguishment of debt 10 Gain on sale of equity interest in naviHealth (1)(1)Loss before income taxes (137)(973)(86)%(27)(604)(96)nefit from income taxes 2 (7)(1,022)N.M.(8)(925)N.M.Net earnings/(loss)(130)49 N.M.(19)321 N.M.Less:Net earnings attributable to noncontrolling interests (1)(1)Net earnings/(loss)attributable to Cardinal Health,Inc.$(130)$49 N.M.$(20)$320 N.M.Earnings/(Loss)per common share attributable to Cardinal Health,Inc.:Basic$(0.50)$0.17 N.M.$(0.08)$1.13 N.M.Diluted (0.50)0.17 N.M.(0.08)1.12 N.M.Weighted-average number of common shares outstanding:Basic 261 279 266 283 Diluted 261 281 266 285 1 Impairments and(gain)/loss on disposal of assets,net included pre-tax impairment charges related to the Medical segment of$709 million and$863 million recorded during the three and six months ended December 31,2022,respectively.During the three and six months ended December 31,2021,impairments and(gain)/loss on disposal of assets,net included a pre-tax impairment charge of$1.3 billion related to the Medical segment.2 For fiscal 2023,the estimated net tax benefit related to the impairments is$68 million and is included in the annual effective tax rate.As a result,the amount of tax benefit increased approximately by an incremental$118 million and$140 million for the three and six months ended December 31,2022,respectively,and is expected to increase the provision for income taxes during the remainder of the fiscal year.Schedule 2 Cardinal Health,Inc.and Subsidiaries Condensed Consolidated Balance Sheets(in millions)December 31,2022 June 30,2022 Assets(Unaudited)Current assets:Cash and equivalents$3,654$4,717 Trade receivables,net 11,421 10,561 Inventories,net 17,263 15,636 Prepaid expenses and other 2,258 2,021 Total current assets 34,596 32,935 Property and equipment,net 2,341 2,361 Goodwill and other intangibles,net 6,618 7,629 Other assets 927 953 Total assets$44,482$43,878 Liabilities and Shareholders Deficit Current liabilities:Accounts payable$30,083$27,128 Current portion of long-term obligations and other short-term borrowings 577 580 Other accrued liabilities 2,552 2,842 Total current liabilities 33,212 30,550 Long-term obligations,less current portion 4,685 4,735 Deferred income taxes and other liabilities 8,797 9,299 Total shareholders deficit (2,212)(706)Total liabilities and shareholders deficit$44,482$43,878 Schedule 3 Cardinal Health,Inc.and Subsidiaries Consolidated Statements of Cash Flows(Unaudited)Second Quarter Year-to-Date(in millions)2023 2022 2023 2022 Cash flows from operating activities:Net earnings/(loss)$(130)$49$(19)$321 Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization 170 164 341 332 (Gain)/loss on sale of equity interest in naviHealth (1)(1)Impairments and(gain)/loss on disposal of assets,net 710 1,295 863 1,293 Loss on early extinguishment of debt 10 Share-based compensation 25 18 48 42 Provision for bad debts 30 13 59 25 Change in operating assets and liabilities,net of effects from acquisitions and divestitures:Increase in trade receivables (411)(115)(919)(329)Increase in inventories (1,379)(232)(1,643)(361)Increase in accounts payable 1,720 1,351 2,954 1,059 Other accrued liabilities and operating items,net (138)(1,347)(1,064)(1,842)Net cash provided by operating activities 597 1,195 620 549 Cash flows from investing activities:Proceeds from divestitures,net of cash sold 11 938 Additions to property and equipment (85)(74)(155)(141)Proceeds from disposal of property and equipment 2 Purchases of investments (2)(2)(5)(4)Proceeds from sale of investments 18 1 22 Net cash provided by/(used in)investing activities (87)(47)(157)815 Cash flows from financing activities:Reduction of long-term obligations (6)(5)(13)(592)Net tax proceeds/(withholdings)from share-based compensation 23 1 9 (27)Dividends on common shares (129)(140)(271)(289)Purchase of treasury shares (250)(300)(1,250)(800)Net cash used in financing activities (362)(444)(1,525)(1,708)Effect of exchange rates changes on cash and equivalents 14 (6)(1)(11)Cash reclassified from assets held for sale 109 Net increase/(decrease)in cash and equivalents 162 698 (1,063)(246)Cash and equivalents at beginning of period 3,492 2,463 4,717 3,407 Cash and equivalents at end of period$3,654$3,161$3,654$3,161 Schedule 4 Cardinal Health,Inc.and Subsidiaries Segment Information Second Quarter (in millions)2023 2022 (in millions)2023 2022 Pharmaceutical Medical Revenue Revenue Amount$47,673$41,375 Amount$3,797$4,085 Growth rate 15%Growth rate(7)%(5)%Segment profit(1)Segment profit Amount$464$426 Amount$17$50 Growth rate 9%3%Growth rate(66)%(79)%Segment profit margin 0.97%1.03%Segment profit margin 0.45%1.22%Year-to-Date (in millions)2023 2022 (in millions)2023 2022 Pharmaceutical Medical Revenue Revenue Amount$93,501$81,197 Amount$7,575$8,234 Growth rate 15%Growth rate(8)%Segment profit(1)Segment profit Amount$895$832 Amount$9$173 Growth rate 8%2%Growth rate(95)%(63)%Segment profit margin 0.96%1.02%Segment profit margin 0.12%2.10%The sum of the components and certain computations may reflect rounding adjustments.(1)Pharmaceutical segment profit during the three and six months ended December 31,2021 was positively impacted by a$16 million judgment for lost profits related to an ordinary course intellectual property rights claim.Schedule 5 Cardinal Health,Inc.and Subsidiaries GAAP/Non-GAAP Reconciliation1 Earnings/Gross Operating(Loss)Provision for/Net Diluted Margin SG&A2 Operating Earnings Before(Benefit from)Net Earnings3 Effective EPS 3(in millions,except per common share amounts)Gross Growth Growth Earnings/Growth Income Income Earnings/Growth Tax Diluted Growth Margin Rate SG&A 2 Rate(Loss)Rate Taxes Taxes(Loss)3 Rate Rate EPS 3,4 Rate Second Quarter 2023 GAAP$1,663 3%$1,191 3%$(119)(87)%$(137)$(7)$(130)N.M.5.4%$(0.50)N.M.State opioid assessment related to prior fiscal years 6 (6)(6)(2)(4)(0.02)Shareholder cooperation agreement costs (2)2 2 1 1 0.01 Restructuring and employee severance 17 17 4 13 0.05 Amortization and other acquisition-related costs 71 71 18 53 0.20 Impairments and(gain)/loss on disposal of assets,net 5 710 710 173 537 2.06 Litigation(recoveries)/charges,net (207)(207)(83)(124)(0.48)Non-GAAP$1,663 3%$1,196 4%$467%$450$104$346 (3)#.0%$1.32 4%Second Quarter 2022 GAAP$1,616 (9)%$1,151%$(950)N.M.$(973)$(1,022)$49 N.M.105.0%$0.17 N.M.Surgical gown recall costs/(income)1 1 1 1 Restructuring and employee severance 7 7 2 5 0.02 Amortization and other acquisition-related costs 79 79 20 59 0.21 Impairments and(gain)/loss on disposal of assets,net 5 1,295 1,295 1,080 215 0.77 Litigation(recoveries)/charges,net 6 34 34 6 28 0.10 (Gain)/Loss on sale of equity interest in naviHealth (1)(1)Non-GAAP$1,617 (9)%$1,151%$467 (26)%$443$86$357 (31).4%$1.27 (27)or more information on these measures,refer to the Use of Non-GAAP Measures and Definitions schedules.2Distribution,selling,general and administrative expenses.3Attributable to Cardinal Health,Inc.4 For the three months ended December 31,2022,GAAP diluted EPS and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 261 million common shares,which excludes potentially dilutive securities from the denominator due to their anti-dilutive effects resulting from our GAAP net loss for the periods.For the three months ended December 31,2022,non-GAAP diluted EPS is calculated using a weighted average of 263 million common shares,which includes potentially dilutive shares.5 Impairments and(gain)/loss on disposal of assets,net included pre-tax impairment charges related to the Medical segment of$709 million during the three months ended December 31,2022.For fiscal 2023,the estimated net tax benefit related to the impairments is$68 million and is included in the annual effective tax rate.As a result,the amount of tax benefit increased approximately by an incremental$118 million for the three months ended December 31,2022,and is expected to increase the provision for income taxes during the remainder of the fiscal year.During the three months ended December 31,2021,impairments and(gain)/loss on disposal of assets,net included a pre-tax impairment charge of$1.3 billion related to the Medical segment.6 Litigation(recoveries)/charges,net for the three months ended December 31,2021 does not include a$16 million judgement for lost profits related to an ordinary course intellectual property claim,which positively impacted Pharmaceutical segment profit in the quarter.The sum of the components and certain computations may reflect rounding adjustments.We generally apply varying tax rates depending on the items nature and tax jurisdiction where it is incurred.Schedule 5 Cardinal Health,Inc.and Subsidiaries GAAP/Non-GAAP Reconciliation1 Earnings/Gross Operating(Loss)Provision for/Net Diluted Margin SG&A 2 Operating Earnings Before(Benefit from)Net Earnings3 Effective EPS 3 Gross Growth Growth Earnings/Growth Income Income Earnings/Growth Tax Diluted Growth(in millions,except per common share amounts)Margin Rate SG&A 2 Rate(Loss)Rate Taxes Taxes(Loss)3 Rate Rate EPS 3,4 Rate Year-to-Date 2023 GAAP$3,277 1%$2,388 5%$18 N.M.$(27)$(8)$(20)N.M.30.0%$(0.08)N.M.State opioid assessment related to prior fiscal years 6 (6)(6)(2)(4)(0.02)Shareholder cooperation agreement costs (8)8 8 2 6 0.02 Restructuring and employee severance 46 46 10 36 0.13 Amortization and other acquisition-related costs 142 142 37 105 0.40 Impairments and(gain)/loss on disposal of assets,net 5 863 863 207 656 2.46 Litigation(recoveries)/charges,net (180)(180)(76)(104)(0.39)Non-GAAP$3,277 1%$2,386 5%$891 (10)%$846$170$675 (7) .1%$2.52 (2)%Year-to-Date 2022 GAAP$3,258 (7)%$2,265 (1)%$(535)N.M.$(604)$(925)$320 (15)3.1%$1.12 (12)%Surgical gown recall costs/(income)1 1 1 1 Restructuring and employee severance 25 25 6 19 0.07 Amortization and other acquisition-related costs 158 158 41 117 0.41 Impairments and(gain)/loss on disposal of assets,net 5 1,293 1,293 1,070 223 0.78 Litigation(recoveries)/charges,net 6 52 52 10 42 0.15 Loss on early extinguishment of debt 10 3 7 0.03 (Gain)/Loss on sale of equity interest in naviHealth investment (1)(1)Non-GAAP$3,259 (7)%$2,265 1%$994 (20)%$934$205$728 (24)!.9%$2.56 (21)or more information on these measures,refer to the Use of Non-GAAP Measures and Definitions schedules.2Distribution,selling,general and administrative expenses.3Attributable to Cardinal Health,Inc.4 For the six months ended December 31,2022,GAAP diluted EPS and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 266 million common shares,which excludes potentially dilutive securities from the denominator due to their anti-dilutive effects resulting from our GAAP net loss for the periods.For the six months ended December 31,2022,non-GAAP diluted EPS is calculated using a weighted average of 268 million common shares,which includes potentially dilutive shares.5 Impairments and(gain)/loss on disposal of assets,net included pre-tax impairment charges related to the Medical segment of$863 million recorded during the six months ended December 31,2022.For fiscal 2023,the estimated net tax benefit related to the impairments is$68 million and is included in the annual effective tax rate.As a result,the amount of tax benefit increased approximately by an incremental$140 million for the six months ended December 31,2022,and is expected to increase the provision for income taxes during the remainder of the fiscal year.During the six months ended December 31,2021,impairments and(gain)/loss on disposal of assets,net included a pre-tax impairment charge of$1.3 billion related to the Medical segment.6 Litigation(recoveries)/charges,net for the six months ended December 31,2021 does not include a$16 million judgement for lost profits related to an ordinary course intellectual property claim,which positively impacted Pharmaceutical segment profit in the quarter.The sum of the components and certain computations may reflect rounding adjustments.We generally apply varying tax rates depending on the items nature and tax jurisdiction where it is incurred.Schedule 6 Cardinal Health,Inc.and Subsidiaries GAAP/Non-GAAP Reconciliation-GAAP Cash Flow to Non-GAAP Adjusted Free Cash Flow Second Quarter Year-to-Date(in millions)2023 2023 GAAP-Cash Flow Categories Net cash provided by operating activities$597$620 Net cash used in investing activities (87)(157)Net cash used in financing activities (362)(1,525)Effect of exchange rates changes on cash and equivalents 14 (1)Net increase/(decrease)in cash and equivalents$162$(1,063)Non-GAAP Adjusted Free Cash Flow Net cash provided by operating activities$597$620 Additions to property and equipment (85)(155)Payments/(receipts)related to matters included in litigation(recoveries)/charges,net (73)316 Non-GAAP Adjusted Free Cash Flow$439$781 For more information on these measures,refer to the Use of Non-GAAP Measures and Definitions schedules.Cardinal Health,Inc.and Subsidiaries Use of Non-GAAP Measures This earnings release contains financial measures that are not calculated in accordance with U.S.generally accepted accounting principles(“GAAP).In addition to analyzing our business based on financial information prepared in accordance with GAAP,we use these non-GAAP financial measures internally to evaluate our performance,engage in financial and operational planning,and determine incentive compensation because we believe that these measures provide additional perspective on and,in some circumstances are more closely correlated to,the performance of our underlying,ongoing business.We provide these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on our financial and operating results on a year-over-year basis and in comparing our performance to that of our competitors.However,the non-GAAP financial measures that we use may be calculated differently from,and therefore may not be comparable to,similarly titled measures used by other companies.The non-GAAP financial measures disclosed by us should not be considered a substitute for,or superior to,financial measures calculated in accordance with GAAP,and the financial results calculated in accordance with GAAP and reconciliations to those financial statements set forth below should be carefully evaluated.Exclusions from Non-GAAP Financial Measures Management believes it is useful to exclude the following items from the non-GAAP measures presented in this report for its own and for investors assessment of the business for the reasons identified below:LIFO charges and credits are excluded because the factors that drive last-in first-out(LIFO)inventory charges or credits,such as pharmaceutical manufacturer price appreciation or deflation and year-end inventory levels(which can be meaningfully influenced by customer buying behavior immediately preceding our fiscal year-end),are largely out of our control and cannot be accurately predicted.The exclusion of LIFO charges and credits from non-GAAP metrics facilitates comparison of our current financial results to our historical financial results and to our peer group companies financial results.We did not recognize any LIFO charges or credits during the periods presented.Surgical gown recall costs or income includes inventory write-offs and certain remediation and supply disruption costs,net of related insurance recoveries,arising from the January 2020 recall of select Association for the Advancement of Medical Instrumentation(AAMI)Level 3 surgical gowns and voluntary field actions(a recall of some packs and a corrective action allowing overlabeling of other packs)for Presource Procedure Packs containing affected gowns.Income from surgical gown recall costs represents insurance recoveries of these certain costs.We have excluded these costs from our non-GAAP metrics to allow investors to better understand the underlying operating results of the business and to facilitate comparison of our current financial results to our historical financial results and to our peer group companies financial results.State opioid assessments related to prior fiscal years is the portion of state assessments for prescription opioid medications that were sold or distributed in periods prior to the period in which the expense is incurred.This portion is excluded from non-GAAP financial measures because it is retrospectively applied to sales in prior fiscal years and inclusion would obscure analysis of the current fiscal year results of our underlying,ongoing business.Additionally,while states laws may require us to make payments on an ongoing basis,the portion of the assessment related to sales in prior periods are contemplated to be one-time,nonrecurring items.Income from state opioid assessments related to prior fiscal years represents reversals of accruals due to changes in estimates or when the underlying assessments were invalidated by a Court or reimbursed by manufacturers.Shareholder cooperation agreement costs includes costs such as legal,consulting and other expenses incurred in relation to the agreement(the Cooperation Agreement)entered into among Elliott Associates,L.P.,Elliott International,L.P.(together,Elliott)and Cardinal Health,including costs incurred to negotiate and finalize the Cooperation Agreement and costs incurred by the new Business Review Committee of the Board of Directors,which was formed under this Cooperation Agreement.We have excluded these costs from our non-GAAP metrics because they do not occur in or reflect the ordinary course of our ongoing business operations and may obscure analysis of trends and financial performance.Restructuring and employee severance costs are excluded because they are not part of the ongoing operations of our underlying business.Amortization and other acquisition-related costs,which include transaction costs,integration costs,and changes in the fair value of contingent consideration obligations,are excluded because they are not part of the ongoing operations of our underlying business and to facilitate comparison of our current financial results to our historical financial results and to our peer group companies financial results.Additionally,costs for amortization of acquisition-related intangible assets are non-cash amounts,which are variable in amount and frequency and are significantly impacted by the timing and size of acquisitions,so their exclusion facilitates comparison of historical,current and forecasted financial results.We also exclude other acquisition-related costs,which are directly related to an acquisition but do not meet the criteria to be recognized on the acquired entitys initial balance sheet as part of the purchase price allocation.These costs are also significantly impacted by the timing,complexity and size of acquisitions.Impairments and gain or loss on disposal of assets,net are excluded because they do not occur in or reflect the ordinary course of our ongoing business operations and are inherently unpredictable in timing and amount,and in the case of impairments,are non-cash amounts,so their exclusion facilitates comparison of historical,current and forecasted financial results.Litigation recoveries or charges,net are excluded because they often relate to events that may have occurred in prior or multiple periods,do not occur in or reflect the ordinary course of our business and are inherently unpredictable in timing and amount.During fiscal 2022,we incurred a one-time contingent attorneys fee of$18 million related to the finalization of the settlement agreement(the“Settlement Agreement”)resulting in the settlement of the vast majority of opioid lawsuits filed by state and local governmental entities.Due to the unique nature and significance of the Settlement Agreement,and the one-time,contingent nature of the fee,this fee was included in litigation recoveries or charges,net.Additionally,during fiscal 2022 our Pharmaceutical segment profit was positively impacted by a$16 million judgment for lost profits.This judgment was the result of an ordinary course intellectual property rights claim and,therefore,is not adjusted in calculating the litigation recoveries or charges,net adjustment.During fiscal 2021,we incurred a tax benefit related to a carryback of a net operating loss.Some pre-tax amounts,which contributed to this loss,relate to litigation charges.As a result,we allocated substantially all of the tax benefit to litigation charges.Loss on early extinguishment of debt is excluded because it does not typically occur in the normal course of business and may obscure analysis of trends and financial performance.Additionally,the amount and frequency of this type of charge is not consistent and is significantly impacted by the timing and size of debt extinguishment transactions.(Gain)/Loss on sale of equity interest in naviHealth was incurred in connection with the sale of our remaining equity interest in naviHealth in fiscal 2020.The equity interest was retained in connection with the initial sale of our majority interest in naviHealth during fiscal 2019.We exclude this significant gain because gains or losses on investments of this magnitude do not typically occur in the normal course of business and are similar in nature to a gain or loss from a divestiture of a majority interest,which we exclude from non-GAAP results.The gain on the initial sale of our majority interest in naviHealth in fiscal 2019 was also excluded from our non-GAAP measures.The tax effect for each of the items listed above is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s)in which the item is recorded.The gross,tax and net impact of each item are presented with our GAAP to non-GAAP reconciliations.Non-GAAP adjusted free cash flow:We provide this non-GAAP financial measure as a supplemental metric to assist readers in assessing the effects of items and events on our cash flow on a year-over-year basis and in comparing our performance to that of our peer group companies.In calculating this non-GAAP metric,certain items are excluded from net cash provided by operating activities because they relate to significant and unusual or non-recurring events and are inherently unpredictable in timing and amount.We believe adjusted free cash flow is important to management and useful to investors as a supplemental measure as it indicates the cash flow available for working capital needs,debt repayments,dividend payments,share repurchases,strategic acquisitions,or other strategic uses of cash.A reconciliation of our GAAP financial results to Non-GAAP adjusted free cash flow is provided in Schedule 6 of the financial statement tables included with this release.Forward Looking Non-GAAP Measures In this document,the Company presents certain forward-looking non-GAAP metrics.The Company does not provide outlook on a GAAP basis because the items that the Company excludes from GAAP to calculate the comparable non-GAAP measure can be dependent on future events that are less capable of being controlled or reliably predicted by management and are not part of the Companys routine operating activities.Additionally,management does not forecast many of the excluded items for internal use and therefore cannot create or rely on outlook done on a GAAP basis.The occurrence,timing and amount of any of the items excluded from GAAP to calculate non-GAAP could significantly impact the Companys fiscal 2023 GAAP results.Over the past five fiscal years,the excluded items have impacted the Companys EPS from$0.75 to$18.06,which includes a$17.54 charge related to the opioid litigation we recognized in fiscal 2020.Definitions Growth rate calculation:growth rates in this report are determined by dividing the difference between current-period results and prior-period results by prior-period results.Interest and Other,net:other(income)/expense,net plus interest expense,net.Segment Profit:segment revenue minus(segment cost of products sold and segment distribution,selling,general and administrative expenses).Segment Profit margin:segment profit divided by segment revenue.Non-GAAP gross margin:gross margin,excluding LIFO charges/(credits)and surgical gown recall costs/(income).Non-GAAP distribution,selling,general and administrative expenses or Non-GAAP SG&A:distribution,selling,general and administrative expenses,excluding surgical gown recall costs/(income),state opioid assessment related to prior fiscal years and shareholder cooperation agreement costs.Non-GAAP operating earnings:operating earnings excluding(1)LIFO charges/(credits),(2)surgical gown recall costs/(income),(3)state opioid assessment related to prior fiscal years,(4)shareholder cooperation agreement costs,(5)restructuring and employee severance,(6)amortization and other acquisition-related costs,(7)impairments and(gain)/loss on disposal of assets,net,and(8)litigation(recoveries)/charges,net.Non-GAAP earnings before income taxes:earnings before income taxes excluding(1)LIFO charges/(credits),(2)surgical gown recall costs/(income),(3)state opioid assessment related to prior fiscal years,(4)shareholder cooperation agreement costs,(5)restructuring and employee severance,(6)amortization and other acquisition-related costs,(7)impairments and(gain)/loss on disposal of assets,net,(8)litigation(recoveries)/charges,net,(9)loss on early extinguishment of debt and(10)(gain)/loss on sale of equity interest in naviHealth.Non-GAAP net earnings attributable to Cardinal Health,Inc.:net earnings attributable to Cardinal Health,Inc.excluding(1)LIFO charges/(credits),(2)surgical gown recall costs/(income),(3)state opioid assessment related to prior fiscal years,(4)shareholder cooperation agreement costs,(5)restructuring and employee severance,(6)amortization and other acquisition-related costs,(7)impairments and(gain)/loss on disposal of assets,net,(8)litigation(recoveries)/charges,net,(9)loss on early extinguishment of debt and(10)(gain)/loss on sale of equity interest in naviHealth,each net of tax.Non-GAAP effective tax rate:provision for/(benefit from)income taxes adjusted for the tax impacts of(1)LIFO charges/(credits),(2)surgical gown recall costs/(income),(3)state opioid assessment related to prior fiscal years,(4)shareholder cooperation agreement costs,(5)restructuring and employee severance,(6)amortization and other acquisition-related costs,(7)impairments and(gain)/loss on disposal of assets,net,(8)litigation(recoveries)/charges,net,(9)loss on early extinguishment of debt and(10)(gain)/loss on sale of equity interest in naviHealth divided by(earnings before income taxes adjusted for the ten items above).Non-GAAP diluted earnings per share attributable to Cardinal Health,Inc.:non-GAAP net earnings attributable to Cardinal Health,Inc.divided by diluted weighted-average shares outstanding.Non-GAAP adjusted free cash flow:net cash provided by operating activities less payments related to additions to property and equipment,excluding settlement payments and receipts related to matters included in litigation(recoveries)/charges,net,as defined above,or other significant and unusual or non-recurring cash payments or receipts.For example,the U.S.federal income tax refund of$966 million for the tax benefit from the net operating loss carryback related to a self-insurance pre-tax loss was excluded from the Companys fiscal 2022 non-GAAP adjusted free cash flow.
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Exhibit 99.1 FOR IMMEDIATE RELEASE Cardinal Health Reports Third Quarter Fiscal Year 2023 Results and Raises Fiscal Year 2023 Non-GAAP EPS Guidance Revenue increased 13%to$50.5 billion GAAP1 operating earnings were$572 million;GAAP diluted EPS was$1.34 Non-GAAP operating earnings increased 11%to$606 million;non-GAAP diluted EPS increased 20%to$1.74 Fiscal year 2023 non-GAAP EPS guidance raised and narrowed to$5.60 to$5.80,from$5.20 to$5.50 Fiscal year 2023 adjusted free cash flow guidance raised and narrowed to$2.0 to$2.3 billion,from$1.5 to$2.0 billion DUBLIN,Ohio,May 4,2023 Cardinal Health(NYSE:CAH)today reported third quarter fiscal year 2023 revenues of$50.5 billion,an increase of 13%from the third quarter of fiscal year 2022.Third quarter GAAP operating earnings were$572 million and GAAP diluted earnings per share(EPS)were$1.34.Third quarter non-GAAP operating earnings increased 11%to$606 million due to a significant increase in Pharmaceutical segment profit,partially offset by a decline in Medical segment profit.Non-GAAP diluted EPS increased 20%to$1.74,reflecting the improvement in non-GAAP operating earnings,a lower share count and lower interest expense,partially offset by a higher non-GAAP effective tax rate.Our third quarter results were led by continued momentum and growth in the Pharmaceutical segment,”said Jason Hollar,CEO of Cardinal Health.With the strong overall performance in the quarter,we are pleased to raise our full year non-GAAP EPS guidance by$0.35 at the midpoint.In Medical,we continue to see improvement in underlying performance and remain confident in our Medical Improvement Plan initiatives.Across the enterprise,we continue to operate with urgency to drive our businesses forward and create value for our shareholders.Q3 FY23 summary Q3 FY23 Q3 FY22 Y/Y Revenue$50.5 billion$44.8 billion 13%Operating earnings/(loss)$572 million$(97)million N.M.Non-GAAP operating earnings$606 million$545 million 11%Net earnings/(loss)attributable to Cardinal Health,Inc.$345 million$(1,391)million N.M.Non-GAAP net earnings attributable to Cardinal Health,Inc.$447 million$402 million 11fective Tax Rate2 36.3%(916.5)%Non-GAAP Effective Tax Rate 22.4 .1%Diluted EPS attributable to Cardinal Health,Inc.$1.34$(5.05)N.M.Non-GAAP diluted EPS attributable to Cardinal Health,Inc.$1.74$1.45 20rdinal Health Page 2 Segment results Pharmaceutical segment Q3 FY23 Q3 FY22 Y/Y Revenue$46.8 billion$41.0 billion 14%Segment profit$600 million$487 million 23%Third-quarter revenue for the Pharmaceutical segment increased 14%to$46.8 billion,driven by brand and specialty pharmaceutical sales growth from existing customers.Pharmaceutical segment profit increased 23%to$600 million in the third quarter,driven by positive generics program performance and a higher contribution from brand and specialty products.Medical segment Q3 FY23 Q3 FY22 Y/Y Revenue$3.7 billion$3.9 billion (5)%Segment profit$20 million$59 million (66)%Third-quarter revenue for the Medical segment decreased 5%to$3.7 billion,driven by lower Products and Distribution sales,primarily due to PPE volumes and pricing.Medical segment profit decreased 66%to$20 million in the third quarter,primarily due to lower Products and Distribution volumes and unfavorable sales mix.Additionally,these results reflect both net unfavorable non-recurring adjustments,including simplification actions,and an improvement in PPE margins.Fiscal year 2023 outlook1 The company raised and narrowed its fiscal year 2023 guidance range for non-GAAP diluted earnings per share attributable to Cardinal Health,Inc.to$5.60 to$5.80,from$5.20 to$5.50.This guidance includes an update to fiscal year 2023 Pharmaceutical segment profit outlook to 10.5%to 12%growth,from 4%to 6.5%growth and Medical segment profit outlook to a decline of approximately 50%,from flat to a decline of 20%.Additionally,the company now expects interest and other in the range of$95 to$105 million,a non-GAAP effective tax rate of 22%to 23%,diluted weighted average shares outstanding of 262 to 263 million,capital expenditures of$450 million and adjusted free cash flow of$2.0 to$2.3 billion.The company does not provide forward-looking guidance on a GAAP basis as certain financial information,the probable significance of which cannot be determined,is not available and cannot be reasonably estimated.See Use of Non-GAAP Measures following the attached schedules for additional explanation.Investor Day The company plans to host an Investor Day at 9:00 a.m.Eastern Standard Time on June 8 in New York City to detail its growth strategies and provide updates on its long-term outlook,capital allocation framework and the ongoing business and portfolio review.The event will be live-webcast and archived on Cardinal Healths Investor Relations website.Business Review Committee and Cooperation Agreement update Cardinal Healths management and Board of Directors,with support from the Business Review Committee,continue to work through the comprehensive review of the companys strategy,portfolio,capital allocation framework,and operations.Given the importance of the work in maximizing Cardinal Healths potential for the benefit of all stakeholders,the Board has extended the term of the Business Review Committee for an additional year through July 15,2024.In connection with this extension,Cardinal Health has also extended the term of the companys Cooperation Agreement with Elliott Investment Management L.P.(“Elliott”)until the later Cardinal Health Page 3 of July 15,2024 or until Elliotts representative ceases to serve on,or resigns from,the companys Board of Directors.Recent highlights Cardinal Health initiated and completed a$250 million dollar accelerated share repurchase program in the third quarter,resulting in a total of$1.5 billion year-to-date share repurchases in fiscal year 2023.Cardinal Health announced the opening of two new distribution centers in Central Ohio.Both facilities support the companys Medical segment,focusing on its U.S.Medical Products and Distribution and at-Home Solutions businesses.Cardinal Health announced its collaboration with Signify Health to offer in-home clinical and medication management services through its Outcomes business.Cardinal Health was selected by Autolus to provide core distribution capabilities required for U.S.commercialization of CAR T-cell therapies.Cardinal Health recently introduced the Kangaroo OMNI Enteral Feeding platform,which is designed to accurately deliver thick formula and meet enteral feeding needs,from the hospital to home and infancy to end of life.OMNI is expected to launch in the United States and Canada in early fiscal year 2024.Webcast Cardinal Health will host a webcast today at 8:30 a.m.Eastern Standard Time to discuss third-quarter results.To access the webcast and corresponding slide presentation,go to the Investor Relations page at .No access code is required.Presentation slides and a webcast replay will be available on the Investor Relations page for 12 months.About Cardinal Health Cardinal Health is a distributor of pharmaceuticals,a global manufacturer and distributor of medical and laboratory products,and a provider of performance and data solutions for health care facilities.With more than 50 years in business,operations in more than 30 countries and approximately 46,500 employees globally,Cardinal Health is essential to care.Information about Cardinal Health is available at .Contacts Media:Erich Timmerman, and 614.757.8231 Investors:Kevin Moran, and 614.757.7942 1GAAP refers to U.S.generally accepted accounting principles.This news release includes GAAP financial measures as well as non-GAAP financial measures,which are financial measures not calculated in accordance with GAAP.See Use of Non-GAAP Measures following the attached schedules for definitions of the non-GAAP financial measures presented in this news release and see the attached schedules for reconciliations of the differences between the non-GAAP financial measures and their most directly comparable GAAP financial measures.2During the third quarters of fiscal 2023 and 2022,GAAP effective tax rates were 36.3%and(916.5%),respectively,and included the impact of year-to-date non-cash,pre-tax goodwill impairments of$863 million and$1.8 billion,respectively,in the Medical segment.These impairments increased the estimated annual effective tax rate in fiscal 2023 and significantly decreased the annual effective tax in fiscal 2022.Applying the tax rate to the year-to-date income/loss resulted in recognizing an interim tax expense in the third quarter of fiscal year 2023 and 2022 of approximately$74 million and$1.2 billion,respectively.Cardinal Health uses its website as a channel of distribution for material company information.Important information,including news releases,financial information,earnings and analyst presentations,and information about upcoming presentations and events is routinely posted and accessible on the Investor Relations page at .In addition,the website allows investors and other interested persons to sign up automatically to receive email alerts when the company posts news releases,SEC filings and certain other information on its website.Cardinal Health Page 4 Cautions Concerning Forward-Looking Statements This release contains forward-looking statements addressing expectations,prospects,estimates and other matters that are dependent upon future events or developments.These statements may be identified by words such as expect,anticipate,intend,plan,believe,“will,should,could,would,project,continue,”likely,and similar expressions,and include statements reflecting future results or guidance,statements of outlook and various accruals and estimates.These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected,anticipated or implied.These risks and uncertainties include risks arising from ongoing inflationary pressures and supply chain constraints,including the risk that our plans to mitigate such effects may not be as successful as we anticipate;the possibility that our Medical unit goodwill could be further impaired due to increases in global interest rates,possible unfavorable changes in the U.S.statutory tax rate or additional changes to our long-term financial plan;competitive pressures in Cardinal Healths various lines of business;the performance of our generics program,including the amount or rate of generic deflation and our ability to offset generic deflation and maintain other financial and strategic benefits through our generic sourcing venture or other components of our generics programs;ongoing risks associated with the distribution of opioids,including the financial impact associated with the settlements with governmental authorities,the risk that challenges to our plans to take tax deductions for opioid-related losses could adversely impact our financial results;risks arising from the Department of Justice investigation which we believe concerns our anti-diversion program and risks associated with the injunctive relief requirements under the national settlement,including the risk that we may incur higher costs or operational challenges in the implementation and maintenance of the required changes;risks associated with the manufacture and sourcing of certain products,including risks related to our ability and the ability of third-party manufacturers to import or export certain products or component parts and to comply with applicable regulations;our ability to manage uncertainties associated with the pricing of branded pharmaceuticals;and risks associated with our cost savings initiatives or other business process initiatives,such as the Medical Improvement Plan,including the possibility that they could fail to achieve the intended results.Cardinal Health is subject to additional risks and uncertainties described in Cardinal Healths Form 10-K,Form 10-Q and Form 8-K reports and exhibits to those reports.This release reflects managements views as of May 4,2023.Except to the extent required by applicable law,Cardinal Health undertakes no obligation to update or revise any forward-looking statement.Forward-looking statements are aspirational and not guarantees or promises that goals,targets or projections will be met,and no assurance can be given that any commitment,expectation,initiative or plan in this report can or will be achieved or completed.Cardinal Health provides definitions and reconciliations of non-GAAP financial measures and their most directly comparable GAAP financial measures at .Schedule 1 Cardinal Health,Inc.and Subsidiaries Condensed Consolidated Statements of Earnings/(Loss)(Unaudited)Third Quarter Year-to-Date(in millions,except per common share amounts)2023 2022%Change 2023 2022%Change Revenue$50,487$44,836 13%$151,559$134,261 13%Cost of products sold 48,702 43,154 136,497 129,321 13%Gross margin 1,785 1,682 6%5,062 4,940 2%Operating expenses:Distribution,selling,general and administrative expenses 1,179 1,137 4%3,567 3,402 5%Restructuring and employee severance 16 31 62 56 Amortization and other acquisition-related costs 74 79 216 237 Impairments and(gain)/loss on disposal of assets,net 1 20 471 883 1,764 Litigation(recoveries)/charges,net (76)61 (256)113 Operating earnings/(loss)572 (97)N.M.590 (632)N.M.Other(income)/expense,net 3 (5)(14)Interest expense,net 28 38 (26)x 115 (32)%Loss on early extinguishment of debt 10 Gain on sale of equity interest in naviHealth (1)(2)Earnings/(loss)before income taxes 544 (137)N.M.517 (741)N.M.Provision for income taxes 2 197 1,253 N.M.189 328 N.M.Net earnings/(loss)347 (1,390)N.M.328 (1,069)N.M.Less:Net earnings attributable to noncontrolling interests (2)(1)(3)(2)Net earnings/(loss)attributable to Cardinal Health,Inc.$345$(1,391)N.M.$325$(1,071)N.M.Earnings/(Loss)per common share attributable to Cardinal Health,Inc.:Basic$1.35$(5.05)N.M.$1.24$(3.82)N.M.Diluted 1.34 (5.05)N.M.1.23 (3.82)N.M.Weighted-average number of common shares outstanding:Basic 256 275 263 281 Diluted 258 275 264 281 1 Impairments and(gain)/loss on disposal of assets,net included pre-tax goodwill impairment charges related to the Medical segment of$863 million recorded during the nine months ended March 31,2023.During the three and nine months ended March 31,2022,impairments and(gain)/loss on disposal of assets,net included pre-tax impairment charges of$474 million and$1.8 billion related to the Medical segment,respectively.2 For fiscal 2023,the estimated net tax benefit related to the impairments is$68 million and is included in the annual effective tax rate.As a result,the amount of tax expense recognized increased approximately by an incremental$74 million during the three months ended March 31,2023.The incremental interim tax benefit recognized during the nine months ended March 31,2023 was$66 million and will reverse in the fourth quarter of the fiscal year.For fiscal 2022,the estimated net tax benefit related to the impairment was$126 million and was included in the annual effective tax rate.As a result,the amount of tax expense recognized during the three and nine months ended March 31,2022 increased approximately by an incremental$1.2 billion and$180 million,respectively,and lowered the provision for income taxes during the fourth quarter of fiscal 2022 by approximately$180 million.Schedule 2 Cardinal Health,Inc.and Subsidiaries Condensed Consolidated Balance Sheets(in millions)March 31,2023 June 30,2022 Assets(Unaudited)Current assets:Cash and equivalents$3,990$4,717 Trade receivables,net 10,992 10,561 Inventories,net 16,620 15,636 Prepaid expenses and other 1,895 2,021 Total current assets 33,497 32,935 Property and equipment,net 2,362 2,361 Goodwill and other intangibles,net 6,567 7,629 Other assets 951 953 Total assets$43,377$43,878 Liabilities and Shareholders Deficit Current liabilities:Accounts payable$29,601$27,128 Current portion of long-term obligations and other short-term borrowings 26 580 Other accrued liabilities 2,876 2,842 Total current liabilities 32,503 30,550 Long-term obligations,less current portion 4,708 4,735 Deferred income taxes and other liabilities 8,384 9,299 Total shareholders deficit (2,218)(706)Total liabilities and shareholders deficit$43,377$43,878 Schedule 3 Cardinal Health,Inc.and Subsidiaries Condensed Consolidated Statements of Cash Flows(Unaudited)Third Quarter Year-to-Date(in millions)2023 2022 2023 2022 Cash flows from operating activities:Net earnings/(loss)$347$(1,390)$328$(1,069)Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization 175 181 516 513 Impairments and(gain)/loss on disposal of assets,net 20 471 883 1,764 Impairments and loss on sale of other investments 3 3 (Gain)/loss on sale of equity interest in naviHealth (1)(2)Loss on early extinguishment of debt 10 Share-based compensation 21 23 69 65 Provision for bad debts 20 21 79 46 Change in operating assets and liabilities,net of effects from acquisitions and divestitures:(Increase)/decrease in trade receivables 409 (864)(510)(1,193)(Increase)/decrease in inventories 631 (561)(1,012)(922)Increase/(decrease)in accounts payable (481)62 2,473 1,121 Other accrued liabilities and operating items,net 219 1,636 (845)(206)Net cash provided by/(used in)operating activities 1,361 (419)1,981 130 Cash flows from investing activities:Proceeds from divestitures,net of cash sold (4)923 Acquisition of subsidiaries,net of cash acquired (10)(10)Additions to property and equipment (109)(82)(264)(223)Proceeds from disposal of property and equipment 2 11 Purchases of investments (1)(34)(6)(38)Proceeds from sale of investments 5 1 27 Proceeds from net investment hedge terminations 29 71 29 71 Net cash provided by/(used in)investing activities (91)(44)(248)771 Cash flows from financing activities:Reduction of long-term obligations (558)(5)(571)(597)Net tax proceeds/(withholdings)from share-based compensation 2 1 11 (26)Dividends on common shares (128)(136)(399)(425)Purchase of treasury shares (250)(200)(1,500)(1,000)Net cash used in financing activities (934)(340)(2,459)(2,048)Effect of exchange rates changes on cash and equivalents (2)(1)(13)Cash reclassified from assets held for sale 109 Net increase/(decrease)in cash and equivalents 336 (805)(727)(1,051)Cash and equivalents at beginning of period 3,654 3,161 4,717 3,407 Cash and equivalents at end of period$3,990$2,356$3,990$2,356 Schedule 4 Cardinal Health,Inc.and Subsidiaries Segment Information Third Quarter (in millions)2023 2022 (in millions)2023 2022 Pharmaceutical Medical Revenue Revenue Amount$46,809$40,957 Amount$3,684$3,884 Growth rate 14%Growth rate(5)%(7)%Segment profit Segment profit Amount$600$487 Amount$20$59 Growth rate 23%(5)%Growth rate(66)%(66)%Segment profit margin 1.28%1.19%Segment profit margin 0.54%1.52%Year-to-Date (in millions)2023 2022 (in millions)2023 2022 Pharmaceutical Medical Revenue Revenue Amount$140,310$122,154 Amount$11,259$12,118 Growth rate 15%Growth rate(7)%(3)%Segment profit Segment profit Amount$1,495$1,319 Amount$29$232 Growth rate 13%(1)%Growth rate(88)%(64)%Segment profit margin 1.07%1.08%Segment profit margin 0.26%1.91%The sum of the components and certain computations may reflect rounding adjustments.Schedule 5 Cardinal Health,Inc.and Subsidiaries GAAP/Non-GAAP Reconciliation1 Earnings/Gross Operating(Loss)Net Diluted Margin SG&A2 Operating Earnings Before Provision for Net Earnings3 Effective EPS 3(in millions,except per common share amounts)Gross Growth Growth Earnings/Growth Income Income Earnings/Growth Tax Diluted Growth Margin Rate SG&A 2 Rate(Loss)Rate Taxes Taxes(Loss)3 Rate Rate EPS 3,4 Rate Third Quarter 2023 GAAP$1,785 6%$1,179 4%$572 N.M.$544$197$345 N.M.36.3%$1.34 N.M.Restructuring and employee severance 16 16 4 12 0.05 Amortization and other acquisition-related costs 74 74 19 55 0.21 Impairments and(gain)/loss on disposal of assets,net 5 20 20 (69)89 0.35 Litigation(recoveries)/charges,net (76)(76)(22)(54)(0.21)Non-GAAP$1,785 6%$1,179 4%$606 11%$578$129$447 11.4%$1.74 20%Third Quarter 2022 GAAP$1,682 (7)%$1,137 2%$(97)N.M.$(137)$1,253$(1,391)N.M.(916.5)%$(5.05)N.M.Restructuring and employee severance 31 31 8 23 0.08 Amortization and other acquisition-related costs 79 79 20 59 0.21 Impairments and(gain)/loss on disposal of assets,net 5 471 471 (1,189)1,660 6.03 Litigation(recoveries)/charges,net 6 61 61 10 51 0.18 (Gain)/Loss on sale of equity interest in naviHealth (1)(1)Non-GAAP$1,683 (7)%$1,138 2%$545 (21)%$504$101$402 (11) .1%$1.45 (5)or more information on these measures,refer to the Use of Non-GAAP Measures and Definitions schedules.2Distribution,selling,general and administrative expenses.3Attributable to Cardinal Health,Inc.4 For the three months ended March 31,2022,GAAP diluted EPS and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 275 million common shares,which excludes potentially dilutive securities from the denominator due to their anti-dilutive effects resulting from our GAAP net loss for the periods.For the three months ended March 31,2022,non-GAAP diluted EPS is calculated using a weighted average of 277 million common shares,which includes potentially dilutive shares.5 Impairments and(gain)/loss on disposal of assets,net included pre-tax goodwill impairment charges related to the Medical segment of$863 million recorded during the nine months ended March 31,2023.For fiscal 2023,the estimated net tax benefit related to the impairments is$68 million and is included in the annual effective tax rate.As a result,the amount of tax expense recognized increased approximately by an incremental$74 million during the three months ended March 31,2023.During the three months ended March 31,2022,impairments and(gain)/loss on disposal of assets,net included pre-tax impairment charges of$474 million.For fiscal 2022,the estimated net tax benefit related to the impairment was$126 million and was included in the annual effective tax rate.As a result,the amount of tax expense recognized during the three months ended March 31,2022 increased approximately by an incremental$1.2 billion,and lowered the provision for income taxes during the fourth quarter of fiscal 2022 by approximately$180 million.6 Litigation(recoveries)charges,net includes a one-time contingent attorney fee of$18 million recorded during the three months ended March 31,2022 related to the finalization of the settlement agreement(the Settlement Agreement)resulting in the settlement of the vast majority of opioid lawsuits filed by state and local governmental entities.Due to the unique nature and significance of the Settlement Agreement,and the one-time,contingent nature of the fee,this related fee was included in litigation(recoveries)/charges,net.The sum of the components and certain computations may reflect rounding adjustments.We generally apply varying tax rates depending on the items nature and tax jurisdiction where it is incurred.Schedule 5 Cardinal Health,Inc.and Subsidiaries GAAP/Non-GAAP Reconciliation1 Earnings/Gross Operating(Loss)Net Diluted Margin SG&A 2 Operating Earnings Before Provision for Net Earnings3 Effective EPS 3 Gross Growth Growth Earnings/Growth Income Income Earnings/Growth Tax Diluted Growth(in millions,except per common share amounts)Margin Rate SG&A 2 Rate(Loss)Rate Taxes Taxes(Loss)3 Rate Rate EPS 3,4 Rate Year-to-Date 2023 GAAP$5,062 2%$3,567 5%$590 N.M.$517$189$325 N.M.36.7%$1.23 N.M.State opioid assessment related to prior fiscal years 6 (6)(6)(2)(4)0.02 Shareholder cooperation agreement costs (8)8 8 2 6 (0.02)Restructuring and employee severance 62 62 14 48 0.18 Amortization and other acquisition-related costs 216 216 56 160 0.61 Impairments and(gain)/loss on disposal of assets,net 5 883 883 138 745 2.82 Litigation(recoveries)/charges,net (256)(256)(98)(158)(0.60)Non-GAAP$5,062 2%$3,565 5%$1,497 (3)%$1,424$299$1,122 (1)!.0%$4.24 6%Year-to-Date 2022 GAAP$4,940 (7)%$3,402%$(632)N.M.$(741)$328$(1,071)N.M.(44.4)%$(3.82)N.M.Surgical gown recall costs/(income)1 1 1 1 Restructuring and employee severance 56 56 14 42 0.15 Amortization and other acquisition-related costs 237 237 61 176 0.63 Impairments and(gain)/loss on disposal of assets,net 5 1,764 1,764 (119)1,883 6.71 Litigation(recoveries)/charges,net 6,7 113 113 19 94 0.33 Loss on early extinguishment of debt 10 3 7 0.03 (Gain)/Loss on sale of equity interest in naviHealth (2)(2)Non-GAAP$4,942 (7)%$3,402 1%$1,540 (20)%$1,438$306$1,131 (20)!.3%$4.01 (16)or more information on these measures,refer to the Use of Non-GAAP Measures and Definitions schedules.2Distribution,selling,general and administrative expenses.3Attributable to Cardinal Health,Inc.4 For the nine months ended March 31,2022,GAAP diluted EPS and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 281 million common shares,which excludes potentially dilutive securities from the denominator due to their anti-dilutive effects resulting from our GAAP net loss for the periods.For the nine months ended March 31,2022,non-GAAP diluted EPS is calculated using a weighted average of 282 million common shares,which includes potentially dilutive shares.5 Impairments and(gain)/loss on disposal of assets,net included pre-tax goodwill impairment charges related to the Medical segment of$863 million recorded during the nine months ended March 31,2023.For fiscal 2023,the estimated net tax benefit related to the impairments is$68 million and is included in the annual effective tax rate.As a result,the incremental interim tax benefit recognized during the nine months ended March 31,2023 was$66 million and will reverse in the fourth quarter of the fiscal year.During the nine months ended March 31,2022,impairments and(gain)/loss on disposal of assets,net included a pre-tax impairment charge of$1.8 billion related to the Medical segment.For fiscal 2022,the estimated net tax benefit related to the impairment was$126 million and was included in the annual effective tax rate.As a result,the amount of tax expense recognized during the nine months ended March 31,2022 increased approximately by an incremental$180 million,and lowered the provision for income taxes during the fourth quarter of fiscal 2022 by approximately$180 million.6 Litigation(recoveries)charges,net includes a one-time contingent attorney fee of$18 million recorded during the nine months ended March 31,2022 related to the finalization of the Settlement Agreement resulting in the settlement of the vast majority of opioid lawsuits filed by state and local governmental entities.Due to the unique nature and significance of the Settlement Agreement,and the one-time,contingent nature of the fee,this related fee was included in litigation(recoveries)/charges,net.7 Litigation(recoveries)/charges,net for the nine months ended March 31,2022 does not include a$16 million judgement for lost profits related to an ordinary course intellectual property claim,which positively impacted Pharmaceutical segment profit.The sum of the components and certain computations may reflect rounding adjustments.We generally apply varying tax rates depending on the items nature and tax jurisdiction where it is incurred.Schedule 6 Cardinal Health,Inc.and Subsidiaries GAAP/Non-GAAP Reconciliation-GAAP Cash Flow to Non-GAAP Adjusted Free Cash Flow Third Quarter Year-to-Date (in millions)2023 2023 GAAP-Cash Flow Categories Net cash provided by operating activities$1,361$1,981 Net cash used in investing activities (91)(248)Net cash used in financing activities (934)(2,459)Effect of exchange rates changes on cash and equivalents (1)Net increase/(decrease)in cash and equivalents$336$(727)Non-GAAP Adjusted Free Cash Flow Net cash provided by operating activities$1,361$1,981 Additions to property and equipment (109)(264)Payments related to matters included in litigation(recoveries)/charges,net 57 373 Non-GAAP Adjusted Free Cash Flow$1,309$2,090 For more information on these measures,refer to the Use of Non-GAAP Measures and Definitions schedules.Cardinal Health,Inc.and Subsidiaries Use of Non-GAAP Measures This earnings release contains financial measures that are not calculated in accordance with U.S.generally accepted accounting principles(“GAAP).In addition to analyzing our business based on financial information prepared in accordance with GAAP,we use these non-GAAP financial measures internally to evaluate our performance,engage in financial and operational planning,and determine incentive compensation because we believe that these measures provide additional perspective on and,in some circumstances are more closely correlated to,the performance of our underlying,ongoing business.We provide these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on our financial and operating results on a year-over-year basis and in comparing our performance to that of our competitors.However,the non-GAAP financial measures that we use may be calculated differently from,and therefore may not be comparable to,similarly titled measures used by other companies.The non-GAAP financial measures disclosed by us should not be considered a substitute for,or superior to,financial measures calculated in accordance with GAAP,and the financial results calculated in accordance with GAAP and reconciliations to those financial statements set forth below should be carefully evaluated.Exclusions from Non-GAAP Financial Measures Management believes it is useful to exclude the following items from the non-GAAP measures presented in this report for its own and for investors assessment of the business for the reasons identified below:LIFO charges and credits are excluded because the factors that drive last-in first-out(LIFO)inventory charges or credits,such as pharmaceutical manufacturer price appreciation or deflation and year-end inventory levels(which can be meaningfully influenced by customer buying behavior immediately preceding our fiscal year-end),are largely out of our control and cannot be accurately predicted.The exclusion of LIFO charges and credits from non-GAAP metrics facilitates comparison of our current financial results to our historical financial results and to our peer group companies financial results.We did not recognize any LIFO charges or credits during the periods presented.Surgical gown recall costs or income includes inventory write-offs and certain remediation and supply disruption costs,net of related insurance recoveries,arising from the January 2020 recall of select Association for the Advancement of Medical Instrumentation(AAMI)Level 3 surgical gowns and voluntary field actions(a recall of some packs and a corrective action allowing overlabeling of other packs)for Presource Procedure Packs containing affected gowns.Income from surgical gown recall costs represents insurance recoveries of these certain costs.We have excluded these costs from our non-GAAP metrics to allow investors to better understand the underlying operating results of the business and to facilitate comparison of our current financial results to our historical financial results and to our peer group companies financial results.State opioid assessments related to prior fiscal years is the portion of state assessments for prescription opioid medications that were sold or distributed in periods prior to the period in which the expense is incurred.This portion is excluded from non-GAAP financial measures because it is retrospectively applied to sales in prior fiscal years and inclusion would obscure analysis of the current fiscal year results of our underlying,ongoing business.Additionally,while states laws may require us to make payments on an ongoing basis,the portion of the assessment related to sales in prior periods are contemplated to be one-time,nonrecurring items.Income from state opioid assessments related to prior fiscal years represents reversals of accruals due to changes in estimates or when the underlying assessments were invalidated by a Court or reimbursed by manufacturers.Shareholder cooperation agreement costs includes costs such as legal,consulting and other expenses incurred in relation to the agreement(the Cooperation Agreement)entered into among Elliott Associates,L.P.,Elliott International,L.P.(together,Elliott)and Cardinal Health,including costs incurred to negotiate and finalize the Cooperation Agreement and costs incurred by the new Business Review Committee of the Board of Directors,which was formed under this Cooperation Agreement.We have excluded these costs from our non-GAAP metrics because they do not occur in or reflect the ordinary course of our ongoing business operations and may obscure analysis of trends and financial performance.Restructuring and employee severance costs are excluded because they are not part of the ongoing operations of our underlying business.Amortization and other acquisition-related costs,which include transaction costs,integration costs,and changes in the fair value of contingent consideration obligations,are excluded because they are not part of the ongoing operations of our underlying business and to facilitate comparison of our current financial results to our historical financial results and to our peer group companies financial results.Additionally,costs for amortization of acquisition-related intangible assets are non-cash amounts,which are variable in amount and frequency and are significantly impacted by the timing and size of acquisitions,so their exclusion facilitates comparison of historical,current and forecasted financial results.We also exclude other acquisition-related costs,which are directly related to an acquisition but do not meet the criteria to be recognized on the acquired entitys initial balance sheet as part of the purchase price allocation.These costs are also significantly impacted by the timing,complexity and size of acquisitions.Impairments and gain or loss on disposal of assets,net are excluded because they do not occur in or reflect the ordinary course of our ongoing business operations and are inherently unpredictable in timing and amount,and in the case of impairments,are non-cash amounts,so their exclusion facilitates comparison of historical,current and forecasted financial results.Litigation recoveries or charges,net are excluded because they often relate to events that may have occurred in prior or multiple periods,do not occur in or reflect the ordinary course of our business and are inherently unpredictable in timing and amount.During fiscal 2022,we incurred a one-time contingent attorneys fee of$18 million related to the finalization of the settlement agreement(the“Settlement Agreement”)resulting in the settlement of the vast majority of opioid lawsuits filed by state and local governmental entities.Due to the unique nature and significance of the Settlement Agreement,and the one-time,contingent nature of the fee,this fee was included in litigation recoveries or charges,net.Additionally,during fiscal 2022 our Pharmaceutical segment profit was positively impacted by a$16 million judgment for lost profits.This judgment was the result of an ordinary course intellectual property rights claim and,therefore,is not adjusted in calculating the litigation recoveries or charges,net adjustment.During fiscal 2021,we incurred a tax benefit related to a carryback of a net operating loss.Some pre-tax amounts,which contributed to this loss,relate to litigation charges.As a result,we allocated substantially all of the tax benefit to litigation charges.Loss on early extinguishment of debt is excluded because it does not typically occur in the normal course of business and may obscure analysis of trends and financial performance.Additionally,the amount and frequency of this type of charge is not consistent and is significantly impacted by the timing and size of debt extinguishment transactions.(Gain)/Loss on sale of equity interest in naviHealth was incurred in connection with the sale of our remaining equity interest in naviHealth in fiscal 2020.The equity interest was retained in connection with the initial sale of our majority interest in naviHealth during fiscal 2019.We exclude this significant gain because gains or losses on investments of this magnitude do not typically occur in the normal course of business and are similar in nature to a gain or loss from a divestiture of a majority interest,which we exclude from non-GAAP results.The gain on the initial sale of our majority interest in naviHealth in fiscal 2019 was also excluded from our non-GAAP measures.The tax effect for each of the items listed above is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s)in which the item is recorded.The gross,tax and net impact of each item are presented with our GAAP to non-GAAP reconciliations.Non-GAAP adjusted free cash flow:We provide this non-GAAP financial measure as a supplemental metric to assist readers in assessing the effects of items and events on our cash flow on a year-over-year basis and in comparing our performance to that of our peer group companies.In calculating this non-GAAP metric,certain items are excluded from net cash provided by operating activities because they relate to significant and unusual or non-recurring events and are inherently unpredictable in timing and amount.We believe adjusted free cash flow is important to management and useful to investors as a supplemental measure as it indicates the cash flow available for working capital needs,debt repayments,dividend payments,share repurchases,strategic acquisitions,or other strategic uses of cash.A reconciliation of our GAAP financial results to Non-GAAP adjusted free cash flow is provided in Schedule 6 of the financial statement tables included with this release.Forward Looking Non-GAAP Measures In this document,the Company presents certain forward-looking non-GAAP metrics.The Company does not provide outlook on a GAAP basis because the items that the Company excludes from GAAP to calculate the comparable non-GAAP measure can be dependent on future events that are less capable of being controlled or reliably predicted by management and are not part of the Companys routine operating activities.Additionally,management does not forecast many of the excluded items for internal use and therefore cannot create or rely on outlook done on a GAAP basis.The occurrence,timing and amount of any of the items excluded from GAAP to calculate non-GAAP could significantly impact the Companys fiscal 2023 GAAP results.Over the past five fiscal years,the excluded items have impacted the Companys EPS from$0.75 to$18.06,which includes a$17.54 charge related to the opioid litigation we recognized in fiscal 2020.Definitions Growth rate calculation:growth rates in this report are determined by dividing the difference between current-period results and prior-period results by prior-period results.Interest and Other,net:other(income)/expense,net plus interest expense,net.Segment Profit:segment revenue minus(segment cost of products sold and segment distribution,selling,general and administrative expenses).Segment Profit margin:segment profit divided by segment revenue.Non-GAAP gross margin:gross margin,excluding LIFO charges/(credits)and surgical gown recall costs/(income).Non-GAAP distribution,selling,general and administrative expenses or Non-GAAP SG&A:distribution,selling,general and administrative expenses,excluding surgical gown recall costs/(income),state opioid assessment related to prior fiscal years and shareholder cooperation agreement costs.Non-GAAP operating earnings:operating earnings/(loss)excluding(1)LIFO charges/(credits),(2)surgical gown recall costs/(income),(3)state opioid assessment related to prior fiscal years,(4)shareholder cooperation agreement costs,(5)restructuring and employee severance,(6)amortization and other acquisition-related costs,(7)impairments and(gain)/loss on disposal of assets,net and(8)litigation(recoveries)/charges,net.Non-GAAP earnings before income taxes:earnings/(loss)before income taxes excluding(1)LIFO charges/(credits),(2)surgical gown recall costs/(income),(3)state opioid assessment related to prior fiscal years,(4)shareholder cooperation agreement costs,(5)restructuring and employee severance,(6)amortization and other acquisition-related costs,(7)impairments and(gain)/loss on disposal of assets,net,(8)litigation(recoveries)/charges,net,(9)loss on early extinguishment of debt and(10)(gain)/loss on sale of equity interest in naviHealth.Non-GAAP net earnings attributable to Cardinal Health,Inc.:net earnings/(loss)attributable to Cardinal Health,Inc.excluding(1)LIFO charges/(credits),(2)surgical gown recall costs/(income),(3)state opioid assessment related to prior fiscal years,(4)shareholder cooperation agreement costs,(5)restructuring and employee severance,(6)amortization and other acquisition-related costs,(7)impairments and(gain)/loss on disposal of assets,net,(8)litigation(recoveries)/charges,net,(9)loss on early extinguishment of debt and(10)(gain)/loss on sale of equity interest in naviHealth,each net of tax.Non-GAAP effective tax rate:provision for income taxes adjusted for the tax impacts of(1)LIFO charges/(credits),(2)surgical gown recall costs/(income),(3)state opioid assessment related to prior fiscal years,(4)shareholder cooperation agreement costs,(5)restructuring and employee severance,(6)amortization and other acquisition-related costs,(7)impairments and(gain)/loss on disposal of assets,net,(8)litigation(recoveries)/charges,net,(9)loss on early extinguishment of debt and(10)(gain)/loss on sale of equity interest in naviHealth divided by(earnings before income taxes adjusted for the ten items above).Non-GAAP diluted earnings per share attributable to Cardinal Health,Inc.:non-GAAP net earnings attributable to Cardinal Health,Inc.divided by diluted weighted-average shares outstanding.Non-GAAP adjusted free cash flow:net cash provided by operating activities less payments related to additions to property and equipment,excluding settlement payments and receipts related to matters included in litigation(recoveries)/charges,net,as defined above,or other significant and unusual or non-recurring cash payments or receipts.For example,the U.S.federal income tax refund of$966 million for the tax benefit from the net operating loss carryback related to a self-insurance pre-tax loss was excluded from the Companys fiscal 2022 non-GAAP adjusted free cash flow.
