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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended February 12,2023orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934Commission file number 0-20355Costco Wholesale Corporation(Exact name of registrant as specified in its charter)Washington 91-1223280(State or other jurisdiction ofincorporation or organization)(I.R.S.Employer Identification No.)999 Lake Drive,Issaquah,WA 98027(Address of principal executive offices)(Zip Code)(Registrants telephone number,including area code):(425)313-8100Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock,$.005 Par ValueCOSTThe Nasdaq Global Select MarketIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject tosuch filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required tosubmit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reportingcompany,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The number of shares outstanding of the issuers common stock as of March 1,2023 was 443,483,205.1Table of ContentsCOSTCO WHOLESALE CORPORATIONINDEX TO FORM 10-Q PagePART IFINANCIAL INFORMATIONItem 1.Financial Statements3Condensed Consolidated Statements of Income3Condensed Consolidated Statements of Comprehensive Income4Condensed Consolidated Balance Sheets5Condensed Consolidated Statements of Equity6Condensed Consolidated Statements of Cash Flows8Notes to Condensed Consolidated Financial Statements9Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations18Item 3.Quantitative and Qualitative Disclosures About Market Risk27Item 4.Controls and Procedures27PART IIOTHER INFORMATIONItem 1.Legal Proceedings27Item 1A.Risk Factors27Item 2.Unregistered Sales of Equity Securities and Use of Proceeds28Item 3.Defaults Upon Senior Securities28Item 4.Mine Safety Disclosures28Item 5.Other Information28Item 6.Exhibits29Signatures302Table of ContentsPART IFINANCIAL INFORMATIONItem 1Financial StatementsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(amounts in millions,except per share data)(unaudited)12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022REVENUENet sales$54,239$50,937$107,676$100,354 Membership fees1,027 967 2,027 1,913 Total revenue55,266 51,904 109,703 102,267 OPERATING EXPENSESMerchandise costs48,423 45,517 96,192 89,469 Selling,general and administrative4,940 4,575 9,857 9,293 Operating income1,903 1,812 3,654 3,505 OTHER INCOME(EXPENSE)Interest expense(34)(36)(68)(75)Interest income and other,net114 25 167 67 INCOME BEFORE INCOME TAXES1,983 1,801 3,753 3,497 Provision for income taxes517 481 923 832 Net income including noncontrolling interests1,466 1,320 2,830 2,665 Net income attributable to noncontrolling interests(21)(42)NET INCOME ATTRIBUTABLE TO COSTCO$1,466$1,299$2,830$2,623 NET INCOME PER COMMON SHARE ATTRIBUTABLETO COSTCO:Basic$3.30$2.93$6.37$5.91 Diluted$3.30$2.92$6.37$5.90 Shares used in calculation(000s):Basic443,877 443,623 443,857 443,500 Diluted444,475 444,916 444,503 444,760 The accompanying notes are an integral part of these condensed consolidated financial statements.3Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(amounts in millions)(unaudited)12 Weeks Ended24 Weeks Ended February 12,2023February 13,2022February 12,2023February 13,2022NET INCOME INCLUDING NONCONTROLLINGINTERESTS$1,466$1,320$2,830$2,665 Foreign-currency translation adjustment and other,net253(35)157(107)Comprehensive income1,719 1,285 2,987 2,558 Less:Comprehensive income attributable tononcontrolling interests 21 44 COMPREHENSIVE INCOME ATTRIBUTABLE TOCOSTCO$1,719$1,264$2,987$2,514 The accompanying notes are an integral part of these condensed consolidated financial statements.4Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(amounts in millions,except par value and share data)(unaudited)February 12,2023August 28,2022ASSETSCURRENT ASSETSCash and cash equivalents$12,970$10,203 Short-term investments735 846 Receivables,net2,714 2,241 Merchandise inventories16,081 17,907 Other current assets1,830 1,499 Total current assets34,330 32,696 OTHER ASSETSProperty and equipment,net25,724 24,646 Operating lease right-of-use assets2,859 2,774 Other long-term assets3,935 4,050 TOTAL ASSETS$66,848$64,166 LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable$16,407$17,848 Accrued salaries and benefits4,483 4,381 Accrued member rewards2,016 1,911 Deferred membership fees2,412 2,174 Current portion of long-term debt76 73 Other current liabilities7,122 5,611 Total current liabilities32,516 31,998 OTHER LIABILITIESLong-term debt,excluding current portion6,506 6,484 Long-term operating lease liabilities2,557 2,482 Other long-term liabilities2,470 2,555 TOTAL LIABILITIES44,049 43,519 COMMITMENTS AND CONTINGENCIESEQUITYPreferred stock$0.005 par value;100,000,000 shares authorized;no shares issued andoutstanding Common stock$0.005 par value;900,000,000 shares authorized;443,550,000 and442,664,000 shares issued and outstanding2 2 Additional paid-in capital7,123 6,884 Accumulated other comprehensive loss(1,672)(1,829)Retained earnings17,341 15,585 Total Costco stockholders equity22,794 20,642 Noncontrolling interests5 5 TOTAL EQUITY22,799 20,647 TOTAL LIABILITIES AND EQUITY$66,848$64,166 The accompanying notes are an integral part of these condensed consolidated financial statements.5Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)12 Weeks Ended February 12,2023 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE ATNOVEMBER 20,2022443,841$2$6,982$(1,925)$16,412$21,471$5$21,476 Net income 1,466 1,466 1,466 Foreign-currencytranslation adjustmentand other,net 253 253 253 Stock-basedcompensation 148 148 148 Release of vestedrestricted stock units(RSUs),including taxeffects3 (1)(1)(1)Repurchases ofcommon stock(294)(6)(138)(144)(144)Cash dividend declared (399)(399)(399)BALANCE ATFEBRUARY 12,2023443,550$2$7,123$(1,672)$17,341$22,794$5$22,799 12 Weeks Ended February 13,2022 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE ATNOVEMBER 21,2021443,434$4$7,064$(1,211)$12,606$18,463$537$19,000 Net income 1,299 1,299 21 1,320 Foreign-currencytranslation adjustmentand other,net (35)(35)(35)Stock-basedcompensation 129 129 129 Release of vestedRSUs,including taxeffects4 (4)(4)(4)Repurchases ofcommon stock(159)(3)(80)(83)(83)Cash dividend declared (351)(351)(351)BALANCE ATFEBRUARY 13,2022443,279$4$7,186$(1,246)$13,474$19,418$558$19,976 The accompanying notes are an integral part of these condensed consolidated financial statements.6Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)24 Weeks Ended February 12,2023 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST28,2022442,664$2$6,884$(1,829)$15,585$20,642$5$20,647 Net income 2,830 2,830 2,830 Foreign-currencytranslation adjustmentand other,net 157 157 157 Stock-basedcompensation 551 551 551 Release of vestedrestricted stock units(RSUs),including taxeffects1,465 (302)(302)(302)Repurchases ofcommon stock(579)(10)(275)(285)(285)Cash dividendsdeclared (799)(799)(799)BALANCE ATFEBRUARY 12,2023443,550$2$7,123$(1,672)$17,341$22,794$5$22,799 24 Weeks Ended February 13,2022 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST29,2021441,825$4$7,031$(1,137)$11,666$17,564$514$18,078 Net income 2,623 2,623 42 2,665 Foreign-currencytranslation adjustmentand other,net (109)(109)2(107)Stock-basedcompensation 518 518 518 Release of vestedRSUs,including taxeffects1,690 (359)(359)(359)Repurchases ofcommon stock(236)(4)(114)(118)(118)Cash dividendsdeclared (701)(701)(701)BALANCE ATFEBRUARY 13,2022443,279$4$7,186$(1,246)$13,474$19,418$558$19,976 The accompanying notes are an integral part of these condensed consolidated financial statements.7Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in millions)(unaudited)24 Weeks EndedFebruary 12,2023February 13,2022CASH FLOWS FROM OPERATING ACTIVITIESNet income including noncontrolling interests$2,830$2,665 Adjustments to reconcile net income including noncontrolling interests to net cash provided byoperating activities:Depreciation and amortization917 868 Non-cash lease expense216 145 Stock-based compensation549 516 Other non-cash operating activities,net163 104 Deferred income taxes(18)(15)Changes in operating assets and liabilities:Merchandise inventories1,849(2,322)Accounts payable(1,417)970 Other operating assets and liabilities,net713 728 Net cash provided by operating activities5,802 3,659 CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short-term investments(396)(325)Maturities of short-term investments512 753 Additions to property and equipment(1,947)(1,778)Other investing activities,net(34)(43)Net cash used in investing activities(1,865)(1,393)CASH FLOWS FROM FINANCING ACTIVITIESRepayments of short-term borrowings(520)(87)Proceeds from short-term borrowings479 80 Repayments of long-term borrowings(800)Tax withholdings on stock-based awards(302)(359)Repurchases of common stock(284)(115)Cash dividend payments(400)(350)Other financing activities,net(188)(36)Net cash used in financing activities(1,215)(1,667)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS45(38)Net increase in cash and cash equivalents2,767 561 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR10,203 11,258 CASH AND CASH EQUIVALENTS END OF PERIOD$12,970$11,819 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the first half of the year for:Interest$62$76 Income taxes,net$636$469 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:Cash dividend declared,but not yet paid$399$351 Financing lease assets obtained in exchange for new or modified leases$47$172 Operating lease assets obtained in exchange for new or modified leases$131$60 The accompanying notes are an integral part of these condensed consolidated financial statements.8Table of ContentsCOSTCO WHOLESALE CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(amounts in millions,except share,per share,and warehouse count data)(unaudited)Note 1Summary of Significant Accounting PoliciesDescription of BusinessCostco Wholesale Corporation(Costco or the Company),a Washington corporation,and its subsidiaries operate membership warehousesbased on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range ofmerchandise categories will produce high sales volumes and rapid inventory turnover.At February 12,2023,Costco operated 848 warehousesworldwide:584 in the United States(U.S.)located in 46 states,Washington,D.C.,and Puerto Rico,107 in Canada,40 in Mexico,31 inJapan,29 in the United Kingdom(U.K.),18 in Korea,14 in Taiwan,14 in Australia,four in Spain,two each in France and China,and one eachin Iceland,New Zealand,and Sweden.The Company operates e-commerce websites in the U.S.,Canada,U.K.,Mexico,Korea,Taiwan,Japan,and Australia.Basis of PresentationThe condensed consolidated financial statements include the accounts of Costco,its wholly-owned subsidiaries,and a subsidiary in which it hasa controlling interest.All material inter-company transactions among the Company and its consolidated subsidiaries have been eliminated inconsolidation.Unless otherwise noted,references to net income relate to net income attributable to Costco.These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interimfinancial reporting pursuant to the rules and regulations of the Securities and Exchange Commission(SEC).While these statements reflect allnormal recurring adjustments that are,in the opinion of management,necessary for fair presentation of the results of the interim period,they donot include all of the information and footnotes required by U.S.generally accepted accounting principles(U.S.GAAP)for complete financialstatements.Therefore,the interim condensed consolidated financial statements should be read in conjunction with the consolidated financialstatements and notes included in the Companys Annual Report on Form 10-K for the fiscal year ended August 28,2022.Fiscal Year EndThe Company operates on a 52/53 week fiscal year basis,with the fiscal year ending on the Sunday closest to August 31.Fiscal 2023 is a 53-week year ending on September 3,2023.References to the second quarter of 2023 and 2022 relate to the 12-week fiscal quartersended February 12,2023,and February 13,2022.References to the first half of 2023 and 2022 relate to the 24 weeks ended February 12,2023and February 13,2022.Use of EstimatesThe preparation of financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.These estimates and assumptions take into account historical andforward-looking factors that the Company believes are reasonable.Actual results could differ from those estimates and assumptions.9Table of ContentsReclassificationReclassifications were made to the condensed consolidated statement of cash flows for the first half of 2022 to conform with current yearpresentation.LeasesThe Company leases land,buildings,equipment,and other assets at warehouses,offices,or within the operations that support supply chain anddistribution channels.The Company reviews lease right-of-use assets for impairment when events or changes in circumstances indicate that thecarrying amount of the asset group may not be fully recoverable.The Company also occasionally revisits and modifies the terms of its leasingarrangements.During the first quarter of 2023,the Company recognized a charge of$93,primarily related to the termination costs andimpairment of certain leased assets associated with charter shipping activities.This charge is included in merchandise costs.Note 2InvestmentsThe Companys investments were as follows:February 12,2023:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$595$(11)$584 Held-to-maturity:Certificates of deposit151 151 Total short-term investments$746$(11)$735 August 28,2022:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$534$(5)$529 Held-to-maturity:Certificates of deposit317 317 Total short-term investments$851$(5)$846 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended February 12,2023,andAugust 28,2022.At those dates,there were no available-for-sale securities in a material continuous unrealized-loss position.There were nosales of available-for-sale securities during the first half of 2023 or 2022.The maturities of available-for-sale and held-to-maturity securities at February 12,2023 are as follows:Available-For-SaleHeld-To-Maturity Cost BasisFair ValueDue in one year or less$177$175$151 Due after one year through five years287 282 Due after five years131 127 Total$595$584$151 10Table of ContentsNote 3Fair Value MeasurementAssets and Liabilities Measured at Fair Value on a Recurring BasisThe table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicatesthe level within the fair-value hierarchy reflecting the valuation techniques utilized.Level 2February 12,2023August 28,2022Investment in government and agency securities$584$529 Forward foreign-exchange contracts,in asset position6 34 Forward foreign-exchange contracts,in(liability)position(18)(2)Total$572$561 _(1)The asset and liability values are included in other current assets and other current liabilities,respectively,in the accompanying condensed consolidated balance sheets.At February 12,2023,and August 28,2022,the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fairvalue on a recurring basis.There were no transfers between levels during the first half of 2023 or 2022.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisAssets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured atamortized cost and long-lived nonfinancial assets.These assets are measured at fair value if determined to be impaired.Please see Note 1 foradditional information.Note 4DebtThe carrying value of the Companys long-term debt consisted of the following:February 12,2023August 28,20222.750%Senior Notes due May 2024$1,000$1,000 3.000%Senior Notes due May 20271,000 1,000 1.375%Senior Notes due June 20271,250 1,250 1.600%Senior Notes due April 20301,750 1,750 1.750%Senior Notes due April 20321,000 1,000 Other long-term debt612 590 Total long-term debt6,612 6,590 Less unamortized debt discounts and issuance costs30 33 Less current portion76 73 Long-term debt,excluding current portion$6,506$6,484 _(1)Net of unamortized debt discounts and issuance costs.The fair value of the Senior Notes is estimated using Level 2 inputs.Other long-term debt consists of Guaranteed Senior Notes issued by theCompanys Japan subsidiary,valued using Level 3 inputs.The fair value of the Companys long-term debt,including the current portion,wasapproximately$5,895 and$6,033 at February 12,2023,and August 28,2022.(1)(1)(1)11Table of ContentsNote 5EquityDividendsA quarterly cash dividend of$0.90 per share was declared on January 19,2023 and paid on February 17,2023.The Companys quarterlydividend was$0.79 per share in the second quarter of 2022 and dividends totaled$1.80 and$1.58 per share in the first half of 2023 and 2022.Share Repurchase ProgramOn January 19,2023,the Board of Directors authorized a new share repurchase program in the amount of$4,000,which expires in January2027.This authorization revoked previously authorized but unused amounts,totaling$2,568.At February 12,2023,the remaining amountavailable under the program was$3,955.The following table summarizes the Companys stock repurchase activity:Shares Repurchased(000s)Average Price per ShareTotal CostSecond quarter of 2023294$488.30$144 First half of 2023579$492.06$285 Second quarter of 2022159$518.73$83 First half of 2022236$498.00$118 These amounts may differ from the accompanying condensed consolidated statements of cash flows due to changes in unsettled stockrepurchases at the end of each quarter.Purchases are made from time to time,as conditions warrant,in the open market or in block purchasesand pursuant to plans under SEC Rule 10b5-1.Note 6Stock-Based CompensationThe 2019 Incentive Plan authorized the issuance of 17,500,000 shares(10,000,000 RSUs)of common stock for future grants,plus theremaining shares that were available for grant and the future forfeited shares from grants under the previous plan,up to a maximum of27,800,000 shares(15,885,000 RSUs).The Company issues new shares of common stock upon vesting of RSUs.Shares for vested RSUs aregenerally delivered to participants annually,net of shares withheld for taxes.Summary of Restricted Stock Unit ActivityAt February 12,2023,8,703,000 shares were available to be granted as RSUs,and the following awards were outstanding:2,921,000 time-based RSUs,which vest upon continued employment over specified periods and accelerate upon achievement of a long-service term;41,000 performance-based RSUs granted to executive officers of the Company,for which the performance targets have been met.Theawards vest upon continued employment over specified periods of time and upon achievement of a long-service term;and135,000 performance-based RSUs granted to executive officers of the Company,subject to achievement of performance targets for fiscal2023,as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year.These awards areincluded in the table below.The Company recognized compensation expense for these awards in the second quarter of 2023,as it iscurrently deemed probable that the targets will be achieved.12Table of ContentsThe following table summarizes RSU transactions during the first half of 2023:Number ofUnits(in 000s)Weighted-AverageGrant Date Fair ValueOutstanding at August 28,20223,449$338.41 Granted1,814 471.47 Vested and delivered(2,094)352.57 Forfeited(72)394.40 Outstanding at February 12,20233,097$405.46 The remaining unrecognized compensation cost related to RSUs unvested at February 12,2023,was$1,031,and the weighted-average periodover which this cost will be recognized is 1.8 years.Summary of Stock-Based CompensationThe following table summarizes stock-based compensation expense and the related tax benefits:12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Stock-based compensation expense$147$128$549$516 Less recognized income tax benefits24 23 113 108 Stock-based compensation expense,net$123$105$436$408 Note 7Net Income per Common and Common Equivalent ShareThe following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and ofpotentially dilutive common shares outstanding(shares in 000s):12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Net income attributable to Costco$1,466$1,299$2,830$2,623 Weighted average basic shares443,877 443,623 443,857 443,500 RSUs598 1,293 646 1,260 Weighted average diluted shares444,475 444,916 444,503 444,760 Anti-dilutive RSUs6 Anti-dilutive shares are excluded from the calculation of diluted shares and earnings per diluted share because their impact would increaseearnings per diluted shares.13Table of ContentsNote 8Commitments and ContingenciesLegal ProceedingsThe Company is involved in a number of claims,proceedings and litigations arising from its business and property ownership.In accordancewith applicable accounting guidance,the Company establishes an accrual for legal proceedings if and when those matters present losscontingencies that are both probable and reasonably estimable.There may be exposure to loss in excess of amounts accrued.The Companymonitors those matters for developments that would affect the likelihood of a loss(taking into account where applicable indemnificationarrangements concerning suppliers and insurers)and the accrued amount,if any,thereof,and adjusts the amount as appropriate.The Companyhas recorded immaterial accruals with respect to certain matters described below,in addition to other immaterial accruals for matters notdescribed below.If the loss contingency at issue is not both probable and reasonably estimable,the Company does not establish an accrual,butwill monitor the matter for developments that will make the contingency both probable and reasonably estimable.In each case,there is areasonable possibility that a loss may be incurred,including a loss in excess of the applicable accrual.For matters where no accrual has beenrecorded,the possible loss or range of loss(including any loss in excess of the accrual)cannot,in the Companys view,be reasonably estimatedbecause,among other things:(i)the remedies or penalties sought are indeterminate or unspecified;(ii)the legal and/or factual theories are notwell developed;and/or(iii)the matters involve complex or novel legal theories or a large number of parties.The Company is a defendant in an action commenced in July 2013 under the California Labor Code Private Attorneys General Act(PAGA)alleging violation of California Wage Order 7-2001 for failing to provide seating to employees who work at entrance and exit doors in Californiawarehouses.Canela v.Costco Wholesale Corp.(Case No.2013-1-CV-248813;Santa Clara Superior Court).The complaint seeks relief underthe California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denying the material allegations of thecomplaint.On January 19,2023,the court issued a Proposed/Tentative Statement of Decision Following Court Trial finding in favor of Costco.The plaintiff filed a request for further statement of decision and objections to the tentative decision.The parties are awaiting the courts review ofplaintiffs filings and Costcos response thereto,after which the court will decide if it requires a hearing before a final decision issues.In December 2018,a depot employee raised similar claims,alleging that depot employees in California did not receive suitable seating orreasonably comfortable workplace temperature conditions.Lane v.Costco Wholesale Corp.(Case No.CIVDS 1908816;San BernardinoSuperior Court).In October 2019,the parties settled for an immaterial amount the seating claims on a representative basis,which received courtapproval in February 2020.The parties settled the temperature claims for an immaterial amount in April 2022,and court approval was receivedin May 2022.In June 2022,a business center employee raised similar claims,alleging failure to provide seating to employees who work at membership refunddesks in California warehouses and business centers.Rodriguez v.Costco Wholesale Corp.(Case No.22CV012847;Alameda Superior Court).The complaint seeks relief under the California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denyingthe material allegations of the complaint.In March 2019,employees filed a class action against the Company alleging claims under California law for failure to pay overtime,to providemeal and rest periods and itemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfairbusiness practices.Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Nevarez v.Costco WholesaleCorp.(Case No.2:19-cv-03454;C.D.Cal.).The Company filed an answer denying the material allegations of the complaint.In December 2019,the court issued an order denying class certification.In January 2020,the plaintiffs dismissed their Labor Code claims without prejudice,and thecourt remanded the action to state court.Settlement for an immaterial amount was agreed upon in14Table of ContentsFebruary 2021.Final court approval of the settlement was granted on May 3,2022.A proposed intervenor appealed the denial of her motion tointervene.Her appeal was dismissed on February 15,2023.In May 2019,an employee filed a class action against the Company alleging claims under California law for failure to pay overtime,to provideitemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfair business practices.Roughv.Costco Wholesale Corp.(Case No.2:19-cv-01340;E.D.Cal.).Relief is sought under the California Labor Code,including civil penalties andattorneys fees.In September 2021,the court granted Costcos motion for partial summary judgment and denied class certification.In August2019,the plaintiff filed a companion case in state court seeking penalties under PAGA.Rough v.Costco Wholesale Corp.(Case No.FCS053454;Sonoma County Superior Court).Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Thestate court action has been stayed pending resolution of the federal action.In December 2020,a former employee filed suit against the Company asserting collective and class claims on behalf of non-exempt employeesunder the Fair Labor Standards Act and New York Labor Law for failure to pay for all hours worked,failure to pay certain non-exempt employeeson a weekly basis,and failure to provide proper wage statements and notices.The plaintiff also asserted individual retaliation claims.Cappadorav.Costco Wholesale Corp.(Case No.1:20-cv-06067;E.D.N.Y.).An amended complaint was filed,and the Company denied the materialallegations of the amended complaint.Based on an agreement in principle concerning settlement of the matter,involving a proposed payment bythe Company of an immaterial amount,the federal action has been dismissed.In April 2022,Cappadora and a second plaintiff filed an actionagainst the Company in New York state court,asserting the same class claims asserted in the federal action under the New York Labor Law andseeking preliminary approval of the class settlement.Cappadora and Sancho v.Costco Wholesale Corp.(Index No.604757/2022;NassauCounty Supreme Court).The state court granted preliminary approval of the settlement in October 2022.A final approval hearing is set for March27,2023.In August 2021,a former employee filed a similar suit,asserting class claims on behalf of certain non-exempt employees under New York LaborLaw for failure to pay on a weekly basis.Umadat v.Costco Wholesale Corp.(Case No.2:21-cv-4814;E.D.N.Y.).The Company filed an answer,denying the material allegations of the complaint.In April 2022,a former employee filed a similar suit,asserting class claims on behalf of certainnon-exempt employees under New York Labor Law,as well as under the Fair Labor Standards Act,for failure to pay on a weekly basis andfailure to pay overtime.Burian v.Costco Wholesale Corp.(Case No.2:22-cv-02108;E.D.N.Y.).In September 2022,an amended complaint wasfiled,asserting class claims on behalf of certain non-exempt employees under New York Labor Law for failure to pay on a weekly basis.TheCompany responded by requesting permission to file a motion to dismiss.The court stayed the action pending the class settlement in theCappadora matter noted above.In February 2021,a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment ofwages,meal and rest periods,wage statements,reimbursement of expenses,payment of final wages to terminated employees,and for unfairbusiness practices.Edwards v.Costco Wholesale Corp.(Case No.5:21-cv-00716:C.D.Cal.).In May 2021,the Company filed a motion todismiss the complaint,which was granted with leave to amend.In June 2021,the plaintiff filed an amended complaint,which the Companymoved to dismiss.The court granted the motion in part in July 2021 with leave to amend.In August 2021,the plaintiff filed a second amendedcomplaint and filed a separate representative action under PAGA asserting the same Labor Code claims and seeking civil penalties andattorneys fees.The Company filed an answer to the second amended class action complaint,denying the material allegations.The Companyalso filed an answer to the PAGA representative action,denying the material allegations.On September 27,2022,the parties reached asettlement for an immaterial amount.The settlement requires court approval.In July 2021,a former temporary staffing employee filed a class action against the Company and a staffing company alleging violations of theCalifornia Labor Code regarding payment of wages,meal and rest periods,wage statements,the timeliness of wages and final wages,and forunfair business practices.Dimas v.Costco Wholesale Corp.(Case No.STK-CV-UOE-2021-0006024;San Joaquin Superior Court).15Table of ContentsThe Company has moved to compel arbitration of the plaintiffs individual claims and to dismiss the class action complaint.On September 7,2021,the same former employee filed a separate representative action under PAGA,asserting the same Labor Code violations and seeking civilpenalties and attorneys fees.The case has been stayed pending resolution of the motion to compel in the related case.In September 2021,an employee filed a class action against the Company alleging violations of the California Labor Code regarding failure toprovide sick pay,failure to timely pay wages due at separation from employment,and for violations of Californias unfair competition law.DeBenning v.Costco Wholesale Corp.(Case No.34-2021-00309030-CU-OE-GDS;Sacramento Superior Court).The Company answered thecomplaint in January 2022,denying its material allegations.In April 2022,a settlement for an immaterial amount was agreed upon,subject tocourt approval.Final approval of the settlement was granted on February 10,2023.In March 2022,an employee filed a class action against the Company alleging violations of the California Labor Code regarding the failure to:pay wages,provide meal and rest periods,provide accurate wage statements,timely pay final wages,and reimburse business expenses.Diaz v.Costco Wholesale Corp.(Case No.22STCV09513;Los Angeles Superior Court).The Company filed an answer denying the material allegations.In December 2022,the case was settled for an immaterial amount.In May 2022,an employee filed a PAGA-only representative action against the Company alleging claims under the California Labor Coderegarding the payment of wages,meal and rest periods,the timeliness of wages and final wages,wage statements,accurate records andbusiness expenses.Gonzalez v.Costco Wholesale Corp.(Case No.22AHCV00255;Los Angeles Superior Court).The Company filed ananswer denying the allegations.Beginning in December 2017,the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts ofopioid abuses filed against various defendants by counties,cities,hospitals,Native American tribes,third-party payors,and others.In re NationalPrescription Opiate Litigation(MDL No.2804)(N.D.Ohio).Included are cases that name the Company,including actions filed by counties andcities in Michigan,New Jersey,Oregon,Virginia and South Carolina,a third-party payor in Ohio,and a hospital in Texas,class actions filed onbehalf of infants born with opioid-related medical conditions in 40 states,and class actions and individual actions filed on behalf of individualsseeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa.Claims against theCompany in state courts in New Jersey,Oklahoma,Utah,and Arizona have been dismissed.The Company is defending all of the pendingmatters.Members of the Board of Directors,six corporate officers and the Company are defendants in a shareholder derivative action filed in June 2022related to chicken welfare and alleged breaches of fiduciary duties.Smith,et ano.v.Vachris,et al.,Superior Court of the State of Washington,County of King,No,22-2-08937-7SEA.The complaint seeks from the individual defendants damages,injunctive relief,costs,and attorneys fees.A motion to dismiss the amended complaint has been filed.The Company does not believe that any pending claim,proceeding or litigation,either alone or in the aggregate,will have a material adverseeffect on the Companys financial position,results of operations or cash flows;it is possible that an unfavorable outcome of some or all of thematters,however unlikely,could result in a charge that might be material to the results of an individual fiscal quarter or year.16Table of ContentsNote 9Segment ReportingThe Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S.,Canada,Mexico,Japan,U.K.,Korea,Taiwan,Australia,Spain,France,China,Iceland,New Zealand,and Sweden.Reportable segments are largelybased on managements organization of the operating segments for operational decisions and assessments of financial performance,whichconsiders geographic locations.The material accounting policies of the segments are as described in the notes to the consolidated financialstatements included in the Companys Annual Report filed on Form 10-K for the fiscal year ended August 28,2022,and Note 1 above.Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income.The following table provides information for the Companys reportable segments:United StatesOperationsCanadianOperationsOtherInternationalOperationsTotal12 Weeks Ended February 12,2023Total revenue$40,145$7,299$7,822$55,266 Operating income1,295 284 324 1,903 12 Weeks Ended February 13,2022Total revenue$37,567$7,017$7,320$51,904 Operating income1,179 301 332 1,812 24 Weeks Ended February 12,2023Total revenue$80,290$14,655$14,758$109,703 Operating income2,531 572 551 3,654 24 Weeks Ended February 13,2022Total revenue$73,884$14,138$14,245$102,267 Operating income2,297 594 614 3,505 52 Weeks Ended August 28,2022Total revenue$165,294$31,675$29,985$226,954 Operating income5,268 1,346 1,179 7,793 Disaggregated RevenueThe following table summarizes net sales by merchandise category;sales from e-commerce websites and business centers have been allocatedto the applicable merchandise categories:12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Foods and Sundries$21,926$19,489$43,374$39,052 Non-Foods14,741 15,105 28,773 29,267 Fresh Foods7,376 6,959 14,093 13,398 Warehouse Ancillary and Other Businesses10,196 9,384 21,436 18,637 Total net sales$54,239$50,937$107,676$100,354 17Table of ContentsItem 2Managements Discussion and Analysis of Financial Condition and Results of Operations(amounts in millions,except per share,share,percentages and warehouse count data)FORWARD-LOOKING STATEMENTSCertain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995.For these purposes,forward-looking statements are statements that address activities,events,conditions or developmentsthat the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth,changes in comparablesales,cannibalization of existing locations by new openings,price or fee changes,earnings performance,earnings per share,stock-basedcompensation expense,warehouse openings and closures,capital spending,the effect of adopting certain accounting standards,future financialreporting,financing,margins,return on invested capital,strategic direction,expense controls,membership renewal rates,shopping frequency,litigation,and the demand for our products and services.In some cases,forward-looking statements can be identified because they containwords such as“anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“intend,”“likely,”“may,”“might,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“target,”“will,”“would,”or similar expressions and the negatives of those terms.Such forward-looking statementsinvolve risks and uncertainties that may cause actual events,results,or performance to differ materially from those indicated by suchstatements.These risks and uncertainties include,but are not limited to,domestic and international economic conditions,including exchangerates,inflation or deflation,the effects of competition and regulation,uncertainties in the financial markets,consumer and small businessspending patterns and debt levels,breaches of security or privacy of member or business information,conditions affecting the acquisition,development,ownership or use of real estate,capital spending,actions of vendors,rising costs associated with employees(generally includinghealth-care costs),energy and certain commodities,geopolitical conditions(including tariffs and the Ukraine conflict),the ability to maintaineffective internal control over financial reporting,regulatory and other impacts related to climate change,public-health related factors,and otherrisks identified from time to time in the Companys public statements and reports filed with the Securities and Exchange Commission.Forward-looking statements speak only as of the date they are made,and the Company does not undertake to update these statements,except asrequired by law.OVERVIEWThe following Managements Discussion and Analysis of Financial Condition and Results of Operations(MD&A)is intended to promoteunderstanding of the results of operations and financial condition.MD&A is provided as a supplement to,and should be read in conjunction with,our condensed consolidated financial statements and the accompanying Notes to Financial Statements(Part I,Item 1 of this Form 10-Q),as wellas our consolidated financial statements,the accompanying Notes to Financial Statements,and the related Managements Discussion andAnalysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K,filed with the United States Securities andExchange Commission on October 5,2022.We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limitedselection of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventoryturnover.When combined with the operating efficiencies achieved by volume purchasing,efficient distribution and reduced handling ofmerchandise in no-frills,self-service warehouse facilities,these volumes and turnover enable us to operate profitably at significantly lower grossmargins(net sales less merchandise costs)than most other retailers.We often sell inventory before we are required to pay for it,even whiletaking advantage of early payment discounts.We believe that the most important driver of our profitability is increasing net sales,particularly comparable sales.Net sales includes our coremerchandise categories(foods and sundries,non-foods,and fresh foods),warehouse ancillary(gasoline,pharmacy,optical,food court,hearingaids,and tire installation)and other businesses(e-commerce,business centers,travel and other).We define18Table of Contentscomparable sales as net sales from warehouses open for more than one year,including remodels,relocations and expansions,and sales relatedto e-commerce websites operating for more than one year.Comparable sales growth is achieved through increasing shopping frequency fromnew and existing members and the amount they spend on each visit(average ticket).Sales comparisons can also be particularly influenced bycertain factors that are beyond our control:fluctuations in currency exchange rates(with respect to our international operations);inflation andchanges in the cost of gasoline and associated competitive conditions.The higher our comparable sales exclusive of these items,the more wecan leverage our SG&A expenses,reducing them as a percentage of sales and enhancing profitability.Generating comparable sales growth isforemost a question of making available to our members the right merchandise at the right prices,a skill that we believe we have repeatedlydemonstrated over the long-term.Another substantial factor in net sales growth is the health of the economies in which we do business,including the effects of inflation or deflation,especially the United States.Net sales growth and gross margins are also impacted by ourcompetition,which is vigorous and widespread,across a wide range of global,national and regional wholesalers and retailers,including thosewith e-commerce operations.While we cannot control or reliably predict general economic health or changes in competition,we believe that wehave been successful historically in adapting our business to these changes,such as through adjustments to our pricing and merchandise mix,including increasing the penetration of our private-label items,and through online offerings.Our philosophy is to provide our members with quality goods and services at competitive prices.We do not focus in the short-term onmaximizing prices charged,but instead seek to maintain what we believe is a perception among our members of our“pricing authority”consistently providing the most competitive values.Merchandise costs in the second quarter of 2023 continued to be impacted by inflation.Theimpact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to cost increases.Thosestrategies can include,but are not limited to,working with our suppliers to share in absorbing cost increases,earlier-than-usual purchasing andin greater volumes,offering seasonal merchandise outside its season,as well as passing cost increases on to our members.Our investments inmerchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite costincreases instead of passing the increases on to our members,all negatively impacting gross margin and gross margin as a percentage of netsales(gross margin percentage).We believe our gasoline business enhances traffic in our warehouses,but it generally has a lower gross margin percentage relative to our non-gasoline businesses.It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline businesses.A higher penetrationof gasoline sales will generally lower our gross margin percentage.Rapidly changing gasoline prices may significantly impact our near-term netsales growth.Generally,rising gasoline prices benefit net sales growth which,given the higher sales base,negatively impacts our gross marginpercentage but decreases our SG&A expenses as a percentage of net sales.A decline in gasoline prices has the inverse effect.Additionally,government actions in various countries relating to tariffs,particularly China and the United States,have affected the costs of some of ourmerchandise.The degree of our exposure is dependent on(among other things)the type of goods,rates imposed,and timing of the tariffs.Higher tariffs could adversely impact our results.We also achieve net sales growth by opening new warehouses.As our warehouse base grows,available and desirable sites become moredifficult to secure,and square footage growth becomes a comparatively less substantial component of growth.The negative aspects of suchgrowth,however,including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouseswhen openings occur in existing markets,are continuing to decline in significance as they relate to the results of our total operations.Our rate ofsquare footage growth is generally higher in foreign markets,due to the smaller base in those markets,and we expect that to continue.Our e-commerce business,domestically and internationally,generally has a lower gross margin percentage than our warehouse operations.19Table of ContentsThe membership format is an integral part of our business and has a significant effect on our profitability.This format is designed to reinforcemember loyalty and provide continuing fee revenue.The extent to which we achieve growth in our membership base,increase the penetration ofour Executive members,and sustain high renewal rates materially influences our profitability.Our paid-membership growth rate may beadversely impacted when warehouse openings occur in existing markets as compared to new markets.Our financial performance depends heavily on controlling costs.While we believe that we have achieved successes in this area,some significantcosts are partially outside our control,particularly health care and utility expenses.With respect to the compensation of our employees,ourphilosophy is not to seek to minimize their wages and benefits.Rather,we believe that achieving our longer-term objectives of reducingemployee turnover and enhancing employee satisfaction require maintaining compensation levels that are better than the industry average formuch of our workforce.This may cause us,for example,to absorb costs that other employers might seek to pass through to their workforces.Because our business operates on very low margins,modest changes in various items in the consolidated statements of income,particularlymerchandise costs and SG&A expenses,can have substantial impacts on net income.Our operating model is generally the same across our U.S.,Canadian,and Other International operating segments(see Note 9 to thecondensed consolidated financial statements included in Part I,Item 1,of this Report).Certain operations in the Other International segmenthave relatively higher rates of square footage growth,lower wage and benefit costs as a percentage of sales,less or no direct membershipwarehouse competition,or lack e-commerce or business delivery.In discussions of our consolidated operating results,we refer to the impact of changes in foreign currencies relative to the U.S.dollar,which aredifferences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies intoU.S.dollars.This impact of foreign-exchange rate changes is calculated based on the difference between the current and prior periods currencyexchange rates.The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and priorperiods average price per gallon sold.Our fiscal year ends on the Sunday closest to August 31.References to the second quarter of 2023 and 2022 relate to the 12-week fiscalquarters ended February 12,2023,and February 13,2022.References to the first half of 2023 and 2022 relate to the 24 weeks endedFebruary 12,2023,and February 13,2022.Certain percentages presented are calculated using actual results prior to rounding.Unlessotherwise noted,references to net income relate to net income attributable to Costco.Highlights for the second quarter of 2023 versus 2022 include:Net sales increased 6%to$54,239,driven by an increase in comparable sales of 5%and sales at 20 net new warehouses opened sincethe end of the second quarter of 2022;Membership fee revenue increased 6%to$1,027,driven by new member sign-ups,upgrades to Executive Membership,and a higherrenewal rate;Gross margin percentage increased eight basis points,driven primarily by a LIFO charge recorded in the second quarter of 2022.Thiswas partially offset by decreases in core merchandise categories;SG&A expenses as a percentage of net sales increased 13 basis points,primarily due to central operating costs;Net income was$1,466,$3.30 per diluted share,compared to$1,299,$2.92 per diluted share in 2022;andA quarterly cash dividend of$0.90 per share was declared on January 19,2023 and paid on February 17,2023.20Table of ContentsRESULTS OF OPERATIONSNet Sales12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Net Sales$54,239$50,937$107,676$100,354 Changes in net sales:U.S7%9nada4%4%Other International7%4%Total Company6%7%Changes in comparable sales:U.S6%8nada4%3%Other International4%6%Total Company5%6%E-commerce(10)%(7)%Changes in comparable sales excluding the impact of changesin foreign-currency and gasoline prices:U.S6%6nada10%9%Other International10%9%9%Total Company7%7%E-commerce(9)%(6)%Net SalesNet sales increased$3,302 or 6%,and$7,322 or 7%during the second quarter and first half of 2023.This improvement was attributable to anincrease in comparable sales of 5%and 6%in the second quarter and first half of 2023,and sales at the 20 net new warehouses opened sincethe end of the second quarter of 2022.Sales increased$2,490,or 6%and$4,523,or 6%in core merchandise categories during the secondquarter and first half of 2023,led by foods and sundries and fresh foods;while non-foods decreased.Sales increased$812,or 9%and$2,799,or 15%in warehouse ancillary and other businesses during the second quarter and first half of 2023,led by gasoline,pharmacy and travel.During the second quarter of 2023,changes in foreign currencies relative to the U.S.dollar negatively impacted net sales by approximately$937,184 basis points,compared to the second quarter of 2022,attributable to our Canadian and Other International operations.The volume ofgasoline sold increased approximately 9%,positively impacting net sales by$565,111 basis points.Changes in gasoline prices did notmaterially impact net sales for the current quarter.During the first half of 2023,changes in foreign currencies relative to the U.S.dollar negatively impacted net sales by approximately$2,471,246basis points,compared to the first half of 2022,attributable to our Canadian and Other International Operations.Higher gasoline prices positivelyimpacted net sales by$1,254,125 basis points,compared to 2022,with a 9%increase in the average price per gallon.The volume of gasolinesold increased approximately 10%,positively impacting net sales by$1,215,121 basis points.21Table of ContentsComparable SalesComparable sales increased 5%and 6%in the second quarter and first half of 2023 and were positively impacted by increases in shoppingfrequency and the average ticket,which includes the effects of inflation and changes in foreign currency.Membership Fees12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Membership fees$1,027$967$2,027$1,913 Membership fees increase6%6%Total paid members(000s)68,100 63,400 Total cardholders(000s)123,000 114,800 Membership fee revenue increased 6%in both the second quarter and first half of 2023,driven by sign-ups,upgrades to Executive Membership,and a higher renewal rate.Changes in foreign currencies relative to the U.S.dollar negatively impacted membership fees by$20 and$52 in thesecond quarter and first half of 2023.At the end of the second quarter of 2023,our renewal rates were 92.6%in the U.S.and Canada and 90.5%worldwide.Renewal rates continue to benefit from more members auto renewing and increased penetration of Executive members,who onaverage renew at a higher rate.Our renewal rate,which excludes affiliates of Business members,is a trailing calculation that captures renewalsduring the period seven to eighteen months prior to the reporting date.We account for membership fee revenue on a deferred basis,recognized ratably over the one-year membership period.Our membership countsinclude active memberships and memberships that have not renewed within the 12 months prior to the reporting date.Gross Margin12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Net sales$54,239$50,937$107,676$100,354 Less merchandise costs48,423 45,517 96,192 89,469 Gross margin$5,816$5,420$11,484$10,885 Gross margin percentage10.72.64.67.85%Quarterly ResultsTotal gross margin percentage increased eight basis points compared to the second quarter of 2022.Excluding the impact of gasoline priceinflation on net sales,gross margin percentage was 10.73%,an increase of nine basis points.This was driven primarily by a 14 basis-pointincrease due to a LIFO charge recorded in the second quarter of 2022.Warehouse ancillary and other business also positively impacted grossmargin by three basis points,predominantly gasoline,partially offset by e-commerce and pharmacy.Core merchandise categories negativelyimpacted gross margin by six basis points,predominantly in non-foods and fresh foods,partially offset by foods and sundries.Gross margin wasnegatively impacted by two basis points due to increased 2%rewards.Changes in foreign currencies relative to the U.S.dollar negativelyimpacted gross margin by approximately$91,compared to the second quarter of 2022,attributable to our Canadian and Other Internationaloperations.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),decreased 26 basis points.The decrease was across all categories,most significantly in fresh foods.This measure eliminates the impact ofchanges in sales penetration and gross margins from our warehouse ancillary and other businesses.22Table of ContentsGross margin on a segment basis,when expressed as a percentage of the segments own sales and excluding the impact of changes ingasoline prices on net sales(segment gross margin percentage),increased in our U.S.segment,largely due to the LIFO charge discussedabove and an increase in our warehouse ancillary and other businesses,predominantly gasoline,partially offset by e-commerce.Gross marginpercentage decreased in our Canadian and Other International segment due to decreases in core merchandise categories and increased 2%rewards,partially offset by warehouse ancillary and other businesses.Year-to-date ResultsTotal gross margin percentage decreased 18 basis points compared to the first half of 2022.Excluding the impact of gasoline price inflation onnet sales,gross margin percentage was 10.79%,a decrease of six basis points.This was primarily due to an 18 basis-point decrease in coremerchandise categories,predominantly in non-foods and fresh foods,partially offset by foods and sundries,and a nine basis-point chargeprimarily related to downsizing our charter shipping activities during the first quarter of 2023.Gross margin was also negatively impacted bythree basis points due to increased 2%rewards.Warehouse ancillary and other businesses positively impacted gross margin by 16 basis points,predominantly gasoline,partially offset by e-commerce.A smaller LIFO charge in the first half of 2023 compared to the first half of 2022positively contributed eight basis points.Changes in foreign currencies relative to the U.S.dollar negatively impacted gross margin byapproximately$244,compared to the first half of 2022,attributable to our Canadian and Other International operations.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),decreased 29 basis points.The decrease was primarily due to fresh foods and non-foods.This measure eliminates the impact of changes insales penetration and gross margins from our warehouse ancillary and other businesses.Segment gross margin percentage increased in our U.S.segment,due to warehouse ancillary and other businesses and a smaller LIFO charge,partially offset by the charge related to downsizing our charter shipping activities and decreases in certain core merchandise categories,non-foods and fresh foods,partially offset by foods and sundries.Gross margin decreased in our Canadian and Other International segment due todecreases in core merchandise categories,partially offset by warehouse ancillary and other businesses.All segments were negatively impactedby increased 2%rewards.Selling,General and Administrative Expenses12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022SG&A expenses$4,940$4,575$9,857$9,293 SG&A expenses as a percentage of net sales9.11%8.98%9.15%9.26%Quarterly ResultsSG&A expenses as a percentage of net sales increased 13 basis points.The effect of gasoline price inflation had no impact on SG&A expensesas a percentage of sales.The comparison to last year was negatively impacted by nine basis points in central operating costs partiallyattributable to a charge related to a tax audit covering multiple years.Warehouse operations and other businesses and stock compensation wereboth higher by two basis points.Changes in foreign currencies relative to the U.S.dollar decreased SG&A expenses by approximately$75compared to the second quarter of 2022.23Table of ContentsYear-to-date ResultsSG&A expenses as a percentage of net sales decreased 11 basis points.SG&A expenses as a percentage of net sales excluding the impact ofgasoline price inflation was flat compared to the first half of 2022.The comparison to last year was favorably impacted by 12 basis points from awrite-off of certain information technology assets in the prior year.Warehouse operations and other businesses were higher by six basis points,largely attributable to the wage increases we instituted in 2022.Central operating costs were also higher by six basis points.Changes in foreigncurrencies relative to the U.S.dollar decreased SG&A expenses by approximately$196 compared to the first half of 2022.Interest Expense12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Interest expense$34$36$68$75 Interest expense is primarily related to Senior Notes and financing leases.The decrease in interest expense for the first half of 2023 was due torepayment of the 2.300%Senior Notes on December 1,2021.Interest Income and Other,Net12 Weeks Ended24 Weeks EndedFebruary 12,2023February 13,2022February 12,2023February 13,2022Interest income$105$6$159$15 Foreign-currency transaction gains(losses),net3 12(6)38 Other,net6 7 14 14 Interest income and other,net$114$25$167$67 The increase in interest income in the second quarter and first half of 2023 was due to higher global interest rates.Foreign-currency transactiongains(losses),net,include mark-to-market adjustments for forward foreign-exchange contracts and the revaluation or settlement of monetaryassets and liabilities by our Canadian and Other International operations.See Derivatives and Foreign Currency sections in Item 8,Note 1 of ourAnnual Report on Form 10-K,for the fiscal year ended August 28,2022.Provision for Income Taxes 12 Weeks Ended24 Weeks Ended February 12,2023February 13,2022February 12,2023February 13,2022Provision for income taxes$517$481$923$832 Effective tax rate26.1&.7$.6#.8%The effective tax rate for the first half of 2023 was impacted by net discrete tax benefits of$57,primarily due to excess tax benefits related tostock compensation.Excluding discrete net tax benefits,the tax rate was 26.1%for the first half of 2023.The effective tax rate for the first half of 2022 was impacted by net discrete tax benefits of$91,primarily due to excess tax benefits related tostock compensation.Excluding discrete net tax benefits,the tax rate was 26.4%for the first half of 2022.24Table of ContentsLIQUIDITY AND CAPITAL RESOURCESThe following table summarizes our significant sources and uses of cash and cash equivalents:24 Weeks EndedFebruary 12,2023February 13,2022Net cash provided by operating activities$5,802$3,659 Net cash used in investing activities(1,865)(1,393)Net cash used in financing activities(1,215)(1,667)Our primary sources of liquidity are cash flows from operations,cash and cash equivalents,and short-term investments.Cash and cashequivalents and short-term investments were$13,705 and$11,049 at February 12,2023,and August 28,2022.Of these balances,unsettledcredit and debit card receivables represented approximately$2,083 and$2,010 at February 12,2023,and August 28,2022.These receivablesgenerally settle within four days.Material contractual obligations arising in the normal course of business primarily consist of purchase obligations,long-term debt and relatedinterest payments,leases,and construction and land purchase obligations.Purchase obligations consist of contracts primarily related to merchandise,equipment,and third-party services,the majority of which are due inthe next 12 months.Construction and land purchase obligations consist of contracts primarily related to the development and opening of newand relocated warehouses,the majority of which(other than leases)are due in the next 12 months.Management believes that our cash and investment position and operating cash flows with capacity under existing and available creditagreements will be sufficient to meet our liquidity and capital requirements for the foreseeable future.We believe that our U.S.current andprojected asset position is sufficient to meet our U.S.liquidity requirements.Cash Flows from Operating ActivitiesNet cash provided by operating activities totaled$5,802 in the first half of 2023,compared to$3,659 in the first half of 2022.Our cash flowprovided by operations is primarily from net sales and membership fees.Cash flow used in operations generally consists of payments tomerchandise suppliers,warehouse operating costs,including payroll and employee benefits,utilities,and credit and debit card processing fees.Cash used in operations also includes payments for income taxes.Changes in our net investment in merchandise inventories(the differencebetween merchandise inventories and accounts payable)is impacted by several factors,including inventory turnover,the forward deployment ofinventory to accelerate delivery times,payment terms with suppliers,and early payments to obtain discounts.Cash Flows from Investing ActivitiesNet cash used in investing activities totaled$1,865 in the first half of 2023,compared to$1,393 in the first half of 2022,and is primarily related tocapital expenditures.Net cash from investing activities also includes purchases and maturities of short-term investments.25Table of ContentsCapital Expenditure PlansOur primary requirements for capital are acquiring land,buildings,and equipment for new and remodeled warehouses.Capital is also requiredfor information systems,manufacturing and distribution facilities,initial warehouse operations,and working capital.In the first half of 2023,wespent$1,947 on capital expenditures,and it is our current intention to spend approximately$3,800 to$4,200 during fiscal 2023.Theseexpenditures are expected to be financed with cash from operations,existing cash and cash equivalents,and short-term investments.Weopened 12 new warehouses,including two relocations,in the first half of 2023 and plan to open 15 additional new warehouses,including onerelocation,in the remainder of fiscal 2023.There can be no assurance that current expectations will be realized,and plans are subject to changeupon further review of our capital expenditure needs and the economic environment.Cash Flows from Financing ActivitiesNet cash used in financing activities totaled$1,215 in the first half of 2023,compared to$1,667 in the first half of 2022.Cash flow used infinancing activities during the first half of 2023 was primarily related to the payment of dividends,withholding taxes on stock-based awards,andrepurchases of common stock.In the first half of 2022,cash flow used in financing activities was primarily due to the repayment of our 2.300%Senior Notes.DividendsA quarterly cash dividend of$0.90 per share was declared on January 19,2023,payable to shareholders of record on February 3,2023,whichwas paid on February 17,2023.Share Repurchase ProgramOn January 19,2023,the Board of Directors authorized a new share repurchase program in the amount of$4,000,which expires in January2027.During the first half of 2023 and 2022,we repurchased 579,000 and 236,000 shares of common stock,at an average price per share of$492.06 and$498.00,totaling approximately$285 and$118.These amounts may differ from the accompanying condensed consolidatedstatements of cash flows due to changes in unsettled repurchases at the end of a quarter.Purchases are made from time to time,as conditionswarrant,in the open market or in block purchases,pursuant to plans under SEC Rule 10b5-1.Repurchased shares are retired,in accordancewith the Washington Business Corporation Act.The remaining amount available to be purchased under our approved plan was$3,955 at the endof the second quarter.Bank Credit Facilities and Commercial Paper ProgramsWe maintain bank credit facilities for working capital and general corporate purposes.At February 12,2023,we had borrowing capacity underthese facilities of$1,269.Our international operations maintain$781 of this capacity under bank credit facilities,of which$177 is guaranteed bythe Company.Short-term borrowings outstanding under the bank credit facilities were$45 and$88 at the end of the second quarter of 2023 andat the end of fiscal 2022.The Company has letter of credit facilities,for commercial and standby letters of credit,totaling$231.The outstanding commitments under thesefacilities at the end of the second quarter of 2023 totaled$191,most of which were standby letters of credit that do not expire or have expirationdates within one year.The bank credit facilities have various expiration dates,most within one year,and we generally intend to renew thesefacilities.The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercialletters of credit outstanding.26Table of ContentsCritical Accounting EstimatesThe preparation of our consolidated financial statements in accordance with U.S.GAAP requires that we make estimates and judgments.Webase these on historical experience and on assumptions that we believe to be reasonable.Our critical accounting policies are discussed in PartII,Item 7,“Managements Discussion and Analysis of Financial Condition and Results of Operations”section of our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes to the critical accounting estimates previously disclosed in thatReport.Recent Accounting PronouncementsThere have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form10-K,for the fiscal year ended August 28,2022.Item 3Quantitative and Qualitative Disclosures about Market RiskOur direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates.There have been nomaterial changes to our market risks as disclosed in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.Item 4Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur disclosure controls and procedures(as defined in Rules 13a-15(e)or 15d-15(e)under the Securities Exchange Act of 1934,as amended)are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded,processed,summarized,and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission andto ensure that information required to be disclosed is accumulated and communicated to management,including our principal executive andfinancial officers,to allow timely decisions regarding disclosure.The Chief Executive Officer and the Chief Financial Officer,with assistance fromother members of management,have reviewed the effectiveness of our disclosure controls and procedures as of February 12,2023 and,basedon their evaluation,have concluded the disclosure controls and procedures were effective as of such date.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting(as defined in Rules 13a-15(f)or 15d-15(f)of the Exchange Act)thatoccurred during the second quarter of fiscal 2023 that have materially affected,or are reasonably likely to materially affect,the Companysinternal control over financial reporting.PART IIOTHER INFORMATIONItem 1Legal ProceedingsSee discussion of Legal Proceedings in Note 8 to the condensed consolidated financial statements included in Part I,Item 1 of this Report.Item 1ARisk FactorsIn addition to the other information set forth in the Quarterly Report on Form 10-Q,you should carefully consider the factors discussed in Part I,Item 1A,“Risk Factors”in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes inour risk factors from those disclosed in our Annual Report on Form 10-K.27Table of ContentsItem 2Unregistered Sales of Equity Securities and Use of ProceedsThe following table sets forth information on our common stock repurchase program activity for the second quarter of 2023(amounts in millions,except share and per share data):PeriodTotal Number ofSharesPurchasedAverage PricePaid Per ShareTotal Number of SharesPurchased as Part ofPublicly AnnouncedProgramsMaximum Dollar Value ofShares that May Yet bePurchased Under theProgramsNovember 21,2022 December 18,202291,000$499.57 91,000$2,621 December 19,2022 January 15,202396,000 465.99 96,000 2,576 January 16,2023 February 12,2023107,000 498.61 107,000 3,955 Total second quarter294,000$488.30 294,000 _(1)Our share repurchase program is conducted under a$4,000 authorization approved by our Board of Directors in January 2023,which expires in January 2027.Thisauthorization revoked previously authorized but unused amounts,totaling$2,568.Item 3Defaults Upon Senior SecuritiesNone.Item 4Mine Safety DisclosuresNot applicable.Item 5Other Information(amounts in whole dollars)Disclosure pursuant to Section 2019 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r)of the SecuritiesExchange Act of 1934,as amended.During the second quarter of 2023,we had two individual cardholders under a business membership in the name of the Embassy of the IslamicRepublic of Iran at our subsidiary in Mexico.Gross revenue in the second quarter of 2023 attributable to the membership was approximately$145,and our estimated profit on these transactions was less than$10.The membership was canceled during the second quarter of 2023.TheCompany does not intend to continue these activities.(1)(1)28Table of ContentsItem 6ExhibitsThe following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.Incorporated by ReferenceExhibitNumberExhibit DescriptionFiledHerewithFormPeriod EndingFiling Date3.1Articles of Incorporation as amended of CostcoWholesale Corporation10-K8/28/202210/5/20223.2Bylaws as amended of Costco Wholesale Corporation10-Q5/8/20226/2/202210.1Eleventh Amendment to Citi,N.A.Co-Branded CreditCard Agreementx31.1Rule 13(a)14(a)Certificationsx32.1Section 1350 Certificationsx101.INSInline XBRL Instance Documentx101.SCHInline XBRL Taxonomy Extension Schema Documentx101.CALInline XBRL Taxonomy Extension Calculation LinkbaseDocumentx101.DEFInline XBRL Taxonomy Extension Definition LinkbaseDocumentx101.LABInline XBRL Taxonomy Extension Label LinkbaseDocumentx101.PREInline XBRL Taxonomy Extension Presentation LinkbaseDocumentx104Cover Page Interactive Data File(formatted as inlineXBRL and contained in Exhibit 101)x29Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Report to be signed on its behalf by theundersigned,thereunto duly authorized.COSTCO WHOLESALE CORPORATION(Registrant)March 8,2023By/s/W.CRAIG JELINEKDateW.Craig JelinekChief Executive Officer and DirectorMarch 8,2023By/s/RICHARD A.GALANTIDateRichard A.GalantiExecutive Vice President,Chief Financial Officer and Director30Exhibit 10.1ELEVENTH AMENDMENT TO THECO-BRANDED CREDIT CARD PROGRAM AGREEMENTThis Eleventh Amendment(Amendment)is between Citibank,N.A.(Bank)and Costco Wholesale Corporation(Costco),is effective as ofFebruary 6,2023,and amends that certain Co-Branded Credit Card Program Agreement,by and between Bank and Costco,dated February 27,2015(the Agreement).Pursuant to Section 16.10 of the Agreement,Bank and Costco agree as follows:1.Defined Terms.All capitalized terms used but not defined in this Amendment will have the meanings ascribed to such terms in theAgreement.2.Amendments.a.Section 9.05 Manner and Timing of Payments.Section 9.05(c)is amended by replacing“LIBOR”with“SOFR plus twenty-oneand four tenths basis points(0.214%)”.b.Section 14.02 Payment of Fees Upon Termination.Section 14.02(a)is amended by replacing“LIBOR”with“SOFR plustwenty-one and four tenths basis points(0.214%)”.c.Exhibit A Definitional Supplement.Exhibit A is amended by deleting LIBOR and the corresponding definition in their entiretyand adding the following in their place:“SOFR”means a rate equal to the secured overnight financing rate as administered by the SOFR Administrator(Federal ReserveBank of New York or successor).For purposes of this Agreement,the 3 month average SOFR rate will be used,as published byBloomberg under ticker“USOSFRC BGN Curncy”,on the applicable due date.d.Schedule 7.05(a).The bullet for“Money cost(split by actual 1-Month LIBOR and spread)”is amended to read,“Money cost(split by actual SOFR and spread)”.e.Schedule 9.07(a)(v)-1.Schedule 9.07(a)(v)-2 is deleted in its entirety and replaced with the attached Schedule 9.07(a)(v)-1.3.Full Force and Effect.The Agreement,as modified hereby,will remain in full force and effect and this Amendment will not be deemedto be an amendment or a waiver of any other provision of the Agreement except as expressly stated herein.All such other provisions ofthe Agreement will also be deemed to apply to this Amendment.4.No Modification or Waiver;Incorporation.No modification,amendment or waiver of this Amendment will be effective or bindingunless made in writing and signed by the Parties.The Parties agree that,except for those modifications expressly set forth in thisAmendment,all terms and provisions of the Agreement will remain unchanged and in full force and effect.This Amendment and theAgreement will hereafter be read and construed together as a single document,and all references to the Agreement will hereafter referto the Agreement as amended by this Amendment.5.Counterparts.This Amendment may be executed in counterparts and if so executed will be enforceable and effective upon theexchange of executed counterparts,including by facsimile or electronic transmissions of executed counterparts.Signature page followsDuly authorized representatives of the Parties have executed this Amendment.COSTCO WHOLESALE CORPORATION CITIBANK,N.A.By:/s/Sandy TorreyBy:/s/Jennifer LonginoName:Sandy TorreyName:Jennifer LonginoTitle:SVP,Corporate MarketingTitle:Vice PresidentSchedule 9.07(a)(v)-1Money Cost CalculationThe funding rates for each balance category of asset will be calculated as follows:Variable Revolving Balances:1 month SOFR Spread 19.5 basis points,or1 month SOFR,whichever is higherPromotional Balances:10%of balance at 6 month SOFR Caterpillar Spread10%of balance at 1 year SOFR Caterpillar Spread80%of balance at 5 year SOFR Caterpillar SpreadTransactor/Intro Rate Balances:5%of balance at 1 month SOFR Spread95%of balance at 5 year SOFR Caterpillar SpreadThe Bloomberg tickers for the SOFR rates are as follows:1-month SOFR:USOSFRA BGN Curncy6-month SOFR:USOSFRF BGN Curncy1-year SOFR:USOSFR1 BGN Curncy5-year SOFR:USOSFR5 BGN CurncyAll SOFR rates will be sourced from Bloomberg on the last Business Day of the month.Funding costs will be applied to balances based on theActual/365 day count convention;i.e.Monthly funding cost=Balance*Rate*Actual/365.The“Spread”means the months average spread,weighted 80%as the AAA 7-year Credit Card Asset Backed Security spread,and 20%as theBBB 7-year Credit Card Asset Backed Security spread,in each case,using an average(excluding the high and the low)from major third partysecuirty dealers(e.g.,BAC,MUFG,BARC,RBC,BNP,WFC).The weighted-average spread will be capped at one hundred and forty-five(145)basis points.The“Caterpillar”will comprise a strip of equally-weighted funding tickets of the targeted tenor.For example,a 5-year SOFR Caterpillar willhave sixty(60)tickets,which are the previous sixty(60)months actual 5-year SOFR rates.The 5-year SOFR Caterpillar rate will be the simpleaverage of those sixty(60)tickets.Each month,the oldest funding ticket will drop out of the Caterpillar,and will be replaced with a new ticket atthe current rate.For example,the 5-year SOFR Caterpillar would have the 5-year SOFR rate from sixty(60)months ago drop out,and thatwould be replaced with the current 5-year SOFR rate.Exhibit 31.1CERTIFICATIONSI,W.Craig Jelinek,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.March 8,2023/s/W.CRAIG JELINEKW.Craig JelinekChief Executive Officer and DirectorCERTIFICATIONSI,Richard A.Galanti,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.March 8,2023/s/RICHARD A.GALANTIRichard A.GalantiExecutive Vice President,Chief Financial Officer and DirectorExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended February 12,2023,as filed with the Securities and Exchange Commission(the Report),I,W.Craig Jelinek,Chief Executive Officer and Director of theCompany,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/W.CRAIG JELINEK Date:March 8,2023W.Craig Jelinek Chief Executive Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended February 12,2023,as filed with the Securities and Exchange Commission(the Report),I,Richard A.Galanti,Executive Vice President,Chief Financial Officerand Director of the Company,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/RICHARD A.GALANTI Date:March 8,2023Richard A.Galanti Executive Vice President,Chief Financial Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended November 20,2022orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934Commission file number 0-20355Costco Wholesale Corporation(Exact name of registrant as specified in its charter)Washington 91-1223280(State or other jurisdiction ofincorporation or organization)(I.R.S.Employer Identification No.)999 Lake Drive,Issaquah,WA 98027(Address of principal executive offices)(Zip Code)(Registrants telephone number,including area code):(425)313-8100Securities registered pursuant to Section 12(b)of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock,$.005 Par ValueCOSTThe Nasdaq Global Select MarketIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject tosuch filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required tosubmit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reportingcompany,or an emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The number of shares outstanding of the issuers common stock as of December 22,2022 was 443,729,036.1Table of ContentsCOSTCO WHOLESALE CORPORATIONINDEX TO FORM 10-Q PagePART IFINANCIAL INFORMATIONItem 1.Financial Statements3Condensed Consolidated Statements of Income3Condensed Consolidated Statements of Comprehensive Income4Condensed Consolidated Balance Sheets5Condensed Consolidated Statements of Equity6Condensed Consolidated Statements of Cash Flows7Notes to Condensed Consolidated