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+Item 7. Overall, the impact of the COVID-19 pandemic on 3M’s consolidated results of operations was primarily driven by factors related to changes in demand for products and disruption in global supply chains. 3M is not able to predict the extent to which the COVID-19 pandemic may have a material effect on its consolidated results of operations or financial condition.In 2022, 3M's costs for significant litigation (see Certain amounts adjusted for special items - (non-GAAP measures section below) totaled approximately $2.3 billion pre-tax and included, among things, pre-tax charges associated with steps toward resolving Combat Arms Earplugs litigation and associated with additional commitments to address PFAS-related matters at its Zwijndrecht, Belgium site (approximately $1.3 billion and $355 million, respectively, in 2022). These matters are further discussed in Note 16. In 2022, 3M also completed the split-off of its Food Safety Division business resulting in a pre-tax gain of $2.7 billion and committed to a plan to exit PFAS manufacturing by the end of 2025 resulting in a 2022 pre-tax charge of $0.8 billion related to impairment as discussed in Note 15. See Certain amounts adjusted for special items - (non-GAAP measures) section below for additional discussion of these and other special items.19Table of Contents3M Belgium has experienced interruptions to portions of the manufacturing at its site in Zwijndrecht, Belgium, as more fully discussed in Note 16. As discussed in Note 16, 3M Belgium received agreement with authorities in June 2022 to begin the process toward restarting operations at the Zwijndrecht facility. 3M Belgium has provided information required by the Flemish environmental authorities to receive agreement from the authorities to restart operations, and has done so for production or sampling purposes. Belgian government authorities continue to maintain oversight of these operations and compliance with applicable requirements. In December 2022, 3M Belgium received an official infraction report from the Flemish Environmental Inspectorate and continues to work with the government authorities to comply with applicable legal requirements. See further discussion in Note 16.3M is also impacted by the Russia-Ukraine conflict. In light of a number of factors, 3M suspended operations of its subsidiaries in Russia in March 2022, the net sales of which were less than one percent of 3M’s consolidated net sales for 2021. Further, in September 2022, management committed to a plan to exit and dispose of the related net assets through an intended sale of the subsidiaries. The associated charge in 2022 related to this action is further discussed in Note 15. 3M also has other operations that source certain raw materials from suppliers in Russia and have experienced related supply disruption due to the conflict. Further supply disruption could lead to downstream customer impacts. Though 3M monitors relevant factors as well as options to mitigate potential impacts, it is not able to predict the extent to which these circumstances may have a material effect on 3M’s consolidated results of operations or financial condition. Relevant risk factors can be found in Item 1A “Risk Factors” in this Annual Report on Form 10-K. Operating income margin and earnings per share attributable to 3M common shareholders – diluted:The following table provides the increases (decreases) in operating income margins and diluted earnings per share.Year ended December 31,20222021Percent of net salesEarnings per diluted sharePercent of net salesEarnings per diluted shareSame period last year20.8 %$10.12 22.3 %$9.36 Net costs for significant litigation1.4 0.61 1.0 0.37 Gain on business divestitures — — (1.2)(0.52)Divestiture-related restructuring actions— — 0.2 0.08 Total special items1.4 0.61 — (0.07)Same period last year, excluding special items22.2 10.73 22.3 9.29 Increase/(decrease) due to:Total organic growth/productivity and other1.0 0.56 0.7 1.07 Raw material impact(2.4)(1.13)(0.8)(0.27)Divestitures— (0.05)— (0.05)Foreign exchange impacts— (0.39)— 0.16 Other expense (income), netN/A0.02 N/A0.27 Income tax rateN/A0.06 N/A0.32 Shares of common stock outstandingN/A0.30 N/A(0.06)Current period, excluding special items20.8 10.10 22.2 10.73 Net costs for significant litigation(6.7)(3.20)(1.4)(0.61)Divestiture costs(0.2)(0.08)— — Gain on business divestitures 8.0 4.73 — — Divestiture-related restructuring actions(0.1)(0.05)— — Russia exit charges(0.3)(0.20)— — PFAS manufacturing exit costs(2.4)(1.12)— — Total special items(1.7)0.08 (1.4)(0.61)Current period19.1 %$10.18 20.8 %$10.12 The Company refers to various "adjusted" amounts or measures on an “adjusted basis”. These exclude special items. These non-GAAP measures are further described and reconciled to the most directly comparable GAAP financial measures in the Certain amounts adjusted for special items - (non-GAAP measures) section below.A discussion related to the components of year-on-year changes in operating income margin and earnings per diluted share follows: 20Table of ContentsOrganic growth/productivity and other: •In 2022, the following components impacted operating margins and earnings per diluted share year-on-year:•Declines in disposable respirator demand year-on-year negatively impacted operating margins by 0.3 percent and earnings per share by $0.29. •Remaining organic growth/productivity and other impacts resulted in a net year-on-year benefit $0.85 to earnings per share and 1.3 percent to operating margins which was impacted by the following:◦Benefits from strong pricing, spending discipline and 2021 restructuring actions◦Manufacturing headwinds from global supply chain challenges; geopolitical impacts due to the Russia/Ukraine conflict as well as ongoing COVID-related challenges in China◦Second quarter of 2021 benefit of $91 million pre-tax ($0.12 per share after tax) from the impact of the favorable decision of the Brazilian Supreme Court regarding the calculation of past social taxes◦Increased investments in growth, productivity and sustainability •In 2021, organic volume growth and ongoing cost management increased operating income margins and earnings per diluted share year-on-year offset by manufacturing headwinds from global supply chain challenges and increased compensation/benefit costs. The following also impacted results or provide additional information:•2021 benefit of $91 million pre-tax ($0.12 per share after tax) from a favorable Brazilian Supreme Court decision that concluded on the impact of state value-added tax when determining Brazil’s federal sales-based social tax—essentially lowering the social tax that 3M should have paid in prior periods.•3M continued prioritization of investments in growth and sustainability.•2021 benefit from higher selling prices, restructuring actions taken in 2020 and positive/negative impact of year-over-year change in non-divestiture-related restructuring charges, net of adjustments, for respective periods. Note 5 provides additional information relative to restructuring actions. •Lower year-on-year net gains related to certain property sales.•COVID-impacts recognized on certain assets in 2020.•In 2021, higher defined benefit pension and postretirement service cost increased expense year-on-year. Raw material impact:•In 2022, 3M continued to experience inflationary pressures with year-on-year increases in raw material and logistics costs driven by many geopolitical, logistics, and disruptive events that caused imbalance in the global supply chain.•In 2021, 3M experienced higher raw material, logistics, and outsourced manufacturing costs from strong end-market demand, ongoing COVID-19 and related global supply chain challenges that were further magnified by extreme weather events, such as February 2021 winter storm Uri in the U.S.Acquisitions/divestitures:•Divestiture impacts in 2022 include lost income from divested businesses and remaining stranded costs (net of transition arrangement income). 3M completed the split-off of the Food Safety business in September 2022 (discussed in Note 3). The impact also includes lost income from deconsolidation of the Aearo Entities in July 2022 (discussed in Note 16). •Divestiture impacts in 2021 are primarily comprised of the lost income from the divestiture of the Company’s drug delivery business (sale completed in May 2020).Foreign exchange impacts:•Foreign currency impacts (net of hedging) decreased operating income by approximately $271 million and $103 million (or a decrease in pre-tax earnings of approximately $280 million and $119 million) year-on-year for 2022 and 2021, respectively. These estimates include: (a) the effects of year-on-year changes in exchange rates on translating current period functional currency profits into U.S. dollars and on current period non-functional currency denominated purchases or transfers of goods between 3M operations, and (b) year-on-year changes in transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks.Other expense (income), net: •Lower income related to higher non-service cost components of pension and postretirement expense increased expense year-on-year for 2022. Higher income related to non-service cost components of pension and postretirement expense decreased expense year-on-year for 2021. •Interest expense (net of interest income) decreased in 2022 compared to the same period year-on-year driven by debt maturities in the ordinary course and interest income on invested cash. •Interest expense (net of interest income) decreased in 2021 compared to the same period year-on-year due in part to interest expense savings from early debt extinguishment actions in 2020.21Table of ContentsIncome tax rate:•Certain items above reflect specific income tax rates associated therewith. Overall, the effective tax rates for 2022, 2021, and 2020 were 9.6 percent, 17.8 percent, and 19.7 percent, respectively. These reflect a decrease of 8.2 percentage points from 2021 to 2022 and a decrease of 1.9 percentage points from 2020 to 2021. The primary factors that decreased the Company's effective tax rate for 2022 were the tax efficient structure associated with the gain on split-off of the Food Safety business (see Note 3). The primary factors that decreased the Company's effective tax rate in 2021 were geographical income mix and favorable adjustments in 2021 related to impacts of U.S. international tax provisions. •On an adjusted basis (as discussed below), the effective tax rates for 2022, 2021, and 2020 were 17.7 percent, 18.1 percent, and 20.5 percent, respectively. These reflect a decrease of 0.4 percent percentage points from 2021 to 2022 and a decrease of 2.4 percentage points from 2020 to 2021.Shares of common stock outstanding:•Lower shares outstanding increased earnings per share per diluted share for 2022, while higher shares outstanding decreased earnings per share diluted share for 2021. Certain amounts adjusted for special items - (non-GAAP measures):In addition to reporting financial results in accordance with U.S. GAAP, 3M also provides non-GAAP measures that adjust for the impacts of special items. For the periods presented, special items include the items described below. Operating income, segment operating income (loss), income before taxes, net income, earnings per share, and the effective tax rate are all measures for which 3M provides the reported GAAP measure and a measure adjusted for special items. The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures. While the Company includes certain items in its measure of segment operating performance, it also considers these non-GAAP measures in evaluating and managing its operations. The Company believes that discussion of results adjusted for special items is useful to investors in understanding underlying business performance, while also providing additional transparency to the special items. Special items impacting operating income are reflected in Corporate and Unallocated, except as described below with respect to net costs for significant litigation and PFAS manufacturing exit costs. The determination of these items may not be comparable to similarly titled measures used by other companies. In the first quarter of 2022, the Company changed the extent of matters and charges/benefits it includes within special items with respect to net costs for significant litigation. Previously, 3M included net costs, when significant, associated with changes in accrued liabilities related to respirator mask/asbestos litigation and PFAS-related other environmental matters, along with the associated tax impacts. These non-GAAP measure changes involved including net costs for litigation related to 3M’s Combat Arms Earplugs, expanding net costs to include external legal fees and insurance recoveries associated with the applicable matters in addition to changes in accrued liabilities, and to include all such net costs for the applicable matters, not just when considered significant. Information provided herein reflects the impact of these changes for all periods presented.Special items for the periods presented include:Net costs for significant litigation:•These relate to 3M's respirator mask/asbestos, PFAS-related other environmental, and Combat Arms Earplugs matters (as discussed in Note 16). Net costs include the impacts of any changes in accrued liabilities, external legal fees, and insurance recoveries, along with associated tax impacts. Prior to initiating voluntary chapter 11 bankruptcy proceedings in July 2022, net costs related to Combat Arms Earplugs and Aearo-respirator mask/asbestos matters along with non-Aearo respirator mask/asbestos matters were reflected as special items in the Safety and Industrial business segment. During the bankruptcy period, net costs related to Combat Arms Earplugs and Aearo-respirator mask/asbestos matters are reflected as corporate special items in Corporate and Unallocated while those associated with non-Aearo respirator mask/asbestos matters continue to be reflected as special items in the Safety and Industrial business segment. Net costs associated with PFAS-related other environmental matters are primarily reflected as corporate special items in Corporate and Unallocated.Divestiture costs:•These include costs related to separating and divesting substantially an entire business segment of 3M following public announcement of its intended divestiture.22Table of ContentsGain on business divestitures:•In 2022, 3M recorded a gain related to the split-off and combination of its Food Safety business with Neogen Corporation. In 2020, 3M recorded a gain primarily related to the divestiture of its Drug Delivery business. Refer to Note 3 for further details. Divestiture-related restructuring actions:•In the third quarter of 2022, following the split-off of the Food Safety business, and in 2020, following the divestiture of the Drug Delivery business, (see Note 3) management approved and committed to undertake certain restructuring actions addressing corporate functional costs across 3M in relation to the magnitude of amounts previously allocated to the divested businesses. Refer to Note 5 for further details.Russia exit charges:•In the third quarter of 2022, 3M recorded a charge primarily related to impairment of net assets in Russia in connection with management's committed exit and disposal plan. Refer to Note 15 for further details. PFAS manufacturing exit costs:•These costs relate to 3M's December 2022 commitment to a plan to exit PFAS manufacturing by the end of 2025. Charges for the applicable period relate to asset impairments. These charges were reflected within the Transportation and Electronics business segment. Refer to Note 15 for further details.23Table of ContentsOperating Income (Loss)(Dollars in millions, except per share amounts)Safety and IndustrialSafety and Industrial MarginTransportation and ElectronicsTransportation and Electronics MarginTotal CompanyTotal Company MarginIncome Before TaxesProvision for Income TaxesEffective Tax RateNet Income Attributable to 3MEarnings per Diluted ShareEarnings per diluted share percent changeYear ended December 31, 2020 GAAP$2,58823.6%$1,70120.2%$7,16122.3 %$6,795$1,33719.7 %$5,449$9.36 Adjustments for special items:Net costs for significant litigation205 — 353 353 136 217 0.37 Gain on business divestitures ——(389)(389)(86)(303)(0.52)Divestiture-related restructuring actions——55559460.08 Total special items205—191959(40)(0.07)Year ended December 31, 2020 adjusted amounts (non-GAAP measures)$2,79325.5%$1,70120.2%$7,18022.3 %$6,814$1,39620.5 %$5,409$9.29 Year ended December 31, 2021 GAAP$2,46620.6%$1,88020.3%$7,36920.8 %$7,204$1,28517.8 %$5,921$10.128 %Adjustments for special items:Net costs for significant litigation249 — 463 463 104 359 0.61 Total special items249 — 463 463 104 359 0.61 Year ended December 31, 2021 adjusted amounts (non-GAAP measures)$2,71522.7%$1,88020.3%$7,83222.2 %$7,667$1,38918.1 %$6,280$10.7316 %Year ended December 31, 2022 GAAP$1,19910.3%$1,01211.4%$6,53919.1 %$6,392$6129.6 %$5,777$10.181 %Adjustments for special items:Net costs for significant litigation1,414 — 2,291 2,291 476 1,815 3.20 Divestiture costs— — 60 60 13 47 0.08 Gain on business divestitures — — (2,724)(2,724)(39)(2,685)(4.73)Divestiture-related restructuring actions— — 41 41 9 32 0.05Russia exit charges— — 109 109 (2)111 0.20PFAS manufacturing exit costs— 800 800 800 162 638 1.12Total special items1,414 800 577 577 619 (42)(0.08)Year ended December 31, 2022 adjusted amounts (non-GAAP measures)$2,61322.5%$1,81220.4%$7,11620.8 %$6,969$1,23117.7 %$5,735$10.10(6)%24Table of ContentsSales and operating income (loss) by business segment:The following tables contain sales and operating income (loss) results by business segment for the years ended December 31, 2022 and 2021. Refer to the section entitled “Performance by Business Segment” later in MD&A for additional discussion concerning 2022 versus 2021 results, including Corporate and Unallocated. Refer to Note 19 for additional information on business segments.20222021% change(Dollars in millions)Net Sales% of TotalOperating Income (Loss)Net Sales% of TotalOperating Income (Loss)Net SalesOperating Income (Loss)Business SegmentsSafety and Industrial$11,60433.9 %$1,199$11,98133.9 %$2,466(3.2)%(51.4)%Transportation and Electronics8,90226.0 1,0129,26226.2 1,880(3.9)(46.2)Health Care8,42124.6 1,8158,59724.3 2,037(2.0)(10.9)Consumer5,29815.5 9945,51315.6 1,162(3.9)(14.4)Corporate and Unallocated4— 1,5192— (176)Total Company$34,229 100.0 %$6,539$35,355 100.0 %$7,369 (3.2)%(11.3)%Year ended December 31, 2022Worldwide Sales Change By Business SegmentOrganic salesAcquisitionsDivestituresTranslationTotal sales changeSafety and Industrial1.0 %— %— %(4.2) %(3.2) %Transportation and Electronics1.2 — (0.5)(4.6)(3.9)Health Care3.2 — (1.4)(3.8)(2.0)Consumer(0.9)— (0.4)(2.6)(3.9)Total Company1.2 — (0.5)(3.9)(3.2)Sales by geographic area:Percent change information compares the years ended December 31, 2022 and 2021 with the same prior year period, unless otherwise indicated. Additional discussion of business segment results is provided in the Performance by Business Segment section.Year ended December 31, 2022Americas Asia Pacific Europe, Middle East & Africa Other UnallocatedWorldwide Net sales (millions)$18,400 $9,901 $5,928 $— $34,229 % of worldwide sales53.8 %28.9 %17.3 %100.0 %Components of net sales change:Organic sales2.6 0.3 (0.6)1.2 Divestitures(0.6)(0.4)(0.6)(0.5)Translation(0.3)(6.5)(9.8)(3.9)Total sales change1.7 %(6.6)%(11.0)%(3.2)%Year ended December 31, 2021AmericasAsia PacificEurope, Middle East & AfricaOther UnallocatedWorldwideNet sales (millions)$18,097 $10,600 $6,660 $(2)$35,355 % of worldwide sales51.2 %30.0 %18.8 %100.0 %Components of net sales change:Organic sales9.8 8.5 6.3 8.8 Divestitures(0.6)— (1.1)(0.5)Translation0.3 2.3 3.8 1.6 Total sales change9.5 %10.8 %9.0 %9.9 %25Table of ContentsAdditional information beyond what is included in the preceding tables is as follows:•For the full year 2022, in the Americas geographic area, U.S. total sales were flat which included increased organic sales of 1 percent. Total sales in Mexico increased 8 percent which included increased organic sales of 12 percent. In Canada, total sales increased 9 percent which included increased organic sales of 13 percent. In Brazil, total sales increased 15 percent which included increased organic sales of 12 percent. In the Asia Pacific geographic area, China total sales decreased 6 percent which included decreased organic sales of 3 percent. In Japan, total sales decreased 12 percent which included increased organic sales of 2 percent.•For the full year 2021, in the Americas geographic area, U.S. total sales increased 8 percent which included increased organic sales of 8 percent. Total sales in Mexico increased 18 percent which included increased organic sales of 16 percent. In Canada, total sales increased 18 percent which included increased organic sales of 11 percent. In Brazil, total sales increased 18 percent which included increased organic sales of 22 percent. In the Asia Pacific geographic area, China total sales increased 17 percent which included increased organic sales of 11 percent. In Japan, total sales were flat which included increased organic sales of 2 percent.Managing currency risks:The stronger U.S. dollar had a negative impact on sales in full year 2022 compared to the same periods last year. Net of the Company’s hedging strategy, foreign currency negatively impacted earnings in full year 2022 compared to the same period last year. 3M utilizes a number of tools to manage currency risk related to earnings including natural hedges such as pricing, productivity, hard currency, hard currency-indexed billings, and localizing source of supply. 3M also uses financial hedges to mitigate currency risk. In the case of more liquid currencies, 3M hedges a portion of its aggregate exposure, using a 12, 24 or 36 month horizon, depending on the currency in question. For less liquid currencies, financial hedging is frequently more expensive with more limitations on tenor. Thus, this risk is largely managed via local operational actions using natural hedging tools as discussed above. In either case, 3M’s hedging approach is designed to mitigate a portion of foreign currency risk and reduce volatility, ultimately allowing time for 3M’s businesses to respond to changes in the marketplace.Financial condition:Refer to the section entitled “Financial Condition and Liquidity” later in MD&A for a discussion of items impacting cash flows.In November 2018, 3M’s Board of Directors replaced the Company’s February 2016 repurchase program with a new repurchase program. This new program authorizes the repurchase of up to $10 billion of 3M’s outstanding common stock, with no pre-established end date. In 2022, the Company purchased $1.5 billion of its own stock, compared to $2.2 billion of stock purchases in 2021. As of December 31, 2022, approximately $4.2 billion remained available under the authorization. In February 2023, 3M’s Board of Directors declared a first-quarter 2023 dividend of $1.50 per share, an increase of 1 percent. This marked the 65th consecutive year of dividend increases for 3M. Raw materials:Refer to the section entitled “Raw materials” in Item 1 for discussion of 3M's sources and availability of raw materials in 2022. Pension and postretirement defined benefit/contribution plans:On a worldwide basis, 3M’s pension and postretirement plans were 96 percent funded at year-end 2022. The primary U.S. qualified pension plan, which is approximately 70 percent of the worldwide pension obligation, was 97 percent funded and the international pension plans were 116 percent funded. The U.S. non-qualified pension plan is not funded due to tax considerations and other factors. Asset returns in 2022 for the primary U.S. qualified pension plan were -17.4 percent, as 3M strategically invests in both growth assets and fixed income matching assets to manage its funded status. For the primary U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2023 is 7.5 percent. The primary U.S. qualified pension plan year-end 2022 discount rate was 5.18%, up 2.29 percentage points from the year-end 2021 discount rate of 2.89%. The increase in U.S. discount rates resulted in a decreased valuation of the projected benefit obligation (PBO). The primary U.S. qualified pension plan’s funded status remained at 97% as of December 31, 2022 due to the lower PBO resulting from the discount rate increase, offset by the negative returns of the plan's assets. Additional detail and discussion of international plan asset returns and discount rates is provided in Note 13 (Pension and Postretirement Benefit Plans).3M expects to contribute approximately $100 million to $200 million of cash to its global defined benefit pension and postretirement plans in 2023. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2023. 3M expects global defined benefit pension and postretirement expense in 2023 to decrease by approximately $30 million pre-tax when compared to 2022. Refer to “Critical Accounting Estimates” within MD&A and Note 13 (Pension and Postretirement Benefit Plans) for additional information concerning 3M’s pension and post-retirement plans.26Table of Contents RESULTS OF OPERATIONSNet Sales:Refer to the preceding “Overview” section and the “Performance by Business Segment” section later in MD&A for additional discussion of sales change.Operating Expenses:(Percent of net sales)20222021ChangeCost of sales 56.2 %53.2 %3.0 %Selling, general and administrative expenses (SG&A) 26.5 20.4 6.1 Research, development and related expenses (R&D)5.4 5.6 (0.2)Gain on business divestitures(8.0)— (8.0)Goodwill impairment expense0.8 — 0.8 Operating income margin19.1 %20.8 %(1.7)%The Company is continuing the ongoing deployment of an enterprise resource planning (ERP) system on a worldwide basis, with these investments impacting cost of sales, SG&A, and R&D. Cost of Sales:Cost of sales, measured as a percent of sales, increased in 2022 when compared to the same period last year. Increases were primarily due to 2022 special item costs for significant litigation from additional commitments to address PFAS-related matters at 3M's Zwijndrecht, Belgium site (discussed in Note 16), higher raw materials and logistics costs, manufacturing productivity headwinds which were further magnified by the shutdown of certain operations in Belgium and progress on restarting previously-idled operations, and investments in growth, productivity and sustainability. On a percent of sales basis, these increases were partially offset by increases in selling prices. Selling, General and Administrative Expenses:SG&A, measured as a percent of sales, increased in 2022 when compared to the same period last year. SG&A was impacted by increased special item costs for significant litigation primarily related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 16) resulting in a 2022 second quarter pre-tax charge of approximately $1.2 billion, certain impairment costs related to exiting PFAS manufacturing (see Note 15), costs related to exiting Russia (see Note 15), divestiture-related restructuring charges (see Note 5), and continued investment in key growth initiatives. These increases were partially offset by restructuring benefits and ongoing general 3M cost management.Research, Development and Related Expenses:R&D, measured as a percent of sales, decreased in 2022 when compared to the same period last year. 3M continues to invest in a range of R&D activities from application development, product and manufacturing support, product development and technology development aimed at disruptive innovations.Gain on Business Divestitures:In the third quarter of 2022, 3M recorded a pre-tax gain of $2.7 billion ($2.7 billion after tax) related to the split-off and combination of its Food Safety business with Neogen Corporation. Refer to Note 3 for further details.Goodwill Impairment Expense:As a result of 3M's commitment to exit per- and polyfluoroalkyl substance (PFAS) manufacturing, 3M recorded a goodwill impairment charge related to the Advanced Materials reporting unit (within the Transportation and Electronics business). Refer to Note 15 for further details.27Table of ContentsOther Expense (Income), Net:See Note 6 for a detailed breakout of this line item.Interest expense (net of interest income) decreased in 2022 compared to the same period year-on-year driven by debt maturities in the ordinary course and interest income on invested cash. Interest expense (net of interest income) decreased in 2021 compared to the same period year-on-year due in part to interest expense savings from early debt extinguishment actions in 2020.The non-service pension and postretirement net benefit decreased $49 million and increased $163 million in 2022 and 2021, respectively. The lower year-on-year benefit in 2022 was primarily due to higher interest costs due to higher discount rates as of the year-end 2021, lower expected returns on plan assets for 2023, partially offset by a reduction in actuarial loss amortization, which was driven by the lower discount rates. Refer to Note 13 for additional details.Provision for Income Taxes:(Percent of pre-tax income)20222021Effective tax rate 9.6 %17.8 %Factors that impacted the tax rates between years are further discussed in the Overview section above and in Note 10. The tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws, and employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes. Refer to Note 10 for further discussion of income taxes.Income from Unconsolidated Subsidiaries, Net of Taxes:(Millions)20222021Income (loss) from unconsolidated subsidiaries, net of taxes$11$10Income (loss) from unconsolidated subsidiaries, net of taxes, is attributable to the Company’s accounting under the equity method for ownership interests in certain entities such as Kindeva following 3M's divestiture of the drug delivery business in 2020. In the fourth quarter of 2022, 3M sold its remaining ownership interest in Kindeva resulting in an immaterial gain.Net Income (Loss) Attributable to Noncontrolling Interest:(Millions)20222021Net income (loss) attributable to noncontrolling interest $14 $8 Net income (loss) attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities. The primary noncontrolling interest relates to 3M India Limited, of which 3M’s effective ownership is 75 percent.PERFORMANCE BY BUSINESS SEGMENTItem 1, Business Segments, provides an overview of 3M’s business segments. In addition, disclosures relating to 3M’s business segments are provided in Note 19. Effective in the first quarter of 2022, the measure of segment operating performance used by 3M’s chief operating decision maker (CODM) changed and, as a result, 3M’s disclosed measure of segment profit/loss (business segment operating income) was updated for all comparative periods presented. The change to business segment operating income aligns with the update to how the CODM assesses performance and allocates resources for the Company’s business segments (see Note 19 for additional details). Information provided herein reflects the impact of these changes for all periods presented. 3M manages its operations in four business segments. The reportable segments are Safety and Industrial; Transportation and Electronics; Health Care; and Consumer.28Table of ContentsCorporate and Unallocated:In addition to these four business segments, 3M assigns certain costs to “Corporate and Unallocated,” which is presented separately in the preceding business segments table and in Note 19. Corporate and Unallocated operating income includes “corporate special items” and “other corporate expense-net”. Corporate special items include net costs for significant litigation associated with Combat Arms Earplugs and Aearo-respirator mask/asbestos matters during the chapter 11 bankruptcy period (which began in July 2022) and with PFAS-related other environmental matters (see Note 16). Corporate special items also include divestiture costs, gain/loss on business divestitures (see Note 3), divestiture-related restructuring costs (see Note 5), and Russia exit costs (see Note 15). Divestiture costs include costs related to separating and divesting substantially an entire business segment of 3M following public announcement of its intended divestiture. Other corporate expense-net includes items such as net costs related to limited unallocated corporate staff and centrally managed material resource centers of expertise costs, corporate philanthropic activity, and other net costs that 3M may choose not to allocate directly to its business segments. Other corporate expense-net also includes costs and income from transition supply, manufacturing and service arrangements with Neogen Corporation following the split-off of 3M's Food Safety business in 2022 and with the acquirer of the former Drug Delivery business following its 2020 divestiture. Items classified as revenue from this activity are included in Corporate and Unallocated net sales. Because Corporate and Unallocated includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.Corporate and Unallocated operating expenses decreased in 2022, when compared to the same period last year. The subsections below provide additional information. Corporate Special ItemsRefer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details on the impact of special items and to Note 19 for additional information on the components of corporate special items. Corporate special item net costs decreased in 2022 year over year primarily due to the gain on divestiture associated with the 2022 split-off of the Food Safety business (discussed in Note 3) partially offset by additional commitments in 2022 to address PFAS-related matters, including at 3M's Zwijndrecht, Belgium site (discussed in Note 16).Other Corporate Expense - NetOther corporate operating expenses, net, increased when compared to the same period last year primarily due to a $91 million pre-tax benefit from the impact of the favorable decision of the Brazilian Supreme Court included in the second quarter of 2021 regarding the calculation of past social taxes.Operating Business Segments:Information related to 3M’s business segments is presented in the tables that follow with additional context in the corresponding narrative below the tables. 29Table of ContentsSafety and Industrial Business (33.9% of consolidated sales):20222021Sales (millions) $11,604$11,981Sales change analysis:Organic sales1.0 %7.3 %Translation(4.2)1.9 Total sales change(3.2 %)9.2 %Business segment operating income (loss) (millions)$1,199$2,466Percent change(51.4 %)(4.7 %)Percent of sales10.3 %20.6 %Adjusted business segment operating income (millions) (non-GAAP measure)$2,613$2,715Percent change(3.7) %(2.8) %Percent of sales22.5 %22.7 %The preceding table also displays business segment operating income (loss) information adjusted for special items. For Safety and Industrial these adjustments include net costs for respirator mask/asbestos (Aearo-related and non-Aearo related) and Combat Arms Earplugs litigation matters. During the Aearo chapter 11 bankruptcy period (which began in July 2022 — see Note 16), net costs related to Combat Arms Earplugs and Aearo-respirator mask/asbestos matters are reflected as corporate special items in Corporate and Unallocated while those associated with non-Aearo respirator mask/asbestos matters continue to be reflected as special items in the Safety and Industrial business segment. Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details.Year 2022 results:Sales in Safety and Industrial were down 3.2 percent in U.S. dollars. On an organic sales basis:•Sales increased in electrical markets, abrasives, automotive aftermarket, roofing granules, closure and masking systems, and industrial adhesives and tapes and decreased in personal safety. •Growth from continued improving general industrial manufacturing activity and other end-market demand was partially offset by the disposable respirator sales decline within personal safety, which negatively impacted year-on-year organic growth by 4.5 percentage points. Business segment operating income margins decreased year-on-year due to special item costs for significant litigation primarily related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 16) resulting in a 2022 second quarter pre-tax charge of approximately $1.2 billion. Margins were also impacted by increased raw materials and logistics costs, manufacturing productivity headwinds, partially offset by selling price actions, spending discipline and restructuring actions. Adjusting for special item costs for significant litigation (non-GAAP measure), business segment operating income margins decreased year-on-year as displayed above.Year 2021 results:Sales in Safety and Industrial were up 9.2 percent in U.S. dollars. On an organic sales basis:•Sales increased in abrasives, industrial adhesives and tapes, automotive aftermarket, electrical markets, roofing granules, and closure and masking systems and decreased in personal safety. •Growth was driven by improving general industrial manufacturing activity and other end-market demand partially offset by prior-year strong pandemic-related respirator mask demand.Business segment operating income margins decreased year-on-year due to increases in raw materials, logistics and special item costs for significant litigation; lower gain on sale of properties; and manufacturing productivity impacts that were partially offset by sales growth leverage, and benefits from restructuring actions and lower related charges. Adjusting for special item costs for significant litigation (non-GAAP measure), business segment operating income margins decreased year-on-year as displayed above.30Table of ContentsTransportation and Electronics Business (26.0% of consolidated sales):20222021Sales (millions) $8,902$9,262Sales change analysis:Organic sales1.2 %8.7 %Divestitures(0.5)— Translation (4.6)1.5 Total sales change (3.9)%10.2 %Business segment operating income (millions) $1,012$1,880Percent change (46.2)%10.6 %Percent of sales 11.4 %20.3 %Adjusted business segment operating income (millions) (non-GAAP measure)$1,812$1,880Percent change(3.6) %10.6 %Percent of sales20.4 %20.3 %The preceding table also displays business segment operating income (loss) information adjusted for special items. For Transportation and Electronics these adjustments include PFAS manufacturing exit costs. Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section for additional details.Year 2022 results:Sales in Transportation and Electronics were down 3.9 percent in U.S. dollars. On an organic sales basis:•Sales increased in automotive and aerospace, commercial solutions and advanced materials, and decreased in transportation safety and electronics.•Growth was held back by weaker consumer electronics end-market demand and ongoing impacts of semiconductor supply chain constraints on automotive markets. Divestitures: •Divestiture impact relates to lost Transportation and Electronics sales year-on-year from deconsolidation of the Aearo Entities in July 2022.Business segment operating income margins decreased year-on-year due to special item charges for PFAS manufacturing exit costs related to asset impairments (discussed in Note 15) resulting in a 2022 fourth quarter pre-tax charge of $0.8 billion. Margins were also impacted by increased raw materials and logistics costs, manufacturing productivity headwinds which were further magnified by the shutdown of certain operations in Belgium and investments in auto electrification, partially offset by selling price actions, strong spending discipline and restructuring actions. Adjusting for special item PFAS manufacturing exit costs (non-GAAP measure), business segment operating income margins increased year-on-year as displayed above. Year 2021 results: Sales in Transportation and Electronics were up 10.2 percent in U.S. dollars. On an organic sales basis:•Sales increased in advanced materials, commercial solutions, automotive and aerospace, electronics and transportation safety. •Growth benefited from improving automotive-end market activity such as increases in car and light truck builds, strong demand in data center, semiconductor, interconnect and consumer electronics markets and increased advertising spend and return to workplace trends partially offset by impacts from semiconductor supply chain constraints.Business segment operating income margins increased year-on-year due to sales growth leverage, benefits from restructuring actions and lower related charges, and COVID impacts recognized on certain assets in 2020 that were partially offset by increases in raw materials and logistic costs, manufacturing productivity impacts, and increased compensation and benefit costs.31Table of ContentsHealth Care Business (24.6% of consolidated sales):20222021Sales (millions) $8,421$8,597Sales change analysis:Organic sales3.2 %10.2 %Divestitures(1.4)(2.0)Translation (3.8)1.6 Total sales change (2.0)%9.8 %Business segment operating income (millions) $1,815$2,037Percent change (10.9)%22.5 %Percent of sales 21.6 %23.7 %Year 2022 results:Sales in Health Care were down 2.0 percent in U.S. dollars. On an organic sales basis:•Sales increased in separation and purification, health information systems, food safety and medical solutions, and was flat in oral care.•Growth continues to be impacted by COVID-related trends on elective procedure volumes and ongoing inflationary pressures.Divestitures: •Divestiture impact relates to the lost sales year-on-year from the divestiture from the Food Safety Division split-off transaction and combination with Neogen completed in the third quarter of 2022.Business segment operating income margins decreased year-on-year due to increased raw materials and logistics costs along with manufacturing productivity headwinds, investments in the business and transaction-related costs associated with the announced divestiture of the food safety business (see Note 3), partially offset by sales growth (including selling price actions), strong spending discipline and restructuring actions.As discussed in Note 3, in July 2022, 3M announced its intention to spin off the Health Care business as a separate public company. 3M expects to initially retain a 19.9% ownership position in the Health Care business. Year 2021 results: Sales in Health Care were up 9.8 percent in U.S. dollars.On an organic sales basis:•Sales increased in oral care, separation and purification, food safety, health information systems and medical solutions. •Growth benefited from higher year-on-year dental procedures, continued high demand for biopharma filtration solutions for COVID-related vaccine and therapeutic development and manufacturing, rising elective procedure volumes in the first six months of 2021 and due to improving hospital information technology investments.Divestitures:•In May 2020, 3M completed the sale of substantially all of its drug delivery business.Business segment operating income margins increased year-on-year due to sales growth leverage and benefits from restructuring actions and lower related charges that were partially offset by supply chain disruptions, increases in raw materials and logistics costs, deal-related costs associated with the announced divestiture of the food safety business (see Note 3), manufacturing productivity impacts, increased compensation and benefit costs, and increased investments in growth.32Table of ContentsConsumer Business (15.5% of consolidated sales):20222021Sales (millions) $5,298$5,513Sales change analysis:Organic sales(0.9)%9.8 %Divestitures(0.4)— Translation (2.6)1.0 Total sales change (3.9)%10.8 %Business segment operating income (millions) $994$1,162Percent change (14.4)%3.8 %Percent of sales 18.8 %21.1 %Year 2022 results:Sales in Consumer were down 3.9 percent in U.S. dollars.On an organic sales basis: •Sales increased in stationery and office and home care, was flat in consumer health and safety, and decreased in home improvement.•Growth was impacted by softening trends in the Consumer retail business as consumers pulled back on discretionary spending and retailers took actions to reduce their inventories. These impacts were partially offset by demand for Scotch BlueTM painter’s tape, Scotch-BriteTM, and Post-it®-solutions. Business segment operating income margins decreased year-on-year as a result of increased raw materials, logistics and outsourced hardgoods manufacturing costs along with manufacturing productivity headwinds and investments in the business, partially offset by sales growth (including selling price actions), strong spending discipline and restructuring actions.Year 2021 results: Sales in Consumer were up 10.8 percent in U.S. dollars.On an organic sales basis: •Sales increased in stationery and office, home improvement, consumer health and safety and home care.•Growth driven by continued strength in the market with strong demand for CommandTM adhesives, FiltreteTM air quality solutions, MeguiarsTM auto care and Scotch BlueTM painter’s tape and from ongoing strength in demand for packaging and shipping products, Post-it®-solutions and Scotch® brand office tapes as the business laps last year’s COVID-related comparisons.Business segment operating income margins decreased year-on-year as a result of increases in raw materials, logistics, and outsourced hardgoods manufacturing costs, manufacturing productivity impacts, and increased compensation and benefit costs that more than offset leverage from sales growth and benefits from restructuring actions and lower related charges.PERFORMANCE BY GEOGRAPHIC AREAWhile 3M manages its businesses globally and believes its business segment results are the most relevant measure of performance, the Company also utilizes geographic area data as a secondary performance measure. Export sales are generally reported within the geographic area where the final sales to 3M customers are made. A portion of the products or components sold by 3M’s operations to its customers are exported by these customers to different geographic areas. As customers move their operations from one geographic area to another, 3M’s results will follow. Thus, net sales in a particular geographic area are not indicative of end-user consumption in that geographic area. Financial information related to 3M operations in various geographic areas is provided in Note 2 and Note 19.Refer to the “Overview” section for a summary of net sales by geographic area and business segment.33Table of ContentsGeographic Area Supplemental InformationEmployees as of December 31,Capital SpendingProperty, Plant and Equipment - net as of December 31,(Millions, except Employees)202220212022202120222021Americas54,000 56,000 $1,321 $1,046 $6,066 $5,864 Asia Pacific18,000 18,000 182 216 1,389 1,582 Europe, Middle East and Africa20,000 21,000 246 341 1,723 1,983 Total Company92,000 95,000 $1,749 $1,603 $9,178 $9,429 Employment:Employment decreased in 2022 when compared to 2021. The above table includes the impact of acquisitions, net of divestitures and other actions.Capital Spending/Net Property, Plant and Equipment:Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. 3M is increasing its investment in manufacturing and sourcing capability in order to more closely align its product capability with its sales in major geographic areas in order to best serve its customers throughout the world with proprietary, automated, efficient, safe and sustainable processes. Capital spending is discussed in more detail later in MD&A in the section entitled “Cash Flows from Investing Activities.”CRITICAL ACCOUNTING ESTIMATESInformation regarding significant accounting policies is included in Note 1 to the consolidated financial statements. As stated in Note 1, the preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions. Such estimates and assumptions are subject to inherent uncertainties which may result in actual amounts differing from these estimates.The Company considers the items below to be critical accounting estimates. Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the Company. Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee of 3M’s Board of Directors.Legal Proceedings:Assessments of lawsuits and claims can involve a series of complex judgments about future events, the outcomes of which are inherently uncertain, and can rely heavily on estimates and assumptions. The Company accrues an estimated liability for legal proceeding claims that are both probable and reasonably estimable in accordance with Accounting Standard Codification (ASC) 450, Contingencies. Please refer to the section entitled “Process for Disclosure and Recording of Liabilities Related to Legal Proceedings” (contained in “Legal Proceedings” in Note 16) for additional information about such estimates.Pension and Postretirement Obligations:The Company applies certain estimates for the discount rates and expected return on plan assets in determining its defined benefit pension and postretirement obligations and related net periodic benefit costs. The below further describes these estimates. Note 13 provides the weighted averages of these assumptions as of applicable dates and for respective periods and additional information on how the rates were determined. 34Table of ContentsDiscount rateThe defined benefit pension and postretirement obligation represents the present value of the benefits that employees are entitled to in the future for services already rendered as of the measurement date. The Company measures the present value of these future benefits by projecting benefit payment cash flows for each future period and discounting these cash flows back to the December 31 measurement date, using the yields of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Service cost and interest cost are measured separately using the spot yield curve approach applied to each corresponding obligation. Service costs are determined based on duration-specific spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying duration-specific spot rates to the year-by-year projected benefit payments. The spot yield curve approach does not affect the measurement of the total benefit obligations as the change in service and interest costs offset the actuarial gains and losses recorded in other comprehensive income. Changes in expected benefit payment and service cost cash flows, as well as ongoing changes in market activity and yields, cause these rates to be subject to uncertainty. Using this methodology, the Company determined discount rates for its plans as follow:U.S. Qualified PensionInternational Pension (weighted average)U.S. Postretirement MedicalDecember 31, 2022 Liability:Benefit obligation5.18 %4.39 %5.13 %2023 Net Periodic Benefit Cost Components:Service cost5.27 %4.06 %5.26 %Interest cost5.11 %4.39 %5.05 %Expected return on plan assetsThe expected return on plan assets for the primary U.S. qualified pension plan is based on strategic asset allocation of the plan, long-term capital market return expectations, and expected performance from active investment management. For the primary U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2023 is 7.50%, an increase from 6.00% in 2022. Return on assets assumptions for international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions. The weighted average expected return for the international pension plans is 4.61% for 2023 compared to 3.86% for 2022. Changes in asset allocation and market performance over time, among other factors, cause these estimates to be subject to uncertainty.For the year ended December 31, 2022, the Company recognized consolidated defined benefit pre-tax pension and postretirement service cost expense of $426 million and a benefit of $248 million related to all non-service pension and postretirement net benefit costs (after settlements, curtailments, special termination benefits and other) for a total consolidated defined benefit pre-tax pension and postretirement expense of $178 million, down from $206 million in 2021.In 2023, defined benefit pension and postretirement service cost expense is anticipated to total approximately $270 million while non-service pension and postretirement net benefit costs is anticipated to be a benefit of approximately $125 million, for a total consolidated defined benefit pre-tax pension and postretirement expense of approximately $145 million, a decrease of approximately $30 million compared to 2022.Assessments of Goodwill:The Company makes certain estimates and judgments in impairment assessments of goodwill. As of December 31, 2022, 3M goodwill totaled approximately $12.8 billion. Goodwill is tested for impairment annually in the fourth quarter of each year and is tested between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. If future non-cash asset impairment charges are taken, 3M would expect that only a portion of the goodwill would be impaired.35Table of ContentsImpairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but are required to be combined when reporting units within the same segment have similar economic characteristics. At 3M, reporting units correspond to a division. 3M did not combine any of its reporting units for impairment testing. An impairment loss would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit, and the loss would equal that difference. The estimated fair value of a reporting unit is determined based on a market approach using comparable company information such as EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. 3M also performs a discounted cash flow analysis for certain reporting units where the market approach indicates additional review is warranted. A discounted cash flow analysis involves key assumptions including projected sales, EBITDA margins, capital expenditures, and discount rates. Changes in reporting unit earnings, comparable company information, and expected future cash flows, as well as underlying market and overall economic conditions, among other factors, make these estimates subject to uncertainty.Based on the annual test in the fourth quarter of 2022 completed as of October 1, 2022, no goodwill impairment was indicated for any of the reporting units. As of October 1, 2022, 3M had 21 primary reporting units, with ten reporting units accounting for approximately 94 percent of the goodwill. These ten reporting units were comprised of the following divisions: Advanced Materials, Display Materials and Systems, Electronics Materials Solutions, Health Information Systems, Industrial Adhesives and Tapes, Medical Solutions, Oral Care, Personal Safety, Separation and Purification Sciences, and Transportation Safety. 3M is a highly integrated enterprise, where businesses share technology and leverage common fundamental strengths and capabilities, thus many of 3M’s businesses could not easily be sold on a stand-alone basis. 3M’s focus on research and development has resulted in a portion of 3M’s value being comprised of internally developed businesses.Following the annual impairment test, as a result of 3M's December 2022 announced commitment to a plan to exit per- and polyfluoroalkyl substance (PFAS) manufacturing as described in Notes 4 and 15, 3M tested the Advanced Materials and Electronics Materials Solutions reporting units (within the Transportation and Electronics business) for impairment resulting in a goodwill impairment charge related to the Advanced Materials reporting unit. 3M will continue to monitor its reporting units and asset groups in 2023 for any triggering events or other indicators of impairment.Assessments of Long-Lived Assets:The Company makes certain estimates and judgments in impairment assessments of long-lived assets. As discussed in Note 1, long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount exceeds the estimated undiscounted future cash flows expected to result from the use of the asset group and its eventual disposition. The amount of the impairment is based on the excess of the asset group’s carrying value over its fair value. As discussed in Notes 4 and 15, in December 2022, as a result of 3M's commitment to a plan to exit per- and polyfluoroalkyl substance (PFAS) manufacturing, 3M recorded a charge related to impairment of long-lived assets. Underlying fair values were determined primarily using discounted cash flow models. Key assumptions included projected sales, EBITDA margins, capital expenditures, and discount rates. Changes in underlying market and overall economic conditions, including changes in competitive conditions and customer preferences; operational execution of activities associated with these asset groupings; and items mentioned in Item 1A—Risk Factors with respect to 3M’s exit of PFAS manufacturing, among other factors, make these estimates subject to uncertainty. Uncertainty in Income Tax Positions:The extent of 3M’s operations involves dealing with uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. The Company follows guidance provided by ASC 740, Income Taxes, a subset of which relates to uncertainty in income taxes, to record these liabilities (refer to Note 10 for additional information). The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the tax liabilities. If the Company’s estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary.NEW ACCOUNTING PRONOUNCEMENTSInformation regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.36Table of ContentsFINANCIAL CONDITION AND LIQUIDITYThe strength and stability of 3M’s business model and strong free cash flow capability, together with proven capital markets access, provide financial flexibility to deploy capital in accordance with the Company's stated priorities and meet needs associated with contractual commitments and other obligations. Investing in 3M’s business to drive organic growth and deliver strong returns on invested capital remains the first priority for capital deployment. This includes research and development, capital expenditures, and commercialization capability. The Company also continues to actively manage its portfolio through acquisitions and divestitures to maximize value for shareholders. 3M expects to continue returning cash to shareholders through dividends and share repurchases. To fund cash needs in the United States, the Company relies on ongoing cash flow from U.S. operations, access to capital markets and repatriation of the earnings of its foreign affiliates that are not considered to be permanently reinvested. For those international earnings still considered to be reinvested indefinitely, the Company currently has no plans or intentions to repatriate these funds for U.S. operations. See Note 10 for further information on earnings considered to be reinvested indefinitely.3M maintains a strong liquidity profile. The Company’s primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 3M believes it will have continuous access to the commercial paper market. 3M’s commercial paper program permits the Company to have a maximum of $5 billion outstanding with a maximum maturity of 397 days from date of issuance. The Company had no commercial paper outstanding at December 31, 2022 and December 31, 2021.Total debt:The strength of 3M’s credit profile and significant ongoing cash flows provide 3M proven access to capital markets. Additionally, the Company’s debt maturity profile is staggered to help ensure refinancing needs in any given year are reasonable in proportion to the total portfolio. As of December 2022, 3M has a credit rating of A1, stable outlook from Moody's Investors Service, and a credit rating of A+, CreditWatch negative from S&P Global Ratings. The Company’s total debt was lower at December 31, 2022 when compared to December 31, 2021. Decreases in debt were largely due to the repayments of 500 million euros and $600 million aggregate principal amounts of fixed-rate medium-term notes in February 2022 and June 2022, respectively. For discussion of repayments of and proceeds from debt refer to the following “Cash Flows from Financing Activities” section. In July 2017, the United Kingdom’s Financial Conduct Authority announced that it would no longer require banks to submit rates for the London InterBank Offered Rate (“LIBOR”) after 2021. In November 2020, the ICE Benchmark Administration (IBA), LIBOR’s administrator, proposed extending the publication of USD LIBOR through June 2023. Subsequently, in March of 2021, IBA ceased publication of certain LIBOR rates after December 31, 2021. USD LIBOR rates that did not cease on December 31, 2021 will continue to be published through June 30, 2023. The Company has reviewed its debt securities, bank facilities, derivative instruments, and commercial contracts that may utilize LIBOR as the reference rate. Contracts will be modified to apply a new reference rate where applicable.Effective February 10, 2020, the Company updated its “well-known seasoned issuer” (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M’s previous shelf registration dated February 24, 2017. In May 2016, in connection with the WKSI shelf, 3M entered into an amended and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company’s medium-term notes program (Series F), up to the aggregate principal amount of $18 billion, which was an increase from the previous aggregate principal amount up to $9 billion of the same Series. As of December 31, 2022, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued in February 2019 and prior years is approximately $17.6 billion (utilizing the foreign exchange rates applicable at the time of issuance for the euro denominated debt). Information with respect to long-term debt issuances and maturities for the periods presented is included in Note 12.As disclosed in Note 12, 3M had debt financing facilities providing commitments for term loans and potential bridge financing aggregating $1.0 billion related to the Food Safety Division split-off transaction and combination with Neogen (discussed in Note 3). The debt commitments also included a $150 million revolving credit facility for the Food Safety business. Coincident with completion of the September 2022 split-off, the Food Safety business term loan borrowings funded the cash payment to 3M discussed in Note 3. The bridge financing component of these facilities was terminated early and not utilized. Obligations under the commitments (including the $150 million revolving credit facility) transferred with the Food Safety business and became those of Neogen.37Table of ContentsCash, cash equivalents and marketable securities:At December 31, 2022, 3M had $3.9 billion of cash, cash equivalents and marketable securities, of which approximately $2.7 billion was held by the Company’s foreign subsidiaries and approximately $1.2 billion was held in the United States. These balances are invested in bank instruments and other high-quality fixed income securities. At December 31, 2021, 3M had $4.8 billion of cash, cash equivalents and marketable securities, of which approximately $3.1 billion was held by the Company’s foreign subsidiaries and $1.7 billion was held by the United States. The decrease from December 31, 2021 primarily resulted from cash flow from operations and Food Safety transaction-related cash consideration and earlier borrowings (see Note 3) offset by ongoing dividend payments, purchases of treasury stock, capital expenditures, and the fixed-rate medium-term note maturities in 2022.Net Debt (non-GAAP measure):Net debt is not defined under U.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be important indicators of liquidity and financial position. The following table provides net debt as of December 31, 2022 and 2021.December 31,(Millions)20222021ChangeTotal debt$15,939$17,363$(1,424)Less: Cash, cash equivalents and marketable securities3,9164,792(876)Net debt (non-GAAP measure)$12,023$12,571$(548)Refer to the preceding “Total Debt” and “Cash, Cash Equivalents and Marketable Securities” sections for additional details.Balance Sheet:3M’s strong balance sheet and liquidity provide the Company with significant flexibility to fund its numerous opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual review of acquisition opportunities.The Company uses working capital measures that place emphasis and focus on certain working capital assets, such as accounts receivable and inventory activity.Working capital (non-GAAP measure):December 31,(Millions)20222021ChangeCurrent assets$14,688$15,403$(715)Less: Current liabilities9,5239,035488Working capital (non-GAAP measure)$5,165$6,368$(1,203)Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. Working capital is not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital as current assets minus current liabilities. 3M believes working capital is meaningful to investors as a measure of operational efficiency and short-term financial health. Working capital decreased $1.2 billion compared with December 31, 2021. Balance changes in current assets decreased working capital by $0.7 billion, driven largely by decreases in cash and cash equivalents. Balance changes in current liabilities decreased working capital by $0.5 billion, primarily due to increases in short-term borrowings and current-portion of long-term debt offset by decreases in accrued payroll.Inventory increased $387 million from December 31, 2021, primarily as a result of increased underlying operating activity partially offset by foreign currency translation impacts. Current portion of long-term debt increased as upcoming debt maturities now considered current were partially offset by the bond maturities in 2022, while accounts payable also increased as a result of increased sequential operating activity partially offset by foreign currency translation impacts. 38Table of ContentsCash Flows:Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on cash and cash equivalents, which are presented separately in the cash flows. Thus, the amounts presented in the following operating, investing and financing activities tables reflect changes in balances from period to period adjusted for these effects.Cash Flows from Operating Activities:Year ended December 31, (Millions)20222021Net income including noncontrolling interest$5,791 $5,929 Depreciation and amortization1,831 1,915 Long-lived and indefinite-lived asset impairment expense618 — Goodwill impairment expense271 — Company pension and postretirement contributions(158)(180)Company pension and postretirement expense178 206 Stock-based compensation expense263 274 Gain on business divestitures(2,724)— Income taxes (deferred and accrued income taxes)(710)(410)Accounts receivable(105)(122)Inventories(629)(903)Accounts payable111 518 Other — net854 227 Net cash provided by (used in) operating activities$5,591 $7,454 Cash flows from operating activities can fluctuate significantly from period to period, as working capital movements, tax timing differences and other items can significantly impact cash flows. In 2022, cash flows provided by operating activities decreased $1,863 million compared to the same period last year, with this decrease primarily due to lower net income and the cash impact from capitalization of R&D for U.S. tax purposes. The combination of accounts receivable, inventories and accounts payable decreased operating cash flow by $623 million in 2022, compared to an operating cash flow decrease of $507 million in 2021. Additional discussion on working capital changes is provided earlier in the “Financial Condition and Liquidity” section. The 2022 second quarter pre-tax charge of approximately $1.2 billion related to steps toward resolving Combat Arms Earplugs litigation (discussed in Note 16) largely impacted the 2022 net income component above, with offsets in the other-net and deferred tax elements. The 2022 non-cash impairment expenses added back to net income in arriving at net cash provided by operating activities above primarily relate to 3M's commitment to a plan to exit per- and polyfluoroalkyl substance (PFAS) manufacturing as described in Note 15. Cash Flows from Investing Activities:Year ended December 31, (Millions)20222021Purchases of property, plant and equipment (PP&E)$(1,749)$(1,603)Proceeds from sale of PP&E and other assets200 51 Purchases and proceeds from maturities and sale of marketable securities and investments, net11 204 Proceeds from sale of businesses, net of cash sold13 — Cash payment from Food Safety business split-off, net of divested cash478 — Other — net1 31 Net cash provided by (used in) investing activities$(1,046)$(1,317)Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. The Company expects 2023 capital spending to be approximately $1.5 billion to $1.8 billion as 3M continues to invest in growth, productivity and sustainability.3M records capital-related government grants earned as reductions to the cost of property, plant and equipment; and associated unpaid liabilities and grant proceeds receivable are considered non-cash changes in such balances for purposes of preparation of statement of cash flows.39Table of Contents3M invests in renewal and maintenance programs, which pertain to cost reduction, cycle time, maintaining and renewing current capacity, eliminating pollution, and compliance. Costs related to maintenance, ordinary repairs, and certain other items are expensed. 3M also invests in growth, which adds to capacity, driven by new products, both through expansion of current facilities and new facilities. Finally, 3M also invests in other initiatives, such as information technology (IT), laboratory facilities, and a continued focus on investments in sustainability.Refer to Note 3 for information on acquisitions and divestitures (including the cash payment from the Food Safety business split-off). The Company is actively considering additional acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses.Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and investments are primarily attributable to certificates of deposit/time deposits, commercial paper, and other securities, which are classified as available-for-sale. Refer to Note 11 for more details about 3M’s diversified marketable securities portfolio. Purchases of investments include additional survivor benefit insurance, plus investments in equity securities.Cash Flows from Financing Activities:Year ended December 31, (Millions)20222021Change in short-term debt — net$340 $(2)Repayment of debt (maturities greater than 90 days)(1,179)(1,144)Proceeds from debt (maturities greater than 90 days)1 1 Total cash change in debt(838)(1,145)Purchases of treasury stock(1,464)(2,199)Proceeds from issuances of treasury stock pursuant to stock option and benefit plans381 639 Dividends paid to shareholders(3,369)(3,420)Other — net(60)(20)Net cash provided by (used in) financing activities$(5,350)$(6,145)2022 Debt Activity:Total debt was approximately $15.9 billion at December 31, 2022 and $17.4 billion at December 31, 2021. Decreases in debt were largely due to the repayments of 500 million euros and $600 million aggregate principal amounts of fixed-rate medium-term notes in February 2022 and June 2022, respectively. The Company had no commercial paper outstanding at December 31, 2022 and 2021. In conjunction with the Food Safety Division split-off transaction and combination with Neogen (discussed in Note 3), the associated non-cash debt-for-debt exchange in the third quarter of 2022 reduced then-outstanding 3M commercial paper indebtedness of $350 million (borrowed earlier in the year) which became new term-debt obligations of Neogen. Net commercial paper issuances in addition to repayments and borrowings by international subsidiaries are largely reflected in “Change in short-term debt – net” in the preceding table. 3M’s primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. Refer to Note 12 for more detail regarding debt.2021 Debt Activity:Decreases in debt were largely due to the March 2021 early redemption of $450 million in debt maturing in 2022 via make-whole call offers and the November 2021 repayment of 600 million euros aggregate principal amount of Eurobonds that matured. The Company had no commercial paper outstanding at December 31, 2021 and December 31, 2020. Net commercial paper issuances in addition to repayments and borrowings by international subsidiaries are largely reflected in “Change in short-term debt – net” in the preceding table. Repurchases of Common Stock:Repurchases of common stock are made to support the Company’s stock-based employee compensation plans and for other corporate purposes. In 2022, the Company purchased $1,464 million of its own stock. For more information, refer to the table titled “Issuer Purchases of Equity Securities” in Part II, Item 5. The Company does not utilize derivative instruments linked to the Company’s stock.40Table of ContentsDividends Paid to Shareholders:3M has paid dividends since 1916. In February 2023, 3M’s Board of Directors declared a first-quarter 2023 dividend of $1.50 per share, an increase of 1 percent. This is equivalent to an annual dividend of $6.00 per share and marked the 65th consecutive year of dividend increases.Other cash flows from financing activities may include various other items, such as cash paid associated with certain derivative instruments, distributions to or sales of noncontrolling interests, changes in overdraft balances, and principal payments for finance leases. Free Cash Flow (non-GAAP measure):Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion are meaningful to investors as they are useful measures of performance and the Company uses these measures as an indication of the strength of the company and its ability to generate cash. Free cash flow and free cash flow conversion vary across quarters throughout the year. Below find a recap of free cash flow and free cash flow conversion.Refer to the preceding “Cash Flows from Operating Activities” and “Cash Flows from Investing Activities” sections for discussion of items that impacted the operating cash flow and purchases of PP&E components of the calculation of free cash flow. Refer to the preceding “Results of Operations” section for discussion of items that impacted the net income attributable to 3M component of the calculation of free cash flow conversion.Year ended December 31, (Millions)20222021Major GAAP Cash Flow CategoriesNet cash provided by (used in) operating activities$5,591$7,454Net cash provided by (used in) investing activities(1,046)(1,317)Net cash provided by (used in) financing activities(5,350)(6,145)Free Cash Flow (non-GAAP measure)Net cash provided by (used in) operating activities$5,591$7,454Purchases of property, plant and equipment(1,749)(1,603)Free cash flow3,8425,851Net income attributable to 3M$5,777$5,921Free cash flow conversion66 %99 %Material Cash Requirements from Known Contractual and Other Obligations:3M’s material cash requirements from known contractual and other obligations primarily relate to following, for which information on both a short-term and long-term basis is provided in the indicated notes to the consolidated financial statements:•Tax obligations—Refer to Note 10.•Debt—Refer to Note 12. Future cash payments for interest on long-term debt is approximately $6 billion. •Commitments and contingencies—Refer to Note 16. •Operating and finance leases—Refer to Note 17. 3M purchases the majority of its materials and services as needed, with no unconditional commitments. In limited circumstances, in the normal course of business, 3M enters into unconditional purchase obligations with various vendors that may take the form of, for example, take or pay contracts in which 3M guarantees payment to ensure availability to 3M of certain materials or services or to ensure ongoing efforts on capital projects. The Company expects to receive underlying materials or services for these purchase obligations. To the extent the limited amount of these purchase obligations fluctuates, it largely trends with normal-course changes in regular operating activities. Additionally, contractual capital commitments represent a small part of the Company’s expected capital spending.41Table of ContentsFINANCIAL INSTRUMENTSThe Company enters into foreign exchange forward contracts, options and swaps to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies and to offset, in part, the impacts of changes in value of various non-functional currency denominated items including certain intercompany financing balances. The Company manages interest rate risks using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The Company manages commodity price risks through negotiated supply contracts and price protection agreements.Refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, for further discussion of foreign exchange rates risk, interest rates risk, commodity prices risk and value at risk analysis.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.In the context of Item 7A, 3M is exposed to market risk due to the risk of loss arising from adverse changes in foreign currency exchange rates, interest rates and commodity prices. Changes in those factors could impact the Company’s results of operations and financial condition. Senior management provides oversight for risk management and derivative activities, determines certain of the Company’s financial risk policies and objectives, and provides guidelines for derivative instrument utilization. Senior management also establishes certain associated procedures relative to control and valuation, risk analysis, counterparty credit approval, and ongoing monitoring and reporting.The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency swaps, and forward and option contracts. However, the Company’s risk is limited to the fair value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties.Foreign Exchange Rates Risk:Foreign currency exchange rates and fluctuations in those rates may affect the Company’s net investment in foreign subsidiaries and may cause fluctuations in cash flows related to foreign denominated transactions. 3M is also exposed to the translation of foreign currency earnings to the U.S. dollar. The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. These transactions are designated as cash flow hedges. 3M may de-designate these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows of the forecasted transactions is 36 months. In addition, 3M enters into foreign currency contracts that are not designated in hedging relationships to offset, in part, the impacts of changes in value of various non-functional currency denominated items including certain intercompany financing balances. As circumstances warrant, the Company also uses foreign currency forward contracts and foreign currency denominated debt as hedging instruments to hedge portions of the Company’s net investments in foreign operations. The dollar equivalent gross notional amount of the Company’s foreign exchange forward and option contracts designated as either cash flow hedges or net investment hedges was $3.2 billion at December 31, 2022. The dollar equivalent gross notional amount of the Company’s foreign exchange forward and option contracts not designated as hedging instruments was $2.8 billion at December 31, 2022. In addition, as of December 31, 2022, the Company had €2.4 billion in principal amount of foreign currency denominated debt designated as non-derivative hedging instruments in certain net investment hedges as discussed in Note 14 in the “Net Investment Hedges” section.Interest Rates Risk:The Company may be impacted by interest rate volatility with respect to existing debt and future debt issuances. 3M manages interest rate risk and expense using a mix of fixed and floating rate debt. In addition, the Company may enter into interest rate swaps that are designated and qualify as fair value hedges. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The dollar equivalent (based on inception date foreign currency exchange rates) gross notional amount of the Company’s interest rate swaps at December 31, 2022 was $800 million. Additional details about 3M’s long-term debt can be found in Note 12, including references to information regarding derivatives and/or hedging instruments, further discussed in Note 14, associated with the Company’s long-term debt.Commodity Prices Risk:The Company manages commodity price risks through negotiated supply contracts and price protection agreements.42Table of ContentsValue At Risk:The value at risk analysis is performed annually to assess the Company’s sensitivity to changes in currency rates, interest rates, and commodity prices. A Monte Carlo simulation technique was used to test the impact on after-tax earnings related to debt instruments, interest rate derivatives and underlying foreign exchange and commodity exposures outstanding at December 31, 2022. The model (third-party bank dataset) used a 95 percent confidence level over a 12-month time horizon. This model does not purport to represent what actually will be experienced by the Company. The following table summarizes the possible adverse and positive impacts to after-tax earnings related to these exposures.Adverse impact on after-tax earningsPositive impact on after-tax earnings(Millions)2022202120222021Foreign exchange rates$(315)$(140)$314 $147 Interest rates(18)(2)18 2 Commodity prices(5)(21)7 14 An analysis of the global exposures related to purchased components and materials is performed at each year-end. A one percent price change would result in a pre-tax cost or savings of approximately $85 million per year. The global energy exposure is such that a ten percent price change would result in a pre-tax cost or savings of approximately $45 million per year. Global energy exposure includes energy costs used in 3M production and other facilities, primarily electricity and natural gas.