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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 ACTOF 1934For the Quarterly Period Ended March 31,2023ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACTOF 1934For the Transition Period From to Commission File Number 000-23554StoneX Group Inc.(Exact name of registrant as specified in its charter)Delaware 59-2921318(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)230 Park Ave,10th FloorNew York,NY 10169(Address of principal executive offices)(Zip Code)(212)485-3500(Registrants telephone number,including area code)Securities registered pursuant to Section 12(b)of the Act:Title of Each ClassTrading SymbolName of each exchange on which registeredCommon Stock,$0.01 par valueSNEXThe Nasdaq Stock Market LLCIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934during 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 filingrequirements 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 ofRegulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit suchfiles).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company or anemerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growthcompany”in Rule 12b-2 of the Exchange Act.Large accelerated filer Accelerated filerNon-accelerated filer Smaller 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 newor 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 May 1,2023,there were 20,743,910 shares of the registrants common stock outstanding.Table of ContentsStoneX Group Inc.Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31,2023Table of Contents PagePart I.FINANCIAL INFORMATIONItem 1.Financial Statements(Unaudited)Condensed Consolidated Balance Sheets1Condensed Consolidated Income Statements2Condensed Consolidated Statements of Comprehensive Income3Condensed Consolidated Statements of Cash Flows4Condensed Consolidated Statements of Stockholders Equity6Notes to Condensed Consolidated Financial Statements7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations32Item 3.Quantitative and Qualitative Disclosures about Market Risk62Item 4.Controls and Procedures64Part II.OTHER INFORMATIONItem 1.Legal Proceedings64Item 1A.Risk Factors65Item 2.Unregistered Sales of Equity Securities and Use of Proceeds66Item 6.Exhibits66Signatures67Table of ContentsPART I.FINANCIAL INFORMATIONItem 1.Financial StatementsStoneX Group Inc.Condensed Consolidated Balance Sheets(Unaudited)(in millions,except par value and share amounts)March 31,2023September 30,2022ASSETSCash and cash equivalents$1,263.9$1,108.5 Cash,securities and other assets segregated under federal and other regulations(including$25.8 million and$805.7 million at fair value atMarch 31,2023 and September 30,2022,respectively)2,512.3 3,267.2 Collateralized transactions:Securities purchased under agreements to resell2,623.2 1,672.0 Securities borrowed753.7 1,209.8 Deposits with and receivables from broker-dealers,clearing organizations and counterparties,net(including$4,655.7 million and$2,817.2 millionat fair value at March 31,2023 and September 30,2022,respectively)7,616.3 6,842.6 Receivable from clients,net(including$2.3 million and$(0.5)million at fair value at March 31,2023 and September 30,2022,respectively)978.7 566.2 Notes receivable,net5.1 5.1 Income taxes receivable15.5 16.8 Financial instruments owned,at fair value(includes securities pledged as collateral that can be sold or repledged of$1,593.1 million and$2,372.3 million at March 31,2023 and September 30,2022,respectively)5,049.1 4,167.3 Physical commodities inventory,net(including$351.6 million and$359.8 million at fair value at March 31,2023 and September 30,2022,respectively)572.1 513.5 Deferred income taxes,net35.5 52.0 Property and equipment,net117.7 112.9 Operating right of use assets117.7 121.8 Goodwill and intangible assets,net88.9 86.2 Other assets169.2 117.7 Total assets$21,918.9$19,859.6 LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Accounts payable and other accrued liabilities(including$1.3 million and$0 at fair value at March 31,2023 and September 30,2022,respectively)$513.8$400.6 Operating lease liabilities144.1 143.0 Payables to:Clients(including$669.5 million and$(1,392.4)million at fair value at March 31,2023 and September 30,2022,respectively)10,168.7 9,891.0 Broker-dealers,clearing organizations and counterparties(including$34.1 million and$55.8 million at fair value at March 31,2023 andSeptember 30,2022,respectively)558.4 659.8 Lenders under loans561.3 485.1 Senior secured borrowings,net340.6 339.1 Income taxes payable26.2 16.2 Collateralized transactions:Securities sold under agreements to repurchase5,023.1 3,195.6 Securities loaned764.5 1,189.5 Financial instruments sold,not yet purchased,at fair value2,570.9 2,469.6 Total liabilities20,671.6 18,789.5 Commitments and contingencies(Note 11)Stockholders equity:Preferred stock,$0.01 par value.Authorized 1,000,000 shares;no shares issued or outstanding Common stock,$0.01 par value.Authorized 30,000,000 shares;23,286,021 issued and 20,678,698 outstanding at March 31,2023 and22,911,227 issued and 20,303,904 outstanding at September 30,20220.2 0.2 Common stock in treasury,at cost.2,607,323 shares at March 31,2023 and September 30,2022(69.3)(69.3)Additional paid-in-capital358.7 340.2 Retained earnings1,007.9 889.6 Accumulated other comprehensive loss,net(50.2)(90.6)Total equity1,247.3 1,070.1 Total liabilities and stockholders equity$21,918.9$19,859.6 See accompanying notes to the condensed consolidated financial statements.1Table of ContentsStoneX Group Inc.Condensed Consolidated Income Statements(Unaudited)Three Months Ended March 31,Six Months Ended March 31,(in millions,except share and per share amounts)2023202220232022Revenues:Sales of physical commodities$15,506.2$15,864.2$27,909.6$29,783.1 Principal gains,net256.6 323.5 510.8 574.6 Commission and clearing fees130.7 138.4 248.7 254.7 Consulting,management,and account fees40.7 25.4 80.5 49.5 Interest income226.8 31.2 423.0 62.2 Total revenues16,161.0 16,382.7 29,172.6 30,724.1 Cost of sales of physical commodities15,456.6 15,838.0 27,813.4 29,728.9 Operating revenues704.4 544.7 1,359.2 995.2 Transaction-based clearing expenses69.2 76.5 136.5 147.4 Introducing broker commissions42.2 43.2 79.0 81.5 Interest expense178.7 14.1 333.0 29.8 Interest expense on corporate funding14.9 10.6 29.3 22.4 Net operating revenues399.4 400.3 781.4 714.1 Compensation and other expenses:Compensation and benefits232.5 207.1 431.5 382.1 Trading systems and market information17.8 16.9 35.5 33.0 Professional fees11.3 13.8 27.2 25.7 Non-trading technology and support16.2 12.8 31.0 25.8 Occupancy and equipment rental10.6 8.8 19.5 17.5 Selling and marketing14.2 14.3 27.1 25.3 Travel and business development5.8 3.0 11.5 5.9 Communications2.1 2.1 4.3 4.0 Depreciation and amortization13.1 11.3 25.8 20.4 Bad debts,net of recoveries3.0 12.3 3.7 12.1 Other15.3 16.9 34.7 28.8 Total compensation and other expenses341.9 319.3 651.8 580.6 Gain on acquisition and other gain 6.4 23.5 6.4 Income before tax57.5 87.4 153.1 139.9 Income tax expense15.8 23.4 34.8 34.2 Net income$41.7$64.0$118.3$105.7 Earnings per share:Basic$2.02$3.18$5.77$5.27 Diluted$1.95$3.11$5.57$5.15 Weighted-average number of common shares outstanding:Basic19,930,027 19,573,871 19,850,052 19,477,540 Diluted20,621,194 20,012,709 20,553,913 19,930,047 See accompanying notes to the condensed consolidated financial statements.2Table of ContentsStoneX Group Inc.Condensed Consolidated Statements of Comprehensive Income(Unaudited)Three Months Ended March 31,Six Months Ended March 31,(in millions)2023202220232022Net income$41.7$64.0$118.3$105.7 Other comprehensive gain/(loss),net of tax:Foreign currency translation adjustment3.2 1.2 11.4(0.1)Cash flow hedges14.3(18.1)29.0(18.2)Total other comprehensive gain/(loss),net of tax17.5(16.9)40.4(18.3)Comprehensive income$59.2$47.1$158.7$87.4 See accompanying notes to the condensed consolidated financial statements.3Table of ContentsStoneX Group Inc.Condensed Consolidated Statements of Cash Flows(Unaudited)Six Months Ended March 31,(in millions)20232022Cash flows from operating activities:Net income$118.3$105.7 Adjustments to reconcile net income to net cash provided(used in)/provided by operating activities:Depreciation and amortization25.8 20.4 Amortization of right of use assets5.7 7.8 Bad debts,net of recoveries3.7 12.1 Deferred income taxes1.8(0.4)Amortization of debt issuance costs2.8 2.2 Amortization of share-based compensation14.9 8.3 Gain on acquisition(23.5)Changes in operating assets and liabilities,net:Securities and other assets segregated under federal and other regulations579.6(11.5)Securities purchased under agreements to resell(951.2)(290.7)Securities borrowed456.1 78.3 Deposits with and receivables from broker-dealers,clearing organizations,and counterparties,net(1,314.1)202.3 Receivables from clients,net(363.3)(126.7)Notes receivable,net 1.0 Income taxes receivable3.7 10.6 Financial instruments owned,at fair value(859.3)198.4 Physical commodities inventory,net(36.1)(134.5)Other assets(45.2)6.8 Accounts payable and other accrued liabilities60.1 31.6 Operating lease liabilities(0.5)(6.8)Payables to clients274.1 1,661.9 Payables to broker-dealers,clearing organizations,and counterparties(101.8)(93.6)Income taxes payable9.2 15.4 Securities sold under agreements to repurchase1,827.5(533.0)Securities loaned(425.0)(49.9)Financial instruments sold,not yet purchased,at fair value134.0 986.3 Net cash(used in)/provided by operating activities(602.7)2,102.0 Cash flows from investing activities:Acquisition of businesses and assets,net of cash received(6.1)Sale of exchange memberships and common stock 0.2 Purchases of property and equipment(22.5)(24.3)Net cash used in investing activities(28.6)(24.1)Cash flows from financing activities:Net change in payables to lenders under loans with maturities 90 days or less67.0 232.7 Proceeds from payables to lenders under loans with maturities greater than 90 days150.0 430.0 Repayments of payables to lenders under loans with maturities greater than 90 days(151.0)(440.0)Repayments of senior secured term loan(4.9)Deferred payments on acquisitions(17.2)(1.5)Exercise of stock options3.6 5.9 Net cash provided by financing activities52.4 222.2 Effect of exchange rates on cash,segregated cash,cash equivalents,and segregated cash equivalents11.1(0.1)Net(decrease)/increase in cash,segregated cash,cash equivalents,and segregated cash equivalents(567.8)2,300.0 Cash,segregated cash,cash equivalents,and segregated cash equivalents at beginning of period6,285.1 6,509.5 Cash,segregated cash,cash equivalents,and segregated cash equivalents at end of period$5,717.3$8,809.5 Supplemental disclosure of cash flow information:Cash paid for interest$337.5$43.9 Income taxes paid,net of cash refunds$19.5$7.8 Supplemental disclosure of non-cash investing and financing activities:Identified intangible assets and goodwill on acquisitions$10.3$Additional consideration payable related to acquisitions,net$28.7$Acquisition of business:Assets acquired$143.0$Liabilities assumed84.1 Total net assets acquired$58.9$See accompanying notes to the condensed consolidated financial statements.4Table of ContentsStoneX Group Inc.Condensed Consolidated Statements of Cash Flows-Continued(Unaudited)The following table provides a reconciliation of cash,segregated cash,cash equivalents,and segregated cash equivalents reported within the CondensedConsolidated Balance Sheets.March 31,(in millions)20232022Cash and cash equivalents$1,263.9$1,299.7 Cash segregated under federal and other regulations2,486.4 2,740.9 Securities segregated under federal and other regulations0.2 Cash segregated and deposited with or pledged to exchange-clearing organizations and other futures commission merchants(“FCMs”)1,032.5 4,294.1 Securities segregated and pledged to exchange-clearing organizations934.3 474.8 Total cash,segregated cash,cash equivalents,and segregated cash equivalents shown in the condensed consolidated statements of cash flows$5,717.3$8,809.5 Represents segregated client cash held at third-party banks.Excludes segregated commodity warehouse receipts,segregated U.S.Treasury obligations with original oracquired maturities of greater than 90 days,and other assets of$25.7 million and$25.6 million as of March 31,2023 and 2022,respectively,included within Cash,securities and other assets segregated under federal and other regulations on the Condensed Consolidated Balance Sheets.Represents segregated client cash and U.S.Treasury obligations on deposit with,or pledged to,exchange clearing organizations and other FCMs.Excludes non-segregated cash,segregated U.S.Treasury obligations pledged to exchange-clearing organizations with original or acquired maturities greater than 90 days,and other assetsof$5,649.5 million and$1,951.0 million as of March 31,2023 and 2022,respectively,included within Deposits with and receivables from broker-dealers,clearingorganizations,and counterparties,net on the Condensed Consolidated Balance Sheets.See accompanying notes to the condensed consolidated financial statements.(1)(1)(2)(2)(1)(2)5Table of ContentsStoneX Group Inc.Condensed Consolidated Statements of Stockholders Equity(Unaudited)Three Months Ended March 31,2022(in millions)Common StockTreasury StockAdditional Paid-in CapitalRetainedEarningsAccumulated OtherComprehensiveLoss,netTotalBalances as of December 31,2021$0.2$(69.3)$324.4$724.2$(26.5)$953.0 Net income 64.0 64.0 Other comprehensive loss,net of tax (16.9)(16.9)Exercise of stock options 1.3 1.3 Share-based compensation 4.2 4.2 Balances as of March 31,2022$0.2$(69.3)$329.9$788.2$(43.4)$1,005.6 Three Months Ended March 31,2023(in millions)Common StockTreasury StockAdditional Paid-in CapitalRetainedEarningsAccumulated OtherComprehensiveLoss,netTotalBalances as of December 31,2022$0.2$(69.3)$347.2$966.2$(67.7)$1,176.6 Net income 41.7 41.7 Other comprehensive gain,net of tax 17.5 17.5 Exercise of stock options 2.1 2.1 Share-based compensation 9.4 9.4 Balances as of March 31,2023$0.2$(69.3)$358.7$1,007.9$(50.2)$1,247.3 Six Months Ended March 31,2022(in millions)Common StockTreasury StockAdditional Paid-in CapitalRetainedEarningsAccumulated OtherComprehensiveLoss,netTotalBalances as of September 30,2021$0.2$(69.3)$315.7$682.5$(25.1)$904.0 Net income 105.7 105.7 Other comprehensive loss,net of tax (18.3)(18.3)Exercise of stock options 5.9 5.9 Share-based compensation 8.3 8.3 Balances as of March 31,2022$0.2$(69.3)$329.9$788.2$(43.4)$1,005.6 Six Months Ended March 31,2023(in millions)Common StockTreasury StockAdditional Paid-in CapitalRetainedEarningsAccumulated OtherComprehensiveLoss,netTotalBalances as of September 30,2022$0.2$(69.3)$340.2$889.6$(90.6)$1,070.1 Net income 118.3 118.3 Other comprehensive gain,net of tax 40.4 40.4 Exercise of stock options 3.6 3.6 Share-based compensation 14.9 14.9 Balances as of March 31,2023$0.2$(69.3)$358.7$1,007.9$(50.2)$1,247.3 See accompanying notes to the condensed consolidated financial statements.6Table of ContentsStoneX Group Inc.Notes to the Condensed Consolidated Financial Statements(Unaudited)Note 1 Basis of Presentation and Consolidation and Accounting Standards AdoptedStoneX Group Inc.,a Delaware corporation,and its consolidated subsidiaries(collectively“StoneX”or“the Company”),is a global financial servicesnetwork that connects companies,organizations,traders and investors to the global market ecosystem through a unique blend of digital platforms,end-to-end clearing and execution services,high touch service,and deep expertise.The Company strives to be the one trusted partner to its clients,providing itsnetwork,products and services to allow them to pursue trading opportunities,manage their market risks,make investments and improve their businessperformance.The Company offers a vertically integrated product suite,beginning with high-touch and electronic access to nearly all major financialmarkets worldwide,as well as numerous liquidity venues.The Company delivers access and services through the entire lifecycle of a trade,by deliveringdeep market expertise and on-the-ground intelligence,best execution,and finally post-trade clearing,custody,as well as settlement services.The Companyhas created revenue streams,diversified by asset class,client type and geography,that earn commissions and spreads as clients execute transactions acrossits financial network,while monetizing non-trading client activity including interest and fee earnings on client balances as well as earning consulting feesfor market intelligence and risk management services.The Company provides its services to a diverse group of clients in more than 180 countries.These clients include more than 54,000 commercial,institutional,and global payments clients and over 400,000 retail clients.The Companys clients include commercial entities,asset managers,regional,national and introducing broker-dealers,insurance companies,brokers,institutional investors and professional traders,commercial and investment banksand government and non-governmental organizations(“NGOs”).The Companys common stock trades on The NASDAQ Global Select Market under the symbol“SNEX”.Basis of Presentation and ConsolidationThe accompanying unaudited Condensed Consolidated Balance Sheet as of September 30,2022,which has been derived from the audited consolidatedbalance sheet of September 30,2022,and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission(“SEC”).Certain information and disclosures normally included in annual consolidated financialstatements prepared in accordance with accounting principles generally accepted in the United States of America(“U.S.GAAP”)have been condensed oromitted pursuant to those rules and regulations.The Company believes that the included disclosures clearly and fairly present the information within.Inmanagements opinion,all adjustments,generally consisting of normal accruals,considered necessary to fairly present the condensed consolidated financialstatements for the interim periods presented have been reflected as required by Rule 10-01 of Regulation S-X.Operating results for interim periods are not necessarily indicative of the results that may be expected for the related full year.These condensedconsolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements and related notes containedin the Companys Annual Report on Form 10-K for the fiscal year ended September 30,2022,as filed with the SEC.These condensed consolidated financial statements include the accounts of StoneX Group Inc.and all entities in which the Company has a controllingfinancial interest.All material intercompany transactions and balances have been eliminated in consolidation.The Companys fiscal year end is September 30,and its fiscal quarters end on December 31,March 31,June 30 and September 30.Unless otherwise stated,all dates refer to fiscal years and fiscal interim periods.Preparing condensed consolidated financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities,disclosure of contingent liabilities as of the date of the condensed consolidated financial statements and thereported amounts of revenue and expenses during the reporting period.The most significant of these estimates and assumptions relate to fair valuemeasurement for financial instruments,revenue recognition,valuation of inventories,and income taxes.These estimates are based on managements bestknowledge of current events and actions the Company may undertake in the future.The Company reviews all significant estimates affecting the financialstatements on a recurring basis and records the effect of any necessary adjustments prior to financial statement issuance.Although these and other estimatesand assumptions are based on the best available information,actual results could be materially different from these estimates.Estimates and assumptionswere considered and made in context with the information reasonably available to the Company as of March 31,2023 and through the date of this Form 10-Q.In the Condensed Consolidated Income Statements,the total revenues reported combine gross revenues for the physical commodities business and netrevenues for all other businesses.The subtotal Operating revenues in the Condensed7Table of ContentsConsolidated Income Statements is calculated by deducting Cost of sales of physical commodities from Total revenues.The subtotal Net operating revenuesin the Condensed Consolidated Income Statements is calculated as Operating revenues less Transaction-based clearing expenses,Introducing brokercommissions,Interest expense,and Interest expense on corporate funding.Transaction-based clearing expenses represent variable expenses paid toexecuting brokers,exchanges,clearing organizations and banks in relation to transactional volumes.Introducing broker commissions include commissionpaid to certain non-employee third parties that have introduced clients to the Company.Net operating revenues represent revenues available to pay variablecompensation to risk management consultants and traders,direct non-variable expenses,as well as variable and non-variable expenses to operational andadministrative employees.Gain on acquisition and other gainGain on acquisition contains the value that the Company acquired in excess of consideration paid for business combinations.More details can be found inNote 17.Accounting StandardsThe Company did not adopt any new accounting standards during the three and six months ended March 31,2023.Note 2 Earnings per ShareThe Company presents basic and diluted earnings per share(“EPS”)using the two-class method,which requires all outstanding unvested share-basedpayment awards that contain rights to non-forfeitable dividends and therefore participate in undistributed earnings with common stockholders be includedin computing earnings per share.Under the two-class method,net income is reduced by the amount of dividends declared in the period for each class ofcommon stock and participating security.The remaining undistributed earnings are then allocated to common stock and participating securities,based ontheir respective rights to receive dividends.Restricted stock awards granted to certain employees and directors contain non-forfeitable rights to dividends atthe same rate as common stock and are considered participating securities.Basic EPS has been computed by dividing net income by the weighted-averagenumber of common shares outstanding.The following is a reconciliation of the numerator and denominator of the diluted earnings per share computations for the periods presented below.Three Months Ended March 31,Six Months Ended March 31,(in millions,except share amounts)2023202220232022Numerator:Net income$41.7$64.0$118.3$105.7 Less:Allocation to participating securities(1.5)(1.8)(4.0)(3.1)Net income allocated to common stockholders$40.2$62.2$114.3$102.6 Denominator:Weighted average number of:Common shares outstanding19,930,027 19,573,871 19,850,052 19,477,540 Dilutive potential common shares outstanding:Share-based awards691,167 438,838 703,861 452,507 Diluted weighted-average common shares20,621,194 20,012,709 20,553,913 19,930,047 The dilutive effect of share-based awards is reflected in diluted net income per share by applying the treasury stock method,which includes considerationof unamortized share-based compensation expense.Options to purchase 123,372 and 468,763 shares of common stock for the three months ended March 31,2023 and 2022,respectively,were excluded fromthe calculation of diluted earnings per share as they would have been anti-dilutive.Options to purchase 181,396 and 411,145 shares of common stock forthe six months ended March 31,2023 and 2022,respectively,were excluded from the calculation of diluted earnings per share as they would have beenanti-dilutive.Note 3 Assets and Liabilities,at Fair ValueFair value is defined by U.S.GAAP as the exchange price that would be received for an asset or paid to transfer a liability(an exit price)in the principal ormost advantageous market for the asset or liability in an orderly transaction between willing market participants on the measurement date.Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure.Even when marketassumptions are not readily available,the Company is required to develop a set of assumptions that reflect those that market participants would use inpricing an asset or liability at the measurement date.The Company uses prices and inputs that are current as of measurement date,including periods ofmarket dislocation.In periods of market dislocation,the observability of prices and inputs may be reduced for many securities.This condition could causea security to be reclassified to a lower level within the fair value hierarchy.8Table of ContentsThe Company has designed independent price verification controls and periodically performs such controls to ensure the reasonableness of such values.Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair valuemeasurement.The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities(Level 1measurements)and the lowest priority to unobservable inputs(Level 3 measurements).A market is active if there are sufficient transactions on an ongoingbasis to provide current pricing information for the asset or liability,pricing information is released publicly,and price quotations do not vary substantiallyeither over time or among market participants.Observable inputs reflect the assumptions market participants would use in pricing the asset or liabilitydeveloped based on market data obtained from sources independent of the reporting entity.Relevant guidance requires the Company to consider counterparty credit risk of all parties to outstanding derivative instruments that would be consideredby a market participant in the transfer or settlement of such contracts(exit price).The Companys exposure to credit risk on derivative financial instrumentsprincipally relates to the portfolio of Over-the-counter(“OTC”)derivative contracts as all exchange-traded contracts held can be settled on an active marketwith a credit guarantee from the respective exchange.The Company requires each counterparty to deposit margin collateral for all OTC instruments and isalso required to deposit margin collateral with counterparties.The Company has assessed the nature of these deposits and used its discretion to adjust eachbased on the underlying credit considerations for the counterparty and determined that the collateral deposits minimize the exposure to counterparty creditrisk in the evaluation of the fair value of OTC instruments as determined by a market participant.In accordance with Financial Accounting Standards Board(“FASB”)Accounting Standards Codification(“ASC”)820,Fair Value Measurement,theCompany groups its assets and liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and thereliability of the assumptions used to determine fair value.These levels are:Level 1-Valuation is based upon unadjusted quoted prices in active markets that are accessible at the measurement date for identical,unrestricted assets orliabilities.Level 1 consists of financial assets and liabilities whose fair values are estimated using quoted market prices.Level 2-Valuation is based upon quoted prices for identical or similar assets or liabilities in markets that are less active,that is,markets in which there arefew transactions for the asset or liability that are observable for substantially the full term.Included in Level 2 are those financial assets and liabilities forwhich fair values are estimated using models or other valuation methodologies.These models are primarily industry-standard models that consider variousobservable inputs,including time value,yield curve,volatility factors,observable current market and contractual prices for the underlying financialinstruments,as well as other relevant economic measures.Level 3-Valuation is based on prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable(i.e.,supported by little or no market activity).Level 3 comprises financial assets and liabilities whose fair value is estimated based on internally developedmodels or methodologies utilizing significant inputs that are not readily observable from objective sources.Level 3 includes contingent liabilities that havebeen valued using an income approach based upon management developed discounted cash flow projections,which are an unobservable input.The Company had no contingent liabilities as of March 31,2023 and September 30,2022,respectively.The Company had certain options related tobusiness combinations and certain deferred acquisition consideration classified as Level 3 assets as of March 31,2023 and no Level 3 assets as ofSeptember 30,2022.Fair value of financial and nonfinancial assets and liabilities that are carried on the Condensed Consolidated Balance Sheets at fair value on arecurring basisCash and cash equivalents reported at fair value on a recurring basis includes certificates of deposit and money market mutual funds,which are stated atcost plus accrued interest,which approximates fair value.Cash,securities and other assets segregated under federal and other regulations reported at fair value on a recurring basis include the value of pledgedinvestments,primarily U.S.Treasury obligations and commodities warehouse receipts.Deposits with and receivables from broker-dealers,clearing organizations and counterparties and payable to clients and broker-dealers,clearingorganizations and counterparties includes the fair value of pledged investments,primarily U.S.Treasury obligations and foreign government obligations.These balances also include the fair value of exchange-traded options on futures and OTC forwards,swaps and options.Financial instruments owned and sold,not yet purchased include the fair value of equity securities,which includes common,preferred,and foreignordinary shares,American Depository Receipts(“ADRs”),Global Depository Receipts(“GDRs”),and exchange-traded funds(“ETFs”),corporate andmunicipal bonds,U.S.Treasury obligations,U.S.government agency obligations,foreign government obligations,agency mortgage-backed obligations,asset-backed obligations,derivative financial9Table of Contentsinstruments,commodities warehouse receipts,exchange firm common stock,and investments in managed funds.The fair value of exchange firm commonstock is determined by quoted market prices.Cash equivalents,debt and equity securities,commodities warehouse receipts,physical commodities inventory,derivative financial instruments andcontingent liabilities are carried at fair value,on a recurring basis,and are classified and disclosed into three levels in the fair value hierarchy.The following section describes the valuation methodologies used by the Company to measure classes of financial instruments at fair value and specifiesthe level within the fair value hierarchy where various financial instruments are classified.The Company uses quoted prices in active markets,where available,and classifies instruments with such quotes within Level 1 of the fair value hierarchy.Examples include U.S.Treasury obligations,foreign government obligations,commodities warehouse receipts,certain equity securities traded in activemarkets,physical precious metals inventory held by a regulated broker-dealer subsidiary,exchange firm common stock,investments in managed funds,aswell as options on futures contracts traded on national exchanges.The fair value of exchange firm common stock is determined by recent sale transactionsand is included within Level 1.When instruments are traded in secondary markets and observable prices are not available for substantially the full term,the Company generally relies oninternal valuation techniques based upon observable inputs for comparable financial instruments,or prices obtained from third-party pricing services orbrokers or a combination thereof,and accordingly,classified these instruments as Level 2.Examples include corporate and municipal bonds,U.S.government agency obligations,agency-mortgage backed obligations,asset-backed obligations,certain equity securities traded in less active markets,andOTC derivative contracts,which include purchase and sale commitments related to the Companys foreign exchange,agricultural,and energy commodities.Certain derivatives without a quoted price in an active market and derivatives executed OTC are valued using internal valuation techniques,includingpricing models which utilize significant inputs observable to market participants.The valuation techniques and inputs depend on the type of derivative andthe nature of the underlying instrument.The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interestyield curves,foreign exchange rates,commodity prices,volatilities and correlation.These derivative instruments are included within Level 2 of the fairvalue hierarchy.Physical commodities inventory includes precious metals that are a part of the trading activities of a regulated broker-dealer subsidiary and is recorded atfair value using exchange-quoted prices.Physical commodities inventory also includes agricultural commodities that are a part of the trading activities of anon-broker dealer subsidiary and are recorded at net realizable value using exchange-quoted prices.The fair value of precious metals physical commoditiesinventory is based upon unadjusted exchange-quoted prices and is,therefore,classified within Level 1 of the fair value hierarchy.The fair value ofagricultural physical commodities inventory and the related OTC firm sale and purchase commitments are generally based upon exchange-quoted prices,adjusted for basis or differences in local markets,broker or dealer quotations or market transactions in either listed or OTC markets.Exchange-quotedprices are adjusted for location and quality because the exchange-quoted prices for agricultural and energy related products represent contracts that havestandardized terms for commodity,quantity,future delivery period,delivery location,and commodity quality or grade.The basis or local marketadjustments are observable inputs or have an insignificant impact on the measurement of fair value and,therefore,the agricultural physical commoditiesinventory,as well as the related OTC forward firm sale and purchase commitments have been included within Level 2 of the fair value hierarchy.With the exception of certain derivative instruments where the valuation approach is disclosed above,financial instruments owned and sold are primarilyvalued using third-party pricing sources.Third-party pricing vendors compile prices from various sources and often apply matrix pricing for similarsecurities when market-observable transactions for the instruments are not observable for substantially the full term.The Company reviews the pricingmethodologies used by third-party pricing vendors in order to evaluate the fair value hierarchy classification of vendor-priced financial instruments and theaccuracy of vendor pricing,which typically involves comparing of primary vendor prices to internal trader prices or secondary vendor prices.Whenevaluating the propriety of vendor-priced financial instruments using secondary prices,considerations include the range and quality of vendor prices,levelof observable transactions for identical and similar instruments,and judgments based upon knowledge of a particular market and asset class.If the primaryvendor price does not represent fair value,justification for using a secondary price,including source data used to make the determination,is subject toreview and approval by authorized personnel prior to using a secondary price.Financial instruments owned and sold that are valued using third partypricing sources are included within either Level 1 or Level 2 of the fair value hierarchy based upon the observability of the inputs used and the level ofactivity in the market.The fair value estimates presented herein are based on pertinent information available to management as of March 31,2023 and September 30,2022.Although management is not aware of any factors that would significantly affect the estimated fair value10Table of Contentsamounts,such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since that date andcurrent estimates of fair value may differ significantly from the amounts presented herein.11Table of ContentsThe following tables set forth the Companys financial and nonfinancial assets and liabilities accounted for at fair value,on a recurring basis,as ofMarch 31,2023 and September 30,2022 by level in the fair value hierarchy.All fair value measurements were performed on a recurring basis as ofMarch 31,2023 and September 30,2022.March 31,2023(in millions)Level 1Level 2Level 3Netting(1)TotalAssets:Certificates of deposit$15.8$15.8 Money market mutual funds66.1 66.1 Cash and cash equivalents81.9 81.9 Commodities warehouse receipts25.7 25.7 U.S.Treasury obligations0.1 0.1 Securities and other assets segregated under federal and otherregulations25.8 25.8 U.S.Treasury obligations4,153.3 4,153.3 To be announced and forward settling securities 55.4 (41.1)14.3 Foreign government obligations16.4 16.4 Derivatives6,505.1 1,261.5 (7,294.9)471.7 Deposits with and receivables from broker-dealers,clearingorganizations and counterparties,net10,674.8 1,316.9 (7,336.0)4,655.7 Receivables from clients,net-Derivatives50.8 495.4 (543.9)2.3 Equity securities372.4 18.5 390.9 Corporate and municipal bonds 196.8 196.8 U.S.Treasury obligations641.0 641.0 U.S.government agency obligations 334.1 334.1 Foreign government obligations4.1 4.1 Agency mortgage-backed obligations 3,021.4 3,021.4 Asset-backed obligations 75.8 75.8 Derivatives0.6 901.5 (616.7)285.4 Commodities leases 23.9 23.9 Commodities warehouse receipts33.1 33.1 Exchange firm common stock11.5 11.5 Cash flow hedges 4.7 4.7 Mutual funds and other25.8 0.6 26.4 Financial instruments owned1,088.5 4,576.7 0.6(616.7)5,049.1 Physical commodities inventory111.5 240.1 351.6 Total assets at fair value$12,033.3$6,629.1$0.6$(8,496.6)$10,166.4 Liabilities:Accounts payable and other accrued liabilities$1.3$1.3 Payables to clients-Derivatives6,435.2 207.0 (5,972.7)669.5 TBA and forward settling securities 72.5 (37.5)35.0 Derivatives109.9 1,505.4 (1,616.2)(0.9)Payable to broker-dealers,clearing organizations andcounterparties109.9 1,577.9 (1,653.7)34.1 Equity securities318.0 13.0 331.0 Foreign government obligations5.9 5.9 Corporate and municipal bonds 98.6 98.6 U.S.Treasury obligations1,830.6 1,830.6 U.S.government agency obligations 13.8 13.8 Agency mortgage-backed obligations 40.8 40.8 Derivatives2.5 762.7 (555.5)209.7 Cash flow hedges 38.5 38.5 Other 0.8 1.2 2.0 Financial instruments sold,not yet purchased2,157.0 968.2 1.2(555.5)2,570.9 Total liabilities at fair value$8,702.1$2,753.1$2.5$(8,181.9)$3,275.8(1)Represents cash collateral and the impact of netting across at each level of the fair value hierarchy.12Table of Contents September 30,2022(in millions)Level 1Level 2Level 3Netting(1)TotalAssets:Certificates of deposit$4.0$4.0 Money market mutual funds39.5 39.5 Cash and cash equivalents43.5 43.5 Commodities warehouse receipts19.7 19.7 U.S.Treasury obligations786.0 786.0 Securities and other assets segregated under federal and otherregulations805.7 805.7 U.S.Treasury obligations4,258.5 4,258.5 TBA and forward settling securities 207.6 (91.4)116.2 Foreign government obligations14.4 14.4 Derivatives7,714.4 461.4 (9,747.7)(1,571.9)Deposits with and receivables from broker-dealers,clearingorganizations and counterparties,net11,987.3 669.0 (9,839.1)2,817.2 Receivables from clients,net-Derivatives67.2 511.6(579.3)(0.5)Equity securities367.9 11.8 379.7 Corporate and municipal bonds 156.8 156.8 U.S.Treasury obligations347.6 347.6 U.S.government agency obligations 343.0 343.0 Foreign government obligations4.8 4.8 Agency mortgage-backed obligations 2,588.7 2,588.7 Asset-backed obligations 70.7 70.7 Derivatives0.7 694.3 (502.4)192.6 Commodities leases 26.4 26.4 Commodities warehouse receipts24.9 24.9 Exchange firm common stock10.6 10.6 Mutual funds and other17.4 4.1 21.5 Financial instruments owned773.9 3,895.8 (502.4)4,167.3 Physical commodities inventory136.3 223.5 359.8 Total assets at fair value$13,813.9$5,299.9$(10,920.8)$8,193.0 Liabilities:Payables to clients-Derivatives7,722.5 175.4(9,290.3)(1,392.4)TBA and forward settling securities 154.9 (96.9)58.0 Derivatives58.7 590.6 (651.5)(2.2)Payable to broker-dealers,clearing organizations andcounterparties58.7 745.5 (748.4)55.8 Equity securities299.9 5.7 305.6 Foreign government obligations0.5 0.5 Corporate and municipal bonds 63.2 63.2 U.S.Treasury obligations1,686.5 1,686.5 U.S.government agency obligations 24.3 24.3 Agency mortgage-backed obligations 5.4 5.4 Derivatives 779.7 (466.3)313.4 Cash flow hedges 70.6 70.6 Other 0.1 0.1 Financial instruments sold,not yet purchased1,986.9 949.0 (466.3)2,469.6 Total liabilities at fair value$9,768.1$1,869.9$(10,505.0)$1,133.0(1)Represents cash collateral and the impact of netting across at each level of the fair value hierarchy.Realized and unrealized gains and losses are included in Principal gains,net,Interest income,and Cost of sales of physical commodities in the CondensedConsolidated Income Statements.13Table of ContentsAdditional disclosures about the fair value of financial instruments that are not carried on the Condensed Consolidated Balance Sheets at fair valueMany,but not all,of the financial instruments that the Company holds are recorded at fair value in the Condensed Consolidated Balance Sheets.Thefollowing represents financial instruments in which the ending balance at March 31,2023 and September 30,2022 was not carried at fair value inaccordance with U.S.GAAP on the Condensed Consolidated Balance Sheets:Short-term financial instruments:The carrying value of short-term financial instruments,including cash and cash equivalents,cash segregated underfederal and other regulations,securities purchased under agreements to resell and securities sold under agreements to repurchase,and securities borrowedand loaned are recorded at amounts that approximate the fair value of these instruments due to their short-term nature and level of collateralization.Thesefinancial instruments generally expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interestrates that approximate market rates.Under the fair value hierarchy,cash and cash equivalents and cash segregated under federal and other regulations areclassified as Level 1.Securities purchased under agreements to resell and securities sold under agreements to repurchase,and securities borrowed andloaned are classified as Level 2 under the fair value hierarchy as they are generally overnight or short-term in nature and are collateralized by equitysecurities,U.S.Treasury obligations,U.S.government agency obligations,agency mortgage-backed obligations,and asset-backed obligations.Receivables and other assets:Receivables from broker-dealers,clearing organizations,and counterparties,receivables from clients,net,notes receivables,and certain other assets are recorded at amounts that approximate fair value due to their short-term nature and are classified as Level 2 under the fair valuehierarchy.Payables:Payables to clients and payables to broker-dealers,clearing organizations,and counterparties are recorded at amounts that approximate fair valuedue to their short-term nature and are classified as Level 2 under the fair value hierarchy.Lenders under loans:Payables to lenders under loans carry variable rates of interest and thus approximate fair value and are classified as Level 2 under thefair value hierarchy.Senior secured borrowings,net:Senior secured borrowings,net includes the Companys 8.625%Senior Secured Notes due 2025(the“Senior SecuredNotes”),as further described in Note 9,with a carrying value of$340.6 million as of March 31,2023.The carrying value of the Senior Secured Notesrepresent their principal amount net of unamortized deferred financing costs and original issue discount.As of March 31,2023,the Senior Secured Noteshad a fair value of$351.9 million and are classified as Level 2 under the fair value hierarchy.Note 4 Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit RiskThe Company is party to certain financial instruments with off-balance sheet risk in the normal course of its business.The Company has sold financialinstruments that it does not currently own and will therefore be obliged to purchase such financial instruments at a future date.The Company has recordedthese obligations in the condensed consolidated financial statements as of March 31,2023 and September 30,2022 at the fair values of the related financialinstruments.The Company will incur losses if the fair value of the underlying financial instruments increases subsequent to March 31,2023.The totalfinancial instruments sold,not yet purchased of$2,570.9 million and$2,469.6 million as of March 31,2023 and September 30,2022,respectively,includes$209.7 million and$313.4 million for derivative contracts not designated as hedges,respectively,which represented a liability to the Company based ontheir fair values as of March 31,2023 and September 30,2022.DerivativesThe Company utilizes derivative products in its trading capacity as a dealer in order to satisfy client needs and mitigate risk.The Company manages risksfrom both derivatives and non-derivative cash instruments on a consolidated basis.The risks of derivatives should not be viewed in isolation,but inaggregate with the Companys other trading activities.The Companys derivative positions are included in the Condensed Consolidated Balance Sheets inDeposits with and receivables from broker-dealers,clearing organizations and counterparties,Receivables from clients,net,Financial instruments ownedand sold,not yet purchased,at fair value,Payable to clients and Payables to broker-dealers,clearing organizations and counterparties.14Table of ContentsListed below are the fair values of the Companys derivative assets and liabilities as of March 31,2023 and September 30,2022.Assets represent netunrealized gains and liabilities represent net unrealized losses.March 31,2023September 30,2022(in millions)Assets Liabilities Assets Liabilities Derivative contracts not accounted for as hedges:Exchange-traded commodity derivatives$2,052.1$2,040.6$4,520.4$4,519.3 OTC commodity derivatives1,476.1 1,395.6 756.9 695.6 Exchange-traded foreign exchange derivatives213.0 213.0 25.6 25.7 OTC foreign exchange derivatives762.5 716.0 577.1 549.3 Exchange-traded interest rate derivatives2,097.1 2,099.7 2,626.8 2,626.7 OTC interest rate derivatives287.3 287.3 168.9 205.1 Exchange-traded equity index derivatives2,194.3 2,194.3 609.5 609.5 OTC equity and indices derivatives132.5 76.2 164.4 95.7 TBA and forward settling securities55.4 72.5 207.6 154.9 Subtotal9,270.3 9,095.2 9,657.2 9,481.8 Derivative contracts designated as hedging instruments:Interest rate contracts1.8 38.4 48.8 Foreign currency forward contracts2.9 0.1 21.8 Subtotal4.7 38.5 70.6 Gross fair value of derivative contracts$9,275.0$9,133.7$9,657.2$9,552.4 Impact of netting and collateral(8,496.6)(8,181.9)(10,920.8)(10,505.0)Total fair value included in Deposits with and receivables from broker-dealers,clearingorganizations,and counterparties,net$486.0$(1,455.7)Total fair value included in Receivables from clients,net$2.3$(0.5)Total fair value included in Financial instruments owned,at fair value$290.1$192.6 Total fair value included in Payables to clients$669.5$(1,392.4)Total fair value included in Payables to broker-dealers,clearing organizations andcounterparties$34.1$55.8 Total fair value included in Financial instruments sold,not yet purchased,at fair value$248.2$384.0(1)As of March 31,2023 and September 30,2022,the Companys derivative contract volume for open positions was approximately 16.4 million and 13.3 millioncontracts,respectively.The Companys derivative contracts are principally held in its Commercial and Retail segments.The Company assists its Commercial segment clients inprotecting the value of their future production by entering into option or forward agreements with them on an OTC basis.The Company also provides itsCommercial segment clients with option products,including combinations of buying and selling puts and calls.In its Retail segment,the Companyprovides its retail clients with access to spot foreign exchange,precious metals trading,as well as contracts for a difference(“CFDs”)and spread bets,where permitted.The Company mitigates its risk by generally offsetting the clients transaction simultaneously with one of the Companys tradingcounterparties or will offset that transaction with a similar but not identical position on the exchange.The risk mitigation of these offsetting trades is notwithin the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC.These derivative contracts are traded alongwith cash transactions because of the integrated nature of the markets for these products.The Company manages the risks associated with derivatives on anaggregate basis along with the risks associated with its proprietary trading and market-making activities in cash instruments as part of its firm-wide riskmanagement policies.In particular,the risks related to derivative positions may be partially offset by inventory,unrealized gains in inventory or cashcollateral paid or received.Hedging ActivitiesThe Company uses interest rate derivatives,in the form of swaps,to hedge risk related to variability in overnight rates.These hedges are designated cashflow hedges,through which the Company mitigates uncertainty in its interest income by converting floating-rate interest income to fixed-rate interestincome.While the swaps mitigate interest rate risk,they do introduce credit risk,which is the possibility that the Companys trading counterparty fails tomeet its obligation.The Company minimizes this risk by entering into its swaps with highly-rated,multi-national institutions.In addition to credit risk,there is market risk associated with the swap positions.The Companys market risk is limited,because any amounts the Company must pay from(1)(1)(1)(1)15Table of Contentshaving exchanged variable interest will be funded by the variable interest the Company receives on its deposits.As of March 31,2023,the Companyshedges will all have matured by approximately 2 years from the end of the current period.The Company also uses foreign currency derivatives,in the form of forward contracts,to hedge risk related to the variability in exchange rates relative tocertain of the Companys non-USD expenditures.These hedges are designated cash flow hedges,through which the Company mitigates variability inexchange rates by exchanging foreign currency for USD at fixed exchange rates at a pre-determined future date,or several cash flows at several pre-determined future dates.While the forward contracts mitigate exchange rate variability risk,they do introduce credit risk,which is the possibility that theCompanys trading counterparty fails to meet its obligation.The Company minimizes this risk by entering into its forward contracts with highly-rated,multi-national institutions.These hedges will all mature within 2 years from the end of the current period.The Company assesses the effectiveness of its hedges at each reporting period to identify any required reclassifications into current earnings.During thethree months ended March 31,2023 and 2022,the Company did not designate any portion of its hedges as ineffective and thus did not have any values incurrent earnings related to ineffective hedges.The fair values of derivative instruments designated for hedging held as of March 31,2023 andSeptember 30,2022 are as follow:March 31,2023September 30,2022(in millions)Balance Sheet LocationFair ValueFair ValueAsset DerivativesDerivatives designated as hedging instruments:Interest rate contractsFinancial instruments owned,net$1.8$Foreign currency forward contractsFinancial instruments owned,net2.9 Total derivatives designated as hedging instruments$4.7$Derivative assets expected to be released from Other comprehensive income into current earnings:Foreign currency forward contracts$0.5$Total expected to be released from Other comprehensive income into earnings$0.5$Liability DerivativesDerivatives designated as hedging instruments:Interest rate contractsFinancial instruments sold,not yet purchased$38.4$48.8 Foreign currency forward contractsFinancial instruments sold,not yet purchased0.1 21.8 Total derivatives designated as hedging instruments$38.5$70.6 Derivative liabilities expected to be released from Other comprehensive income into current earnings:Interest rate contracts$32.7$9.7 Foreign currency forward contracts 8.9 Total expected to be released from Other comprehensive income into earnings$32.7$18.6 The notional values of derivative instruments designated for hedging held as of March 31,2023 and September 30,2022 are as follow:March 31,2023September 30,2022(in millions)Notional ValueNotional ValueDerivatives designated as hedging instruments:Interest rate contracts$2,000.0$1,500.0 Foreign currency forward contracts:Foreign currency forward contracts to purchase Polish Zloty:Local currencyz156.1 z USD$33.2$Foreign currency forward contracts to purchase British Pound Sterling:Local currency168.0 168.0 USD$206.8$207.3 16Table of ContentsThe Condensed Consolidated Income Statement effects of derivative instruments designated for hedging held for the three and six months ended March 31,2023 and 2022 are as follows:(in millions)Income Statement LocationThree Months Ended March31,2023Six Months Ended March 31,2023Total amounts in income related to hedgesInterest rate contractsInterest income$(11.6)$(17.0)Foreign currency forward contractsCompensation and benefits0.7 0.5 Total derivatives designated as hedging instruments$(10.9)$(16.5)Loss on cash flow hedging relationships:Amount of loss reclassified from accumulated other comprehensive income intoincome$(10.9)$(16.5)Amount of gain reclassified from accumulated other comprehensive income intoincome as a result of a forecasted transaction that is no longer probable ofoccurring$(in millions)Income Statement LocationThree Months Ended March31,2022Six Months Ended March 31,2022Total amounts in income related to hedgesInterest rate contractsInterest Income$1.6$1.7 Total derivatives designated as hedging instruments$1.6$1.7 Gain on cash flow hedging relationships:Amount of gain reclassified from accumulated other comprehensive income intoincome$1.6$1.7 Amount of gain reclassified from accumulated other comprehensive income intoincome as a result of a forecasted transaction that is no longer probable ofoccurring$The accumulated other comprehensive income effects of derivative instruments designated for hedging held for three and six months ended March 31,2023and 2022 are as follow:Three Months Ended March 31,2023(in millions)Amount of Gain Recognized in OtherComprehensive Income on Derivatives,net of taxLocation of amount Reclassified fromAccumulated Other ComprehensiveIncome into IncomeAmount Reclassified from AccumulatedOther Comprehensive Income into IncomeDerivatives in Cash Flow Hedging Relationships:Interest rate contracts$10.6 Interest Income$(11.6)Foreign currency forward contracts3.7 Compensation and benefits0.7 Total$14.3$(10.9)Six Months Ended March 31,2023(in millions)Amount of Gain Recognized in OtherComprehensive Income on Derivatives,net of tax Location of Gain Reclassified fromAccumulated Other ComprehensiveIncome into IncomeAmount Reclassified from AccumulatedOther Comprehensive Income into IncomeDerivatives in Cash Flow Hedging Relationships:Interest rate contracts$9.2 Interest Income$(17.0)Foreign currency forward contracts19.8 Compensation and benefits0.5 Total$29.0$(16.5)Three Months Ended March 31,2022(in millions)Amount of Gain/(loss)Recognized inOther Comprehensive Income onDerivatives,net of taxLocation of amount Reclassified fromAccumulated Other ComprehensiveIncome into IncomeAmount Reclassified from AccumulatedOther Comprehensive Income into IncomeDerivatives in Cash Flow Hedging Relationships:Interest rate contracts$18.1 Interest Income$1.6 Total$18.1$1.6 17Table of ContentsSix Months Ended March 31,2022(in millions)Amount of Loss Recognized in OtherComprehensive Income on Derivatives,net of tax Location of Gain Reclassified fromAccumulated Other ComprehensiveIncome into IncomeAmount of Gain Reclassified fromAccumulated Other ComprehensiveIncome into IncomeDerivatives in Cash Flow Hedging Relationships:Interest rate contracts$18.2 Interest Income$1.7 Total$18.2$1.7 The following table sets forth the Companys net gains/(losses)related to derivative financial instruments for the three and six months ended March 31,2023 and 2022 in accordance with the Derivatives and Hedging Topic of the ASC.The net gains/(losses)set forth below are included in Principal gains,net and Cost of sales of physical commodities in the Condensed Consolidated Income Statements.Three Months Ended March 31,Six Months Ended March 31,(in millions)2023202220232022Commodities$147.8$135.2$202.0$182.9 Foreign exchange(72.8)56.7(24.0)92.5 Interest rate,equities,and indices25.6 27.4 33.9 52.8 TBA and forward settling securities(14.1)94.1(37.1)92.0 Net gains from derivative contracts$86.5$313.4$174.8$420.2 Credit RiskIn the normal course of business,the Company purchases and sells financial instruments,commodities and foreign currencies as either a principal or agenton behalf of its clients.If either the client or counterparty fails to perform,the Company may be required to discharge the obligations of the nonperformingparty.In such circumstances,the Company may sustain a loss if the fair value of the financial instrument,commodity,or foreign currency is different fromthe contract value of the transaction.The majority of the Companys transactions and,consequently,the concentration of its credit exposure are with commodity exchanges,clients,broker-dealers and other financial institutions.These activities primarily involve collateralized and uncollateralized arrangements and may result in credit exposurein the event that a counterparty fails to meet its contractual obligations.The Companys exposure to credit risk can be directly impacted by volatilefinancial markets,which may impair counterparties ability to satisfy contractual obligations.The Company seeks to control its credit risk through a varietyof reporting and control procedures,including establishing credit and/or position limits based upon a review of the counterparties financial condition andcredit ratings.The Company monitors collateral levels on a daily basis for compliance with regulatory and internal guidelines and requests changes incollateral levels as appropriate.The Company is a party to financial instruments in the normal course of its business through client and proprietary trading accounts in exchange-traded andOTC derivative instruments.These instruments are primarily the result of the execution of orders for commodity futures,options on futures,OTC swapsand options and spot and forward foreign currency contracts on behalf of its clients,substantially all of which are transacted on a margin basis.Suchtransactions may expose the Company to significant credit risk in the event that margin requirements are not sufficient to fully cover losses which clientsmay incur.The Company controls the risks associated with these transactions by requiring clients to maintain margin deposits in compliance withindividual exchange regulations and internal guidelines.The Company monitors required margin levels daily,and therefore,may require clients to depositadditional collateral or reduce positions when necessary.The Company also establishes credit limits for clients,which are monitored daily.The Companyevaluates each clients creditworthiness on a case by case basis.Clearing,financing,and settlement activities may require the Company to maintain fundswith or pledge securities as collateral with other financial institutions.Generally,these exposures to both clients and exchanges are subject to masternetting,or client agreements,which reduce the exposure to the Company by permitting receivables and payables with such clients to be offset in the eventof a client default.Management believes that the margin deposits held as of March 31,2023 and September 30,2022 were adequate to minimize the risk ofmaterial loss that could be created by positions held at that time.Additionally,the Company monitors collateral fair value on a daily basis and adjustscollateral levels in the event of excess market exposure.Derivative financial instruments involve varying degrees of off-balance sheet market risk whereby changes in the fair values of underlying financialinstruments may result in changes in the fair value of the financial instruments in excess of the amounts reflected in the consolidated balance sheets.Exposure to market risk is influenced by a number of factors,including the relationships between the financial instruments and the Companys positions,aswell as the volatility and liquidity in the markets in which the financial instruments are traded.The principal risk components of financial instrumentsinclude,among other things,interest rate volatility,the duration of the underlying instruments and changes in commodity pricing and foreign18Table of Contentsexchange rates.The Company attempts to manage its exposure to market risk through various techniques.Aggregate market limits have been establishedand market risk measures are routinely monitored against these limits.Note 5 Allowance for Doubtful AccountsThe allowance for doubtful accounts related to deposits with and receivables from broker-dealers,clearing organizations,and counterparties was$0.1million as of March 31,2023 and$1.4 million as of September 30,2022.The allowance for doubtful accounts related to receivables from clients was$48.7million and$46.4 million as of March 31,2023 and September 30,2022,respectively.The Company had no allowance for doubtful accounts related tonotes receivable as of March 31,2023 and September 30,2022.Activity in the allowance for doubtful accounts for the six months ended March 31,2023 was as follows:(in millions)Balance as of September 30,2022$47.8 Provision for bad debts1.3 Allowance charge-offs(0.3)Balance as of March 31,2023$48.8 Note 6 Physical Commodities InventoryThe Companys inventories consist of finished physical commodities as shown below.(in millions)March 31,2023September 30,2022Physical Ag&Energy$240.1$223.6 Precious metals-held by broker-dealer subsidiary111.5 136.3 Precious metals-held by non-broker-dealer subsidiaries220.5 153.6 Physical commodities inventory,net$572.1$513.5 Physical Ag&Energy consists of agricultural commodity inventories,including corn,soybeans,wheat,dried distillers grain,canola,sorghum,coffee,cocoa,cotton,and others.Agricultural inventories have reliable,readily determinable and realizable market prices,have relatively insignificant costs ofdisposal and are available for immediate delivery.Physical Ag&Energy also includes energy related inventories,including primarily propane,gasoline,and kerosene.The Company records changes to these values in Cost of sales of physical commodities on the Condensed Consolidated Income Statements.Note 7 GoodwillGoodwill allocated to the Companys operating segments is as follows:(in millions)March 31,2023September 30,2022Commercial$33.8$32.6 Institutional9.8 9.8 Retail5.8 5.8 Global Payments10.0 10.0 Total Goodwill$59.4$58.2(1)(1)19Table of ContentsNote 8 Intangible AssetsThe gross and net carrying values of intangible assets as of the balance sheet dates,by major intangible asset class are as follows(in millions):March 31,2023September 30,2022Gross AmountAccumulated AmortizationNet AmountGross AmountAccumulated AmortizationNet AmountIntangible assets subject to amortizationTrade/domain names$4.1$(2.0)$2.1$3.7$(1.6)$2.1 Software programs/platforms28.6(23.9)4.7 28.3(19.4)8.9 Client and supplier base38.1(21.1)17.0 29.5(18.0)11.5 Total intangible assets subject to amortization70.8(47.0)23.8 61.5(39.0)22.5 Intangible assets not subject to amortizationWebsite domains2.0 2.0 1.8 1.8 Business licenses3.7 3.7 3.7 3.7 Total intangible assets not subject to amortization5.7 5.7 5.5 5.5 Total intangible assets$76.5$(47.0)$29.5$67.0$(39.0)$28.0 Amortization expense related to intangible assets was$4.1 million and$3.7 million for the three months ended March 31,2023 and 2022,respectively.Amortization expense related to intangible assets was$8.0 million and$7.4 million for the six months ended March 31,2023 and March 31,2022,respectively.As of March 31,2023,the estimated future amortization expense was as follows:(in millions)Fiscal 2023(remaining six months)$6.3 Fiscal 20246.8 Fiscal 20253.6 Fiscal 20262.8 Fiscal 2027 and thereafter4.3 Total intangible assets subject to amortization$23.8 Note 9 Credit FacilitiesCommitted Credit FacilitiesThe Company has four committed credit facilities,including a senior secured term loan,under which the Company and its subsidiaries may borrow up to$1,130.0 million,subject to the terms and conditions for these facilities.The amounts outstanding under these credit facilities carry variable rates ofinterest,thus approximating fair value.The Companys committed credit facilities consist of the following:A three-year first-lien senior secured syndicated loan facility is available to the Company for general working capital requirements and capitalexpenditures.This$475.0 million revolving credit facility matures April 21,2025.An unsecured syndicated committed line of credit under which$180.0 million is available to the Companys wholly owned subsidiary,StoneXFinancial Inc.,to provide short-term funding of margin to commodity exchanges.The line of credit is subject to annual review and its continuedavailability is subject to StoneX Financial Inc.s financial condition and operating results continuing to be satisfactory as set forth in the relevantagreement.This facility was amended during the period to increase the amount available from$75.0 million to$180.0 million and extend thematurity to December 11,2023.A$400.0 million syndicated committed borrowing facility available to the Companys wholly owned subsidiary,StoneX Commodity SolutionsLLC,to finance commodity financing arrangements and commodity repurchase agreements.The facility is secured by the assets of StoneXCommodity Solutions LLC and guaranteed by the Company.An unsecured syndicated committed borrowing facility under which$75.0 million is available to the Companys wholly owned subsidiary,StoneXFinancial Ltd.,for short-term funding of margin to commodity exchanges.This facility was amended to extend its maturity to October 14,2023.The facility is guaranteed by the Company.20Table of ContentsUncommitted Credit FacilitiesThe Company has access to certain uncommitted financing agreements that support its ordinary course securities and commodities inventories.Theagreements are subject to certain borrowing terms and conditions.Note Payable to BankIn December 2020,the Company obtained a$9.0 million loan from a commercial bank,secured by equipment purchased with the proceeds.The note ispayable in monthly installments,with the final payment due during December 2025.The note bears interest at a rate per annum equal to the Index rate,asdefined in the agreement,plus 2.35%.Senior Secured NotesOn June 11,2020,the Company completed the issuance and sale of$350 million in aggregate principal amount of the Companys 8.625%Senior SecuredNotes due 2025(the“Notes”)at the offering price of 98.5%of the aggregate principal amount.During June 2021,the Company redeemed$1.6 millionprincipal amount of outstanding Notes,for 103%of the principal amount,plus accrued and unpaid interest.The Company used the proceeds from theissuance of the Notes to fund the consideration for the acquisition of Gain Capital Holdings,Inc.,to pay acquisition related costs,and to fund theredemption of the amount of Gains notes outstanding at acquisition.The Notes will mature on June 15,2025.Interest on the Notes accrues at a rate of 8.625%per annum and is payable semiannually in arrears on June 15 andDecember 15 of each year,commencing on December 15,2020.In connection with issuing the Notes,the Company incurred debt issuance costs of$9.5 million,which are being amortized over the term of the Notes under the effective interest method.The following table sets forth a listing of credit facilities,the current committed amounts as of the report date on the facilities,and outstanding borrowingson the facilities,as well as indebtedness on a promissory note and the Notes as of the periods indicated:(in millions)Amounts OutstandingBorrowerSecurityRenewal/Expiration DateTotal CommitmentMarch 31,2023September 30,2022Committed Credit FacilitiesSenior StoneX Group Inc.Committed CreditFacility-Revolving Line of Credit(1)April 21,2025$475.0$312.5(5)$260.0 StoneX Financial Inc.NoneDecember 11,2023180.0 (5)StoneX Commodity Solutions LLCCertain commodities assetsJuly 28,2024400.0 221.1(5)217.0 StoneX Financial Ltd.NoneOctober 14,202375.0 (5)$1,130.0$533.6$477.0 Uncommitted Credit FacilitiesVarious19.9(5)Note Payable to BankCertain equipment7.8(5)8.1 Senior Secured Notes(2)340.6(3),(4)339.1 Total outstanding borrowings$901.9$824.2(1)The StoneX Group Imitted credit facility is secured by substantially all of the assets of StoneX Group Inc.and certain subsidiaries identified in the credit facilityagreement as obligors,and pledged equity of certain subsidiaries identified in the credit facility as limited guarantors.(2)The Notes and the related guarantees are secured by liens on substantially all of the Companys and the guarantors assets,subject to certain customary and otherexceptions and permitted liens.The liens on the assets that secure the Notes and the related guarantees are contractually subordinated to the liens on the assets that secure theCompanys and the guarantors existing and future first lien secured indebtedness,including indebtedness under the Companys senior committed credit facility.(3)Amounts outstanding under the Notes are reported net of unamortized original issue discount of$7.4 million and$8.8 million,in the respective periods presented.(4)Included in Senior secured borrowings,net on the Condensed Consolidated Balance Sheets.(5)Included in Lenders under loans on the Condensed Consolidated Balance Sheets.As reflected above,some of the Companys committed credit facilities are scheduled to expire during the next twelve months following the quarterly periodended March 31,2023.The Company intends to renew or replace the other facilities as they expire,and based on the Companys liquidity position andcapital structure,the Company believes it will be able to do so.21Table of ContentsThe Companys credit facility agreements contain financial covenants relating to financial measures on a consolidated basis,as well as on a certain stand-alone subsidiary basis,including minimum tangible net worth,minimum regulatory capital,minimum net unencumbered liquid assets,maximum net loss,minimum fixed charge coverage ratio and maximum funded debt to net worth ratio.Failure to comply with these covenants could result in the debtbecoming payable on demand.As of March 31,2023,the Company was in compliance with all of its financial covenants under its credit facilities.Note 10 Securities and Commodity Financing TransactionsThe Companys repurchase agreements and securities borrowing and lending arrangements are generally recorded at cost in the Condensed ConsolidatedBalance Sheets,which is a reasonable approximation of their fair values due to their short-term nature.Secured borrowing and lending arrangements areentered into to obtain collateral necessary to effect settlement,finance inventory positions,meet customer needs or re-lend as part of our dealer operations.The fair value of securities loaned and borrowed is monitored daily compared with the related payable or receivable,and additional collateral or returningexcess collateral is requested,as appropriate.These arrangements may serve to limit credit risk resulting from our transactions with our counterparties.Financial instruments are pledged as collateral under repurchase agreements,securities lending agreements and other secured arrangements,includingclearing arrangements.Agreements with counterparties generally contain contractual provisions allowing counterparties the right to sell or repledgecollateral.Either the Company or its counterparties may require additional collateral.All collateral is held by the Company or a custodian.The following tables set forth the carrying value of repurchase agreements,and securities lending agreements by remaining contractual maturity(inmillions):March 31,2023Overnight and OpenLess than 30 Days30-90 DaysOver 90 DaysTotalSecurities sold under agreements to repurchase$7,237.3$1,564.1$1,492.4$38.3$10,332.1 Securities loaned764.5 764.5 Gross amount of secured financing$8,001.8$1,564.1$1,492.4$38.3$11,096.6 September 30,2022Overnight and OpenLess than 30 Days30-90 DaysOver 90 DaysTotalSecurities sold under agreements to repurchase$3,664.7$2,279.1$186.3$3.4$6,133.5 Securities loaned1,189.5 1,189.5 Gross amount of secured financing$4,854.2$2,279.1$186.3$3.4$7,323.0 Offsetting of Collateralized TransactionsThe following table sets forth the carrying value of repurchase agreements and securities lending agreements by class of collateral pledged(in millions):Securities sold under agreements to repurchaseMarch 31,2023September 30,2022U.S.Treasury obligations$4,777.7$1,311.0 U.S.government agency obligations476.0 604.1 Asset-backed obligations54.8 178.0 Agency mortgage-backed obligations4,651.0 3,762.5 Foreign government obligations124.1 97.2 Corporate bonds248.5 180.7 Total securities sold under agreement to repurchase$10,332.1$6,133.5 Securities loanedEquity securities$764.5$1,189.5 Total securities loaned764.5 1,189.5 Gross amount of secured financing$11,096.6$7,323.0 The following tables provide the netting of securities purchased under agreements to resell,securities sold under agreements to repurchase,securitiesborrowed and securities loaned as of the periods indicated(in millions):22Table of ContentsMarch 31,2023Offsetting of collateralized transactions:Gross Amounts RecognizedAmounts Offset in the CondensedConsolidated Balance SheetNet Amounts Presented in theCondensed Consolidated BalanceSheetSecurities purchased under agreements to resell$7,932.2$(5,309.0)$2,623.2 Securities borrowed$753.7$753.7 Securities sold under agreements to repurchase$10,332.1$(5,309.0)$5,023.1 Securities loaned$764.5$764.5 September 30,2022Offsetting of collateralized transactions:Gross Amounts RecognizedAmounts Offset in the CondensedConsolidated Balance SheetNet Amounts Presented in theCondensed Consolidated BalanceSheetSecurities purchased under agreements to resell$4,609.9$(2,937.9)$1,672.0 Securities borrowed$1,209.8$1,209.8 Securities sold under agreements to repurchase$6,133.5$(2,937.9)$3,195.6 Securities loaned$1,189.5$1,189.5 The Company pledges securities owned as collateral in both tri-party and bilateral arrangements.Pledged securities under tri-party arrangements may notbe repledged or sold by the Companys counterparties,whereas bilaterally pledged securities may be.The approximate fair value of pledged securities thatcan be sold or repledged by the Companys counterparties has been parenthetically disclosed on the Condensed Consolidated Balance Sheets.The Company receives securities as collateral under reverse repurchase agreements,securities borrowed agreements,and margin securities held on behalfof counterparties.This collateral is used by the Company to cover financial instruments sold,not yet purchased;to obtain financing in the form ofrepurchase agreements;and to meet counterparties needs under lending arrangement and matched-booked trading strategies.Additional securitiescollateral is obtained as necessary to ensure such transactions are adequately collateralized.In many instances,the Company is permitted by contract torepledge the securities received as collateral,which may include pledges to cover collateral requirements for tri-party repurchase agreements.The following table sets forth the carrying value of collateral pledged,received and repledged(in millions):March 31,2023September 30,2022Securities pledged or repledged to cover collateral requirements for tri-party arrangements$4,824.6$3,787.8 Securities received as collateral that may be repledged$8,832.5$5,836.1 Securities received as collateral that may be repledged covering securities sold short$2,005.2$1,615.3 Repledged securities borrowed and client securities held under custodial clearing arrangements to collateralize securities loanedagreements$754.9$1,146.0 Note 11 Commitments and ContingenciesContingenciesIn November 2018,balances in approximately 300 client accounts of the FCM division of the Companys wholly owned subsidiary,StoneX Financial Inc.,declined below required maintenance margin levels and into deficit balances,primarily as a result of significant and unexpected price fluctuations in thenatural gas markets.All positions in these accounts,which were managed by OptionS Inc.(“OptionSellers”),an independent CommodityTrading Advisor(“CTA”),were liquidated in accordance with StoneX Financial Inc.s client agreements and obligations under market regulationstandards.A CTA is registered with the U.S.Commodity Futures Trading Commission(“CFTC”)and a member of,and subject to audit by,the National FuturesAssociation(“NFA”).OptionSellers was registered under a CFTC Rule 4.7 exemption for providing services only to“qualified eligible persons,”whichrequires the account holders authorizing OptionSellers to act as their CTA to meet or exceed certain minimum financial requirements.OptionSellers,in itsrole as a CTA,had been granted by each of its clients full discretionary authority to manage the trading in the clients accounts,while StoneX Financial Inc.acted solely as the clearing firm in its role as the FCM.23Table of ContentsStoneX Financial Inc.s client agreements hold account holders liable for all losses in their accounts and obligate the account holders to reimburse StoneXFinancial Inc.for any deficits in their accounts.As of March 31,2023,the receivable from these client accounts,net of collections and other allowabledeductions,was$22.0 million,with no individual account receivable exceeding$1.4 million.As of March 31,2023,the allowance against theseuncollected balances was$6.7 million.The Company is pursuing collection of the uncollected balances through arbitration proceedings against the accountholders.The Company will consider developments in these proceedings,and any other relevant matters,in determining whether any changes in theallowance against the uncollected balances are required.In these and other arbitration proceedings,clients are seeking damages from StoneX Financial Inc.related to the trading losses in their accounts.During thesix months ended March 31,2023,the Company reached privately negotiated settlements of a number of arbitration proceedings,pursuant to which in mostcases the account holders agreed to pay all or a substantial portion of their outstanding deficit balances and in some cases the Company agreed to makecertain payments to the account holders that are not material to the Company,individually or in the aggregate.The Company intends to continue vigorouslypursuing claims through arbitration and settling cases in what the Company determines to be appropriate circumstances.The ultimate outcome ofremaining arbitrations cannot presently be determined.Depending on future collections and the outcomes of arbitration proceedings,any provisions for bad debts and actual losses may or may not be material tothe Companys financial results.However,the Company believes that the likelihood of a material adverse outcome is remote,and does not currentlybelieve that any potential losses related to this matter would impact its ability to comply with its ongoing liquidity,capital,and regulatory requirements.Legal ProceedingsFrom time to time and in the ordinary course of business,the Company is involved in various legal actions and proceedings,including tort claims,contractual disputes,employment matters,workers compensation claims and collections.The Company carries insurance that provides protection againstcertain types of claims,up to the relevant policys limits.As of March 31,2023 and September 30,2022,the Condensed Consolidated Balance Sheets include loss contingency accruals which are not material,individually or in the aggregate,to the Companys financial position or liquidity.In the opinion of management,possible exposure from loss contingenciesin excess of the amounts accrued,is not likely to be material to the Companys earnings,financial position or liquidity.Other than the updates provided within Contingencies,above,there have been no material changes to the legal actions and proceedings compared toSeptember 30,2022.Contractual CommitmentsSelf-InsuranceThe Company self-insures its costs related to medical and dental claims.The Company is self-insured,up to a stop loss amount,for eligible participatingemployees and retirees,and for qualified dependent medical and dental claims,subject to deductibles and limitations.As of March 31,2023,the Companyhad$1.4 million accrued for self-insured medical and dental claims included in Accounts payable and other accrued liabilities in the CondensedConsolidated Balance Sheet.Note 12 Accumulated Other Comprehensive Loss,NetComprehensive income consists of net income and other gains and losses affecting stockholders equity that,under U.S.GAAP,are excluded from netincome.Other comprehensive income includes net actuarial losses from defined benefit pension plans,foreign currency translation adjustments,and cashflow hedge gains or losses.See notes 1 and 4 for additional information on cash flow hedges.The following table summarizes the changes in accumulated other comprehensive loss,net for the six months ended March 31,2023.(in millions)Foreign CurrencyTranslation AdjustmentPension BenefitsAdjustmentCash Flow HedgeAccumulated OtherComprehensive Loss,netBalances as of September 30,2022$(34.4)$(2.7)$(53.5)$(90.6)Other comprehensive income,net of tax11.4 29.0 40.4 Balances as of March 31,2023$(23.0)$(2.7)$(24.5)$(50.2)24Table of ContentsNote 13 Revenue from Contracts with ClientsThe Company accounts for revenue earned from contracts with clients for services such as the execution,clearing,brokering,and custody of futures andoptions on futures contracts,OTC derivatives,and securities,investment management,and underwriting services in accordance with FASB ASC 606,Revenues from Contracts with Customers(Topic 606).Revenues for these services are recognized when the performance obligations related to theunderlying transaction are completed.Revenues are recognized when control of the promised goods or services are transferred to clients,in an amount that reflects the consideration theCompany expects to be entitled to in exchange for those goods or services.Revenues are analyzed to determine whether the Company is the principal(i.e.reports revenue on a gross basis)or agent(i.e.,reports revenues on a net basis)in the contract.Principal or agent designations depend primarily on thecontrol an entity has over the good or service before control is transferred to a client.The indicators of which party exercises control include primaryresponsibility over performance obligations,inventory risk before the good or service is transferred,and discretion in establishing the price.Topic 606 does not apply to revenues associated with dealing,or market-making,activities in financial instruments or contracts in the capacity of aprincipal,including derivative sales contracts which result in physical settlement and interest income.Revenues within the scope of Topic 606 are presented within Commission and clearing fees and Consulting,management,and account fees on theCondensed Consolidated Income Statements.Revenues that are not within the scope of Topic 606 are presented within Sales of physical commodities,Principal gains,net,and Interest income on the Condensed Consolidated Income Statements.Three Months Ended March 31,Six Months Ended March 31,(in millions)2023202220232022Revenues from contracts with clients as a percentage of total revenues5.7%5.9%6.4%6.2%Table of ContentsThe following table represents a disaggregation of the Companys total revenues separated between revenues from contracts with clients and other sourcesof revenue for the periods indicated.Three Months Ended March 31,Six Months Ended March 31,(in millions)2023202220232022Revenues from contracts with clients:Commission and clearing fees:Sales-based:Exchange-traded futures and options$55.3$57.7$104.0$102.3 OTC derivative brokerage4.5 4.9 8.1 9.3 Equities and fixed income15.6 17.1 31.0 31.7 Mutual funds0.9 1.2 1.5 2.4 Insurance and annuity products2.7 2.4 4.5 5.2 Other1.1 0.9 2.2 1.7 Total sales-based commission80.1 84.2 151.3 152.6 Trailing:Mutual funds3.1 3.6 6.1 7.5 Insurance and annuity products3.5 4.2 7.0 8.6 Total trailing commission6.6 7.8 13.1 16.1 Clearing fees40.0 40.6 76.0 77.0 Trade conversion fees2.0 4.0 4.4 6.0 Other2.0 1.8 3.9 3.0 Total commission and clearing fees130.7 138.4 248.7 254.7 Consulting,management,and account fees:Underwriting fees0.1 0.1 0.3 0.3 Asset management fees11.1 11.4 21.8 22.0 Advisory and consulting fees9.0 7.5 17.7 15.0 Sweep program fees12.9 0.5 24.3 1.0Client account fees3.7 4.3 7.5 8.0 Other3.9 1.6 8.9 3.2 Total consulting,management,and account fees40.7 25.4 80.5 49.5 Sales of physical commodities:Precious metals sales746.4 807.0 1,535.0 1,587.3 Total revenues from contracts with clients$917.8$970.8$1,864.2$1,891.5 Method of revenue recognition:Point-in-time$878.2$943.6$1,787.3$1,837.4 Time elapsed39.6 27.2 76.9 54.1 Total revenues from contracts with clients917.8 970.8 1,864.2 1,891.5 Other sources of revenuesPhysical precious metals trading13,703.1 14,211.3 24,182.1 26,526.6 Physical agricultural and energy product trading1,056.7 845.9 2,192.5 1,669.2 Principal gains,net256.6 323.5 510.8 574.6 Interest income226.8 31.2 423.0 62.2 Total revenues$16,161.0$16,382.7$29,172.6$30,724.1 Total revenues by primary geographic region:United States$1,471.1$1,204.6$3,034.7$2,329.3 Europe912.0 933.6 1,827.0 1,818.2 South America56.5 23.6 118.7 41.3 Middle East and Asia13,720.0 14,218.5 24,186.3 26,530.7 Other1.4 2.4 5.9 4.6 Total revenues$16,161.0$16,382.7$29,172.6$30,724.1 Operating revenues by primary geographic region:United States$538.5$364.5$1,028.4$668.6 Europe105.5 131.3 207.0 239.0 South America32.0 23.6 63.5 41.3 Middle East and Asia27.1 23.0 54.5 41.8 Other1.3 2.3 5.8 4.5 Total operating revenues$704.4$544.7$1,359.2$995.2 26Table of ContentsThe substantial majority of the Companys performance obligations for revenues from contracts with clients are satisfied at a point in time and are typicallycollected from clients by debiting their accounts with the Company.Commission and clearing fee revenue and consulting,management,and account fees revenue are primarily related to the Commercial,Institutional andRetail reportable segments.Principal gains,net are contributed by all of the Companys reportable segments.Interest income is primarily related to theCommercial and Institutional reportable segments.Precious metals trading and agricultural and energy product trading revenues are primarily related to theCommercial reportable segment.Precious metals sales that are recognized on a point-in-time basis are included in the Retail and the Commercial reportablesegmentsPrincipal gains,net also includes dividend income on long equity positions and dividend expense on short equity positions,which are recognized on the ex-dividend date.The following table indicates the relevant income and expense:Three Months Ended March 31,Six Months Ended March 31,(in millions)2023202220232022Dividend income on long equity positions$3.2$26.3$17.4$87.5 Dividend expense on short equity positions4.1 25.5 17.3 77.9 Dividend(loss)/income,net reported within Principal Gains,net$(0.9)$0.8$0.1$9.6 Remaining Performance ObligationsRemaining performance obligations are services that the Company has committed to perform in the future in connection with its contracts with clients.TheCompanys remaining performance obligations are generally related to its risk management consulting and asset management contracts with clients.Revenues associated with remaining performance obligations related to these contracts with clients are not material to the overall consolidated results of theCompany.For the Companys asset management activities,where fees are calculated based on a percentage of the fair value of eligible assets in clientsaccounts,future revenue associated with remaining performance obligations cannot be determined as such fees are subject to fluctuations in the fair valueof eligible assets in clients accounts.Note 14 Other ExpensesOther expenses consisted of the following,for the periods indicated.Three Months Ended March 31,Six Months Ended March 31,(in millions)2023202220232022Non-income taxes$2.2$5.5$6.9$9.1 Insurance3.0 3.0 5.7 5.4 Employee related expenses2.3 1.8 5.9 4.0 Other direct business expenses4.1 2.9 8.1 4.4 Membership fees1.1 1.1 1.9 1.8 Director and public company expenses0.5 0.6 1.0 1.0 Office expenses0.5 0.4 0.9 0.8 Other expenses1.6 1.6 4.3 2.3 Total other expenses$15.3$16.9$34.7$28.8 Note 15 Income TaxesThe income tax provision for interim periods comprises income tax on ordinary income/(loss)figures provided at the most recent estimated annualeffective income tax rate,adjusted for the income tax effect of discrete items.Management uses an estimated annual effective income tax rate based on theforecasted pretax income/(loss)and statutory tax rates in the various jurisdictions in which it operates.The Companys effective income tax rate differsfrom the U.S.statutory income tax rate primarily due to state and local taxes,global intangible low taxed income(“GILTI”),and differing statutory taxrates applied to the income of non-U.S.subsidiaries.The Company records the tax effect of certain discrete items,including the effects of changes in taxlaws,tax rates and adjustments with respect to valuation allowances or other unusual or nonrecurring tax adjustments,in the interim period in which theyoccur,as an addition to,or reduction from,the income tax provision,rather than being included in the estimated effective annual income tax rate.Inaddition,jurisdictions with a projected loss for the year or a year-to-date loss where no income tax benefit can be recognized are excluded from theestimated annual effective income tax rate.Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and arestated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.The Company is required to assess its deferred tax assets andthe need for a valuation allowance at each reporting period.This27Table of Contentsassessment requires judgment on the part of management with respect to benefits that may be realized.The Company will record a valuation allowanceagainst deferred tax assets when it is considered more likely than not that all or a portion of the deferred tax assets will not be realized.Current and Prior Period Tax ExpenseIncome tax expense of$15.8 million and$23.4 million for the three months ended March 31,2023 and 2022,respectively,and income tax expense of$34.8 million and$34.2 million for the six months ended March 31,2023 and 2022,respectively,reflects estimated federal,foreign,state and local incometaxes.The Companys effective tax rate was 27%for the three months ended March 31,2023 and 2022.The effective tax rate was higher than the U.S.federalstatutory rate of 21%due to U.S.state and local taxes,GILTI,U.S.and foreign permanent differences,and the amount of foreign earnings taxed at higherrates.Note 16 Regulatory Capital Requirements The Companys activities are subject to significant governmental regulation,both in the U.S.and in the international jurisdictions in which it operates.Subsidiaries of the Company were in compliance with all of their regulatory requirements as of March 31,2023.The following table details thosesubsidiaries with minimum regulatory requirements in excess of$10.0 million along with the actual balance maintained as of that date.(in millions)As of March 31,2023SubsidiaryRegulatory AuthorityActualMinimum RequirementStoneX Financial Inc.SEC and CFTC$394.7$228.8 StoneX Financial Ltd.Financial Conduct Authority(“FCA”)$493.1$358.0 Gain Capital Group,LLCCFTC and NFA$54.3$29.3 StoneX Financial Pte.Ltd.Monetary Authority of Singapore(MAS)$65.9$17.8 StoneX Markets LLCCFTC and NFA$211.3$121.4 Certain other subsidiaries of the Company,typically with a minimum requirement less than$10.0 million,are also subject to net capital requirementspromulgated by authorities in the countries in which they operate.As of March 31,2023,all of the Companys subsidiaries were in compliance with theirlocal regulatory requirements.Note 17-AcquisitionsCotton Distributors Inc.On October 31,2022,the Companys wholly owned subsidiary,StoneX Netherlands B.V.,acquired CDI-Societe Cotonniere De Distribution S.A(“CDI”),based in Switzerland.CDI operates a global cotton merchant business with clients and producers in Brazil and West Africa as well as buyers throughoutAsia.The purchase price is approximately$42.7 million,which is based on CDIs estimated acquisition date tangible book value as defined by the terms ofthe purchase agreement and based on Swiss accounting practices,and an earn-out payment due to the seller.The earn-out value is determined by CDIsperformance with respect to certain contracts entered into before the acquisition date and settling after the closing date.During the three months ended March 31,2023,CDI contributed$(1.7)million of Net operating revenue and$(4.1)million of Net loss.During the sixmonths ended March 31,2023,CDI contributed$12.3 million of Net operating revenue and$5.1 million of Net income.The measurement period for the CDI acquisition remains open as the Company finalizes certain valuation calculations related to intangible assets,nettangible asset value adjustments,the fair values of forward contracts and other derivatives,as well as the earn-out due to the seller.The gain on acquisitionwas principally due to the fair value of commodity forward purchases and sales contracts and fair value of identified intangible assets acquired exceedingthe consideration paid for these assets.28Table of Contents(in millions)Fair ValueCash and cash equivalents$8.2 Deposits with and receivables from broker-dealers,clearing organizations,and counterparties7.7Receivables from clients,net51.9Financial instruments owned,at fair value45.7Deferred income taxes,net(3.3)Property and equipment,net0.1Physical commodities inventory,net22.5Other assets6.7Total fair value of tangible assets acquired139.5Accounts payable and other accrued liabilities40.0Financial instruments sold,not yet purchased,at fair value28.3Payables to lenders under loans10.1Payable to broker-dealers,clearing organizations,and counterparties0.4Payable to clients2.6Income taxes payable0.8Total fair value of tangible liabilities assumed82.2Fair value of tangible net assets acquired$57.3 Identifiable intangible assets acquiredClient relationships$4.7 Supplier relationships3.7Trade name0.4Non-compete0.1Total fair value of intangible assets acquired8.9Fair value of identifiable net assets acquired66.2Total merger consideration42.7Gain on acquisition$23.5 Incomm S.A.S.On February 3,2023,the Companys subsidiary StoneX Commodity Solutions LLC executed a sale and purchase agreement to acquire all of theoutstanding shares of Incomm S.A.S.(“Incomm”),a company duly incorporated and in existence according with the laws of Colombia.This transactionwas effective on the closing date of February 3,2023.Incomm was established to support the import of grain and feed products for Colombian clients,andis a proven resource in management of customs clearing,inventory management at destination ports and providing non-recourse trade finance fordestination buyers via local Colombian banks.The purchase price consists of$0.2 million of cash consideration and also includes a contingent earn-out valued at approximately$1.3 million with annualpayments over the four years following the acquisition.The contingent earn-out payments are variable in nature,as they equal a percentage of the acquiredbusiness lines pre-tax profits,as defined in the purchase agreement.The business activities of Incomm will be assigned to the Companys Commercialreportable segment.The acquisition generated$1.3 million of Goodwill.Note 18 Segment AnalysisThe Companys operating segments are principally based on the nature of the clients we serve(commercial,institutional,and retail),and a fourth operatingsegment,its global payments business.The Company manages its business in this manner due to its large global footprint,in which it has more than 3,800employees allowing it to serve clients in more than 180 countries.The Companys business activities are managed as operating segments and organized into reportable segments as follows:CommercialInstitutionalRetailGlobal PaymentsCommercialThe Company offers commercial clients a comprehensive array of products and services,including risk management and hedging services,execution andclearing of exchange-traded and OTC products,voice brokerage,market intelligence and29Table of Contentsphysical trading,as well as commodity financing and logistics services.The ability to provide these high-value-added pro
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 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 Number 001-38769The Cigna Group(Exact name of registrant as specified in its charter)Delaware82-4991898(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)900 Cottage Grove RoadBloomfield,Connecticut 06002(Address of principal executive offices)(Zip Code)(860)226-6000(Registrants telephone number,including area code)Not Applicable(Former name,former address and former fiscal year,if changed since last report)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock,Par Value$0.01CINew York Stock Exchange,Inc.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 the preceding 12 months(or for suchshorter 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 NoIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes NoIndicate 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 definitions oflarge accelerated filer,accelerated filer,smaller reporting company,and emerging growth company in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standardsprovided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes NoAs of April 28,2023,295,872,231 shares of the issuers common stock were outstanding.THE CIGNA GROUPTABLE OF CONTENTSPagePART IFINANCIAL INFORMATIONItem 1.Financial Statements(Unaudited)3Consolidated Statements of Income3Consolidated Statements of Comprehensive Income4Consolidated Balance Sheets5Consolidated Statements of Changes in Total Equity6Consolidated Statements of Cash Flows7Notes to the Consolidated Financial Statements8Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations35Item 3.Quantitative and Qualitative Disclosures About Market Risk50Item 4.Controls and Procedures51PART IIOTHER INFORMATIONItem 1.Legal Proceedings52Item 1A.Risk Factors52Item 2.Unregistered Sales of Equity Securities and Use of Proceeds52Item 5.Other Information52Item 6.Exhibits53SIGNATURE54As used herein,the Company refers to one or more of The Cigna Group and its consolidated subsidiaries.Part I.FINANCIAL INFORMATIONItem 1.FINANCIAL STATEMENTSThe Cigna GroupConsolidated Statements of IncomeUnauditedThree Months Ended March 31,(In millions,except per share amounts)20232022 RevenuesPharmacy revenues$32,144$30,697 Premiums11,025 10,356 Fees and other revenues3,071 2,539 Net investment income277 414 TOTAL REVENUES46,517 44,006 Benefits and expensesPharmacy and other service costs31,459 29,813 Medical costs and other benefit expenses9,046 8,272 Selling,general and administrative expenses3,538 3,275 Amortization of acquired intangible assets459 458 TOTAL BENEFITS AND EXPENSES44,502 41,818 Income from operations2,015 2,188 Interest expense and other(358)(299)Net realized investment losses(56)(322)Income before income taxes1,601 1,567 TOTAL INCOME TAXES295 355 Net income1,306 1,212 Less:Net income attributable to noncontrolling interests39 15 SHAREHOLDERS NET INCOME$1,267$1,197 Shareholders net income per shareBasic$4.28$3.76 Diluted$4.24$3.73 Amounts have been restated to reflect the adoption of Targeted Improvements to the Accounting for Long-Duration Contracts in 2023.See Note 2 to the Consolidated Financial Statements for further information.The accompanying Notes to the Consolidated Financial Statements(unaudited)are an integral part of these statements.(1)(1)3The Cigna GroupConsolidated Statements of Comprehensive IncomeUnauditedThree Months Ended March 31,(In millions)20232022 Net income$1,306$1,212 Other comprehensive income(loss),net of taxNet unrealized appreciation(depreciation)on securities and derivatives194(843)Net long-duration insurance and contractholder liabilities measurement adjustments(331)459 Net translation gains(losses)on foreign currencies16(63)Postretirement benefits liability adjustment10 13 Other comprehensive loss,net of tax(111)(434)Total comprehensive income1,195 778 Comprehensive income(loss)attributable to noncontrolling interestsNet income attributable to redeemable noncontrolling interests34 3 Net income attributable to other noncontrolling interests5 12 Other comprehensive loss attributable to redeemable noncontrolling interests(2)Total comprehensive income attributable to noncontrolling interests39 13 SHAREHOLDERS COMPREHENSIVE INCOME$1,156$765 Amounts have been restated to reflect the adoption of Targeted Improvements to the Accounting for Long-Duration Contracts in 2023.See Note 2 to the Consolidated Financial Statements for further information.The accompanying Notes to the Consolidated Financial Statements(unaudited)are an integral part of these statements.(1)(1)4The Cigna GroupConsolidated Balance SheetsUnauditedAs ofMarch 31,As ofDecember 31,(In millions)20232022 AssetsCash and cash equivalents$7,935$5,924 Investments914 905 Accounts receivable,net17,704 17,218 Inventories4,211 4,777 Other current assets1,263 1,298 Total current assets32,027 30,122 Long-term investments19,010 16,288 Reinsurance recoverables5,286 5,416 Property and equipment3,837 3,774 Goodwill45,811 45,811 Other intangible assets32,102 32,492 Other assets2,563 2,704 Separate account assets7,340 7,278 TOTAL ASSETS$147,976$143,885 LiabilitiesCurrent insurance and contractholder liabilities$7,166$5,409 Pharmacy and other service costs payable17,609 17,070 Accounts payable7,360 7,775 Accrued expenses and other liabilities9,174 7,978 Short-term debt3,418 2,993 Total current liabilities44,727 41,225 Non-current insurance and contractholder liabilities11,790 11,976 Deferred tax liabilities,net7,707 7,786 Other non-current liabilities2,692 2,766 Long-term debt29,124 28,100 Separate account liabilities7,340 7,278 TOTAL LIABILITIES103,380 99,131 Contingencies Note 16Redeemable noncontrolling interests78 66 Shareholders equityCommon stock 4 4 Additional paid-in capital30,332 30,233 Accumulated other comprehensive loss(1,769)(1,658)Retained earnings38,841 37,940 Less:Treasury stock,at cost(22,906)(21,844)TOTAL SHAREHOLDERS EQUITY44,502 44,675 Other noncontrolling interests16 13 Total equity44,518 44,688 Total liabilities and equity$147,976$143,885 Amounts have been restated to reflect the adoption of Targeted Improvements to the Accounting for Long-Duration Contracts in 2023.See Note 2 to the Consolidated Financial Statements for further information.Par value per share,$0.01;shares issued,399 million as of March 31,2023 and 398 million as of December 31,2022;authorized shares,600 million.The accompanying Notes to the Consolidated Financial Statements(unaudited)are an integral part of these statements.(1)(2)(1)(2)5The Cigna GroupConsolidated Statements of Changes in Total EquityUnauditedThree Months Ended March 31,2023(In millions)Common StockAdditional Paid-in CapitalAccumulated OtherComprehensive(Loss)RetainedEarningsTreasury StockShareholders EquityOther Non-controllingInterestsTotal EquityRedeemableNoncontrolling InterestsBalance at December 31,2022,as retrospectively restated$4$30,233$(1,658)$37,940$(21,844)$44,675$13$44,688$66 Effect of issuing stock for employee benefit plans99(104)(5)(5)Other comprehensive loss(111)(111)(111)Net income1,267 1,267 5 1,272 34 Common dividends declared(per share:$1.23)(366)(366)(366)Repurchase of common stock(958)(958)(958)Other transactions impacting noncontrolling interests(2)(2)(22)Balance at March 31,2023$4$30,332$(1,769)$38,841$(22,906)$44,502$16$44,518$78 Three Months Ended March 31,2022(In millions)Common StockAdditional Paid-in CapitalAccumulated OtherComprehensive(Loss)RetainedEarningsTreasury StockShareholders EquityOther Non-controllingInterestsTotal EquityRedeemableNoncontrolling InterestsBalance at December 31,2021,as retrospectively restated 4 29,574(1,068)32,623(14,175)46,958 18 46,976 54 Effect of issuing stock for employee benefit plans162(72)90 90 Other comprehensive loss(432)(432)(432)(2)Net income1,197 1,197 12 1,209 3 Common dividends declared(per share:$1.12)(356)(356)(356)Repurchase of common stock(1,334)(1,334)(1,334)Other transactions impacting noncontrolling interests (8)(8)Balance at March 31,2022$4$29,736$(1,500)$33,464$(15,581)$46,123$22$46,145$55 Amounts have been restated to reflect the adoption of Targeted Improvements to the Accounting for Long-Duration Contracts in 2023.See Note 2 to the Consolidated Financial Statements to the Consolidated Financial Statements for furtherinformation.The accompanying Notes to the Consolidated Financial Statements(unaudited)are an integral part of these statements.(1)(1)(1)(1)6The Cigna GroupConsolidated Statements of Cash FlowsUnauditedThree Months Ended March 31,(In millions)20232022 Cash Flows from Operating ActivitiesNet income$1,306$1,212 Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization749 717 Realized investment losses,net56 322 Deferred income tax benefit(108)(134)Net changes in assets and liabilities,net of non-operating effects:Accounts receivable,net(479)(983)Inventories566 222 Reinsurance recoverable and Other assets72 584 Insurance liabilities1,533 142 Pharmacy and other service costs payable539(74)Accounts payable and Accrued expenses and other liabilities690 85 Other,net104(63)NET CASH PROVIDED BY OPERATING ACTIVITIES5,028 2,030 Cash Flows from Investing ActivitiesProceeds from investments sold:Debt securities and equity securities196 757 Investment maturities and repayments:Debt securities and equity securities257 456 Commercial mortgage loans4 65 Other sales,maturities and repayments(primarily short-term and other long-term investments)160 479 Investments purchased or originated:Debt securities and equity securities(2,794)(1,246)Commercial mortgage loans(59)Other(primarily short-term and other long-term investments)(377)(425)Property and equipment purchases,net(408)(288)Divestitures,net of cash sold22(57)Other,net(43)(6)NET CASH USED IN INVESTING ACTIVITIES(2,983)(324)Cash Flows from Financing ActivitiesDeposits and interest credited to contractholder deposit funds45 43 Withdrawals and benefit payments from contractholder deposit funds(48)(49)Net change in short-term debt(9)(463)Repayment of long-term debt(80)Net proceeds on issuance of long-term debt1,491 Repurchase of common stock(962)(1,368)Issuance of common stock30 93 Common stock dividend paid(368)(357)Other,net(136)(70)NET CASH USED IN FINANCING ACTIVITIES(37)(2,171)Effect of foreign currency rate changes on cash,cash equivalents and restricted cash5(23)Net increase(decrease)in cash,cash equivalents and restricted cash2,013(488)Cash,cash equivalents and restricted cash January 1,5,976 5,548 Cash,cash equivalents and restricted cash,March 31,7,989 5,060 Cash and cash equivalents reclassified to Assets of businesses held for sale(591)Cash,cash equivalents and restricted cash March 31,per Consolidated Balance Sheets$7,989$4,469 Supplemental Disclosure of Cash Information:Income taxes paid,net of refunds$77$43 Interest paid$322$308 Amounts have been restated to reflect the adoption of Targeted Improvements to the Accounting for Long-Duration Contracts in 2023.See Note 2 to the Consolidated Financial Statements for further information.Includes$425 million reported in Assets of businesses held for sale as of January 1,2022.Restricted cash and cash equivalents were reported in other long-term investments.The accompanying Notes to the Consolidated Financial Statements(unaudited)are an integral part of these statements.(1)(2)(3)(1)(2)(3)7THE CIGNA GROUPNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)TABLE OF CONTENTSNote NumberFootnotePageBUSINESS AND CAPITAL STRUCTURE1Description of Business92Summary of Significant Accounting Policies93Accounts Receivable,Net114Supplier Finance Program115Mergers,Acquisitions and Divestitures116Earnings Per Share127Debt138Common and Preferred Stock14INSURANCE INFORMATION9Insurance and Contractholder Liabilities1510Reinsurance20INVESTMENTS11Investments2112Fair Value Measurements2413Variable Interest Entities2814Accumulated Other Comprehensive Income(Loss)29COMPLIANCE,REGULATION AND CONTINGENCIES15Income Taxes3016Contingencies and Other Matters30RESULTS DETAILS17Segment Information328Note 1 Description of BusinessThe Cigna Group,together with its subsidiaries(either individually or collectively referred to as the Company,we,us or our),is a global health company with a mission of helping those weserve improve their health and vitality.Our subsidiaries offer a differentiated set of pharmacy,medical,behavioral,dental and related products and services.The majority of these products are offered through employers and other groups such as governmental and non-governmental organizations,unions and associations.Cigna Healthcare also offerscommercial health and dental insurance and Medicare products to individuals in the United States and selected international markets.In addition to these ongoing operations,The Cigna Group also hascertain run-off operations.A full description of our segments follows:Evernorth Health Services includes a broad range of coordinated and point solution health services and capabilities,as well as those from partners across the health care system,in Pharmacy Benefits,Home Delivery Pharmacy,Specialty Pharmacy,Distribution and Care Delivery and Management Solutions,which are provided to health plans,employers,government organizations and health careproviders.Cigna Healthcare includes the U.S.Commercial,U.S.Government and International Health operating segments which provide comprehensive medical and coordinated solutions to clients andcustomers.U.S.Commercial products and services include medical,pharmacy,behavioral health,dental and other products and services for insured and self-insured clients.U.S.Government solutionsinclude Medicare Advantage,Medicare Supplement and Medicare Part D plans for seniors and individual health insurance plans.International Health solutions include health care coverage in ourinternational markets,as well as health care benefits for globally mobile individuals and employees of multinational organizations.Other Operations comprises the remainder of our business operations,which includes ongoing businesses and exited businesses.Our ongoing businesses include continuing business(corporate-owned life insurance(COLI)and our run-off businesses.Our run-off businesses include(i)variable annuity reinsurance business(also referred to as guaranteed minimum death benefit(GMDB)and guaranteed minimum income benefit(GMIB)business)that was effectively exited through reinsurance with Berkshire Hathaway Life Insurance Company of Nebraska(Berkshire)in 2013,(ii)settlement annuity business,and(iii)individual life insurance and annuity and retirement benefits businesses comprised of deferred gains from the sales of these businesses.Our exited businessesinclude our interest in a joint venture in Trkiye,which was sold in December 2022 and the international life,accident and supplemental benefits businesses sold in July 2022(the Chubbtransaction).Corporate reflects amounts not allocated to operating segments,including net interest expense(defined as interest on corporate debt less net investment income on investments not supporting segmentand other operations),certain litigation matters,expense associated with our frozen pension plans,charitable contributions,operating severance,certain overhead and enterprise-wide project costs andintersegment eliminations for products and services sold between segments.Note 2 Summary of Significant Accounting Policies Basis of PresentationThe Consolidated Financial Statements include the accounts of The Cigna Group and its consolidated subsidiaries.Intercompany transactions and accounts have been eliminated in consolidation.These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America(GAAP).Certain amounts in prior years havebeen reclassified to conform to the current year presentation.Amounts recorded in the Consolidated Financial Statements necessarily reflect managements estimates and assumptions about medical costs,investment and receivable valuations,interest rates andother factors.Significant estimates are discussed throughout these Notes;however,actual results could differ from those estimates.The impact of a change in estimate is generally included in earningsin the period of adjustment.These interim Consolidated Financial Statements are unaudited but include all adjustments(including normal recurring adjustments)necessary,in the opinion of management,for a fair statement offinancial position and results of operations for the periods reported.The interim Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statementsand Notes included in the 2022 Annual Report on Form 10-K(2022 Form 10-K).The preparation of interim Consolidated Financial Statements necessarily relies heavily on estimates.This and otherfactors,including the seasonal nature of portions of the health care and related benefits business,as well as competitive and other market conditions,call for caution in estimating full-year resultsbased on interim results of operations.9Recent Accounting PronouncementsThe Companys 2022 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted or may impact our financial statements in the future.The followinginformation provides updates on recently adopted accounting pronouncements that have occurred since the Company filed its 2022 Form 10-K.There are no accounting pronouncements not yetadopted as of March 31,2023.Targeted Improvements to the Accounting for Long-Duration Contracts(LDTI),Accounting Standards Update(ASU)2018-12 and related amendmentsThe Cigna Group adopted LDTI January 1,2023,which includes the following key provisions:Changes to the measurement of the future policy benefits liability for traditional and limited-pay insurance contracts:Assumptions used to measure cash flows(such as mortality,morbidity and lapse assumptions)are updated at least annually with the effect of changes in those assumptionsremeasured retrospectively and reflected in current period net income.Discount rate assumptions are updated quarterly based on market-level yields for low credit risk fixed income instruments(upper-medium grade fixed-income instrument),withany changes reflected in other comprehensive income.The upper-medium grade fixed-income instrument yield is interpreted to mean A-rated.Deferred policy acquisition costs(DAC)related to long-duration insurance contracts are amortized on a constant-level basis over the expected term of the related contracts.Other relateddeferred or capitalized balances(such as unearned revenue liability and value of business acquired)may use this simplified amortization method.Market risk benefits(MRB),defined as protecting the contractholder from other-than-nominal capital market risk and exposing the insurer to that risk,are measured at fair value,withchanges in fair value recognized in net income each period,except for the effect of the Companys change in nonperformance risk(own credit risk),which is recognized in othercomprehensive income.Additional disclosures,including disaggregated roll forwards for the liability for future policy benefits,market risk benefits,separate account liabilities and DAC,as well as information aboutsignificant inputs,judgments,assumptions and methods used in measurement.The transition methods applied at adoption were:The liability for future policy benefits was remeasured using a modified retrospective approach applied to all outstanding contracts as of the beginning of the earliest period presentedand was recognized in the opening balance of retained earnings.The impact of remeasuring the future policy benefits liability for the discount rate was recorded through accumulatedother comprehensive income.DAC followed the transition method used for future policyholder benefits.Market risk benefits were remeasured at fair value at the beginning of the earliest period presented.The difference between this fair value and carrying value was recognized in theopening balance of retained earnings,excluding the effect of the Companys change in nonperformance risk(own credit risk),which is recognized in accumulated othercomprehensive income.Effects of adoption:The new guidance applies to our long-duration insurance products predominantly within the Cigna Healthcare segment and Other Operations.The cumulative effects of adopting the new standard were immaterial.The impacts were a decrease to January 1,2021 Shareholders equity of$139 million and an increase to Shareholdersnet income for the year ended December 31,2022 and December 31,2021 of$36 million and$5 million,respectively.The corresponding impact to diluted earnings per share was an increaseof$0.11 and$0.02 for the year ended December 31,2022 and December 31,2021,respectively.The prior periods within our Consolidated Statements of Income,Consolidated Statements of Comprehensive Income,Consolidated Balance Sheets,Consolidated Statements of Changes inTotal Equity and Consolidated Statements of Cash Flows were restated to conform to the current presentation.Prior period balances in the Companys footnote disclosures have been updated to reflect adjustments resulting from the adoption of this standard.Refer to Note 9 to the ConsolidatedFinancial Statements for the Companys updated accounting policies.It is possible that our income recognition pattern could change on a prospective basis for several reasons:Applying periodic assumption updates,versus the locked-in model,may change our timing of profit or loss recognition.10DAC amortization is on a constant level basis over the expected term of the related contracts and no longer tied to the emergence of profit on such contracts.Additionally,in December 2022,the Financial Accounting Standards Board(FASB)published ASU 2022-05,which simplified the retrospective adoption of LDTI by permitting companies to makean accounting policy election to exclude contracts that are sold and removed from the balance sheet prior to the effective date of the standard from the retrospective adoption of LDTI.The CignaGroup made this policy election for the contracts sold in the Chubb transaction and our divested interest in a joint venture in Trkiye.Note 3 Accounts Receivable,NetThe following amounts were included within Accounts receivable,net:(In millions)March 31,2023December 31,2022Noninsurance customer receivables$7,845$6,899 Pharmaceutical manufacturers receivables7,128 7,108 Insurance customer receivables2,467 2,963 Other receivables264 248 Total$17,704$17,218 These receivables are reported net of our allowances of$2.1 billion as of March 31,2023 and$1.9 billion as of December 31,2022.These allowances include contractual allowances for certainrebates receivable with pharmaceutical manufacturers and certain receivables from third-party payors,discounts and claims adjustments issued to customers in the form of client credits,an allowancefor current expected credit losses and other non-credit adjustments.The Companys allowance for current expected credit losses was$87 million as of March 31,2023 and$86 million as of December 31,2022.Note 4 Supplier Finance ProgramThe Company facilitates a voluntary supplier finance program(the program)that provides suppliers the opportunity to sell their receivables due from us(i.e.,our payment obligations to thesuppliers)to a financial institution,on a non-recourse basis,in order to be paid earlier than our payment terms require.The Cigna Group is not a party to the program and agrees to commercial termswith its suppliers independently of their participation in the program.Amounts due to suppliers that participate in the program are generally paid within one month following the invoice date.Asuppliers participation in the program has no impact on the Companys payment terms and the Company has no economic interest in a suppliers decision to participate in the program.The suppliers,at their sole discretion,determine which invoices,if any,to sell to the financial institution.No guarantees or pledged assets are provided by the Company or any of our subsidiaries under the program.As of March 31,2023 and December 31,2022,$1.5 billion and$1.3 billion,respectively,of the Companys outstanding payment obligations were confirmed as valid within the program by thefinancial institution and reflected in Accounts payable in the Consolidated Balance Sheets.The amounts confirmed as valid for both periods are predominately associated with one supplier.We havebeen informed by the financial institution that$324 million as of March 31,2023 of the Companys outstanding payment obligations were voluntarily elected by suppliers to be sold to the financialinstitution under the program.Note 5 Mergers,Acquisitions and DivestituresA.Divestiture of International BusinessesIn July 2022,the Company completed the sale of its life,accident and supplemental benefits businesses in six countries(Hong Kong,Indonesia,New Zealand,South Korea,Taiwan and Thailand)(theChubb transaction)for approximately$5.4 billion in cash.The Company recognized a gain of$1.7 billion pre-tax($1.4 billion after-tax),which includes recognition of previously unrealized capitallosses on investments sold and translation loss on foreign currencies.In December 2022,the Company also divested its ownership interest in a joint venture in Trkiye.B.Integration and Transaction-related CostsIn 2023 and 2022,the Company incurred net costs mainly related to the Chubb transaction.In the first three months of 2022,the Company also incurred net costs related to the sale of the GroupDisability and Life business and acquisition of MDLIVE.These net11costs were$1 million pre-tax($1 million after-tax)for the three months ended March 31,2023 and$52 million pre-tax($37 million after-tax)for the three months ended March 31,2022.These costsconsisted primarily of certain projects to separate or integrate the Companys systems,products and services,fees for legal,advisory and other professional services and certain employment-relatedcosts.Note 6 Earnings Per ShareBasic and diluted earnings per share were computed as follows:Three Months EndedMarch 31,2023March 31,2022(Shares in thousands,dollars in millions,except per share amounts)BasicEffect ofDilutionDilutedBasicEffect ofDilutionDilutedShareholders net income$1,267$1,267$1,197$1,197 Shares:Weighted average295,706 295,706 318,487 318,487 Common stock equivalents3,293 3,293 2,795 2,795 Total shares295,706 3,293 298,999 318,487 2,795 321,282 Earnings per share$4.28$(0.04)$4.24$3.76$(0.03)$3.73 Amounts reflected above for the three months ended March 31,2022 have been restated to reflect the impact of adopting amended accounting guidance for long-duration insurance contracts(discussed in Note 2 to the Consolidated Financial Statements).The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect was anti-dilutive:Three Months Ended March 31,(In millions)20232022Anti-dilutive options0.9 2.8 The Company held approximately 102.7 million shares of common stock in treasury at March 31,2023,99.1 million shares as of December 31,2022 and 77.3 million shares as of March 31,2022.12Note 7 DebtThe outstanding amounts of debt,net of issuance costs,discounts or premiums,and finance leases were as follows:(In millions)March 31,2023December 31,2022Short-term debt$17 million,8.300%Notes due January 2023 17$63 million,7.650%Notes due March 2023 63$700 million,Floating Rate Notes due July 2023700 700$1,000 million,3.000%Notes due July 2023996 994$1,187 million,3.750%Notes due July 20231,187 1,186$500 million,0.613%Notes due March 2024499 Other,including finance leases36 33 Total short-term debt$3,418$2,993 Long-term debt$500 million,0.613%Notes due March 2024 499$1,000 million,3.500%Notes due June 2024992 990$900 million,3.250%Notes due April 2025878 872$2,200 million,4.125%Notes due November 20252,195 2,195$1,500 million,4.500%Notes due February 20261,503 1,503$800 million,1.250%Notes due March 2026797 797$700 million,5.685%Notes due March 2026697$1,500 million,3.400%Notes due March 20271,440 1,436$259 million,7.875bentures due May 2027259 259$600 million,3.050%Notes due October 2027597 597$3,800 million,4.375%Notes due October 20283,785 3,785$1,500 million,2.400%Notes due March 20301,492 1,492$1,500 million,2.375%Notes due March 2031 1,398 1,380$45 million,8.080%Step Down Notes due January 2033 45 45$800 million,5.400%Notes due March 2033794$190 million,6.150%Notes due November 2036190 190$2,200 million,4.800%Notes due August 20382,192 2,192$750 million,3.200%Notes due March 2040743 743$121 million,5.875%Notes due March 2041119 119$448 million,6.125%Notes due November 2041488 488$317 million,5.375%Notes due February 2042315 315$1,500 million,4.800%Notes due July 20461,466 1,466$1,000 million,3.875%Notes due October 2047989 989$3,000 million,4.900%Notes due December 20482,969 2,968$1,250 million,3.400%Notes due March 20501,236 1,236$1,500 million,3.400%Notes due March 20511,478 1,478 Other,including finance leases67 66 Total long-term debt$29,124$28,100 The Company has entered into interest rate swap contracts hedging a portion of these fixed-rate debt instruments.See Note 11 in the Companys 2022 Form 10-K for further information about the Companys interest rate risk management andthese derivative instruments.Interest rate step down to 8.080fective January 15,2023.Long-term debtDebt Issuance.On March 7,2023,the Company issued$1.5 billion of new senior notes.The proceeds of this issuance will be used for general corporate purposes,and may include repayment ofoutstanding debt securities.Interest on this debt is paid semi-annually.PrincipalMaturity DateInterest RateNet Proceeds$700 million March 15,20265.685%$698 million$800 million March 15,20335.400%$796 million Redeemable at any time discounted at the U.S.Treasury rate plus 20 basis points.Redeemable at par on or after March 15,2024.Redeemable at any time discounted at the U.S.Treasury rate plus 25 basis points.Redeemable at par on or after December 15,2032.