Financial Statements8Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations17Item 3.Quantitative and Qualitative Disclosures About Market Risk25Item 4.Controls and Procedures25PART IIOTHER INFORMATIONItem 1.Legal Proceedings25Item 1A.Risk Factors25Item 2.Unregistered Sales of Equity Securities and Use of Proceeds26Item 3.Defaults Upon Senior Securities26Item 4.Mine Safety Disclosures26Item 5.Other Information26Item 6.Exhibits27Signatures282Table of ContentsPART IFINANCIAL INFORMATIONItem 1Financial StatementsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(amounts in millions,except per share data)(unaudited)12 Weeks EndedNovember 20,2022November 21,2021REVENUENet sales$53,437$49,417 Membership fees1,000 946 Total revenue54,437 50,363 OPERATING EXPENSESMerchandise costs47,769 43,952 Selling,general and administrative4,917 4,718 Operating income1,751 1,693 OTHER INCOME(EXPENSE)Interest expense(34)(39)Interest income and other,net53 42 INCOME BEFORE INCOME TAXES1,770 1,696 Provision for income taxes406 351 Net income including noncontrolling interests1,364 1,345 Net income attributable to noncontrolling interests(21)NET INCOME ATTRIBUTABLE TO COSTCO$1,364$1,324 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:Basic$3.07$2.99 Diluted$3.07$2.98 Shares used in calculation(000s):Basic443,837 443,377 Diluted444,531 444,604 The accompanying notes are an integral part of these condensed consolidated financial statements.3Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(amounts in millions)(unaudited)12 Weeks Ended November 20,2022November 21,2021NET INCOME INCLUDING NONCONTROLLING INTERESTS$1,364$1,345 Foreign-currency translation adjustment and other,net(96)(72)Comprehensive income1,268 1,273 Less:Comprehensive income attributable to noncontrolling interests 23 COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO$1,268$1,250 The accompanying notes are an integral part of these condensed consolidated financial statements.4Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(amounts in millions,except par value and share data)(unaudited)November 20,2022August 28,2022ASSETSCURRENT ASSETSCash and cash equivalents$10,856$10,203 Short-term investments817 846 Receivables,net2,312 2,241 Merchandise inventories18,571 17,907 Other current assets1,594 1,499 Total current assets34,150 32,696 OTHER ASSETSProperty and equipment,net25,144 24,646 Operating lease right-of-use assets2,787 2,774 Other long-term assets3,946 4,050 TOTAL ASSETS$66,027$64,166 LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable$18,348$17,848 Accrued salaries and benefits4,317 4,381 Accrued member rewards1,959 1,911 Deferred membership fees2,322 2,174 Current portion of long-term debt71 73 Other current liabilities6,050 5,611 Total current liabilities33,067 31,998 OTHER LIABILITIESLong-term debt,excluding current portion6,472 6,484 Long-term operating lease liabilities2,503 2,482 Other long-term liabilities2,509 2,555 TOTAL LIABILITIES44,551 43,519 COMMITMENTS AND CONTINGENCIESEQUITYPreferred stock$0.005 par value;100,000,000 shares authorized;no shares issued andoutstanding Common stock$0.005 par value;900,000,000 shares authorized;443,841,000 and442,664,000 shares issued and outstanding2 2 Additional paid-in capital6,982 6,884 Accumulated other comprehensive loss(1,925)(1,829)Retained earnings16,412 15,585 Total Costco stockholders equity21,471 20,642 Noncontrolling interests5 5 TOTAL EQUITY21,476 20,647 TOTAL LIABILITIES AND EQUITY$66,027$64,166 The accompanying notes are an integral part of these condensed consolidated financial statements.5Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF EQUITY(amounts in millions)(unaudited)12 Weeks Ended November 20,2022 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST28,2022442,664$2$6,884$(1,829)$15,585$20,642$5$20,647 Net income 1,364 1,364 1,364 Foreign-currencytranslation adjustmentand other,net (96)(96)(96)Stock-basedcompensation 403 403 403 Release of vestedrestricted stock units(RSUs),including taxeffects1,462 (301)(301)(301)Repurchases ofcommon stock(285)(4)(137)(141)(141)Cash dividend declared (400)(400)(400)BALANCE ATNOVEMBER 20,2022443,841$2$6,982$(1,925)$16,412$21,471$5$21,476 12 Weeks Ended November 21,2021 Common StockAdditionalPaid-inCapitalAccumulatedOtherComprehensiveIncome(Loss)RetainedEarningsTotal CostcoStockholdersEquityNoncontrollingInterestsTotalEquity Shares(000s)AmountBALANCE AT AUGUST29,2021441,825$4$7,031$(1,137)$11,666$17,564$514$18,078 Net income 1,324 1,324 21 1,345 Foreign-currencytranslation adjustmentand other,net (74)(74)2(72)Stock-basedcompensation 389 389 389 Release of vestedRSUs,including taxeffects1,686 (355)(355)(355)Repurchases ofcommon stock(77)(1)(34)(35)(35)Cash dividend declared (350)(350)(350)BALANCE ATNOVEMBER 21,2021443,434$4$7,064$(1,211)$12,606$18,463$537$19,000 The accompanying notes are an integral part of these condensed consolidated financial statements.6Table of ContentsCOSTCO WHOLESALE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in millions)(unaudited)12 Weeks EndedNovember 20,2022November 21,2021CASH FLOWS FROM OPERATING ACTIVITIESNet income including noncontrolling interests$1,364$1,345 Adjustments to reconcile net income including noncontrolling interests to net cash provided byoperating activities:Depreciation and amortization447 432 Non-cash lease expense111 72 Stock-based compensation402 388 Other non-cash operating activities,net123 111 Deferred income taxes(2)(2)Changes in operating assets and liabilities:Merchandise inventories(737)(2,760)Accounts payable487 3,389 Other operating assets and liabilities,net415 283 Net cash provided by operating activities2,610 3,258 CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short-term investments(253)(258)Maturities of short-term investments274 444 Additions to property and equipment(1,057)(1,055)Other investing activities,net(21)(43)Net cash used in investing activities(1,057)(912)CASH FLOWS FROM FINANCING ACTIVITIESTax withholdings on stock-based awards(301)(355)Repurchases of common stock(141)(37)Cash dividend payments(400)(350)Other financing activities,net(21)(97)Net cash used in financing activities(863)(839)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS(37)(14)Net change in cash and cash equivalents653 1,493 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR10,203 11,258 CASH AND CASH EQUIVALENTS END OF PERIOD$10,856$12,751 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the first 12 weeks of the year for:Interest$52$64 Income taxes,net$214$206 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:Financing lease assets obtained in exchange for new or modified leases$49$118 Operating lease assets obtained in exchange for new or modified leases$68$61 The accompanying notes are an integral part of these condensed consolidated financial statements.7Table of ContentsCOSTCO WHOLESALE CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(amounts in millions,except share,per share,and warehouse count data)(unaudited)Note 1Summary of Significant Accounting PoliciesDescription of BusinessCostco Wholesale Corporation(Costco or the Company),a Washington corporation,and its subsidiaries operate membership warehousesbased on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range ofmerchandise categories will produce high sales volumes and rapid inventory turnover.At November 20,2022,Costco operated 845 warehousesworldwide:582 in the United States(U.S.)located in 46 states,Washington,D.C.,and Puerto Rico,107 in Canada,40 in Mexico,31 inJapan,29 in the United Kingdom(U.K.),18 in Korea,14 in Taiwan,13 in Australia,four in Spain,two each in France and China,and one eachin Iceland,New Zealand,and Sweden.The Company operates e-commerce websites in the U.S.,Canada,U.K.,Mexico,Korea,Taiwan,Japan,and Australia.Basis of PresentationThe condensed consolidated financial statements include the accounts of Costco,its wholly-owned subsidiaries,and a subsidiary in which it hasa controlling interest.All material inter-company transactions among the Company and its consolidated subsidiaries have been eliminated inconsolidation.Unless otherwise noted,references to net income relate to net income attributable to Costco.These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interimfinancial reporting pursuant to the rules and regulations of the Securities and Exchange Commission(SEC).While these statements reflect allnormal recurring adjustments that are,in the opinion of management,necessary for fair presentation of the results of the interim period,they donot include all of the information and footnotes required by U.S.generally accepted accounting principles(U.S.GAAP)for complete financialstatements.Therefore,the interim condensed consolidated financial statements should be read in conjunction with the consolidated financialstatements and notes included in the Companys Annual Report on Form 10-K for the fiscal year ended August 28,2022.Fiscal Year EndThe Company operates on a 52/53 week fiscal year basis,with the fiscal year ending on the Sunday closest to August 31.Fiscal 2023 is a 53-week year ending on September 3,2023.References to the first quarter of 2023 and 2022 relate to the 12-week fiscal quartersended November 20,2022,and November 21,2021.Use of EstimatesThe preparation of financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.These estimates and assumptions take into account historical andforward-looking factors that the Company believes are reasonable.Actual results could differ from those estimates and assumptions.8Table of ContentsReclassificationReclassifications were made to the condensed consolidated statement of cash flows for the first quarter of 2022 to conform with current yearpresentation.LeasesThe Company leases land,buildings,equipment,and other assets at warehouses,offices,or within the operations that support supply chain anddistribution channels.The Company reviews lease right-of-use assets for impairment when events or changes in circumstances indicate that thecarrying amount of the asset group may not be fully recoverable.The Company also occasionally revisits and modifies the terms of its leasingarrangements.During the first quarter of 2023,the Company recognized a charge of$93,primarily related to the termination costs andimpairment of certain leased assets associated with charter shipping activities.This charge is included in merchandise costs.Note 2InvestmentsThe Companys investments were as follows:November 20,2022:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$570$(12)$558 Held-to-maturity:Certificates of deposit259 259 Total short-term investments$829$(12)$817 August 28,2022:CostBasisUnrealizedLosses,NetRecordedBasisAvailable-for-sale:Government and agency securities$534$(5)$529 Held-to-maturity:Certificates of deposit317 317 Total short-term investments$851$(5)$846 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended November 20,2022,andAugust 28,2022.At those dates,there were no available-for-sale securities in a material continuous unrealized-loss position.There were nosales of available-for-sale securities during the first quarter of 2023 or 2022.The maturities of available-for-sale and held-to-maturity securities at November 20,2022 are as follows:Available-For-SaleHeld-To-Maturity Cost BasisFair ValueDue in one year or less$220$217$259 Due after one year through five years264 259 Due after five years86 82 Total$570$558$259 9Table of ContentsNote 3Fair Value MeasurementAssets and Liabilities Measured at Fair Value on a Recurring BasisThe table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicatesthe level within the fair-value hierarchy reflecting the valuation techniques utilized.Level 2November 20,2022August 28,2022Investment in government and agency securities$558$529 Forward foreign-exchange contracts,in asset position19 34 Forward foreign-exchange contracts,in(liability)position(25)(2)Total$552$561 _(1)The asset and liability values are included in other current assets and other current liabilities,respectively,in the accompanying condensed consolidated balance sheets.At November 20,2022,and August 28,2022,the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fairvalue on a recurring basis.There were no transfers between levels during the first quarter of 2023 or 2022.Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisAssets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured atamortized cost and long-lived nonfinancial assets.These assets are measured at fair value if determined to be impaired.Please see Note 1 foradditional information.Note 4DebtThe carrying value of the Companys long-term debt consisted of the following:November 20,2022August 28,20222.750%Senior Notes due May 2024$1,000$1,000 3.000%Senior Notes due May 20271,000 1,000 1.375%Senior Notes due June 20271,250 1,250 1.600%Senior Notes due April 20301,750 1,750 1.750%Senior Notes due April 20321,000 1,000 Other long-term debt574 590 Total long-term debt6,574 6,590 Less unamortized debt discounts and issuance costs31 33 Less current portion71 73 Long-term debt,excluding current portion$6,472$6,484 _(1)Net of unamortized debt discounts and issuance costs.The fair value of the Senior Notes is estimated using Level 2 inputs.Other long-term debt consists of Guaranteed Senior Notes issued by theCompanys Japan subsidiary,valued using Level 3 inputs.The fair value of the Companys long-term debt,including the current portion,wasapproximately$5,816 and$6,033 at November 20,2022,and August 28,2022.(1)(1)(1)10Table of ContentsNote 5EquityDividendsOn October 12,2022,the Board of Directors declared a quarterly cash dividend in the amount of$0.90 per share,which was paid onNovember 10,2022.Share Repurchase ProgramThe Companys share repurchase program is conducted under a$4,000 authorization by the Board of Directors,which expires in April 2023.AtNovember 20,2022,the remaining amount available under the plan was$2,667.The following table summarizes the Companys stockrepurchase activity:Shares Repurchased(000s)Average Price per ShareTotal CostFirst quarter of 2023285$495.94$141 First quarter of 202277$455.08$35 These amounts may differ from repurchases of common stock in the accompanying condensed consolidated statements of cash flows due tochanges in unsettled stock repurchases at the end of each quarter.Purchases are made from time to time,as conditions warrant,in the openmarket or in block purchases and pursuant to plans under SEC Rule 10b5-1.Note 6Stock-Based CompensationThe 2019 Incentive Plan authorized the issuance of 17,500,000 shares(10,000,000 RSUs)of common stock for future grants,plus theremaining shares that were available for grant and the future forfeited shares from grants under the previous plan,up to a maximum of27,800,000 shares(15,885,000 RSUs).The Company issues new shares of common stock upon vesting of RSUs.Shares for vested RSUs aregenerally delivered to participants annually,net of shares withheld for taxes.Summary of Restricted Stock Unit ActivityAt November 20,2022,8,652,000 shares were available to be granted as RSUs,and the following awards were outstanding:2,976,000 time-based RSUs,which vest upon continued employment over specified periods and accelerate upon achievement of thelong-service term;41,000 performance-based RSUs,granted to executive officers of the Company,for which the performance targets have been met.Theawards vest upon continued employment over specified periods of time and upon achievement of the long-service term;and135,000 performance-based RSUs,granted to executive officers of the Company,subject to achievement of performance targets forfiscal 2023,as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year.These awards arenot included in the table below or in the amount of unrecognized compensation cost.11Table of ContentsThe following table summarizes RSU transactions during the first quarter of 2023:Number ofUnits(in 000s)Weighted-AverageGrant Date Fair ValueOutstanding at August 28,20223,449$338.41 Granted1,678 470.47 Vested and delivered(2,090)352.56 Forfeited(20)385.02 Outstanding at November 20,20223,017$401.75 The remaining unrecognized compensation cost related to RSUs unvested at November 20,2022,was$1,139,and the weighted-average periodover which this cost will be recognized is 1.8 years.Summary of Stock-Based CompensationThe following table summarizes stock-based compensation expense and the related tax benefits:12 Weeks EndedNovember 20,2022November 21,2021Stock-based compensation expense$402$388 Less recognized income tax benefits89 85 Stock-based compensation expense,net$313$303 Note 7Net Income per Common and Common Equivalent ShareThe following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and ofpotentially dilutive common shares outstanding(shares in 000s):12 Weeks EndedNovember 20,2022November 21,2021Net income attributable to Costco$1,364$1,324 Weighted average basic shares443,837 443,377 RSUs694 1,227 Weighted average diluted shares444,531 444,604 12Table of ContentsNote 8Commitments and ContingenciesLegal ProceedingsThe Company is involved in a number of claims,proceedings and litigations arising from its business and property ownership.In accordancewith applicable accounting guidance,the Company establishes an accrual for legal proceedings if and when those matters present losscontingencies that are both probable and reasonably estimable.There may be exposure to loss in excess of amounts accrued.The Companymonitors those matters for developments that would affect the likelihood of a loss(taking into account where applicable indemnificationarrangements concerning suppliers and insurers)and the accrued amount,if any,thereof,and adjusts the amount as appropriate.The Companyhas recorded immaterial accruals with respect to certain matters described below,in addition to other immaterial accruals for matters notdescribed below.If the loss contingency at issue is not both probable and reasonably estimable,the Company does not establish an accrual,butwill monitor the matter for developments that will make the contingency both probable and reasonably estimable.In each case,there is areasonable possibility that a loss may be incurred,including a loss in excess of the applicable accrual.For matters where no accrual has beenrecorded,the possible loss or range of loss(including any loss in excess of the accrual)cannot,in the Companys view,be reasonably estimatedbecause,among other things:(i)the remedies or penalties sought are indeterminate or unspecified;(ii)the legal and/or factual theories are notwell developed;and/or(iii)the matters involve complex or novel legal theories or a large number of parties.The Company is a defendant in an action commenced in July 2013 under the California Labor Code Private Attorneys General Act(PAGA)alleging violation of California Wage Order 7-2001 for failing to provide seating to employees who work at entrance and exit doors in Californiawarehouses.Canela v.Costco Wholesale Corp.(Case No.2013-1-CV-248813;Santa Clara Superior Court).The complaint seeks relief underthe California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denying the material allegations of thecomplaint.A bench trial was held in June and July;no decision has been issued.In June 2022,a business center employee raised similar claims alleging failure to provide seating to employees who work at membership refunddesks in California warehouses and business centers.Rodriguez v.Costco Wholesale Corp.(Case No.22CV012847;Alameda Superior Court).The complaint seeks relief under the California Labor Code,including civil penalties and attorneys fees.The Company filed an answer denyingthe material allegations of the complaint.In December 2018,a depot employee raised similar claims,alleging that depot employees in California did not receive suitable seating orreasonably comfortable workplace temperature conditions.Lane v.Costco Wholesale Corp.(Case No.CIVDS 1908816;San BernardinoSuperior Court).The Company filed an answer denying the material allegations of the complaint.In October 2019,the parties settled for animmaterial amount the seating claims on a representative basis,which received court approval in February 2020.The parties settled thetemperature claims for an immaterial amount in April 2022,and court approval was received in May 2022.A February 2023 hearing has been setfor a final report on the settlement.In March 2019,employees filed a class action against the Company alleging claims under California law for failure to pay overtime,to providemeal and rest periods and itemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfairbusiness practices.Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Nevarez v.Costco WholesaleCorp.(Case No.2:19-cv-03454;C.D.Cal.).The Company filed an answer denying the material allegations of the complaint.In December 2019,the court issued an order denying class certification.In January 2020,the plaintiffs dismissed their Labor Code claims without prejudice,and thecourt remanded the action to state court.Settlement for an immaterial amount was agreed upon in February 2021.Final court approval of thesettlement was granted on May 3,2022.A proposed intervenor has appealed the denial of her motion to intervene.13Table of ContentsIn May 2019,an employee filed a class action against the Company alleging claims under California law for failure to pay overtime,to provideitemized wage statements,to timely pay wages due to terminating employees,to pay minimum wages,and for unfair business practices.Roughv.Costco Wholesale Corp.(Case No.2:19-cv-01340;E.D.Cal.).Relief is sought under the California Labor Code,including civil penalties andattorneys fees.In September 2021,the court granted Costcos motion for partial summary judgment and denied class certification.In August2019,the plaintiff filed a companion case in state court seeking penalties under PAGA.Rough v.Costco Wholesale Corp.(Case No.FCS053454;Sonoma County Superior Court).Relief is sought under the California Labor Code,including civil penalties and attorneys fees.Thestate court action has been stayed pending resolution of the federal action.In December 2020,a former employee filed suit against the Company asserting collective and class claims on behalf of non-exempt employeesunder the Fair Labor Standards Act and New York Labor Law for failure to pay for all hours worked,failure to pay certain non-exempt employeeson a weekly basis,and failure to provide proper wage statements and notices.The plaintiff also asserted individual retaliation claims.Cappadorav.Costco Wholesale Corp.(Case No.1:20-cv-06067;E.D.N.Y.).An amended complaint was filed,and the Company denied the materialallegations of the amended complaint.Based on an agreement in principle concerning settlement of the matter,involving a proposed payment bythe Company of an immaterial amount,the federal action has been dismissed.In April 2022,Cappadora and a second plaintiff filed an actionagainst the Company in New York state court,asserting the same class claims asserted in the federal action under the New York Labor Law andseeking preliminary approval of the class settlement.Cappadora and Sancho v.Costco Wholesale Corp.(Index No.604757/2022;NassauCounty Supreme Court).The state court granted preliminary approval of the settlement in October 2022.In August 2021,a former employee filed a similar suit,asserting class claims on behalf of certain non-exempt employees under New York LaborLaw for failure to pay on a weekly basis.Umadat v.Costco Wholesale Corp.(Case No.2:21-cv-4814;E.D.N.Y.).The Company filed an answer,denying the material allegations of the complaint.In April 2022,a former employee filed a similar suit,asserting class claims on behalf of certainnon-exempt employees under New York Labor Law,as well as under the Fair Labor Standards Act,for failure to pay on a weekly basis andfailure to pay overtime.Burian v.Costco Wholesale Corp.(Case No.2:22-cv-02108;E.D.N.Y.).In September 2022,an amended complaint wasfiled,asserting class claims on behalf of certain non-exempt employees under New York Labor Law for failure to pay on a weekly basis.TheCompany responded by requesting permission to file a motion to dismiss.The court has not responded.In February 2021,a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment ofwages,meal and rest periods,wage statements,reimbursement of expenses,payment of final wages to terminated employees,and for unfairbusiness practices.Edwards v.Costco Wholesale Corp.(Case No.5:21-cv-00716:C.D.Cal.).In May 2021,the Company filed a motion todismiss the complaint,which was granted with leave to amend.In June 2021,the plaintiff filed an amended complaint,which the Companymoved to dismiss later that month.The court granted the motion in part in July 2021 with leave to amend.In August 2021,the plaintiff filed asecond amended complaint and filed a separate representative action under PAGA asserting the same Labor Code claims and seeking civilpenalties and attorneys fees.The Company filed an answer to the second amended class action complaint,denying the material allegations.The Company also filed an answer to the PAGA representative action,denying the material allegations.On September 27,2022,the partiesreached a settlement for an immaterial amount.The settlement requires court approval.In July 2021,a former temporary staffing employee filed a class action against the Company and a staffing company alleging violations of theCalifornia Labor Code regarding payment of wages,meal and rest periods,wage statements,the timeliness of wages and final wages,and forunfair business practices.Dimas v.Costco Wholesale Corp.(Case No.STK-CV-UOE-2021-0006024;San Joaquin Superior Court).TheCompany has moved to compel arbitration of the plaintiffs individual claims and to dismiss the class action complaint.On September 7,2021,the same former employee filed a separate representative14Table of Contentsaction under PAGA,asserting the same Labor Code violations and seeking civil penalties and attorneys fees.The case has been stayedpending the motion to compel in the related case.In September 2021,an employee filed a class action against the Company alleging violations of the California Labor Code regarding the allegedfailure to provide sick pay,failure to timely pay wages due at separation from employment,and for violations of Californias unfair competitionlaw.De Benning v.Costco Wholesale Corp.(Case No.34-2021-00309030-CU-OE-GDS;Sacramento Superior Court).The Company answeredthe complaint in January 2022,denying its material allegations.In April 2022,a settlement for an immaterial amount was agreed upon,subject tocourt approval.The court granted preliminary approval of the settlement on October 28,2022.A final approval hearing is set for February 10,2023.In March 2022,an employee filed a class action against the Company alleging violations of the California Labor Code regarding the failure to:pay wages,provide meal and rest periods,provide accurate wage statements,timely pay final wages,and reimburse business expenses.Diaz v.Costco Wholesale Corp.(Case No.22STCV09513;Los Angeles Superior Court).The Company filed an answer denying the material allegations.In May 2022,an employee filed a PAGA-only representative action against the Company alleging claims under the California Labor Coderegarding the payment of wages,meal and rest periods,the timeliness of wages and final wages,wage statements,accurate records andbusiness expenses.Gonzalez v.Costco Wholesale Corp.(Case No.22AHCV00255;Los Angeles Superior Court).Beginning in December 2017,the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts ofopioid abuses filed against various defendants by counties,cities,hospitals,Native American tribes,third-party payors,and others.In re NationalPrescription Opiate Litigation(MDL No.2804)(N.D.Ohio).Included are cases that name the Company,including actions filed by counties andcities in Michigan,New Jersey,Oregon,Virginia and South Carolina,a third-party payor in Ohio,and a hospital in Texas,class actions filed onbehalf of infants born with opioid-related medical conditions in 40 states,and class actions and individual actions filed on behalf of individualsseeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa.Claims against theCompany in state courts in New Jersey,Oklahoma,Utah,and Arizona have been dismissed.The Company is defending all of the pendingmatters.Members of the Board of Directors,six corporate officers and the Company are defendants in a shareholder derivative action related to chickenwelfare and alleged breaches of fiduciary duties.Smith,et ano.v.Vachris,et al.,Superior Court of the State of Washington,County of King,No,22-2-08937-7SEA,(filed 6/14/22,as amended,6/30/22);The complaint seeks from the individual defendants damages,injunctive relief,costs,and attorneys fees.A motion to dismiss the amended complaint has been filed.The Company does not believe that any pending claim,proceeding or litigation,either alone or in the aggregate,will have a material adverseeffect on the Companys financial position,results of operations or cash flows;it is possible that an unfavorable outcome of some or all of thematters,however unlikely,could result in a charge that might be material to the results of an individual fiscal quarter or year.15Table of ContentsNote 9Segment ReportingThe Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S.,Canada,Mexico,Japan,U.K.,Korea,Taiwan,Australia,Spain,France,China,Iceland,New Zealand,and Sweden.Reportable segments are largelybased on managements organization of the operating segments for operational decisions and assessments of financial performance,whichconsiders geographic locations.The material accounting policies of the segments are as described in the notes to the consolidated financialstatements included in the Companys Annual Report filed on Form 10-K for the fiscal year ended August 28,2022,and Note 1 above.Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income.The following table provides information for the Companys reportable segments:United StatesOperationsCanadianOperationsOtherInternationalOperationsTotal12 Weeks Ended November 20,2022Total revenue$40,145$7,356$6,936$54,437 Operating income1,236 288 227 1,751 12 Weeks Ended November 21,2021Total revenue$36,317$7,121$6,925$50,363 Operating income1,118 293 282 1,693 52 Weeks Ended August 28,2022Total revenue$165,294$31,675$29,985$226,954 Operating income5,268 1,346 1,179 7,793 Disaggregated RevenueThe following table summarizes net sales by merchandise category;sales from e-commerce websites and business centers have been allocatedto the applicable merchandise categories:12 Weeks EndedNovember 20,2022November 21,2021Foods and Sundries$21,448$19,563 Non-Foods14,032 14,162 Fresh Foods6,717 6,439 Warehouse Ancillary and Other Businesses11,240 9,253 Total net sales$53,437$49,417 16Table of ContentsItem 2Managements Discussion and Analysis of Financial Condition and Results of Operations(amounts in millions,except per share,share,percentages and warehouse count data)FORWARD-LOOKING STATEMENTSCertain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995.For these purposes,forward-looking statements are statements that address activities,events,conditions or developmentsthat the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth,changes in comparablesales,cannibalization of existing locations by new openings,price or fee changes,earnings performance,earnings per share,stock-basedcompensation expense,warehouse openings and closures,capital spending,the effect of adopting certain accounting standards,future financialreporting,financing,margins,return on invested capital,strategic direction,expense controls,membership renewal rates,shopping frequency,litigation,and the demand for our products and services.In some cases,forward-looking statements can be identified because they containwords such as“anticipate,”“believe,”“continue,”“could,”“estimate,”“expect,”“intend,”“likely,”“may,”“might,”“plan,”“potential,”“predict,”“project,”“seek,”“should,”“target,”“will,”“would,”or similar expressions and the negatives of those terms.Such forward-looking statementsinvolve risks and uncertainties that may cause actual events,results,or performance to differ materially from those indicated by suchstatements.These risks and uncertainties include,but are not limited to,domestic and international economic conditions,including exchangerates,inflation or deflation,the effects of competition and regulation,uncertainties in the financial markets,consumer and small-businessspending patterns and debt levels,breaches of security or privacy of member or business information,conditions affecting the acquisition,development,ownership or use of real estate,capital spending,actions of vendors,rising costs associated with employees(generally includinghealth-care costs),energy and certain commodities,geopolitical conditions(including tariffs and the Ukraine conflict),the ability to maintaineffective internal control over financial reporting,regulatory and other impacts related to climate change,COVID-19 related factors andchallenges,and other risks identified from time to time in the Companys public statements and reports filed with the Securities and ExchangeCommission(SEC).Forward-looking statements speak only as of the date they are made,and the Company does not undertake to update thesestatements,except as required by law.OVERVIEWThe following Managements Discussion and Analysis of Financial Condition and Results of Operations(MD&A)is intended to promoteunderstanding of the results of operations and financial condition.MD&A is provided as a supplement to,and should be read in conjunction with,our condensed consolidated financial statements and the accompanying Notes to Financial Statements(Part I,Item 1 of this Form 10-Q),as wellas our consolidated financial statements,the accompanying Notes to Financial Statements,and the related Managements Discussion andAnalysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K,filed with the United States Securities andExchange Commission(SEC)on October 5,2022.We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limitedselection of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventoryturnover.When combined with the operating efficiencies achieved by volume purchasing,efficient distribution and reduced handling ofmerchandise in no-frills,self-service warehouse facilities,these volumes and turnover enable us to operate profitably at significantly lower grossmargins(net sales less merchandise costs)than most other retailers.We often sell inventory before we are required to pay for it,even whiletaking advantage of early payment discounts.We believe that the most important driver of our profitability is increasing net sales,particularly comparable sales.Net sales includes our coremerchandise categories(foods and sundries,non-foods,and fresh foods),warehouse ancillary(gasoline,pharmacy,optical,food court,hearingaids,and tire installation)and other businesses(e-commerce,business centers,travel and other).We define17Table of Contentscomparable sales as net sales from warehouses open for more than one year,including remodels,relocations and expansions,and sales relatedto e-commerce websites operating for more than one year.Comparable sales growth is achieved through increasing shopping frequency fromnew and existing members and the amount they spend on each visit(average ticket).Sales comparisons can also be particularly influenced bycertain factors that are beyond our control:fluctuations in currency exchange rates(with respect to our international operations);inflation andchanges in the cost of gasoline and associated competitive conditions.The higher our comparable sales exclusive of these items,the more wecan leverage our SG&A expenses,reducing them as a percentage of sales and enhancing profitability.Generating comparable sales growth isforemost a question of making available to our members the right merchandise at the right prices,a skill that we believe we have repeatedlydemonstrated over the long-term.Another substantial factor in net sales growth is the health of the economies in which we do business,including the effects of inflation or deflation,especially the United States.Net sales growth and gross margins are also impacted by ourcompetition,which is vigorous and widespread,across a wide range of global,national and regional wholesalers and retailers,including thosewith e-commerce operations.While we cannot control or reliably predict general economic health or changes in competition,we believe that wehave been successful historically in adapting our business to these changes,such as through adjustments to our pricing and merchandise mix,including increasing the penetration of our private-label items,and through online offerings.Our philosophy is to provide our members with quality goods and services at competitive prices.We do not focus in the short-term onmaximizing prices charged,but instead seek to maintain what we believe is a perception among our members of our“pricing authority”consistently providing the most competitive values.Merchandise costs in the first quarter of 2023 was impacted by inflation higher than what wehave experienced in recent years.The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategiesin response to cost increases.Those strategies can include,but are not limited to,working with our suppliers to share in absorbing costincreases,earlier-than-usual purchasing and in greater volumes,offering seasonal merchandise outside its season,as well as passing costincreases on to our members.Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meetcompetition and holding prices steady despite cost increases instead of passing the increases on to our members,all negatively impacting grossmargin and gross margin as a percentage of net sales(gross margin percentage).We believe our gasoline business enhances traffic in our warehouses,but it generally has a lower gross margin percentage relative to our non-gasoline businesses.It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline businesses.A higher penetrationof gasoline sales will generally lower our gross margin percentage.Rapidly changing gasoline prices may significantly impact our near-term netsales growth.Generally,rising gasoline prices benefit net sales growth which,given the higher sales base,negatively impacts our gross marginpercentage but decreases our SG&A expenses as a percentage of net sales.A decline in gasoline prices has the inverse effect.Additionally,government actions in various countries,particularly China and the United States,have affected the costs of some of our merchandise.Thedegree of our exposure is dependent on(among other things)the type of goods,rates imposed,and timing of the tariffs.Higher tariffs couldadversely impact our results.We also achieve net sales growth by opening new warehouses.As our warehouse base grows,available and desirable sites become moredifficult to secure,and square footage growth becomes a comparatively less substantial component of growth.The negative aspects of suchgrowth,however,including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouseswhen openings occur in existing markets,are continuing to decline in significance as they relate to the results of our total operations.Our rate ofsquare footage growth is generally higher in foreign markets,due to the smaller base in those markets,and we expect that to continue.Our e-commerce business,domestically and internationally,generally has a lower gross margin percentage than our warehouse operations.The membership format is an integral part of our business and has a significant effect on our profitability.This format is designed to reinforcemember loyalty and provide continuing fee revenue.The extent to18Table of Contentswhich we achieve growth in our membership base,increase the penetration of our Executive members,and sustain high renewal rates materiallyinfluences our profitability.Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets ascompared to new markets.Our financial performance depends heavily on controlling costs.While we believe that we have achieved successes in this area,some significantcosts are partially outside our control,particularly health care and utility expenses.With respect to the compensation of our employees,ourphilosophy is not to seek to minimize their wages and benefits.Rather,we believe that achieving our longer-term objectives of reducingemployee turnover and enhancing employee satisfaction require maintaining compensation levels that are better than the industry average formuch of our workforce.This may cause us,for example,to absorb costs that other employers might seek to pass through to their workforces.Because our business operates on very low margins,modest changes in various items in the consolidated statements of income,particularlymerchandise costs and SG&A expenses,can have substantial impacts on net income.Our operating model is generally the same across our U.S.,Canadian,and Other International operating segments(see Note 9 to thecondensed consolidated financial statements included in Part I,Item 1,of this Report).Certain operations in the Other International segmenthave relatively higher rates of square footage growth,lower wage and benefit costs as a percentage of sales,less or no direct membershipwarehouse competition,or lack e-commerce or business delivery.In discussions of our consolidated operating results,we refer to the impact of changes in foreign currencies relative to the U.S.dollar,which aredifferences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies intoU.S.dollars.This impact of foreign-exchange rate changes is calculated based on the difference between the current and prior periods currencyexchange rates.The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and priorperiods average price per gallon sold.Our fiscal year ends on the Sunday closest to August 31.References to the first quarter of 2023 and 2022 relate to the 12-week fiscal quartersended November 20,2022,and November 21,2021.Certain percentages presented are calculated using actual results prior to rounding.Unlessotherwise noted,references to net income relate to net income attributable to Costco.Highlights for the first quarter of 2023 versus 2022 include:Net sales increased 8%to$53,437,driven by an increase in comparable sales of 7%and sales at 22 net new warehouses opened sincethe end of the first quarter of 2022;Membership fee revenue increased 6%to$1,000,driven by new member sign-ups,upgrades to Executive Membership,and an increasein our renewal rate;Gross margin percentage decreased 45 basis points,driven primarily by our core merchandise categories and a charge of$93,$0.15 perdiluted share,predominantly related to downsizing our charter shipping activities.This was partially offset by increases in warehouseancillary and other businesses;SG&A expenses as a percentage of net sales decreased 35 basis points,primarily due to a write-off of information technology assets of$118,$0.20 per diluted share,recorded in the first quarter of 2022,and leveraging increased sales in the first quarter of 2023.The provision for income taxes in the first quarter of 2023 was positively impacted by a benefit related to stock compensation of$53,$0.12 per diluted share,compared to$91,$0.21 per diluted share,in the first quarter of 2022.Net income was$1,364,$3.07 per diluted share,compared to$1,324,$2.98 per diluted share in 2022;andOn October 12,2022,our Board declared a quarterly cash dividend of$0.90 per share,which was paid on November 10,2022.19Table of ContentsRESULTS OF OPERATIONSNet Sales12 Weeks EndedNovember 20,2022November 21,2021Net Sales$53,437$49,417 Changes in net sales:U.S11nada3%Other International%Total Company8%Changes in comparable sales:U.S9nada2%Other International(3)%Total Company7%E-commerce(4)%Changes in comparable sales excluding the impact of changes in foreign-currencyand gasoline prices:U.S7nada8%8%Other International9%Total Company7%E-commerce(2)%Net SalesNet sales increased$4,020 or 8%during the first quarter of 2023.This improvement was attributable to an increase in comparable sales of 7%and sales at the 22 net new warehouses opened since the end of the first quarter of 2022.Sales increased$2,033,or 5.1%in core merchandisecategories,led by foods and sundries and fresh foods;while non-foods decreased slightly.Sales increased$1,987,or 21.5%in warehouseancillary and other businesses,led by gasoline,business centers and travel businesses.During the first quarter of 2023,higher gasoline prices positively impacted net sales by$1,216,246 basis points,compared to 2022,with a 17%increase in the average price per gallon.The volume of gasoline sold increased approximately 10%,positively impacting net sales by$650,131basis points.Changes in foreign currencies relative to the U.S.dollar negatively impacted net sales by approximately$1,534,310 basis points,compared to the first quarter of 2022,attributable to our Canadian and Other International operations.Comparable SalesComparable sales increased 7%in the first quarter of 2023 and were positively impacted by increases in shopping frequency and the averageticket,which includes the effects of inflation and changes in foreign currency.20Table of ContentsMembership Fees12 Weeks EndedNovember 20,2022November 21,2021Membership fees$1,000$946 Membership fees increase6%Total paid members(000s)66,900 62,500 Total cardholders(000s)120,900 113,100 Membership fee revenue increased 6%in the first quarter of 2023,driven by sign-ups,upgrades to Executive Membership,and an increase inour renewal rate.Changes in foreign currencies relative to the U.S.dollar negatively impacted membership fees by$32,compared to the firstquarter of 2022.At the end of the first quarter of 2023,our member renewal rates were 93%in the U.S.and Canada and 90%worldwide.Renewal rates continue to benefit from more members auto renewing and increased penetration of Executive members,who on average renewat a higher rate.Our renewal rate,which excludes affiliates of Business members,is a trailing calculation that captures renewals during theperiod seven to eighteen months prior to the reporting date.We account for membership fee revenue on a deferred basis,recognized ratably over the one-year membership period.Our membership countsinclude active memberships and memberships that have not renewed within the 12 months prior to the reporting date.Gross Margin12 Weeks EndedNovember 20,2022November 21,2021Net sales$53,437$49,417 Less merchandise costs47,769 43,952 Gross margin$5,668$5,465 Gross margin percentage10.61.06%Total gross margin percentage decreased 45 basis points compared to the first quarter of 2022.Excluding the impact of gasoline price inflationon net sales,gross margin percentage was 10.85%,a decrease of 21 basis points.This was primarily due to a 31 basis-point decrease in coremerchandise categories,predominantly in non-foods and fresh foods,and an 18 basis-point charge,primarily related to downsizing our chartershipping activities.Gross margin was also negatively impacted by five basis points due to increased 2%rewards.Warehouse ancillary and otherbusinesses positively impacted gross margin by 30 basis points,predominantly gasoline,partially offset by e-commerce.A smaller LIFO chargein the first quarter of 2023 compared to the first quarter of 2022 positively contributed three basis points.Changes in foreign currencies relativeto the U.S.dollar negatively impacted gross margin by approximately$153,compared to the first quarter of 2022,attributable to our Canadianand Other International operations.The gross margin in core merchandise categories,when expressed as a percentage of core merchandise sales(rather than total net sales),decreased 31 basis points.The decrease was primarily due to fresh foods and non-foods,partially offset by foods and sundries.This measureeliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.21Table of ContentsGross margin on a segment basis,when expressed as a percentage of the segments own sales and excluding the impact of changes ingasoline prices on net sales(segment gross margin percentage),decreased across all segments.All segments were negatively impacted bydecreases in core merchandise categories as described above and increased 2%rewards,partially offset by increases in warehouse ancillaryand other businesses.Gross margin in our U.S.segment was also negatively impacted by the charge primarily related to the downsizing of ourcharter shipping activities,partially offset by a lower LIFO charge.Selling,General and Administrative Expenses12 Weeks EndedNovember 20,2022November 21,2021SG&A expenses$4,917$4,718 SG&A expenses as a percentage of net sales9.20%9.55%SG&A expenses as a percentage of net sales decreased 35 basis points.SG&A expenses as a percentage of net sales excluding the impact ofgasoline price inflation was 9.42%,a decrease of 13 basis points.The comparison to last year was favorably impacted by 24 basis points from awrite-off of certain information technology assets in the prior year.Stock compensation was also lower by one basis point.Warehouse operationsand other businesses were higher by nine basis points,largely attributable to the wage increases we instituted in 2022.Central operating costswere higher by three basis points.Changes in foreign currencies relative to the U.S.dollar decreased SG&A expenses by approximately$121compared to the first quarter of 2022.Interest Expense12 Weeks EndedNovember 20,2022November 21,2021Interest expense$34$39 Interest expense is primarily related to Senior Notes and financing leases.Interest expense decreased in the first quarter of 2023 due torepayment of the 2.300%Senior Notes on December 1,2021.Interest Income and Other,Net12 Weeks EndedNovember 20,2022November 21,2021Interest income$54$8 Foreign-currency transaction gains(losses),net(9)26 Other,net8 8 Interest income and other,net$53$42 The increase in interest income in the first quarter of 2023 was primarily due to higher global interest rates.Foreign-currency transaction gains(losses),net include the mark-to-market adjustments for forward foreign-exchange contracts and the revaluation or settlement of monetaryassets and liabilities by our Canadian and Other International operations.See Derivatives and Foreign Currency sections in Item 8,Note 1 of ourAnnual Report on Form 10-K,for the fiscal year ended August 28,2022.22Table of ContentsProvision for Income Taxes 12 Weeks Ended November 20,2022November 21,2021Provision for income taxes$406$351 Effective tax rate23.0 .7%The effective tax rate for the first quarter of 2023 was impacted by net discrete tax benefits of$56,primarily attributable to$53 in excess taxbenefits related to stock compensation.Excluding discrete net tax benefits,the tax rate was 26.1%for the first quarter of 2023.The effective tax rate for the first quarter of 2022 was impacted by net discrete tax benefits of$97,primarily attributable to$91 in excess taxbenefits related to stock compensation.Excluding discrete net tax benefits,the tax rate was 26.4%for the first quarter of 2022.LIQUIDITY AND CAPITAL RESOURCESThe following table summarizes our significant sources and uses of cash and cash equivalents:12 Weeks EndedNovember 20,2022November 21,2021Net cash provided by operating activities$2,610$3,258 Net cash used in investing activities(1,057)(912)Net cash used in financing activities(863)(839)Our primary sources of liquidity are cash flows from our operations,cash and cash equivalents,and short-term investments.Cash and cashequivalents and short-term investments were$11,673 and$11,049 at November 20,2022,and August 28,2022.Of these balances,unsettledcredit and debit card receivables represented approximately$2,488 and$2,010 at November 20,2022,and August 28,2022.These receivablesgenerally settle within four days.Material contractual obligations arising in the normal course of business primarily consist of purchase obligations,long-term debt and relatedinterest payments,leases,and construction and land purchase obligations.Purchase obligations consist of contracts primarily related to merchandise,equipment,and third-party services,the majority of which are due inthe next 12 months.Construction and land purchase obligations consist of contracts primarily related to the development and opening of newand relocated warehouses,the majority of which(other than leases)are due in the next 12 months.Management believes that our cash and investment position and operating cash flows with capacity under existing and available creditagreements will be sufficient to meet our liquidity and capital requirements for the foreseeable future.We believe that our U.S.current andprojected asset position is sufficient to meet our U.S.liquidity requirements.Cash Flows from Operating ActivitiesNet cash provided by operating activities totaled$2,610 in the first quarter of 2023,compared to$3,258 in the first quarter of 2022.Our cashflow provided by operations is primarily from net sales and membership fees.Cash flow used in operations generally consists of payments tomerchandise suppliers,warehouse operating costs,including payroll and employee benefits,utilities,and credit and debit card processing fees.Cash used in operations also includes payments for income taxes.Changes in our net investment in merchandise inventories(the differencebetween merchandise inventories and accounts payable)is23Table of Contentsimpacted by several factors,including inventory turnover,the forward deployment of inventory to accelerate delivery times,payment terms withsuppliers,and early payments to obtain discounts.Cash Flows from Investing ActivitiesNet cash used in investing activities totaled$1,057 in the first quarter of 2023,compared to$912 in the first quarter of 2022,and is primarilyrelated to capital expenditures.Net cash from investing activities also includes purchases and maturities of short-term investments.Capital Expenditure PlansOur primary requirements for capital are acquiring land,buildings,and equipment for new and remodeled warehouses.Capital is also requiredfor information systems,manufacturing and distribution facilities,initial warehouse operations,and working capital.In the first quarter of 2023,we spent$1,057 on capital expenditures,and it is our current intention to spend approximately$3,800 to$4,000 during fiscal 2023.Theseexpenditures are expected to be financed with cash from operations,existing cash and cash equivalents,and short-term investments.Weopened eight new warehouses,including one relocation,in the first quarter of 2023 and plan to open 19 additional new warehouses,includingtwo relocations,in the remainder of fiscal 2023.There can be no assurance that current expectations will be realized,and plans are subject tochange upon further review of our capital expenditure needs and the economic environment.Cash Flows from Financing ActivitiesNet cash used in financing activities totaled$863 in the first quarter of 2023,compared to$839 in the first quarter of 2022.Cash flow used infinancing activities was primarily related to the payment of dividends,withholding taxes on stock-based awards,and repurchases of commonstock.DividendsOn October 12,2022,our Board declared a quarterly cash dividend of$0.90 per share,payable to shareholders of record on October 28,2022,which was paid on November 10,2022.Share Repurchase ProgramDuring the first quarter of 2023 and 2022,we repurchased 285,000 and 77,000 shares of common stock,at an average price per share of$495.94 and$455.08,totaling approximately$141 and$35.These amounts may differ from the repurchase balances in the accompanyingcondensed consolidated statements of cash flows due to changes in unsettled repurchases at the end of a quarter.Purchases are made fromtime to time,as conditions warrant,in the open market or in block purchases,pursuant to plans under SEC Rule 10b5-1.Repurchased sharesare retired,in accordance with the Washington Business Corporation Act.Bank Credit Facilities and Commercial Paper ProgramsWe maintain bank credit facilities for working capital and general corporate purposes.At November 20,2022,we had borrowing capacity underthese facilities of$1,244.Our international operations maintain$756 of this capacity under bank credit facilities,of which$171 is guaranteed bythe Company.Short-term borrowings outstanding under the bank credit facilities were$37 and$88 at the end of the first quarter of 2023 and atthe end of fiscal 2022.The Company has letter of credit facilities,for commercial and standby letters of credit,totaling$226.The outstanding commitments under thesefacilities at the end of the first quarter of 2023 totaled$187,most of which were standby letters of credit that do not expire or have expirationdates within one year.The bank credit facilities have various expiration dates,most within one year,and we generally intend to renew thesefacilities.The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercialletters of credit outstanding.24Table of ContentsCritical Accounting EstimatesThe preparation of our consolidated financial statements in accordance with U.S.GAAP requires that we make estimates and judgments.Webase these on historical experience and on assumptions that we believe to be reasonable.Our critical accounting policies are discussed in PartII,Item 7,“Managements Discussion and Analysis of Financial Condition and Results of Operations”section of our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes to the critical accounting estimates previously disclosed in thatReport.Recent Accounting PronouncementsThere have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form10-K,for the fiscal year ended August 28,2022.Item 3Quantitative and Qualitative Disclosures about Market RiskOur direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates.There have been nomaterial changes to our market risks as disclosed in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.Item 4Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur disclosure controls and procedures(as defined in Rules 13a-15(e)or 15d-15(e)under the Securities Exchange Act of 1934,as amended)are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded,processed,summarized,and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission andto ensure that information required to be disclosed is accumulated and communicated to management,including our principal executive andfinancial officers,to allow timely decisions regarding disclosure.The Chief Executive Officer and the Chief Financial Officer,with assistance fromother members of management,have reviewed the effectiveness of our disclosure controls and procedures as of November 20,2022 and,based on their evaluation,have concluded the disclosure controls and procedures were effective as of such date.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting(as defined in Rules 13a-15(f)or 15d-15(f)of the Exchange Act)thatoccurred during the first quarter of fiscal 2023 that have materially affected,or are reasonably likely to materially affect,the Companys internalcontrol over financial reporting.PART IIOTHER INFORMATIONItem 1Legal ProceedingsSee discussion of Legal Proceedings in Note 8 to the condensed consolidated financial statements included in Part I,Item 1 of this Report.Item 1ARisk FactorsIn addition to the other information set forth in the Quarterly Report on Form 10-Q,you should carefully consider the factors discussed in Part I,Item 1A,“Risk Factors”in our Annual Report on Form 10-K,for the fiscal year ended August 28,2022.There have been no material changes inour risk factors from those disclosed in our Annual Report on Form 10-K.25Table of ContentsItem 2Unregistered Sales of Equity Securities and Use of ProceedsThe following table sets forth information on our common stock repurchase program activity for the first quarter of 2023(amounts in millions,except share and per share data):PeriodTotal Number ofSharesPurchasedAverage PricePaid Per ShareTotal Number of SharesPurchased as Part ofPublicly AnnouncedProgramsMaximum Dollar Value ofShares that May Yet bePurchased Under theProgramsAugust 29,2022 September 25,202289,000$513.91 89,000$2,762 September 26,2022 October 23,2022101,000 473.85 101,000 2,714 October 24,2022 November 20,202295,000 502.66 95,000 2,667 Total first quarter285,000$495.94 285,000 _(1)Our share repurchase program is conducted under a$4,000 authorization approved by our Board of Directors in April 2019,which expires in April 2023.Item 3Defaults Upon Senior SecuritiesNone.Item 4Mine Safety DisclosuresNot applicable.Item 5Other Information(amounts in whole dollars)Disclosure pursuant to Section 2019 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r)of the SecuritiesExchange Act of 1934,as amended.During the first quarter of 2023,we had as cardholders at our subsidiary in Mexico three individuals under a business membership in the nameof the Embassy of the Islamic Republic of Iran.Gross revenue in the first quarter of 2023 attributable to the membership was approximately$1,131,and our estimated profit on these transactions was less than$100.The membership was canceled during the second quarter of 2023.The Company does not intend to continue these activities.(1)(1)26Table of ContentsItem 6ExhibitsThe following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.Incorporated by ReferenceExhibitNumberExhibit DescriptionFiledHerewithFormPeriod EndingFiling Date3.1Articles of Incorporation as amended of CostcoWholesale Corporation10-K8/28/202210/5/20223.2Bylaws as amended of Costco Wholesale Corporation10-Q5/8/20226/2/202210.1*Fiscal 2023 Executive Bonus Plan8-K11/9/202210.2*Extension of the Term of the Executive EmploymentAgreement effective January 1,2023,between W.CraigJelinek and Costco Wholesale Corporationx10.3Ninth Amendment to Citi,N.A.Co-Branded Credit CardAgreementx10.4Tenth Amendment to Citi,N.A.Co-Branded Credit CardAgreementx31.1Rule 13(a)14(a)Certificationsx32.1Section 1350 Certificationsx101.INSInline XBRL Instance Documentx101.SCHInline XBRL Taxonomy Extension Schema Documentx101.CALInline XBRL Taxonomy Extension Calculation LinkbaseDocumentx101.DEFInline XBRL Taxonomy Extension Definition LinkbaseDocumentx101.LABInline XBRL Taxonomy Extension Label LinkbaseDocumentx101.PREInline XBRL Taxonomy Extension Presentation LinkbaseDocumentx104Cover Page Interactive Data File(formatted as inlineXBRL and contained in Exhibit 101)x _*Management contract,compensatory plan or arrangement.27Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Report to be signed on its behalf by theundersigned,thereunto duly authorized.COSTCO WHOLESALE CORPORATION(Registrant)December 29,2022By/s/W.CRAIG JELINEKDateW.Craig JelinekChief Executive Officer and DirectorDecember 29,2022By/s/RICHARD A.GALANTIDateRichard A.GalantiExecutive Vice President,Chief Financial Officer and Director28Exhibit 10.2December 14,2022Hamilton E.JamesChairman of the BoardCostco Wholesale CorporationRE:Executive Employment AgreementDear Tony:As provided for under section 7(b)of the Executive Employment Agreement,effective January 1,2017,between Costco Wholesale Corporationand me,this letter will confirm an extension of the term through and including December 31,2023.Consistent with the prior decisions of theCompensation Committee:section 1(a)is amended to change the Annual Base Salary to$1,150,000;and section 1(h)is amended to changethe Target Bonus to$600,000.The reference in the first whereas clause to my serving as President shall be deemed omitted.Pleasecountersign below to indicate acceptance on behalf of the Company.Very truly yours,By:/s/W.Craig JelinekW.Craig JelinekChief Executive OfficerCostco Wholesale CorporationBy:/s/Hamilton JamesHamilton E.JamesChairman of the Boardcc:John StantonExhibit 10.3NINTH AMENDMENT TO THECO-BRANDED CREDIT CARD PROGRAM AGREEMENTThis Ninth Amendment(Amendment)is between Citibank,N.A.(Bank)and Costco Wholesale Corporation(Costco),is effective as ofAugust 13,2022,and amends that certain Co-Branded Credit Card Program Agreement,by and between Bank and Costco,dated February 27,2015(the Agreement).Pursuant to Section 16.10 of the Agreement,the Bank and Costco agree as follows:1.Defined Terms.All capitalized terms used but not defined in this Amendment will have the meanings ascribed to such terms in theAgreement.2.Amendments.a.Schedule 4.06(a).Schedule 4.06(a)is deleted in its entirety and replaced with the attached Schedule 4.06(a).b.Schedule 7.05(a).The bullet for“Purchases and transactions at Costco(gas only)”is amended to read,“Purchases andtransactions at Costco(gas and electric vehicle charging only)”.The bullet under“Purchases transactions outside Costco by type”isamended to add a bullet that says,“Electric vehicle charging”.3.Full Force and Effect.The Agreement,as modified hereby,will remain in full force and effect and this Amendment will not be deemedto be an amendment or a waiver of any other provision of the Agreement except as expressly stated herein.All such other provisions ofthe Agreement will also be deemed to apply to this Amendment.4.No Modification or Waiver;Incorporation.No modification,amendment or waiver of this Amendment will be effective or bindingunless made in writing and signed by the Parties.The Parties agree that,except for those modifications expressly set forth in thisAmendment,all terms and provisions of the Agreement will remain unchanged and in full force and effect.This Amendment and theAgreement will hereafter be read and construed together as a single document,and all references to the Agreement will hereafter referto the Agreement as amended by this Amendment.5.Counterparts.This Amendment may be executed in counterparts and if so executed will be enforceable and effective upon theexchange of executed counterparts,including by facsimile or electronic transmissions of executed counterparts.Signature page followsDuly authorized representatives of the Parties have executed this Amendment.COSTCO WHOLESALE CORPORATIONCITIBANK,N.A.By:/s/Sandy TorreyBy:/s/Matthew BremName:Sandy TorreyName:Matthew BremTitle:SVP,Corporate MarketingTitle:Vice President,Citibank N.A.Schedule 4.06(a)Loyalty Program and RewardsConsumer Card Loyalty Program(Cash Rebate portion only)Co-Branded Cardholders will earn an annual reward based on the eligible purchases on their Co-Branded Card from Costco and Citi during anannual reward period.An annual reward period is 12 billing periods,starting with the one that begins in February.Eligible purchases arepurchases for goods and services minus returns and other credits.Eligible purchases do NOT include fees or interest charges,balancetransfers,cash advances,purchases of travelers checks,purchases or reloading of prepaid cards,or purchases of any cash equivalents.Additional terms and restrictions apply.Co-Branded Cardholders will earn an annual reward of:4%on the first$7,000 of purchases each annualreward period(1%thereafter)of gasoline and electric vehicle charging transactions at Costco,gas stations and electric vehicle charginglocations in the U.S.(excluding superstores,supermarkets,convenience stores,and warehouse clubs other than Costco);3%at restaurantslocated in the U.S.;3%for eligible travel purchases(eligible travel purchases are:airfare for a scheduled flight on a passenger carrier,hotelstays(excluding timeshares,banquets and events),car rentals from select major car rental companies listed athttps:/ other purchases from Costco Travel,cruise lines,travel agencies and tour operators);2%on eligiblepurchases at Costco Locations(unless a higher reward applies,such as at Costco gas,Costco electric vehicle charging,or Costco travel);and1%on all other eligible purchases.Bank is obligated to fund the annual rewards up to the Loyalty Funding Cap.Merchants are assigned codes based on what they primarily sell.A purchase will not earn a higher percentage reward if the merchants code isnot eligible.Purchases made through a third-party payment account or on an online marketplace(with multiple retailers)will not earn a higherpercentage reward.A purchase may not earn a higher percentage reward if the merchant submits the purchase using a mobile or wireless cardreader or if the Co-Branded Cardholder uses a mobile or digital wallet.Reward is distributed and valid at any U.S.Costco warehouse,including Puerto Rico,for merchandise or cash.Requests for cash may befulfilled in the form of a check at the Costco warehouses discretion.Coupon must be redeemed in person prior to its expiration date ofDecember 31st in the year in which it is issued.Additional terms and conditions apply.See Co-Branded Cardholder Agreement for full terms andconditions.Small Business Loyalty Program(Cash Rebate portion only)Co-Branded Cardholders will earn an annual reward based on eligible purchases on their small business Co-Branded Cards from Costco duringan annual reward period.An annual reward period is 12 billing periods,starting with the one that begins in February.Eligible purchases arepurchases for goods and services minus returns and other credits.Eligible purchases do NOT include fees or interest charges,balancestransfers,cash advances,purchases of travelers checks,purchases or reloading of prepaid cards,or purchases of any cash equivalents.Additional terms and restrictions apply.Co-Branded Cardholders will earn an annual reward of:4%on the first$7,000 of purchases each annualreward period(1%thereafter)of gasoline and electric vehicle charging transactions at Costco,gas stations and electric vehicle charginglocations in the U.S.(excluding superstores,supermarkets,convenience stores,and warehouse clubs other than Costco);3%at restaurantslocated in the U.S.;3%for eligible travel purchases(eligible travel purchases are:airfare for a scheduled flight on a passenger carrier,hotelstays(excluding timeshares,banquets and events),car rentals from select major car rental companies listed athttps:/ other purchases from Costco Travel,cruise lines,travel agencies and tour operators);2%on eligiblepurchases at Costco Locations(unless a higher reward applies,such as at Costco gas,Costco electric vehicle charging,or Costco travel);and1%on all other eligible purchases.Bank is obligated to fund the annual rewards up to the Loyalty Funding Cap.Merchants are assigned codes based on what they primarily sell.A purchase will not earn a higher percentage reward if the merchants code isnot eligible.Purchases made through a third-party payment account or on an online marketplace(with multiple retailers)will not earn a higherpercentage reward.A purchase may not earn a higher percentage reward if the merchant submits the purchase using a mobile or wireless cardreader or if the Co-Branded Cardholder uses a mobile or digital wallet.Reward is distributed and valid at any U.S.Costco warehouse,including Puerto Rico,for merchandise or cash.Requests for cash may befulfilled in the form of a check at the Costco warehouses discretion.Coupon must be redeemed in person on or prior to its expiration dateof December 31st in the year in which it is issued.Additional terms and conditions apply.See Co-Branded Cardholder Agreement for fullterms and conditions.Exhibit 10.4TENTH AMENDMENT TO THECO-BRANDED CREDIT CARD PROGRAM AGREEMENTThis Tenth Amendment(Amendment)is between Citibank,N.A.(Bank)and Costco Wholesale Corporation(Costco),is effective as ofNovember 11,2022,and amends that certain Co-Branded Credit Card Program Agreement,by and between Bank and Costco,dated February27,2015(the Agreement).Pursuant to Section 16.10 of the Agreement,the Bank and Costco agree as follows:1.Defined Terms.All capitalized terms used but not defined in this Amendment will have the meanings ascribed to such terms in theAgreement.2.Amendments.a.Section 4.06(a)-1.Schedule 4.06(a)-1 is deleted in its entirety and replaced with the attached Schedule 4.06-1.3.Full Force and Effect.The Agreement,as modified hereby,will remain in full force and effect and this Amendment will not be deemedto be an amendment or a waiver of any other provision of the Agreement except as expressly stated herein.All such other provisions ofthe Agreement will also be deemed to apply to this Amendment.4.No Modification or Waiver;Incorporation.No modification,amendment or waiver of this Amendment will be effective or bindingunless made in writing and signed by the Parties.The Parties agree that,except for those modifications expressly set forth in thisAmendment,all terms and provisions of the Agreement will remain unchanged and in full force and effect.This Amendment and theAgreement will hereafter be read and construed together as a single document,and all references to the Agreement will hereafter referto the Agreement as amended by this Amendment.5.Counterparts.This Amendment may be executed in counterparts and if so executed will be enforceable and effective upon theexchange of executed counterparts,including by facsimile or electronic transmissions of executed counterparts.Signature page followsDuly authorized representatives of the Parties have executed this Amendment.COSTCO WHOLESALE CORPORATION CITIBANK,N.A.By:/s/Sandy TorreyBy:/s/Jennifer LonginoName:Sandy TorreyName:Jennifer LonginoTitle:SVP,Corporate MarketingTitle:Vice PresidentSchedule 4.06(a)-1Additional Co-Branded Cardholder BenefitsCar RentalNo country exclusions.No vehicle exclusionsDamage&TheftPurchase ProtectionUp to 120 days post purchase.Up to$1,000 per claim,$50,000 per year.Travel AccidentUp to$250,000Travel&EmergencyAssistanceEmergency travel arrangements,cash transfers,medicalreferrals,etc.Roadside AssistanceDispatch service for roadside support.Exhibit 31.1CERTIFICATIONSI,W.Craig Jelinek,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.December 29,2022/s/W.CRAIG JELINEKW.Craig JelinekChief Executive Officer and DirectorCERTIFICATIONSI,Richard A.Galanti,certify that:1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation(“the registrant”);2)Based on my knowledge,this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made,in light of the circumstances under which such statements were made,not misleading with respect to theperiod covered by this report;3)Based on my knowledge,the financial statements,and other financial information included in this report,fairly present in all materialrespects the financial condition,results of operations and cash flows of the registrant as of,and for,the periods presented in this report;4)The registrants other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures(asdefined in Exchange Act Rules 13a-15(e)and 15d-15(e)and internal control over financial reporting(as defined in Exchange Act Rules13a-15(f)and 15d-15(f)for the registrant and have:a)Designed such disclosure controls and procedures,or caused such disclosure controls and procedures to be designed underour supervision,to ensure that material information relating to the registrant,including its consolidated subsidiaries,is madeknown to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting,or caused such internal control over financial reporting to be designedunder our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based onsuch evaluation;andd)Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrantsmost recent fiscal quarter(the registrants fourth fiscal quarter in the case of an annual report)that has materially affected,or isreasonably likely to materially affect,the registrants internal control over financial reporting;and5)The registrants other certifying officer(s)and I have disclosed,based on our most recent evaluation of internal control over financialreporting,to the registrants auditors and the audit committee of the registrants board of directors(or persons performing the equivalentfunctions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrants ability to record,process,summarize and report financial information;andb)Any fraud,whether or not material,that involves management or other employees who have a significant role in the registrantsinternal control over financial reporting.December 29,2022/s/RICHARD A.GALANTIRichard A.GalantiExecutive Vice President,Chief Financial Officer and DirectorExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended November 20,2022,as filed with the Securities and Exchange Commission(the Report),I,W.Craig Jelinek,Chief Executive Officer and Director of theCompany,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/W.CRAIG JELINEK Date:December 29,2022W.Craig Jelinek Chief Executive Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.CERTIFICATION PURSUANT TO18 U.S.C.SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Quarterly Report of Costco Wholesale Corporation(the Company)on Form 10-Q for the quarter ended November 20,2022,as filed with the Securities and Exchange Commission(the Report),I,Richard A.Galanti,Executive Vice President,Chief Financial Officerand Director of the Company,certify,pursuant to 18 U.S.C.Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002,that:(1)The Report fully complies with the requirements of Section 13(a)or 15(d)of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents,in all material respects,the financial condition and results of operations of theCompany./s/RICHARD A.GALANTI Date:December 29,2022Richard A.Galanti Executive Vice President,Chief Financial Officer and Director A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to theSecurities and Exchange Commission or its staff upon request.