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto. Discussion regarding our financial condition and results of operations for fiscal 2021 as compared to fiscal 2020 is included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 3, 2021, filed with the SEC on January 21, 2022.CRITICAL ACCOUNTING POLICIES AND ESTIMATESIn preparing our Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We evaluate our assumptions, judgments and estimates on a regular basis. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, business combinations and income taxes have the greatest potential impact on our Consolidated Financial Statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates, and consequently, we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.Revenue Recognition Our contracts with customers may include multiple goods and services. For example, some of our offerings include both on-premise and/or on-device software licenses and cloud services. Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. We have concluded that the on-premise/on-device software licenses and cloud services provided in our Creative Cloud and Document Cloud subscription offerings are not distinct from each other such that revenue from each offering should be recognized ratably over the subscription period for which the cloud services are provided. In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or document workflow solution that operates seamlessly across multiple devices and teams. We fulfill this promise by providing access to a solution that integrates cloud-based and on-premise/on-device features that, together through their integration, provide functionalities, utility and workflow efficiencies that could not be obtained from either the on-premise/on-device software or cloud services on their own.Cloud-based features that are integral to our Creative Cloud and Document Cloud offerings and that work together with the on-premise/on-device software include, but are not limited to: Creative Cloud Libraries, which enable customers to access their work, settings, preferences and other assets seamlessly across desktop and mobile devices and collaborate across teams in real time; shared reviews which enable simultaneous editing and commenting of digital assets across desktop, mobile and web; automatic cloud rendering of a design which enables it to be worked on in multiple mediums; and Sensei, Adobe’s cloud-hosted artificial intelligence and machine learning framework, which enables features such as automated photo-editing, photograph content-awareness, natural language processing, optical character recognition and automated document tagging.Business CombinationsWe allocate the purchase price of acquired companies to tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:•future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;•expected costs to develop acquired technologies and patents internally into commercially viable products;36Table of Contents•historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;•the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio;•the expected use of the acquired assets; and •discount rates.In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue obligations assumed. The estimated fair value of these obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.Accounting for Income TaxesWe use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Significant judgment is required in determining our current provision for income taxes and deferred tax assets or liabilities. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.Our assumptions, judgments and estimates relative to the current provision for income taxes take into account our interpretation and application of current tax laws and possible outcomes of current and future examinations conducted by domestic and foreign tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and associated reserves. To the extent that the final determination of any of these examinations is different from the amounts recorded, such differences will affect the provision for income taxes and the effective tax rate in the period in which such determination is made.Recent Accounting Pronouncements See Note 1 of our Notes to Consolidated Financial Statements for information regarding recent accounting pronouncements that are of significance, or potential significance to us. ACQUISITIONS In the fourth quarter of fiscal 2021, we completed the acquisition of Frame.io, a privately held company that provides a cloud-based video collaboration platform, for approximately $1.24 billion and we began integrating Frame.io into our Digital Media reportable segment. In the first quarter of fiscal 2021, we completed the acquisition of Workfront, a privately held company that provides a workflow platform, for approximately $1.52 billion in cash consideration and we began integrating Workfront into our Digital Experience reportable segment. See Note 3 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions.RESULTS OF OPERATIONSOverview of 2022For our fiscal 2022, we experienced strong demand across our Digital Media and Digital Experience offerings, driven by the ongoing shift towards a digital-first world. As we execute on our long-term growth initiatives, we have continued to experience growth in software-based subscription revenue across our portfolio of offerings.Digital MediaIn our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich content and immersive 3D experiences. Starting in December 2021, Creative Cloud includes Adobe Express, a web and mobile application designed to enable a broad spectrum of users, including novice content creators, communicators and creative professionals, to create, edit and customize content quickly and easily with content-first, task-based solutions. Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and 37Table of Contentssyncing of files across users’ devices, machine learning and artificial intelligence, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers.We offer Creative Cloud for individuals, students, teams and enterprises. We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by attracting new users with new features and products like Adobe Express that make creative tools accessible to first-time creators and communicators, and delivering new features and technologies to existing customers with our latest releases such as share for review. We have also built out a marketplace for Creative Cloud subscribers to enable the delivery and purchase of stock content in our Adobe Stock service. Overall, our strategy with Creative Cloud is designed to enable us to increase our revenue with users, attract more new customers, and grow our recurring and predictable revenue stream that is recognized ratably.We continue to implement strategies that are designed to accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new desktop, web and mobile applications, as well as targeted promotions and offers that attract past customers and potential users to experience and ultimately subscribe to Creative Cloud. Because of the shift towards Creative Cloud subscriptions and Enterprise Term License Agreements (“ETLAs”), revenue from perpetual licensing of our Creative products has been immaterial to our business.We are also a market leader with our Document Cloud offerings built around our Adobe Acrobat family of products, with a set of integrated mobile apps and cloud-based document services which enable users to create, review, approve, sign and track documents regardless of platform or application source type. Document Cloud, which enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat, Adobe Acrobat Sign and Adobe Scan. Adobe Acrobat is offered both through subscription and perpetual licenses.As part of our Creative Cloud and Document Cloud strategies, we utilize a data-driven operating model (“DDOM”) and our Adobe Experience Cloud solutions to raise awareness of our products, drive new customer acquisition, engagement and retention, and optimize customer journeys, and it continues to contribute strong growth in the business.Annualized Recurring Revenue (“ARR”) is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment. ARR should be viewed independently of revenue, deferred revenue and remaining performance obligations as ARR is a performance metric and is not intended to be combined with any of these items. We adjust our reported ARR on an annual basis to reflect any exchange rate changes. Our reported ARR results in the current fiscal year are based on currency rates set at the beginning of the year and held constant throughout the year for measurement purposes. We calculate ARR as follows:Creative ARRAnnual Value of Creative Cloud Subscriptions and Services+ Annual Creative ETLA Contract Value Document Cloud ARRAnnual Value of Document Cloud Subscriptions and Services +Annual Document Cloud ETLA Contract ValueDigital Media ARRCreative ARR+ Document Cloud ARRIn March 2022, in response to the Russia-Ukraine war, we announced a halt of all new sales of our products and services in Russia and Belarus. As a result, we reduced our Digital Media ARR balance by $75 million, which represented our Digital Media ARR for existing business in Russia and Belarus. While we continued to provide Digital Media services in Ukraine, we also reduced our Digital Media ARR balance by an additional $12 million, which represented our Digital Media business in Ukraine. This resulted in a total ARR reduction of $87 million taken at the beginning of the second quarter of fiscal 2022.Creative ARR exiting fiscal 2022 was $11.60 billion, up from $10.22 billion at the end of fiscal 2021. Document Cloud ARR exiting fiscal 2022 was $2.37 billion, up from $1.93 billion at the end of fiscal 2021. Total Digital Media ARR grew to $13.97 billion at the end of fiscal 2022, up from $12.15 billion at the end of fiscal 2021. Revaluing our ending ARR for fiscal 2022 using currency rates at the beginning of fiscal 2023, our Digital Media ARR at the end of fiscal 2022 would be $13.26 billion or approximately $712 million lower than the ARR reported above.38Table of ContentsOur success in driving growth in ARR has positively affected our revenue growth. Creative revenue in fiscal 2022 was $10.46 billion, up from $9.55 billion in fiscal 2021 and representing 10% year-over-year growth. Document Cloud revenue in fiscal 2022 was $2.38 billion, up from $1.97 billion in fiscal 2021 and representing 21% year-over-year growth. Total Digital Media segment revenue grew to $12.84 billion in fiscal 2022, up from $11.52 billion in fiscal 2021 and representing 11% year-over-year growth driven by strong net new user growth.Digital ExperienceWe are a market leader in the fast-growing category addressed by our Digital Experience segment. The Adobe Experience Cloud applications, services and platform are designed to manage customer journeys, enable personalized experiences at scale and deliver intelligence for businesses of any size in any industry. Our differentiation and competitive advantage are strengthened by our ability to use the Adobe Experience Platform to integrate our comprehensive set of solutions.Adobe Experience Cloud delivers solutions for our customers across the following strategic growth pillars:•Data insights and audiences. Our solutions, including Adobe Analytics, Adobe Experience Platform, Customer Journey Analytics, Adobe Audience Manager and our Real-time Customer Data Platform, deliver robust customer profiles and AI-powered analytics across the customer journey to provide timely, relevant experiences across platforms.•Content and commerce. Our solutions help customers manage, deliver and optimize content delivery through Adobe Experience Manager, and enable shopping experiences that scale from mid-market to enterprise businesses with Adobe Commerce.•Customer journeys. Our solutions help businesses manage, test, target, personalize and orchestrate campaigns and customer journeys across B2E use cases, including through Marketo Engage, Adobe Campaign, Adobe Target and Journey Optimizer. •Marketing workflow. We offer Adobe Workfront, a work management platform directed toward marketers to orchestrate campaign workflows.In addition to chief marketing officers, chief revenue officers and digital marketers, users of our Digital Experience solutions include advertisers, campaign managers, publishers, data analysts, content managers, social marketers, marketing executives and information management and technology executives. These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings. By combining the creativity of our Digital Media business with the science of our Digital Experience business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.We utilize a direct sales force to market and license our Digital Experience solutions, as well as an extensive ecosystem of partners, including marketing agencies, systems integrators and independent software vendors that help license and deploy our solutions to their customers. We have made significant investments to broaden the scale and size of all of these routes to market, and our recent financial results reflect the success of these investments. Digital Experience revenue was $4.42 billion in fiscal 2022, up from $3.87 billion in fiscal 2021 which represents 14% year-over-year growth. Driving this increase was the increase in subscription revenue across our offerings which grew to $3.88 billion in fiscal 2022 from $3.38 billion in fiscal 2021, representing 15% year-over-year growth.Macroeconomic ConditionsAs a corporation with an extensive global footprint, we are subject to risks and exposures from foreign currency exchange rate fluctuations caused by significant events with macroeconomic impacts, including, but not limited to, the Russia-Ukraine war, COVID-19 pandemic and actions taken by central banks to counter inflation. We continuously monitor the direct and indirect impacts of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. Foreign currency exchange rate fluctuations have negatively impacted our revenue and earnings during fiscal 2022, and are expected to continue to negatively impact our financial results in fiscal 2023.While our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, remain uncertain. See the section titled “Risk Factors” in Part I, Item 1A of this report for further discussion of the possible impact of these macroeconomic issues on our business.39Table of ContentsFinancial Performance Summary for Fiscal 2022•Total Digital Media ARR of approximately $13.97 billion as of December 2, 2022 increased by $1.82 billion, or 15%, from $12.15 billion as of December 3, 2021. The change in our Digital Media ARR was primarily due to new user adoption of our Creative Cloud and Document Cloud offerings, partially offset by an $87 million ARR reduction taken in March 2022 in response to the Russia-Ukraine war. •Creative revenue of $10.46 billion increased by $913 million, or 10%, during fiscal 2022, from $9.55 billion in fiscal 2021. Document Cloud revenue of $2.38 billion increased by $409 million, or 21%, during fiscal 2022, from $1.97 billion in fiscal 2021. The increases were primarily due to subscription revenue growth associated with our Creative Cloud and Document Cloud offerings.•Digital Experience revenue of $4.42 billion increased by $555 million, or 14%, during fiscal 2022, from $3.87 billion in fiscal 2021. The increase was primarily due to subscription revenue growth across our offerings.•Remaining performance obligations of $15.19 billion as of December 2, 2022 increased by $1.20 billion, or 9%, from $13.99 billion as of December 3, 2021, primarily due to new contracts and renewals for our Digital Media and Digital Experience offerings, partially offset by the impact of foreign currency exchange rate fluctuations. •Cost of revenue of $2.17 billion increased by $300 million, or 16%, during fiscal 2022, from $1.87 billion in fiscal 2021 primarily due to increases in hosting services and data center costs, as well as increases in base and incentive compensation and related benefits costs.•Operating expenses of $9.34 billion increased by $1.23 billion, or 15%, during fiscal 2022, from $8.12 billion in fiscal 2021 primarily due to increases in base and incentive compensation and related benefits costs, as well as increased marketing spend.•Cash flows from operations of $7.84 billion during fiscal 2022 increased by $608 million, or 8%, from $7.23 billion in fiscal 2021 primarily due to higher net income after adjustment for non-cash items.RevenueRevenue for fiscal 2021 benefited from an extra week in the first quarter of fiscal 2021 due to our 52/53 week financial calendar whereby fiscal 2021 was a 53-week year compared with fiscal 2022 and 2020 which were 52-week years.(dollars in millions)202220212020% Change2022-2021Subscription$16,388 $14,573 $11,626 12 %Percentage of total revenue93 %92 %90 % Product532 555 507 (4)%Percentage of total revenue3 %4 %4 % Services and other686 657 735 4 %Percentage of total revenue4 %4 %6 % Total revenue$17,606 $15,785 $12,868 12 %SubscriptionOur subscription revenue is comprised primarily of fees we charge for our subscription and hosted service offerings, and related support, including Creative Cloud and certain of our Adobe Experience Cloud and Document Cloud services. We primarily recognize subscription revenue ratably over the term of agreements with our customers, beginning with commencement of service. Subscription revenue related to certain offerings, where fees are based on a number of transactions and invoicing is aligned to the pattern of performance, customer benefit and consumption, are recognized on a usage basis.40Table of ContentsWe have the following reportable segments: Digital Media, Digital Experience, and Publishing and Advertising. Subscription revenue by reportable segment for fiscal 2022, 2021 and 2020 is as follows:(dollars in millions)202220212020% Change2022-2021Digital Media$12,385 $11,048 $8,813 12 %Digital Experience3,880 3,379 2,660 15 %Publishing and Advertising123 146 153 (16)%Total subscription revenue$16,388 $14,573 $11,626 12 %ProductOur product revenue is comprised primarily of fees related to licenses for on-premise software purchased on a perpetual basis, for a fixed period of time or based on usage for certain of our OEM and royalty agreements. We primarily recognize product revenue at the point in time the software is available to the customer, provided all other revenue recognition criteria are met.Services and OtherOur services and other revenue is comprised primarily of fees related to consulting, training, maintenance and support for certain on-premise licenses that are recognized at a point in time and our advertising offerings. We typically sell our consulting contracts on a time-and-materials or fixed-fee basis. These revenues are recognized as the services are performed for time-and-materials contracts and on a relative performance basis for fixed-fee contracts. Training revenues are recognized as the services are performed. Our maintenance and support offerings, which entitle customers, partners and developers to receive desktop product upgrades and enhancements or technical support, depending on the offering, are generally recognized ratably over the term of the arrangement. Transaction-based advertising revenue is recognized on a usage basis as we satisfy the performance obligations to our customers.Segments In fiscal 2022, we categorized our products into the following reportable segments:•Digital Media—Our Digital Media segment provides products, services and solutions that enable individuals, teams and enterprises to create, publish and promote their content anywhere and accelerate their productivity by modernizing how they view, share, engage with and collaborate on documents and creative content. Our customers include creative professionals, including photographers, video editors, graphic and experience designers and game developers, communicators, including content creators, students, marketers and knowledge workers, and consumers. •Digital Experience—Our Digital Experience segment provides an integrated platform and set of applications and services that enable brands and businesses to create, manage, execute, measure, monetize and optimize customer experiences that span from analytics to commerce. Our customers include marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers and executives across the C-suite. •Publishing and Advertising—Our Publishing and Advertising segment contains legacy products and services that address diverse market opportunities, including eLearning solutions, technical document publishing, web conferencing, document and forms platform, web application development, high-end printing and our Adobe Advertising Cloud offerings.Segment Information(dollars in millions)202220212020% Change2022-2021Digital Media$12,842 $11,520 $9,233 11 %Percentage of total revenue73 %73 %72 % Digital Experience4,422 3,867 3,125 14 %Percentage of total revenue25 %24 %24 % Publishing and Advertising342 398 510 (14)%Percentage of total revenue2 %3 %4 % Total revenue$17,606 $15,785 $12,868 12 %41Table of ContentsDigital MediaRevenue by major offerings in our Digital Media reportable segment for fiscal 2022, 2021 and 2020 were as follows:(dollars in millions)202220212020% Change2022-2021Creative Cloud$10,459 $9,546 $7,736 10 %Document Cloud2,383 1,974 1,497 21 %Total Digital Media revenue$12,842 $11,520 $9,233 11 %Revenue from Digital Media increased $1.32 billion during fiscal 2022 as compared to fiscal 2021, driven by increases in revenue associated with our Creative and Document Cloud subscription offerings due to continued demand amid an increasingly digital environment and strong customer acquisition and engagement, partially offset by the impact of foreign currency exchange rate fluctuations. Digital ExperienceRevenue from Digital Experience increased $555 million during fiscal 2022 as compared to fiscal 2021 primarily due to net new additions across our subscription offerings, partially offset by the impact of foreign currency exchange rate fluctuations. Geographical Information(dollars in millions)202220212020% Change2022-2021Americas$10,251 $8,996 $7,454 14 %Percentage of total revenue58 %57 %58 % EMEA4,593 4,252 3,400 8 %Percentage of total revenue26 %27 %26 % APAC2,762 2,537 2,014 9 %Percentage of total revenue16 %16 %16 % Total revenue$17,606 $15,785 $12,868 12 %Overall revenue during fiscal 2022 increased in all geographic regions as compared to fiscal 2021 primarily due to increases in Digital Media revenue and, to a lesser extent, increases in Digital Experience revenue. Within each geographic region, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above. Included in the overall change in revenue for fiscal 2022 as compared to fiscal 2021 were impacts associated with foreign currency which were mitigated in part by our foreign currency hedging program. During fiscal 2022, the U.S. Dollar primarily strengthened against EMEA and APAC foreign currencies as compared to fiscal 2021, which decreased revenue in U.S. Dollar equivalents by approximately $486 million. During fiscal 2022, the foreign currency impacts to revenue were offset in part by net hedging gains from our cash flow hedging program of $176 million.See Note 2 of our Notes to Consolidated Financial Statements for additional details of revenue by geography.Cost of Revenue(dollars in millions)202220212020% Change2022-2021Subscription$1,646 $1,374 $1,108 20 %Percentage of total revenue9 %9 %9 % Product35 41 36 (15)%Percentage of total revenue*** Services and other484 450 578 8 %Percentage of total revenue3 %3 %4 % Total cost of revenue$2,165 $1,865 $1,722 16 %_________________________________________(*) Percentage is less than 1%42Table of ContentsSubscriptionCost of subscription revenue consists of third-party hosting services and data center costs, including expenses related to operating our network infrastructure. Cost of subscription revenue also includes compensation costs associated with network operations, implementation, account management and technical support personnel, royalty fees, software costs and amortization of certain intangible assets.Cost of subscription revenue increased due to the following: Components of% Change2022-2021Hosting services and data center costs9 %Amortization of intangibles4 Base compensation and related benefits3 Incentive compensation, cash and stock-based1 Royalty costs2 Various individually insignificant items1 Total change20 %Product Cost of product revenue is primarily comprised of third-party royalties, localization costs and the costs associated with the manufacturing of our products.Services and OtherCost of services and other revenue is primarily comprised of compensation and contracted costs incurred to provide consulting services, training and product support, and hosting services and data center costs. Cost of services and other also includes media costs related to impressions purchased from third-party ad inventory sources for our transaction-based Adobe Advertising Cloud offerings. Cost of services and other revenue increased during fiscal 2022 as compared to fiscal 2021 primarily due to increases in compensation costs and professional fees.Operating Expenses(dollars in millions)202220212020% Change2022-2021Research and development$2,987 $2,540 $2,188 18 %Percentage of total revenue17 %16 %17 % Sales and marketing4,968 4,321 3,591 15 %Percentage of total revenue28 %27 %28 % General and administrative1,219 1,085 968 12 %Percentage of total revenue7 %7 %8 % Amortization of intangibles169 172 162 (2)%Percentage of total revenue1 %1 %1 % Total operating expenses$9,343 $8,118 $6,909 15 %Research and Development Research and development expenses consist primarily of compensation and contracted costs associated with software development, third-party hosting services and data center costs, related facilities costs and expenses associated with computer equipment and software used in development activities.43Table of ContentsResearch and development expenses increased due to the following: Components of% Change2022-2021Incentive compensation, cash and stock-based7 %Base compensation and related benefits7 Professional and consulting fees2 Various individually insignificant items2 Total change18 %We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced offerings and solutions. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our subscription and service offerings, applications and tools.Sales and MarketingSales and marketing expenses consist primarily of compensation costs, amortization of contract acquisition costs, including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows and events, public relations and other market development programs.Sales and marketing expenses increased due to the following: Components of% Change2022-2021Marketing spend related to campaigns, events and overall marketing efforts5 %Base compensation and related benefits4 Incentive compensation, cash and stock-based3 Various individually insignificant items3 Total change15 %General and AdministrativeGeneral and administrative expenses consist primarily of compensation and contracted costs, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.General and administrative expenses increased due to the following: Components of% Change2022-2021Professional and consulting fees4 %Incentive compensation, cash and stock-based4 Base compensation and related benefits3 Charitable contributions2 Charges related to cancellation of corporate events, net of recoveries(2)Various individually insignificant items1 Total change12 %Professional and consulting fees increased from fiscal 2022 as compared to fiscal 2021 primarily due to incurred transaction costs associated with our planned acquisition of Figma. 44Table of ContentsNon-Operating Income (Expense), Net(dollars in millions)202220212020% Change2022-2021Interest expense$(112)$(113)$(116)(1)%Percentage of total revenue(1)%(1)%(1)%Investment gains (losses), net(19)16 13 **Percentage of total revenue*** Other income (expense), net41 — 42 **Percentage of total revenue***Total non-operating income (expense), net$(90)$(97)$(61)(7)%_________________________________________(*) Percentage is less than 1%.(**) Percentage is not meaningful.Interest ExpenseInterest expense represents interest associated with our debt instruments. Interest on our senior notes is payable semi-annually, in arrears, on February 1 and August 1.Investment Gains (Losses), NetInvestment gains (losses), net consists principally of unrealized holding gains and losses associated with our deferred compensation plan assets, and gains and losses associated with our direct and indirect investments in privately held companies.Other Income (Expense), Net Other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Other income (expense), net also includes realized gains and losses on fixed income investments and foreign exchange gains and losses.Other income (expense), increased during fiscal 2022 primarily due to increases in interest income driven by higher average interest rates.Provision for (Benefit from) Income Taxes (dollars in millions)202220212020% Change2022-2021Provision for (benefit from) income taxes$1,252 $883 $(1,084)42 %Percentage of total revenue7 %6 %(8)% Effective tax rate21 %15 %(26)% Our effective tax rate increased by approximately six percentage points during fiscal 2022 as compared to fiscal 2021, primarily due to lower tax benefits related to stock-based compensation in fiscal 2022.Our effective tax rate for fiscal 2022 was the same as the U.S. federal statutory tax rate primarily due to the impact of the U.S. federal research tax credit, largely offset by state taxes.During fiscal 2020, we completed intra-entity transfers of certain IP rights to our Irish subsidiary in order to better align the ownership of these rights with how our business operates. The transfers did not result in taxable gains; however, our Irish subsidiary recognized deferred tax assets for the book and tax basis difference of the transferred IP rights. As a result of these transactions, we recorded deferred tax assets, net of valuation allowance, and related tax benefits totaling $1.35 billion, based on the fair value of the IP rights transferred. The tax-deductible amortization related to the transferred IP rights is recognized over the period of economic benefit.We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized based on evaluation of all available positive and negative evidence. On the basis of this evaluation, we continue to maintain a valuation allowance to reduce our deferred tax assets to the amount realizable. The total valuation allowance was $402 million as of December 2, 2022, primarily related to certain state credits. 45Table of ContentsWe are a United States-based multinational company subject to tax in multiple domestic and foreign tax jurisdictions. The current U.S. tax law subjects the earnings of certain foreign subsidiaries to U.S. tax and generally allows an exemption from taxation for distributions from foreign subsidiaries.In the current global tax policy environment, the domestic and foreign governing bodies continue to consider, and in some cases introduce, changes in regulations applicable to corporate multinationals such as Adobe. As regulations are issued, we account for finalized regulations in the period of enactment. See Note 10 of our Notes to Consolidated Financial Statements for further information regarding our provision for (benefit from) income taxes. Accounting for Uncertainty in Income TaxesThe gross liabilities for unrecognized tax benefits excluding interest and penalties were $321 million, $289 million and $201 million for fiscal 2022, 2021 and 2020, respectively. If the total unrecognized tax benefits as of December 2, 2022, December 3, 2021 and November 27, 2020 were recognized, $203 million, $199 million and $136 million would decrease the respective effective tax rates.As of December 2, 2022 and December 3, 2021, the combined amounts of accrued interest and penalties related to tax positions taken on our tax returns were approximately $17 million and $22 million, respectively. These amounts were included in long-term income taxes payable in their respective years.The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of our tax assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Although the timing of resolution, settlement and closing of audits is not certain, it is reasonably possible that the underlying unrecognized tax benefits may decrease by up to $25 million over the next 12 months.Our future effective tax rates may be materially affected by changes in the tax rates in jurisdictions where our income is earned, changes in jurisdictions in which our profits are determined to be earned and taxed, changes in the valuation of our deferred tax assets and liabilities, changes in or interpretation of tax rules and regulations in the jurisdictions in which we do business, or unexpected changes in business and market conditions that could reduce certain tax benefits.In addition, the United States and other countries and jurisdictions in which we conduct business, including those covered by governing bodies that enact tax laws applicable to us, such as the European Commission of the European Union, could make changes to relevant tax, accounting or other laws and interpretations thereof that have a material impact to us. These countries, governmental bodies and intergovernmental economic organizations such as the Organization for Economic Cooperation and Development, have or could make unprecedented assertions about how taxation is determined and, in some cases, have proposed or enacted new laws that are contrary to the way in which rules and regulations have historically been interpreted and applied. In the current global tax policy environment, any changes in laws, regulations and interpretations could adversely affect our effective tax rates, cause us to respond by making changes to our business structure, or result in other costs to us which could adversely affect our operations and financial results.Moreover, we are subject to the examination of our income tax returns by domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from these examinations. Our policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. We believe our tax estimates to be reasonable; however, we cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our financial position and results of operations.46Table of Contents LIQUIDITY AND CAPITAL RESOURCESCash Flows This data should be read in conjunction with our Consolidated Statements of Cash Flows.As of(in millions)December 2, 2022December 3, 2021Cash and cash equivalents$4,236 $3,844 Short-term investments$1,860 $1,954 Working capital$868 $1,737 Stockholders’ equity$14,051 $14,797 A summary of our cash flows for fiscal 2022, 2021 and 2020 is as follows:(in millions)202220212020Net cash provided by operating activities$7,838 $7,230 $5,727 Net cash used for investing activities(570)(3,537)(414)Net cash used for financing activities(6,825)(4,301)(3,488)Effect of foreign currency exchange rates on cash and cash equivalents(51)(26)3 Net change in cash and cash equivalents$392 $(634)$1,828 Our primary source of cash is receipts from revenue. Our primary uses of cash are our stock repurchase program as described below and general business expenses including payroll, marketing and third-party hosting services. Other sources of cash include proceeds from participation in the employee stock purchase plan. Other uses of cash include business acquisitions, purchases of property and equipment and payments for taxes related to net share settlement of equity awards.Cash Flows from Operating ActivitiesFor fiscal 2022, net cash provided by operating activities of $7.84 billion was primarily comprised of net income adjusted for the net effect of non-cash items. The primary working capital sources of cash were increases in deferred revenue driven by Digital Media and Digital Experience offerings, partially offset by increases in trade receivables attributable to the timing of billings.Cash Flows from Investing ActivitiesFor fiscal 2022, net cash used for investing activities of $570 million was primarily due to ongoing capital expenditures and business acquisitions. See Note 3 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions.Cash Flows from Financing ActivitiesFor fiscal 2022, net cash used for financing activities of $6.83 billion was primarily due to payments for our common stock repurchases and taxes paid related to the net share settlement of equity awards, offset in part by proceeds from re-issuance of treasury stock mainly for our employee stock purchase plan. See the section titled “Stock Repurchase Program” below.Liquidity and Capital Resources ConsiderationsOur existing cash, cash equivalents and investment balances may fluctuate during fiscal 2023 due to changes in our planned cash outlay. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, risks detailed in the section titled “Risk Factors” in Part I, Item 1A of this report. Based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital, operating resource expenditure and capital expenditure requirements for the next twelve months.Our cash equivalent and short-term investment portfolio as of December 2, 2022 consisted of asset-backed securities, corporate debt securities, foreign government securities, money market funds, municipal securities, time deposits, U.S. agency 47Table of Contentssecurities and U.S. Treasury securities. We use professional investment management firms to manage a large portion of our invested cash.We expect to continue our investing activities, including short-term and long-term investments, purchases of computer systems for research and development, sales and marketing, product support and administrative staff, and facilities expansion. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business.On September 15, 2022, we entered into a definitive agreement under which we intend to acquire Figma, Inc. (“Figma”) for approximately $20 billion, comprised of approximately half cash and half stock, subject to customary purchase price adjustments. Approximately 6 million additional restricted stock units will be granted to Figma’s Chief Executive Officer and employees that will vest over four years subsequent to closing. The transaction is subject to regulatory approvals and customary closing conditions, and is expected to close in 2023. We will be required to pay Figma a reverse termination fee of $1 billion if the transaction fails to receive regulatory clearance, assuming all other closing conditions have been satisfied or waived, or if it fails to close within 18 months from September 15, 2022. We expect to finance the cash portion of the consideration using cash on hand and short-term debt instruments. While the transaction is pending, at a minimum we expect to maintain share repurchases sufficient to offset the dilution of equity issuances to our employees. Revolving Credit AgreementDuring 2022, we entered into a credit agreement (the “Revolving Credit Agreement”) with a syndicate of lenders, providing for a five-year $1.5 billion senior unsecured revolving credit facility through June 30, 2027, which replaces our previous five-year $1 billion senior unsecured revolving credit agreement dated as of October 17, 2018. Subject to the agreement of lenders, we may obtain up to an additional $500 million in commitments, for a maximum aggregate commitment of $2 billion. As of December 2, 2022, there were no outstanding borrowings under this credit agreement and the entire $1.5 billion credit line remains available for borrowing. Under the terms of our Revolving Credit Agreement, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists. We do not anticipate paying any cash dividends in the foreseeable future.Senior NotesWe have $4.15 billion senior notes outstanding, which rank equally with our other unsecured and unsubordinated indebtedness. As of December 2, 2022, the carrying value of our senior notes was $4.13 billion and our maximum commitment for interest payments was $416 million for the remaining duration of our outstanding senior notes. Interest is payable semi-annually, in arrears on February 1 and August 1. Our senior notes do not contain any financial covenants. See Note 17 of our Notes to Consolidated Financial Statements for further details regarding our debt.During the first quarter of fiscal 2022, we reclassified the senior notes due February 1, 2023 as current debt in our Consolidated Balance Sheets. As of December 2, 2022, the carrying value of our current debt was $500 million, net of the related discount and issuance costs. We intend to repay the current portion of our debt on or before the due date.Contractual ObligationsOur purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 2, 2022, the value of our non-cancellable unconditional purchase obligations was $6.09 billion, primarily relating to contracts with vendors for third-party hosting and data center services. See Note 16 of our Notes to Consolidated Financial Statements for additional information regarding our purchase obligations.We lease certain facilities and data centers under non-cancellable operating lease arrangements that expire at various dates through 2032. As of December 2, 2022, the value of our obligations under operating leases was $548 million. See Note 18 of our Notes to Consolidated Financial Statements for additional information regarding our lease obligations.OtherOur transition tax liability related to historical undistributed foreign earnings, which was accrued as a result of the U.S. Tax Act, was approximately $313 million as of December 2, 2022 and is payable in installments through fiscal 2026. As we repatriate foreign earnings for use in the United States, the distributions will generally be exempt from federal income taxes. In addition, the U.S. Tax Act requires companies to capitalize and amortize research and development expenditures starting fiscal 2023. If not modified, we anticipate an adverse impact to our effective rates for income taxes paid, which will be partially offset by the increase in the foreign-derived intangible income deduction, for fiscal 2023 and beyond.48Table of ContentsThe Inflation Reduction Act enacted on August 16, 2022 introduced new provisions including a corporate book minimum tax effective for us beginning in fiscal 2024 and an excise tax on net stock repurchases made after December 31, 2022. We continue to monitor developments and evaluate impacts, if any, of these provisions to our results of operations and cash flows.Stock Repurchase ProgramTo facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase our shares in the open market or enter into structured repurchase agreements with third parties. In December 2020, our Board of Directors granted authority to repurchase up to $15 billion in our common stock through the end of fiscal 2024.During fiscal 2022, we repurchased a total of 15.7 million shares, including approximately 10.4 million shares at an average price of $375.03 through structured repurchase agreements entered into during fiscal 2021 and fiscal 2022, as well as 5.3 million shares at an average purchase price of $451.55 through an accelerated share repurchase agreement entered into during the first quarter of fiscal 2022.During the fourth quarter of fiscal 2022, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $1.75 billion. As of December 2, 2022, $583 million of prepayment remained under our outstanding structured stock repurchase agreement.Subsequent to December 2, 2022, as part of the December 2020 stock repurchase authority, we entered into an accelerated share repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $1.4 billion and received an initial delivery of 3.2 million shares, which represents approximately 75% of our prepayment. Upon completion of the $1.4 billion accelerated share repurchase agreement, $5.15 billion remains under our December 2020 authority.See section titled “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of this report for stock repurchases during the quarter ended December 2, 2022 and Note 14 of our Notes to Consolidated Financial Statements for further details regarding our stock repurchase program.IndemnificationsIn the ordinary course of business, we provide indemnifications of varying scope to customers and channel partners against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid.49Table of ContentsITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKAll market risk sensitive instruments were entered into for non-trading purposes.Foreign Currency RiskForeign Currency Exposures and Hedging InstrumentsIn countries outside the United States, we transact business in U.S. Dollars and various other currencies, which subject us to exposure from movements in exchange rates. We may use foreign exchange option contracts or forward contracts to hedge a portion of our forecasted foreign currency denominated revenue and expenses. Additionally, we hedge our net recognized foreign currency monetary assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. Our significant foreign currency revenue exposures for fiscal 2022, 2021 and 2020 were as follows:(in millions)202220212020Euro€2,487 €2,209 €1,887 Japanese Yen¥118,456 ¥104,829 ¥88,640 British Pounds£737 £669 £562 Australian Dollars$876 $768 $645 As of December 2, 2022, the total notional amounts of all outstanding foreign exchange contracts, including options and forwards, were $3.25 billion, which included the notional equivalent of $1.32 billion in Euros, $602 million in Indian Rupees, $480 million in British Pounds, $394 million in Japanese Yen, $338 million in Australian Dollars and $112 million in other foreign currencies. As of December 2, 2022, all contracts were set to expire at various dates through November 2023. The bank counterparties in these contracts could expose us to credit-related losses that would be largely mitigated with master netting arrangements with the same counterparty by permitting net settlement transactions. In addition, we enter into collateral security agreements that provide for collateral to be received or posted when the net fair value of these contracts fluctuates from contractually established thresholds.A sensitivity analysis was performed on all of our foreign exchange derivatives as of December 2, 2022. This sensitivity analysis measures the hypothetical market value resulting from a 10% shift in the value of exchange rates relative to the U.S. Dollar. For option contracts, the Black-Scholes option pricing model was used. A 10% increase in the value of the U.S. Dollar and a corresponding decrease in the value of the hedged foreign currency asset would lead to an increase in the fair value of our financial hedging instruments by $75 million. A 10% decrease in the value of the U.S. Dollar would lead to an increase in the fair value of these financial instruments by $17 million.As a general rule, we do not use foreign exchange contracts to hedge local currency denominated operating expenses in countries where a natural hedge exists. For example, in many countries, revenue in the local currencies substantially offsets the local currency denominated operating expenses. We also have long-term investment exposures consisting of the capitalization and retained earnings in our non-U.S. Dollar functional currency foreign subsidiaries. As of December 2, 2022 and December 3, 2021, this long-term investment exposure totaled an absolute notional equivalent of $770 million and $749 million, respectively. At this time, we do not hedge these long-term investment exposures.We do not use foreign exchange contracts for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. We regularly review our hedging program and assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.Cash Flow Hedges of Forecasted Foreign Currency Revenue and ExpensesWe may use foreign exchange purchased options or forward contracts to hedge foreign currency revenue denominated in Euros, British Pounds, Japanese Yen and Australian Dollars, or foreign currency expenses in Indian Rupees. We hedge these cash flow exposures to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. We enter into these foreign exchange contracts to hedge forecasted revenue and expenses in the normal course of business and accordingly, they are not speculative in nature.We record changes in fair value of these cash flow hedges of foreign currency denominated revenue and expenses in accumulated other comprehensive income (loss) in our Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction affects earnings, we reclassify the related gain or loss on the cash flow hedge to revenue or 50Table of Contentsoperating expenses, as applicable. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to revenue or operating expenses, as applicable. For the fiscal year ended December 2, 2022, there were no net gains or losses recognized in revenue or operating expenses relating to hedges of forecasted transactions that did not occur.Non-Designated Hedges of Foreign Currency Assets and LiabilitiesOur derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These foreign exchange contracts are carried at fair value with changes in fair value of these contracts recorded to other income (expense), net in our Consolidated Statements of Income. These contracts reduce the impact of currency exchange rate movements on our assets and liabilities. At December 2, 2022, the outstanding balance sheet hedging derivatives had maturities of 180 days or less.See Note 6 of our Notes to Consolidated Financial Statements for information regarding our derivative financial instruments.Interest Rate RiskShort-Term Investments and Fixed Income SecuritiesAt December 2, 2022, we had debt securities classified as short-term investments of $1.86 billion. Changes in interest rates could adversely affect the market value of these investments. A sensitivity analysis was performed on our short-term investment portfolio as of December 2, 2022, based on an estimate of the hypothetical changes in market value of the portfolio that would result from an immediate parallel shift in the yield curve. A 150 basis point increase in interest rates would lead to a $20 million decrease in the market value of our short-term investments. Conversely, a 150 basis point decrease in interest rates would lead to a $20 million increase in the market value of our short-term investments.Senior NotesAs of December 2, 2022, we had $4.15 billion of senior notes outstanding which bear interest at fixed rates, and therefore do not subject us to financial statement risk associated with changes in interest rates. As of December 2, 2022, the total carrying amount of our senior notes was $4.13 billion and the related fair value based on observable market prices in less active markets was $3.88 billion.See Note 17 of our Notes to Consolidated Financial Statements for information regarding our senior notes.51Table of Contents

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion should be read in conjunction with the consolidated financial statements as of December 31, 2022 and December 25, 2021 and for each of the three years in the period ended December 31, 2022 and related notes, which are included in this Annual Report on Form 10-K as well as with the other sections of this Annual Report on Form 10-K, “Part II, Item 8: Financial Statements and Supplementary Data.”IntroductionIn this section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for 2022 compared to 2021, an analysis of changes in our financial condition and a discussion of our off-balance sheet arrangements. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 25, 2021.Overview2022 was a transformative year for AMD as we took several major steps that scaled and reshaped our business. In February 2022, we completed our strategic acquisition of Xilinx, Inc. (Xilinx) which expanded our technology and product portfolio to include adaptable hardware platforms that enable hardware acceleration and rapid innovation across a variety of technologies and established AMD in multiple embedded markets where we have traditionally not had a significant presence. We now offer Field Programmable Gate Arrays (FPGAs), Adaptive SoCs, and Adaptive Compute Acceleration Platform (ACAP) products. With the acquisition of Xilinx, we have access to a new set of markets and customers, further strengthening and diversifying our business model. In May 2022, we expanded our data center solutions capabilities with the acquisition of Pensando Systems, Inc. (Pensando). We now offer high-performance data processing units (DPUs) and a software stack that complements our existing products. With the Xilinx and Pensando acquisitions, we are well positioned to provide the industry’s broadest set of leadership compute engines and accelerators to help enable best performance, security, flexibility and total cost of ownership for leading-edge data centers. Our 2022 financial results reflect the strength of our diversified business model despite the challenging PC market conditions in the second half of 2022. Net revenue for 2022 was $23.6 billion, an increase of 44% compared to 2021 net revenue of $16.4 billion. The increase in net revenue was driven by a 64% increase in Data Center segment revenue primarily due to higher sales of our EPYC™ server processors, a 21% increase in Gaming segment revenue primarily due to higher semi-custom product sales, and a significant increase in Embedded segment revenue from the prior year period driven by the inclusion of Xilinx embedded product sales. This growth was partially offset by a 10% decrease in Client segment revenue primarily due to lower processor shipments driven by a weak PC market and significant inventory correction actions across the PC supply chain. Gross margin, as a percentage of net revenue for 2022, was 45%, compared to 48% in 2021. The decrease in gross margin was primarily due to amortization of intangible assets associated with the Xilinx acquisition. Operating income for 2022 was $1.3 billion compared to operating income of $3.6 billion for 2021. The decrease in operating income was primarily driven by amortization of intangible assets associated with the Xilinx acquisition. Net income for 2022 was $1.3 billion compared to $3.2 billion in the prior year. The decrease in net income was primarily driven by lower operating income.Cash, cash equivalents and short-term investments as of December 31, 2022 were $5.9 billion, compared to $3.6 billion at the end of 2021. Our aggregate principal amount of total debt as of December 31, 2022 was $2.5 billion, compared to $313 million as of December 25, 2021.We took several actions in 2022 to strengthen our financial position. In June 2022, we issued $1.0 billion in aggregate principal amount of senior notes, consisting of $500 million in aggregate principal amount of 3.924% Senior Notes due 2032 (3.924% Notes) and $500 million in aggregate principal amount of 4.393% Senior Notes due 2052 (4.393% Notes). The 3.924% Notes will mature on June 1, 2032 and bear interest at a rate of 3.924% per annum, and the 4.393% Notes will mature on June 1, 2052 and bear interest at a rate of 4.393% per annum. The 3.924% Notes and the 4.393% Notes are senior unsecured obligations. 40Table of ContentsWe also entered into a revolving credit agreement in June 2022. The agreement provides for a five-year unsecured revolving credit facility in the aggregate principal amount of $3.0 billion. There were no funds drawn from this facility during the year ended December 31, 2022. In November 2022, we established a new commercial paper program, under which we may issue unsecured commercial paper notes up to a maximum principal amount outstanding at any time of $3.0 billion with a maturity of up to 397 days from the date of issue. The commercial paper will be sold at a discount from par or, alternatively, will be sold at par and bear interest at rates that will vary based on market conditions at the time of issuance. As of December 31, 2022, we had no commercial paper outstanding.During the twelve months ended December 31, 2022, we returned a total of $3.7 billion to shareholders through the repurchase of 36.3 million shares of common stock under our stock repurchase program. As of December 31, 2022, $6.5 billion remained available for future stock repurchases under this program. The repurchase program does not obligate us to acquire any common stock, has no termination date and may be suspended or discontinued at any time.We continued executing our product technology roadmap by delivering a number of new leadership products and technologies during 2022. For Data Center, we launched our 4th Gen AMD EPYC™ processors with next-generation architecture, technology and features, and designed to deliver optimizations across market segments and applications, while helping businesses free data center resources to create additional workload processing and accelerate output. We also unveiled our 3rd Gen AMD EPYC processors with AMD 3D V-Cache technology for leadership performance in technical computing workloads. We introduced the 7 nm Versal™ ACAP VCK5000 development card designed to offer leadership AI inference performance. We announced the availability of the AMD Instinct™ ecosystem, the new AMD Instinct MI210 accelerator and ROCm™ 5 software. Together the AMD Instinct and ROCm ecosystem offers exascale-class technology to a broad base of high performance computing (HPC) and artificial intelligence (AI) customers, designed to address the demand for compute-accelerated data center workloads and reduce the time to insights and discoveries.In the Embedded segment, we introduced the AMD Ryzen™ Embedded R2000 Series, second-generation mid-range system-on-chip processors optimized for a wide range of industrial and robotics systems, machine vision, IoT (Internet of Things) and thin-client equipment. We also introduced the Kria™ KR260 Robotics Starter Kit, the latest addition to the Kria portfolio. The kit enables rapid development of hardware-accelerated applications for robotics, machine vision and industrial communication and control.For the Client segment, we introduced the Ryzen 7000 Series Desktop processors powered by the new “Zen 4” architecture for gamers, enthusiasts, and content creators. Along with the introduction of the Ryzen 7000 Series Desktop processors, we also unveiled the new Socket AM5 platform featuring four new chipsets. These new desktop processors are designed for gamers, enthusiasts, and content creators. We introduced AMD Ryzen 7000 Mobile processors with up to 16 “Zen 4” architecture cores. We also introduced the AMD Ryzen 6000 Series Mobile processors, built on “Zen 3+” architecture and includes AMD RDNA™ 2 architecture based on integrated graphics. We launched the AMD Ryzen 5000 C-Series processors bringing “Zen 3” architecture to premium Chrome OS devices for work and collaboration. The processors offer up to eight high performance x86 cores. For workstations, we introduced the new AMD Ryzen Threadripper™ PRO 5000 WX-Series workstation processors designed for professionals to run demanding workstation applications. We also introduced the AMD Ryzen PRO 7030 Series Mobile processors built on “Zen 3” core architecture. In the Gaming segment, we unveiled the AMD Radeon™ RX 7900 XTX and the Radeon RX 7900 XT gaming graphics cards that are built on next-generation high performance, energy-efficient AMD RDNA™ 3 architecture. We announced new graphics cards to the AMD Radeon RX 6000 Series product line: the AMD Radeon RX 6950 XT, the AMD Radeon RX 6750 XT and the AMD Radeon RX 6650 XT. These new graphics cards are built on AMD RDNA 2 gaming architecture and GDDR6 memory at up to 18Gbps. We launched the new AMD Radeon PRO GPUs including the introduction of the AMD Radeon PRO W6400 graphics card built on AMD RDNA 2 architecture.Although the current COVID-19 pandemic continues to impact our business operations and practices, we experienced limited disruptions during 2022. We continue to monitor our operations and public health measures implemented by governmental authorities in response to the pandemic. We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements. 41Table of ContentsCritical Accounting EstimatesOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, business combination, goodwill, long-lived and intangible assets, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.Management believes the following critical accounting estimates are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments.Revenue Allowances. Revenue contracts with our customers include variable amounts which we evaluate under ASC 606-10-32-8 through 14 in order to determine the net amount of consideration to which we are entitled and which we recognize as revenue. We determine the net amount of consideration to which we are entitled by estimating the most likely amount of consideration we expect to receive from the customer after adjustments to the contract price for rights of return and rebates to our original equipment manufacturers (OEM) customers and rights of return, rebates and price protection on unsold merchandise to our distributor customers.We base our determination of necessary adjustments to the contract price by reference to actual historical activity and experience, including actual historical returns, rebates and credits issued to OEM and distributor customers adjusted, as applicable, to include adjustments, if any, for known events or current economic conditions, or both.Our estimates of necessary adjustments for distributor price incentives and price protection on unsold products held by distributors are based on actual historical incentives provided to distributor customers and known future price movements based on our internal and external market data analysis.Our estimates of necessary adjustments for OEM price incentives utilize, in addition to known pricing agreements, actual historical rebate attainment rates and estimates of future OEM rebate program attainment based on internal and external market data analysis.We offer incentive programs through cooperative advertising and marketing promotions. Where funds provided for such programs can be estimated, we recognize a reduction to revenue at the time the related revenue is recognized; otherwise, we recognize such reduction to revenue at the later of when: i) the related revenue transaction occurs; or ii) the program is offered. For transactions where we reimburse a customer for a portion of the customer’s cost to perform specific product advertising or marketing and promotional activities, such amounts are recognized as a reduction to revenue unless they qualify for expense recognition.We also provide limited product return rights to certain OEMs and to most distribution customers. These return rights are generally limited to a contractual percentage of the customer’s prior quarter shipments, although, from time to time we may approve additional product returns beyond the contractual arrangements based on the applicable facts and circumstances. In order to estimate adjustments to revenue to account for these returns, including product restocking rights provided to distributor and OEM customers, we utilize relevant, trended actual historical product return rate information gathered, adjusted for actual known information or events, as applicable.Overall, our estimates of adjustments to contract price due to variable consideration under our contracts with OEM and distributor customers, based on our assumptions and include adjustments, if any, for known events, have been materially consistent with actual results; however, these estimates are subject to management’s judgment and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenue and operating results.42Table of ContentsInventory Valuation. We value inventory at standard cost, adjusted to approximate the lower of actual cost or estimated net realizable value using assumptions about future demand and market conditions. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances. In determining excess or obsolescence reserves for products, we consider assumptions such as changes in business and economic conditions, other-than-temporary decreases in demand for our products, and changes in technology or customer requirements. In determining the lower of cost or net realizable value reserves, we consider assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices. If in any period we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales, resulting in a negative impact to our gross margin in that period. If in any period we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, related revenue would be recorded with a lower or no offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period. Overall, our estimates of inventory carrying value adjustments have been materially consistent with actual results.Business Combinations. We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing developed technology, in-process research and development, customer relationships and other identifiable intangible assets include, but are not limited to, expected future revenue growth rates and margins, future changes in technology, time to recreate customer relationships, useful lives, and discount rates.Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.Goodwill. Goodwill is the excess of the aggregate of the consideration transferred over the identifiable assets acquired and liabilities assumed in connection with business combinations. Our reporting units are at the operating segment level. Our goodwill is contained within three reporting units: Data Center, Gaming and Embedded. We perform our goodwill impairment analysis as of the first day of the fourth quarter of each year and, if certain events or circumstances indicate that an impairment loss may have been incurred, on a more frequent basis. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment, which occurs when the carrying value of a reporting unit exceeds its fair value. Significant judgment is required in estimating the fair value of our reporting units to determine if the fair values of those units exceed their carrying values and an impairment to goodwill is required when a quantitative goodwill impairment test is performed. We typically obtain the assistance of third-party valuation specialists to help in determining the fair value of our reporting units. The fair values of our reporting units are estimated using a combination of the income approach, which requires estimating the present value of expected future cash flows of a reporting unit, and the market approach, which uses financial ratios of comparable companies to arrive at an estimated value for the reporting unit. Significant estimates and assumptions used in the income approach include assessments of macroeconomic conditions, growth rates of our reporting units in the near- and long-term, expectations of our ability to execute on our roadmap and projections, and the discount rate applied to cash flows. Significant estimates used in the market approach include the identification of comparable companies for each reporting unit, the determination of an appropriate control premium that a market participant would apply to a reporting unit, and the determination of appropriate multiples to apply to a reporting unit based on adjustments and consideration of specific attributes of that reporting unit. 43Table of ContentsThe most significant assumptions utilized in the determination of the estimated fair values of our reporting units are the sales and earnings growth rates (including long-term growth rates) and discount rates. Long-term growth rates are dependent on overall market growth rates, the competitive environment and inflation. As a result, long-term growth rates could be adversely impacted by a sustained deceleration in category growth or an increased competitive environment. Discount rates, which are consistent with a weighted average cost of capital that is likely to be expected by a market participant, are based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rates may be impacted by adverse changes in the macroeconomic environment, prolonged and continuing inflationary pressures, volatility in the equity and debt markets and other factors that otherwise create or exacerbate risks in our reporting units. Changes in operating plans or adverse changes in the business or in the macroeconomic environment in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of our reporting units’ goodwill. Based on our annual impairment testing, the fair values of all of our reporting units exceeded their carrying values. Long-Lived and Intangible Assets. Long-lived and intangible assets to be held and used are reviewed for impairment if indicators of potential impairment exist and at least annually for indefinite-lived intangible assets. Impairment indicators are reviewed on a quarterly basis. Assets are grouped and evaluated for impairment at the lowest level of identifiable cash flows. When indicators of impairment exist and assets are held for use, we estimate future undiscounted cash flows attributable to the related asset groups. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the asset group or based on appraisals. Factors affecting impairment of assets held for use include the ability of the specific assets to generate separately identifiable positive cash flows. When assets are removed from operations and held for sale, we estimate impairment losses as the excess of the carrying value of the assets over their fair value. Market conditions are among the factors affecting impairment of assets held for sale. Changes in any of these factors could necessitate impairment recognition in future periods for assets held for use or assets held for sale.Income Taxes. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.We regularly assess the likelihood that we will be able to recover our deferred tax assets. Unless recovery is considered more-likely-than-not (a probability level of more than 50%), we will record a charge to income tax expense in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable or maintain the valuation allowance recorded in prior periods. When considering all available evidence, if we determine it is more-likely-than-not we will realize our deferred tax assets, we will reverse some or all of the existing valuation allowance, which would result in a credit to income tax expense and the establishment of an asset in the period of reversal.In determining the need to establish or maintain a valuation allowance, we consider the four sources of jurisdictional taxable income: (i) carryback of net operating losses to prior years; (ii) future reversals of existing taxable temporary differences; (iii) viable and prudent tax planning strategies; and (iv) future taxable income exclusive of reversing temporary differences and carryforwards. Through the end of 2022, we continue to maintain a valuation allowance of approximately $2.1 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to limitations, under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. Certain state and foreign valuation allowances are maintained due to a lack of sufficient sources of future taxable income.In addition, the calculation of our tax liabilities involves addressing uncertainties in the application of complex, multi-jurisdictional tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing authorities. 44Table of ContentsResults of OperationsDuring the second quarter of fiscal year 2022, we changed our reporting segments to align our financial reporting with how we manage our business in strategic end markets. This is consistent with how our Chief Operating Decision Maker (CODM) assesses our financial performance and allocates resources. As a result, we report our financial performance based on the following four reportable segments: Data Center, Client, Gaming, and Embedded.Additional information on our reportable segments is contained in Note 4 – Segment Reporting of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).Our operating results tend to vary seasonally. Historically, our net revenue has been generally higher in the second half of the year than in the first half of the year, although market conditions and product transitions could impact these trends.The following table provides a summary of net revenue and operating income (loss) by segment for 2022 and 2021:Year EndedDecember 31,2022December 25,2021(In millions)Net revenue:Data Center$6,043 $3,694 Client6,201 6,887 Gaming6,805 5,607 Embedded4,552 246 Total net revenue$23,601 $16,434 Operating income (loss):Data Center$1,848 $991 Client1,190 2,088 Gaming953 934 Embedded2,252 44 All Other(4,979)(409)Total operating income (loss)$1,264 $3,648 Data CenterData Center net revenue of $6 billion in 2022 increased by 64%, compared to net revenue of $3.7 billion in 2021. The increase was primarily driven by higher sales of our EPYC server processors.Data Center operating income was $1.8 billion in 2022, compared to operating income of $991 million in 2021. The increase in operating income was primarily driven by higher revenue, partially offset by higher operating expenses. Operating expenses increased for the reasons outlined under “Expenses” below.ClientClient net revenue of $6.2 billion in 2022 decreased by 10%, compared to net revenue of $6.9 billion in 2021, primarily driven by a 24% decrease in unit shipment, partially offset by a 19% increase in average selling price. The decrease in unit shipments was due to challenging PC market conditions and significant inventory correction across the PC supply chain experienced during the second half of 2022. The increase in average selling price was primarily driven by a richer mix of Ryzen mobile processor sales.Client operating income was $1.2 billion in 2022, compared to operating income of $2.1 billion in 2021. The decrease in operating income was primarily driven by lower revenue and higher operating expenses. Operating expenses increased for the reasons outlined under “Expenses” below. 45Table of ContentsGamingGaming net revenue of $6.8 billion in 2022 increased by 21%, compared to net revenue of $5.6 billion in 2021. The increase in net revenue was driven by higher semi-custom product sales due to higher demand for gaming console SoCs, partially offset by lower gaming graphics sales due to a decrease in unit shipments driven by soft consumer demand given weakened macroeconomic conditions experienced in the second half of 2022.Gaming operating income was $953 million in 2022, compared to operating income of $934 million in 2021. The increase in operating income was primarily driven by higher revenue, partially offset by higher operating expenses. Operating expenses increased for the reasons outlined under “Expenses” below.EmbeddedEmbedded net revenue of $4.6 billion in 2022 increased significantly, compared to net revenue of $246 million in 2021. The significant increase in net revenue was primarily driven by the inclusion of Xilinx embedded product revenue as a result of the acquisition of Xilinx in February 2022. Embedded operating income was $2.3 billion in 2022, compared to operating income of $44 million in 2021. The significant increase in operating income was primarily driven by the inclusion of Xilinx embedded product revenue.All OtherAll Other operating loss of $5.0 billion in 2022 primarily consisted of $3.5 billion of amortization of acquisition-related intangibles, $1.1 billion of stock-based compensation expense, and $452 million of acquisition-related costs, which primarily include transaction costs, amortization of Xilinx inventory fair value step-up adjustment, and depreciation related to the Xilinx fixed assets fair value step-up adjustment, certain compensation charges related to the acquisitions of Xilinx and Pensando, and licensing gain. All Other operating loss of $409 million in 2021 primarily consisted of $379 million of stock-based compensation expense and $42 million of acquisition-related costs.Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Income (Expense) and Income TaxesThe following is a summary of certain consolidated statement of operations data for 2022 and 2021:December 31, 2022December 25, 2021 (In millions, except for percentages)Net revenue$23,601 $16,434 Cost of sales11,550 8,505 Amortization of acquisition-related intangibles1,448 — Gross profit10,603 7,929 Gross margin45 %48 %Research and development5,005 2,845 Marketing, general and administrative2,336 1,448 Amortization of acquisition-related intangibles2,100 — Licensing gain(102)(12)Interest expense(88)(34)Other income, net8 55 Income tax provision (benefit)(122)513 Gross MarginGross margin as a percentage of net revenue was 45% in 2022 compared to 48% in 2021. The decrease in gross margin was primarily due to amortization of intangible assets associated with the Xilinx acquisition.46Table of ContentsExpensesResearch and Development ExpensesResearch and development expenses of $5.0 billion in 2022 increased by $2.2 billion, or 76%, compared to $2.8 billion in 2021. The increase was primarily driven by strategic investments across all of our segments, including an increase in headcount through acquisitions and organic growth. Marketing, General and Administrative ExpensesMarketing, general and administrative expenses of $2.3 billion in 2022 increased by $888 million, or 61%, compared to $1.4 billion in 2021. The increase was primarily due to an increase in headcount through acquisitions and organic growth, go-to-market activities, and acquisition-related costs.Amortization of Acquisition-Related IntangiblesIn 2022, cost of sales and operating expense included $1.4 billion and $2.1 billion, respectively, of amortization expense from intangible assets acquired as a result of the acquisitions of Xilinx and Pensando.Licensing GainDuring 2022, we recognized $102 million of licensing gain from milestone achievement and royalty income associated with the licensed IP to the THATIC JV, our two joint ventures with Higon Information Technology Co., Ltd., a third-party Chinese entity. We recognized a licensing gain from royalty income of $12 million for the year ended December 25, 2021. Interest ExpenseInterest expense of $88 million in 2022 increased by $54 million compared to $34 million in 2021, primarily due to interest expense from the 2.95% Senior Notes due 2024 and the 2.375% Senior Notes due 2030 (together, the Assumed Xilinx Notes) and the 3.924% Notes and 4.393% Notes issued in 2022.Other Income (Expense), netOther income (expense), net is primarily comprised of interest income from short-term investments, changes in valuation of equity investments and foreign currency transaction gains and losses.Other income, net was $8 million in 2022 compared to $55 million of Other income, net in 2021. The change was primarily due to a $62 million decrease in the fair value of equity investments in 2022 compared to an increase in fair value of $56 million from equity investments in 2021, partially offset by $65 million of interest income driven mainly by rising interest rates in 2022 compared to losses from conversion of our convertible debt of $7 million in 2021.Income Tax Provision (Benefit)We recorded an income tax benefit of $122 million in 2022 and an income tax provision of $513 million in 2021, representing effective tax rates of (10%) and 14%, respectively. The reduction in income tax expense in 2022 was primarily due to the lower pre-tax income coupled with a $261 million foreign-derived intangible income tax benefit and $241 million of research and development tax credits.Through the end of fiscal year 2022, we continued to maintain a valuation allowance of approximately $2.1 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. Certain state and foreign valuation allowance maintained is due to lack of sufficient sources of future taxable income.International SalesInternational sales as a percentage of net revenue were 66% in 2022 and 72% in 2021. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Substantially all of our sales transactions are denominated in U.S. dollars.47Table of ContentsFINANCIAL CONDITIONLiquidity and Capital ResourcesAs of December 31, 2022, our cash, cash equivalents and short-term investments were $5.9 billion compared to $3.6 billion as of December 25, 2021. The increase in cash, cash equivalents and short-term investments was primarily driven by the $2.4 billion of cash and $1.6 billion of short-term investments acquired from the Xilinx acquisition, $1.0 billion from the debt issuance of our 3.924% Notes and 4.393% Notes, and cash flows from operations, partially offset by stock repurchases and cash paid for the acquisition of Pensando. The percentage of cash and cash equivalents held domestically was 73% as of December 31, 2022, and 91% as of December 25, 2021.Our operating, investing and financing cash flow activities for 2022 and 2021 were as follows:December 31, 2022December 25, 2021 (In millions)Net cash provided by (used in):Operating activities$3,565 $3,521 Investing activities1,999 (686)Financing activities(3,264)(1,895)Net increase in cash and cash equivalents$2,300 $940 Our aggregate principal debt obligations were $2.5 billion as of December 31, 2022, which consisted primarily of $1.5 billion of the Xilinx Notes assumed as part of the Xilinx acquisition and $1.0 billion of 3.924% Notes and 4.393% Notes issued during the year, compared to $313 million as of December 25, 2021, respectively. We repaid $312 million of our 7.50% Senior Notes that matured in August 2022. On April 29, 2022, we entered into a revolving credit agreement (Revolving Credit Agreement) with Wells Fargo Bank, N.A. as administrative agent and other banks identified therein as lenders. The Revolving Credit Agreement provides for a five-year unsecured revolving credit facility in the aggregate principal amount of $3.0 billion. There were no funds drawn from this facility during the year ended December 31, 2022. On November 3, 2022, we established a new commercial paper program where we may issue unsecured commercial paper notes up to a maximum principal amount outstanding at any time of $3.0 billion with a maturity of up to 397 days from the date of issue. The commercial paper will be sold at a discount from par or, alternatively, will be sold at par and bear interest at rates that will vary based on market conditions at the time of issuance. As of December 31, 2022, we had no commercial paper outstanding.As of December 31, 2022, we had unconditional purchase commitments of approximately $8.6 billion, of which $6.5 billion are in fiscal year 2023. On an ongoing basis, we work with our suppliers on the timing of payments and deliveries of purchase commitments, taking into account business conditions.We believe our cash, cash equivalents, short-term investments and cash flows from operations along with our Revolving Credit Facility and commercial paper program will be sufficient to fund operations, including capital expenditures and purchase commitments, over the next 12 months and beyond. We believe we will be able to access the capital markets should we require additional funds. However, we cannot assure that such funds will be available on favorable terms, or at all.Operating ActivitiesOur working capital cash inflows and outflows from operations consist primarily of cash collections from our customers, payments for inventory purchases and payments for employee-related expenditures.48Table of ContentsNet cash provided by operating activities was $3.6 billion in 2022, primarily due to our net income of $1.3 billion in 2022, adjusted for non-cash adjustments of $4.1 billion and net cash outflows of $1.8 billion from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $1.4 billion increase in inventories driven primarily by build of advanced process nodes to support the ramp of new products, a $1.1 billion increase in accounts receivable driven primarily by higher revenue in the fourth quarter of 2022 compared to the fourth quarter of 2021, and a $1.2 billion increase in prepaid expenses and other assets due primarily to prepayments under long-term supply agreements in 2022, offset by an $931 million increase in accounts payable primarily due to timing of payments to our suppliers, and a $546 million increase in accrued liabilities and other driven mainly by higher customer-related accruals.Net cash provided by operating activities was $3.5 billion in 2021, primarily due to our higher net income of $3.2 billion in 2021, adjusted for non-cash adjustments of $1.1 billion and net cash outflows of $774 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $640 million increase in accounts receivable driven primarily by $1.6 billion higher revenue in the fourth quarter of 2021 compared to the fourth quarter of 2020, a $556 million increase in inventories driven by our continued increase in product build in support of customer demand, and a $920 million increase in prepaid expenses and other assets due primarily to prepayments under long-term supply agreements in 2021, offset by an $801 million increase in accounts payable primarily due to timing of payments to our suppliers, and a $526 million increase in accrued liabilities and other, both of which were driven mainly by higher marketing accruals, and higher accrued annual employee incentives due to improved financial performance.Investing ActivitiesNet cash provided by investing activities was $2 billion in 2022, which primarily consisted of higher cash provided by maturities of short-term investments of $4.3 billion and cash acquired as part of the acquisition of Xilinx of $2.4 billion, partially offset by higher cash used for purchases of short-term investments of $2.7 billion, cash used in the acquisition of Pensando of $1.5 billion and $450 million for purchases of property and equipment.Net cash used in investing activities was $686 million in 2021, which primarily consisted of higher cash used for purchases of short-term investments of $2.1 billion and $301 million for purchases of property and equipment, partially offset by higher cash provided by maturities of short-term investments of $1.7 billion.Financing ActivitiesNet cash used in financing activities was $3.3 billion in 2022, which primarily consisted of common stock repurchases of $3.7 billion under the Repurchase Program, higher repurchases to cover tax withholding on employee equity plans of $406 million and repayment of debt of $312 million, partially offset by proceeds from the issuance of debt of $991 million and higher proceeds from the issuance of common stock under our employee equity plans of $167 million. Net cash used in financing activities was $1.9 billion in 2021, which primarily consisted of common stock repurchases of $1.8 billion under the Repurchase Program and higher repurchases to cover tax withholding on employee equity plans of $237 million, partially offset by higher proceeds from the issuance of common stock under our employee equity plans of $104 million. Off-Balance Sheet ArrangementsAs of December 31, 2022, we had no off-balance sheet arrangements.49Table of ContentsITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and long-term debt. We usually invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of December 31, 2022, our investment portfolio consisted of fixed income instruments, time deposits and commercial paper. Our primary aim with our investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. In accordance with our investment policy, we place investments with high credit quality issuers and limit the amount of credit exposure to any one issuer based upon the issuer's credit rating. These securities are subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 50 basis-point (half percentage point) increase or decrease in interest rates compared to rates at December 31, 2022 would have affected the fair value of our cash equivalent and investment portfolio by approximately $2.9 million. As of December 31, 2022, all of our outstanding long-term debt had fixed interest rates. Consequently, our exposure to market risk for changes in interest rates on reported interest expense and corresponding cash flows is minimal.We will continue to monitor our exposure to interest rate risk.Default Risk. We mitigate default risk in our investment portfolio by investing in only high credit quality securities and by constantly positioning our portfolio to respond to a significant reduction in a credit rating of any investment issuer or guarantor. Our portfolio includes investments in marketable debt securities with active secondary or resale markets to ensure portfolio liquidity. We are averse to principal loss and strive to preserve our invested funds by limiting default risk and market risk.We actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated debt securities with relatively short maturities and do not invest in securities which we believe involve a higher degree of risk. As of December 31, 2022, substantially all of our investments in debt securities were A-rated by at least one of the rating agencies. While we believe we take prudent measures to mitigate investment-related risks, such risks cannot be fully eliminated as there are circumstances outside of our control.Foreign Exchange Risk. As a result of our foreign operations, we incur costs and we carry assets and liabilities that are denominated in foreign currencies, while sales of products are primarily denominated in U.S. dollars. We maintain a foreign currency hedging strategy which uses derivative financial instruments to mitigate the risks associated with changes in foreign currency exchange rates. This strategy takes into consideration all of our exposures. We do not use derivative financial instruments for trading or speculative purposes. The following table provides information about our foreign currency forward contracts as of December 31, 2022 and December 25, 2021. All of our foreign currency forward contracts mature within 18 months. December 31, 2022December 25, 2021NotionalAmountAverageContractRateEstimatedFair ValueGain (Loss)NotionalAmountAverageContractRateEstimatedFair ValueGain (Loss) (In millions except contract rates)Foreign currency forward contracts:Chinese Renminbi$599 6.7848 $(3)$360 6.5693 $6 Canadian Dollar607 1.3137 (16)416 1.2646 (6)Indian Rupee516 82.1493 (9)162 77.3309 1 Taiwan Dollar207 29.1231 (4)122 27.2725 (1)Singapore Dollar259 1.3600 4 71 1.3489 — Euro142 0.9334 1 47 0.8444 (2)Pound Sterling88 0.8204 (1)6 0.7317 — Japanese Yen2 133.7593 — 1 114.3214 — Australian Dollar1 1.4689 — — 1.3809 — Total$2,421 $(28)$1,185 $(2)50Table of Contents