(1)(1)(2)(1)(2)(1)(2)(1)(2)13Short-term and Credit Facilities DebtRevolving Credit Agreements.Our revolving credit agreements provide us with the ability to borrow amounts for general corporate purposes,including providing liquidity support if necessary underour commercial paper program discussed below.As of March 31,2023,The Cigna Group had a$3.0 billion five-year revolving credit and letter of credit agreement maturing in April 2027;a$1.0 billion three-year revolving credit agreementmaturing in April 2025;and a$1.0 billion 364-day revolving credit agreement maturing in April 2023.There were no outstanding balances under these revolving credit agreements as of March 31,2023.In April 2023,The Cigna Group entered into the following revolving credit agreements(the Credit Agreements),which replaced the agreements discussed above:a$4.0 billion five-year revolving credit and letter of credit agreement that will mature in April 2028 with an option to extend the maturity date for additional one-year periods,subject toconsent of the banks.The Company can borrow up to$4.0 billion under the credit agreement for general corporate purposes,with up to$500 million available for issuance of letters of credit.a$1.0 billion 364-day revolving credit agreement that will mature in April 2024.The Company can borrow up to$1.0 billion under the credit agreement for general corporate purposes.Thisagreement includes the option to term out any revolving loans that are outstanding at maturity by converting them into a term loan maturing on the one-year anniversary of conversion.Each of the Credit Agreements include an option to increase commitments in an aggregate amount of up to$1.5 billion across both facilities for a maximum total commitment of$6.5 billion.TheCredit Agreements allow for borrowings at either a base rate or an adjusted term Secured Overnight Funding Rate(SOFR)plus,in each case,an applicable margin based on the Companys seniorunsecured credit ratings.Each of the two facilities is diversified among 21 large commercial banks,all of which had an A-equivalent or higher rating by at least one Nationally Recognized Statistical Rating Organization as ofMarch 31,2023.Each facility also contains customary covenants and restrictions,including a financial covenant that the Companys leverage ratio,as defined in the Credit Agreements,may notexceed 60%subject to certain exceptions upon the consummation of an acquisition.Commercial Paper.Under our commercial paper program,we may issue short-term,unsecured commercial paper notes privately placed on a discounted basis through certain broker-dealers at anytime not to exceed an aggregate amount of$5.0 billion.Amounts available under the program may be borrowed,repaid and re-borrowed from time to time.The net proceeds of issuances have beenand are expected to be used for general corporate purposes.There was no commercial paper outstanding balance as of March 31,2023.Debt Covenants.The Company was in compliance with its debt covenants as of March 31,2023.Interest ExpenseInterest expense on long-term and short-term debt was$345 million for the three months ended March 31,2023 and$314 million for the three months ended March 31,2022.Note 8 Common and Preferred StockDividendsIn the first quarter of 2023,The Cigna Group declared quarterly cash dividends of$1.23 per share of the Companys common stock.In the first quarter of 2022,The Cigna Group declared quarterlycash dividends of$1.12 per share of the Companys common stock.The following table provides details of the Companys dividend payments:Record DatePayment DateAmount per ShareTotal Amount Paid(in millions)2023March 8,2023March 23,2023$1.23$3682022March 9,2022March 24,2022$1.12$357On April 26,2023,the Board of Directors declared the second quarter cash dividend of$1.23 per share of The Cigna Group common stock to be paid on June 22,2023 to shareholders of record onJune 7,2023.The Company currently intends to pay regular quarterly14dividends,with future declarations subject to approval by its Board of Directors and the Boards determination that the declaration of dividends remains in the best interests of The Cigna Group and itsshareholders.The decision of whether to pay future dividends and the amount of any such dividends will be based on the Companys financial position,results of operations,cash flows,capitalrequirements,the requirements of applicable law and any other factors the Board may deem relevant.Note 9 Insurance and Contractholder LiabilitiesA.Account Balances Insurance and Contractholder LiabilitiesThe Companys insurance and contractholder liabilities were comprised of the following:March 31,2023December 31,2022March 31,2022(In millions)CurrentNon-currentTotalCurrentNon-currentTotalTotalUnpaid claims and claim expensesCigna Healthcare$4,880$79$4,959$4,117$59$4,176$4,491 Other Operations97 175 272 107 177 284 744 Future policy benefitsCigna Healthcare59 542 601 43 544 587 681 Other Operations290 3,341 3,631 150 3,442 3,592 7,981 Contractholder deposit fundsCigna Healthcare12 151 163 14 157 171 181 Other Operations361 6,309 6,670 351 6,358 6,709 6,843 Market risk benefits48 1,172 1,220 51 1,217 1,268 1,558 Unearned premiums1,419 21 1,440 576 22 598 1,030 Total23,509Insurance and contractholder liabilities classified asLiabilities of businesses held for sale(4,562)Total insurance and contractholder liabilities$7,166$11,790$18,956$5,409$11,976$17,385$18,947 Amounts classified as Liabilities of businesses held for sale primarily include$3.7 billion of Future policy benefits,$0.4 billion of Unpaid claims and$0.4 billion of Unearned premiums as of March 31,2022.Insurance and contractholder liabilities expected to be paid within one year are classified as current.The Company adopted amended accounting guidance for long-duration insurance contracts onJanuary 1,2023,discussed further in Note 2 to the Consolidated Financial Statements,which resulted in restatement of prior period amounts.Additionally,see below updated accounting policies andincremental disclosures associated with future policy benefits(Note 9C),contractholder deposit funds(Note 9D),and market risk benefits(Note 9E).B.Unpaid Claims and Claim Expenses Cigna HealthcareThis liability reflects estimates of the ultimate cost of claims that have been incurred but not reported,including expected development on reported claims,those that have been reported but not yetpaid(reported claims in process)and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionalsand facilities.The total of incurred but not reported liabilities plus expected development on reported claims,including reported claims in process,was$4.6 billion at March 31,2023 and$4.2 billion at March 31,2022.(1)(1)15Activity,net of intercompany transactions,in the unpaid claims liability for the Cigna Healthcare segment was as follows:Three Months Ended(In millions)March 31,2023March 31,2022Beginning balance$4,176$4,261 Less:Reinsurance and other amounts recoverable221 261 Beginning balance,net3,955 4,000 Incurred costs related to:Current year9,041 8,024 Prior years(144)(276)Total incurred8,897 7,748 Paid costs related to:Current year5,316 4,634 Prior years2,795 2,822 Total paid8,111 7,456 Ending balance,net4,741 4,292 Add:Reinsurance and other amounts recoverable218 199 Ending balance$4,959$4,491 Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims of certain business for which the Companyadministers the plan benefits without any right of offset.See Note 10 to the Consolidated Financial Statements for additional information on reinsurance.Variances in incurred costs related to prior years unpaid claims and claim expenses that resulted from the differences between actual experience and the Companys key assumptions were as follows:Three Months EndedMarch 31,2023March 31,2022(Dollars in millions)$%$tual completion factors$1%$99 0.3%Medical cost trend143 0.5 177 0.6 Total favorable variance$144 0.5%$276 0.9%Percentage of current year incurred costs as reported for the year ended December 31,2022.Percentage of current year incurred costs as reported for the year ended December 31,2021.Favorable prior year development in both years reflects lower than expected utilization of medical services as compared to our assumptions.C.Future Policy BenefitsAccounting Policy.Future policy benefits represent the present value of estimated future obligations,estimated using actuarial methods,for long-term insurance policies and annuity productscurrently in force,consisting primarily of reserves for annuity contracts,life insurance benefits,and certain supplemental health products that are guaranteed renewable beyond one year.Contracts are grouped at a level no higher than issue year,based on the original contract issue date,and at lower levels of disaggregation within each issue year for certain businesses to reflect factorsincluding product type,plan type and currency.Management estimates these obligations based on assumptions for premiums,interest rates,mortality or morbidity,future claim adjudication expensesand surrenders.Mortality,morbidity and surrender assumptions are based on the Companys own experience and published actuarial tables,and are updated at least annually,to the extent changes incircumstances require.Interest rate assumptions are based on market-level yields for low credit risk fixed income instruments(upper-medium grade fixed-income instrument).For interest accretionpurposes,interest rates are fixed at the year of the cohorts inception,however for purposes of liability measurement,are updated to the current rate quarterly,with all changes in the interest rate frominception to current period reported through Accumulated other comprehensive loss.For contracts issued domestically,we use observable inputs from a published spot rate curve for terms up to 30years and extrapolate for longer terms using a constant forward rate approach.For contracts issued by foreign operating entities with functional currencies other than the U.S.dollar,we use observableinputs to approximate a risk free rate and add a credit spread adjustment to align with a low credit risk fixed income instrument.For terms beyond the last observable risk free rates,which vary byinternational market,we extrapolate to the ultimate forward rate assuming a constant credit spread.(1)(2)(1)(2)16For the annuity business,the premium paying period is shorter than the benefit coverage period,and a deferred profit liability(DPL)is reported in future policy benefits representing gross premiumreceived in excess of net premiums.DPL is amortized based on expected future benefit payments.Cigna HealthcareThe weighted average interest rates applied and duration for future policy benefits in the Cigna Healthcare segment,consisting primarily of supplemental health products including individual Medicaresupplement,limited benefit health products and individual private medical insurance,were as follows:As ofMarch 31,2023March 31,2022Interest accretion rate2.59%2.64%Current discount rate5.29%4.90%Weighted average duration8.05 years7.45 yearsThe net liability for future policy benefits for the segments supplemental health products represents the present value of benefits expected to be paid to policyholders,net of the present value ofexpected net premiums,which is the portion of expected future gross premium expected to be collected from policyholders that is required to provide for all expected future benefits and expenses.Thepresent values of expected net premiums and expected future policy benefits for the Cigna Healthcare segment are as follows:Three Months Ended(In millions)March 31,2023March 31,2022Present value of expected net premiumsBeginning balance$8,557$9,314 Reversal of effect of beginning of period discount rate assumptions1,537(367)Effect of assumption changes and actual variances from expected experience Issuances and lapses306 143 Net premiums collected(326)(310)Interest and other 56 46 Ending balance at original discount rate10,130 8,826 Effect of end of period discount rate assumptions(1,312)(376)Ending balance$8,818$8,450 Present value of expected policy benefitsBeginning balance$8,945$9,794 Reversal of effect of discount rate assumptions1,611(379)Effect of assumption changes and actual variances from expected experience Issuances and lapses307 215 Benefit payments(326)(385)Interest and other 58 52 Ending balance at original discount rate10,595 9,297 Effect of discount rate assumptions(1,378)(392)Ending balance$9,217$8,905 Liability for future policy benefits$399$455 Other202 226 Total liability for future policy benefits$601$681 Includes the foreign exchange rate impact of translating from transactional and functional currency to United States dollar and the impact of flooring the liability at zero.The flooring impact is calculated at the cohort level after discounting thereserves at the current discount rate.As of March 31,2023 and March 31,2022,respectively,undiscounted expected future gross premiums were$17.6 billion and$13.5 billion.As of March 31,2023 and March 31,2022,respectively,discounted expected future gross premiums were$12.5 billion and$10.7 billion.As of March 31,2023 and March 31,2022,respectively,undiscounted expected future policy benefits were$12.8 billion and$11.2 billion.The liability for future policyholder benefits includes immaterial businesses shown as reconciling items above,most of which are in run-off.$154 million and$171 million of reinsurance recoverable asset reported in the Consolidated Balance Sheets as of March 31,2023 and March 31,2022,respectively,relate to the liability for future policy benefits.(1)(2)(1)(3)(4)(5)(1)(2)(3)(4)(5)17Other OperationsThe weighted average interest rates applied and duration for future policy benefits in Other Operations,consisting of annuity and life insurance products,were as follows:As ofMarch 31,2023March 31,2022Interest accretion rate5.64%5.64%Current discount rate4.95%3.59%Weighted average duration11.7 years13.9 yearsObligations for annuities represent discounted periodic benefits to be paid to an individual or groups of individuals over their remaining lives.Other Operations traditional insurance contracts,whichare in run-off,have no premium remaining to be collected;therefore,future policy benefit reserves represent the present value of expected future policy benefits,discounted using the current discountrate and the remaining amortizable DPL.Future policy benefits for Other Operations includes DPL of$392 million as of March 31,2023 and$384 million as of March 31,2022.Future policy benefits excluding DPL,were$3.2 billion as ofboth March 31,2023 and December 31,2022 and$3.9 billion and$4.3 billion as of March 31,2022 and December 31,2021,respectively.These balances exclude amounts classified as Liabilities ofbusinesses held for sale of$3.7 billion as of March 31,2022 and$3.8 billion as of December 31,2021.The change in future policy benefits reserves year-to-date was primarily driven by changes inthe current discount rate.Undiscounted expected future policy benefits were$4.6 billion as of March 31,2023 and$4.7 billion as of March 31,2022.As of March 31,2023 and March 31,2022,$1.0 billion and$1.2 billion ofthe future policy benefit reserve was recoverable through treaties with external reinsurers.D.Contractholder Deposit FundsAccounting Policy.Liabilities for contractholder deposit funds primarily include deposits received from customers for investment-related and universal life products and investment earnings on theirfund balances in Other Operations.These liabilities are adjusted to reflect administrative charges and,for universal life fund balances,mortality charges.Interest credited on these funds is accruedratably over the contract period.Contractholder deposit fund liabilities within Other Operations were$6.7 billion as of both March 31,2023 and December 31,2022 and$6.8 billion and$6.9 billion as of March 31,2022 andDecember 31,2021,respectively.Approximately 39%of the balance is reinsured externally.Activity in these liabilities is presented net of reinsurance in the Consolidated Statements of Cash Flows.The net year-to-date decrease in contractholder deposit fund liabilities generally relates to withdrawals and benefit payments from contractholder deposit funds,partially offset by deposits and interestcredited to contractholder deposit funds.As of March 31,2023,the weighted average crediting rate,net amount at risk and cash surrender value for contractholder deposit fund liabilities not externally reinsured were 3.25%,$3.2 billion and$2.8 billion,respectively.The comparative amounts as of March 31,2022 were 3.18%,$3.5 billion and$2.9 billion,respectively.As of both March 31,2023 and March 31,2022,more than 99%ofthe$4.1 billion liability not reinsured externally is for contracts with guaranteed interest rates of 3%-4%,and approximately$1.2 billion represented contracts with policies at the guarantee.At bothof these same period ends,$1.2 billion was 50-150 bps above the guarantee and the remaining$1.7 billion represented contracts above the guarantee that pay the policyholder based on the greater of aguaranteed minimum cash value or the actual cash value.More than 90%of these contracts have actual cash values of at least 110%of the guaranteed cash value.E.Market Risk BenefitsLiabilities for market risk benefits consist of variable annuity reinsurance contracts(also referred to as GMDB and GMIB contracts)in Other Operations.These liabilities arise under annuities andriders to annuities written by ceding companies that guarantee the benefit received at death and,for a subset of policies,also provide contractholders the option,within 30 days of a policy anniversaryafter the appropriate waiting period,to elect minimum income payments.The Companys capital market risk exposure on variable annuity reinsurance contracts arises when the reinsured guaranteedminimum benefit exceeds the contractholders account value in the related underlying mutual funds at the time the insurance benefit is payable under the respective contract.The Company receivesand pays premium periodically based on the terms of the reinsurance agreements.Accounting Policy.Variable annuity reinsurance liabilities are measured as MRBs at fair value,net of nonperformance risk,with fluctuations in value gross of reinsurer nonperformance risk reportedin benefits expense while fluctuations in the Companys own18nonperformance risk(own credit risk)are reported in Accumulated other comprehensive loss.Nonperformance risk reflects risk that a party might default and therefore not fulfill its obligations(i.e.nonpayment risk).The nonperformance risk adjustment reflects a market participants view of nonpayment risk by adding an additional spread to the discount rate in the calculation of both(a)thevariable annuity reinsurance liabilities to be paid by the Company and(b)the variable annuity reinsurance assets to be paid by the reinsurers,after considering collateral.The Company classifiesvariable annuity assets and liabilities in Level 3 of the fair value hierarchy described in Note 12 to the Consolidated Financial Statements because assumptions related to future annuitant behavior arelargely unobservable.As discussed further in Note 10 to the Consolidated Financial Statements,due to the reinsurance agreements covering these liabilities,the liabilities do not generally impact netincome except for the change in nonperformance risk on the reinsurance recoverable,which is reported in benefits expense and does not offset the nonperformance risk valuation on the liability.Variable annuity liabilities are established using capital market assumptions and assumptions related to future annuitant behavior(including mortality,lapse and annuity election rates).Market risk benefits activity was as follows:Three Months Ended(Dollars in millions)March 31,2023March 31,2022Balance,beginning of year$1,268$1,824 Balance,beginning of year,before the effect of nonperformance risk(own credit risk)1,379 1,949 Changes due to expected run-off(6)(19)Changes due to capital markets versus expected(41)(271)Changes due to policyholder behavior versus expected6(9)Assumption changes(33)39 Balance,end of year,before the effect of changes in nonperformance risk(own credit risk)1,305 1,689 Nonperformance risk(own credit risk),end of period(85)(131)Balance,end of period$1,220$1,558 Reinsured market risk benefit,end of period$1,301$1,681 The following table presents the net amount at risk and the average attained age of contractholders(weighted by exposure)for contracts assumed by the Company.The net amount at risk is the amountthe Company would have to pay to contractholders if all deaths or annuitizations occurred as of the earliest possible date in accordance with the insurance contract.The Company should be reimbursedin full for these payments unless the Berkshire reinsurance limit is exceeded,as discussed further in Note 10 to the Consolidated Financial Statements.(Dollars in millions,excludes impact of reinsurance ceded)March 31,2023March 31,2022Net amount at risk$2,183$1,892 Average attained age of contractholders(weighted by exposure)75.4 years76.4 years19Note 10 ReinsuranceThe Companys insurance subsidiaries enter into agreements with other insurance companies to limit losses from large exposures and to permit recovery of a portion of incurred losses.Reinsurance isceded primarily in acquisition and disposition transactions when the underwriting company is not being acquired.Reinsurance does not relieve the originating insurer of liability.Therefore,reinsuredliabilities must continue to be reported along with the related reinsurance recoverables.The Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of itscredit risk.A.Reinsurance RecoverablesThe majority of the Companys reinsurance recoverables resulted from acquisition and disposition transactions in which the underwriting company was not acquired.The Company bears the risk ofloss if its reinsurers and retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company.The Company reviews its reinsurance arrangements and establishes reservesagainst the recoverables.The Companys reinsurance recoverables as of March 31,2023 are presented at amount due by range of external credit rating and collateral level in the following table,with reinsurance recoverablesthat are market risk benefits separately presented at fair value:(In millions)Fair value of collateralcontractually required to meetor exceed carrying value ofrecoverableCollateral provisions existthat may mitigate risk ofcredit loss No collateralTotalOngoing OperationsA-equivalent and higher current ratings$94$94 BBB-to BBB equivalent current credit ratings 59 59 Not rated142 5 63 210 Total recoverables related to ongoing operations 142 5 216 363 Acquisition,disposition or run-off activitiesBBB equivalent and higher current ratings Lincoln National Life and Lincoln Life&Annuity of New York 2,750 2,750 Empower Annuity Insurance Company 133 133 Prudential Insurance Company of America380 380 Life Insurance Company of North America 386 386 Other187 25 15 227 Not rated 9 3 12 Total recoverables related to acquisition,disposition or run-off activities567 3,170 151 3,888 Total reinsurance recoverables before market risk benefits$709$3,175$367$4,251 Allowance for uncollectible reinsurance(35)Market risk benefits 1,301 Total reinsurance recoverables$5,517 Certified by a Nationally Recognized Statistical Rating Organization(NRSRO).Includes$231 million of current reinsurance recoverables that are reported in Other current assets.Includes collateral provisions requiring the reinsurer to fully collateralize its obligation if its external credit rating is downgraded to a specified level.Total Berkshire and certain Other recoverables reflected under acquisition,disposition or run-off activities in the Companys 2022 Form 10-K that relate to the Companys variable annuity reinsurance products discussed in section B below arenow reported at fair market value as MRBs,as further discussed in Note 9 to the Consolidated Financial Statements.At December 31,2022,we reported$711 million related to these recoverables related to the GMDB variable annuity reinsuranceproduct.The restated December 31,2022 variable annuity reinsurance recoverable balance is$1.4 billion,which also includes the GMIB variable annuity reinsurance product that was classified in Other assets prior to the adoption of LDTI.Collateral levels are defined internally based on the fair value of the collateral relative to the carrying amount of the reinsurance recoverable,the frequency at which collateral is required to bereplenished and the potential for volatility in the collaterals fair value.B.Effective Exit of Variable Annuity Reinsurance BusinessThe Company entered into an agreement with Berkshire to effectively exit the variable annuity reinsurance business via a reinsurance transaction in 2013.Variable annuity contracts are accounted foras assumed and ceded reinsurance and categorized as market risk(3)(1)(1)(2)(1)(4)(2)(1)(2)(3)(4)20benefits as discussed in Note 9 to the Consolidated Financial Statements.Berkshire reinsured 100%of the Companys future cash flows in this business,net of other reinsurance arrangements existingat that time.The reinsurance agreement is subject to an overall limit with approximately$3.1 billion remaining at March 31,2023.As a result of the reinsurance transaction,reserve increases are offsetby a corresponding increase in the recorded reinsurance recoverable,provided the increased recoverable remains within the overall Berkshire limit.(In millions)Reinsurer March 31,2023December 31,2022Collateral and Other Terms at March 31,2023Berkshire$1,043$1,116 90%were secured by assets in a trust.Sun Life Assurance Company of Canada117 115 Liberty Re(Bermuda)Ltd.128 128 100%were secured by assets in a trust.SCOR SE35 39 70%were secured by a letter of credit.Market risk benefits$1,323$1,398 All reinsurers are rated A-equivalent and higher by an NRSRO.Includes IBNR and outstanding claims of$25 million offset by premium due of$3 million.These amounts are excluded from market risk benefits at March 31,2023 in Note 9 and Note 10A to the Consolidated Financial Statements.AtDecember 31,2022,IBNR and outstanding claims of$27 million offset by premium due of$3 million were excluded from the market risk benefits as restated due to the adoption of LDTI.The impact of nonperformance risk(i.e.the risk that a counterparty might default)on the variable annuity reinsurance asset was immaterial for the three months ended March 31,2023 and March 31,2022.Note 11 InvestmentsThe Cigna Groups investment portfolio consists of a broad range of investments including debt securities,equity securities,commercial mortgage loans,policy loans,other long-term investments,short-term investments and derivative financial instruments.The sections below provide more detail regarding our investment balances and realized investment gains and losses.See Note 12 to theConsolidated Financial Statements for information about the valuation of the Companys investment portfolio.Further information about our accounting policies for investment assets can be found inNote 11 in the Companys 2022 Form 10-K.The following table summarizes the Companys investments by category and current or long-term classification:March 31,2023December 31,2022(In millions)CurrentLong-termTotalCurrentLong-termTotalDebt securities$616$9,293$9,909$654$9,218$9,872 Equity securities51 3,069 3,120 45 577 622 Commercial mortgage loans106 1,501 1,607 67 1,547 1,614 Policy loans 1,211 1,211 1,218 1,218 Other long-term investments 3,936 3,936 3,728 3,728 Short-term investments141 141 139 139 Total$914$19,010$19,924$905$16,288$17,193 A.Investment PortfolioDebt SecuritiesAccounting policy.Our accounting policy for debt securities(including bonds,mortgage and other asset-backed securities and preferred stocks redeemable by the investor)remains materiallyconsistent with the policy disclosed in the Companys 2022 Form 10-K.However,with the adoption of amended accounting guidance for long-duration insurance contracts on January 1,2023(discussed in Note 2 to the Consolidated Financial Statements),net unrealized appreciation on debt securities supporting the Companys run-off settlement annuity business is no longer reported inNon-current insurance and contractholder liabilities but rather is reported in Accumulated other comprehensive loss.See Note 14 to the Consolidated Financial Statements for the impact toAccumulated other comprehensive loss.(1)(2)(1)(2)21The amortized cost and fair value by contractual maturity periods for debt securities were as follows as of March 31,2023:(In millions)AmortizedCostFairValueDue in one year or less$638$630 Due after one year through five years3,972 3,752 Due after five years through ten years3,227 2,915 Due after ten years2,450 2,268 Mortgage and other asset-backed securities381 344 Total$10,668$9,909 Actual maturities of these securities could differ from their contractual maturities used in the table above because issuers may have the right to call or prepay obligations,with or without penalties.Gross unrealized appreciation(depreciation)on debt securities by type of issuer is shown below:(In millions)AmortizedCostAllowance for CreditLossUnrealizedAppreciationUnrealizedDepreciationFairValueMarch 31,2023Federal government and agency$276$29$(8)$297 State and local government42 (1)41 Foreign government373 16(18)371 Corporate9,596(41)124(823)8,856 Mortgage and other asset-backed381 1(38)344 Total$10,668$(41)$170$(888)$9,909 December 31,2022Federal government and agency$292$32$(12)$312 State and local government43 (2)41 Foreign government375 11(21)365 Corporate9,742(44)89(981)8,806 Mortgage and other asset-backed390 1(43)348 Total$10,842$(44)$133$(1,059)$9,872 Review of declines in fair value.Management reviews impaired debt securities to determine whether a credit loss allowance is needed based on criteria that include:severity of decline;financial health and specific prospects of the issuer;andchanges in the regulatory,economic or general market environment of the issuers industry or geographic region.The table below summarizes debt securities with a decline in fair value from amortized cost for which an allowance for credit losses has not been recorded,by investment grade and the length of timethese securities have been in an unrealized loss position.Unrealized depreciation on these debt securities is primarily due to declines in fair value resulting from increasing interest rates since thesesecurities were purchased.March 31,2023December 31,2022(Dollars in millions)FairValueAmortizedCostUnrealizedDepreciationNumberof IssuesFairValueAmortizedCostUnrealizedDepreciationNumberof IssuesOne year or lessInvestment grade$3,176$3,362$(186)1,019$5,533$6,127$(594)1,659 Below investment grade353 371(18)936887 964(77)1,287 More than one yearInvestment grade3,222 3,808(586)1,0351,151 1,487(336)462 Below investment grade682 780(98)770330 382(52)369 Total$7,433$8,321$(888)3,760$7,901$8,960$(1,059)3,777 22Equity SecuritiesThe following table provides the values of the Companys equity security investments as of March 31,2023 and December 31,2022:March 31,2023December 31,2022(In millions)CostCarrying Value CostCarrying ValueEquity securities with readily determinable fair values$680$91$673$138 Equity securities with no readily determinable fair value2,926 3,029 380 484 Total$3,606$3,120$1,053$622 Consistent with our strategy to invest in targeted startup and growth-stage companies in the health care industry,approximately 95%of our investments in equity securities are in the health care sector.Commercial Mortgage LoansMortgage loans held by the Company are made exclusively to commercial borrowers and are diversified by property type,location and borrower.Loans are generally issued at fixed rates of interestand are secured by high quality,primarily completed and substantially leased operating properties.The Company regularly evaluates and monitors credit risk from the initial mortgage loan underwriting and throughout the investment holding period.For more information on the Companysaccounting policies and methodologies regarding these investments,see Note 11 in the Companys 2022 Form 10-K.The following table summarizes the credit risk profile of the Companys commercial mortgage loan portfolio:(Dollars in millions)March 31,2023December 31,2022Loan-to-Value RatioCarrying ValueAverage Debt ServiceCoverage RatioAverage Loan-to-Value RatioCarrying ValueAverage Debt ServiceCoverage RatioAverage Loan-to-Value RatioBelow 60%$912 2.11$901 2.1260%to 79P4 1.73564 1.7380%to 1001 1.32149 1.17Total$1,607 1.8960%$1,614 1.8960%Other Long-Term InvestmentsOther long-term investments include investments in unconsolidated entities,including certain limited partnerships and limited liability companies holding real estate,securities or loans.Theseinvestments are carried at cost plus the Companys ownership percentage of reporting income or loss,based on the financial statements of the underlying investments that are generally reported at fairvalue.Income or loss from these investments is reported on a one quarter lag due to the timing of when financial information is received from the general partner or manager of the investments.Other long-term investments also include investment real estate carried at depreciated cost less any impairment write-downs to fair value when cash flows indicate that the carrying value may not berecoverable.Additionally,statutory and other restricted deposits and foreign currency swaps carried at fair value are reported in the table below as Other.The following table provides the carryingvalue information for these investments:Carrying Value as of(In millions)March 31,2023December 31,2022Real estate investments$1,434$1,319 Securities partnerships2,259 2,166 Other243 243 Total$3,936$3,728 B.Derivative Financial InstrumentsThe Company uses derivative financial instruments to manage the characteristics of investment assets(such as duration,yield,currency and liquidity)to meet the varying demands of the relatedinsurance and contractholder liabilities.The Company also uses23derivative financial instruments to hedge the risk of changes in the net assets of certain of its foreign subsidiaries due to changes in foreign currency exchange rates and to hedge the interest rate risk ofcertain long-term debt.As of March 31,2023,there have been no material changes to the Companys derivative financial instruments.The effects of derivative financial instruments used in our individual hedging strategieswere not material to the Consolidated Financial Statements as of March 31,2023 and December 31,2022.The gross fair values of our derivative financial instruments are presented in Note 12 to theConsolidated Financial Statements.Please refer to the Companys 2022 Form 10-K for further discussion of the types of derivative financial instruments and associated accounting policies.C.Realized Investment Gains and LossesAccounting policy.Realized investment gains and losses are based on specifically identified assets and result from sales,investment asset write-downs,change in the fair value of certain derivativesand equity securities and changes in allowances for credit losses on debt securities and commercial mortgage loan investments.With the adoption of amended accounting guidance for long-durationinsurance contracts on January 1,2023(discussed in Note 2 to the Consolidated Financial Statements),realized investment gains and losses no longer exclude amounts that were previously required toadjust future policy benefits for the run-off settlement annuity business.Prior period net realized investment losses have been updated to reflect the impact of adopting LDTI.The following realized gains and losses on investments exclude realized gains and losses attributed to the Companys separate accounts because those gains and losses generally accrue directly toseparate account policyholders:Three Months Ended March 31,(In millions)20232022Net realized investment(losses),excluding credit loss expense and asset write-downs$(51)$(322)Credit loss recoveries3 Other investment asset write-downs(8)Net realized investment(losses),before income taxes$(56)$(322)Net realized investment losses for the three months ended March 31,2023 and March 31,2022 were primarily due to mark-to-market losses on a strategic health care equity securities investment.Note 12 Fair Value MeasurementsThe Company carries certain financial instruments at fair value in the financial statements including debt securities,certain equity securities,short-term investments and derivatives.Other financialinstruments are measured at fair value only under certain conditions,such as when impaired or when there are observable price changes for equity securities with no readily determinable fair value.Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date.A liabilitys fair value is defined as the amountthat would be paid to transfer the liability to a market participant,not the amount that would be paid to settle the liability with the creditor.The Companys financial assets and liabilities carried at fair value have been classified based upon a hierarchy defined by GAAP.The hierarchy gives the highest ranking to fair values determinedusing unadjusted quoted prices in active markets for identical assets and liabilities(Level 1)and the lowest ranking to fair values determined using methodologies and models with unobservable inputs(Level 3).An assets or a liabilitys classification is based on the lowest level of input that is significant to its measurement.For example,a financial asset or liability carried at fair value would beclassified in Level 3 if unobservable inputs were significant to the instruments fair value,even though the measurement may be derived using inputs that are both observable(Levels 1 and 2)andunobservable(Level 3).For a description of the policies,methods and assumptions that are used to estimate fair value and determine the fair value hierarchy for each class of financial instruments,see Note 12 in theCompanys 2022 Form 10-K.24A.Financial Assets and Financial Liabilities Carried at Fair ValueThe following table provides information about the Companys financial assets and liabilities carried at fair value.Further information regarding insurance assets and liabilities carried at fair value isprovided in Note 9E to the Consolidated Financial Statements.Separate account assets are also recorded at fair value on the Companys Consolidated Balance Sheets and are reported separately in theSeparate Accounts section below as gains and losses related to these assets generally accrue directly to contractholders:(In millions)Quoted Prices in Active Markets for IdenticalAssets(Level 1)Significant Other Observable Inputs(Level 2)Significant Unobservable Inputs(Level 3)TotalMarch 31,2023December 31,2022March 31,2023December 31,2022March 31,2023December 31,2022March 31,2023December 31,2022Financial assets at fair valueDebt securitiesFederal government and agency$151$147$146$165$297$312 State and local government 41 41 41 41 Foreign government 371 365 371 365 Corporate 8,421 8,394 435 412 8,856 8,806 Mortgage and other asset-backed 309 313 35 35 344 348 Total debt securities151 147 9,288 9,278 470 447 9,909 9,872 Equity securities 6 6 84 132 1 91 138 Short-term investments 141 139 141 139 Derivative assets 206 230 1 1 207 231 Excludes certain equity securities that have no readily determinable fair value.Level 3 Financial Assets and Financial LiabilitiesCertain inputs for instruments classified in Level 3 are unobservable(supported by little or no market activity)and significant to their resulting fair value measurement.Unobservable inputs reflect theCompanys best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.Additionally,as discussed in Note 9 to theConsolidated Financial Statements,the Company classifies variable annuity assets and liabilities in Level 3 of the fair value hierarchy.Quantitative Information about Unobservable InputsThe significant unobservable input used to value our corporate and government debt securities and mortgage and other asset-backed securities is an adjustment for liquidity.This adjustment is neededto reflect current market conditions and issuer circumstances when there is limited trading activity for the security.The following table summarizes the fair value and significant unobservable inputs that were developed directly by the Company and used in pricing these debt securities.The range and weightedaverage basis point(bps)amounts for liquidity reflect the Companys best estimates of the unobservable adjustments a market participant would make to calculate these fair values.Fair Value as ofUnobservable Adjustment Range(Weighted Average byQuantity)as of(Fair value in millions)March 31,2023December 31,2022Unobservable input March 31,2023March 31,2023December 31,2022Debt securitiesCorporate and government debt securities$433$412 Liquidity60-1060(300)bps60-1060(270)bpsMortgage and other asset-backed securities35 35 Liquidity105-520(310)bps110-520(310)bpsOther debt securities2 Total Level 3 debt securities$470$447 A significant increase in liquidity spread adjustments would result in a lower fair value measurement,while a decrease would result in a higher fair value measurement.(1)(1)25Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair ValueThe following table summarizes the changes in financial assets and financial liabilities classified in Level 3.Gains and losses reported in the table may include net changes in fair value that areattributable to both observable and unobservable inputs.For the Three Months EndedMarch 31,(In millions)20232022Debt and Equity SecuritiesBeginning balance$447$796 Gains included in Shareholders net income1 12 Gains(losses)included in Other comprehensive loss5(15)Losses required to adjust future policy benefits for settlement annuities (12)Purchases,sales and settlementsPurchases4 49 Settlements(9)(81)Total purchases,sales and settlements(5)(32)Transfers into/(out of)Level 3Transfers into Level 339 101 Transfers out of Level 3(16)(164)Total transfers into/(out of)Level 323(63)Ending balance$471$686 Total gains included in Shareholders net income attributable to instruments held at the reporting date$1$Change in unrealized gain or(loss)included in Other comprehensive loss for assets held at the end of the reporting period$5$(13)Amounts do not accrue to shareholders.Total gains and losses included in Shareholders net income in the tables above are reflected in the Consolidated Statements of Income as Net realized investment losses and Net investment income.Gains and losses included in Other comprehensive loss,net of tax in the tables above are reflected in Net unrealized appreciation(depreciation)on securities and derivatives in the ConsolidatedStatements of Comprehensive Income.Transfers into or out of the Level 3 category occur when unobservable inputs,such as the Companys best estimate of what a market participant would use to determine a current transaction price,become more or less significant to the fair value measurement.Market activity typically decreases during periods of economic uncertainty and this decrease in activity reduces the availability ofmarket observable data.As a result,the level of unobservable judgment that must be applied to the pricing of certain instruments increases and is typically observed through the widening of liquidityspreads.Transfers between Level 2 and Level 3 during 2023 and 2022 primarily reflected changes in liquidity estimates for certain private placement issuers across several sectors.See discussionunder Quantitative Information about Unobservable Inputs above for more information.Separate AccountsThe investment income and fair value gains and losses of Separate account assets generally accrue directly to the contractholders and,together with their deposits and withdrawals,are excluded fromthe Companys Consolidated Statements of Income and Cash Flows.(1)(1)26Fair values of Separate account assets were as follows:Quoted Prices in Active Markets forIdentical Assets(Level 1)Significant Other Observable Inputs(Level 2)Significant Unobservable Inputs(Level 3)Total(In millions)March 31,2023December 31,2022March 31,2023December 31,2022March 31,2023December 31,2022March 31,2023December 31,2022Guaranteed separate accounts(See Note 16)$213$203$349$382$562$585 Non-guaranteed separate accounts221 211 5,586 5,522 213 203 6,020 5,936 Subtotal$434$414$5,935$5,904$213$203 6,582 6,521 Non-guaranteed separate accounts priced at net assetvalue(NAV)as a practical expedient 758 757 Total$7,340$7,278 Non-guaranteed separate accounts include$4.0 billion as of March 31,2023 and December 31,2022 in assets supporting the Companys pension plans,including$0.2 billion classified in Level 3 as of March 31,2023 and December 31,2022.Separate account assets classified in Level 3 primarily support the Companys pension plans and include certain newly-issued,privately-placed,complex or illiquid securities that are priced usingmethods discussed above,as well as commercial mortgage loans.Activity,including transfers into and out of Level 3,was not material for the three months ended March 31,2023 or 2022.Separate account investments in securities partnerships,real estate and hedge funds are generally valued based on the separate accounts ownership share of the equity of the investee(NAV as apractical expedient),including changes in the fair values of its underlying investments.Substantially all of these assets support the Companys pension plans.The following table provides additionalinformation on these investments:Fair Value as ofUnfunded Commitment as ofMarch 31,2023Redemption Frequency(if currently eligible)Redemption NoticePeriod(In millions)March 31,2023December 31,2022Securities partnerships$467$451$228 Not applicableNot applicableReal estate funds287 302 Quarterly30-90 daysHedge funds4 4 Up to annually,varying by fund30-90 daysTotal$758$757$228 As of March 31,2023,the Company does not have plans to sell any of these assets at less than fair value.These investments are structured to satisfy longer-term investment objectives.Securitiespartnerships are contractually non-redeemable and the underlying investment assets are expected to be liquidated by the fund managers within ten years after inception.B.Assets and Liabilities Measured at Fair Value under Certain ConditionsSome financial assets and liabilities are not carried at fair value,such as commercial mortgage loans that are carried at unpaid principal,investment real estate that is carried at depreciated cost andequity securities with no readily determinable fair value when there are no observable market transactions.However,these financial assets and liabilities may be measured using fair value undercertain conditions,such as when investments become impaired and are written down to their fair value,or when there are observable price changes from orderly market transactions of equity securitiesthat otherwise had no readily determinable fair value.For the three months ended March 31,2023 and 2022,impairments recognized requiring these assets to be measured at fair value were not material.Realized investment gains and losses from theseobservable price changes for the three months ended March 31,2023 and March 31,2022 were not material.(1)(1)(1)27C.Fair Value Disclosures for Financial Instruments Not Carried at Fair ValueThe following table includes the Companys financial instruments not recorded at fair value but for which fair value disclosure is required.In addition to universal life products and finance leases,financial instruments that are carried in the Companys Consolidated Balance Sheets at amounts that approximate fair value are excluded from the following table:Classification in FairValue HierarchyMarch 31,2023December 31,2022(In millions)Fair ValueCarrying ValueFair ValueCarrying ValueCommercial mortgage loansLevel 3$1,509$1,607$1,491$1,614 Long-term debt,including current maturities,excluding finance leasesLevel 2$30,679$32,439$28,653$30,994 Note 13 Variable Interest EntitiesWe perform ongoing qualitative analyses of our involvement with variable interest entities to determine if consolidation is required.The Company determined that it was not a primary beneficiary inany material variable interest entity as of March 31,2023 or December 31,2022.The Companys involvement with variable interest entities for which it is not the primary beneficiary has not changedmaterially from December 31,2022.For details of our accounting policy for variable interest entities and the composition of variable interest entities with which the Company is involved,refer toNote 13 in the Companys 2022 Form 10-K.The Company has not provided,and does not intend to provide,financial support to any of these variable interest entities in excess of its maximumexposure.28Note 14 Accumulated Other Comprehensive Income(Loss)(AOCI)AOCI includes net unrealized(depreciation)appreciation on securities and derivatives,change in discount rate and instrument specific credit risk for certain long-duration insurance contractholderliabilities(Note 9 to the Consolidated Financial Statements),foreign currency translation and the net postretirement benefits liability adjustment.AOCI includes the Companys share fromunconsolidated entities reported on the equity method.Generally,tax effects in AOCI are established at the currently enacted tax rate and reclassified to Shareholders net income in the same periodthat the related pre-tax AOCI reclassifications are recognized.Changes in the components of AOCI,including the impact of adopting amended accounting guidance for long-duration insurancecontracts(discussed in Note 2 to the Consolidated Financial Statements),were as follows:Three Months Ended March 31,(In millions)20232022Securities and DerivativesBeginning balance,as retrospectively restated$(332)1,266 Unrealized appreciation(depreciation)on securities and derivatives252(1,065)Tax(expense)benefit(54)231 Net unrealized appreciation(depreciation)on securities and derivatives198(834)Reclassification adjustment for(gains)included in Shareholders net income(Net realized investment losses)(5)(11)Reclassification adjustment for tax expense included in Shareholders net income1 2 Net(gains)reclassified from AOCI to Shareholders net income(4)(9)Other comprehensive income(loss),net of tax194(843)Ending balance$(138)$423 Net long-duration insurance and contractholder liabilities measurement adjustments Beginning balance(256)(765)Current period change in discount rate for certain long duration liabilities(411)584 Tax benefit(expense)101(130)Net current period change in discount rate for certain long duration liabilities(310)454 Current period change in instrument-specific credit risk for market risk benefits(26)6 Tax benefit(expense)5(1)Net current period change in instrument-specific credit risk for market risk benefits(21)5 Other comprehensive(loss)income,net of tax(331)459 Ending balance(587)(306)Translation of foreign currenciesBeginning balance,as retrospectively restated$(154)(233)Translation of foreign currencies15(60)Tax benefit(expense)1(3)Net translation of foreign currencies16(63)Less:Net translation(loss)on foreign currencies attributable to noncontrolling interests(2)Shareholders other comprehensive income(loss),net of tax16(61)Ending balance$(138)$(294)Postretirement benefits liabilityBeginning balance$(916)$(1,336)Reclassification adjustment for amortization of net prior actuarial losses and prior service costs(Interest expense and other)13 16 Reclassification adjustment for tax(benefit)included in Shareholders net income(3)(3)Net adjustments reclassified from AOCI to Shareholders net income10 13 Other comprehensive income,net of tax10 13 Ending balance$(906)$(1,323)Total Accumulated other comprehensive lossBeginning balance,as retrospectively restated(1,658)(1,068)Shareholders other comprehensive(loss),net of tax(111)(432)Ending balance$(1,769)$(1,500)Established upon the adoption of Targeted Improvements to the Accounting for Long-Duration Contracts in 2023.See Note 2 to the Consolidated Financial Statements for further information.(1)(1)29Note 15 Income TaxesIncome Tax ExpenseThe 18.4fective tax rate for the three months ended March 31,2023 was lower than the 22.7%rate for the three months ended March 31,2022.This decrease was driven largely by favorableresults relative to the Companys foreign operations,partially offset by an increase pertaining to the year over year impact of remeasurement of deferred taxes.As of March 31,2023,we had approximately$255 million in deferred tax assets(DTAs)associated with unrealized investment losses that are partially recorded in Accumulated othercomprehensive loss.We have determined that a valuation allowance against the DTAs is not currently required based on the Companys ability to carryback losses and our ability and intent to holdcertain securities until recovery.We continue to monitor and evaluate the need for any valuation allowance in the future.Note 16 Contingencies and Other MattersThe Company,through its subsidiaries,is contingently liable for various guarantees provided in the ordinary course of business.A.Financial Guarantees:Retiree and Life Insurance BenefitsThe Company guarantees that separate account assets will be sufficient to pay certain life insurance or retiree benefits.For the majority of these benefits,the sponsoring employers are primarilyresponsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations.If employers fail to do so,theCompany or an affiliate of the buyer of the retirement benefits business has the right to redirect the management of the related assets to provide for benefit payments.As of March 31,2023,employersmaintained assets that generally exceeded the benefit obligations under these arrangements of approximately$420 million.An additional liability is established if management believes that theCompany will be required to make payments under the guarantees;there were no additional liabilities required for these guarantees,net of reinsurance,as of March 31,2023.Separate account assetssupporting these guarantees are classified in Levels 1 and 2 of the GAAP fair value hierarchy.The Company does not expect that these financial guarantees will have a material effect on the Companys consolidated results of operations,liquidity or financial condition.B.Certain Other GuaranteesThe Company had indemnification obligations as of March 31,2023 in connection with acquisition and disposition transactions.These indemnification obligations are triggered by the breach ofrepresentations or covenants provided by the Company,such as representations for the presentation of financial statements,filing of tax returns,compliance with law or identification of outstandinglitigation.These obligations are typically subject to various time limitations,defined by the contract or by operation of law,such as statutes of limitation.In some cases,the maximum potential amountdue is subject to contractual limitations based on a percentage of the transaction purchase price,while in other cases limitations are not specified or applicable.The Company does not believe that it ispossible to determine the maximum potential amount due under these obligations because not all amounts due under these indemnification obligations are subject to limitation.There were noliabilities for these indemnification obligations as of March 31,2023.C.Guaranty Fund AssessmentsThe Company operates in a regulatory environment that may require its participation in assessments under state insurance guaranty association laws.The Companys exposure to assessments forcertain obligations of insolvent insurance companies to policyholders and claimants is based on its share of business written in the relevant jurisdictions.There were no material charges or credits resulting from existing or new guaranty fund assessments for the three months ended March 31,2023.D.Legal and Regulatory MattersThe Company is routinely involved in numerous claims,lawsuits,regulatory inquiries and audits,government investigations,including under the federal False Claims Act and state false claims actsinitiated by a government investigating body or by a qui tam relators filing of a complaint under court seal,and other legal matters arising,for the most part,in the ordinary course of managing aglobal health services business.Additionally,the Company has received and is cooperating with subpoenas or similar processes from various governmental agencies requesting information,all arisingin the normal course of its business.Disputed tax matters arising30from audits by the Internal Revenue Service or other state and foreign jurisdictions,including those resulting in litigation,are accounted for under GAAP guidance for uncertain tax positions.Pending litigation and legal or regulatory matters that the Company has identified with a reasonably possible material loss and certain other material litigation matters are described below.For thosematters that the Company has identified with a reasonably possible material loss,the Company provides disclosure in the aggregate of accruals and range of loss,or a statement that such informationcannot be estimated.The Companys accruals for the matters discussed below under Litigation Matters and Regulatory Matters are not material.Due to numerous uncertain factors presented inthese cases,it is not possible to estimate an aggregate range of loss(if any)for these matters at this time.In light of the uncertainties involved in these matters,there is no assurance that their ultimateresolution will not exceed the amounts currently accrued by the Company.An adverse outcome in one or more of these matters could be material to the Companys results of operations,financialcondition or liquidity for any particular period.The outcomes of lawsuits are inherently unpredictable and we may be unsuccessful in these ongoing litigation matters or any future claims or litigation.Litigation MattersExpress Scripts Litigation with Elevance.In March 2016,Elevance filed a lawsuit in the United States District Court for the Southern District of New York alleging various breach of contract claimsagainst Express Scripts relating to the parties rights and obligations under the periodic pricing review section of the pharmacy benefit management agreement between the parties including allegationsthat Express Scripts failed to negotiate new pricing concessions in good faith,as well as various alleged service issues.Elevance also requested that the court enter declaratory judgment that ExpressScripts is required to provide Elevance competitive benchmark pricing,that Elevance can terminate the agreement and that Express Scripts is required to provide Elevance with post-terminationservices at competitive benchmark pricing for one year following any termination by Elevance.Elevance claimed it is entitled to$13 billion in additional pricing concessions over the remaining termof the agreement,as well as$1.8 billion for one year following any contract termination by Elevance and$150 million damages for service issues(Elevances Allegations).On April 19,2016,inresponse to Elevances complaint,Express Scripts filed its answer denying Elevances Allegations in their entirety and asserting affirmative defenses and counterclaims against Elevance.The courtsubsequently granted Elevances motion to dismiss two of six counts of Express Scripts amended counterclaims.Express Scripts filed its Motion for Summary Judgment on August 27,2021.Elevancecompleted filing of its Response to Express Scripts Motion for Summary Judgment on October 16,2021.Express Scripts filed its Reply in Support of its Motion for Summary Judgment on November19,2021.On March 31,2022,the court granted summary judgment in favor of Express Scripts on all of Elevances pricing claims for damages totaling$14.8 billion and on most of Elevances claimsrelating to service issues.Elevances only remaining service claims relate to the review or processing of prior authorizations.On June 10,2022,Express Scripts filed a Motion for Partial SummaryJudgment seeking to limit Elevances remaining prior authorization claims and a Motion to Exclude certain opinions offered by its experts.Elevance filed its opposition to both motions,and a cross-motion to submit a supplemental expert report,on July 9,2022.Express Scripts pending Motions were fully briefed at the end of July 2022.On March 8,2023,the Court granted Express ScriptsMotion for Partial Summary Judgement,excluding in full the testimony of four of Elevances experts and in part the testimony of two additional experts,and granted Elevance leave to submit asupplemental expert report.On April 5,2023,the Court entered a scheduling order setting a trial on Elevances remaining prior authorization claims to commence on December 4,2023.Medicare Advantage.A qui tam action that was filed by a private individual on behalf of the government in the United States District Court for the Southern District of New York in 2017 wasunsealed on August 6,2020.The action asserts claims related to risk adjustment practices arising from certain health exams conducted as part of the Companys Medicare Advantage business.InSeptember 2021,the qui tam action was transferred to the United States District Court for the Middle District of Tennessee.On January 11,2022,the U.S.Department of Justice(DOJ)(U.S.Attorneys Offices for the Southern District of New York and the Middle District of Tennessee)filed a motion to partially intervene,which was granted on August 2,2022.On October 14,2022,theDOJ filed its complaint-in-intervention alleging that certain diagnoses made during in-home exams were invalid for risk adjustment purposes,seeking unspecified damages and penalties under thefederal False Claims Act.The Company filed motions to dismiss the DOJs complaint and the remainder of the qui tam complaint on December 16,2022.Briefing is complete and the matter ispending before the court.Regulatory MattersCivil Investigative Demand.The DOJ is conducting industry-wide investigations of Medicare Advantage organizations risk adjustment practices.For certain Medicare Advantage organizations,including The Cigna Group,those investigations have resulted in litigation(see Litigation MattersMedicare Advantage above).The Company has responded to information requests(civilinvestigative demands)from the DOJ(U.S.Attorneys Office for the Eastern District of Pennsylvania)and is continuing to cooperate with the DOJ.31Note 17 Segment InformationSee Note 1 to the Consolidated Financial Statements for a description of our segments.A description of our basis for reporting segment operating results is outlined below.Intersegment revenuesprimarily reflect pharmacy and care services transactions between the Evernorth Health Services and Cigna Healthcare segments.The Company uses pre-tax adjusted income(loss)from operations and adjusted revenues as its principal financial measures of segment operating performance because management believes thesemetrics best reflect the underlying results of business operations and permit analysis of trends in underlying revenue,expenses and profitability.We define pre-tax adjusted income from operations asincome before income taxes excluding pre-tax income(loss)attributable to noncontrolling interests,net realized investment results,amortization of acquired intangible assets,and special items.TheCigna Groups share of certain realized investment results of its joint ventures reported in the Cigna Healthcare segment using the equity method of accounting are also excluded.Special items arematters that management believes are not representative of the underlying results of operations due to their nature or size.Adjusted income(loss)from operations is measured on an after-tax basis forconsolidated results and on a pre-tax basis for segment results.The Company defines adjusted revenues as total revenues excluding the following adjustments:special items and The Cigna Groups share of certain realized investment results of its joint venturesreported in the Cigna Healthcare segment using the equity method of accounting.Special items are matters that management believes are not representative of the underlying results of operations dueto their nature or size.We exclude these items from this measure because management believes they are not indicative of past or future underlying performance of the business.The Company does not report total assets by segment because this is not a metric used to allocate resources or evaluate segment performance.Special items charges(benefits)recorded by the Company were$1 million both pre-tax and after-tax for the three months ended March 31,2023 and$52 million pre-tax($37 million after-tax)for thethree months ended March 31,2022.Effective January 1,2023,we adopted amended accounting guidance for long-duration insurance contracts.See Note 2 to the Consolidated Financial Statements for further information.Prior periodsummarized segment information has been retrospectively adjusted to conform to this new basis of accounting.Summarized segment financial information was as follows:32(In millions)Evernorth HealthServicesCigna HealthcareOther OperationsCorporate andEliminationsTotalThree months ended March 31,2023Revenues from external customers$34,511$11,650$79$46,240 Intersegment revenues1,618 963 (2,581)Net investment income50 143 78 6 277 Total revenues36,179 12,756 157(2,575)46,517 Net realized investment results from certain equity method investments(38)(38)Adjusted revenues$36,179$12,718$157$(2,575)$46,479 Income(loss)before income taxes$918$1,077$21$(415)$1,601 Pre-tax adjustments to reconcile to adjusted income from operations(Income)attributable to noncontrolling interests(42)(1)(43)Net realized investment losses(gains)24(6)18 Amortization of acquired intangible assets444 15 459 Special itemsIntegration and transaction-related costs 1 1 Pre-tax adjusted income(loss)from operations$1,320$1,115$15$(414)$2,036(In millions)Evernorth HealthServicesCigna HealthcareOther OperationsCorporate andEliminationsTotalThree months ended March 31,2022Revenues from external customers$32,289$10,462$841$43,592 Intersegment revenues1,287 562 (1,849)Net investment income10 266 138 414 Total revenues33,586 11,290 979(1,849)44,006 Net realized investment results from certain equity method investments 103 103 Adjusted revenues$33,586$11,393$979$(1,849)$44,109 Income(loss)before income taxes$870$877$215$(395)$1,567 Pre-tax adjustments to reconcile to adjusted income from operations(Income)attributable to noncontrolling interests(11)(1)(5)(17)Net realized investment losses(gains)406 19 425 Amortization of acquired intangible assets443 15 458 Special itemsIntegration and transaction-related costs 52 52 Pre-tax adjusted income(loss)from operations$1,302$1,297$229$(343)$2,485 Includes the Companys share of certain realized investment results of its joint ventures reported in the Cigna Healthcare segment using the equity method of accounting.(1)(1)(1)33Revenue from external customers includes Pharmacy revenues,Premiums and Fees and other revenues.Prior period amounts have been retrospectively adjusted to reflect adoption of amendedaccounting guidance for long-duration insurance contracts,as discussed in Note 2 to the Consolidated Financial Statements.The following table presents these revenues by product,premium andservice type:Three Months Ended March 31,(In millions)20232022Products(Pharmacy revenues)(ASC 606)Network revenues$15,748$15,531 Home delivery and specialty revenues16,025 14,699 Other revenue
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2023/7/23 16:29https:/ of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,DC 20549FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934For the Quarterly Period Ended April 29,2023or Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934For the transition period from _ to _Commission File Number:001-33764ULTA BEAUTY,INC.(Exact name of Registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation or organization)38-4022268(I.R.S.EmployerIdentification No.)1000 Remington Blvd.,Suite 120Bolingbrook,Illinois(Address of principal executive offices)60440(Zip code)Registrants telephone number,including area code:(630)410-4800Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading SymbolName of each exchange on whichregisteredCommon Stock,par value$0.01 per shareULTAThe NASDAQ Global Select MarketIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)ofthe Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrantwas required to file such reports),and(2)has been subject to such filing requirements for the past 90 days.Yes NoIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required tobe submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(orfor such shorter period that the registrant was required to submit such files).Yes NoIndicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-acceleratedfiler,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 ExchangeAct.Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company If an emerging growth company,indicate by check mark if the registrant has elected not to use the extendedtransition period for complying with any new or revised financial accounting standards provided pursuant toSection 13(a)of the Exchange Act.2023/7/23 16:29https:/ by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes NoThe number of shares of the registrants common stock,par value$0.01 per share,outstanding as of May 22,2023was 49,801,592 shares.2023/7/23 16:29https:/ of Contents2ULTA BEAUTY,INC.TABLE OF CONTENTSPart I-Financial InformationItem 1.Financial Statements Consolidated Balance Sheets3 Consolidated Statements of Income4 Consolidated Statements of Cash Flows5 Consolidated Statements of Stockholders Equity6 Notes to Consolidated Financial Statements7Item 2.Managements Discussion and Analysis of Financial Condition and Results ofOperations13Item 3.Quantitative and Qualitative Disclosures about Market Risk21Item 4.Controls and Procedures21Part II-Other Information22Item 1.Legal Proceedings22Item 1A.Risk Factors22Item 2.Unregistered Sales of Equity Securities and Use of Proceeds22Item 3.Defaults Upon Senior Securities22Item 4.Mine Safety Disclosures22Item 5.Other Information22Item 6.Exhibits22SIGNATURES242023/7/23 16:29https:/ of Contents3Part I-Financial InformationItem 1.Financial StatementsUlta Beauty,Inc.Consolidated Balance SheetsApril 29,January 28,April 30,(In thousands,except per share data)2023 2023 2022Assets(Unaudited)(Unaudited)Current assets:Cash and cash equivalents$636,449$737,877$654,486Receivables,net190,282199,422192,754Merchandise inventories,net1,751,2351,603,4511,570,552Prepaid expenses and other current assets108,014130,246114,075Prepaid income taxes38,308Total current assets2,685,9802,709,3042,531,867Property and equipment,net1,019,9781,009,273909,543Operating lease assets1,559,5601,561,2631,488,040Goodwill10,87010,87010,870Other intangible assets,net1,0151,3121,307Deferred compensation plan assets37,00235,38235,978Other long-term assets61,31443,00734,431Total assets$5,375,719$5,370,411$5,012,036Liabilities and stockholders equityCurrent liabilities:Accounts payable$621,272$559,527$585,500Accrued liabilities308,583444,278305,000Deferred revenue357,217394,677324,694Current operating lease liabilities288,133283,293276,440Accrued income taxes58,695108,113Total current liabilities1,633,9001,681,7751,599,747Non-current operating lease liabilities1,610,2561,619,8831,568,356Deferred income taxes57,49055,34640,702Other long-term liabilities56,00553,59657,611Total liabilities3,357,6513,410,6003,266,416Commitments and contingencies(Note 6)Stockholders equity:Common stock,$0.01 par value,400,000 shares authorized;50,729,51,120,and 52,790 shares issued;49,932,50,364,and 52,038 shares outstanding;at April 29,2023(unaudited),January 28,2023,and April 30,2022(unaudited),respectively507511528Treasury stock-common,at cost(82,129)(60,470)(58,650)Additional paid-in capital1,040,3781,023,997951,802Retained earnings1,059,312995,773851,940Total stockholders equity2,018,0681,959,8111,745,620Total liabilities and stockholders equity$5,375,719$5,370,411$5,012,036See accompanying notes to consolidated financial statements.2023/7/23 16:29https:/ of Contents4Ulta Beauty,Inc.Consolidated Statements of Income(Unaudited)13 Weeks EndedApril 29,April 30,(In thousands,except per share data)20232022Net sales$2,634,263$2,345,901Cost of sales1,579,4061,404,875Gross profit1,054,857941,026Selling,general and administrative expenses612,129500,970Pre-opening expenses6582,348Operating income442,070437,708Interest(income)expense,net(7,348)401Income before income taxes449,418437,307Income tax expense102,367105,912Net income$347,051$331,395Net income per common share:Basic$6.92$6.34Diluted$6.88$6.30Weighted average common shares outstanding:Basic50,15352,250Diluted50,46952,582See accompanying notes to consolidated financial statements.2023/7/23 16:29https:/ of Contents5Ulta Beauty,Inc.Consolidated Statements of Cash Flows(Unaudited)13 Weeks EndedApril 29,April 30,(In thousands)2023 2022Operating activitiesNet income$347,051$331,395Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization57,94962,839Non-cash lease expense75,47872,192Deferred income taxes2,1441,009Stock-based compensation expense9,72110,356Loss on disposal of property and equipment1,4511,002Change in operating assets and liabilities:Receivables9,14040,928Merchandise inventories(147,784)(71,334)Prepaid expenses and other current assets22,232(3,261)Income taxes97,003101,236Accounts payable62,25742,586Accrued liabilities(98,515)(57,214)Deferred revenue(37,460)(28,885)Operating lease liabilities(78,562)(79,936)Other assets and liabilities(17,204)3,390Net cash provided by operating activities304,901426,303Investing activitiesCapital expenditures(109,766)(71,076)Other investments(314)(797)Net cash used in investing activities(110,080)(71,873)Financing activitiesRepurchase of common shares(283,517)(132,834)Stock options exercised8,9276,502Purchase of treasury shares(21,659)(5,172)Net cash used in financing activities(296,249)(131,504)Net(decrease)increase in cash and cash equivalents(101,428)222,926Cash and cash equivalents at beginning of period737,877431,560Cash and cash equivalents at end of period$636,449$654,486Supplemental informationIncome taxes paid,net of refunds$2,818$3,357Non-cash capital expenditures29,63427,475See accompanying notes to consolidated financial statements.2023/7/23 16:29https:/ of Contents6Ulta Beauty,Inc.Consolidated Statements of Stockholders Equity(Unaudited)Treasury-Common StockCommon StockAdditionalTotalIssuedTreasury Paid-In RetainedStockholders(In thousands)Shares Amount Shares Amount Capital Earnings EquityBalance January 29,202253,049$530(738)$(53,478)$934,945$653,376$1,535,373Net income331,395331,395Stock-based compensation10,35610,356Stock options exercised andother awards7316,5016,502Purchase of treasury shares(14)(5,172)(5,172)Repurchase of commonshares(332)(3)(132,831)(132,834)Balance April 30,202252,790$528(752)$(58,650)$951,802$851,940$1,745,620Balance January 28,202351,120$511(756)$(60,470)$1,023,997$995,773$1,959,811Net income347,051347,051Stock-based compensation9,7219,721Stock options exercised andother awards15018,9268,927Purchase of treasury shares(41)(21,659)(21,659)Repurchase of commonshares,including excise tax(541)(5)(2,266)(283,512)(285,783)Balance April 29,202350,729$507(797)$(82,129)$1,040,378$1,059,312$2,018,068See accompanying notes to consolidated financial statements.2023/7/23 16:29https:/ of Contents7Ulta Beauty,Inc.Notes to Consolidated Financial Statements(In thousands,except per share and store count data)(Unaudited)1.Business and basis of presentationUlta Beauty,Inc.was founded in 1990 to operate specialty retail stores selling cosmetics,fragrance,haircare and skincare products,and related accessories and services.Nearly every store features a full-service salon.As used in these notes and throughout this Quarterly Report on Form 10-Q,all referencesto“we,”“us,”“our,”“Ulta Beauty,”or the“Company”refer to Ulta Beauty,Inc.and its consolidatedsubsidiaries.As of April 29,2023,the Company operated 1,359 stores across 50 states,as shown in the table below.Number ofNumber ofLocation stores Location storesAlabama24Montana6Alaska3Nebraska5Arizona34Nevada16Arkansas11New Hampshire8California168New Jersey44Colorado27New Mexico7Connecticut19New York55Delaware4North Carolina43Florida92North Dakota4Georgia43Ohio46Hawaii4Oklahoma22Idaho9Oregon18Illinois55Pennsylvania45Indiana26Rhode Island4Iowa11South Carolina24Kansas13South Dakota3Kentucky15Tennessee29Louisiana18Texas127Maine3Utah15Maryland28Vermont1Massachusetts25Virginia32Michigan49Washington37Minnesota19West Virginia7Mississippi12Wisconsin20Missouri25Wyoming4Total1,359The accompanying unaudited consolidated financial statements and related notes have been prepared inaccordance with U.S.generally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and the U.S.Securities and Exchange Commissions Article 10,Regulation S-X.These financial statements were prepared on a consolidated basis to include theaccounts of the Company and its wholly owned subsidiaries.All significant intercompany accounts,transactions,and unrealized profit were eliminated in consolidation.In the opinion of management,theaccompanying unaudited consolidated financial statements reflect all adjustments,which are of anormal recurring nature,necessary to fairly state the financial position and results of operations andcash flows for the interim periods presented.2023/7/23 16:29https:/ of ContentsThe Companys business is subject to seasonal fluctuation,with significant portions of net sales and netincome being realized during the fourth quarter of the fiscal year due to the holiday selling season.Theresults for the 13 weeks ended April 29,2023 are not necessarily indicative of the results to be expectedfor the fiscal year ending February 3,2024,or for any other future interim period or for any future year.These unaudited interim consolidated financial statements and the related notes should be read inconjunction with the consolidated financial statements and notes included in the Companys AnnualReport on Form 10-K for the year ended January 28,2023.All amounts are stated in thousands,with theexception of per share amounts and number of stores.2.Summary of significant accounting policiesInformation regarding significant accounting policies is contained in Note 2,“Summary of significantaccounting policies,”to the consolidated financial statements in the Annual Report on Form 10-K forthe year ended January 28,2023.Presented below and in the following notes is supplementalinformation that should be read in conjunction with“Notes to Consolidated Financial Statements”in theAnnual Report.Fiscal quarterThe Companys quarterly periods are the 13 weeks ending on the Saturday closest to April 30,July 31,October 31,and January 31.The first quarter in fiscal 2023 and 2022 ended on April 29,2023 andApril 30,2022,respectively.Use of estimatesThe preparation of consolidated financial statements in conformity with U.S.generally acceptedaccounting principles requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the consolidated financial statements and the reportedamounts of revenues and expenses during the accounting period.Actual results could differ from thoseestimates.The Company considers its accounting policies relating to inventory valuations,vendorallowances,impairment of long-lived tangible and right-of-use assets,loyalty program and incometaxes to be the most significant accounting policies that involve management estimates and judgments.Significant changes,if any,in those estimates and assumptions resulting from continuing changes in theeconomic environment will be reflected in the consolidated financial statements in future periods.3.RevenueNet sales include retail stores and e-commerce merchandise sales as well as salon services and otherrevenue.Other revenue includes the private label and co-branded credit card programs,royaltiesderived from the partnership with Target Corporation,and deferred revenue related to the loyaltyprogram and gift card breakage.Disaggregated revenueThe following table sets forth the approximate percentage of net sales by primary category:13 Weeks Ended April 29,April 30,(Percentage of net sales)20232022Cosmetics44D%Skincare19%Haircare products and styling tools18 %Fragrance and bath12%Services4%3cessories and other3%300 23/7/23 16:29https:/ 16:29https:/ of Contents9Deferred revenueDeferred revenue primarily represents contract liabilities for the obligation to transfer additional goodsor services to a guest for which the Company has received consideration,such as unredeemed UltamateRewards loyalty points and unredeemed Ulta Beauty gift cards.In addition,breakage on gift cards isrecognized proportionately as redemption occurs.The following table provides a summary of the changes included in deferred revenue during the 13weeks ended April 29,2023 and April 30,2022:13 Weeks EndedApril 29,April 30,(In thousands)20232022Beginning balance$388,583$345,206Additions to contract liabilities(1)124,024114,005Deductions to contract liabilities(2)(162,484)(146,852)Ending balance$350,123$312,359(1)Loyalty points and gift cards issued in the current period but not redeemed or expired.(2)Revenue recognized in the current period related to the beginning liability.Other amounts included in deferred revenue were$7,094 and$12,335 at April 29,2023 andApril 30,2022,respectively.4.Goodwill and other intangible assetsGoodwill,which represents the excess of cost over the fair value of net assets acquired,was$10,870 atApril 29,2023,January 28,2023,and April 30,2022.No additional goodwill was recognized duringthe 13 weeks ended April 29,2023.The recoverability of goodwill is reviewed annually during the fourth quarter or more frequently if an event occurs or circumstances change that would indicate that impairment may exist.Other definite-lived intangible assets are amortized over their useful lives.The recoverability ofintangible assets is reviewed whenever events or changes in circumstances indicate the carrying amountof such assets may not be recoverable.5.LeasesThe Company leases retail stores,distribution centers,fast fulfillment centers,market fulfillmentcenters,corporate offices,and certain equipment under non-cancelable operating leases with variousexpiration dates through 2035.All leases are classified as operating leases and generally have initiallease terms of 10 years and when determined applicable,include renewal options under substantially thesame terms and conditions as the original leases.Leases do not contain any material residual valueguarantees or material restrictive covenants.Lease costThe majority of operating lease cost relates to retail stores,distribution centers,fast fulfillment centers,and market fulfillment centers and is classified within cost of sales.Operating lease cost for corporateoffices is classified within selling,general and administrative expenses.Operating lease cost from thecontrol date through store opening date is classified within pre-opening expenses.2023/7/23 16:29https:/ of Contents10The following table presents a summary of operating lease costs:13 Weeks EndedApril 29,April 30,(In thousands)20232022Operating lease cost$85,128$80,901Other informationThe following table presents supplemental disclosures of cash flow information related to operatingleases:13 Weeks EndedApril 29,April 30,(In thousands)20232022Cash paid for operating lease liabilities(1)$98,055$94,745Operating lease assets obtained in exchange for operating lease liabilities(non-cash)73,77577,976(1)Excludes$9,593 and$6,701 related to cash received for tenant incentives for the 13 weeks endedApril 29,2023 and April 30,2022,respectively.6.Commitments and contingenciesThe Company is involved in various legal proceedings that are incidental to the conduct of the businessincluding both class action and single plaintiff litigation.In the opinion of management,the amount ofany liability with respect to these proceedings,either individually or in the aggregate,will not have amaterial adverse effect on the Companys consolidated financial position,results of operations or cashflows.7.DebtOn February 27,2023,the Company entered into Amendment No.2 to the Second Amended andRestated Loan Agreement(as so amended,the Loan Agreement)with Wells Fargo Bank,NationalAssociation,as Administrative Agent,Collateral Agent and a Lender thereunder;Wells Fargo Bank,National Association and JPMorgan Chase Bank,N.A.,as Lead Arrangers and Bookrunners;JPMorganChase Bank,N.A.,as Syndication Agent and a Lender;PNC Bank,National Association,asDocumentation Agent and a Lender;and the other lenders party thereto.The Loan Agreement matureson March 11,2025,provides maximum revolving loans equal to the lesser of$1,000,000 ora percentage of eligible owned inventory and eligible owned receivables(which borrowing base may,atthe election of the Company and satisfaction of certain conditions,include a percentage of qualifiedcash),contains a$50,000 subfacility for letters of credit and allows the Company to increase therevolving facility by an additional$100,000,subject to the consent by each lender and other conditions.The Loan Agreement contains a requirement to maintain a fixed charge coverage ratio of not less than1.0 to 1.0 during such periods when availability under the Loan Agreement falls below a specifiedthreshold.Substantially all of the Companys assets are pledged as collateral for outstanding borrowingsunder the Loan Agreement.Outstanding borrowings bear interest,at the Companys election,at either abase rate plus a margin of 0%to 0.125%or the Term Secured Overnight Financing Rate plus a marginof 1.125%to 1.250%and a credit spread adjustment of 0.10%,with such margins based on theCompanys borrowing availability,and the unused line fee is 0.20%per annum.As of April 29,2023,January 28,2023,and April 30,2022,there were no borrowings outstandingunder the credit facility.As of April 29,2023,the Company was in compliance with all terms and covenants of the LoanAgreement.2023/7/23 16:29https:/ of Contents8.Fair value measurementsThe carrying value of cash and cash equivalents,accounts receivable,and accounts payableapproximates their estimated fair values due to the short maturities of these instruments.Fair value is measured using inputs from the three levels of the fair value hierarchy,which are describedas follows:Level 1 observable inputs such as quoted prices for identical instruments in active markets.Level 2 inputs other than quoted prices in active markets that are observable either directlyor indirectly through corroboration with observable market data.Level 3 unobservable inputs in which there is little or no market data,which would requirethe Company to develop its own assumptions.As of April 29,2023,January 28,2023,and April 30,2022,there were liabilities related to the non-qualified deferred compensation plan included in other long-term liabilities on the consolidated balancesheets of$40,374,$37,501,and$40,792,respectively.The liabilities are categorized as Level 2 as theyare based on third-party reported values,which are based primarily on quoted market prices ofunderlying assets of the funds within the plan.9.Stock-based compensationStock-based compensation expense is measured on the grant date based on the fair value of the award.Stock-based compensation expense is recognized on a straight-line basis over the requisite serviceperiod for awards expected to vest.The estimated grant date fair value of stock options was determinedusing a Black-Scholes valuation model using the following weighted-average assumptions for theperiods indicated:13 Weeks EndedApril 29,April 30,2023 2022Volatility rate 45.0I.0%Average risk-free interest rate 3.8%2.4%Average expected life(in years)3.4 3.4Dividend yield The expected volatility is based on the historical volatility of the Companys common stock.The risk-free interest rate is based on the United States Treasury yield curve in effect on the date of grant for therespective expected life of the option.The expected life represents the time the options granted areexpected to be outstanding.The expected life of options granted is derived from historical data on UltaBeauty stock option exercises.Forfeitures of stock options are estimated at the grant date based onhistorical rates of stock option activity and reduce the stock-based compensation expense recognized.The Company does not currently pay a regular dividend.The Company granted 41 and 48 stock options during the 13 weeks ended April 29,2023 andApril 30,2022,respectively.Stock-based compensation expense for stock options was$1,470 and$2,342 for the 13 weeks ended April 29,2023 and April 30,2022,respectively.The weighted-averagegrant date fair value of these stock options was$200.67 and$149.14 for the 13 weeks endedApril 29,2023 and April 30,2022,respectively.At April 29,2023,there was approximately$16,402 ofunrecognized stock-based compensation expense related to unvested stock options.There were 38 and 50 restricted stock units issued during the 13 weeks ended April 29,2023 andApril 30,2022,respectively.Stock-based compensation expense for restricted stock units was$4,359and$4,452 for the 13 weeks ended April 29,2023 and April 30,2022,respectively.At April 29,2023,there was approximately$39,616 of unrecognized stock-based compensation expense related torestricted stock units.There were 32 and 37 performance-based restricted stock units issued during the 13 weeks endedApril 29,2023 and April 30,2022,respectively.Stock-based compensation expense for performance-2023/7/23 16:29https:/ restricted stock units was$3,892 and$3,562 for the 13 weeks ended April 29,2023 andApril 30,2022,respectively.At April 29,2023,there was2023/7/23 16:29https:/ of Contents12approximately$38,418 of unrecognized stock-based compensation expense related to performance-based restricted stock units.10.Income taxesIncome tax expense reflects the federal statutory tax rate and the weighted average state statutory taxrate for the states in which the Company operates stores.Income tax expense of$102,367 for the 13weeks ended April 29,2023 represents an effective tax rate of 22.8%,compared to$105,912 of incometax expense representing an effective tax rate of 24.2%for the 13 weeks ended April 30,2022.Thelower effective tax rate is primarily due to benefits from income tax accounting for stock-basedcompensation.On August 16,2022,the Inflation Reduction Act of 2022 was enacted into law,which,among otherthings,introduced a 15%corporate alternative minimum tax on book income of certain largecorporations and created a 1%excise tax on net share repurchases.The corporate alternative minimumtax will be effective in fiscal 2024 and is not expected to have a material impact on the consolidatedfinancial statements.The excise tax applies to share repurchases made after December 31,2022.11.Net income per common shareThe following is a reconciliation of net income and the number of shares of common stock used in thecomputation of net income per basic and diluted common share:13 Weeks EndedApril 29,April 30,(In thousands,except per share data)2023 2022Numerator:Net income$347,051$331,395Denominator:Weighted-average common shares Basic50,15352,250Dilutive effect of stock options and non-vested stock316332Weighted-average common shares Diluted50,46952,582Net income per common share:Basic$6.92$6.34Diluted$6.88$6.30The denominator for diluted net income per common share for the 13 weeks ended April 29,2023 andApril 30,2022 excludes 79 and 143 employee stock options and restricted stock units,respectively,dueto their anti-dilutive effects.Outstanding performance-based restricted stock units are included in thecomputation of dilutive shares only to the extent that the underlying performance conditions aresatisfied prior to the end of the reporting period or would be considered satisfied if the end of thereporting period were the end of the related contingency period and the results would be dilutive underthe treasury stock method.12.Share repurchase programIn March 2022,the Board of Directors authorized a share repurchase program(the 2022 ShareRepurchase Program)pursuant to which the Company may repurchase up to$2,000,000 of the Companys common stock.The 2022 Share Repurchase Program revokes the previously authorized but unused amounts from the earlier share repurchase program.The authorized value of shares available to be repurchased under the 2022 Share Repurchase Program excludes excise tax.The 2022 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.2023/7/23 16:29https:/ 16:29https:/ of ContentsA summary of common stock repurchase activity is presented in the following table:13 Weeks Ended April 29,April 30,(In thousands)2023 2022Shares repurchased541332Total cost of shares repurchased,including excise tax$285,783$132,834Item 2.Managements Discussion and Analysis of Financial Condition and Results ofOperationsThe following discussion and analysis of our financial condition and results of operations should beread in conjunction with our financial statements and related notes included elsewhere in this quarterlyreport.This discussion contains forward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934,as amended,and the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995,which reflect our current views with respect to,among other things,future events and financial performance.You can identify these forward-looking statements by the useof forward-looking words such as“outlook,”“believes,”“expects,”“plans,”“estimates,”“targets,”“strategies,”or other comparable words.Any forward-looking statements contained in this Form 10-Qare based upon our historical performance and on current plans,estimates,and expectations.Theinclusion of this forward-looking information should not be regarded as a representation by us or anyother person that the future plans,estimates,targets,strategies,or expectations contemplated by us willbe achieved.Such forward-looking statements are subject to various risks and uncertainties,whichinclude,without limitation:macroeconomic conditions,including inflation,rising interest rates and recessionary concerns,as well as ongoing labor cost pressures,transportation and shipping cost pressures,and theCOVID-19 pandemic,have had,and may continue to have,a negative impact on our business,financial condition,profitability,and cash flows(including future uncertain impacts);changes in the overall level of consumer spending and volatility in the economy,including as aresult of macroeconomic conditions and geopolitical events;our ability to sustain our growth plans and successfully implement our long-range strategicand financial plan;the ability to execute our operational excellence priorities,including continuous improvement,Project SOAR(our replacement enterprise resource planning platform),and supply chainoptimization;our ability to gauge beauty trends and react to changing consumer preferences in a timelymanner;the possibility that we may be unable to compete effectively in our highly competitivemarkets;the possibility of significant interruptions in the operations of our distribution centers,fastfulfillment centers,and market fulfillment centers;the possibility that cybersecurity or information security breaches and other disruptions couldcompromise our information or result in the unauthorized disclosure of confidentialinformation;the possibility of material disruptions to our information systems,including our Uwebsite and mobile applications;the failure to maintain satisfactory compliance with applicable privacy and data protectionlaws and regulations;changes in the good relationships we have with our brand partners and/or our ability tocontinue to offer permanent or temporary exclusive products of our brand partners;changes in the wholesale cost of our products and/or interruptions at our brand partners orthird-party vendors operations;future epidemics,pandemics or natural disasters could negatively impact sales;the possibility that new store openings and existing locations may be impacted by developer orco-tenant issues;our ability to attract and retain key executive personnel;the impact of climate change on our business operations and/or supply chain;2023/7/23 16:29https:/ ability to successfully execute our common stock repurchase program or implement futurecommon stock repurchase programs;a decline in operating results may lead to asset impairment and store closure charges;and2023/7/23 16:29https:/ of Contents14other risk factors detailed in our public filings with the Securities and Exchange Commission(the SEC),including risk factors contained in Item 1A,“Risk Factors”of our Annual Reporton Form 10-K for the year ended January 28,2023,as such may be amended or supplementedin our subsequently filed Quarterly Reports on Form 10-Q(including this report).Except to the extent required by the federal securities laws,we undertake no obligation to publiclyupdate or revise any forward-looking statements,whether as a result of new information,future events,or otherwise.References in the following discussion to“we,”“us,”“our,”“Ulta Beauty,”the“Company,”and similarreferences mean Ulta Beauty,Inc.and its consolidated subsidiaries,unless otherwise expressly stated orthe context otherwise requires.OverviewWe were founded in 1990 as a beauty retailer at a time when prestige,mass,and salon products weresold through distinct channels department stores for prestige products;drug stores and massmerchandisers for mass products;and salons and authorized retail outlets for professional hair careproducts.We developed a unique specialty retail concept that offers a broad range of brands and pricepoints,select beauty services,and a convenient and welcoming shopping environment.We define ourtarget consumer as a beauty enthusiast,a consumer who is passionate about the beauty category,usesbeauty for self-expression,experimentation,and self-investment,and has high expectations for theshopping experience.We believe our strategy provides us with the competitive advantages that havecontributed to our financial performance.Today,we are the largest specialty beauty retailer in the United States and the premier beautydestination for cosmetics,fragrance,skin care products,hair care products,and salon services.Keyaspects of our business include:a differentiated assortment of more than 25,000 beauty products acrossa variety of categories and price points as well as a variety of beauty services,including salon services,in more than 1,350 stores predominantly located in convenient,high-traffic locations;engaging digitalexperiences delivered through our website,U,and our mobile applications;our best-in-classloyalty program that enables members to earn points for every dollar spent on products and beautyservices and provides us with deep,proprietary customer insights;and our ability to cultivate humanconnection with warm and welcoming guest experiences across all of our channels.The continued growth of our business and any future increases in net sales,net income,and cash flowsis dependent on our ability to execute our strategic priorities:1)drive breakthrough and disruptivegrowth through an expanded definition of All Things Beauty;2)evolve the omnichannel experiencethrough connected physical and digital ecosystems,All In Your World;3)expand and deepen ourpresence across the beauty journey,solidifying Ulta Beauty at the Heart of the Beauty Community;4)drive operational excellence and optimization;5)protect and cultivate our world-class culture andtalent;and 6)expand our environmental and social impact.We believe the attractive and growing U.S.beauty products and salon services industry,the expanding definition of beauty and the role thatomnichannel capabilities play in consumers lives,coupled with Ulta Beautys competitive strengths,position us to capture additional market share in the industry.Comparable sales is a key metric that is monitored closely within the retail industry.Our comparablesales have fluctuated in the past,and we expect them to continue to fluctuate in the future.A variety offactors affect our comparable sales,including general U.S.economic conditions,changes inmerchandise strategy or mix,and timing and effectiveness of our marketing activities,among others.Over the long term,our growth strategy is to increase total net sales through growing our comparablesales,expanding omnichannel capabilities,and opening new stores.Long-term operating profit isexpected to increase as a result of our efforts to optimize our real estate portfolio,expand merchandisemargin,and leverage our fixed store costs with comparable sales increases and operating efficiencies,partially offset by incremental investments in people,guest experiences,systems,and supply chainrequired to support a 1,500 to 1,700 store chain in the U.S.with successful e-commerce and competitiveomnichannel capabilities.2023/7/23 16:29https:/ 16:29https:/ of ContentsCurrent TrendsIndustry trendsOur research indicates that Ulta Beauty has captured meaningful market share across all categories overthe last several years.The overall beauty market expanded in 2022 and into the first quarter of fiscal2023,supported by strong consumer engagement with the beauty category.We remain confident thatour differentiated and diverse business model,our commitment to strategic investments,and our highlyengaged associates will continue to drive market share gains over the long term.Impact of inflation and other macroeconomic trendsAlthough we do not believe inflation had a material impact on our sales during the first quarter of fiscal2023,continued pressure from inflation or other evolving macroeconomic conditions could have anadverse impact on consumer spending and could lead to a recession.Furthermore,inflationarypressures,as well as other macroeconomic trends,could negatively impact our ability to maintaincurrent levels of gross margin and selling,general and administrative expenses as a percentage of netsales if the selling prices of our products do not increase with higher costs.In addition,inflation couldmaterially increase the interest rates on any future debt.Basis of presentationThe Company has one reportable segment,which includes retail stores,salon services,and e-commerce.We recognize merchandise revenue at the point of sale in our retail stores.E-commerce sales arerecognized upon shipment or guest pickup of the merchandise based on meeting the transfer of controlcriteria.Retail store and e-commerce sales are recorded net of estimated returns.Shipping and handlingare treated as costs to fulfill the contract and not a separate performance obligation.Accordingly,werecognize revenue for our single performance obligation related to online sales at the time control of themerchandise passes to the customer,which is at the time of shipment or guest pickup.We providerefunds for merchandise returns within 60 days from the original purchase date.State sales taxes arepresented on a net basis as we consider our self a pass-through conduit for collecting and remitting statesales tax.Salon service revenue is recognized at the time the service is provided to the guest.Gift cardsales revenue is deferred until the guest redeems the gift card.Company coupons and other incentivesare recorded as a reduction of net sales.Other revenue includes the private label and co-branded creditcard programs,royalties derived from the partnership with Target Corporation,and deferred revenuerelated to the loyalty program and gift card breakage.Comparable sales reflect sales for stores beginning on the first day of the 14th month of operation.Therefore,a store is included in our comparable store base on the first day of the period after one yearof operations plus the initial one-month grand opening period.Non-comparable store sales include salesfrom new stores that have not yet completed their 13th month of operation and stores that were closedfor part or all of the period in either year.Remodeled stores are included in comparable sales unless thestore was closed for a portion of the current or prior period.Comparable sales include retail sales,salonservices,and e-commerce.In fiscal years with 53 weeks,the 53rd week of comparable sales is includedin the calculation.In the year following a 53-week year,the prior year period is shifted by one week tocompare similar calendar weeks.There may be variations in the way in which some of our competitorsand other retailers calculate comparable or same store sales.Measuring comparable sales allows us to evaluate the performance of our store base as well as severalother aspects of our overall strategy.Several factors could positively or negatively impact ourcomparable sales results:the general national,regional,and local economic conditions and corresponding impact oncustomer spending levels;the introduction of new products or brands;the location of new stores in existing store markets;competition;our ability to respond on a timely basis to changes in consumer preferences;the effectiveness of our various merchandising and marketing activities;and2023/7/23 16:29https:/ 16:29https:/ of Contents16the number of new stores opened and the impact on the average age of all of our comparablestores.Cost of sales includes:the cost of merchandise sold,offset by vendor income that is not a reimbursement of specific,incremental,and identifiable costs;distribution costs including labor and related benefits,freight,rent,depreciation andamortization,real estate taxes,utilities,and insurance;shipping and handling costs;retail store occupancy costs including rent,depreciation and amortization,real estate taxes,utilities,repairs and maintenance,insurance,and licenses;salon services payroll and benefits;andshrink and inventory valuation reserves.Our cost of sales may be negatively impacted as we open new stores.Changes in our merchandise orchannel mix may also have an impact on cost of sales.This presentation of items included in cost ofsales may not be comparable to the way in which our competitors or other retailers compute their costof sales.Selling,general and administrative expenses include:payroll,bonus,and benefit costs for retail store and corporate employees;advertising and marketing costs,offset by vendor income that is a reimbursement of specific,incremental,and identifiable costs;occupancy costs related to our corporate office facilities;stock-based compensation expense;depreciation and amortization for all assets,except those related to our retail stores anddistribution operations,which are included in cost of sales;andlegal,finance,information systems,and other corporate overhead costs.This presentation of items in selling,general and administrative expenses may not be comparable to theway in which our competitors or other retailers compute their selling,general and administrativeexpenses.Pre-opening expenses include non-capital expenditures during the period prior to store opening for new,remodeled,and relocated stores including rent during the construction period for new and relocatedstores,store set-up labor,management and employee training,and grand opening advertising.Interest(income)expense,net includes both interest income and expense.Interest income representsinterest primarily from cash equivalents,which include highly liquid investments such as money marketfunds and certificates of deposit with an original maturity of three months or less from the date ofpurchase.Interest expense includes interest costs and facility fees associated with our credit facility,which is structured as an asset-based lending instrument.Our credit facility interest is based on avariable interest rate structure which can result in increased cost in periods of rising interest rates.Income tax expense reflects the federal statutory tax rate and the weighted average state statutory taxrate for the states in which we operate stores.Results of operationsOur quarterly periods are the 13 weeks ending on the Saturday closest to April 30,July 31,October 31,and January 31.The Companys first quarter in fiscal 2023 and 2022 ended on April 29,2023 andApril 30,2022,respectively.Our quarterly results of operations have varied in the past and are likely todo so again in the future.As such,we believe that period-to-period comparisons of our results ofoperations should not be relied upon as an indication of our future performance.2023/7/23 16:29https:/ of ContentsThe following tables present the components of our consolidated results of operations for the periodsindicated:13 Weeks EndedApril 29,April 30,(Dollars in thousands)2023 2022Net sales$2,634,263$2,345,901Cost of sales 1,579,406 1,404,875Gross profit 1,054,857 941,026Selling,general and administrative expenses 612,129 500,970Pre-opening expenses 658 2,348Operating income 442,070 437,708Interest(income)expense,net(7,348)401Income before income taxes 449,418 437,307Income tax expense 102,367 105,912Net income$347,051$331,395Other operating data:Number of stores end of period1,3591,318Comparable sales9.3.0 Weeks EndedApril 29,April 30,(Percentage of net sales)2023 2022Net sales100.00.0%Cost of sales60.0Y.9%Gross profit40.0.1%Selling,general and administrative expenses23.2!.4%Pre-opening expenses0.0%0.1%Operating income16.8.7%Interest(income)expense,net(0.3%)0.0%Income before income taxes17.1.6%Income tax expense3.9%4.5%Net income13.2.1%Comparison of 13 weeks ended April 29,2023 to 13 weeks ended April 30,2022Net salesNet sales increased$288.4 million or 12.3%,to$2.6 billion for the 13 weeks ended April 29,2023,compared to$2.3 billion for the 13 weeks ended April 30,2022.The net sales increase was primarilydue to increased comparable sales,strong new store performance,and an increase of$18.9 million inother revenue.The total comparable sales increase of 9.3%was driven by an 11.0%increase intransactions and a 1.5crease in average ticket.Gross profitGross profit increased$113.8 million or 12.1%,to$1.1 billion for the 13 weeks ended April 29,2023,compared to$941.0 million for the 13 weeks ended April 30,2022.Gross profit as a percentage of netsales decreased to 40.0%for the 13 weeks ended April 29,2023,compared to 40.1%for the 13 weeksended April 30,2022.The decrease in gross profit margin was primarily due to higher inventory shrink,lower merchandise margins,higher supply chain costs,and deleverage of salon expenses,partiallyoffset by strong growth in other revenue and leverage of store fixed costs.2023/7/23 16:29https:/ 16:29https:/ of Contents18Selling,general and administrative expensesSelling,general and administrative(SG&A)expenses increased$111.2 million or 22.2%,to$612.1million for the 13 weeks ended April 29,2023,compared to$501.0 million for the 13 weeks endedApril 30,2022.SG&A expenses as a percentage of net sales increased to 23.2%for the 13 weeks endedApril 29,2023,compared to 21.4%for the 13 weeks ended April 30,2022,primarily due to deleverageof store payroll and benefits,deleverage of corporate overhead due to strategic investments,anddeleverage of marketing expenses,partially offset by leverage of incentive compensation and storeexpenses.Pre-opening expensesPre-opening expenses were$0.7 million for the 13 weeks ended April 29,2023 compared to$2.3million for the 13 weeks ended April 30,2022.Interest(income)expense,netInterest income,net was$7.3 million for the 13 weeks ended April 29,2023 compared to interestexpense,net of$0.4 million for the 13 weeks ended April 30,2022,due to higher average interest ratesand higher average cash balances during the quarter.We did not have any outstanding borrowings onthe credit facility as of April 29,2023 and April 30,2022.Income tax expenseIncome tax expense of$102.4 million for the 13 weeks ended April 29,2023 represents an effective taxrate of 22.8%,compared to$105.9 million of income tax expense representing an effective tax rate of24.2%for the 13 weeks ended April 30,2022.The lower effective tax rate is primarily due to benefitsfrom income tax accounting for stock-based compensation.Net incomeNet income was$347.1 million for the 13 weeks ended April 29,2023,compared to$331.4 million forthe 13 weeks ended April 30,2022.The increase in net income is primarily related to the$113.8 millionincrease in gross profit,the$7.7 million increase in interest income,net,and the$3.5 million decreasein income tax expense,partially offset by the$111.2 million increase in SG&A expenses.Liquidity and capital resourcesOur primary sources of liquidity are cash and cash equivalents,cash flows from operations,andborrowings under our credit facility.The most significant components of our working capital aremerchandise inventories and cash and cash equivalents reduced by accounts payable,accrued liabilitiesand deferred revenue.As of April 29,2023,January 28,2023,and April 30,2022,we had cash and cashequivalents of$636.4 million,$737.9 million,and$654.5 million,respectively.Our primary cash needs are for rent,capital expenditures for new,remodeled,and relocated stores,increased merchandise inventories related to store expansion and new brand additions,supply chainimprovements,share repurchases,and continued investment in our information technology systems.Our most significant ongoing short-term cash requirements relate primarily to funding operations(including expenditures for lease expenses,inventory,labor,distribution,advertising and marketing,and tax liabilities)as well as periodic spend for capital expenditures,investments,and sharerepurchases.Our working capital needs are greatest from August through November each year as aresult of our inventory build-up during this period for the approaching holiday season.Long-term cash requirements primarily relate to funding lease expenses and other purchasecommitments.2023/7/23 16:29https:/ of ContentsWe generally fund short-term and long-term cash requirements with cash from operating activities.Webelieve our primary sources of liquidity will satisfy our cash requirements over both the short term(thenext twelve months)and long term.Cash flowsWe believe our ability to generate substantial cash from operating activities and readily secure financingat competitive rates are key strengths that give us significant flexibility to meet our short and long-termfinancial commitments.The following table presents a summary of our cash flows:13 Weeks EndedApril 29,April 30,(In thousands)2023 2022Net cash provided by operating activities$304,901$426,303Net cash used in investing activities(110,080)(71,873)Net cash used in financing activities(296,249)(131,504)Operating activitiesOperating activities consist of net income adjusted for certain non-cash items,including depreciationand amortization,non-cash lease expense,deferred income taxes,stock-based compensation expense,realized gains or losses on disposal of property and equipment,and the effect of working capitalchanges.The decrease in net cash provided by operating activities in the first quarter of fiscal 2023 compared tothe first quarter of fiscal 2022 was mainly due to a larger increase in merchandise inventories in the firstquarter of fiscal 2023 and the timing of accrued liabilities and receivable collections,partially offset bythe increase in net income,a decrease in prepaid expenses,and the timing of accounts payable.Theincrease in net income was primarily due to an increase in gross profit resulting from higher sales,anincrease in interest income,and a decrease in income taxes,partially offset by an increase in SG&Aexpenses.Merchandise inventories,net were$1.75 billion at April 29,2023,compared to$1.57 billion atApril 30,2022,representing an increase of$180.7 million or 11.5%.The increase in total inventory isprimarily due to the following:$102 million increase to support increased demand,product cost increases,and brandexpansions;$49 million increase due to the addition of 41 net new stores opened since April 30,2022;and$28 million increase due to new brand launches.Investing activitiesWe have historically used cash primarily for new,remodeled,relocated,and refreshed stores,supplychain investments,short-term investments,and investments in information technology systems.Investing activities for capital expenditures were$109.8 million during the 13 weeks endedApril 29,2023 compared to$71.1 million during the 13 weeks ended April 30,2022.During the 13 weeks ended April 29,2023,we opened 5 new stores,closed one store,remodeled twostores,and relocated one store,compared to the 13 weeks ended April 30,2022,when we opened 10new stores and relocated six stores.The increase in net cash used in investing activities in the first quarter of fiscal 2023 compared to thefirst quarter of fiscal 2022 was primarily due to more capital expenditures compared to the first quarterof fiscal 2022.Our future investments will depend primarily on the number of new,remodeled,and relocated stores,information technology systems investments,and supply chain investments that we undertake and thetiming of these expenditures.2023/7/23 16:29https:/ 16:29https:/ of Contents20Based on past performance and current expectations,we believe our sources of liquidity will besufficient to fund future capital expenditures.Financing activitiesFinancing activities include share repurchases,borrowing and repayment of our revolving credit facility,and capital stock transactions.Purchases of treasury shares represent the fair value of common sharesrepurchased from plan participants in connection with shares withheld to satisfy minimum statutory taxobligations upon the vesting of restricted stock.The increase in net cash used in financing activities in the first quarter of fiscal 2023 compared to thefirst quarter of fiscal 2022 was primarily due to an increase in share repurchases.We had no borrowings outstanding under the credit facility as of April 29,2023,January 28,2023,andApril 30,2022.The zero outstanding borrowings position is due to a combination of factors includingsales demand,overall performance of management initiatives including expense control,and inventoryand other working capital reductions.We may require borrowings under the facility from time to time infuture periods for unexpected business disruptions,to support our new store program,seasonalinventory needs,or share repurchases.Share repurchase programIn March 2022,the Board of Directors authorized a share repurchase program(the 2022 ShareRepurchase Program)pursuant to which the Company may repurchase up to$2.0 billion of theCompanys common stock.The 2022 Share Repurchase Program revokes the previously authorized butunused amounts from the earlier share repurchase program.The authorized value of shares available tobe repurchased under the 2022 Share Repurchase Program excludes excise tax.The 2022 ShareRepurchase Program does not have an expiration date and may be suspended or discontinued at anytime.A summary of common stock repurchase activity is presented in the following table:13 Weeks Ended April 29,April 30,(Dollars in millions)2023 2022Shares repurchased 541,108 331,834Total cost of shares repurchased,including excise tax$285.8$132.8Credit facilityOn February 27,2023,we entered into Amendment No.2 to the Second Amended and Restated LoanAgreement(as so amended,the Loan Agreement)with Wells Fargo Bank,National Association,asAdministrative Agent,Collateral Agent and a Lender thereunder;Wells Fargo Bank,NationalAssociation and JPMorgan Chase Bank,N.A.,as Lead Arrangers and Bookrunners;JPMorgan ChaseBank,N.A.,as Syndication Agent and a Lender;PNC Bank,National Association,as DocumentationAgent and a Lender;and the other lenders party thereto.The Loan Agreement matures on March 11,2025,provides maximum revolving loans equal to the lesser of$1.0 billion or a percentage of eligibleowned inventory and eligible owned receivables(which borrowing base may,at the election of theCompany and satisfaction of certain conditions,include a percentage of qualified cash),contains a$50.0 million subfacility for letters of credit and allows the Company to increase the revolving facilityby an additional$100.0 million,subject to the consent by each lender and other conditions.The LoanAgreement contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0during such periods when availability under the Loan Agreement falls below a specified threshold.Substantially all of the Companys assets are pledged as collateral for outstanding borrowings under theLoan Agreement.Outstanding borrowings bear interest,at the Companys election,at either a base rateplus a margin of 0%to 0.125%or the Term Secured Overnight Financing Rate plus a margin of 1.125%to 1.250%and a credit spread adjustment of 0.10%,with such margins based on the Companysborrowing availability,and the unused line fee is 0.20%per annum.2023/7/23 16:29https:/ 16:29https:/ of ContentsAs of April 29,2023,January 28,2023,and April 30,2022 we had no borrowings outstanding under thecredit facility.As of April 29,2023,we were in compliance with all terms and covenants of the Loan Agreement.SeasonalityOur business is subject to seasonal fluctuation.Significant portions of our net sales and profits arerealized during the fourth quarter of the fiscal year due to the holiday selling season.To a lesser extent,our business is also affected by Mothers Day and Valentines Day.Any decrease in sales during thesehigher sales volume periods could have an adverse effect on our business,financial condition,oroperating results for the entire fiscal year.Our quarterly results of operations have varied in the past andare likely to do so again in the future.As such,we believe that period-to-period comparisons of ourresults of operations should not be relied upon as an indication of our future performance.Critical accounting policies and estimatesManagements discussion and analysis of financial condition and results of operations is based upon ourconsolidated financial statements,which have been prepared in accordance with U.S.generallyaccepted accounting principles.The preparation of these consolidated financial statements required theuse of estimates and judgments that affect the reported amounts of our assets,liabilities,revenues,andexpenses.Management bases estimates on historical experience and other assumptions it believes to bereasonable under the circumstances and evaluates these estimates on an on-going basis.Actual resultsmay differ from these estimates.There have been no significant changes to the critical accountingpolicies and estimates included in our Annual Report on Form 10-K for the fiscal year endedJanuary 28,2023.Item 3.Quantitative and Qualitative Disclosures About Market RiskMarket risk represents the risk of loss that may impact our financial position due to adverse changes infinancial market prices and rates.Our market risk exposure is primarily the result of fluctuations ininterest rates.We do not hold or issue financial instruments for trading purposes.Interest rate riskWe are exposed to interest rate risks primarily through borrowings under our credit facility.Interest onour borrowings is based upon variable rates.We did not have any outstanding borrowings on the creditfacility as of April 29,2023,January 28,2023,and April 30,2022.Item 4.Controls and ProceduresEvaluation of disclosure controls and procedures over financial reportingWe have established disclosure controls and procedures to ensure that material information relating tothe Company is made known to the officers who certify our financial reports and to the members of oursenior management and Board of Directors.Based on managements evaluation as of April 29,2023,our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedures(as defined in Rules 13a-15(e)and 15d-15(e)under the Securities Exchange Act of 1934),are effective to ensure that theinformation required to be disclosed by us in our reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded,processed,summarized,and reported within the time periodsspecified in the Securities and Exchange Commissions rules and forms,and that such information isaccumulated and communicated to our management,including the Chief Executive Officer and ChiefFinancial Officer,as appropriate,to allow timely decisions regarding required disclosure.Changes in internal control over financial reportingThere were no changes to our internal controls over financial reporting during the 13 weeks endedApril 29,2023 that have materially affected,or are reasonably likely to materially affect,our internalcontrols over financial reporting.2023/7/23 16:29https:/ 16:29https:/ of Contents22Part II-Other InformationItem 1.Legal ProceedingsSee Note 6 to our consolidated financial statements,“Commitments and contingencies,”for informationon legal proceedings.Item 1A.Risk FactorsIn addition to the other information set forth in this report,you should carefully consider the factorsdiscussed in Part I,“Item 1A.Risk Factors”in our Annual Report on Form 10-K for the year endedJanuary 28,2023,which could materially affect our business,financial condition,financial results,orfuture performance.There have been no material changes from the risk factors previously disclosed inour Annual Report on Form 10-K for the year ended January 28,2023.Item 2.Unregistered Sales of Equity Securities and Use of ProceedsThe following table sets forth repurchases of our common stock during the first quarter of 2023:Period Totalnumberof sharespurchased(1)Averageprice paidper share Totalnumberof sharespurchasedaspart ofpubliclyannouncedplans orprograms Approximatedollar valueofshares thatmay yetbe purchasedunder plansor programs(inthousands)January 29,2023 to February 25,2023 113,791$526.29 113,791$1,040,658February 26,2023 to March 25,2023 277,335 520.87 236,440 918,401March 26,2023 to April 29,2023 191,305 538.93 190,877 816,45013 weeks ended April 29,2023 582,431 527.86 541,108 816,450(1)There were 541,108 shares repurchased as part of our publicly announced share repurchaseprogram during the 13 weeks ended April 29,2023 and there were 41,323 shares transferred fromemployees in satisfaction of minimum statutory tax withholding obligations upon the vesting ofrestricted stock during the period.Item 3.Defaults Upon Senior SecuritiesNoneItem 4.Mine Safety DisclosuresNoneItem 5.Other InformationNoneItem 6.ExhibitsThe exhibits listed in the Exhibit Index below are filed as part of this Quarterly Report on Form 10-Q.2023/7/23 16:29https:/ of Contents23EXHIBIT INDEXIncorporated by ReferenceExhibitNumberDescription of documentFiledHerewith FormExhibitNumberFileNumber Filing Date3.1Certificate of Incorporation of UltaBeauty,Inc.8-K3.1001-33764 1/30/20173.2Bylaws of Ulta Beauty,Inc.,as amendedthrough June 3,20208-K3.2001-33764 6/08/202010.1Amendment No.2 to Second Amendedand Restated Loan Agreement,datedFebruary 27,2023,among Ulta Beauty,Inc.,Ulta Salon,Cosmetics&Fragrance,Inc.,the subsidiaries of UltaBeauty signatory thereto,the lendersparty thereto,and Wells Fargo Bank,National Association,as administrativeagent and collateral agent for the lendersX31.1Certification of the Chief ExecutiveOfficer pursuant to Rules 13a-14(a)and15d-14(a)of the Securities ExchangeAct of 1934,as adopted pursuant tosection 302 of the Sarbanes-Oxley Actof 2002X31.2Certification of the Chief FinancialOfficer pursuant to Rules 13a-14(a)and15d-14(a)of the Securities ExchangeAct of 1934,as adopted pursuant tosection 302 of the Sarbanes-Oxley Actof 2002X32Certification of the Chief ExecutiveOfficer and Chief Financial Officerpursuant to 18 U.S.C.Section 1350,asadopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002X101.INS Inline XBRL InstanceX101.SCHInline XBRL Taxonomy ExtensionSchemaX101.CALInline XBRL Taxonomy ExtensionCalculationX101.LABInline XBRL Taxonomy ExtensionLabelsX101.PRE Inline XBRL Taxonomy ExtensionPresentationX101.DEFInline XBRL Taxonomy ExtensionDefinitionX104Cover Page Interactive Data File(formatted as Inline XBRL withapplicable taxonomy extensioninformation contained in Exhibits 101).2023/7/23 16:29https:/ 16:29https:/ of Contents24SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused thisreport to be signed on May 25,2023 on its behalf by the undersigned,thereunto duly authorized.ULTA BEAUTY,INC.By:/s/David C.KimbellDavid C.KimbellChief Executive Officer and DirectorBy:/s/Scott M.SetterstenScott M.SetterstenChief Financial Officer,Treasurer and AssistantSecretary
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 FORM 10-QQUARTERLY REPORT PURSUA.