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 _FORM 10-Q_(Mark One)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the quarterly period ended September 30,2022orTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to .Commission File No.000-22513_AMAZON.COM,INC.(Exact name of registrant as specified in its charter)_Delaware 91-1646860(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification No.)410 Terry Avenue North,Seattle,Washington 98109-5210(206)266-1000(Address and telephone number,including area code,of registrants principal executive offices)Securities registered pursuant to Section 12(b)of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock,par value$.01 per shareAMZNNasdaq Global Select Market_Indicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during thepreceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for the past90 days.Yes No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-Tduring the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,a smaller reporting company,or an emerging growthcompany.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No 10,201,654,176 shares of common stock,par value$0.01 per share,outstanding as of October 19,2022Table of ContentsAMAZON.COM,INC.FORM 10-QFor the Quarterly Period Ended September 30,2022INDEX PagePART I.FINANCIAL INFORMATIONItem 1.Financial Statements3Consolidated Statements of Cash Flows3Consolidated Statements of Operations4Consolidated Statements of Comprehensive Income(Loss)5Consolidated Balance Sheets6Notes to Consolidated Financial Statements7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations21Item 3.Quantitative and Qualitative Disclosures About Market Risk32Item 4.Controls and Procedures33PART II.OTHER INFORMATIONItem 1.Legal Proceedings34Item 1A.Risk Factors34Item 2.Unregistered Sales of Equity Securities and Use of Proceeds44Item 3.Defaults Upon Senior Securities44Item 4.Mine Safety Disclosures44Item 5.Other Information44Item 6.Exhibits45Signatures462Table of ContentsPART I.FINANCIAL INFORMATIONItem 1.Financial StatementsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions)(unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,Twelve Months EndedSeptember 30,202120222021202220212022CASH,CASH EQUIVALENTS,AND RESTRICTED CASH,BEGINNING OF PERIOD$40,667$37,700$42,377$36,477$30,202$30,177 OPERATING ACTIVITIES:Net income(loss)3,156 2,872 19,041(3,000)26,263 11,323 Adjustments to reconcile net income(loss)to net cash from operating activities:Depreciation and amortization of property and equipment and capitalized content costs,operating leaseassets,and other8,948 10,204 24,494 28,776 32,112 38,578 Stock-based compensation3,180 5,556 9,077 14,015 11,639 17,695 Other operating expense(income),net24 123 72 460(415)525 Other expense(income),net340(1,272)(2,374)13,521(3,701)1,589 Deferred income taxes909(825)3,313(4,781)1,677(8,404)Changes in operating assets and liabilities:Inventories(7,059)732(7,572)(5,772)(7,242)(7,687)Accounts receivable,net and other(4,890)(4,794)(11,607)(13,109)(16,168)(19,665)Accounts payable3,832(1,226)(4,387)(6,907)8,863 1,082 Accrued expenses and other(1,465)(20)(7,210)(7,335)(84)1,998 Unearned revenue338 54 1,394 1,711 1,727 2,631 Net cash provided by(used in)operating activities7,313 11,404 24,241 17,579 54,671 39,665 INVESTING ACTIVITIES:Purchases of property and equipment(15,748)(16,378)(42,118)(47,053)(56,941)(65,988)Proceeds from property and equipment sales and incentives997 1,337 3,192 4,172 4,822 6,637 Acquisitions,net of cash acquired,and other(654)(885)(1,604)(7,485)(1,985)(7,866)Sales and maturities of marketable securities15,808 557 46,847 25,918 64,185 38,455 Purchases of marketable securities(15,231)(239)(51,891)(2,332)(72,692)(10,598)Net cash provided by(used in)investing activities(14,828)(15,608)(45,574)(26,780)(62,611)(39,360)FINANCING ACTIVITIES:Common stock repurchased (6,000)(6,000)Proceeds from short-term debt,and other2,187 12,338 5,289 30,946 7,724 33,613 Repayments of short-term debt,and other(1,917)(7,916)(5,094)(21,757)(7,385)(24,416)Proceeds from long-term debt176 107 18,803 12,931 19,334 13,131 Repayments of long-term debt(509)(589)(1)(703)(1,002)Principal repayments of finance leases(2,693)(1,465)(8,903)(6,301)(11,271)(8,561)Principal repayments of financing obligations(20)(48)(115)(186)(124)(233)Net cash provided by(used in)financing activities(2,776)3,016 9,391 9,632 7,575 6,532 Foreign currency effect on cash,cash equivalents,and restricted cash(199)(1,334)(258)(1,730)340(1,836)Net increase(decrease)in cash,cash equivalents,and restricted cash(10,490)(2,522)(12,200)(1,299)(25)5,001 CASH,CASH EQUIVALENTS,AND RESTRICTED CASH,END OF PERIOD$30,177$35,178$30,177$35,178$30,177$35,178 See accompanying notes to consolidated financial statements.3Table of ContentsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in millions,except per share data)(unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Net product sales$54,876$59,340$170,371$172,370 Net service sales55,936 67,761 162,039 192,409 Total net sales110,812 127,101 332,410 364,779 Operating expenses:Cost of sales62,930 70,268 189,509 203,191 Fulfillment18,498 20,583 52,666 61,196 Technology and content14,380 19,485 40,739 52,399 Sales and marketing8,010 11,014 21,741 29,420 General and administrative2,153 3,061 6,298 8,558 Other operating expense(income),net(11)165 38 504 Total operating expenses105,960 124,576 310,991 355,268 Operating income4,852 2,525 21,419 9,511 Interest income119 277 330 544 Interest expense(493)(617)(1,327)(1,673)Other income(expense),net(163)759 2,795(13,356)Total non-operating income(expense)(537)419 1,798(14,485)Income(loss)before income taxes4,315 2,944 23,217(4,974)Benefit(provision)for income taxes(1,155)(69)(4,179)1,990 Equity-method investment activity,net of tax(4)(3)3(16)Net income(loss)$3,156$2,872$19,041$(3,000)Basic earnings per share$0.31$0.28$1.88$(0.29)Diluted earnings per share$0.31$0.28$1.85$(0.29)Weighted-average shares used in computation of earnings per share:Basic10,132 10,191 10,103 10,178 Diluted10,309 10,331 10,287 10,178 See accompanying notes to consolidated financial statements.4Table of ContentsAMAZON.COM,INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS)(in millions)(unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Net income(loss)$3,156$2,872$19,041$(3,000)Other comprehensive income(loss):Foreign currency translation adjustments,net of tax of$39,$76,$35,and$136(537)(2,142)(752)(4,661)Net change in unrealized gains(losses)on available-for-sale debtsecurities:Unrealized gains(losses),net of tax of$3,$(4),$31,and$(3)(5)(195)(109)(1,095)Reclassification adjustment for losses(gains)included in“Otherincome(expense),net,”net of tax of$5,$0,$13,and$0(8)4(34)17 Net unrealized gains(losses)on available-for-sale debt securities(13)(191)(143)(1,078)Total other comprehensive income(loss)(550)(2,333)(895)(5,739)Comprehensive income(loss)$2,606$539$18,146$(8,739)See accompanying notes to consolidated financial statements.5Table of ContentsAMAZON.COM,INC.CONSOLIDATED BALANCE SHEETS(in millions,except per share data)December 31,2021September 30,2022(unaudited)ASSETSCurrent assets:Cash and cash equivalents$36,220$34,947 Marketable securities59,829 23,715 Inventories32,640 36,647 Accounts receivable,net and other32,891 36,154 Total current assets161,580 131,463 Property and equipment,net160,281 177,195 Operating leases56,082 62,033 Goodwill15,371 20,168 Other assets27,235 37,503 Total assets$420,549$428,362 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable$78,664$67,760 Accrued expenses and other51,775 59,974 Unearned revenue11,827 12,629 Total current liabilities142,266 140,363 Long-term lease liabilities67,651 69,332 Long-term debt48,744 58,919 Other long-term liabilities23,643 22,259 Commitments and contingencies(Note 4)Stockholders equity:Preferred stock($0.01 par value;500 shares authorized;no shares issued or outstanding)Common stock($0.01 par value;100,000 shares authorized;10,644 and 10,714 shares issued;10,175 and10,198 shares outstanding)106 107 Treasury stock,at cost(1,837)(7,837)Additional paid-in capital55,437 69,419 Accumulated other comprehensive income(loss)(1,376)(7,115)Retained earnings85,915 82,915 Total stockholders equity138,245 137,489 Total liabilities and stockholders equity$420,549$428,362 See accompanying notes to consolidated financial statements.6Table of ContentsAMAZON.COM,INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 1 ACCOUNTING POLICIES AND SUPPLEMENTAL DISCLOSURESUnaudited Interim Financial InformationWe have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission(the“SEC”)for interim financial reporting.These consolidated financial statements are unaudited and,in our opinion,include all adjustments,consisting ofnormal recurring adjustments and accruals necessary for a fair presentation of our consolidated cash flows,operating results,and balance sheets for the periodspresented.Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2022 due to seasonal and otherfactors.Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generallyaccepted in the United States(“GAAP”)have been omitted in accordance with the rules and regulations of the SEC.These consolidated financial statementsshould be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II,“Financial Statements andSupplementary Data,”of our 2021 Annual Report on Form 10-K.Common Stock SplitOn May 27,2022,we effected a 20-for-1 stock split of our common stock and proportionately increased the number of authorized shares of commonstock.All share,restricted stock unit(“RSU”),and per share or per RSU information throughout this Quarterly Report on Form 10-Q has been retroactivelyadjusted to reflect the stock split.The shares of common stock retain a par value of$0.01 per share.Accordingly,an amount equal to the par value of theincreased shares resulting from the stock split was reclassified from“Additional paid-in capital”to“Common stock.”Principles of ConsolidationThe consolidated financial statements include the accounts of A,Inc.and its consolidated entities(collectively,the“Company”),consisting ofits wholly-owned subsidiaries and those entities in which we have a variable interest and of which we are the primary beneficiary,including certain entities inIndia and certain entities that support our seller lending financing activities.Intercompany balances and transactions between consolidated entities areeliminated.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets andliabilities,revenues and expenses,and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes.Estimatesare used for,but not limited to,income taxes,useful lives of equipment,commitments and contingencies,valuation of acquired intangibles and goodwill,stock-based compensation forfeiture rates,vendor funding,inventory valuation,collectability of receivables,impairment of property and equipment and operatingleases,and valuation and impairment of investments.Actual results could differ materially from these estimates.We review the useful lives of equipment on an ongoing basis,and effective January 1,2022 we changed our estimate of the useful lives for our serversfrom four to five years and for our networking equipment from five to six years.The longer useful lives are due to continuous improvements in our hardware,software,and data center designs.The effect of this change in estimate for Q3 2022,based on servers and networking equipment that were included in“Property and equipment,net”as of June 30,2022 and those acquired during the three months ended September 30,2022,was a reduction in depreciation andamortization expense of$882 million and a benefit to net income of$665 million,or$0.07 per basic share and$0.06 per diluted share.The effect of thischange in estimate for the nine months ended September 30,2022,based on servers and networking equipment that were included in“Property and equipment,net”as of December 31,2021 and those acquired during the nine months ended September 30,2022,was a reduction in depreciation and amortization expenseof$2.8 billion and a benefit to net loss of$2.2 billion,or$0.21 per basic share and$0.21 per diluted share.7Table of ContentsSupplemental Cash Flow InformationThe following table shows supplemental cash flow information(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,Twelve Months EndedSeptember 30,202120222021202220212022SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest on debt$276$304$731$932$933$1,299 Cash paid for operating leases1,812 1,813 5,029 6,268 6,230 7,961 Cash paid for interest on finance leases121 88 407 290 535 404 Cash paid for interest on financing obligations48 39 116 152 147 189 Cash paid for income taxes,net of refunds750 742 3,354 4,340 3,774 4,674 Assets acquired under operating leases10,447 6,755 19,561 14,031 23,908 19,839 Property and equipment acquired under finance leases,net of remeasurements andmodifications1,744 131 5,453 358 8,149 1,966 Property and equipment recognized during the construction period of build-to-suitlease arrangements1,797 526 3,877 2,877 4,916 4,847 Property and equipment derecognized after the construction period of build-to-suitlease arrangements,with the associated leases recognized as operating76 2,195 174 3,307 174 3,363 Earnings Per ShareBasic earnings per share is calculated using our weighted-average outstanding common shares.Diluted earnings per share is calculated using ourweighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method.In periods when wehave a net loss,stock awards are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect.The following table shows the calculation of diluted shares(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Shares used in computation of basic earnings per share10,132 10,191 10,103 10,178 Total dilutive effect of outstanding stock awards177 140 184 Shares used in computation of diluted earnings per share10,309 10,331 10,287 10,178 Other Income(Expense),NetOther income(expense),net,is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Marketable equity securities valuation gains(losses)$(129)$1,039$(48)$(11,528)Equity warrant valuation gains(losses)(50)(170)1,194(1,606)Upward adjustments relating to equity investments in private companies155 11 1,661 76 Foreign currency gains(losses)(107)(103)(28)(206)Other,net(32)(18)16(92)Total other income(expense),net(163)759 2,795(13,356)Included in other income(expense),net is a marketable equity securities valuation gain(loss)of$1.1 billion in Q3 2022,and$(10.4)billion for the ninemonths ended September 30,2022,from our equity investment in Rivian Automotive,Inc.(“Rivian”).Our investment in Rivians preferred stock wasaccounted for at cost,with adjustments for observable changes in prices or impairments,prior to Rivians initial public offering in November 2021,whichresulted in the conversion of our preferred stock to Class A common stock.As of September 30,2022,we held 158 million shares of Rivians Class A commonstock,representing an approximate 17%ownership interest,and an approximate 16%voting interest.We determined that we have the ability to exercisesignificant influence over Rivian through our equity investment,our commercial arrangement for the purchase of electric vehicles,and one of our employeesserving on Rivians board of directors.We elected the fair value8Table of Contentsoption to account for our equity investment in Rivian,which is included in“Marketable securities”on our consolidated balance sheets.Required summarized financial information of Rivian as disclosed in its most recent SEC filings is as follows(in millions):Six Months Ended June 30,20212022Revenues$459 Gross profit(1,206)Loss from operations(990)(3,287)Net loss(994)(3,305)InventoriesInventories,consisting of products available for sale,are primarily accounted for using the first-in,first-out method,and are valued at the lower of costand net realizable value.This valuation requires us to make judgments,based on currently available information,about the likely method of disposition,suchas through sales to individual customers,returns to product vendors,or liquidations,and expected recoverable values of each disposition category.Theinventory valuation allowance,representing a write-down of inventory,was$2.6 billion and$2.3 billion as of December 31,2021 and September 30,2022.Accounts Receivable,Net and OtherIncluded in“Accounts receivable,net and other”on our consolidated balance sheets are amounts primarily related to customers,vendors,and sellers.Asof December 31,2021 and September 30,2022,customer receivables,net,were$20.2 billion and$22.8 billion,vendor receivables,net,were$5.3 billion and$4.9 billion,and seller receivables,net,were$1.0 billion and$1.4 billion.Seller receivables are amounts due from sellers related to our seller lending program,which provides funding to sellers primarily to procure inventory.We estimate losses on receivables based on expected losses,including our historical experience of actual losses.The allowance for doubtful accounts was$1.1 billion and$1.3 billion as of December 31,2021 and September 30,2022.Digital Video and Music ContentThe total capitalized costs of video,which is primarily released content,and music as of December 31,2021 and September 30,2022 were$10.7 billionand$16.3 billion.Total video and music expense was$3.3 billion and$4.2 billion in Q3 2021 and Q3 2022,and$9.4 billion and$11.4 billion for the ninemonths ended September 30,2021 and 2022.Unearned RevenueUnearned revenue is recorded when payments are received or due in advance of performing our service obligations and is recognized over the serviceperiod.Unearned revenue primarily relates to prepayments of AWS services and Amazon Prime memberships.Our total unearned revenue as of December 31,2021 was$14.0 billion,of which$10.1 billion was recognized as revenue during the nine months ended September 30,2022.Included in“Other long-termliabilities”on our consolidated balance sheets was$2.2 billion and$2.7 billion of unearned revenue as of December 31,2021 and September 30,2022.Additionally,we have performance obligations,primarily related to AWS,associated with commitments in customer contracts for future services thathave not yet been recognized in our consolidated financial statements.For contracts with original terms that exceed one year,those commitments not yetrecognized were$104.3 billion as of September 30,2022.The weighted-average remaining life of our long-term contracts is 3.8 years.However,the amountand timing of revenue recognition is largely driven by customer usage,which can extend beyond the original contractual term.Acquisition ActivityOn March 17,2022,we acquired MGM Holdings Inc.(“MGM”),for cash consideration of approximately$6.1 billion,net of cash acquired,to providemore digital media content options for customers.We also assumed$2.5 billion of debt,which we repaid immediately after closing.The acquired assetsprimarily consist of$3.4 billion of video content and$4.9 billion of goodwill,the majority of which is allocated to our North America segment.Pro forma results of operations have not been presented because the effects of the MGM acquisition were not material to our consolidated results ofoperations.Acquisition-related costs were expensed as incurred and were not significant.9Table of ContentsNote 2 FINANCIAL INSTRUMENTSCash,Cash Equivalents,Restricted Cash,and Marketable SecuritiesAs of December 31,2021 and September 30,2022,our cash,cash equivalents,restricted cash,and marketable securities primarily consisted of cash,AAA-rated money market funds,U.S.and foreign government and agency securities,other investment grade securities,and marketable equity securities.Cashequivalents and marketable securities are recorded at fair value.Fair value is defined as the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at the measurement date.To increase the comparability of fair value measures,the followinghierarchy prioritizes the inputs to valuation methodologies used to measure fair value:Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.Level 2Valuations based on observable inputs other than quoted prices included in Level 1,such as quoted prices for similar assets and liabilities inactive markets,quoted prices for identical or similar assets and liabilities in markets that are not active,or other inputs that are observable or can becorroborated by observable market data.Level 3Valuations based on unobservable inputs reflecting our own assumptions,consistent with reasonably available assumptions made by othermarket participants.These valuations require significant judgment.We measure the fair value of money market funds and certain marketable equity securities based on quoted prices in active markets for identical assets orliabilities.Other marketable securities were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similarinstruments and other significant inputs derived from or corroborated by observable market data.We did not hold significant amounts of marketable securitiescategorized as Level 3 assets as of December 31,2021 and September 30,2022.The following table summarizes,by major security type,our cash,cash equivalents,restricted cash,and marketable securities that are measured at fairvalue on a recurring basis and are categorized using the fair value hierarchy(in millions):December 31,2021September 30,2022 TotalEstimatedFair ValueCost orAmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesTotalEstimatedFair ValueCash$10,942$10,720$10,720 Level 1 securities:Money market funds20,312 16,697 16,697 Equity securities(1)(3)1,646 5,988 Level 2 securities:Foreign government and agency securities181 141 (2)139 U.S.government and agency securities4,300 2,301 (169)2,132 Corporate debt securities35,764 20,229 (799)19,430 Asset-backed securities6,738 3,578 (191)3,387 Other fixed income securities686 403 (22)381 Equity securities(1)(3)15,740 19$96,309$54,069$(1,183)$58,893 Less:Restricted cash,cash equivalents,and marketablesecurities(2)(260)(231)Total cash,cash equivalents,and marketable securities$96,049$58,662 _(1)The related unrealized gain(loss)recorded in“Other income(expense),net”was$(116)million and$1.0 billion in Q3 2021 and Q3 2022,and$6 millionand$(11.3)billion for the nine months ended September 30,2021 and 2022.(2)We are required to pledge or otherwise restrict a portion of our cash,cash equivalents,and marketable fixed income securities primarily as collateral forreal estate,amounts due to third-party sellers in certain jurisdictions,debt,and standby and trade letters of credit.We classify cash,cash equivalents,andmarketable fixed income securities with use restrictions of less than twelve months as“Accounts receivable,net and other”and of twelve months or longeras non-current“Other assets”on our consolidated balance sheets.See“Note 4 Commitments and Contingencies.”(3)Our equity investment in Rivian had a fair value of$15.6 billion and$5.2 billion as of December 31,2021 and September 30,2022,respectively.Theinvestment was subject to regulatory sales restrictions resulting in a discount for lack of marketability of approximately$800 million as of December 31,2021,which expired in Q1 2022.10Table of ContentsThe following table summarizes the remaining contractual maturities of our cash equivalents and marketable fixed income securities as of September 30,2022(in millions):AmortizedCostEstimatedFair ValueDue within one year$26,797$26,738 Due after one year through five years13,757 12,807 Due after five years through ten years772 728 Due after ten years2,023 1,893 Total$43,349$42,166 Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.Equity Warrants and Non-Marketable Equity InvestmentsWe hold equity warrants giving us the right to acquire stock of other companies.As of December 31,2021 and September 30,2022,these warrants had afair value of$3.4 billion and$2.5 billion,and are recorded within“Other assets”on our consolidated balance sheets with gains and losses recognized in“Otherincome(expense),net”on our consolidated statements of operations.These warrants are primarily classified as Level 2 assets.As of December 31,2021 and September 30,2022,equity investments not accounted for under the equity-method and without readily determinable fairvalues had a carrying value of$603 million and$831 million,and are recorded within“Other assets”on our consolidated balance sheets with adjustmentsrecognized in“Other income(expense),net”on our consolidated statements of operations.Consolidated Statements of Cash Flows ReconciliationThe following table provides a reconciliation of the amount of cash,cash equivalents,and restricted cash reported within the consolidated balance sheetsto the total of the same such amounts shown in the consolidated statements of cash flows(in millions):December 31,2021September 30,2022Cash and cash equivalents$36,220$34,947 Restricted cash included in accounts receivable,net and other242 224 Restricted cash included in other assets15 7 Total cash,cash equivalents,and restricted cash shown in the consolidated statements of cash flows$36,477$35,178 Note 3 LEASESWe have entered into non-cancellable operating and finance leases for fulfillment,delivery,office,physical store,data center,and sortation facilities aswell as server and networking equipment,vehicles,and aircraft.Gross assets acquired under finance leases,inclusive of those where title transfers at the end ofthe lease,are recorded in“Property and equipment,net”and were$72.2 billion and$66.6 billion as of December 31,2021 and September 30,2022.Accumulated amortization associated with finance leases was$43.4 billion as of December 31,2021 and September 30,2022.Lease cost recognized in our consolidated statements of operations is summarized as follows(in millions):Three Months Ended September 30,Nine Months Ended September 30,2021202220212022Operating lease cost$1,911$2,236$5,129$6,472 Finance lease cost:Amortization of lease assets2,497 1,496 7,442 4,586 Interest on lease liabilities114 85 365 280 Finance lease cost2,611 1,581 7,807 4,866 Variable lease cost372 462 1,135 1,402 Total lease cost$4,894$4,279$14,071$12,740 11Table of ContentsOther information about lease amounts recognized in our consolidated financial statements is as follows:December 31,2021September 30,2022Weighted-average remaining lease term operating leases11.3 years11.4 yearsWeighted-average remaining lease term finance leases8.1 years9.8 yearsWeighted-average discount rate operating leases2.2%2.6%Weighted-average discount rate finance leases2.0%2.3%Our lease liabilities were as follows(in millions):December 31,2021 Operating LeasesFinance LeasesTotalGross lease liabilities$66,269$25,866$92,135 Less:imputed interest(7,939)(2,113)(10,052)Present value of lease liabilities58,330 23,753 82,083 Less:current portion of lease liabilities(6,349)(8,083)(14,432)Total long-term lease liabilities$51,981$15,670$67,651 September 30,2022 Operating LeasesFinance LeasesTotalGross lease liabilities$75,495$18,838$94,333 Less:imputed interest(10,712)(2,207)(12,919)Present value of lease liabilities64,783 16,631 81,414 Less:current portion of lease liabilities(7,046)(5,036)(12,082)Total long-term lease liabilities$57,737$11,595$69,332 12Table of ContentsNote 4 COMMITMENTS AND CONTINGENCIESCommitmentsThe following summarizes our principal contractual commitments,excluding open orders for purchases that support normal operations and are generallycancellable,as of September 30,2022(in millions):Three MonthsEnded December31,Year Ended December 31,20222023202420252026ThereafterTotalLong-term debt principal and interest$1,886$4,789$8,993$5,995$4,563$67,529$93,755 Operating lease liabilities2,664 8,380 7,918 7,327 6,747 42,459 75,495 Finance lease liabilities,including interest1,616 4,523 2,137 1,345 1,188 8,029 18,838 Financing obligations,including interest(1)115 462 462 456 463 7,177 9,135 Leases not yet commenced213 1,562 2,158 2,126 2,153 19,497 27,709 Unconditional purchase obligations(2)1,721 7,102 6,296 4,984 4,335 9,405 33,843 Other commitments(3)(4)1,191 2,485 1,586 1,006 1,063 9,716 17,047 Total commitments$9,406$29,303$29,550$23,239$20,512$163,812$275,822 _(1)Includes non-cancellable financing obligations for fulfillment,sortation,and data center facilities.Excluding interest,current financing obligations of$196million and$254 million are recorded within“Accrued expenses and other”and$6.2 billion and$6.7 billion are recorded within“Other long-termliabilities”as of December 31,2021 and September 30,2022.The weighted-average remaining term of the financing obligations was 18.8 years and 18.2years and the weighted-average imputed interest rate was 3.2%as of December 31,2021 and September 30,2022.(2)Includes unconditional purchase obligations related to long-term agreements to acquire and license digital media content that are not reflected on theconsolidated balance sheets and certain products offered in our Whole Foods Market stores.For those digital media content agreements with variableterms,we do not estimate the total obligation beyond any minimum quantities and/or pricing as of the reporting date.Purchase obligations associated withrenewal provisions solely at the option of the content provider are included to the extent such commitments are fixed or a minimum amount is specified.(3)Includes asset retirement obligations,the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit leasearrangements that are under construction,and liabilities associated with digital media content agreements with initial terms greater than one year.(4)Excludes approximately$3.4 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period ofpayment,if any.In addition,we are paying the previously disclosed 1.13 billion fine imposed by the Italian Competition Authority in December 2021,which we willseek to recover pending conclusion of all appeals.In July 2022,we entered into an agreement to acquire 1Life Healthcare,Inc.