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThis Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), should be read in conjunction with our consolidated financial statements and notes thereto that appear elsewhere in this annual report on Form 10-K. See “Risk Factors” elsewhere in this annual report on Form 10-K for a discussion of certain risks associated with our business. The following discussion contains forward-looking statements. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures or other events that may be announced after the date hereof.OverviewWe provide solutions to power and protect life online. The key factors that influence our financial success are our ability to build on recurring revenue commitments for our security and performance offerings, increase traffic on our network, continue to develop, scale and successfully bring to market our cloud computing platform and compute-to-edge solutions that meet the needs of professional users and enterprises, effectively manage the prices we charge for our solutions, develop new products and appropriately manage our capital spending and other expenses. The purpose of this discussion and analysis section is to provide material information relevant to an assessment of our financial condition and results of operations from management’s perspective, including to describe and explain key trends, events and other factors that impacted our reported results and that are likely to impact our future performance.RevenueFor most of our solutions, our customers commit to contracts having terms of a year or longer, which allows us to have a consistent and predictable base level of revenue. In addition to a base level of revenue, we are also dependent on delivery customers, and some cloud computing customers, where usage of our solutions is more variable. As a result, our revenue is impacted by the amount of traffic we serve on our network or the usage of cloud computing services, the rate of adoption of gaming, social media and video platform offerings, the timing and variability of customer-specific one-time events and geopolitical, economic and other developments that impact our customers' businesses. Seasonal variations that impact traffic on our network, such as holiday-related activities, can cause revenue fluctuations from quarter to quarter. Over the longer term, our ability to expand our product portfolio and to effectively manage the prices we charge for our solutions are key factors impacting our revenue growth.We have observed the following trends related to our revenue in recent years:•Increased sales of our security solutions, led by application security solutions and segmentation solutions from our Guardicore acquisition, and more recently, increased sales of our compute solutions primarily attributable to our acquisition of Linode in the first quarter of 2022, have made a significant contribution to revenue growth. During 2022, security and compute revenue represented over half of our total revenue. We plan to continue to invest in these areas with a focus on further enhancing our product portfolios and extending our go-to-market capabilities, particularly in certain markets and through our channel partners.•During 2020 and early 2021, we saw a dramatic increase in traffic growth on our network due to the shutdowns and restrictions related to the COVID-19 pandemic. While traffic on our network continues to grow as compared to prior years, the rate of traffic growth has decelerated. Our delivery revenue was negatively impacted by the deceleration, which we believe is partly due to the rollback of COVID-19 pandemic-related restrictions. We expect traffic growth rates in 2023 to continue to be below historical levels as we and other companies manage through a time of economic headwinds and uncertainty.•The prices paid by some of our customers have declined in recent years due to competition and contract renewals, which negatively impacts our revenue growth rates. We have been able to mitigate some of the negative impacts to our revenue growth rates by upselling incremental solutions to our existing customers. We are taking steps to try to maintain alignment between customer traffic volumes and unit pricing.•Revenue from our international operations has generally been growing at a faster pace in recent years than from our U.S. operations, particularly from cross-selling of incremental solutions. Because we publicly report in U.S. dollars, and due to the strengthening U.S. dollar, our reported revenue results have been negatively impacted during 2022.25Table of Contents•We have experienced variations in certain types of revenue from quarter to quarter. In particular, we typically experience higher revenue in the fourth quarter of each year for some of our solutions as a result of holiday season activity. In addition, we experience quarterly variations in revenue attributable to, among other things, the nature and timing of software and gaming releases by our customers; whether there are large live sporting or other events or situations that impact the amount of media traffic on our network; the timing of large customer contract renewals; and the frequency and timing of purchases of custom solutions or licensed software.ExpensesOur level of profitability is also impacted by our expenses, including direct costs to support our revenue such as bandwidth and co-location costs, which includes energy to power our network. We have observed the following trends related to our profitability in recent years:•Network bandwidth costs represent a significant portion of our cost of revenue. Historically, we have been able to mitigate increases in these costs by reducing our network bandwidth costs per unit and investing in internal-use software development to improve the performance and efficiency of our network. We will need to continue to effectively manage our bandwidth costs to maintain current levels of profitability.•Co-location costs are also a significant portion of our cost of revenue. As we build out our new compute locations to provide us with the ability to scale our platform, we expect to enter into longer term leases that include certain financial commitments in order to achieve more favorable unit economics. The costs of the financial commitments are straight-lined over the life of the lease. We continue to improve our internal-use software and remain disciplined in managing our hardware deployments, particularly for our delivery platform, which enables us to use servers more efficiently. With these efficiencies we have been able to minimize the impact of rising energy costs, particularly in Europe. We expect to continue to scale our network in the future, which will allow us to continue to effectively manage our co-location costs to maintain current levels of profitability.•Network build-out and supporting service costs represent another significant portion of our cost of revenue. These costs include maintenance and supporting services incurred as we continue to build-out our compute infrastructure and maintain our global network, and costs of third-party cloud providers used for some of our operations. We have seen these costs increase in recent years, as a result of our network expansion and increased use of third-party cloud services. We expect this trend to continue in the near-term as we invest in our network to support our compute solutions, including migrating from third-party cloud providers to our own cloud solutions. We will need to effectively manage our network build-out and supporting costs to maintain current levels of profitability.•Our employees are core to the operations of our business, and payroll and related costs, including stock-based compensation, is one of our largest expenses. It is important to the success of operations that we offer competitive compensation packages. However, we remain disciplined in allocating our resources to support our faster growing security and compute solutions, including maintaining operational efficiencies to mitigate the rising cost of talent. We are prioritizing our hiring to our high growth areas. In addition, we are re-tasking certain employees to develop, deploy and support go-to-market efforts for our compute solutions.•Depreciation expense related to our network equipment also contributes to our overall expense levels. In recent years we have invested in our network as traffic levels have increased, which increased our capital expenditures and resulting depreciation expense. We plan to continue to make investments in capital expenditures, however, the focus is to further invest in support of our faster growing compute solutions. Due to the software and hardware initiatives we have undertaken to manage our global network more efficiently, we expect the useful lives of our network servers to be extended. As a result of our expected investments in our network, particularly with respect to cloud computing, we expect depreciation to increase, which will be partially offset by the expected change in useful lives of our network servers.•Growth in our international operations incrementally increases our exposure to foreign currency fluctuations. In 2022, due to the strengthening U.S. dollar, our expenses that are denominated in foreign currencies have been positively impacted and partially offset the negative impact on revenue, resulting in a negative overall impact on our operating margins.26Table of ContentsRecent AcquisitionsIn March 2022, we acquired all of the outstanding equity interests of Linode for $898.5 million in cash. Linode is an infrastructure-as-a-service platform provider that allows for developer-friendly cloud computing capabilities. The acquisition is intended to enhance our computing services by enabling us to create a unique cloud platform to build, run and secure applications from the cloud to the edge. Linode had approximately 250 employees when we completed the acquisition.In October 2021, we acquired Guardicore for $610.7 million in cash. Guardicore's micro-segmentation solution is designed to limit user access to only those applications that are authorized to communicate with each other, thereby limiting the spread of malware and protecting the flow of enterprise data across the network. Guardicore had approximately 270 employees when we completed the acquisition, and the acquisition was dilutive to our earnings per share in 2022.Remote WorkIn May 2022, we launched our FlexBase program, which allows the more than 95% of our workforce designated as flexible to choose whether they want to work from an Akamai office, their home office or a combination of both. Our operations have not been significantly disrupted by the shift to remote working. While we have incurred and expect to continue to incur expenses associated with enabling remote work, reconfiguring work spaces and re-thinking our facility footprint and the way we utilize office space, we do not currently believe those costs will materially impact our financial condition or results of operations.Global DevelopmentsSince the start of 2022, several global macroeconomic and geopolitical developments have emerged. These developments impacted our traffic growth rates, and as a result, our revenue growth rates. We have experienced a decline in revenue in 2022 related to the war in Ukraine due to a decrease in traffic in Russia, Belarus and Ukraine. Approximately 1% of our 2021 revenue was generated from traffic we served into these countries, and we experienced a decline in revenue in 2022 due to a decrease in traffic in these countries. Additionally, we were negatively impacted by the strengthening of the U.S. dollar. In addition, we, along with our customers, continue to manage through an uncertain period of inflation, growing recessionary concerns, supply chain challenges, uncertain energy supplies, heightened geopolitical tensions and rising interest rates. As a result of the uncertain macroeconomic environment, we have experienced elongated sales cycles with our customers and prospects, and expect to continue to experience elongated sales cycles in 2023. Our board of directors is continuing to oversee risks related to macroeconomic and geopolitical developments, including the ongoing war in Ukraine, and management is monitoring these developments, including the potential impact from the war or other geopolitical events on our business. As a result of overall macroeconomic trends, growing concerns of a potential global recession and future projections of traffic consumption that suggest traffic growth will moderate as restrictions related to the COVID-19 pandemic are lifted, we anticipate our traffic will grow, but at a more moderate pace than we have experienced previously. The extent of the ongoing impact of these macroeconomic events on our business and on global economic activity may continue to adversely affect our business, operations and financial results.27Table of ContentsResults of OperationsThe following sets forth, as a percentage of revenue, consolidated statements of income data for the years indicated: 202220212020Revenue100.0 %100.0 %100.0 %Costs and operating expenses:Cost of revenue (exclusive of amortization of acquired intangible assets shown below)38.3 36.7 35.4 Research and development10.8 9.7 8.4 Sales and marketing13.9 13.3 16.0 General and administrative16.2 16.0 17.1 Amortization of acquired intangible assets1.8 1.4 1.3 Restructuring charge0.4 0.3 1.2 Total costs and operating expenses81.4 77.4 79.4 Income from operations18.6 22.6 20.6 Interest and marketable securities income, net0.1 0.5 0.9 Interest expense(0.3)(2.1)(2.2)Other (expense) income, net(0.3)0.1 (0.1)Income before provision for income taxes18.1 21.1 19.2 Provision for income taxes(3.5)(1.8)(1.4)Loss from equity method investment(0.2)(0.4)(0.4)Net income14.4 %18.9 %17.4 %RevenueThe Company reports its revenue in three solution categories: security, delivery and compute. Prior to January 1, 2022, revenue by solution was reported by product group: Security Technology Group and Edge Technology Group. Revenue from security solutions was previously presented as Security Technology Group revenue. Revenue from delivery and compute solutions was previously presented as Edge Technology Group revenue. The periods presented prior to January 1, 2022 have been revised to reflect this new presentation. Revenue by solution category during the periods presented is as follows (in thousands):For the Years Ended December 31,For the Years Ended December 31,20222021% Change% Change at Constant Currency20212020% Change% Change at Constant CurrencySecurity$1,541,941 $1,334,836 15.5 %19.7 %$1,334,836 $1,061,622 25.7 %24.6 %Delivery1,669,257 1,873,243 (10.9)(7.8)1,873,243 1,929,810 (2.9)(3.7)Compute405,456 253,144 60.2 64.0 253,144 206,717 22.4 21.4 Total revenue$3,616,654 $3,461,223 4.5 %8.0 %$3,461,223 $3,198,149 8.2 %7.3 %The increases in our revenue in 2022 as compared to 2021, and 2021 as compared to 2020, was primarily the result of continued strong growth in sales of our security solutions, in addition to growth in compute solutions. The increase in 2022 as compared to 2021 was negatively impacted by the significant strengthening of the U.S. dollar and a decline in revenue from our delivery solutions.The increase in security solutions revenue for 2022 as compared to 2021, was due to growth in a number of key products in our security solutions portfolio, including our application security portfolio, driven by application and application performance interfaces protection, as well as our Zero Trust Enterprise portfolio, which is led by our Guardicore segmentation solution. The increase in security solutions revenue in 2021 as compared to 2020, was due to growth across our security products portfolio, including Bot Manager, Kona Site Defender, Prolexic and our access control product suite.28Table of ContentsThe decrease in delivery solutions revenue for 2022 as compared to 2021 was due to reduction in traffic growth, particularly among our largest customers, which we believe was attributed to macroeconomic challenges our customers are experiencing and the pricing impact of some large renewals that we completed in the first half of the year. The decrease in delivery solutions revenue for 2021 as compared to 2020 was due to reduction in sales of application performance solutions, partially offset by growth in edge application solutions.The increase in compute solutions revenue in 2022 as compared to 2021 was due to strong growth in compute products, including through the acquisition of Linode in the first quarter of 2022, and continued growth in cloud optimization solutions. Revenue attributable to Linode since the date of the acquisition, and included in our consolidated statements of income, for the year ended 2022 was $103.5 million. The increase in compute solutions revenue in 2021 as compared to 2020, was due to strong growth in cloud optimization solutions.Revenue derived in the U.S. and internationally during the periods presented is as follows (in thousands):For the Years Ended December 31,For the Years Ended December 31,20222021% Change% Change at Constant Currency20212020% Change% Change at Constant CurrencyU.S.$1,902,051 $1,837,508 3.5 %3.5 %$1,837,508 $1,777,435 3.4 %3.4 %International1,714,603 1,623,715 5.6 13.2 1,623,715 1,420,714 14.3 12.3 Total revenue$3,616,654 $3,461,223 4.5 %8.0 %$3,461,223 $3,198,149 8.2 %7.3 %For each of the years ended December 31, 2022 and 2021, approximately 47% of our revenue was derived from our operations located outside of the U.S., compared to 44% for the year ended December 31, 2020. No single country outside of the U.S. accounted for 10% or more of revenue during any of these periods. We have generally seen revenue growth across all our international regions. Changes in foreign currency exchange rates negatively impacted our revenue by $122.1 million in 2022 as compared to 2021, and positively impacted our revenue by $28.8 million in 2021 as compared to 2020.Cost of RevenueCost of revenue consisted of the following for the periods presented (in thousands): For the Years Ended December 31,For the Years Ended December 31, 20222021% Change20212020% ChangeBandwidth fees$205,268$209,288(1.9)%$209,288$200,1674.6 %Co-location fees197,375177,95010.9 177,950156,27513.9 Network build-out and supporting services195,669157,23424.4 157,234134,95216.5 Payroll and related costs298,269276,5447.9 276,544262,9725.2 Acquisition-related costs4,982—100.0 ——— Stock-based compensation, including amortization of prior capitalized amounts57,14657,390(0.4)57,39052,8638.6 Depreciation of network equipment259,359226,38414.6 226,384167,01735.5 Amortization of internal-use software165,751164,1661.0 164,166158,4263.6 Total cost of revenue$1,383,819$1,268,9569.1 %$1,268,956$1,132,67212.0 %As a percentage of revenue38.3 %36.7 %36.7 %35.4 %29Table of ContentsThe increases in cost of revenue for 2022 as compared to 2021, and 2021 as compared to 2020, was primarily due to increased network build-out and supporting services, particularly related to increased supporting services for third-party cloud applications, and increased investment in our network in prior years to support traffic growth, which resulted in higher depreciation costs of our network equipment and growth in expenses related to our co-location facilities including energy to power our network. The increase in cost of revenue for 2022 as compared to 2021 was also due to increased payroll and related costs as a result of increased headcount due to the acquisition of Linode.During 2023, we expect our cost of revenue to increase as compared to 2022, in particular co-location costs, due to investments in our network to support the continued growth of our compute solutions. We plan to continue to focus our efforts on managing our operating margins, including our bandwidth and network build-out costs. In particular, we are taking steps to shift workloads to our own cloud solutions, which we expect will reduce third-party cloud application expense. We also expect to change the estimated useful lives of our network servers from five to six years due to software and hardware initiatives we have undertaken to manage our global network more efficiently. This change will partially offset our expected increase in depreciation expense related to our investment in network equipment.Research and Development ExpensesResearch and development expenses consisted of the following for the periods presented (in thousands):For the Years Ended December 31,For the Years Ended December 31, 20222021% Change20212020% ChangePayroll and related costs$468,928 $456,138 2.8 %$456,138 $410,568 11.1 %Stock-based compensation78,116 65,951 18.4 65,951 48,854 35.0 Capitalized salaries and related costs(183,540)(200,530)(8.5)(200,530)(200,143)0.2 Acquisition-related costs2,832 — 100.0 — — — Other expenses25,098 13,813 81.7 13,813 10,036 37.6 Total research and development$391,434 $335,372 16.7 %$335,372 $269,315 24.5 %As a percentage of revenue10.8 %9.7 %9.7 %8.4 %The increase in research and development expenses for 2022 as compared to 2021 was due to higher payroll and related costs and related stock-based compensation as a result of headcount growth from employees joining us through acquisitions, a reduction in capitalized salaries and related costs as a result of a shift in resources to work on core maintenance activities related to our platform and an increase in other expenses due to an increase in the use of third-party cloud applications to support our research and development activities.The increase in research and development expenses for 2021 as compared to 2020 was due to increased payroll and related costs, including stock-based compensation, primarily due to headcount growth, the redeployment of some employees to research and development functions from sales and marketing activities as part of our March 2021 reorganization and as a result of employees joining us through acquisitions.Research and development costs are expensed as incurred, other than certain internal-use software development costs eligible for capitalization. Capitalized development costs consist of payroll and related costs for personnel and external consulting expenses involved in the development of internal-use software used to deliver our services and operate our network. For the years ended December 31, 2022, 2021 and 2020, we capitalized $30.0 million, $32.2 million and $35.7 million, respectively, of stock-based compensation. These capitalized internal-use software development costs are amortized to cost of revenue over their estimated useful lives, ranging from two to seven years based on the software developed and its expected useful life.We expect research and development costs to increase in 2023, in particular payroll and related costs and stock-based compensation, to support the continued growth of our compute and security solutions.30Table of ContentsSales and Marketing ExpensesSales and marketing expenses consisted of the following for the periods presented (in thousands):For the Years Ended December 31,For the Years Ended December 31, 20222021% Change20212020% ChangePayroll and related costs$374,110 $366,501 2.1 %$366,501 $393,800 (6.9)%Stock-based compensation47,789 46,342 3.1 46,342 65,257 (29.0)Marketing programs and related costs55,033 40,553 35.7 40,553 39,272 3.3 Acquisition-related costs2,166 — 100.0 — — — Other expenses23,311 8,571 172.0 8,571 12,076 (29.0)Total sales and marketing$502,409 $461,967 8.8 %$461,967 $510,405 (9.5)%As a percentage of revenue13.9 %13.3 %13.3 %16.0 %The increase in sales and marketing expenses for 2022 as compared to 2021 was primarily due to increased marketing programs and related costs due to advertising and customer events held in 2022. Other expenses also increased due to travel associated with customer events and meetings, as well as a sales recognition event during 2022 that did not occur in 2021. Such events and travel costs were higher in 2022 than in 2021 due to the rollback of COVID-19 pandemic-related restrictions that had been in place in the prior year.The decrease in sales and marketing expenses for 2021 as compared to 2020 was due to decreased payroll and related costs, including stock-based compensation, primarily as a result of headcount reductions due to the establishment of a unified global sales organization and elimination of duplicative roles. In addition, some employees who previously supported the sales organization were redeployed in 2021 to our research and development function to focus our investments to improve security, performance, scalability and innovation across our solutions.We expect sales and marketing costs to increase in 2023 as compared to 2022, due to our continued investment in go-to-market efforts. However, we plan to continue to carefully manage costs in an effort to manage our operating margins. General and Administrative ExpensesGeneral and administrative expenses consisted of the following for the periods presented (in thousands):For the Years Ended December 31,For the Years Ended December 31, 20222021% Change20212020% ChangePayroll and related costs$213,772 $223,238 (4.2)%$223,238 $199,992 11.6 %Stock-based compensation62,926 63,324 (0.6)63,324 58,470 8.3 Depreciation and amortization74,225 81,934 (9.4)81,934 82,862 (1.1)Facilities-related costs103,473 100,769 2.7 100,769 98,805 2.0 Provision for doubtful accounts7,042 763 822.9 763 2,881 (73.5)Acquisition-related costs19,071 13,317 43.2 13,317 5,579 138.7 Software and related service costs50,320 40,861 23.1 40,861 41,392 (1.3)Legal settlements— — — — 275 (100.0)Endowment of Akamai Foundation— — — — 20,000 (100.0)Other expenses53,377 28,818 85.2 28,818 37,632 (23.4)Total general and administrative$584,206 $553,024 5.6 %$553,024 $547,888 0.9 %As a percentage of revenue16.2 %16.0 %16.0 %17.1 %The increase in general and administrative expenses for 2022 as compared to 2021 was primarily due to software and related service costs as we transition and expand to cloud-based applications, other expenses related to an increase in 31Table of Contentsprofessional service fees to support our operations and acquisition-related costs primarily related to our acquisition of Linode. These increases were partially offset by a decrease in payroll and related costs due to a decline in performance-based compensation programs.The increase in general and administrative expenses for 2021 as compared to 2020 was primarily due to increased payroll and related costs, including stock-based compensation, as a result of annual merit increases and headcount growth, partially offset by a decrease in an endowment contribution to the Akamai Foundation in 2020 that did not recur in 2021.General and administrative expenses for 2022, 2021 and 2020 are broken out by category as follows (in thousands):For the Years Ended December 31,For the Years Ended December 31,20222021% Change20212020% ChangeGlobal functions$212,674 $212,456 0.1 %$212,456 $193,719 9.7 %As a percentage of revenue5.9 %6.1 %6.1 %6.1 %Infrastructure345,391326,480 5.8 326,480 325,434 0.3 As a percentage of revenue9.6 %9.4 %9.4 %10.2 %Other26,14114,088 85.6 14,088 28,735 (51.0)Total general and administrative expenses$584,206 $553,024 5.6 %$553,024 $547,888 0.9 %As a percentage of revenue16.2 %16.0 %16.0 %17.1 %Global functions expense includes payroll, stock-based compensation and other employee-related costs for administrative functions, including finance, purchasing, order entry, human resources, legal, information technology and executive personnel, as well as third-party professional service fees. Infrastructure expense includes payroll, stock-based compensation and other employee-related costs for our network infrastructure functions, as well as facility rent expense, depreciation and amortization of facility and IT-related assets, software and related service costs, business insurance and taxes. Our network infrastructure function is responsible for network planning, sourcing, architecture evaluation and platform security. Other expense includes acquisition-related costs, provision for doubtful accounts, legal settlements and the endowment contribution to the Akamai Foundation.During 2023, we expect our general and administrative expenses to increase as compared to 2022 as a result of payroll and related costs, including stock-based compensation, due to the expected achievement of the performance-based compensation programs. We plan to continue to control costs, including reducing our real estate expenses due to excess capacity created by our FlexBase program, in an effort to manage our operating margins.Amortization of Acquired Intangible AssetsFor the Years Ended December 31,For the Years Ended December 31,(in thousands)20222021% Change20212020% ChangeAmortization of acquired intangible assets$64,983 $48,019 35.3 %$48,019 $42,049 14.2 %As a percentage of revenue1.8 %1.4 %1.4 %1.3 %The increase in amortization of acquired intangible assets for 2022 as compared to 2021, as well as 2021 as compared to 2020, was the result of amortization of acquired intangible assets related to our recent acquisitions. Based on acquired intangible assets as of December 31, 2022, future amortization is expected to be $63.5 million, $59.2 million, $61.2 million, $56.3 million and $43.7 million for the years ending December 31, 2023, 2024, 2025, 2026 and 2027, respectively.Restructuring ChargeFor the Years Ended December 31,For the Years Ended December 31,(in thousands)20222021% Change20212020% ChangeRestructuring charge$13,529 $10,737 26.0 %$10,737 $37,286 (71.2)%As a percentage of revenue0.4 %0.3 %0.3 %1.2 %32Table of ContentsThe restructuring charge for 2022 was primarily related to software impairment charges related to our investment with Mitsubishi UFJ Financial Group ("MUFG") in the joint venture Global Open Network, Inc. ("GO-NET"), and MUFG's decision to suspend GO-NET's operations, and impairments of right-of-use-assets for facilities that are no longer needed as a result of our FlexBase program.The restructuring charge in 2021 was primarily the result of management's actions initiated in the fourth quarter of 2020 to better position us to become more agile in delivering our solutions. The restructuring charge for this action includes severance and related expenses for certain headcount reductions and software charges for software not yet placed into service that will not be implemented due to this action. In addition to the 2020 action, additional charges were incurred in 2021, related to management’s plans to launch its new FlexBase program in May 2022. The restructuring charge incurred for this program in 2021 includes impairments of lease-related assets for certain facilities that are no longer needed. These restructuring charges were partially offset by the release of a lease obligation for a facility previously exited as part of management actions initiated in late 2019. The restructuring charge in 2020 was primarily the result of the management actions initiated in the fourth quarter of 2020, and the associated severance and related expenses and software charges that resulted from the action. In addition, an $8.7 million impairment of lease-related assets was incurred during 2020 to exit leased facilities related to a 2019 action, which allowed us to focus on investment with the potential to accelerate new revenue growth.We are continuing to evaluate our facility footprint in light of our FlexBase program, including our plans and ability to sublease space, but we do not currently believe such charges will materially impact our financial condition or results of operation.Non-Operating Income (Expense)For the Years Ended December 31,For the Years Ended December 31,(in thousands)20222021% Change20212020% ChangeInterest and marketable securities income, net$3,258 $15,620 (79.1)%$15,620 $29,122 (46.4)%As a percentage of revenue0.1 %0.5 %0.5 %0.9 %Interest expense$(11,096)$(72,332)(84.7)%$(72,332)$(69,120)4.6 %As a percentage of revenue(0.3)%(2.1)%(2.1)%(2.2)%Other (expense) income, net$(10,433)$1,785 (684.5)%$1,785 $(2,454)(172.7)%As a percentage of revenue(0.3)%0.1 %0.1 %(0.1)%Interest and marketable securities income, net primarily consists of interest earned on invested cash and marketable securities balances and income and losses on mutual funds that are associated with our employee non-qualified deferred compensation plan. The decrease to interest and marketable securities income, net for 2022 as compared to 2021 was due to increased losses associated with the non-qualified deferred compensation plan and lower interest earned on invested cash balances and marketable securities as a result of lower marketable securities balances in 2022 due to the funding of our recent acquisitions. The decrease to interest and marketable securities, net for 2021 as compared to 2020 was primarily the result of investing in marketable securities having lower rates of return due to lower interest rates.Interest expense is related to our debt transactions, which are described in Note 11 to the consolidated financial statements included elsewhere in this annual report on Form 10-K. The decrease to interest expense for 2022 as compared to 2021 was the result of the adoption of the new guidance for accounting for convertible senior notes on January 1, 2022, which resulted in the elimination of the amortization of debt discounts.Other (expense) income, net primarily represents net foreign exchange gains and losses mainly due to foreign exchange rate fluctuations on intercompany transactions and other non-operating expense and income items as well as gains and losses on equity investments. Other (expense) income, net for the year ended December 31, 2022 includes an $8.9 million impairment from an equity investment, partially offset by a favorable impact of changes in foreign currency exchange rates. Other (expense) income, net for the years ended December 31, 2021 and 2020 also includes gains from the sale of equity investments of $3.7 million and $7.2 million, respectively. Other income (expense), net may fluctuate in the future based on changes in foreign currency exchange rates or other events.33Table of ContentsProvision for Income TaxesFor the Years Ended December 31,For the Years Ended December 31,(in thousands)20222021% Change20212020% ChangeProvision for income taxes$126,696 $62,571 102.5 %$62,571 $45,922 36.3 %As a percentage of revenue3.5 %1.8 %1.8 %1.4 %Effective income tax rate19.3 %8.6 %8.6 %7.5 %The increase in the provision for income taxes for 2022 as compared to 2021 was mainly due to an intercompany sale of intellectual property, an increase in the tax on global intangible low-taxed income, a decrease in foreign income taxed at lower rates and a decrease in the excess tax benefit related to stock-based compensation. These amounts were partially offset by a decrease in profitability.The increase in the provision for income taxes for 2021 as compared to 2020 was mainly due to an increase in profitability and a decrease in the excess tax benefit related to stock-based compensation. These amounts were partially offset by an increase in foreign income taxed at lower rates, a decrease in state taxes, a decrease in the revaluation of certain foreign income tax liabilities due to foreign exchange rate fluctuations and the release of certain tax reserves related to the expiration of local statutes of limitations.For the year ended December 31, 2022, our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by non-deductible stock-based compensation, tax on global intangible low-taxed income and an intercompany sale of intellectual property.For the year ended December 31, 2021, our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by non-deductible stock-based compensation and state taxes.For the year ended December 31, 2020, our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the impact of the excess tax benefit related to stock-based compensation and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by non-deductible stock-based compensation, state taxes and the valuation allowance recorded against tax credits and foreign net operating loss carryforwards.Our effective income tax rate may fluctuate between fiscal years and from quarter to quarter due to items arising from discrete events, such as tax benefits from the settlement of employee equity awards, tax law changes and settlements of tax audits and assessments. Our effective income tax rate is also impacted by, and may fluctuate in any given period because of, the composition of income in foreign jurisdictions where tax rates differ depending on the local statutory rates.Refer to Note 19 to the consolidated financial statements included elsewhere in this annual report on Form 10-K for additional information regarding unrecognized tax benefits that, if recognized, would impact the effective income tax rate in the next 12 months.Loss from Equity Method InvestmentFor the Years Ended December 31,For the Years Ended December 31,(in thousands)20222021% Change20212020% ChangeLoss from equity method investment$7,635 $14,008 (45.5)%$14,008 $13,106 6.9 %As a percentage of revenue0.2 %0.4 %0.4 %0.4 %Loss from equity method investment includes our share of losses from our investment with MUFG in the joint venture GO-NET, in addition to impairment charges realized. Since MUFG made the decision to suspend operations and ultimately liquidate GO-NET during 2022, our final impairment charge, which reduced our investment value to zero, was recognized during 2022.34Table of ContentsNon-GAAP Financial MeasuresIn addition to providing financial measurements based on generally accepted accounting principles in the United States of America ("GAAP") we provide additional financial metrics that are not prepared in accordance with GAAP ("non-GAAP financial measures"). Management uses non-GAAP financial measures to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes, to measure executive compensation and to evaluate our financial performance. These non-GAAP financial measures are non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income, non-GAAP net income per diluted share, Adjusted EBITDA, Adjusted EBITDA margin, capital expenditures and impact of foreign currency exchange rates, as discussed below.Management believes that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they facilitate comparing financial results across accounting periods and to those of peer companies. Management also believes that these non-GAAP financial measures enable investors to evaluate our operating results and future prospects in the same manner as management. These non-GAAP financial measures may exclude expenses and gains that may be unusual in nature, infrequent or not reflective of our ongoing operating results.The non-GAAP financial measures do not replace the presentation of our GAAP financial measures and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP.The non-GAAP adjustments, and our basis for excluding them from non-GAAP financial measures, are outlined below:•Amortization of acquired intangible assets – We have incurred amortization of intangible assets, included in our GAAP financial statements, related to various acquisitions we have made. The amount of an acquisition's purchase price allocated to intangible assets and term of its related amortization can vary significantly and is unique to each acquisition; therefore, we exclude amortization of acquired intangible assets from our non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results. •Stock-based compensation and amortization of capitalized stock-based compensation – Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to interpret; therefore, we believe it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from our non-GAAP financial measures in order to highlight the performance of our core business and to be consistent with the way many investors evaluate our performance and compare our operating results to peer companies. •Acquisition-related costs – Acquisition-related costs include transaction fees, advisory fees, due diligence costs and other direct costs associated with strategic activities, as well as certain additional compensation costs payable to employees acquired from the Linode acquisition if employed for a certain period of time. The additional compensation cost was initiated by and determined by the seller, and is in addition to normal levels of compensation, including retention programs, offered by Akamai. Acquisition-related costs are impacted by the timing and size of the acquisitions. We exclude acquisition-related costs from our non-GAAP financial measures to provide a useful comparison of our operating results to prior periods and to our peer companies because such amounts vary significantly based on the magnitude of our acquisition transactions and do not reflect our core operations. •Restructuring charge – We have incurred restructuring charges from programs that have significantly changed either the scope of the business undertaken by us or the manner in which that business is conducted. These charges include severance and related expenses for workforce reductions, impairments of long-lived assets that will no longer be used in operations (including right-of-use assets, other facility-related property and equipment and internal-use software) and termination fees for any contracts cancelled as part of these programs. We exclude these items from our non-GAAP financial measures when evaluating our continuing business performance as such items vary significantly based on the magnitude of the restructuring action and do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or past operations of our business.35Table of Contents•Amortization of debt discount and issuance costs and amortization of capitalized interest expense – In August 2019, we issued $1,150 million of convertible senior notes due 2027 with a coupon interest rate of 0.375%. In May 2018, we issued $1,150 million of convertible senior notes due 2025 with a coupon interest rate of 0.125%. The imputed interest rates of these convertible senior notes were 3.10% and 4.26%, respectively. This is a result of the debt discounts recorded for the conversion features that, prior to January 1, 2022, were required to be separately accounted for as equity under GAAP, thereby reducing the carrying values of the convertible debt instruments. The debt discounts were amortized as interest expense. On January 1, 2022, we adopted the new guidance for accounting for convertible instruments. This new guidance eliminated separate accounting for the equity portion, and thus the amortization of the debt discount that was recorded as interest expense. Prior to January 1, 2022, we excluded this non-cash interest expense from our non-GAAP results because it was not representative of ongoing operating performance. After January 1, 2022, this interest expense is no longer included in or excluded from GAAP or non-GAAP results. Additionally, the issuance costs of the convertible senior notes are amortized to interest expense and are also excluded from our non-GAAP results because we believe the non-cash amortization expense is not representative of ongoing operating performance. •Gains and losses on investments – We have recorded gains and losses from the disposition, changes to fair value and impairment of certain investments. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to these gains and losses are not representative of our core business operations and ongoing operating performance. •Legal settlements – We have incurred losses related to the settlement of legal matters. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations. •Endowment of Akamai Foundation – We have incurred expenses to endow the Akamai Foundation, a private corporate foundation dedicated to encouraging the next generation of technology innovators by supporting math and science education. Our first endowment was in 2018 to enable a permanent endowment for the Akamai Foundation to allow it to expand its reach. In the fourth quarter of 2020 we supplemented the endowment to enable specific initiatives to increase diversity in the technology industry. We believe excluding these amounts from non-GAAP financial measures is useful to investors as these infrequent expenses are not representative of our core business operations. •Income and losses from equity method investment – We record income or losses on our share of earnings and losses from our equity method investment. We exclude such income and losses because we do not have direct control over the operations of the investment and the related income and losses are not representative of our core business operations. •Income tax effect of non-GAAP adjustments and certain discrete tax items – The non-GAAP adjustments described above are reported on a pre-tax basis. The income tax effect of non-GAAP adjustments is the difference between GAAP and non-GAAP income tax expense. Non-GAAP income tax expense is computed on non-GAAP pre-tax income (GAAP pre-tax income adjusted for non-GAAP adjustments) and excludes certain discrete tax items (such as recording or releasing of valuation allowances), if any. We believe that applying the non-GAAP adjustments and their related income tax effect allows us to highlight income attributable to our core operations.36Table of ContentsThe following table reconciles GAAP income from operations to non-GAAP income from operations and non-GAAP operating margin for the years ended December 31, 2022, 2021 and 2020 (in thousands): 202220212020Income from operations$676,274 $783,148 $658,534 Amortization of acquired intangible assets64,983 48,019 42,049 Stock-based compensation217,185 202,759 197,411 Amortization of capitalized stock-based compensation and capitalized interest expense31,768 35,894 33,202 Restructuring charge13,529 10,737 37,286 Acquisition-related costs29,049 13,317 5,579 Legal settlements— — 275 Endowment of Akamai Foundation— — 20,000 Non-GAAP income from operations$1,032,788 $1,093,874 $994,336 GAAP operating margin19 %23 %21 %Non-GAAP operating margin29 %32 %31 %The following table reconciles GAAP net income to non-GAAP net income for the years ended December 31, 2022, 2021 and 2020 (in thousands): 202220212020Net income$523,672 $651,642 $557,054 Amortization of acquired intangible assets64,983 48,019 42,049 Stock-based compensation217,185 202,759 197,411 Amortization of capitalized stock-based compensation and capitalized interest expense31,768 35,894 33,202 Restructuring charge13,529 10,737 37,286 Acquisition-related costs29,049 13,317 5,579 Legal settlements— — 275 Endowment of Akamai Foundation— — 20,000 Amortization of debt discount and issuance costs4,395 66,025 62,823 Loss (gain) on investments8,260 (3,680)(7,228)Loss from equity method investment7,635 14,008 13,106 Income tax effect of above non-GAAP adjustments and certain discrete tax items(42,768)(96,164)(103,280)Non-GAAP net income$857,708 $942,557 $858,277 37Table of ContentsThe following table reconciles GAAP net income per diluted share to non-GAAP net income per diluted share for the years ended December 31, 2022, 2021 and 2020 (in thousands, except per share data): 202220212020GAAP net income per diluted share$3.26 $3.93 $3.37 Adjustments to net income:Amortization of acquired intangible assets0.40 0.29 0.25 Stock-based compensation1.35 1.22 1.19 Amortization of capitalized stock-based compensation and capitalized interest expense0.20 0.22 0.20 Restructuring charge0.08 0.06 0.23 Acquisition-related costs0.18 0.08 0.03 Legal settlements— — — Endowment of Akamai Foundation— — 0.12 Amortization of debt discount and issuance costs0.03 0.40 0.38 Loss (gain) on investments0.05 (0.02)(0.04)Loss from equity method investment0.05 0.08 0.08 Income tax effect of above non-GAAP adjustments and certain discrete tax items(0.27)(0.58)(0.63)Adjustment for shares (1)0.02 0.06 0.04 Non-GAAP net income per diluted share (2)$5.37 $5.74 $5.22 Shares used in GAAP per diluted share calculations160,467 165,804 165,213 Impact of benefit from note hedge transactions (1)(720)(1,600)(873)Shares used in non-GAAP per diluted share calculations (1)159,747 164,204 164,340 (1) Shares used in non-GAAP per diluted share calculations have been adjusted for the periods presented for the benefit of our note hedge transactions. During the periods presented, our average stock price was in excess of $95.10, which is the initial conversion price of our convertible senior notes due in 2025. See further discussion below.(2) May not foot due to rounding.Non-GAAP net income per diluted share is calculated as non-GAAP net income divided by diluted weighted average common shares outstanding. GAAP diluted weighted average common shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to us pursuant to the note hedge transactions entered into in connection with the issuance of our convertible senior notes. Under GAAP, shares delivered under hedge transactions are not considered offsetting shares in the fully-diluted share calculation until they are delivered. However, we would receive a benefit from the note hedge transactions and would not allow the dilution to occur, so management believes that adjusting for this benefit provides a meaningful view of net income per share. Unless our weighted average stock price is greater than $95.10, the initial conversion price of the convertible senior notes due 2025, or $116.18, the initial conversion price of the convertible senior notes due 2027, there will be no difference between our GAAP and non-GAAP diluted weighted average common shares outstanding.We consider Adjusted EBITDA to be another important indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Adjusted EBITDA eliminates items that we do not consider to be part of our core operations. We define Adjusted EBITDA as GAAP net income excluding the following items: interest and marketable securities income and losses; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; gains and losses on legal settlements; costs incurred related to endowment contributions to the Akamai Foundation; foreign exchange gains and losses; interest expense; amortization of capitalized interest expense; certain gains and losses on investments; income and losses from equity method investments; and other non-recurring or unusual items that may arise from time to time. Adjusted EBITDA margin represents Adjusted EBITDA stated as a percentage of revenue.38Table of ContentsThe following table reconciles GAAP net income to Adjusted EBITDA and Adjusted EBITDA margin for the years ended December 31, 2022, 2021 and 2020 (in thousands): 202220212020Net income$523,672 $651,642 $557,054 Amortization of acquired intangible assets64,983 48,019 42,049 Stock-based compensation217,185 202,759 197,411 Amortization of capitalized stock-based compensation and capitalized interest expense31,768 35,894 33,202 Restructuring charge13,529 10,737 37,286 Acquisition-related costs29,049 13,317 5,579 Legal settlements— — 275 Interest and marketable securities income, net(3,258)(15,620)(29,122)Endowment of Akamai Foundation— — 20,000 Interest expense11,096 72,332 69,120 Provision for income taxes126,696 62,571 45,922 Depreciation and amortization496,909 467,048 403,160 Loss (gain) on investments8,260 (3,680)(7,228)Loss from equity method investment7,635 14,008 13,106 Other expense, net2,173 1,895 9,682 Adjusted EBITDA$1,529,697 $1,560,922 $1,397,496 Net income margin14 %19 %17 %Adjusted EBITDA margin42 %45 %44 %Impact of Foreign Currency Exchange RatesRevenue and earnings from our international operations have historically been an important contributor to our financial results. Consequently, our financial results have been impacted, and management expects they will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, when the local currencies of our foreign subsidiaries weaken, generally our consolidated results stated in U.S. dollars are negatively impacted.Because exchange rates are a meaningful factor in understanding period-to-period comparisons, management believes the presentation of the impact of foreign currency exchange rates on revenue and earnings enhances the understanding of our financial results and evaluation of performance in comparison to prior periods. The dollar impact of changes in foreign currency exchange rates presented is calculated by translating current period results using monthly average foreign currency exchange rates from the comparative period and comparing them to the reported amount. The percentage change at constant currency presented is calculated by comparing the prior period amounts as reported and the current period amounts translated using the same monthly average foreign currency exchange rates from the comparative period.Liquidity and Capital ResourcesTo date, we have financed our operations primarily through public and private sales of debt and equity securities and cash generated by operations. As of December 31, 2022, our cash, cash equivalents and marketable securities, which primarily consisted of time deposits, corporate bonds and U.S. government agency obligations, totaled $1.4 billion. We place our cash investments in instruments that meet high-quality credit standards, as specified in our investment policy. Our investment policy also limits the amount of our credit exposure to any one issue or issuer and seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity at all times.Changes in cash, cash equivalents and marketable securities are dependent upon changes in, among other things, working capital items such as accounts receivable, deferred revenue, accounts payable and various accrued expenses, as well as changes in our capital and financial structure due to common stock repurchases, debt repayments and issuances, acquisitions, purchases and sales of marketable securities, cash paid for acquisitions and similar events. We believe that our strong balance sheet and 39Table of Contentscash position are important competitive differentiators that provide the financial stability and flexibility to enable us to continue to make investments at opportune times. We expect to continue to evaluate strategic investments to strengthen our business.As of December 31, 2022, we had cash and cash equivalents of $249.5 million held in accounts outside the U.S. The U.S. Tax Cuts and Jobs Act establishes a territorial tax system in the U.S., which provides companies with the potential ability to repatriate earnings with minimal U.S. federal income tax impact. As a result, our liquidity is not expected to be materially impacted by the amount of cash and cash equivalents held in accounts outside the U.S.The following table summarizes current and long-term material cash requirements as of December 31, 2022, which we expect to fund primarily with operating cash flows (in thousands): Payments Due by PeriodTotalLess than12 Months12 to 36Months36 to 60MonthsMore than60 MonthsOperating lease obligations: (1)Real estate arrangements$715,112 $78,714 $151,323 $126,737 $358,338 Co-location arrangements310,605 119,527 113,277 59,217 18,584 Bandwidth agreements118,066 82,949 34,006 1,111 — Open vendor purchase orders434,996 378,816 53,207 2,973 — Convertible senior notes2,300,000 — 1,150,000 1,150,000 — Total contractual obligations$3,878,779 $660,006 $1,501,813 $1,340,038 $376,922 (1) Excludes $141.7 million of obligations for operating leases that have not yet commenced. See Note 12 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for additional information.In accordance with the authoritative guidance for accounting for uncertainty in income taxes, as of December 31, 2022, we had unrecognized tax benefits of $38.3 million, including $8.6 million of accrued interest and penalties. We believe that it is reasonably possible that $3.6 million of our unrecognized tax benefits will be recognized by the end of 2023. The settlement period for the remaining amount of the unrecognized tax benefits is unknown.Cash Provided by Operating ActivitiesFor the Years Ended December 31,(in thousands)202220212020Net income$523,672 $651,642 $557,054 Non-cash reconciling items included in net income756,321 793,445 727,829 Changes in operating assets and liabilities(5,317)(40,524)(69,883)Net cash flows provided by operating activities$1,274,676 $1,404,563 $1,215,000 The decrease in cash provided by operating activities for 2022 as compared to 2021 was primarily due to income taxes paid on an intercompany sale of intellectual property, lower profitability and timing of vendor payments.The increase in cash provided by operating activities for 2021 as compared to 2020 was primarily due to increased profitability in 2021 and timing of payments from customers.40Table of ContentsCash Used in Investing ActivitiesFor the Years Ended December 31,(in thousands)202220212020Cash paid for acquired businesses, net of cash acquired$(872,091)$(598,825)$(127,999)Cash paid for asset acquisition— — (36,376)Purchases of property and equipment and capitalization of internal-use software development costs(458,302)(545,230)(731,872)Net marketable securities activity714,205 501,478 (154,848)Other, net(6,122)(4,322)8,121 Net cash used in investing activities$(622,310)$(646,899)$(1,042,974)The decrease in cash used in investing activities in 2022 as compared to 2021 was due to a decrease in purchases of marketable securities, as we did not reinvest our matured securities in order to fund our acquisition of Linode, and a decrease in purchases of property and equipment as we reduced spending related to our delivery solutions as we focused on higher growth initiatives, partially offset by cash paid for the acquisition of Linode in March 2022.The decrease in cash used in investing activities in 2021 as compared to 2020 was primarily driven by a decrease in purchases of marketable securities, as we did not reinvest our matured securities in order to fund our acquisition of Guardicore in October 2021. The decrease was also attributable to a reduction of purchases of property and equipment as we slowed expansion of our network, as compared to 2020. These decreases were partially offset by an increase in cash paid for acquired businesses in 2021, due to the size of the acquisition completed in 2021 as compared to 2020.Cash Used in Financing ActivitiesFor the Years Ended December 31,(in thousands)202220212020Activity related to stock-based compensation$(25,774)$(39,480)$(30,053)Repurchases of common stock(608,010)(522,255)(193,588)Other, net(393)(268)— Net cash used in financing activities$(634,177)$(562,003)$(223,641)The increase in cash used in financing activities in 2022 as compared to 2021, and 2021 as compared to 2020, was primarily the result of increased share repurchases. Effective November 1, 2018, our board of directors authorized a $1.1 billion share repurchase program through December 31, 2021. In October 2021, our board of directors authorized a new $1.8 billion share repurchase program, effective January 1, 2022 through December 31, 2024. Our goals for the share repurchase programs are to offset the dilution created by our employee equity compensation programs over time and provide the flexibility to return capital to shareholders as business and market conditions warrant, while still preserving our ability to pursue other strategic opportunities.During 2022, 2021 and 2020, we repurchased 6.4 million, 4.7 million and 2.0 million shares of our common stock, respectively, at an average price per share of $94.96, $109.97 and $98.53, respectively.Convertible Senior NotesIn August 2019, we issued $1,150.0 million in par value of convertible senior notes due 2027 and entered into related convertible note hedge and warrant transactions. We have used and expect to continue to use the net proceeds of the offering for share repurchases, working capital and general corporate purposes, including potential acquisitions and other strategic transactions.In May 2018, we issued $1,150.0 million in par value of convertible senior notes due 2025 and entered into related convertible note hedge and warrant transactions. We used a portion of the net proceeds to repay at maturity all of our $690.0 million outstanding aggregate principle amount of convertible senior notes due in 2019. In addition, we have used and expect to continue to use the remaining net proceeds of the offering for share repurchases, working capital and general corporate purposes, including potential acquisitions and other strategic transactions.41Table of ContentsThe terms of the notes and the hedge and warrant transactions are discussed more fully in Note 11 to the consolidated financial statements included elsewhere in this annual report on Form 10-K. Revolving Credit FacilityIn May 2018, we entered into a $500.0 million, five-year revolving credit agreement ("2018 Credit Agreement"). Borrowings under the 2018 Credit Agreement bore interest, at our option, at a base rate plus a spread of 0.00% to 0.25% or an adjusted LIBOR rate plus a spread of 0.875% to 1.25%, in each case with such spread being determined based on our consolidated leverage ratio specified in the 2018 Credit Agreement. Regardless of what amounts, if any, were outstanding under the 2018 Credit Agreement, we were also obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.075% to 0.15%, with such rate being based on our consolidated leverage ratio specified in the 2018 Credit Agreement.In November 2022, we entered into a $500.0 million, five-year revolving credit agreement ("2022 Credit Agreement"). The 2022 Credit Agreement replaces the 2018 Credit Agreement. Borrowings under the 2022 Credit Agreement may be used to finance working capital needs and for general corporate purposes. The 2022 Credit Agreement provides for an initial $500.0 million revolving loans. Under specified circumstances, the facility can be increased to up to $1.0 billion in aggregate principal amount.Borrowings under the 2022 Credit Agreement bear interest, at our option, and subject to a credit spread adjustment, at a term benchmark rate plus a spread of 0.75% to 1.125%, a reference rate plus a spread of 0.75% to 1.125%, or a base rate plus a spread of 0.00% to 0.125%, in each case with such spread being determined based on our consolidated leverage ratio specified in the 2022 Credit Agreement. Regardless of what amounts, if any, are outstanding under the 2022 Credit Agreement, we are also obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.07% to 0.125%, with such rate being based on our consolidated leverage ratio specified in the 2022 Credit Agreement.The 2022 Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default. The negative covenants include restrictions on subsidiary indebtedness, liens and fundamental changes. These covenants are subject to a number of important exceptions and qualifications. The principal financial covenant requires a maximum consolidated leverage ratio. The 2022 Credit Facility expires, and any amounts outstanding thereunder will become due and payable, in November 2027, subject to up to two one-year extensions at our request and with the consent of the lenders party thereto. There were no outstanding borrowings under the 2022 Credit Agreement as of December 31, 2022. Liquidity OutlookBased on our present business plan, we expect our current cash, cash equivalents and marketable securities balances and our forecasted cash flows from operations to be sufficient to meet our foreseeable cash needs for at least the next 12 months. Our foreseeable cash needs, in addition to our recurring operating costs, include our expected capital expenditures, investments in information technology, potential strategic acquisitions, anticipated share repurchases, lease and purchase commitments and settlements of other liabilities.Off-Balance Sheet ArrangementsWe have entered into indemnification agreements with third parties, including vendors, customers, landlords, our officers and directors, shareholders of acquired companies, joint venture partners and third parties to which we license technology. Generally, these indemnification agreements require us to reimburse losses suffered by a third party due to various events, such as lawsuits arising from patent or copyright infringement or our negligence. These indemnification obligations are considered off-balance sheet arrangements in accordance with the authoritative guidance for guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. See Note 13 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for further discussion of these indemnification agreements. The fair value of guarantees issued or modified during 2022 and 2021 was determined to be immaterial.Significant Accounting Policies and EstimatesSee Note 2 to the consolidated financial statements included elsewhere in this annual report on Form 10-K for information regarding recent and newly adopted accounting pronouncements. 42Table of ContentsApplication of Critical Accounting Policies and EstimatesOverviewOur MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, accounts receivable and related reserves, valuation and impairment of marketable securities, capitalized internal-use software development costs, goodwill and acquired intangible assets, income tax reserves, impairment and useful lives of long-lived assets and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results may differ from these estimates. For a complete description of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this annual report on Form 10-K.DefinitionsWe define our critical accounting policies as those policies that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our consolidated financial statements. Our estimates are based upon assumptions and judgments about matters that are highly uncertain at the time an accounting estimate is made and applied and require us to assess a range of potential outcomes.Review of Critical Accounting Policies and EstimatesRevenue RecognitionOur contracts with customers sometimes include promises to transfer multiple services to a customer. Determining whether services are distinct performance obligations often requires the exercise of judgment by management. Advanced features that enhance a main product or service and are highly interrelated are generally not considered distinct; rather, they are combined with the service they relate to into one performance obligation. Different determinations related to combining services into performance obligations could result in differences in the timing and amount of revenue recognized in a period.Determination of the standalone selling price ("SSP") also requires the exercise of judgment by management. SSP is based on observable inputs such as the price we charge for the service when sold separately, or the discounted list price per management’s approved price list. In cases where services are not sold separately or price list rates are not available, a cost-plus-margin approach or adjusted market approach is used to determine SSP. Changes to SSP could result in differences in the allocation of transaction price among performance obligations, which could result in differences in the timing and amount of revenue recognized in a period.From time to time, we enter into contracts to sell services or license technology to unrelated enterprises at or about the same time that we enter into contracts to purchase products or services from the same enterprises. Consideration payable to a customer is reviewed as part of the transaction price. If the payment to the customer does not represent payment for a distinct service, revenue is recognized only up to the net amount of consideration after customer payment obligations are considered. Different determinations on whether a payment represents a distinct service could result in differences in the amount of revenue recognized.We may also resell the licenses or services of third parties. If we are acting as an agent in an arrangement with a customer to provide third party services, the transaction price reflects only the net amount to which we will be entitled, after accounting for payments made to the third party responsible for satisfying the performance obligation. Different determinations on whether we are acting as an agent or a principal could change the amount of revenue recognized.Accounts Receivable and Related ReservesTrade accounts receivable are recorded at the invoiced amounts and do not bear interest. In addition to trade accounts receivable, our accounts receivable balance includes unbilled accounts that represent revenue recorded for customers that is typically billed within one month. We record allowances against our accounts receivable balance, primarily for current expected credit losses. Increases and decreases in the allowance for current expected credit losses are included as a component of general and administrative expense in the consolidated statements of income.43Table of ContentsEstimates are used in determining our allowance for current expected credit losses using historical loss rates for the previous twelve months as well as expectations about the future where we have been able to develop forecasts to supports our estimates. In addition, the allowance for current expected credit losses considers outstanding balances on a customer-specific, account-by-account basis. We assess collectability based upon a review of customer receivables from prior sales with collection issues where we no longer believe that the customer has the ability to pay for services previously provided. We also perform ongoing credit evaluations of our customers. If such an evaluation indicates that payment is no longer reasonably assured for services provided, any future services provided to that customer will result in the creation of a cash basis reserve until we receive consistent payments. Valuation and Impairment of Marketable SecuritiesWe measure the fair value of our financial assets and liabilities at the end of each reporting period. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We have certain financial assets and liabilities recorded at fair value (principally cash equivalents and short- and long-term marketable securities) that have been classified as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we can access at the reporting date. Fair values determined by Level 2 inputs utilize data points other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Fair values determined by Level 3 inputs are based on unobservable data points for the asset or liability.Marketable securities are considered to be impaired when a decline in fair value below cost basis is determined to be other-than-temporary. We periodically evaluate whether a decline in fair value below cost basis is other-than-temporary by considering available evidence regarding these investments including, among other factors, the duration of the period that, and extent to which, the fair value is less than cost basis; the financial health of, and business outlook for, the issuer, including industry and sector performance and operational and financing cash flow factors; overall market conditions and trends; and our intent and ability to retain our investment in the security for a period of time sufficient to allow for an anticipated recovery in market value. Once a decline in fair value is determined to be other-than-temporary, a write-down is recorded and a new cost basis in the security is established. Assessing the above factors involves inherent uncertainty. Write-downs, if recorded, could be materially different from the actual market performance of marketable securities in our portfolio if, among other things, relevant information related to our investments and marketable securities was not publicly available or other factors not considered by us would have been relevant to the determination of impairment.Impairment and Useful Lives of Long-Lived AssetsWe review our long-lived assets, such as property and equipment, operating lease right-of-use assets and acquired intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events that would trigger an impairment review include a change in the use of the asset or forecasted negative cash flows related to the asset. When such events occur, we compare the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If this comparison indicates that impairment is present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the asset. The estimates required to apply this accounting policy include forecasted usage of the long-lived assets, the useful lives of these assets and expected future cash flows. Changes in these estimates could materially impact results from operations.Goodwill and Acquired Intangible AssetsWe test goodwill for impairment on an annual basis, as of December 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have concluded that we have one reporting unit and that our chief operating decision maker is our chief executive officer and the executive management team. We have assigned the entire balance of goodwill to our one reporting unit. The fair value of the reporting unit was based on our market capitalization as of each of December 31, 2022 and 2021, and it was substantially in excess of the carrying value of the reporting unit at each date. Acquired intangible assets consist of completed technologies, customer relationships, trademarks and trade names, non-compete agreements and acquired license rights. We engage third party valuation specialists to assist us with the initial measurement of the fair value of acquired intangible assets. Fair value and useful life determinations may be based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in calculating present values. Acquired intangible assets, other than goodwill, are amortized over their estimated useful lives based upon the estimated economic value derived from the related intangible assets.44Table of ContentsIncome Taxes Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards by using expected tax rates in effect in the years during which the differences are expected to reverse or the carryforwards are expected to be realized.We currently have net deferred tax assets, comprised of net operating loss, or NOL, carryforwards, tax credit carryforwards and deductible temporary differences. Our management periodically weighs the positive and negative evidence to determine if it is more-likely-than-not that some or all of the deferred tax assets will be realized. In determining our net deferred tax assets and valuation allowances, annualized effective tax rates and cash paid for income taxes, management is required to make judgments and estimates about domestic and foreign profitability, the timing and extent of the utilization of NOL carryforwards, applicable tax rates, transfer pricing methodologies and tax planning strategies. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from our projections.We have recorded certain tax reserves to address potential exposures involving our income tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. Our estimate of the value of our tax reserves contains assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the costs of the ultimate tax liability or benefit from these matters may be more or less than the amount that we estimated.Uncertainty in income taxes is recognized in our consolidated financial statements using a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed more-likely-than-not to be sustained based on technical merit, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that we believe has a greater than 50% likelihood of being realized upon ultimate settlement.Accounting for Stock-Based CompensationWe issue stock-based compensation awards including stock options, restricted stock, restricted stock units and deferred stock units. We measure the fair value of these awards at the grant date and recognize such fair value as expense over the vesting period. We have selected the Black-Scholes option pricing model to determine the fair value of stock option awards and the Monte Carlo simulation model to determine the fair value of market-based restricted stock unit awards. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected life of the stock awards and the volatility of the underlying common stock. Our assumptions may differ from those used in prior periods. Changes to the assumptions may have a significant impact on the fair value of stock-based awards, which could have a material impact on our financial statements. Judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Should our actual forfeiture rates differ significantly from our estimates, our stock-based compensation expense and results of operations could be materially impacted. In addition, for awards that vest and become exercisable only upon achievement of specified performance conditions, we make judgments and estimates each quarter about the probability that such performance conditions will be met or achieved. Changes to the estimates we make from time to time may have a significant impact on our stock-based compensation expense and could materially impact our results of operations.Capitalized Internal-Use Software CostsWe capitalize salaries and related costs, including stock-based compensation, of employees and consultants who devote time to the development of internal-use software development projects, as well as interest expense related to our senior convertible notes. Capitalization begins during the application development stage, once the preliminary project stage has been completed. If a project constitutes an enhancement to previously-developed software, we assess whether the enhancement creates additional functionality to the software, thus qualifying the work incurred for capitalization. Once the project is available for general release, capitalization ceases and we estimate the useful life of the asset and begin amortization. We periodically assess whether triggering events are present to review internal-use software for impairment. Changes in our estimates related to internal-use software would increase or decrease operating expenses or amortization recorded during the period.45Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskInterest Rate RiskOur portfolio of cash equivalents and short- and long-term investments is maintained in a variety of securities, including U.S. government agency obligations, commercial paper and high-quality corporate bonds. The majority of our investments are classified as available-for-sale securities and carried at fair market value with cumulative unrealized gains or losses recorded as a component of accumulated other comprehensive loss within stockholders' equity. A sharp rise in interest rates could have an adverse impact on the fair market value of certain securities in our portfolio. We do not currently hedge our interest rate exposure and do not enter into financial instruments for trading or speculative purposes. If market interest rates were to increase by 100 basis points from December 31, 2022 levels, the fair value of our available-for-sale portfolio would decline by approximately $7.0 million. In August 2019, we issued $1,150.0 million aggregate principal amount of 0.375% convertible senior notes due 2027. In May 2018, we issued $1,150.0 million aggregate principal amount of 0.125% convertible senior notes due 2025. These notes have a fixed annual interest rate, so they do not give rise to financial or economic interest exposure associated with changes in interest rates. However, the fair value of fixed rate debt instruments fluctuates when interest rates change. Additionally, the fair value can be affected when the market price of our common stock fluctuates. We carry the notes at face value less an unamortized discount on our consolidated balance sheet, and we present the fair value for required disclosure purposes only.Our exposure to risk for changes in interest rates relates primarily to any borrowings under our 2022 Credit Agreement, which has a variable rate of interest. There were no outstanding borrowings under the 2022 Credit Agreement as of December 31, 2022.Foreign Currency RiskGrowth in our international operations will incrementally increase our exposure to foreign currency fluctuations as well as other risks typical of international operations that could impact our business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions. Due to the strengthening U.S. dollar, our revenue results have been negatively impacted. The strengthening U.S. dollar has the opposite effect on expenses that are denominated in foreign currencies, but only partially offsets the impact to our revenue. A hypothetical 10% strengthening or weakening in the value of the U.S. dollar relative to the foreign currencies in which our revenues and expenses are denominated would not result in a material impact to our consolidated financial statements.Transaction ExposureForeign exchange rate fluctuations may adversely impact our consolidated results of operations as exchange rate fluctuations on transactions denominated in currencies other than functional currencies result in gains and losses that are reflected in our consolidated statements of income. We enter into short-term foreign currency forward contracts to offset foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of these derivatives, as well as re-measurement gains and losses, are recognized in our consolidated statements of income within other income (expense), net. Foreign currency transaction gains and losses from these forward contracts were determined to be immaterial during the years ended December 31, 2022, 2021 and 2020. We do not enter into derivative financial instruments for trading or speculative purposes.Translation ExposureTo the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions will result in increased revenue and operating expenses. Conversely, our revenue and operating expenses will decrease when the U.S. dollar strengthens against foreign currencies.Foreign exchange rate fluctuations may also adversely impact our consolidated financial condition as the assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our consolidated balance sheet. These gains or losses are recorded as a component of accumulated other comprehensive loss within stockholders' equity.46Table of ContentsCredit RiskConcentrations of credit risk with respect to accounts receivable are limited to certain customers to which we make substantial sales. Our customer base consists of a large number of geographically dispersed customers diversified across numerous industries. We believe that our accounts receivable credit risk exposure is limited. As of December 31, 2022 and 2021, there was one customer with an accounts receivable balance greater than 10% of our accounts receivable. We believe that at December 31, 2022, the concentration of credit risk related to accounts receivable was insignificant.47Table of Contents