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-Q QUARTERLY REPORT PURSUA.
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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 June 30,2023OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number:001-35727Netflix,Inc.(Exact name of Registrant as specified in its charter)Delaware77-0467272(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification Number)121 Albright Way,Los Gatos,California95032(Address of principal executive offices)(Zip Code)(408)540-3700(Registrants telephone number,including area code)Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon stock,par value$0.001 per shareNFLXNASDAQ Global Select MarketIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during thepreceding 12 months(or for such shorter period that the registrant was required to file such reports)and(2)has been subject to such filing requirements for the past 90days.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 growthcompany.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the ExchangeAct.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 by Rule 12b-2 of the Exchange Act).Yes No As of June 30,2023,there were 443,146,751 shares of the registrants common stock,par value$0.001,outstanding.Table of Contents PagePart I.Financial InformationItem 1.Consolidated Financial StatementsConsolidated Statements of Operations3Consolidated Statements of Comprehensive Income4Consolidated Statements of Cash Flows5Consolidated Balance Sheets6Consolidated Statements of Stockholders Equity7Notes to Consolidated Financial Statements8Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations18Item 3.Quantitative and Qualitative Disclosures About Market Risk31Item 4.Controls and Procedures31Part II.Other InformationItem 1.Legal Proceedings32Item 1A.Risk Factors33Item 2.Unregistered Sales of Equity Securities and Use of Proceeds33Item 5.Other Information33Item 6.Exhibits33Exhibit Index34Signatures342Table of ContentsNETFLIX,INC.Consolidated Statements of Operations(unaudited)(in thousands,except per share data)Three Months EndedSix Months EndedJune 30,2023June 30,2022June 30,2023June 30,2022Revenues$8,187,301$7,970,141$16,348,804$15,837,908 Cost of revenues4,673,470 4,690,755 9,477,095 8,975,460 Marketing627,168 574,960 1,182,530 1,130,938 Technology and development657,983 716,846 1,345,258 1,374,376 General and administrative401,497 409,297 802,421 807,225 Operating income1,827,183 1,578,283 3,541,500 3,549,909 Other income(expense):Interest expense(174,812)(175,455)(349,051)(363,034)Interest and other income(expense)26,961 220,226(44,243)415,871 Income before income taxes1,679,332 1,623,054 3,148,206 3,602,746 Provision for income taxes(191,722)(182,103)(355,476)(564,348)Net income$1,487,610$1,440,951$2,792,730$3,038,398 Earnings per share:Basic$3.35$3.24$6.28$6.84 Diluted$3.29$3.20$6.18$6.73 Weighted-average shares of common stock outstanding:Basic443,881 444,557 444,559 444,352 Diluted451,572 450,169 451,990 451,578 See accompanying notes to the consolidated financial statements.3Table of ContentsNETFLIX,INC.Consolidated Statements of Comprehensive Income(unaudited)(in thousands)Three Months EndedSix Months EndedJune 30,2023June 30,2022June 30,2023June 30,2022Net income$1,487,610$1,440,951$2,792,730$3,038,398 Other comprehensive income(loss):Foreign currency translation adjustments52,429(70,306)78,040(103,981)Comprehensive income$1,540,039$1,370,645$2,870,770$2,934,417 See accompanying notes to the consolidated financial statements.4Table of ContentsNETFLIX,INC.Consolidated Statements of Cash Flows(unaudited)(in thousands)Three Months EndedSix Months Ended June 30,2023June 30,2022June 30,2023June 30,2022Cash flows from operating activities:Net income$1,487,610$1,440,951$2,792,730$3,038,398 Adjustments to reconcile net income to net cash provided by operating activities:Additions to content assets(3,683,007)(4,687,011)(6,141,673)(8,271,175)Change in content liabilities46,119 191,228(308,672)(155,921)Amortization of content assets3,410,021 3,261,348 6,870,005 6,427,713 Depreciation and amortization of property,equipment and intangibles89,385 83,505 179,720 158,107 Stock-based compensation expense78,030 150,392 177,129 269,601 Foreign currency remeasurement loss(gain)on debt28,952(304,513)109,603(466,334)Other non-cash items121,483 205,374 241,491 307,342 Deferred income taxes(103,172)(115,820)(201,954)(184,726)Changes in operating assets and liabilities:Other current assets(183,049)123,399(271,571)164,556 Accounts payable38,332(122,048)(51,336)(337,492)Accrued expenses and other liabilities177,831(238,719)363,130 112,044 Deferred revenue49,647(10,376)47,257 6,367 Other non-current assets and liabilities(117,950)125,040(186,887)(42,891)Net cash provided by operating activities1,440,232 102,750 3,618,972 1,025,589 Cash flows from investing activities:Purchases of property and equipment(100,972)(90,018)(162,991)(211,176)Acquisitions(68,876)(193,397)Purchases of short-term investments(303,228)(504,862)Proceeds from maturities of short-term investments501,937 501,937 Net cash provided by(used in)investing activities97,737(158,894)(165,916)(404,573)Cash flows from financing activities:Repayments of debt (700,000)Proceeds from issuance of common stock34,717 11,250 60,745 24,928 Repurchases of common stock(645,146)(1,045,247)Other financing activities(38,920)(38,920)Net cash provided by(used in)financing activities(649,349)11,250(1,023,422)(675,072)Effect of exchange rate changes on cash,cash equivalents and restricted cash39,626(145,198)66,049(156,646)Net increase(decrease)in cash,cash equivalents and restricted cash928,246(190,092)2,495,683(210,702)Cash,cash equivalents and restricted cash at beginning of period6,738,019 6,034,501 5,170,582 6,055,111 Cash,cash equivalents and restricted cash at end of period$7,666,265$5,844,409$7,666,265$5,844,409 See accompanying notes to the consolidated financial statements.5Table of ContentsNETFLIX,INC.Consolidated Balance Sheets(in thousands,except share and par value data)As of June 30,2023December 31,2022(unaudited)AssetsCurrent assets:Cash and cash equivalents$7,662,788$5,147,176 Short-term investments914,201 911,276 Other current assets2,929,347 3,208,021 Total current assets11,506,336 9,266,473 Content assets,net32,520,774 32,736,713 Property and equipment,net1,471,968 1,398,257 Other non-current assets5,318,395 5,193,325 Total assets$50,817,473$48,594,768 Liabilities and Stockholders EquityCurrent liabilities:Current content liabilities$4,440,412$4,480,150 Accounts payable615,374 671,513 Accrued expenses and other liabilities1,908,714 1,514,650 Deferred revenue1,311,918 1,264,661 Short-term debt399,387 Total current liabilities8,675,805 7,930,974 Non-current content liabilities2,849,387 3,081,277 Long-term debt14,070,151 14,353,076 Other non-current liabilities2,389,915 2,452,040 Total liabilities27,985,258 27,817,367 Commitments and contingencies(Note 7)Stockholders equity:Common stock,$0.001 par value;4,990,000,000 shares authorized at June 30,2023 and December 31,2022;443,146,751 and 445,346,776 issued and outstanding at June 30,2023 and December 31,2022,respectively4,874,208 4,637,601 Treasury stock at cost(4,635,858 and 1,564,478 shares at June 30,2023 and December 31,2022,respectively)(1,876,753)(824,190)Accumulated other comprehensive loss(139,266)(217,306)Retained earnings19,974,026 17,181,296 Total stockholders equity22,832,215 20,777,401 Total liabilities and stockholders equity$50,817,473$48,594,768 See accompanying notes to the consolidated financial statements.6Table of ContentsNETFLIX,INC.Consolidated Statements of Stockholders Equity(unaudited)(in thousands)Three Months EndedSix Months Ended June 30,2023June 30,2022June 30,2023June 30,2022Total stockholders equity,beginning balances$21,828,196$17,544,039$20,777,401$15,849,248 Common stock and additional paid-in capital:Beginning balances$4,762,395$4,155,580$4,637,601$4,024,561 Issuance of common stock upon exercise of options33,783 10,898 59,478 22,708 Stock-based compensation expense78,030 150,392 177,129 269,601 Ending balances$4,874,208$4,316,870$4,874,208$4,316,870 Treasury stock:Beginning balances$(1,228,920)$(824,190)$(824,190)$(824,190)Repurchases of common stock to be held as treasury stock(647,833)(1,052,563)Ending balances$(1,876,753)$(824,190)$(1,876,753)$(824,190)Accumulated other comprehensive loss:Beginning balances$(191,695)$(74,170)$(217,306)$(40,495)Other comprehensive income(loss)52,429(70,306)78,040(103,981)Ending balances$(139,266)$(144,476)$(139,266)$(144,476)Retained earnings:Beginning balances$18,486,416$14,286,819$17,181,296$12,689,372 Net income1,487,610 1,440,951 2,792,730 3,038,398 Ending balances$19,974,026$15,727,770$19,974,026$15,727,770 Total stockholders equity,ending balances$22,832,215$19,075,974$22,832,215$19,075,974 See accompanying notes to the consolidated financial statements.7Table of ContentsNETFLIX,INC.Notes to Consolidated Financial Statements(unaudited)1.Basis of Presentation and Summary of Significant Accounting PoliciesThe accompanying interim consolidated financial statements of Netflix,Inc.and its wholly owned subsidiaries(the“Company”)have been prepared inconformity with accounting principles generally accepted in the United States(“U.S.”)and are consistent in all material respects with those applied in theCompanys Annual Report on Form 10-K for the year ended December 31,2022 filed with the Securities and Exchange Commission(the“SEC”)on January26,2023.The preparation of consolidated financial statements in conformity with U.S.generally accepted accounting principles(“GAAP”)requiresmanagement to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.Significantitems subject to such estimates and assumptions include the amortization of content assets and the recognition and measurement of income tax assets andliabilities.The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under thecircumstances.On a regular basis,the Company evaluates the assumptions,judgments and estimates.Actual results may differ from these estimates.The interim financial information is unaudited,but reflects all normal recurring adjustments that are,in the opinion of management,necessary to fairlypresent the information set forth herein.The interim consolidated financial statements should be read in conjunction with the audited consolidated financialstatements and related notes included in the Companys Annual Report on Form 10-K for the year ended December 31,2022.Interim results are not necessarilyindicative of the results for a full year.There have been no material changes in the Companys significant accounting policies as compared to the significant accounting policies described in theCompanys Annual Report on Form 10-K for the year ended December 31,2022.2.Revenue RecognitionThe Companys primary source of revenues is from monthly membership fees.Members are billed in advance of the start of their monthly membershipand revenues are recognized ratably over each monthly membership period.Revenues are presented net of the taxes that are collected from members andremitted to governmental authorities.The Company is the principal in all its relationships where partners,including consumer electronics(“CE”)manufacturers,multichannel video programming distributors(“MVPDs”),mobile operators and internet service providers(“ISPs”),provide access to theservice as the Company retains control over service delivery to its members.Typically,payments made to the partners,such as for marketing,are expensed.However,if there is no distinct service provided in exchange for the payments made to the partners or if the price that the member pays is established by thepartners and there is no standalone price for the Netflix service(for instance,in a bundle),these payments are recognized as a reduction of revenues.The Company also earns revenue from advertisements presented on its streaming service,consumer products and various other sources.Revenues earnedfrom sources other than monthly membership fees were not material for the three and six months ended June 30,2023 and June 30,2022.The following tables summarize revenues,paid net membership additions(losses),and ending paid memberships by region for the three and six monthsended June 30,2023 and June 30,2022,respectively:United States and Canada(UCAN)As of/Three Months EndedAs of/Six Months Ended June 30,2023June 30,2022June 30,2023June 30,2022(in thousands)Revenues$3,599,448$3,537,863$7,208,093$6,888,287 Paid net membership additions(losses)1,173(1,296)1,275(1,932)Paid memberships at end of period(1)75,571 73,283 75,571 73,283 8Table of ContentsEurope,Middle East,and Africa(EMEA)As of/Three Months EndedAs of/Six Months Ended June 30,2023June 30,2022June 30,2023June 30,2022(in thousands)Revenues$2,562,170$2,457,235$5,079,811$5,019,066 Paid net membership additions(losses)2,434(767)3,078(1,070)Paid memberships at end of period(1)79,807 72,966 79,807 72,966 Latin America(LATAM)As of/Three Months EndedAs of/Six Months Ended June 30,2023June 30,2022June 30,2023June 30,2022(in thousands)Revenues$1,077,435$1,030,234$2,147,627$2,029,182 Paid net membership additions(losses)1,217 14 767(337)Paid memberships at end of period(1)42,466 39,624 42,466 39,624 Asia-Pacific(APAC)As of/Three Months EndedAs of/Six Months Ended June 30,2023June 30,2022June 30,2023June 30,2022(in thousands)Revenues$919,273$907,719$1,852,796$1,824,473 Paid net membership additions(losses)1,068 1,080 2,523 2,167 Paid memberships at end of period(1)40,546 34,799 40,546 34,799(1)A paid membership(also referred to as a paid subscription)is defined as a membership that has the right to receive Netflix service following sign-up and a method ofpayment being provided,and that is not part of a free trial or certain other promotions that may be offered by the Company to new or rejoining members.Certain members havethe option to add extra member sub accounts.These extra member sub accounts are not included in paid memberships.A membership is canceled and ceases to be reflected inthe above metrics as of the effective cancellation date.Voluntary cancellations generally become effective at the end of the prepaid membership period.Involuntarycancellations,as a result of a failed method of payment,become effective immediately.Memberships are assigned to territories based on the geographic location used at time ofsign-up as determined by the Companys internal systems,which utilize industry standard geo-location technology.Total U.S.revenues,inclusive of DVD revenues not reported in the tables above,were$3.3 billion and$6.6 billion,respectively,for the three and sixmonths ended June 30,2023 and$3.3 billion and$6.4 billion,respectively,for the three and six months ended June 30,2022.DVD revenues were$29 millionand$60 million,respectively,for the three and six months ended June 30,2023 and$37 million and$77 million,respectively,for the three and six monthsended June 30,2022.Deferred revenue consists of membership fees billed that have not been recognized,as well as gift cards and other prepaid memberships that have notbeen fully redeemed.As of June 30,2023,total deferred revenue was$1,312 million,the vast majority of which was related to membership fees billed that areexpected to be recognized as revenue within the next month.The remaining deferred revenue balance,which is related to gift cards and other prepaidmemberships,will be recognized as revenue over the period of service after redemption,which is expected to occur over the next 12 months.The$47 millionincrease in deferred revenue as compared to the balance of$1,265 million as of December 31,2022 is a result of the increase in membership fees billed due toincreased memberships.9Table of Contents3.Earnings Per ShareBasic earnings per share is computed using the weighted-average number of outstanding shares of common stock during the period.Diluted earnings pershare is computed using the weighted-average number of outstanding shares of common stock and,when dilutive,potential outstanding shares of commonstock during the period.Potential shares of common stock consist of incremental shares issuable upon the assumed exercise of stock options.The computationof earnings per share is as follows:Three Months EndedSix Months EndedJune 30,2023June 30,2022June 30,2023June 30,2022(in thousands,except per share data)Basic earnings per share:Net income$1,487,610$1,440,951$2,792,730$3,038,398 Shares used in computation:Weighted-average shares of common stock outstanding443,881 444,557 444,559 444,352 Basic earnings per share$3.35$3.24$6.28$6.84 Diluted earnings per share:Net income$1,487,610$1,440,951$2,792,730$3,038,398 Shares used in computation:Weighted-average shares of common stock outstanding443,881 444,557 444,559 444,352 Employee stock options7,691 5,612 7,431 7,226 Weighted-average number of shares451,572 450,169 451,990 451,578 Diluted earnings per share$3.29$3.20$6.18$6.73 Employee stock options with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation astheir inclusion would have been anti-dilutive.The following table summarizes the potential shares of common stock excluded from the diluted calculation:Three Months EndedSix Months EndedJune 30,2023June 30,2022June 30,2023June 30,2022(in thousands)Employee stock options4,348 8,175 5,097 5,462 10Table of Contents4.Cash,Cash Equivalents,Restricted Cash,and Short-term InvestmentsThe Companys investment policy is consistent with the definition of available-for-sale securities.The Company does not buy and hold securitiesprincipally for the purpose of selling them in the near future.The Companys policy is focused on the preservation of capital,liquidity and return.From time totime,the Company may sell certain securities but the objectives are generally not to generate profits on short-term differences in price.The following tablessummarize the Companys cash,cash equivalents,restricted cash and short-term investments as of June 30,2023 and December 31,2022:As of June 30,2023 Cash and cashequivalentsShort-terminvestmentsOther CurrentAssetsNon-currentAssetsTotal(in thousands)Cash$4,662,668$1,763$1,660$4,666,091 Level 1 securities:Money market funds2,628,351 54 2,628,405 Level 2 securities:Time Deposits(1)371,769 914,201 1,285,970$7,662,788$914,201$1,763$1,714$8,580,466 As of December 31,2022 Cash and cashequivalentsShort-terminvestmentsOther CurrentAssetsNon-currentAssetsTotal(in thousands)Cash$4,071,584$3,410$19,874$4,094,868 Level 1 securities:Money market funds569,826 122 569,948 Level 2 securities:Time Deposits(1)505,766 911,276 1,417,042$5,147,176$911,276$3,410$19,996$6,081,858(1)The majority of the Companys time deposits are domestic deposits,which mature within one year.Other current assets include restricted cash for deposits related to self insurance and letter of credit agreements.Non-current assets include restricted cashrelated to letter of credit agreements.The fair value of cash equivalents and short-term investments included in the Level 2 category is based on observableinputs,such as quoted prices for similar assets at the measurement date;quoted prices in markets that are not active;or other inputs that are observable,eitherdirectly or indirectly.See Note 6 Debt to the consolidated financial statements for further information regarding the fair value of the Companys senior notes.There were no material gross realized gains or losses in the three and six months ended June 30,2023 and 2022,respectively.115.Balance Sheet ComponentsContent Assets,NetContent assets consisted of the following:As ofJune 30,2023December 31,2022(in thousands)Licensed content,net$12,622,409$12,732,549 Produced content,netReleased,less amortization9,286,399 9,110,518 In production9,796,704 10,255,940 In development and pre-production815,262 637,706 19,898,365 20,004,164 Content assets,net$32,520,774$32,736,713 As of June 30,2023,approximately$5,495 million,$2,844 million,and$1,971 million of the$12,622 million unamortized cost of the licensed content isexpected to be amortized in each of the next three years.As of June 30,2023,approximately$3,544 million,$2,420 million,and$1,710 million of the$9,286million unamortized cost of the produced content that has been released is expected to be amortized in each of the next three years.As of June 30,2023,the amount of accrued participations and residuals was not material.The following table represents the amortization of content assets:Three Months Ended June 30,2023June 30,2022(in thousands)Licensed content$1,779,321$1,899,782 Produced content1,630,700 1,361,566 Total$3,410,021$3,261,348 Six Months Ended June 30,2023June 30,2022(in thousands)Licensed content$3,502,999$3,784,220 Produced content3,367,006 2,643,493 Total$6,870,005$6,427,713 12Property and Equipment,NetProperty and equipment and accumulated depreciation consisted of the following:As ofJune 30,2023December 31,2022Estimated Useful Lives(in thousands)Land$86,662$85,005 Buildings60,720 52,106 30 yearsLeasehold improvements1,068,757 1,040,570 Over life of leaseFurniture and fixtures155,401 153,682 3 yearsInformation technology461,590 442,681 3 yearsCorporate aircraft133,998 115,578 8-10 yearsMachinery and equipment27,384 26,821 3-5 yearsCapital work-in-progress348,194 235,555 Property and equipment,gross2,342,706 2,151,998 Less:Accumulated depreciation(870,738)(753,741)Property and equipment,net$1,471,968$1,398,257 LeasesThe Company has entered into operating leases primarily for real estate.Operating leases are included in Other non-current assets on the CompanysConsolidated Balance Sheets,and represent the Companys right to use the underlying asset for the lease term.The Companys obligations to make leasepayments are included in Accrued expenses and other liabilities and Other non-current liabilities on the Companys Consolidated Balance Sheets.Information related to the Companys operating right-of-use assets and related operating lease liabilities were as follows:Three Months EndedJune 30,2023June 30,2022(in thousands)Cash paid for operating lease liabilities$114,760$99,758 Right-of-use assets obtained in exchange for new operating lease obligations91,572 39,304 Six Months EndedJune 30,2023June 30,2022(in thousands)Cash paid for operating lease liabilities$228,167$202,899 Right-of-use assets obtained in exchange for new operating lease obligations112,466 180,602 As ofJune 30,2023December 31,2022(in thousands)Operating lease right-of-use assets,net$2,187,732$2,227,122 Current operating lease liabilities376,847 355,985 Non-current operating lease liabilities2,147,306 2,222,503 Total operating lease liabilities$2,524,153$2,578,488 13Other Current AssetsOther current assets consisted of the following:As ofJune 30,2023December 31,2022(in thousands)Trade receivables$1,218,326$988,898 Prepaid expenses481,546 392,735 Other1,229,475 1,826,388 Total other current assets$2,929,347$3,208,021 The decrease in Other was primarily driven by receipt of amounts due under a modified content licensing arrangement.6.DebtAs of June 30,2023,the Company had aggregate outstanding notes of$14,470 million,net of$72 million of issuance costs,with varying maturities(theNotes).Of the outstanding balance,$399 million,net of issuance costs,is classified as short-term debt on the Consolidated Balance Sheets.As ofDecember 31,2022,the Company had aggregate outstanding notes of$14,353 million,net of$79 million of issuance costs.Each of the Notes were issued atpar and are senior unsecured obligations of the Company.Interest is payable semi-annually at fixed rates.A portion of the outstanding Notes is denominated inforeign currency(comprised of 5,170 million)and is remeasured into U.S.dollars at each balance sheet date(with remeasurement loss totaling$29 millionand$110 million,respectively,for the three and six months ended June 30,2023).The following table provides a summary of the Companys outstanding debt and the fair values based on quoted market prices in less active markets as ofJune 30,2023 and December 31,2022:Principal Amount at ParLevel 2 Fair Value as ofJune 30,2023December 31,2022Issuance DateMaturityJune 30,2023December 31,2022(in millions)(in millions)5.750%Senior Notes$400$400 February 2014March 2024$401$404 5.875%Senior Notes800 800 February 2015February 2025804 811 3.000%Senior Notes(1)513 503 April 2020June 2025503 495 3.625%Senior Notes500 500 April 2020June 2025483 479 4.375%Senior Notes1,000 1,000 October 2016November 2026979 980 3.625%Senior Notes(1)1,419 1,391 May 2017May 20271,387 1,338 4.875%Senior Notes1,600 1,600 October 2017April 20281,584 1,557 5.875%Senior Notes1,900 1,900 April 2018November 20281,972 1,930 4.625%Senior Notes(1)1,200 1,177 October 2018May 20291,216 1,151 6.375%Senior Notes800 800 October 2018May 2029848 830 3.875%Senior Notes(1)1,310 1,284 April 2019November 20291,279 1,201 5.375%Senior Notes900 900 April 2019November 2029904 885 3.625%Senior Notes(1)1,200 1,177 October 2019June 20301,145 1,078 4.875%Senior Notes1,000 1,000 October 2019June 2030986 944$14,542$14,432$14,491$14,083(1)The following Senior Notes have a principal amount denominated in euro:3.000%Senior Notes for 470 million,3.625%Senior Notes for 1,300 million,4.625%Senior Notes for 1,100 million,3.875%Senior Notes for 1,200 million,and 3.625%Senior Notes for 1,100 million.14Table of ContentsEach of the Notes are repayable in whole or in part upon the occurrence of a change of control,at the option of the holders,at a purchase price in cashequal to 101%of the principal plus accrued interest.The Company may redeem the Notes prior to maturity in whole or in part at an amount equal to theprincipal amount thereof plus accrued and unpaid interest and an applicable premium.The Notes include,among other terms and conditions,limitations on theCompanys ability to create,incur or allow certain liens;enter into sale and lease-back transactions;create,assume,incur or guarantee additional indebtednessof certain of the Companys subsidiaries;and consolidate or merge with,or convey,transfer or lease all or substantially all of the Companys and its subsidiariesassets,to another person.As of June 30,2023 and December 31,2022,the Company was in compliance with all related covenants.Revolving Credit FacilityOn March 6,2023,the Company amended its$1 billion unsecured revolving credit facility(Revolving Credit Agreement)to replace the Londoninterbank offered rate to a variable secured overnight financing rate(the“Term SOFR Rate”)as the rate to which interest payments are indexed,among otherthings.The Revolving Credit Agreement matures on June 17,2026.Revolving loans may be borrowed,repaid and reborrowed until June 17,2026,at whichtime all amounts borrowed must be repaid.The Company may use the proceeds of future borrowings under the Revolving Credit Agreement for workingcapital and general corporate purposes.As of June 30,2023,no amounts have been borrowed under the Revolving Credit Agreement.The borrowings under the Revolving Credit Agreement bear interest,at the Companys option,of either(i)a floating rate equal to a base rate(the“Alternate Base Rate”)or(ii)a rate equal to the Term SOFR Rate(or the applicable benchmark replacement),plus a margin of 0.75%.The Alternate Base Rateis defined as the greatest of(A)the rate of interest published by the Wall Street Journal,from time to time,as the prime rate,(B)the federal funds rate,plus 0.500%and(C)the Term SOFR Rate for a one-month tenor,plus 1.00%.The Term SOFR Rate is the forward-looking secured overnight financing rateadministered by the Federal Reserve Bank of New York or a successor administrator,for the relevant interest period,but in no event shall the Term SOFR Ratebe less than 0.00%per annum.The Company is also obligated to pay a commitment fee on the undrawn amounts of the Revolving Credit Agreement at an annual rate of 0.10%.TheRevolving Credit Agreement requires the Company to comply with certain covenants,including covenants that limit or restrict the ability of the Companyssubsidiaries to incur debt and limit or restrict the ability of the Company and its subsidiaries to grant liens and enter into sale and leaseback transactions;and,inthe case of the Company or a guarantor,merge,consolidate,liquidate,dissolve or sell,transfer,lease or otherwise dispose of all or substantially all of the assetsof the Company and its subsidiaries,taken as a whole.As of June 30,2023 and December 31,2022,the Company was in compliance with all relatedcovenants.7.Commitments and ContingenciesContentAs of June 30,2023,the Company had$20.9 billion of obligations comprised of$4.4 billion included in Current content liabilities and$2.8 billion ofNon-current content liabilities on the Consolidated Balance Sheets and$13.7 billion of obligations that are not reflected on the Consolidated Balance Sheetsas they did not yet meet the criteria for recognition.As of December 31,2022,the Company had$21.8 billion of obligations comprised of$4.5 billion included in Current content liabilities and$3.1billion of Non-current content liabilities on the Consolidated Balance Sheets and$14.2 billion of obligations that are not reflected on the ConsolidatedBalance Sheets as they did not yet meet the criteria for recognition.The expected timing of payments for these content obligations is as follows:As of June 30,2023December 31,2022(in thousands)Less than one year$9,818,370$10,038,483 Due after one year and through three years9,131,131 9,425,551 Due after three years and through five years1,662,733 2,124,307 Due after five years288,054 243,606 Total content obligations$20,900,288$21,831,947 15Table of ContentsContent obligations include amounts related to the acquisition,licensing and production of content.Obligations that are in non-U.S.dollar currencies aretranslated to the U.S.dollar at period end rates.An obligation for the production of content includes non-cancelable commitments under creative talent andemployment agreements as well as other production related commitments.An obligation for the acquisition and licensing of content is incurred at the time theCompany enters into an agreement to obtain future titles.Once a title becomes available,a content liability is recorded on the Consolidated Balance Sheets.Certain agreements include the obligation to license rights for unknown future titles,the ultimate quantity and/or fees for which are not yet determinable as ofthe reporting date.Traditional film output deals,or certain TV series license agreements where the number of seasons to be aired is unknown,are examples ofsuch license agreements.The Company does not include any estimated obligation for these future titles beyond the known minimum amount.However,theunknown obligations are expected to be significant.Legal ProceedingsFrom time to time,in the normal course of its operations,the Company is subject to litigation matters and claims,including claims relating to employeerelations,business practices and patent infringement.Litigation can be expensive and disruptive to normal business operations.Moreover,the results ofcomplex legal proceedings are difficult to predict and the Companys view of these matters may change in the future as the litigation and events related theretounfold.The Company expenses legal fees as incurred.The Company records a provision for contingent losses when it is both probable that a liability has beenincurred and the amount of the loss can be reasonably estimated.An unfavorable outcome to any legal matter,if material,could have an adverse effect on theCompanys operations or its financial position,liquidity or results of operations.The Company is involved in litigation matters not listed herein but does not consider the matters to be material either individually or in the aggregate atthis time.The Companys view of the matters not listed may change in the future as the litigation and events related thereto unfold.IndemnificationIn the ordinary course of business,the Company has entered into contractual arrangements under which it has agreed to provide indemnification ofvarying scope and terms to business partners and other parties with respect to certain matters,including,but not limited to,losses arising out of the Companysbreach of such agreements and out of intellectual property infringement claims made by third parties.In these circumstances,payment may be conditional onthe other party making a claim pursuant to the procedures specified in the particular contract.The Companys obligations under these agreements may be limited in terms of time or amount,and in some instances,the Company may have recourseagainst third parties for certain payments.In addition,the Company has entered into indemnification agreements with its directors and certain of its officers thatwill require it,among other things,to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers.Theterms of such obligations vary.It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to theconditional nature of the Companys obligations and the unique facts and circumstances involved in each particular agreement.No amount has been accrued inthe accompanying consolidated financial statements with respect to these indemnification obligations.8.Stockholders EquityStock Option PlanIn June 2020,the Companys stockholders approved the 2020 Stock Plan,which was adopted by the Companys Board of Directors in March 2020subject to stockholder approval.The 2020 Stock Plan provides for the grant of incentive stock options to employees and for the grant of non-statutory stockoptions,stock appreciation rights,restricted stock and restricted stock units to employees,directors and consultants.16Table of ContentsA summary of the activities related to the Companys stock option plans is as follows:Options OutstandingSharesAvailablefor GrantNumber ofSharesWeighted-AverageExercise Price(per share)Weighted-AverageRemainingContractual Term(in years)AggregateIntrinsic Value(in thousands)Balances as of December 31,202216,454,103 19,896,861$242.22 Granted(1,025,300)1,025,300 333.49Exercised(871,355)68.23 Expired(574)13.14 Balances as of June 30,202315,428,803 20,050,232$254.46 5.52$3,982,709 Vested and expected to vest as of June 30,202320,050,232$254.46 5.52$3,982,709 Exercisable as of June 30,202319,918,808$253.84 5.49$3,970,659 The aggregate intrinsic value in the table above represents the total pretax intrinsic value(the difference between the Companys closing stock price onthe last trading day of the second quarter of 2023 and the exercise price,multiplied by the number of in-the-money options)that would have been received bythe option holders had all option holders exercised their options on the last trading day of the second quarter of 2023.This amount changes based on the fairmarket value of the Companys common stock.A summary of the amounts related to option exercises,is as follows:Three Months EndedSix Months EndedJune 30,2023June 30,2022June 30,2023June 30,2022(in thousands)Total intrinsic value of options exercised$137,791$83,030$254,101$197,792 Cash received from options exercised34,717 11,250 60,745 24,928 Stock-based CompensationStock options are generally vested in full upon grant date and exercisable for the full ten year contractual term regardless of employment status.Stockoptions granted to certain named executive officers vest on the one-year anniversary of the grant date,subject to the employees continuous employment orservice with the Company through the vesting date.The following table summarizes the assumptions used to value option grants using the lattice-binomialmodel and the valuation data:Three Months EndedSix Months EndedJune 30,2023June 30,2022June 30,2023June 30,2022Dividend yield%Expected volatility43IC%-468%-49%Risk-free interest rate3.57%2.57%3.57%-3.63%1.71%-2.57%Suboptimal exercise factor4.27 4.71 4.22-4.274.71 Weighted-average fair value(per share)$200$138$192$167 Total stock-based compensation expense(in thousands)$78,030$150,392$177,129$269,601 Total income tax impact on provision(in thousands)$17,148$33,335$38,859$59,748 Stock RepurchasesIn March 2021,the Companys Board of Directors authorized the repurchase of up to$5 billion of its common stock,with no expiration date.Stockrepurchases may be effected through open market repurchases in compliance with Rule 10b-18 under the Exchange Act,including through the use of tradingplans intended to qualify under Rule 10b5-1 under the Exchange Act,privately-negotiated transactions,accelerated stock repurchase plans,block purchases,orother similar purchase techniques and in such amounts as management deems appropriate.The Company is not obligated to repurchase any specific number ofshares,and the timing and actual number of shares repurchased will depend on a variety of factors,including the Companys stock price,general economic,business and market conditions,and alternative investment17Table of Contentsopportunities.The Company may discontinue any repurchases of its common stock at any time without prior notice.During the three and six months endedJune 30,2023,the Company repurchased 1,849,324 and 3,071,380 shares,respectively,for an aggregate amount of$645 million and$1,045 million,respectively.As of June 30,2023,$3.4 billion remain available for repurchases.Shares repurchased by the Company are accounted for when the transaction issettled.As of June 30,2023,there were no unsettled share repurchases.Direct costs incurred to acquire the shares are included in the total cost of the shares.9.Income Taxes Three Months EndedSix Months Ended June 30,2023June 30,2022June 30,2023June 30,2022(in thousands,except percentages)Provision for income taxes$191,722$182,103$355,476$564,348 Effective tax rate11%The effective tax rates for the three and six months ended June 30,2023 differed from the Federal statutory rate primarily due to the impact ofinternational provisions of the Tax Cuts and Jobs Act,research and development credits,and the recognition of excess tax benefits of stock-basedcompensation.The effective tax rates for the three and six months ended June 30,2022 differed from the Federal statutory rate primarily due to the impact offoreign taxes,international provisions of the Tax Cuts and Jobs Act,research and development credits,and the recognition of excess tax benefits of stock-basedcompensation.The effective tax rate for the three months ended June 30,2023 was consistent compared to the same period in 2022.The decrease in the effective tax ratefor the six months ended June 30,2023,as compared to the same period in 2022 was primarily due to a decrease in foreign taxes.For the three and six monthsended June 30,2023,the Company recognized a discrete tax benefit related to the excess tax benefits from stock-based compensation of$28 million and$52 million,compared to the three and six months ended June 30,2022 of$18 million and$43 million.Gross unrecognized tax benefits were$240 million and$227 million as of June 30,2023 and December 31,2022,respectively.The gross unrecognizedtax benefits,if recognized by the Company,will result in a reduction of approximately$164 million to the provision for income taxes thereby favorablyimpacting the Companys effective tax rate.The Company files U.S.Federal,state and foreign tax returns.The Company is currently under examination by the IRS for the years 2016 through 2018and is subject to examination for 2019 through 2022.The foreign and state tax returns for the years 2015 through 2022 are subject to examination by variousstates and foreign jurisdictions.While the Company is in various stages of inquiries and examinations by federal,state and foreign taxing authorities,webelieve that our tax positions will more likely than not be sustained.Nonetheless,it is possible that future obligations related to these matters could arise.Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute oflimitations,it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months.However,anestimate of the range of reasonably possible adjustments cannot be made at this time.10.Segment and Geographic InformationThe Company operates as one operating segment.The Companys chief operating decision maker(CODM)is its co-chief executive officers,whoreview financial information presented on a consolidated basis for the purposes of making operating decisions,assessing financial performance and allocatingresources.Total U.S.revenues were$3.3 billion and$6.6 billion,respectively,for the three and six months ended June 30,2023,and$3.3 billion and$6.4 billion,respectively,for the three and six months ended June 30,2022.See Note 2 Revenue Recognition for additional information about streaming revenue by region.The Companys long-lived tangible assets,as well as the Companys operating lease right-of-use assets recognized on the Consolidated Balance Sheets asof June 30,2023 and December 31,2022,were located as follows:As ofJune 30,2023December 31,2022(in thousands)United States$2,795,979$2,745,071 International863,721 880,308 18Table of ContentsItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThis Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws.These forward-lookingstatements include,but are not limited to,statements regarding:our core strategy;our ability to improve our content offerings and service;our future financialperformance,including expectations regarding revenues,deferred revenue,operating income and margin,net income,expenses,and profitability;liquidity,including the sufficiency of our capital resources,net cash provided by(used in)operating activities,access to financing sources,and free cash flows;capitalallocation strategies,including any stock repurchases or repurchase programs;seasonality;stock price volatility;impact of foreign exchange rate fluctuations,including on net income,revenues and average revenues per paying member;impact of interest rate fluctuations;adequacy of existing facilities;futureregulatory changes and their impact on our business;intellectual property;price changes and testing;accounting treatment for changes related to content assets;acquisitions;membership growth,including impact of content and pricing changes on membership growth;partnerships;member viewing patterns;dividends;future contractual obligations,including unknown content obligations and timing of payments;our global content and marketing investments,includinginvestments in original programming;impact of work stoppages;content amortization;resolution of tax examinations;tax expense;unrecognized tax benefits;deferred tax assets;and our ability to effectively manage change and growth.These forward-looking statements are subject to risks and uncertainties that couldcause actual results and events to differ materially from those included in forward-looking statements.Factors that might cause or contribute to such differencesinclude,but are not limited to,those discussed in our Annual Report on Form 10-K for the year ended December 31,2022 filed with the Securities andExchange Commission(“SEC”)on January 26,2023,in particular the risk factors discussed under the heading“Risk Factors”in Part I,Item 1A.We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q,unless required by law.Investors and others should note that we announce material financial information to our investors using our investor relations website(),SECfilings,press releases,public conference calls and webcasts.We use these channels,as well as social media and blogs to communicate with our members andthe public about our company,our services and other issues.It is possible that the information we post on social media and blogs could be deemed to bematerial information.Therefore,we encourage investors,the media,and others interested in our company to review the information we post on the socialmedia channels and blogs listed on our investor relations website.OverviewWe are one of the worlds leading entertainment services with over 238 million paid memberships in over 190 countries enjoying TV series,films andgames across a wide variety of genres and languages.Members can play,pause and resume watching as much as they want,anytime,anywhere,and canchange their plans at any time.Our core strategy is to grow our business globally within the parameters of our operating margin target.We strive to continuously improve our membersexperience by offering compelling content that delights them and attracts new members.We seek to drive conversation around our content to further enhancemember joy,and we are continuously enhancing our user interface to help our members more easily choose content that they will find enjoyable.Our membership growth exhibits a seasonal pattern that reflects variations when consumers buy internet-connected screens and when they tend toincrease their viewing.Historically,the fourth quarter represents our greatest streaming membership growth.In addition,our membership growth can beimpacted by our content release schedule and changes to pricing.19Table of ContentsResults of OperationsThe following represents our consolidated performance highlights:As of/Three Months EndedChangeJune 30,2023June 30,2022Q223 vs.Q222(in thousands,except revenue per membership and percentages)Financial Results:Streaming revenues$8,158,326$7,933,051$225,275 3%DVD revenues(1)28,975 37,090(8,115)(22)%Total revenues$8,187,301$7,970,141$217,160 3%Operating income$1,827,183$1,578,283$248,900 16%Operating margin22 %2%Global Streaming Memberships:Paid net membership additions(losses)5,892(969)6,861 708%Paid memberships at end of period238,390 220,672 17,718 8%Average paying memberships235,444 221,157 14,287 6%Average monthly revenue per paying membership$11.55$11.96$(0.41)(3)%(1)In April 2023,we announced our plans to discontinue our DVD-by-mail service,which we do not expect to have a material effect on our operations or financial results.Consolidated revenues for the three months ended June 30,2023 increased 3%as compared to the three months ended June 30,2022.The increase in ourconsolidated revenues was due to the 6%growth in average paying memberships,partially offset by a 3crease in average monthly revenue per payingmembership.The decrease in average monthly revenue per paying membership was primarily due to the strengthening of the U.S.dollar relative to certainforeign currencies,higher membership growth in regions with lower average monthly revenue per paying membership and timing of paid net membershipadditions.These decreases were partially offset by price increases in certain regions.The increase in operating margin is primarily due to the 3%growth in revenue coupled with lower cost of revenues,technology and developmentexpenses,and general and administrative expenses for the three months ended June 30,2023 as compared to the corresponding prior year period.The decreasein expenses was impacted by approximately$150 million of expenses related to cost restructuring initiatives incurred during the three months ended June 30,2022 with no similar transactions for the three months ended June 30,2023.Streaming RevenuesWe primarily derive revenues from monthly membership fees for services related to streaming content to our members.We offer a variety of streamingmembership plans,the price of which varies by country and the features of the plan.As of June 30,2023,pricing on our paid plans ranged from the U.S.dollarequivalent of$1 to$27 per month,and pricing on our extra member sub accounts ranged from the U.S.dollar equivalent of$2 to$8 per month.We expect thatfrom time to time the prices of our membership plans in each country may change and we may test other plan and price variations.We also earn revenue from advertisements presented on our streaming service,consumer products and various other sources.Revenues earned fromsources other than monthly membership fees were not material for the three and six months ended June 30,2023 and June 30,2022.The following tables summarize streaming revenue and other streaming membership information by region for the three and six months ended June 30,2023 and 2022.20Table of ContentsUnited States and Canada(UCAN)Three months ended June 30,2023 as compared to the three months ended June 30,2022As of/Three Months EndedChange June 30,2023June 30,2022Q223 vs.Q222(in thousands,except revenue per membership and percentages)Revenues$3,599,448$3,537,863$61,585 2%Paid net membership additions(losses)1,173(1,296)2,469 191%Paid memberships at end of period75,571 73,283 2,288 3%Average paying memberships74,985 73,931 1,054 1%Average monthly revenue per paying membership$16.00$15.95$0.05%Constant currency change(1)1%Six months ended June 30,2023 as compared to the six months ended June 30,2022As of/Six Months EndedChange June 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except revenue per membership and percentages)Revenues$7,208,093$6,888,287$319,806 5%Paid net membership additions(losses)1,275(1,932)3,207 166%Paid memberships at end of period75,571 73,283 2,288 3%Average paying memberships74,666 74,414 252%Average monthly revenue per paying membership$16.09$15.43$0.66 4%Constant currency change(1)5%Europe,Middle East,and Africa(EMEA)Three months ended June 30,2023 as compared to the three months ended June 30,2022As of/Three Months EndedChange June 30,2023June 30,2022Q223 vs.Q222(in thousands,except revenue per membership and percentages)Revenues$2,562,170$2,457,235$104,935 4%Paid net membership additions(losses)2,434(767)3,201 417%Paid memberships at end of period79,807 72,966 6,841 9%Average paying memberships78,590 73,350 5,240 7%Average monthly revenue per paying membership$10.87$11.17$(0.30)(3)%Constant currency change(1)(1)%Six months ended June 30,2023 as compared to the six months ended June 30,202221Table of ContentsAs of/Six Months EndedChange June 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except revenue per membership and percentages)Revenues$5,079,811$5,019,066$60,745 1%Paid net membership additions(losses)3,078(1,070)4,148 388%Paid memberships at end of period79,807 72,966 6,841 9%Average paying memberships77,821 73,618 4,203 6%Average monthly revenue per paying membership$10.88$11.36$(0.48)(4)%Constant currency change(1)%Latin America(LATAM)Three months ended June 30,2023 as compared to the three months ended June 30,2022As of/Three Months EndedChange June 30,2023June 30,2022Q223 vs.Q222(in thousands,except revenue per membership and percentages)Revenues$1,077,435$1,030,234$47,201 5%Paid net membership additions(losses)1,217 14 1,203 8,593%Paid memberships at end of period42,466 39,624 2,842 7%Average paying memberships41,858 39,617 2,241 6%Average monthly revenue per paying membership$8.58$8.67$(0.09)(1)%Constant currency change(1)8%Six months ended June 30,2023 as compared to the six months ended June 30,2022As of/Six Months EndedChange June 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except revenue per membership and percentages)Revenues$2,147,627$2,029,182$118,445 6%Paid net membership additions(losses)767(337)1,104 328%Paid memberships at end of period42,466 39,624 2,842 7%Average paying memberships41,666 39,702 1,964 5%Average monthly revenue per paying membership$8.59$8.52$0.07 1%Constant currency change(1)8%Asia-Pacific(APAC)Three months ended June 30,2023 as compared to the three months ended June 30,202222Table of ContentsAs of/Three Months EndedChange June 30,2023June 30,2022Q223 vs.Q222(in thousands,except revenue per membership and percentages)Revenues$919,273$907,719$11,554 1%Paid net membership additions(losses)1,068 1,080(12)(1)%Paid memberships at end of period40,546 34,799 5,747 17%Average paying memberships40,012 34,259 5,753 17%Average monthly revenue per paying membership$7.66$8.83$(1.17)(13)%Constant currency change(1)(7)%Six months ended June 30,2023 as compared to the six months ended June 30,2022As of/Six Months EndedChange June 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except revenue per membership and percentages)Revenues$1,852,796$1,824,473$28,323 2%Paid net membership additions(losses)2,523 2,167 356 16%Paid memberships at end of period40,546 34,799 5,747 17%Average paying memberships39,382 33,718 5,664 17%Average monthly revenue per paying membership$7.84$9.02$(1.18)(13)%Constant currency change(1)(6)%(1)We believe constant currency information is useful in analyzing the underlying trends in average monthly revenue per paying membership.In order to exclude the effect offoreign currency rate fluctuations on average monthly revenue per paying membership,we estimate current period revenue assuming foreign exchange rates had remainedconstant with foreign exchange rates from each of the corresponding months of the prior-year period.For the three and six months ended June 30,2023,our revenues wouldhave been approximately$231 million and$577 million higher had foreign currency exchange rates remained constant with those for the three and six months ended June 30,2022.Cost of RevenuesAmortization of content assets makes up the majority of cost of revenues.Expenses associated with the acquisition,licensing and production of content(such as payroll and related personnel expenses,costs associated with obtaining rights to music included in our content,overall deals with talent,miscellaneousproduction related costs and participations and residuals),streaming delivery costs and other operations costs make up the remainder of cost of revenues.Wehave built our own global content delivery network(“Open Connect”)to help us efficiently stream a high volume of content to our members over the internet.Delivery expenses,therefore,include equipment costs related to Open Connect,payroll and related personnel expenses and all third-party costs,such as cloudcomputing costs,associated with delivering content over the internet.Other operations costs include customer service and payment processing fees,includingthose we pay to our integrated payment partners,as well as other costs incurred in making our content available to members.Three months ended June 30,2023 as compared to the three months ended June 30,2022Three Months EndedChangeJune 30,2023June 30,2022Q223 vs.Q222(in thousands,except percentages)Cost of revenues$4,673,470$4,690,755$(17,285)%As a percentage of revenues57Y%Cost of revenues for the three months ended June 30,2023 as compared to the three months ended June 30,2022 remained relatively flat.Six months ended June 30,2023 as compared to the six months ended June 30,202223Table of ContentsSix Months EndedChangeJune 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except percentages)Cost of revenues$9,477,095$8,975,460$501,635 6%As a percentage of revenues58W%The increase in cost of revenues was primarily due to a$442 million increase in content amortization relating to our existing and new content,includingmore exclusive and original programming.MarketingMarketing expenses consist primarily of advertising expenses and certain payments made to our marketing and advertising sales partners,includingconsumer electronics(“CE”)manufacturers,multichannel video programming distributors(“MVPDs”),mobile operators,and internet service providers(“ISPs”).Advertising expenses include promotional activities such as digital and television advertising.Marketing expenses also include payroll and relatedexpenses for personnel that support marketing activities.Three months ended June 30,2023 as compared to the three months ended June 30,2022Three Months EndedChangeJune 30,2023June 30,2022Q223 vs.Q222(in thousands,except percentages)Marketing$627,168$574,960$52,208 9%As a percentage of revenues8%7%The increase in marketing expenses was primarily due to an$88 million increase in advertising expenses,partially offset by a$20 million decrease inpersonnel-related costs and a$11 million decrease in payments to our marketing partners.Six months ended June 30,2023 as compared to the six months ended June 30,2022Six Months EndedChangeJune 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except percentages)Marketing$1,182,530$1,130,938$51,592 5%As a percentage of revenues7%7%The increase in marketing expenses was primarily due to a$107 million increase in advertising expenses,partially offset by a$34 million decrease inpersonnel-related costs and a$20 million decrease in payments to our marketing partners.Technology and DevelopmentTechnology and development expenses consist primarily of payroll and related expenses for technology personnel responsible for making improvementsto our service offerings,including testing,maintaining and modifying our user interface,our recommendations,merchandising and infrastructure.Technologyand development expenses also include costs associated with general use computer hardware and software.Three months ended June 30,2023 as compared to the three months ended June 30,2022Three Months EndedChangeJune 30,2023June 30,2022Q223 vs.Q222(in thousands,except percentages)Technology and development$657,983$716,846$(58,863)(8)%As a percentage of revenues8%9%The decrease in technology and development expenses was primarily due to a$62 million decrease in personnel-related costs,partially offset by anincrease in expenses related to continued improvements in our streaming service.Six months ended June 30,2023 as compared to the six months ended June 30,202224Table of ContentsSix Months EndedChangeJune 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except percentages)Technology and development$1,345,258$1,374,376$(29,118)(2)%As a percentage of revenues8%9%The decrease in technology and development expenses was primarily due to a$36 million decrease in personnel-related costs,partially offset by anincrease in expenses related to continued improvements in our streaming service.General and AdministrativeGeneral and administrative expenses consist primarily of payroll and related expenses for corporate personnel.General and administrative expenses alsoinclude professional fees and other general corporate expenses.Three months ended June 30,2023 as compared to the three months ended June 30,2022Three Months EndedChangeJune 30,2023June 30,2022Q223 vs.Q222(in thousands,except percentages)General and administrative$401,497$409,297$(7,800)(2)%As a percentage of revenues5%5%The decrease in general and administrative expenses was primarily due to a$15 million decrease in personnel-related costs and a decrease inadministrative expenses,partially offset by an increase in third-party expenses,including costs for contractors and consultants.Six months ended June 30,2023 as compared to the six months ended June 30,2022Six Months EndedChangeJune 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except percentages)General and administrative$802,421$807,225$(4,804)(1)%As a percentage of revenues5%5%General and administrative expenses for the six months ended June 30,2023 as compared to the six months ended June 30,2022 remained relatively flat.25Table of ContentsInterest ExpenseInterest expense consists primarily of the interest associated with our outstanding debt obligations,including the amortization of debt issuance costs.SeeNote 6 Debt in the accompanying notes to our consolidated financial statements for further detail on our debt obligations.Three months ended June 30,2023 as compared to the three months ended June 30,2022 Three Months EndedChange June 30,2023June 30,2022Q223 vs.Q222(in thousands,except percentages)Interest expense$174,812$175,455$(643)%As a percentage of revenues2%2%Six months ended June 30,2023 as compared to the six months ended June 30,2022 Six Months EndedChange June 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except percentages)Interest expense$349,051$363,034$(13,983)(4)%As a percentage of revenues2%2%Interest expense primarily consists of interest on our Notes of$175 million and$349 million for the three and six months ended June 30,2023.Interestexpense for the three months ended June 30,2023 as compared to the three months ended June 30,2022 remained relatively flat.The decrease in interestexpense for the six months ended June 30,2023 as compared to the six months ended June 30,2022 was due to the lower average aggregate principal ofinterest bearing notes outstanding.Interest and Other Income(Expense)Interest and other income(expense)consists primarily of foreign exchange gains and losses on foreign currency denominated balances and interest earnedon cash,cash equivalents and short-term investments.Three months ended June 30,2023 as compared to the three months ended June 30,2022 Three Months EndedChange June 30,2023June 30,2022Q223 vs.Q222(in thousands,except percentages)Interest and other income(expense)$26,961$220,226$(193,265)(88)%As a percentage of revenues%3%Six months ended June 30,2023 as compared to the six months ended June 30,2022 Six Months EndedChange June 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except percentages)Interest and other income(expense)$(44,243)$415,871$(460,114)(111)%As a percentage of revenues%3%Interest and other income(expense)decreased in the three and six months ended June 30,2023 primarily due to foreign exchange losses of$23 millionand$130 million,respectively,compared to gains of$239 million and$431 million,respectively,for the corresponding periods in 2022.In the three monthsended June 30,2023,the foreign exchange losses were primarily driven by the non-cash losses of$29 million from the remeasurement of our 5,170 millionSenior Notes,partially offset by the remeasurement of cash and content liability positions in currencies other than the functional currencies.In the six monthsended June 30,2023,the foreign exchange losses were primarily driven by the non-cash losses of$110 million from the remeasurement of our 5,170 millionSenior Notes,coupled with the remeasurement of cash and content liability positions in currencies other than the functional currencies.In the three and sixmonths ended June 30,2022,the foreign exchange gains were primarily driven by the non-cash gains of$305 million and$466 million,respectively,from theremeasurement of our 5,170 million Senior Notes,partially offset by the remeasurement of cash and content liability positions in currencies other than thefunctional currencies.The change in foreign currency gains and losses was partially offset by higher interest income earned in the three and six months endedJune 30,2023 as compared to the corresponding periods in 2022.26Table of ContentsProvision for Income TaxesThree months ended June 30,2023 as compared to the three months ended June 30,2022 Three Months EndedChange June 30,2023June 30,2022Q223 vs.Q222(in thousands,except percentages)Provision for income taxes$191,722$182,103$9,619 5fective tax rate11%Six months ended June 30,2023 as compared to the six months ended June 30,2022 Six Months EndedChange June 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except percentages)Provision for income taxes$355,476$564,348$(208,872)(37)fective tax rate11%The effective tax rates for the three and six months ended June 30,2023 differed from the Federal statutory rate primarily due to the impact ofinternational provisions of the Tax Cuts and Jobs Act,research and development credits,and the recognition of excess tax benefits of stock-basedcompensation.The effective tax rate for the three months ended June 30,2023 was consistent compared to the same period in 2022.The decrease in the effective tax ratefor the six months ended June 30,2023,as compared to the same period in 2022 was primarily due to a decrease in foreign taxes.Liquidity and Capital ResourcesAs ofChangeJune 30,2023December 31,2022June 30,2023 vs.December 31,2022(in thousands,except percentages)Cash,cash equivalents,restricted cash and short-term investments$8,580,466$6,081,858$2,498,608 41%Short-term and long-term debt14,469,538 14,353,076 116,462 1sh,cash equivalents,restricted cash and short-term investments increased$2,499 million in the six months ended June 30,2023 primarily due to cashprovided by operations,partially offset by the repurchase of stock.Debt,net of debt issuance costs,increased$116 million primarily due to the remeasurement of our euro-denominated notes.The amount of principal andinterest on our outstanding notes due in the next twelve months is$1,086 million.As of June 30,2023,no amounts had been borrowed under the$1 billionRevolving Credit Agreement.See Note 6 Debt in the accompanying notes to our consolidated financial statements.We anticipate that our future capital needs from the debt market will be more limited compared to prior years.Our ability to obtain this or any additionalfinancing that we may choose or need,including for potential strategic acquisitions and investments,will depend on,among other things,our developmentefforts,business plans,operating performance,and the condition of the capital markets at the time we seek financing.We may not be able to obtain suchfinancing on terms acceptable to us or at all.If we raise additional funds through the issuance of equity or debt securities,those securities may have rights,preferences or privileges senior to the rights of our common stock,and our stockholders may experience dilution.In March 2021,our Board of Directors authorized the repurchase of up to$5 billion of our common stock,with no expiration date.Stock repurchasesmay be effected through open market repurchases in compliance with Rule 10b-18 under the Exchange Act,including through the use of trading plans intendedto qualify under Rule 10b5-1 under the Exchange Act,privately-negotiated transactions,accelerated stock repurchase plans,block purchases,or other similarpurchase techniques and in such amounts as management deems appropriate.We are not obligated to repurchase any specific number of shares,and the timingand actual number of shares repurchased will depend on a variety of factors,including our stock price,general economic,business and market conditions,andalternative investment opportunities.We may discontinue any repurchases of our common stock at any time without prior notice.During the six months endedJune 30,2023,the Company repurchased 3,071,380 shares of common stock for an aggregate amount of$1,045 million.As of June 30,2023,$3.4 billionremains available for repurchases.27Table of ContentsOur primary uses of cash include the acquisition,licensing and production of content,marketing programs,streaming delivery and personnel-relatedcosts,as well as for strategic acquisitions and investments.Cash payment terms for non-original content have historically been in line with the amortizationperiod.Investments in original content,and in particular content that we produce and own,require more cash upfront relative to licensed content.For example,production costs are paid as the content is created,well in advance of when the content is available on the service and amortized.We expect to continue tosignificantly invest in global content,particularly in original content,which will impact our liquidity.We currently anticipate that cash flows from operations,available funds and access to financing sources,including our revolving credit facility,will continue to be sufficient to meet our cash needs for the next twelvemonths and beyond.Our material cash requirements from known contractual and other obligations primarily relate to our content,debt and lease obligations.As of June 30,2023,the expected timing of those payments are as follows:Payments due by PeriodContractual obligations(in thousands):TotalNext 12 MonthsBeyond 12 MonthsContent obligations(1)$20,900,288$9,818,370$11,081,918 Debt(2)18,002,660 1,086,201 16,916,459 Operating lease obligations(3)3,223,471 490,130 2,733,341 Total$42,126,419$11,394,701$30,731,718(1)As of June 30,2023,content obligations were comprised of$4.4 billion included in“Current content liabilities”and$2.8 billion of“Non-current contentliabilities”on the Consolidated Balance Sheets and$13.7 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did notthen meet the criteria for recognition.The material cash requirements above do not include any estimated obligation for the unknown future titles,payment for which could range from lessthan one year to more than five years.However,these unknown obligations are expected to be significant and we believe could include approximately$1 billion to$4 billion over the next three years,with the payments for the vast majority of such amounts expected to occur after the next twelve months.The foregoing range is based on considerable management judgments and the actual amounts may differ.Once we know the title that we will receiveand the license fees,we include the amount in the contractual obligations table above.(2)Debt obligations include our Notes consisting of principal and interest payments.See Note 6 Debt to the consolidated financial statements for furtherdetails.(3)Operating lease obligations are comprised of operating lease liabilities included in Accrued expenses and other liabilities and Other non-currentliabilities on the Consolidated Balance Sheets,inclusive of imputed interest.Operating lease obligations also include additional obligations that are notreflected on the Consolidated Balance Sheets as they did not meet the criteria for recognition.See Note 5 Balance Sheet Components in theaccompanying notes to our consolidated financial statements for further details regarding leases.As of June 30,2023,we had gross unrecognized tax benefits of$240 million.At this time,an estimate of the range of reasonably possible adjustments tothe balance of unrecognized tax benefits cannot be made.Free Cash FlowWe define free cash flow as cash provided by(used in)operating activities less purchases of property and equipment and change in other assets.Webelieve free cash flow is an important liquidity metric because it measures,during a given period,the amount of cash generated that is available to repay debtobligations,make strategic acquisitions and investments and for certain other activities like stock repurchases.Free cash flow is considered a non-GAAPfinancial measure and should not be considered in isolation of,or as a substitute for,net income,operating income,net cash provided by operating activities,orany other measure of financial performance or liquidity presented in accordance with GAAP.In assessing liquidity in relation to our results of operations,we compare free cash flow to net income,noting that the major recurring differences areexcess content payments over amortization,non-cash stock-based compensation expense,non-cash remeasurement gain/loss on our euro-denominated debt,and other working capital differences.Working capital differences include deferred revenue,excess property and equipment purchases over depreciation,taxesand semi-annual interest payments on our outstanding debt.Our receivables from members generally settle quickly.28Table of ContentsThree months ended June 30,2023 as compared to the three months ended June 30,2022Three Months EndedChangeJune 30,2023June 30,2022Q223 vs.Q222(in thousands,except percentages)Net cash provided by operating activities$1,440,232$102,750$1,337,482 1,302%Net cash provided by(used in)investing activities97,737(158,894)256,631 162%Net cash provided by(used in)financing activities(649,349)11,250(660,599)(5,872)%Non-GAAP reconciliation of free cash flow:Net cash provided by operating activities1,440,232 102,750 1,337,482 1,302%Purchases of property and equipment(100,972)(90,018)10,954 12%Free cash flow$1,339,260$12,732$1,326,528 10,419%Net cash provided by operating activities increased$1,337 million to$1,440 million for the three months ended June 30,2023.The increase in net cashprovided by operating activities was primarily driven by a decrease in payments for content assets,coupled with a$217 million or 3%increase in revenues.The payments for content assets decreased$859 million,from$4,496 million to$3,637 million,or 19%.On May 1,2023,the collective bargaining agreementbetween the Writers Guild of America(“WGA”)and the Alliance of Motion Picture and Television Producers(“AMPTP”)expired,and on May 2,2023,theWGA commenced an industry-wide strike.On July 12,2023,the collective bargaining agreement between the Screen Actors Guild-American Federation ofTelevision and Radio Artists(“SAG-AFTRA”)and the AMPTP expired,and on July 14,2023,the SAG-AFTRA commenced an industry-wide strike.We havepaused and expect to pause additional productions in response to the concurrent WGA and SAG-AFTRA strikes.As a result,the timing of certain productionpayments will be delayed until productions can resume and may increase the variability in payments for content assets in future periods.Net cash provided by(used in)investing activities increased$257 million for the three months ended June 30,2023,primarily due to proceeds frommaturities of short-term investments and there being no acquisitions in the three months ended June 30,2023,as compared to acquisitions for an aggregateamount of$69 million in the three months ended June 30,2022,partially offset by purchases of short-term investments.Net cash provided by(used in)financing activities decreased$661 million for the three months ended June 30,2023,primarily due to the repurchases ofcommon stock for an aggregate amount of$645 million in the three months ended June 30,2023,as compared to no repurchases of common stock in the threemonths ended June 30,2022.Free cash flow was$148 million lower than net income for the three months ended June 30,2023,primarily due to$227 million of cash payments forcontent assets exceeding amortization expense and$28 million in other non-favorable working capital differences,partially offset by$78 million of non-cashstock-based compensation expense and$29 million of non-cash remeasurement loss on our euro-denominated debt.Free cash flow was$1,428 million lower than net income for the three months ended June 30,2022,primarily due to$1,234 million of cash payments forcontent assets exceeding amortization expense,$305 million of non-cash remeasurement gain on our euro-denominated debt and$39 million in other non-favorable working capital differences,partially offset by$150 million of non-cash stock-based compensation expense.29Table of ContentsSix months ended June 30,2023 as compared to the six months ended June 30,2022Six Months EndedChangeJune 30,2023June 30,2022YTD23 vs.YTD22(in thousands,except percentages)Net cash provided by operating activities$3,618,972$1,025,589$2,593,383 253%Net cash used in investing activities(165,916)(404,573)(238,657)(59)%Net cash used in financing activities(1,023,422)(675,072)348,350 52%Non-GAAP reconciliation of free cash flow:Net cash provided by operating activities3,618,972 1,025,589 2,593,383 253%Purchases of property and equipment(162,991)(211,176)(48,185)(23)%Free cash flow$3,455,981$814,413$2,641,568 324%Net cash provided by operating activities increased$2,593 million to$3,619 million for the six months ended June 30,2023.The increase in net cashprovided by operating activities was primarily driven by a decrease in payments for content assets,coupled with a$511 million or 3%increase in revenues.The payments for content assets decreased$1,977 million,from$8,427 million to$6,450 million,or 23%.Net cash used in investing activities decreased$239 million for the six months ended June 30,2023,primarily due to proceeds from the maturities ofshort-term investments and there being no acquisitions in the six months ended June 30,2023,as compared to acquisitions for an aggregate amount of$193million in the six months ended June 30,2022,partially offset by purchases of short-term investments.Net cash used in financing activities increased$348 million for the six months ended June 30,2023,primarily due to repurchases of common stock for anaggregate amount of$1,045 million in the six months ended June 30,2023,as compared to no repurchases of common stock in the six months ended June 30,2022,partially offset by there being no repayment of debt in the six months ended June 30,2023 as compared to the repayment upon maturity of the$700 million aggregate principal amount of our 5.500%Senior Notes in February 2022.Free cash flow was$663 million higher than net income for the six months ended June 30,2023 primarily due to$420 million of amortization expenseexceeding cash payments for content assets,$177 million of non-cash stock-based compensation expense and$110 million of non-cash remeasurement loss onour euro-denominated debt,partially offset by$44 million in other non-favorable working capital differences.Free cash flow was$2,224 million lower than net income for the six months ended June 30,2022 primarily due to$1,999 million of cash payments forcontent assets exceeding amortization expense,$466 million of non-cash remeasurement gain on our euro-denominated debt and$29 million in other non-favorable working capital differences,partially offset by$270 million of non-cash stock-based compensation expense.IndemnificationThe information set forth under Note 7 Commitments and Contingencies to the consolidated financial statements under the caption“Indemnification”isincorporated herein by reference.Critical Accounting EstimatesThe preparation of financial statements and related disclosures in conformity with U.S.generally accepted accounting principles and the Companysdiscussion and analysis of its financial condition and operating results require the Companys management to make judgments,assumptions and estimates thataffect the amounts reported.Note 1,“Basis of Presentation and Summary of Significant Accounting Policies”of the Notes to consolidated Financial Statementsin Part I,Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II,Item 8 of our Annual Report on Form 10-K for the yearended December 31,2022,describe the significant accounting policies and methods used in the preparation of the Companys consolidated financialstatements.There have been no material changes to the Companys critical accounting estimates included in our Annual Report on Form 10-K for the yearended December 31,2022.30Table of ContentsItem 3.Quantitative and Qualitative Disclosures About Market RiskFor financial market risks related to changes in interest rates,reference is made to Item 7A“Quantitative and Qualitative Disclosures About Market Risk”contained in Part II of our Annual Report on Form 10-K for the year ended December 31,2022.Our exposure to market risk has not changed significantlysince December 31,2022.Interest Rate RiskAt June 30,2023,our cash equivalents and short-term investments were generally invested in money market funds and time deposits.Interest paid onsuch funds fluctuates with the prevailing interest rate.As of June 30,2023,we had$14.5 billion of debt,consisting of fixed rate unsecured debt in fourteen tranches due between 2024 and 2030.Refer to Note6 Debt to the consolidated financial statements for details about all issuances.The fair value of our debt will fluctuate with movements of interest rates,increasing in periods of declining rates of interest and declining in periods of increasing rates of interest.The fair value of our debt will also fluctuate based onchanges in foreign currency rates,as discussed below.Foreign Currency RiskCurrencies denominated in other than the U.S.dollar account for 57%of revenue for the six months ended June 30,2023.We therefore have foreigncurrency risk related to these currencies,which are primarily the euro,the British pound,the Brazilian real,the Canadian dollar,the Mexican Peso,theJapanese yen,and the Australian dollar.Accordingly,changes in exchange rates,and in particular a weakening of foreign currencies relative to the U.S.dollar may negatively affect our revenueand operating income as expressed in U.S.dollars.In the six months ended June 30,2023,our revenues would have been approximately$577 million higherhad foreign currency exchange rates remained consistent with those in the same period of 2022.We have also experienced and will continue to experience fluctuations in our net income as a result of gains(losses)on the settlement and theremeasurement of monetary assets and liabilities denominated in currencies that are not the functional currency.In the six months ended June 30,2023,werecognized a$130 million foreign exchange loss primarily due to the non-cash remeasurement of our Senior Notes denominated in euros,coupled with theremeasurement of cash and content liabilities denominated in currencies other than the functional currencies.In addition,the effect of exchange rate changes on cash,cash equivalents and restricted cash as disclosed on the Consolidated Statements of Cash Flowfor the six months ended June 30,2023 was an increase of$66 million.We do not use foreign exchange contracts or derivatives to hedge any foreign currency exposures.The volatility of exchange rates depends on manyfactors that we cannot forecast with reliable accuracy.Our continued international expansion increases our exposure to exchange rate fluctuations and,as aresult,such fluctuations could have a significant impact on our future results of operations.Item 4.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management,with the participation of our co-Chief Executive Officers and Chief Financial Officer,evaluated the effectiveness of our disclosurecontrols and procedures(as defined in Rules 13a-15(e)and 15d-15(e)under the Exchange Act)as of the end of the period covered by this Quarterly Report onForm 10-Q.Based on that evaluation,our co-Chief Executive Officers and Chief Financial Officer concluded that our disclosure controls and procedures as ofthe end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosedby us in reports that we file or submit under the Exchange Act,is recorded,processed,summarized and reported within the time periods specified in theSecurities and Exchange Commissions rules and forms,and that such information is accumulated and communicated to our management,including our co-Chief Executive Officers and Chief Financial Officer,as appropriate,to allow timely decisions regarding required disclosures.Our management,including our co-Chief Executive Officers and Chief Financial Officer,does not expect that our disclosure controls and procedures orour internal controls will prevent all error and all fraud.A control system,no matter how well conceived and operated,can provide only reasonable,notabsolute,assurance that the objectives of the control system are met.Further,the design of a control system must reflect the fact that there are resourceconstraints,and the benefits of controls must be considered relative to their costs.Because of the inherent limitations in all control systems,no evaluation ofcontrols can provide absolute assurance that all control issues and instances of fraud,if any,within the Company have been detected.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the quarter ended June 30,2023,that have materially affected,or are reasonably likely to materially affect,our internal control over financial reporting.31Table of ContentsPART II.OTHER INFORMATIONItem 1.Legal ProceedingsThe information set forth under Note 7 Commitments and Contingencies in the notes to the consolidated financial statements under the caption“LegalProceedings”is incorporated herein by reference.32Table of ContentsItem 1A.Risk FactorsThere have been no material changes from the risk factors previously disclosed under the heading Risk Factors in the Companys Annual Report onForm 10-K for the year ended December 31,2022.Item 2.Unregistered Sales of Equity Securities and Use of ProceedsCompany Purchases of Equity SecuritiesStock repurchases during the three months ended June 30,2023 were as follows:PeriodTotal Number ofShares Purchased(1)Average Price Paid perShare(2)Total Number ofShares Purchased asPart of PubliclyAnnounced Programs(1)Approximate DollarValue of Shares thatMay Yet Be PurchasedUnder the Program(1)(in thousands)April 1-30,2023$4,000,000 May 1-31,20231,417,075$336.81 1,417,075$3,522,717 June 1-30,2023432,249$388.35 432,249$3,354,855 Total1,849,324 1,849,324(1)In March 2021,the Companys Board of Directors authorized the repurchase of up to$5 billion of its common stock,with no expiration date.For further informationregarding stock repurchase activity,see Note 8 Stockholders Equity to the consolidated financial statements in this Quarterly Report.(2)Average price paid per share includes costs associated with the repurchases.Item 5.Other InformationRule 10b5-1 Trading PlansThe adoption or termination of contracts,instructions or written plans for the purchase or sale of our securities by our Section 16 officers and directors forthe three months ended June 30,2023,each of which is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c)under the Exchange Act(“Rule10b5-1 Plan”),were as follows:NameTitleActionDate AdoptedExpiration DateAggregate#of Securities tobe Purchased/SoldAnn Mather(1)DirectorAdoption5/4/20232/28/20256,385Ted Sarandos(2)Co-CEO and DirectorAdoption5/5/20238/2/202455,386(1)Ann Mather,a member of the Board of Directors,entered into a Rule 10b5-1 Plan on May 4,2023.Ms.Mathers plan provides for the potential exercise of vested stockoptions and the associated sale of up to 6,385 shares of the Companys common stock.The plan expires on February 28,2025,or upon the earlier completion of all authorizedtransactions under the plan.(2)Ted Sarandos,co-CEO and a member of the Board of Directors,entered into a Rule 10b5-1 Plan on May 5,2023.Mr.Sarandos plan provides for the potential exercise ofvested stock options and the associated sale of up to 55,386 shares of the Companys common stock.The plan expires on August 2,2024,or upon the earlier completion of allauthorized transactions under the plan.None of our directors or officers adopted or terminated a non-Rule 10b5-1 trading arrangement as defined in Item 408 of Regulation S-K.Item 6.Exhibits(a)Exhibits:See Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q.33Table of ContentsEXHIBIT INDEX ExhibitNumberExhibit DescriptionIncorporated by ReferenceFiledHerewithFormFile No.ExhibitFiling Date3.1Restated Certificate of Incorporation8-K001-357273.1June 8,20223.2Amended and Restated Bylaws8-K001-357273.2February 24,202331.1Certification of Co-Chief Executive Officer Pursuant to Section302 of the Sarbanes-Oxley Act of 2002X31.2Certification of Co-Chief Executive Officer Pursuant to Section302 of the Sarbanes-Oxley Act of 2002X31.3Certification of Chief Financial Officer Pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002X32.1*Certifications of Co-Chief Executive Officers and Chief FinancialOfficer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002X101The following financial statements from the Companys QuarterlyReport on Form 10-Q for the quarter ended June 30,2023,formatted in Inline XBRL:(i)Consolidated Statements ofOperations,(ii)Consolidated Statements of ComprehensiveIncome,(iii)Consolidated Statements of Cash Flows,(iv)Consolidated Balance Sheets,(v)Consolidated Statements ofStockholders Equity and(vi)Notes to Consolidated FinancialStatements,tagged as blocks of text and including detailed tagsX104The cover page from the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,2023,formatted in Inline XBRLX*These certifications are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 orthe Securities Exchange Act of 1934,irrespective of any general incorporation language in any filings.SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.NETFLIX,INC.Dated:July 21,2023By:/s/Ted SarandosTed SarandosCo-Chief Executive Officer(Principal executive officer)Dated:July 21,2023By:/s/Greg PetersGreg PetersCo-Chief Executive Officer(Principal executive officer)Dated:July 21,2023By:/s/Jeffrey KarbowskiJeffrey KarbowskiChief Accounting Officer(Principal accounting officer)34EXHIBIT 31.1CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I,Ted Sarandos,certify that:1.I have reviewed this Quarterly Report on Form 10-Q of Netflix,Inc.;2.Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made,in light of the circumstances under which such statements were made,not misleading with respect to the period covered by thisreport;3.Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all material respects thefinancial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4.The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures(as defined inExchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)for the registrant and have:a)designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed under our supervision,toensure that material information relating to the registrant,including its consolidated subsidiaries,is made known to us by others within thoseentities,particularly during the period in which this report is being prepared;b)designed such internal control over financial reporting,or caused such internal control over financial reporting to be designed under oursupervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based on such evaluation;andd)disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recentfiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or is reasonably likely tomaterially affect,the registrants internal control over financial reporting;and5.The registrants other certifying officers and I have disclosed,based on our most recent evaluation of internal control over financial reporting,to theregistrants auditors and the audit committee of registrants board of directors(or persons performing the equivalent function):a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)any fraud,whether or not material,that involves management or other employees who have a significant role in the registrants internalcontrol over financial reporting.Dated:July 21,2023 By:/S/TED SARANDOS Ted Sarandos Co-Chief Executive OfficerEXHIBIT 31.2CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I,Greg Peters,certify that:1.I have reviewed this Quarterly Report on Form 10-Q of Netflix,Inc.;2.Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made,in light of the circumstances under which such statements were made,not misleading with respect to the period covered by thisreport;3.Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all material respects thefinancial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4.The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures(as defined inExchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)for the registrant and have:a)designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed under our supervision,toensure that material information relating to the registrant,including its consolidated subsidiaries,is made known to us by others within thoseentities,particularly during the period in which this report is being prepared;b)designed such internal control over financial reporting,or caused such internal control over financial reporting to be designed under oursupervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based on such evaluation;andd)disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recentfiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or is reasonably likely tomaterially affect,the registrants internal control over financial reporting;and5.The registrants other certifying officers and I have disclosed,based on our most recent evaluation of internal control over financial reporting,to theregistrants auditors and the audit committee of registrants board of directors(or persons performing the equivalent function):a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)any fraud,whether or not material,that involves management or other employees who have a significant role in the registrants internalcontrol over financial reporting.Dated:July 21,2023 By:/S/GREG PETERS Greg Peters Co-Chief Executive OfficerEXHIBIT 31.3CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I,Spencer Neumann,certify that:1.I have reviewed this Quarterly Report on Form 10-Q of Netflix,Inc.;2.Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made,in light of the circumstances under which such statements were made,not misleading with respect to the period covered by thisreport;3.Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all material respects thefinancial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4.The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures(as defined inExchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)for the registrant and have:a)designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed under our supervision,toensure that material information relating to the registrant,including its consolidated subsidiaries,is made known to us by others within thoseentities,particularly during the period in which this report is being prepared;b)designed such internal control over financial reporting,or caused such internal control over financial reporting to be designed under oursupervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based on such evaluation;andd)disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recentfiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or is reasonably likely tomaterially affect,the registrants internal control over financial reporting;and5.The registrants other certifying officers and I have disclosed,based on our most recent evaluation of internal control over financial reporting,to theregistrants auditors and the audit committee of registrants board of directors(or persons performing the equivalent function):a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)any fraud,whether or not material,that involves management or other employees who have a significant role in the registrants internalco
2023-07-24
38页
5星级
Exhibit 99.1 Gaotu Techedu Announces First Quarter of 2023 Unaudited Financial Results Beijing,Chin.