(One Medical)for approximately$3.9 billion,including its debt,subject tocustomary closing conditions.In August 2022,we entered into an agreement to acquire iRobot Corporation for approximately$1.7 billion,including its debt,subject to customary closing conditions.We expect to fund these acquisitions with cash on hand.Other ContingenciesWe are disputing claims and denials of refunds or credits related to various non-income taxes(such as sales,value added,consumption,service,andsimilar taxes),including in jurisdictions in which we already collect and remit these taxes.These non-income tax controversies typically relate to(i)thetaxability of products and services,including cross-border intercompany transactions,(ii)collection and withholding on transactions with third parties,and(iii)the adequacy of compliance with reporting obligations,including evolving documentation requirements.Due to the inherent complexity and uncertainty ofthese matters and the judicial and regulatory processes in certain jurisdictions,the final outcome of any such controversies may be materially different from ourexpectations.13Table of ContentsLegal ProceedingsThe Company is involved from time to time in claims,proceedings,and litigation,including the matters described in Item 8 of Part II,“FinancialStatements and Supplementary Data Note 7 Commitments and Contingencies Legal Proceedings”of our 2021 Annual Report on Form 10-K and inItem 1 of Part I,“Financial Statements Note 4 Commitments and Contingencies Legal Proceedings”of our Quarterly Reports on Form 10-Q for theperiods ended March 31,2022 and June 30,2022,as supplemented by the following:Beginning in March 2020,with Frame-Wilson v.A,Inc.filed in the United States District Court for the Western District of Washington,private litigants have filed a number of cases in the U.S.and Canada alleging,among other things,price fixing arrangements between A,Inc.andvendors and third-party sellers in Amazons stores,monopolization and attempted monopolization,and consumer protection and unjust enrichment claims.Attorneys General for the District of Columbia and California brought similar suits in May 2021 and September 2022 in the Superior Court of the District ofColumbia and the California Superior Court for the County of San Francisco,respectively.Some of the private cases include allegations of several distinctpurported classes,including consumers who purchased a product through Amazons stores and consumers who purchased a product offered by Amazonthrough another e-commerce retailer.The complaints seek billions of dollars of alleged actual damages,treble damages,punitive damages,injunctive relief,civil penalties,attorneys fees,and costs.In March 2022,the court in the Frame-Wilson case granted Amazons motion to dismiss claims alleging thatAmazons pricing policies are inherently illegal under federal law and claims alleging competition and consumer protection violations under state law,anddenied Amazons motion to dismiss claims alleging that Amazons pricing policies are an unlawful restraint of trade under federal law.In the same month,theDC Superior Court dismissed the DC Attorney Generals lawsuit in its entirety;the dismissal is subject to appeal.We dispute the allegations of wrongdoing andintend to defend ourselves vigorously in these matters.In October 2020,BroadbandiTV,Inc.filed a complaint against A,Inc.,A Services LLC,and Amazon Web Services,Inc.in theUnited States District Court for the Western District of Texas.The complaint alleges,among other things,that certain Amazon Prime Video features andservices infringe U.S.Patent Nos.9,648,388,10,546,750,and 10,536,751,each entitled“Video-On-Demand Content Delivery System For Providing Video-On-Demand Services To TV Services Subscribers”;10,028,026,entitled“System For Addressing On-Demand TV Program Content On TV Services PlatformOf A Digital TV Services Provider”;and 9,973,825,entitled“Dynamic Adjustment Of Electronic Program Guide Displays Based On Viewer Preferences ForMinimizing Navigation In VOD Program Selection.”The complaint seeks an unspecified amount of damages.In April 2022,BroadbandiTV alleged in itsdamages report that,in the event of a finding of liability,A,Inc.,A Services LLC,and Amazon Web Services,Inc.could be subject to$166-$986 million in damages.In September 2022,the court granted summary judgment,holding that the patents are invalid.This decision is subject to appeal.We dispute the allegations of wrongdoing and will continue to defend ourselves vigorously in this matter.In January 2022,VideoLabs,Inc.and VL Collective IP LLC filed a complaint against A,Inc.and Amazon Web Services,Inc.in the UnitedStates District Court for the Western District of Texas.The complaint alleges,among other things,that Amazon Prime Video,Amazon Glow,Amazon EchoShow,Fire TV,Fire TV Cube,Fire TV Stick,Fire Tablets,AWS Elemental MediaConvert,AWS Elemental Live,AWS Elemental Server,AWS ElementalMediaPackage,AWS Elemental MediaLive,and Amazon Elastic Transcoder infringe U.S.Patent Nos.7,769,238 and 8,139,878;both entitled“Picture CodingMethod and Picture Decoding Method”,and 7,970,059,entitled“Variable Length Coding Method and Variable Length Decoding Method”;that Amazon PrimeVideo,AWS Elemental MediaConvert,AWS Elemental Live,AWS Elemental Server,AWS Elemental MediaPackage,AWS Elemental MediaLive,AmazonElastic Transcoder,and Amazon Kinesis Video Streams infringe U.S.Patent No.8,605,794,entitled“Method for Synchronizing Content-Dependent DataSegments of Files”;that Amazon Echo Show,Amazon Echo Spot,Amazon Connect,Amazon Chime,and Amazon Kinesis Video Streams infringe U.S.PatentNo.7,266,682,entitled“Method and System for Transmitting Data from a Transmitter to a Receiver and Transmitter and Receiver Therefore”;that AWS AutoScaling and Amazon EC2 Auto Scaling infringe U.S.Patent No.6,880,156,entitled“Demand Responsive Method and Apparatus to Automatically ActivateSpare Servers”;and that Amazon Prime Video infringes U.S.Patent No.7,440,559,entitled“System and Associated Terminal,Method and Computer ProgramProduct for Controlling the Flow of Content.”The complaint seeks an unspecified amount of damages,enhanced damages,attorneys fees,costs,interest,andinjunctive relief.In October 2022,the case was transferred to the United States District Court for the Western District of Washington.We dispute theallegations of wrongdoing and intend to defend ourselves vigorously in this matter.In addition,we are regularly subject to claims,litigation,and other proceedings,including potential regulatory proceedings,involving patent and otherintellectual property matters,taxes,labor and employment,competition and antitrust,privacy and data protection,consumer protection,commercial disputes,goods and services offered by us and by third parties,and other matters.The outcomes of our legal proceedings and other contingencies are inherently unpredictable,subject to significant uncertainties,and could be material toour operating results and cash flows for a particular period.We evaluate,on a regular14Table of Contentsbasis,developments in our legal proceedings and other contingencies that could affect the amount of liability,including amounts in excess of any previousaccruals and reasonably possible losses disclosed,and make adjustments and changes to our accruals and disclosures as appropriate.For the matters wedisclose that do not include an estimate of the amount of loss or range of losses,such an estimate is not possible or is immaterial,and we may be unable toestimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies.Until the final resolution of suchmatters,if any of our estimates and assumptions change or prove to have been incorrect,we may experience losses in excess of the amounts recorded,whichcould have a material effect on our business,consolidated financial position,results of operations,or cash flows.See also“Note 7 Income Taxes.”Note 5 DEBTAs of September 30,2022,we had$62.5 billion of unsecured senior notes outstanding(the“Notes”),including$12.8 billion issued in April 2022 forgeneral corporate purposes,and$1.0 billion of borrowings under our credit facility.Our total long-term debt obligations are as follows(in millions):Maturities(1)Stated Interest RatesEffective Interest RatesDecember 31,2021September 30,20222012 Notes issuance of$3.0 billion20222.50%2.66%1,250 1,250 2014 Notes issuance of$6.0 billion2024-20443.80%-4.95%3.90%-5.12%4,000 4,000 2017 Notes issuance of$17.0 billion2023-20572.40%-5.20%2.56%-4.33,000 16,000 2020 Notes issuance of$10.0 billion2023-20600.40%-2.70%0.56%-2.77,000 10,000 2021 Notes issuance of$18.5 billion2023-20610.25%-3.25%0.35%-3.31,500 18,500 2022 Notes Issuance of$12.8 billion2024-20622.73%-4.10%2.83%-4.15,750 Credit Facility803 1,041 Total face value of long-term debt50,553 63,541 Unamortized discount and issuance costs,net(318)(375)Less:current portion of long-term debt(1,491)(4,247)Long-term debt$48,744$58,919 _(1)The weighted-average remaining lives of the 2012,2014,2017,2020,2021,and 2022 Notes were 0.2,12.8,14.5,17.0,13.6,and 13.5 years as ofSeptember 30,2022.The combined weighted-average remaining life of the Notes was 14.0 years as of September 30,2022.Interest on the Notes is payable semi-annually in arrears.We may redeem the Notes at any time in whole,or from time to time,in part at specifiedredemption prices.We are not subject to any financial covenants under the Notes.The estimated fair value of the Notes was approximately$53.3 billion and$53.7 billion as of December 31,2021 and September 30,2022,which is based on quoted prices for our debt as of those dates.We have a$1.5 billion secured revolving credit facility with a lender that is secured by certain seller receivables,which we increased from$1.0 billion to$1.5 billion in August 2022 and we may from time to time increase in the future subject to lender approval(the“Credit Facility”).The Credit Facility isavailable until August 2025,bears interest based on the daily Secured Overnight Financing Rate plus 1.25%,and has a commitment fee of up to 0.45%on theundrawn portion.There were$803 million and$1.0 billion of borrowings outstanding under the Credit Facility as of December 31,2021 and September 30,2022,which had a weighted-average interest rate of 2.7%.As of December 31,2021 and September 30,2022,we have pledged$918 million and$1.2 billionof our cash and seller receivables as collateral for debt related to our Credit Facility.The estimated fair value of the Credit Facility,which is based on Level 2inputs,approximated its carrying value as of December 31,2021 and September 30,2022.We have U.S.Dollar and Euro commercial paper programs(the“Commercial Paper Programs”)under which we may from time to time issue unsecuredcommercial paper up to a total of$20.0 billion(including up to 3.0 billion)at the date of issue,with individual maturities that may vary but will not exceed397 days from the date of issue.In March 2022,we increased the size of the Commercial Paper Programs from$10.0 billion to$20.0 billion.There were$725million and$11.7 billion of borrowings outstanding under the Commercial Paper Programs as of December 31,2021 and September 30,2022,which wereincluded in“Accrued expenses and other”on our consolidated balance sheets and had a weighted-average effective interest rate,including issuance costs,of0.08%and 2.54%,respectively.We use the net proceeds from the issuance of commercial paper for general corporate purposes.15Table of ContentsWe also have a$10.0 billion unsecured revolving credit facility with a syndicate of lenders(the“Credit Agreement”),which was amended and restated inMarch 2022 to increase the borrowing capacity from$7.0 billion to$10.0 billion and to extend the term to March 2025.It may be extended for up to threeadditional one-year terms if approved by the lenders.The interest rate applicable to outstanding balances under the Credit Agreement is the applicablebenchmark rate specified in the Credit Agreement plus 0.45%,with a commitment fee of 0.03%on the undrawn portion of the credit facility.There were noborrowings outstanding under the Credit Agreement as of December 31,2021 and September 30,2022.We also utilize other short-term credit facilities for working capital purposes.There were$318 million and$1.1 billion of borrowings outstanding underthese facilities as of December 31,2021 and September 30,2022,which were included in“Accrued expenses and other”on our consolidated balance sheets.Inaddition,we had$10.0 billion of unused letters of credit as of September 30,2022.Note 6 STOCKHOLDERS EQUITYStock Repurchase ActivityIn March 2022,the Board of Directors authorized a program to repurchase up to$10.0 billion of our common stock,with no fixed expiration,whichreplaced the previous$5.0 billion stock repurchase authorization,approved by the Board of Directors in February 2016.We repurchased 46.2 million shares ofour common stock for$6.0 billion during the nine months ended September 30,2022 under these programs.As of September 30,2022,we have$6.1 billionremaining under the repurchase program.Stock Award ActivityCommon shares outstanding plus shares underlying outstanding stock awards totaled 10.5 billion and 10.6 billion as of December 31,2021 andSeptember 30,2022.These totals include all vested and unvested stock awards outstanding,including those awards we estimate will be forfeited.Stock-basedcompensation expense is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Cost of sales$126$190$361$549 Fulfillment473 727 1,381 1,988 Technology and content1,627 3,036 4,742 7,495 Sales and marketing657 1,128 1,804 2,783 General and administrative297 475 789 1,200 Total stock-based compensation expense$3,180$5,556$9,077$14,015 The following table summarizes our restricted stock unit activity for the nine months ended September 30,2022(in millions):Number of UnitsWeighted-AverageGrant-DateFair ValueOutstanding as of December 31,2021279.9$134 Units granted224.1 150 Units vested(69.1)109 Units forfeited(35.6)143 Outstanding as of September 30,2022399.3 147 Scheduled vesting for outstanding restricted stock units as of September 30,2022,is as follows(in millions):Three MonthsEnded December 31,Year Ended December 31,20222023202420252026ThereafterTotalScheduled vesting restricted stock units44.0 137.2 133.0 56.5 24.7 3.9 399.3 As of September 30,2022,there was$26.9 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements.This compensation is recognized on an accelerated basis with more than half of the compensation expected to be expensed in the next twelve months,and has aremaining weighted-average recognition period of 1.1 years.The16Table of Contentsestimated forfeiture rate as of December 31,2021 and September 30,2022 was 27%and 26%.Changes in our estimates and assumptions relating to forfeituresmay cause us to realize material changes in stock-based compensation expense in the future.Changes in Stockholders EquityThe following table shows changes in stockholders equity(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Total beginning stockholders equity$114,803$131,402$93,404$138,245 Beginning common stock106 107 105 106 Stock-based compensation and issuance of employee benefit plan stock 1 1 Ending common stock106 107 106 107 Beginning treasury stock(1,837)(7,837)(1,837)(1,837)Common stock repurchased (6,000)Ending treasury stock(1,837)(7,837)(1,837)(7,837)Beginning additional paid-in capital48,623 63,871 42,765 55,437 Stock-based compensation and issuance of employee benefit plan stock3,155 5,548 9,013 13,982 Ending additional paid-in capital51,778 69,419 51,778 69,419 Beginning accumulated other comprehensive income(loss)(525)(4,782)(180)(1,376)Other comprehensive income(loss)(550)(2,333)(895)(5,739)Ending accumulated other comprehensive income(loss)(1,075)(7,115)(1,075)(7,115)Beginning retained earnings68,436 80,043 52,551 85,915 Net income(loss)3,156 2,872 19,041(3,000)Ending retained earnings71,592 82,915 71,592 82,915 Total ending stockholders equity$120,564$137,489$120,564$137,489 Note 7 INCOME TAXESOur tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate,adjusted for discreteitems,if any,that are taken into account in the relevant period.Each quarter we update our estimate of the annual effective tax rate,and if our estimated tax ratechanges,we make a cumulative adjustment.Our quarterly tax provision,and our quarterly estimate of our annual effective tax rate,is subject to significant variation due to several factors,includingvariability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate,intercompany transactions,theapplicability of special tax regimes,changes in how we do business,acquisitions,investments,developments in tax controversies,changes in our stock price,changes in our deferred tax assets and liabilities and their valuation,foreign currency gains(losses),changes in statutes,regulations,case law,andadministrative practices,principles,and interpretations related to tax,including changes to the global tax framework,competition,and other laws andaccounting rules in various jurisdictions,and relative changes of expenses or losses for which tax benefits are not recognized.Our effective tax rate can bemore or less volatile based on the amount of pre-tax income or loss.For example,the impact of discrete items and non-deductible expenses on our effective taxrate is greater when our pre-tax income is lower.In addition,we record valuation allowances against deferred tax assets when there is uncertainty about ourability to generate future income in relevant jurisdictions.For 2022,we estimate that our effective tax rate will be favorably impacted by the U.S.federal research and development credit.In addition,valuationgains and losses from our equity investment in Rivian impact our pre-tax income and may cause variability in our effective tax rate.17Table of ContentsOur income tax provision for the nine months ended September 30,2021 was$4.2 billion,which included$1.7 billion of net discrete tax benefitsprimarily attributable to excess tax benefits from stock-based compensation and audit-related developments.Our income tax benefit for the nine months endedSeptember 30,2022 was$2.0 billion,which included$3.3 billion of net discrete tax benefits primarily attributable to a valuation loss related to our equityinvestment in Rivian.Cash paid for income taxes,net of refunds was$750 million and$742 million in Q3 2021 and Q3 2022,and$3.4 billion and$4.3 billion for the ninemonths ended September 30,2021 and 2022.As of December 31,2021 and September 30,2022,tax contingencies were approximately$3.2 billion and$3.4 billion.Changes in tax laws,regulations,administrative practices,principles,and interpretations may impact our tax contingencies.Due to various factors,including the inherent complexities anduncertainties of the judicial,administrative,and regulatory processes in certain jurisdictions,the timing of the resolution of income tax controversies is highlyuncertain,and the amounts ultimately paid,if any,upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued.It isreasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or possibly reach resolution of incometax controversies in one or more jurisdictions.These assessments or settlements could result in changes to our contingencies related to positions on prior yearstax filings.We are under examination,or may be subject to examination,by the Internal Revenue Service for the calendar year 2016 and thereafter.Theseexaminations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examinationas well as subsequent periods.We are also subject to taxation in various states and other foreign jurisdictions including China,France,Germany,India,Japan,Luxembourg,and theUnited Kingdom.We are under,or may be subject to,audit or examination and additional assessments by the relevant authorities in respect of these particularjurisdictions primarily for 2009 and thereafter.We are currently disputing tax assessments in multiple jurisdictions,including with respect to the allocation andcharacterization of income.In September 2022,the Luxembourg Tax Authority(“LTA”)denied the tax basis of certain intangible assets that we distributed from Luxembourg to theU.S.in 2021.We believe the LTAs position is without merit and intend to defend ourselves vigorously in this matter.In October 2014,the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg withregard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid.On October 4,2017,the EuropeanCommission announced its decision that determinations by the tax authorities in Luxembourg did not comply with European Union rules on state aid.Based onthat decision,the European Commission announced an estimated recovery amount of approximately 250 million,plus interest,for the period May 2006through June 2014,and ordered Luxembourg tax authorities to calculate the actual amount of additional taxes subject to recovery.Luxembourg computed aninitial recovery amount,consistent with the European Commissions decision,which we deposited into escrow in March 2018,subject to adjustment pendingconclusion of all appeals.In December 2017,Luxembourg appealed the European Commissions decision.In May 2018,we appealed.On May 12,2021,theEuropean Union General Court annulled the European Commissions state aid decision.In July 2021,the European Commission appealed the decision to theEuropean Court of Justice.We will continue to defend ourselves vigorously in this matter.Note 8 SEGMENT INFORMATIONWe have organized our operations into three segments:North America,International,and AWS.We allocate to segment results the operating expenses“Fulfillment,”“Technology and content,”“Sales and marketing,”and“General and administrative”based on usage,which is generally reflected in the segmentin which the costs are incurred.The majority of technology infrastructure costs are allocated to the AWS segment based on usage.The majority of theremaining non-infrastructure technology costs are incurred in the U.S.and are allocated to our North America segment.There are no internal revenuetransactions between our reportable segments.These segments reflect the way our chief operating decision maker evaluates the Companys businessperformance and manages its operations.North AmericaThe North America segment primarily consists of amounts earned from retail sales of consumer products(including from sellers)and subscriptionsthrough North America-focused online and physical stores.This segment includes export sales from these online stores.18Table of ContentsInternationalThe International segment primarily consists of amounts earned from retail sales of consumer products(including from sellers)and subscriptions throughinternationally-focused online stores.This segment includes export sales from these internationally-focused online stores(including export sales from theseonline stores to customers in the U.S.,Mexico,and Canada),but excludes export sales from our North America-focused online stores.AWSThe AWS segment consists of amounts earned from global sales of compute,storage,database,and other services for start-ups,enterprises,governmentagencies,and academic institutions.Information on reportable segments and reconciliation to consolidated net income(loss)is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022North AmericaNet sales$65,557$78,843$197,473$222,517 Operating expenses64,677 79,255 189,996 225,124 Operating income(loss)$880$(412)$7,477$(2,607)InternationalNet sales$29,145$27,720$90,515$83,544 Operating expenses30,056 30,186 89,812 89,062 Operating income(loss)$(911)$(2,466)$703$(5,518)AWSNet sales$16,110$20,538$44,422$58,718 Operating expenses11,227 15,135 31,183 41,082 Operating income$4,883$5,403$13,239$17,636 ConsolidatedNet sales$110,812$127,101$332,410$364,779 Operating expenses105,960 124,576 310,991 355,268 Operating income4,852 2,525 21,419 9,511 Total non-operating income(expense)(537)419 1,798(14,485)Benefit(provision)for income taxes(1,155)(69)(4,179)1,990 Equity-method investment activity,net of tax(4)(3)3(16)Net income(loss)$3,156$2,872$19,041$(3,000)19Table of ContentsNet sales by groups of similar products and services,which also have similar economic characteristics,is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Net Sales:Online stores(1)$49,942$53,489$156,000$155,473 Physical stores(2)4,269 4,694 12,387 14,006 Third-party seller services(3)24,252 28,666 73,046 81,377 Subscription services(4)8,148 8,903 23,645 26,029 Advertising services(5)7,612 9,548 21,444 26,182 AWS16,110 20,538 44,422 58,718 Other(6)479 1,263 1,466 2,994 Consolidated$110,812$127,101$332,410$364,779 _(1)Includes product sales and digital media content where we record revenue gross.We leverage our retail infrastructure to offer a wide selection ofconsumable and durable goods that includes media products available in both a physical and digital format,such as books,videos,games,music,andsoftware.These product sales include digital products sold on a transactional basis.Digital product subscriptions that provide unlimited viewing or usagerights are included in“Subscription services.”(2)Includes product sales where our customers physically select items in a store.Sales to customers who order goods online for delivery or pickup at ourphysical stores are included in“Online stores.”(3)Includes commissions and any related fulfillment and shipping fees,and other third-party seller services.(4)Includes annual and monthly fees associated with Amazon Prime memberships,as well as digital video,audiobook,digital music,e-book,and other non-AWS subscription services.(5)Includes sales of advertising services to sellers,vendors,publishers,authors,and others,through programs such as sponsored ads,display,and videoadvertising.(6)Includes sales related to various other offerings,such as certain licensing and distribution of video content and shipping services,and our co-branded creditcard agreements.20Table of ContentsItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThis Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.Allstatements other than statements of historical fact,including statements regarding guidance,industry prospects,or future results of operations or financialposition,made in this Quarterly Report on Form 10-Q are forward-looking.We use words such as anticipates,believes,expects,future,intends,and similarexpressions to identify forward-looking statements.Forward-looking statements reflect managements current expectations and are inherently uncertain.Actualresults and outcomes could differ materially for a variety of reasons,including,among others,fluctuations in foreign exchange rates,changes in globaleconomic conditions and customer spending,inflation,interest rates,regional labor market and global supply chain constraints,world events,the rate ofgrowth of the Internet,online commerce,and cloud services,the amount that A invests in new business opportunities and the timing of thoseinvestments,the mix of products and services sold to customers,the mix of net sales derived from products as compared with services,the extent to which weowe income or other taxes,competition,management of growth,potential fluctuations in operating results,international growth and expansion,the outcomesof claims,litigation,government investigations,and other proceedings,fulfillment,sortation,delivery,and data center optimization,risks of inventorymanagement,variability in demand,the degree to which we enter into,maintain,and develop commercial agreements,proposed and completed acquisitionsand strategic transactions,payments risks,and risks of fulfillment throughput and productivity.In addition,global economic and geopolitical conditions andadditional or unforeseen effects from the COVID-19 pandemic amplify many of these risks.These risks and uncertainties,as well as other risks anduncertainties that could cause our actual results or outcomes to differ significantly from managements expectations,are described in greater detail in Item 1Aof Part II,“Risk Factors.”For additional information,see Item 7 of Part II,“Managements Discussion and Analysis of Financial Condition and Results of Operations Overview”of our 2021 Annual Report on Form 10-K.Critical Accounting JudgmentsThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets andliabilities,revenues and expenses,and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes.The SEChas defined a companys critical accounting policies as the ones that are most important to the portrayal of the companys financial condition and results ofoperations,and which require the company to make its most difficult and subjective judgments,often as a result of the need to make estimates of matters thatare inherently uncertain.Based on this definition,we have identified the critical accounting policies and judgments addressed below.We also have other keyaccounting policies,which involve the use of estimates,judgments,and assumptions that are significant to understanding our results.For additionalinformation,see Item 8 of Part II,“Financial Statements and Supplementary Data Note 1 Description of Business,Accounting Policies,andSupplemental Disclosures”of our 2021 Annual Report on Form 10-K and Item 1 of Part I,“Financial Statements Note 1 Accounting Policies andSupplemental Disclosures,”of this Form 10-Q.Although we believe that our estimates,assumptions,and judgments are reasonable,they are based uponinformation presently available.Actual results may differ significantly from these estimates under different assumptions,judgments,or conditions.InventoriesInventories,consisting of products available for sale,are primarily accounted for using the first-in first-out method,and are valued at the lower of costand net realizable value.This valuation requires us to make judgments,based on currently available information,about the likely method of disposition,suchas through sales to individual customers,returns to product vendors,or liquidations,and expected recoverable values of each disposition category.Theseassumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.As a measure of sensitivity,for every 1%of additional inventory valuation allowance as of September 30,2022,we would have recordedan additional cost of sales of approximately$405 million.In addition,we enter into supplier commitments for certain electronic device components and certain products.These commitments are based onforecasted customer demand.If we reduce these commitments,we may incur additional costs.Income TaxesWe are subject to income taxes in the U.S.(federal and state)and numerous foreign jurisdictions.Tax laws,regulations,administrative practices,principles,and interpretations in various jurisdictions may be subject to significant change,with or without notice,due to economic,political,and otherconditions,and significant judgment is required in evaluating and estimating our provision and accruals for these taxes.There are many transactions that occurduring the ordinary course of business for which the ultimate tax determination is uncertain.In addition,our actual and forecasted earnings are subject to21Table of Contentschange due to economic,political,and other conditions and significant judgment is required in determining our ability to use our deferred tax assets.Our effective tax rates could be affected by numerous factors,such as changes in our business operations,acquisitions,investments,entry into newbusinesses and geographies,intercompany transactions,the relative amount of our foreign earnings,including earnings being lower than anticipated injurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates,losses incurred injurisdictions for which we are not able to realize related tax benefits,the applicability of special tax regimes,changes in foreign currency exchange rates,changes in our stock price,changes to our forecasts of income and loss and the mix of jurisdictions to which they relate,changes in our deferred tax assets andliabilities and their valuation,changes in the laws,regulations,administrative practices,principles,and interpretations related to tax,including changes to theglobal tax framework,competition,and other laws and accounting rules in various jurisdictions.In addition,a number of countries have enacted or are activelypursuing changes to their tax laws applicable to corporate multinationals.We are also currently subject to tax controversies in various jurisdictions,and these jurisdictions may assess additional income tax liabilities against us.Developments in an audit,investigation,or other tax controversy could have a material effect on our operating results or cash flows in the period or periods forwhich that development occurs,as well as for prior and subsequent periods.We regularly assess the likelihood of an adverse outcome resulting from theseproceedings to determine the adequacy of our tax accruals.Although we believe our tax estimates are reasonable,the final outcome of audits,investigations,and any other tax controversies could be materially different from our historical income tax provisions and accruals.Liquidity and Capital ResourcesCash flow information is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,Twelve Months EndedSeptember 30,202120222021202220212022Cash provided by(used in):Operating activities$7,313$11,404$24,241$17,579$54,671$39,665 Investing activities(14,828)(15,608)(45,574)(26,780)(62,611)(39,360)Financing activities(2,776)3,016 9,391 9,632 7,575 6,532 Our principal sources of liquidity are cash flows generated from operations and our cash,cash equivalents,and marketable securities balances,which,atfair value,were$96.0 billion and$58.7 billion as of December 31,2021 and September 30,2022.Amounts held in foreign currencies were$22.7 billion and$11.6 billion as of December 31,2021 and September 30,2022.Our foreign currency balances include British Pounds,Canadian Dollars,Euros,and JapaneseYen.Cash provided by(used in)operating activities was$7.3 billion and$11.4 billion for Q3 2021 and Q3 2022,and$24.2 billion and$17.6 billion for thenine months ended September 30,2021 and 2022.Our operating cash flows result primarily from cash received from our consumer,seller,developer,enterprise,and content creator customers,and advertisers,offset by cash payments we make for products and services,employee compensation,paymentprocessing and related transaction costs,operating leases,and interest payments on our long-term obligations.Cash received from our customers and otheractivities generally corresponds to our net sales.Because consumers primarily use credit cards to buy from us,our receivables from consumers settle quickly.The decrease in operating cash flow for the trailing twelve months ended September 30,2022,compared to the comparable prior year period,was primarilydue to changes in working capital,as well as changes in net income(loss),excluding non-cash expenses.Working capital at any specific point in time is subjectto many variables,including variability in demand,inventory management and category expansion,the timing of cash receipts and payments,vendor paymentterms,and fluctuations in foreign exchange rates.Cash provided by(used in)investing activities corresponds with cash capital expenditures,including leasehold improvements,incentives received fromproperty and equipment vendors,proceeds from asset sales,cash outlays for acquisitions,investments in other companies and intellectual property rights,andpurchases,sales,and maturities of marketable securities.Cash provided by(used in)investing activities was$(14.8)billion and$(15.6)billion for Q3 2021 andQ3 2022,and$(45.6)billion and$(26.8)billion for the nine months ended September 30,2021 and 2022,with the variability caused primarily by purchases,sales,and maturities of marketable securities.Cash capital expenditures were$14.8 billion and$15.0 billion during Q3 2021 and Q3 2022,and$38.9 billionand$42.9 billion for the nine months ended September 30,2021 and 2022,which primarily reflect investments in technology infrastructure(the majority ofwhich is to support AWS business growth)and in additional capacity to support our fulfillment network.We expect to continue these investments over time,with increased spending on technology infrastructure and decreased spending on our fulfillment network in 2022.We made cash payments,net of acquiredcash,related to acquisition and other investment activity of$654 million and$885 million during Q3 2021 and Q3 2022,and$1.6 billion and$7.5 billion forthe nine months ended September 30,2021 and 2022.We funded the22Table of Contentsacquisition of MGM Holdings Inc.with cash on hand.We expect to fund the acquisitions of 1Life Healthcare,Inc.