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+Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.A discussion regarding our financial condition and results of operations for fiscal 2022 compared to fiscal 2021 is presented under Results of Operations of this Form 10-K. Discussions regarding our financial condition and results of operations for fiscal 2021 compared to 2020 have been omitted from this Annual Report on Form 10-K, but can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 25, 2022, which is available without charge on the SEC's website at www.sec.gov and on our investor relations website at investor.aligntech.com.Executive Overview of ResultsTrends and Uncertainties Our business strategic priorities remain focused on four principal pillars for growth: (i) international expansion; (ii) GP adoption; (iii) patient demand and conversion; and (iv) orthodontic utilization. Our growth strategy depends on our ability to facilitate the digital transformation of dentistry happening around the world, our continuous focus on innovation, and expansion to meet and exceed evolving customer expectations as the array of products and services available to them increases.We strive to deliver on each of our strategic growth drivers through a variety of interrelated enterprise-wide efforts including:•Continuing penetration and adoption of Invisalign products, intraoral scanners and CAD/CAM solutions in international markets by investing in manufacturing operations, research and development, clinical treatment planning, sales and marketing and building our quality and regulatory capabilities in existing and emerging markets globally. For instance, in 2022, we opened a new aligner fabrication facility in Wroclaw, Poland as a part of our strategy to bring operational facilities closer to customers to serve them more quickly and respond to their needs more effectively as well as new treatment planning operations in targeted regional geographies. We also diversified our research and development activities throughout Europe in 2022, which has created a longer term, more stable environment for consistent hiring, retention and innovation in a variety of high technology sectors. •Targeting growth opportunities with international orthodontists and GP customers, particularly with adopters of digital dentistry platforms by tailoring our sales and marketing strategies, manufacturing operations and resources around the 40unique needs of each customer channel. As we continue growing, we intend to opportunistically expand our research, development, manufacturing, treatment planning, and sales and marketing operations to meet local and regional demand thoughtfully and deliberately. Over the longer-term, we expect international revenues to grow faster than Americas' revenues as a result of growing international demand, our continued investment in international market expansion, the size of the market opportunities and our relatively low market penetration in these regions.•Building confidence within the GP and orthodontic communities through training and education efforts to increase their adoption and utilization of digital dental practice transformation and clear aligner treatment. Accordingly, we continue to expand our Invisalign customer base by educating new doctors on the benefits of digital dentistry through the Invisalign system and demonstrating to GPs and orthodontists how the iTero portfolio of intraoral scanners and CAD/CAM restorative services and workflows can increase revenues and profitability for their dental practices by enhancing patient experiences and creating operation practice efficiencies.•Investing in research and development that allows us to innovate, develop and bring to market products and solutions that deliver the ever-increasing clinical precision and predictability that doctors expect with the speed and convenience their patients require.•Creating demand and enabling patient conversion through targeted investments in advertising and public relations through social media, influencers and other forms of digital communications to encourage treatment by Invisalign trained doctors. We believe that well-designed, targeted sales and marketing promotions that build on our strong brand awareness allow us to differentiate our products and solutions from traditional and emerging competitors. In 2022, we continued to build on the success of the “Invis-is” consumer advertising campaign with creative content and influencers focused on teens and young adults. We expect to make further investments to create additional demand for Invisalign system treatment driving more consumers to dental professionals for those treatments.•Pursuing new product lines that complement our doctor-prescribed principal products currently available in certain e-commerce and retail channels in the U.S. Similarly, in 2023 we expect to continue to focus on our doctor subscription plan and grow our underpenetrated share of the retainer business through strategic marketing campaigns focused on driving adoption and increasing market share in the U.S.•Increasing global orthodontic utilization rates as doctors’ clinical confidence in the efficacy and predictability of the Invisalign system increases with advancements in products and technology and as patients and doctors demand treatments that emphasize convenience and safety through fewer visits and less invasive and quicker treatments. In addition, the teenage and younger market makes up 75% of the approximately 21 million total annual global orthodontic case starts each year. As we continue to emphasize the benefits of the Invisalign system for teenage and younger patient treatments through education, training and sales and marketing programs, we expect utilization rates to rise. However, our utilization rates will fluctuate from period to period due to a variety of factors, which may include seasonal trends in our business, consumer demand due to macroeconomic factors, office closures or slowdowns related to COVID-19-and adoption rates for new products and features. Macroeconomic Challenges and Military Conflict in Ukraine Our revenues are susceptible to fluctuations in macroeconomic conditions, in line with inflation, rising interest rates, threats of or actual recessions, fluctuations in currency exchange rates, supply chain challenges, market volatility, wars and military actions, and other factors, each of which impact customer confidence, consumer sentiment and demand. Many of these same factors are also impacting our costs through higher raw material prices, transportation costs, labor costs, supply and distribution operations and the operations of our suppliers. Additionally, many of our international operations are denominated in currencies other than the U.S. dollar and in 2022 were impacted, and may continue to be impacted, by macroeconomic slowing or contraction causing weakening against the U.S. dollar, which is negatively impacting our financial condition and results of operations. While we expect moderation of the strength of the dollar, we also expect the dollar to remain historically strong against many of these currencies. The nature and extent of the impact of these factors varies by time and region and remains uncertain and unpredictable.The military conflict between Russia and Ukraine increased the unpredictability of the already uncertain macroeconomic conditions during 2022 and may continue to impact this unpredictability. While we continue to employ research and development personnel in Russia as well as certain sales, marketing and administrative personnel, the total number of employees in Russia was significantly reduced in 2022, complementing programs previously underway aimed at maintaining and growing our research and development operations and diversifying the facilities at which our personnel are located. 41Although immaterial to our consolidated financial statements, our commercial business operations in Russia were significantly impacted by the conflict in 2022. Although we remain committed to providing continuity of care consistent with our values and ethical responsibility to patients who are in Invisalign treatment in Russia, we deemed it prudent to align the size of our commercial operations with the ongoing resources needed to perform those functions. Accordingly, in the fourth quarter of 2022, we initiated a restructuring plan to increase efficiencies across the organization and lower our overall cost structure, which reduced the number of employees and our commercial business operations in Russia. Refer to Note 16 “Restructuring and Other Charges” of the Notes to Consolidated Financial Statements for further details. Our Board of Directors and its applicable committees receive regular updates from management regarding the military conflict between Russia and Ukraine and continue to provide oversight of the risks to our personnel, operations and other areas of strategic importance. Our management continues to closely monitor the situation and evaluate additional ways in which we can support our employees and operations. COVID-19 Pandemic UpdateAlthough there remains significant uncertainty surrounding the COVID-19 pandemic for regional economies, its global impact has gradually declined. During 2022, we experienced the impacts of the COVID-19 pandemic primarily in the Asia Pacific region, particularly in China, where lockdowns decreased economic activity throughout most of the year. With the easing of the restrictions in China in 2023 and the increased rate of infections, the impacts of the COVID-19 pandemic are likely to persist into 2023 and remain unpredictable, but we expect it to be at a lesser extent than in 2022. Nevertheless, comparing our financial results for the reporting periods of 2023 to the same reporting periods of 2022 or earlier may not be a useful means by which to evaluate our business and results of operations due to volatility in regional business environments caused by the pandemic.Changing Product PreferencesAs the markets for clear aligners and digital processes and workflows used to transform the practice of dentistry continue to mature, we anticipate customer and patient expectations and demands will evolve. We expect to meet customer demands with innovative treatment options that include more choices to address a wider scope of treatment goals and budgets based on our existing and new products. This may result in larger and unpredictable variations in geographic and product mix and selling prices with uncertain implications on our financial statements and business operations.We strive to manage the challenges from the macroeconomic conditions, the conflict in Ukraine, COVID-19 and the evolution of our target markets by focusing on improving our operations, building flexibility and efficiencies in our processes, adjusting our business models to changing circumstances and offering products that meet market demand. Specifically, we are managing cost impacts through pricing actions, implementing cost saving measures and slowing hiring. We also continue to innovate and introduce new and enhanced products that augment our doctor customer and patient experiences. Further discussion of the impact of these challenges on our business may be found in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”Key Financial and Operating MetricsWe measure our performance against these strategic priorities by the achievement of key financial and operating metrics. For the year ended December 31, 2022, our business operations reflect the following:◦Revenues of $3,734.6 million, a decrease of 5.5% year-over-year;◦Clear Aligner revenues of $3,072.6 million, a decrease of 5.4% year-over-year;▪Americas Clear Aligner revenues of $1,458.8 million, a decrease of 5.6% year-over-year;▪International Clear Aligner revenues of $1,349.0 million, a decrease of 10.0% year-over-year;▪Clear Aligner volume decrease of 7.4% year-over-year and Clear Aligner volume decrease for teenage patients of 0.2% year-over-year;◦Imaging Systems and CAD/CAM Services revenues of $662.1 million, a decrease of 6.2% year-over-year;◦Income from operations of $642.6 million and operating margin of 17.2%;◦Effective tax rate of 39.6%;◦Net income of $361.6 million with diluted net income per share of $4.61;◦Cash, cash equivalents and marketable securities of $1,041.6 million as of December 31, 2022;◦Operating cash flow of $568.7 million;◦Capital expenditures of $291.9 million, predominantly related to increases in our manufacturing capacity and facilities; and42◦Number of employees was 23,165 as of December 31, 2022, an increase of 2.8% year-over-year. Other Statistical Data and Trends•As of December 31, 2022, over 14 million people worldwide have been treated with our Invisalign system. Management measures these results by comparing to the millions of people who can benefit from straighter teeth and uses this data to target opportunities to expand the market for orthodontics by educating consumers about the benefits of straighter teeth using the Invisalign system.•For the fourth quarter of 2022, total Invisalign cases submitted with a digital scanner in the Americas increased to 92.5%, up from 89.1% in the fourth quarter of 2021 and international scans increased to 86.8%, up from 80.8% in the fourth quarter of 2021. For the fourth quarter of 2022, 97.4% of Invisalign cases submitted by North American orthodontists were submitted digitally. •The total utilization rate in 2022 was 18.9 cases per doctor compared to 20.8 cases per doctor in 2021 and 16.1 cases per doctor in 2020. Our utilization rates have declined in 2022 due to the macroeconomic conditions, COVID-19 impacts, and other factors as described in the Trends and Uncertainties section above. In general, we expect utilization rates to rise over time although they are likely to fluctuate from period to period.•North America: The utilization rate among our North American orthodontist customers was 89.2 cases per doctor in 2022 compared to 98.1 cases per doctor in 2021 and 67.3 cases per doctor in 2020 and the utilization rate among our North American GP customers was 13.9 cases per doctor in 2022 compared to 14.3 cases per doctor in 2021 and 9.6 cases per doctor in 2020. •International: International doctor utilization rate was 16.2 cases per doctor in 2022 compared to 17.5 cases per doctor in 2021 and 14.5 cases per doctor in 2020.* Invisalign utilization rates are calculated by the number of cases shipped divided by the number of doctors to whom cases were shipped. Our International region includes Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). Latin America (“LATAM”) is excluded from the International region based on its immateriality to the year; however is included in the Total utilization. Results of Operations43Net Revenues by Reportable Segment We group our operations into two reportable segments: Clear Aligner segment and Systems and Services segment.•Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:•Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First. •Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go and Invisalign Go Plus. •Non-Case products include, but are not limited to, retention products, Invisalign training, adjusting tools used by dental professionals during the course of treatment and Invisalign Accessory Products that are complementary to our doctor-prescribed principal products such as aligner cases (clamshells), teeth whitening products, cleaning solutions (crystals, foam and other material) and other oral health products available in certain e-commerce channels in select markets. We also offer in the U.S. and Canada, a Doctor Subscription Program which is a monthly subscription program based on the doctor’s monthly need for retention or limited treatment. The program allows doctors the flexibility to order both “touch-up” or retention aligners within their subscribed tier and is designed for a segment of experienced Invisalign trained doctors who are currently not regularly using our retainers or low-stage aligners.•Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options. Our services include subscription software, disposables, rentals, leases, pay per scan services, as well as exocad’s CAD/CAM software solutions that integrate workflows to dental labs and dental practices.Net revenues for our Clear Aligner and Systems and Services segments by region for the year ended December 31, 2022, 2021 and 2020 are as follows (in millions): Year Ended December 31,Year Ended December 31,Net Revenues20222021Change20212020ChangeClear Aligner revenues: Americas$1,458.8 $1,544.8 $(85.9)(5.6)%$1,544.8 $1,010.2 $534.5 52.9 % International1,349.0 1,498.7 (149.7)(10.0)%1,498.7 965.4 533.2 55.2 % Non-case 264.8 203.7 61.1 30.0 %203.7 125.8 77.8 61.9 %Total Clear Aligner net revenues $3,072.6 $3,247.1 $(174.5)(5.4)%$3,247.1 $2,101.5 $1,145.6 54.5 %Systems and Services net revenues662.1 705.5 (43.5)(6.2)%705.5 370.5 335.0 90.4 %Total net revenues$3,734.6 $3,952.6 $(217.9)(5.5)%$3,952.6 $2,471.9 $1,480.6 59.9 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Clear Aligner Case VolumeCase volume data which represents Clear Aligner case shipments for the year ended December 31, 2022, 2021 and 2020 is as follows (in thousands): Year Ended December 31,Year Ended December 31,20222021Change20212020ChangeTotal case volume2,358.7 2,547.7 (189.0)(7.4)%2,547.7 1,645.3 902.4 54.8 % Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Total net revenues decreased by $217.9 million in 2022 as compared to 2021, primarily due to unfavorable foreign exchange rates, a decrease in both Clear Aligner case volumes and scanner volumes, partially offset by increases in Clear Aligner non-case revenues, service revenues and an increase in Clear Aligner average selling price (“ASP”).44Clear Aligner - AmericasAmericas net revenues decreased by $85.9 million in 2022 as compared to 2021, primarily due to a decrease in case volumes of 9.4% which reduced net revenues by $145.3 million, partially offset by an increase in ASP which increased net revenues by $59.4 million. Higher ASP was mainly due to processing fees charged on most shipments and price increases in certain markets which increased net revenues by $54.2 million along with lower net deferrals which increased net revenues by $34.5 million. The increases in ASP were partially offset by unfavorable promotional discounts and sales credits which reduced net revenues by $25.1 million.Clear Aligner - InternationalInternational net revenues decreased by $149.7 million in 2022 as compared to 2021 due to a 5.0% decrease in case volumes, which decreased net revenues by $75.1 million, and lower ASP, which decreased net revenues by $74.6 million. Lower ASP was largely due to unfavorable foreign exchange rates which resulted in lower net revenues of $150.6 million, a product mix shift to lower priced products which decreased net revenues by $60.5 million, and unfavorable promotional discounts which decreased net revenues $39.4 million. The decrease in ASP was partially offset by processing fees charged on most shipments which increased net revenues by $94.1 million and lower net deferrals which increased net revenues by $81.4 million. Clear Aligner - Non-CaseNon-case net revenues increased by $61.1 million in 2022 compared to 2021 mainly due to increased volume for retention products across most regions primarily driven by Vivera retainers. Systems and ServicesSystems and Services net revenues decreased by $43.5 million in 2022 as compared to 2021 primarily due to a lower number of scanners sold which decreased net revenues by $97.1 million and lower scanner ASP which decreased net revenues by $9.0 million. The decreases were partially offset by higher service and other revenues which increased net revenues by $62.6 million mostly due to a larger scanner install base.Cost of net revenues and gross profit (in millions): Year Ended December 31,Year Ended December 31, 20222021Change20212020ChangeClear AlignerCost of net revenues$844.4 $772.7 $71.7 $772.7 $569.3 $203.4 % of net segment revenues27.5 %23.8 %23.8 %27.1 %Gross profit$2,228.2 $2,474.4 $(246.2)$2,474.4 $1,532.1 $942.2 Gross margin %72.5 %76.2 %76.2 %72.9 %Systems and ServicesCost of net revenues$256.4 $244.5 $11.9 $244.5 $139.4 $105.1 % of net segment revenues38.7 %34.7 %34.7 %37.6 %Gross profit$405.6 $461.0 $(55.4)$461.0 $231.1 $229.9 Gross margin %61.3 %65.3 %65.3 %62.4 %Total cost of net revenues$1,100.9 $1,017.2 $83.6 $1,017.2 $708.7 $308.5 % of net revenues29.5 %25.7 %25.7 %28.7 %Gross profit$2,633.8 $2,935.4 $(301.6)$2,935.4 $1,763.2 $1,172.1 Gross margin %70.5 %74.3 %74.3 %71.3 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.Clear Aligner45The gross margin percentage decreased in 2022 as compared to 2021 primarily due to a higher mix of additional aligners, higher freight costs and increased manufacturing spend as we continue to ramp our new manufacturing facility in Poland.Systems and ServicesThe gross margin percentage decreased in 2022 as compared to 2021 primarily due to manufacturing inefficiencies from lower production volumes and lower ASP. These factors were partially offset by higher service revenues.Selling, general and administrative (in millions): Year Ended December 31,Year Ended December 31, 20222021Change20212020ChangeSelling, general and administrative$1,674.5 $1,708.6 $(34.2)$1,708.6 $1,200.8 $507.9 % of net revenues44.8 %43.2 %43.2 %48.6 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Selling, general and administrative expense generally includes personnel-related costs, including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, market research, marketing materials, clinical education, trade shows and industry events, legal and outside service costs, equipment, software and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology (“IT”).Selling, general and administrative expense decreased in 2022 compared to 2021 primarily due to lower incentive compensation, lower advertising and marketing costs and lower allocations of corporate overhead expenses. These decreases were offset by higher salaries expenses, fringe benefits and stock-based compensation from increased headcount as well as higher equipment, software and maintenance costs. Research and development (in millions): Year Ended December 31,Year Ended December 31, 20222021Change20212020ChangeResearch and development$305.3 $250.3 $54.9 $250.3 $175.3 $75.0 % of net revenues8.2 %6.3 %6.3 %7.1 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Research and development expense generally includes personnel-related costs, including payroll and stock-based compensation, outside service costs associated with the research and development of new products and enhancements to existing products, software, equipment, material and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and IT.Research and development expense increased in 2022 compared to 2021 primarily due to higher salaries expense, fringe benefits and stock-based compensation as we continue to focus our investments in innovation and research in addition to higher allocations of corporate overhead expenses, outside services costs and equipment and materials costs. These increases were partially offset by lower incentive compensation.Restructuring and other charges (in millions): Year Ended December 31,Year Ended December 31, 20222021Change20212020ChangeRestructuring and other charges$11.5 $— $11.5 $— $— $— % of net revenues0.3 %— %— %— %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Restructuring and other charges includes $7.3 million of severance and related costs, in addition to lease termination charges and asset impairments.46Income from operations (in millions): Year Ended December 31,Year Ended December 31, 20222021Change20212020ChangeClear AlignerIncome from operations$1,134.4 $1,325.9 $(191.4)$1,325.9 $768.0 $557.8 Operating margin %36.9 %40.8 %40.8 %36.5 %Systems and ServicesIncome from operations$179.8 $259.1 $(79.4)$259.1 $96.1 $163.1 Operating margin %27.2 %36.7 %36.7 %25.9 %Total income from operations 1$642.6 $976.4 $(333.8)$976.4 $387.2 $589.2 Operating margin %17.2 %24.7 %24.7 %15.7 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.1 Refer to Note 15 “Segments and Geographical Information” of the Notes to Consolidated Financial Statements for details on unallocated corporate expenses and the reconciliation to Consolidated Income from Operations.Clear AlignerOperating margin percentage decreased in 2022 compared to 2021 primarily due to lower gross margin.Systems and ServicesOperating margin percentage decreased in 2022 compared to 2021 primarily due to higher operating expenses as a percentage of net revenues as well as lower gross margin.Interest income (in millions): Year Ended December 31,Year Ended December 31, 20222021Change20212020ChangeInterest income$5.4 $3.1 $2.3 $3.1 $3.1 $— % of net revenues0.1 %0.1 %0.1 %0.1 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Interest income generally includes interest earned on cash, cash equivalents and investment balances.Interest income increased in 2022 compared to 2021 primarily due to higher interest rates during 2022, which was partially offset by the interest earned from the arbitration award related to our investment in SmileDirectClub in the first quarter of 2021. Other income (expense), net (in millions): Year Ended December 31,Year Ended December 31, 20222021Change20212020ChangeOther income (expense), net$(48.9)$32.9 $(81.8)$32.9 $(11.3)$44.3 % of net revenues(1.3)%0.8 %0.8 %(0.5)%Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Other income (expense), net, generally includes foreign exchange gains and losses, gains and losses on foreign currency forward contracts, interest expense, gains and losses on equity investments and other miscellaneous charges.Other income (expense), net decreased in 2022 compared to 2021 primarily due to a $43.4 million gain associated to the arbitration award related to our investment in SmileDirectClub recognized in the first quarter of 2021 as well as $30.5 million of higher net foreign exchange losses from the weakening of international currencies against the U.S. dollar in 2022 as compared to 2021.47Provision for (benefit from) income taxes (in millions): Year Ended December 31,Year Ended December 31, 20222021Change20212020ChangeProvision for (benefit from) income taxes$237.5 $240.4 $(2.9)$240.4 $(1,396.9)$1,637.3 Effective tax rates39.6 %23.7 %23.7 %(368.6)%Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.The increase in our effective tax rate for the year ended December 31, 2022 compared to the same period in 2021 is primarily attributable to decreased earnings in low tax jurisdictions and an increase in the amount of foreign earnings subject to US tax in 2022. Additionally, a change in U.S. tax laws effective January 1, 2022 which requires capitalization and amortization of research and development expenses incurred after December 31, 2021 increased our effective tax rate for the year ended December 31, 2022.During 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, where our EMEA regional headquarters is located beginning January 1, 2020. The transfer of intellectual property rights did not result in a taxable gain; however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $1,493.5 million during the year ended December 31, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory. The amortization of this deferred tax asset depends on the profitability of our Swiss headquarters and the recognition of this tax benefit is allowed for a maximum recovery period of 15 years. The U.S. Inflation Reduction Act of 2022 (“IRA”) was enacted in the United States on August 16, 2022. The IRA imposes a 15% alternative minimum tax on the financial statement income of certain corporations which is effective for tax years beginning after December 31, 2022, as well as a 1% excise tax on the net fair market value of stock repurchases made after December 31, 2022. Based upon our analysis of the IRA, we have determined there is no impact to our tax provision for the year ended December 31, 2022. We will continue to evaluate the impact of these tax law changes on future periods. Liquidity and Capital ResourcesLiquidity and TrendsAs of December 31, 2022 and 2021, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):December 31, 20222021Cash and cash equivalents$942,050 $1,099,370 Marketable securities, short-term 57,534 71,972 Marketable securities, long-term41,978 125,320 Total$1,041,562 $1,296,662 As of December 31, 2022 and 2021, approximately $653.7 million and $713.8 million, respectively, of cash, cash equivalents and marketable securities were held by our foreign subsidiaries. We intend to continue reinvesting our foreign subsidiary earnings indefinitely and expect the additional costs upon repatriation of these foreign earnings not to be significant. We generate sufficient domestic operating cash flow and have access to external funding under our $300.0 million revolving line of credit. We believe that our current cash balances and the borrowing capacity under our credit facility, if necessary, will be sufficient to fund our business for at least the next 12 months.The sanctions against Russian banks or international bank messaging systems due to the military conflict between Ukraine and Russia could impact our ability to access our cash in Russia but would not materially impact our liquidity position. As of December 31, 2022, cash and cash equivalents domiciled in Russia, which is required to fund their current operating requirements, represent approximately 2.6% of our total cash, cash equivalents and marketable securities. Our material cash requirements as of December 31, 2022 are as below:48•Our purchase commitments for goods and services, excluding capital expenditures, totaled $1,151.7 million, of which $860.8 million will be payable within the next 12 months. These commitments primarily relate to agreements with contract manufacturers and suppliers, sales and marketing services, research and development services and technological services. •We expect our investments in capital expenditures to exceed $200.0 million for the next 12 months. Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity due to international expansion. Despite the challenging market conditions, we intend to expand our investments in research and development, manufacturing, treatment planning, sales and marketing operations to meet actual and anticipated local and regional demands. •We have future operating lease payments of $158.3 million, which includes $14.3 million for leases that have not yet commenced as of December 31, 2022. Refer to Note 4 “Leases” of the Notes to Consolidated Financial Statements for details on the lease payments. •We have $249.9 million available for repurchase under the stock repurchase program authorized by our Board of Directors in May 2021 (“May 2021 Repurchase Program”). Our stock repurchase program is subject to periodic evaluations to determine when and if repurchases are in the best interests of our stockholders, taking into account prevailing market conditions. Refer to Note 10 “Common Stock Repurchase Programs” of the Notes to Consolidated Financial Statements for details on our stock repurchase programs. Subsequent to the fourth quarter, in January 2023, our Board of Directors authorized a new plan to repurchase up to $1.0 billion of our common stock. Additionally, in February 2023, we entered into an ASR to repurchase $250.0 million of our common stock, completing our 2021 Repurchase Program. Under the Inflation Reduction Act of 2022, effective January 1, 2023, excise tax of 1% is applicable to stock repurchases. We are currently evaluating the impact of this provision, if any, on our results of operations and cash flows.Sources and Use of Cash The following table summarizes our Consolidated Statements of Cash Flows for the year ended December 31, 2022, 2021 and 2020 (in thousands): Year Ended December 31, 202220212020Net cash provided by (used in):Operating activities$568,732 $1,172,544 $662,174 Investing activities(213,316)(563,430)(231,506)Financing activities(501,686)(458,332)(30,808)Effects of foreign exchange rate changes on cash, cash equivalents, and restricted cash (11,514)(12,117)10,480 Net (decrease) increase in cash, cash equivalents, and restricted cash$(157,784)$138,665 $410,340 Operating ActivitiesFor the year ended December 31, 2022, cash flows from operations of $568.7 million resulted primarily from our net income of approximately $361.6 million as well as the following:Significant adjustments to net income•Stock-based compensation of $133.4 million related to equity awards granted to employees and directors; and•Depreciation and amortization of $125.8 million related to our investments in property, plant and equipment and intangible assets.Significant changes in working capital ��Increase of $241.9 million in deferred revenues due to the deferral of revenue on shipments over the period as well as timing of revenue recognition;•Increase of $130.1 million in inventories primarily due to lower shipment volumes over the period in addition to our efforts to manage stock at appropriate levels as required; and49•Decrease of $121.9 million in accrued and other long-term liabilities primarily due to the payment of our 2021 corporate bonus as well as timing payment of other activities.For the year ended December 31, 2021, cash flows from operations of $1,172.5 million resulted primarily from our net income of approximately $772.0 million as well as the following:Significant adjustments to net income•Stock-based compensation of $114.3 million related to equity awards granted to employees and directors;•Depreciation and amortization of $108.7 million related to our investments in property, plant and equipment and intangible assets; and•Gain related to our SDC arbitration award of $43.4 million.Significant changes in working capital•Increase of $462.6 million in deferred revenues primarily related to increased case volumes in our Clear Aligner segment, increased scanner volumes in our Systems and Services segment and timing of revenue recognition;•Increase of $262.1 million in accounts receivable which is primarily a result of the increase in our sales; •Increase of $158.5 million in accrued and other long-term liabilities and an increase of $124.6 million in prepaid expenses and other assets due to the timing of prepayment and activities; and•Increase of $112.5 million in inventories to support our demand, including safety stock, due to shipping delays during the COVID-19 pandemic as well as long lead times with our suppliers.Investing ActivitiesNet cash used in investing activities was $213.3 million for the year ended December 31, 2022 which primarily consisted of purchases of property, plant and equipment of $291.9 million, purchases of marketable securities of $28.0 million and $12.3 million cash paid relating to a business acquisition. These outflows were partially offset by sales and maturities of marketable securities of $121.1 million. Net cash used in investing activities was $563.4 million for the year ended December 31, 2021 and primarily consisted of purchases of property, plant and equipment of $401.1 million and purchases of marketable securities of $200.9 million, which were partially offset by $43.4 million of proceeds from our SDC arbitration award.Financing ActivitiesNet cash used in financing activities was $501.7 million for the year ended December 31, 2022 which consisted of payments related to our common stock repurchases of $475.0 million and payroll taxes paid for equity awards through share withholdings of $52.8 million, which were partially offset by $26.1 million of proceeds from the issuance of common stock under our employee stock purchase plan. Net cash used in financing activities was $458.3 million for the year ended December 31, 2021 which consisted of payments related to our accelerated stock repurchase arrangements of $375.0 million and payroll taxes paid for equity awards through share withholdings of $108.9 million which were partially offset by $25.6 million of proceeds from the issuance of common stock.Critical Accounting Policies and Estimates Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. We evaluate our estimates on an on-going basis and use authoritative pronouncements, historical experience and other assumptions as the basis for making the estimates. Actual results could differ from those estimates.We believe the following critical accounting policies and estimates affect our more significant judgments used in the preparation of our consolidated financial statements. For further information on all of our significant accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements under

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis MDA includes information relating to Alliant Energy, IPL and WPL, as well as AEF and Corporate Services. Where appropriate, information relating to a specific entity has been segregated and labeled as such. The following discussion and analysis should be read in conjunction with the Financial Statements and Notes included in this report. Unless otherwise noted, all “per share” references in MDA refer to earnings per diluted share. In addition, this MDA includes certain financial information for 2022 compared to 2021. Refer to MDA in the combined 2021 Form 10-K for details on certain financial information for 2021 compared to 2020.24Table of ContentsOVERVIEWMission, Purpose and StrategyAlliant Energy’s mission is to deliver affordable energy solutions and exceptional service that its customers and communities count on - affordably, safely, reliably, and sustainably. This mission aligns with Alliant Energy’s purpose - to serve customers and build stronger communities - which guides it through the ever-changing dynamics of the economy and the energy industry. Alliant Energy takes its responsibility as a corporate citizen seriously and remains a careful steward of the environment and supports the communities in its service territories. Alliant Energy’s mission and purpose is supported by a strategy focused on meeting the evolving expectations of customers while providing an attractive return for investors, and pursuing emerging technologies and safe, sustainable methods of energy production. This strategy includes the following key elements:Providing affordable energy solutions to customers - Alliant Energy’s strategy focuses on affordable energy solutions that support retention and growth of its existing customers and attract new customers to its service territories.Key Highlights - •Alliant Energy’s Clean Energy Blueprint, also known as its cleaner energy strategy, continues to add clean energy resources in Iowa and Wisconsin, which directly reinvests in the communities Alliant Energy serves through the addition of skilled jobs, economic development and increased tax revenue. The execution of Alliant Energy’s strategy is expected to result in cost benefits for its utility customers by continuing to add renewable energy projects that generate fuel cost benefits and renewable tax credits that are provided to its electric customers. Alliant Energy, IPL and WPL currently expect to utilize various provisions of the Inflation Reduction Act of 2022 to enhance the tax benefits expected from their announced solar and battery storage projects, including transferring certain future tax credits from such projects to other corporate taxpayers.•In 2022, Alliant Energy’s wind generation was the highest in its history, which resulted in renewable tax credits and fuel cost savings for its customers.•Reductions in Iowa corporate income tax rates resulting from tax reform enacted in March 2022 are expected to provide cost benefits to IPL’s customers in the future.•IPL maintaining flat base rates for its retail electric and gas customers in 2021 and 2022.•IPL’s renewable energy rider became effective February 26, 2020, which allows for annual adjustments to electric rates charged to IPL’s retail electric customers for actual renewable energy costs incurred to fund IPL’s 1,000 MW of wind EGUs placed in service in 2019 and 2020, and related tax benefits, including production tax credits, that are provided to its electric customers.•Providing $35 million of billing credits to IPL’s retail electric customers beginning in the third quarter of 2020 through June 2021, largely driven by Federal Tax Reform benefits for customers.•Significant fuel cost reductions achieved in 2021 and 2022 as a result of shortening the term of IPL’s DAEC PPA by 5 years.•Issuance of new long-term debt at historically low interest rates for IPL ($300 million of 3.1% senior debentures due 2051) and WPL ($300 million of 1.95% green bonds due 2031) in 2021, and WPL ($600 million of 3.95% green bonds due 2032) in 2022.•Redemption of IPL’s 5.1% cumulative preferred stock in 2021.•Levelized cost recovery mechanism for the remaining net book value of Edgewater Unit 5, which helps reduce customer costs in 2022 and 2023.Making customer-focused investments - Alliant Energy’s strategic priorities include making significant customer-focused investments toward cleaner energy and resilient and sustainable customer solutions. Alliant Energy’s strategy drives a capital allocation process focused on: 1) transitioning its generation portfolio to meet the growing interest of customers for reliable and sustainable sources of energy, 2) upgrading its electric and gas distribution systems to strengthen safety and resiliency, as well as enable distributed energy solutions in its service territories, and 3) enhancing its customers’ and employees’ experience with evolving technology and greater flexibility.Key Highlights (refer to “Customer Investments” for details) - •Planned development and acquisition of additional renewable energy, including approximately 1,100 MW of solar generation at WPL with in-service dates in 2022-2024, approximately 275 MW of battery storage at WPL with in-service dates in 2024 and 2025, approximately 400 MW of solar generation at IPL with in-service dates in 2023 and 2024, and approximately 75 MW of battery storage at IPL with in-service dates in 2024. In addition, IPL and WPL continue to evaluate additional opportunities to add more renewable generation, including repowering of existing wind farms and additional solar generation and distributed energy resources, including community solar and energy storage systems.•Plans to construct and/or acquire additional renewable, battery and natural gas resources to meet the requirements of MISO’s new seasonal resource adequacy process establishing capacity planning reserve margin and capacity accreditation requirements effective with the 2023/2024 MISO Planning Year.•WPL’s completion of new solar generation in Wisconsin in 2022, including 150 MW in Wood County, 50 MW in Richland County, and 50 MW in Rock County.25Table of ContentsGrowing customer demand - Alliant Energy’s strategy supports expanding electric and gas usage in its service territories by promoting electrification initiatives and economic development in the communities it serves.Key Highlights - •Alliant’s Energy’s economic development efforts resulted in being named a Top Utility in Economic Development by Site Selection Magazine for the fourth year in a row, and in 2022 being awarded the Chairman’s Award for Workforce Development Leadership by the Center for Energy Workforce Development.•Alliant Energy continues to partner with its commercial and industrial customers to help develop renewable solutions to enhance their sustainability initiatives, including planned solar facilities in Iowa and Wisconsin.•Alliant Energy has various development-ready sites throughout Iowa and Wisconsin, including the 1,300-acre Big Cedar Industrial Center Mega-site in Cedar Rapids, Iowa, and the 730-acre Prairie View Industrial Center Super Park in Ames, Iowa, which are rail-served ready-to-build manufacturing and industrial sites in close proximity to the regional airport and interstate freeways and access IPL’s electric services. The Big Cedar Industrial Center Mega-site also accesses Travero’s rail-served warehouse in Iowa. In addition, the Beaver Dam Commerce Park is a 520-acre ready-to-build manufacturing and industrial site in Beaver Dam, Wisconsin, with access to commercial and freight airports, interstate freeways and WPL’s electric services.RESULTS OF OPERATIONSResults of operations include financial information prepared in accordance with GAAP as well as utility electric margins and utility gas margins, which are not measures of financial performance under GAAP. Utility electric margins are defined as electric revenues less electric production fuel, purchased power and electric transmission service expenses. Utility gas margins are defined as gas revenues less cost of gas sold. Utility electric margins and utility gas margins are non-GAAP financial measures because they exclude other utility and non-utility revenues, other operation and maintenance expenses, depreciation and amortization expenses, and taxes other than income tax expense.Management believes that utility electric and gas margins provide a meaningful basis for evaluating and managing utility operations since electric production fuel, purchased power and electric transmission service expenses and cost of gas sold are generally passed through to customers, and therefore, result in changes to electric and gas revenues that are comparable to changes in such expenses. The presentation of utility electric and gas margins herein is intended to provide supplemental information for investors regarding operating performance. These utility electric and gas margins may not be comparable to how other entities define utility electric and gas margin. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.Additionally, the table below includes EPS for Utilities and Corporate Services, ATC Holdings, and Non-utility and Parent, which are non-GAAP financial measures. Alliant Energy believes these non-GAAP financial measures are useful to investors because they facilitate an understanding of segment performance and trends, and provide additional information about Alliant Energy’s operations on a basis consistent with the measures that management uses to manage its operations and evaluate its performance.Financial Results Overview - Alliant Energy’s net income and EPS attributable to Alliant Energy common shareowners were as follows (dollars in millions, except per share amounts):20222021Income (Loss)EPSIncome (Loss)EPSUtilities and Corporate Services$690$2.74$632$2.52ATC Holdings290.12310.12Non-utility and Parent(33)(0.13)(4)(0.01)Alliant Energy Consolidated$686$2.73$659$2.63Alliant Energy’s Utilities and Corporate Services net income increased by $58 million in 2022 compared to 2021. The increase was primarily due to higher revenue requirements and AFUDC from WPL capital investments and higher electric and gas margins, including the impacts of temperatures. These items were partially offset by higher depreciation expense.Alliant Energy’s Non-utility and Parent net income decreased by $29 million in 2022 compared to 2021, primarily due to higher financing expense and the impact of the Iowa state income tax rate change.26Table of ContentsOperating income and a reconciliation of utility electric and gas margins to the most directly comparable GAAP measure, operating income, was as follows (in millions):Alliant EnergyIPLWPL202220212022202120222021Operating income$928 $795 $453 $460 $452 $308 Electric utility revenues$3,421 $3,081 $1,859 $1,752 $1,562 $1,329 Electric production fuel and purchased power expenses(830)(642)(383)(295)(447)(347)Electric transmission service expense(573)(537)(407)(367)(166)(170)Utility Electric Margin (non-GAAP)2,018 1,902 1,069 1,090 949 812 Gas utility revenues642 456 351 265 291 191 Cost of gas sold(389)(258)(206)(149)(183)(109)Utility Gas Margin (non-GAAP)253 198 145 116 108 82 Other utility revenues49 49 46 46 3 3 Non-utility revenues93 83 — — — — Other operation and maintenance expenses(704)(676)(369)(362)(278)(268)Depreciation and amortization expenses(671)(657)(381)(375)(283)(276)Taxes other than income tax expense(110)(104)(57)(55)(47)(45)Operating income$928 $795 $453 $460 $452 $308 Operating Income Variances - Variances between periods in operating income for 2022 compared to 2021 were as follows (in millions):Alliant EnergyIPLWPLTotal higher (lower) utility electric margin variance (Refer to details below)$116($21)$137Total higher utility gas margin variance (Refer to details below)552926Total higher other operation and maintenance expenses variance (Refer to details below)(28)(7)(10)Total higher depreciation and amortization expense(14)(6)(7)Other4(2)(2)$133($7)$144Electric and Gas Revenues and Sales Summary - Electric and gas revenues (in millions), and MWh and Dth sales (in thousands), were as follows:ElectricGasRevenuesMWhs SoldRevenuesDths Sold20222021202220212022202120222021Alliant EnergyRetail$3,019 $2,771 25,409 25,432 $588 $413 55,021 48,179 Sales for resale:Wholesale233 187 2,866 2,787 N/AN/AN/AN/ABulk power and other111 56 3,734 3,018 N/AN/AN/AN/ATransportation/Other58 67 62 71 54 43 104,812 99,179 $3,421 $3,081 32,071 31,308 $642 $456 159,833 147,358 IPLRetail$1,747 $1,633 14,270 14,283 $317 $237 28,492 24,881 Sales for resale:Wholesale64 57 771 738 N/AN/AN/AN/ABulk power and other13 17 1,401 1,069 N/AN/AN/AN/ATransportation/Other35 45 33 35 34 28 43,264 40,738 $1,859 $1,752 16,475 16,125 $351 $265 71,756 65,619 WPLRetail$1,272 $1,138 11,139 11,149 $271 $176 26,529 23,298 Sales for resale:Wholesale169 130 2,095 2,049 N/AN/AN/AN/ABulk power and other98 39 2,333 1,949 N/AN/AN/AN/ATransportation/Other23 22 29 36 20 15 61,548 58,441 $1,562 $1,329 15,596 15,183 $291 $191 88,077 81,739 27Table of ContentsSales Trends and Temperatures - Alliant Energy’s retail electric sales volumes were unchanged in 2022 compared to 2021 primarily due to increases in sales volumes to residential and commercial customers caused by changes in temperatures, offset by decreases in sales volumes to industrial customers caused by maintenance outages and labor-related disruptions at certain large customers. Alliant Energy’s retail gas sales volumes increased 14% in 2022 compared to 2021, primarily due to changes in temperatures and increases in the number of retail gas customers.Estimated increases (decreases) to electric and gas margins from the impacts of temperatures were as follows (in millions):Electric MarginsGas Margins2022202120222021IPL$16$12$5($1)WPL1072(2)Total Alliant Energy$26$19$7($3)Electric Sales for Resale - Electric sales for resale volume changes were largely due to changes in sales in the wholesale energy markets operated by MISO. These changes are impacted by several factors, including the availability and dispatch of Alliant Energy’s EGUs and electricity demand within these wholesale energy markets. Changes in sales for resale revenues were largely offset by changes in fuel-related costs, and therefore, did not have a significant impact on electric margins.Gas Transportation/Other - Gas transportation/other sales volume changes were largely due to changes in the gas volumes supplied to Alliant Energy’s natural gas-fired EGUs caused by the availability and dispatch of such EGUs. Changes in these transportation/other revenues did not have a significant impact on gas margins.Utility Electric Margin Variances - The following items contributed to increased (decreased) utility electric margins for 2022 compared to 2021 (in millions):Alliant EnergyIPLWPLHigher revenue requirements at WPL due to increasing rate base (a)$121$—$121Higher revenues at IPL due to changes in credits on customers’ bills related to excess deferred income tax benefits amortization through the tax benefit rider (offset by changes in income taxes)1111—Estimated changes in sales volumes caused by temperatures743Lower revenues at IPL related to changes in the renewable energy rider (mostly offset by changes in income taxes caused by higher production tax credits)(37)(37)—Other (includes higher wholesale margins at WPL)14113$116($21)$137(a)In December 2021, the PSCW issued an order authorizing annual base rate increases of $114 million and $15 million for WPL’s retail electric and gas customers, respectively, covering the 2022/2023 forward-looking Test Period, which was based on a stipulated agreement between WPL and certain stakeholders. The key drivers for the annual base rate increases include higher retail fuel-related costs in 2022, lower excess deferred income tax benefits in 2022 and 2023 compared to 2021, and revenue requirement impacts of increasing electric and gas rate base, including investments in solar generation. Retail electric rate changes were effective on January 1, 2022 and extend through the end of 2023. Retail gas rate changes were effective on January 1, 2022 and extended through the end of 2022. The higher fuel expense costs are recognized in electric margin and the lower amount of excess deferred income tax benefits is recognized as an increase in income tax expense.Utility Gas Margin Variances - The following items contributed to increased (decreased) utility gas margins for 2022 compared to 2021 (in millions):Alliant EnergyIPLWPLHigher revenues at IPL related to changes in recovery amounts for energy efficiency costs through the energy efficiency rider (mostly offset by changes in energy efficiency expense)$17$17$—Higher revenue requirements at WPL due to increasing rate base (refer to (a) above)17—17Estimated changes in sales volumes caused by temperatures1064Other (includes higher sales in 2022)1165$55$29$2628Table of ContentsOther Operation and Maintenance Expenses Variances - The following items contributed to (increased) decreased other operation and maintenance expenses for 2022 compared to 2021 (in millions):Alliant EnergyIPLWPLHigher energy efficiency expense at IPL (mostly offset by higher revenues)($15)($15)$—Non-utility Travero (mostly offset by higher revenues)(9)——Other (4)8(10)($28)($7)($10)Other Income and Deductions Variances - The following items contributed to (increased) decreased other income and deductions for 2022 compared to 2021 (in millions):Alliant EnergyIPLWPLHigher interest expense primarily due to financings completed in 2022 and 2021, and higher interest rates($48)($9)($16)Lower equity income from unconsolidated investments, net (refer to Note 6 for details of a reduction recorded in 2022 related to the MISO return on equity complaint)(11)——Higher AFUDC primarily due to changes in CWIP balances related to WPL’s solar generation35233Other (refer to Note 13(a) for details of IPL’s qualified pension plan settlement losses)(1)(5)3($25)($12)$20Income Taxes - Refer to Note 12 for details of effective income tax rates, including the impact of Iowa tax reform in 2022.Preferred Dividend Requirements of IPL - Refer to Note 8 for details of the redemption of IPL’s 5.1% cumulative preferred stock in 2021, including a $5 million non-cash charge recorded in 2021 related to this transaction.Other Future Considerations - In addition to items discussed in this report, the following key items could impact Alliant Energy’s, IPL’s and WPL’s future financial condition or results of operations:•Financing Plans - Alliant Energy currently expects to issue up to $250 million of common stock in 2023 through the distribution agreement for the sale from time to time of up to $225 million of common stock that was executed in December 2022, and its Shareowner Direct Plan. Alliant Energy and its subsidiaries currently expect to issue up to $1.2 billion of long-term debt in 2023. AEF has $400 million of long-term debt maturing in 2023.•Common Stock Dividends - Alliant Energy announced a 6% increase in its targeted 2023 annual common stock dividend to $1.81 per share, which is equivalent to a quarterly rate of $0.4525 per share, beginning with the February 2023 dividend payment. The timing and amount of future dividends is subject to an approved dividend declaration from Alliant Energy’s Board of Directors, and is dependent upon earnings expectations, capital requirements, and general financial business conditions, among other factors.•Higher Earnings on Increasing Rate Base - Alliant Energy and WPL currently expect an increase in earnings in 2023 compared to 2022 due to impacts from increasing revenue requirements related to investments in the utility business, including WPL’s solar investments.•Other Operation and Maintenance Expenses - Alliant Energy, IPL and WPL currently expect a decrease in other operation and maintenance expenses in 2023 compared to 2022 largely due to cost reductions resulting from operating efficiencies.•Interest Expense - Alliant Energy, IPL and WPL currently expect an increase in interest expense in 2023 compared to 2022 due to financings completed in 2022 and planned in 2023 as discussed above, as well as expected higher interest rates.CUSTOMER INVESTMENTSAlliant Energy’s, IPL’s and WPL’s strategic priorities include making significant customer-focused investments toward cleaner energy and resilient and sustainable customer solutions. These priorities include:Clean Energy BlueprintAlliant Energy has developed a Clean Energy Blueprint, or its cleaner energy strategy, as a guide to meet customer demand for affordable, safe, reliable and sustainable energy in Iowa and Wisconsin. This strategy includes the planned development and acquisition of additional renewable energy, including approximately 1,100 MW of solar generation at WPL with in-service dates in 2022-2024, approximately 275 MW of battery storage at WPL with in-service dates in 2024 and 2025, approximately 400 MW of solar generation at IPL with in-service dates in 2023 and 2024 and approximately 75 MW of battery storage at IPL with in-service dates in 2024. In order to support reliable and sustainable energy and meet the MISO’s new seasonal resource adequacy requirements, Alliant Energy, IPL and WPL continue to evaluate additional opportunities for renewable generation, distributed energy resources and natural gas resources, as well as repower existing wind farms. Estimated capital expenditures for these planned projects for 2023 through 2026 are included in the “Renewables and battery storage” line in the construction and acquisition table in “Liquidity and Capital Resources.” These estimates include current expectations for higher costs for various projects, as supply constraints and commodity inflation continue to be prevalent in the solar market. In 29Table of Contentsaddition, Alliant Energy completed the construction and acquisition of approximately 1,200 MW of wind generation in aggregate (approximately 1,000 MW at IPL and approximately 200 MW at WPL) from 2018 through 2020.WPL’s Solar Generation and Distributed Energy Resources - In June 2021, WPL received an order from the PSCW for its first CA authorizing WPL to acquire, own, and operate 675 MW of new solar generation in the following Wisconsin counties: Grant (200 MW), Sheboygan (150 MW), Wood (150 MW), Jefferson (75 MW), Richland (50 MW) and Rock (50 MW). In June 2022, WPL received an order from the PSCW for its second CA authorizing WPL to acquire, construct, own, and operate up to 414 MW of new solar generation in the following Wisconsin counties: Dodge (150 MW), Waushara (99 MW), Rock (65 MW), Grant (50 MW) and Green (50 MW). The Wood, Richland and Rock County projects were placed in service in 2022, and the remaining projects in the first and second CAs are expected to be placed in service in 2023 and 2024. The 1,089 MW of new solar generation is expected to replace energy and capacity being eliminated with the planned retirements of the coal-fired Edgewater Generating Station (414 MW) by June 1, 2025, and Columbia Units 1 and 2 (595 MW in aggregate) by June 1, 2026, which are the last coal-fired EGUs at WPL. The retirement of these coal-fired EGUs supports Alliant Energy’s strategy, which is focused on meeting its customers’ energy needs in an affordable, safe, reliable and sustainable manner.In September 2022, WPL filed a request with the PSCW for approval to construct, own and operate 175 MW of battery storage, with 100 MW and 75 MW at the Grant County and Wood County solar projects, respectively, with in-service dates in 2024. In January 2023, WPL filed a request with the PSCW for approval to construct, own and operate approximately 99 MW of battery storage at the Edgewater Generating Station, with an in-service date in 2025.IPL’s Solar Generation and Distributed Energy Resources - In November 2021, IPL filed for advance rate-making principles with the IUB for up to 400 MW of solar generation with in-service dates in 2023 and 2024 and 75 MW of battery storage in 2024. The advance rate-making principles filing included requests for a fixed cost cap, including AFUDC and transmission upgrade costs among other costs, and a return on common equity of 11.40%, and proposed that a portion of the construction be financed by tax equity partners. In September 2022, IPL provided the IUB with a summary of the Inflation Reduction Act of 2022, as well as an economic analysis indicating full ownership for these planned solar and battery storage projects is currently expected to result in more cost benefits for its customers compared to previous plans to utilize tax equity financing.In November 2022, the IUB denied these advance rate-making principles filings and IPL requested reconsideration of the IUB’s decision. In December 2022, the IUB issued an order granting reconsideration of 200 MW of solar generation, and denied reconsideration of the other 200 MW of solar generation and 75 MW of battery storage. In January 2023, IPL filed additional information with the IUB related to the 400 MW of solar generation and 75 MW of battery storage, including a revised fixed cost cap of $1,845/kilowatt, based on updated materials, labor and shipping costs. In addition, IPL filed a request for judicial review in January 2023 regarding the denial of advance rate-making principles for the other 200 MW of solar generation and 75 MW of battery storage. In February 2023, the IUB issued an order stating that it will not issue a decision on the advance rate-making principles for the 200 MW of solar that was granted reconsideration until it receives clarity regarding its authority to issue the advance rate-making principles while the judicial review is also pending. IPL believes these solar generation and battery storage projects are in the best interests of its customers, and if advance rate-making principles are not approved by the IUB or approval by the IUB is expected to be delayed, IPL may decide to proceed with constructing the solar generation and battery storage subject to other applicable approvals (such as a GCU Certificate), and seek recovery in future rate reviews.The 400 MW of new solar generation and 75 MW of battery storage would help replace a portion of the energy and capacity expected to be eliminated with the planned retirement of the coal-fired Lansing Generating Station (275 MW) in the first half of 2023 and the reduction of energy and capacity resulting from the December 2021 fuel switch of the Burlington Generating Station (212 MW) from coal to natural gas. In addition, IPL’s plans include additional renewables and distributed energy resources, including community solar and energy storage systems, to add energy and capacity.New MISO Seasonal Resource Adequacy Process - In August 2022, FERC approved MISO’s proposal to change its resource adequacy process establishing capacity planning reserve margin and capacity accreditation requirements effective with the 2023/2024 MISO Planning Year, to help ensure the reliability of electricity in the MISO region. The process will change from the current Summer-based annual construct to four distinct seasons to help ensure the continued reliability of the electric transmission grid throughout each year. FERC’s approval also establishes planning reserve margin requirements for all market participants on a seasonal basis and determines a seasonal accredited capacity value for certain classes of generating resources, including higher accredited capacity for wind generation during the Spring, Fall and Winter seasons and higher accredited capacity for solar generation during the Summer season. Alliant Energy, IPL and WPL are currently unable to predict with certainty the future outcome or impact of these matters, but plan to construct and/or acquire additional renewable, battery and natural gas resources to meet the requirements of the new seasonal resource adequacy process and have reflected the estimated capital expenditures for these projects in the “Renewables and battery storage” and “Other” Generation lines in the construction and acquisition table in “Liquidity and Capital Resources.”30Table of ContentsWPL’s West Riverside Natural Gas-fired Generating Station - In 2020, WPL completed the construction of West Riverside, a 723 MW natural gas-fired combined-cycle EGU in Beloit, Wisconsin. WPL entered into agreements with neighboring utilities and electric cooperatives that provide each of them options to purchase a partial ownership interest in West Riverside. The purchase price for such options is based on the ownership interest acquired and the net book value of West Riverside on the date of the purchase. The timing and ownership amount of the options are as follows:CounterpartyOption Amount and TimingWisconsin Public Service Corporation (WPSC)100 MW were exercised January 2022 and are pending PSCW approval; additionally, up to 100 MW may be exercised prior to May 16, 2024 subject to PSCW approval (a)Madison Gas and Electric Company (MGE)25 MW were exercised January 2022 and approved by the PSCW in December 2022; additionally, up to 25 MW may be exercised prior to May 16, 2025 subject to PSCW approvalElectric cooperativesApproximately 60 MW were acquired January 2018(a)Upon WPSC’s exercise of its options, WPL may exercise reciprocal options, subject to approval by the PSCW, to purchase up to 200 MW of any natural-gas combined-cycle EGU that either WPSC or its affiliated utility, Wisconsin Electric Power Company, places in service prior to May 2030.Plant Retirements and Fuel Switching - The current strategy includes the retirement, or fuel switch from coal to natural gas, of various EGUs in the next several years. IPL currently expects to retire the coal-fired Lansing Generating Station (275 MW) in the first half of 2023, and fuel switch or retire Prairie Creek Units 1 and 3 (65 MW in aggregate) by December 31, 2025. WPL currently expects to retire the coal-fired Edgewater Generating Station (414 MW) by June 1, 2025, and Columbia Units 1 and 2 (595 MW in aggregate) by June 1, 2026. Alliant Energy, IPL and WPL are working with MISO, state regulatory commissions and other regulatory agencies, as required, to determine the timing of these actions, which are subject to change depending on operational, regulatory, market and other factors. Refer to Note 3 for additional details on these EGUs.Environmental Stewardship - Alliant Energy’s environmental stewardship is focused on meeting its customers’ energy needs affordably, safely, reliably and sustainably. Alliant Energy proactively considers future environmental compliance requirements and proposed regulations in its planning, decision-making, construction and ongoing operations activities. Alliant Energy is focused on executing a long-term strategy to deliver reliable and affordable energy with lower emissions independent of changing policies and political landscape. To achieve these long-term goals, Alliant Energy will transition away from coal-fired EGUs by incorporating renewable energy, distributed energy resources, energy efficiency, demand response, natural gas-fired EGUs and other technologies such as energy storage. Alliant Energy’s voluntary environmental-related goals and achievements include the following: •Exceeded its 2020 targets by reducing air emissions for sulfur dioxide by over 90%, nitrogen oxides by over 80% and mercury by over 90% from 2005 levels.•By 2030, reduce CO2 emissions by 50% from its owned fossil-fueled EGUs and reduce electric utility water supply by 75% from 2005 levels, and transition 100% of its owned light-duty fleet vehicles to be electric, as well as partner to plant more than 1 million trees by the end of 2030.•By 2040, eliminate all coal-fired EGUs from its generating fleet.