2023-07-21
11页
5星级
UNITEDSTATESSECURITIESANDEXCHANGECOMMISSIONWashington,D.C.20549Form10-Q(MarkOne)QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthequarterlyperiodendedApril30,2023orTRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthetransitionperiodfromtoCommissionfilenumber001-33608lululemonathleticainc.(Exactnameofregistrantasspecifiedinitscharter)Delaware20-3842867(Stateorotherjurisdictionofincorporationororganization)(I.R.S.EmployerIdentificationNo.)1818CornwallAvenue,Vancouver,BritishColumbiaV6J1C7(Addressofprincipalexecutiveoffices)Registrantstelephonenumber,includingareacode:604-732-6124Formername,formeraddressandformerfiscalyear,ifchangedsincelastreport:N/ASecuritiesregisteredpursuanttoSection12(b)oftheAct:TitleofeachclassTradingsymbol(s)NameofeachexchangeonwhichregisteredCommonStock,parvalue$0.005pershareLULUNasdaqGlobalSelectMarketIndicatebycheckmarkwhethertheregistrant:(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesNoIndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyeveryInteractiveDataFilerequiredtobesubmittedpursuanttoRule405ofRegulationS-Tduringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitsuchfiles).YesNoIndicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,asmallerreportingcompany,oranemerginggrowthcompany.Seethedefinitionsoflargeacceleratedfiler,acceleratedfiler,smallerreportingcompany,andemerginggrowthcompanyinRule12b-2oftheExchangeAct.(Checkone):LargeAcceleratedFilerAcceleratedfilerNon-acceleratedfilerSmallerreportingcompanyEmerginggrowthcompanyIfanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct.Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).YesNoAsofMay26,2023,therewere121,949,471sharesoftheregistrantscommonstock,parvalue$0.005pershare,outstanding.ExchangeableandSpecialVotingShares:AsofMay26,2023,therewereoutstanding5,115,961exchangeablesharesofLuluCanadianHolding,Inc.,awholly-ownedsubsidiaryoftheregistrant.Exchangeablesharesareexchangeableforanequalnumberofsharesoftheregistrantscommonstock.Inaddition,asofMay26,2023,theregistranthadoutstanding5,115,961sharesofspecialvotingstock,throughwhichtheholdersofexchangeablesharesofLuluCanadianHolding,Inc.mayexercisetheirvotingrightswithrespecttotheregistrant.Thespecialvotingstockandtheregistrantscommonstockgenerallyvotetogetherasasingleclassonallmattersonwhichthecommonstockisentitledtovote.TableofContentsTABLEOFCONTENTSPagePARTI.FINANCIALINFORMATIONItem1.FinancialStatements(Unaudited):3ConsolidatedBalanceSheets3ConsolidatedStatementsofOperationsandComprehensiveIncome4ConsolidatedStatementsofStockholdersEquity5ConsolidatedStatementsofCashFlows6IndexforNotestotheUnauditedInterimConsolidatedFinancialStatements7Item2.ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations18Item3.QuantitativeandQualitativeDisclosuresAboutMarketRisk28Item4.ControlsandProcedures30PARTII.OTHERINFORMATIONItem1.LegalProceedings31Item1A.RiskFactors31Item2.UnregisteredSalesofEquitySecuritiesandUseofProceeds43Item6.Exhibits45Signatures46TableofContents2PARTIFINANCIALINFORMATIONITEM1.FINANCIALSTATEMENTS(UNAUDITED)lululemonathleticainc.CONSOLIDATEDBALANCESHEETS(Unaudited;Amountsinthousands,exceptpershareamounts)April30,2023January29,2023ASSETSCurrentassetsCashandcashequivalents$950,607$1,154,867Accountsreceivable,net107,468132,906Inventories1,580,3131,447,367Prepaidandreceivableincometaxes182,393185,641Prepaidexpensesandothercurrentassets232,521238,6723,053,3023,159,453Propertyandequipment,net1,312,7931,269,614Right-of-useleaseassets993,471969,419Goodwill24,04124,144Intangibleassets,net20,08221,961Deferredincometaxassets6,1306,402Othernon-currentassets161,725156,045$5,571,544$5,607,038LIABILITIESANDSTOCKHOLDERSEQUITYCurrentliabilitiesAccountspayable$287,464$172,732Accruedliabilitiesandother342,751399,223Accruedcompensationandrelatedexpenses125,053248,167Currentleaseliabilities210,506207,972Currentincometaxespayable30,213174,221Unredeemedgiftcardliability223,970251,478Othercurrentliabilities36,81438,4051,256,7711,492,198Non-currentleaseliabilities888,582862,362Non-currentincometaxespayable28,55528,555Deferredincometaxliabilities54,53355,084Othernon-currentliabilities23,02720,0402,251,4682,458,239CommitmentsandcontingenciesStockholdersequityUndesignatedpreferredstock,$0.01parvalue:5,000sharesauthorized;noneissuedandoutstandingExchangeablestock,noparvalue:60,000sharesauthorized;5,116and5,116issuedandoutstandingSpecialvotingstock,$0.000005parvalue:60,000sharesauthorized;5,116and5,116issuedandoutstandingCommonstock,$0.005parvalue:400,000sharesauthorized;122,099and122,205issuedandoutstanding610611Additionalpaid-incapital478,496474,645Retainedearnings3,118,5842,926,127Accumulatedothercomprehensiveloss(277,614)(252,584)3,320,0763,148,799$5,571,544$5,607,038SeeaccompanyingnotestotheunauditedinterimconsolidatedfinancialstatementsTableofContents3lululemonathleticainc.CONSOLIDATEDSTATEMENTSOFOPERATIONSANDCOMPREHENSIVEINCOME(Unaudited;Amountsinthousands,exceptpershareamounts)QuarterEndedApril30,2023May1,2022Netrevenue$2,000,792$1,613,463Costofgoodssold849,987 743,070Grossprofit1,150,805 870,393Selling,generalandadministrativeexpenses747,513 607,851Amortizationofintangibleassets1,878 2,195Incomefromoperations401,414 260,347Otherincome(expense),net8,025(22)Incomebeforeincometaxexpense409,439 260,325Incometaxexpense119,034 70,327Netincome$290,405$189,998Othercomprehensiveincome(loss),netoftax:Foreigncurrencytranslationadjustment$(42,750)$(25,848)Netinvestmenthedgegains17,720 5,056Othercomprehensiveincome(loss),netoftax$(25,030)$(20,792)Comprehensiveincome$265,375$169,206Basicearningspershare$2.28$1.48Dilutedearningspershare$2.28$1.48Basicweighted-averagenumberofsharesoutstanding127,246 128,077Dilutedweighted-averagenumberofsharesoutstanding127,621 128,541SeeaccompanyingnotestotheunauditedinterimconsolidatedfinancialstatementsTableofContents4lululemonathleticainc.CONSOLIDATEDSTATEMENTSOFSTOCKHOLDERSEQUITY(Unaudited;Amountsinthousands)QuarterEndedApril30,2023ExchangeableStockSpecialVotingStockCommonStockAdditionalPaid-inCapitalRetainedEarningsAccumulatedOtherComprehensiveLossTotalStockholdersEquitySharesSharesParValueSharesParValueBalanceasofJanuary29,20235,1165,116$122,205$611$474,645$2,926,127$(252,584)$3,148,799Netincome290,405290,405Othercomprehensiveincome(loss),netoftax(25,030)(25,030)Stock-basedcompensationexpense21,30121,301Commonstockissueduponsettlementofstock-basedcompensation27411,87311,873Shareswithheldrelatedtonetsharesettlementofstock-basedcompensation(88)(28,793)(28,793)Repurchaseofcommonstock,includingexcisetax(292)(1)(530)(97,948)(98,479)BalanceasofApril30,20235,1165,116$122,099$610$478,496$3,118,584$(277,614)$3,320,076QuarterEndedMay1,2022ExchangeableStockSpecialVotingStockCommonStockAdditionalPaid-inCapitalRetainedEarningsAccumulatedOtherComprehensiveLossTotalStockholdersEquitySharesSharesParValueSharesParValueBalanceasofJanuary30,20225,2035,203$123,297$616$422,507$2,512,840$(195,917)$2,740,046Netincome189,998189,998Othercomprehensiveincome(loss),netoftax(20,792)(20,792)Stock-basedcompensationexpense18,35818,358Commonstockissueduponsettlementofstock-basedcompensation23925,1415,143Shareswithheldrelatedtonetsharesettlementofstock-basedcompensation(96)(32,059)(32,059)Repurchaseofcommonstock(708)(4)(1,234)(231,406)(232,644)BalanceasofMay1,20225,2035,203$122,732$614$412,713$2,471,432$(216,709)$2,668,050SeeaccompanyingnotestotheunauditedinterimconsolidatedfinancialstatementsTableofContents5lululemonathleticainc.CONSOLIDATEDSTATEMENTSOFCASHFLOWS(Unaudited;Amountsinthousands)QuarterEndedApril30,2023May1,2022CashflowsfromoperatingactivitiesNetincome$290,405$189,998Adjustmentstoreconcilenetincometonetcashprovidedby(usedin)operatingactivities:Depreciationandamortization84,116 64,470Stock-basedcompensationexpense21,301 18,358Settlementofderivativesnotdesignatedinahedgingrelationship(721)(10,378)Changesinoperatingassetsandliabilities:Inventories(155,174)(320,607)Prepaidandreceivableincometaxes3,249 2,646Prepaidexpensesandothercurrentassets27,511 4,296Othernon-currentassets(7,222)(4,523)Accountspayable116,935 20,630Accruedliabilitiesandother(53,685)28,113Accruedcompensationandrelatedexpenses(120,699)(84,123)Currentandnon-currentincometaxespayable(141,237)(119,959)Unredeemedgiftcardliability(26,506)(23,816)Right-of-useleaseassetsandcurrentandnon-currentleaseliabilities5,255 7,115Othercurrentandnon-currentliabilities1,975(15,476)Netcashprovidedby(usedin)operatingactivities45,503(243,256)CashflowsfrominvestingactivitiesPurchaseofpropertyandequipment(136,942)(111,352)Settlementofnetinvestmenthedges(1,277)10,024Netcashusedininvestingactivities(138,219)(101,328)CashflowsfromfinancingactivitiesProceedsfromsettlementofstock-basedcompensation11,873 5,143Shareswithheldrelatedtonetsharesettlementofstock-basedcompensation(28,793)(32,059)Repurchaseofcommonstock(98,479)(232,644)Netcashusedinfinancingactivities(115,399)(259,560)Effectofforeigncurrencyexchangeratechangesoncashandcashequivalents3,855(6,711)Increase(decrease)incashandcashequivalents(204,260)(610,855)Cashandcashequivalents,beginningofperiod$1,154,867$1,259,871Cashandcashequivalents,endofperiod$950,607$649,016SeeaccompanyingnotestotheunauditedinterimconsolidatedfinancialstatementsTableofContents6lululemonathleticainc.INDEXFORNOTESTOTHEUNAUDITEDINTERIMCONSOLIDATEDFINANCIALSTATEMENTSNote1NatureofOperationsandBasisofPresentation8Note2RecentAccountingPronouncements8Note3RevolvingCreditFacilitiesandSupplyChainFinancingProgram9Note4Stock-BasedCompensationandBenefitPlans10Note5FairValueMeasurement11Note6DerivativeFinancialInstruments12Note7EarningsPerShare14Note8SupplementaryFinancialInformation15Note9SegmentedInformation17Note10NetRevenuebyGeographyandCategory18Note11LegalProceedingsandOtherContingencies18TableofContents7lululemonathleticainc.NOTESTOTHEUNAUDITEDINTERIMCONSOLIDATEDFINANCIALSTATEMENTSNote1.NatureofOperationsandBasisofPresentationNatureofoperationslululemonathleticainc.,aDelawarecorporation,(lululemonand,togetherwithitssubsidiariesunlessthecontextotherwiserequires,theCompany)isengagedinthedesign,distribution,andretailoftechnicalathleticapparel,footwear,andaccessories,whicharesoldthroughachainofcompany-operatedstores,directtoconsumerthroughe-commerce,outlets,salestowholesaleaccounts,licenseandsupplyarrangements,recommerce,andsalesfromtemporarylocations.RecommerceisthesaleofrepurchasedproductviatheCompanysLikeNewprogram.TheCompanyoperatesstoresintheUnitedStates,thePeoplesRepublicofChina(PRC),Canada,Australia,theUnitedKingdom,SouthKorea,Germany,NewZealand,Singapore,Japan,France,Ireland,Spain,Malaysia,Sweden,theNetherlands,Norway,andSwitzerland.Therewere662and655company-operatedstoresasofApril30,2023andJanuary29,2023,respectively.TheCompanyalsooffersin-homeconnectedfitnessandassociatedcontentsubscriptionsthroughlululemonStudio.BasisofpresentationTheunauditedinterimconsolidatedfinancialstatementsasofApril30,2023andforthequartersendedApril30,2023andMay1,2022arepresentedinU.S.dollarsandhavebeenpreparedbytheCompanyundertherulesandregulationsoftheSecuritiesandExchangeCommission(SEC).ThefinancialinformationispresentedinaccordancewithUnitedStatesgenerallyacceptedaccountingprinciples(GAAP)forinterimfinancialinformationand,accordingly,doesnotincludealloftheinformationandfootnotesrequiredbyGAAPforcompletefinancialstatements.ThefinancialinformationasofJanuary29,2023isderivedfromtheCompanysauditedconsolidatedfinancialstatementsandrelatednotesforthefiscalyearendedJanuary29,2023,whichareincludedinItem8intheCompanysfiscal2022AnnualReportonForm10-KfiledwiththeSEConMarch28,2023.Theseunauditedinterimconsolidatedfinancialstatementsreflectalladjustmentswhichare,intheopinionofmanagement,necessarytoafairstatementoftheresultsfortheinterimperiodspresented.TheseunauditedinterimconsolidatedfinancialstatementsshouldbereadinconjunctionwiththeCompanysconsolidatedfinancialstatementsandrelatednotesincludedinItem8intheCompanysfiscal2022AnnualReportonForm10-K.Note2.RecentAccountingPronouncementssetsouttheimpactofrecentaccountingpronouncements.TheCompanysfiscalyearendsontheSundayclosesttoJanuary31ofthefollowingyear,typicallyresultingina52-weekyear,butoccasionallygivingrisetoanadditionalweek,resultingina53-weekyear.Fiscal2023willendonJanuary28,2024andwillbea52-weekyear.Fiscal2022wasa52-weekyearandendedonJanuary29,2023.Fiscal2023andfiscal2022arereferredtoas2023,and2022,respectively.Thefirstquarterof2023and2022endedonApril30,2023andMay1,2022,respectively.TheCompanysbusinessisaffectedbythepatternofseasonalitycommontomostretailapparelbusinesses.Historically,theCompanyhasrecognizedasignificantportionofitsoperatingprofitinthefourthfiscalquarterofeachyearasaresultofincreasednetrevenueduringtheholidayseason.UseofestimatesThepreparationoffinancialstatementsinconformitywithGAAPintheUnitedStatesrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesandthedisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsaswellasthereportedamountsofnetrevenueandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.Note2.RecentAccountingPronouncementsRecentlyadoptedaccountingpronouncementsTheCompanyconsiderstheapplicabilityandimpactofallAccountingStandardUpdates(ASUs).ASUsadoptedbytheCompanyduringthefirstquarterof2023notlistedbelowwereassessed,anddeterminedtobeeithernotapplicableorareexpectedtohaveminimalimpactonitsconsolidatedfinancialpositionorresultsofoperations.InSeptember2022,theFASBissuedASC405-50,Liabilities-SupplierFinancePrograms,torequireannualandinterimdisclosuresaboutthekeytermsofsupplierfinanceprogramsusedinconnectionwiththepurchaseofgoodsandservicesalongwithinformationabouttheobligationsundertheseprograms,includingtheamountoutstandingattheendofeachTableofContents8reportingperiodandarollforwardofthoseobligations.TheCompanyadoptedthisupdateduringthefirstquarterof2023andtherelateddisclosuresareincludedinNote3.RevolvingCreditFacilitiesandSupplyChainFinancingProgram.RecentlyissuedaccountingpronouncementsASUsrecentlyissuedwereassessedanddeterminedtobeeithernotapplicableorareexpectedtohaveminimalimpactonitsconsolidatedfinancialpositionorresultsofoperations.Note3.RevolvingCreditFacilitiesandSupplyChainFinancingProgramNorthAmericarevolvingcreditfacilityOnDecember14,2021,theCompanyenteredintoanamendedandrestatedcreditagreementextendingitsexistingcreditfacility,whichprovidesfor$400.0millionincommitmentsunderanunsecuredfive-yearrevolvingcreditfacility.ThecreditfacilityhasamaturitydateofDecember14,2026,subjecttoextensionundercertaincircumstances.Borrowingsunderthecreditfacilitymaybeprepaidandcommitmentsmaybereducedorterminatedwithoutpremiumorpenalty(otherthancustomarybreakagecosts).AsofApril30,2023,asidefromlettersofcreditof$6.5million,theCompanyhadnootherborrowingsoutstandingunderthiscreditfacility.Borrowingsmadeunderthecreditfacilitybearinterestatarateperannumequalto,attheCompanysoption,either(a)aratebasedontheSecuredOvernightFinancingRateasadministeredbytheFederalReserveBankofNewYork(SOFR),or(b)analternatebaserate,plus,ineachcase,anapplicablemargin.Theapplicablemarginisdeterminedbyreferencetoapricinggrid,basedontheratioofindebtednesstoearningsbeforeinterest,tax,depreciation,amortization,andrent(EBITDAR)andrangesbetween1.000%-1.375%forSOFRloansand0.000%-0.375%foralternatebaserateorCanadianprimerateloans.Additionally,acommitmentfeeofbetween0.100%-0.200%,alsodeterminedbyreferencetothepricinggrid,ispayableontheaveragedailyunusedamountsunderthecreditfacility.Theapplicableinterestratesandcommitmentfeesaresubjecttoadjustmentbasedoncertainsustainabilitykeyperformanceindicators(KPIs).ThetwoKPIsarebasedongreenhousegasemissionsintensityreductionandgenderpayequity,andtheCompanysperformanceagainstcertaintargetsmeasuredonanannualbasiscouldresultinpositiveornegativesustainabilityrateadjustmentsof2.50basispointstoitsdrawnpricingandpositiveornegativesustainabilityfeeadjustmentsof0.50basispointstoitsundrawnpricing.Thecreditagreementcontainsnegativecovenantsthat,amongotherthingsandsubjecttocertainexceptions,limittheabilityoftheCompanyssubsidiariestoincurindebtedness,incurliens,undergofundamentalchanges,makedispositionsofallorsubstantiallyalloftheirassets,altertheirbusinessesandenterintoagreementslimitingsubsidiarydividendsanddistributions.TheCompanysfinancialcovenantsincludemaintaininganoperatingleaseadjustedleverageratioofnotgreaterthan3.25:1.00andtheratioofconsolidatedEBITDARtoconsolidatedinterestcharges(plusrent)ofnotlessthan2.00:1.00.Thecreditagreementalsocontainscertaincustomaryrepresentations,warranties,affirmativecovenants,andeventsofdefault(including,amongothers,aneventofdefaultupontheoccurrenceofachangeofcontrol).Ifaneventofdefaultoccurs,thecreditagreementmaybeterminated,andthematurityofanyoutstandingamountsmaybeaccelerated.AsofApril30,2023,theCompanywasincompliancewiththecovenantsofthecreditfacility.ChinaMainlandrevolvingcreditfacilityInDecember2019,theCompanyenteredintoanuncommittedandunsecured130.0millionChineseYuan($18.8million)revolvingcreditfacilitywithtermsthatarereviewedonanannualbasis.Thecreditfacilitywasincreasedto230.0millionChineseYuan($33.3million)during2020.Itiscomprisedofarevolvingloanofupto200.0millionChineseYuan($28.9million)andafinancialguaranteefacilityofupto30.0millionChineseYuan($4.3million),oritsequivalentinanothercurrency.Loansareavailableforaperiodnottoexceed12months,ataninterestrateequaltotheloanprimerateplusaspreadof0.5175%.TheCompanyisrequiredtofollowcertaincovenants.AsofApril30,2023,theCompanywasincompliancewiththecovenantsand,asidefromlettersofcreditof25.1millionChineseYuan($3.6million),therewerenootherborrowingsorguaranteesoutstandingunderthiscreditfacility.SupplyChainFinancingProgramTheCompanyfacilitatesavoluntarysupplychainfinancing(SCF)programthatallowsitssupplierstoelecttosellthereceivablesowedtothembytheCompanytoathirdpartyfinancialinstitution.ParticipatingsuppliersnegotiatearrangementsTableofContents9directlywiththefinancialinstitution.IfasupplierchoosestoparticipateintheSCFprogramitmayrequestaninvoicebepaidearlierthanitwouldbytheCompany,andthefinancialinstitutionatitssoleandabsolutediscretion,mayelecttomakeanearlypaymenttothesupplieratadiscount.TheCompanysobligationstoitssuppliers,includingamountsdueandscheduledpaymentterms,arenotimpactedbyasuppliersparticipationinthearrangementandtheCompanyprovidesnoguaranteestoanythirdpartiesundertheSCFprogram.AsofApril30,2023andJanuary29,2023,$65.2millionand$17.6million,respectively,wasoutstandingundertheSCFprogramandpresentedwithinaccountspayable.Note4.Stock-BasedCompensationandBenefitPlansStock-basedcompensationplansTheCompanyseligibleemployeesparticipateinvariousstock-basedcompensationplans,provideddirectlybytheCompany.Stock-basedcompensationexpensechargedtoincomefortheplanswas$21.0millionand$18.2millionforthefirstquarterof2023and2022,respectively.Totalunrecognizedcompensationcostforallstock-basedcompensationplanswas$206.6millionasofApril30,2023,whichisexpectedtoberecognizedoveraweighted-averageperiodof2.5years.AsummaryofthebalancesoftheCompanysstock-basedcompensationplansasofApril30,2023,andchangesduringthefirstquarterthenended,ispresentedbelow:StockOptionsPerformance-BasedRestrictedStockUnitsRestrictedSharesRestrictedStockUnitsNumberWeighted-AverageExercisePriceNumberWeighted-AverageGrantDateFairValueNumberWeighted-AverageGrantDateFairValueNumberWeighted-AverageGrantDateFairValue(Inthousands,exceptpershareamounts)BalanceasofJanuary29,2023866$230.78 166$295.93 5$308.66 221$323.89Granted202 358.09 120 295.03 116 358.09Exercised/released84 140.75 104 200.37 86 281.70Forfeited/expired6 307.34 1 335.71 3 337.28BalanceasofApril30,2023978$264.40 181$349.71 5$308.66 248$354.36ExercisableasofApril30,2023495$194.41TheCompanysperformance-basedrestrictedstockunitsareawardedtoeligibleemployeesandentitlethegranteetoreceiveamaximumoftwosharesofcommonstockperperformance-basedrestrictedstockunitiftheCompanyachievesspecifiedperformancegoalsandthegranteeremainsemployedduringthevestingperiod.Thefairvalueofperformance-basedrestrictedstockunitsisbasedontheclosingpriceoftheCompanyscommonstockonthegrantdate.Expenseforperformance-basedrestrictedstockunitsisrecognizedwhenitisprobablethattheperformancegoalwillbeachieved.ThegrantdatefairvalueoftherestrictedsharesandrestrictedstockunitsisbasedontheclosingpriceoftheCompanyscommonstockonthegrantdate.ThegrantdatefairvalueofeachstockoptiongrantedisestimatedonthedateofgrantusingtheBlack-Scholesmodel.TheclosingpriceoftheCompanyscommonstockonthegrantdateisusedinthemodel.Theassumptionsusedtocalculatethefairvalueoftheoptionsgrantedareevaluatedandrevised,asnecessary,toreflectmarketconditionsandtheCompanyshistoricalexperience.Theexpectedtermoftheoptionsisbaseduponthehistoricalexperienceofsimilarawards,givingconsiderationtoexpectationsoffutureemployeeexercisebehavior.ExpectedvolatilityisbaseduponthehistoricalvolatilityoftheCompanyscommonstockfortheperiodcorrespondingwiththeexpectedtermoftheoptions.Therisk-freeinterestrateisbasedontheU.S.Treasuryyieldcurvefortheperiodcorrespondingwiththeexpectedtermoftheoptions.TheTableofContents10followingareweightedaveragesoftheassumptionsthatwereusedincalculatingthefairvalueofstockoptionsgrantedduringthefirstquarterof2023:FirstQuarter2023Expectedterm3.75yearsExpectedvolatility 42.35%Risk-freeinterestrate 3.49%Dividendyield%EmployeesharepurchaseplanTheCompanysboardofdirectorsandstockholdersapprovedtheCompanysEmployeeSharePurchasePlan(ESPP)inSeptember2007.Contributionsaremadebyeligibleemployees,subjecttocertainlimitsdefinedintheESPP,andtheCompanymatchesone-thirdofthecontribution.ThemaximumnumberofsharesauthorizedtobepurchasedundertheESPPis6.0millionshares.AllsharespurchasedundertheESPParepurchasedintheopenmarket.Duringthefirstquarterof2023,therewere27.7thousandsharespurchased.DefinedcontributionpensionplansTheCompanyoffersdefinedcontributionpensionplanstoitseligibleemployees.Participatingemployeesmayelecttodeferandcontributeaportionoftheireligiblecompensationtoaplanuptolimitsstatedintheplandocuments,nottoexceedthedollaramountssetbyapplicablelaws.TheCompanymatches50%to75%ofthecontributiondependingontheparticipantslengthofservice,andthecontributionissubjecttoatwoyearvestingperiod.TheCompanysnetexpenseforthedefinedcontributionplanswas$4.8millionand$3.4millioninthefirstquarterof2023and2022,respectively.Note5.FairValueMeasurementFairvalueisdefinedasthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.Fairvaluemeasurementsaremadeusingathree-tierfairvaluehierarchy,whichprioritizestheinputsusedinmeasuringfairvalue:Level1-definedasobservableinputssuchasquotedpricesinactivemarkets;Level2-definedasinputsotherthanquotedpricesinactivemarketsthatareeitherdirectlyorindirectlyobservable;andLevel3-definedasunobservableinputsinwhichlittleornomarketdataexists,thereforerequiringanentitytodevelopitsownassumptions.AssetsandliabilitiesmeasuredatfairvalueonarecurringbasisThefairvaluemeasurementiscategorizedinitsentiretybyreferencetoitslowestlevelofsignificantinput.AsofApril30,2023andJanuary29,2023,theCompanyheldcertainassetsandliabilitiesthatarerequiredtobemeasuredatfairvalueonarecurringbasis:April30,2023Level1Level2Level3BalanceSheetClassification(Inthousands)Moneymarketfunds$362,740$362,740$CashandcashequivalentsTermdeposits8 8 CashandcashequivalentsForwardcurrencycontractassets17,388 17,388 PrepaidexpensesandothercurrentassetsForwardcurrencycontractliabilities9,993 9,993 OthercurrentliabilitiesTableofContents11January29,2023Level1Level2Level3BalanceSheetClassification(Inthousands)Moneymarketfunds$568,000$568,000$CashandcashequivalentsTermdeposits8 8 CashandcashequivalentsForwardcurrencycontractassets16,707 16,707 PrepaidexpensesandothercurrentassetsForwardcurrencycontractliabilities25,625 25,625 OthercurrentliabilitiesTheCompanyrecordscash,accountsreceivable,accountspayable,andaccruedliabilitiesatcost.Thecarryingvaluesoftheseinstrumentsapproximatetheirfairvalueduetotheirshort-termmaturities.TheCompanyhasshort-term,highlyliquidinvestmentsclassifiedascashequivalents,whichareinvestedinAAA-ratedmoneymarketfunds,whichincludeinvestmentsingovernmentbonds,andtermdeposits.TheCompanyrecordscashequivalentsattheiroriginalpurchasepricesplusinterestthathasaccruedatthestatedrate.ThefairvaluesoftheforwardcurrencycontractassetsandliabilitiesaredeterminedusingobservableLevel2inputs,includingforeigncurrencyspotexchangerates,forwardpricingcurves,andinterestrates.ThefairvaluesconsiderthecreditriskoftheCompanyanditscounterparties.TheCompanysMasterInternationalSwapDealersAssociation,Inc.,Agreementsandothersimilararrangementsallownetsettlementsundercertainconditions.However,theCompanyrecordsallderivativesonitsconsolidatedbalancesheetsatfairvalueanddoesnotoffsetderivativeassetsandliabilities.Note6.DerivativeFinancialInstrumentsForeigncurrencyexchangeriskTheCompanyisexposedtorisksassociatedwithchangesinforeigncurrencyexchangeratesandusesderivativefinancialinstrumentstomanageitsexposuretocertainoftheseforeigncurrencyexchangeraterisks.TheCompanydoesnotenterintoderivativecontractsforspeculativeortradingpurposes.TheCompanycurrentlyhedgesagainstchangesintheCanadiandollarandChineseYuantotheU.S.dollarexchangerateandchangesintheEuroandAustraliandollartotheCanadiandollarexchangerateusingforwardcurrencycontracts.NetinvestmenthedgesTheCompanyisexposedtoforeigncurrencyexchangegainsandlosseswhichariseontranslationofitsinternationalsubsidiariesbalancesheetsintoU.S.dollars.Thesegainsandlossesarerecordedasothercomprehensiveincome(loss),netoftaxinaccumulatedothercomprehensiveincomeorlosswithinstockholdersequity.TheCompanyholdsasignificantportionofitsassetsinCanadaandentersintoforwardcurrencycontractsdesignedtohedgeaportionoftheforeigncurrencyexposurethatarisesontranslationofaCanadiansubsidiaryintoU.S.dollars.Theseforwardcurrencycontractsaredesignatedasnetinvestmenthedges.TheCompanyassesseshedgeeffectivenessbasedonchangesinforwardrates.TheCompanyrecordednoineffectivenessfromnetinvestmenthedgesduringthefirstquarterof2023.TheCompanyclassifiesthecashflowsatsettlementofitsnetinvestmenthedgeswithininvestingactivitiesintheconsolidatedstatementsofcashflows.DerivativesnotdesignatedashedginginstrumentsTheCompanyisexposedtogainsandlossesarisingfromchangesinforeigncurrencyexchangeratesassociatedwithtransactionswhichareundertakenbyitssubsidiariesincurrenciesotherthantheirfunctionalcurrency.Suchtransactionsincludeintercompanytransactionsandinventorypurchases.Thesetransactionsresultintherecognitionofcertainforeigncurrencydenominatedmonetaryassetsandliabilitieswhichareremeasuredtothequarter-endorsettlementdateforeigncurrencyexchangerate.Theresultingforeigncurrencygainsandlossesarerecordedinselling,generalandadministrativeexpenses.Duringthefirstquarterof2023,theCompanyenteredintocertainforwardcurrencycontractsdesignedtoeconomicallyhedgetheforeigncurrencyexchangerevaluationgainsandlossesthatarerecognizedbyitsCanadianandChinesesubsidiariesonspecificmonetaryassetsandliabilitiesdenominatedincurrenciesotherthanthefunctionalcurrencyoftheentity.TheTableofContents12Companyhasnotappliedhedgeaccountingtotheseinstrumentsandthechangeinfairvalueofthesederivativesisrecordedwithinselling,generalandadministrativeexpenses.TheCompanyclassifiesthecashflowsatsettlementofitsforwardcurrencycontractswhicharenotdesignatedinhedgingrelationshipswithinoperatingactivitiesintheconsolidatedstatementsofcashflows.QuantitativedisclosuresaboutderivativefinancialinstrumentsTheCompanypresentsitsderivativeassetsandderivativeliabilitiesattheirgrossfairvalueswithinprepaidexpensesandothercurrentassetsandothercurrentliabilitiesontheconsolidatedbalancesheets.However,theCompanysMasterInternationalSwapDealersAssociation,Inc.,Agreementsandothersimilararrangementsallownetsettlementsundercertainconditions.AsofApril30,2023,therewerederivativeassetsof$17.4millionandderivativeliabilitiesof$10.0millionsubjecttoenforceablenettingarrangements.Thenotionalamountsandfairvaluesofforwardcurrencycontractswereasfollows:April30,2023January29,2023GrossNotionalAssetsLiabilitiesGrossNotionalAssetsLiabilities(Inthousands)Derivativesdesignatedasnetinvestmenthedges:Forwardcurrencycontracts$1,215,000$8,194$1,070,000$17,211Derivativesnotdesignatedinahedgingrelationship:Forwardcurrencycontracts1,760,191 9,194 9,993 1,605,284 16,707 8,414Netderivativesrecognizedonconsolidatedbalancesheets:Forwardcurrencycontracts$17,388$9,993$16,707$25,625TheforwardcurrencycontractsdesignatedasnetinvestmenthedgesoutstandingasofApril30,2023matureondifferentdatesbetweenMay2023andAugust2023.TheforwardcurrencycontractsnotdesignatedinahedgingrelationshipoutstandingasofApril30,2023matureondifferentdatesbetweenMay2023andAugust2023.Thepre-taxgainsandlossesonforeigncurrencyexchangeforwardcontractsrecordedinaccumulatedothercomprehensiveincomeorlosswereasfollows:FirstQuarter20232022(Inthousands)Gains(losses)recognizedinnetinvestmenthedgegains(losses):Derivativesdesignatedasnetinvestmenthedges$24,127$6,847Nogainsorlosseshavebeenreclassifiedfromaccumulatedothercomprehensiveincomeorlossintonetincomeforderivativefinancialinstrumentsinanetinvestmenthedgingrelationship,astheCompanyhasnotsoldorliquidated(orsubstantiallyliquidated)itshedgedsubsidiary.TableofContents13Thepre-taxnetforeigncurrencyexchangeandderivativegainsandlossesrecordedintheconsolidatedstatementofoperationswereasfollows:FirstQuarter20232022(Inthousands)Gains(losses)recognizedinselling,generalandadministrativeexpenses:Foreigncurrencyexchangegains(losses)$8,328$(1,743)Derivativesnotdesignatedinahedgingrelationship(9,707)(892)Netforeigncurrencyexchangeandderivativegains(losses)$(1,379)$(2,635)CreditriskTheCompanyisexposedtocredit-relatedlossesintheeventofnonperformancebythecounterpartiestotheforwardcurrencycontracts.ThecreditriskamountistheCompanysunrealizedgainsonitsderivativeinstruments,basedonforeigncurrencyratesatthetimeofnonperformance.TheCompanysforwardcurrencycontractsareenteredintowithinvestmentgradecreditworthyandreputablefinancialinstitutionsthataremonitoredbytheCompanyforcounterpartyrisk.TheCompanysderivativecontractscontaincertaincreditrisk-relatedcontingentfeatures.Undercertaincircumstances,includinganeventofdefault,bankruptcy,termination,andcrossdefaultundertheCompanysrevolvingcreditfacility,theCompanymayberequiredtomakeimmediatepaymentforoutstandingliabilitiesunderitsderivativecontracts.Note7.EarningsPerShareThedetailsofthecomputationofbasicanddilutedearningspershareareasfollows:FirstQuarter20232022(Inthousands,exceptpershareamounts)Netincome$290,405$189,998Basicweighted-averagenumberofsharesoutstanding127,246 128,077Assumedconversionofdilutivestockoptionsandawards375 464Dilutedweighted-averagenumberofsharesoutstanding127,621 128,541Basicearningspershare$2.28$1.48Dilutedearningspershare$2.28$1.48TheCompanyscalculationofweighted-averagesharesincludesthecommonstockoftheCompanyaswellastheexchangeableshares.Exchangeablesharesaretheequivalentofcommonsharesinallmaterialrespects.Allclassesofstockhave,ineffect,thesamerightsandshareequallyinundistributednetincome.Forthefirstquarterof2023and2022,0.1millionand0.1millionstockoptionsandawards,respectively,wereanti-dilutivetoearningspershareandthereforehavebeenexcludedfromthecomputationofdilutedearningspershare.OnJanuary31,2019,theCompanysboardofdirectorsapprovedastockrepurchaseprogramforupto$500.0millionoftheCompanyscommonshares.OnDecember1,2020,itapprovedanincreaseintheremainingauthorizationfrom$263.6millionto$500.0million,andonOctober1,2021,itapprovedanincreaseintheremainingauthorizationfrom$141.2millionto$641.2million.Duringthefirstquarterof2022,theCompanycompletedtheremainingstockrepurchasesunderthisprogram.OnMarch23,2022,theCompanysboardofdirectorsapprovedastockrepurchaseprogramforupto$1.0billionoftheCompanyscommonsharesontheopenmarketorinprivatelynegotiatedtransactions.Therepurchaseplanhasnotimelimitanddoesnotrequiretherepurchaseofaminimumnumberofshares.Commonsharesrepurchasedontheopenmarketareatprevailingmarketprices,includingunderplanscomplyingwiththeprovisionsofRule10b5-1andRule10b-18oftheSecuritiesExchangeActof1934.Thetimingandactualnumberofcommonsharestoberepurchasedwilldependuponmarketconditions,eligibilitytotrade,andotherfactors,inaccordancewithSecuritiesandExchangeCommissionTableofContents14requirements.TheauthorizedvalueofsharesavailabletoberepurchasedunderthisprogramexcludesthecostofcommissionsandexcisetaxesandasofApril30,2023,theremainingauthorizedvaluewas$645.7million.Duringthefirstquarterof2023,0.3millionshareswererepurchasedatatotalcostincludingcommissionsandexcisetaxesof$98.5million.Duringthefirstquarterof2022,0.7millionshareswererepurchasedatatotalcostincludingcommissionsof$232.6million.SubsequenttoApril30,2023,anduptoMay26,2023,0.2millionshareswererepurchasedatatotalcostincludingcommissionsandexcisetaxesof$57.1million.Note8.SupplementaryFinancialInformationAsummaryofcertainconsolidatedbalancesheetaccountsisasfollows:Inventories:Inventories,atcost$1,722,629$1,571,981Provisiontoreduceinventoriestonetrealizablevalue(142,316)(124,614)$1,580,313$1,447,367Prepaidexpensesandothercurrentassets:Prepaidexpenses$143,109$142,003Forwardcurrencycontractassets17,388 16,707Othercurrentassets72,024 79,962$232,521$238,672Propertyandequipment,net:Land$78,932$80,692Buildings28,898 28,850Leaseholdimprovements855,745 818,071Furnitureandfixtures147,539 144,572Computerhardware166,810 166,768Computersoftware812,792 742,295Equipmentandvehicles35,991 30,766Workinprogress209,879 244,898Propertyandequipment,gross2,336,586 2,256,912Accumulateddepreciation(1,023,793)(987,298)$1,312,793$1,269,614Othernon-currentassets:Cloudcomputingarrangementimplementationcosts$119,973$114,700Securitydeposits28,945 28,447Other12,807 12,898$161,725$156,045April30,2023January29,2023(Inthousands)TableofContents15Accruedliabilitiesandother:Accruedoperatingexpenses$144,501$169,429Accruedfreight33,066 57,692Salesreturnallowances44,999 55,528Forwardcurrencycontractliabilities9,993 25,625Accruedduty29,782 21,046Salestaxcollected19,639 20,183Accruedcapitalexpenditures17,141 19,365Accruedrent13,725 12,223Accruedinventoryliabilities16,728 4,345Other13,177 13,787$342,751$399,223April30,2023January29,2023(Inthousands)TableofContents16Note9.SegmentedInformationTheCompanyssegmentsarebasedonthefinancialinformationitusesinmanagingitsbusinessandcomprisetworeportablesegments:(i)company-operatedstoresand(ii)directtoconsumer.Theremainderofitsoperations,whichincludesoutlets,salestowholesaleaccounts,licenseandsupplyarrangements,recommerce,temporarylocations,andlululemonStudio,areincludedwithinOther.20232022(Inthousands)Netrevenue:Company-operatedstores$958,087$731,604Directtoconsumer834,942 721,253Other207,763 160,606$2,000,792$1,613,463Segmentedincomefromoperations:Company-operatedstores$259,819$160,706Directtoconsumer369,453 285,107Other44,083 19,527673,355 465,340Generalcorporateexpense270,063 202,798Amortizationofintangibleassets1,878 2,195Incomefromoperations401,414 260,347Otherincome(expense),net8,025(22)Incomebeforeincometaxexpense$409,439$260,325Capitalexpenditures:Company-operatedstores$41,711$24,946Directtoconsumer26,890 20,339Corporateandother68,341 66,067$136,942$111,352Depreciationandamortization:Company-operatedstores$36,749$31,310Directtoconsumer8,666 8,669Corporateandother38,701 24,491$84,116$64,470FirstQuarterTableofContents17Note10.NetRevenuebyGeographyandCategoryInadditiontothedisaggregationofnetrevenuebyreportablesegmentinNote9.SegmentedInformation,thefollowingtabledisaggregatestheCompanysnetrevenuebygeographicarea.FirstQuarter20232022(Inthousands)UnitedStates$1,314,391$1,098,329Canada253,347 244,944PeoplesRepublicofChina249,685 139,427Restofworld183,369 130,763$2,000,792$1,613,463ThefollowingtabledisaggregatestheCompanysnetrevenuebycategory.Othercategoriesisprimarilycomposedofaccessories,lululemonStudio,andfootwear.FirstQuarter20232022(Inthousands)Womensproduct$1,308,828$1,073,924Mensproduct438,165 374,998Othercategories253,799 164,541$2,000,792$1,613,463Note11.LegalProceedingsandOtherContingenciesTheCompanyis,fromtimetotime,involvedinroutinelegalmatters,andauditsandinspectionsbygovernmentalagenciesandotherthirdpartieswhichareincidentaltotheconductofitsbusiness.Thisincludeslegalmatterssuchasinitiationanddefenseofproceedingstoprotectintellectualpropertyrights,personalinjuryclaims,productliabilityclaims,employmentclaims,andsimilarmatters.TheCompanybelievestheultimateresolutionofanysuchlegalproceedings,audits,andinspectionswillnothaveamaterialadverseeffectonitsconsolidatedbalancesheets,resultsofoperationsorcashflows.TheCompanyhasrecognizedimmaterialprovisionsrelatedtotheexpectedoutcomeoflegalproceedings.ITEM2.MANAGEMENTSDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONSSomeofthestatementscontainedinthisForm10-Qandanydocumentsincorporatedhereinbyreferenceconstituteforward-lookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995,Section27AoftheSecuritiesActof1933andSection21EoftheSecuritiesExchangeActof1934.Allstatements,otherthanstatementsofhistoricalfacts,includedorincorporatedinthisForm10-Qareforward-lookingstatements,particularlystatementswhichrelatetoexpectations,beliefs,projections,futureplansandstrategies,anticipatedeventsortrendsandsimilarexpressionsconcerningmattersthatarenothistoricalfacts,suchasstatementsregardingourfuturefinancialconditionorresultsofoperations,ourprospectsandstrategiesforfuturegrowth,thedevelopmentandintroductionofnewproducts,andtheimplementationofourmarketingandbrandingstrategies.Inmanycases,youcanidentifyforward-lookingstatementsbytermssuchasmay,will,should,expects,plans,anticipates,believes,estimates,intends,predicts,potentialorthenegativeofthesetermsorothercomparableterminology.Theforward-lookingstatementscontainedinthisForm10-Qandanydocumentsincorporatedhereinbyreferencereflectourcurrentviewsaboutfutureeventsandaresubjecttorisks,uncertainties,assumptions,andchangesincircumstancesthatmaycauseeventsorouractualactivitiesorresultstodiffersignificantlyfromthoseexpressedinanyforward-lookingstatement.Althoughwebelievethattheexpectationsreflectedintheforward-lookingstatementsarereasonable,wecannotguaranteefutureevents,results,actions,levelsofactivity,performance,orachievements.Readersarecautionednottoplaceunduerelianceontheseforward-lookingstatements.Anumberofimportantfactorscouldcauseactualresultstodiffermateriallyfromthoseindicatedbytheforward-lookingstatements,including,butnotlimitedto,thosefactorsdescribedinRiskFactorsandelsewhereinthisreport.TableofContents18Theforward-lookingstatementscontainedinthisForm10-QreflectourviewsandassumptionsonlyasofthedateofthisForm10-QandareexpresslyqualifiedintheirentiretybythecautionarystatementsincludedinthisForm10-Q.Exceptasrequiredbyapplicablesecuritieslaw,weundertakenoobligationtoupdateanyforward-lookingstatementtoreflecteventsorcircumstancesafterthedateonwhichthestatementismadeortoreflecttheoccurrenceofunanticipatedevents.ThisinformationshouldbereadinconjunctionwiththeunauditedinterimconsolidatedfinancialstatementsandthenotesincludedinItem1ofPartIofthisQuarterlyReportonForm10-Qandtheauditedconsolidatedfinancialstatementsandnotes,andManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations,containedinourfiscal2022AnnualReportonForm10-KfiledwiththeSEConMarch28,2023.Fiscal2023andfiscal2022arereferredtoas2023,and2022,respectively.Thefirstquarterof2023and2022endedonApril30,2023andMay1,2022,respectively.Componentsofmanagementsdiscussionandanalysisoffinancialconditionandresultsofoperationsinclude:OverviewFinancialHighlightsandMarketConditionsandTrendsQuarter-to-DateResultsofOperationsComparableStoreSalesandTotalComparableSalesNon-GAAPFinancialMeasuresSeasonalityLiquidityandCapitalResourcesCriticalAccountingPoliciesandEstimatesOperatingLocationsWedisclosematerialnon-publicinformationthroughoneormoreofthefollowingchannels:ourinvestorrelationswebsite(http:/ 100.00.0%Costofgoodssold849,987 743,070 42.5 46.1Grossprofit1,150,805 870,393 57.5 53.9Selling,generalandadministrativeexpenses747,513 607,851 37.4 37.7Amortizationofintangibleassets1,878 2,195 0.1 0.1Incomefromoperations401,414 260,347 20.1 16.1Otherincome(expense),net8,025(22)0.4 Incomebeforeincometaxexpense409,439 260,325 20.5 16.1Incometaxexpense119,034 70,327 5.9 4.4Netincome$290,405$189,998 14.5.8%NetRevenueNetrevenueincreased$387.3million,or24%,to$2.0billionforthefirstquarterof2023from$1.6billionforthefirstquarterof2022.Onaconstantdollarbasis,assumingtheaverageforeigncurrencyexchangeratesforthefirstquarterof2023remainedconstantwiththeaverageforeigncurrencyexchangeratesforthefirstquarterof2022,netrevenueincreased$432.0million,or27%.Theincreaseinnetrevenuewasprimarilyduetoincreasedcompany-operatedstorenetrevenue,includingfromnewcompany-operatedstoresandincreasedcomparablestoresales,aswellasduetoincreaseddirecttoconsumernetrevenue.Othernetrevenuealsoincreased.Totalcomparablesales,whichincludescomparablestoresalesanddirecttoconsumernetrevenue,increased14%forthefirstquarterof2023comparedtothefirstquarterof2022.Totalcomparablesalesincreased17%onaconstantdollarbasis.Netrevenueforthefirstquarterof2023and2022issummarizedbelow.FirstQuarter2023202220232022Yearoveryearchange(Inthousands)(Percentages)(Inthousands)(Percentages)Company-operatedstores$958,087$731,604 47.9E.3%$226,483 31.0%Directtoconsumer834,942 721,253 41.7 44.7113,689 15.8Other207,763 160,606 10.4 10.047,157 29.4Netrevenue$2,000,792$1,613,463 100.00.0%$387,329 24.0%Company-OperatedStores.Theincreaseinnetrevenuefromourcompany-operatedstoreswasdrivenbynetrevenuefromcompany-operatedstoresthatweopenedorsignificantlyexpandedsincethefirstquarterof2022whichcontributed$137.9million.Wehaveopened83netnewcompany-operatedstoressincethefirstquarterof2022,including39storesinAsiaPacific,37storesinNorthAmerica,andsevenstoresinEurope.Theincreaseinnetrevenuefromourcompany-operatedstoreswasalsodrivenbyincreasedcomparablestoresales.Comparablestoresalesincreased13%,or16%onaconstantdollarbasis.Theincreaseincomparablestoresaleswasprimarilyaresultofincreasedstoretraffic,partiallyoffsetbyadecreaseinconversionrates.Dollarvaluepertransactionwasconsistentyearoveryear.DirecttoConsumer.Directtoconsumernetrevenueincreased16%,or18%onaconstantdollarbasis.Theincreaseinnetrevenuefromourdirecttoconsumersegmentwasprimarilyaresultofincreasedtraffic,partiallyoffsetbyadecreaseinconversionratesandalowerdollarvaluepertransaction.Other.Theincreaseinothernetrevenuewasprimarilyduetoincreasedoutletsales,licenseandsupplyarrangementrevenue,salestowholesaleaccounts,andrecommercerevenue.TheincreaseinnetrevenuewaspartiallyoffsetbyaTableofContents21decreaseinnetrevenuefromourtemporarylocations,whichhadfewerlocationsopencomparedtotheprioryear,andlululemonStudio.GrossProfitFirstQuarter20232022Yearoveryearchange(Inthousands)(Inthousands)(Percentage)Grossprofit$1,150,805$870,393$280,412 32.2%Grossmargin 57.5S.960basispointsTheincreaseingrossmarginwasprimarilytheresultof:anetincreaseinproductmarginof430basispoints,primarilyduetolowerairfreightcostsfromratereductionsandreducedusage,modestlyoffsetbyhigherinventoryprovisionsinthecurrentyear;andadecreaseinoccupancyanddepreciationcostsasapercentageofnetrevenueof10basispoints,drivenprimarilybytheincreaseinnetrevenue.Theincreaseingrossmarginwaspartiallyoffsetbyanunfavorableimpactofforeigncurrencyexchangeratesof50basispoints,andanincreaseincostsrelatedtoourproductdepartmentsanddistributioncentersasapercentageofnetrevenueof30basispoints.Selling,GeneralandAdministrativeExpensesFirstQuarter20232022Yearoveryearchange(Inthousands)(Inthousands)(Percentage)Selling,generalandadministrativeexpenses$747,513$607,851$139,662 23.0%Selling,generalandadministrativeexpensesasapercentageofnetrevenue 37.47.7%(30)basispointsTheincreaseinselling,generalandadministrativeexpenseswasprimarilydueto:anincreaseinheadofficecostsof$79.3million,comprisedof:anincreaseof$45.5millionprimarilyduetoanincreaseindepreciationof$14.8million,increasedbrandandcommunitycosts,includingcharitabledonations,of$12.6million,increasedtechnologycosts,includingcloudcomputingamortization,of$11.0million,aswellasprofessionalfees;andanincreaseinemployeecostsof$33.8millionprimarilyduetoanincreaseinsalariesandwagesof$18.9millionandincreasedincentivecompensationandstock-basedcompensationof$8.1million,primarilyasaresultofheadcountgrowthandincreasedwagerates,aswellasincreasedbenefitcostsandtravelcosts.anincreaseincostsrelatedtoouroperatingchannelsof$61.6million,comprisedof:anincreaseinemployeecostsof$34.4millionprimarilyduetoanincreaseinsalariesandwagesexpenseandincentivecompensationinourcompany-operatedstoreschannel,primarilyfromthegrowthinourbusinessandincreasedwagerates;anincreaseinvariablecostsof$13.7millionprimarilyduetoanincreaseincreditcardfees,distributioncosts,andpackagingcosts,primarilyasaresultofincreasednetrevenue;anincreaseinothercostsof$8.2millionprimarilyduetoincreasedtechnologycosts,professionalfees,andrepairsandmaintenancecosts;andanincreaseinbrandandcommunitycostsof$5.3millionprimarilyduetoanincreaseindigitalmarketingexpensesrelatedtoourdirecttoconsumerchannel,partiallyoffsetbyadecreaseinmarketingexpensesrelatedtolululemonStudio.TableofContents22Theincreaseinselling,generalandadministrativeexpenseswaspartiallyoffsetbyadecreaseinnetforeigncurrencyexchangeandderivativerevaluationlossesof$1.3million.AmortizationofIntangibleAssetsFirstQuarter20232022Yearoveryearchange(Inthousands)(Inthousands)(Percentage)Amortizationofintangibleassets$1,878$2,195$(317)(14.4)%TheamortizationofintangibleassetswasprimarilytheresultoftheamortizationofintangibleassetsrecognizedupontheacquisitionofMIRROR.IncomefromOperationsOnasegmentbasis,wedetermineincomefromoperationswithouttakingintoaccountourgeneralcorporateexpensesandcertainotherexpenses.Segmentedincomefromoperationsissummarizedbelow.FirstQuarter2023202220232022Yearoveryearchange(Inthousands)(Percentageofnetrevenueofrespectiveoperatingsegment)(Inthousands)(Percentage)Segmentedincomefromoperations:Company-operatedstores$259,819$160,706 27.1.0%$99,113 61.7%Directtoconsumer369,453285,107 44.2 39.584,346 29.6Other44,08319,527 21.2 12.224,556 125.8$673,355$465,340$208,015 44.7%Generalcorporateexpense270,063202,79867,265 33.2Amortizationofintangibleassets1,8782,195(317)(14)Incomefromoperations$401,414$260,347$141,067 54.2%Operatingmargin 20.1.10basispointsCompany-OperatedStores.Theincreaseinincomefromoperationsfromourcompany-operatedstoreswasprimarilytheresultofincreasedgrossprofitof$149.8million,drivenbyincreasednetrevenueandhighergrossmargin.Theincreaseingrossmarginwasprimarilyduetohigherproductmargindrivenbylowerairfreightcostsandlowermarkdowns,partiallyoffsetbyhigherinventoryprovisions.Theincreaseingrossmarginwasalsoduetoleverageonoccupancyanddepreciationcosts,partiallyoffsetbyanunfavorableimpactofforeigncurrencyexchangeratesanddeleverageincostsfromourdistributioncentersandproductteams.Theincreaseingrossprofitwaspartiallyoffsetbyanincreaseinselling,generalandadministrativeexpenses,primarilyduetohigheremployeeandoperatingcosts.Employeecostsincreasedprimarilyduetohighersalariesandwagesexpenseandhigherincentivecompensationasaresultofthegrowthinourbusinessandincreasedwagerates.Storeoperatingcostsincreasedprimarilyduetoincreasesincreditcardfees,packagingcosts,anddistributioncosts,asaresultofhighernetrevenue,aswellasincreasedrepairsandmaintenance.Incomefromoperationsasapercentageofcompany-operatedstoresnetrevenueincreasedduetohighergrossmarginandleverageonselling,generalandadministrativeexpenses.DirecttoConsumer.Theincreaseinincomefromoperationsfromourdirecttoconsumersegmentwasprimarilytheresultofincreasedgrossprofitof$111.0million,drivenbyincreasednetrevenueandhighergrossmargin.Theincreaseingrossmarginwasprimarilyduetohigherproductmargindrivenbylowerairfreightcosts,partiallyoffsetbyhigherinventoryprovisions.Theincreaseingrossmarginwaspartiallyoffsetbyanunfavorableimpactofforeigncurrencyexchangeratesanddeleverageincostsfromourdistributioncentersandproductteams.Theincreaseingrossprofitwaspartiallyoffsetbyanincreaseinselling,generalandadministrativeexpenses,primarilyduetohighervariableoperatingcostsincludingdistributioncosts,packagingcosts,andcreditcardfees,asaresultofhighernetrevenue,aswellashigherdigitalmarketingexpensesandtechnologycosts.Incomefromoperationsasapercentageofdirecttoconsumernetrevenueincreasedprimarilyduetohighergrossmargin.Other.TheincreaseinincomefromoperationsfromourotherchannelswasprimarilytheresultofincreasedoperatingprofitfromourotherlululemonretailoperationsandareductioninlululemonStudiomarketingexpenses.IncreasednetTableofContents23revenuefromoutlets,licenseandsupplyarrangements,salestowholesaleaccounts,andrecommerceresultedinincreasedgrossprofit.ThiswaspartiallyoffsetbyadecreaseinnetrevenuefromourtemporarylocationsandlululemonStudio.Selling,generalandadministrativeexpensesdecreasedprimarilyduetolowerlululemonStudiomarketingcosts.Incomefromoperationsasapercentageofothernetrevenueincreasedprimarilyduetoleverageonselling,generalandadministrativeexpenses,partiallyoffsetbylowergrossmargindrivenbyhighermarkdowns.GeneralCorporateExpense.Theincreaseingeneralcorporateexpensewasprimarilyduetoincreasedemployeecosts,primarilyfromheadcountgrowthandincreasedwagerates,aswellasincreaseddepreciation,brandandcommunitycosts,technologycosts,andprofessionalfees.Theincreaseingeneralcorporateexpensewaspartiallyoffsetbyadecreaseinnetforeigncurrencyexchangeandderivativerevaluationlossesof$1.3million.OtherIncome(Expense),NetFirstQuarter20232022Yearoveryearchange(Inthousands)(Inthousands)(Percentage)Otherincome(expense),net$8,025$(22)$8,047n/aTheincreaseinotherincome,netwasprimarilyduetoanincreaseininterestincomeasaresultofhigherinterestratesandhighercashbalances.IncomeTaxExpenseFirstQuarter20232022Yearoveryearchange(Inthousands)(Inthousands)(Percentage)Incometaxexpense$119,034$70,327$48,707 69.3fectivetaxrate 29.1.0!0basispointsTheeffectivetaxrateforthefirstquarterof2023hasincreasedcomparedtothefirstquarterof2022primarilyduetotheaccrualofwithholdingtaxesonunremittedforeignearningsandadecreaseindeductionsrelatedtostock-basedcompensation.Thiswaspartiallyoffsetbyareductioninnon-deductibleexpensesininternationaljurisdictions.NetIncomeFirstQuarter20232022Yearoveryearchange(Inthousands)(Inthousands)(Percentage)Netincome$290,405$189,998$100,407 52.8%Theincreaseinnetincomewasprimarilyduetoanincreaseingrossprofitof$280.4millionandanincreaseinotherincome(expense),netof$8.0million,partiallyoffsetbyanincreaseinselling,generalandadministrativeexpensesof$139.7millionandanincreaseinincometaxexpenseof$48.7million.ComparableStoreSalesandTotalComparableSalesWeusecomparablestoresalestoassesstheperformanceofourexistingstoresasitallowsustomonitortheperformanceofourbusinesswithouttheimpactofrecentlyopenedorexpandedstores.Weusetotalcomparablesalestoevaluatetheperformanceofourbusinessfromanomni-channelperspective.Webelieveinvestorswouldsimilarlyfindthesemetricsusefulinassessingtheperformanceofourbusiness.Comparablestoresalesreflectnetrevenuefromcompany-operatedstoresthathavebeenopen,oropenafterbeingsignificantlyexpanded,foratleast12fullfiscalmonths.Netrevenuefromastoreisincludedincomparablestoresalesbeginningwiththefirstfiscalmonthforwhichthestorehasafullfiscalmonthofsalesintheprioryear.Comparablestoresalesexcludesalesfromnewstoresthathavenotbeenopenforatleast12fullfiscalmonths,fromstoreswhichhavenotbeenintheirsignificantlyexpandedspaceforatleast12fullfiscalmonths,andfromstoreswhichhavebeentemporarilyTableofContents24relocatedforrenovationsortemporarilyclosed.Comparablestoresalesalsoexcludesalesfromdirecttoconsumerandourotheroperations,aswellassalesfromcompany-operatedstoresthathaveclosed.Totalcomparablesalescombinescomparablestoresalesanddirecttoconsumernetrevenue.Infiscalyearswith53weeks,the53rdweekofnetrevenueisexcludedfromthecalculationofcomparablesales.Intheyearfollowinga53weekyear,theprioryearperiodisshiftedbyoneweektocomparesimilarcalendarweeks.Openingnewstoresandexpandingexistingstoresisanimportantpartofourgrowthstrategy.Accordingly,totalcomparablesalesisjustonewayofassessingthesuccessofourgrowthstrategyinsofarascomparablesalesdonotreflecttheperformanceofstoresopened,orsignificantlyexpanded,withinthelast12fullfiscalmonths.Thecomparablesalesmeasureswereportmaynotbeequivalenttosimilarlytitledmeasuresreportedbyothercompanies.Non-GAAPFinancialMeasuresConstantdollarchangesinnetrevenue,totalcomparablesales,comparablestoresales,anddirecttoconsumernetrevenuearenon-GAAPfinancialmeasures.Aconstantdollarbasisassumestheaverageforeigncurrencyexchangeratesfortheperiodremainedconstantwiththeaverageforeigncurrencyexchangeratesforthesameperiodoftheprioryear.Weprovideconstantdollarchangesinourresultstohelpinvestorsunderstandtheunderlyinggrowthrateofnetrevenueexcludingtheimpactofchangesinforeigncurrencyexchangerates.Thepresentationofthisfinancialinformationisnotintendedtobeconsideredinisolationorasasubstitutefor,orwithgreaterprominenceto,thefinancialinformationpreparedandpresentedinaccordancewithGAAP.Areconciliationofthenon-GAAPfinancialmeasuresfollows,whichincludesmoredetailontheGAAPfinancialmeasurethatismostdirectlycomparabletoeachnon-GAAPfinancialmeasure,andtherelatedreconciliationsbetweenthesefinancialmeasures.Ournon-GAAPfinancialmeasuresmaybecalculateddifferentlyfrom,andthereforemaynotbedirectlycomparableto,similarlytitledmeasuresreportedbyothercompanies.ConstantDollarChangesinNetRevenueThebelowchangesinnetrevenueshowthechangecomparedtothecorrespondingperiodintheprioryear.FirstQuarter2023NetRevenue(Inthousands)(Percentages)Change$387,329 24justmentsduetoforeigncurrencyexchangeratechanges44,624 3Changeinconstantdollars$431,953 27%ConstantDollarChangesinTotalComparableSales,ComparableStoreSales,andDirecttoConsumerNetRevenueThebelowchangesintotalcomparablesales,comparablestoresales,anddirecttoconsumernetrevenueshowthechangecomparedtothecorrespondingperiodintheprioryear.FirstQuarter2023TotalComparableSales(1),(2)ComparableStoreSales(2)DirecttoConsumerNetRevenueChange 14justmentsduetoforeigncurrencyexchangeratechanges 3 3 2Changeinconstantdollars 17%_(1)Totalcomparablesalesincludescomparablestoresalesanddirecttoconsumernetrevenue.(2)Comparablestoresalesreflectsnetrevenuefromcompany-operatedstoresthathavebeenopenforatleast12fullfiscalmonths,oropenforatleast12fullfiscalmonthsafterbeingsignificantlyexpanded.TableofContents25SeasonalityOurbusinessisaffectedbythegeneralseasonaltrendscommontotheretailapparelindustry.Ourannualnetrevenueisweightedmoreheavilytowardourfourthfiscalquarter,reflectingourhistoricalstrengthinsalesduringtheholidayseason,whileouroperatingexpensesaremoreequallydistributedthroughouttheyear.Asaresult,asubstantialportionofouroperatingprofitsaretypicallygeneratedinthefourthquarterofourfiscalyear.Forexample,wegeneratedapproximately44%ofourfullyearoperatingprofitduringthefourthquarterof2021.Ouroperatingprofitsin2022werenotweightedtowardsourfourthquarterprimarilyduetotheimpairmentofgoodwillandotherassetsrecognizedinrelationtoourlululemonStudiobusinessunitduringthatquarter.LiquidityandCapitalResourcesOurprimarysourcesofliquidityareourcurrentbalancesofcashandcashequivalents,cashflowsfromoperations,andcapacityunderourcommittedrevolvingcreditfacility,includingtofundshort-termworkingcapitalrequirements.Ourprimarycashneedsarecapitalexpendituresforopeningnewstoresandremodelingorrelocatingexistingstores,investinginourdistributioncenters,investingintechnologyandmakingsystemenhancements,fundingworkingcapitalrequirements,andmakingotherstrategiccapitalinvestmentsbothinNorthAmericaandinternationally.Wemayalsousecashtorepurchasesharesofourcommonstock.Cashandcashequivalentsinexcessofourneedsareheldininterestbearingaccountswithfinancialinstitutions,aswellasinmoneymarketfundsandtermdeposits.Thefollowingtablesummarizesournetcashflowsprovidedbyandusedinoperating,investing,andfinancingactivitiesfortheperiodsindicated:FirstQuarter20232022Yearoveryearchange(Inthousands)Totalcashprovidedby(usedin):Operatingactivities$45,503$(243,256)$288,759Investingactivities(138,219)(101,328)(36,891)Financingactivities(115,399)(259,560)144,161Effectofforeigncurrencyexchangeratechangesoncash3,855(6,711)10,566Increase(decrease)incashandcashequivalents$(204,260)$(610,855)$406,595OperatingActivitiesTheincreaseincashprovidedbyoperatingactivitieswasprimarilyasaresultof:anincreaseincashflowsfromthechangesinoperatingassetsandliabilitiesof$156.1million,primarilydrivenbychangesininventoriesandaccountspayable,partiallyoffsetbychangesinaccruedliabilities;increasednetincomeof$100.4million;andchangesinadjustingitemsof$32.2million,primarilydrivenbyincreaseddepreciationandhighercashinflowsrelatedtoderivativesnotdesignatedinahedgingrelationship.InvestingActivitiesTheincreaseincashusedininvestingactivitieswasprimarilyduetoincreasedcapitalexpendituresandthesettlementofnetinvestmenthedges.Theincreaseincapitalexpenditureswasprimarilyduetoanincreaseincompany-operatedstoreexpendituresdrivenbyopeningnewstoresandremodelingexistingstoresaswellasincreasedinvestmentinournewandexistingdistributionfacilities.Therehasalsobeenanincreaseindirecttoconsumerexpendituresdrivenbyinvestmentinourdistributioncentersaswellasothertechnologyinfrastructureandsysteminitiatives.Corporateexpendituresalsoincreaseddrivenbyinvestmentintechnologyandbusinesssystemsandincreasedexpendituresoncorporateofficerenovations.FinancingActivitiesThedecreaseincashusedinfinancingactivitieswasprimarilytheresultofadecreaseinourstockrepurchases.Duringthefirstquarterof2023,0.3millionshareswererepurchasedatatotalcostincludingcommissionsandexcisetaxesof$98.5million.Duringthefirstquarterof2022,0.7millionshareswererepurchasedatatotalcostincludingcommissionsof$232.6TableofContents26million.Thecommonstockwasrepurchasedintheopenmarketatprevailingmarketprices,includingunderplanscomplyingwiththeprovisionsofRule10b5-1andRule10b-18oftheSecuritiesExchangeActof1934,withthetimingandactualnumberofsharesrepurchaseddependinguponmarketconditions,eligibilitytotrade,andotherfactors.LiquidityOutlookWebelievethatourcashandcashequivalentbalances,cashgeneratedfromoperations,andborrowingsavailabletousunderourcommittedrevolvingcreditfacilitywillbeadequatetomeetourliquidityneedsandcapitalexpenditurerequirementsforatleastthenext12months.Ourcashfromoperationsmaybenegativelyimpactedbyadecreaseindemandforourproducts,aswellastheotherfactorsdescribedinItem1A.RiskFactors.Inaddition,wemaymakediscretionarycapitalimprovementswithrespecttoourstores,distributionfacilities,headquarters,orsystems,orwemayrepurchasesharesunderanapprovedstockrepurchaseprogram,whichwewouldexpecttofundthroughtheuseofcash,issuanceofdebtorequitysecuritiesorotherexternalfinancingsourcestotheextentwewereunabletofundsuchexpendituresoutofourcashandcashequivalentsandcashgeneratedfromoperations.Thefollowingtableincludescertainmeasuresofourliquidity:April30,2023(Inthousands)Cashandcashequivalents$950,607Workingcapitalexcludingcashandcashequivalents(1)845,924Capacityundercommittedrevolvingcreditfacility393,546_(1)Workingcapitaliscalculatedascurrentassetsof$3.1billionlesscurrentliabilitiesof$1.3billion.Weenterintostandbylettersofcredittosecurecertainofourobligations,includingleases,taxes,andduties.AsofApril30,2023,lettersofcreditandlettersofguaranteetotaling$10.0millionhadbeenissued,including$6.5millionunderourcommittedrevolvingcreditfacility.OurcommittedNorthAmericacreditfacilityprovidesfor$400.0millionincommitmentsunderanunsecuredfive-yearrevolvingcreditfacility.ThecreditfacilityhasamaturitydateofDecember14,2026,subjecttoextensionundercertaincircumstances.AsofApril30,2023,asidefromlettersofcreditof$6.5million,wehadnootherborrowingsoutstandingunderthiscreditfacility.FurtherinformationregardingourcreditfacilitiesandassociatedcovenantsisoutlinedinNote3.RevolvingCreditFacilitiesandSupplyChainFinancingProgramincludedinItem1ofPartIofthisreport.Thetimingandcostofourinventorypurchaseswillvarydependingonavarietyoffactorssuchasrevenuegrowth,assortmentandpurchasingdecisions,productcostsincludingfreightandduty,andtheavailabilityofproductioncapacityandspeed.OurinventorybalanceasofApril30,2023was$1.6billion,anincreaseof24%fromMay1,2022.CriticalAccountingPoliciesandEstimatesThepreparationoffinancialstatementsinconformitywithU.S.generallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptions.Predictingfutureeventsisinherentlyanimpreciseactivityand,assuch,requirestheuseofsignificantjudgment.Actualresultsmayvaryfromourestimatesinamountsthatmaybematerialtothefinancialstatements.Anaccountingpolicyisdeemedtobecriticalifitrequiresanaccountingestimatetobemadebasedonassumptionsaboutmattersthatarehighlyuncertainatthetimetheestimateismade,andifdifferentestimatesthatreasonablycouldhavebeenusedorchangesintheaccountingestimatesthatarereasonablylikelytooccurperiodically,couldmateriallyimpactourconsolidatedfinancialstatements.Ourcriticalaccountingpolicies,estimates,andjudgementsarediscussedwithinItem7.ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperationsofour2022AnnualReportonForm10-KfiledwiththeSEConMarch28,2023.TableofContents27OperatingLocationsOurcompany-operatedstoresbycountryasofApril30,2023andJanuary29,2023aresummarizedinthetablebelow.Numberofcompany-operatedstoresbycountry(market)April30,2023January29,2023UnitedStates357 350PeoplesRepublicofChina(1)119 117Canada69 69Australia32 32UnitedKingdom20 20SouthKorea16 16Germany9 10NewZealand8 8Singapore7 8Japan7 7France4 4Ireland4 4Spain3 3Malaysia2 2Sweden2 2Netherlands1 1Norway1 1Switzerland1 1Totalcompany-operatedstores662 655_(1)PRCincluded101storesinChinaMainland,ninestoresinHongKongSpecialAdministrativeRegion,sevenstoresinTaiwan,andtwostoresinMacaoSpecialAdministrationRegion,asofApril30,2023.AsofJanuary29,2023,therewere99storesinChinaMainland,ninestoresinHongKongSpecialAdministrativeRegion,sevenstoresinTaiwan,andtwostoresinMacaoSpecialAdministrationRegion.Retaillocationsoperatedbythirdpartiesunderlicenseandsupplyarrangementsarenotincludedintheabovetable.AsofApril30,2023,therewere26licensedlocations,including12inMexico,sevenintheUnitedArabEmirates,threeinQatar,threeinSaudiArabia,andoneinKuwait.ITEM3.QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKETRISKForeignCurrencyExchangeRisk.Thefunctionalcurrencyofourinternationalsubsidiariesisgenerallytheapplicablelocalcurrency.OurconsolidatedfinancialstatementsarepresentedinU.S.dollars.Therefore,thenetrevenue,expenses,assets,andliabilitiesofourinternationalsubsidiariesaretranslatedfromtheirfunctionalcurrenciesintoU.S.dollars.FluctuationsinthevalueoftheU.S.dollaraffectthereportedamountsofnetrevenue,expenses,assets,andliabilities.ForeigncurrencyexchangedifferenceswhichariseontranslationofourinternationalsubsidiariesbalancesheetsintoU.S.dollarsarerecordedasothercomprehensiveincome(loss),netoftaxinaccumulatedothercomprehensiveincomeorlosswithinstockholdersequity.Wealsohaveexposuretochangesinforeigncurrencyexchangeratesassociatedwithtransactionswhichareundertakenbyoursubsidiariesincurrenciesotherthantheirfunctionalcurrency.Suchtransactionsincludeintercompanytransactionsandinventorypurchasesdenominatedincurrenciesotherthanthefunctionalcurrencyofthepurchasingentity.Asaresult,wehavebeenimpactedbychangesinforeigncurrencyexchangeratesandmaybeimpactedfortheforeseeablefuture.Thepotentialimpactofcurrencyfluctuationincreasesasourinternationalexpansionincreases.AsofApril30,2023,wehadcertainforwardcurrencycontractsoutstandinginordertohedgeaportionoftheforeigncurrencyexposurethatarisesontranslationofaCanadiansubsidiaryintoU.S.dollars.WealsohadcertainforwardcurrencycontractsoutstandinginanefforttoreduceourexposuretotheforeigncurrencyexchangerevaluationgainsandlossesthatarerecognizedbyourCanadianandChinesesubsidiariesonU.S.dollardenominatedmonetaryassetsandliabilities.PleaseTableofContents28refertoNote6.DerivativeFinancialInstrumentsincludedinItem1ofPartIofthisreportforfurtherinformation,includingdetailsofthenotionalamountsoutstanding.Inthefuture,inanefforttoreduceforeigncurrencyexchangerisks,wemayenterintofurtherderivativefinancialinstrumentsincludinghedgingadditionalcurrencypairs.Wedonot,anddonotintendto,engageinthepracticeoftradingderivativesecuritiesforprofit.WecurrentlygenerateasignificantportionofournetrevenueandincurasignificantportionofourexpensesinCanada.WealsoholdasignificantportionofournetassetsinCanada.ThereportingcurrencyforourconsolidatedfinancialstatementsistheU.S.dollar.AstrengtheningoftheU.S.dollaragainsttheCanadiandollarresultsin:thefollowingimpactstotheconsolidatedstatementsofoperations:adecreaseinournetrevenueupontranslationofthesalesmadebyourCanadianoperationsintoU.S.dollarsforthepurposesofconsolidation;adecreaseinourselling,generalandadministrativeexpensesincurredbyourCanadianoperationsupontranslationintoU.S.dollarsforthepurposesofconsolidation;foreigncurrencyexchangerevaluationgainsbyourCanadiansubsidiariesonU.S.dollardenominatedmonetaryassetsandliabilities;andderivativevaluationlossesonforwardcurrencycontractsnotdesignatedinahedgingrelationship;thefollowingimpactstotheconsolidatedbalancesheets:adecreaseintheforeigncurrencytranslationadjustmentwhicharisesonthetranslationofourCanadiansubsidiariesbalancesheetsintoU.S.dollars;andnetinvestmenthedgelossesfromderivativevaluationlossesonforwardcurrencycontracts,enteredintoasnetinvestmenthedgesofaCanadiansubsidiary.Duringthefirstquarterof2023,thechangeintherelativevalueoftheU.S.dollaragainsttheCanadiandollarresultedina$22.8millionincreaseinaccumulatedothercomprehensivelosswithinstockholdersequity.Duringthefirstquarterof2022,thechangeintherelativevalueoftheU.S.dollaragainsttheCanadiandollarresultedina$11.4millionincreaseinaccumulatedothercomprehensivelosswithinstockholdersequity.A10%appreciationintherelativevalueoftheU.S.dollaragainsttheCanadiandollarcomparedtotheforeigncurrencyexchangeratesineffectforthefirstquarterof2023wouldhaveresultedinlowerincomefromoperationsofapproximately$83.9million.Thisassumesaconsistent10%appreciationintheU.S.dollaragainsttheCanadiandollaroverthefirstquarterof2023.ThetimingofchangesintherelativevalueoftheU.S.dollarcombinedwiththeseasonalnatureofourbusiness,canaffectthemagnitudeoftheimpactthatfluctuationsinforeigncurrencyexchangerateshaveonourincomefromoperations.InterestRateRisk.Ourcommittedrevolvingcreditfacilityprovidesuswithavailableborrowingsinanamountupto$400.0million.Becauseourrevolvingcreditfacilitiesbearinterestatavariablerate,wewillbeexposedtomarketrisksrelatingtochangesininterestrates,ifwehaveameaningfuloutstandingbalance.AsofApril30,2023,asidefromlettersofcreditof$6.5million,therewerenoborrowingsoutstandingunderthesecreditfacilities.Wecurrentlydonotengageinanyinterestratehedgingactivityandcurrentlyhavenointentiontodoso.However,inthefuture,ifwehaveameaningfuloutstandingbalanceunderourrevolvingfacility,inanefforttomitigatelossesassociatedwiththeserisks,wemayattimesenterintoderivativefinancialinstruments,althoughwehavenothistoricallydoneso.Thesemaytaketheformofforwardcontracts,optioncontracts,orinterestrateswaps.Wedonot,anddonotintendto,engageinthepracticeoftradingderivativesecuritiesforprofit.Ourcashandcashequivalentbalancesareheldintheformofcashonhand,bankbalances,andshort-termdepositswithoriginalmaturitiesofthreemonthsorless,andinmoneymarketfunds.Wedonotbelievethesebalancesaresubjecttomaterialinterestraterisk.CreditRisk.Wehavecashondepositwithvariouslarge,reputablefinancialinstitutionsandhaveinvestedinAAA-ratedmoneymarketfunds,whichincludeinvestmentsingovernmentbonds.Theamountofcashandcashequivalentsheldwithcertainfinancialinstitutionsexceedsgovernment-insuredlimits.Wearealsoexposedtocredit-relatedlossesintheeventofnonperformancebythefinancialinstitutionsthatarecounterpartiestoourforwardcurrencycontracts.Thecreditriskamountisourunrealizedgainsonourderivativeinstruments,basedonforeigncurrencyratesatthetimeofnonperformance.TableofContents29Wehavenotexperiencedanylossesrelatedtotheseitems,andwebelievecreditrisktobeminimal.Weseektominimizeourcreditriskbyenteringintotransactionswithinvestmentgradecreditworthyandreputablefinancialinstitutionsandbymonitoringthecreditstandingofthefinancialinstitutionswithwhomwetransact.Weseektolimittheamountofexposurewithanyonecounterparty.InflationInflationaryfactorssuchasincreasesinthecostofourproduct,aswellasoverheadcostsandcapitalexpendituresmayadverselyaffectouroperatingresults.During2022andthefirstquarterof2023,ouroperatingmarginwasimpactedbyincreasedwagerates.Duringthefirsthalfof2022,ourgrossmarginwasimpactedbyhigherairfreightcostsasaresultofglobalsupplychaindisruption.Sustainedincreasesintransportationcosts,wages,andrawmaterialcosts,orotherinflationarypressuresinthefuturemayhaveanadverseeffectonourabilitytomaintaincurrentlevelsofoperatingmarginifthesellingpricesofourproductsdonotincreasewiththeseincreasedcosts,orwecannotidentifycostefficiencies.ITEM4.CONTROLSANDPROCEDURESWemaintaindisclosurecontrolsandproceduresthataredesignedtoensurethatinformationrequiredtobedisclosedbyusinthereportswefileorsubmitundertheSecuritiesExchangeActof1934,isrecorded,processed,summarizedandreportedwithinthetimeperiodsspecifiedintheSECsrulesandforms,andthatsuchinformationisaccumulatedandcommunicatedtoourmanagement,includingourprincipalexecutiveofficerandprincipalfinancialandaccountingofficer,toallowtimelydecisionstobemaderegardingrequireddisclosure.WehaveestablishedaDisclosureCommittee,consistingofcertainmembersofmanagement,toassistinthisevaluation.TheDisclosureCommitteemeetsonaquarterlybasis,andasneeded.Ourmanagement,includingourprincipalexecutiveofficerandprincipalfinancialandaccountingofficer,evaluatedtheeffectivenessofourdisclosurecontrolsandprocedures(asdefinedinRules13a-15(e)and15d-15(e)promulgatedundertheExchangeAct)asofApril30,2023.Basedonthatevaluation,ourprincipalexecutiveofficerandprincipalfinancialandaccountingofficerconcludedthat,asofApril30,2023,ourdisclosurecontrolsandprocedureswereeffective.TherewerenochangesinourinternalcontroloverfinancialreportingduringthequarterendedApril30,2023thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.TableofContents30PARTIIOTHERINFORMATIONITEM1.LEGALPROCEEDINGSInadditiontothelegalmattersdescribedinNote11.LegalProceedingsandOtherContingenciesincludedinItem1ofPartIofthisreportandinour2022AnnualReportonForm10-K,weare,fromtimetotime,involvedinroutinelegalmattersincidentaltotheconductofourbusiness,includinglegalmatterssuchasinitiationanddefenseofproceedingstoprotectintellectualpropertyrights,personalinjuryclaims,productliabilityclaims,employmentclaims,andsimilarmatters.Webelievetheultimateresolutionofanysuchcurrentproceedingwillnothaveamaterialadverseeffectonourfinancialposition,resultsofoperationsorcashflows.ITEM1A.RISKFACTORSInadditiontotheotherinformationcontainedinthisForm10-Qandinour2022AnnualReportonForm10-K,thefollowingriskfactorsshouldbeconsideredinevaluatingourbusiness.Ourbusiness,financialcondition,orresultsofoperationscouldbemateriallyadverselyaffectedasaresultofanyoftheserisks.RisksrelatedtoourbusinessandindustryOursuccessdependsonourabilitytomaintainthevalueandreputationofourbrand.Thelululemonnameisintegraltoourbusinessaswellastotheimplementationofourexpansionstrategies.Maintaining,promoting,andpositioningourbrandwilldependlargelyonthesuccessofourmarketingandmerchandisingeffortsandourabilitytoprovideaconsistent,highqualityproduct,andguestexperience.Werelyonsocialmedia,asoneofourmarketingstrategies,tohaveapositiveimpactonbothourbrandvalueandreputation.Ourbrandandreputationcouldbeadverselyaffectedifwefailtoachievetheseobjectives,ifourpublicimagewastobetarnishedbynegativepublicity,whichcouldbeamplifiedbysocialmedia,ifwefailtodeliverinnovativeandhighqualityproductsacceptabletoourguests,orifwefaceormishandleaproductrecall.Ourreputationcouldalsobeimpactedbyadversepublicity,whetherornotvalid,regardingallegationsthatwe,orpersonsassociatedwithusorformerlyassociatedwithus,haveviolatedapplicablelawsorregulations,includingbutnotlimitedtothoserelatedtosafety,employment,discrimination,harassment,whistle-blowing,privacy,corporatecitizenship,improperbusinesspractices,orcybersecurity.Certainactivitiesonthepartofstakeholders,includingnongovernmentalorganizationsandgovernmentalinstitutions,couldcausereputationaldamage,distractseniormanagement,anddisruptourbusiness.Additionally,whilewedevoteconsiderableeffortandresourcestoprotectingourintellectualproperty,iftheseeffortsarenotsuccessfulthevalueofourbrandmaybeharmed.Anyharmtoourbrandandreputationcouldhaveamaterialadverseeffectonourfinancialcondition.Changesinconsumershoppingpreferences,andshiftsindistributionchannelscouldmateriallyimpactourresultsofoperations.Wesellourproductsthroughavarietyofchannels,withasignificantportionthroughtraditionalbrick-and-mortarretailchannels.Asstronge-commercechannelsemergeanddevelop,weareevolvingtowardsanomni-channelapproachtosupporttheshoppingbehaviorofourguests.Thisinvolvescountryandregion-specificwebsites,socialmedia,productnotificationemails,mobileapps,includingmobileappsonin-storedevicesthatallowdemandtobefulfilledviaourdistributioncenters,andonlineorderfulfillmentthroughstores.Thediversionofsalesfromourcompany-operatedstorescouldadverselyimpactourreturnoninvestmentandcouldleadtoimpairmentchargesandstoreclosures,includingleaseexitcosts.Wecouldhavedifficultyinrecreatingthein-storeexperiencethroughdirectchannels.Ourfailuretosuccessfullyintegrateourdigitalandphysicalchannelsandrespondtotheserisksmightadverselyimpactourbusinessandresultsofoperations,aswellasdamageourreputationandbrands.Ifanyofourproductshavemanufacturingordesigndefectsorareotherwiseunacceptabletousorourguests,ourbusinesscouldbeharmed.Wehaveoccasionallyreceived,andmayinthefuturereceive,shipmentsofproductsthatfailtocomplywithourtechnicalspecificationsorthatfailtoconformtoourqualitycontrolstandards.Wehavealsoreceived,andmayinthefuturereceive,productsthatareotherwiseunacceptabletousorourguests.Underthesecircumstances,unlessweareabletoobtainreplacementproductsinatimelymanner,weriskthelossofnetrevenueresultingfromtheinabilitytosellthoseproductsandrelatedincreasedadministrativeandshippingcosts.Additionally,iftheunacceptabilityofourproductsisnotdiscovereduntilaftersuchproductsaresold,ourguestscouldloseconfidenceinourproductsorwecouldfaceaproductrecallandourresultsofoperationscouldsufferandourbusiness,reputation,andbrandcouldbeharmed.TableofContents31OurlululemonStudiosubsidiaryofferscomplexhardwareandsoftwareproductsandservicesthatcanbeaffectedbydesignandmanufacturingdefects.Sophisticatedoperatingsystemsoftwareandapplications,suchasthoseofferedbylululemonStudio,oftenhaveissuesthatcanunexpectedlyinterferewiththeintendedoperationofhardwareorsoftwareproducts.Defectsmayalsoexistincomponentsandproductsthatwesourcefromthirdparties.Anydefectscouldmakeourproductsandservicesunsafeandcreateariskofenvironmentalorpropertydamageorpersonalinjuryandwemaybecomesubjecttothehazardsanduncertaintiesofproductliabilityclaimsandrelatedlitigation.Theoccurrenceofrealorperceiveddefectsinanyofourproducts,noworinthefuture,couldresultinadditionalnegativepublicity,regulatoryinvestigations,orlawsuitsfiledagainstus,particularlyifguestsorotherswhouseorpurchaseourlululemonStudioproductsareinjured.Evenifinjuriesarenottheresultofanydefects,iftheyareperceivedtobe,wemayincurexpensestodefendorsettleanyclaimsandourbrandandreputationmaybeharmed.Weoperateinahighlycompetitivemarketandourcompetitorsmaycompetemoreeffectivelythanwecan,resultinginalossofourmarketshareandadecreaseinournetrevenueandprofitability.Themarketfortechnicalathleticapparelishighlycompetitive.Competitionmayresultinpricingpressures,reducedprofitmarginsorlostmarketshare,orafailuretogrowormaintainourmarketshare,anyofwhichcouldsubstantiallyharmourbusinessandresultsofoperations.Wecompetedirectlyagainstwholesalersanddirectretailersofathleticapparel,includinglarge,diversifiedapparelcompanieswithsubstantialmarketshare,andestablishedcompaniesexpandingtheirproductionandmarketingoftechnicalathleticapparel,aswellasagainstretailersspecificallyfocusedonwomensathleticapparel.Wealsofacecompetitionfromwholesalersanddirectretailersoftraditionalcommodityathleticapparel,suchascottonT-shirtsandsweatshirts.Manyofourcompetitorsarelargeapparelandsportinggoodscompanieswithstrongworldwidebrandrecognition.Becauseofthefragmentednatureoftheindustry,wealsocompetewithotherapparelsellers,includingthosespecializinginyogaapparelandotheractivewear.Manyofourcompetitorshavesignificantcompetitiveadvantages,includinglongeroperatinghistories,largerandbroadercustomerbases,moreestablishedrelationshipswithabroadersetofsuppliers,greaterbrandrecognitionandgreaterfinancial,researchanddevelopment,storedevelopment,marketing,distribution,andotherresourcesthanwedo.Ourcompetitorsmaybeabletoachieveandmaintainbrandawarenessandmarketsharemorequicklyandeffectivelythanwecan.Wemayfailtoacknowledgeorreactappropriatelytotheentryorgrowthofaviablecompetitorordisruptiveforce,andcouldstruggletocontinuetoinnovate,differentiate,andsustainthegrowthofourbrand.Theincreasingdominanceandpresenceofourbrandmayalsodrivegueststowardsalternativeemergingcompetitors.Inaddition,becauseweholdlimitedpatentsandexclusiveintellectualpropertyrightsinthetechnology,fabricsorprocessesunderlyingourproducts,ourcurrentandfuturecompetitorsareabletomanufactureandsellproductswithperformancecharacteristics,fabricationtechniques,andstylingsimilartoourproducts.Oursalesandprofitabilitymaydeclineasaresultofincreasingcostsanddecreasingsellingprices.Ourbusinessissubjecttosignificantpressureoncostsandpricingcausedbymanyfactors,includingintensecompetition,constrainedsourcingcapacityandrelatedinflationarypressure,theavailabilityofqualifiedlaborandwageinflation,pressurefromconsumerstoreducethepriceswechargeforourproducts,andchangesinconsumerdemand.Theseandotherfactorshave,andmayinthefuture,causeustoexperienceincreasedcosts,reduceourpricestoconsumersorexperiencereducedsalesinresponsetoincreasedprices,anyofwhichcouldcauseouroperatingmargintodeclineifweareunabletooffsetthesefactorswithreductionsinoperatingcostsandcouldhaveamaterialadverseeffectonourfinancialcondition,operatingresults,andcashflows.Ifweareunabletoanticipateconsumerpreferencesandsuccessfullydevelopandintroducenew,innovative,anddifferentiatedproducts,wemaynotbeabletomaintainorincreaseoursalesandprofitability.Oursuccessdependsonourabilitytoidentifyandoriginateproducttrendsaswellastoanticipateandreacttochangingconsumerdemandsinatimelymanner.Allofourproductsaresubjecttochangingconsumerpreferencesthatcannotbepredictedwithcertainty.Ifweareunabletointroducenewproductsornoveltechnologiesinatimelymannerorournewproductsortechnologiesarenotacceptedbyourguests,ourcompetitorsmayintroducesimilarproductsinamoretimelyfashion,whichcouldhurtourgoaltobeviewedasaleaderintechnicalathleticapparelinnovation.Ournewproductsmaynotreceiveconsumeracceptanceasconsumerpreferencescouldshiftrapidlytodifferenttypesofathleticapparelorawayfromthesetypesofproductsaltogether,andourfuturesuccessdependsinpartonourabilitytoanticipateandrespondtothesechanges.Ourfailuretoanticipateandrespondinatimelymannertochangingconsumerpreferencescouldleadto,amongotherthings,lowersalesandexcessinventorylevels.Wemaynothaverelevantdatatoeffectivelyunderstandandreacttoconsumerpreferencesandexpectations.Evenifwearesuccessfulinanticipatingconsumerpreferences,ourabilitytoadequatelyreacttoandaddressthosepreferenceswillinpartdependuponourcontinuedabilitytodevelopandintroduceinnovative,high-qualityproducts.OurfailuretoeffectivelyintroducenewproductsthatareacceptedbyconsumerscouldTableofContents32resultinadecreaseinnetrevenueandexcessinventorylevels,whichcouldhaveamaterialadverseeffectonourfinancialcondition.Ourresultsofoperationscouldbemateriallyharmedifweareunabletoaccuratelyforecastguestdemandforourproducts.Toensureadequateinventorysupply,wemustforecastinventoryneedsandplaceorderswithourmanufacturersbasedonourestimatesoffuturedemandforparticularproducts.Ourabilitytoaccuratelyforecastdemandforourproductscouldbeaffectedbymanyfactors,includinganincreaseordecreaseinguestdemandforourproductsorforproductsofourcompetitors,ourfailuretoaccuratelyforecastguestacceptanceofnewproducts,productintroductionsbycompetitors,unanticipatedchangesingeneralmarketconditions(forexample,becauseofglobaleconomicconcernssuchasinflation,aneconomicdownturn,ordelaysanddisruptionsresultingfromlocalandinternationalshippingdelaysandlaborshortages),andweakeningofeconomicconditionsorconsumerconfidenceinfutureeconomicconditions(forexample,becauseofinflationarypressures,orbecauseofsanctions,restrictions,andotherresponsesrelatedtogeopoliticalevents).Ifwefailtoaccuratelyforecastguestdemand,wemayexperienceexcessinventorylevelsorashortageofproductsavailableforsaleinourstoresorfordeliverytoguests.Inventorylevelsinexcessofguestdemandmayresultininventorywrite-downsorwrite-offsandthesaleofexcessinventoryatdiscountedprices,whichwouldcauseourgrossmargintosufferandcouldimpairthestrengthandexclusivityofourbrand.Conversely,ifweunderestimateguestdemandforourproducts,ourmanufacturersmaynotbeabletodeliverproductstomeetourrequirements,andthiscouldresultindamagetoourreputationandguestrelationships.Ourlimitedoperatingexperienceandlimitedbrandrecognitioninnewinternationalmarketsandnewproductcategoriesmaylimitourexpansionandcauseourbusinessandgrowthtosuffer.OurfuturegrowthdependsinpartonourexpansioneffortsoutsideofNorthAmerica.Wehavelimitedexperiencewithregulatoryenvironmentsandmarketpracticesinternationally,andwemaynotbeabletopenetrateorsuccessfullyoperateinanynewmarket.InconnectionwithourexpansioneffortswemayencounterobstacleswedidnotfaceinNorthAmerica,includingculturalandlinguisticdifferences,differencesinregulatoryenvironments,laborpracticesandmarketpractices,difficultiesinkeepingabreastofmarket,businessandtechnicaldevelopments,andinternationalgueststastesandpreferences.Wemayalsoencounterdifficultyexpandingintonewinternationalmarketsbecauseoflimitedbrandrecognitionleadingtodelayedacceptanceofourtechnicalathleticapparelbyguestsinthesenewinternationalmarkets.Ourfailuretodevelopourbusinessinnewinternationalmarketsordisappointinggrowthoutsideofexistingmarketscouldharmourbusinessandresultsofoperations.Inaddition,ourcontinuedgrowthdependsinpartonourabilitytoexpandourproductcategoriesandintroducenewproductlines.Wemaynotbeabletosuccessfullymanageintegrationofnewproductcategoriesorthenewproductlineswithourexistingproducts.Sellingnewproductcategoriesandlineswillrequireourmanagementtolearndifferentstrategiesinordertobesuccessful.Wemaybeunsuccessfulinenteringnewproductcategoriesanddevelopingorlaunchingnewproductlines,whichrequiresmanagementofnewsuppliers,potentialnewcustomers,andnewbusinessmodels.Ourmanagementmaynothavetheexperienceofsellinginthesenewproductcategoriesandwemaynotbeabletogrowourbusinessasplanned.Forexample,inJuly2020,weacquiredMIRROR,anin-homefitnesscompanywithaninteractiveworkoutplatformthatfeaturesliveandon-demandclasses.Ifweareunabletoeffectivelyandsuccessfullyfurtherdeveloptheseandfuturenewproductcategoriesandlines,wemaynotbeabletoincreaseormaintainoursalesandouroperatingmarginsmaybeadverselyaffected.Thismayalsodiverttheattentionofmanagementandcauseadditionalexpenses.Wemay,fromtimetotime,evaluateandpursueotherstrategicinvestmentsoracquisitions.Theseinvolvevariousinherentrisksandthebenefitssoughtmaynotberealized.Ifwecontinuetogrowatarapidpace,wemaynotbeabletoeffectivelymanageourgrowthandtheincreasedcomplexityofourbusinessandasaresultourbrandimageandfinancialperformancemaysuffer.Ifouroperationscontinuetogrowatarapidpace,wemayexperiencedifficultiesinobtainingsufficientrawmaterialsandmanufacturingcapacitytoproduceourproducts,aswellasdelaysinproductionandshipments,asourproductsaresubjecttorisksassociatedwithoverseassourcingandmanufacturing.Wecouldberequiredtocontinuetoexpandoursalesandmarketing,productdevelopmentanddistributionfunctions,toupgradeourmanagementinformationsystemsandotherprocessesandtechnology,andtoobtainmorespaceforourexpandingworkforce.Thisexpansioncouldincreasethestrainonourresources,andwecouldexperienceoperatingdifficulties,includingdifficultiesinhiring,training,andmanaginganincreasingnumberofemployees.Thesedifficultiescouldresultintheerosionofourbrandimagewhichcouldhaveamaterialadverseeffectonourfinancialcondition.TableofContents33Wearesubjecttorisksassociatedwithleasingretailanddistributionspacesubjecttolong-termandnon-cancelableleases.Weleasethemajorityofourstoresunderoperatingleasesandourinabilitytosecureappropriaterealestateorleasetermscouldimpactourabilitytogrow.Ourleasesgenerallyhaveinitialtermsofbetweentwoand15years,andgenerallycanbeextendedinincrementsbetweentwoandfiveyears,ifatall.Wegenerallycannotcanceltheseleasesatouroption.Ifanexistingornewstoreisnotprofitable,andwedecidetocloseit,aswehavedoneinthepastandmaydointhefuture,wemaynonethelessbecommittedtoperformourobligationsundertheapplicableleaseincluding,amongotherthings,payingthebaserentforthebalanceoftheleaseterm.Similarly,wemaybecommittedtoperformourobligationsundertheapplicableleasesevenifcurrentlocationsofourstoresbecomeunattractiveasdemographicpatternschange.Inaddition,aseachofourleasesexpire,wemayfailtonegotiaterenewals,eitheroncommerciallyacceptabletermsoratall,whichcouldrequireustoclosestoresindesirablelocations.Wealsoleasethemajorityofourdistributioncentersandourinabilitytosecureappropriaterealestateorleasetermscouldimpactourabilitytodeliverourproductstothemarket.Ourfuturesuccessissubstantiallydependentontheserviceofourseniormanagementandotherkeyemployees.Theperformanceofourseniormanagementteamandotherkeyemployeesmaynotmeetourneedsandexpectations.Also,thelossofservicesofanyofthesekeyemployees,oranynegativepublicperceptionwithrespecttotheseindividuals,maybedisruptiveto,orcauseuncertaintyin,ourbusinessandcouldhaveanegativeimpactonourabilitytomanageandgrowourbusinesseffectively.Suchdisruptioncouldhaveamaterialadverseimpactonourfinancialperformance,financialcondition,andthemarketpriceofourstock.Ifweareunabletosuccessfullymaintainandevolveouruniquecorporateculture,offercompetitivecompensationandbenefits,andadesirableworkmodel,wemaybeunabletoattractandretainhighlyqualifiedindividualstosupportourbusinessandcontinuedgrowth.Ourworkmodelmaynotmeettheneedsandexpectationsofouremployeesandmaynotbeperceivedasfavorablecomparedtoothercompanies.Wealsofacerisksrelatedtoemployeeengagementandproductivity.Ourbusinessisaffectedbyseasonality,whichcouldresultinfluctuationsinouroperatingresults.Ourbusinessisaffectedbythegeneralseasonaltrendscommontotheretailapparelindustry.Ourannualnetrevenueistypicallyweightedmoreheavilytowardourfourthfiscalquarter,reflectingourhistoricalstrengthinsalesduringtheholidayseason,whileouroperatingexpensesaremoreequallydistributedthroughouttheyear.Thisseasonality,alongwithotherfactorsthatarebeyondourcontrol,includingweatherconditionsandtheeffectsofclimatechange,couldadverselyaffectourbusinessandcauseourresultsofoperationstofluctuate.RisksrelatedtooursupplychainDisruptionsofoursupplychaincouldhaveamaterialadverseeffectonouroperatingandfinancialresults.Disruptionofoursupplychaincapabilitiesduetotraderestrictions,politicalinstability,severeweather,naturaldisasters,publichealthcrises,war,terrorism,productrecalls,laborsupplyshortagesorstoppages,thefinancialoroperationalinstabilityofkeysuppliersandcarriers,changesindiplomaticortraderelationships(includinganysanctions,restrictions,andotherresponsessuchasthoserelatedtocurrentgeopoliticalevents),orotherreasonscouldimpairourabilitytodistributeourproducts.Totheextentweareunabletomitigatethelikelihoodorpotentialimpactofsuchevents,therecouldbeamaterialadverseeffectonouroperatingandfinancialresults.Werelyoninternationalsuppliersandanysignificantdisruptiontooursupplychaincouldimpairourabilitytoprocureordistributeourproducts.WedonotmanufactureourproductsorrawmaterialsandrelyonsuppliersandmanufacturerslocatedpredominantlyintheAsiaPacificregion,includingthePRC.Wealsosourceothermaterialsusedinourproducts,includingitemssuchascontentlabels,elastics,buttons,clasps,anddrawcords,fromsupplierslocatedprimarilyinthisregion.Basedoncost,during2022:Approximately39%ofourproductsweremanufacturedinVietnam,14%inCambodia,12%inSriLanka,8%inBangladesh,and7%inIndonesia,andtheremainderinotherregions.Approximately43%ofthefabricusedinourproductsoriginatedfromTaiwan,19%fromChinaMainland,16%fromSriLanka,andtheremainderfromotherregions.TableofContents34Theentireapparelindustry,includingourcompany,couldfacesupplychainchallengesasaresultoftheimpactsofglobalpublichealthcrises,politicalinstability,inflationarypressures,macroeconomicconditions,andotherfactors,includingreducedfreightavailabilityandincreasedcosts,portdisruption,manufacturingfacilityclosures,andrelatedlaborshortagesandothersupplychaindisruptions.Oursupplychaincapabilitiesmaybedisruptedduetotheseorotherfactors,suchassevereweather,naturaldisasters,warorothermilitaryconflicts,terrorism,laborsupplyshortagesorstoppages,thefinancialoroperationalinstabilityofkeysuppliersorthecountriesinwhichtheyoperate,orchangesindiplomaticortraderelationships(includinganysanctions,restrictions,andotherresponsestogeopoliticalevents).Anysignificantdisruptioninoursupplychaincapabilitiescouldimpairourabilitytoprocureordistributeourproducts,whichwouldadverselyaffectourbusinessandresultsofoperations.Arelativelysmallnumberofvendorssupplyandmanufactureasignificantportionofourproducts,andlosingoneormoreofthesevendorscouldadverselyaffectourbusinessandresultsofoperations.Manyofthespecialtyfabricsusedinourproductsaretechnicallyadvancedtextileproductsdevelopedandmanufacturedbythirdpartiesandmaybeavailable,intheshort-term,fromonlyoneoralimitednumberofsources.Wehavenolong-termcontractswithanyofoursuppliersormanufacturersfortheproductionandsupplyofourrawmaterialsandproducts,andwecompetewithothercompaniesforfabrics,otherrawmaterials,andproduction.During2022,weworkedwithapproximately45vendorstomanufactureourproductsand60supplierstoprovidethefabricforourproducts.Basedoncost,during2022:Approximately56%ofourproductsweremanufacturedbyourtopfivevendors,thelargestofwhichproducedapproximately15%ofourproducts;andApproximately56%ofourfabricswereproducedbyourtopfivefabricsuppliers,thelargestofwhichproducedapproximately21%offabricused.Wehaveexperienced,andmayinthefutureexperience,asignificantdisruptioninthesupplyoffabricsorrawmaterialsandmaybeunabletolocatealternativesuppliersofcomparablequalityatanacceptableprice,oratall.Inaddition,ifweexperiencesignificantincreaseddemand,orifweneedtoreplaceanexistingsupplierormanufacturer,wemaybeunabletolocateadditionalsuppliesoffabricsorrawmaterialsoradditionalmanufacturingcapacityontermsthatareacceptabletous,oratall,orwemaybeunabletolocateanysupplierormanufacturerwithsufficientcapacitytomeetourrequirementsorfillourordersinatimelymanner.Identifyingasuitablesupplierisaninvolvedprocessthatrequiresustobecomesatisfiedwithitsqualitycontrol,responsivenessandservice,financialstability,andlaborandotherethicalpractices.Evenifweareabletoexpandexistingorfindnewmanufacturingorfabricsources,wemayencounterdelaysinproductionandaddedcostsasaresultofthetimeittakestotrainoursuppliersandmanufacturersinourmethods,products,andqualitycontrolstandards.Oursupplyoffabricormanufactureofourproductscouldbedisruptedordelayedbyeconomicorpoliticalorglobalhealthconditions,andtherelatedgovernmentandprivatesectorresponsiveactionssuchasclosures,restrictionsonproductshipments,andtravelrestrictions.Delaysrelatedtosupplierchangescouldalsoariseduetoanincreaseinshippingtimesifnewsuppliersarelocatedfartherawayfromourmarketsorfromotherparticipantsinoursupplychain.Inaddition,freightcapacityissuescontinuetopersistworldwideasthereismuchgreaterdemandforshippingandreducedcapacityandequipment.Anydelays,interruption,orincreasedcostsinthesupplyoffabricormanufactureofourproductscouldhaveanadverseeffectonourabilitytomeetguestdemandforourproductsandresultinlowernetrevenueandincomefromoperationsbothintheshortandlongterm.OurbusinesscouldbeharmedifoursuppliersandmanufacturersdonotcomplywithourVendorCodeofEthicsorapplicablelaws.WhilewerequireoursuppliersandmanufacturerstocomplywithourVendorCodeofEthics,whichincludeslabor,healthandsafety,andenvironmentstandards,wedonotcontroltheiroperations.Ifsuppliersorcontractorsdonotcomplywiththesestandardsorapplicablelawsorthereisnegativepublicityregardingtheproductionmethodsofanyofoursuppliersormanufacturers,evenifunfoundedornotspecifictooursupplychain,ourreputationandsalescouldbeadverselyaffected,wecouldbesubjecttolegalliability,orcouldcauseustocontractwithalternativesuppliersormanufacturingsources.Thefluctuatingcostofrawmaterialscouldincreaseourcostofgoodssold.Thefabricsusedtomakeourproductsincludesyntheticfabricswhoserawmaterialsincludepetroleum-basedproducts.Ourproductsalsoincludesilverandnaturalfibers,includingcotton.Ourcostsforrawmaterialsareaffectedby,amongotherthings,weather,consumerdemand,speculationonthecommoditiesmarket,therelativevaluationsandfluctuationsoftheTableofContents35currenciesofproducerversusconsumercountries,andotherfactorsthataregenerallyunpredictableandbeyondourcontrol.Anyandallofthesefactorsmaybeexacerbatedbyglobalclimatechange.Inaddition,politicalinstability,traderelations,sanctions,inflationarypressure,orothergeopoliticaloreconomicconditionscouldcauserawmaterialcoststoincreaseandhaveanadverseeffectonourfuturemargins.Increasesinthecostofrawmaterials,includingpetroleumorthepriceswepayforsilverandourcottonyarnandcotton-basedtextiles,couldhaveamaterialadverseeffectonourcostofgoodssold,resultsofoperations,financialcondition,andcashflows.Ifweencounterproblemswithourdistributionsystem,ourabilitytodeliverourproductstothemarketandtomeetguestexpectationscouldbeharmed.Werelyonourdistributionfacilitiesforsubstantiallyallofourproductdistribution.Ourdistributionfacilitiesincludecomputercontrolledandautomatedequipment,whichmeanstheiroperationsmaybesubjecttoanumberofrisksrelatedtosecurityorcomputerviruses,theproperoperationofsoftwareandhardware,electronicorpowerinterruptions,orothersystemfailures.Inaddition,ouroperationscouldalsobeinterruptedbylabordifficulties,pandemics,theimpactsofclimatechange,extremeorsevereweatherconditionsorbyfloods,fires,orothernaturaldisastersnearourdistributioncenters.Ifweencounterproblemswithourdistributionsystem,ourabilitytomeetguestexpectations,manageinventory,completesales,andachieveobjectivesforoperatingefficienciescouldbeharmed.IncreasinglaborcostsandotherfactorsassociatedwiththeproductionofourproductsinSouthAsiaandSouthEastAsiacouldincreasethecoststoproduceourproducts.AsignificantportionofourproductsareproducedinSouthAsiaandSouthEastAsiaandincreasesinthecostsoflaborandothercostsofdoingbusinessinthecountriesinthisareacouldsignificantlyincreaseourcoststoproduceourproductsandcouldhaveanegativeimpactonouroperationsandearnings.Factorsthatcouldnegativelyaffectourbusinessincludelaborshortagesandincreasesinlaborcosts,labordisputes,pandemics,theimpactsofclimatechange,difficultiesandadditionalcostsintransportingproductsmanufacturedfromthesecountriestoourdistributioncentersandsignificantrevaluationofthecurrenciesusedinthesecountries,whichmayresultinanincreaseinthecostofproducingproducts.Also,theimpositionoftradesanctionsorotherregulationsagainstproductsimportedbyusfrom,orthelossofnormaltraderelationsstatuswithanycountryinwhichourproductsaremanufactured,couldsignificantlyincreaseourcostofproductsandharmourbusiness.RisksrelatedtoinformationsecurityandtechnologyWemaybeunabletosafeguardagainstsecuritybreacheswhichcoulddamageourcustomerrelationshipsandresultinsignificantlegalandfinancialexposure.Aspartofournormaloperations,wereceiveconfidential,proprietary,andpersonallyidentifiableinformation,includingcreditcardinformation,andinformationaboutourcustomers,ouremployees,jobapplicants,andotherthirdparties.Ourbusinessemployssystemsandwebsitesthatallowforthestorageandtransmissionofthisinformation.However,despiteoursafeguardsandsecurityprocessesandprotections,securitybreachescouldexposeustoariskoftheftormisuseofthisinformation,andcouldresultinlitigationandpotentialliability.Theretailindustry,inparticular,hasbeenthetargetofmanyrecentcyber-attacks.Wemaynothavetheresourcesortechnicalsophisticationtobeabletoanticipateorpreventrapidlyevolvingtypesofcyber-attacks.Attacksmaybetargetedatus,ourvendorsorcustomers,orotherswhohaveentrusteduswithinformation.Inaddition,despitetakingmeasurestosafeguardourinformationsecurityandprivacyenvironmentfromsecuritybreaches,ourcustomersandourbusinesscouldstillbeexposedtorisk.Actualoranticipatedattacksmaycauseustoincurincreasingcostsincludingcoststodeployadditionalpersonnelandprotectiontechnologies,trainemployeesandengagethirdpartyexpertsandconsultants.Advancesincomputercapabilities,newtechnologicaldiscoveriesorotherdevelopmentsmayresultinthetechnologyusedbyustoprotecttransactionorotherdatabeingbreachedorcompromised.Measuresweimplementtoprotectagainstcyber-attacksmayalsohavethepotentialtoimpactourcustomersshoppingexperienceordecreaseactivityonourwebsitesbymakingthemmoredifficulttouse.Dataandsecuritybreachescanalsooccurasaresultofnon-technicalissuesincludingintentionalorinadvertentbreachbyemployeesorpersonswithwhomwehavecommercialrelationshipsthatresultintheunauthorizedreleaseofpersonalorconfidentialinformation.Anycompromiseorbreachofoursecuritycouldresultinaviolationofapplicableprivacyandotherlaws,significantlegalandfinancialexposure,anddamagetoourbrandandreputationorotherharmtoourbusiness.Inaddition,theincreaseduseofemployee-owneddevicesforcommunicationsaswellaswork-from-homearrangementspresentadditionaloperationalriskstoourtechnologysystems,includingincreasedrisksofcyber-attacks.Further,likeothercompaniesintheretailindustry,wehaveinthepastexperienced,andweexpecttocontinuetoTableofContents36experience,cyber-attacks,includingphishing,andotherattemptstobreach,orgainunauthorizedaccessto,oursystems.Todate,theseattackshavenothadamaterialimpactonouroperations,buttheymayhaveamaterialimpactinthefuture.Privacyanddataprotectionlawsincreaseourcomplianceburden.Wearesubjecttoavarietyofprivacyanddataprotectionlawsandregulationsthatchangefrequentlyandhaverequirementsthatvaryfromjurisdictiontojurisdiction.Forexample,wearesubjecttosignificantcomplianceobligationsunderprivacylawssuchastheGeneralDataPrivacyRegulation(GDPR)intheEuropeanUnion,thePersonalInformationProtectionandElectronicDocumentsAct(“PIPEDA”)inCanada,theCaliforniaConsumerPrivacyAct(CCPA)modifiedbytheCaliforniaPrivacyRightsAct(“CPRA”),andthePersonalInformationProtectionLaw(“PIPL”)inthePRC.Someprivacylawsprohibitthetransferofpersonalinformationtocertainotherjurisdictions.Wearesubjecttoprivacyanddataprotectionauditsorinvestigationsbyvariousgovernmentagencies.Ourfailuretocomplywiththeselawssubjectsustopotentialregulatoryenforcementactivity,fines,privatelitigationincludingclassactions,andothercosts.Oureffortstocomplywithprivacylawsmaycomplicateouroperationsandaddtoourcompliancecosts.Asignificantprivacybreachorfailureorperceivedfailurebyusorourthird-partyserviceproviderstocomplywithprivacyordataprotectionlaws,regulations,policiesorregulatoryguidancemighthaveamateriallyadverseimpactonourreputation,businessoperationsandourfinancialconditionorresultsofoperations.Disruptionofourtechnologysystemsorunexpectednetworkinterruptioncoulddisruptourbusiness.Weareincreasinglydependentontechnologysystemsandthird-partiestooperateoure-commercewebsites,processtransactions,respondtoguestinquiries,manageinventory,purchase,sellandshipgoodsonatimelybasis,andmaintaincost-efficientoperations.Thefailureofourtechnologysystemstooperateproperlyoreffectively,problemswithtransitioningtoupgradedorreplacementsystems,ordifficultyinintegratingnewsystems,couldadverselyaffectourbusiness.Inaddition,wehavee-commercewebsitesintheUnitedStates,Canada,andinternationally.Ourtechnologysystems,websites,andoperationsofthirdpartiesonwhomwerely,mayencounterdamageordisruptionorslowdowncausedbyafailuretosuccessfullyupgradesystems,systemfailures,viruses,computerhackers,naturaldisasters,orothercauses.These
2023-07-20
46页
5星级
Years ended March 31,20232022%RevenueMillions of Yen 14,306,40221.711,757,55946.8Profit before Income TaxesMillions of Yen1,395,29519.81,164,480158.7Profit for the YearMillions of Yen1,154,62723.1937,670167.6Profit for the Year Attributable to Owners of the ParentMillions of Yen1,130,63023.6914,722172.7Comprehensive Income for the YearMillions of Yen1,250,890(11.3)1,410,98841.7Earnings per Share Attributable to Owners of the Parent,BasicYen721.82561.61Earnings per Share Attributable to Owners of the Parent,DilutedYen721.41561.38Profit Ratio to Equity Attributable to Owners of the Parent.918.0Profit before Income Taxes to Total Assets%9.28.5March 31,2023 March 31,2022Total AssetsMillions of Yen15,380,91614,923,290Total EquityMillions of Yen6,565,1485,795,416Total Equity Attributable to Owners of the ParentMillions of Yen6,367,7505,605,205Equity Attributable to Owners of the Parent RatioA.437.6Equity per Share Attributable to Owners of the ParentYen4,177.493,501.21Consolidated Financial Results for the Year Ended March 31,2023 IFRSTokyo,May 2,2023-Mitsui&Co.,Ltd.announced its consolidated financial results for the year ended March 31,2023,based on International Financial Reporting Standards(“IFRS”).Mitsui&Co.,Ltd.and subsidiaries(Website:https:/ and Chief Executive Officer:Kenichi HoriInvestor Relations Contacts:Hideaki Konishi,Investor Relations Division TEL 81-3-3285-11111.Consolidated financial results(1)Consolidated operating results information for the year ended March 31,2023(from April 1,2022 to March 31,2023)Note:1.Percentage figures for Revenue,Profit before Income Taxes,Profit for the Year,Profit for the Year Attributable to Owners of the Parent,and Comprehensive Income for the Year represent changes from the previous year.2.Share of profit(loss)of investments accounted for using the equity method for the years ended March 31,2023 and 2022 were 555,526 million and 431,263 million,respectively.(2)Consolidated financial position informationYears ended March 31,20232022Operating ActivitiesMillions of Yen1,047,537806,896Investing ActivitiesMillions of Yen(178,341)(181,191)Financing ActivitiesMillions of Yen(634,685)(614,325)Cash and Cash Equivalents at the End of YearMillions of Yen1,390,1301,127,868Years ended March 31,Year ending March 31,2024(Forecast)20232022Interim dividend per shareYen654575Year-end dividend per shareYen756075Annual dividend per shareYen140105150Annual dividend(total)Millions of Yen216,879169,586Consolidated dividend payout ratio.418.725.7Consolidated dividend on equity attributable to owners of the parent%3.63.4Year endingMarch 31,2024Profit Attributable to Owners of the ParentMillions of Yen880,000Earnings per Share Attributable to Owners of the Parent,BasicYen582.79()Changes in accounting policies required by IFRSNone()Other changesNone()Changes in accounting estimatesYes(3)Consolidated cash flow information2.Dividend informationNote:For the dividend policy,please refer to p.25“(3)Profit Distribution Policy.”The amount of dividend for the shares related to the share-based compensation plan for employees included in the Annual dividend for the years ended March 31,2023 and 2022 were 529 million and 405 million,respectively.3.Forecast of consolidated operating results for the year ending March 31,2024(from April 1,2023 to March 31,2024)4.Others(1)Increase/decrease of important subsidiaries during the Year:None(2)Changes in accounting policies and accounting estimate:Note:For further details,please refer to p.33“5.Consolidated Financial Statements(7)Changes in Accounting Estimates.”March 31,2023March 31,2022Number of shares of common stock issued,including treasury stock1,544,660,5441,642,355,644Number of shares of treasury stock20,361,04941,423,291Year endedMarch 31,2023Year endedMarch 31,2022Average number of shares of common stock outstanding1,566,366,5531,628,744,153(3)Number of shares:This earnings report is not subject to audit.A Cautionary Note on Forward-Looking Statements:This report contains forward-looking statements including those concerning future performance of Mitsui&Co.,Ltd.(“Mitsui”),and those statements are based on Mitsuis current assumptions,expectations and beliefs in light of the information currently possessed by it.Various factors may cause Mitsuis actual results to be materially different from any future performance expressed or implied by these forward-looking statements.Therefore,these statements do not constitute a guarantee by Mitsui that such future performance will be realized.For key assumptions on which the statements concerning future performance are based,please refer to(2)“Forecasts for the Year Ending March 31,2024”on p.22.For cautionary notes with respect to forward-looking statements,please refer to the“Notice”section on p.26.Supplementary materials and IR meetings on financial results:Supplementary materials on financial results can be found on our website.We will hold IR meetings for analysts and institutional investors on financial results on May 2,2023,and on the new Medium-term Management Plan on May 9,2023.Contents of the meeting(English and Japanese)will be posted on our website immediately after the meeting.1.Qualitative Information(1)Operating Environment2(2)Results of Operations.3(3)Financial Condition and Cash Flows.152.Management Policies(1)New Medium-term Management Plan.22(2)Forecasts for the Year Ending March 31,2024.22(3)Profit Distribution Policy.253.Basic Approach on Adoption of Accounting Standards254.Other Information.265.Consolidated Financial Statements(1)Consolidated Statements of Financial Position27(2)Consolidated Statements of Income and Comprehensive Income.29(3)Consolidated Statements of Changes in Equity.31(4)Consolidated Statements of Cash Flows.32(5)Assumption for Going Concern.33(6)Basis of Consolidated Financial Statements33(7)Changes in Accounting Estimates.33(8)Notes to Consolidated Financial Statements.34Table of Contents-1-1.Qualitative InformationAs of the date of disclosure of this earnings report,the audit procedures for consolidated financial statements have not been completed.As used in this report,“Mitsui”and the“Company”refer to Mitsui&Co.,Ltd.(Mitsui Bussan Kabushiki Kaisha),and“we,”“us,”“our,”“Mitsui&Co.group”and the“companies”are used to indicate Mitsui&Co.,Ltd.and its subsidiaries,unless otherwise indicated.(1)Operating EnvironmentIn the year ended March 31,2023,the global economy slowed compared to the previous year due to rising inflation and rapid monetary tightening,mainly in the US,Europe and other developed countries,the ripple effects from the Russia-Ukraine situation,and the impact of turmoil in the Chinese economy stemming from the zero-COVID policy in China.In addition,new risk factors emerged at the end of the fiscal year,such as the collapse of regional financial institutions in the US.In the US,although consumer spending generally continued to recover backed by a strong employment situation and other factors despite continued high inflation,the rapid monetary tightening led to a decline in housing investment and sluggish growth in capital investment,resulting in a slowdown in the economy.Looking ahead,the economy is expected to slow further due to monetary tightening and the impact from the collapse of regional financial institutions.In Europe,the economy weakened due to supply constraints in energy,caused by the Russia-Ukraine situation,as well as due to a rise in prices and other factors.Looking ahead,the economy is expected to stall due to continued high inflation and monetary tightening.In Japan,service consumption and inbound demand began to recover amid the ongoing normalization of economic activity,but the pickup was slow due to refrained goods consumption and sluggish exports in the face of rising prices.Looking ahead,the economy is expected to maintain a moderate recovery trend,partly due to the trend of wage hikes exceeding the previous years increase and policy support.In China,the economy slowed further last year due to the impact of the zero-COVID policy and the deterioration of the real estate market,but with the lifting of the zero-COVID policy at the end of last year,domestic demand,including consumption of services,showed signs of picking up.Looking ahead,the economy is expected to pick up gradually,partly due to policy support such as lowering of the reserve ratio.In Brazil,the economy is expected to slow down due to the monetary tightening done up until last year and other factors.In Russia,economic activity is expected to remain stagnant due to economic sanctions imposed by the international community.Looking ahead,although there are expectations for a recovery in China,the global economy is expected to remain in a slowdown phase overall due to high inflation and continued monetary tightening in the US,Europe,and other developed countries,as well as concerns about the financial system,while the effects of the situation in Russia and Ukraine are expected to linger.-2-(Billions of Yen)Current YearPrevious YearChangeRevenue14,306.411,757.6 2,548.8Gross Profit1,396.21,141.4 254.8Selling,General and Administrative Expenses(702.8)(596.3)(106.5)Other Income(Expenses)Gain(Loss)on Securities and Other InvestmentsNet59.58.7 50.8Impairment Reversal(Loss)of Fixed AssetsNet(30.0)(19.1)(10.9)Gain(Loss)on Disposal or Sales of Fixed AssetsNet19.414.5 4.9Other Income(Expense)Net9.214.9(5.7)Finance Income(Costs)Interest Income47.820.0 27.8Dividend Income154.9196.5(41.6)Interest Expense(114.6)(47.3)(67.3)Share of Profit(Loss)of Investments Accounted for Using the Equity Method555.5431.3 124.2Income Taxes(240.7)(226.8)(13.9)Profit for the Year1,154.6937.7 216.9Profit for the Year Attributable to Owners of the Parent1,130.6914.7 215.9(2)Results of Operations1)Analysis of Consolidated Income Statements*May not match with the total of items due to rounding off.The same shall apply hereafter.RevenueRevenue for the year ended March 31,2023(“current year”)was 14,306.4 billion,an increase of 2,548.8 billion from 11,757.6 billion for the year ended March 31,2022(“previous year”).The increase was mainly in the Energy Segment and the Lifestyle Segment.Gross ProfitMainly the Energy Segment and the Machinery&Infrastructure Segment recorded an increase,while the Mineral&Metal Resources Segment recorded a decrease.-3-Billions of YenCurrent YearPrevious YearChange*Personnel.(384.0)(333.6)(50.4)Welfare(13.4)(11.8)(1.6)Travel.(25.2)(10.6)(14.6)Entertainment.(6.4)(3.2)(3.2)Communication.(55.3)(48.6)(6.7)Rent.(11.7)(9.0)(2.7)Depreciation(41.2)(35.0)(6.2)Fees and Taxes(17.3)(12.9)(4.4)Loss Allowance.(18.9)(20.2) 1.3Others.(129.4)(111.4)(18.0)Total(702.8)(596.3)(106.5)Selling,General and Administrative ExpensesMainly the Machinery&Infrastructure Segment and the Chemicals Segment recorded an increase in expenses.The table provides a breakdown.*Negative amounts in the“Change”column displayed in parentheses represent an increase in expenses.Other Income(Expenses)Gain(Loss)on Securities and Other InvestmentsNetFor the current year,a gain on securities was recorded mainly in the Mineral&Metal Resources Segment and Innovation&Corporate Development Segment,while an impairment loss was recorded in the Machinery&Infrastructure Segment.For the previous year,a gain on securities was recorded mainly in the Lifestyle Segment,while an impairment loss was recorded in the Machinery&Infrastructure Segment.Impairment Reversal(Loss)of Fixed AssetsNetFor the current year,mainly the Machinery&Infrastructure Segment recorded impairment losses on fixed assets.For the previous year,mainly the Energy Segment recorded impairment losses on fixed assets.Gain(Loss)on Disposal or Sales of Fixed AssetsNetFor the current and previous years,mainly the Innovation&Corporate Development Segment recorded gains on sales of fixed assets.Other Income(Expense)NetFor the current and previous years,the Energy Segment recorded a provision,while the Lifestyle Segment recorded a valuation profit of a put option,and the Chemicals Segment recorded insurance proceeds.Finance Income(Costs)Dividend IncomeMainly the Mineral&Metal Resources Segment recorded a decrease.-4-Share of Profit(Loss)of Investments Accounted for Using the Equity MethodMainly the Energy Segment and the Machinery&Infrastructure Segment recorded an increase,while the Mineral&Metal Resources Segment recorded a decrease.Income TaxesIncome taxes for the current year were 240.7 billion,an increase of 13.9 billion from 226.8 billion for the previous year.The effective tax rate for the current year was 17.2%,a decrease of 2.3 points from 19.5%for the previous year.The effective tax rate decreased due to the tax effect of a portion of equity method profit-which increased,not being recognized,and other factors.Profit for the Year Attributable to Owners of the ParentAs a result,profit for the year attributable to owners of the parent was 1,130.6 billion,an increase of 215.9 billion from the previous year.-5-(Billions of Yen)CurrentYearPreviousYearChangeDescriptionProfit for the Year Attributable to Owners of the Parent438.8497.6(58.8)Gross Profit355.8392.5(36.7)Iron ore mining operations in Australia -60.2(lower prices)Coal mining operations in Australia 20.2 (higher prices)Profit(Loss)of Equity Method Investments127.6145.3(17.7)Iron ore mining operations in Australia-12.2(lower prices)Oriente Copper Netherlands*1-8.8(lower prices)Japan Collahuasi Resources*2-8.7(lower prices)Inner Mongolia Erdos Electric Power&Metallurgical-3.2(lower prices in ferroalloys and chemicals businesses)Increase in coal mining operations in Australia(higher prices)Dividend Income74.3124.3(50.0)Lower dividend from Vale and iron ore mining operations in AustraliaSelling,General and Administrative Expenses(33.4)(30.2)(3.2)Others(85.5)(134.3) 48.8 Gain on sale of Stanmore SMC 36.7 Increase due to copper price hedge transactions Japan Collahuasi Resources-6.2(absence of a deferred tax liability reversal in the previous year*3)2)Operating Results by Operating SegmentThe fluctuation analysis for the results by operating segment is as follows.Note,“Others”includes income taxes,but generally,the impact of income taxes are not included in the explanations in the“Description”column relation to each account title.Mineral&Metal Resources Segment*1 An investor in Inversiones Mineras Becrux,which invests in Anglo American Sur,a copper mining company in Chile.*2 An investor in Compaa Minera Doa Ins de Collahuasi,a copper mining company in Chile.*3 A deferred tax liability reversal related to the restructuring of Japan Collahuasi Resources.-6-(Billions of Yen)CurrentYearPreviousYearChangeDescriptionProfit for the Year Attributable to Owners of the Parent309.4114.0 195.4Gross Profit316.4145.4 171.0 Increase in LNG Trading Mitsui E&P USA 41.3(higher gas prices)Mitsui E&P Australia 35.1(higher oil prices)Mitsui E&P Italia B 14.4(cost improvements)Mitsui E&P Middle East 10.8(higher oil prices)MEP Texas Holdings 9.6(higher oil and gas prices)MOEX North America 7.2(higher oil prices)Decrease in fuel supply related business-7.7Profit(Loss)of Equity Method Investments108.532.3 76.2 Increase in Japan Australia LNG(MIMI)(higher oil and gas prices)Japan Arctic LNG 10.2(oil price and foreign exchange valuation profit)Mitsui&Co.LNG Investment USA 5.2(increase in volume)Mitsui Oil Exploration 3.1(changes to lease accounting,other factors)Mitsui E&P Mozambique Area 1-3.5(recorded provision on a financial asset)Dividend Income58.753.6 5.1 4 LNG projects*1 3.9(current year 56.7,previous year 52.8)Selling,General and Administrative Expenses(57.9)(53.1)(4.8)Absence of provision loss in relation to valuation allowance of a loan for Japan Arctic LNG recorded in the previous year 4.5Energy Segment-7-Others(116.3)(64.2)(52.1)Mitsui Oil Exploration-13.6(recorded provision)Mitsui E&P Australia-8.8(recorded provision)Impairment loss in biomass power generation business-3.3 Absence of provision loss in relation to valuation allowance of a guarantee for Arctic LNG2 project guarantees recorded in previous year,other factors 12.4 Foreign exchange hedge related profit in fuel supply business,other factors 6.4 Absence of valuation loss*2 in Mitsui Oil Exploration Block M-3 exploration project in previous year 4.6*1 Sakhalin II,Abu Dhabi,Oman and Qatargas 3.Includes Qatargas 1 for which interest expired during the previous year.*2 For the previous year,Mitsui Oil Exploration recorded an impairment loss of 7.3 billion for Block M-3 exploration project and profit of 2.7 billion in relation to a reversal of reserve for an overseas investment loss.-8-(Billions of Yen)CurrentYearPreviousYearChangeDescriptionProfit for the Year Attributable to Owners of the Parent171.9120.8 51.1Gross Profit199.9142.9 57.0 Construction&industrial machinery businesses 12.4(good sales performance)Inversiones Mitta consolidation 7.7 Bussan Auto Finance 7.7(increase in interest income due to an accumulation of operating assets)Position Partners consolidation 5.1 Hino Mexico 3.7(good sales performance)Profit(Loss)of Equity Method Investments197.3146.0 51.3 MBK USA Commercial Vehicles 18.9(good performance of truck leasing and rental business)Tanker owning company(increase in vessel related revenue)Penske Automotive Group 9.1(good sales performance)FPSO 7.8(increase due to MV30/31 operations starting)Canadian automobile company(increase in unit sales,decrease in sales promotion expenses)Gas distribution business 6.4(steady gas demand)VLI-6.5(impairment loss of fixed assets,other factors*1-8.6)IPP-13.1(impairment loss of Hezhou project in China*2-6.5,weak performance at Mainstreams projects in Chile,weak performance in Ontario,Canada,impact of steep rise in electricity and gas prices in Australia,increase due to a portion of Thai business becoming operational)Dividend Income4.24.1 0.1Selling,General and Administrative Expenses(163.6)(127.7)(35.9)Position Partners consolidation-5.1 Bussan Auto Finance-3.6(increase of provisions due to an accumulation of operating assets)Machinery&Infrastructure Segment-9-Others(65.9)(44.5)(21.4)Fixed assets valuation loss in Brazilian passenger railway business*3-15.1 MT Falcon impairment loss*4 current year:-3.1,previous year:-9.7 Decrease in corporate income tax burden resulting from the sale of Lucid Group shares 7.2*5*1 VLI recorded a fixed assets impairment loss of 6.7 billion and a reversal of deferred tax assets of 1.9 billion due to the reassessment of a recoverable amount of some assets related to a Brazilian freight railway concession.*2 An equity method loss of 6.5 billion was recorded due to the reassessment of a recoverable amount of assets of Hezhou Power Plant Project.*3 A fixed assets impairment loss was recorded based on the latest estimation regarding the decrease in revenue and the increased discount rate for the passenger railway business in Brazil.*4 For the current year,an impairment loss of 3.1 billion was recorded,based on the conclusion of a sale and purchase agreement for the shares of MT Falcon Holdings.For the previous year,an impairment loss of 9.7 billion was recorded,based on the conclusion of a sale and purchase agreement for the shares of MT Falcon Holdings.*5 The corporate income tax burden was reduced due to tax expenses being recognized as other comprehensive income resulting from the sale of financial assets in Lucid Group shares measured at FVTOCI.-10-(Billions of Yen)CurrentYearPreviousYearChangeDescriptionProfit for the Year Attributable to Owners of the Parent70.968.9 2.0Gross Profit209.3183.0 26.3 Mitsui AgriScience International*1 6.4(strong crop protection demand)Increase in fertilizer related trading(higherprices)Intercontinental Terminals Company 3.3(good performance)MMTX-6.8(higher raw material prices,lower sales prices)Profit(Loss)of Equity Method Investments27.420.7 6.7 MVM Resources 5.1(higher phosphate ore prices)Dividend Income3.83.3 0.5Selling,General and Administrative Expenses(137.4)(112.8)(24.6)Mitsui AgriScience International*1-4.7(costs related to business integration)Others(32.2)(25.3)(6.9)Intercontinental Terminals Company incident*2(Billions of Yen)CurrentYearPreviousYearChangeDescriptionProfit for the Year Attributable to Owners of the Parent22.526.9(4.4)Gross Profit40.735.5 5.2 Mitsui&Co.Steel 4.3(good trading performance in first half)Overseas trading subsidiary-3.7(lower prices)Profit(Loss)of Equity Method Investments24.726.0(1.3)NuMit*1-4.6(inventory valuation loss,lower prices)Dividend Income3.01.7 1.3Selling,General and Administrative Expenses(27.6)(23.6)(4.0)Others(18.3)(12.7)(5.6)Chemicals Segment*1 Due to a merger,the combined total of Mitsui AgriScience International and its affiliate Certis Belchim have been used for figures for the previous year.*2 Insurance proceeds and costs were recorded in Intercontinental Terminals Company both for the current year and previous year.(Current year:7.3 billion of profit)Iron&Steel Products Segment*1 An investment company of Steel Technologies.-11-(Billions of Yen)CurrentYearPreviousYearChangeDescriptionProfit for the Year Attributable to Owners of the Parent54.861.5(6.7)Gross Profit153.7143.0 10.7 Good performance in grain trading 5.8 Foreign exchange impact in coffee trading business 4.9 Foreign exchange impact in MITSUI&CO.COFFEE TRADING(Brazil) 3.5 Fair value valuation loss of drug discovery support fund*1-6.1Profit(Loss)of Equity Method Investments50.741.1 9.6 IHH Healthcare 8.5(good performance in the hospital business and asset recycling,etc.)WILSEY FOODS 5.5(good performance at Ventura Foods,a manufacturer of processed oil food)PHC Holdings deconsolidation*2-4.3Dividend Income6.25.6 0.6Selling,General and Administrative Expenses(142.0)(130.7)(11.3)Others(13.8)2.5(16.3)Absence of valuation gain of Mitsui Bussan I-Fashion recorded in the previous year-10.7 Absence of PHC Holdings securities related profit recorded in the previous year-8.9 Foreign exchange hedging loss in coffee trading-4.5 Decrease in corporate income tax burden resulting from the sale of financial assets measured at FVTOCI*3 12.2 Multigrain related tax refund 5.0 Put option related to JSC R-Pharm*4current year 6.5,previous year-6.2Lifestyle Segment*1 Valuation loss of a drug investment from a drug discovery support fund made through MBK Pharma Partnering.*2 Absence of equity method profit recorded in the previous year following the deconsolidation of PHC Holdings.*3 The corporate income tax burden was reduced due to tax expenses being recognized as other comprehensive income resulting from the sale of financial assets measured at FVTOCI.*4 A valuation gain was recorded for a put option in relation to JSC R-Pharm.-12-(Billions of Yen)CurrentYearPreviousYearChangeDescriptionProfit for the Year Attributable to Owners of the Parent66.757.6 9.1Gross Profit112.697.7 14.9 Mitsui Bussan Commodities 15.3(good performance of commodity derivative trading)Absence of sale of shares in Wise in the previous year-3.5Profit(Loss)of Equity Method Investments18.919.7(0.8)Peterson Ventures Partners-4.4(fall in fair value of shares)Dividend Income3.82.8 1.0Selling,General and Administrative Expenses(82.7)(67.8)(14.9)Mitsui Bussan Commodities-6.4Others14.15.2 8.9 Gain on sale of real estate business in Singapore*1 Gain on sale of part of Hibiya Fort Tower 5.9 Gain on sale of investment securities 4.0 Gain on sale of real estate in the US*2 3.6 Absence of gain on sale of land recorded in the previous year-5.1Innovation&Corporate Development Segment*1 A gain on sale of Southernwood Property,an investment vehicle that owns an office building in Singapore.*2 Fixed asset sale of multiple property sales in the US.-13-3)Evaluation of assets and liabilities for the Russian LNG businessThe Russian LNG business in which we participate,is affected by the Russia-Ukraine situation.Based on discussions with each partner,we have evaluated its relevant assets and liabilities.In relation to the investment in the Sakhalin II project,we undertook the ownership of Sakhalin Energy LLC(“SELLC”)on September 2,2022,which was established based on Russian Presidential Decree(No.416)dated June 30,2022,and Resolution of the Government of the Russian Federation dated August 2,2022(No.1369),through MIT SEL Investment,a newly established subsidiary.Consequently,we continue to invest in the Sakhalin II project and the reorganization does not materially impact the Consolidated Financial Statements.As of March 31,2023,the situation still remains uncertain as the final LLC members composition is not yet decided,the LLC members agreement is not signed,etc.Based on the current situation,the fair value was measured using the income approach by expected present value technique with the probability-weighted average considering a scenario where the continuous dividend income is predicted through an investment in SELLC and other scenarios.As a result,the investment balance in Sakhalin II project as of March 31,2023 was 98.5 billion.Also,in the year ended March 31,2023,a decrease of 126.0 billion in the fair value of the investment was recorded in Other Comprehensive Income.While the decision on the new LLC member has been acknowledged by Order of the Government of the Russian Federation dated April 11,2023(No.890),the Company has concluded there is no impact on the above fair value.The fair value may increase or decrease due to further changes in situation hereafter.The Company did not recognize any significant profit and loss or Other Comprehensive Income in the current year with respect to the Arctic LNG2 project.The balance of the investments,loans and guarantees related to the Arctic LNG2 project was 239.2 billion(15.8 billion in investments and loans and 223.4 billion in guarantees)as of March 31,2023.In addition,a provision for loss on guarantees of 18.2 billion has been recorded.For further details,please refer to“5.Consolidated Financial Statements(8)Notes to Consolidated Financial Statements Impact of the Russia-Ukraine Situation on the Russian LNG Business”.-14-(Billions of Yen)March 31,2023March 31,2022ChangeTotal Assets15,380.914,923.3 457.6Current Assets5,674.85,716.7(41.9)Non-current Assets9,706.19,206.6 499.5Current Liabilities3,766.63,808.6(42.0)Non-current Liabilities5,049.15,319.2(270.1)Net Interest-bearing Debt3,212.73,338.9(126.2)Total Equity Attributable to Owners of the Parent6,367.85,605.2 762.6Net Debt-to-Equity Ratio(times)0.500.60(0.10)(Billions of Yen)March 31,2023March 31,2022ChangeDescriptionCurrent Assets5,674.85,716.7(41.9)Cash and cash equivalents1,390.11,127.9 262.2Trade and other receivables2,191.22,303.1(111.9)Trade receivables-164.5(EN*1)Market fluctuation,decrease in trading volume Loan receivables 57.4(MI*1)Increase in the current portion of long-term loan receivablesOther financial assets773.0997.9(224.9)(IC*1,LI*1)Market fluctuation,decrease in derivative assets(EN*1)Market fluctuation,decrease in trading volumeInventories940.5949.7(9.2)Advance payments to suppliers226.7183.4 43.3(MI*1)Increase in trading volumeOther Current assets153.3154.7(1.4)(3)Financial Condition and Cash Flows1)Financial ConditionAssetsCurrent Assets:*1 EN:Energy Segment,MI:Machinery&Infrastructure Segment,IC:Innovation&Corporate Development Segment,LI:Lifestyle Segment-15-(Billions of Yen)March 31,2023March 31,2022ChangeDescriptionNon-current Assets9,706.19,206.6 499.5Investments accounted for using the equity method3,929.63,387.4 542.2 Investments accounted for using the equity method 555.5 Foreign exchange fluctuations 216.2 Investment in the holding company of Mainstream Renewable Power 79.8 Investment in Climate Friendly Investment in Ouro Fino Sade Animal Investment in FPSO(Libra MV31) 15.7 Investment in New Forests Investment in Mitsui E&P Mozambique Area 1 10.6 Dividends from equity accounted investees-425.9 Sale of Stanmore SMC-15.1(Sale-29.6,change in period 14.5)Sale of Southernwood Property-10.7Other investments2,134.12,347.4(213.3)Fair value of FVTOCI financial assets-246.8(including-126.0 from equity interest in Sakhalin II project)(LI*1)Sale of FVTOCI financial assets-42.5 Sale of shares in Lucid Group-25.1 Foreign exchange fluctuations 41.0 Investment in a large-scale renewable energy project in IndiaTrade and other receivables320.0320.00Other financial assets208.0167.8 40.2(MI*1)Increase in trading volumeProperty,plant and equipment2,300.62,190.9 109.7 Oil and gas projects 48.8(including foreign exchange fluctuations 7.6)MITSUI FOODS new logistics center 33.4 Intercontinental Terminals Company 11.0(including foreign exchange fluctuations 11.1)M&T Aviation sale of owned aircraft-10.9 Sale of ships owned by OMC Shipping-10.6Non-current Assets:-16-Investment property282.5318.6(36.1)Xingu Agri-22.1(including sale of agricultural land-33.2,foreign exchange 13.4)MBK Real Estate Holdings -14.4(including sale of multiple properties-20.8)Intangible assets277.3253.0 24.3 Consolidations(Position Partners,Lee Soon Seng Plastics Industries)Brazilian passenger railway business-13.2(including impairment-15.1)Deferred tax assets105.2100.7 4.5Other non-current assets148.8120.8 28.0 Increase in pension related assets(premium contributions)(Billions of Yen)March 31,2023March 31,2022ChangeDescriptionCurrent Liabilities3,766.63,808.6(42.0)Short-term debt432.2281.8 150.4Current portion of long-term debt811.0410.3 400.7Trade and other payables1,510.41,739.1(228.7)Decrease in trade payablesOther financial liabilities622.01,003.2(381.2)Decrease in derivative liabilitiesIncome tax payables49.368.5(19.2)Advances from customers234.9202.1 32.8 Corresponding to increase in advance paymentsProvisions59.048.6 10.4(EN*1,CH*1)Increase in provisionsOther current liabilities47.855.0(7.2)Non-current Liabilities5,049.15,319.2(270.1)Long-term debt,less the current portion3,797.34,185.4(388.1)Other financial liabilities223.4147.0 76.4Increase in derivative liabilitiesRetirement benefit liabilities37.038.0(1.0)Provisions310.5266.2 44.3(EN*1)Increase in asset retirement obligationsDeferred tax liabilities648.3654.0(5.7)Other non-current liabilities32.628.6 4.0*1 LI:Lifestyle Segment,MI:Machinery&Infrastructure SegmentLiabilities*1 EN:Energy Segment,CH:Chemicals Segment-17-(Billions of Yen)March 31,2023March 31,2022ChangeDescriptionCommon stock342.6342.4 0.2Capital surplus381.9376.5 5.4Retained earnings4,840.54,166.0 674.5Other components of equity869.0827.4 41.6Financial assets measured at FVTOCI215.6465.1(249.5)Lower share prices,decrease in fair value of Sakhalin II projectForeign currency translation adjustments638.5478.6 159.9 USD 123.7 (Mar-23 JPY133.53/USD,up from Mar-22 JPY122.39/USD)AUD-27.9 (Mar-23 JPY89.69/AUD,down from Mar-22 JPY92.00/AUD)Cash flow hedges14.9(116.3) 131.2 Commodity price and interest rate hedge accountingTreasury stock(66.2)(107.1) 40.9 Cancellation of treasury stock 310.7 Share repurchase-270.0Total Equity Attributable to Owners of the Parent6,367.85,605.2 762.6Non-controlling interests197.4190.2 7.2(Billions of Yen)Current Year Previous YearChangeCash Flows from Operating Activities1,047.5806.9 240.6Cash Flows from Investing Activities(178.3)(181.2) 2.9Free Cash Flow869.2625.7 243.5Cash Flows from Financing Activities(634.7)(614.3)(20.4)Effect of Exchange Rate Changes on Cash and Cash Equivalents27.853.3(25.5)Change in Cash and Cash Equivalents262.364.7 197.6Equity2)Cash Flows-18-(Billions of Yen)Current Year Previous YearChangeCash Flows from Operating Activitiesa1,047.5806.9 240.6Cash Flows from Change in Working Capitalb(223.5)(407.4) 183.9Repayments of Lease Liabilitiesc(65.5)(55.6)(9.9)Core Operating Cash Flowa-b c1,205.51,158.7 46.8(Billions of Yen)Current YearPrevious YearChangeMineral&Metal Resources436.7552.8(116.1)Energy419.6280.2 139.4Machinery&Infrastructure182.9144.0 38.9Chemicals89.593.8(4.3)Iron&Steel Products18.012.4 5.6Lifestyle31.135.2(4.1)Innovation&Corporate Development46.646.60All Other and Adjustments and Eliminations(18.9)(6.3)(12.6)Consolidated Total1,205.51,158.7 46.8(Billions of Yen)Current YearPrevious YearChangeMineral&Metal Resources58.751.3 7.4Energy88.2138.5(50.3)Machinery&Infrastructure34.823.9 10.9Chemicals31.624.7 6.9Iron&Steel Products1.51.4 0.1Lifestyle23.221.8 1.4Innovation&Corporate Development18.818.1 0.7All Other and Adjustments and Eliminations15.916.7(0.8)Consolidated Total272.7296.4(23.7)Cash Flows from Operating ActivitiesCash flows from change in working capital(changes in operating assets and liabilities)was 223.5 billion of net cash outflow.Repayments of lease liabilities was 65.5 billion of cash outflow.Core Operating Cash Flow,which equals cash flows from operating activities excluding changes in working capital and repayments of lease liabilities,amounted to 1,205.5 billion.-Net cash inflow from dividend income,including dividends received from equity accounted investees,for the current year totaled 574.2 billion,an increase of 19.4 billion from 554.8 billion for the previous year.-Depreciation and amortization for the current year was 272.7 billion,a decrease of 23.7 billion from 296.4 billion for the previous year.The following table shows Core Operating Cash Flow by operating segment.The following table shows Depreciation and amortization by operating segment.-19-(Billions of Yen)Current YearPrevious YearDescription of Current YearCash flows from investing activities(178.3)(181.2)Net change in investments in equity accounted investees(103.4)(27.1)Cash outflow(238.6)(92.2)Mainstream Renewable Power holding company-79.8 Climate Friendly Ouro Fino Sade Animal FPSO(Libra MV31)-15.7 New Forests Mit Power Capitals-11.5 Japan Arctic LNG Mitsui E&P Mozambique Area 1 -10.6Cash inflow135.265.1 Stanmore SMC 54.9 Southernwood Property 20.1 MT Falcon Holdings 11.6Net change in other investments33.9(43.8)Cash outflow(100.4)(106.1)Large-scale renewable energy project in IndiaCash inflow134.362.3(LI*1)Sale of FVTOCI financial assets Lucid Group 25.1Net change in property,plant and equipment(190.0)(156.6)Cash outflow(228.0)(185.5)Oil and gas projects-50.9 Iron ore mining operations in Australia-43.7 Coal mining operations in Australia-24.7 MyPower-17.0 Intercontinental Terminals Company-13.0Cash inflow38.028.9 M&T Aviation sale of owned aircraft 10.9Net change in investment property48.4(4.5)Cash outflow(12.3)(26.4)Cash inflow60.721.9 Sale of multiple properties by MBK Real Estate Holdings 32.6 Sale of Xingu Agri agricultural land 17.9 Partial sale of Hibiya Fort TowerNet change in loan receivables(4.2)50.0Net change in time deposits37.00.8Cash Flows from Investing Activities-20-(Billions of Yen)Current YearPrevious YearDescription of Current YearCash flows from financing activities(634.7)(614.3)Net change in short-term debt168.7(82.5)Net change in long-term debt(217.6)(55.0)(Proceeds from long-term debt)1,041.21,206.6(Repayments of long-term debt)(1,258.8)(1,261.6)Repayments of lease liabilities(65.5)(55.6)Purchase and sales of treasury stock-net(270.2)(174.9)Dividends paid(198.1)(148.2)Transactions with non-controlling interest shareholders(52.0)(98.1)Mainly payment of additional acquisition of shares in Mitsui Oil ExplorationCash Flows from Financing Activities-21-2.Management Policies(1)New Medium-term Management PlanReference is made to our new Medium-term Management Plan“Medium-term Management Plan 2026 Creating Sustainable Futures”,announced on our corporate website today.AssumptionMarch 2024ForecastMarch 2023ResultExchange rate(USD/JPY)130.00136.00Crude oil(JCC)$79/bbl$103/bblConsolidated oil price$88/bbl$93/bbl(Billions of Yen)March 31,2024ForecastMarch 31,2023ResultIncrease/(Decrease)DescriptionGross Profit1,170.01,396.2(226.2)Lower commodity pricesSelling,General and Administrative Expenses(750.0)(702.8)(47.2)Gain(Loss)on Investments,Fixed Assets and Other230.058.3 171.7One-time valuation gainAsset recyclingInterest Expenses(110.0)(66.8)(43.2)Higher interest ratesDividend Income160.0154.9 5.1Profit(Loss)of Equity Method Investments440.0555.5(115.5)Lower commodity pricesProfit before Income Taxes1,140.01,395.3(255.3)Income Taxes(240.0)(240.7) 0.7Non-Controlling Interests(20.0)(24.0) 4.0Profit for the Year Attributable to Owners of the Parent880.01,130.6(250.6)Depreciation and Amortization270.0272.7(2.7)Core Operating Cash Flow870.01,205.5(335.5)(2)Forecasts for the Year Ending March 31,20241)Forecasts for the year ending March 31,2024For further major assumptions in addition to oil prices and USD/JPY and sensitivities,please refer to“2)Key commodity prices and other parameters for the year ending March 31,2024”.-22-(Billions of Yen)Year endingMarch 31,2024Year endedMarch 31,2023Increase/(Decrease)DescriptionMineral&Metal Resources290.0438.8(148.8)Metallurgical coal and iron ore pricesAbsence of gain from asset sales in the previous yearEnergy130.0309.4(179.4)Oil&gas pricesLNG tradingMachinery&Infrastructure240.0171.9 68.1Asset recyclingChemicals60.070.9(10.9)Iron&Steel Products20.022.5(2.5)Lifestyle90.054.8 35.2One-time profit due to equity method investee becoming a subsidiaryInnovation&Corporate Development60.066.7(6.7)Others/Adjustmentsand Eliminations(10.0)(4.4)(5.6)Consolidated Total880.01,130.6(250.6)(Billions of Yen)Year endingMarch 31,2024Year endedMarch 31,2023Increase/(Decrease)DescriptionMineral&Metal Resources320.0436.7(116.7)Metallurgical coal and iron ore pricesDividend incomeEnergy230.0419.6(189.6)Oil and gas pricesLNG tradingMachinery&Infrastructure140.0182.9(42.9)Asset recyclingChemicals80.089.5(9.5)Iron&Steel Products10.018.0(8.0)Lifestyle50.031.1 18.9Recovery in coffee trading businessInnovation&Corporate Development40.046.6(6.6)Others/Adjustmentsand Eliminations0.0(18.9) 18.9Consolidated Total870.01,205.5(335.5)The forecast of Profit for the Year Attributable to Owners of the Parent by operating segment compared to the year ended March 31,2023 is as follows:The forecast for Core Operating Cash Flow by operating segment compared to the year ended March 31,2023 is as follows:-23-Impact on profit for the year attributable to owners of the parentfor the Year ending March 31,2024March 2024AssumptionMarch 2023ResultCommodityCrude Oil/JCC-79103Consolidated Oil Price(*1)2.6 bn(US$1/bbl)8893U.S.Natural Gas(*2)1.4 bn(US$0.1/mmBtu)2.996.51(*3)Iron Ore(*4)2.7 bn(US$1/ton)(*5)116(*6)Metallurgical Coal0.3 bn(US$1/ton)(*5)352(*7)Copper(*8)0.7 bn(US$100/ton)8,6008,815(*9)Forex(*10)USD3.9 bn(1/USD)130.00136.00AUD2.7 bn(1/AUD)85.0092.672)Key commodity prices and other parameters for the year ending March 31,2024The table below shows assumptions for key commodity prices and foreign exchange rates for the forecast for the year ending March 31,2024.The effects of movements on each commodity price and foreign exchange rates on profit for the year attributable to owners of the parent are included in the table.(*1)As the crude oil price affects our consolidated results with a time lag,the effect of the crude oil prices on consolidated results is estimated as the Consolidated Oil Price,which reflects this lag.For the year ending March 2024,we have assumed that there is a 4-6 month lag for approx.35%,a 1-3 month lag for approx.30%,over one year of a lag for approx.30%,and no lag for approx.5%.The above sensitivities show annual impact of changes in the consolidated oil price.(*2)As Mitsui has very limited exposure to US.natural gas sold at Henry Hub(HH),the above sensitivities show annual impact of changes in the weighted average sale price.(*3)US.gas figures for the year ended March 2023 are the Henry Hub Natural Gas Futures average daily prompt-month closing prices traded on NYMEX during January to December 2022.(*4)The effect of dividend income from Vale has not been included.(*5)Iron ore and metallurgical coal price assumptions are not disclosed.(*6)Iron ore results figures for the year ended March 2023 are the daily average(reference price)spot indicated price(Fe 62R North China)recorded in several industry trade magazines from April 2022 to March 2023.(*7)Metallurgical coal results figures for the year ended March 2023 are the quarterly average prices of representative metallurgical coal brands in Japan(US$/MT).(*8)As the copper price affects our consolidated results with a 3-month time lag,the above sensitivities show the annual impact of US$100/ton change in averages of the LME monthly average cash settlement prices for the period March to December 2023.(*9)Copper results figures for the year ended March 2023 are the averages of the LME monthly average cash settlement prices for the period January to December 2022.(*10)Impact of currency fluctuations on reported profit for the year of overseas subsidiaries and equity accounted investees denominated in their respective functional currencies and the impact of dividend received from major foreign investees.Depreciation of the yen has the effect of increasing profit for the year through the conversion of profit(denominated in functional currencies)into yen.In the overseas subsidiaries and equity accounted investees where the sales contract is in USD,the impact of currency fluctuations between the USD and the functional currencies(AUD)and the impact of currency hedging are not included.-24-(3)Profit Distribution PolicyOur profit distribution policy is as follows:In order to increase corporate value and maximize shareholder value,we seek to maintain an optimal balance between meeting demand for capital in our core and growth areas through reinvestment of our retained earnings,and based on the level of stable cash generation directly provide returns to shareholders by paying out cash dividends.In addition to the above,regarding share repurchases which are done to improve capital efficiency amongst other things,the amount and timing will be decided upon in a prompt and flexible manner taking into consideration the business environment.Such considerations include balance between share repurchases and growth investments,cash flow level after accounting for shareholder returns,interest-bearing debt levels,and return on equity.Share repurchases for the year ended March 31,2023,were 270 billion in total.For details,please refer to the releases on our website“Notification of Progress and End of Stock Repurchase”dated September 26,2022,and“Notification of Progress on Share Repurchase”dated April 3,2023.The full-year dividend for the year ended March 31,2023,is planned to be 140 per share(an increase of 35 from the previous year,including the interim dividend of 65 per share).Taking into consideration Core Operating Cash Flow and Profit for the Year Attributable to Owners of the Parent announced today,as well as the stability and continuity of dividend payments,the full-year dividend for the year ending March 31,2024 is planned to be 150 per share(an increase of 10 from the previous year,including the interim dividend of 75).Furthermore,during the new Mid-term Management Plan,we will set a minimum dividend of 150 per share(an increase of 10 from the previous year,including the interim dividend of 75),and will introduce a progressive dividend that will have the dividend level maintained or increased.We have set a shareholder returns policy(dividends and share repurchases)of around 37%of Core Operating Cash Flow on a three-year cumulative basis for the new Medium-term Management Plan.3.Basic Approach on Adoption of Accounting StandardsInternational Financial Reporting Standards was adopted on our annual securities report under the Financial Instruments and Exchange Act for the year ended March 31,2014 for the purpose of improving international comparability of financial information as well as enhancement and efficiency of our financial reporting.-25-4.Other InformationNotice:This flash report contains forward-looking statements about Mitsui and its consolidated subsidiaries.These forward-looking statements are based on Mitsuis current assumptions,expectations and beliefs in light of the information currently possessed by it and involve known and unknown risks,uncertainties and other factors.Such risks,uncertainties and other factors may cause Mitsuis actual consolidated financial position,consolidated operating results or consolidated cash flows to be materially different from any future consolidated financial position,consolidated operating results or consolidated cash flows expressed or implied by these forward-looking statements.These important risks,uncertainties and other factors include,among others,(1)business investment risks,(2)country risks,(3)risks regarding climate changes,(4)commodity market risks,(5)foreign currency risks,(6)stock price risks of listed stock Mitsui and its subsidiaries hold,(7)credit risks,(8)risks regarding fund procurement,(9)operational risks,(10)risks regarding employees compliance with laws,regulations,and internal policies,(11)risks regarding information systems and information securities,(12)risks relating to natural disasters,terrorism,violent groups and infectious diseases.For further information on the above,please refer to Mitsuis Annual Securities Report.Forward-looking statements may be included in Mitsuis Annual Securities Report and Quarterly Securities Reports or in its other disclosure documents,press releases or website disclosures.Mitsui undertakes no obligation to publicly update or revise any forward-looking statements.-26-(Millions of Yen)AssetsMarch 31,2023March 31,2022Current Assets:Cash and cash equivalents1,390,1301,127,868Trade and other receivables2,191,1812,303,140Other financial assets772,984997,862Inventories940,543949,663Advance payments to suppliers226,692183,370Other current assets153,303154,780Total current assets5,674,8335,716,683Non-current Assets:Investments accounted for using the equity method3,929,6363,387,371Other investments2,134,1032,347,414Trade and other receivables320,040319,977Other financial assets208,021167,845Property,plant and equipment2,300,6072,190,902Investment property282,497318,570Intangible assets277,316253,039Deferred tax assets105,197100,743Other non-current assets148,666120,746Total non-current assets9,706,0839,206,607Total15,380,91614,923,2905.Consolidated Financial Statements(1)Consolidated Statements of Financial Position-27-(Millions of Yen)Liabilities and EquityMarch 31,2023March 31,2022Current Liabilities:Short-term debt432,233281,831Current portion of long-term debt810,999410,257Trade and other payables1,510,3911,739,149Other financial liabilities621,9791,003,156Income tax payables49,33568,456Advances from customers234,946202,074Provisions58,95248,589Other current liabilities47,80255,114Total current liabilities3,766,6373,808,626Non-current Liabilities:Long-term debt,less current portion3,797,3284,185,375Other financial liabilities223,381147,031Retirement benefit liabilities36,99838,045Provisions310,513266,161Deferred tax liabilities648,263653,979Other non-current liabilities32,64828,657Total non-current liabilities5,049,1315,319,248Total liabilities8,815,7689,127,874Equity:Common stock342,560342,384Capital surplus381,869376,516Retained earnings4,840,5104,165,962Other components of equity868,963827,441Treasury stock(66,152)(107,098)Total equity attributable to owners of the parent6,367,7505,605,205Non-controlling interests197,398190,211Total equity6,565,1485,795,416Total15,380,91614,923,290-28-(Millions of Yen)Year endedMarch 31,2023Year endedMarch 31,2022Revenue:14,306,40211,757,559Cost:(12,910,174)(10,616,188)Gross Profit1,396,2281,141,371Other Income(Expenses):Selling,general and administrative expenses(702,809)(596,311)Gain(loss)on securities and other investments-net59,5248,705Impairment reversal(loss)of fixed assets-net(29,975)(19,117)Gain(loss)on disposal or sales of fixed assets-net19,43614,480Other income(expense)-net9,24814,909Total other income(expenses)(644,576)(577,334)Finance Income(Costs):Interest income47,75719,999Dividend income154,942196,505Interest expense(114,582)(47,324)Total finance income(costs)88,117169,180Share of Profit(Loss)of Investments Accounted for Using the Equity Method555,526431,263Profit before Income Taxes1,395,2951,164,480Income Taxes(240,668)(226,810)Profit for the Year1,154,627937,670Profit for the Year Attributable to:Owners of the parent1,130,630914,722Non-controlling interests23,99722,948(2)Consolidated Statements of Income and Comprehensive IncomeConsolidated Statements of Income-29-(Millions of Yen)Year endedMarch 31,2023Year endedMarch 31,2022Profit for the Year1,154,627937,670Other Comprehensive Income:Items that will not be reclassified to profit or loss:Financial assets measured at FVTOCI(238,455)163,811Remeasurements of defined benefit pension plans9,34318,946Share of other comprehensive income of investments accounted for using the equity method(12,811)(19,631)Income tax relating to items not reclassified45,527(55,126)Items that may be reclassified subsequently to profit or loss:Foreign currency translation adjustments(22,865)103,754Cash flow hedges56,921(69,905)Share of other comprehensive income of investments accounted for using the equity method276,047338,093Income tax relating to items that may be reclassified(17,444)(6,624)Total other comprehensive income96,263473,318Comprehensive Income for the Year1,250,8901,410,988Comprehensive Income for the Year Attributable to:Owners of the parent1,224,5881,370,647Non-controlling interests26,30240,341Consolidated Statements of Comprehensive Income-30-(Millions of Yen)Attributable to owners of the parentNon-controlling InterestsTotal EquityCommon StockCapital SurplusRetained EarningsOther Components of EquityTreasury StockTotalBalance as at April 1,2021 342,080 396,238 3,547,789373,786(89,473)4,570,420 252,467 4,822,887Profit for the year914,722914,72222,948937,670Other comprehensive income for the year455,925455,92517,393473,318Comprehensive income for the year914,722455,9251,370,64740,3411,410,988Transaction with owners:Dividends paid to the owners of the parent(148,206)(148,206)(148,206)Dividends paid to non-controlling interest shareholders(26,260)(26,260)Acquisition of treasury stock(174,918)(174,918)(174,918)Sales of treasury stock(234)(336)57111Cancellation of treasury stock(156,722)156,722-Compensation costs related to share-based payment3041,8822,1862,186Equity transactions with non-controlling interest shareholders(21,370)6,445(14,925)(76,337)(91,262)Transfer to retained earnings8,715(8,715)-Balance as at March 31,2022 342,384 376,516 4,165,962827,441(107,098)5,605,205 190,211 5,795,416Profit for the year1,130,6301,130,63023,9971,154,627Other comprehensive income for the year93,95893,9582,30596,263Comprehensive income for the year1,130,63093,9581,224,58826,3021,250,890Transaction with owners:Dividends paid to the owners of the parent(198,082)(198,082)(198,082)Dividends paid to non-controlling interest shareholders(22,380)(22,380)Acquisition of treasury stock(270,257)(270,257)(270,257)Sales of treasury stock(252)(284)53711Cancellation of treasury stock(310,666)310,666-Compensation costs related to share-based payment1763,9064,0824,082Equity transactions with non-controlling interest shareholders1,6995142,2133,2655,478Transfer to retained earnings52,950(52,950)-Balance as at March 31,2023 342,560 381,869 4,840,510868,963(66,152)6,367,750 197,398 6,565,148(3)Consolidated Statements of Changes in Equity-31-(Millions of Yen)Year endedMarch 31,2023Year endedMarch 31,2022Operating Activities:Profit for the year1,154,627937,670Adjustments to reconcile profit for the year to cash flowsfrom operating activities:Depreciation and amortization272,689296,396Change in retirement benefit liabilities(11,708)6,689Loss allowance18,85720,238(Gain)loss on securities and other investments-net(59,524)(8,705)Impairment(reversal)loss of fixed assets-net29,97519,117(Gain)loss on disposal or sales of fixed assets-net(19,436)(14,480)Interest income,dividend income and interest expense(123,867)(199,875)Income taxes240,668226,810Share of(profit)loss of investments accounted for using the equity method(555,526)(431,263)Valuation(gain)loss related to contingent considerations and others(2,137)(4,624)Changes in operating assets and liabilities:Change in trade and other receivables216,139(416,102)Change in inventories53,699(291,352)Change in trade and other payables(295,922)369,080Other-net(197,336)(69,024)Interest received84,25050,824Interest paid(96,668)(49,278)Dividends received574,208554,764Income taxes paid(235,451)(189,989)Cash flows from operating activities1,047,537806,896Investing Activities:Net change in time deposits37,048794Net change in investments in equity accounted investees(103,428)(27,067)Net change in other investments33,866(43,761)Net change in loan receivables(4,186)50,005Net change in property,plant and equipment(190,043)(156,636)Net change in investment property48,402(4,526)Cash flows from investing activities(178,341)(181,191)Financing Activities:Net change in short-term debt168,678(82,522)Net change in long-term debt(217,647)(54,976)Repayments of lease liabilities(65,454)(55,630)Purchases and sales of treasury stock(270,246)(174,915)Dividends paid(198,082)(148,206)Transactions with non-controlling interest shareholders(51,934)(98,076)Cash flows from financing activities(634,685)(614,325)Effect of Exchange Rate Changes on Cash and Cash Equivalents27,75153,338Change in Cash and Cash Equivalents262,26264,718Cash and Cash Equivalents at Beginning of Year1,127,8681,063,150Cash and Cash Equivalents at End of Year1,390,1301,127,868(4)Consolidated Statements of Cash Flows-32-“Interest income,dividend income and interest expense”,“Interest received”,“Interest paid”and“Dividends received”of Consolidated Statements of Cash Flows include not only interest income,dividend income and interest expense that are included in“Finance Income(Costs)”of Consolidated Statements of Income,but also interest income,dividend income,interest expense that are included in Revenue and Cost respectively and cash flows related with them.(5)Assumption for Going Concern:None1)Overseas2102)Japan871)Overseas1712)Japan45(6)Basis of Consolidated Financial StatementsScope of subsidiaries and equity accounted investees Subsidiaries Equity accounted investees(associated companies and joint ventures)A total of 477 subsidiaries and equity accounted investees are excluded from the above.These include companies which are sub-consolidated or accounted for under the equity method by subsidiaries other than trading subsidiaries.(7)Changes in Accounting EstimatesThe significant changes in accounting estimates in the Consolidated Financial Statements for the year endedMarch 31,2023 are as follows.Decrease of the fair value related to Russian LNG businessChanges in accounting estimates related to the Russian LNG business are described in(8)Note to Consolidated Financial Statements Impact of the Russia-Ukraine situation on the Russian LNG business.Impairment loss for the passenger railway business in BrazilAn impairment loss of 15,080 million in the Machinery&Infrastructure Segment engaged in the passenger railway business in Brazil was recorded in“Impairment reversal(loss)of fixed assets net”in the Consolidated Statements of Income by reducing the carrying amount of intangible assets to the recoverable amount of 41,264 million.The impairment loss was mainly related to a decrease in revenue and an increase in the discount rate.The recoverable amount above represented the value in use.The discount rate used to calculate the value in use is deemed to reflect the market average profit margin and the risks inherent to the cash-generating unit.-33-(Millions of Yen)Mineral&Metal ResourcesEnergyMachinery&InfrastructureChemicalsIron&Steel ProductsLifestyleInnovation&Corporate DevelopmentTotalOthers/Adjustments and EliminationsConsolidated TotalRevenue2,220,3163,517,0771,115,1923,160,663726,1803,306,954259,48914,305,87153114,306,402Gross Profit355,820316,446199,900209,29840,699153,736112,5911,388,4907,7381,396,228Share of Profit(Loss)of Investments Accounted for Using the Equity Method127,550108,476197,31327,36824,73550,71218,931555,085441555,526Profit for the Year Attributable to Owners of the Parent438,785309,382171,90870,94522,48454,84966,6771,135,030(4,400)1,130,630Core Operating Cash Flow436,661419,583182,90189,53117,99531,09946,5881,224,358(18,855)1,205,503Total Assets at March 31,20233,062,8363,009,4723,216,7941,773,664776,5312,504,0781,642,45915,985,834(604,918)15,380,916(Millions of Yen)Mineral&Metal ResourcesEnergyMachinery&InfrastructureChemicalsIron&Steel ProductsLifestyleInnovation&Corporate DevelopmentTotalOthers/Adjustments and EliminationsConsolidated TotalRevenue1,900,6532,597,392856,6032,861,701615,0762,700,478223,66511,755,5681,99111,757,559Gross Profit392,469145,414142,931182,98435,492142,96597,7431,139,9981,3731,141,371Share of Profit(Loss)of Investments Accounted for Using the Equity Method145,31232,347146,02920,71426,02041,08719,745431,2549431,263Profit for the Year Attributable to Owners of the Parent497,579114,017120,80868,94126,88961,49857,591947,323(32,601)914,722Core Operating Cash Flow552,789280,178143,97493,76412,41635,16146,5911,164,873(6,209)1,158,664Total Assets at March 31,20223,180,1972,960,4122,684,4781,692,949691,6302,428,5731,729,00615,367,245(443,955)14,923,290(8)Notes to Consolidated Financial Statements Segment InformationYear ended March 31,2023(from April 1,2022 to March 31,2023)Year ended March 31,2022(from April 1,2021 to March 31,2022)Notes:1.“Others/Adjustments and Eliminations”includes of the Corporate Staff Unit which provides financing services and operations services to the companies and affiliated companies.Total assets of“Others/Adjustments and Eliminations”at March 31,2022 and March 31,2023 includes cash,cash equivalents and time deposits related to financing activities,and assets of the Corporate Staff Unit and certain subsidiaries related to the above services amounting to 7,647,360 million and 8,215,000 million,respectively.2.Transfers between reportable segments are made at cost plus a markup.3.Profit for the Year Attributable to Owners of the parent of“Others/Adjustments and Eliminations”includes income and expense items that are not allocated to specific reportable segments,and eliminations of intersegment transactions.4.Total assets of“Others/Adjustments and Eliminations”at March 31,2022 and March 31,2023 includes elimination of receivables and payables between segments amounting to 8,091,315 million and 8,819,918 million,respectively.5.Core Operating Cash Flow is calculated by deducting the total of the“Changes in Operating Assets and Liabilities”from the“Cash Flows from Operating Activities”,and further deducting the“Repayments of lease liabilities”in the“Cash Flows from Financing Activities”from it,in the Consolidated Statements of Cash Flows.-34-Profit(numerator)Shares(denominator)Per share amountMillions of YenIn ThousandsYenBasic Earnings per Share Attributable to Owners of the Parent:Profit for the Year Attributable to Owners of the Parent1,130,6301,566,367721.82Effect of Dilutive Securities:Adjustments of effect of:Dilutive securities of associated companies(10)Share-based remuneration877Diluted Earnings per Share Attributable to Owners of the Parent:Profit for the Year Attributable to Owners of the Parent after effect of dilutive securities1,130,6201,567,244721.41Profit(numerator)Shares(denominator)Per share amountMillions of YenIn ThousandsYenBasic Earnings per Share Attributable to Owners of the Parent:Profit for the Year Attributable to Owners of the Parent914,7221,628,744561.61Effect of Dilutive Securities:Adjustments of effect of:Dilutive securities of associated companies(1)Stock options667Diluted Earnings per Share Attributable to Owners of the Parent:Profit for the Year Attributable to Owners of the Parent after effect of dilutive securities914,7211,629,411561.38 Earnings per ShareThe following is a reconciliation of basic earnings per share attributable to owners of the parent to diluted earnings per share attributable to owners of the parent for the years ended March 31,2023 and 2022:Year ended March 31,2023(from April 1,2022 to March 31,2023)Year ended March 31,2022(from April 1,2021 to March 31,2022)-35-Subsequent EventsAcquisition of Additional Shares in Aim Services Co.,Ltd.On April 6,2023(the acquisition date),the Company acquired an additional 50%equity share(equivalent to 277 stocks)of AIM SERVICES CO.,LTD.(Aim),which is a major food contracting service company in Japan under the Lifestyle Segment,from Aramark,a U.S.based company.The Company already held 50%share and acquired remaining balance of 50%shares while aiming to accelerate Aims growth by leveraging its comprehensive strengths.The acquisition price was USD 535 million(68,790 million),which was paid in cash and cash equivalents on hand.After the acquisition,Aim became a wholly owned subsidiary of the Company.Pursuant to the acquisition,Aim is reclassified from an equity-method investee to a wholly-owned subsidiary of the Company and the revaluation gain on the previously held equity interest of 50%shares is expected to be 43,449 million under“Gain on securities and other investments”in the Consolidated Statements of Income for the first quarter of the year ending March 31,2024.Additionally,the Company has begun the process of allocating purchase price to the assets acquired and liabilities assumed.However,this process is not completed and such allocation is yet to be finalized.Issuance of New Shares as Post-Delivery Restricted-Stock-Based RemunerationOn April 6,2023,the Board of Directors of the Company resolved to issue new shares as post-delivery restricted-stock-based remuneration under the remuneration system of tenure-linked restricted stock unit,and the payment of new shares was completed on April 28,2023.The details are as follows.(1)Class and number of shares issued:Common stock of the Company,129,424 shares(2)Issue price :3,906 yen per share(3)Total value of issue :505,530,144 yen(4)Pay-in date :April 28,2023(5)Categories and numbers of persons eligible for allocations,numbers of shares allocated:Managing Officers 7 persons,113,759 shares (including retired Managing Officers 6 persons,98,559 shares)Directors 1 person,15,665 shares The Fire Incident of Intercontinental Terminals CompanyOn March 17,2019(US time)a fire began at the Deer Park tank terminal of Intercontinental Terminals Company(“ITC”),a wholly owned U.S.subsidiary of Mitsui.The Deer Park tank terminal is located in the outskirts of Houston,Texas.The fire partially damaged tanks owned by ITC.ITC has resumed its operation after discussions with related authorities.Harris County Fire Marshals Office released its final report with respect to the fire incident on December 6,2019(US time)and the report classified the fire as accidental,while not specifying the cause of the fire.The cause of the fire is still under investigation by other relevant authorities.The profit and loss related to this incident recognized in the year ended March 31,2022 and 2023,and the outstanding balance of related provision as of March 31,2023 are immaterial.There are multiple lawsuits that have been brought against ITC in relation to this incident.These lawsuits are at the early stages and the ultimate outcome of these lawsuits is not expected to have significant impact on our consolidated financial position,operating results and cash flow.-36-Impact of the Security Situation in Northern Mozambique on LNG ProjectThe Company participates in the Mozambique LNG Project through Mitsui E&P Mozambique Area 1,its joint venture in the Energy Segment.In April 2021,all project personnel evacuated the project site due to the deteriorating security situation in northern Mozambique where the project site is located,and April 26,2021,the project operator,TotalEnergies of France,announced that it had declared force majeure under the Joint Operating Agreement.Progress has been seen in the restoration of order,stability and security in the region,and project partners are working with the government and relevant stakeholders for an early restart of the construction,while the exact restart date is still being reviewed.The Company does not expect a significant impact on our consolidated financial position,operating results and cash flow at this stage.Impact of the Russia-Ukraine Situation on the Russian LNG businessThe Russian LNG business in which the Company,its subsidiary,and the equity accounted investee in the Energy Segment have invested,financed and guaranteed,is affected by the Russia-Ukraine situation that has been ongoing since February 2022 and the resulting sanctions against Russia,etc.Based on discussions with each partner,the Company has evaluated its relevant assets and liabilities.In relation to the investment in Sakhalin II project that was held by Mitsui Sakhalin Holdings,a subsidiary of the Company,all the rights and obligations of Sakhalin Energy Investment Company,an original operator of the project,have been transferred to Sakhalin Energy LLC(“SELLC”)established based on Russian Presidential Decree(No.416)dated June 30,2022 and Resolution of the Government of the Russian Federation dated August 2,2022(No.1369).Accordingly,we submitted to the Government of the Russian Federation the notice of consent to take the ownership of SELLC.The notice of consent was approved and MIT SEL Investment,a newly established subsidiary of the Company,undertook ownership on September 2,2022.Consequently,we continue to invest in the Sakhalin II project before and after the aforementioned reorganization and it does not materially impact on the Consolidated Financial Statements.On the other hand,the situation as of March 31,2023 still remains uncertain as the final LLC members composition is not yet decided and the relevant LLC members agreement is not signed,etc.Under this situation,the fair value of our investment in the Sakhalin II project was measured using the income approach by expected present value technique and the probability-weighted average considering a scenario where the continuous dividend income is expected from SELLC and other scenarios.As a result,the fair value decreased by 125,970 million from the balance as of March 31,2022,and the valuation difference is recorded in“Financial assets measured at FVTOCI”in the Consolidated Statements of Comprehensive Income.The outstanding balances of“Other investments”in the Consolidated Statements of Financial Position related to this project as of March 31,2023 and 2022 were 98,505 million and 208,154 million,respectively.While the decision on the new LLC member has been acknowledged by Order of the Government of the Russian Federation dated April 11,2023(No.890),the Company has concluded there is no impact on the above fair value.The fair value may increase or decrease due to further changes in situation hereafter.In addition,the carrying amount of the investments in Japan Arctic LNG,an equity accounted investee that invests in and finances the Arctic LNG 2 project,and the assets value held by Japan Arctic LNG were revaluated during the current period based on the rating of the Russian Federation,however the profit and loss and comprehensive income recognized in the current period were immaterial.The outstanding balances of the investments and loans(*)as of March 31,2023 and 2022 were 15,759 million and 14,374 million,respectively.The balance of financial guarantees as contingent liabilities were 223,415 million and 182,160 million,respectively,and the provision for loss on guarantees included in Other financial liabilities were 18,213 million and 18,097 million,respectively.These estimates may be affected by uncertain future developments in Russia and Ukraine,and any further changes in the credit rating of the Russian Federation.Also,any changes in the Companys policies regarding its Russian LNG business may have a significant impact on the amounts of related investments,loans and financial guarantees in the Consolidated Financial Statements for the next fiscal year.(*)Investments and loans are the sum of“Investments accounted for using the equity method”,and loans(net of loss allowance)included in“Trade and other receivables”in the Consolidated Statements of Financial Position.-37-