(One Medical)and iRobot Corporation withcash on hand.Cash provided by(used in)financing activities was$(2.8)billion and$3.0 billion for Q3 2021 and Q3 2022,and$9.4 billion and$9.6 billion for the ninemonths ended September 30,2021 and 2022.Cash inflows from financing activities resulted from proceeds from short-term debt,and other and long-term debtof$2.4 billion and$12.4 billion for Q3 2021 and Q3 2022,and$24.1 billion and$43.9 billion for the nine months ended September 30,2021 and 2022.Cashoutflows from financing activities resulted from repurchases of common stock,payments of short-term debt,and other,long-term debt,finance leases,andfinancing obligations of$5.1 billion and$9.4 billion in Q3 2021 and Q3 2022,and$14.7 billion and$34.2 billion for the nine months ended September 30,2021 and 2022.Property and equipment acquired under finance leases was$1.7 billion and$131 million during Q3 2021 and Q3 2022,and$5.5 billion and$358 million for the nine months ended September 30,2021 and 2022.We had no borrowings outstanding under the Credit Agreement,$11.7 billion of borrowings outstanding under the Commercial Paper Programs,and$1.0billion of borrowings outstanding under our Credit Facility as of September 30,2022.See Item 1 of Part I,“Financial Statements Note 5 Debt”foradditional information.Certain foreign subsidiary earnings and losses are subject to current U.S.taxation and the subsequent repatriation of those earnings is not subject to tax inthe U.S.We intend to invest substantially all of our foreign subsidiary earnings,as well as our capital in our foreign subsidiaries,indefinitely outside of theU.S.in those jurisdictions in which we would incur significant,additional costs upon repatriation of such amounts.Our U.S.taxable income is reduced by tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions andincreased by the impact of capitalized research and development expenses.U.S.tax rules provide for enhanced accelerated depreciation deductions by allowingthe election of full expensing of qualified property,primarily equipment,through 2022.Effective January 1,2022,research and development expenses arerequired to be capitalized and amortized for U.S.tax purposes,which delays the deductibility of these expenses.Cash taxes paid(net of refunds)were$750million and$742 million for Q3 2021 and Q3 2022,and$3.4 billion and$4.3 billion for the nine months ended September 30,2021 and 2022.As of December 31,2021 and September 30,2022,restricted cash,cash equivalents,and marketable securities were$260 million and$231 million.SeeItem 1 of Part I,“Financial Statements Note 4 Commitments and Contingencies”and“Financial Statements Note 5 Debt”for additional discussionof our principal contractual commitments,as well as our pledged assets.Additionally,we have purchase obligations and open purchase orders,including forinventory and capital expenditures,that support normal operations and are primarily due in the next twelve months.These purchase obligations and openpurchase orders are generally cancellable in full or in part through the contractual provisions.We believe that cash flows generated from operations and our cash,cash equivalents,and marketable securities balances,as well as our borrowingarrangements,will be sufficient to meet our anticipated operating cash needs for at least the next twelve months.However,any projections of future cash needsand cash flows are subject to substantial uncertainty.See Item 1A of Part II,“Risk Factors.”We continually evaluate opportunities to sell additional equity ordebt securities,obtain credit facilities,obtain finance and operating lease arrangements,enter into financing obligations,repurchase common stock,paydividends,or repurchase,refinance,or otherwise restructure our debt for strategic reasons or to further strengthen our financial position.The sale of additional equity or convertible debt securities would be dilutive to our shareholders.In addition,we will,from time to time,consider theacquisition of,or investment in,complementary businesses,products,services,capital infrastructure,and technologies,which might affect our liquidityrequirements or cause us to secure additional financing,or issue additional equity or debt securities.There can be no assurance that additional credit lines orfinancing instruments will be available in amounts or on terms acceptable to us,if at all.In addition,economic conditions and actions by policymaking bodiesare contributing to rising interest rates,which,along with increases in our borrowing levels,could increase our future borrowing costs.23Table of ContentsResults of OperationsWe have organized our operations into three segments:North America,International,and AWS.These segments reflect the way the Company evaluatesits business performance and manages its operations.See Item 1 of Part I,“Financial Statements Note 8 Segment Information.”OverviewMacroeconomic factors,including increased inflation and interest rates,the prolonged COVID-19 pandemic,global supply chain constraints,and globaleconomic and geopolitical developments,have direct and indirect impacts on our results of operations that are difficult to isolate and quantify.These factorscontributed to increases in our operating costs during Q3 2022,particularly across our North America and International segments,primarily due to a return tomore normal,seasonal demand volumes in relation to our fulfillment network fixed costs,increased transportation and utility costs,and increased wage rates.In addition,rising fuel,utility,and food costs,rising interest rates,and recessionary fears may impact customer demand.We expect some or all of these factorsto continue to impact our operations into Q4 2022.Net SalesNet sales include product and service sales.Product sales represent revenue from the sale of products and related shipping fees and digital media contentwhere we record revenue gross.Service sales primarily represent third-party seller fees,which includes commissions and any related fulfillment and shippingfees,AWS sales,advertising services,Amazon Prime membership fees,and certain digital content subscriptions.Net sales information is as follows(inmillions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Net Sales:North America$65,557$78,843$197,473$222,517 International29,145 27,720 90,515 83,544 AWS16,110 20,538 44,422 58,718 Consolidated$110,812$127,101$332,410$364,779 Year-over-year Percentage Growth(Decline):North America10 #%International16(5)35(8)AWS39 27 36 32 Consolidated15 15 28 10 Year-over-year Percentage Growth,excluding the effect of foreign exchangerates:North America10 %International15 12 29 4 AWS39 28 36 32 Consolidated15 19 26 13 Net sales mix:North America59ba%International26 22 27 23 AWS15 16 13 16 Consolidated100000%Sales increased 15%in Q3 2022,and 10%for the nine months ended September 30,2022 compared to the comparable prior year periods.Changes inforeign currency exchange rates impacted net sales by$(5.0)billion for Q3 2022 and by$(10.5)billion for the nine months ended September 30,2022.For adiscussion of the effect of foreign exchange rates on sales growth,see“Effect of Foreign Exchange Rates”below.North America sales increased 20%in Q3 2022,and 13%for the nine months ended September 30,2022 compared to the comparable prior year periods.The sales growth primarily reflects increased unit sales,including sales by third-party sellers,and advertising sales.Increased unit sales were driven largely byour continued focus on price,selection,and convenience for our customers,including from our shipping offers.24Table of ContentsInternational sales decreased 5%in Q3 2022,and 8%for the nine months ended September 30,2022,compared to the comparable prior year periods,primarily due to the impact of foreign currency exchange rates,partially offset by increased unit sales,including sales by third-party sellers,advertising sales,and subscription services.Increased unit sales were driven largely by our continued focus on price,selection,and convenience for our customers,includingfrom our shipping offers.Changes in foreign currency exchange rates impacted International net sales by$(4.9)billion for Q3 2022,and by$(10.2)billion forthe nine months ended September 30,2022.AWS sales increased 27%in Q3 2022,and 32%for the nine months ended September 30,2022 compared to the comparable prior year periods.The salesgrowth primarily reflects increased customer usage,partially offset by pricing changes,primarily driven by long-term customer contracts.Operating Income(Loss)Operating income(loss)by segment is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Operating Income(Loss)North America$880$(412)$7,477$(2,607)International(911)(2,466)703(5,518)AWS4,883 5,403 13,239 17,636 Consolidated$4,852$2,525$21,419$9,511 Operating income decreased from$4.9 billion in Q3 2021 to$2.5 billion in Q3 2022,and decreased from$21.4 billion for the nine months endedSeptember 30,2021 to$9.5 billion for the nine months ended September 30,2022.We believe that operating income is a more meaningful measure than grossprofit and gross margin due to the diversity of our product categories and services.The North America operating loss in Q3 2022,as compared to the operating income in the comparable prior year period,is primarily due to increasedshipping and fulfillment costs,due in part to increased investments in our fulfillment network and increased transportation costs,and growth in certainoperating expenses,partially offset by increased unit sales,including sales by third-party sellers,and advertising sales.The North America operating loss forthe nine months ended September 30,2022,as compared to the operating income in the comparable prior year period,is primarily due to increased shippingand fulfillment costs,due in part to increased investments in our fulfillment network,increased transportation costs,increased wage rates and incentives,andfulfillment network inefficiencies,and growth in certain operating expenses,partially offset by increased unit sales,including sales by third-party sellers,andadvertising sales.Changes in foreign exchange rates positively impacted operating income(loss)by$95 million for Q3 2022,and by$198 million for the ninemonths ended September 30,2022.The increase in International operating loss in absolute dollars in Q3 2022,compared to the comparable prior year period,is primarily due to increasedshipping and fulfillment costs,due in part to increased investments in our fulfillment network and increased transportation costs,and growth in certainoperating expenses,partially offset by increased unit sales,including sales by third-party sellers,and advertising sales.The International operating loss for thenine months ended September 30,2022,as compared to the operating income in the comparable prior year period,is primarily due to increased shipping andfulfillment costs,due in part to increased investments in our fulfillment network,increased transportation costs,and increased wage rates and incentives,andgrowth in certain operating expenses,partially offset by increased advertising sales.Changes in foreign exchange rates negatively impacted operating income(loss)by$216 million for Q3 2022,and by$526 million for the nine months ended September 30,2022.The increase in AWS operating income in absolute dollars in Q3 2022 and for the nine months ended September 30,2022,compared to the comparableprior year periods,is primarily due to increased sales and cost structure productivity,including a reduction in depreciation and amortization expense from ourchange in the estimated useful lives of our servers and networking equipment,partially offset by increased payroll and related expenses and spending ontechnology infrastructure,all of which were primarily driven by additional investments to support AWS business growth.Changes in foreign exchange ratespositively impacted operating income by$478 million for Q3 2022,and by$976 million for the nine months ended September 30,2022.25Table of ContentsOperating ExpensesInformation about operating expenses is as follows(in millions):Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2021202220212022Operating expenses:Cost of sales$62,930$70,268$189,509$203,191 Fulfillment18,498 20,583 52,666 61,196 Technology and content14,380 19,485 40,739 52,399 Sales and marketing8,010 11,014 21,741 29,420 General and administrative2,153 3,061 6,298 8,558 Other operating expense(income),net(11)165 38 504 Total operating expenses$105,960$124,576$310,991$355,268 Year-over-year Percentage Growth(Decline):Cost of sales10#%7%Fulfillment26 11 32 16 Technology and content31 35 33 29 Sales and marketing47 38 49 35 General and administrative29 42 34 36 Other operating expense(income),net(118)(1,619)(91)1,210 Percent of Net Sales:Cost of sales56.8U.3W.0U.7%Fulfillment16.7 16.2 15.8 16.8 Technology and content13.0 15.3 12.3 14.4 Sales and marketing7.2 8.7 6.5 8.1 General and administrative1.9 2.4 1.9 2.3 Other operating expense(income),net0.0 0.1 0.0 0.1 Cost of SalesCost of sales primarily consists of the purchase price of consumer products,inbound and outbound shipping costs,including costs related to sortation anddelivery centers and where we are the transportation service provider,and digital media content costs where we record revenue gross,including video andmusic.The increase in cost of sales in absolute dollars in Q3 2022,compared to the comparable prior year period,is primarily due to increased product andshipping costs resulting from increased sales,increased investments in our fulfillment network,increased transportation costs,and increased wage rates.Theincrease in cost of sales in absolute dollars for the nine months ended September 30,2022,compared to the comparable prior year period,is primarily due toincreased product and shipping costs resulting from increased sales,increased investments in our fulfillment network,increased transportation costs,increasedwage rates and incentives,and fulfillment network inefficiencies.Changes in foreign exchange rates reduced cost of sales by$3.6 billion for Q3 2022,and by$7.4 billion for the nine months ended September 30,2022.Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of sales upon sale of products to ourcustomers.Shipping costs,which include sortation and delivery centers and transportation costs,were$18.1 billion and$19.9 billion in Q3 2021 and Q3 2022,and$53.0 billion and$58.8 billion for the nine months ended September 30,2021 and 2022.We expect our cost of shipping to continue to increase to theextent our customers accept and use our shipping offers at an increasing rate,we use more expensive shipping methods,including faster delivery,and we offeradditional services.We seek to mitigate costs of shipping over time in part through achieving higher sales volumes,optimizing our fulfillment network,negotiating better terms with our suppliers,and achieving better operating efficiencies.We believe that offering low prices to our customers is fundamental toour future success,and one way we offer lower prices is through shipping offers.Costs to operate our AWS segment are primarily classified as“Technology and content”as we leverage a shared infrastructure that supports both ourinternal technology requirements and external sales to AWS customers.26Table of ContentsFulfillmentFulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers,physicalstores,and customer service centers and payment processing costs.While AWS payment processing and related transaction costs are included in“Fulfillment,”AWS costs are primarily classified as“Technology and content.”Fulfillment costs as a percentage of net sales may vary due to several factors,such as paymentprocessing and related transaction costs,our level of productivity and accuracy,changes in volume,size,and weight of units received and fulfilled,the extentto which third party sellers utilize Fulfillment by Amazon services,timing of fulfillment network and physical store expansion,the extent we utilize fulfillmentservices provided by third parties,mix of products and services sold,and our ability to affect customer service contacts per unit by implementingimprovements in our operations and enhancements to our customer self-service features.Additionally,sales by our sellers have higher payment processing andrelated transaction costs as a percentage of net sales compared to our retail sales because payment processing costs are based on the gross purchase price ofunderlying transactions.The increase in fulfillment costs in absolute dollars in Q3 2022,compared to the comparable prior year period,is primarily due to increased investmentsin our fulfillment network and variable costs corresponding with increased product and service sales volume and inventory levels.The increase in fulfillmentcosts in absolute dollars for the nine months ended September 30,2022,compared to the comparable prior year period,is primarily due to increasedinvestments in our fulfillment network and variable costs corresponding with increased product and service sales volume and inventory levels,and increasedwage rates and incentives.Changes in foreign exchange rates reduced fulfillment costs by$810 million for Q3 2022,and by$1.7 billion for the nine monthsended September 30,2022.We seek to expand our fulfillment network to accommodate a greater selection and in-stock inventory levels and to meet anticipated shipment volumesfrom sales of our own products as well as sales by third parties for which we provide the fulfillment services.We regularly evaluate our facility requirements.Technology and ContentTechnology and content costs include payroll and related expenses for employees involved in the research and development of new and existing productsand services,development,design,and maintenance of our stores,curation and display of products and services made available in our online stores,andinfrastructure costs.Infrastructure costs include servers,networking equipment,and data center related depreciation and amortization,rent,utilities,and otherexpenses necessary to support AWS and other Amazon businesses.Collectively,these costs reflect the investments we make in order to offer a wide variety ofproducts and services to our customers.We seek to invest efficiently in numerous areas of technology and content so we may continue to enhance the customer experience and improve ourprocess efficiency through rapid technology developments,while operating at an ever increasing scale.Our technology and content investment and capitalspending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems andoperations.We expect spending in technology and content to increase over time as we continue to add employees and technology infrastructure.These costs areallocated to segments based on usage.The increase in technology and content costs in absolute dollars in Q3 2022 and for the nine months ended September30,2022,compared to the comparable prior year periods,is primarily due to increased payroll and related costs associated with technical teams responsible forexpanding our existing products and services and initiatives to introduce new products and service offerings,and an increase in spending on technologyinfrastructure,partially offset by a reduction in depreciation and amortization expense from our change in the estimated useful lives of our servers andnetworking equipment.See Item 7 of Part II,“Managements Discussion and Analysis of Financial Condition and Results of Operations Overview”of our2021 Annual Report on Form 10-K for a discussion of how management views advances in technology and the importance of innovation.See Item 1 of Part I,“Financial Statements Note 1 Accounting Policies and Supplemental Disclosures Use of Estimates”for additional information on the change inestimated useful lives of our servers and networking equipment.Sales and MarketingSales and marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities,including salescommissions related to AWS.We direct customers to our stores primarily through a number of marketing channels,such as our sponsored search,social andonline advertising,third party customer referrals,television advertising,and other initiatives.Our marketing costs are largely variable,based on growth in salesand changes in rates.To the extent there is increased or decreased competition for these traffic sources,or to the extent our mix of these channels shifts,wewould expect to see a corresponding change in our marketing costs.The increase in sales and marketing costs in absolute dollars in Q3 2022 and for the nine months ended September 30,2022,compared to the comparableprior year periods,is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities and higher marketingspend.27Table of ContentsWhile costs associated with Amazon Prime membership benefits and other shipping offers are not included in sales and marketing expense,we viewthese offers as effective worldwide marketing tools,and intend to continue offering them indefinitely.General and AdministrativeThe increase in general and administrative costs in absolute dollars in Q3 2022 and for the nine months ended September 30,2022,compared to thecomparable prior year periods,is primarily due to increases in payroll and related expenses and professional fees.Other Operating Expense(Income),NetOther operating expense(income),net was$(11)million and$165 million for Q3 2021 and Q3 2022,and$38 million and$504 million for the ninemonths ended September 30,2021 and 2022,and was primarily related to impairments of property and equipment and operating leases in 2022 and theamortization of intangible assets.Interest Income and ExpenseOur interest income was$119 million and$277 million during Q3 2021 and Q3 2022,and$330 million and$544 million for the nine months endedSeptember 30,2021 and 2022.We generally invest our excess cash in AAA-rated money market funds and investment grade short-to intermediate-term fixedincome securities.Our interest income corresponds with the average balance of invested funds based on the prevailing rates,which vary depending on thegeographies and currencies in which they are invested.Interest expense was$493 million and$617 million during Q3 2021 and Q3 2022,and$1.3 billion and$1.7 billion for the nine months ended September30,2021 and 2022,and was primarily related to debt and finance leases.Other Income(Expense),NetOther income(expense),net was$(163)million and$759 million during Q3 2021 and Q3 2022,and$2.8 billion and$(13.4)billion for the nine monthsended September 30,2021 and 2022.The primary components of other income(expense),net are related to equity securities valuations and adjustments,equitywarrant valuations,and foreign currency.Included in other income(expense),net is a marketable equity securities valuation gain(loss)of$1.1 billion in Q32022,and$(10.4)billion for the nine months ended September 30,2022,from our equity investment in Rivian.Income TaxesOur income tax provision for the nine months ended September 30,2021 was$4.2 billion,which included$1.7 billion of net discrete tax benefitsprimarily attributable to excess tax benefits from stock-based compensation and audit-related developments.Our income tax benefit for the nine months endedSeptember 30,2022 was$2.0 billion,which included$3.3 billion of net discrete tax benefits primarily attributable to a valuation loss related to our equityinvestment in Rivian.See Item 1 of Part I,“Financial Statements Note 7 Income Taxes”for additional information.Non-GAAP Financial MeasuresRegulation G,Conditions for Use of Non-GAAP Financial Measures,and other SEC regulations define and prescribe the conditions for use of certainnon-GAAP financial information.Our measures of free cash flows and the effect of foreign exchange rates on our consolidated statements of operations meetthe definition of non-GAAP financial measures.We provide multiple measures of free cash flows because we believe these measures provide additional perspective on the impact of acquiring propertyand equipment with cash and through finance leases and financing obligations.28Table of ContentsFree Cash FlowFree cash flow is cash flow from operations reduced by“Purchases of property and equipment,net of proceeds from sales and incentives.”The followingis a reconciliation of free cash flow to the most comparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailingtwelve months ended September 30,2021 and 2022(in millions):Twelve Months EndedSeptember 30,20212022Net cash provided by(used in)operating activities$54,671$39,665 Purchases of property and equipment,net of proceeds from sales and incentives(52,119)(59,351)Free cash flow$2,552$(19,686)Net cash provided by(used in)investing activities$(62,611)$(39,360)Net cash provided by(used in)financing activities$7,575$6,532 Free Cash Flow Less Principal Repayments of Finance Leases and Financing ObligationsFree cash flow less principal repayments of finance leases and financing obligations is free cash flow reduced by“Principal repayments of financeleases”and“Principal repayments of financing obligations.”Principal repayments of finance leases and financing obligations approximates the actualpayments of cash for our finance leases and financing obligations.The following is a reconciliation of free cash flow less principal repayments of financeleases and financing obligations to the most comparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailing twelvemonths ended September 30,2021 and 2022(in millions):Twelve Months EndedSeptember 30,20212022Net cash provided by(used in)operating activities$54,671$39,665 Purchases of property and equipment,net of proceeds from sales and incentives(52,119)(59,351)Free cash flow2,552(19,686)Principal repayments of finance leases(11,271)(8,561)Principal repayments of financing obligations(124)(233)Free cash flow less principal repayments of finance leases and financing obligations$(8,843)(28,480)Net cash provided by(used in)investing activities$(62,611)$(39,360)Net cash provided by(used in)financing activities$7,575$6,532 Free Cash Flow Less Equipment Finance Leases and Principal Repayments of All Other Finance Leases and Financing ObligationsFree cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations is free cash flow reduced byequipment acquired under finance leases,which is included in“Property and equipment acquired under finance leases,net of remeasurements andmodifications,”principal repayments of all other finance lease liabilities,which is included in“Principal repayments of finance leases,”and“Principalrepayments of financing obligations.”All other finance lease liabilities and financing obligations consists of property.In this measure,equipment acquiredunder finance leases is reflected as if these assets had been purchased with cash,which is not the case as these assets have been leased.The following is areconciliation of free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations to the mostcomparable GAAP cash flow measure,“Net cash provided by(used in)operating activities,”for the trailing twelve months ended September 30,2021 and2022(in millions):29Table of Contents Twelve Months EndedSeptember 30,20212022Net cash provided by(used in)operating activities$54,671$39,665 Purchases of property and equipment,net of proceeds from sales and incentives(52,119)(59,351)Free cash flow2,552(19,686)Equipment acquired under finance leases(1)(5,738)(868)Principal repayments of all other finance leases(2)(582)(706)Principal repayments of financing obligations(124)(233)Free cash flow less equipment finance leases and principal repayments of all other finance leases and financingobligations$(3,892)$(21,493)Net cash provided by(used in)investing activities$(62,611)$(39,360)Net cash provided by(used in)financing activities$7,575$6,532 _(1)For the twelve months ended September 30,2021 and 2022,this amount relates to equipment included in“Property and equipment acquired under financeleases,net of remeasurements and modifications”of$8,149 million and$1,966 million.(2)For the twelve months ended September 30,2021 and 2022,this amount relates to property included in“Principal repayments of finance leases”of$11,271 million and$8,561 million.All of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent theresidual cash flow available for discretionary expenditures.For example,these measures of free cash flows do not incorporate the portion of paymentsrepresenting principal reductions of debt or cash payments for business acquisitions.Additionally,our mix of property and equipment acquisitions with cash orother financing options may change over time.Therefore,we believe it is important to view
2023-04-19
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INTERIM REPORT 2022CONTENTS2Company Profile4Principal Financial Data and Indicators8Business Review .
2023-04-14
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-Q(Mark One)QUARTERLY REPO.
2023-04-14
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T R A N S C R I P T Citi Third Quarter 2022 Earnings Review October 14,2022 Copyright 2022 Citigroup.
2023-04-03
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T R A N S C R I P T Citi Fourth Quarter 2022 Earnings Review January 13,2023 Copyright 2022 Citigrou.