•By 2050, achieve an aspirational goal of net-zero CO2 emissions from the electricity it generates.Future updates to sustainable energy plans and attaining these goals will depend on future economic developments, evolving energy technologies and emerging trends in Alliant Energy’s service territories.Other Customer-focused InvestmentsElectric and Gas Distribution Systems - Customer-focused investments include replacing, modernizing and upgrading infrastructure in the electric and gas distribution systems. Electric system investments will focus on areas such as improving reliability and resiliency with more underground electric distribution and enabling distributed energy solutions with higher capacity lines. Gas system investments will focus on pipeline replacement to ensure safety and pipeline expansion to support reliability and economic development. Estimated capital expenditures for expected and current electric and gas distribution infrastructure projects for 2023 through 2026 are included in the “Electric and gas distribution systems” lines in the construction and acquisition expenditures table in “Liquidity and Capital Resources.”Fiber Optic Telecommunication Network - Alliant Energy is currently installing fiber optic routes between its facilities to enhance its communications network to improve resiliency and reliability of, and enable and strengthen, the integrated grid network focused on less densely populated rural areas among financially disadvantaged customers and communities.Gas Pipeline Expansion - IPL and WPL currently expect to make investments to extend various gas distribution systems to provide natural gas to unserved or underserved areas in their service territories.31Table of ContentsGas Pipeline Safety - The Pipeline and Hazardous Materials Safety Administration published various final rules from 2019 through 2022 that updated safety requirements for gas transmission pipelines, and updated procedures were implemented to address these rules. Plans to address certain requirements for specific pipelines were developed and implemented, with identified remediation efforts to be completed by July 2035. In anticipation of these rule changes, Alliant Energy, IPL and WPL have been proactively replacing certain of IPL’s transmission pipelines, making modifications to certain of WPL’s transmission pipelines, and updating practices for assessment and operation of these pipelines. Alliant Energy, IPL, and WPL also continue to evaluate the impact of these final rules and resulting remediation plans on their financial condition and results of operations.Technology - Alliant Energy, IPL and WPL currently plan to make investments in technology to enhance productivity and efficiency through automation, customer self-service and telework. Estimated capital expenditures for expected and current technology projects for 2023 through 2026 are included in the “Other” line in the construction and acquisition expenditures table in “Liquidity and Capital Resources.”Non-utility business - Alliant Energy continues to explore growth of its Travero businesses and other limited scope opportunities outside of, but complementary to, Alliant Energy’s core utility business. This non-utility strategy continues to evolve through exploration of modest strategic opportunities that are accretive to earnings and cash flows.RATE MATTERSRate ReviewsRetail Base Rate Filings - Base rate changes reflect both returns on additions to infrastructure and recovery of changes in costs incurred or expected to be incurred to provide electric and gas service to retail customers. Given that a portion of the rate changes will offset changes in costs, revenues from rate changes should not be expected to result in an equal change in net income for either IPL or WPL.WPL’s Retail Electric and Gas Rate Reviews (2022/2023 Forward-looking Test Period) - In December 2021, the PSCW issued an order authorizing annual base rate increases of $114 million and $15 million for WPL’s retail electric and gas customers, respectively, covering the 2022/2023 forward-looking Test Period, which was based on a stipulated agreement between WPL and certain stakeholders. The key drivers for the annual base rate increases include higher retail fuel-related costs in 2022, lower excess deferred income tax benefits in 2022 and 2023 and revenue requirement impacts of increasing electric and gas rate base, including investments in solar generation. In addition, the PSCW authorized WPL to receive a recovery of and a return on the remaining net book value of Edgewater Unit 5 through 2023. Retail electric rate changes were effective on January 1, 2022 and extend through the end of 2023. Retail gas rate changes were effective from January 1, 2022 through the end of 2022.In December 2022, the PSCW issued an order authorizing an additional annual base rate increase of $9 million for WPL’s retail gas customers, covering the 2023 forward-looking Test Period, which reflects changes in weighted average cost of capital, updated depreciation rates and modifications to certain regulatory asset and regulatory liability amortizations. These retail gas rate changes were effective on January 1, 2023 and extend through the end of 2023.WPL’s settlement extends, with certain modifications, an earnings sharing mechanism through 2023. Under the earnings sharing mechanism, WPL will defer a portion of its earnings if its annual regulatory return on common equity exceeds 10.25% during the 2022/2023 Test Period. WPL must defer 50% of its excess earnings between 10.25% and 10.75%, and 100% of any excess earnings above 10.75%. Through 2023, any such deferral is required to be offset against the remaining net book value of Edgewater Unit 5, which is currently expected to be retired by June 1, 2025.WPL’s Retail Fuel-related Rate Filing (2021 Forward-looking Test Period) - In August 2022, the PSCW authorized WPL to collect $37 million in 2023 from its retail electric customers, plus interest, for an under-collection of fuel-related costs incurred by WPL in 2021 that were higher than fuel-related costs used to determine rates for such period.WPL’s Retail Fuel-related Rate Filing (2023 Forward-looking Test Period) - In December 2022, the PSCW authorized WPL to collect $47 million in higher rates in 2023 from its retail electric customers to reflect an increase in expected fuel-related costs for 2023 compared to WPL’s approved 2022 fuel-related costs.32Table of ContentsRate Review Details - Details related to IPL’s and WPL’s key jurisdictions were as follows:AverageAuthorized ReturnCommon EquityRegulatoryRate Baseon CommonComponent of RegulatoryEffectiveBody(in millions)Equity (a)Capital StructureDateIPL Retail Electric (2020 Test Period)Marshalltown (b)IUB$55911.00%51.0%2/26/2020Emery (b)IUB16512.23%51.0%2/26/2020Whispering Willow - East (b)IUB16311.70%51.0%2/26/2020Renewable energy rider (c)IUB1,57710.10%51.0%4/15/2022Other (b)IUB3,7679.50%51.0%2/26/2020IPL Retail Gas (2020 Test Period) (b)IUB5579.60%51.0%1/10/2020IPL Wholesale ElectricFERC16210.97%51.0%1/1/2022WPL Retail Electric and GasElectric (2023 Test Period) (d)PSCW4,57310.00%54.1%1/1/2023Gas (2023 Test Period) (d)PSCW47110.00%54.1%1/1/2023WPL Wholesale ElectricFERC42410.90%55.0%1/1/2022(a)Authorized returns on common equity may not be indicative of actual returns earned or projections of future returns.(b)Average rate base amounts reflect IPL’s allocated retail share of rate base and do not include CWIP, and were calculated using a forecasted 13-month average for the test period.(c)Average rate base amounts recovered through IPL’s renewable energy rider mechanism include construction costs incurred to fund IPL’s 1,000 MW of wind generation facilities placed in service in 2019 and 2020 (11.00% return on common equity), production tax credit carryforwards for the 1,000 MW of wind generation facilities (5.00% return on common equity) and certain transmission facilities classified as intangible assets (9.50% return on common equity), and were calculated using a 13-month average.(d)Average rate base amounts reflect WPL’s allocated retail share of rate base and do not include CWIP or a cash working capital allowance, and were calculated using a forecasted 13-month average for the test period. The PSCW provides a return on selected CWIP and a cash working capital allowance by adjusting the percentage return on rate base.Planned Rate Reviews - WPL currently expects to file a retail electric and gas rate review with the PSCW in the second quarter of 2023 for the 2024/2025 forward-looking Test Period. The key drivers for the anticipated filing include revenue requirement impacts of increasing electric and gas rate base, including investments in solar generation and battery storage. Any rate changes granted from this pending request are expected to be effective on January 1, 2024, with a decision from the PSCW expected by the end of 2023.IPL currently expects to file a retail electric and gas rate review with the IUB by the first half of 2024. The key drivers for the anticipated filing include revenue requirement impacts of increasing electric and gas rate base, including investments in solar generation and battery storage.LEGISLATIVE MATTERSIn August 2022, the Inflation Reduction Act of 2022 was enacted. The most significant provisions of the new legislation for Alliant Energy, IPL and WPL relate to a 10-year extension of tax credits for clean energy projects, a new production tax credit eligible for solar projects, a new stand-alone investment tax credit for battery storage projects and the right to transfer future renewable credits to other corporate taxpayers. The new legislation also includes a requirement for corporations with income over $1 billion to pay a 15% minimum tax; however, Alliant Energy is currently below this income level. Alliant Energy, IPL and WPL currently expect to utilize various provisions of the new legislation to enhance the tax benefits expected from their announced solar and battery storage projects, including transferring the future tax credits from such projects to other corporate taxpayers and opting to retain full ownership of such projects instead of financing a portion of the projects with tax equity partners. Compared to previous plans to utilize tax equity financing, the impact of these changes is expected to result in more cost benefits for IPL's and WPL's customers, higher rate base amounts, additional financing needs expected to be satisfied with additional long-term debt and common stock issuances, and improvements in long-term cash flows over the life of the solar and battery storage projects.Refer to Note 12 for discussion of Iowa tax reform enacted in March 2022.In November 2021, the Infrastructure Investment and Jobs Act (IIJA Act) was enacted. The most significant provisions of the IIJA Act for Alliant Energy relate to a variety of infrastructure-related priorities, including transportation, environmental, energy and broadband infrastructure. In addition, the IIJA Act is intended to accelerate research, development, demonstration and deployment of carbon-free technologies, including hydrogen and carbon capture and storage.In March 2021, the American Rescue Plan Act of 2021 (Act) was enacted. The most significant provision of the Act for Alliant Energy is reduced minimum pension plan funding requirements, which Alliant Energy adopted in August 2021. The Act also 33Table of Contentsprovides additional funding to the Low Income Home Energy Assistance Program, which assists certain of Alliant Energy’s customers with managing their energy costs, as well as provides financial support for certain of Alliant Energy’s residential, small business and non-profit customers.In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted. The most significant provision of the CARES Act for Alliant Energy relates to an acceleration of refunds of existing alternative minimum tax credits to increase liquidity. In 2020, Alliant Energy received $11 million of credits that otherwise would have been received in 2021 and 2022. In addition, Alliant Energy deferred certain 2020 payroll taxes to 2021 and 2022. The CARES Act also provides additional funding to the Low Income Home Energy Assistance Program, which assists certain of Alliant Energy’s customers with managing their energy costs, as well as financial support for certain of Alliant Energy’s residential, small business and non-profit customers.LIQUIDITY AND CAPITAL RESOURCESOverview - Alliant Energy, IPL and WPL expect to maintain adequate liquidity to operate their businesses and implement their strategy as a result of operating cash flows generated by their utility business, and available capacity under a single revolving credit facility and IPL’s sales of accounts receivable program, supplemented by periodic issuances of long-term debt and Alliant Energy equity securities. As summarized below, Alliant Energy, IPL and WPL believe they have the ability to generate and obtain adequate amounts of cash to meet their requirements and plans for cash in the next 12 months and beyond.Liquidity Position - At December 31, 2022, Alliant Energy had $20 million of cash and cash equivalents, $358 million ($148 million at the parent company, $100 million at IPL and $110 million at WPL) of available capacity under the single revolving credit facility and $30 million of available capacity at IPL under its sales of accounts receivable program.Capital Structure - Alliant Energy, IPL and WPL plan to maintain debt-to-total capitalization ratios that are consistent with investment-grade credit ratings. IPL and WPL expect to maintain capital structures consistent with the authorized levels approved by regulators. Capital structures as of December 31, 2022 were as follows (Common Equity (CE); Long-term Debt (including current maturities) (LD); Short-term Debt (SD)):Alliant Energy, IPL and WPL intend to manage their capital structures and liquidity positions in such a way that facilitates their ability to raise funds reliably and on reasonable terms and conditions, while maintaining capital structures consistent with those approved by regulators. In addition to capital structures, other important factors used to determine the characteristics of future financings include financial coverage ratios, capital spending plans, regulatory orders and rate-making considerations, levels of debt imputed by rating agencies, market conditions, the impact of tax initiatives and legislation, and any potential proceeds from asset sales. The PSCW factors certain imputed debt adjustments, including certain lease obligations, in establishing a regulatory capital structure as part of WPL’s retail rate reviews. The IUB does not make any explicit adjustments for imputed debt in establishing capital ratios used in determining customer rates, although such adjustments are considered by IPL in recommending an appropriate capital structure. Debt imputations by rating agencies include, among others, pension and OPEB obligations and the sales of accounts receivable program.Credit and Capital Markets - Alliant Energy, IPL and WPL maintain a single revolving credit facility to provide backstop liquidity to their commercial paper programs, and ensure a committed source of liquidity in the event the commercial paper market becomes disrupted. In addition, IPL maintains a sales of accounts receivable program as an alternative financing source; however, if customer arrears were to exceed certain levels, IPL’s access to the program may be restricted.Primary Sources and Uses of Cash - Alliant Energy’s most significant source of cash is from electric and gas sales to IPL’s and WPL’s customers. Cash from these sales reimburses IPL and WPL for prudently-incurred expenses to provide service to their utility customers and generally provides IPL and WPL a return of and a return on the assets used to provide such services. Capital needed to retire debt and fund capital expenditures related to large strategic projects is expected to be met primarily through external financings.34Table of ContentsCash Flows - Selected information from the cash flows statements was as follows (in millions):Alliant EnergyIPLWPL202220212022202120222021Cash, cash equivalents and restricted cash, January 1$40 $56 $34 $50 $2 $3 Cash flows from (used for):Operating activities486 582 83 153 299 371 Investing activities(933)(728)215 91 (1,033)(716)Financing activities431 130 (317)(260)737 344 Net increase (decrease)(16)(16)(19)(16)3 (1)Cash, cash equivalents and restricted cash, December 31$24 $40 $15 $34 $5 $2 Operating Activities - The following items contributed to increased (decreased) operating activity cash flows for 2022 compared to 2021 (in millions):Alliant EnergyIPLWPLTiming of WPL’s fuel-related cost recoveries from retail electric customers($80)$—($80)Changes in the sales of accounts receivable at IPL(41)(41)—Changes in interest payments(39)(10)(10)Changes in levels of production fuel(19)(16)(3)Changes in levels of gas stored underground(15)—(15)Lower (higher) contributions to qualified defined benefit pension plans(13)(33)18Changes in income taxes paid/refunded(3)(11)(18)Higher collections from WPL’s retail electric and gas base rate increases121—121Changes in cash collateral and deposit balances at Corporate Services38——Increased collections from IPL’s and WPL’s retail customers caused by temperature impacts on electric and gas sales17107Timing of intercompany payments and receipts—7(26)Other (primarily due to other changes in working capital)(62)24(66)($96)($70)($72)Income Tax Payments and Refunds - Income tax (payments) refunds were as follows (in millions):20222021IPL$36$47WPL(56)(38)Other subsidiaries14(12)Alliant Energy($6)($3)Alliant Energy, IPL and WPL currently do not expect to make any significant federal income tax payments over the next few years based on their current credit carryforward positions; however, some tax payments and refunds may occur for state taxes and between consolidated group members (including IPL and WPL) under the tax sharing agreement between Alliant Energy and its subsidiaries. Refer to Note 12 for discussion of the carryforward positions.As discussed in “Legislative Matters,” the Inflation Reduction Act of 2022 provides the right to transfer future renewable tax credits to other corporate taxpayers, which is expected to result in future cash flows from operating activities for Alliant Energy, IPL and WPL beginning as early as 2023.Pension Plan Contributions - Alliant Energy, IPL and WPL currently expect to make $12 million, $1 million and $10 million of pension plan contributions in 2023, respectively, based on the funded status and assumed return on assets for each plan as of the December 31, 2022 measurement date. Refer to Note 13(a) for discussion of pension plan contributions in 2022 and the current funded levels of pension plans.Investing Activities - The following items contributed to increased (decreased) investing activity cash flows for 2022 compared to 2021 (in millions):Alliant EnergyIPLWPL(Higher) lower utility construction and acquisition expenditures (a)($322)$12($334)Changes in the amount of cash receipts on sold receivables9696—Other 211617($205)$124($317)(a)Largely due to higher expenditures for WPL’s solar generation.35Table of ContentsConstruction and Acquisition Expenditures - Construction and acquisition expenditures and financing plans are reviewed, approved and updated as part of the strategic planning process. Changes may result from a number of reasons, including regulatory requirements, changing legislation, not obtaining favorable and acceptable regulatory approval on certain projects, improvements in technology and improvements to ensure resiliency and reliability of the electric and gas distribution systems. Alliant Energy, IPL and WPL have not yet entered into contractual commitments relating to the majority of their anticipated future construction and acquisition expenditures. As a result, they have some discretion with regard to the level and timing of these expenditures. The table below summarizes anticipated construction and acquisition expenditures (in millions), which are focused on the transition to cleaner energy and strengthening the resiliency and reliability of IPL’s and WPL’s electric grid. Cost estimates represent Alliant Energy’s, IPL’s and WPL’s portion of construction expenditures and exclude AFUDC and capitalized interest, if applicable. Refer to “Customer Investments” for further discussion of certain key projects impacting construction and acquisition plans related to the utility business.Alliant EnergyIPLWPL202320242025202620232024202520262023202420252026Generation:Renewables and battery storage$900 $1,205 $725 $1,060 $325 $625 $260 $670 $575 $580 $465 $390 Other100 315 490 335 55 55 70 100 45 260 420 235 Distribution:Electric systems550 595 545 535 320 360 300 280 230 235 245 255 Gas systems80 85 85 85 35 40 40 40 45 45 45 45 Other220 210 175 180 45 40 45 45 35 30 30 30 $1,850 $2,410 $2,020 $2,195 $780 $1,120 $715 $1,135 $930 $1,150 $1,205 $955 Renewables and Battery Storage - Alliant Energy, IPL and WPL continue to evaluate potential impacts from cost pressures prevalent in the solar generation and battery storage markets on the timing and estimated costs for IPL’s and WPL’s planned development and acquisition of additional renewable energy, which could impact their anticipated future construction and acquisition expenditures. Refer to “Customer Investments” for further discussion of regulatory filings with the IUB and PSCW related to future renewable and battery storage projects.West Riverside Options - WPL entered into agreements with neighboring utilities that provide them options to purchase a partial ownership interest in West Riverside. Upon exercise of such options, WPL will receive proceeds from the sale. Refer to “Customer Investments” for additional information, including timing for the actual and potential exercise of options.Financing Activities - The following items contributed to increased (decreased) financing activity cash flows for 2022 compared to 2021 (in millions):Alliant EnergyIPLWPLHigher (lower) net proceeds from issuance of long-term debt$738($300)$288Payments to redeem cumulative preferred stock of IPL in 2021200200—Net changes in the amount of commercial paper outstanding1—75Higher payments to retire long-term debt(625)—(250)(Higher) lower common stock dividends(25)79(8)Higher (lower) capital contributions from IPL’s and WPL’s parent company, Alliant Energy—(50)285Other12143$301($57)$393FERC and Public Utility Holding Company Act Financing Authorizations - Under the Public Utility Holding Company Act of 2005, FERC has authority over the issuance of utility securities, except to the extent that a public utility’s primary state regulatory commission has retained jurisdiction over such matters. FERC currently has authority over the issuance of securities by IPL. FERC does not have authority over the issuance of securities by Alliant Energy, WPL, AEF or Corporate Services. In 2021, IPL received authorization from FERC to issue securities in 2022 and 2023 as follows (in millions):Long-term debt securities issuances in aggregate$700Short-term debt securities outstanding at any time (including borrowings from its parent)400Preferred stock issuances in aggregate300State Regulatory Financing Authorizations - In 2017, WPL received authorization from the PSCW to have up to $400 million of short-term borrowings and/or letters of credit outstanding at any time through the earlier of the expiration date of WPL’s credit facility agreement (including extensions) or December 2024. In February 2023, WPL received authorization from the PSCW to issue up to $1.2 billion of long-term debt securities in aggregate through December 2025.36Table of ContentsShelf Registrations - Alliant Energy, IPL and WPL have current shelf registration statements on file with the SEC for availability to issue unspecified amounts of securities through December 2023. Alliant Energy’s shelf registration statement may be used to issue common stock, debt and other securities. IPL’s and WPL’s shelf registration statements may be used to issue preferred stock and debt securities.Common Stock Dividends - Payment of common stock dividends is subject to dividend declaration by Alliant Energy’s Board of Directors and is dependent upon, among other factors, regulatory limitations, earnings, cash flows, capital requirements and general financial condition of subsidiaries. Alliant Energy’s general long-term goal is to maintain a dividend payout ratio that is competitive with the industry average. Based on that, Alliant Energy’s goal is to maintain a dividend payout ratio of approximately 60% to 70% of consolidated earnings from continuing operations. Refer to “Results of Operations” for discussion of expected common stock dividends in 2023.Common Stock Issuances - Refer to Note 7 for discussion of common stock issuances by Alliant Energy in 2021 and 2022, and “Results of Operations” for discussion of expected issuances of common stock in 2023.Short-term Debt - In 2021, Alliant Energy, IPL and WPL entered into a single revolving credit facility agreement, which expires in December 2026 and is discussed in Note 9(a). There are currently 13 lenders that participate in the credit facility, with respective commitments ranging from $20 million to $130 million. Subject to certain conditions, Alliant Energy, IPL and WPL may exercise two extension options, each extending the maturity date by one year. The credit facility has a provision to expand the facility size up to an additional $300 million, for a potential total commitment of $1.3 billion, subject to lender approval for Alliant Energy and subject to lender and regulatory approvals for IPL and WPL.The credit agreement contains customary events of default, including a cross-default provision that would be triggered if Alliant Energy or certain of its significant subsidiaries (including IPL and WPL) defaults on debt (other than non-recourse debt) totaling $100 million or more. IPL and WPL are subject to a similar cross-default provision with respect to their own respective consolidated debt. A default by Alliant Energy or its non-utility subsidiaries would not trigger a cross-default at IPL or WPL, nor would a default by either of IPL or WPL constitute a cross-default event for the other. If an event of default under the credit agreement occurs and is continuing, then the lenders may declare any outstanding obligations of the defaulting borrower under the credit agreement immediately due and payable.The single credit facility agreement contains a financial covenant, which requires Alliant Energy, IPL and WPL to maintain certain debt-to-capital ratios in order to borrow under the credit facility. AEF’s term loan credit agreement contains a financial covenant, which requires Alliant Energy to maintain a certain debt-to-capital ratio in order to borrow under the term loan credit agreement. The required debt-to-capital ratios compared to the actual debt-to-capital ratios at December 31, 2022 were as follows:Alliant EnergyIPLWPLRequirement, not to exceed65%65%65%Actual58%49%48%The debt component of the capital ratios includes, when applicable, long- and short-term debt (excluding non-recourse debt and hybrid securities to the extent the total carrying value of such hybrid securities does not exceed 15% of consolidated capital of the applicable borrower), finance lease obligations, certain letters of credit, guarantees of the foregoing and new synthetic leases. Unfunded vested benefits under qualified pension plans and sales of accounts receivable are not included in the debt-to-capital ratios. The equity component of the capital ratios excludes accumulated other comprehensive income (loss).Long-term Debt - Refer to Note 9(b) for discussion of issuances and retirements of long-term debt in 2022 and 2023, and “Results of Operations” for discussion of expected issuances of long-term debt in 2023. In 2021, IPL issued $300 million of 3.1% senior debentures due 2051, and the net proceeds from the issuance were used by IPL to retire its cumulative preferred stock in 2021 and for general corporate purposes. In 2021, WPL issued $300 million of 1.95% green bond debentures due 2031, and an amount in excess of the net proceeds was disbursed for the construction and development of WPL’s wind and solar EGUs.Impact of Credit Ratings on Liquidity and Collateral Obligations -Ratings Triggers - The long-term debt of Alliant Energy and its subsidiaries is not subject to any repayment requirements as a result of explicit credit rating downgrades or so-called “ratings triggers.” However, Alliant Energy and its subsidiaries are parties to various agreements that contain provisions dependent on credit ratings. In the event of a significant downgrade, Alliant Energy or its subsidiaries may need to provide credit support, such as letters of credit or cash collateral equal to the amount of any exposure, or may need to unwind contracts or pay underlying obligations. In the event of a significant downgrade, management believes Alliant Energy, IPL and WPL have sufficient liquidity to cover counterparty credit support or collateral requirements under these various agreements. In addition, a downgrade in the credit ratings of Alliant Energy, IPL or WPL could also result in them paying higher interest rates in future financings, reduce flexibility with future financing plans, reduce their pool of potential lenders, increase their borrowing costs under existing credit facilities or limit their access to the commercial paper market. Credit ratings and outlooks as of the date of this report are as follows:37Table of ContentsStandard & Poor’s Ratings ServicesMoody’s Investors ServiceAlliant Energy:Corporate/issuerA-Baa2Commercial paperA-2P-2Senior unsecured long-term debtN/AN/AOutlookStableStableIPL:Corporate/issuerA-Baa1Commercial paperA-2P-2Senior unsecured long-term debtA-Baa1OutlookStableStableWPL:Corporate/issuerAA3Commercial paperA-1P-2Senior unsecured long-term debtAA3OutlookNegativeNegativeStandard & Poor’s Ratings Services and Moody’s Investors Service issued credit ratings of BBB+ and Baa2, respectively, for the senior notes issued by AEF in 2018, 2020 and 2022 (with Alliant Energy as guarantor). Credit ratings are not recommendations to buy or sell securities and are subject to change, and each rating should be evaluated independently of any other rating. Each of Alliant Energy, IPL or WPL assumes no obligation to update their respective credit ratings. Refer to Note 15 for additional information on ratings triggers for commodity contracts accounted for as derivatives.Off-Balance Sheet Arrangements -Special Purpose Entities - IPL maintains a Receivables Agreement whereby it may sell its customer accounts receivables, unbilled revenues and certain other accounts receivables to a third party through wholly-owned and consolidated special purpose entities. The purchase commitment from the third party to which IPL sells its receivables expires in March 2023. IPL currently expects to amend and extend the purchase commitment. In 2022 and 2021, IPL evaluated the third party that purchases IPL’s receivable assets under the Receivables Agreement and believes that the third party is a VIE; however, IPL concluded consolidation of the third party was not required.In addition, IPL’s sales of accounts receivable program agreement contains a cross-default provision that is triggered if IPL or Alliant Energy incurs an event of default on debt totaling $100 million or more. If an event of default under IPL’s sales of accounts receivable program agreement occurs, then the counterparty could terminate such agreement. Refer to Note 5(b) for additional information regarding IPL’s sales of accounts receivable program.Guarantees and Indemnifications - At December 31, 2022, various guarantees and indemnifications are outstanding related to Alliant Energy’s cash equity ownership interest in a non-utility wind farm and prior divestiture activities. Refer to Note 17(d) for additional information.Certain Financial Commitments - Contractual Obligations - Alliant Energy, IPL and WPL have various long-term contractual obligations as of December 31, 2022, which include long-term debt maturities in Note 9(b), operating and finance leases in Note 10, capital purchase obligations in Note 17(a), and other purchase obligations in Note 17(b). At December 31, 2022, Alliant Energy, IPL and WPL had no uncertain tax positions recorded as liabilities. Refer to Note 13(a) for anticipated pension and OPEB funding amounts. Refer to “Construction and Acquisition Expenditures” above for additional information on construction and acquisition programs. In addition, at December 31, 2022, there were various other liabilities included on the balance sheets that, due to the nature of the liabilities, the timing of payments cannot be estimated.OTHER MATTERSMarket Risk Sensitive Instruments and Positions - Primary market risk exposures are associated with commodity prices, counterparty credit risk, investment prices and interest rates. Risk management policies are used to monitor and assist in mitigating these market risks and derivative instruments are used to manage some of the exposures related to commodity prices and interest rates. Refer to Notes 1(h) and 15 for further discussion of derivative instruments, and Note 1(g) for details of utility cost recovery mechanisms that significantly reduce commodity risk.Commodity Price - Alliant Energy, IPL and WPL are exposed to the impact of market fluctuations in the price and transportation costs of commodities they procure and market. Established policies and procedures mitigate risks associated with these market fluctuations, including the use of various commodity derivatives and contracts of various durations for the forward sale and purchase of these commodities. Exposure to commodity price risks in the utility businesses is also significantly mitigated by current rate-making structures in place for recovery of fuel-related costs as well as the cost of natural gas purchased for resale. IPL’s electric and gas tariffs and WPL’s wholesale electric and gas tariffs provide for subsequent monthly adjustments to their tariff rates for material changes in prudently incurred commodity costs. IPL’s and WPL’s rate mechanisms, combined with commodity derivatives, significantly reduce commodity risk associated with their electric and gas 38Table of Contentsmargins. WPL’s retail electric margins have exposure to the impact of changes in commodity prices due largely to the current retail recovery mechanism in place in Wisconsin for fuel-related costs.Counterparty Credit Risk - Alliant Energy, IPL, and WPL are exposed to credit risk related to losses resulting from counterparties’ nonperformance of their contractual obligations. Alliant Energy, IPL and WPL maintain credit policies intended to minimize overall credit risk and actively monitor these policies to reflect changes and scope of operations. Alliant Energy, IPL, and WPL conduct credit reviews for all counterparties and employ credit risk controls, such as letters of credit, parental guarantees, master netting agreements and termination provisions. Credit exposure is monitored, and when necessary, activity with a specific counterparty is limited until credit enhancement is provided. Distress in the financial markets could increase Alliant Energy’s, IPL’s and WPL’s credit risk.Investment Price - Alliant Energy, IPL and WPL are exposed to investment price risk as a result of their investments in securities, largely related to securities held by their pension and OPEB plans. Refer to Note 13(a) for details of the securities held by their pension and OPEB plans. Refer to “Critical Accounting Policies and Estimates” for the impact on retirement plan costs of changes in the rate of returns earned by plan assets.Interest Rate - Alliant Energy, IPL and WPL are exposed to risk resulting from changes in interest rates associated with variable-rate borrowings. In addition, Alliant Energy and IPL are exposed to risk resulting from changes in interest rates on cash amounts outstanding under IPL’s sales of accounts receivable program. Assuming the impact of a hypothetical 100 basis point increase in interest rates on variable-rate borrowings and cash amounts outstanding under IPL’s sales of accounts receivable program at December 31, 2022, Alliant Energy’s, IPL’s and WPL’s annual pre-tax expense would increase by approximately $11 million, $1 million and $3 million, respectively. Refer to Notes 5(b) and 9 for additional information on cash amounts outstanding under IPL’s sales of accounts receivable program, and short- and long-term variable-rate borrowings, respectively. Refer to “Critical Accounting Policies and Estimates” for the impacts of changes in discount rates on retirement plan obligations and costs.Critical Accounting Policies and Estimates - Alliant Energy’s, IPL’s and WPL’s financial statements are prepared in conformity with GAAP, which requires management to apply accounting policies, judgments and assumptions, and make estimates that affect results of operations and the amounts of assets and liabilities reported in the financial statements. The following accounting policies and estimates are critical to the business and the understanding of financial results as they require critical assumptions and judgments by management. The results of these assumptions and judgments form the basis for making estimates regarding the results of operations and the amounts of assets and liabilities that are not readily apparent from other sources. Actual financial results may differ materially from estimates. Management has discussed these critical accounting policies and estimates with the Audit Committee of the Board of Directors. Refer to Note 1 for additional discussion of accounting policies and estimates used in the preparation of the financial statements.Regulatory Assets and Regulatory Liabilities - IPL and WPL are regulated by various federal and state regulatory agencies. As a result, they are subject to GAAP for regulated operations, which recognizes that the actions of a regulator can provide reasonable assurance of the existence of an asset or liability. Regulatory assets or regulatory liabilities arise as a result of a difference between GAAP and actions imposed by the regulatory agencies in the rate-making process. Regulatory assets generally represent incurred costs that have been deferred as such costs are probable of recovery in future customer rates. Regulatory liabilities generally represent obligations to make refunds to customers or amounts collected in rates for which the related costs have not yet been incurred. Regulatory assets and regulatory liabilities are recognized in accordance with the rulings of applicable federal and state regulators, and future regulatory rulings may impact the carrying value and accounting treatment of regulatory assets and regulatory liabilities.Assumptions and judgments are made each reporting period regarding whether regulatory assets are probable of future recovery and regulatory liabilities are probable future obligations by considering factors such as regulatory environment changes, rate orders issued by the applicable regulatory agencies, historical decisions by such regulatory agencies regarding similar regulatory assets and regulatory liabilities, and subsequent events of such regulatory agencies. The decisions made by regulatory authorities have an impact on the recovery of costs, the rate of return on invested capital and the timing and amount of assets to be recovered by rates. A change in these decisions may result in a material impact on results of operations and the amount of assets and liabilities in the financial statements. Note 2 provides details of the nature and amounts of regulatory assets and regulatory liabilities assessed at December 31, 2022.Income Taxes - Alliant Energy, IPL and WPL are subject to income taxes in various jurisdictions. Assumptions and judgments are made each reporting period to estimate income tax assets, liabilities, benefits and expenses. Judgments and assumptions are supported by historical data and reasonable projections. Significant changes in these judgments and assumptions could have a material impact on financial condition and results of operations. Alliant Energy’s and IPL’s critical assumptions and judgments for 2022 include estimates of qualifying deductions for repairs expenditures and allocation of mixed service costs due to the impact of Iowa rate-making principles on such property-related differences. Critical assumptions and judgments also include projections of future taxable income used to determine the ability to utilize federal credit carryforwards prior to their expiration. Refer to Note 12 for further discussion of tax matters.Effect of Rate-making on Property-related Differences - Alliant Energy’s and IPL’s effective income tax rates are normally impacted by certain property-related differences at IPL for which deferred tax is not recorded in the income statement pursuant 39Table of Contentsto Iowa rate-making principles. Changes in methods or assumptions regarding the amount of IPL’s qualifying repairs expenditures, allocation of mixed service costs, and costs related to retirement or removal of depreciable property could result in a material impact on Alliant Energy’s and IPL’s financial condition and results of operations.Carryforward Utilization - Significant federal tax credit carryforwards exist for Alliant Energy, IPL and WPL as of December 31, 2022. Based on projections of current and future taxable income, Alliant Energy, IPL and WPL plan to utilize all of these carryforwards prior to their expiration. Federal credit carryforwards generated from 2004 through 2008 are expected to be utilized within five years of expiration. All other federal credit carryforwards are expected to be utilized more than five years before expiration. Changes in tax regulations or assumptions regarding current and future taxable income could require valuation allowances in the future resulting in a material impact on financial condition and results of operations.Long-Lived Assets - Periodic assessments regarding the recoverability of certain long-lived assets are completed when factors indicate the carrying value of such assets may not be recoverable or such assets are planned to be sold. These assessments require significant assumptions and judgments by management. The long-lived assets assessed for impairment generally include certain assets within regulated operations that may not be fully recovered from IPL’s and WPL’s customers as a result of regulatory decisions in the future, and assets within non-utility operations that are proposed to be sold or are currently generating operating losses.Regulated Operations - Alliant Energy’s, IPL’s and WPL’s long-lived assets within their regulated operations that were assessed for impairment and/or plant abandonment in 2022 included IPL’s and WPL’s generating units subject to early retirement and WPL’s solar generation projects recently completed and under construction.Generating Units Subject to Early Retirement - Alliant Energy, IPL and WPL evaluate future plans for their electric generation fleet and have announced the early retirement of certain EGUs. When it becomes probable that an EGU will be retired before the end of its useful life, Alliant Energy, IPL and WPL must assess whether the EGU meets the criteria to be considered probable of abandonment. EGUs that are considered probable of abandonment generally have material remaining net book values and are expected to cease operations in the near term significantly before the end of their original estimated useful lives. If an EGU meets such criteria to be considered probable of abandonment, Alliant Energy, IPL and WPL must assess the probability of full recovery of the remaining carrying value of such EGU. If it is probable that regulators will not allow full recovery of and a full return on the remaining net book value of the abandoned EGU, an impairment charge is recognized equal to the difference between the remaining carrying value and the present value of the future revenues expected from the abandoned EGU.Alliant Energy and IPL concluded that Lansing (expected to be retired in the first half of 2023), and Alliant Energy and WPL concluded that Edgewater Unit 5 (expected to be retired by June 1, 2025) and Columbia Units 1 and 2 (expected to be retired by June 1, 2026), met the criteria to be considered probable of abandonment as of December 31, 2022. IPL and WPL are currently allowed a full recovery of and a full return on its respective EGUs from both its retail and wholesale customers, and as a result, Alliant Energy, IPL and WPL concluded that no impairment was required as of December 31, 2022. Upon retirement of Lansing, which is currently expected in the first half of 2023, IPL anticipates reclassifying the remaining net book value, which was $233 million as of December 31, 2022, from property, plant and equipment to a regulatory asset on Alliant Energy’s and IPL’s balance sheets. Continued recovery of the remaining net book value of Lansing is expected to be addressed in future rate reviews. Alliant Energy, IPL and WPL evaluated their other EGUs that are subject to early retirement and determined that no other EGUs met the criteria to be considered probable of abandonment as of December 31, 2022. Note 3 provides additional details of these assets anticipated to be retired early.WPL’s Solar Generation Projects Recently Completed and Under Construction - As discussed in “Customer Investments,” WPL previously received authorization from the PSCW to acquire, construct, own and/or operate approximately 1,100 MW of new solar generation, which includes various projects in various Wisconsin counties. In 2022, WPL completed the construction of three solar projects, and the remaining solar projects are currently expected to be placed in service in 2023 and 2024. Alliant Energy and WPL review property, plant and equipment for possible impairment whenever events or changes in circumstances indicate all or a portion of the carrying value of the assets may be disallowed for rate-making purposes. If WPL is disallowed recovery of any portion of, or is only allowed a partial return on, the carrying value of the solar generation projects recently completed or under construction, then an impairment charge is recognized.In July 2021, WPL notified the PSCW that it expected estimated construction costs associated with approximately 675 MW of new solar generation will exceed amounts previously approved by the PSCW by approximately 7-10%. In addition, the prior authorization received from the PSCW for approximately 1,100 MW of new solar generation assumed that a portion of the construction costs would be financed by a tax equity partner. Following the enactment of the Inflation Reduction Act of 2022, WPL determined that retaining full ownership of the approximately 1,100 MW of new solar generation is expected to result in more cost benefits for its customers. Alliant Energy and WPL no longer expect their solar generation project construction costs to be financed with capital from tax equity partners, which would result in higher rate base amounts compared to those previously approved by the PSCW for WPL’s planned approximately 1,100 MW of solar generation. Alliant Energy and WPL concluded that there was not a probable disallowance of anticipated higher rate base amounts as of December 31, 2022 given construction costs were reasonably and prudently incurred and full ownership of WPL’s planned solar generation is expected to result in more cost benefits for WPL's customers.40Table of ContentsUnbilled Revenues - Unbilled revenues are primarily associated with utility operations. Energy sales to individual customers are based on the reading of customers’ meters, which occurs on a systematic basis throughout the month. Amounts of energy delivered to customers since the date of the last meter reading are estimated at the end of each reporting period and the corresponding estimated unbilled revenue is recorded. The unbilled revenue is based on estimates of daily system demand volumes, customer usage by class, temperature impacts, line losses and the most recent customer rates. Such process involves the use of various judgments and assumptions and significant changes in these judgments and assumptions could have a material impact on results of operations. As of December 31, 2022, unbilled revenues related to Alliant Energy’s utility operations were $247 million ($132 million at IPL and $115 million at WPL).Pensions and Other Postretirement Benefits - Alliant Energy, IPL and WPL sponsor various defined benefit pension and OPEB plans that provide benefits to a significant portion of their employees and retirees. Assumptions and judgments are made periodically to estimate the obligations and costs related to their retirement plans. There are many judgments and assumptions involved in determining an entity’s pension and other postretirement liabilities and costs each period including employee demographics (including life expectancies and compensation levels), discount rates, assumed rates of return and funding. Changes made to plan provisions may also impact current and future benefits costs. Judgments and assumptions are supported by historical data and reasonable projections and are reviewed at least annually. The following table shows the impacts of changing certain key actuarial assumptions discussed above (in millions):Defined Benefit Pension PlansOPEB PlansChange in Actuarial AssumptionImpact on Projected Benefit Obligation at December 31, 2022Impact on 2023 Net Periodic Benefit CostsImpact on Accumulated Benefit Obligation at December 31, 2022Impact on 2023 Net Periodic Benefit CostsAlliant Energy1% change in discount rate$87$6$13$—1% change in expected rate of returnN/A7N/A1IPL1% change in discount rate4035—1% change in expected rate of returnN/A3N/A1WPL1% change in discount rate3935—1% change in expected rate of returnN/A3N/A—Contingencies - Assumptions and judgments are made each reporting period regarding the future outcome of contingent events. Loss contingency amounts are recorded for any contingent events for which the likelihood of loss is probable and able to be reasonably estimated based upon current available information. The amounts recorded may differ from actuals when the uncertainty is resolved. The estimates made in accounting for contingencies, and the gains and losses that are recorded upon the ultimate resolution of these uncertainties, could have a significant effect on results of operations and the amount of assets and liabilities in the financial statements.Effective January 1, 2020 upon the adoption of the new accounting standard for credit losses, certain contingencies, such as Alliant Energy Resources, LLC’s guarantees of the partnership obligations of an affiliate of Whiting Petroleum, require estimation each reporting period of the expected credit losses on those contingencies. These estimates require significant judgment and result in recognition of a credit loss liability sooner than the previous accounting standards, which required recognition when the contingency became probable and could be reasonably estimated based on then currently available information. With respect to Alliant Energy’s guarantees of the partnership obligations of an affiliate of Whiting Petroleum, the most significant judgments in determining the credit loss liability were the estimate of the exposure under the guarantees and the methodology used for calculating the credit loss liability. As of December 31, 2022, Alliant Energy currently estimates the exposure to be a portion of the known partnership abandonment obligations. The methodology used to determine the credit loss liability considers both quantitative and qualitative information, which utilizes potential outcomes in a range of possible estimated amounts. Factors considered include market and external data points, the creditworthiness of the other partners, Whiting Petroleum’s emergence from bankruptcy in the third quarter of 2020 as well as subsequent bankruptcy developments, payments by Whiting Petroleum related to abandonment obligations, forecasted cash flow expenditures associated with the abandonment obligations based on information made available to Alliant Energy, and Whiting Petroleum’s business combination with Oasis Petroleum Inc. in the third quarter of 2022. Note 1(l) provides discussion of the adoption of the new accounting standard for credit losses.Note 17 provides further discussion of contingencies assessed at December 31, 2022 that may have a material impact on financial condition and results of operations, including various pending legal proceedings, guarantees and indemnifications.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk are reported in “Other Matters - Market Risk Sensitive Instruments and Positions” in MDA.

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+Item 7. For additional detail on the changes in operating assets and liabilities and the non-cash expenses that do not impact net cash provided by operating activities, refer to the Statement of Consolidated Cash Flows in the Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.Proceeds from APA and Apache Credit Facilities, Net As of December 31, 2022, there were outstanding borrowings of $566 million under APA’s syndicated credit facilities. As of December 31, 2021, there were outstanding borrowings of $542 million under Apache’s former syndicated credit facility. These borrowings are classified as long-term debt. Proceeds from Altus Credit Facility, Net During the year ended December 31, 2021, Altus Midstream LP borrowed $33 million under its revolving credit facility to fund capital contributions to its equity method interests. Prior to the deconsolidation of Altus on February 22, 2022, there were no additional borrowings under this facility in 2022.49Proceeds from Asset Divestitures The Company received $778 million and $256 million in proceeds from the divestiture of certain non-core assets during the years ended December 31, 2022 and 2021, respectively. The Company also received $224 million of cash proceeds from the sale of four million of its shares in Kinetik during 2022. For more information regarding the Company’s acquisitions and divestitures, refer to Note 2—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements in Part IV set forth in Part IV, Item 15 of this Annual Report on Form 10-K.Uses of Cash and Cash EquivalentsAdditions to Upstream Oil & Gas Property Exploration and development cash expenditures were $1.8 billion and $1.1 billion for the years ended December 31, 2022 and 2021, respectively. The increase in capital investment is reflective of the increase in the Company’s capital program in 2022 associated with higher cash flow from operations. The Company operated an average of 22 drilling rigs during 2022, compared to an average of 13 drilling rigs during 2021. Acquisition of Delaware Basin Properties During 2022, the Company completed the acquisition of oil and gas assets in the Delaware Basin for approximately $615 million, after post-closing adjustments. Cash consideration paid totaled $591 million, with final cash settlement anticipated to be completed during the first quarter of 2023.Leasehold and Property Acquisitions During 2022 and 2021, the Company completed leasehold and property acquisitions, primarily in the Permian Basin, for total cash consideration of $37 million and $9 million, respectively.Payments on Fixed-Rate Debt On January 18, 2022, Apache redeemed the outstanding $213 million principal amount of 3.25% senior notes due April 15, 2022, at a redemption price equal to 100 percent of their principal amount, plus accrued and unpaid interest to the redemption date. The redemption was financed by borrowing under Apache’s former revolving credit facility.During the quarter ended March 31, 2022, Apache closed cash tender offers for certain outstanding notes issued under its indentures, accepting for purchase $1.1 billion aggregate principal amount of notes. Apache paid holders an aggregate $1.2 billion in cash, reflecting principal, premium to par, and accrued and unpaid interest. The Company recognized a $66 million loss on extinguishment of debt, including $11 million of unamortized debt discount and issuance costs in connection with the note purchases. The repurchases were partially financed by borrowing under Apache’s former revolving credit facility.During the quarter ended March 31, 2022, Apache purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of $15 million for an aggregate purchase price of $16 million in cash, including accrued interest and broker fees, reflecting a premium to par of an aggregate $1 million. The Company recognized a $1 million loss on these repurchases. The repurchases were partially financed by borrowing under Apache’s former revolving credit facility.On October 17, 2022, Apache redeemed the outstanding $123 million outstanding principal amount of 2.625% notes due January 15, 2023, at a redemption price equal to 100 percent of their principal amount, plus accrued and unpaid interest to the redemption date. The redemption was financed in part by Apache’s borrowing under the Company’s U.S. dollar-denominated revolving credit facility.During 2021, Apache closed cash tender offers for certain outstanding notes issued under its indentures, accepting for purchase $1.7 billion aggregate principal amount of notes covered by the tender offers. Apache paid holders an aggregate cash purchase price of $1.8 billion reflecting principal, premium to par, and accrued and unpaid interest. The Company recognized a $105 million loss on extinguishment of debt, including $11 million of unamortized debt discount and issuance costs, in connection with the note purchases.During 2021, Apache purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of $22 million for an aggregate purchase price of $20 million in cash, including accrued interest and broker fees, reflecting a discount to par of an aggregate $2 million. The Company recognized a $1 million net gain on extinguishment of debt as part of these transactions. The Company expects that Apache will continue to reduce debt outstanding under its indentures from time to time.50Dividends Paid to APA Common Stockholders The Company paid $207 million and $52 million during the years ended December 31, 2022 and 2021, respectively, for dividends on its common stock. During the third quarter of 2021, the Company’s Board of Directors approved an increase in its quarterly dividend per share from $0.025 to $0.0625 and, in the fourth quarter of 2021, a further increase to $0.125 per share. During the third quarter of 2022, the Company’s Board of Directors approved a further increase to its quarterly dividend to $0.25 per share.Distributions to Noncontrolling Interest - Egypt Sinopec holds a one-third minority participation interest in the Company’s oil and gas operations in Egypt. The Company paid $362 million and $279 million during the years ended December 31, 2022 and 2021, respectively, in cash distributions to Sinopec.Distributions to Altus Preferred Unit Limited Partners Prior to the deconsolidation of Altus on February 22, 2022, Altus Midstream LP paid $11 million and $46 million in cash distributions to its limited partners holding Preferred Units during the years ended December 31, 2022 and 2021, respectively. For more information regarding the Preferred Units, refer to Note 13—Redeemable Noncontrolling Interest - Altus in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.Treasury Stock Activity, Net During 2022, the Company repurchased 36.2 million shares at an average price of $39.34 per share totaling $1.4 billion, and as of December 31, 2022, the Company had remaining authorization to repurchase 52.6 million shares. During 2021, the Company repurchased 31.2 million shares at an average price of $27.14 per share totaling $847 million.LiquidityThe following table presents a summary of the Company’s key financial indicators as of December 31: 20222021 (In millions)Cash and cash equivalents$245 $302 Total debt - APA and Apache 5,453 6,853 Total debt - Altus— 657 Total equity (deficit)1,345 (717)Available committed borrowing capacity under syndicated credit facilities2,238 2,426 Available committed borrowing capacity - Altus— 141 Cash and Cash Equivalents As of December 31, 2022, the Company had $245 million in cash and cash equivalents. The majority of the Company’s cash is invested in highly liquid, investment-grade instruments with maturities of three months or less at the time of purchase.Debt As of December 31, 2022, the Company had $5.5 billion in total debt outstanding, which consisted of notes and debentures of Apache, credit facility borrowings, and finance lease obligations. Future interest payments on the fixed-rate notes and debentures are approximately $4.2 billion. As of December 31, 2022, current debt included $2 million of finance lease obligations.Committed Credit Facilities On April 29, 2022, the Company entered into two unsecured syndicated credit agreements for general corporate purposes that replaced and refinanced Apache’s 2018 unsecured syndicated credit agreement (the Former Facility). •One agreement is denominated in US dollars (the USD Agreement) and provides for an unsecured five-year revolving credit facility, with aggregate commitments of US$1.8 billion (including a letter of credit subfacility of up to US$750 million, of which US$150 million currently is committed). The Company may increase commitments up to an aggregate US$2.3 billion by adding new lenders or obtaining the consent of any increasing existing lenders. This facility matures in April 2027, subject to the Company’s two, one-year extension options. •The second agreement is denominated in pounds sterling (the GBP Agreement) and provides for an unsecured five-year revolving credit facility, with aggregate commitments of £1.5 billion for loans and letters of credit. This facility matures in April 2027, subject to the Company’s two, one-year extension options.51In connection with the Company’s entry into the USD Agreement and the GBP Agreement (each, a New Agreement), Apache terminated US$4.0 billion of commitments under the Former Facility, borrowings then outstanding under the Former Facility were deemed outstanding under the USD Agreement, and letters of credit then outstanding under the Former Facility were deemed outstanding under a New Agreement, depending upon whether denominated in US dollars or pounds sterling. Apache may borrow under the USD Agreement up to an aggregate principal amount of US$300 million outstanding at any given time. Apache has guaranteed obligations under each New Agreement effective until the aggregate principal amount of indebtedness under senior notes and debentures outstanding under Apache’s existing indentures is less than US$1.0 billion.As of December 31, 2022, there were $566 million of borrowings and a $20 million letter of credit outstanding under the USD Agreement, and an aggregate £652 million in letters of credit outstanding under the GBP Agreement. As of December 31, 2021, there were $542 million of borrowings and an aggregate £748 million and $20 million in letters of credit outstanding under the Former Facility. The letters of credit denominated in pounds were issued to support North Sea decommissioning obligations, the terms of which required such support after Standard & Poor’s reduced Apache’s credit rating from BBB to BB+ on March 26, 2020.All borrowings under the USD Agreement bear interest at one of two per annum rate options selected by the borrower, being either an alternate base rate (as defined), plus a margin ranging from 0.10% to 0.675% (Base Rate Margin), or an adjusted term SOFR rate (as defined), plus a margin varying from 1.10% to 1.675% (Applicable Margin). All borrowings under the GBP Agreement bear interest at an adjusted rate per annum determined by reference to the Sterling Overnight Index Average published by the Bank of England, plus the Applicable Margin. Each New Agreement also requires the borrower to pay quarterly a facility fee on total commitments. Margins and facility fees are at varying rates per annum determined by reference to the senior, unsecured, non-credit enhanced, long-term indebtedness for borrowed money of APA, or if such indebtedness is not rated and the Apache guaranty is in effect, of Apache (Long-Term Debt Rating). As of December 31, 2022, Apache’s Long-Term Debt Rating applied, and the Base Rate Margin was 0.60%, the Applicable Margin was 1.60%, and the facility fee was 0.275%.A commission is payable quarterly to lenders under each New Agreement on the face amount of each outstanding letter of credit at a per annum rate equal to the Applicable Margin then in effect. Customary letter of credit fronting fees and other charges are payable to issuing banks.Borrowers under each New Agreement, which may include certain subsidiaries of APA, may borrow, prepay, and reborrow loans and obtain letters of credit, and APA may obtain letters of credit for the account of its subsidiaries, in each case subject to representations and warranties, covenants, and events of default substantially similar to those in the Former Facility, such as:•A financial covenant requires APA to maintain an adjusted debt-to-capital ratio of not greater than 60 percent at the end of any fiscal quarter. For purposes of this calculation, capital continues to exclude the effects of non-cash write-downs, impairments, and related charges occurring after June 30, 2015. At December 31, 2022, APA’s debt-to-capital ratio as calculated under each New Agreement was 21 percent.• A negative covenant restricts the ability of APA and its subsidiaries to create liens securing debt on their hydrocarbon-related assets, with exceptions for liens typically arising in the oil and gas industry; liens securing debt incurred to finance the acquisition, construction, improvement, or capital lease of assets, provided that such debt, when incurred, does not exceed the subject purchase price and costs, as applicable, and related expenses; liens on subsidiary assets located outside of the U. S. and Canada; and liens arising as a matter of law, such as tax and mechanics’ liens. Liens on assets also are permitted if debt secured thereby does not exceed 15 percent of APA’s consolidated net tangible assets or approximately $1.5 billion as of December 31, 2022.• Negative covenants restrict APA’s ability to merge with another entity unless it is the surviving entity, a borrower’s disposition of substantially all of its assets, prohibitions on the ability of certain subsidiaries to make payments to borrowers, and guarantees by APA or certain subsidiaries of debt of non-consolidated entities in excess of the stated threshold. • Lenders may accelerate payment maturity and terminate lending and issuance commitments for nonpayment and other breaches; if a borrower or certain subsidiaries defaults on other indebtedness in excess of the stated threshold, has any unpaid, non-appealable judgment against it for payment of money in excess of the stated threshold, or has specified pension plan liabilities in excess of the stated threshold; or APA undergoes a specified change in control. Such acceleration and termination are automatic upon specified insolvency events of a borrower or certain subsidiaries.52Consistent with the Former Facility, the New Agreements do not require collateral, do not have a borrowing base, do not permit lenders to accelerate maturity or refuse to lend based on unspecified material adverse changes, and do not have borrowing restrictions or prepayment obligations in the event of a decline in credit ratings.The Company was in compliance with the terms of each New Agreement as of December 31, 2022. In November 2018, Altus and its subsidiary, Altus Midstream LP (Altus LP), were subsidiaries of Apache, and Altus LP entered into an unsecured revolving credit facility for general corporate purposes. The agreement for the facility, as amended, provided aggregate commitments from a syndicate of banks of $800 million, including a letter of credit subfacility. The credit facility was not guaranteed by APA, Apache, or any of APA’s other subsidiaries. On February 22, 2022, Altus was deconsolidated from APA and Apache. As of December 31, 2021, there were $657 million of borrowings and $2 million letters of credit outstanding under the facility.There is no assurance of the terms upon which potential lenders under future credit facilities will make loans or other extensions of credit available to APA or its subsidiaries or the composition of such lenders. There is no assurance that the financial condition of banks with lending commitments to APA or its subsidiaries will not deteriorate. The Company closely monitor the ratings of the banks in its bank groups. Having large bank groups allows the Company to mitigate the potential impact of any bank’s failure to honor its lending commitment.Uncommitted Credit Facilities The Company from time to time has and uses uncommitted credit and letter of credit facilities for working capital and credit support purposes. As of December 31, 2022 and 2021, there were no outstanding borrowings under these facilities. As of December 31, 2022, there were £199 million and $17 million in letters of credit outstanding under these facilities. As of December 31, 2021, there were £117 million and $17 million in letters of credit outstanding under these facilities.Former Apache Commercial Paper Program As of December 31, 2020, no commercial paper was outstanding. Apache did not use its commercial paper program during 2021 and terminated the program during the third quarter of 2021. Contractual ObligationsPurchase Obligations From time to time, the Company enters into agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. These include minimum commitments associated with take-or-pay contracts, NGL processing agreements, drilling work program commitments and agreements to secure capacity rights on third-party pipelines. As of December 31, 2022, the Company had contractual obligations totaling $3.0 billion, of which $1.0 billion is related to U.S. firm transportation contracts, $1.8 billion is related to the new merged concession agreement with the EGPC, and $0.2 billion of other items. Under terms agreed to in the Egypt modernized PSC, the Company committed to spend a minimum of $3.5 billion on exploration, development, and operating activities by March 31, 2026. As of December 31, 2022, the Company has spent $1.7 billion and believes it will be able to satisfy the remaining obligation within its current exploration and development program. Leases In the normal course of business, the Company enters into various lease agreements for real estate, drilling rigs, vessels, aircrafts, and equipment related to its exploration and development activities, which are typically classified as operating leases under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842 (Leases). As of December 31, 2022, the Company had net minimum commitments of $315 million and $45 million for operating and finance leases, respectively. 53For additional information regarding these obligations, refer to Note 11—Commitments and Contingencies in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.For information regarding the Company’s liability for dismantlement, abandonment, and restoration costs of oil and gas properties or pension or postretirement benefit obligations, refer to Notes 8—Asset Retirement Obligation and Note 12—Retirement and Deferred Compensation Plans in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.The Company is also subject to various contingent obligations that become payable only if certain events or rulings were to occur. The inherent uncertainty surrounding the timing of and monetary impact associated with these events or rulings prevents any meaningful accurate measurement, which is necessary to assess settlements resulting from litigation. The Company’s management believes that it has adequately reserved for its contingent obligations, including approximately $1 million for environmental remediation and approximately $64 million for various contingent legal liabilities. For a detailed discussion of the Company’s lease obligations, purchase obligations, environmental and legal contingencies, and other commitments, please see Note 11—Commitments and Contingencies and Note 12—Retirement and Deferred Compensation Plans in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.With respect to oil and gas operations in the Gulf of Mexico, the Bureau of Ocean Energy Management (BOEM) issued a Notice to Lessees (NTL No. 2016-N01) significantly revising the obligations of companies operating in the Gulf of Mexico to provide supplemental assurances of performance with respect to plugging, abandonment, and decommissioning obligations associated with wells, platforms, structures, and facilities located upon or used in connection with such companies’ oil and gas leases. While the NTL was paused in mid-2017 and is currently listed on BOEM’s website as “rescinded,” if reinstated, the NTL will likely require that the Company provide additional security to BOEM with respect to plugging, abandonment, and decommissioning obligations relating to the Company’s current ownership interests in various Gulf of Mexico leases. Additionally, the Company is not able to predict the effect that these changes might have on counterparties to which the Company has sold Gulf of Mexico assets or with whom the Company has joint ownership. Such changes could cause the bonding obligations of such parties to increase substantially, thereby causing a significant impact on the counterparties’ solvency and ability to continue as a going concern.Potential Decommissioning Obligations on Sold PropertiesThe Company’s subsidiaries have potential exposure to future obligations related to divested properties. The Company has divested various leases, wells, and facilities located in the Gulf of Mexico (GOM) where the purchasers typically assume all obligations to plug, abandon, and decommission the associated wells, structures, and facilities acquired. One or more of the counterparties in these transactions could, either as a result of the severe decline in oil and natural gas prices or other factors related to the historical or future operations of their respective businesses, face financial problems that may have a significant impact on their solvency and ability to continue as a going concern. If a purchaser of such GOM assets becomes the subject of a case or proceeding under relevant insolvency laws or otherwise fails to perform required abandonment obligations, APA’s subsidiaries could be required to perform such actions under applicable federal laws and regulations. In such event, such subsidiaries may be forced to use available cash to cover the costs of such liabilities and obligations should they arise.In 2013, Apache sold its GOM Shelf operations and properties and its GOM operating subsidiary, GOM Shelf LLC (GOM Shelf) to Fieldwood Energy LLC (Fieldwood). Under the terms of the purchase agreement, Apache received cash consideration of $3.75 billion and Fieldwood assumed the obligation to decommission the properties held by GOM Shelf and the properties acquired from Apache and its other subsidiaries (collectively, the Legacy GOM Assets). In respect of such abandonment obligations, Fieldwood posted letters of credit in favor of Apache (Letters of Credit) and established trust accounts (Trust A and Trust B) of which Apache was a beneficiary and which were funded by two net profits interests (NPIs) depending on future oil prices. On February 14, 2018, Fieldwood filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In connection with the 2018 bankruptcy, Fieldwood confirmed a plan under which Apache agreed, inter alia, to (i) accept bonds in exchange for certain of the Letters of Credit and (ii) amend the Trust A trust agreement and one of the NPIs to consolidate the trusts into a single Trust (Trust A) funded by both remaining NPIs. Currently, Apache holds two bonds (Bonds) and five Letters of Credit backed by investment-grade counterparties to secure Fieldwood’s asset retirement obligations on the Legacy GOM Assets as and when Apache is required to perform or pay for decommissioning any Legacy GOM Asset over the remaining life of the Legacy GOM Assets.54On August 3, 2020, Fieldwood again filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On June 25, 2021, the United States Bankruptcy Court for the Southern District of Texas (Houston Division) entered an order confirming Fieldwood’s bankruptcy plan. On August 27, 2021, Fieldwood’s bankruptcy plan became effective. Pursuant to the plan, the Legacy GOM Assets were separated into a standalone company, which was subsequently merged into GOM Shelf. Under GOM Shelf’s limited liability company agreement, the proceeds of production of the Legacy GOM Assets will be used to fund decommissioning of Legacy GOM Assets. By letter dated April 5, 2022, replacing two prior letters dated September 8, 2021 and February 22, 2022, GOM Shelf notified the Bureau of Safety and Environmental Enforcement (BSEE) that it was unable to fund the decommissioning obligations that it is currently obligated to perform on certain of the Legacy GOM Assets. As a result, Apache and other current and former owners in these assets have received orders from BSEE to decommission certain of the Legacy GOM Assets included in GOM Shelf’s notification to BSEE. Apache expects to receive such orders on the other Legacy GOM Assets included in GOM Shelf’s notification letter. Further, Apache anticipates that GOM Shelf may send additional such notices to BSEE in the future and that it may receive additional orders from BSEE requiring it to decommission other Legacy GOM Assets.If Apache incurs costs to decommission any Legacy GOM Asset and GOM Shelf does not reimburse Apache for such costs, then Apache expects to obtain reimbursement from Trust A, the Bonds, and the Letters of Credit until such funds and securities are fully utilized. In addition, after such sources have been exhausted, Apache has agreed to provide a standby loan to GOM Shelf of up to $400 million to perform decommissioning (Standby Loan Agreement), with such standby loan secured by a first and prior lien on the Legacy GOM Assets. If the combination of GOM Shelf’s net cash flow from its producing properties, the Trust A funds, the Bonds, and the remaining Letters of Credit are insufficient to fully fund decommissioning of any Legacy GOM Assets that Apache may be ordered by BSEE to perform, or if GOM Shelf’s net cash flow from its remaining producing properties after the Trust A funds, Bonds, and Letters of Credit are exhausted is insufficient to repay any loans made by Apache under the Standby Loan Agreement, then Apache may be forced to effectively use its available cash to fund the deficit.As of December 31, 2022, Apache estimates that its potential liability to fund decommissioning of Legacy GOM Assets it may be ordered to perform ranges from $1.2 billion to $1.4 billion on an undiscounted basis. Management does not believe any specific estimate within this range is a better estimate than any other. Accordingly, the Company has recorded a contingent liability of $1.2 billion as of December 31, 2022, representing the estimated costs of decommissioning it may be required to perform on Legacy GOM Assets. Of the total liability recorded, $738 million is reflected under the caption “Decommissioning contingency for sold Gulf of Mexico properties,” and $450 million is reflected under “Other current liabilities” in the Company’s consolidated balance sheet. Changes in significant assumptions impacting Apache’s estimated liability, including expected decommissioning rig spread rates, lift boat rates, and planned abandonment logistics could result in a liability in excess of the amount accrued.As of December 31, 2022, the Company has also recorded a $667 million asset, which represents the amount the Company expects to be reimbursed from the Trust A funds, the Bonds, and the Letters of Credit for decommissioning it may be required to perform on Legacy GOM Assets. Of the total asset recorded, $217 million is reflected under the caption “Decommissioning security for sold Gulf of Mexico properties,” and $450 million is reflected under “Other current assets.” The Company recognized $157 million and $446 million during 2022 and 2021, respectively, of “Losses on previously sold Gulf of Mexico properties” to reflect the net impact of changes to the estimated decommissioning liability and decommissioning asset to the Company’s statement of consolidated operations. Insurance ProgramThe Company maintains insurance policies that include coverage for physical damage to its assets, general liabilities, workers’ compensation, employers’ liability, sudden and accidental pollution, and other risks. The Company’s insurance coverage is subject to deductibles or retentions that it must satisfy prior to recovering on insurance. Additionally, the Company’s insurance is subject to policy exclusions and limitations. There is no assurance that insurance will adequately protect the Company against liability from all potential consequences and damages. Further, the Company does not have coverage in place for a variety of other risks including Gulf of Mexico named windstorm and business interruption. Service agreements, including drilling contracts, generally indemnify the Company for injuries and death of the service provider’s employees as well as subcontractors hired by the service provider. 55The Company purchases multi-year political risk insurance from The Islamic Corporation for the Insurance of Investment and Export Credit Trade (ICIEC, an agency of the Islamic Development Bank) and highly-rated insurers covering a portion of its investments in Egypt for losses arising from confiscation, nationalization, and expropriation risks. In the aggregate, these insurance policies provide up to $750 million of coverage, subject to policy terms and conditions and a retention of approximately $500 million.Apache also has an insurance policy with U.S. International Development Finance Corporation (DFC), which, subject to policy terms and conditions, provides up to $150 million of coverage through 2024 for losses arising from (1) non-payment by EGPC of arbitral awards covering amounts owed Apache on past due invoices and (2) expropriation of exportable petroleum in the event that actions taken by the government of Egypt prevent Apache from exporting its share of production. The Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, provides $60 million in reinsurance to DFC.Future insurance coverage for the Company’s industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable or unavailable on terms economically acceptable.Critical Accounting EstimatesThe Company prepares its financial statements and accompanying notes in conformity with accounting principles generally accepted in the U.S., which require management to make estimates and assumptions about future events that affect reported amounts in the financial statements and the accompanying notes. The Company identifies certain accounting policies involving estimation as critical accounting estimates based on, among other things, their impact on the portrayal of the Company’s financial condition, results of operations, or liquidity, as well as the degree of difficulty, subjectivity, and complexity in their deployment. Critical accounting estimates address accounting matters that are inherently uncertain due to unknown future resolution of such matters. Management routinely discusses the development, selection, and disclosure of each critical accounting estimate. The following is a discussion of the Company’s most critical accounting estimates.Reserves EstimatesProved oil and gas reserves are the estimated quantities of natural gas, crude oil, condensate, and NGLs that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing conditions, operating conditions, and government regulations.Proved undeveloped reserves include those reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Undeveloped reserves may be classified as proved reserves on undrilled acreage directly offsetting development areas that are reasonably certain of production when drilled, or where reliable technology provides reasonable certainty of economic producibility. Undrilled locations may be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless specific circumstances justify a longer time.Despite significant judgment involved in these engineering estimates, the Company’s reserves are used throughout its financial statements. For example, since the Company uses the units-of-production method to amortize its oil and gas properties, the quantity of reserves could significantly impact DD&A expense. A material adverse change in the estimated volumes of reserves could result in property impairments. Finally, these reserves are the basis for the Company’s supplemental oil and gas disclosures. For more information regarding the Company’s supplemental oil and gas disclosures, refer to Note 18—Supplemental Oil and Gas Disclosures (Unaudited) in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report on Form 10-K.Reserves are calculated using an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous twelve months, held flat for the life of the production, except where prices are defined by contractual arrangements. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation.The Company has elected not to disclose probable and possible reserves or reserve estimates in this filing.56Oil and Gas Exploration CostsThe Company accounts for its exploration and production activities using the successful efforts method of accounting. Costs of acquiring unproved and proved oil and gas leasehold acreage are capitalized. Costs of drilling and equipping productive wells, including development dry holes, and related production facilities are also capitalized. Oil and gas exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. Costs associated with drilling an exploratory well are initially capitalized, or suspended, pending a determination as to whether proved reserves have been found. On a quarterly basis, management reviews the status of all suspended exploratory well costs in light of ongoing exploration activities and determines whether the Company is making sufficient progress in its ongoing exploration and appraisal efforts or, in the case of discoveries requiring government sanctioning, whether development negotiations are underway and proceeding as planned. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are recorded as dry hole expense and reported in exploration expense in the statement of consolidated operations. Otherwise, the costs of exploratory wells remain capitalized.Offshore Decommissioning ContingencyThe Company has potential exposure to future obligations related to divested properties. For information regarding potential decommissioning obligations on sold properties estimated and recorded in the third quarter of 2021, please refer to “Potential Decommissioning Obligations on Sold Properties” above and in Note 11—Commitments and Contingencies in the Notes to Consolidated Financial Statements in Part IV, Item 5 of this Annual Report on Form 10-K. Changes in significant assumptions impacting the Company’s estimated liability, including expected decommissioning rig spread rates, lift boat rates, and planned abandonment logistics could result in a liability in excess of the amount accrued.Impairment of Equity Method InterestsEquity method interests are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred, if the loss is deemed to be other than temporary. When the loss is deemed to be other than temporary, the carrying value of the equity method investment is written down to fair value, and the amount of the write-down is included in income.Altus recorded an impairment charge on its equity method interest in the EPIC crude oil pipeline (EPIC) in the fourth quarter of 2021. The fair value of the impaired interest was determined using the income approach. The income approach considered estimates of future throughput volumes, tariff rates, and costs. These assumptions were applied to develop future cash flow projections that were then discounted to estimated fair value, using a discount rate believed to be consistent with that which would be applied by market participants. The Company has classified this nonrecurring fair value measurement as Level 3 in the fair value hierarchy. Refer to Note 6—Equity Method Interests, within Part IV, Item 15 of this Annual Report on Form 10-K for further details of Altus’ equity method interests.Long-Lived Asset ImpairmentsLong-lived assets used in operations, including proved oil and gas properties and GPT assets, are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future cash flows expected to be generated by an asset. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. If there is an indication that the carrying amount of an asset group may not be recovered, the asset is assessed by management through an established process in which changes to significant assumptions such as prices, volumes, and future development plans are reviewed. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is assessed by management using the income approach.Under the income approach, the fair value of each asset group is estimated based on the present value of expected future cash flows. The income approach is dependent on a number of factors including estimates of forecasted revenue and operating costs, proved reserves, the success of future exploration for and development of unproved reserves, expected throughput volumes for GPT assets, discount rates, and other variables. Key assumptions used in developing a discounted cash flow model described above include estimated quantities of crude oil and natural gas reserves; estimates of market prices considering forward commodity price curves as of the measurement date; and estimates of operating, administrative, and capital costs adjusted for inflation. The Company discounts the resulting future cash flows using a discount rate believed to be consistent with those applied by market participants. 57To assess the reasonableness of our fair value estimate, when available, management uses a market approach to compare the fair value to similar assets. This requires management to make certain judgments about the selection of comparable assets, recent comparable asset transactions, and transaction premiums.Although the fair value estimate of each asset group is based on assumptions believed to be reasonable, those assumptions are inherently unpredictable and uncertain, and actual results could differ from the estimate. Negative revisions of estimated reserves quantities, increases in future cost estimates, divestiture of a significant component of the asset group, or sustained decreases in crude oil or natural gas prices could lead to a reduction in expected future cash flows and possibly an additional impairment of long-lived assets in future periods.Over the past several years, the Company has experienced substantial volatility in commodity prices, which impacted its future development plans and operating cash flows. As such, material impairments of certain proved oil and gas properties and gathering, processing, and transmission facilities were recorded in 2020. For discussion of these impairments, see “Fair Value Measurements” of Note 1—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.Asset Retirement Obligation (ARO)The Company has significant obligations to remove tangible equipment and restore land or seabed at the end of oil and gas production operations. The Company’s removal and restoration obligations are primarily associated with plugging and abandoning wells and removing and disposing of offshore oil and gas platforms in the North Sea and Gulf of Mexico. Estimating the future restoration and removal costs is difficult and requires management to make estimates and judgments. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety, and public relations considerations.ARO associated with retiring tangible long-lived assets is recognized as a liability in the period in which the legal obligation is incurred and becomes determinable. The liability is offset by a corresponding increase in the underlying asset. The ARO liability reflects the estimated present value of the amount of dismantlement, removal, site reclamation, and similar activities associated with the Company’s oil and gas properties and other long-lived assets. The Company utilizes current retirement costs to estimate the expected cash outflows for retirement obligations. Inherent in the present value calculation are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value.Income TaxesThe Company’s oil and gas exploration and production operations are subject to taxation on income in numerous jurisdictions worldwide. The Company records deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in its financial statements and tax returns. Management routinely assesses the ability to realize the Company’s deferred tax assets. If management concludes that it is more likely than not that some portion or all of the deferred tax assets will not be realized under accounting standards, the tax asset would be reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices).The Company regularly assesses and, if required, establishes accruals for uncertain tax positions that could result from assessments of additional tax by taxing jurisdictions in countries where the Company operates. The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. These accruals for uncertain tax positions are subject to a significant amount of judgment and are reviewed and adjusted on a periodic basis in light of changing facts and circumstances considering the progress of ongoing tax audits, case law, and any new legislation. The Company believes that its accruals for uncertain tax positions are adequate in relation to the potential for any additional tax assessments.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe primary objective of the following information is to provide forward-looking quantitative and qualitative information about the Company’s exposure to market risk. The term market risk relates to the risk of loss arising from adverse changes in oil, gas, and NGL prices, interest rates, or foreign currency and adverse governmental actions. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. The forward-looking information provides indicators of how the Company views and manages its ongoing market risk exposures.58Commodity Price RiskThe Company’s revenues, earnings, cash flow, capital investments and, ultimately, future rate of growth are highly dependent on the prices the Company receives for its crude oil, natural gas, and NGLs, which have historically been very volatile because of unpredictable events such as economic growth or retraction, weather, political climate, and global supply and demand. The Company continually monitors its market risk exposure, as oil and gas supply and demand are impacted by uncertainties in the commodity and financial markets associated with the conflict in Ukraine, global inflation, and other current events.The Company’s average crude oil price realizations increased 44 percent to $99.11 per barrel in 2022 from $68.97 per barrel in 2021. The Company’s average natural gas price realizations increased 25 percent to $4.98 per Mcf in 2022 from $3.99 per Mcf in 2021. The Company’s average NGL price realizations increased 21 percent to $34.51 per barrel in 2022 from $28.48 per barrel in 2021. Based on average daily production for 2022, a $1.00 per barrel change in the weighted average realized oil price would have increased or decreased revenues for the year by approximately $69 million, a $0.10 per Mcf change in the weighted average realized natural gas price would have increased or decreased revenues for the year by approximately $32 million, and a $1.00 per barrel change in the weighted average realized NGL price would have increased or decreased revenues for the year by approximately $23 million.The Company periodically enters into derivative positions on a portion of its projected crude oil and natural gas production through a variety of financial and physical arrangements intended to manage fluctuations in cash flows resulting from changes in commodity prices. Such derivative positions may include the use of futures contracts, swaps, and/or options. The Company does not hold or issue derivative instruments for trading purposes. As of December 31, 2022, the Company had open natural gas derivatives not designated as cash flow hedges in a liability position with a fair value of $45 million. A 10 percent increase in gas prices would decrease the liability by approximately $4 million, while a 10 percent decrease in prices would increase the liability by approximately $4 million. These fair value changes assume volatility based on prevailing market parameters as of December 31, 2022. Refer to Note 4—Derivative Instruments and Hedging Activities in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Annual Report Form 10-K for notional volumes and terms with the Company’s derivative contracts.Interest Rate RiskAt December 31, 2022, the Company had $4.9 billion, net, in outstanding notes and debentures, all of which was fixed-rate debt, with a weighted average interest rate of 5.32 percent. Although near-term changes in interest rates may affect the fair value of fixed-rate debt, such changes do not expose the Company to the risk of earnings or cash flow loss associated with that debt. The Company is also exposed to interest rate risk related to its interest-bearing cash and cash equivalents balances and amounts outstanding under its syndicated credit facilities. As of December 31, 2022, the Company had approximately $245 million in cash and cash equivalents, approximately 60 percent of which was invested in money market funds and short-term investments with major financial institutions. As of December 31, 2022, there were $566 million of borrowings outstanding under the Company’s syndicated revolving credit facilities. A change in the interest rate applicable to short-term investments and credit facility borrowings would have an immaterial impact on earnings and cash flows but could impact interest costs associated with future debt issuances or any future borrowings.Foreign Currency Exchange Rate RiskThe Company’s cash activities relating to certain international operations is based on the U.S. dollar equivalent of cash flows measured in foreign currencies. The Company’s North Sea production is sold under U.S. dollar contracts, while the majority of costs incurred are paid in British pounds. The Company’s Egypt production is sold under U.S. dollar contracts, and the majority of costs incurred are denominated in U.S. dollars. Transactions denominated in British pounds are converted to U.S. dollar equivalents based on the average exchange rates during the period.Foreign currency gains and losses also arise when monetary assets and monetary liabilities denominated in foreign currencies are translated at the end of each month. Foreign currency gains and losses are included as either a component of “Other” under “Revenues and Other” or, as is the case when the Company re-measures its foreign tax liabilities, as a component of the Company’s provision for income tax expense on the statement of consolidated operations. A foreign currency net gain or loss of $3 million would result from a 10 percent weakening or strengthening, respectively, in the British pound as of December 31, 2022.59

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+Item 7. Valuation and Recoverability of GoodwillOur goodwill related to acquisitions of businesses was $2.60 billion and $2.57 billion as of December 31, 2022 and 2021, respectively. We review our goodwill annually in the fourth quarter for impairment, or more frequently if indicators of impairment exist. Such indicators include: a significant adverse change in legal factors, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel or a significant decline in our expected future cash flows due to changes in company-specific factors or the broader business climate. The evaluation of such factors requires considerable management judgment. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our Consolidated Financial Statements. Goodwill is tested for impairment at the reporting unit level, which is either at the operating segment or one level below, if that component is a business for which discrete financial information is available and segment management regularly reviews such information. Components within an operating segment can be aggregated into one reporting unit if they have similar economic characteristics. A goodwill impairment loss is measured as the excess of the carrying value, including goodwill, of the reporting unit over its fair value. An impairment loss is limited to the amount of goodwill allocated to the reporting unit. Our Global Lifestyle operating segment is disaggregated into the following three reporting units: Connected Living, Global Automotive and Global Financial Services. Our reporting unit for goodwill testing was at the same level as the operating segment for Global Housing. In second quarter of 2022, we exited the sharing economy and small commercial businesses (which are now included within non-core operations) and reclassified $7.8 million of goodwill from Global Housing to Corporate and Other. The entire $7.8 million of goodwill reported in Corporate and Other was impaired and written off in the fourth quarter of 2022.The following table illustrates the amount of goodwill carried by operating segment as of the dates indicated: December 31, 20222021Global Lifestyle (1)$2,193.9 $2,192.1 Global Housing (2)409.1 379.5 Total$2,603.0 $2,571.6 (1)As of December 31, 2022, $689.1 million, $1,432.9 million and $71.9 million of goodwill was assigned to the Connected Living, Global Automotive and Global Financial Services reporting unit, respectively. As of December 31, 2021, $698.7 million, $1,420.5 million, and $72.9 million of goodwill was assigned to the Connected Living, Global Automotive and Global Financial Services reporting unit, respectively. (2)Goodwill of $7.8 million associated with the sharing economy and small commercial businesses was included in Global Housing as of December 31, 2021 and subsequently reclassified to Corporate and Other, impaired and written off in 2022.Quantitative Impairment TestingIn the fourth quarter of 2022, we performed a quantitative assessment for the Global Lifestyle and Global Housing reporting units given the uncertainty in macro-economic conditions, inflation concerns, and lingering COVID-19 impacts on industry performance. Based on this quantitative assessment, the Company determined that it was more likely than not that the reporting units’ fair values were more than their carrying amounts and that there was no impairment for the Global Lifestyle and Global Housing reporting units as of October 1, 2022.The determination of fair value of the reporting units requires many estimates and assumptions. These estimates and assumptions include earnings and required capital projections discussed above, discount rates, terminal growth rates, operating income and dividend forecasts for each reporting unit and the weighting assigned to the results of each valuation method included in the fair value calculation. Changes in certain assumptions could have a significant impact on the goodwill impairment assessment.49Should the operating results of these reporting units decline substantially compared to projected results, or should further interest rate declines increase the net unrealized investment portfolio gain position, we could determine that we need to perform an updated impairment test due to the potential impairment indicators, which may require the recognition of a goodwill impairment loss in any of the reporting units.For the fourth quarter of 2022 quantitative assessment, had the net book value for of the reporting units exceeded its estimated fair value, the Company would have recognized a goodwill impairment loss for the difference up to the amount of goodwill allocated to the reporting unit.Refer to Note 15 to the Consolidated Financial Statements included elsewhere in this Report for further detail.Recent Accounting PronouncementsPlease see Note 2 to the Consolidated Financial Statements included elsewhere in this Report. Results of OperationsAssurant ConsolidatedThe table below presents information regarding our consolidated results of operations: For the Years Ended December 31, 202220212020Revenues:Net earned premiums$8,765.3 $8,572.1 $8,277.9 Fees and other income1,243.3 1,172.9 1,042.3 Net investment income364.1 314.4 285.6 Net realized (losses) gains on investments and fair value changes to equity securities(179.7)128.2 (8.2)Total revenues10,193.0 10,187.6 9,597.6 Benefits, losses and expenses:Policyholder benefits2,359.8 2,201.9 2,275.2 Underwriting, selling, general and administrative expenses7,366.3 7,081.9 6,639.8 Goodwill impairment7.8 — — Interest expense108.3 111.8 104.5 Loss on extinguishment of debt0.9 20.7 — Total benefits, losses and expenses9,843.1 9,416.3 9,019.5 Income before provision for income taxes349.9 771.3 578.1 Provision for income taxes73.3 168.4 58.7 Net income from continuing operations276.6 602.9 519.4 Net income (loss) from discontinued operations— 758.9 (77.7)Net income276.6 1,361.8 441.7 Less: Net income attributable to non-controlling interest— — (0.9)Net income attributable to stockholders276.6 1,361.8 440.8 Less: Preferred stock dividends— (4.7)(18.7)Net income attributable to common stockholders$276.6 $1,357.1 $422.1 Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021Net Income from Continuing OperationsConsolidated net income from continuing operations decreased $326.3 million, or 54%, to $276.6 million for Twelve Months 2022 from $602.9 million for Twelve Months 2021, primarily due to a net decrease in unrealized gains from changes in fair value of equity securities mostly driven by the four equity positions that went public in 2021 through SPAC mergers. The changes in fair value of these investments resulted in $84.1 million of after-tax unrealized losses in 2022 compared to $67.5 million of after-tax unrealized gains in 2021. The decrease was also due to $50.3 million of net realized losses from sales of fixed maturity securities in 2022 compared to $13.6 million of net realized gains from sales in 2021, and a $52.8 million after-50tax decrease in earnings from our non-core operations mostly related to adverse prior year reserve development from the sharing economy business. Also contributing to the decrease was $41.8 million of after-tax restructuring costs related to realigning our organizational structure and the acceleration of real estate consolidation strategy announced in December 2022, and lower earnings contributions from Global Housing, mainly due to higher non-catastrophe loss experience, partially offset by higher earnings contributions from Global Lifestyle driven by favorable results from both Connected Living and Global Automotive.Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020Net Income from Continuing OperationsConsolidated net income from continuing operations increased $83.5 million, or 16%, to $602.9 million for Twelve Months 2021 from $519.4 million for Twelve Months 2020, primarily due to higher net realized gains on investments and fair value changes to equity securities compared to net losses in the prior period, including $67.5 million of after-tax unrealized gains from four equity positions that went public during Twelve Months 2021, the absence of $25.5 million of after-tax net unrealized losses on collateralized loan obligations in Twelve Months 2020 and $19.2 million of after-tax unrealized gains from equity securities accounted for under the measurement alternative. The increase was also due to favorable earnings contributions from Global Lifestyle, mainly due to continued organic growth and favorable loss experience in Global Automotive. These increases were partially offset by the absence of an $84.4 million tax benefit that was recorded in Twelve Months 2020 related to the utilization of net operating losses in connection with the 2020 Coronavirus Aid, Relief, and Economic Security Act.51Global Lifestyle The table below presents information regarding the Global Lifestyle segment’s results of operations for the periods indicated: For the Years Ended December 31, 202220212020Revenues:Net earned premiums$6,829.9 $6,712.7 $6,436.2 Fees and other income1,106.2 1,027.4 895.4 Net investment income249.4 198.8 191.5 Total revenues8,185.5 7,938.9 7,523.1 Benefits, losses and expenses:Policyholder benefits1,325.5 1,333.1 1,411.8 Underwriting, selling, general and administrative expenses6,106.6 5,903.7 5,475.3 Total benefits, losses and expenses7,432.1 7,236.8 6,887.1 Global Lifestyle Adjusted EBITDA$753.4 $702.1 $636.0 Net earned premiums, fees and other income:Connected Living$4,233.4 $4,303.2 $4,216.5 Global Automotive3,702.7 3,436.9 3,115.1 Total$7,936.1 $7,740.1 $7,331.6 Net earned premiums, fees and other income:Domestic $6,156.3 $5,871.5 $5,402.3 International1,779.8 1,868.6 1,929.3 Total$7,936.1 $7,740.1 $7,331.6 Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021Adjusted EBITDA increased $51.3 million, or 7%, to $753.4 million for Twelve Months 2022 from $702.1 million for Twelve Months 2021, driven by growth across U.S. Connected Living and Global Automotive, partially offset by weaker performance in Europe and Asia Pacific, including the unfavorable impact of foreign exchange. Growth in Connected Living reflected increased mobile subscribers in North America and more favorable mobile loss experience. Global Automotive increased primarily from higher net investment income, after client profit sharing, favorable loss experience in select domestic ancillary products and expansion across distribution channels. Segment results included $24.1 million of income from real estate and a $11.2 million one-time client contract benefit.Total revenues increased $246.6 million, or 3%, to $8.19 billion for Twelve Months 2022 from $7.94 billion for Twelve Months 2021. Net earned premiums increased $117.2 million, or 2%, primarily driven by continued organic growth from strong prior period U.S. sales in our Global Automotive business across all distribution channels and domestic mobile subscriber growth within our cable operator distribution channel. The increase in net earned premiums was partially offset by the run-off of certain global mobile programs and unfavorable foreign exchange. Fees and other income increased $78.8 million, or 8%, mainly driven by an increase in global mobile devices serviced, which included $148.4 million from in-store mobile service and repair program, which, as previously announced, is not expected to continue in 2023. Net investment income increased $50.6 million, or 25%, primarily due to income from higher fixed maturity yields and asset levels and higher real estate related income.Total benefits, losses and expenses increased $195.3 million, or 3%, to $7.43 billion for Twelve Months 2022 from $7.24 billion for Twelve Months 2021. Underwriting, selling, general and administrative expenses increased $202.9 million, or 3%, mainly due to higher commission expenses, primarily from growth across our Global Automotive business and domestic mobile subscriber growth within our cable operator distribution channel, as well as higher cost of sales in Connected Living due to an increase in global mobile devices serviced, which included expenses from the in-store mobile service and repair program, and higher operating costs to support growth. This was partially offset by lower commission expenses related to the run-off of certain global mobile programs. The increase in total benefits losses and expenses was partially offset by a decrease in policyholder benefits of $7.6 million, or 1%, due to the run-off of certain global mobile programs and favorable loss experience 52from select domestic ancillary products in Global Automotive and from mobile device protection products, partially offset by growth across our Global Automotive and Connected Living businesses.Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020Adjusted EBITDA increased $66.1 million, or 10%, to $702.1 million for Twelve Months 2021 from $636.0 million for Twelve Months 2020, primarily due to Global Automotive from underlying growth from prior period sales driven by expanded and new client relationships globally, favorable loss experience in select ancillary products and $10.4 million of one-time benefits in Twelve Months 2021 that are not expected to repeat. Connected Living also contributed to the increase, led by mobile, mainly from higher mobile trade-in volumes, including our acquisition of Hyla Mobile, Inc.(“Hyla”), better performance in Asia Pacific and additional domestic mobile subscribers across carrier and cable operator clients, as well as financial services and other products, mainly due to claims and sales recoveries as Twelve Months 2020 included unfavorable impacts related to COVID-19. This increase was partially offset by investments to build out service and repair capabilities in mobile and an $11.1 million benefit for an extended service contract client recoverable in Twelve Months 2020. Total revenues increased $415.8 million, or 6%, to $7.94 billion for Twelve Months 2021 from $7.52 billion for Twelve Months 2020. Net earned premiums increased $276.5 million, or 4%, primarily driven by continued growth from strong U.S. sales in our Global Automotive business across all distribution channels. The increase in net earned premiums was partially offset by modest declines in Connected Living, as the run-off of certain global mobile programs was offset by growth in extended service contract programs and domestic mobile subscribers within our cable operator distribution channel. Fees and other income increased $132.0 million, or 15%, primarily driven by Connected Living from higher mobile repair and logistics volumes mainly from Hyla contributions and mobile carrier promotions, partially offset by the $176 million reduction from the previously disclosed program contract change. Net investment income increased $7.3 million, or 4%, primarily due to higher income from real estate related investments.Total benefits, losses and expenses increased $349.7 million, or 5%, to $7.24 billion for Twelve Months 2021 from $6.89 billion for Twelve Months 2020. Underwriting, selling, general and administrative expenses increased $428.4 million, or 8%, primarily due to growth across the businesses, including higher mobile repair and logistics volumes, with contributions from Hyla, and investments to build out service and repair capabilities, partially offset by the impact of the previously disclosed program contract change. The increase in total benefits, losses and expenses was partially offset by a $78.7 million, or 6%, decrease in policyholder benefits, primarily due to the run-off of certain global mobile programs in our Connected Living business and lower loss experience in select ancillary products in Global Automotive, partially offset by growth across our Global Automotive and Connected Living businesses.53Global Housing The table below presents information regarding the Global Housing segment’s results of operations for the periods indicated: For the Years Ended December 31, 202220212020Revenues:Net earned premiums$1,874.0 $1,796.6 $1,758.3 Fees and other income136.4 144.8 143.7 Net investment income80.0 78.0 68.5 Total revenues2,090.4 2,019.4 1,970.5 Benefits, losses and expenses:Policyholder benefits915.2 798.8 794.3 Underwriting, selling, general and administrative expenses873.2 863.5 858.2 Total benefits, losses and expenses1,788.4 1,662.3 1,652.5 Global Housing Adjusted EBITDA$302.0 $357.1 $318.0 Impact of reportable catastrophes$172.7 $155.1 $178.5 Net earned premiums, fees and other income:Lender-placed Insurance$1,124.0 $1,065.9 $1,052.5 Multifamily Housing482.4 482.3 451.6 Specialty and Other404.0 393.2 397.9 Total$2,010.4 $1,941.4 $1,902.0 Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 Adjusted EBITDA decreased $55.1 million, or 15%, to $302.0 million for Twelve Months 2022 from $357.1 million for Twelve Months 2021. Pre-tax reportable catastrophes for Twelve Months 2022 increased $17.6 million to $172.7 million, compared to $155.1 million for Twelve Months 2021, primarily due to Hurricane Ian. Excluding reportable catastrophes, Adjusted EBITDA decreased $37.5 million, or 7%, mainly driven by higher non-catastrophe loss experience across all major products, due to higher claims severity from inflation, particularly from elevated fire losses, as well as higher catastrophe reinsurance costs. The decrease was partially offset by premium from higher average insured values, premium rates and policies in force in Lender-placed Insurance. Total revenues increased $71.0 million, or 4%, to $2.09 billion for Twelve Months 2022 from $2.02 billion for Twelve Months 2021. Net earned premiums increased $77.4 million, or 4%, primarily due to higher average insured values, policies in force and premium rates in our Lender-placed Insurance business, including contributions from a new client onboarded during fourth quarter 2022, partially offset by higher catastrophe reinsurance costs including higher reinstatement premiums. The increase was partially offset by a decrease in fees and other income of $8.4 million, or 6%, primarily due to a decline in fees from our Multifamily Housing and Lender-placed Insurance businesses. Total benefits, losses and expenses increased $126.1 million, or 8%, to $1.79 billion for Twelve Months 2022 from $1.66 billion for Twelve Months 2021. Policyholder benefits increased $116.4 million, or 15%, due to higher non-catastrophe loss experience as described above. Underwriting, selling, general and administrative expenses increased $9.7 million, or 1%, mainly due to higher operating costs to support growth, with general and administrative expenses remaining relatively flat through operational savings initiatives. 54Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020 Adjusted EBITDA increased $39.1 million, or 12%, to $357.1 million for Twelve Months 2021 compared to $318.0 million for Twelve Months 2020. Adjusted EBITDA for Twelve Months 2021 included $155.1 million of pre-tax reportable catastrophes, primarily related to Hurricane Ida and the Texas winter storms, compared to $178.5 million for Twelve Months 2020. Excluding reportable catastrophes, Adjusted EBITDA increased $15.7 million, or 3%, driven by premium rate and average insured value increases in our Lender-placed Insurance business. These increases were partially offset by decreases from higher non-catastrophe loss experience from an anticipated increase to more normalized levels than experienced in Twelve Months 2020 as well as lower REO volumes related to COVID-19 foreclosure moratoriums in Lender-placed Insurance.Total revenues increased $48.9 million, or 2%, to $2.02 billion for Twelve Months 2021 from $1.97 billion for Twelve Months 2020. Net earned premiums increased $38.3 million, or 2%, primarily due to average insured value and premium rate increases in our Lender-placed Insurance business and continued growth from renters insurance in our Multifamily Housing business. These increases were partially offset by lower REO volumes, higher estimated catastrophe premium, higher reinsurance reinstatement premium primarily related to Hurricane Ida, and a decline in Specialty and Other from client run-offs. Net investment income increased $9.5 million, or 14%, primarily due to higher income from real estate related investments. Total benefits, losses and expenses increased $9.8 million, or 1%, to $1.66 billion for Twelve Months 2021 from $1.65 billion for Twelve Months 2020. Policyholder benefits increased $4.5 million, or 1%, primarily from higher non-catastrophe losses across all lines of business from an anticipated increase to more normalized levels than experienced in Twelve Months 2020, partially offset by a decrease in reportable catastrophe losses. Underwriting, selling, general and administrative expenses increased $5.3 million, or 1%, primarily due to an increase in expenses consistent with net earned premium growth and continued investments in Multifamily Housing, partially offset by a decrease in commission expense in our Specialty and Other business.55Corporate and OtherThe table below presents information regarding the Corporate and Other segment’s results of operations for the periods indicated: For the Years Ended December 31, 202220212020Revenues:Net earned premiums$— $— $— Fees and other income0.5 0.3 0.5 Net investment income26.9 31.9 17.6 Total revenues27.4 32.2 18.1 Benefits, losses and expensesPolicyholder benefits0.5 — — General and administrative expenses126.1 125.5 142.5 Total benefits, losses and expenses126.6 125.5 142.5 Corporate and Other Adjusted EBITDA$(99.2)$(93.3)$(124.4)Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021Adjusted EBITDA was $(99.2) million for Twelve Months 2022 compared to $(93.3) million for Twelve Months 2021. The increase in the loss was primarily due to lower investment income and higher employee-related and technology expenses.Total revenues decreased $4.8 million, or 15%, to $27.4 million for Twelve Months 2022 from $32.2 million for Twelve Months 2021 primarily driven by a decrease in net investment income of $5.0 million, or 16%, mostly due to a reduction in income from limited partnerships, partially offset by increased income from higher invested assets balances, primarily reflecting the remaining proceeds from the sale of Global Preneed.Total benefits, losses and expenses increased $1.1 million, or 1%, to $126.6 million for Twelve Months 2022 from $125.5 million for Twelve Months 2021. General and administrative expenses increased modestly, primarily due to higher employee-related and technology expenses. Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020 Adjusted EBITDA was $(93.3) million for Twelve Months 2021 compared to $(124.4) million for Twelve Months 2020, primarily driven by lower general operating expenses and an increase in net investment income.Total Revenue increased $14.1 million, or 78%, to $32.2 million for Twelve Months 2021 from $18.1 million for Twelve Months 2020, primarily driven by a $14.3 million increase in net investment income, mostly driven by gains from the sale of real estate joint venture properties and higher income from limited partnerships. Total Benefits, Losses and Expenses decreased $17.0 million, or 12%, to $125.5 million for Twelve Months 2021 from $142.5 million for Twelve Months 2020, primarily due to lower operating expenses, including employee-related and third-party expenses.56Discontinued OperationsThe table below presents information regarding the results of the discontinued operations for the periods indicated:For the Years Ended December 31,20212020Revenues:Net earned premiums$42.6 $66.9 Fees and other income91.0 151.1 Net investment income168.4 289.3 Net realized gains (losses) on investments and fair value changes to equity securities4.2 (8.0)Gain on disposal of businesses916.2 — Total revenues1,222.4 499.3 Benefits, losses and expenses:Policyholder benefits172.7 284.4 Underwriting, selling, general and administrative expenses85.2 142.6 Goodwill impairment— 137.8 Total benefits, losses and expenses257.9 564.8 Income (loss) before provision for income taxes964.5 (65.5)Provision for income taxes205.6 12.2 Net income (loss) from discontinued operations$758.9 $(77.7)Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020Net income from discontinued operations was $758.9 million for Twelve Months 2021 compared to a net loss from discontinued operations of $77.7 million for Twelve Months 2020. The change was primarily due to a $720.1 million after-tax gain on the sale of the disposed Global Preneed business in Twelve Months 2021. The gain included $606.0 million in after-tax AOCI, primarily net unrealized gains on investments, that was recognized in earnings upon the sale. The increase was also due to the absence of a $137.8 million after-tax goodwill impairment on the disposed Global Preneed business from Twelve Months 2020. These items were partially offset by lower operating results for the disposed Global Preneed business as Twelve Months 2021 included only seven months of results since the sale closed on August 2, 2021.Total revenues increased $723.1 million to $1.22 billion for Twelve Months 2021 from $499.3 million for Twelve Months 2020, primarily due to the gain on the sale of the disposed Global Preneed business. The gain included $774.2 million of pre-tax AOCI, primarily net unrealized gains on investments, that was recognized in earnings upon sale. The increase in total revenues was partially offset by a $120.9 million, or 42%, decrease in net investment income, a $60.1 million, or 40%, decrease in fees and other income and a $24.3 million, or 36%, decrease in net earned premiums, primarily because Twelve Months 2021 included only seven months of results.Total benefits, losses and expenses decreased $306.9 million, or 54%, to $257.9 million for Twelve Months 2021 from $564.8 million for Twelve Months 2020, primarily due to the absence of a $137.8 million goodwill impairment on the disposed Global Preneed business from Twelve Months 2020. The decrease in total benefits, losses and expenses was also due to a $111.7 million, or 39%, decrease in policyholder benefits and a $57.4 million, or 40%, decrease in underwriting, selling, general and administrative expenses, primarily because Twelve Months 2021 included only seven months of results.57Investments We had total investments of $7.52 billion and $8.67 billion as of December 31, 2022 and 2021, respectively. Net unrealized gains/losses on our fixed maturity securities portfolio decreased $948.5 million during Twelve Months 2022, from a $311.4 million unrealized gain at December 31, 2021 to a $637.1 million unrealized loss at December 31, 2022, primarily due to an increase in Treasury yields.The following table shows the credit quality of our fixed maturity securities portfolio as of the dates indicated: Fair Value as ofFixed Maturity Securities by Credit QualityDecember 31, 2022December 31, 2021Aaa / Aa / A$3,615.2 57.5 %$4,066.5 56.4 %Baa2,295.4 36.5 %2,719.0 37.7 %Ba305.2 4.9 %333.7 4.6 %B and lower67.9 1.1 %96.1 1.3 %Total$6,283.7 100.0 %$7,215.3 100.0 %The following table shows the major categories of net investment income for the periods indicated: Years Ended December 31, 202220212020Fixed maturity securities$270.0 $232.8 $228.4 Equity securities15.0 14.9 14.5 Commercial mortgage loans on real estate14.9 8.9 8.2 Short-term investments4.7 2.1 5.7 Other investments48.6 61.0 16.6 Cash and cash equivalents25.7 8.5 13.3 Revenue from consolidated investment entities (1)— — 56.3 Total investment income378.9 328.2 343.0 Investment expenses(14.8)(13.8)(20.5)Expenses from consolidated investment entities (1)— — (36.9)Net investment income$364.1 $314.4 $285.6 (1)The following table shows the revenues net of expenses from consolidated investment entities for the periods indicated. Years Ended December 31,202220212020Investment income from direct investments in:Real estate funds (1)$— $— $8.3 CLO entities— — 8.0 Investment management fees— — 3.1 Net investment income from consolidated investment entities$— $— $19.4 (1)The investment income from the real estate funds includes income attributable to non-controlling interest of $1.1 million for the year ended December 31, 2020. Net investment income increased $49.7 million, or 16%, to $364.1 million for Twelve Months 2022 from $314.4 million for Twelve Months 2021. The increase was primarily driven by higher yields on fixed maturity securities and cash and cash equivalents, and higher income from commercial mortgage loans on real estate due to higher invested assets, partially offset by lower income from other investments mostly due to a reduction in income from limited partnerships.Net investment income increased $28.8 million, or 10%, to $314.4 million for Twelve Months 2021 from $285.6 million for Twelve Months 2020. The increase was primarily driven by higher income from other investments mostly due to higher income from sales of real estate joint venture partnerships and higher valuations in our real estate joint venture and other partnerships. Fixed maturity income increased, mostly due to higher asset levels, partially offset by lower yields. Investment expenses decreased due to prior year costs associated with the disposed Global Preneed business and one-time expenses related 58to the outsourcing of our real estate asset management. These increases were offset in part by a decrease in income from short-term investments and cash and cash equivalents mainly due to continued low yields.Net realized losses on investments and fair value changes to equity securities were $179.7 million for Twelve Months 2022 compared to net realized gains and fair value changes to equity securities of $128.2 million for Twelve Months 2021. The change in Twelve Months 2022 was primarily driven by $132.7 million of net unrealized losses from changes in fair value of equity securities that included a $106.4 million decrease in net unrealized gains from four equity positions that went public in Twelve Months 2021. The change in Twelve Months 2022 was also driven by $63.7 million of net realized losses on sales of fixed maturity securities, partially offset by $18.1 million of net realized gains on sales of equity securities. The change in Twelve Months 2021 was primarily driven by $112.4 million of net unrealized gains from changes in fair value of equity securities that included $85.4 million of unrealized gains from three equity positions that went public in third quarter 2021, and $17.2 million of net realized gains from sales of fixed maturity securities. As of December 31, 2022, we owned $17.4 million of securities guaranteed by financial guarantee insurance companies. Included in this amount was $14.7 million of municipal securities, whose credit rating was A+ with the guarantee, but would have had a rating of AA- without the guarantee. For more information on our investments, see Notes 8 and 10 to the Consolidated Financial Statements included elsewhere in this Report. Liquidity and Capital Resources The following section discusses our ability to generate cash flows from each of our subsidiaries, borrow funds at competitive rates and raise new capital to meet our operating and growth needs. Management believes that we will have sufficient liquidity to satisfy our needs over the next twelve months, including the ability to pay interest on our debt and dividends on our common stock.Regulatory Requirements Assurant, Inc. is a holding company and, as such, has limited direct operations of its own. Our assets consist primarily of the capital stock of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends and other statutorily permissible payments from our subsidiaries, such as payments under our tax allocation agreement and under management agreements with our subsidiaries. Our subsidiaries’ ability to pay such dividends and make such other payments is regulated by the states and territories in which our subsidiaries are domiciled. These dividend regulations vary from jurisdiction to jurisdiction and by type of insurance provided by the applicable subsidiary, but generally require our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends they can pay to the holding company. See “Item 1A – Risk Factors – Legal and Regulatory Risks – Changes in insurance regulation may reduce our profitability and limit our growth.” Along with solvency regulations, the primary driver in determining the amount of capital used for dividends from insurance subsidiaries is the level of capital needed to maintain desired financial strength ratings from A.M. Best. For the year ending December 31, 2023, the maximum amount of dividends our regulated U.S. domiciled insurance subsidiaries could pay us, under applicable laws and regulations without prior regulatory approval, is approximately $344.7 million. Our international and non-insurance subsidiaries provide additional sources of dividends. Regulators or rating agencies could become more conservative in their methodology and criteria, increasing capital requirements for our insurance subsidiaries or the enterprise. In 2022, the following actions were taken by the rating agencies:A.M. Best •In August 2022, upgraded the insurance financial strength ratings on our insurance operating subsidiaries, American Bankers Life Assurance Company of Florida (“ABLAC”) and Caribbean American Life Assurance Company, to A from A- with a stable outlook.Moody’s•In June 2022, upgraded the senior debt rating of Assurant, Inc. to Baa2 from Baa3 with a stable outlook and upgraded the insurance financial strength ratings on our insurance operating subsidiaries, American Bankers Insurance Company of Florida, ABLAC and American Security Insurance Company, to A2 from A3 with a stable outlook.For further information on our ratings and the risks of ratings downgrades, see “Item 1 – Business – Ratings” and “Item 1A – Risk Factors – Financial Risks – A decline in the financial strength ratings of our insurance subsidiaries could adversely affect our results of operations and financial condition.”59Holding CompanyAs of December 31, 2022, we had approximately $446.1 million in holding company liquidity, $221.1 million above our targeted minimum level of $225.0 million. The target minimum level of holding company liquidity, which can be used for unforeseen capital needs at our subsidiaries or liquidity needs at the holding company, is calibrated based on approximately one year of corporate operating losses and interest expenses. We use the term “holding company liquidity” to represent the portion of cash and other liquid marketable securities held at Assurant, Inc., out of a total of $532.1 million of holding company investment securities and cash, which we are not otherwise holding for a specific purpose as of the balance sheet date. We can use such assets for stock repurchases, stockholder dividends, acquisitions and other corporate purposes. Dividends or returns of capital paid by our subsidiaries, net of infusions of liquid assets and excluding amounts used for or as a result of acquisitions or received from dispositions, were $549.5 million and $728.6 million for Twelve Months 2022 and Twelve Months 2021, respectively. Twelve Months 2021 included approximately $12.0 million of dividends from subsidiaries, net of infusions, in the disposed Global Preneed business. We use these cash inflows primarily to pay holding company operating expenses, to make interest payments on indebtedness, to make dividend payments to our common stockholders, to fund investments and acquisitions, and to repurchase our common stock. From time to time, we may also seek to purchase outstanding debt in open market repurchases or privately negotiated transactions. Dividends and RepurchasesDuring Twelve Months 2022 and Twelve Months 2021, we made common stock repurchases and paid dividends to our common stockholders of $717.8 million and $1.00 billion, respectively. On January 19, 2023, the Board declared a quarterly dividend of $0.70 per common share payable on March 20, 2023 to stockholders of record as of February 27, 2023. We paid dividends of $0.70 per common share on December 19, 2022 to stockholders of record as of November 28, 2022. This represented a 3% increase to the quarterly dividend of $0.68 per common share paid on September 19, June 20, and March 21, 2022.Any determination to pay future dividends will be at the discretion of the Board and will be dependent upon various factors, including: our subsidiaries’ payments of dividends and other statutorily permissible payments to us; our results of operations and cash flows; our financial condition and capital requirements; general business conditions and growth prospects; any legal, tax, regulatory and contractual restrictions on the payment of dividends; and any other factors the Board deems relevant. The Credit Facility (as defined below) also contains limitations on our ability to pay dividends to our stockholders and repurchase capital stock if we are in default, or such dividend payments or repurchases would cause us to be in default, of our obligations thereunder. In addition, if we elect to defer the payment of interest on our 7.00% Fixed-to-Floating Rate Subordinated Notes due March 2048 or our 5.25% Subordinated Notes due January 2061 (refer to “— Senior and Subordinated Notes” below), we generally may not make payments on or repurchase any shares of our capital stock.During Twelve Months 2022, we repurchased 3,347,558 shares of our outstanding common stock at a cost of $567.6 million, exclusive of commissions. In May 2021, the Board authorized a share repurchase program for up to $900.0 million of our outstanding common stock. As of December 31, 2022, $274.5 million aggregate cost at purchase remained unused under the repurchase authorization. The timing and the amount of future repurchases will depend on various factors, including those listed above.As previously announced, in second quarter 2022 and within one year of closing the transaction, we completed the return of $900.0 million of net proceeds from the sale of the disposed Global Preneed business through share repurchases. For additional information, refer to Note 4 to the Consolidated Financial Statements included elsewhere in this Report.Assurant SubsidiariesThe primary sources of funds for our subsidiaries consist of premiums and fees collected, proceeds from the sales and maturity of investments and net investment income. Cash is primarily used to pay insurance claims, agent commissions, operating expenses and taxes. We generally invest our subsidiaries’ funds in order to generate investment income.We conduct periodic asset liability studies to measure the duration of our insurance liabilities, to develop optimal asset portfolio maturity structures for our significant lines of business and ultimately to assess that cash flows are sufficient to meet the timing of cash needs. These studies are conducted in accordance with formal company-wide Asset Liability Management guidelines. To complete a study for a particular line of business, models are developed to project asset and liability cash flows and balance sheet items under a varied set of plausible economic scenarios. These models consider many factors including the current investment portfolio, the required capital for the related assets and liabilities, our tax position and projected cash flows from both existing and projected new business. For risks related to modeling, see “Item 1A – Risk Factors – Financial Risks –60Actual results may differ materially from the analytical models we use to assist in our decision-making in key areas such as pricing, catastrophe risks, reserving and capital management.”Alternative asset portfolio asset allocations are analyzed for significant lines of business. An investment portfolio maturity structure is then selected from these profiles given our return hurdle and risk appetite. Scenario testing of significant liability assumptions and new business projections is also performed. Our liabilities generally do not include policyholder optionality, which means that the timing of payments is generally insensitive to the interest rate environment. In addition, our investment portfolio is largely comprised of highly liquid public fixed maturity securities with a sufficient component of such securities invested that are near maturity which may be sold with minimal risk of loss to meet cash needs.Generally, our subsidiaries’ premiums, fees and investment income, along with planned asset sales and maturities, provide sufficient cash to pay claims and expenses. However, there may be instances when unexpected cash needs arise in excess of that available from usual operating sources. In such instances, we have several options to raise needed funds, including selling assets from the subsidiaries’ investment portfolios, using holding company cash (if available), issuing commercial paper, or drawing funds from the Credit Facility.Senior and Subordinated Notes The following table shows the principal amount and carrying value of our outstanding debt, less unamortized discount and issuance costs as applicable, as of December 31, 2022 and 2021:December 31, 2022December 31, 2021Principal AmountCarrying ValuePrincipal AmountCarrying Value4.20% Senior Notes due September 2023225.0 224.7 300.0 299.0 4.90% Senior Notes due March 2028300.0 297.8 300.0 297.5 3.70% Senior Notes due February 2030350.0 347.6 350.0 347.3 2.65% Senior Notes due January 2032350.0 346.7 350.0 346.4 6.75% Senior Notes due February 2034275.0 272.5 275.0 272.4 7.00% Fixed-to-Floating Rate Subordinated Notes due March 2048400.0 396.5 400.0 395.9 5.25% Subordinated Notes due January 2061250.0 244.1 250.0 244.0 Total Debt$2,129.9 $2,202.5 In June 2022, we redeemed $75.0 million of the $300.0 million then outstanding aggregate principal amount of our 2023 Senior Notes at a make-whole premium plus accrued and unpaid interest to the redemption date. In connection with the redemption, we recognized a loss on extinguishment of debt of $0.9 million. In the next five years, we have one upcoming debt maturity in September 2023 when the 2023 Senior Notes will become due and payable. For additional information, see Note 19 to the Consolidated Financial Statements included elsewhere in this Report.Credit Facility and Commercial Paper ProgramWe have a $500.0 million five-year senior unsecured revolving credit facility (the “Credit Facility”) with a syndicate of banks arranged by JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association. The Credit Facility provides for revolving loans and the issuance of multi-bank, syndicated letters of credit and letters of credit from a sole issuing bank in an aggregate amount of $500.0 million, which may be increased up to $700.0 million. The Credit Facility is available until December 2026, provided we are in compliance with all covenants. The Credit Facility has a sublimit for letters of credit issued thereunder of $50.0 million. The proceeds from these loans may be used for our commercial paper program or for general corporate purposes. We made no borrowings using the Credit Facility during Twelve Months 2022 and no loans were outstanding as of December 31, 2022.Our commercial paper program requires us to maintain liquidity facilities either in an available amount equal to any outstanding notes from the program or in an amount sufficient to maintain the ratings assigned to the notes issued from the program. Our commercial paper is rated AMB-1 by A.M. Best, P-2 by Moody’s and A-2 by S&P. Our subsidiaries do not maintain commercial paper or other borrowing facilities. This program is currently backed up by the Credit Facility, of which $499.8 million out of the $500.0 million was available as of December 31, 2022, due to $0.2 million of letters of credit outstanding. 61We did not use the commercial paper program during Twelve Months 2022 and there were no amounts relating to the commercial paper program outstanding as of December 31, 2022. For additional information, see Note 19 to the Consolidated Financial Statements included elsewhere in this Report.Letters of Credit Letters of credit are issued in the ordinary course of business. These letters of credit are supported by commitments under which we are required to indemnify the financial institution issuing the letter of credit if the letter of credit is drawn. We had $2.7 million and $7.2 million of letters of credit outstanding as of December 31, 2022 and 2021, respectively. Cash Flows We monitor cash flows at the consolidated, holding company and subsidiary levels. Cash flow forecasts at the consolidated and subsidiary levels are provided on a monthly basis, and we use trend and variance analyses to project future cash needs making adjustments to the forecasts when needed. The table below shows our recent net cash flows for the periods indicated: For the Years Ended December 31, 202220212020Net cash provided by (used in):Operating activities - continuing operations$596.9 $630.5 $1,114.3 Operating activities - discontinued operations— 151.2 227.7 Operating activities596.9 781.7 1,342.0 Investing activities - continuing operations(262.1)302.8 (519.4)Investing activities - discontinued operations— (145.2)(215.8)Investing activities(262.1)157.6 (735.2)Financing activities - continuing operations(818.4)(1,089.8)(264.8)Financing activities - discontinued operations— — — Financing activities(818.4)(1,089.8)(264.8)Effect of exchange rate changes on cash and cash equivalents - continuing operations(34.5)(23.5)19.4 Effect of exchange rate changes on cash and cash equivalents - discontinued operations— 0.2 0.1 Effect of exchange rate changes on cash and cash equivalents(34.5)(23.3)19.5 Net change in cash$(518.1)$(173.8)$361.5 Cash Flows for the Years Ended December 31, 2022, 2021 and 2020Operating Activities We typically generate operating cash inflows from premiums collected from our insurance products, fees received for services and income received from our investments while outflows consist of policy acquisition costs, benefits paid and operating expenses. These net cash flows are then invested to support the obligations of our insurance products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees, and investment income received and expenses paid. Net cash provided by operating activities from continuing operations was $596.9 million and $630.5 million for Twelve Months 2022 and Twelve Months 2021, respectively. The decrease in net cash provided by operating activities was primarily due to the timing of our mobile business operations mostly due to lower collections of premiums and fees receivable and an increase in payments to vendors for the acquisition of mobile devices used to meet insurance claims or generate profits through sales to third parties. These decreases were partially offset by an increase in cash from the receipt of a tax refund that was in excess of tax payments for Twelve Months 2022.Net cash provided by operating activities from continuing operations was $630.5 million and $1.11 billion for Twelve Months 2021 and Twelve Months 2020, respectively. The decrease in net cash provided by operating activities was primarily due to the timing of certain cash payments and business activities from our Global Lifestyle segment. The primary factors contributing to the variance included timing of cumulative payments to a vendor related to various programs for acquiring mobile devices used to meet insurance claims or generate profits through sales to third parties and higher commission payments associated with fourth quarter 2020 premiums that were paid in first quarter 2021. The decrease was also due to the absence of 62a $204.9 million tax refund, including interest, related to the ability to carry back operating losses to prior periods under the CARES Act that was collected during Twelve Months 2020 and higher tax payments, net of refunds, primarily due to the gain on sale of the disposed Global Preneed business and an increase in taxable income for Twelve Months 2021. These decreases were partially offset by an increase in premiums collected in connection with the continued growth in Global Automotive.Investing Activities Net cash used in investing activities from continuing operations was $262.1 million for Twelve Months 2022 compared to net cash provided by investing activities from continuing operations of $302.8 million for Twelve Months 2021. The decrease in cash provided by investing activities was primarily driven by a decrease in cash from sales of subsidiaries, partially offset by an increase in cash from sales and maturities, net of purchases, and a change in our short term investments, due to ongoing management of our investment portfolio. Twelve Months 2021 included $1.31 billion of proceeds, net of $27.3 million of cash transferred, from the sale of the disposed Global Preneed business that were mostly reinvested in short-term high quality liquid fixed income investments.Net cash provided by investing activities from continuing operations was $302.8 million for Twelve Months 2021 compared to net cash used in investing activities from continuing operations of $519.4 million for Twelve Months 2020. The increase in cash provided by investing activities was primarily driven by an increase in cash from sales and maturities, net of purchases, due to the ongoing management of our investment portfolio and a reduction in net cash used for acquisitions. Twelve Months 2021 included $1.27 billion of proceeds from the sale of the disposed Global Preneed business that were mostly reinvested within our investment portfolio. Twelve Months 2020 included $135.8 million of net cash used for the AFAS acquisition, $276.8 million of net cash used for the Hyla acquisition and $51.3 million of cash outflow, net of $22.0 million of proceeds from a foreign currency hedge, for the sale of our interests in Iké. Additionally, Twelve Months 2020 included a $34.0 million cash outflow to Iké Grupo for the Iké Loan that was repaid and reflected as a net cash inflow for Twelve Months 2021. These increases were partially offset by the absence of $197.1 million of net cash provided by consolidated investment entities and a $66.2 million increase in purchases of property and equipment mostly due to continued investments in information technology supporting our core operations.Financing Activities Net cash used in financing activities from continuing operations was $818.4 million and $1.09 billion for Twelve Months 2022 and Twelve Months 2021, respectively. The decrease in net cash used in financing activities was primarily due to lower cash outflow for share repurchases, mainly funded by the net proceeds from the Global Preneed sale.Net cash used in financing activities from continuing operations was $1.09 billion and $264.8 million for Twelve Months 2021 and Twelve Months 2020, respectively. The increase in net cash used in financing activities was mainly due to a $542.3 million increase in share repurchases, mainly funded by the net proceeds from the Global Preneed sale, the issuance of the 5.25% subordinated notes due January 2061 with an aggregate principal amount of $250.0 million, net of issuance costs, of $243.7 million in Twelve Months 2020, the $50.0 million repayment of our floating rate senior notes due March 2021 in first quarter 2021 and the loss on extinguishment of debt related to the repayment of our 4.00% senior notes due March 2023.Discontinued operationsChanges in cash flows from the operating and investing activities from our discontinued operations for Twelve Months 2021 as compared to Twelve Months 2020 were lower mainly due to Twelve Months 2021 including only seven months of net cash flows since the sale closed on August 2, 2021.The table below shows our cash outflows for taxes, interest and dividends for the periods indicated: For the Years Ended December 31, 202220212020Income taxes paid$127.7 $221.1 $98.5 Interest paid on debt108.4 109.8 103.6 Common stock dividends150.2 157.6 154.6 Preferred stock dividends— 4.7 18.7 Total$386.3 $493.2 $375.4 63Contractual Obligations and CommitmentsWe have contractual obligations and commitments to third parties as a result of our operations, as detailed in the table below by maturity date as of December 31, 2022: As of December 31, 2022 TotalLess than 1Year1-3Years3-5YearsMore than 5YearsContractual obligations:Insurance liabilities (1)$2,116.8 $1,506.4 $462.1 $81.1 $67.2 Debt and related interest3,830.9 328.8 193.3 193.3 3,115.5 Operating leases42.0 15.9 19.2 6.1 0.8 Pension obligations and postretirement benefits (2)495.5 56.1 106.8 101.3 231.3 Commitments:Investment purchases outstanding:Commercial mortgage loans on real estate7.9 7.9 Capital contributions to non-consolidated VIEs143.6 143.6 Liability for unrecognized tax benefits20.4 16.9 3.5 Total obligations and commitments$6,657.1 $2,058.7 $798.3 $381.8 $3,418.3 (1)Insurance liabilities reflect undiscounted estimated cash payments to be made to policyholders, net of expected future premium cash receipts on in-force policies and excluding fully reinsured runoff operations. The total gross reserve for fully reinsured runoff operations that was excluded was $607.9 million which, if the reinsurers defaulted, would be payable over a 30+ year period with the majority of the payments occurring after 5 years. Additional information on the reinsurance arrangements can be found in Note 18 to the Consolidated Financial Statements included elsewhere in this Report. These liabilities also do not include recoverable amounts related to certain high deductible policies in our sharing economy business, included in our non-core operations, for which we are responsible for paying the entirety of the claim and are subsequently reimbursed by the insured for the deductible portion of the claim. As of December 31, 2022, we had exposure to $379.1 million of reserves below the deductible that we would be responsible for if the clients were to default on their contractual obligation to pay us the deductible. See Note 5 to the Consolidated Financial Statements included elsewhere in this Report for more information on our evaluation of the credit risk exposure from these recoverables. As a result, the amounts presented in this table do not agree to the future policy benefits and expenses and claims and benefits payable in the consolidated balance sheets.(2)Our pension obligations and postretirement benefits include an Assurant Pension Plan, various non-qualified pension plans (including an Executive Pension Plan) and certain life and health care benefits for retired employees and their dependents (“Retirement Health Benefits”), all of which were frozen in 2016. In February 2020, we amended the Retirement Health Benefits to terminate such plan benefits to retirees effective December 31, 2024. Due to the Assurant Pension Plan’s current overfunded status, no contributions were made during 2022 and none are expected to be made in 2023. See Note 24 to the Consolidated Financial Statements included elsewhere in this Report for more information.Liabilities for future policy benefits and expenses have been included in the commitments and contingencies table. Significant uncertainties relating to these liabilities include mortality, morbidity, expenses, persistency, investment returns, inflation, contract terms and the timing of payments.Item 7A. Quantitative and Qualitative Disclosures About Market RiskThe following is a discussion of our primary market risk exposures and management of such exposures as of December 31, 2022. There were no other significant changes in our primary market risk exposures or in how those exposures were managed for the year ended December 31, 2022, compared to the year ended December 31, 2021. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect in future reporting periods. Market risk is the risk of loss from changes in the fair value of our financial instruments, including due to interest rates (including impacts of changes in credit spreads), foreign currency exchange rates and credit risk from counterparties. Market risk is dependent on the volatility and liquidity in the underlying markets in which these assets are traded. Our investment portfolio consists primarily of fixed maturity securities, denominated in both U.S. dollars and foreign currencies, which are sensitive to changes in interest rates, including impacts of changes in credit spreads, foreign currency exchange rates and credit risk from counterparties. The majority of our fixed income portfolio is classified as available for sale. The carrying value of our investment portfolio at December 31, 2022 and 2021 was $7.52 billion and $8.67 billion, respectively, of which 84% and 83% was invested in fixed maturity securities, respectively. 64Interest Rate Risk Interest rate risk is the possibility that the fair value of liabilities will change more or less than the market value of investments in response to changes in interest rates, including changes in investment yields and changes in spreads due to credit risks and other factors.Our investment portfolio, including our fixed maturity portfolio, has exposure to interest rate risk. Changes in investment values attributable to interest rate changes are mitigated by corresponding and partially offsetting changes in the economic value of our liabilities. We monitor this exposure through periodic reviews of our asset and liability positions and we manage interest rate risk by selecting investments with characteristics such as duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of our insurance and reinsurance liabilities. Portfolio duration is primarily managed through cash market transactions. For additional information, see Notes 8 and 10 to the Consolidated Financial Statements included elsewhere in this Report and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Investments”.The interest rate sensitivity relating to changes in fair value in our fixed maturity portfolio is assessed using hypothetical scenarios that assume parallel shifts of the yield curves. Our actual experience may differ from the results indicated below, particularly due to the assumptions reflected or if events occur that were not included in the methodology. For more information, see “Item 1A – Risk Factors – Financial Risks – Actual results may differ materially from the analytical models we use to assist in our decision-making in key areas such as pricing, catastrophe risks, reserving and capital management.”Our sensitivity analysis model produces a loss in fair value in the fixed maturity portfolio of (i) $143.9 million and $178.6 million as of December 31, 2022 and 2021, respectively, based on a hypothetical and instantaneous 50 basis point parallel increase in interest rates (including impacts of changes in credit spreads), and (ii) $283.2 million and $349.6 million as of December 31, 2022 and 2021, respectively, based on a hypothetical and instantaneous 100 basis point parallel increase in interest rates (including impacts of changes in credit spreads). Our debt obligations also have exposure to interest rate risk, primarily at the time of refinancing. We monitor market interest rates and evaluate refinancing opportunities for our debt obligations as maturity dates approach. We stagger the maturity dates of our debt to mitigate the interest rate risk in any given year. For additional information, see Note 19 to the Consolidated Financial Statements included elsewhere in this Report and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.Our sensitivity analysis model produces a loss in fair value of our debt obligations of (i) $44.7 million and $61.1 million as of December 31, 2022 and 2021, respectively, based on a hypothetical and instantaneous 50 basis point parallel increase in interest rates, and (ii) $88.4 million and $122.0 million as of December 31, 2022 and 2021, respectively, based on a hypothetical and instantaneous 100 basis point parallel increase in interest rates. Foreign Exchange RiskWe are exposed to foreign exchange risk arising from our investments in foreign subsidiaries. Foreign exchange risk is the possibility that changes in exchange rates produce an adverse effect on earnings and equity when measured in domestic currency. This risk is largest when assets backing liabilities payable in one currency are invested in financial instruments of another currency. To manage foreign exchange risk, our general principle is to invest in assets that match the currency in which we expect liabilities to be paid. Foreign exchange risk is mitigated by matching our liabilities under insurance policies that are payable in foreign currencies with investments that are denominated in such currencies.The foreign exchange risk sensitivity of the fair value of our investments in foreign subsidiaries is assessed using a hypothetical 10% immediate change in each of the foreign currency exchange rates to which we are exposed. The modeling technique we use to report our currency exposure does not take into account correlation among foreign currency exchange rates. Our actual experience may differ from the results indicated below, particularly due to the assumptions reflected or if events occur that were not included in the methodology. For more information, see “Item 1A – Risk Factors – Financial Risks – Actual results may differ materially from the analytical models we use to assist in our decision-making in key areas such as pricing, catastrophe risks, reserving and capital management” and “– Fluctuations in the exchange rate of the U.S. Dollar and other foreign currencies may materially and adversely affect our results of operations.”The following table summarizes the net assets (liabilities) denominated in foreign currencies as of December 31, 2022 and 2021 and the sensitivity to a hypothetical strengthening of the U.S. dollar. 65December 31, 2022December 31, 20212022 vs. 2021Value of net assets (liabilities)Exchange rate per USDValue of net assets (liabilities)Exchange rate per USD% Change in exchange rate per USDBritish pound sterling (GBP)$306.9 1.2153$351.1 1.3235(8.2)%Canadian dollar (CAD)209.8 0.7393229.4 0.7874(6.1)%Euro (EUR)179.4 1.0608192.1 1.1235(5.6)%Brazilian real (BRL)68.8 0.188867.1 0.17557.6%Australian dollar (AUD)59.6 0.670161.6 0.7124(5.9)%Mexican peso (MXN)63.5 0.050580.9 0.04805.2%Japanese yen (JPY)26.9 0.007337.4 0.0088(17.0)%Argentine peso (ARS)27.4 0.005632.0 0.0097(42.3)%Other (various currencies)21.8 4.5 Value of net assets denominated in foreign currencies$964.1 $1,056.1 Net assets$4,228.7 $5,464.1 As a percentage of total net assets22.8 %19.3 %Pre-tax decrease in fair value of our investments in foreign subsidiaries from a hypothetical 10 percent strengthening of the USD$(117.3)$(128.4)Pre-tax increase in fair value of our investments in foreign subsidiaries from a hypothetical 10 percent weakening of the USD$117.3 $128.4 Credit RiskCredit risk is the possibility that counterparties may not be able to meet payment obligations when they become due. A counterparty is any person or entity from which cash or other forms of consideration are expected to extinguish a liability or obligation to us. With respect to our market risk sensitive instruments, we have exposure to credit risk as a holder of fixed maturity securities. Our risk management strategy and investment policy is to invest in securities from a diversified pool of issuers and to limit the amount of credit exposure with respect to any one issuer. We attempt to limit our credit exposure by imposing fixed maturity portfolio limits on individual issuers based upon credit quality, among other strategies. For additional information, refer to “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Investments” and Notes 5 and 8 to the Consolidated Financial Statements included elsewhere in this Report. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements and Financial Statement Schedules in Part IV, Item 15(a)(1) and (2) of this Report are incorporated by reference into this