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Unleash InnovationTSMC,Ltd02023TSMC PropertyUnleash Innovation2023 First Quarter Earnings Conference April 20,2023Unleash InnovationTSMC,Ltd12023TSMC PropertyAgendaWelcomeJeff Su,IR Director1Q23 Financial Results and 2Q23 OutlookWendell Huang,CFOKey Messages Wendell Huang,CFO C.C.Wei,CEOQ&AUnleash InnovationTSMC,Ltd22023TSMC PropertySafe Harbor NoticeTSMCs statements of its current expectations are forward-looking statements subject to significant risks and uncertainties and actual results may differ materially from those contained in the forward-looking statements.Information as to those factors that could cause actual results to vary can be found in TSMCs 2021 Annual Report on Form 20-F filed with the United States Securities and Exchange Commission(the“SEC”)on April 14,2022 and such other documents as TSMC may file with,or submit to,the SEC from time to time.Except as required by law,we undertake no obligation to update any forward-looking statement,whether as a result of new information,future events,or otherwise.Unleash InnovationTSMC,Ltd32023TSMC PropertyStatements of Comprehensive IncomeSelected Items from Statements of Comprehensive Income 1Q23(In NT$billions unless otherwise noted)GuidanceNet Revenue(US$billions)16.7216.7-17.519.9317.57-16.1%-4.8%Net Revenue508.63625.53491.08-18.7% 3.6%Gross Margin56.3S.5%-55.5b.2U.6%-5.9 ppts 0.7 pptOperating Expenses(55.31)(64.54)(48.61)-14.3% 13.8%Operating Margin45.5A.5%-43.5R.0E.6%-6.5 ppts-0.1 pptNon-Operating Items13.049.633.04 35.4% 328.6%Net Income to Shareholders of the Parent Company206.99295.90202.73-30.0% 2.1%Net Profit Margin40.7G.3A.3%-6.6 ppts-0.6 pptEPS(NT Dollar)7.9811.417.82-30.0% 2.1%ROE27.5A.76.2%-14.2 ppts-8.7 pptsShipment(Kpcs,12-equiv.Wafer)3,2273,7023,778-12.8%-14.6%Average Exchange Rate-USD/NTD30.4230.7031.3927.95-3.1% 8.8%*Diluted weighted average outstanding shares were 25,929mn units in 1Q23.*ROE figures are annualized based on average equity attributable to shareholders of the parent company.1Q234Q221Q221Q23Over4Q221Q23Over1Q22Unleash InnovationTSMC,Ltd42023TSMC Property1Q23 Revenue by Technology-50 100 150 200 250 300Revenue(NT$B)7nm5nm0.11/0.13um 2nm 2%0.25um and above 1/45nm 7(nm12%7nm and Below Revenue16nm 13%0.15/0.18um 5enm 6%7nm20%5nm31 nm 1%Unleash InnovationTSMC,Ltd52023TSMC Property1Q23 Revenue by Platform-14%-27%-19% 5%-5%-18%Growth Rate by Platform(QoQ)Smartphone34%Automotive7%HPC44E2%Others4%IoT9%SmartphoneAutomotiveOthersHPCIoTDCEUnleash InnovationTSMC,Ltd62023TSMC PropertyBalance Sheets&Key IndicesSelected Items from Balance Sheets(In NT$billions)Amount%Amount%Amountsh&Marketable Securities1,589.19 31.6%1,561.49 31.4%1,282.06 32.1counts Receivable148.05 2.9#1.344.7!3.435.3%Inventories216.074.31.154.4 0.125.0%Long-term Investments69.911.4h.931.4E.741.2%Net PP&E2,833.40 56.1%2,693.84 54.3%2,104.33 52.7%Total Assets5,045.84 100.0%4,964.78 100.0%3,992.68 100.0%Current Liabilities873.0917.34.2319.02.8720.6%Long-term Interest-bearing Debts854.7916.99.1016.9c2.7415.8%Total Liabilities1,952.95 38.7%2,004.29 40.4%1,671.21 41.9%Total Shareholders Equity3,092.89 61.3%2,960.49 59.6%2,321.47 58.1%Key IndicesA/R Turnover DaysInventory Turnover DaysCurrent Ratio(x)Asset Productivity(x)*Total outstanding shares were 25,932 mn units at 3/31/23*Asset productivity=Annualized net revenue/Average net PP&E961Q234Q221Q2234363893882.32.22.10.71.01.0Unleash InnovationTSMC,Ltd72023TSMC PropertyCash Flows*Free cash flow =Cash from operating activities Capital expenditures*(In NT$billions)1Q234Q221Q22Beginning Balance1,342.811,296.011,064.99Cash from operating activities385.24486.88372.17Capital expenditures(302.50)(336.84)(262.13)Cash dividends(71.30)(71.30)(71.31)Short-term loans 0.000.0030.53Bonds payable7.305.8019.60Investments and others23.68(37.74)(2.26)Ending Balance1,385.231,342.811,151.59Free Cash Flow82.74150.04110.04Unleash InnovationTSMC,Ltd82023TSMC Property2Q23 GuidanceRevenue to be between US$15.2 billion and US$16.0 billionBased on our current business outlook,management expects:And,based on the exchange rate assumption of 1 US dollar to 30.4 NT dollars,management expects:Gross profit margin to be between 52%and 54%Operating profit margin to be between 39.5%and 41.5%Unleash InnovationTSMC,Ltd92023TSMC PropertyRecap of Recent Major EventsPlease visit TSMCs website(https:/)and Market Observation Post System(https:/.tw)for details and other announcementsTSMC Board of Directors Approved NT$2.75 Cash Dividend for the Fourth Quarter of 2022 and Set June 15 as the Ex-Dividend Date,June 21 as the Record Date and July 13,2023 as the Distribution Date(2023/02/14)TSMC Board of Directors Approved the Issuance of Unsecured Corporate Bonds in the Domestic Market for An Amount Not to Exceed NT$60 Billion(2023/02/14)TSMC Board of Directors Approved the Issuance of 2,110,000 Shares of 2022 Employee Restricted Stock Awards(RSAs).In Addition,the Board Approved the Issuance of No More Than 6,249,000 Common Shares of RSAs for the Year 2023,Which Will Be Submitted to the 2023 Annual Shareholders Meeting for Approval(2023/02/14)TSMC Board of Directors Approved the Convening of the 2023 AGM on June 6,2023(2023/02/14)TSMC Offers the Industrys Most Successful FinFET Technology to Academia(2023/02/03)TSMC Presents 2022 Excellent Performance Award to Outstanding Suppliers(2023/01/18)Unleash InnovationTSMC,Ltd102023TSMC Propertyhttps:/
2023-07-17
11页
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Glencore Q1 2023 Production Report 1 NEWS RELEASE Baar,21 April 2023 First Quarter Production Repor.
2023-07-17
18页
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2023Q1 SALES&HIGHLIGHTSAPPENDICES2DISCLAIMERThis presentation is for information purposes only and does not constitute an offer or solicitation to sell or buy instruments,part of thecompany or the assets described here,in the US or any other country.This presentation contains forward-looking statements or information.While EDF believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions at the time they were made,these assumptions are fundamentally uncertain andimply a certain amount of risk and uncertainty which is beyond the control of EDF.As a result,EDF cannot guarantee that these assumptionswill materialise.Future events and actual financial and other outcomes may differ materially from the assumptions used in these forward-looking statements,including,and not limited to,potential timing differences and the completion of transactions described therein.Risks and uncertainties(notably linked to the economic,financial,competition,regulatory and climate backdrop)may include changes ineconomic and business trends,regulations,as well as those described or identified in the publicly-available documents filed by EDF with theFrench financial markets authority(AMF),including those presented in Section 2.2“Risks to which the Group is exposed”of the EDFUniversal Registration Document(URD)(under number D.23-0122)filed with the AMF on 21 March 2023,which may be consulted on theAMF website at www.amf-france.org or on the EDF website at www.edf.fr.The quarterly financial information is not subject to an auditorsreport.EDF and its affiliates do not undertake nor do have any obligation to update forward-looking information contained in this presentation toreflect any unexpected events or circumstances arising after the date of this presentation.2023 Q1 SALES&HIGHLIGHTSP.10OPERATIONAL DATAP.22MARKET DATAP.20FINANCIAL CONSOLIDATED STATEMENTSP.4STRATEGY AND INVESTMENTSTABLE OF CONTENTS342023Q1 SALES&HIGHLIGHTSSTRATEGY AND INVESTMENTSOperational data Consolidated financial statementsMarket dataStrategy and investmentsAll the welds concerned were upgraded as of 31 December 2022.Non-destructive inspection treatments are ongoing and stress-relieving heat treatments are almost completed(95%to date)The most complex penetration welds upgrading works on the reactor containment building are fully completed and compliantOther technical matters have mobilised the teams and are currently being examined by the French Nuclear Safety Authority(ASN),in particular the filtration sumps SIS/CHRM(1),the pressurizer safety release valves and the lesson-learnt from the technical issue at the Taishan No.1 reactor.Concerning this last issue,EDF is assessing the needs and conditions for the replacement of the potentially affected fuel assemblies with 64 new reinforced fuel assembliesEDF has updated the fuel-loading date from Q2 2023 to Q1 2024 and the estimated completion cost was increased from 12.7bn to 13.2bn(2)These elements take into account the difficulties encountered in modelling and carrying out the stress-relieving heat treatment operations on“complex geometry”weldsASN will examine the potential postponement of the vessel head replacement from 2024 to the end of the first operating cycle,in the second half of 2025,following a request from FramatomeCosts arising from post-commissioning modifications are not included in the construction cost of the projectFLAMANVILLE 3 EPR(1.6GW)UPGRADE ON THE MAIN SECONDARY CIRCUIT WELDS AND OTHER MATTERS OF ATTENTION(1)SIS=Safety injection system,CHRM=containment heat removal system.(2)As announced in the press release of 16 December 2022.In 2015 euros,excluding interim interest(see note 10.6 of the Consolidated financial statements as of 31 December 2022).SCHEDULE AND COSTS52023 Q1 SALES&HIGHLIGHTSOperational data Consolidated financial statementsMarket dataStrategy and investments6HINKLEY POINT C(1)See EDFs Press Release of 19 May 2022“Hinkley Point C Update”.(2)Cost net of operational action plans,in 2015 sterling,excluding interim interest and at a reference exchange rate for the project of 20151=1.23.(3)Based on inflation indexes as at 30 June 2022,the estimated cost at completion in current value could reach 32.7bn.The real cost remains unchanged.2023 Q1 SALES&HIGHLIGHTSConclusions of the last schedule and cost review for the two Hinkley Point C reactors announced on 19 May 2022(1):-The start of electricity generation for Unit 1 is targeted for June 2027;the risk of further delay of the two units is assessed at 15 months,assuming no additional effects of the war in Ukraine.The risk of additional delays and budget overruns is increasing-The project completion cost was estimated,during this review,in the range of 201525bn to 201526bn(2),corresponding to 31bn to 32bn in current value based on the inflation indexes available at end-2021(3)-The schedule and cost of electromechanical works and of final testing were not reviewed at this stage of the projectKEY DATAThe 768-tonne Reactor Cavity Pool has been safely lifted into Unit 1s Reactor BuildingThe Reactor Pressure Vessel of Unit 1 has arrived at Hinkley Point CThe Reactor Building Equipment Hatch cover and the first Instrumentation and Control(I&C)cabinets have been deliveredc.46%of total concrete has been poured,and c.14%of mechanical,electrical,heating,ventilation and air conditioning equipments have been manufactured.These progresses are behind the planned trajectoryand action plans are being setSCHEDULE AND COST REVIEWThe agreements between EDF and CGN include a compensation mechanism of certain additional costs by EDF in case of overrun of the initial budget or delays.This mechanism was triggered in January 2023.This arrangement is part of a Shareholders bilateral agreement signed between EDF and CGN in September 2016 and is subject to a confidentiality clauseAs the projects total financing needs exceed the contractual commitment of the shareholders,shareholders will be asked to provide additional equity on a voluntary basis in H2 2023(estimation).The probability that CGN will not fund the project beyond its committed equity cap is high.In the event that CGN does not allocate voluntary equity,it is likely that EDF will have to contribute in place of CGN,as soon as CGN has contributed its share of committed equityCONSTRUCTION PROGRESSOperational data Consolidated financial statementsMarket dataStrategy and investmentsSIZEWELL C72023 Q1 SALES&HIGHLIGHTSPROGRESSMAIN ASPECTSFINAL INVESTMENT DECISION(FID)Project of 2 UK European Pressurised Reactors(EPR)at Sizewell on the Suffolk coast for a total capacity of 3.26GWPower supply to 6 million households for around 60 years Second of a kind UK EPR following Hinkley Point C,replication as much as possible of the Hinkley Point C design and supply chainThe power plants construction remains subject to EDF taking a FID.It will be subject to the fulfilment of some conditions including:-Securing project financing-A return on capital expected by EDF,as an investor of up to 19,99%,in line with its investment policy-The granting of the remaining required consents,in particular subsidy control clearance-The finalisation of the GSP-An agreement with the UK Government on the base case estimate of costs at completion and schedule-The finalisation of the key EDF contracts to be signed at FID-The ability of EDF to deconsolidate the project in the Groups financial statements(including in the calculation of the economic indebtedness by the rating agencies)Should EDF decide not to take a FID,the UK Government would have a right to exercise an option over the land purchase or over EDFs shares in Sizewell CSupport from UK GovernmentAt 31 March 2023,the UK Government held a 40%shareholding in the project,with EDF owning the remaining 60%The UK Government will increase its shareholding through 2023 until it reaches parity with EDF as a 50%ownership,in view of an expected FID by EDF in 2024FinancingEDF intends to be a minority shareholder from FID with no more than 19.99%and to supply the EPR design and key nuclear equipmentThe project is eligible for funding under the Regulated Asset Base(RAB)model,the terms of which are currently under discussion with the UK Government as is the Government Support Package(GSP)The financing terms of the project are not defined at this stageOrganisationOrganisation and collaboration schemes with Hinkley Point C,that will have to be consistent with the deconsolidation objectives of EDF,are being analysed to secure the benefits of the replication of the Hinkley Point C project Licenses and permitsThe ONR(Office for Nuclear Regulation)confirmed in July 2022 that almost all the regulatory requirements were satisfied to grant a Nuclear Site LicenseDevelopment Consent Order(DCO)granted in July 2022.A request for judicial review has been launched in the UKThe Environment Agency issued in March 2023 the three environmental permits required for the plant to operateOperational data Consolidated financial statementsMarket dataStrategy and investments8STRESS CORROSION PHENOMENON(SC)(1)2023 Q1 SALES&HIGHLIGHTS(1)See Information notes of 8 March 2023,of 17 March 2023 and Press Releases of 16 March 2023 and of 26 April 2023.(2)Most sensitive reactors:the 4 N4 series reactors of 1,450MW and the 12 P4 series reactors of 1,300MW.(3)6 reactors not treated(Belleville 1,Belleville 2,Cattenom 2,Golfech 2,Nogent 1,Nogent 2).As of March 2023,among the 16 most sensitive reactors(2)to SC detected in the auxiliary circuits of the main primary circuit:The 40 less sensitive reactors will be inspected by the end of 2025 during the planned outagesIn March 2023,a SC defect detected on a weld that was subject to a double repair in the RIS system of Penly 1.The pipe has been replaced to dateIdentification of 320 welds(repaired during the construction),of which 69 identified as the most sensitive to SCEvolution in EDFs strategy:acceleration of the inspection of the welds(repaired at the time of construction),during scheduled maintenance outagesASN considers the schedule appropriate On the basis of the control strategy,estimate of nuclear output in France for 2023 remains in the range 300-330TWh sections of pipe replaced on 10 reactors preventive replacement of impacted lines by end of 2023 of the 6 remaining reactors(3)Operational data Consolidated financial statementsMarket dataStrategy and investments9ESG PROGRESS TOWARDS AN INTEGRATED PERFORMANCE(1)See Press Release of 21 February 2023.(2)See Press Release of 9 March 2023.EDF IN THE TOP 8%ASSESSED FOR SUPPLIER ENGAGEMENT ON CLIMATE CHANGE EDF included in CDP Supplier Leaderboard thanks to its engagement with clients on climate change EDF also recognised by LOral as a“best in class”supplier and signed with the company several contracts:Corporate Power Purchase Agreement,aggregating contract and supply of electricity for the production sites(1)NEW MILESTONES IN CSR GOVERNANCE From 2023 and ahead of CSRD,annual ESG results and the reporting on EU taxonomy will be reviewed by a joint meeting of the audit committee&the corporate responsibility committee of EDF BoardIn April 2023,the Co-Chair of EDF groups stakeholder advisory committee presented the outcomes of the committee and discussed common agenda with the board on strategic ESG issues to EDFs corporate responsibility committee EDF PULSE START-UP AWARDSThe 4 winners of the EDF Pulse start-up award develop solutions in:low carbon output low carbon consumption decarbonisation of digital usage simpler&safer companiesEDF provides them with technological,commercial and marketing support and has granted each a financial aid of 30k(2)With the EDF Pulse Awards,the EDF Group is actively strengthening the synergies between its employees and the world of start-ups to stimulate innovation,which is essential for achieving carbon neutrality2023 Q1 SALES&HIGHLIGHTS102023Q1 SALES&HIGHLIGHTSOPERATIONAL DATAOperational data Consolidated financial statementsMarket dataStrategy and investments11KEY OPERATIONAL INDICATORS Q1 20232023 Q1 SALES&HIGHLIGHTS85.2TWhNuclear outputFrance-7.1%vs Q1 20229.0TWh-21.5%vs Q1 2022Nuclear outputUnited Kingdom-2.1%vs Q1 20229.2TWhRenewable output(Group excl.hydro France)Hydro outputmainland Francevs 54gCO2/kWh Q1 202246gCO2/kWhCarbon intensity(Group)7.8TWh 5.4%vs Q1 20227.3GW grossvs 7.9GW Q1 2022Wind and Solar capacities under construction(Group)Operational data Consolidated financial statementsMarket dataStrategy and investments12FRANCE NUCLEAR OUTPUTNuclear output in France amounted to 85.2TWh for Q1 2023,down by 6.5TWh from Q1 2022.This decrease is explained by a lower nuclear fleet availability,mainly due to outages for the controls and repairs on the pipes affected by the stress corrosion phenomenon,and to the impacts of social movements35.264.891.730.859.685.2JanuaryFebruaryMarch2022 cumulative output2023 cumulative output-12.5%(in TWh)-7.1%-8.0 23 Q1 SALES&HIGHLIGHTSOperational data Consolidated financial statementsMarket dataStrategy and investments13FRANCE:UPSTREAM/DOWNSTREAM ELECTRICITY BALANCENB:EDF excluding French islands electrical activities.(1)Hydro output after deduction of pumped volumes:7.5TWh in Q1 2023/7.5TWh in Q1 2022.(2)Including hydro pumped volumes of 1.6TWh in Q1 2023/1.9TWh in Q1 2022.2023 Q1 SALES&HIGHLIGHTSIn TWh Q1 2023vs.Q1 2022OUTPUT/PURCHASECONSUMPTION/SALES Q1 2023vs.Q1 2022-6.4-6.4In TWh116.3-6.5-0.8 2.1-0.2-1.0116.3NuclearHydro(1)ThermalLT&Structured purchasesPurchase obligationsStructured sales and others(2)ARENH supplyEnd-customers14.94.32.79.285.2-1.1 0.171.510.231.2 1.5Net market sales3.3-6.9including:Market offers:34.7Regulated tariffs:36.8including: 1.7:Market offers-2.8:Regulated tariffsOperational data Consolidated financial statementsMarket dataStrategy and investmentsUnfavourable hydro conditions in Q1 2023 even lower than Q1 2022:hydraulic conditions index of 0.72 in Q1 2023 vs 0.74 in Q1 2022Hydraulic reservoirs filling rate in France at 48%at end-March 2023: 8 points above historical averageFRANCE HYDRO OUTPUT(1)Hydropower excluding electrical activities on French islands,before deduction of pumped volume consumption.(2)Production after deduction of pumped volume consumption:7.5TWh in Q1 2022/7.5 TWh in Q1 2023.3.86.49.44.16.59.2end-Januaryend-Februaryend-March2022 cumulative output2023 cumulative output(2)-2.1%vs end-March 2022(in TWh)(1)(1)4000000%MarchNormal hydro conditions levelMonthly mins and max between 2013 and 202220222021Dec.Sept.June202314 1.6% 7.9 23 Q1 SALES&HIGHLIGHTSOperational data Consolidated financial statementsMarket dataStrategy and investments3.3-0.211.516.449.586.173.394.06.05.05.09.015.915.215.217.454.954.956.056.501/08/202101/02/202201/08/2022 01/02/2023Energy fees(5)TURPECapacityCost to serve(4)and marginCatch-up(6)(1)Source:Journal Officiel.(2)The figures are based on an average calculation on customers portfolio at the Regulated Sales Tariffs at end-2021(latest available database to date).(3)Due to rounding,the total is not strictly equal to the sum of the components.(4)Including cost of Energy Efficiency Certificates.(5)For 2022 and 2023,this part takes into account the tariff cap for the current year.In February 2023,in particular,this part includes the catch-up under the 2022 cap and a discount of 143.2/MWh under the 2023 tariff cap.This discount is compensated by the CSPE under the finance law for 2023 and will therefore not be subject to a catch-up in 2024.(6)Remaining tariff increase decided in Year-1 but invoiced in Year 1.15REGULATED SALES TARIFFS IN FRANCE:CHANGE IN 2021-2023RESIDENTIAL BLUE TARIFF EXCLUDING TAXES(1)(2)AVERAGE BILL BREAKDOWN VAT INCLUDED(BLUE RESIDENTIAL CUSTOMER)161.1(3)193.3161.1(3)01/08/202274.7106.1105.0136.854.954.956.056.522.51.01.01.043.441.441.639.901/08/202101/02/202201/08/2022 01/02/2023203.5(3)203.6234.2TICFETURPETaxesProcurementand commercial costs,net of state compensation(5)(in/MWh)(in/MWh)129.7(3)195.5 30% 42% 74% 28% 24.3% 31.3/MWh 4.0% 7.7/MWh 15.0% 30.6/MWh 20.0% 32.2/MWh2023 Q1 SALES&HIGHLIGHTSOperational data Consolidated financial statementsMarket dataStrategy and investments(1)Taking into consideration the closure of Tihange 2(Belgium).(2)Including sea energy:0.24GW at 31 March 2023.(3)Taking into consideration the disposal of the participation in Sloe(Netherlands).(4)Taking into consideration the end of generation at West Burton A(the UK).(5)This split is based on targets.Although management believes that this split is reasonable,investors are cautioned that such data is subject to numerous risks and uncertainties that could cause actual results and developments to differ materially from those expressed herein.16INSTALLED CAPACITY AS OF 31 MARCH 20232023 Q1 SALES&HIGHLIGHTS(in GW)Total net capacity of EDF Group,including shares in associates and joint venturesInvestments in associates and joint venturesConsolidated capacity of EDF GroupNuclear(1)67.856%-0.267.959%Hydro(2)22.619%1.021.519%ENR13.411%2.910.59%Gas(3)11.19%-0,311.410%Fuel oil3.73%0.23.53%Coal(4)3.02%1.81.21%Total121.5100%5.5116.0100%of installed consolidated capacities at end-March 2023 and c.94%of investments in 2022 were low-carbon.EDF will continue to decarbonise its capex in the future,in line with its net zero trajectory.Notably,for the period 2023-2026,the capex will be split between 50%nuclear,15%renewables and 35%others mainly corresponding to networks(5)Operational data Consolidated financial statementsMarket dataStrategy and investments17RENEWABLES:INSTALLED CAPACITY AND CAPACITY UNDER CONSTRUCTION,AS OF 31 MARCH 2023(1)Gross capacity:total capacity of the facilities in which EDF has a stake.(2)Net capacity:capacity corresponding to EDFs stake.2023 Q1 SALES&HIGHLIGHTS(in MW)Gross(1)Net(2)31/12/202231/03/202331/12/202231/03/2023Wind under construction2,7832,9481,6621,727Solar under construction4,3474,3343,0733,049Capacity under construction 7,1307,2824,7354,777Wind 14,55214,1489,5749,548Solar7,4277,4393,5913,609Wind&Solar installed capacity 21,97921,58713,16513,157Biomass and geothermal-232232Renewable(excl.hydro)installed capacity-13,39713,389Hydraulic-22,57722,580Renewable installed capacity-35,97435,969Operational data Consolidated financial statementsMarket dataStrategy and investments18ELECTRICITY OUTPUT(1)Hydro output includes tidal energy for 136GWh in Q1 2022 and 123GWh in Q1 2023.Hydro output after deduction of pumped volumes is 8.2TWh in Q1 2022 and 8.3TWh in Q1 2023.(2)End of generation at West Burton A on 31/03/2023,last coal plant in the UK owned by EDF.2023 Q1 SALES&HIGHLIGHTSOutput from fully consolidated entities(in TWh)Q1 2022Q1 2023Nuclear104.877.778%Total ENR16.812.014%Hydro(1)10.160%9.958%Wind5.834%6.337%Solar0.74%0.64%Biomass0.21%0.21%Gas11.48%9.27%Fuel oil1.41%1.21%Coal(2)1.01%0.20%Group135.41003.3100%Operational data Consolidated financial statementsMarket dataStrategy and investmentsn.s.=not significant.(1)Including direct CO2 emissions,excluding life cycle analysis(LCA)of fuel and production means.(2)Power generation in ZNI:Zones non interconnectes corresponding to overseas departments and Corsica-(mainly island territories)and Electricit de Strasbourg(ES).(3)End of generation at West Burton A on 31/03/2023,last coal plant in the UK owned by EDF.(4)Carbon intensity corresponds to CO2emissions in relation to the Groups electricity and heat generation.The EDF Groups heat generation amounts to 8.3TWh in Q1 2023(vs 9.3TWh in Q1 2022).19CO2EMISSIONS(1)2023 Q1 SALES&HIGHLIGHTSCO2emissions from fully consolidated entities Emissions from the heat and power generation by segmentIn ktIn g/kWh(4)Q1 2022Q1 2023Q1 2022Q1 2023France Generation and supply activities1,84123%1,1982012France Regulated activities(2)88311u312Q3480Dalkia1,74522%1,626278187United Kingdom(3)111102Italy2,10127%1,83830)9320Other international1,14115g111!7173Framatome and Other activities n.s.-n.s.-n.s.n.s.Group7,834100%6,111100T46202023Q1 SALES&HIGHLIGHTSCONSOLIDATED FINANCIAL STATEMENTSOperational data Consolidated financial statementsMarket dataStrategy and investments(1,926)(3,187)12,93823,0396,0006,3635065351,9922,1627389543,4297,1567,0015,9141,4971,8873,4082,938 10,101 363 61 136 197 3,909(1,143) 375(410)(1,411)Q1 2022Q1 2023France Generation&supply activitiesFrance Regulated activities21(1)Organic change at comparable scope,accounting standards and exchange rates.(2)With no EBITDA impacts.2023 Q1 SALES&HIGHLIGHTSIn mORGANIC CHANGE: 34.6%(1)France Generation&supply activitiesFrance Regulated activitiesUnited KingdomOther internationalItalyDalkiaOther activitiesFramatomeEDF Renewables47,76135,583ItalyEDFRenewablesDalkiaFramatomeScope&forex&inter-segment eliminationUnited KingdomOther internationalOtheractivitiesInter-segment elimination Higher output due to commissionings&price effects Downstream sales at higher prices Resale of purchase obligations at higher prices(2) Rise in energy prices&in sales tariffs in power&gas Positive price effects-Lower volumes distributed-Sharp decrease in wholesale gas volumes&prices Good EDF Trading performance Higher sales in fuel in the USA and services in Germany-Negative gas volume effect on wholesale&downstream markets Commercial momentum&cogeneration output&price effectIn Belgium: Positive price effectQ1 2023 GROUP SALES 222023Q1 SALES&HIGHLIGHTSMARKET DATAOperational data Consolidated financial statementsMarket dataStrategy and investments23COMPARATIVE CREDIT RATINGSSources:rating agencies as of 27/04/2023.(1)Update of the outlook of EDF SA by S&P on 14 December 2022.(2)Update of the rating and outlook of EDF SA by Moodys on 21 February 2022.(3)Update of the outlook of EDF SA by Fitch on 3 April 2023.2023 Q1 SALES&HIGHLIGHTSA S&P ratingsMoodys ratingsFitch ratingsEDFBBB stable(1)Baa1 negative(2)BBB stable(3)EngieBBB stableBaa1 stableA-stableTotalEnergiesA stableA1 stableAA-stableEDPBBB stableBaa3 positiveBBB stableSSEBBB positiveBaa1 stableBBB stableIberdrolaBBB stableBaa1 stableBBB stableEnelBBB negativeBaa1 negativeBBB stableE.ONBBB stableBaa2 stableBBB stableRWEn.d.Baa2 stableBBB stableEngieIberdrolaE.ONEnelBaa3BBB A-ABaa1A3A2A1EDFSSEMoodys ratingsBaa2BBBBBB-S&P ratingsEDPTotalEnergiesOperational data Consolidated financial statementsMarket dataStrategy and investments24IMPORT BALANCE AND AVERAGE SPOT PRICES IN Q1 20232023 Q1 SALES&HIGHLIGHTS(1)Change in average prices vs Q1 2022.(2)Trade(Source:RTE&ENTSO-E Transparency Website)and change vs Q1 2022.(3)Introduction of flow-based coupling mechanism from 21 May 2015 for the entire CWE(France,Benelux,Germany).Average observed spot market price for Q1 2023:EPEXSPOT:France&GermanyN2EX:United-KingdomOMIE:SpainGME:Italy(Prezzo Unico Nazionale)APX:NetherlandsBELPEX:BelgiumThe average decrease in electricity spot prices of-101.9/MWh vs Q1 2022 in France was attributable to the decrease in commodity prices,especially gas prices from the last quarter of 2022In Q1 2023,a decrease in nuclear generation in France(-6.5TWh vs Q1 2022)impacted mainly by social movements.However,it was partly compensated by the increase in renewable generation(wind and solar)( 3.7TWh vs Q1 2022).Fossil fuel power generation was reduced(-2.1TWh)159.9/MWh130.3/MWh115.8/MWh121.4/MWh144.1/MWh96.3/MWh127.4/MWh-86.0/MWh(1)-94.8/MWh(1)-68.8/MWh(1)-101.9/MWh(1)-89.4/MWh(1)-80.6/MWh(1)-133.1/MWh(1)CWE(3)2.5TWh 0.2TWh(2)5.3TWh 2.7TWh(2)4.2TWh 1.8TWh(2)1.4TWh-1.2TWh(2)0.3TWh 0.0TWh(2)6.0TWh 1.8TWh(2)9.4TWh-0.7TWh(2)2.9TWh 2.0TWh(2)1.6TWh 0.7TWh(2)5.7TWh 0.5TWh(2)Export balance France:3.3TWh(importer in Q1 2022:0.6TWh)Exports:21.3TWh(15.5TWh in Q1 2022)Imports:18.0TWh(16.1TWh in Q1 2022)Consumption in France fell sharply(-9.1TWh)to 126.3TWh for Q1 2023,amid high prices and mild temperatures like in Q1 2022Operational data Consolidated financial statementsMarket dataStrategy and investments01002003004005006007008009001,0001,1001,200Apr-21 May-21Jun-21Jul-21Aug-21Sep-21Oct-21Nov-21 Dec-21Jan-22Feb-22 Mar-22Apr-22 May-22Jun-22Jul-22Aug-22Sep-22Oct-22Nov-22 Dec-22Jan-23Feb-23 Mar-23Electricity-Annual baseload contract France(EEX)Electricity-1-April Annual baseload contract UK(EDF Trading)Electricity-Annual baseload contract Italy(EDF Trading)25FORWARD ELECTRICITY PRICES IN FRANCE,THE UK AND ITALY(Y 1)FROM 01/04/2021 TO 31/03/20232023 Q1 SALES&HIGHLIGHTS(in/MWh)Operational data Consolidated financial statementsMarket dataStrategy and investments26FORWARD ELECTRICITY PRICES IN FRANCE,THE UK AND ITALY(Y 2)FROM 01/04/2021 TO 31/03/20232023 Q1 SALES&HIGHLIGHTS01002003004005006007008009001,0001,1001,200Apr-21 May-21Jun-21Jul-21Aug-21Sep-21Oct-21Nov-21 Dec-21Jan-22Feb-22 Mar-22Apr-22 May-22Jun-22Jul-22Aug-22Sep-22Oct-22Nov-22 Dec-22Jan-23Feb-23 Mar-23Electricity-Annual baseload contract France(EEX)Electricity-Annual baseload contract UK(EDF Trading)Electricity-Annual baseload contract Italy(EDF Trading)(in/MWh)Operational data Consolidated financial statementsMarket dataStrategy and investments27FRANCE:BASELOAD ELECTRICITY SPOT PRICES2023 Q1 SALES&HIGHLIGHTSSource:EPEX(daily average in/MWh)0100200300400500600700800AprMayJunJulAugSepOctNovDecJanFebMar04/2021-03/202204/2022-03/2023Max:8 March 2022=537.60/MWhMin:31 December 2022=4.38/MWhMin:8 August 2021=0.28/MWh1 April 2022 31 March 20231 April 2021 31 March 2022Max:30 August 2022=743.84/MWhBaseload electricity spot prices averaged 130.3/MWh in Q1 2023(-101.9/MWh vs Q1 2022).This is explained by:gas PEG spot prices done by 46.5%compared to Q1 2022(-44.3/MWh)because of high level of stocks and numerous LNG imports in Q1 2023;electricity consumption done by 6.7%;and renewable generation levels higher compared to Q1 20222023Q1 SALES&HIGHLIGHTSAPPENDICES
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Report on the first quarter 2023 Volvo GroupThe first quarter in briefIn Q1 2023,net sales increased by 25%to SEK 131.4 billion(105.3).Adjusted for currency movements,the increase was 17%.Adjusted operating income1 amounted to SEK 18,409 M(12,681),corresponding to an adjusted operating margin of 14.0%(12.0).Adjusted operating income excludes a negative effect of SEK 1,300 M from a restructuring provision in Buses.Reported operating income amounted to SEK 17,109 M(8,556).Currency movements had a positive impact on operating income of SEK 1,669 M.Earnings per share amounted to SEK 6.35(3.46).Operating cash flow in the Industrial Operations amounted to SEK 5,004 M(-5,400).Return on capital employed in Industrial Operations amounted to 30.3%(25.3).First quarter SEK M unless otherwise stated20232022Net sales 131,420 105,317 Adjusted operating income 18,409 12,681 Adjusted operating margin,.0 12.0 Operating income 17,109 8,556 Operating margin,.0 8.1 Income after financial items 16,797 9,027 Income for the period 12,934 7,071 Earnings per share,SEK 6.35 3.46 Operating cash flow in Industrial Operations 5,004 -5,400 Net financial position in Industrial Operations,SEK bn 77.7 59.5 Return on capital employed in Industrial Operations,0.3 25.3 Return on equity in Financial Services,.0 4.1 Return on equity in Financial Services excluding Russian and Belarus operations,.8 17.8 Net order intake,number of trucks 60,040 45,594 Deliveries,number of trucks 61,531 55,588 Net order intake,number of construction equipment 13,342 20,683 Deliveries,number of construction equipment 14,468 20,779 Net sales,SEK bnAdjusted operating income,SEK bn 1 Adjusted operating margin,%Return on capital employedIndustrial Operations,%3 105.3131.4Q1 2022Q2Q3Q4Q1 202312.718.412.0.0%Q1 2022Q2Q3Q4Q1 202325.30.3%Q1 2022Q2Q3Q4Q1 20231 For information on adjusted operating income,please see note 6.2 Excluding post-employment benefits and lease liabilities.3 12 months rolling.On the cover:Lineup of Mack Medium Duty Electric trucks.VOLVO GROUP 2 THE FIRST QUARTER 2023CEOS COMMENTSStrong start to 2023During Q1 2023,the Volvo Groups growth continued and our profitability took a step up.Sales increased in all business areas and in all regions.Net sales rose by 25%to SEK 131.4 billion,the highest so far for a first quarter.We increased the adjusted operating income by SEK 5.7 billion to SEK 18.4 billion,corresponding to a margin of 14.0%(12.0).Return on capital employed rose to 30.3%(25.3).A good profitability is important for us to be able to continue to increase our investments in the biggest technological shift ever in our industries.We are in a period when we are investing battery and fuel cell electric vehicles as well as internal combustion engines in parallel.Furthermore,the proposed Euro VII emissions legislation will put additional pressure on our investments in research and development of the combustion engine.Good profitability and financial strength are important to be able to drive these investments.In Q1,Industrial Operations generated an operating cash flow of SEK 5.0 billion(-5.4)and at the end of the quarter had net cash of SEK 77.7 billion,excluding pension and leasing liabilities.Despite a deteriorating economic outlook with high inflation and rising interest rates,transport volumes and infrastructure activity have continued to be solid in most of our markets.In combination with customers need to renew aging fleets,this contributes to good demand for our products.The high activity levels were also reflected in our service sales,which grew by 13justed for currency.The service business is a priority area because it contributes to increasing our customers productivity,strengthens customer relationships and provides stability over the business cycle.There is a continued pent-up need to replace aging fleets,which is noticeable on the truck side,where order intake rose as we gradually opened the order books for the second half of 2023.Overall,order intake rose by 32%to 60,040 trucks while we delivered 61,531 trucks,an increase of 11%compared to the previous year.This is both a delivery and production record for a Q1 and the result of hard work across the value chain.The disturbances in the European supply chains have not been as extensive as in the autumn and have contributed to increased productivity.The North American supply chain,on the other hand,remains unstable,which leads to production disturbances.During Q1,net sales in the truck business grew by 29%to SEK 89.6 billion,with strong sales in all regions.The adjusted operating margin increased to 14.2%(12.5).With the exception of China,activity in the construction industry has continued to be good in most of our markets.It is primarily driven by ongoing infrastructure investments and by the mining industry,which benefits from continued good commodity prices.Construction Equipments net sales increased by 11%to SEK 25.1 billion and the adjusted operating margin rose to 18.3%(12.4)with strong development for our Volvo products in North America and Europe.However,order intake decreased by 35%due to lower demand in China and weakening order intake in Europe.Seen in a longer perspective,the order books are large in most markets and we are working to shorten the long lead times.Demand for buses has continued to improve as travel has increased after the pandemic.This is particularly evident for coaches in North America and on the service side.In Q1,net sales in Buses rose by 40%and amounted to SEK 4.3 billion.Underlying profitability improved but remains low.The adjusted operating margin amounted to 4.2%(0.7),excluding a cost of SEK 1.3 billion to restructure the European operations.A good profitability is important for us to be able to continue to increase our investments in the biggest technological shift ever in our industries.For Volvo Penta,demand continued to be good in both the marine and industrial segments.Net sales rose by 33%to SEK 5.6 billion and the adjusted operating margin improved to 22.7%(18.3).For Volvo Financial Services,the credit portfolio continued to grow and the good activity levels at our customers in most regions was reflected in continued low credit losses.The adjusted operating income amounted to SEK 871 M(882).Together with our business partners,we continue to work hard to meet our customers needs while at the same time having a high degree of flexibility to quickly adapt to any changes in demand.We are operating from a position of strength and will continue to take advantage of growth opportunities in our efforts to move to fossil-free transport and infrastructure solutions to the benefit of our customers and our shareholders as well as society at large.Martin LundstedtPresident and CEO VOLVO GROUP 3 THE FIRST QUARTER 2023FINANCIAL SUMMARY OF THE FIRST QUARTER 2023Net salesIn Q1 2023,the Volvo Groups net sales amounted to SEK 131,420 M compared with SEK 105,317 M in the same quarter the preceding year.Sales increased in all business areas and in all regions.Adjusted for currency movements,net sales increased by 17%,of which vehicle sales by 18%and service sales by 13%.Operating incomeIn Q1 2023,adjusted operating income amounted to SEK 18,409 M(12,681),corresponding to an adjusted operating margin of 14.0%(12.0).The adjusted operating income in Q1 2023 excludes a negative effect of SEK 1,300 M from a restructuring provision in Buses.Q1 2022 excluded a negative effect from provisioning of assets related to Russia in an amount of SEK 4,125 M.For more information on adjusted operating income,please see Note 6.Compared with Q1 2022,the higher adjusted operating income is mainly an effect of price realization and favorable brand and product mix in Construction Equipment.This was partly offset by higher material costs as well as increased R&D and selling expenses.Currency movements,compared with Q1 2022,had a positive impact of SEK 1,669 M.Reported operating income in Q1 2023 amounted to SEK 17,109 M(8,556).Net salesFirst quarter Change%SEK M20232022Net sales per geographical regionEurope 57,521 46,565 24 North America 40,153 29,861 34 South America 9,566 8,836 8 Asia 16,488 14,115 17 Africa and Oceania 7,692 5,940 30 Total net sales 131,420 105,317 25 Net sales per product groupVehicles 100,732 80,035 26 Services 30,688 25,282 21 Total net sales 131,420 105,317 25 Timing of revenue recognitionRevenue of vehicles and services recognized at the point of delivery 119,878 96,339 24 Revenue of vehicles and services recognized over contract period 11,542 8,978 29 Total net sales 131,420 105,317 25 Consolidated Income StatementFirst quarter SEK M20232022Net sales 131,420 105,317 Cost of sales-96,112 -80,700 Gross income 35,308 24,617 Research and development expenses-6,492 -4,583 Selling expenses-7,894 -6,783 Administrative expenses-1,663 -1,321 Other operating income and expenses-1,980 -3,377 Income/loss from investments in joint ventures and associated companies-171 -123 Income/loss from other investments-127 Operating income 17,109 8,556 Interest income and similar credits 572 125 Interest expenses and similar charges-314 -328 Other financial income and expenses-570 674 Income after financial items 16,797 9,027 Income taxes-3,863 -1,956 Income for the period*12,934 7,071*Attributable to:Owners of AB Volvo 12,910 7,033 Non-controlling interest 24 38 12,934 7,071 Basic earnings per share,SEK 6.35 3.46 Diluted earnings per share,SEK 6.35 3.46 VOLVO GROUP 4 THE FIRST QUARTER 2023Financial itemsIn Q1 2023,interest income was SEK 572 M(125)as a consequence of higher interest on financial assets,whereas interest expenses amounted to SEK 314 M(328).Other financial income and expenses amounted to SEK-570 M(674).The change is primarily due to revaluation effects of financial assets and liabilities.Income taxesIn Q1 2023,income taxes amounted to SEK 3,863 M(1,956).The tax rate was 23%(22).Income for the period and earnings per shareIn Q1 2023,income for the period amounted to SEK 12,934 M(7,071).Earnings per share amounted to SEK 6.35(3.46).Operating cash flow in the Industrial OperationsDuring Q1 2023,operating cash flow in the Industrial Operations was positive in an amount of SEK 5,004 M(-5,400).Compared with Q1 2022,the improved operating cash flow is primarily related to a lower seasonal buildup of working capital of SEK 7,738 M(15,890)and higher operating income of SEK 16,238 M(10,241).This was partly off-set by higher tax payments of SEK 5,602 M(1,826).Operating cash flowIndustrial Operations,SEK bn-5.45.0Q1 2022Q2Q3Q4Q1 2023Volvo Group financial positionDuring Q1 2023,net financial assets in the Industrial Operations,excluding provisions for post-employment benefits and lease liabilities,increased by SEK 3.8 billion resulting in a net financial asset position of SEK 77.7 billion on March 31,2023.The change is mainly explained by a positive operating cash flow of SEK 5.0 billion.Including provisions for post-employment benefits and lease liabilities,the Industrial Operations net financial assets amounted to SEK 63.4 billion on March 31,2023.During Q1 2023,remeasurements of defined benefit pension plans had a negative impact of SEK 1.0 billion.The remeasurements were primarily an effect of lower discount rates,partly offset by higher return on assets.During Q1 2023 a decision was made to call the final tranche(EUR 0.6 billion)of the hybrid bond with payment date on March 10,2023.On March 31,2023,total equity for the Volvo Group amounted to SEK 178.7 billion compared with SEK 166.2 billion at year-end 2022.The equity ratio was 27.3%(26.4).On the same date the equity ratio in the Industrial Operations amounted to 35.8%(34.1).Net financial position excl.post-employment benefits and lease liabilitiesIndustrial Operations,SEK bn59.577.7Q1 2022Q2Q3Q4Q1 2023Blue-collar 53,486 51,779 52,114 Whereof temporary employees and consultants 8,567 7,064 8,732 White-collar 50,765 50,376 47,232 Whereof temporary employees and consultants 7,366 7,405 6,555 Total number of employees 104,251 102,155 99,346 Whereof temporary employees and consultants 15,933 14,469 15,287 Number of employeesMar 31 2023Dec 31 2022Mar 31 2022Number of employeesOn March 31,2023,the Volvo Group had 104,251 employees,including temporary employees and consultants,compared with 99,346 employees on March 31 2022.The number of blue-collar employees increased by 1,372 and the number of white-collar employees increased by 3,533.The increase in blue-collar employees is related to higher production levels and the increase in white-collar employees is related to higher development and transformational activities.VOLVO GROUP 5 THE FIRST QUARTER 2023IMPORTANT EVENTS FOR THE VOLVO GROUPTina Hultkvist resigned as CFOOn February 3,2023,it was announced that Tina Hultkvist had decided to leave her role as Volvo Group Chief Financial Officer and member of the Executive Board.Jan Ytterberg,previously Volvo Group Chief Financial Officer and member of the Executive Board and Volvo Group senior advisor,stepped in as acting CFO.Volvo Buses changes business model in Europe and has decided to close its bodybuilding factory in Wroclaw in 2024On March 16,2023,it was announced that Volvo Buses is changing its business model in Europe and will apply the same successful model as it has on several other markets.This means that Volvo Buses will focus its production on chassis and together with external bodybuilders offer customers in Europe a complete range of city and intercity buses as well as coaches for the premium segment.Consequently,Volvo Buses has decided to close its bodybuilding factory in Wroclaw,Poland,Q1 2024.Volvo Buses has signed a Letter of Intent regarding the divestment of its premises to Vargas Holding.A restructuring provision of SEK 1,300 M negatively impacted operating income in Q1 2023.Annual General Meeting of AB VolvoAB Volvos Annual General Meeting on April 4,2023,adopted the income statement and balance sheet as well as the consolidated income statement and the consolidated balance sheet.In accordance with the Boards proposal,the Meeting resolved that an ordinary dividend of SEK 7.00 per share and an extraordinary dividend of SEK 7.00 per share should be paid to the shareholders.April 6,2023 was decided as the record date for the right to receive dividends.The Board Members,Board Deputies and the President and CEO were discharged from liability for their administration during the 2022 fiscal year.Matti Alahuhta,Jan Carlson,Eric Elzvik,Martha Finn Brooks,Kurt Jofs,Martin Lundstedt,Kathryn V.Marinello,Martina Merz,Helena Stjernholm and Carl-Henric Svanberg were re-elected as members of the Board.Bo Annvik was elected as new member of the Board.Carl-Henric Svanberg was re-elected as Chairman of the Board.The follwing persons were elected as members of the Election Committee:Pr Boman(AB Industrivrden),Anders Oscarsson(AMF and AMF Funds),Magnus Billing(Alecta,subsequently replaced by Carina Silberg),Anders Algotsson(AFA Insurance)and the Chairman of the Board.The Meeting resolved that no fees shall be paid to the members of the Election Committee.The Annual General Meeting approved the Boards remuneration report.Guidelines for remuneration to the Volvo Group Executive Board were adopted in accordance with the Boards proposal.The Meeting resolved to approve the Boards proposed adoption of a new long-term incentive plan.Detailed information about the events is available at VOLVO GROUP 6 THE FIRST QUARTER 2023BUSINESS SEGMENT OVERVIEWNet salesFirst quarter Change%Change months Jan-DecSEK M20232022rolling2022Trucks 89,556 69,552 29 21 330,540 310,536 Construction Equipment 25,109 22,613 11 5 102,757 100,261 Buses 4,267 3,051 40 29 19,799 18,583 Volvo Penta 5,603 4,204 33 26 19,500 18,102 Group Functions&Other 3,779 3,848 -2 -16,307 16,376 Eliminations-1,195 -923 -4,427 -4,155 Industrial Operations 127,117 102,345 24 16 484,475 459,703 Financial Services 5,370 3,734 44 33 18,991 17,355 Reclassifications and eliminations-1,067 -762 -3,884 -3,579 Volvo Group 131,420 105,317 25 17 499,582 473,479 1 Adjusted for exchange rate fluctuations.Adjusted operating income First quarter Change months Jan-DecSEK M20232022rolling2022Trucks 12,715 8,690 46 37,847 33,821 Construction Equipment 4,587 2,810 63 15,022 13,244 Buses 178 20 781 511 353 Volvo Penta 1,271 769 65 3,031 2,530 Group Functions&Other-1,225 -488 151 -3,648 -2,911 Eliminations 12 -3 -26 12 Industrial Operations 17,538 11,798 49 52,789 47,049 Financial Services 871 882 -1 3,405 3,416 Reclassifications and eliminations-1 -2 2 Volvo Group adjusted operating income 18,409 12,681 45 56,195 50,467 Adjustments -1,300 -4,125 -1,930 -4,755 Volvo Group operating income 17,109 8,556 100 54,265 45,712 1 For more information on adjusted operating income,please see note 6Adjusted operating marginFirst quarter 12 months Jan-Dec 232022rolling2022Trucks 14.2 12.5 11.4 10.9 Construction Equipment 18.3 12.4 14.6 13.2 Buses 4.2 0.7 2.6 1.9 Volvo Penta 22.7 18.3 15.5 14.0 Industrial Operations 13.8 11.5 10.9 10.2 Volvo Group adjusted operating margin 14.0 12.0 11.2 10.7 Volvo Group operating margin 13.0 8.1 10.9 9.7 VOLVO GROUP 7 THE FIRST QUARTER 2023TRUCKSStrong growth and improved profitabilityIn Q1,net sales increased by 29%to SEK 89,556 MAdjusted operating income increased to SEK 12,715 M(8,690)with a margin of 14.2%(12.5)Order intake increased by 32%and deliveries by 11%Market developmentDuring Q1 2023,demand in both Europe and North America continued to be on a good level for both new and used vehicles as well as for services on the back of customers replacing aging fleets and continued good transport activity.In Brazil,demand in Q1 declined due to a prebuy that took place in 2022 ahead of a new emission legislation which was implemented on January 1,2023.The Indian market continued to grow as an effect of increased consumption levels,pent-up demand,and increased government expenditure on infrastructure.Demand in China started to show signs of recovery with contribution from various regional stimulus initiatives in infrastructure and towards consumer consumption.Orders and deliveriesIn Q1,the truck markets in most regions continued to be supply-driven on the back of production capacity limitations.Net order intake in Q1 increased by 32%to 60,040 trucks while deliveries increased by 11%to 61,531 trucks.In Europe,order intake increased by 25%to 31,290 vehicles and deliveries increased by 13%to 32,850 vehicles.Volvo Trucks total heavy-duty market share through February decreased to 17.9%(18.7)while the electric heavy-duty market share increased to 50.2%(32.0).Renault Trucks heavy-duty total market share decreased to 9.0%(9.6)and the electric heavy-duty market share decreased to 15.5%(18.7).Order intake in North America increased by 152%to 15,159 trucks while deliveries increased by 15%to 16,011 vehicles.Volvo Trucks heavy-duty truck market share through March decreased to 8.7%(9.8).Mack Trucks market share increased to 5.7%(5.3).In South America,order intake decreased by 29%to 5,212 trucks while deliveries decreased by 28%to 4,475 vehicles after the prebuy in 2022.Production rates have been reduced.In Brazil,Volvo Trucks heavy-duty trucks market share through March decreased to 21.8%(25.9).Order intake in Asia increased by 12%to 5,336 vehicles and deliveries increased by 55%to 5,742 vehicles,mainly driven by the Middle East.In Q1,order intake for fully electric trucks increased by 67%to 825(494)vehicles while deliveries increased by 254%to 683(193)vehicles.Order intake for the Indian joint venture,VE Commercial Vehicles,increased by 15%to 20,590 vehicles while deliveries increased by 12%to 20,017 vehicles.Deliveries from the Chinese joint venture,Dongfeng Commercial Vehicles decreased by 31%to 14,184 trucks.Total market developmentFirst quarter Change%Full yearForecastChange vs.previous forecastRegistrations,number of trucks2023202220222023Europe 29 heavy-duty 80,186 66,204 21 264,100 -Europe 30 heavy-duty 89,770 74,315 21 297,500 320,000 20,000North America heavy-duty(retail)79,433 62,134 28 309,916 320,000 20,000Brazil heavy-duty 21,454 20,049 7 97,856 80,000 unchangedChina medium-and heavy-duty 197,265 227,181 -13 566,130 650,000 unchangedIndia medium-and heavy-duty 117,318 101,869 15 350,797 400,000 unchanged1 EU29 includes Norway and Switzerland but excludes UK.EU30 includes UK.2 Previous year has been adjusted to exclude exports.VOLVO GROUP 8 THE FIRST QUARTER 2023Net order intakeFirst quarter Change%Number of trucks20232022Europe 31,290 24,984 25 Heavy-and medium-duty 26,055 19,631 33 Light-duty 5,235 5,353 -2 North America 15,159 6,017 152 South America 5,212 7,354 -29 Asia 5,336 4,766 12 Africa and Oceania 3,043 2,473 23 Total order intake 60,040 45,594 32 Heavy-duty(16 tons)49,901 36,861 35 Medium-duty(7-16 tons)4,831 3,272 48 Light-duty(16 tons)50,684 46,889 8 Medium-duty(7-16 tons)4,604 3,818 21 Light-duty(16 tons)49,901 36,861 35 Medium-duty(7-16 tons)4,831 3,272 48 Light-duty(16 tons)34,742 25,816 35 Medium-duty(7-16 tons)1,214 1,341 -9 Total Volvo 35,956 27,157 32 Renault TrucksEurope 13,923 14,047 -1 Heavy-and medium-duty 8,688 8,694 -Light-duty 5,235 5,353 -2 North America 50 65 -23 South America 127 116 9 Asia 1,104 1,409 -22 Africa and Oceania 537 504 7 Total Renault Trucks 15,741 16,141 -2 Heavy-duty(16 tons)8,528 9,065 -6 Medium-duty(7-16 tons)1,905 1,615 18 Light-duty(16 tons)6,268 1,816 245 Medium-duty(7-16 tons)1,665 215 674 Total Mack 7,933 2,031 291 VOLVO GROUP 29 THE FIRST QUARTER 2023DELIVERIESDeliveries of trucksFirst quarter Change%Number of trucks20232022DeliveriesEurope 32,850 29,089 13 Heavy-and medium-duty 26,702 24,276 10 Light-duty 6,148 4,813 28 North America 16,011 13,908 15 South America 4,475 6,245 -28 Asia 5,742 3,697 55 Africa and Oceania 2,453 2,649 -7 Total deliveries 61,531 55,588 11 Heavy-duty(16 tons)50,684 46,889 8 Medium-duty(7-16 tons)4,604 3,818 21 Light-duty(16 tons)34,705 33,050 5 Medium-duty(7-16 tons)1,084 811 34 Total Volvo 35,789 33,861 6 Renault TrucksEurope 15,661 13,451 16 Heavy-and medium-duty 9,513 8,638 10 Light-duty 6,148 4,813 28 North America 50 23 117 South America 81 128 -37 Asia 1,293 784 65 Africa and Oceania 411 354 16 Total Renault Trucks 17,496 14,740 19 Heavy-duty(16 tons)9,345 8,252 13 Medium-duty(7-16 tons)1,908 1,607 19 Light-duty(16 tons)6,388 5,211 23 Medium-duty(7-16 tons)1,570 1,307 20 Total Mack 7,958 6,518 22 VOLVO GROUP 30 THE FIRST QUARTER 2023This report contains forward-looking statements that reflect the Board of Directors and managements current views with respect to certain future events and potential financial performance.Forward-looking statements are subject to risks and uncertainties.Results could differ materially from forward-looking statements as a result of,among other factors,(i)changes in economic,market and competitive conditions,(ii)success of business initiatives,(iii)changes in the regulatory environment and other government actions,(iv)fluctuations in exchange rates and(v)business risk management.This report is based solely on the circumstances at the date of publication and except to the extent required under applicable law,AB Volvo is under no obligation to update the information,opinions or forward-looking statements in this report.VOLVO GROUP 31 THE FIRST QUARTER 2023Financial calendarReport on the second quarter 2023July 19 2023Report on the third quarter 2023October 18 2023ContactsMedia relations:Claes Eliasson 46 765 53 72 29Investor Relations:Christer Johansson 46 739 02 25 22Johan Bartler 46 739 02 21 93Anders Christensson 46 765 53 59 66Aktiebolaget Volvo(publ)5560125790Investor Relations,VGHQSE-405 08 Gteborg,SwedenTel 46 31 66 00 VOLVO GROUP 32 THE FIRST QUARTER 2023
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Earnings Report as of March 31,2023Deutsche BankContent2 Financial summary3 Results at a glance5 Strategy9 Group results13 Segment results22 Consolidated balance sheet24 Outlook27 Risks and opportunities30 Risk information42 Additional information42 Management and Supervisory Board43 Capital expenditures and divestitures43 Events after the reporting period44 Basis of preparation/impact of changes in accounting principles47 Total net revenues47 Earnings per common share48 Consolidated statement of comprehensive income48 ImpactofECBTargetedLonger-termRefinancing Operations(TLTRO III)49 Provisions49 Non-current assets and disposal groups held for sale50Non-GAAPfinancialmeasures56 Imprint 2 Deutsche Bank Financial summary Earnings Report as of March 31,2023 Financial summary Three months ended Mar 31,2023 Mar 31,2022 Group targets Post-tax return on average tangible shareholders equity1 8.3%8.1%Compound annual growth rate of revenues from 20212 6.7%N/A Cost/income ratio3 71.0s.4%Common Equity Tier 1 capital ratio 13.6.8%Statement of income Total net revenues,in bn.7.7 7.3 Provision for credit losses,in bn.0.4 0.3 Total noninterest expenses,in bn.5.5 5.4 Adjusted costs,in bn.4 5.4 5.4 Pre-provision profit,in bn.5 2.2 2.0 Profit(loss)before tax,in bn.1.9 1.7 Profit(loss),in bn.1.3 1.2 Profit(loss)attributable to Deutsche Bank shareholders,in bn.1.2 1.1 Balance sheet6 Total assets,in bn.1,307 1,343 Net assets(adjusted),in bn.7 1,019 1,016 Average interest earning assets,in bn.972 967 Loans(gross of allowance for loan losses),in bn.488 481 Average loans(gross of allowance for loan losses),in bn.488 478 Deposits,in bn.592 604 Allowance for loan losses,in bn.5.0 4.9 Shareholders equity,in bn.63 59 Sustainable finance volume(per quarter/year),in bn.8 22 20 Resources6 Risk-weighted assets,in bn.360 364 of which:operational risk RWA,in bn.59 60 Leverage exposure,in bn.1,238 1,164 Tangible shareholders equity(tangible book value),in bn.7 57 53 High-quality liquid assets(HQLA),in bn.208 214 Liquidity reserves in bn.241 246 Employees(full-time equivalent)86,712 83,000 Branches 1,499 1,669 Ratios Post-tax return on average shareholders equity1 7.4%7.2%Provision for credit losses as bps of average loans 30.5 24.4 Operating leverage9 3.3%4.8%Net interest margin 1.4%1.2%Loan-to-deposit ratio 82.4y.7%Leverage ratio(reported/phase-in)4.6%4.6%Liquidity coverage ratio 1435%Share-related information Basic earnings per share 0.63 0.57 Diluted earnings per share 0.61 0.55 Book value per basic share outstanding7 30.33 28.09 Tangible book value per basic share outstanding7 27.28 25.15 Dividend per share(with respect to previous financial year)1 Based on profit(loss)attributable to Deutsche Bank shareholders after AT1 coupon;for further information,please refer to“Additional Information:Non-GAAP Financial Measures”of this report 2 Twelve months period compared to full year 2021 3 Total noninterest expenses as a percentage of net interest income before provision for credit losses,plus noninterest income 4 The reconciliation of adjusted costs is provided in section“Additional Information:Non-GAAP Financial Measures;Adjusted costs”of this document 5 Defined as net revenues less noninterest expenses 6 At period end 7 For further information please refer to“Additional Information:Non-GAAP Financial Measures”of this report 8 Sustainable financing and investment activities are defined in the“Sustainable Financing Framework Deutsche Bank Group”which is available at investor-;in cases where validation against the Framework cannot be completed before the end of the reporting quarter,volumes are disclosed upon completion of the validation in subsequent quarters 9 Operating leverage is calculated as the difference between year-on-year change in percentages of reported net revenues and year-on-year change in percentages of reported noninterest expense Due to rounding,numbers presented throughout this document may not sum precisely to the totals provided and percentages may not precisely reflect the absolute figures Strong performance in volatile markets Improvement in pre-provision profit to 2.2bn in the quarter Ongoing disciplined expense management with efficiencies offsetting investments and inflation,reducing CIR to 71%Revenues up 5%YoY with higher contributions from Corporate Bank and Private Bank Well diversified mix of businesses creates opportunity to perform strongly even in challenging markets Hosted 2nd Sustainability Deep Dive to update on business strategies,commitments and policies Increased sustainable finance volumes by 22bn in Q1 2023 Strong balance sheet,positioned to navigate uncertainty;credit loss provisions contained proving robust risk management Sound liquidity metrics above targeted level,reflecting prudent steeringProfitabilityFranchiseSustainabilityResilienceFirst quarter of 2023RevenuesCET1RoTERoTE pro-rata annualized-bank leviesLCR7.7bnCumulative Sustainable Finance volumes238bn8.63%Continued progress across all divisions Increased net inflows,including into ESG products Developing the Xtrackers brand Continue to invest in platform transformation Deposit stability despite competitive environment Further 36 branches closed in Q1 Penultimate wave of Postbank IT migration successfully executed Strong underlying FIC revenue driven by robust client activity Continued development of core franchise Hiring of key O&A personnel across M&A and selected regions/sectorsCorporate BankInvestment BankOperating leverage Revenue growth YoYNet inflowsRoTEManagementfee margin New MNC mandates for working capital and global value chain reviews Merchant Solutions entry into APAC Strong Corporate Trust momentumAsset ManagementPrivate Bank 10knNet inflows ex Cash9bn27.7bpsConsecutive quarter of YoY Rates growthO&A QoQ share growthFirst quarter of 20235th 40bps33.3%5 Deutsche Bank Strategy Earnings Report as of March 31,2023 Strategy The following section provides an update on the progress of Deutsche Banks strategy implementation in the first quarter of 2023 and should be read in conjunction with the Strategy section provided in the Annual Report 2022.Global Hausbank In March 2022,the Group outlined its strategic and financial roadmap through 2025,which aims to position Deutsche Bank as a“Global Hausbank”,and communicated Deutsche Banks 2025 financial targets and capital objectives.The Global Hausbank strategy is underpinned by key themes which have become even more important in the light of the ongoing geopolitical and macro-economic challenges.In this environment,Deutsche Bank aims to leverage a more favorable interest rate environment,deploy its risk management expertise to support clients,and allocate capital to high-return growth opportunities.As sustainability becomes ever more important,the bank aims to deepen its dialogue and support for clients and broaden the agenda in respect of the banks own operations.As technology continues to evolve,the bank aims to reap further cost savings,accelerate the transition to a digital bank and expand upon strategic partnerships,which are already creating substantial value.Deutsche Banks key performance indicators 2025 Financial targets:Post-tax Return on Average Tangible Equity of above 10%for the Group Compounded annual growth rate of revenues of 3.5%to 4.5%Cost/income ratio of less than 62.5pital objectives:Common Equity Tier 1 capital ratio of approximately 13P%Total payout ratio from 2025 Deutsche Bank reaffirms its financial targets and capital objectives for 2025.Post-tax Return on Average Tangible Equity is a non-GAAP financial measure.Please refer to“Non-GAAP financial measures”of this report for the definitions of such measures and reconciliations to the IFRS measures on which they are based.Progress on strategy implementation In the first quarter of 2023,the Group made further progress towards its path to sustainable growth,despite turbulent conditions in the banking sector and macro-economic challenges.Deutsche Banks performance in the first quarter of 2023 demonstrated the resilience and strength of the franchise,profitability and balance sheet,as well as the importance of a Global Hausbank serving clients in volatile markets.Building on the progress made to date and opportunities in the market,the bank has identified three areas to accelerate the execution of its strategic agenda.First through operational efficiency:through targeted efficiency measures,the bank aims to increase cost saving ambitions by an additional 500 million to 2.5 billion from 2021,from 2.0 billion previously announced.Specific measures to meet this ambition include additional savings in the non-revenue generating workforce,further optimizing the distribution networks in the Private Bank,streamlining the mortgage origination platform as well as benefits in operations and process automation.Second,the bank will focus on capital efficiency by freeing up 15 to 20 billion in risk weighted assets from reductions in certain low return lending and mortgage portfolios,greater utilization of securitization and hedging optimization.These measures are expected to have minimal revenue impact but will enable the Group to increase returns,and re-allocate resources to more capital-accretive businesses,and support capital distributions.Third,the combination of cost and capital efficiency together with additional opportunities across markets positions the bank to outperform its existing revenue growth objectives through 2025.The Management Board changes announced by the bank in April 20223 aim to support this agenda.Furthermore,the bank will continue to invest into its platforms,and benefit from opportunities created by current market conditions to attract talent to strengthen advisory capabilities in various businesses and regions,especially in Wealth Management and Origination and Advisory,including in Asia.These actions are expected to accelerate the execution of the banks strategy and increase returns to shareholders over time.6 Deutsche Bank Strategy Earnings Report as of March 31,2023 Sustainability Sustainability has been a central component of Deutsche Banks“Global Hausbank”strategy and an important management priority of the bank.On March 2,2023,Deutsche Bank hosted its 2nd Sustainability Deep Dive where the bank announced additional measures to reinforce its net zero commitment.More details can be found on the banks webpage: bank continued to make progress in the first quarter of 2023 in implementing its target to achieve 500 billion in sustainable financing and investments by the end of 2025 by:Acting as sole mandated lead arranger and sustainability coordinator in a 5-year,120 million senior secured sustainability-linked term loan to Beontag Ltd.