2023-04-03
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February 8,2023THE WALT DISNEY COMPANY REPORTSFIRST QUARTER EARNINGS FOR FISCAL 2023BURBANK,Calif.The Walt Disney Company today reported earnings for its first quarter ended December 31,2022.Revenues for the quarter grew 8%.Diluted earnings per share(EPS)from continuing operations for the quarter increased to$0.70from$0.63 in the prior-year quarter.Excluding certain items(1),diluted EPS for the quarter decreased to$0.99 from$1.06 in the prior-year quarter.“After a solid first quarter,we are embarking on a significant transformation,one that will maximize the potential of our world-class creative teams and our unparalleled brands and franchises,”said Robert A.Iger,Chief Executive Officer,The Walt Disney Company.“We believe the work we are doing to reshape our company around creativity,while reducing expenses,will lead to sustained growth and profitability for our streaming business,better position us to weather future disruption and global economic challenges,and deliver value for our shareholders.”The following table summarizes the first quarter results for fiscal 2023 and 2022(in millions,except per share amounts):Quarter EndedDecember 31,2022January 1,2022ChangeRevenues$23,512$21,819 8%Income from continuing operations before income taxes$1,773$1,688 5%Total segment operating income(1)$3,043$3,258 (7)%Net income from continuing operations(2)$1,279$1,152 11%Diluted EPS from continuing operations(2)$0.70$0.63 11%Diluted EPS excluding certain items(1)$0.99$1.06 (7)sh used in continuing operations$(974)$(209)(100)%Free cash flow(1)$(2,155)$(1,190)(81)%(1)Diluted EPS excluding certain items,total segment operating income and free cash flow are non-GAAP financialmeasures.The most comparable GAAP measures are diluted EPS from continuing operations,income from continuingoperations before income taxes,and cash provided by continuing operations,respectively.See the discussion on page 2and on pages 10 through 12 for how we define and calculate these measures and a reconciliation thereof to the mostdirectly comparable GAAP measures.(2)Reflects amounts attributable to shareholders of The Walt Disney Company,i.e.after deduction of income attributableto noncontrolling interests.FOR IMMEDIATE RELEASE1SEGMENT RESULTSThe Company evaluates the performance of its operating segments based on segment operating income,and management uses total segment operating income as a measure of the performance of operating businesses separate from non-operating factors.The Company believes that information about total segment operating income assists investors by allowing them to evaluate changes in the operating results of the Companys portfolio of businesses separate from non-operational factors that affect net income,thus providing separate insight into both operations and other factors that affect reported results.The following are reconciliations of income from continuing operations before income taxes to total segment operating income(in millions):Quarter EndedDecember 31,2022January 1,2022ChangeIncome from continuing operations before income taxes$1,773$1,688 5d:Corporate and unallocated shared expenses 280 228 (23)%Restructuring and impairment charges 69 nmOther expense,net 42 436 90%Interest expense,net 300 311 4%Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs 579 595 3%Total segment operating income$3,043$3,258 (7)%The following table summarizes the first quarter segment revenue and segment operating income(loss)for fiscal 2023 and 2022(in millions):Quarter EndedDecember 31,2022January 1,2022ChangeSegment Revenues:Disney Media and Entertainment Distribution$14,776$14,585 1%Disney Parks,Experiences and Products 8,736 7,234 21%Total Segment Revenues$23,512$21,819 8%Segment operating income(loss):Disney Media and Entertainment Distribution$(10)$808 nmDisney Parks,Experiences and Products 3,053 2,450 25%Total Segment Operating Income$3,043$3,258 (7)-isney Media and Entertainment DistributionRevenue and operating results for the Disney Media and Entertainment Distribution segment are as follows(in millions):Quarter EndedChangeDecember 31,2022January 1,2022Revenues:Linear Networks$7,293$7,706 (5)%Direct-to-Consumer 5,307 4,690 13%Content Sales/Licensing and Other 2,460 2,433 1%Elimination of Intrasegment Revenue(1)(284)(244)(16)%$14,776$14,585 1%Operating income(loss):Linear Networks$1,255$1,499 (16)%Direct-to-Consumer(1,053)(593)(78)%Content Sales/Licensing and Other(212)(98)(100)%$(10)$808 nm(1)Reflects fees received by the Linear Networks from other DMED businesses for the right to air our Linear Networks and related services.Linear NetworksLinear Networks revenues for the quarter decreased 5%to$7.3 billion,and operating income decreased 16%to$1.3 billion.The following table provides further detail of Linear Networks results(in millions):Quarter EndedChangeDecember 31,2022January 1,2022Supplemental revenue detailDomestic Channels$6,066$6,152 (1)%International Channels 1,227 1,554 (21)%$7,293$7,706 (5)%Supplemental operating income detailDomestic Channels$928$888 5%International Channels 131 369 (64)%Equity in the income of investees 196 242 (19)%$1,255$1,499 (16)%Domestic ChannelsDomestic Channels revenues for the quarter decreased 1%to$6.1 billion,and operating income increased 5%to$928 million.The increase in operating income was due to higher results at Cable,while results at Broadcasting were comparable to the prior-year quarter.The increase at Cable was due to lower programming and production costs,partially offset by decreases in advertising and affiliate revenue.The decrease in programming and production costs was attributable to lower costs for sports programming and,to a lesser extent,a lower cost mix of non-sports programming.The decrease in sports programming and production costs was due to lower NFL and College Football Playoff(CFP)rights costs,partially offset by an increase in production costs.The decline 3in NFL rights expense reflects the timing of costs under our new agreement compared to the prior NFL agreement.The decrease in costs for CFP programming was due to the timing of the CFP games relative to our fiscal periods,partially offset by contractual rate increases.The current quarter included two host games and two semi-final games compared to four host games and two semi-final games in the prior-year quarter.Lower advertising revenue was due to a decrease in rates and fewer impressions reflecting a decline in average viewership.Rates and impressions were impacted by the timing of CFP games.The decrease in affiliate revenue was attributable to a decline in subscribers,partially offset by higher contractual rates.Broadcasting results were comparable to the prior-year quarter as growth at the owned television stations from higher advertising revenue was largely offset by lower results at ABC.The decrease at ABC was due to lower advertising revenue,partially offset by higher affiliate revenue from contractual rate increases.Lower advertising revenue resulted from fewer impressions reflecting a decline in average viewership and,to a lesser extent,fewer units delivered,partially offset by higher rates.International ChannelsInternational Channels revenues for the quarter decreased 21%to$1.2 billion and operating income decreased 64%to$131 million.The decrease in operating income was due to lower advertising revenue,an unfavorable foreign exchange impact and a decrease in affiliate revenue,partially offset by a decrease in programming and production costs.The decrease in advertising revenue was due to lower average viewership and rates.The decline in affiliate revenue reflected the impact of channel closures in the prior year,partially offset by higher contractual rates.Lower programming and production costs were due to decreased sports programming costs attributable to lower costs for cricket rights,partially offset by higher production costs and costs for new soccer rights.The decreases in cricket programming costs and advertising viewership reflected no Indian Premier League(IPL)cricket matches aired in the current quarter compared to thirteen matches aired in the prior-year quarter as matches shifted from fiscal 2021 into fiscal 2022 due to COVID-19.IPL matches typically occur in the second and third quarters of our fiscal year.The decrease in cricket programming costs was also due to lower costs per match for the International Cricket Council T20 World Cup compared to the prior-year quarter.Equity in the Income of InvesteesIncome from equity investees decreased$46 million,to$196 million from$242 million,due to lower income from A E Television Networks attributable to lower advertising revenue and higher programming costs.Direct-to-ConsumerDirect-to-Consumer revenues for the quarter increased 13%to$5.3 billion and operating loss increased$0.5 billion to$1.1 billion.The increase in operating loss was due to a higher loss at Disney and a decrease in results at Hulu,partially offset by improved results at ESPN .Results at Disney reflected higher programming and production costs and increased technology costs,partially offset by higher subscription revenue and a decrease in marketing costs.The increase in programming and production costs was attributable to more content provided on the service and higher average costs per hour,which included an increased mix of original content.Higher subscription revenue was due to subscriber growth,partially offset by an unfavorable foreign exchange impact.The decrease in results at Hulu was primarily due to higher programming and production costs and a decrease in advertising revenue,partially offset by subscription revenue growth.The increase in 4programming and production costs was attributable to an increase in subscriber-based fees for programming the Live TV service,more content provided on the service and higher average costs per hour.Higher subscriber-based fees for programming the Live TV service were due to rate increases and more subscribers.The decrease in advertising revenue was caused by lower impressions,partially offset by an increase in rates.Subscription revenue growth was due to increases in retail pricing and subscribers.The improvement at ESPN was due to growth in subscription revenue attributable to increases in subscribers and retail pricing.First Quarter of Fiscal 2023 Comparison to Fourth Quarter of Fiscal 2022The following tables and related discussion present additional information about our Disney ,ESPN and Hulu direct-to-consumer(DTC)product offerings(1)on a sequential quarter basis.Paid subscribers(1)as of:(in millions)December 31,2022October 1,2022ChangeDisney Domestic(U.S.and Canada)46.6 46.4%International(excluding Disney Hotstar)(1)57.7 56.5 2%Disney Core(2)104.3 102.9 1%Disney Hotstar 57.5 61.3 (6)%Total Disney (2)161.8 164.2 (1)%ESPN 24.9 24.3 2%HuluSVOD Only 43.5 42.8 2%Live TV SVOD 4.5 4.4 2%Total Hulu(2)48.0 47.2 2%Average Monthly Revenue Per Paid Subscriber(1)for the quarter ended:December 31,2022October 1,2022ChangeDisney Domestic(U.S.and Canada)$5.95$6.10 (2)%International(excluding Disney Hotstar)(1)5.62 5.83 (4)%Disney Core 5.77 5.96 (3)%Disney Hotstar 0.74 0.58 28%Global Disney 3.93 3.91 1%ESPN 5.53 4.84 14%HuluSVOD Only 12.46 12.23 2%Live TV SVOD 87.90 86.77 1%(1)See discussion on page 10DTC Product Descriptions and Key Definitions(2)Total may not equal the sum of the column due to roundingThe average monthly revenue per paid subscriber for domestic Disney decreased from$6.10 to$5.95 driven by a higher mix of subscribers to multi-product offerings,partially offset by an increase in retail pricing.5The average monthly revenue per paid subscriber for international Disney (excluding Disney Hotstar)decreased from$5.83 to$5.62 due to an unfavorable foreign exchange impact.The average monthly revenue per paid subscriber for Disney Hotstar increased from$0.58 to$0.74 due to higher per-subscriber advertising revenue.The average monthly revenue per paid subscriber for ESPN increased from$4.84 to$5.53 due to an increase in retail pricing,partially offset by a higher mix of subscribers to multi-product offerings.The average monthly revenue per paid subscriber for the Hulu SVOD Only service increased from$12.23 to$12.46 due to an increase in retail pricing,partially offset by a higher mix of subscribers to multi-product offerings and lower per-subscriber advertising revenue.The average monthly revenue per paid subscriber for the Hulu Live TV SVOD service increased from$86.77 to$87.90 due to higher per-subscriber advertising revenue.Content Sales/Licensing and OtherContent Sales/Licensing and Other revenues for the quarter increased 1%to$2.5 billion and operating loss increased by$114 million to a loss of$212 million.The increase in operating loss was due to lower TV/SVOD distribution results,higher overhead costs and a decrease in home entertainment distribution results.These decreases were partially offset by higher theatrical distribution results.The decrease in TV/SVOD distribution results was primarily due to lower sales volumes of both film and episodic television content reflecting the shift from licensing content to third parties to distributing it on our DTC services.The decrease in sales of episodic television content was also driven by the comparison to a license of animated series in the prior-year quarter.The decrease in home entertainment results was due to lower unit sales of new release titles,reflecting fewer releases,and catalog titles.The increase in theatrical distribution results reflected the performance of titles released in the current quarter led by Black Panther:Wakanda Forever,as well as fewer releases,compared to losses on titles released in the prior-year quarter,partially offset by the comparison to income from the release of Marvels Spider-Man:No Way Home co-production in the prior-year quarter.Other releases in the current quarter included Avatar:The Way of Water and Strange World.Disney Parks,Experiences and ProductsDisney Parks,Experiences and Products revenues for the quarter increased 21%to$8.7 billion and segment operating income increased 25%to$3.1 billion.Higher operating results for the quarter reflected increases at our domestic parks and experiences and,to a lesser extent,our international parks and resorts.Operating income growth at our domestic parks and experiences was due to higher volumes and increased guest spending,partially offset by cost inflation,higher operations support costs and increased costs for new guest offerings.Higher volumes were attributable to increases in passenger cruise days,attendance and occupied room nights.Guest spending growth was due to an increase in average per capita ticket revenue driven by Genie and Lightning Lane,which were introduced in the prior-year quarter.Increased results at our international parks and resorts were due to growth at Disneyland Paris and higher royalties from Tokyo Disney Resort,partially offset by a decrease at Shanghai Disney Resort.Higher operating results at Disneyland Paris were due to an increase in volumes and higher guest spending,partially offset by a loss on the disposal of our ownership interest in Villages Nature,increased costs for new guest offerings and cost inflation.Higher volumes consisted of increases in attendance and occupied room nights.Guest spending growth was driven by an increase in average ticket prices and higher average daily hotel room rates.The decrease at Shanghai Disney Resort was due to lower 6attendance reflecting fewer operating days in the current quarter compared to the prior-year quarter as a result of COVID-19-related closures.The following table presents supplemental revenue and operating income detail for the Disney Parks,Experiences and Products segment:Quarter EndedChange(in millions)December 31,2022January 1,2022Supplemental revenue detailParks&ExperiencesDomestic$6,072$4,800 27%International 1,094 861 27%Consumer Products 1,570 1,573%$8,736$7,234 21%Supplemental operating income detailParks&ExperiencesDomestic$2,113$1,555 36%International 79 21 100%Consumer Products 861 874 (1)%$3,053$2,450 25%OTHER FINANCIAL INFORMATIONCorporate and Unallocated Shared ExpensesCorporate and unallocated shared expenses increased$52 million for the quarter,from$228 million to$280 million,driven by higher compensation and human resource-related costs,marketing spend on the Disney100 celebration and timing of allocations to operating segments.Restructuring and Impairment ChargesIn the current quarter,the Company recorded charges of$69 million related to exiting our businesses in Russia.Other Expense,netIn the current quarter,the Company recorded a$70 million non-cash loss to adjust its investment in DraftKings,Inc.(DraftKings)to fair value(DraftKings loss),partially offset by a$28 million gain on the sale of a business.In the prior-year quarter,the Company recorded a$432 million DraftKings loss.Interest Expense,netInterest expense,net was as follows(in millions):Quarter Ended December 31,2022January 1,2022ChangeInterest expense$(465)$(361)(29)%Interest income,investment income and other 165 50 100%Interest expense,net$(300)$(311)4%The increase in interest expense was due to higher average rates,partially offset by lower average debt balances.7The increase in interest income,investment income and other resulted from a favorable comparison of pension and postretirement benefit costs,other than service cost,and higher interest income on cash balances.Equity in the Income of InvesteesEquity in the income of investees was as follows(in millions):Quarter EndedDecember 31,2022January 1,2022ChangeAmounts included in segment results:Disney Media and Entertainment Distribution$196$245 (20)%Disney Parks,Experiences and Products(2)(3)33%Amortization of TFCF intangible assets related to equity investees(3)(3)%Equity in the income of investees$191$239 (20)%Income from equity investees decreased$48 million,to$191 million from$239 million,due to lower income from A E Television Networks.Income TaxesThe effective income tax rate was as follows:Quarter EndedDecember 31,2022January 1,2022Income from continuing operations before income taxes$1,773$1,688 Income tax expense on continuing operations 412 488 Effective income tax rate-continuing operations 23.2(.9%The decrease in the effective income tax rate was due to the impact of adjustments related to prior years,which was favorable in the current quarter and unfavorable in the prior-year quarter.This impact was partially offset by the tax effect of employee share-based awards,which had an unfavorable impact in the current quarter and favorable impact in the prior-year quarter.Noncontrolling InterestsNet income attributable to noncontrolling interests was as follows(in millions):Quarter EndedDecember 31,2022January 1,2022ChangeNet income from continuing operations attributable to noncontrolling interests$(82)$(48)(71)%The increase in net income from continuing operations attributable to noncontrolling interests was primarily due to the purchase of Major League Baseballs 15%interest in BAMTech LLC and lower losses at our DTC sports business,partially offset by higher losses at Shanghai Disney Resort.Net income attributable to noncontrolling interests is determined on income after royalties and management fees,financing costs and income taxes,as applicable.8Cash FlowCash provided by operations and free cash flow were as follows(in millions):Quarter Ended December 31,2022January 1,2022ChangeCash used in operations$(974)$(209)$(765)Investments in parks,resorts and other property(1,181)(981)(200)Free cash flow(1)$(2,155)$(1,190)$(965)(1)Free cash flow is not a financial measure defined by GAAP.See the discussion on pages 10 through 12.Cash used in operations increased by$765 million from$209 million in the prior-year quarter to$974 million in the current quarter.The increase was due to collateral payments related to our hedging program,lower operating income at Disney Media and Entertainment Distribution and higher spending for film and television programming,partially offset by higher operating income at Disney Parks,Experiences and Products.Capital Expenditures and Depreciation ExpenseInvestments in parks,resorts and other property were as follows(in millions):Quarter Ended December 31,2022January 1,2022Disney Media and Entertainment Distribution$279$169 Disney Parks,Experiences and ProductsDomestic 519 457 International 219 202 Total Disney Parks,Experiences and Products 738 659 Corporate 164 153 Total investments in parks,resorts and other property$1,181$981 Capital expenditures increased from$1.0 billion to$1.2 billion primarily due to higher spending at Disney Media and Entertainment Distribution and Disney Parks,Experiences and Products.Higher spending at Disney Media and Entertainment Distribution was due to increased technology spending to support our streaming services.The increase in spending at Disney Parks,Experiences and Products was primarily due to cruise ship fleet expansion.Depreciation expense was as follows(in millions):Quarter Ended December 31,2022January 1,2022Disney Media and Entertainment Distribution$164$153 Disney Parks,Experiences and ProductsDomestic 452 398 International 164 168 Total Disney Parks,Experiences and Products 616 566 Corporate 48 48 Total depreciation expense$828$767 9DTC PRODUCT DESCRIPTIONS AND KEY DEFINITIONSProduct offeringsIn the U.S.,Disney ,ESPN and Hulu SVOD Only are each offered as a standalone service or together as part of various multi-product offerings.Hulu Live TV SVOD includes Disney and ESPN .Disney is available in more than 150 countries and territories outside the U.S.and Canada.In India and certain other Southeast Asian countries,the service is branded Disney Hotstar.In certain Latin American countries,we offer Disney as well as Star ,a general entertainment SVOD service,which is available on a standalone basis or together with Disney (Combo ).Depending on the market,our services can be purchased on our websites or through third-party platforms/apps or are available via wholesale arrangements.Paid subscribersPaid subscribers reflect subscribers for which we recognized subscription revenue.Subscribers cease to be a paid subscriber as of their effective cancellation date or as a result of a failed payment method.Subscribers to multi-product offerings in the U.S.are counted as a paid subscriber for each service included in the multi-product offering and subscribers to Hulu Live TV SVOD are counted as one paid subscriber for each of the Hulu Live TV SVOD,Disney and ESPN services.In Latin America,if a subscriber has either the standalone Disney or Star service or subscribes to Combo ,the subscriber is counted as one Disney paid subscriber.Subscribers include those who receive a service through wholesale arrangements including those for which we receive a fee for the distribution of the service to each subscriber of an existing content distribution tier.When we aggregate the total number of paid subscribers across our DTC streaming services,we refer to them as paid subscriptions.International Disney (excluding Disney Hotstar)International Disney (excluding Disney Hotstar)includes the Disney service outside the U.S.and Canada and the Star service in Latin America.Average Monthly Revenue Per Paid SubscriberAverage monthly revenue per paid subscriber is calculated based on the average of the monthly average paid subscribers for each month in the period.The monthly average paid subscribers is calculated as the sum of the beginning of the month and end of the month paid subscriber count,divided by two.Disney average monthly revenue per paid subscriber is calculated using a daily average of paid subscribers for the period.Revenue includes subscription fees,advertising(excluding revenue earned from selling advertising spots to other Company businesses)and premium and feature add-on revenue but excludes Premier Access and Pay-Per-View revenue.The average revenue per paid subscriber is net of discounts on offerings that carry more than one service.Revenue is allocated to each service based on the relative retail price of each service on a standalone basis.Hulu Live TV SVOD revenue is allocated to the SVOD services based on the wholesale price of the Hulu SVOD Only,Disney and ESPN multi-product offering.In general,wholesale arrangements have a lower average monthly revenue per paid subscriber than subscribers that we acquire directly or through third-party platforms.NON-GAAP FINANCIAL MEASURESThis earnings release presents free cash flow,diluted EPS excluding certain items,and total segment operating income,all of which are important financial measures for the Company,but are not financial measures defined by GAAP.These measures should be reviewed in conjunction with the most comparable GAAP financial measures and are not presented as alternative measures of cash provided by continuing operations,diluted EPS or income from continuing operations before income taxes as determined in accordance with GAAP.10Free cash flow,diluted EPS excluding certain items and total segment operating income as we have calculated them may not be comparable to similarly titled measures reported by other companies.See further discussion of total segment operating income on page 2.Free cash flowThe Company uses free cash flow(cash provided by continuing operations less investments in parks,resorts and other property),among other measures,to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures.Management believes that information about free cash flow provides investors with an important perspective on the cash available to service debt obligations,make strategic acquisitions and investments and pay dividends or repurchase shares.The following table presents a summary of the Companys consolidated cash flows(in millions):Quarter Ended December 31,2022January 1,2022Cash used in operations-continuing operations$(974)$(209)Cash used in investing activities-continuing operations(1,292)(987)Cash used in financing activities-continuing operations(1,043)(280)Cash used in discontinued operations (4)Impact of exchange rates on cash,cash equivalents and restricted cash 164 (35)Change in cash,cash equivalents and restricted cash(3,145)(1,515)Cash,cash equivalents and restricted cash,beginning of period 11,661 16,003 Cash,cash equivalents and restricted cash,end of period$8,516$14,488 The following table presents a reconciliation of the Companys consolidated cash used in operations to free cash flow(in millions):Quarter Ended December 31,2022January 1,2022ChangeCash used in operations-continuing operations$(974)$(209)$(765)Investments in parks,resorts and other property(1,181)(981)(200)Free cash flow$(2,155)$(1,190)$(965)Diluted EPS excluding certain itemsThe Company uses diluted EPS excluding(1)certain items affecting comparability of results from period to period and(2)amortization of TFCF and Hulu intangible assets,including purchase accounting step-up adjustments for released content,to facilitate the evaluation of the performance of the Companys operations exclusive of these items,and these adjustments reflect how senior management is evaluating segment performance.The Company believes that providing diluted EPS exclusive of certain items impacting comparability is useful to investors,particularly where the impact of the excluded items is significant in relation to reported earnings and because the measure allows for comparability between periods of the operating performance of the Companys business and allows investors to evaluate the impact of these items separately.The Company further believes that providing diluted EPS exclusive of amortization of TFCF and Hulu intangible assets associated with the acquisition in 2019 is useful to investors because the TFCF and Hulu acquisition was considerably larger than the Companys historic acquisitions with a significantly greater acquisition accounting impact.11The following table reconciles reported diluted EPS from continuing operations to diluted EPS excluding certain items for the first quarter:(in millions except EPS)Pre-Tax Income/LossTax Benefit/Expense(1)After-Tax Income/Loss(2)Diluted EPS(3)Change vs.prior year periodQuarter Ended December 31,2022As reported$1,773$(412)$1,361$0.70 11%Exclude:Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(4)579 (135)444 0.24 Restructuring and impairment charges(5)69 (8)61 0.03 Other expense,net(6)42 (16)26 0.01 Excluding certain items$2,463$(571)$1,892$0.99 (7)%Quarter Ended January 1,2022As reported$1,688$(488)$1,200$0.63 Exclude:Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(4)595 (139)456 0.24 Other expense,net(6)436 (102)334 0.18 Excluding certain items$2,719$(729)$1,990$1.06 (1)Tax benefit/expense is determined using the tax rate applicable to the individual item.(2)Before noncontrolling interest share.(3)Net of noncontrolling interest share,where applicable.Total may not equal the sum of the column due to rounding.(4)For the current quarter,intangible asset amortization was$417 million,step-up amortization was$159 million and amortization of intangible assets related to TFCF equity investees was$3 million.For the prior-year quarter,intangible asset amortization was$435 million,step-up amortization was$157 million and amortization of intangible assets related to TFCF equity investees was$3 million.(5)Charges for the current quarter were related to exiting our businesses in Russia.(6)In the current quarter,other expense,net was due to the DraftKings loss($70 million),partially offset by a gain on the sale of a business($28 million).For the prior-year quarter,other expense,net was due to the DraftKings loss($432 million).CONFERENCE CALL INFORMATIONIn conjunction with this release,The Walt Disney Company will host a conference call today,February 8,2023,at 4:30 PM EST/1:30 PM PST via a live Webcast.To access the Webcast go to discussion will be archived.12FORWARD-LOOKING STATEMENTSCertain statements and information in this earnings release may constitute“forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995,including statements regarding future performance and growth;business plans,strategic priorities and drivers of growth and profitability and other statements that are not historical in nature.These statements are made on the basis of managements views and assumptions regarding future events and business performance as of the time the statements are made.Management does not undertake any obligation to update these statements.Actual results may differ materially from those expressed or implied.Such differences may result from actions taken by the Company,including restructuring or strategic initiatives(including capital investments,asset acquisitions or dispositions,new or expanded business lines or cessation of certain operations),our execution of our business plans(including the content we create and IP we invest in,our pricing decisions,our cost structure and our management and other personnel decisions)or other business decisions,as well as from developments beyond the Companys control,including:further deterioration in domestic and global economic conditions;deterioration in or pressures from competitive conditions,including competition to create or acquire content and competition for talent;consumer preferences and acceptance of our content,offerings,pricing model and price increases and the market for advertising sales on our DTC services and linear networks;health concerns and their impact on our businesses and productions;international,regulatory,legal,political,or military developments;technological developments;labor markets and activities;adverse weather conditions or natural disasters;andavailability of content;each such risk includes the current and future impacts of,and may be amplified by,COVID-19 and related mitigation efforts.Such developments may further affect entertainment,travel and leisure businesses generally and may,among other things,affect(or further affect,as applicable):our operations,business plans or profitability;demand for our products and services;the performance of the Companys content;our ability to create or obtain desirable content at or under the value we assign the content;the advertising market for programming;income tax expense;andperformance of some or all Company businesses either directly or through their impact on those who distribute our products.Additional factors are set forth in the Companys Annual Report on Form 10-K for the year ended October 1,2022,including under the captions“Risk Factors,”“Managements Discussion and Analysis of Financial Condition and Results of Operations,”and“Business,”quarterly reports on Form 10-Q,including under the captions“Risk Factors”and“Managements Discussion and Analysis of Financial Condition and Results of Operations,”and subsequent filings with the Securities and Exchange Commission.The terms“Company,”“we,”and“our”are used in this report to refer collectively to the parent company and the subsidiaries through which our various businesses are actually conducted.13THE WALT DISNEY COMPANYCONDENSED CONSOLIDATED STATEMENTS OF INCOME(unaudited;in millions,except per share data)Quarter Ended December 31,2022January 1,2022Revenues$23,512$21,819 Costs and expenses(21,519)(19,623)Restructuring and impairment charges(69)Other expense,net(42)(436)Interest expense,net(300)(311)Equity in the income of investees 191 239 Income from continuing operations before income taxes 1,773 1,688 Income taxes on continuing operations(412)(488)Net income from continuing operations 1,361 1,200 Loss from discontinued operations,net of income tax benefit of$0,$14,respectively (48)Net income 1,361 1,152 Net income from continuing operations attributable to noncontrolling interests(82)(48)Net income attributable to The Walt Disney Company(Disney)$1,279$1,104 Earnings(loss)per share attributable to Disney(1):DilutedContinuing operations$0.70$0.63 Discontinued operations (0.03)$0.70$0.60 BasicContinuing operations$0.70$0.63 Discontinued operations (0.03)$0.70$0.61 Weighted average number of common and common equivalent shares outstanding:Diluted 1,827 1,828 Basic 1,825 1,819(1)Total may not equal the sum of the column due to rounding.14THE WALT DISNEY COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS(unaudited;in millions,except per share data)December 31,2022October 1,2022ASSETSCurrent assetsCash and cash equivalents$8,470$11,615 Receivables,net 13,993 12,652 Inventories 1,830 1,742 Content advances 1,300 1,890 Other current assets 1,319 1,199 Total current assets 26,912 29,098 Produced and licensed content costs 36,266 35,777 Investments 3,169 3,218 Parks,resorts and other propertyAttractions,buildings and equipment 68,253 66,998 Accumulated depreciation(40,641)(39,356)27,612 27,642 Projects in progress 5,430 4,814 Land 1,158 1,140 34,200 33,596 Intangible assets,net 14,347 14,837 Goodwill 77,867 77,897 Other assets 9,363 9,208 Total assets$202,124$203,631 LIABILITIES AND EQUITYCurrent liabilitiesAccounts payable and other accrued liabilities$18,149$20,213 Current portion of borrowings 3,249 3,070 Deferred revenue and other 5,672 5,790 Total current liabilities 27,070 29,073 Borrowings 45,128 45,299 Deferred income taxes 8,236 8,363 Other long-term liabilities 12,812 12,518 Commitments and contingenciesRedeemable noncontrolling interests 8,743 9,499 EquityPreferred stock Common stock,$0.01 par value,Authorized 4.6 billion shares,Issued 1.8 billion shares 56,579 56,398 Retained earnings 44,955 43,636 Accumulated other comprehensive loss(4,478)(4,119)Treasury stock,at cost,19 million shares(907)(907)Total Disney Shareholders equity 96,149 95,008 Noncontrolling interests 3,986 3,871 Total equity 100,135 98,879 Total liabilities and equity$202,124$203,631 15THE WALT DISNEY COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited;in millions)Quarter Ended December 31,2022January 1,2022OPERATING ACTIVITIESNet income from continuing operations$1,361$1,200 Depreciation and amortization 1,306 1,269 Net loss on investments and dispositions of businesses 68 436 Deferred income taxes(15)726 Equity in the income of investees(191)(239)Cash distributions received from equity investees 176 223 Net change in produced and licensed content costs and advances 558 507 Equity-based compensation 270 196 Pension and postretirement medical cost amortization 1 155 Other,net(232)(7)Changes in operating assets and liabilities:Receivables(1,423)(1,401)Inventories(88)(14)Other assets(443)(115)Accounts payable and other liabilities(2,378)(2,579)Income taxes 56 (566)Cash used in operations-continuing operations(974)(209)INVESTING ACTIVITIESInvestments in parks,resorts and other property(1,181)(981)Other,net(111)(6)Cash used in investing activities-continuing operations(1,292)(987)FINANCING ACTIVITIESCommercial paper borrowings(payments),net 799 (124)Borrowings 67 33 Reduction of borrowings(1,000)Contributions from noncontrolling interests 178 Acquisition of redeemable noncontrolling interests(900)Other,net(187)(189)Cash used in financing activities-continuing operations(1,043)(280)CASH FLOWS FROM DISCONTINUED OPERATIONSCash provided by operations-discontinued operations 8 Cash used in financing activities-discontinued operations (12)Cash used in discontinued operations (4)Impact of exchange rates on cash,cash equivalents and restricted cash 164 (35)Change in cash,cash equivalents and restricted cash(3,145)(1,515)Cash,cash equivalents and restricted cash,beginning of year 11,661 16,003 Cash,cash equivalents and restricted cash,end of year$8,516$14,488 16Contacts:David JeffersonCorporate Communications818-560-4832Alexia QuadraniInvestor Relations818-560-660117
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