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+ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSPlease read the following discussion and analysis of our financial condition and results of operations together with “Note about Forward-Looking Statements,” Part I, Item 1 "Business," Part I, Item 1A "Risk Factors," and our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in Item 7 of our 2021 Annual Report on Form 10-K.Understanding Alphabet’s Financial ResultsAlphabet is a collection of businesses — the largest of which is Google. We report Google in two segments, Google Services and Google Cloud; we also report all non-Google businesses collectively as Other Bets. For further details on our segments, see Part I, Item 1 “Business” and Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.Trends in Our Business and Financial EffectThe following long-term trends have contributed to the results of our consolidated operations, and we anticipate that they will continue to affect our future results:•Users' behaviors and advertising continue to shift online as the digital economy evolves.The continuing shift from an offline to online world has contributed to the growth of our business and our revenues since inception. We expect that this shift to an online world will continue to benefit our business and our revenues, although at a slower pace than we have experienced historically, in particular after the outsized growth in our advertising revenues during the COVID-19 pandemic. In addition, we face increasing competition for user engagement and advertisers, which may affect our revenues.•Users continue to access our products and services using diverse devices and modalities, which allows for new advertising formats that may benefit our revenues but adversely affect our margins. Our users are accessing the Internet via diverse devices and modalities, such as smartphones, wearables, and smart home devices, and want to be able to be connected no matter where they are or what they are doing. We are focused on expanding our products and services to stay in front of these trends in order to maintain and grow our business.We benefit from advertising revenues generated from different channels, including mobile, and newer advertising formats. The margins from these channels and newer products have generally been lower than those from traditional desktop search. Additionally, as the market for a particular device type or modality matures, our advertising revenues may be affected. For example, growth in the global smartphone market has slowed due to various factors, including increased market saturation in developed countries, which can affect our mobile advertising revenues.We expect TAC paid to our distribution partners and Google Network partners to increase as our revenues grow and TAC as a percentage of our advertising revenues ("TAC rate") to be affected by changes in device mix; geographic mix; partner mix; partner agreement terms; the percentage of queries channeled through paid access points; product mix; the relative revenue growth rates of advertising revenues from different channels; and revenue share terms.We expect these trends to continue to affect our revenues and put pressure on our margins.•As online advertising evolves, we continue to expand our product offerings, which may affect our monetization.As interactions between users and advertisers change, and as online user behavior evolves, we continue to expand our product offerings to serve these changing needs, which may affect our monetization. For example, revenues from ads on YouTube and Google Play monetize at a lower rate than our traditional search ads. We also may develop new products incorporating AI innovations that could affect our monetization trends. Additionally, when developing new products and services we generally focus first on user experience before prioritizing monetization.•As users in developing economies increasingly come online, our revenues from international markets continue to increase, and may require continued investments. In addition, movements in foreign exchange rates affect such revenues. The shift to online, as well as the advent of the multi-device world, has brought opportunities outside of the U.S., including in emerging markets, such as India. We continue to invest heavily and develop localized versions of our products and advertising programs relevant to our users in these markets. This has led to a trend of increased 26Table of ContentsAlphabet Inc.revenues from emerging markets. We expect that our results will continue to be affected by our performance in these markets, particularly as low-cost mobile devices become more available. This trend could affect our revenues as developing markets initially monetize at a lower rate than more mature markets.International revenues represent a significant portion of our revenues and are subject to fluctuations in foreign currency exchange rates relative to the U.S. dollar. While we have a foreign exchange risk management program designed to reduce our exposure to these fluctuations, this program does not fully offset their effect on our revenues and earnings.•The revenues that we derive from non-advertising products and services are increasing and may adversely affect our margins.Non-advertising revenues have grown over time, and we expect this trend to continue as we focus on expanding our products and services. The margins on these revenues vary significantly and are generally lower than the margins on our advertising revenues. In particular margins on our hardware products adversely affect our consolidated margins due to pressures on pricing and higher cost of sales.•As we continue to serve our users and expand our businesses, we will invest heavily in operating and capital expenditures.We continue to make significant research and development investments in areas of strategic focus as we seek to develop new, innovative offerings and improve our existing offerings across our businesses. We also expect to continue to invest in our technical infrastructure, including servers, network equipment, and data centers, to support the growth of our business and our long-term initiatives, in particular in support of AI. In addition acquisitions and strategic investments contribute to the breadth and depth of our offerings, expand our expertise in engineering and other functional areas, and build strong partnerships around strategic initiatives. For example, in September 2022 we closed the acquisition of Mandiant to help expand our offerings in dynamic cyber defense and response. •We face continuing changes in regulatory conditions, laws, and public policies, which could affect our business practices and financial results.Changes in social, political, economic, tax, and regulatory conditions or in laws and policies governing a wide range of topics and related legal matters have resulted in fines and caused us to change our business practices. As these global trends continue, our cost of doing business may increase, our ability to pursue certain business models or offer certain products or services may be limited, and we may need to change our business practices. Examples include the antitrust complaints filed by the U.S. Department of Justice and a number of state Attorneys General; pending litigation in the U.S., EU, and around the world that could diminish or eliminate safe harbor protection for websites and online platforms; and the Digital Markets Act and Digital Services Act in Europe and various legislative proposals in the U.S. focused on large technology platforms. For additional information see Item 1A Risk Factors and Legal Matters in Note 10 of the Notes to Consolidated Financial Statements included in Part II,

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsEXECUTIVE SUMMARY OF 2022 FINANCIAL RESULTSAon plc is a leading global professional services firm providing a broad range of risk, health, and wealth solutions. Through our experience, global reach, and comprehensive analytics, we are better able to help clients meet rapidly changing, increasingly complex, and interconnected challenges. We are committed to accelerating innovation to address unmet and evolving client needs, so that our clients are better informed, better advised, and able to make better decisions to protect and grow their business. Management is focused on strengthening Aon and uniting the firm with one portfolio of capability enabled by data and analytics and one operating model to deliver additional insight, connectivity, and efficiency.Financial ResultsThe following is a summary of our 2022 financial results:•Revenue increased $286 million, or 2%, to $12.5 billion in 2022 compared to 2021, reflecting 6% organic revenue growth and a 1% favorable impact from fiduciary investment income, partially offset by a 4% unfavorable impact from foreign currency translation a 1% unfavorable impact from acquisitions, divestitures and other.•Operating expenses decreased $1.3 billion, or 13%, to $8.8 billion in 2022 compared to 2021 due primarily to the $1.0 billion payment made in connection with terminating the combination with WTW (the “Termination Fee”) and certain transaction costs incurred related to the termination in the prior year (together, the “Transaction Costs”) and a $373 million favorable impact from foreign currency translation, partially offset by an increase in expense associated with 6% organic revenue growth, investments in long-term growth, and a $58 million charge related to certain legal settlements reached.•Operating margin increased to 29.4% in 2022 from 17.1% in 2021. The increase was driven by a decrease in operating expenses as listed above and organic revenue growth of 6%.•Due to the factors set forth above, Net income was $2.6 billion in 2022, an increase of $1.3 billion, or 102%, from 2021.•Diluted earnings per share increased 119% to $12.14 per share during the twelve months of 2022 compared to $5.55 per share for the prior year period.•Cash flows provided by operating activities was $3.2 billion in 2022, an increase of $1.0 billion, or 48%, from $2.2 billion in 2021, primarily due to the Transaction Costs paid in the prior year period, and strong operating income growth, partially offset by higher incentive compensation payments made in the current year following strong performance in 2021. We focus on four key metrics not presented in accordance with U.S. GAAP that we communicate to shareholders: organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, and free cash flow. These non-GAAP metrics should be viewed in addition to, not instead of, our Consolidated Financial Statements. The following is our measure of performance against these four metrics for 2022:•Organic revenue growth, a non-GAAP measure defined under the caption “Review of Consolidated Results — Organic Revenue Growth,” was 6% in 2022, compared to 9% organic growth in the prior year.•Adjusted operating margin, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Operating Margin,” was 30.8% in 2022, compared to 30.1% in the prior year. The increase in adjusted operating margin primarily reflects 6% organic revenue growth and a higher fiduciary investment income, partially offset by increased expenses and investments in long-term growth. •Adjusted diluted earnings per share, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Diluted Earnings per Share,” was $13.39 per share in 2022, an increase of $1.39 per share, or 12%, from $12.00 per share in 2021. The increase in adjusted diluted earnings per share primarily reflects strong operational performance and effective capital management, highlighted by $3.2 billion of share repurchase during 2022, partially offset by an unfavorable impact from foreign currency translation.•Free cash flow, a non-GAAP measure defined under the caption “Review of Consolidated Results — Free Cash Flow,” was $3.0 billion in 2022, an increase of $978 million, or 48%, from $2.0 billion in 2021, reflecting an increase in Cash flows from operations, partially offset by a $59 million increase in capital expenditures.30ENVIRONMENTAL, SOCIAL, AND GOVERNANCEFor many companies, the management of ESG risks and opportunities has become increasingly important, and ESG-related challenges, such as extreme weather events, supply chain disruptions, cyber events, regulatory changes, ongoing public health impacts, and the increased focus on workforce resilience in highly varied work environments continue to create volatility and uncertainty for our clients. Aon offers a wide range of risk assessment, consulting and advisory solutions, many of which are significant parts of our core business offerings, designed to address and manage ESG issues for clients, and to enable our clients to create more sustainable value. We view ESG risks as presenting an important opportunity for Aon to work together as one firm to address client needs and improve our impact on ESG matters.REVIEW OF CONSOLIDATED RESULTSSummary of ResultsOur consolidated results are as follow (in millions, except per share data):Years Ended December 31202220212020Revenue Total revenue$12,479 $12,193 $11,066 Expenses Compensation and benefits6,477 6,738 5,905 Information technology509 477 444 Premises289 327 291 Depreciation of fixed assets151 179 167 Amortization and impairment of intangible assets113 147 246 Other general expense1,271 2,235 1,232 Total operating expenses8,810 10,103 8,285 Operating income3,669 2,090 2,781 Interest income18 11 6 Interest expense(406)(322)(334)Other income (expense)(125)152 13 Income before income taxes3,156 1,931 2,466 Income tax expense510 623 448 Net income2,646 1,308 2,018 Less: Net income attributable to noncontrolling interests57 53 49 Net income attributable to Aon shareholders$2,589 $1,255 $1,969 Diluted net income per share attributable to Aon shareholders$12.14 $5.55 $8.45 Weighted average ordinary shares outstanding - diluted213.2 226.1 233.1 31Consolidated Results for 2022 Compared to 2021RevenueTotal revenue increased $286 million, or 2%, to $12.5 billion in 2022, compared to $12.2 billion in 2021. The increase was driven by 6% organic revenue growth and a 1% favorable impact from fiduciary investment income, partially offset by a 4% unfavorable impact from foreign currency translation and a 1% unfavorable impact from acquisitions, divestitures, and other.Commercial Risk Solutions revenue increased $80 million, or 1%, to $6.7 billion in 2022, compared to $6.6 billion in 2021. Organic revenue growth was 6% in 2022, reflecting growth across every major geography, including double-digit growth in Latin America, Asia, and the Pacific, driven by strong net new business generation, retention, and management of the renewal book portfolio. U.S. retail brokerage was pressured primarily by Transaction Solutions, which declined due to lower external deal volume. Results also reflect strong growth globally in the affinity business across both consumer and business solutions, including growth in the travel and events practice and Digital Client Solutions. On average globally, exposures and pricing were modestly positive, resulting in modestly positive market impact.Reinsurance Solutions revenue increased $193 million, or 10%, to $2.2 billion in 2022, compared to $2.0 billion in 2021. Organic revenue growth was 8% in 2022 driven by strong net new business generation in treaty, as well as solid growth in facultative placements and the Strategy and Technology Group. In addition, market impact was modestly positive on results.Health Solutions revenue increased $70 million, or 3%, to $2.2 billion in 2022, compared to $2.2 billion in 2021. Organic revenue growth was 8% in 2022, reflecting growth globally in core health and benefits brokerage, driven by strong retention, net new business generation and management of the renewal book portfolio. Strength in health and benefits included growth in advisory work related to wellbeing and resilience. Results also reflect double-digit growth in Human Capital, driven by data and advisory solutions, and modest growth in Consumer Benefits Solutions.Wealth Solutions revenue decreased $59 million, or 4%, to $1.4 billion in 2022, compared to $1.4 billion in 2021. The decrease was primarily driven by a 5% unfavorable impact from foreign currency translation and a 2% unfavorable impact from acquisitions, divestitures, and other. This decrease was offset by organic revenue growth of 3% in 2022 driven by high demand and project related work related to pension risk transfer and ongoing impacts of regulatory changes. In Investments, a decrease in AUM-based delegated investment management revenue due to equity market and interest rate movements was partially offset by higher advisory demand and project-related work.Compensation and BenefitsCompensation and benefits decreased $261 million, or 4%, in 2022 compared to 2021. The decrease was primarily driven by a $293 million favorable impact from foreign currency translation and a $245 million decrease in Transaction Costs, partially offset by an increase in expense associated with 6% organic revenue growth.Information TechnologyInformation technology, which represents costs associated with supporting and maintaining our infrastructure, increased $32 million, or 7%, in 2022 compared to 2021. The increase was primarily driven by ongoing investments in Aon Business Services-enabled technology platforms and technology to drive long-term growth, partially offset by a $17 million decrease in Transaction Costs.PremisesPremises, which represents the cost of occupying offices in various locations throughout the world, decreased $38 million, or 12%, in 2022 compared to 2021. The decrease was primarily driven by a $22 million decrease in Transaction Costs and a $19 million favorable impact from foreign currency translation.Depreciation of Fixed AssetsDepreciation of fixed assets primarily relates to software, leasehold improvements, furniture, fixtures and equipment, computer equipment, buildings, and automobiles. Depreciation of fixed assets decreased $28 million, or 16%, in 2022 compared to 2021. The decrease was primarily driven by a $16 million decrease in Transaction Costs.Amortization and Impairment of Intangible Assets Amortization and impairment of intangibles primarily relates to finite-lived customer-related and contract-based, technology, and tradename assets. Amortization and impairment of intangibles decreased $34 million, or 23%, in 2022 compared to 2021. 32Other General ExpensesOther general expenses decreased $964 million, or 43%, in 2022 compared to 2021. The decrease was primarily driven by a $1.1 billion decrease in Transaction Costs, partially offset by an increase in expense associated with 6% organic revenue growth, including travel and entertainment expense, and a $58 million charge from certain legal settlements reach in 2022. Interest IncomeInterest income represents income earned on operating cash balances and other income-producing investments. It does not include interest earned on Funds held on behalf of clients. Interest income was $18 million in 2022, an increase of $7 million, or 64%, from 2021.Interest ExpenseInterest expense, which represents the cost of our debt obligations, was $406 million in 2022, an increase of $84 million, or 26%, from 2021. The increase primarily reflects an increase in total debt.Other Income (Expense)Other expense was $125 million in 2022, which primarily reflects a non-cash pension settlement charge of $170 million incurred in the fourth quarter, compared to Other income of $152 million in 2021, primarily reflecting a gain from sale of businesses in the prior year period.Income before Income TaxesIncome before income taxes was $3.2 billion in 2022, a 63% increase from $1.9 billion in 2021. The increase was primarily driven by $1.4 billion in Transaction Costs in the prior year period and strong operational performance.Income Taxes The effective tax rate on net income was 16.2% in 2022 and 32.3% in 2021. The 2022 tax rate was primarily driven by the geographical distribution of income and certain discrete items, primarily the favorable impacts of share-based payments.The 2021 tax rate was primarily driven by the impact of the Termination Fee, the U.K. statutory tax rate increase, and the tax benefit of share-based payments. The U.K. enacted legislation in the second quarter of 2021 which increases the corporate income tax rate from 19% to 25% with effect from April 1, 2023 and the Company remeasured its U.K. deferred tax assets and liabilities accordingly.Net Income Attributable to Aon ShareholdersNet income attributable to Aon shareholders increased to $2.6 billion, or $12.14 per diluted share, in 2022, compared to $1.3 billion, or $5.55 per diluted share, in 2021.Consolidated Results for 2021 Compared to 2020We have elected not to include a discussion of our consolidated results for 2021 compared to 2020 in this report in reliance upon Instruction 1 to Item 303(b) of Regulation S-K. This discussion can be found in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 18, 2022.Non-GAAP MetricsIn our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, adjusted net income attributable to Aon shareholders, adjusted net income per share, other income (expense), as adjusted, adjusted effective tax rate, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. Management believes that these measures are important to make meaningful period-to-period comparisons and that this supplemental information is helpful to investors. Management also uses these measures to assess operating performance and performance for compensation. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Consolidated Financial Statements.33Organic Revenue GrowthWe use supplemental information related to organic revenue growth to help us and our investors evaluate business growth from existing operations. Organic revenue growth is a non-GAAP measure that includes the impact of certain intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. This supplemental information related to organic revenue growth represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of this non-GAAP measure to the reported Total revenue is as follows (in millions, except percentages): Years EndedDec 31, 2022Dec 31, 2021% ChangeLess: Currency Impact (1)Less: Fiduciary Investment Income (2)Less: Acquisitions, Divestitures & OtherOrganic Revenue Growth (3)Commercial Risk Solutions$6,715 $6,635 1 %(4)%1 %(2)%6 %Reinsurance Solutions2,190 1,997 10 (3)1 4 8 Health Solutions2,224 2,154 3 (3)— (2)8 Wealth Solutions1,367 1,426 (4)(5)— (2)3 Elimination(17)(19)N/AN/AN/AN/AN/ATotal revenue$12,479 $12,193 2 %(4)%1 %(1)%6 % Years EndedDec 31, 2021Dec 31, 2020% ChangeLess: Currency Impact (1)Less: Fiduciary Investment Income (2)Less: Acquisitions, Divestitures & OtherOrganic Revenue Growth (3)Commercial Risk Solutions$6,635 $5,861 13 %2 %— %— %11 %Reinsurance Solutions1,997 1,814 10 2 — — 8 Health Solutions2,154 2,067 4 2 — (8)10 Wealth Solutions1,426 1,341 6 3 — 1 2 Elimination(19)(17)NANANANANATotal revenue$12,193 $11,066 10 %2 %— %(1)%9 %(1)Currency impact is determined by translating last year’s revenue at this year’s foreign exchange rates.(2)Fiduciary investment income for the years ended December 31, 2022 2021, and 2020 was $76 million, $8 million, and $27 million, respectively.(3)Organic revenue growth includes the impact of certain intercompany activity, changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges.34Adjusted Operating MarginWe use adjusted operating margin as a non-GAAP measure of core operating performance of the Company. Adjusted operating margin excludes the impact of certain items, as listed below, because management does not believe these expenses reflect our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance with U.S. GAAP, and should be viewed in addition to, not instead of, our Consolidated Financial Statements. A reconciliation of this non-GAAP measure to reported operating margins is as follows (in millions, except percentages):Years Ended December 3120222021Revenue $12,479 $12,193 Operating income - as reported$3,669 $2,090 Amortization and impairment of intangible assets 113 147 Transaction costs and other charges related to the combination and resulting termination (1)— 1,436 Legal settlements (2)$58 $— Operating income - as adjusted3,840 3,673 Operating margin - as reported29.4 %17.1 %Operating margin - as adjusted30.8 %30.1 %(1)As part of the terminated combination with WTW, certain transaction costs were incurred by the Company through the third quarter of 2021. These costs included advisory, legal, accounting, valuation, and other professional or consulting fees related to the combination, including planned divestitures, some of which were terminated, as well as certain compensation expenses and expenses related to further steps on our Aon United operating model as a result of the termination. Additionally, this includes the $1 billion Termination Fee paid in connection with the termination of the combination.(2)In connection with certain legal settlements reached, a $58 million charge was recognized in the second quarter of 2022.35Adjusted Diluted Earnings per ShareWe use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the impact of certain items, as listed below, because management does not believe these expenses are the best indicators of our core operating performance. This supplemental information related to adjusted diluted earnings per share represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements.A reconciliation of this non-GAAP measure to reported diluted earnings per share is as follows (in millions, except per share data and percentages):Year Ended December 31, 2022U.S. GAAPAdjustmentsNon-GAAP AdjustedOperating income$3,669 $171 $3,840 Interest income18 — 18 Interest expense(406)— (406)Other income (expense) (1)(125)170 45 Income before income taxes 3,156 341 3,497 Income tax expense (2)510 75 585 Net income2,646 266 2,912 Less: Net income attributable to noncontrolling interests57 — 57 Net income attributable to Aon shareholders$2,589 $266 $2,855 Diluted net income per share attributable to Aon shareholders$12.14 $1.25 $13.39 Weighted average ordinary shares outstanding — diluted213.2 — 213.2 Effective tax rates (2)16.2 %16.7 %Year Ended December 31, 2021U.S. GAAPAdjustmentsNon-GAAP AdjustedOperating income $2,090 $1,583 $3,673 Interest income11 — 11 Interest expense(322)— (322)Other income (expense) (3)152 (124)28 Income before income taxes 1,931 1,459 3,390 Income tax expense (2)623 — 623 Net income1,308 1,459 2,767 Less: Net income attributable to noncontrolling interests53 — 53 Net income attributable to Aon shareholders$1,255 $1,459 $2,714 Diluted net income per share attributable to Aon shareholders$5.55 $6.45 $12.00 Weighted average ordinary shares outstanding — diluted226.1 — 226.1 Effective tax rates (2)32.3 %18.4 %(1)To further its pension de-risking strategy the Company purchased an annuity for portions of its U.S. pension plans that will settle certain obligations. A non-cash settlement charge totaling $170 million was recognized in the fourth quarter of 2022 which is excluded from Adjusted Other income (expense).(2)Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with certain transaction costs and other charges related to the combination and resulting termination, as well as certain legal and pension settlements, which are adjusted at the related jurisdictional rate. In addition, income tax expense for the year ended December 30, 2021 excludes the impact of remeasuring the net deferred tax liabilities in the U.K. as a result of the corporate income tax rate increase enacted in the second quarter of 2021.(3)Adjusted Other income (expense) excludes gains from dispositions of $124 million, for the year ended December 31, 2021.36Free Cash FlowWe use free cash flow, defined as cash flow provided by operations minus capital expenditures, as a non-GAAP measure of our core operating performance and cash generating capabilities of our business operations. This supplemental information related to free cash flow represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, the Consolidated Financial Statements. The use of this non-GAAP measure does not imply or represent the residual cash flow for discretionary expenditures. A reconciliation of this non-GAAP measure to cash flow provided by operations is as follows (in millions):Years Ended December 3120222021Cash provided by operating activities$3,219 $2,182 Capital expenditures(196)(137)Free cash flow$3,023 $2,045 Impact of Foreign Currency Exchange Rate FluctuationsBecause we conduct business in more than 120 countries and sovereignties, foreign currency exchange rate fluctuations have a significant impact on our business. Foreign currency exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, to give financial statement users meaningful information about our operations, we have provided an illustration of the impact of foreign currency exchange rate fluctuations on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between periods by translating the prior year’s revenue, expenses, and net income using the current year’s foreign currency exchange rates.Currency fluctuations had an unfavorable impact of $0.33 on earnings per diluted share during the year ended December 31, 2022 if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had a favorable impact of $0.17 on earnings per diluted share during the year ended December 31, 2021, if 2020 results were translated at 2021 rates.Currency fluctuations had an unfavorable impact of $0.44 on adjusted earnings per diluted share during the year ended December 31, 2022 if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had a favorable impact of $0.23 on adjusted earnings per diluted share during the year ended December 31, 2021, if 2020 results were translated at 2021 rates. These translations are performed for comparative and illustrative purposes only and do not impact the accounting policies or practices for amounts included in our Financial Statements.LIQUIDITY AND FINANCIAL CONDITIONLiquidityExecutive SummaryWe believe that our balance sheet and strong cash flow provide us with adequate liquidity. Our primary sources of liquidity in the near-term include cash flows provided by operations and available cash reserves; primary sources of liquidity in the long-term include cash flows provided by operations, debt capacity available under our credit facilities, and capital markets. Our primary uses of liquidity are operating expenses and investments, capital expenditures, acquisitions, share repurchases, pension obligations, and shareholder dividends. We believe that cash flows from operations, available credit facilities, available cash reserves, and the capital markets will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, pension contributions, and anticipated working capital requirements in the next twelve months and over the long-term.Cash on our balance sheet includes funds available for general corporate purposes, as well as amounts restricted as to their use. Funds held on behalf of clients in a fiduciary capacity are segregated and shown together with uncollected insurance premiums and claims in Fiduciary assets in the Consolidated Statements of Financial Position, with a corresponding amount in Fiduciary liabilities.In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance underwriters. We also collect claims or refunds from underwriters on behalf of insureds, which are then returned to the insureds. Unremitted insurance premiums and claims are held by us in a fiduciary capacity. The levels of funds held on behalf of clients and liabilities can fluctuate significantly depending on when we collect the premiums, claims, and refunds, make payments to underwriters and insureds, and collect funds from clients and make 37payments on their behalf, and upon the impact of foreign currency movements. Funds held on behalf of clients, because of their nature, are generally invested in very liquid securities with highly rated, credit-worthy financial institutions. Fiduciary assets include funds held on behalf of clients comprised of cash and cash equivalents of $6.4 billion and $6.1 billion at December 31, 2022 and 2021, and fiduciary receivables of $9.5 billion and $8.3 billion at December 31, 2022 and 2021, respectively. While we earn investment income on the funds held in cash and money market funds, the funds cannot be used for general corporate purposes.We maintain multi-currency cash pools with third-party banks in which various Aon entities participate. Individual Aon entities are permitted to overdraw on their individual accounts provided the overall global balance does not fall below zero. At December 31, 2022, non-U.S. cash balances of one or more entities may have been negative; however, the overall balance was positive.The following table summarizes our Cash and cash equivalents, Short-term investments, and Fiduciary assets as of December 31, 2022 (in millions): Statement of Financial Position Classification Asset TypeCash and cashequivalentsShort-terminvestmentsFiduciaryassetsTotalCertificates of deposit, bank deposits, or time deposits$690 $— $3,515 $4,205 Money market funds— 452 2,871 3,323 Cash, Short-term investments, and funds held on behalf of clients690 452 6,386 7,528 Fiduciary receivables— — 9,514 9,514 Total$690 $452 $15,900 $17,042 Cash and cash equivalents and funds held on behalf of clients increased $431 million in 2022 compared to 2021. A summary of our cash flows provided by and used for operating, investing, and financing activities is as follows (in millions): Years Ended December 3120222021Cash provided by operating activities$3,219 $2,182 Cash provided by (used for) investing activities$(449)$49 Cash used for financing activities$(1,790)$(1,924)Effect of exchange rates on cash and cash equivalents and funds held on behalf of clients$(549)$(235)Operating ActivitiesNet cash provided by operating activities during the year ended December 31, 2022 increased $1,037 million, or 48%, from the prior year to $3,219 million. This amount represents Net income reported, generally adjusted for the following primary drivers including gains from sales of businesses, losses from sales of businesses, share-based compensation expense, depreciation expense, amortization and impairments, and other non-cash income and expenses, including pension settlement charges. Adjustments also include changes in working capital that relate primarily to the timing of payments of accounts payable and accrued liabilities and collection of receivables.Pension ContributionsPension contributions were $59 million for the year ended December 31, 2022, as compared to $87 million for the year ended December 31, 2021. In 2023, we expect to contribute approximately $61 million in cash to our pension plans, including contributions to non-U.S. pension plans, which are subject to changes in foreign exchange rates.Investing ActivitiesCash flows used for investing activities during the year ended December 31, 2022 were $449 million, a decrease of $498 million compared to prior year. Generally, the primary drivers of cash flows used for investing activities are acquisition of businesses, purchases of short-term investments, capital expenditures, and payments for investments. Generally, the primary drivers of cash flows provided by investing activities are sales of businesses, sales of short-term investments, and proceeds from investments. The gains and losses corresponding to cash flows provided by proceeds from investments and used for payments for investments are primarily recognized in Other income (expense) in the Consolidated Statements of Income.38Short-term InvestmentsShort-term investments increased $160 million at December 31, 2022 as compared to December 31, 2021. As disclosed in Note 14 “Fair Value Measurements and Financial Instruments” of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report, the majority of our investments carried at fair value are money market funds. These money market funds are held throughout the world with various financial institutions. We are not aware of any market liquidity issues that would materially impact the fair value of these investments.Acquisitions and Dispositions of BusinessesDuring 2022, the Company completed the acquisition of five businesses for consideration of $162 million, net of cash and funds held on behalf of clients, and the disposition of three businesses for a $81 million cash inflow, net of cash and funds held on behalf of clients.During 2021, the Company completed the acquisition of two businesses for consideration of $14 million, net of cash and funds held on behalf of clients, and the disposition of six business for a $218 million cash inflow, net of cash and funds held on behalf of clients.Capital ExpendituresThe Company’s additions to fixed assets, including capitalized software, which amounted to $196 million in 2022 and $137 million in 2021, primarily related to refurbishing and modernizing of office facilities, software development costs, and computer equipment purchases.Financing ActivitiesCash flows used for financing activities during the year ended December 31, 2022 was $1,790 million, a decrease of $134 million compared to prior year. Generally, the primary drivers of cash flow used for financing activities are repayments of debt, share repurchases, dividends paid to shareholders, cash paid for employee taxes on withholding shares, transactions with noncontrolling interests, and other financing activities, such as collection of or payments for deferred consideration in connection with prior year business acquisitions and divestitures. Generally, the primary drivers of cash flow provided by financing activities are issuances of debt, changes in net fiduciary liabilities, and proceeds from issuance of shares.Share Repurchase ProgramWe have a share repurchase program authorized by our Board of Directors. The Repurchase Program was established in April 2012 with $5.0 billion in authorized repurchases, and was increased by $5.0 billion in authorized repurchases in each of November 2014, June 2017, and November 2020, and by $7.5 billion in February 2022 for a total of $27.5 billion in repurchase authorizations.The following table summarizes the Company’s Share Repurchase activity (in millions, except per share data):Years Ended December 3120222021Shares repurchased11.1 12.4 Average price per share$289.76 $286.82 Repurchase costs recorded to accumulated deficit$3,203 $3,543 At December 31, 2022, the remaining authorized amount for share repurchase under the Repurchase Program was approximately $6.0 billion. Under the Repurchase Program, we have repurchased a total of 160.7 million shares for an aggregate cost of approximately $21.5 billion.BorrowingsTotal debt at December 31, 2022 was $10.8 billion, an increase of $1.4 billion compared to December 31, 2021. In November 2022, Aon Global Limited’s $350 million 4.00% Senior Notes due November 2023 were classified as Short-term debt and current portion of long-term debt in the Consolidated Statement of Financial Position as the date of maturity is in less than one year as of December 31, 2022.39In November 2022, Aon Corporation’s $500 million 2.20% Senior Notes matured and were repaid in full. In November 2021, the Company’s $500 million 2.20% Senior Notes due November 2022 were classified as Short-term debt and current portion of long-term debt in the Consolidated Statements of Financial Position as the date of maturity is in less than one year as of December 31, 2021.On September 12, 2022, Aon Corporation, a Delaware corporation, and Aon Global Holdings plc, a public limited company formed under the laws of England and Wales, both wholly owned subsidiaries of the Company, co-issued $500 million of 5.00% Senior Notes due September 2032. The Company intends to use the net proceeds from the offering for general corporate purposes.On February 28, 2022, Aon Corporation and Aon Global Holdings plc co-issued $600 million of 2.85% Senior Notes due May 2027 and $900 million of 3.90% Senior Notes due February 2052. The Company intends to use the net proceeds from the offering for general corporate purposes.On December 2, 2021, Aon Corporation and Aon Global Holdings plc co-issued $500 million aggregate principal amount of 2.60% Senior Notes due December 2031. We intend to use the net proceeds of the offering for general corporate purposes.On August 23, 2021, Aon Corporation and Aon Global Holdings plc co-issued $400 million of 2.05% Senior Notes due August 2031 and $600 million of 2.90% Senior Notes due August 2051. We intend to use the net proceeds from the offering for general corporate purposes.On January 13, 2021, Aon Global Limited issued an irrevocable notice of redemption to holders of its 2.80% Senior Notes for the redemption of all $400 million outstanding aggregate principal amount of the notes, which were set to mature in March 2021. The redemption date was on February 16, 2021 and resulted in an insignificant loss due to extinguishment.Aon Corporation has established a U.S. commercial paper program (the “U.S. Program”) and Aon Global Holdings plc has established a European multi-currency commercial paper program (the “European Program” and, together with the U.S. Program, the “Commercial Paper Programs”). Commercial paper may be issued in aggregate principal amounts of up to $1 billion under the U.S. Program and €625 million under the European Program, not to exceed the amount of our committed credit facilities, which was approximately $1.8 billion at December 31, 2022. The aggregate capacity of the Commercial Paper Program remains fully backed by our committed credit facilities. Commercial paper activity during the years ended December 31, 2022 and 2021 is as follows (in millions):Years Ended December 3120222021 (2)Total issuances (1)$12,301 $4,478 Total repayments(12,366)(3,807)Net issuances (repayments)$(65)$671 (1) The proceeds of the commercial paper issuances were used primarily for short-term working capital needs.(2) Proceeds from commercial paper issued by Aon Corporation under the U.S. Program, where the aggregate principal was raised on July 26, 2021, were used to pay approximately $400 million of the Termination Fee on July 27, 2021.Other Liquidity MattersDistributable ProfitsWe are required under Irish law to have available “distributable profits” to make share repurchases or pay dividends to shareholders. Distributable profits are created through the earnings of the Irish parent company and, among other methods, through intercompany dividends or a reduction in share capital approved by the High Court of Ireland. Distributable profits are not linked to a U.S. GAAP reported amount (e.g. Accumulated deficit). As of December 31, 2022 and December 31, 2021, we had distributable profits in excess of $29.0 billion and $32.7 billion, respectively. We believe that we will have sufficient distributable profits for the foreseeable future. Credit FacilitiesWe expect cash generated by operations for 2022 to be sufficient to service our debt and contractual obligations, finance capital expenditures, and continue to pay dividends to our shareholders. Although cash from operations is expected to be sufficient to service these activities, we have the ability to access the commercial paper markets or borrow under our credit facilities to accommodate any timing differences in cash flows. Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed.40As of December 31, 2022, we had two primary committed credit facilities outstanding: our $1.0 billion multi-currency U.S. credit facility expiring in September 2026 and our $750 million multi-currency U.S. credit facility expiring in October 2024. In aggregate, these two facilities provide approximately $1.8 billion in available credit.Each of these primary committed credit facilities includes customary representations, warranties, and covenants, including financial covenants that require us to maintain specified ratios of adjusted consolidated EBITDA to consolidated interest expense and consolidated debt to consolidated adjusted EBITDA, tested quarterly. At December 31, 2022, we did not have borrowings under either facility, and we were in compliance with the financial covenants and all other covenants contained therein during the rolling year ended December 31, 2022.Shelf Registration StatementOn May 12, 2020, we filed a shelf registration statement with the SEC, registering the offer and sale from time to time of an indeterminate amount of, among other securities, debt securities, preference shares, class A ordinary shares and convertible securities. Our ability to access the market as a source of liquidity is dependent on investor demand, market conditions, and other factors.Rating Agency RatingsThe major rating agencies’ ratings of our debt at February 17, 2023 appear in the table below.Ratings Senior Long-term Debt Commercial Paper OutlookStandard & Poor’sA-A-2StableMoody’s Investor ServicesBaa2P-2StableFitch, Inc.BBB+F-2StableLetters of Credit and Other GuaranteesWe have entered into a number of arrangements whereby our performance on certain obligations is guaranteed by a third party through the issuance of a LOC. We had total LOCs outstanding of approximately $74 million at December 31, 2022, compared to $75 million at December 31, 2021. These LOCs cover the beneficiaries related to certain of our U.S. and Canadian non-qualified pension plan schemes and secure deductible retentions for our own workers’ compensation program. We also have obtained LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at our international subsidiaries.We have certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately $173 million at December 31, 2022, compared to $153 million at December 31, 2021.Contractual ObligationsOur contractual obligations and commitments as of December 31, 2022 are comprised of principal payments on debt, interest payments on debt, operating leases, pension and other postretirement benefit plans, and purchase obligations.Operating leases are primarily comprised of leased office space throughout the world. As leases expire, we do not anticipate difficulty in negotiating renewals or finding other satisfactory space if the premise becomes unavailable. In certain circumstances, we may have unused space and may seek to sublet such space to third parties, depending upon the demands for office space in the locations involved. Refer to Note 8 “Lease Commitments” of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report for further information.Pension and other postretirement benefit plan obligations include estimates of our minimum funding requirements pursuant to the ERISA and other regulations, as well as minimum funding requirements agreed with the trustees of our U.K. pension plans. Additional amounts may be agreed to with, or required by, the U.K. pension plan trustees. Nonqualified pension and other postretirement benefit obligations are based on estimated future benefit payments. We may make additional discretionary contributions. Refer to Note 11 “Employee Benefits” of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report for further information.Purchase obligations are defined as agreements to purchase goods and services that are enforceable and legally binding on us, and that specifies all significant terms, including the goods to be purchased or services to be rendered, the price at which the goods or services are to be rendered, and the timing of the transactions. Most of our purchase obligations are related to purchases of information technology services or other service contracts.41We had no other cash requirements from known contractual obligations and commitments that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, results of operations, or liquidity. Guarantee of Registered SecuritiesIn connection with the Ireland Reorganization, Aon plc and Aon Global Holdings plc, a company incorporated under the laws of England and Wales, entered into various agreements pursuant to which they agreed to guarantee the obligations of Aon Corporation arising under issued and outstanding debt securities, which were previously guaranteed solely by Aon Global Limited and the obligations of Aon Global Limited arising under issued and outstanding debt securities, which were previously guaranteed solely by Aon Corporation. Those agreements include: (1) Second Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, and Aon Global Holdings plc and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) (amending and restating the Amended and Restated Indenture, dated April 2, 2012, among Aon Corporation, Aon Global Limited and the Trustee); (2) Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Indenture, dated December 12, 2012, among Aon Corporation, Aon Global Limited plc and the Trustee); (3) Second Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Amended and Restated Indenture, dated May 20, 2015, among Aon Corporation, Aon Global Limited and the Trustee); (4) Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Indenture, dated November 13, 2015, among Aon Corporation, Aon Global Limited and the Trustee); and (5) Amended and Restated Indenture, dated April 1, 2020, among Aon Corporation, Aon Global Limited, Aon plc, Aon Global Holdings plc and the Trustee (amending and restating the Indenture, dated December 3, 2018, among Aon Corporation, Aon Global Limited and the Trustee).After the Ireland Reorganization, newly issued and outstanding debt securities by Aon Corporation are guaranteed by Aon Global Limited, Aon plc, and Aon Global Holdings plc, and include the following (collectively, the “Aon Corporation Notes”): Aon Corporation Notes8.205% Junior Subordinated Notes due January 20274.50% Senior Notes due December 20283.75% Senior Notes due May 20292.80% Senior Notes due May 20306.25% Senior Notes due September 2040All guarantees of Aon plc, Aon Global Limited, and Aon Global Holdings plc of the Aon Corporation Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the company. There are no subsidiaries other than those listed above that guarantee the Aon Corporation Notes.After the Ireland Reorganization, newly issued and outstanding debt securities by Aon Global Limited are guaranteed by Aon plc, Aon Global Holdings plc, and Aon Corporation, and include the following (collectively, the “Aon Global Limited Notes”):Aon Global Limited Notes4.00% Senior Notes due November 20233.50% Senior Notes due June 20243.875% Senior Notes due December 20252.875% Senior Notes due May 20264.25% Senior Notes due December 20424.45% Senior Notes due May 20434.60% Senior Notes due June 20444.75% Senior Notes due May 2045All guarantees of Aon plc, Aon Global Holdings plc, and Aon Corporation of the Aon Global Limited Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future 42unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the company. There are no subsidiaries other than those listed above that guarantee the Aon Global Limited Notes.Newly co-issued and outstanding debt securities by Aon Corporation and Aon Global Holdings plc (together, the “Co-Issuers”) are guaranteed by Aon plc and Aon Global Limited and include the following (collectively, the “Co-Issued Notes”):Co-Issued Notes - Aon Corporation and Aon Global Holdings plc2.85% Senior Notes due May 20272.05% Senior Notes due August 20312.60% Senior Notes due December 20315.00% Senior Notes due September 20322.90% Senior Notes due August 20513.90% Senior Notes due February 2052All guarantees of Aon plc and Aon Global Limited of the Co-Issued Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the Co-Issuers. There are no subsidiaries other than those listed above that guarantee the Co-Issued Notes.Aon Corporation, Aon Global Limited, and Aon Global Holdings plc are indirect wholly owned subsidiaries of Aon plc. Aon plc, Aon Global Limited, Aon Global Holdings plc, and Aon Corporation together comprise the “Obligor group”. The following tables set forth summarized financial information for the Obligor group.Adjustments are made to the tables to eliminate intercompany balances and transactions between the Obligor group. Intercompany balances and transactions between the Obligor group and non-guarantor subsidiaries are presented as separate line items within the summarized financial information. These balances are presented on a net presentation basis, rather than a gross basis, as this better reflects the nature of the intercompany positions and presents the funding or funded position that is to be received or owed. No balances or transactions of non-guarantor subsidiaries are presented in the summarized financial information, including investments of the Obligor group in non-guarantor subsidiaries. Summarized Statement of Income information for the Obligor group is as follows (in millions):Obligor GroupSummarized Statement of Income InformationYear EndedDecember 31, 2022Revenue$— Operating loss$(102)Expense from non-guarantor subsidiaries before income taxes$(656)Net loss$(1,069)Net loss attributable to Aon shareholders$(1,069)43Summarized Statement of Financial Position information for the Obligor group is as follows (in millions):Obligor GroupSummarized Statement of Financial Position InformationAs ofDecember 31, 2022Receivables due from non-guarantor subsidiaries$1,300 Other current assets317 Total current assets$1,617 Non-current receivables due from non-guarantor subsidiaries$483 Other non-current assets1,060 Total non-current assets$1,543 Payables to non-guarantor subsidiaries$16,172 Other current liabilities5,880 Total current liabilities$22,052 Non-current payables to non-guarantor subsidiaries$2,343 Other non-current liabilities11,226 Total non-current liabilities$13,569 CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we make estimates, assumptions, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the periods presented.In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, and base our estimates, assumptions, and judgments on our historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these Consolidated Financial Statements.Revenue RecognitionThe Company recognizes revenue when control of the promised services is transferred to the customer in the amount that best reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements where control is transferred over time, an input or output method is applied that represents a faithful depiction of the progress towards completion of the performance obligation. For arrangements that include variable consideration, the Company assesses whether any amounts should be constrained. For arrangements that include multiple performance obligations, the Company allocates consideration based on their relative fair values.Costs incurred by the Company in obtaining a contract are capitalized and amortized on a systematic basis that is consistent with the transfer of control of the services to which the asset relates, considering anticipated renewals when applicable. Certain contract related costs, including pre-placement brokerage costs, are capitalized as a cost to fulfill and are amortized on a systematic basis consistent with the transfer of control of the services to which the asset relates, which is generally less than one year.Commercial Risk Solutions includes retail brokerage, specialty solutions, global risk consulting and captives management, and Affinity programs. Revenue primarily includes insurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services 44to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units delivered and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Revenue is recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data. Reimbursements received for out-of-pocket expenses are generally recorded as a component of revenue. Commissions and fees for brokerage services may be invoiced near the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. Reinsurance Solutions includes treaty reinsurance, facultative reinsurance, Strategy and Technology Group, and capital markets. Revenue primarily includes reinsurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units delivered and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Commissions and fees for brokerage services may be invoiced at the inception of the reinsurance period for certain reinsurance brokerage, or more commonly for treaty reinsurance arrangements, over the term of the arrangement in installments based on deposit or minimum premiums.Health Solutions includes consulting and brokerage, Human Capital, and Consumer Benefits Solutions. Revenue primarily includes insurance commissions and fees for services rendered. For brokerage commissions, revenue is predominantly recognized at the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services using input or output measures, including units delivered or time elapsed, to provide a faithful depiction of the progress towards completion of the performance obligation. For Human Capital, revenue is recognized over time or at a point in time upon completion of the services. For arrangements recognized over time, revenue is based on a measure of progress that depicts the transfer of control of the services to the customer utilizing an appropriate input or output measure to provide a faithful depiction of the progress towards completion of the performance obligation, including units delivered or time elapsed. Input and output measures utilized vary based on the arrangement but typically include reports provided or days elapsed. Revenue from Consumer Benefits Solutions arrangements are typically recognized upon successful enrollment of participants. Commissions and fees for brokerage services may be invoiced at the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. Payment terms for other services vary but are typically over the contract term in installments.Wealth Solutions includes retirement consulting, pension administration and investments. Revenue recognized for these arrangements is predominantly recognized over the term of the arrangement using input or output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For consulting arrangements recognized over time, revenue will be recognized based on a measure of progress that depicts the transfer of control of the services to the customer, utilizing an appropriate input or output measure to provide a reasonable assessment of the progress towards completion of the performance obligation including units delivered or time elapsed. Fees paid by customers for consulting services are typically charged on an hourly, project or fixed-fee basis, and revenue for these arrangements is typically recognized based on time incurred, days elapsed, or reports delivered. Revenue from time-and-materials or cost-plus arrangements are recognized as services are performed using input or output measures to provide a reasonable assessment of the progress towards completion of the performance obligation including hours worked, and revenue for these arrangements is typically recognized based on time and materials incurred. Revenue generated from our delegated investment business is generally earned as an agreed percentage based on AUM and, to a lesser extent, based on performance fees. Reimbursements received for out-of-pocket expenses are generally recorded as a component of revenue. Payment terms vary but are typically over the contract term in installments.PensionsWe sponsor defined benefit pension plans throughout the world. Our most significant plans are located in the U.S., the U.K., the Netherlands, and Canada, which are closed to new entrants. We have ceased crediting future benefits relating to salary and services for our U.S., U.K., Netherlands, and Canada plans to the extent statutorily permitted.The service cost component of net periodic benefit cost is reported in Compensation and benefits and all other components are reported in Other income (expense). We used a full-yield curve approach in the estimation of the service and interest cost components of net periodic pension and postretirement benefit cost for our major pension and other postretirement benefit plans; this was obtained by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.45Recognition of Gains and Losses and Prior Service Certain changes in the value of the obligation and in the value of plan assets, which may occur due to various factors such as changes in the discount rate and actuarial assumptions, actual demographic experience, and/or plan asset performance are not immediately recognized in net income. Such changes are recognized in Other comprehensive income and are amortized into net income as part of the net periodic benefit cost.Unrecognized gains and losses that have been deferred in Other comprehensive income, as previously described, are amortized into expense as a component of periodic pension expense based on the average life expectancy of the U.S., U.K., Netherlands, and Canada plan members. We amortize any prior service expense or credits that arise as a result of plan changes over a period consistent with the amortization of gains and losses.As of December 31, 2022, our pension plans have deferred losses that have not yet been recognized through income in the Consolidated Financial Statements. We amortize unrecognized actuarial losses outside of a corridor, which is defined as 10% of the greater of market-related value of plan assets or PBO. To the extent not offset by future gains, incremental amortization as calculated above will continue to affect future pension expense similarly until fully amortized.The following table discloses our accumulated other comprehensive loss, the number of years over which we are amortizing the loss, and the estimated 2023 amortization of loss by country (in millions, except amortization period):U.K.U.S.OtherAccumulated other comprehensive loss $1,761 $1,305 $437 Amortization period7 to 25 years6 to 23 years11 to 34 yearsEstimated 2023 amortization of loss$74 $34 $13 The U.S. had no unrecognized prior service cost (credit) at December 31, 2022. The unrecognized prior service cost (credit) at December 31, 2022 was $35 million, and $(6) million for the U.K. and other plans, respectively.For the U.S. pension plans, we use a market-related valuation of assets approach to determine the expected return on assets, which is a component of net periodic benefit cost recognized in the Consolidated Statements of Income. This approach recognizes 20% of any gains or losses in the current year’s value of market-related assets, with the remaining 80% spread over the next four years. As this approach recognizes gains or losses over a five-year period, the future value of assets and therefore, our net periodic benefit cost will be impacted as previously deferred gains or losses are recorded. As of December 31, 2022, the market-related value of assets was $1.8 billion. We do not use the market-related valuation approach to determine the funded status of the U.S. plans recorded in the Consolidated Statements of Financial Position. Instead, we record and present the funded status in the Consolidated Statements of Financial Position based on the fair value of the plan assets. As of December 31, 2022, the fair value of plan assets was $1.5 billion. Our non-U.S. plans use fair value to determine expected return on assets.Rate of Return on Plan Assets and Asset AllocationThe following table summarizes the expected long-term rate of return on plan assets for future pension expense as of December 31, 2022:U.K.U.S.OtherExpected return on plan assets, net of administration expenses5.34%6.82%4.20 - 4.85%In determining the expected rate of return for the plan assets, we analyze investment community forecasts and current market conditions to develop expected returns for each of the asset classes used by the plans. In particular, we surveyed multiple third-party financial institutions and consultants to obtain long-term expected returns on each asset class, considered historical performance data by asset class over long periods, and weighted the expected returns for each asset class by target asset allocations of the plans.The U.S. pension plan asset allocation is based on approved allocations following adopted investment guidelines. The investment policy for U.K. and other non-U.S. pension plans is generally determined by the plans’ trustees. Because there are several pension plans maintained in the U.K. and other non-U.S. categories, our target allocation presents a range of the target allocation of each plan. Target allocations are subject to change.46Impact of Changing Economic AssumptionsChanges in the discount rate and expected return on assets can have a material impact on pension obligations and pension expense.Holding all other assumptions constant, the following table reflects what a 25 BPS increase and decrease in our discount rate would have on our PBO at December 31, 2022 (in millions):Increase (decrease) in projected benefit obligation (1)25 BPS Change in Discount RateIncreaseDecreaseU.K. plans$(95)$(98)U.S. plans$(53)$56 Other plans$(39)$41 (1)Increases to the PBO reflect increases to our pension obligations, while decreases in the PBO are recoveries toward fully-funded status. A change in the discount rate has an inverse relationship to the PBO.Holding all other assumptions constant, the following table reflects what a 25 BPS increase and decrease in our discount rate would have on our estimated 2023 pension expense (in millions): 25 BPS Change in Discount RateIncrease (decrease) in expenseIncreaseDecreaseU.K. plans$(3)$3 U.S. plans$— $— Other plans$— $— Holding all other assumptions constant, the following table reflects what a 25 BPS increase and decrease in our long-term rate of return on plan assets would have on our estimated 2023 pension expense (in millions): 25 BPS Change in Long-Term Rate of Return on Plan AssetsIncrease (decrease) in expenseIncreaseDecreaseU.K. plans$(9)$9 U.S. plans$(4)$4 Other plans$(3)$3 Estimated Future ContributionsWe estimate cash contributions of approximately $61 million to our pension plans in 2023 as compared with cash contributions of $59 million in 2022.Goodwill and Other Intangible AssetsGoodwill represents the excess of purchase price over the fair market value of the net assets acquired. We classify our intangible assets acquired as either customer-related and contract-based, technology, tradenames or other intangibles.Goodwill is not amortized, but rather tested for impairment at least annually in the fourth quarter. We test more frequently if there are indicators of impairment or whenever business circumstances suggest that the carrying value of goodwill may not be recoverable. These indicators may include a sustained significant decline in our share price and market capitalization, a significant decline in our expected future cash flows, or a significant adverse change in legal factors or in the business climate, among others. We perform impairment reviews at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components are a reporting unit, or if the segment comprises only a single component. We aggregate components of any operating segments that have similar economic characteristics into a single reporting unit.47When evaluating these assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, then the goodwill impairment test becomes a quantitative analysis. If the fair value of a reporting unit is determined to be greater than the carrying value of the reporting unit, goodwill is deemed not to be impaired and no further testing is necessary. If the fair value of a reporting unit is less than the carrying value, a goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value limited to the total amount of the goodwill allocated to the reporting unit.When determining the fair value of our reporting units, we use a DCF model based on our most current forecasts. We discount the related cash flow forecasts using the weighted average cost of capital method at the date of evaluation. Preparation of forecasts and selection of the discount rate for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium. We believe the implied control premium determined by our impairment analysis is reasonable based upon historic data of premiums paid on actual transactions within our industry.We review intangible assets that are being amortized for impairment whenever events or changes in circumstance indicate that an asset group’s carrying value may not be recoverable. If we are required to record impairment charges in the future, they could materially impact our results of operations.ContingenciesWe define a contingency as an existing condition that involves a degree of uncertainty as to a possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. Under U.S. GAAP, we are required to establish reserves for loss contingencies when the loss is probable and we can reasonably estimate its financial impact. We are required to assess the likelihood of material adverse judgments or outcomes, as well as potential ranges or probability of losses. We determine the amount of reserves required, if any, for contingencies after carefully analyzing each individual item. The required reserves may change due to new developments in each issue. We do not recognize gain contingencies until all contingencies are resolved.Share-Based PaymentsShare-based compensation expense is measured based on the grant date fair value and recognized over the requisite service period for awards that we ultimately expect to vest. For purposes of measuring share-based compensation expense, we consider whether an adjustment to the observable market price is necessary to reflect material nonpublic information that is known to us at the time the award is granted. No adjustments were necessary for the years ended December 31, 2022, 2021, or 2020. We also estimate forfeitures at the time of grant based on our actual experience to date and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.Restricted Share UnitsRSUs are service-based awards for which we recognize the associated compensation cost on a straight-line basis over the requisite service period. We estimate the fair value of the awards based on the market price of the underlying share on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period where applicable.Performance Share AwardsPSAs are performance-based awards for which vesting is dependent on the achievement of certain objectives. Such objectives may be made on a personal, group or company level. We estimate the fair value of the awards based on the market price of the underlying share on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period.Compensation expense is recognized over the performance period. The number of shares issued on the vesting date will vary depending on the actual performance objectives achieved, which are based on a fixed number of potential outcomes. We make assessments of future performance using subjective estimates, such as long-term plans. As a result, changes in the underlying assumptions could have a material impact on the compensation expense recognized.The largest plan is the LPP, which has a three-year performance period. As the percent of expected performance increases or decreases, the potential change in expense can go from 0% to 200% of the targeted total expense. The 2020 to 2022 performance period ended on December 31, 2022, the 2019 to 2021 performance period ended on December 31, 2021, and the 2018 to 2020 performance period ended on December 31, 2020. The LPP currently has two open performance periods: 2021 to 482023 and 2022 to 2024. A 10% upward adjustment in our estimated performance achievement percentage for both open performance periods would have increased our 2022 expense by approximately $2.6 million, while a 10% downward adjustment would have decreased our expense by approximately $7.7 million. Income TaxesWe earn income in numerous countries and this income is subject to the laws of taxing jurisdictions within those countries. The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies and are based on management’s assumptions and estimates about future operating results and levels of taxable income, and judgments regarding the interpretation of the provisions of current accounting principles.Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Considerations with respect to the realizability of deferred tax assets include the period of expiration of the deferred tax asset, historical earnings and projected future taxable income by jurisdiction as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Significant management judgment is required in determining the assumptions and estimates related to the amount and timing of future taxable income. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors.We assess carryforwards and tax credits for realization as a reduction of future taxable income by using a “more likely than not” determination. We base the carrying values of liabilities and assets for income taxes currently payable and receivable on management’s interpretation of applicable tax laws and incorporate management’s assumptions and judgments about using tax planning strategies in various taxing jurisdictions. Using different estimates, assumptions, and judgments in accounting for income taxes, especially those that deploy tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and changes in our results of operations.NEW ACCOUNTING PRONOUNCEMENTSNote 2 “Summary of Significant Accounting Principles and Practices” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report contains a summary of our significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable.Item 7A. Quantitative and Qualitative Disclosures About Market RiskWe are exposed to potential fluctuations in earnings, cash flows, and the fair values of certain of our assets and liabilities due to changes in interest rates and foreign exchange rates. To manage the risk from these exposures, we enter into a variety of derivative instruments. We do not enter into derivatives or financial instruments for trading or speculative purposes.The following discussion describes our specific exposures and the strategies we use to manage these risks. Refer to Note 2 “Summary of Significant Accounting Principles and Practices” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for a discussion of our accounting policies for financial instruments and derivatives.Foreign Exchange RiskWe are subject to foreign exchange rate risk. Our primary exposures include exchange rates between the U.S. dollar and the euro, the British pound, the Canadian dollar, the Australian dollar, the Indian rupee, and the Japanese yen. We use over-the-counter options and forward contracts to reduce the impact of foreign currency risk to our financial statements.Additionally, some of our non-U.S. brokerage subsidiaries receive revenue in currencies that differ from their functional currencies. Our U.K. subsidiaries earn a portion of their revenue in U.S. dollars, euro, and Japanese yen, but most of their expenses are incurred in British pounds. At December 31, 2022, we have hedged approximately 45% of our U.K. subsidiaries’ expected exposures to the U.S. dollar, euro, and Japanese yen transactions for the years ending December 31, 2023 and 2024. We generally do not hedge exposures beyond three years.We also use forward and option contracts to economically hedge foreign exchange risk associated with monetary balance sheet exposures, such as intercompany notes and current assets and liabilities that are denominated in a non-functional currency and are subject to remeasurement.The potential loss in future earnings from foreign exchange derivative instruments resulting from a hypothetical 10% adverse change in year-end exchange rates would be $19 million and $9 million at December 31, 2023 and 2024, respectively.49The translated value of revenues and expenses from our international brokerage operations are subject to fluctuations in foreign exchange rates. If we were to translate prior year results at current year exchange rates, diluted earnings per share would have an unfavorable $0.33 impact during the year ended December 31, 2022. Further, adjusted diluted earnings per share, a non-GAAP measure as defined and reconciled under the caption “Review of Consolidated Results — Adjusted Diluted Earnings Per Share,” would have an unfavorable $0.44 impact during the year ended December 31, 2022 if we were to translate prior year results at current quarter exchange rates.Interest Rate RiskOur fiduciary investment income is affected by changes in international and domestic short-term interest rates. We monitor our net exposure to short-term interest rates and, as appropriate, hedge our exposure with various derivative financial instruments. This activity primarily relates to brokerage funds held on behalf of clients in the U.S. and in continental Europe. A hypothetical, instantaneous parallel decrease in the year-end yield curve of 100 BPS would cause a decrease, net of derivative positions, of $67 million to each of 2023 and 2024 pretax income. A corresponding increase in the year-end yield curve of 100 BPS would cause an increase, net of derivative positions, of $67 million to each of 2023 and 2024 pre-tax income.We have long-term debt outstanding, excluding the current portion, with a fair market value of $8.7 billion and $9.2 billion as of December 31, 2022 and December 31, 2021, respectively. The fair value was less than the carrying value by $1.1 billion at December 31, 2022, and $0.9 billion greater than the carrying value at December 31, 2021. A hypothetical 1% increase or decrease in interest rates would change the fair value by a decrease of 7% or an increase of 8%, respectively, at December 31, 2022.We have selected hypothetical changes in foreign currency exchange rates, interest rates, and equity market prices to illustrate the possible impact of these changes; we are not predicting market events.50