(Investment Bank)Acting as ESG coordinator and joint bookrunner in a 500 million inaugural sustainability-linked bond to IHO Holdings GmbH(Investment Bank)Facilitating 202 million structured export finance loan for the construction of two wind farms in Australia(Corporate Bank)Moreover,the Private Bank Germany and World Wide Fund For Nature(WWF)Germany signed an agreement for an initial two-year advisory service to further advance its sustainable finance offering.In addition,the bank invested into the Berlin-based start-up Plan A which offers carbon measurement solutions and services.Deutsche Bank also made progress in other areas of its sustainability strategy.The bank tightened its policy for financing thermal coal and set the ambition that at least 90%of the high emitting clients in the most carbon intensive sectors that engage in new corporate lending transactions with the bank shall have a net zero commitment in place from 2026 onwards.Moreover,the bank published an updated human rights statement and implemented a minimum sustainability score requirement for new or extended vendor contracts with a threshold of more than 500,000 per annum.7 Deutsche Bank Strategy Earnings Report as of March 31,2023 Deutsche Bank Businesses This section should be read in conjunction with the section Deutsche Bank:Deutsche Banks Organization in the Operating and Financial Review in the Annual Report 2022.Corporate Bank In the first quarter of 2023,Corporate Bank continued to make progress on the divisions strategic objectives,leveraging the divisions strong brand and deep client relationships and aiming to offer a full range of advisory and financing solutions for corporate treasurers.The business aims to remain the trusted partner for the German economy and build on its standing as the leading Corporate Bank in its home market.The division is also committed to connect financial institutions worldwide,a business where the business is one of the market leaders(source:SWIFT Euro peer benchmarking).The Corporate Banks initiatives target revenue growth with corporate clients across cash management and payments,including strengthening its fee-based business.As Corporate Bank seeks to grow its business with clients globally,the division commits to applying sound risk management principles in order to maintain its high-quality loan portfolio and strict lending standards.Equally,the division sees further potential to reduce its cost base from technology and front-to-back process optimization,as well as automation and location strategy.The Corporate Banks ambition is also to become a leader in ESG and drive the transition to a sustainable economy by supporting its corporate clients globally.Further developing ESG offerings will be an integral part of the Corporate Banks approach,building on its tradition on innovations for corporate clients.Additionally,the division expects investments into new products enabling new business models of the real economy,like merchant solutions,to contribute to future sustainable growth.Investment Bank In the first quarter of 2023,Investment Bank continued to execute against the divisions strategic priorities,delivering robust business performance despite a highly challenging market environment.Within Fixed Income and Currencies,whilst business revenues were lower year on year,this was against an exceptionally strong prior year quarter.Underlying performance was robust,and the division continued to provide a full suite of services to clients despite extreme volatility,specifically in interest rate markets following the collapse of Silicon Valley Bank,UBSs takeover of Credit Suisse and any related impacts.The Rates business demonstrated its recent development,growing revenues year on year despite the market environment,and the focused evolution of the Emerging Markets business also delivered revenue performance well above the historical average.The Financing franchise continues to focus on targeted and disciplined balance sheet deployment,with ongoing strong client demand.Origination and Advisory revenue decreased year on year,though in line with the industry fee pool and reflected a market share recovery compared to the fourth quarter of 2022.The division continues to assess selected focus areas of growth within Mergers&Acquisitions,while remaining mindful of the challenging revenue environment.Investment Banks focus on delivering front-to-back efficiency continues,with various programs in place to enhance client interaction,from the price discovery through to settlement.During the quarter the division was awarded FX Derivatives House of the Year at the IFR 2022 Awards and Flow Market-Maker House of the Year at the Risk Awards.ESG continues to be a strategic focus area for the Investment Bank.The Origination&Advisory business acted as ESG coordinator and joint bookrunner on IHO Holdings GmbH,500 million inaugural sustainability-linked bond and was joint bookrunner on Stellantis N.V.1,250 million inaugural green bond.Private Bank Private Bank Germany had a successful start in 2023 with strong revenue growth,partly driven by higher income from deposits in a rising interest rate environment.Deposit revenue growth was further accelerated in the first quarter of 2023 with the launch of deposit campaigns at both brands,Deutsche Bank and Postbank.Private Bank Germany maintained an overall stable loan book alongside further impacts of mortgage demand due to rising interest rates.Furthermore,first quarter marked the go-live of extended partnerships with Zurich and Talanx for insurance products and further strategic progress was made in restructuring Private Bank Germanys branch network and other efficiency measures.Private Bank Germany also continued to execute the migration of Postbank clients onto the Deutsche Bank IT platform.After completing a key milestone with the migration of four million contracts back in January,further seven million contracts were successfully migrated in the beginning of April 2023.The next step is the migration of the remaining Postbank customer contracts onto a joint platform which is planned for mid-2023.8 Deutsche Bank Strategy Earnings Report as of March 31,2023 International Private Bank progressed with the execution of its strategic objectives in the first quarter.Despite continued market turbulences and geopolitical uncertainty,International Private Bank maintained strong revenue growth momentum across its regions,also fueled by increasing deposit revenues in the context of rising interest rates.Net new assets confirmed International Private Banks resilience,positive trend,and was supported by the evolution of the divisions differentiating investment offering.Furthermore,the Wealth Management&Bank for Entrepreneurs segment continued to drive client activation and business momentum with selective hiring in strategic Ultra/High Net Worth growth markets like Asia and Middle East Africa.At the same time,International Private Bank maintained a continued focus on cost efficiency,largely self-funding growth investments and further optimizing the service model around its different client segments.For instance,the further rightsizing of the branch footprint in Italy allowed to free up resources in Premium Banking to be reinvested in growth initiatives.Similarly,the ongoing execution of the divisions IT and data strategy,including the progressing roll-out of the lean Cloud platform in Germany,was also an important driver in containing costs.Private Bank announced its ESG strategy for the upcoming years at Deutsche Banks Sustainability Deep Dive in March 2023.In Private Bank Germany,a strategic cooperation with WWF Germany was established to audit sustainability initiatives and to accelerate the change in the advisory and offering suite towards sustainability.International Private Bank successfully launched new ESG-related products like green and sustainability linked bonds in Italy and Germany.Asset Management Asset Management principally consists of DWS Group GmbH&Co.KGaA.DWS aspires to be one of the worlds leading asset managers with 841 billion in Assets under Management as of March 31,2023.With the market environment becoming increasingly uncertain and client expectations evolving,DWS has refined its strategy with a goal of growing long-term shareholder value.Asset Management aims to maintain its leading position in Germany and further capture upside in Europe by building additional partnerships,growing its Passive business and leveraging its Alternatives capabilities to participate in the European transformation.In the Americas,DWS aims to expand its Passive and Alternatives businesses and in Asia Pacific focus on its strategic partnerships.In December 2022 and as part of the refined strategy,DWS has reassessed its opportunities and has assigned its lines of business into four key strategic clusters categorized by the differentiation of its capabilities and the market growth potential:Growth(expanding areas of strength in Passive,built around the Xtrackers brand,and Alternatives),Value(build and grow capabilities in Equity,Multi-Asset and Fixed Income),Build(leverage digital trends and translate into new digital products and solutions)and Reduce(reallocate financial resources to fund investments into Growth areas).Progress in the quarter includes the launch of fourteen new funds,including nine Xtracker funds,and the transfer of the Private Equity Solutions business to Brookfield Asset Management.In addition,as part of the refined strategy,DWS announced new medium-term financial targets to be delivered over the next three years.DWS has identified five key enablers to support the execution of its strategic objectives.These are:expanding distribution partnerships,continuing to leverage collaboration with Deutsche Bank Group,enabling business by migrating to cloud and streamlining data management,creating a diverse culture to drive strong performance for clients and building on a diversified management team with focus on execution.DWS is further refining its approach regarding sustainability to better meet the evolving needs of its stakeholders most importantly its clients.In this context,DWS remains committed to sustainability with a focus on climate and stakeholder engagement.9 Deutsche Bank Group results Earnings Report as of March 31,2023 Group results Deutsche Banks profit before tax was 1.9 billion for the first quarter of 2023,up 12%year on year.Post-tax profit was up 8%to 1.3 billion.Post-tax return on average tangible shareholders equity(RoTE)was 8.3%,up from 8.1%in the prior year quarter.Post-tax return on average shareholders equity was 7.4%in the quarter,up from 7.2%in the first quarter of 2022.Diluted earnings per share were 0.61,up from 0.55 in the prior year quarter.The cost/income ratio improved to 71%,from 73%in the first quarter of 2022.Deutsche Banks results include annual bank levies of 473 million,recognized in the first quarter.Assuming an equal distribution of the annual bank levy across the four quarters of 2023 and a three-month pro rata(three twelfths)share in the first quarter,profit before tax would have been 2.2 billion and post-tax profit would have been 1.6 billion in the quarter.Post-tax RoTE would have been 10.0%and the cost/income ratio would have been 67%,reflecting substantial progress towards the banks 2025 targets for post-tax RoTE of above 10%and a cost/income ratio below 62.5%.The banks businesses contributed as follows to the banks key target ratios:Corporate Bank:post-tax RoTE of 18.3%and cost/income ratio of 55%Investment Bank:post-tax RoTE of 8.5%and cost/income ratio of 67%Private Bank:post-tax RoTE of 5.3%and cost/income ratio of 78%Asset Management:post-tax RoTE of 13.6%and cost/income ratio of 74%Revenue growth in challenging conditions Net revenues were 7.7 billion,up 5%over the prior year quarter and the highest quarterly net revenues since 2016,despite business exits as part of the banks transformation programme and challenging conditions in financial markets during the quarter.This compares to the banks target for compound annual revenue growth of between 3.5%and 4.5%through 2025.In the businesses,net revenues were as follows:Corporate Bank net revenues were 2.0 billion,up 35%year on year,the highest quarterly revenues since the launch of Deutsche Banks transformation programme,reflecting significant year-on-year growth across all regions and businesses.Growth was driven by year-on-year growth of 71%in net interest income and continued pricing discipline.Fee income rose 1%year on year.Revenues in Corporate Treasury Services grew by 32%,Institutional Client Services revenues rose 28%and Business Banking revenues were up 59%Investment Bank net revenues were 2.7 billion,down 19%from the very strong first quarter of 2022.Fixed Income&Currencies(FIC)revenues declined by 17%,partly reflecting a significant contribution from episodic items in the prior year quarter which did not recur.Rates revenues were higher than the strong prior year quarter,while Credit Trading revenues were lower,reflecting the non-recurrence of a concentrated distressed position in the prior year quarter,partly offset by growth in flow credit revenues.Financing revenues were lower,impacted by the non-recurrence of other episodic revenue events in the prior year.Foreign Exchange revenues were significantly lower,reflecting heightened interest rate volatility and market dislocation during March.Origination&Advisory revenues were down 31%,reflecting lower industry fee pools and lower issuance activity against the backdrop of continued macro-economic and geo-political uncertainties.Advisory revenues were lower,although by less than industry average(source:Dealogic)Private Bank net revenues were 2.4 billion,up 10%year on year,driven by strong net interest income.Revenues in the Private Bank Germany were up 14%year on year,while the International Private Bank grew revenues by 3%.Net inflows were 6 billion during the quarter,driven by inflows into investment products.Assets under Management grew by 13 billion to 531 billion during the quarter,more than reversing the decline of the previous quarter,driven by net inflows into investment products and rising market levels Asset Management net revenues were 589 million,down 14%compared to the prior year quarter.This primarily reflected an 8cline in management fees to 571 million,largely due to market-driven declines in Assets under Management during 2022.Performance and transaction fees declined 58%to 11 million.Net inflows were 6 billion,or 9 billion ex-cash,compared to net outflows of 2 billion in the previous quarter.Assets under Management grew by 19 billion to 841 billion at the end of the first quarter,reflecting positive net inflows and rising market levels 10 Deutsche Bank Group results Earnings Report as of March 31,2023 Noninterest expenses essentially flat year on year Noninterest expenses were 5.5 billion in the quarter,up 1%compared to the prior year quarter and including annual bank levies of 473 million.Adjusted costs were 5.4 billion,flat year on year,while adjusted costs ex-bank levies were up 5%to 4.9 billion.This development reflects investments in business growth,technology and controls in line with the banks strategy.The bank is currently implementing additional efficiency measures across the front office and infrastructure.These include strict limitations on hiring in non-client-facing areas,focused reductions in management layers,streamlining the mortgage platform and further downsizing of the technology centre in Russia.Credit provisions:year on year growth reflects macroeconomic developments Provision for credit losses was 372 million in the quarter,up from 292 million in the first quarter of 2022 and 30 basis points of average loans.The year-on-year development included a rise in provision for credit losses in the Private Bank to 267 million,up from 101 million in the prior year quarter,driven by a small number of idiosyncratic events in the International Private Bank,while the quality of the overall portfolio remained solid.Provision for non-performing(Stage 3)loans was 397 million,up from 114 million in the prior year quarter.These were partly offset by net releases of performing(Stage 1 and 2)loans of 26 million,reflecting a modest improvement in the economic outlook since year end 2022 and lower levels of provisioning in the Corporate Bank.For the full year 2023,provision for credit losses is expected to remain within the previously communicated range of 25-30 basis points of average loans.Capital and liquidity in line with goals and capital distribution plans reaffirmed The Common Equity Tier 1(CET1)capital ratio strengthened to 13.6%at quarter end,ahead of the banks ambition of around 13%,up from 13.4%in the previous quarter and the highest level for eight quarters.Strong organic capital generation through higher profitability more than offset the impact of deductions for common share dividends and equity compensation.Risk weighted assets were 360 billion at the end of the quarter,unchanged from the previous quarter and down slightly from 364 billion at the end of the prior year quarter.The Leverage ratio was 4.6%at the end of the first quarter,essentially unchanged from the end of the previous quarter.At 4.6%,the leverage ratio was also consistent with the prior year quarter,which excluded certain central bank cash balances in accordance with EU regulation then in effect;including these balances,the leverage ratio at the end of the prior year quarter would have been 4.3%.Leverage exposure was 1,238 billion at quarter end,essentially unchanged from the end of the previous quarter.The Liquidity Coverage Ratio strengthened to 143%at the end of the quarter,from 142%at the end of the previous quarter,above the regulatory requirement of 100%and a surplus of 63 billion.Liquidity reserves were 241 billion,compared to 256 billion at the end of the previous quarter,including High Quality Liquid Assets of 208 billion.The Net Stable Funding Ratio was 120%,at the high end of the banks target range of 115-120%,with a surplus of 100 billion above required levels.For Deutsche Banks Annual General Meeting on May 17,2023,the Management Board and the Supervisory Board have formally proposed payment of a cash dividend of 0.30 per share in respect of 2022,up 50%from 2021.This reflects the banks commitment to its capital distribution ambitions as set out in the Global Hausbank strategy announced in March 2022.Deutsche Bank remains fully committed to further capital distributions in 2023.Given the banks strong first quarter performance and further improved capital ratios,management has initiated a dialogue with supervisors to enable 2023 share repurchases and currently expects to commence buybacks in the second half of 2023.11 Deutsche Bank Group results Earnings Report as of March 31,2023 Accelerating the Global Hausbank strategy Deutsche Bank also announced additional measures aimed at accelerating execution of its Global Hausbank strategy.These include:Operational efficiency:targeting additional efficiency measures to raise the banks ambition for incremental cost savings from 2.0 to 2.5 billion.Specific measures include workforce reductions in non-client facing staff;further streamlining the mortgage platform;optimization of the retail distribution network,and improved operations by automating processes Capital efficiency:reducing 15 to 20 billion in risk weighed assets by 2025 from lower-yielding portfolios and from optimization with minimal revenue impact;enabling redeployment and distributions to shareholders and thereby improving RoTE.Specific measures include reducing mortgage originations and sub-hurdle lending;reducing balance sheet intensity through increased securitization;optimized hedging;and enhanced risk models and processes Revenue growth:aiming to outperform on previously communicated revenue targets through platform growth in capital-light businesses.Specific measures include investments in technology,selective hiring and additional growth initiatives in the Corporate Bank and Investment Bank;investments in digital and direct sales and accelerated hiring in Wealth Management in the Private Bank;and in Asset Management,the expansion of Passive and Alternatives together with strategic partnerships and product innovations Sustainable Finance:further progress across businesses Environmental,Social and Governance(ESG)-related financing and investment volumes ex-DWS were 22 billion in the quarter,bringing the cumulative total since January 1,2020,to 238 billion.In the first quarter,Deutsche Banks businesses contributed as follows:Corporate Bank:3 billion in sustainable financing,raising the business cumulative total since January 1,2020,to 43 billion Investment Bank:14 billion,comprising 4 billion in sustainable financing and 9 billion in capital market issuance,for a cumulative total of 142 billion Private Bank:5 billion growth in ESG Assets under Management and 1 billion in ESG new client lending,raising the Private Banks cumulative total to 53 billion Sustainability remains one of Deutsche Banks strategic priorities and the bank demonstrated this by hosting its second Sustainability Deep Dive on March 2,2023 at which an update was provided on the business strategies as well as on its policies and commitments.This included a tightened thermal coal policy as well as the ambition to encourage corporate clients to commit to net zero.12 Deutsche Bank Group results Earnings Report as of March 31,2023 Group results at a glance Three months ended in m.(unless stated otherwise)Mar 31,2023 Mar 31,2022 Absolute Change Change in%Net revenues:Of which:Corporate Bank(CB)1,973 1,462 511 35 Investment Bank(IB)2,691 3,323 (632)(19)Private Bank(PB)2,438 2,220 218 10 Asset Management(AM)589 682 (93)(14)Corporate&Other(C&O)(10)(359)349 (97)Total net revenues 7,680 7,328 353 5 Provision for credit losses 372 292 79 27 Noninterest expenses:Compensation and benefits 2,696 2,657 39 1 General and administrative expenses 2,761 2,764 (3)(0)Impairment of goodwill and other intangible assets 0 0 0 N/M Restructuring activities 0 (43)44 N/M Total noninterest expenses 5,457 5,377 79 1 Profit(loss)before tax 1,852 1,658 194 12 Income tax expense(benefit)531 431 100 23 Profit(loss)1,322 1,227 95 8 Profit(loss)attributable to noncontrolling interests 25 40 (14)(36)Profit(loss)attributable to Deutsche Bank shareholders and additional equity components 1,296 1,187 110 9 Profit(loss)attributable to additional equity components 138 126 12 10 Profit(loss)attributable to Deutsche Bank shareholders 1,158 1,060 98 9 Post-tax return on average tangible shareholders equity2,3 8.3%8.1%0.2ppt N/M Cost/income ratio 71.0s.4%(2.3)ppt N/M Common Equity Tier 1 capital ratio 13.6.8%0.8ppt N/M Loans(gross of allowance for loan losses,in bn)1 488 481 7 1 Deposits(in bn)1 592 604 (12)(2)Risk-weighted assets(in bn)1 360 364 (5)(1)of which:operational risk RWA(in bn)1 59 60 (1)(2)Leverage exposure(in bn)1 1,238 1,164 74 6 Employees(full-time equivalent)1 86,712 83,000 3,712 4 Post-tax return on average shareholders equity2,3 7.4%7.2%0.2ppt N/M Leverage ratio(reported/phase-in)4.6%4.6%0.1ppt N/M N/M Not meaningful Prior years comparatives aligned to presentation in the current year 1 As of quarter-end 2 Based on profit(loss)attributable to Deutsche Bank shareholders after AT1 coupon;for further information please refer to“Non-GAAP financial measures”in this report 3 The post-tax return on average tangible shareholders equity and average shareholders equity at the Group level reflects the reported effective tax rate for the Group,which was 29%for the first quarter of 2023 and 26%for the first quarter of 2022;for further information please refer to“Non-GAAP financial measures”in this report 13 Deutsche Bank Segment results Earnings Report as of March 31,2023 Segment results Corporate Bank Profit before tax was 822 million in the quarter,more than triple the prior year quarter and the highest quarterly profit before tax since the creation of the Corporate Bank in 2019.Post-tax RoTE was 18.3%,up from 5.9%in the prior year quarter,and post-tax RoE was 16.9%,up from 5.4%.The cost/income ratio improved to 55%,from 73%in the first quarter of 2022.Net revenues were 2.0 billion,35%higher year on year.Revenue growth was driven by increased interest rates and continued pricing discipline,with net interest income up 71%,and commissions and fee income up 1%,compared to the prior year quarter.Deposits declined by 1%,or 2 billion year on year,while loans gross of allowances were down 3%,or 4 billion compared to the first quarter of 2022 but essentially flat compared to previous quarter.All of the Corporate Banks businesses contributed to revenue growth.Corporate Treasury Services net revenues were 1.2 billion,up 32%year on year.Institutional Client Services net revenues were 447 million,28%higher year on year.Business Banking net revenues were 337 million,up by 59%year on year.Noninterest expenses were 1.1 billion,up 2%year on year,as lower bank levies were offset by higher service relationship expenses compared to the prior year quarter.Provision for credit losses was 64 million in the quarter,57%lower year on year.Provisions remained contained despite a more challenging macroeconomic environment compared with the prior year quarter and were primarily driven by one large Stage 3 event.14 Deutsche Bank Segment results Earnings Report as of March 31,2023 Corporate Bank results at a glance Three months ended in m.(unless stated otherwise)Mar 31,2023 Mar 31,2022 Absolute Change Change in%Net revenues:Corporate Treasury Services 1,188 899 289 32 Institutional Client Services 447 350 97 28 Business Banking 337 212 125 59 Total net revenues 1,973 1,462 511 35 Of which:Net interest income 1,333 780 553 71 Commissions and fee income 576 569 6 1 Remaining income 64 112 (48)(43)Provision for credit losses 64 148 (84)(57)Noninterest expenses:Compensation and benefits 361 353 8 2 General and administrative expenses 725 715 10 1 Impairment of goodwill and other intangible assets 0 0 0 N/M Restructuring activities 0 (0)0 N/M Total noninterest expenses 1,086 1,067 19 2 Noncontrolling interests 0 0 0 N/M Profit(loss)before tax 822 246 576 N/M Employees(front office,full-time equivalent)1 7,524 7,415 110 1 Employees(business-aligned operations,full-time equivalent)1 6,853 5,916 938 16 Employees(allocated central infrastructure,full-time equivalent)1 8,598 7,420 1,178 16 Total employees(full-time equivalent)1 22,976 20,750 2,225 11 Total assets(in bn)1,2 248 249 (1)(0)Risk-weighted assets(in bn)1 74 71 3 4 of which:operational risk RWA(in bn)1 5 5 (0)(3)Leverage exposure(in bn)1 310 305 5 2 Deposits(in bn)1 269 271 (2)(1)Loans(gross of allowance for loan losses,in bn)1 121 125 (4)(3)Cost/income ratio 55.1s.0%(18.0)ppt N/M Post-tax return on average shareholders equity3,4 16.9%5.4.5ppt N/M Post-tax return on average tangible shareholders equity3,4 18.3%5.9.4ppt N/M N/M Not meaningful Prior years comparatives aligned to presentation in the current year 1 As of quarter-end 2 Segment assets represent consolidated view,i.e.,the amounts do not include intersegment balances 3 Based on profit(loss)attributable to Deutsche Bank shareholders after AT1 coupon;for further information please refer to“Non-GAAP Financial Measures”in this report 4 For the post-tax return on average tangible shareholders equity and average shareholders equity of the segments,the Group effective tax rate was adjusted to exclude the impact of permanent differences not attributed to the segments,so that the segment tax rates were 28%for the first quarter of 2023 and all quarters of 2022;for further information please refer to“Non-GAAP Financial Measures”in this report 15 Deutsche Bank Segment results Earnings Report as of March 31,2023 Investment Bank Profit before tax was 861 million,down 42%year on year.Post-tax RoTE was 8.5%and post-tax RoE was 8.2%compared to 16.6%and 15.9%respectively in the prior year quarter.The cost/income ratio was 67%,compared to 54%in the prior year quarter.Net revenues were 2.7 billion,down 19%year on year.Revenues in FIC Sales&Trading were lower than a very strong first quarter of 2022,partly reflecting a significant contribution from episodic items in the prior year quarter which did not recur on the current quarter,and changes in the market environment.Origination and Advisory revenues also declined in line with a lower industry fee pool(source:Dealogic).FIC Sales&Trading revenues were 2.4 billion,down 17%year on year compared to an exceptionally strong prior year quarter.In Rates,revenues were higher against a very strong prior year quarter.Emerging Markets revenues were lower,driven by the non-recurrence of exceptional client activity in the Central&Eastern Europe,Middle East&Africa region in the prior year.Credit Trading revenues were lower,reflecting the non-recurrence of a concentrated distressed credit position in the prior year,though this was partly offset by growth in flow credit revenues.Financing revenues were impacted by the non-recurrence of other episodic revenue events in the prior year.Foreign Exchange revenues were significantly lower,reflecting heightened interest rate volatility and market dislocation seen during March.Origination&Advisory revenues were 327 million,down 31%year on year,in line with the year-on-year decline in the industry fee pool.Debt Origination revenues were significantly lower as the leveraged loan market remained muted,although High Yield activity showed signs of partial recovery prior to the market disruption in March.Investment Grade debt revenues also declined,as did the industry fee pool.Equity Origination revenues were lower in a challenging market with low issuance activity.Advisory revenues were also significantly lower than in the prior year quarter but decreased by less than the industry average(source:Dealogic).Noninterest expenses were 1.8 billion in the quarter,essentially flat year on year.A year-on-year reduction in bank levies was offset by slight increases in service relationships and nonoperating costs.Provision for credit losses was 41 million in the quarter,or 16 basis points of average loans.The slight year-on-year increase was driven by higher Stage 3 impairments,largely offset by reduced Stage 1 and 2 provisions,as forward-looking indicators reflected an expected improvement in the macro-economic environment.16 Deutsche Bank Segment results Earnings Report as of March 31,2023 Investment Bank results at a glance Three months ended in m.(unless stated otherwise)Mar 31,2023 Mar 31,2022 Absolute Change Change in%Net revenues:Fixed Income,Currency(FIC)Sales&Trading 2,360 2,840 (481)(17)Debt Origination 213 307 (94)(31)Equity Origination 21 34 (12)(36)Advisory 92 134 (42)(31)Origination&Advisory 327 474 (148)(31)Other 5 9 (4)(47)Total net revenues 2,691 3,323 (632)(19)Provision for credit losses 41 36 5 14 Noninterest expenses:Compensation and benefits 612 611 1 0 General and administrative expenses 1,178 1,184 (5)(0)Impairment of goodwill and other intangible assets 0 0 0 N/M Restructuring activities 1 1 (0)(22)Total noninterest expenses 1,792 1,796 (5)(0)Noncontrolling interests (2)1 (3)N/M Profit(loss)before tax 861 1,490 (629)(42)Employees(front office,full-time equivalent)1 4,354 4,225 130 3 Employees(business-aligned operations,full-time equivalent)1 3,484 2,974 510 17 Employees(allocated central infrastructure,full-time equivalent)1 11,280 9,872 1,408 14 Total employees(full-time equivalent)1 19,118 17,071 2,047 12 Total assets(in bn)1,2 664 664 0 0 Risk-weighted assets(in bn)1 142 145 (2)(2)of which:operational risk RWA(in bn)1 23 25 (1)(5)Leverage exposure(in bn)1 541 547 (6)(1)Deposits(in bn)1 11 13 (3)(20)Loans(gross of allowance for loan losses,in bn)1 103 94 9 10 Cost/income ratio 66.6T.0.5ppt N/M Post-tax return on average shareholders equity3,4 8.2.9%(7.7)ppt N/M Post-tax return on average tangible shareholders equity3,4 8.5.6%(8.1)ppt N/M N/M Not meaningful Prior years comparatives aligned to presentation in the current year 1 As of quarter-end 2 Segment assets represent consolidated view,i.e.,the amounts do not include intersegment balances 3 Based on profit(loss)attributable to Deutsche Bank shareholders after AT1 coupon;for further information please refer to“Non-GAAP Financial Measures”in this report 4 For the post-tax return on average tangible shareholders equity and average shareholders equity of the segments,the Group effective tax rate was adjusted to exclude the impact of permanent differences not attributed to the segments,so that the segment tax rates were 28%for the first quarter of 2023 and all quarters of 2022;for further information please refer to“Non-GAAP Financial Measures”in this report 17 Deutsche Bank Segment results Earnings Report as of March 31,2023 Private Bank Profit before tax was 280 million in the quarter compared to 394 million in the prior year quarter.The decline was primarily attributable to higher provision for credit losses,reflecting a small number of single name losses in the International Private Bank in the current quarter and the non-recurrence of restructuring provision releases in the first quarter of 2022.Growth in revenues more than offset increases in the adjusted cost base.The cost/income ratio was 78%,essentially flat compared to the prior year quarter.Post-tax RoTE of 5.3clined by 3.2 percentage points compared to the prior year quarter.Post-tax RoE was 4.9%,down from 7.7%in the first quarter of last year.Net revenues were 2.4 billion,up by 10%.This marks the highest quarterly revenue performance since the formation of Private Bank excluding specific items such as gains on sales.Growth was driven by higher net interest income from deposit products.This more than compensated a decline in fee income,which reflected changes in contractual and regulatory conditions as well as the impact of the current environment.The Private Bank attracted net inflows in Assets under Management(AuM)of 6 billion in the quarter,driven by strong investment product inflows,which more than offset modest deposit outflows within Assets under Management.Quarterly loan growth was impacted by lower demand in mortgage loans in Germany and deleveraging activities of clients of the International Private Bank in the current market environment.Net revenues in the Private Bank Germany grew by 14%to 1.6 billion in the quarter.Growth,mainly driven by deposit revenues,was supported by higher interest rates.This more than offset a decline in fee income which reflected the aforementioned factors.In the International Private Bank,net revenues of 888 million were up 3%year on year,or 4%if adjusted for specific revenue items from prior year.Revenue growth reflected higher deposit revenues,partly offset by lower loan and investment product revenues.The latter developments reflect lower client activity in a more challenging environment as well as the impacts of a lower asset base following a decline in market valuations during 2022.Assets under Management in the Private Bank were 531 billion at quarter end.The increase of 13 billion in the quarter was driven by the aforementioned net inflows of 6 billion and a 9 billion impact of higher market levels,which partly reversed the impact from lower market levels of roughly 56 billion seen in 2022.Noninterest expenses were 1.9 billion,up 10%year on year,in part attributable to the non-recurrence of restructuring provision releases recorded in the first quarter of 2022.Adjusted costs were up 5%due to higher investment spending and increased internal service cost allocations.Inflationary impacts were mostly offset by continued savings from transformation initiatives,including workforce reductions and branch closures.Provision for credit losses was 267 million,or 40 basis points of average loans,compared to 101 million in the prior year quarter.This development was largely driven by a small number of single name losses in the International Private Bank.Excluding these items,the development of the overall portfolio continued to reflect the high quality of the loan book,especially in the retail businesses,and ongoing tight risk discipline.18 Deutsche Bank Segment results Earnings Report as of March 31,2023 Private Bank results at a glance Three months ended in m.(unless stated otherwise)Mar 31,2023 Mar 31,2022 Absolute Change Change in%Net revenues:Private Bank Germany 1,550 1,357 193 14 International Private Bank 888 863 25 3 Premium Banking 242 244 (2)(1)Wealth Management&Bank for Entrepreneurs 645 618 27 4 Total net revenues 2,438 2,220 218 10 Of which:Net interest income 1,532 1,183 349 29 Commissions and fee income 777 957 (180)(19)Remaining income 130 80 50 62 Provision for credit losses 267 101 166 164 Noninterest expenses:Compensation and benefits 689 682 7 1 General and administrative expenses 1,202 1,088 114 11 Impairment of goodwill and other intangible assets 0 0 0 N/M Restructuring activities (0)(45)44 (99)Total noninterest expenses 1,891 1,725 166 10 Noncontrolling interests 0 (0)0 N/M Profit(loss)before tax 280 394 (113)(29)Employees(front office,full-time equivalent)1 21,115 21,813 (697)(3)Employees(business-aligned operations,full-time equivalent)1 5,839 6,019 (180)(3)Employees(allocated central infrastructure,full-time equivalent)1 11,103 9,510 1,593 17 Total employees(full-time equivalent)1 38,057 37,342 715 2 Total assets(in bn)1,2 329 316 12 4 Risk-weighted assets(in bn)1 87 87 0 0 of which:operational risk RWA(in bn)1 8 7 1 7 Leverage exposure(in bn)1 340 328 13 4 Deposits(in bn)1 310 316 (6)(2)Loans(gross of allowance for loan losses,in bn)1 263 258 5 2 Assets under Management(in bn)1,3 531 549 (17)(3)Net flows(in bn)6 10 (4)(39)Cost/income ratio 77.6w.7%(0.2)ppt N/M Post-tax return on average shareholders equity4,5 4.9%7.7%(2.9)ppt N/M Post-tax return on average tangible shareholders equity4,5 5.3%8.4%(3.2)ppt N/M N/M Not meaningful Prior years comparatives aligned to presentation in the current year 1 As of quarter-end 2 Segment assets represent consolidated view,i.e.,the amounts do not include intersegment balances 3 The Group defines Assets under Management as(a)assets held on behalf of customers for investment purposes and/or(b)client assets that are managed by the bank;Assets under Management are managed on a discretionary or advisory basis,or these assets are deposited with the bank;deposits are considered Assets under Management if they serve investment purposes;in the Private Bank Germany and Premium Banking,this includes term deposits and savings deposits;in Wealth Management&Bank for Entrepreneurs,it is assumed that all customer deposits are held with the bank primarily for investment purposes 4 Based on profit(loss)attributable to Deutsche Bank shareholders after AT1 coupon for further information please refer to“Non-GAAP Financial Measures”in this report 5 For the post-tax return on average tangible shareholders equity and average shareholders equity of the segments,the Group effective tax rate was adjusted to exclude the impact of permanent differences not attributed to the segments,so that the segment tax rates were 28%for the first quarter of 2023 and all quarters of 2022;for further information please refer to“Non-GAAP Financial Measures”in this report 19 Deutsche Bank Segment results Earnings Report as of March 31,2023 Asset Management Profit before tax was 115 million in the first quarter,a 44crease over the prior year period,primarily driven by lower revenues which reflected declines in market levels during 2022.Post-tax RoTE was 13.6%,down from 25.5%in the prior year quarter,and post-tax RoE was 5.8%,down from 11.0%.The cost/income ratio rose to 74%in the quarter,up by 12 percentage points over the prior year quarter.Net revenues were 589 million,down 14%over the prior year quarter.This was due to lower Management fees,which were down 8%to 571 million,predominantly due to declining market levels during 2022.Performance and transaction fees were 11 million,compared to 26 million in the prior year quarter.Noninterest expenses were 436 million in the quarter,up 3%year on year.Adjusted costs were 426 million,up by 1%.While compensation and benefits costs dropped due to lower carried interests,general and administrative expenses increased,partly due to higher costs for service relationships and non-operating costs.Net flows were 6 billion in the quarter.Excluding cash,net inflows were 9 billion,driven by Active(ex-Cash)product inflows of 6 billion and Passive product inflows of 4 billion including Xtrackers.These more than offset outflows of 3 billion in low-margin cash products,partly reflecting a rising interest rate environment,and of 1 billion in Alternatives.ESG products attracted net inflows of 1 billion.Assets under Management rose by 19 billion,or 2%,to 841 billion during the quarter.This increase was mainly due to rising market levels and net inflows during the quarter,while exchange rate movements had a negative impact.Compared to the prior year quarter,Assets under Management have decreased by 7%,primarily driven by the aforementioned declines in market levels during 2022.20 Deutsche Bank Segment results Earnings Report as of March 31,2023 Asset Management results at a glance Three months ended in m.(unless stated otherwise)Mar 31,2023 Mar 31,2022 Absolute Change Change in%Net revenues:Management Fees 571 621 (50)(8)Performance and transaction fees 11 26 (15)(58)Other 7 35 (28)(80)Total net revenues 589 682 (93)(14)Provision for credit losses (1)0 (1)N/M Noninterest expenses:Compensation and benefits 222 230 (7)(3)General and administrative expenses 213 192 21 11 Impairment of goodwill and other intangible assets 0 0 0 N/M Restructuring activities 1 0 0 28 Total noninterest expenses 436 422 14 3 Noncontrolling interests 39 55 (15)(28)Profit(loss)before tax 115 206 (91)(44)Employees(front office,full-time equivalent)1 1,994 1,887 107 6 Employees(business-aligned operations,full-time equivalent)1 2,303 2,254 49 2 Employees(allocated central infrastructure,full-time equivalent)1 521 446 75 17 Total employees(full-time equivalent)1 4,818 4,587 231 5 Total assets(in bn)1,2 10 11 (1)(9)Risk-weighted assets(in bn)1 13 14 (1)(5)of which:operational risk RWA(in bn)1 3 3 0 4 Leverage exposure(in bn)1 9 10 (1)(7)Assets under Management(in bn)1 841 902 (62)(7)Net flows(in bn)6 (1)7 N/M Cost/income ratio 74.0a.8.2ppt N/M Post-tax return on average shareholders equity3,4 5.8.0%(5.2)ppt N/M Post-tax return on average tangible shareholders equity3,4 13.6%.5%(11.9)ppt N/M N/M Not meaningful Prior years comparatives aligned to presentation in the current year 1 As of quarter-end 2 Segment assets represent consolidated view,i.e.,the amounts do not include intersegment balances 3 Based on profit(loss)attributable to Deutsche Bank shareholders after AT1 coupon,for further information please refer to“Non-GAAP Financial Measures”in this report 4 For the post-tax return on average tangible shareholders equity and average shareholders equity of the segments,the Group effective tax rate was adjusted to exclude the impact of permanent differences not attributed to the segments,so that the segment tax rates were 28%for the first quarter of 2023 and all quarters of 2022;for further information please refer to“Non-GAAP Financial Measures”in this report 21 Deutsche Bank Segment results Earnings Report as of March 31,2023 Corporate&Other Corporate&Other reported a loss before tax of 226 million in the first quarter of 2023,compared to a loss before tax of 677 million in the prior year quarter.This development reflected higher revenues together with lower noninterest expenses.Net revenues were negative 10 million in the quarter,compared to negative 359 million in the prior year quarter.The improvement was primarily driven by revenues relating to valuation and timing differences of positive 239 million,compared to negative 183 million in the prior year quarter.Revenues related to funding and liquidity were negative 103 million in the first quarter of 2023,compared to negative 115 million in the prior year quarter.Noninterest expenses were 252 million in the quarter,down 31%compared to 367 million in the prior year quarter,primarily driven by lower expenses relating to legacy portfolios,previously reported as the Capital Release Unit.Expenses associated with shareholder activities as defined in the OECD Transfer Pricing guidelines not allocated to the business divisions were 124 million in the quarter,essentially flat year on year.Noncontrolling interests are reversed in C&O after deduction from the divisional profit before tax.These were positive 37 million for the quarter,down from positive 56 million in the prior year quarter,and were mainly related to DWS.Risk-weighted assets stood at 43 billion at the end of the first quarter,including 19 billion of operational risk RWA,down 3 billion since the fourth quarter of 2022 and down 5 billion compared to the prior year quarter.Corporate&Other results at a glance Three months ended in m.(unless stated otherwise)Mar 31,2023 Mar 31,2022 Absolute Change Change in%Net revenues (10)(359)349 (97)Provision for credit losses 1 7 (6)(82)Noninterest expenses:Compensation and benefits 811 781 30 4 General and administrative expenses (558)(414)(144)35 Impairment of goodwill and other intangible assets 0 0 0 N/M Restructuring activities (1)0 (1)N/M Total noninterest expenses 252 367 (115)(31)Noncontrolling interests (37)(56)19 (33)Profit(loss)before tax (226)(677)451 (67)Employees(C&O,net,full-time equivalent)1 1,743 3,250 (1,507)(46)Employees(central infrastructure allocated to businesses,full-time equivalent)1 31,502 27,248 4,254 16 Total Employees(full-time equivalent)1 33,245 30,498 2,747 9 Risk-weighted assets(in bn)1 43 48 (5)(10)Leverage exposure(in bn)1 37 57 (20)(35)N/M Not meaningful Prior years comparatives aligned to presentation in the current year 1 As of quarter-end 22 Deutsche Bank Consolidated balance sheet Earnings Report as of March 31,2023 Consolidated balance sheet Assets in m.Mar 31,2023 Dec 31,2022 Cash and central bank balances 160,777 178,896 Interbank balances(without central banks)5,863 7,195 Central bank funds sold and securities purchased under resale agreements 10,016 11,478 Securities borrowed 24 (0)Financial assets at fair value through profit or loss Trading assets 110,901 92,867 Positive market values from derivative financial instruments 246,299 299,686 Non-trading financial assets mandatory at fair value through profit and loss 99,854 89,654 Financial assets designated at fair value through profit or loss 167 168 Total financial assets at fair value through profit or loss 457,220 482,376 Financial assets at fair value through other comprehensive income 29,087 31,675 Equity method investments 1,074 1,124 Loans at amortized cost 482,642 483,700 Property and equipment 6,101 6,103 Goodwill and other intangible assets 7,088 7,092 Other assets1 138,408 118,293 Assets for current tax 1,594 1,584 Deferred tax assets 6,883 7,272 Total assets 1,306,777 1,336,788 Liabilities and equity in m.Mar 31,2023 Dec 31,2022 Deposits 591,937 621,456 Central bank funds purchased and securities sold under repurchase agreements 451 573 Securities loaned 9 13 Financial liabilities at fair value through profit or loss Trading liabilities 57,276 50,616 Negative market values from derivative financial instruments 231,823 282,353 Financial liabilities designated at fair value through profit or loss 81,048 54,634 Investment contract liabilities 479 469 Total financial liabilities at fair value through profit or loss 370,625 388,072 Other short-term borrowings 4,908 5,122 Other liabilities1 133,387 113,714 Provisions 2,759 2,449 Liabilities for current tax 512 388 Deferred tax liabilities 621 650 Long-term debt 127,680 131,525 Trust preferred securities 508 500 Total liabilities 1,233,397 1,264,460 Common shares,no par value,nominal value of 2.56 5,223 5,291 Additional paid-in capital 39,861 40,513 Retained earnings 19,286 17,800 Common shares in treasury,at cost (60)(331)Accumulated other comprehensive income(loss),net of tax (1,270)(1,314)Total shareholders equity 63,041 61,959 Additional equity components 8,540 8,578 Noncontrolling interests 1,798 1,791 Total equity 73,380 72,328 Total liabilities and equity 1,306,777 1,336,788 1 Includes non-current assets and disposal groups held for sale 23 Deutsche Bank Consolidated balance sheet Earnings Report as of March 31,2023 Movements in assets and liabilities As of March 31,2023,the total balance sheet of 1.3 trillion was essentially flat compared to year end 2022.Deposits decreased by 29.5 billion,mainly in the Corporate and Institutional Cash Management business in Corporate Bank,driven by increased price competition,normalization from elevated levels in the prior two quarters and market volatility at the end of the quarter.In the Private Bank,deposits have reduced primarily due to migration into higher yielding investment products and continued inflationary pressure impacting retail clients.This decline in deposits was the primary driver of 19.5 billion decrease in cash,central bank and interbank balances.Central bank funds sold,securities purchased under resale agreements and securities loaned across all applicable measurement categories increased by 7.8 billion,mainly driven by higher client activity and short coverage requirements.Corresponding liabilities increased by 24.7 billion,mainly attributable to increased secured funding of trading inventory.Trading assets and liabilities increased by 18.0 billion and 6.7 billion,respectively,mainly due to increased exposure in government securities from higher client flows and desk positioning in relation to the current environment.Positive and negative market values of derivative financial instruments decreased by 53.4 billion and 50.5 billion,respectively,primarily driven by moves in foreign exchange products in Investment Bank,mainly due to the weakening of the U.S.dollar against the euro and market volatility.Long term debt decreased by 3.8 billion as a result of prepayment of TLTRO funding,partly offset by new issuances during the quarter.Other assets increased by 20.1 billion,mainly driven by increases in brokerage and securities related receivables of 19.4 billion.This was mainly attributable to higher receivables from pending settlements of regular way trades following the seasonality pattern the bank typically observes of lower year-end levels versus higher volumes over the course of the year.This seasonality pattern was also reflected in an increase in brokerage and securities related payables by 16.7 billion,driving the 19.7 billion increase in other liabilities.The overall movement of the balance sheet included a decrease of 8.5 billion due to foreign exchange rate movements,mainly driven by a weakening of the U.S.Dollar against the Euro.The effects of foreign exchange rate movements are embedded in the movements of the balance sheet line items discussed in this section.Liquidity Total High Quality Liquid Assets(HQLA)as defined by the Commission Delegated Regulation(EU)2015/61 and amended by Regulation(EU)2018/1620 were 208 billion as of March 31,2023,compared to 219 billion as of December 31,2022.The decrease is primarily driven by reduction of Corporate and Private Bank deposits offset by an increase in capital market issuances and a reduction in loans.The Group maintains additional highly liquid central bank eligible assets,not qualifying as HQLA or subject to transfer restrictions under the HQLA definition.These additional liquid assets were 33 billion as at the end of March 31,2023,such that the Groups total Liquidity Reserves were 241 billion.The Liquidity Coverage Ratio was 143%in the first quarter of 2023,a surplus to regulatory requirements of 63 billion.Equity Total equity as of March 31,2023,increased by 1.1 billion compared to December 31,2022.This change was driven by a number of factors including the profit reported for the period of 1.3 billion,treasury shares distributed under share-based compensation plans of 378 million and remeasurement gains related to defined benefit plans of 190 million,net of tax.Further contributing factors include unrealized net gains on accumulated other comprehensive income,mainly attributable to financial assets at fair value through other comprehensive income of 245 million,net of tax and unrealized net gains on derivatives hedging cash flows of 207 million,net of tax.These were partially offset by a negative impact from foreign currency translation of 444 million,net of tax,mainly resulting from the weakening of the U.S.dollar against the Euro,net purchases of treasury shares of 407 million and a net change in share awards for the period of 382 million.On February 28,2023,Deutsche Bank cancelled 27 million of its common shares.The cancellation reduced the nominal value of the shares by 68 million.The cancelled shares had been held in common shares in treasury,at their acquisition cost of 300 million.The difference between the common shares at cost and their nominal value has reduced additional paid-in capital by 232 million.The shares had already been deducted from the reported total equity on December 31,2022.Therefore,the cancellation did not reduce the reported total equity in the first quarter 2023.24 Deutsche Bank Outlook Earnings Report as of March 31,2023 Outlook The following section provides an overview of updates to the outlook for the Group and business divisions for the financial year 2023 and should be read in conjunction with the Outlook section in the Combined Management Report provided in the Annual Report 2022.Macroeconomic and Banking Industry Outlook The outlook for the global economy slightly improved for 2023.However,core inflation remains persistent despite energy cost pressures having peaked.Central banks are expected to curtail rate hikes due to the lagged effects of the tightening measures already implemented.The Group currently expects global GDP growth and inflation to be at 2.8%and 6.6%,respectively,for 2023.The Eurozone economy is likely to avoid a recession in the first half of the year and could see a rather muted recovery during summer,although inflation-related loss of purchasing power could weaken demand of private households over the year.Additional headwinds could come from the ECBs monetary tightening.Global economic momentum is expected to see support from the recovery of the Chinese economy.On the other hand,a recession in the U.S.,which is expected to set in during the second half of the year,would reduce external demand and thus slow down global growth.Banks globally are expected to continue to benefit from higher interest rates in 2023,albeit to a lesser extent than before,supporting net interest income.Higher interest rates may dampen demand for credit,while supply conditions will probably tighten as banks become more cautious in taking risks.As a result,lending dynamics could slow meaningfully.Deposit funding costs might rise as well,reflecting greater competition for funding and a diminishing lag effect as the rate cycle matures.In addition,given the risks from a deteriorating commercial real estate and housing market,loan loss provisions may rise.Banks may be more affected by this in the U.S.than in Europe given their provisions are based on a lifetime expected loss model,which usually results in greater volatility,along with the weaker macroeconomic outlook for the U.S.in 2024.Capital market revenues could be mixed,with elevated volatility impacting segments differently.Overall,the absolute level of profitability might not remain as strong as in the previous year,but nonetheless is expected to be robust in the U.S.as well as Europe.Recent concerns about the global banking industry have been caused by idiosyncratic issues at some institutions,especially in the U.S.,and broader uncertainty about the impact of tighter monetary policy.However,the banking systems fundamentals are very strong.In Europe,profitability is at a post financial crisis high and non-performing loans are at a 15-year low,while capital and liquidity ratios remain close to record levels.In the U.S.,net profits have stayed near their all-time high,despite a normalization in loan loss provisions.The global economic outlook is impacted by several risks.While inflation seems to have peaked,it remains well above central bank targets and is likely to be persistent.Failure to bring down inflation could lead to central banks keeping monetary policy tighter for longer,which would affect financial markets and increase the risk of a recession.Geopolitical risks remain elevated due to the war in Ukraine and the tensions between China and Taiwan;also,the strategic competition U.S.versus China could possibly continue to intensify.A recession in the U.S.is expected in the second half of 2023,but there is a risk that it could occur sooner.Deutsche Bank Outlook In March 2022,Deutsche Bank outlined its strategic and financial road map through 2025,referred to as the Global Hausbank strategy,and communicated the banks 2025 financial targets and capital objectives.In addition,the bank is working to refine and accelerate its Global Hausbank strategy with measures which,if successfully implemented,could allow the bank to outperform its 2025 financial targets.Deutsche Bank reaffirms its financial targets to be achieved by 2025 of a post-tax return on average tangible equity of above 10%,a compound annual revenue growth in revenues of between 3.5%and 4.5%for 2021 to 2025 and a cost/income ratio of below 62.5%.The bank also confirms its capital objectives of a CET1 capital ratio of around 13%and a payout ratio of 50%from 2025 onwards.Deutsche Bank is managing the Groups cost base towards its 2025 cost/income ratio target.The Group remains highly focused on cost discipline and delivery of the initiatives underway,with incremental operational efficiencies in the process of being implemented.25 Deutsche Bank Outlook Earnings Report as of March 31,2023 In 2023,Group revenues are expected to be slightly higher compared to the prior year.Deutsche Bank expects revenues to be in the middle of the range of 28 billion to 29 billion at Group level reflecting the positive impact of interest rates,particularly in the Corporate and Private Bank,and robust organic business growth,partly offset by some normalization in other businesses,notably FIC.Corporate Bank expects the interest rate environment and progress on its initiatives to support the performance in 2023,despite macro-economic uncertainties.Revenues are expected to be higher compared to the prior year,driven by further improvements in interest rates and growth initiatives.Corporate Treasury Services revenues are anticipated to be higher due to strong momentum in the Corporate Cash Management business and growth in structured and flow trade finance solutions.Institutional Client Services revenues are expected to be slightly higher,supported by business growth and higher interest rates.In Business Banking,revenues are expected to be significantly higher compared to the prior year,principally due to higher interest rates in Germany.Investment Bank revenues are expected to be essentially flat in 2023 compared to the prior year,as the expected partial recovery in Origination and Advisory in the second half of 2023 is likely to be offset by a normalization in FIC Sales&Trading.FIC Sales and Trading revenues are expected to be lower than 2022.Rates will look to build on a strong first quarter and build out targeted business areas where it sees opportunities but expects a normalization in the market in the remainder of the year.Global Emerging Markets will continue to develop its onshore footprint and client workflow solutions further,though no repeat of the heightened volatility in the Central&Eastern Europe,Middle East&Africa region and associated revenue seen in 2022 is expected.The Foreign Exchange business was negatively impacted by the extreme interest rate volatility in the first quarter of 2023,and this will impact the full year performance.Within Credit Trading the flow credit business will look to build on investments into product and coverage teams which have contributed to improved performance in the first quarter.This will support the broader Credit Trading franchise performance.The Financing business will continue to take a disciplined and selective approach to the deployment of resources and look to benefit going forward from the increase in interest rates seen over the last nine months.Origination&Advisory revenues are expected to be significantly higher in 2023 compared to 2022,primarily due to an expected recovery in the Debt Origination business.The industry saw an increase in High Yield activity in the first quarter of 2023,which is expected to feed into the rest of the year and potentially open up the Leveraged Debt market,notwithstanding the events in March.Additionally,the business does not expect a recurrence of the loan markdowns that occurred across the industry in 2022.The Investment Grade Debt business will look to maintain its quarter-on-quarter improvement seen in the first quarter and further develop its ESG capabilities for clients.Equity Origination will continue to provide a competitive offering across products and expects to see the market start to open up again throughout the year.Advisory plans to build on the momentum of investment and market share gains in the prior year,however,the reduced levels of announced volumes seen over the last three quarters materially lowered the industry fee pool in the first quarter of 2023,and this will impact revenues for the remainder of the year.Net revenues in the Private Bank in 2023 are anticipated to remain essentially flat compared to 2022.The year on year comparison will be impacted by the non-recurrence of a gain on the sale of the Deutsche Bank Financial Advisors business in Italy and by lower revenues from workout activities in Sal.Oppenheim.Revenues excluding these specific items are expected to be slightly higher compared to 2022 driven by net positive effects from the rising interest rate environment and by continued business growth despite an expected slowdown of the growth of the German mortgage book.In the Private Bank Germany,revenues are expected to be slightly higher compared to 2022.Net interest income is expected to grow driven by higher deposit revenues which will be partly offset by reduced funding benefits including from the ECBs TLTRO program.Fee income is expected to be slightly lower with increases in investment product revenues more than offset by impacts from changes in contractual and regulatory conditions.Net revenues in the International Private Bank are expected to be slightly lower compared to 2022 driven by the non-recurrence of the aforementioned gain in Italy of approximately 310 million and Sal.Oppenheim workout revenues of approximately 130 million.Excluding these specific items,revenues are anticipated to be slightly higher year on year reflecting continued business growth supported by prior relationship manager hiring.Positive impacts from rising interest rates are expected to more than compensate for the impact of reduced benefits from the ECBs TLTRO program.AuM volumes are continued to be expected higher compared to year end 2022 despite net AuM deposit outflows in the first quarter 2023.As usual,the overall development of AuM volumes will highly depend on market parameters,including equity indices and foreign exchange rates.Growth dynamics in the loan businesses in Private Bank Germany are expected to slow down mainly reflecting lower demand in mortgage loans.26 Deutsche Bank Outlook Earnings Report as of March 31,2023 In 2023,Asset Management expects to return to positive net inflows and contribute towards its medium-term refined targets of AuM CAGR of greater than 12%for Passive and greater than 10%for Alternatives by 2025,enhanced by expanding the divisions distribution partnerships and further ESG offerings.Assuming market stabilization,Assets under Management at the end of 2023 are expected to be slightly higher compared to the end of 2022,and total revenues to be essentially flat.Management fees are expected to be slightly lower in 2023 compared to 2022,with higher expected performance and transactions fees and significantly higher other revenues.For 2023,Corporate&Other is expected to generate a pre-tax loss,and as previously reported,will include financial impacts of legacy portfolios,previously reported as the Capital Release Unit.Results in Corporate&Other will continue to be impacted by valuation and timing differences on positions that are economically hedged,but do not meet the hedge accounting requirements.Corporate&Other will also continue to retain certain transitional costs relating to the Groups funds transfer pricing framework,and legacy activities,which in total are expected to be around 300 million for the full year.Shareholder expenses are expected to be around 500 million for the full year.The pre-tax loss associated with legacy portfolios is expected to be lower than the equivalent pre-tax loss in 2022,primarily from lower noninterest expenses.The bank expects noninterest expenses in 2023 to be essentially flat compared to 2022,as higher restructuring and severance,now expected to amount to 500 million in 2023,are expected to offset the reduction in bank levies.Adjusted costs excluding bank levies are expected to be essentially flat in 2023.The bank expects to benefit from the banks structural efficiency measures including optimization of its Germany platform,the upgrade of its technology architecture,the front-to-back redesign of processes and measures to increase infrastructure efficiency.These structural benefits are expected to offset inflationary headwinds and selected investments in business growth,technology and in the control environment.For the full year 2023,the Group expects provision for credit losses in a range of 25 to 30 basis points of average loans.The bank expects provision for credit losses in 2023,to be driven by single-name losses rather than a deterioration of macro-economic forward-looking indicators.Deutsche Bank remains committed to its stringent underwriting standards and tight risk management framework.Further details on the calculation of expected credit losses are provided in the section“Risk information”in this report.Common Equity Tier 1 ratio(CET 1 ratio)by year end 2023 is expected to remain essentially flat compared to 2022.The Group expects several regulatory decisions on internal credit and market risk models in 2023.Risk weighted assets are expected to be slightly higher when considering model impacts,respective mitigation initiatives and business growth.Deutsche Bank aims for a Common Equity Tier 1 capital ratio of 200 basis points above the Maximum Distributable Amount(MDA)threshold at the end of 2023.The timing of model decisions might drive CET1 ratio variability within the year.Risks to the Groups outlook include potential impacts on the business model from macroeconomic as well as geopolitical uncertainties,including client refinancing risks,which could impact certain sectors such as Commercial Real Estate and more highly leveraged corporate clients;as well as higher interest rates,pressures on loan-to-value ratios and tighter lending conditions may impact clients ability to refinance.In addition,continued uncertainties associated with the war in Ukraine,the tensions between China and Taiwan and a possible intensification of U.S.versus China strategic competition,as well as global inflationary pressures,slower economic growth in the major operating countries including the risk of a deeper and longer recession,impact from changes in foreign exchange rates,and lower client activity could pose risks.Furthermore,uncertainty around central bank policies,the interest rate environment,ongoing regulatory developments,such as the finalization of the Basel III framework as well as other geopolitical event risks may also have an adverse impact.Adjusted costs,Adjusted costs excluding bank levies as well as Post-tax Return on Average Tangible Equity are non-GAAP financial measures.Please refer to“Non-GAAP financial measures”of this report for the definitions of such measures and reconciliations to the IFRS measures on which they are based.27 Deutsche Bank Risks and opportunities Earnings Report as of March 31,2023 Risks and opportunities The following section focuses on future trends or events that may result in downside risk or upside potential from what the Group has anticipated in its“Outlook”.The main development in the first three months ended March 31,2023,was the emergence of significant market volatility and selective failures and/or restructurings in the U.S.and European banking sector.The Group assessment of other risks and opportunities that its businesses are exposed to has not materially changed compared to the information presented in its Annual Report 2022.Key downside risks stem from the ongoing impacts of rising interest rates and elevated inflation,the potential for tightening bank lending standards following the March market stress,a deterioration in the macroeconomic environment and elevated geopolitical risks.Opportunities may arise if macroeconomic conditions improve beyond currently forecasted levels,which may lead to higher revenues and improving the Groups ability to meet its financial targets.At the same time,higher inflation and interest rate levels and market volatility could lead to increased revenues from trading flows and higher net interest income and lending margins.Deutsche Bank could also benefit from helping clients navigate increasingly volatile financial markets.By focusing on and investing in Deutsche Banks areas of core strengths,in alignment with its sustainability strategy,the implementation of its strategy may create further opportunities if implemented to a greater extent or under more favourable conditions than currently anticipated.Risks Macroeconomic and market conditions In March,mounting investor concerns over banking sector risks resulted in several U.S.regional banks and one major European bank either failing or being restructured.While overall banking sector fundamentals remain sound,recent events have increased the likelihood of a persistent tightening of financial conditions as banks act to preserve liquidity amid higher competition for deposits and increased depositor sensitivity around concentration risks.A pronounced tightening in financial conditions would lead to higher client refinancing risks,with Commercial Real Estate and higher leveraged corporate clients among the sectors in focus.Major central banks continued to tighten monetary policy throughout the recent banking sector turmoil and amid exceptionally high market volatility in some asset classes.Shorter-term sovereign bond yields saw multi-decade record daily moves in mid-March as contagion fears increased.The impact of recent events on investor appetite may at least temporarily impact the Groups ability to distribute and de-risk capital market commitments which could potentially result in losses.Recent events have also increased the risk of idiosyncratic counterparty events both directly and indirectly e.g.,as a result of a shortfall under Lombard or securities financing transactions.In addition,the ECBs TLTRO programme continues to run off with the maturity of the existing TLTRO-III drawings in addition to voluntary prepayments by participating banks.The reduction in this funding source may increase competition for liquidity among Eurozone banks which could have an impact on Deutsche Banks funding costs.While headline inflation has likely passed its peak in key economies,core inflation is expected to be persistent and the path towards normalization remains uncertain.Elevated policy rates may adversely affect Deutsche Banks planned results of operations,financial targets and costs.This includes increased losses,including higher provisions for credit losses,and rating downgrades across the banks client franchise leading to RWA inflation.More persistent inflation and higher terminal interest rates could also dampen consumer spending and private client investments and lead to a reduction in new lending for consumer finance and/or private mortgages.Commercial real estate,in particular the U.S.office sector,is likely to experience pressure on asset quality due to the combination of higher interest rates,tighter financial conditions and post-pandemic shifts in working patterns.28 Deutsche Bank Risks and opportunities Earnings Report as of March 31,2023 Strategy While the Group continuously plans and adapts to changing situations,it runs the risk that a significant deterioration in the global operating environment,or an adverse change in market confidence in the banking sector and/or client behaviour,could lead the Group to miss its publicly communicated targets,incur unexpected losses including further impairments and provisions,experience lower than planned profitability or an erosion of the Groups capital and funding base,leading to a material adverse effect on Deutsche Banks results of operations and share price.Deutsche Bank continues to operate in highly competitive markets in all divisions and repercussions from the banking sector stress in March 2023 may have negative impacts on the Group during the remainder of the year.This exacerbates risks that the bank could fall publicly announced targets and objectives e.g.,its CET1 ratio objective of circa 200 basis points above the banks Maximum Distributable Amount(MDA)threshold as highlighted in the section“Outlook”in this report.Liquidity and funding risks Deutsche Bank retained investment grade ratings with all leading credit rating agencies through the end of March 2023 and does not expect that recent volatility events will have a negative impact on its credit ratings.In response to global inflation and the events during the first quarter of 2023,several Central banks continued to increase interest rates which,in turn,could lead to an increase in Deutsche Banks funding costs and lower valuation of liquid assets which constitute part of its liquidity reserves.At the same time,a downturn in the macro-economic environment could lead to a reduced savings rate and decline in levels of deposits.This effect could be further exacerbated by competitive pricing pressures from other deposit-taking institutions,as well as any broader counterparty concerns about exposures to certain segments of the banking sector.As of March 31,2023,Deutsche Banks key liquidity metrics remained well above the regulatory minimum requirements,providing a strong basis to manage through ongoing market volatility.Third Party Risk The regulatory framework for managing third party risk continues to evolve and becomes increasingly complex as regulators seek to address various objectives.Geopolitical risk developments are also leading to increased scrutiny towards technology providers from third countries and growing localisation requirements.For example,the European Digital Operational Resilience Act(DORA)package which entered into force on January 16,2023,expands the EU framework for third party risk management by introducing further monitoring,reporting,testing and oversight requirements(among others)applicable to EU financial institutions in respect of services carried out by their third-party ICT service providers.The DORA legislative package will apply from January 17,2025,and will complement pre-existing EU“outsourcing”requirements applicable to the financial services sector.A key risk remains that the bank may be ultimately liable in respect of services provided by third parties on behalf of the Group as if the bank had carried out those services itself.In addition,the bank may also face risks of material losses or reputational damage if third parties fail to provide services as agreed with the bank and/or in line with regulatory requirements.29 Deutsche Bank Risks and opportunities Earnings Report as of March 31,2023 Opportunities Macroeconomic and market conditions An improvement in macroeconomic conditions beyond currently forecasted levels could result in higher than planned revenues.The continued increases in interest rates and elevated market volatility observed in the first quarter also present opportunities including increased revenues from higher trading flows amid private,corporate and institutional customers repositioning their portfolios and higher net interest income.Strategy Amid recent volatility events,the banks complete range of services aim to help clients navigate increasingly uncertain financial markets.The ongoing focus on the efficiency of the banks client coverage and further developments in the client experience and service offering aims to add strength and depth to the banks global client relationships.The impact of recent events on the competitive environment also presents an opportunity for Deutsche Bank to accelerate growth initiatives and target market share gains.This includes attracting key revenue generating talent in particular in advisory businesses,as well as the potential acquisition of portfolios and other assets in line with the Banks stated strategy.Technology,Data and Innovation Digital innovation offers various opportunities to increase monetization on existing customers and acquire new customer groups by expanding the Groups own portfolio of products and engaging in product partnerships with third parties,thereby potentially benefiting from a shorter time-to-market.Recent developments in artificial intelligence(AI)technologies such as Generative AI and LLM(Large Language Models)are an area of significant potential for Deutsche Banks operational efficiency and revenue growth.The bank is also collaborating with Google on the early adoption of new AI technologies and on Responsible AI for the banking industry.The Bank is experimenting with such technologies in a prudent and responsible way to ensure it understands and mitigates risks that may arise before such technologies are deployed into production.The Groups global reach allows it to scale products quickly and efficiently across geographies.At the same time,the banks customers will benefit from products and services being developed and brought to market more quickly in the future.Environmental,social and governance As outlined in Deutsche Banks Sustainability Deep Dive on March 2,2023,the transition to a lower carbon economy presents multiple opportunities to support clients on their pathways to net zero through the provision of sustainable finance and transition expertise.Coupled with the active management of the Groups carbon footprint via its net zero target regime,this can lead to both revenue opportunities as well as improved stakeholder perceptions.30 Deutsche Bank Risk information Earnings Report as of March 31,2023 Risk information Key risk metrics The following section provides qualitative and quantitative disclosures about credit,market,liquidity and other risk metrics and its developments within the three months ended March 31,2023.Disclosures according to Pillar 3 of the Basel III Capital Framework,which are implemented in the European Union by the Capital Requirements Regulation(CRR)and supported by EBA Implementing Technical Standards or the EBA Guideline,will be published in the Groups separate Pillar 3 report.European Regulation(EU)2019/876 and Directive(EU)2019/878 introduced amendments to the CRR/CRD with various changes to the regulatory framework that became applicable on June 30,2021:A new standardized approach for counterparty credit risk(SA-CCR)was introduced that replaces the mark-to-market method to determine the exposure value for derivatives that are not in scope of the internal model method.In addition,a new framework to determine the risk weight for banking book investments in collective investment undertakings and default fund contributions to central counterparties was introduced.Moreover,a minimum regulatory leverage ratio of 3%is determined as the ratio of Tier 1 capital and the regulatory leverage exposure.In addition,a minimum Net Stable Funding Ratio(NSFR)of 100%was introduced that requires banks to maintain a stable funding profile in relation to its on and off-balance sheet exposures.Since June 30,2020,the Group applies the transitional arrangements in relation to IFRS 9 as provided in the current CRR/CRD for all CET1 measures.For additional details on the Groups Regulatory Framework,information on key risk categories and on the management of its material risks,please refer to the Annual Report 2022 under the chapter“Risk report”.31 Deutsche Bank Risk information Earnings Report as of March 31,2023 The following selected key risk ratios and corresponding metrics form part of the banks holistic risk management across individual risk types.The Common Equity Tier 1 ratio(CET1),Economic Capital Adequacy(ECA)Ratio,Leverage ratio,Total Loss Absorbing Capacity(TLAC),Minimum Requirement for Own Funds and Eligible Liabilities(MREL),Liquidity Coverage Ratio(LCR)and Stressed Net Liquidity Position(sNLP)serve as high-level metrics and are fully integrated across strategic planning,risk appetite framework,stress testing(except LCR,TLAC and MREL)and recovery and resolution planning practices,which are reviewed and approved by the Management Board at least annually.Going forward,the newly introduced Net Stable Funding Ratio(NSFR)will also form part of the Groups holistic risk management approach.Common Equity Tier 1 ratio 31.3.2023 13.61.12.2022 13.4onomic capital adequacy ratio 31.3.2023 2281.12.2022 239%Leverage ratio 31.3.2023 4.61.12.2022 4.6%Total loss absorbing capacity(TLAC)31.3.2023(Risk Weighted Asset based)33.041.3.2023(Leverage Exposure based)9.601.12.2022(Risk Weighted Asset based)32.201.12.2022(Leverage Exposure based)9.34%Liquidity coverage ratio(LCR)31.3.2023 1431.12.2022 142%Total risk-weighted assets 31.3.2023 359.5 bn 31.12.2022 360.0 bn Total economic capital 31.3.2023 22.1 bn 31.12.2022 20.9 bn Leverage exposure 31.3.2023 1,238 bn 31.12.2022 1,240 bn Minimum requirement for own funds and eligible liabilities(MREL)31.3.2023 35.281.12.2022 34.35%Stressed net liquidity position(sNLP)31.3.2023 44.6 bn 31.12.2022 48.1 bn Net Stable Funding Ratio(NSFR)31.3.2023 1201.12.2022 1202 Deutsche Bank Risk information Earnings Report as of March 31,2023 Risk-weighted assets Risk-weighted assets by risk type and business division Mar 31,2023 in m.Corporate Bank Investment Bank Private Bank Asset Management Corporate&Other Total Credit risk 67,766 94,456 79,241 9,404 18,881 269,749 Settlement risk 0 2 0 0 209 211 Credit valuation adjustment(CVA)54 5,305 33 5 769 6,165 Market risk 589 19,210 76 28 4,568 24,471 Operational risk 5,301 23,416 7,893 3,489 18,839 58,937 Total 73,711 142,388 87,243 12,925 43,267 359,534 Dec 31,2022 in m.Corporate Bank Investment Bank Private Bank Asset Management Corporate&Other Total Credit risk 68,022 93,184 79,865 9,417 18,726 269,214 Settlement risk 0 63 0 0 61 124 Credit valuation adjustment(CVA)130 5,144 29 4 877 6,184 Market risk 847 17,895 72 28 7,289 26,131 Operational risk 5,304 23,155 7,637 3,414 18,839 58,349 Total 74,303 139,442 87,602 12,864 45,792 360,003 1 Comparatives aligned to current presentation The RWA of Deutsche Bank were 359.5 billion as of March 31,2023,compared to 360.0 billion at the end of 2022.The decrease of 0.5 billion was driven by market risk RWA,which was partially offset by operational risk RWA and credit risk RWA.The reduction in market risk RWA by 1.7 billion was primarily driven by decreases in the Value-at-Risk and Stressed Value-at-Risk components due to a lower Capital Multiplier,following a reduction in the qualitative component.Exposure changes also led to a lower Stressed Value-at-Risk but a higher Incremental Risk Charge that offset each other.Higher operational risk RWA of 0.6 billion was mainly driven by qualitative adjustments and external losses,partly offset by a more favorable development of Deutsche Banks internal loss profile feeding into the capital model.The increase in credit risk RWA by 0.5 billion was primarily driven by business growth within the Investment Bank and the Corporate Bank.The increase in credit risk RWA was partly offset by foreign exchange movements and lower RWA for deferred tax assets.33 Deutsche Bank Risk information Earnings Report as of March 31,2023 CET1 capital reconciliation to shareholders equity in m.Mar 31,2023 Dec 31,2022 Total shareholders equity per accounting balance sheet 63,041 61,959 Deconsolidation/Consolidation of entities 72 29 Of which:Additional paid-in capital 0 0 Retained earnings 72 29 Accumulated other comprehensive income(loss),net of tax 0 0 Total shareholders equity per regulatory balance sheet 63,113 61,988 Minority Interests(amount allowed in consolidated CET1)993 1,002 AT1 coupon and shareholder dividend deduction1 (1,299)(1,342)Capital instruments not eligible under CET1 as per CRR 28(1)(23)(14)Common Equity Tier 1(CET1)capital before regulatory adjustments 62,785 61,634 Prudential filters (1,744)(1,427)Of which:Additional value adjustments (1,941)(2,026)Any increase in equity that results from securitized assets (0)(0)Fair value reserves related to gains or losses on cash flow hedges and gains or losses on liabilities designated at fair value resulting from changes in own credit standing 197 600 Regulatory adjustments relating to unrealized gains and losses pursuant to Art.467 and 468 CRR 0 0 Regulatory adjustments (12,116)(12,110)Of which:Goodwill and other intangible assets(net of related tax liabilities)(negative amount)(4,929)(5,024)Deferred tax assets that rely on future profitability (3,112)(3,244)Negative amounts resulting from the calculation of expected loss amounts (518)(466)Defined benefit pension fund assets(net of related tax liabilities)(negative amount)(1,323)(1,149)Direct,indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities 0 0 Securitization positions not included in risk-weighted assets 0 0 Other (2,234)(2,225)Common Equity Tier 1 capital 48,926 48,097 1 Interim profits are recognized subject to approval as per ECB Decision(EU)2015/656 in accordance with the Article 26(2)of Regulation(EU)No 575/2013(ECB/2015/4)2 Includes capital deductions of 1.2 billion(Dec 2022:1.2 billion)based on ECB guidance on irrevocable payment commitments related to the Single Resolution Fund and the Deposit Guarantee Scheme,1.0 billion(Dec 2022:1.0 billion)based on ECBs supervisory recommendation for a prudential provisioning of non-performing exposures,2.9 million(Dec 2022:7 million)resulting from minimum value commitments as per Article 36(1)(n)of the CRR and CET1 decrease of 1.7 million(Dec 2022:15 million)from IFRS 9 transitional provision as per Article 473a of the CRR As of March 31,2023,Deutsche Banks CET1 capital ratio increased to 13.6%compared to 13.4%as of December 31,2022.The increase of 25 basis points is mainly driven by higher CET1 capital and partially by decreased RWA due to the aforementioned developments.CET1 Capital increased by 0.8 billion compared to year end 2022 which was mainly the result of the net profit of 1.3 billion for the first three months ended March 31,2023,partially offset by regulatory deductions for future common share dividend and AT1 coupon payments of 0.4 billion which is in line with the ECB Decision(EU)(2015/656)on the recognition of interim or year-end profits in CET1 capital in accordance with the Article 26(2)of Regulation(EU)No 575/2013(ECB/2015/4).In addition,CET1 capital increased as a result of positive impacts from reduced dividend deduction of 0.4 billion for 2022 due to the proposed dividend payment for 2022 and 0.5 billion unrealized gains and losses from financial instruments at fair value through other comprehensive income(mainly stemming from 0.2 billion reduced unrealized net losses on securities available for sale and 0.2 billion reduced unrealized net losses on cash flow derivatives hedging).These positive impacts were partly offset by deductions of 0.4 billion from Equity compensation,0.3 billion cash flow hedge reserve related to non-fair value underlying and higher expected loss shortfall deduction of 0.1 billion.Additionally,CET1 capital decreased due to Currency Translation Adjustments of 0.3 billion net of foreign exchange counter-effects of capital deduction items of 0.1 billion.34 Deutsche Bank Risk information Earnings Report as of March 31,2023 Economic capital adequacy ratio and economic capital The economic capital adequacy ratio w
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