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+Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. OverviewOur mission is to help companies grow their apps and accelerate their business. Our full stack software solution provides advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. We also operate a portfolio of owned mobile apps and accelerated our market penetration through an active acquisition and partnership strategy. Our scaled business model sits at the nexus of the mobile app ecosystem, which creates a durable competitive advantage that has fueled our clients’ success and our strong growth.Since our founding in 2011, we have been focused on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. Our founders, who are mobile app developers themselves, quickly realized the real impediment to success and growth in the mobile app ecosystem was a discovery and monetization problem—breaking through the congested app stores to efficiently find users and successfully grow their business. Their first-hand experience with these developer challenges led to the development of our infrastructure and software—AppLovin Core Technologies and AppLovin Software Platform. We capitalized on our success and understanding of the mobile app ecosystem by launching AppLovin Apps in 2018. Our Apps now consist of a globally diversified portfolio of over 350 free-to-play mobile games across five genres, run by eleven studios.For 2022, our revenue grew 1% year-over-year from 2021, from $2.79 billion in 2021 to $2.82 billion in 2022. For 2021, our revenue grew 92% year-over-year from 2020, from $1.45 billion in 2020 to $2.79 billion in 2021. We generated a net loss of $192.9 million in 2022, net income of $35.3 million in 2021, and a net loss of $125.9 million in 2020. We generated Adjusted EBITDA of $1.1 billion, $726.8 million, and $345.5 million in 2022, 2021 and 2020, respectively. Additionally, we have generated strong cash flows, with net cash provided by operating activities of $412.8 million, $361.9 million, and $222.9 million in 2022, 2021, and 2020, respectively. Given our strong financial position, we have been able to reinvest in our expansion and growth and consummate strategic acquisitions and partnerships. See the section titled “—Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.In February 2022, our board of directors authorized a share repurchase program to repurchase $750.0 million of our Class A common stock over time. We will continuously evaluate efficient alternatives to using cash on hand to fund the program, including accessing the capital markets, subject to market conditions.Our Business ModelWe collect revenue from our Software Platform and our Apps. In 2022, Software Platform Revenue represented 37% of total revenue and Apps Revenue represented 63% of total revenue.In the second quarter of 2022, we revised the presentation of segment information to align with changes to how our chief operating decision maker (“CODM”), the Chief Executive Officer, allocates resources and assesses performance. Effective in May 2022, we report our operating results through two reportable segments: Software Platform and Apps. Previously we had a single operating and reportable segment. The CODM evaluates performance of each segment based on several factors, of which the financial measures are segment revenue and segment adjusted EBITDA, as defined in Note 14 to the Company's consolidated financial statements. The Software Platform and Apps segments provide a view into the organization of our business and generate revenue as follows:Software Platform RevenueWe primarily generate Software Platform Revenue from fees paid by mobile app advertisers who use our Software Platform to grow and monetize their apps. We are able to grow our Software Platform Revenue by improving our various software technologies.Software Platform clients include a wide variety of advertisers, from indie developer studios to some of the largest global internet platforms, such as Facebook and Google. While we have thousands of clients as of December 31, 2022, the vast majority of our revenue is derived from our Software Platform Enterprise Clients. See “Key Metrics” below for additional information on how we calculate Software Platform Enterprise Clients. We see multiple opportunities to gain new Software Platform clients, and to increase spend from existing clients, as we help them grow their businesses and make them more successful. Our Software Platform includes AppDiscovery, MAX, Adjust, and Wurl. 48Table of ContentsClients use AppDiscovery to automate, optimize, and manage their user acquisition investments. They set marketing and user growth goals, and AppDiscovery optimizes their ad spend in an effort to achieve their return on advertising spend targets and other marketing objectives. AppDiscovery comprises the vast majority of revenue from our Software Platform. Revenue is generated from our advertisers, typically on a performance-basis, and shared with our advertising publishers, typically on a cost per impression model. Our Software Platform Enterprise Clients had a Net Dollar-Based Retention Rate of approximately 134% for the twelve months ended December 31, 2022.1Software Platform clients use MAX to optimize purchases of app advertising inventory. The Compass Analytics tool within MAX provides insights to manage against key performance indicators, understand the long-term value of users, and help manage profitability. Revenue from MAX is generated based on a percentage of client spend. As more developers move to in-app bidding monetization, we expect growth in the adoption of, and revenue from, MAX.Software Platform clients use Adjust's SaaS mobile marketing platform to better understand their users' journey while allowing marketers to make smarter decisions through measurement, attribution and fraud prevention. Revenue from Adjust is primarily generated from an annual software subscription fee.Software Platform clients use Wurl's CTV platform to distribute streaming video, maximize advertising revenue, and acquire and retain viewers or subscribers. Revenue from Wurl is primarily generated from content companies, typically on a usage-based model.Apps RevenueDuring the fourth quarter of 2022, we changed the terms used to describe our two Apps segment revenue streams to better align with market terminology. We now refer to our Apps "Business" revenue as "In-App Advertising" and "Consumer" revenue as "In-App Purchases." Apps Revenue is generated when a user of one of our Apps makes an in-app purchase ("IAP") and when clients purchase the digital advertising inventory of our portfolio of Apps ("In-App Advertising" or "IAA"). We are able to grow our Apps Revenue by adding more apps to our Apps portfolio and increasing engagement on our existing Apps.Our Apps are generally free-to-play mobile games and generate IAP Revenue through IAPs. IAPs consist of virtual goods used to enhance gameplay, accelerate access to certain features or levels, and augment other mobile game progression opportunities for the user. IAPs drive more engagement and better economics from our Apps. The vast majority of our IAP revenue flows through two app stores, Apple App Store and Google Play, which charge us a standard commission on IAPs. IAP Revenue represented 67% of total Apps Revenue for the twelve months ended December 31, 2022.During the twelve months ended December 31, 2022, we had an average of 2.3 million Monthly Active Payers ("MAPs") across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer ("ARPMAP") of $43. See “Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.IAA clients that purchase advertising inventory from our Apps are able to target highly relevant users from our diverse and global portfolio of over 350 mobile games. Our clients leverage a broad set of high-performing mobile ad formats, including playable and rewarded video, and are able to match these ads with relevant users resulting in a better return on their advertising spend. By increasing the number of users and their engagement, as well as better matching ads with the appropriate target audience, we are able to increase our revenue from IAA clients that purchase advertising inventory from our Apps. IAA Revenue represented 33% of total Apps Revenue for the twelve months ended December 31, 2022.1 We measure Net Dollar-Based Retention Rate for the twelve months ended December 31, 2022 for our Software Platform Enterprise Clients as current period revenue divided by prior period revenue. Prior period revenue is measured as revenue for the twelve months ended December 31, 2021 from our Software Platform Enterprise Clients as of December 31, 2021. Current period revenue is revenue for the twelve months ended December 31, 2022 from our Software Platform Enterprise Clients as of December 31, 2021.Key MetricsWe review the following key metrics on a regular basis in order to evaluate the health of our business, identify trends affecting our performance, prepare financial projections, and make strategic decisions.Update to our Key MetricsAs our Software Platform, which includes AppDiscovery, MAX, AppLovin Exchange, Adjust and Wurl, continues to evolve, we continue to evaluate metrics that facilitate an understanding of our business. Following the addition and integration of offerings like Adjust and Wurl, as well as the future launch of our Array OEM/carrier offering, the revenue mix within our Software Platform segment is shifting and we expect this shift will become more pronounced over time as these businesses grow. Given the structural differences in these businesses—in terms of their revenue models as well as the nature of their clients—we believe our current key metrics for the Software Platform will no longer provide a valuable method to understand fluctuations in the performance of our Software Platform revenue. As a result, beginning in first quarter of 2023, we will no longer provide certain key metrics related to our Software Platform segment including Total Software Transaction Value, Software Platform Enterprise Clients and Revenue per Software Platform Enterprise Client.Software Platform Enterprise Clients ("SPECs"). We focus on the number of SPECs, which are third-party clients from whom we have collected greater than $125,000 of Software Platform Revenue in the trailing twelve months to a given date. SPECs generate the vast majority of our Software Platform Revenue and Software Platform Revenue growth.49Table of ContentsRevenue Per Software Platform Enterprise Client ("Revenue per SPEC"). We define Revenue per SPEC as (i) the total revenue derived from our Software Platform Enterprise Clients in the trailing twelve months to a given period, divided by (ii) Software Platform Enterprise Clients as of the end of that same period. Revenue per SPEC shows how efficiently we are monetizing each SPEC. We expect to increase Revenue per SPEC over time as we enhance our Software Platform and Apps.The following table shows our SPEC and Revenue per SPEC as of December 31, 2022, 2021 and 2020.Twelve Months EndedDecember 31,202220212020SPEC (trailing twelve months)566 380 142 Revenue per SPEC (trailing twelve months) (in thousands)$1,907 $1,634 $1,404 Total Software Transaction Value ("TSTV"). Software Platform Revenue is from third-party clients using our Software Platform to find new customers. We do not recognize revenue from our own spend on our Software Platform. Therefore, we use TSTV to measure the scale and growth rates of our Software Platform as it reflects the total value on our Software Platform including our first-party studios as though they were stand-alone businesses.The following table shows our TSTV for the years ended December 31, 2022, 2021 and 2020.Year EndedDecember 31,202220212020Total Software Transaction Value (in thousands)$1,222,160 $982,248 $295,698 Monthly Active Payers ("MAPs"). We define a MAP as a unique mobile device active on one of our Apps in a month that completed at least one IAP during that time period. A consumer who makes IAPs within two separate Apps on the same mobile device in a monthly period will be counted as two MAPs. MAPs for a particular time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution partners. Some of our Apps do not utilize such third-party attribution partners, and therefore our MAPs figure for any period does not capture every user that completed an IAP on our Apps. We estimate that our counted MAPs generated approximately 98% of our IAP Revenue during the year ended December 31, 2022, and as such, management believes that MAPs are still a useful metric to measure the engagement and monetization potential of our games.Average Revenue Per Monthly Active Payer ("ARPMAP"). We define ARPMAP as (i) the total IAP Revenue derived from our Apps in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP.The following table shows our Monthly Active Payers and Average Revenue Per Monthly Active Payer for the years ended December 31, 2022, 2021 and 2020.Year EndedDecember 31,202220212020Monthly Active Payers (millions)2.3 3.0 1.5 Average Revenue Per Monthly Active Payer$43 $43 $41 Our key metrics are not based on any standardized industry methodology and are not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. The numbers that we use to calculate TSTV, MAP, and ARPMAP are based on internal data. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.Non-GAAP Financial MetricsAdjusted EBITDA and Adjusted EBITDA MarginWe define Adjusted EBITDA for a particular period as net income (loss) before interest expense and loss on settlement of debt, other (income) expense, net (excluding certain recurring items), provision for (benefit from) income taxes, amortization, depreciation and write-offs and as further adjusted for stock-based compensation expense, acquisition-related expense and transaction bonus, publisher bonuses, MoPub acquisition transition services, restructuring costs, impairment and loss on disposal, loss (gain) on extinguishments of acquisition related contingent consideration, non-operating foreign exchange (gain) losses, lease modification and abandonment of leasehold improvements, and change in the fair value of contingent consideration. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period.50Table of ContentsAdjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our financial performance and are also used for internal planning and forecasting purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for 2022, 2021, and 2020, and a reconciliation of net income (loss) to Adjusted EBITDA:Year EndedDecember 31,202220212020(in thousands, except percentages)Net income (loss)$(192,947)$35,338$(125,934)Adjusted as follows:Interest expense and loss on settlement of debt171,863103,17077,873Other (income), net1(18,647)(7,545)(6,183)Provision for (benefit from) income taxes(12,230)10,973(9,772)Amortization, depreciation and write-offs547,084431,063254,951Impairment and loss in connection with sale of long-lived assets127,892——Non-operating foreign exchange (gain) loss(164)(1,537)1,210Stock-based compensation2191,612135,46862,387Acquisition-related expense and transaction bonus21,27916,8877,850Publisher bonuses3209,6353,227—MoPub acquisition transition services46,999——Loss on extinguishments of acquisition related contingent consideration——74,820Lease modification and abandonment of leasehold improvements——7,851Restructuring costs10,834——Change in the fair value of contingent consideration—(230)442Adjusted EBITDA$1,063,210$726,814$345,495Net income (loss) margin(6.8)%1.3%(8.7)%Adjusted EBITDA margin37.7%26.0%23.8%1 Excludes recurring operational foreign exchange gains and losses and write-off investments included in Amortization, depreciation and write-offs.2 The twelve months ended December 31, 2021 includes $2.3 million of bonus compensation settled in stock outside of the scope of ASC 718.3 In association with the MoPub acquisition, we incurred certain costs to incentivize publishers to migrate to our MAX mediation solution, including existing publishers of MoPub as well as publishers on other competitor offerings. We have not historically incurred significant publisher migration costs, nor do we currently intend to incur significant publisher migration costs in the future. As such, we have removed the impact of these costs from Adjusted EBITDA.4 Reflects one-time transition services provided by Twitter to AppLovin.In 2022, 2021 and 2020, our net income (loss) and Adjusted EBITDA included $0.8 million, $1.8 million and $62.0 million, related to the fair value adjustment of the deferred revenue balance assumed as a result of the acquisitions of Adjust in 2021 and Machine Zone in 2020.51Table of ContentsFree Cash FlowWe define Free Cash Flow as net cash provided by operating activities less purchases of property and equipment and principal payment of finance leases. We use Free Cash Flow to help manage the health of our business, prepare budgets and for capital allocation purposes. We believe Free Cash Flow provides useful supplemental information to help investors understand underlying trends in our business and our liquidity. Free cash flow has certain limitations, including that it does not reflect our future contractual commitments. Our definition may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish Free Cash Flow or similar metrics. Thus, our Free Cash Flow should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.The following table provides our Free Cash Flow for 2022, 2021, and 2020, and a reconciliation of net cash provided by operating activities to Free Cash Flow:Year EndedDecember 31,202220212020(in thousands, except percentages)Net cash provided by operating activities$412,773 $361,851 $222,883 Less:Purchase of property and equipment(662)(1,390)(3,241)Principal payments of finance leases(24,083)(15,271)(9,708)Free Cash Flow$388,028 $345,190 $209,934 Net cash used in investing activities$(1,371,468)$(1,214,930)$(679,891)Net cash provided by (used in) financing activities$(526,848)$3,109,546 $377,855 Factors Affecting Our PerformanceWe believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow profitably while maintaining strong cash flow.Continue to invest in innovationWe have made, and intend to continue to make, significant investments in our Core Technologies and Software Platform to enhance their effectiveness and value proposition for our clients. We expect that these investments will require spending on research and development, and acquisitions and partnerships related to technology components and products. We believe investments in our software, including our machine learning engine AXON, AppDiscovery, Adjust, and MAX, will further improve effectiveness for developers. Our investments will also allow us to enter new mobile app sectors outside of gaming. While our investments in research and development and acquisitions and partnerships may not result in revenue in the near term, we believe these investments position us to increase our revenue over time.Retain and grow existing clientsWe rely on existing clients for a significant portion of our revenue. As we improve our Software Platform and Apps, we can attract additional spend from these clients. Our clients include indie studio developers and some of the largest mobile advertising platforms in the world. We believe there is significant room for us to further expand our relationships with these clients and increase their usage of our Software Platform. We have invested in targeted sales and account-based marketing efforts, including through Adjust’s sales and marketing teams, to identify and showcase opportunities to clients and plan to continue to do so in the future.In the past, our clients have generally increased their usage of our Software Platform and Apps, and as a result, growth from existing clients has been a primary driver of our revenue growth. We must continue to retain our existing clients and expand their spend with us over time to continue to grow our revenue, increase profitability and drive greater cash flow.Add new clients globallyOur future success depends in part on our ability to acquire new clients. We recently increased our focus on markets outside the United States to serve the needs of clients globally. In 2022, only 41% of our revenue from Software Platform and IAA Revenue clients was generated from outside of the United States. We believe that the global opportunity is significant and will continue to expand as developers and advertisers outside the United States adopt our Software Platform and advertise on our Apps. We also see opportunities to acquire new clients outside of mobile gaming, as the capabilities of our Core Technologies and Software Platform are relevant to the broader mobile app ecosystem. We are investing in direct sales, product development, education, and other capabilities to drive increased awareness and adoption of our Software Platform and Apps, which investments may impact our profitability in the near term as we seek further scale. We must continue to acquire new clients to grow our revenue, increase profitability, and drive greater cash flow.52Table of ContentsReview of our AppLovin Apps portfolioOver the past several years, our Apps have been critical in providing first-party data and audiences for our Software Platform to enable us to test, design, and scale our technologies. Given the recent development of our technology, the current scale of our Software Platform, and the reach of our MAX solution, we believe we can reduce our reliance on the data from our Apps. Therefore, we are continuing our strategic review and optimization of our Apps portfolio and its cost structure, focusing on how best to optimize each asset’s contribution to our overall financial performance. This review has resulted in the divestiture or closure of certain studios, a reduction of headcount, restructuring of earn out arrangements, and other changes to our Apps portfolio, such as restructuring of certain assets or choosing to make changes to optimize the cost structure of certain Apps rather than investing in revenue growth. For example, we have reduced our user acquisition spend for our portfolio of Apps as we increased our desired return goals, which has led to improved App segment Adjusted EBITDA margin, but also contributed to a decline in revenue and MAPs. While we believe we have made substantial progress on this review, we may take similar actions in the future. We will continue to manage our Apps portfolio for financial return, including investing for growth through new game launches, while remaining open to evaluating opportunities for the retention, restructure, or sale of assets in the future. We believe that our execution of this review, and our ability to optimize the contribution of our Apps portfolio, will affect our revenue growth, profitability, and cash flow.Continued execution of strategic acquisitions and partnershipsWe intend to continue to make strategic acquisitions and enter into strategic partnerships to grow our business. From the beginning of 2018 through December 31, 2022, we have invested nearly $4.0 billion in 29 strategic acquisitions and partnerships with mobile app developers and for technologies to enhance our Software Platform including the acquisition of MAX in 2018, Adjust in April 2021, MoPub in January 2022, and Wurl in April 2022.While we have a strong pipeline of strategic acquisition and partnership opportunities, we believe our future results of operations will be affected by our ability to continue to identify and execute such transactions that are accretive to our growth and profitability.Growth and structure of the mobile app ecosystemOur business and results of operations will be impacted by industry factors that drive overall performance of the mobile app ecosystem. The mobile app ecosystem has been affected by the recent economic uncertainty, including by advertisers more closely managing budgets and reducing overall spend, which has resulted in slowed growth for our Software Platform in recent quarters. We expect that any further slowing, or accelerations of our growth would affect our business and results of operations. In addition, even if the mobile app ecosystem continues to grow at its current rate, our ability to position ourselves within the market will impact our business and results of operations.Mobile app developers, including AppLovin, rely on third-party platforms, such as the Apple App Store and Google Play Store, among others, to distribute games, collect payments made for IAPs, and target users with relevant advertising. We expect this to continue for the foreseeable future. These third-party platforms have significant market power and discretion to set platform fees, select which apps to promote, and decide how much consumer information to provide to advertising networks that enable our Core Technologies and Software Platform to target users with personalized and relevant advertising and allocate marketing campaigns in an efficient and cost-effective manner. Any changes made in the policies of third-party platforms could drive rapid change across the mobile app ecosystem. For example, in April 2021, Apple started implementing its application tracking transparency framework that, among other things, requires users' opt-in consent for certain types of tracking. While this transparency framework has not had a significant impact on our overall business, it may in the future, including with respect to the effectiveness of our advertising practices and/or our ability to efficiently generate revenue for our Apps. We rely in part on Identifier for Advertisers ("IDFA") to provide us with data that helps our Software Platform better market and monetize Apps. In light of the IDFA and transparency changes, we made changes to our data collection practices., To the extent we are unable to utilize IDFA or a similar offering, or if the transparency changes and any related opt-in or other requirements result in decreases in the availability or utility of data relating to Apps, our Software Platform may not be as effective, we may not be able to continue to efficiently generate revenue for our Apps, and our revenue and results of operations may be harmed. Additionally, Apple implemented new requirements for consumer disclosures regarding privacy and data processing practices in December 2020, which has resulted in increased compliance requirements and could result in decreased usage of our Apps. In February 2022, Google announced its Privacy Sandbox initiative for Android, expecting to restrict tracking activity and limit advertisers' ability to collect app and user data across Android devices by the third quarter of 2023. These or any similar changes to the policies of Apple or Google may materially and adversely affect our business, financial condition, and results of operations. To date, these data privacy changes have had some impact on the discoverability of apps across these platforms, though they have had a relatively muted aggregate impact on our overall results of operations.New tools for developers, industry standards, and platforms may emerge in the future. We believe our focus on the mobile app ecosystem has allowed us to understand the needs of our clients and our relentless innovation has enabled us to quickly adapt to changes in the industry and pioneer new solutions. We must continue to innovate and stay ahead of developments in the mobile app ecosystem in order for our business to succeed and our results of operations to continue to improve.53Table of ContentsCurrent Economic Conditions and COVID-19We are subject to risks and uncertainties caused by global economic conditions and events with significant macroeconomic impacts, including but not limited to, the COVID-19 pandemic, the Russian invasion of Ukraine, and actions taken to counter inflation. Inflation, rising interest rates and reduced consumer confidence have caused and may continue to cause our clients to be cautious in their spending. The mobile gaming and app market continue to be affected by cautious advertiser demand, but we believe that demand is stabilizing when compared against the third quarter of 2022. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain. The risks related to our business are further described in the section titled “Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. Ukraine/Russia ConflictAs the Russian invasion of Ukraine continues to evolve, we are closely monitoring the current and potential impact on our business, our people, and our clients. We have taken steps to comply with applicable domestic and international regulatory restrictions on international trade and financial transactions. In connection with our compliance efforts, we have identified active clients and vendors inside Russia and Belarus that are subject to evolving sanctions imposed by the United States and/or the European Union and have terminated or suspended our contracts with them. Revenues associated with clients and vendors in Russia and Belarus are not material to our consolidated financial results, and we anticipate that the termination of Russian and Belarus clients and vendors that are subject to duly authorized sanctions will not have a material impact on our business or other client relationships. Management and our Board of Directors are monitoring the regional and global ramifications of the continuing events. Our cybersecurity teams are continually monitoring for any attacks that could cause disruption to our platform, systems, and networks, which could result in security breaches or data loss, damage to our brand, or reduce demand for our products and services.Components of Results of OperationsRevenueWe generate Software Platform Revenue primarily from fees collected from advertisers spending on AppDiscovery, typically on a performance basis, then shared with our advertising publishers, typically on a cost per impression model. Software Platform Revenue also includes fees generated based on a percentage of client spend through MAX and subscription fees for Adjust's SaaS mobile marketing platform.We generate Apps Revenue from In-App Purchases made by the users within our Apps and from In-App Advertising generated from advertisers that purchase advertising inventory from our diverse portfolio of Apps. IAA Revenue from our Apps was 33%, 31% and 41% of total Apps Revenue in 2022, 2021 and 2020, respectively.Cost of Revenue and Operating ExpensesCost of revenue. Cost of revenue consists primarily of third-party payment processing fees for distribution partners, amortization of acquired technology-related intangible assets, and expenses associated with operating our network infrastructure. Third-party payment processing fees relate to IAP Revenue. The fees for IAPs are processed and collected by third-party distribution partners.Network operating costs include bandwidth, energy, other equipment costs related to our co-located data centers, and costs for third-party cloud service providers. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.Sales and marketing. Sales and marketing expenses consist primarily of user acquisition costs, other advertising expenses, personnel-related expenses for salaries, employee benefits, and stock-based compensation for employees engaged in sales and marketing, and amortization of acquired user-related intangible assets, marketing programs, travel, customer service costs, and allocated facilities and information technology costs.We plan to continue to invest in sales and marketing to grow our Software Platform customer base and increase brand awareness. We also plan to continue to invest in new App launches to the extent we see opportunities for cost-effective growth. As a result, we expect sales and marketing expenses to increase in absolute dollars over the long-term, though they may fluctuate period-over-period in the near term as we reduce our user acquisition spend for our portfolio of Apps. We also expect our sales and marketing expenses as a percentage of revenue to fluctuate period- over-period in the near term as we invest to grow our customer base and increase brand awareness, and to decrease over the long term as we benefit from greater scale.Research and development. Research and development expenses consist primarily of product development costs, including personnel-related expenses for salaries, employee benefits, and stock- based compensation for employees engaged in research and development, professional services costs related to development of new apps by third parties, consulting costs, regulatory compliance costs, and allocated facilities and information technology costs.54Table of ContentsWe plan to continue to invest in research and development to continue to enhance our Core Technologies and Software Platform, and to improve existing games and develop new games. As a result, we expect research and development expenses to increase in absolute dollars over the long-term, though they may fluctuate period-over-period in the near term as we reassess in which areas to focus our investment. We also expect our research and development expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to enhance our Core Technologies and Software Platform and improve our existing Apps and develop new Apps, and to decrease over the long term as we benefit from greater scale.General and administrative. General and administrative expenses consist primarily of costs incurred to support our business, including personnel-related expenses for salaries, employee benefits, and stock-based compensation for employees engaged in finance, accounting, legal, human resources and administration, professional services fees for legal, accounting, recruiting, and administrative services (including acquisition-related expenses), insurance, travel, and allocated facilities and information technology costs.We plan to continue to invest in our general and administrative function to support the growth of our business. In addition, we expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of a public company, increased insurance and investor relations expenses, and increased professional services fees (including acquisition-related expenses). As a result, we expect general and administrative expenses to increase in absolute dollars. We also expect our general and administrative expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to support the growth of our business, and to decrease over the long term as we benefit from greater scale.Other Income and ExpensesInterest expense and loss on settlement of debt. Interest expense and loss on settlement of debt consists primarily of loss related to debt extinguishment, interest expense associated with our outstanding debt, including accretion of debt discount, and changes in fair value of interest rate swap related to the stream of variable interest payments associated with a portion of our outstanding debt.Other income (expense), net. Other income (expense), net, includes interest earned on our cash and cash equivalents, gains and losses related to embedded derivatives and other financial instruments accounted for at fair value, and foreign currency exchange gains (losses), which consist primarily of remeasurement of transactions and monetary assets and liabilities denominated in currencies other than the functional currency at the end of the period.Provision for (benefit from) income taxes. We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have different statutory tax rates than those in the United States. Additionally, certain of our foreign earnings may also be taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, impacts from acquisition restructuring, deduction benefits related to foreign-derived intangible income, future changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss.55Table of ContentsResults of OperationsIn this section, we discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.The following tables summarize our consolidated statement of operations.Years Ended December 31,202220212020(in thousands)Revenue$2,817,058 $2,793,104 $1,451,086 Costs and expensesCost of revenue(1)(2)1,256,065 988,095 555,578 Sales and marketing(1)(2)919,550 1,129,892 627,796 Research and development(1)507,607 366,402 180,652 General and administrative(1)181,627 158,699 66,431 Extinguishments of acquisition-related contingent consideration— — 74,820 Lease modification and abandonment of leasehold improvements— — 7,851 Total costs and expenses2,864,849 2,643,088 1,513,128 Income (loss) from operations(47,791)150,016 (62,042)Other income (expense):Interest expense and loss on settlement of debt(171,863)(103,170)(77,873)Other income (expense), net14,477 (535)4,209 Total other expense(157,386)(103,705)(73,664)Income (loss) before income taxes(205,177)46,311 (135,706)Provision for (benefit from) income taxes(12,230)10,973 (9,772)Net income (loss)$(192,947)$35,338 $(125,934)_______(1)Includes stock-based compensation expense as follows:Years Ended December 31,202220212020(in thousands)Cost of revenue$6,307 $2,335 $982 Sales and marketing41,533 15,224 10,668 Research and development94,319 63,344 36,852 General and administrative49,453 52,274 13,885 Total stock-based compensation$191,612 $133,177 $62,387 _______(2)Includes amortization expense related to acquired intangibles as follows:Years Ended December 31,202220212020(in thousands)Cost of revenue$448,462 $373,726 $228,339 Sales and marketing66,173 22,661 11,587 Total amortization expense related to acquired intangibles$514,635 $396,387 $239,926 56Table of ContentsThe following table sets forth the components of our consolidated statements of operations for each of the periods presented as a percentage of revenue(1):Years Ended December 31,202220212020(in thousands)Revenue100 %100 %100 %Costs and expenses:Cost of revenue45 %35 %38 %Sales and marketing33 %40 %43 %Research and development18 %13 %12 %General and administrative6 %6 %5 %Extinguishments of acquisition-related contingent consideration— %— %5 %Lease modification and abandonment of leasehold improvements— %— %1 %Total costs and expenses102 %95 %104 %Income (loss) from operations(2)%5 %(4)%Other income (expense):Interest expense and loss on settlement of debt(6)%(4)%(5)%Other income (expense), net1 %— %0 %Total other expense(6)%(4)%(5)%Income (loss) before income taxes(7)%2 %(9)%Provision for (benefit from) income taxes— %— %(1)%Net income (loss)(7)%1 %(9)%_______(1)Totals of percentages of revenue may not foot due to rounding.Comparison of Our Results of Operations for the Twelve Months Ended December 31, 2022, 2021 and 2020RevenueYears Ended December 31,2021 to 2022% change2020 to 2021% change202220212020(in thousands, except percentages)Software Platform Revenue$1,049,167 $673,952 $207,285 56 %225 %In-App Purchases Revenue1,179,133 1,458,595 739,934 (19)%97 %In-App Advertising Revenue588,758 660,557 503,867 (11)%31 %Apps Revenue1,767,891 2,119,152 1,243,801 (17)%70 %Total Revenue$2,817,058 $2,793,104 $1,451,086 1 %92 %For the twelve months ended December 31, 2022, our Software Platform Revenue increased by $375.2 million, or 56%, from the prior year period primarily due to AppDiscovery where installations increased 24% and revenue per installation increased 46% compared to the prior year period, as well as our addition of Wurl during the year which contributed 9% of the Software Platform revenue increase, and continued growth in MAX and Adjust. We do not recognize Software Platform Revenue from transactions with our Owned Studios and Partner Studios.For the twelve months ended December 31, 2022, our Apps Revenue decreased by $351.3 million, or 17%, from the prior year period. For the twelve months ended December 31, 2022, our IAP Revenue from Apps decreased by $279.5 million, or 19%, from the prior year period, primarily due to a 21% decrease in the volume of in-app purchases, partially offset by a 2% increase in price per in-app purchase. Our IAA Revenue from Apps decreased $71.8 million, or 11%, compared to the prior year period, due to a 16% decrease in price per advertising impression, partially offset by a 7% increase in the volume of advertising impressions. We do not recognize IAA Revenue from transactions with our Owned Studios and Partner Studios.For the twelve months ended December 31, 2021, our Software Platform Revenue increased by $466.7 million, or 225%, from the prior year period primarily due to AppDiscovery where installations increased 62% and revenue per installation increased 81% compared to the prior year period, as well as our addition of Adjust during the year which contributed 17% of the Software Platform revenue increase. We do not recognize Software Platform Revenue from transactions with our Owned Studios and Partner Studios.57Table of ContentsFor the twelve months ended December 31, 2021, our Apps Revenue increased by $875.4 million, or 70%, from the prior year period. For the twelve months ended December 31, 2021, our IAP Revenue from Apps increased by $718.7 million, or 97%, from the prior year period, primarily due to a 88% increase in the volume of in-app purchases, as well as a 5% increase in price per in-app purchase. Our IAA Revenue from Apps increased $156.7 million, or 31%, due to a 44% increase in the volume of advertising impressions partially offset by a 9% decrease in price per advertising impression compared to the prior year period. We do not recognize IAA Revenue from transactions with our Owned Studios and Partner Studios.Cost of revenueYears Ended December 31,2021 to 2022% change2020 to 2021% change202220212020(in thousands, except percentages)Cost of revenue$1,256,065 $988,095 $555,578 27 %78 %Percentage of revenue45 %35 %38 %Cost of revenue in 2022 increased by $268.0 million, or 27%, compared to 2021. The increase in 2022 was primarily due to an increase of $127.9 million in impairment and loss in connection with the sale of certain assets resulting from our strategic review of the Apps portfolio, an increase in expenses associated with operating our network infrastructure driven by the growth in our Software Platform operations of $126.1 million, and an increase of $82.1 million in depreciation and amortization driven primarily by current-year acquisition activities and the recognition of a full year amortization of intangible assets acquired in 2021, offset by an $88.4 million decrease in third-party payment processing fees as a result of the decline in IAP Revenue.Cost of revenue in 2021 increased by $432.5 million, or 78%, compared to 2020. The increase in 2021 was primarily due to an increase of $199.8 million in third-party payment processing fees as a result of the growth in IAP Revenue, an increase of $153.9 million in depreciation and amortization of technology-related intangible assets driven by an increase in acquisition activity, and an increase in expenses associated with operating our network infrastructure driven by the growth in our operations of $49.7 million.Sales and marketingYears Ended December 31,2021 to 2022% change2020 to 2021% change202220212020(in thousands, except percentages)Sales and marketing$919,550 $1,129,892 $627,796 (19)%80 %Percentage of revenue33 %40 %43 %Sales and marketing expenses in 2022 decreased by $210.3 million, or 19%, compared to 2021 primarily due to a $317.8 million decrease in user acquisition costs, offset by a $57.1 million increase in personnel-related expense primarily due to an increase in stock-based compensation and an increase in headcount from acquisitions, and a $43.1 million increase in depreciation and amortization of user-related intangible assets.Sales and marketing expenses in 2021 increased by $502.1 million, or 80%, compared to 2020 primarily due to a $432.8 million increase in user acquisition costs, a $23.2 million increase in personnel-related expenses primarily due to an increase in stock-based compensation as a result of higher fair value in our common stock and increase in headcount, and a $28.0 million increase in professional service fees.Research and developmentYears Ended December 31,2021 to 2022% change2020 to 2021% change202220212020(in thousands, except percentages)Research and development$507,607 $366,402 $180,652 39 %103 %Percentage of revenue18 %13 %12 %Research and development expenses in 2022 increased by $141.2 million, or 39%, compared to 2021. The increase was primarily due to an increase of $70.5 million in professional services costs related to development of new games by third parties and an increase of $62.5 million in personnel-related expenses related to an increase in stock-based compensation expense as a result of an increase in headcount.Research and development expenses in 2021 increased by $185.8 million, or 103%, compared to 2020. The increase was primarily due to an increase of $109.9 million in professional services costs related to development of new games by third parties and an increase of $66.1 million in personnel-related expenses related to an increase in stock-based compensation as a result of higher fair value in our common stock and an increase in headcount.58Table of ContentsGeneral and administrativeYears Ended December 31,2021 to 2022% change2020 to 2021% change202220212020(in thousands, except percentages)General and administrative$181,627 $158,699 $66,431 14 %139 %Percentage of revenue6 %6 %5 %General and administrative expenses in 2022 increased by $22.9 million, or 14% compared to 2021. The increase was primarily due to an increase of $12.7 million in acquisition-related costs, an increase of $3.1 million in professional services costs primarily associated with audit, tax, and legal support, and an increase of $3.0 million in bad debt expense.General and administrative expenses in 2021 increased by $92.3 million, or 139% compared to 2020. The increase was primarily due to an increase of $65.4 million in personnel-related expenses related to an increase in stock-based compensation expense as a result of higher fair value in our common stock and an increase in headcount to support our growth and an increase of $12.4 million in professional services costs primarily associated with audit, tax, and legal support.Interest expense and loss on settlement of debtYears Ended December 31,2021 to 2022% change2020 to 2021% change202220212020(in thousands, except percentages)Interest expense and loss on settlement of debt$(171,863)$(103,170)$(77,873)67 %32 %Percentage of revenue(6)%(4)%(5)%In 2022, interest expense and loss on settlement of debt increased by $68.7 million, or 67%, compared to 2021. This increase was primary due to an increase of $86.9 million in interest expense related to an increase in the term loan balance and increase in LIBOR during the period, partially offset by a loss on the settlement of term loans of $16.9 million during the prior year period.In 2021, interest expense and loss on settlement of debt increased by $25.3 million, or 32%, compared to 2020. The increase was primarily due to a loss on the settlement of term loans of $16.9 million during the period.Other income (expense), netYears Ended December 31,2021 to 2022% change2020 to 2021% change202220212020(in thousands, except percentages)Other income (expense), net$14,477 $(535)$4,209 **(113)%Percentage of revenue1 %— %— %** Not meaningfulIn 2022, other income (expense), net increased by $15.0 million compared to 2021. The increase was primarily due to an increase in interest income of $14.0 million.In 2021, other income (expense), net decreased by $4.7 million, or 113% compared to 2020. The decrease was primarily due to the write-off of an investment in non-marketable securities of $10.0 million, third-party cost incurred for the amendment of term loans of $3.7 million, and a fair value remeasurement loss of $2.0 million, which were partially offset by an unrealized gain of $4.7 million related to marketable equity securities, $3.9 million in net foreign exchange gains, and a fair value remeasurement gain related to term loan embedded derivative of $2.0 million.59Table of ContentsProvision for (benefit from) Income TaxesYears Ended December 31,2021 to 2022% change2020 to 2021% change202220212020(in thousands, except percentages)Provision for (benefit from) income taxes$(12,230)$10,973 $(9,772)(211)%(212)%Percentage of revenue— %— %(1)%In 2022, benefit for income taxes increased by $23.2 million or 211% compared to 2021. The increase in tax benefit was driven by an increase of $52.7 million due to the tax impact on the pre-tax loss of $205.2 million in 2022 as compared to $46.3 million of pre-tax income in 2021, an increase of $14.7 million related to capital loss, an increase of $7.2 million due to higher foreign-derived intangible income deduction, and an increase of $5.1 million due to higher research and development credit, offset by a decrease of $30.1 million related to decrease in stock option deduction, a decrease of $15.7 million due to higher US-foreign rate differential, a decrease of $5.6 million due to higher foreign income inclusion and a decrease of $5.2 million due to higher valuation allowance. In 2021, we recognized tax provision of $11.0 million as compared to the tax benefit of $9.8 million, a change of $20.7 million, or 212% compared to 2020. The increase in tax provision was driven by an increase of $38.0 million due to higher pre-tax income in 2021, an increase of $15.9 million due to higher valuation allowance, an increase of $6.0 million due to change in foreign deferred tax rate in 2020, a decrease of $2.6 million due to foreign loss inclusion, a decrease of $19.2 million due to excess tax benefit for stock-based compensation, a decrease of $6.9 million due to higher foreign-derived intangible income deduction, and a decrease of $12.2 million due to a disallowed deduction for extinguishments of acquisition-related contingent considerations in 2020.Comparison of our Segment Results of OperationsThe following table presents the results for our Software Platform and Apps segment adjusted EBITDA for the periods indicated: Years Ended December 31, 2021 to 2022 % change2020 to 2021 % change202220212020(in thousands, except percentages)Software Platform Adjusted EBITDA$808,415 $457,302 $121,114 77 %278 %Apps Adjusted EBITDA$254,795 $269,512 $224,381 (5)%20 %Twelve Months Ended December 31, 2022 Compared to Twelve Months Ended December 31, 2021The $351.1 million, or 77%, increase in Software Platform Adjusted EBITDA for 2022 was primarily driven by an increase in Software Platform revenue of $375.2 million, partially offset by an increase of $123.9 million in expenses associated with our network infrastructure and an increase of $74.3 million in personnel-related expenses related to an increase in headcount primarily due to the acquisitions of Adjust and Wurl. In addition, Software Platform Adjusted EBITDA for 2022 has been adjusted to exclude one-time publisher bonuses of $209.6 million for the year ended December 31, 2022.The $14.7 million, or 5%, decrease in Apps Adjusted EBITDA for 2022 was primarily driven by a decrease in Apps Revenue of $351.3 million and a $73.0 million increase in professional services costs related to development of new apps by third parties, partially offset by a $317.6 million decrease in user acquisition costs, and a $88.4 million decrease in third-party payment processing fees paid associated with in-app purchases.Twelve Months Ended December 31, 2021 Compared to Twelve Months Ended December 31, 2020The $336.2 million, or 278%, increase in Software Platform Adjusted EBITDA for the twelve months ended December 31, 2021 was primarily driven by an increase in Software Platform revenue of $466.7 million, partially offset by an increase of $43.7 million in expenses associated with operating our network infrastructure and an increase of $52.3 million in personnel-related expenses related to an increase in headcount primarily due to the acquisition of Adjust. The $45.1 million, or 20%, increase in Apps Adjusted EBITDA for the twelve months ended December 31, 2021 was primarily driven by an increase in Apps Revenue of $875.4 million, partially offset by a $432.6 million increase in user acquisition costs, a $199.8 million increase in third-party payment processing fees paid associated with in-app purchases, a $151.6 million increase in costs primarily related to the development of new games by third parties, and a $31.8 million increase in personnel-related expenses related to an increase in stock-based compensation expense as a result of higher fair value in our common stock and an increase in headcount.60Table of ContentsLiquidity and Capital ResourcesSince inception, we have financed our operations primarily through payments received from clients using our Software Platform and advertising on our Apps, and from user IAPs from our Apps, and through net proceeds we received from the sales of our convertible preferred stock and of our Class A common stock in our initial public offering and debt borrowings, including borrowings made under our credit agreement. As of December 31, 2022, we had cash and cash equivalents of $1.1 billion.We believe that our existing cash and cash equivalents would be sufficient to satisfy our anticipated working capital and capital expenditures needs for at least the next 12 months. Our future capital requirements, however, will depend on many factors, including our growth rate; sales and marketing activities; timing and extent of spending to support our research and development efforts; capital expenditures to purchase hardware and software; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in teams and technologies, including intellectual property rights, which could increase our cash requirements. For example, in 2022, we acquired MoPub and Wurl, which reduced our year-end 2022 cash balance by $1.3 billion. As a result of these and other factors, we may be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing from outside sources is required, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.The following table summarizes our cash flows for the periods indicated:Years Ended December 31,202220212020(in thousands)Net cash provided by operating activities$412,773 $361,851 $222,883 Net cash used in investing activities$(1,371,468)$(1,214,930)$(679,891)Net cash (used in) provided by financing activities$(526,848)$3,109,546 $377,855 Operating ActivitiesNet cash provided by operating activities was $412.8 million for 2022, primarily consisting of $192.9 million of net loss, adjusted for certain non-cash items, which included $547.1 million of amortization, depreciation and write-offs, $191.6 million of stock-based compensation expense, $127.9 million of impairment charges and losses on disposal of assets, $17.1 million of change in operating right of use asset, and $12.7 million of amortization of debt issuance costs and discount partially offset by a net increase in the operating assets and liabilities of $292.4 million. The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable and other assets, and a decrease in operating lease liabilities, deferred revenue and accrued and other liabilities, partially offset by higher accounts payable.Net cash provided by operating activities was $361.9 million for 2021, primarily consisting of $35.3 million of net income, adjusted for certain non-cash items, which included $431.1 million of amortization, depreciation and write-offs, $133.2 million of stock-based compensation expense, $26.3 million of change in operating right of use asset, $18.2 million of loss on settlement of debt, $8.8 million of net unrealized gains on fair value remeasurement of financial instruments, and $12.8 million of amortization of debt issuance costs and discount, partially offset by a net increase in the operating assets and liabilities of $284.3 million. The net increase in the operating assets and liabilities was primarily driven by an increase in accounts receivable, prepaid expenses and other current assets and decrease in operating lease liabilities partially offset by higher accounts payable and accrued and other liabilities.Investing ActivitiesNet cash used in investing activities was $1.4 billion for 2022, primarily consisting of $1.3 billion related to acquisitions, $66.3 million in purchases of non-marketable investments and other, partially offset by $37.0 million in proceeds from sale of long-lived assets.Net cash used in investing activities was $1.2 billion for 2021, primarily consisting of $1.2 billion related to acquisitions, $15.0 million in purchases of non-marketable investments and other and $12.0 million in proceeds from other investing activity.Financing ActivitiesNet cash used in financing activities was $526.8 million for 2022, primarily consisting of $338.9 million of common stock repurchases, deferred acquisition costs of $124.2 million, payments for withholding taxes related to net share settlement of restricted stock units of $27.5 million, payments for the principal repayment of debt of $25.8 million, and payments for finance leases of $24.1 million, partially offset by $25.5 million in proceeds from exercise of stock awards.Net cash provided by financing activities was $3.1 billion for 2021, primarily consisting of $1.7 billion of proceeds from issuance of common stock in our initial public offering, net of issuance costs as adjusted for cost reimbursement, $2.3 billion of proceeds from debt issuance and $31.2 million proceeds from exercise of stock awards partially offset by payments for the principal repayment of debt of $719.8 million, deferred acquisition costs of $234.1 million and finance leases of $15.3 million.61Table of ContentsCredit AgreementAs of December 31, 2022, our total outstanding indebtedness under the Amended Credit Agreement with the lenders party thereto and Bank of America, N.A. serving as the administrative agent consisted of $3.25 billion of outstanding term loans with $33.3 million due within twelve months. This amount is exclusive of interest payments which vary based on the fluctuations in the interest rate index. Additionally, the Amended Credit Agreement provides a Revolving Credit Facility with a borrowing capacity of $600.0 million. There were no borrowings drawn from the Revolving Credit Facility as of December 31, 2022. For additional information on the Credit Agreement, see Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Contractual ObligationsOur material cash requirements include the following contractual obligations.Deferred Acquisition CostsAs of December 31, 2022, we had accrued certain deferred acquisition costs of $31.0 million, with the entire amount payable within twelve months. These costs represent part of the consideration related to games acquired in asset acquisition transactions. Refer to "Contingent Consideration" below for additional information.Operating LeasesAs of December 31, 2022, we have non-cancellable commitments for real estate leases and leases of certain networking equipment colocation space with fixed lease payment obligations of $77.0 million, with $17.3 million payable within twelve months. For additional information, see Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Finance LeasesAs of December 31, 2022, we have non-cancelable payments related to finance leases of certain networking equipment of $72.8 million, with $25.0 million payable within twelve months. For additional information, see Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.License Asset ObligationAs of December 31, 2022, we have an obligation related to certain intellectual property that we licensed from a third party of $45.8 million, with $15.3 million payable within twelve months.Non-cancelable purchase obligationsAs of December 31, 2022, we have non-cancellable purchase obligations, which primarily consist of a certain arrangement related to cloud platform services, of $480.6 million, with $210.7 million payable within twelve months. Wurl Acquisition ObligationsIn April 2022, we completed our acquisition of Wurl, a software platform company in the connected TV market for $378.2 million, which includes a deferred payment of $22.7 million to be paid in October 2023, less any eligible claims against the deferred payment.Investment CommitmentsDuring the years ended December 31, 2022 and 2021, we invested or committed to invest in certain private equity funds. As of December 31, 2022 these unfunded commitments were $50.1 million, which may be called from time to time by the funds.62Table of ContentsContingent ConsiderationSeveral of the definitive agreements governing our acquisitions of our Owned Studios and arrangements with Partner Studios provide for payment contingent upon future performance metrics. These contingent consideration arrangements include payouts based on a percentage of revenue or profitability metrics, payouts of fixed amounts based on the achievement of certain operating targets, and revenue share arrangements for specific apps, and some of these arrangements do not have a maximum limit of contingent consideration achievable. Because these contingent consideration arrangements are based on the success of relevant Apps and are not guaranteed, we do not expect our results of operations would be materially and adversely effected by the payment of amounts under any such arrangement. The table below presents a summary of the significant contingent consideration arrangements:Relevant TransactionContingent Consideration SummaryRecoded asset acquisition (January 2019)Future one-time earn-out payments, based on a service agreement, of either $60.0 million or $30.0 million per game depending on the nature of the new game App developed, subject to the achievement of a certain monthly revenue milestone in the initial thirty-six months following the launch of a new game App. The term of the service agreement is initially three years, after which time the agreement is terminable by either party upon thirty days’ written notice. We are also required to make future one-time earn-out payments, based on a development agreement during the term of six years, of $10.0 million to each of two additional new game Apps developed, subject to the achievement of the same monthly revenue milestone in the initial thirty-six months following the launch of such game Apps.Samfinaco Games asset acquisition(August 2019)Future earn-out payments for each of the four years from the date of the transaction based on the greater of (i) a predetermined percentage of revenue or (ii) a predetermined percentage of earnings before interest, taxes, depreciation and amortization generated by the acquired game Apps over each such year. We are also required to make future earn-out payments based on performance metrics of the newly developed game Apps which are similar to the performance metrics of the initially acquired mobile game Apps during the four years from the date of the transaction.Zenlife asset acquisition(June 2020)Future earn-out payments for each of the four years from the date of the transaction based on the excess, if any, of revenue generated by the initially acquired game App for such year above the sum of (i) an annual fixed baseline revenue and (ii) the aggregate earn-out payments made in prior years. We are also required to make future earn-out payments for newly developed game Apps determined under the similar approach as for the initially acquired mobile game Apps.Athena acquisition (November 2020)Future earn-out payments for each of the four years from the date of the transaction based on (i)(a) the revenue generated by the initially acquired game Apps in each such year in excess of (b) a certain revenue threshold, multiplied by (ii) a predetermined revenue multiple.Asset acquisition (April 2021)Future earn-out payments are contingent on the revenue generated by the acquired mobile Apps exceeding a certain revenue threshold, which will be measured and payable (if applicable) each year for four years from the date of the transaction.Asset acquisition (April 2021)As amended in 2022, future earn-out payments are contingent on the earnings before interest, taxes, depreciation and amortization ("EBITDA") generated by the acquired mobile Apps.For acquisitions of Owned Studios that are accounted for as business combinations, contingent consideration is initially recognized at fair value. For our other transactions, we generally recognize contingent consideration only on the date when the related performance metrics are achieved. For additional information, see Notes 2 and 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.As of December 31, 2022, we had recorded liabilities of $19.1 million related to uncertain tax positions. Due to uncertainties in the timing of potential tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonable estimate of the timing of payments in individual years particularly beyond 12 months. As a result, this amount is not included in the table above.63Table of ContentsIn April 2020, we entered into a share purchase agreement with Redemption Games, Inc. (Redemption Games). We purchased a majority of the outstanding common stock of Redemption Games and entered into agreements with the equity holders of Redemption Games that, among other things, provide for call/put rights whereby such holders can elect to require us to purchase all or a portion of their vested securities on a specified date in February of each year from 2022 to 2025 and we can require such holders to sell to us all of their remaining securities on or after February 19, 2025, each for a purchase price per share of the then current fair market value per share of common stock of Redemption Games. In 2022, we disposed all of the common stock shares of Redemption Games and such call/put rights were terminated without having been exercised. Critical Accounting Policies and EstimatesThe preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. We base our estimates on assumptions, both historical and forward-looking, that are believed to be reasonable. On an ongoing basis, we evaluate our estimates and assumptions. These estimates are inherently subject to judgment and actual results could differ materially from those estimates. We believe that the following critical accounting policies reflect the more significant judgments, estimates and assumptions used in the preparation of our consolidated financial statements. For additional information, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Revenue from Contracts with CustomersWe generate Software Platform and Apps revenue. Software Platform revenue is generated primarily from fees collected from advertisers and advertising networks who use our Software Platform. We generate Apps revenue from In-App Purchases ("IAP") generated from in-app purchases (“IAPs”) made by users within our apps (“Apps”) and In-App Advertising ("IAA") generated from advertisers that purchase ad inventory from Apps.Software Platform RevenueThe vast majority of the Software Platform Revenue is generated through AppDiscovery and MAX, which provides the technology to match advertisers and owners of digital advertising inventory (“Publishers”) via auctions at large scale and microsecond-level speeds. The terms for all mobile advertising arrangements are governed by our terms and conditions and generally stipulate payment terms of up to 60 days subsequent to the end of the month. Substantially all of our contracts with customers are fully cancellable at any time or upon a short notice.Software Platform Revenue is generated by placing ads on mobile applications owned by Publishers. Our performance obligation is to provide customers with access to the Software Platform, which facilitates the advertiser’s purchase of ad inventory from Publishers. We do not control the ad inventory prior to its transfer to the advertiser, because we do not have the substantive ability to direct the use of nor obtain substantially all of the remaining benefits from the ad inventory. We are not primarily responsible for fulfillment and does not have any inventory risk. We are an agent as it relates to the sale of third-party advertising inventory and presents revenue on a net basis. The transaction price is the product of either the number of completions of agreed upon actions or advertisements displayed and the contractually agreed upon price per advertising unit with the advertiser less consideration paid or payable to Publishers. We recognize Software Platform Revenue when the agreed upon action is completed or when the ad is displayed to users. The number of advertisements delivered and completions of agreed upon actions is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.Software Platform Revenue also includes revenue generated by our mobile application tracking and attribution solutions that is recognized ratably over the subscription period generally up to twelve months.Apps RevenueIAP RevenueIAP Revenue includes fees collected from users to purchase virtual goods to enhance their gameplay experience. The identified performance obligation is to provide users with the ability to acquire, use, and hold virtual items over the estimated period of time the virtual items are available to the user or until the virtual item is consumed. Payment is required at the time of purchase, and the purchase price is a fixed amount. Users make IAPs through our distribution partners. The transaction price is equal to the gross amount charged to users because we are the principal in the transaction. IAPs fees are non-refundable. Such payments are initially recorded as deferred revenue. We categorize virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action in gameplay; accordingly, we recognize revenue from the sale of consumable virtual goods as the goods are consumed. Durable virtual goods represent goods that are accessible to the user over an extended period of time; accordingly, we recognize revenue from the sale of durable virtual goods ratably over the period of time the goods are available to the user, which is generally the estimated average user life (“EAUL”). The EAUL represents our best estimate of the expected life of paying users for the applicable game. The EAUL begins when a user makes the first purchase of durable virtual goods and ends when a user is determined to be inactive. We determine 64Table of Contentsthe EAUL on a game-by-game basis. For a newly launched game with limited playing data, we determine the EAUL based on the EAUL of a game with sufficiently similar characteristics. We determine the EAUL on a quarterly basis and applies such calculated EAUL to all bookings in the respective quarter. Determining the EAUL is subjective and requires management’s judgment. Future playing patterns may differ from historical playing patterns, and therefore the EAUL may change in the future. The EAULs are generally between six and nine months.IAA RevenueIAA Revenue is generated by selling ad inventory on our Apps to third-party advertisers. Advertisers purchase ad inventory either through the Software Platform or through third-party advertising networks (“Ad Networks”). Revenue from the sale of ad inventory through Ad Networks is recognized net of the amounts retained by Ad Networks as we are unable to determine the gross amount paid by the advertisers to Ad Networks. We recognize revenue when the ad is displayed to users.Asset Acquisitions and Business CombinationsWe perform an initial test to determine whether substantially all of the fair value of the gross assets transferred are concentrated in a single identifiable asset or a group of similar identifiable assets, such that the acquisition would not represent a business. If that test suggests that the set of assets and activities is a business, we then perform a second test to evaluate whether the assets and activities transferred include inputs and substantive processes that together, significantly contribute to the ability to create outputs, which would constitute a business. If the result of the second test suggests that the acquired assets and activities constitute a business, we account for the transaction as a business combination.For transactions accounted for as business combinations, we allocate the fair value of acquisition consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. Acquisition consideration includes the fair value of any promised contingent consideration. The excess of the fair value of acquisition consideration over the fair values of acquired identifiable assets and liabilities is recorded as goodwill. Contingent consideration is remeasured to its fair value each reporting period with changes in the fair value of contingent consideration recorded in general and administrative expenses. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates and assumptions in valuing certain identifiable intangible assets include, but are not limited to, forecasted revenue and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions and subject to revision when we receive final information, including appraisals and other analyses. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Acquisition-related costs are expensed as incurred.For transactions accounted for as asset acquisitions, the cost, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values. We generally include contingent consideration in the cost of the assets acquired only when the uncertainty is resolved. We recognize contingent consideration adjustments to the cost of the acquired assets prospectively using the straight-line method over the remaining useful life of the assets. No goodwill is recognized in asset acquisitions.Services and Development AgreementsWe enter into strategic agreements with Partner Studios. We have historically allowed these Partner Studios to continue their operations with a significant degree of autonomy. In some cases, we bought Apps from Partner Studios and entered into service and development agreements whereby Partner Studios provide support in improving existing Apps and developing new Apps. The substantial majority of payments associated with service agreements for existing Apps are expensed to research and development when the services are rendered as the payments primarily relate to developing enhancements for the Apps. Payments for new Apps associated with development agreements are generally made in connection with the development of a particular App, and therefore, we are subject to development risk prior to the release of the App. Accordingly, payments that are due prior to completion of an App are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of an App are generally capitalized and expensed as cost of revenue. For additional information, see Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Software Development CostsWe incur development costs related to internal-use software and the development of Apps. We review software development costs on a quarterly basis to determine if the costs qualify for capitalization. As a result of an agile and iterative development process, the preliminary project stage remains ongoing until just prior to launch, at which time final feature selection occurs. As such, software development costs do not meet the criteria for capitalization and are expensed as incurred to research and development expenses. The software development costs we capitalized during the years ended December 31, 2022 and 2021 were insignificant. We did not capitalize any software development costs during the year ended December 31, 2020 65Table of ContentsGoodwillGoodwill is allocated to reporting units and tested for impairment on an annual basis during the fourth quarter or more frequently if we believe indicators of impairment exist. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. When conducting quantitative annual goodwill impairment assessments, we compare the fair value of its reporting units to their carrying value. If the carrying value of a reporting unit exceeds its fair value, then we record a goodwill impairment. Commencing January 1, 2019, the lesser of (i) the entire amount by which the carrying value of a reporting unit exceeds its fair value or (ii) the carrying value of goodwill allocated to such reporting unit is recorded as an impairment to goodwill. As of December 31, 2022, 2021 and 2020, no impairment of goodwill has been identified.Intangible AssetsThis consists of identifiable intangible assets, primarily Apps, user base, developed technology, customer relationships and intellectual property licenses resulting from acquisitions. Acquired intangible assets are recorded at cost, net of accumulated amortization. Our estimates of useful lives of intangible assets are based on cash flow forecasts which incorporate various assumptions, including forecasted user acquisition costs, user attrition rates and level of user engagement.Intangible assets also include costs of intellectual property that we license from third parties for use of their content in our game. The licensing agreements include license payments, which are due over the terms of the agreements. We recognize these license payments as a license asset and a license obligation at the fair value on the contract date, based on a discounted cash flow model. The amortization of the licensed asset commences when the game with licensed content is launched and when licensed agreement is executed; and is recorded in cost of revenue on a straight-line method over the remaining license terms or estimated useful life of the game with licensed content, whichever is shorter. The classification of the license obligations between current and long-term is based on the expected timing of the payments to the licensor.Impairment of Long-Lived AssetsWe review long-lived assets for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. If such circumstances are present, we assess the recoverability of the long-lived assets by comparing the carrying value to the undiscounted future cash flows associated with the related assets. If the future net undiscounted cash flows are less than the carrying value of the assets, the assets are considered impaired and an expense equal to the amount required to reduce the carrying value of the assets to the estimated fair value is recorded as an impairment of intangible assets in the consolidated statements of operations. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if future operating results do not meet current forecasts, we may be required to record future impairment charges for acquired intangible assets. Additional factors which significantly affect future cash flows related to long-lived assets include, but are not limited to, forecasted user acquisition costs, user attrition rates, and level of user engagement. Significant changes in these factors may require us to reassess recoverability of long-lived assets and record impairment. Impairment charges could materially decrease future net income and result in lower asset values on our consolidated balance sheet. There were no material impairment charges related to long-lived assets that are held and used for the years ended December 31, 2022, 2021 and 2020.We classify an asset as held for sale when we commit to a formal plan to sell the asset and the sale is expected to be completed within one year. Upon classification as held for sale, we recognize the asset at the lower of its carrying value or its estimated fair value, less costs to sell. In addition, we cease to record depreciation or amortization for assets that are classified as held for sale. During the year ended December 31, 2022, we classified certain assets within our Apps reportable segment as held for sale and recognized a total impairment charge of $53.0 million in cost of revenue in our consolidated statements of operations. During the same period, we also recorded a total net loss of $74.9 million as a result of the sale of certain assets within our Apps reportable segment in cost of revenue in our consolidated statements of operations. No assets were classified as held for sale or sold in 2021 or 2020. Income TaxesWe account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.We recognize deferred tax assets to the extent that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset valuation allowance would be made to reduce the provision for income taxes.66Table of ContentsWe record uncertain tax positions on the basis of a two-step process in which determinations are made (i) whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with a tax authority.We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in our consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.Recent Accounting PronouncementsSee Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position included in this Annual Report on 10-K.Item 7A. Quantitative and Qualitative Disclosures About Market RiskWe are exposed to market risks in the ordinary course of our business, which primarily relate to fluctuations in interest rates and foreign exchange.Interest Rate Fluctuation RiskAs of December 31, 2022, we had unrestricted cash and cash equivalents of $1.08 billion. A hypothetical 100 basis point increase in interest rates would not have a material impact on our financial condition or results of operations due to the short-term nature of our cash equivalents.As of December 31, 2022, we had a debt balance of $3.25 billion. We have entered, and in the future may enter, into interest rate swaps to manage interest rate risk on a whole, or a portion, of our outstanding debt. In 2022, we entered into a receive-variable and pay-fixed interest rate swap that allows us to effectively mitigate the impact of an increase in interest rates on a notional amount of $1.8 billion of the outstanding debt balance as of December 31, 2022. With respect to our outstanding borrowings subject to variable interest rates at December 31, 2022, a hypothetical 100 basis point increase in interest rate would have increased the Company’s annual interest expense by approximately $15.1 million.We cannot predict market fluctuations in interest rates and their impact on our debt, nor can there be any assurance that long-term fixed-rate debt will be available at favorable rates, if at all. Consequently, future results may differ materially from estimated results due to adverse changes in interest rates.Foreign Currency Exchange RiskTranslation ExposureWe are exposed to foreign exchange rate fluctuations as we translate the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the translating adjustments resulting from the conversion of our foreign subsidiaries’ financial statements into U.S. dollars would result in a gain or loss recorded as a component of accumulated other comprehensive income (loss), which is part of stockholders’ equity (deficit).67Table of Contents

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+Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)•the announcement in November 2022 of the signing of the Agri-Commodity Sector Roadmap, an agreement which aims to remove deforestation from supply chains by 2025 while protecting global food systems and producer livelihoods, an important step toward putting the global economy on a 1.5C trajectory through forest positive action Sustainability is a key driver of ADM’s expanding portfolio of environmentally responsible, plant-derived products. Consumers today increasingly expect their food and drink to come from sustainable ingredients, produced by companies that share their values and ADM is continually finding new ways to meet those needs through its portfolio actions.The Company’s strategic transformation is focused on three strategic pillars: Productivity, Innovation, and Culture.The Productivity pillar includes (1) advancing the roles of the Company’s Centers of Excellence in procurement, supply chain, and operations to deliver additional efficiencies across the enterprise; (2) continued roll out of the 1ADM business transformation program and implementation of improved standardized business processes; and (3) increased use of technology, analytics, and automation at production facilities, in offices, and with customers.Innovation activities include expansions and investments in (1) improving the customer experience, including leveraging producer relationships and enhancing the use of state-of-the-art digital technology to help customers grow; (2) sustainability-driven innovation, which encompasses the full range of products, solutions, capabilities, and commitments to serve customers’ needs; and (3) growth initiatives, including organic growth to support additional capacity and meet growing demand, and mergers and acquisitions opportunities.The Culture pillar focuses on enabling collaboration, teamwork, and agility from process standardization and digitalization and ADM’s DE&I work which brings new perspectives and expertise to the Company’s decision-making. ADM will support the three pillars with investments in technology, which include expanding digital capabilities and investing further in product research and development. All of these efforts will continue to be strengthened by the Company’s ongoing commitment to Readiness.Operating Performance IndicatorsThe Company’s Ag Services and Oilseeds operations are principally agricultural commodity-based businesses where changes in selling prices move in relationship to changes in prices of the commodity-based agricultural raw materials. As a result, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. Therefore, changes in revenues of these businesses do not necessarily correspond to the changes in margins or gross profit. Thus, gross margins per volume or metric ton are more meaningful than gross margins as percentage of revenues.The Company’s Carbohydrate Solutions operations and Nutrition businesses also utilize agricultural commodities (or products derived from agricultural commodities) as raw materials. However, in these operations, agricultural commodity market price changes do not necessarily correlate to changes in cost of products sold. Therefore, changes in revenues of these businesses may correspond to changes in margins or gross profit. Thus, gross margin rates are more meaningful as a performance indicator in these businesses.The Company has consolidated subsidiaries in more than 70 countries. For the majority of the Company’s subsidiaries located outside the United States, the local currency is the functional currency except certain significant subsidiaries in Switzerland where Euro is the functional currency, and Brazil and Argentina where U.S. dollar is the functional currency. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods. For the majority of the Company’s business activities in Brazil and Argentina, the functional currency is the U.S. dollar; however, certain transactions, including taxes, occur in local currency and require remeasurement to the functional currency. Changes in revenues are expected to be correlated to changes in expenses reported by the Company caused by fluctuations in the exchange rates of foreign currencies, primarily the Euro, British pound, Canadian dollar, and Brazilian real, as compared to the U.S. dollar.29Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)The Company measures its performance using key financial metrics including net earnings, gross margins, constant currency revenue and operating profit, segment operating profit, adjusted segment operating profit, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, manufacturing expenses, selling, general, and administrative expenses, return on invested capital, economic value added, and operating cash flows before working capital. The Company’s financial results can vary significantly due to changes in factors such as fluctuations in energy prices, weather conditions, crop plantings, government programs and policies, trade policies, changes in global demand, general global economic conditions, changes in standards of living, and global production of similar and competitive crops. Due to these unpredictable factors, the Company undertakes no responsibility for updating any forward-looking information contained within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”Operations in Ukraine and RussiaADM employs approximately 640 people in Ukraine and operates an oilseeds crushing plant, a grain port terminal, inland and river silos, and a trading office. Most of the facilities have been temporarily idled since February 24, 2022, some of which were brought back online during the quarter ended September 30, 2022, due in part to the opening of the Black Sea grain export corridor. The Company’s footprint in Russia is limited to operations related to the production and transport of essential food commodities and ingredients.On February 24, 2022, Russian troops invaded Ukraine. While the Company’s Ukraine and Russian operations have historically represented less than 1.0% of consolidated revenues, the direct and indirect impacts of the ongoing military action could negatively affect ADM’s future operating results. The conflict in Ukraine has created disruptions in global supply chains and has created dislocations of key agricultural commodities. The indirect impact of these dislocations on the Company’s operating results will be a function of a number of variables including supply and demand responses from the rest of the world as well as the length of the conflict and the condition of the agricultural industry and export infrastructure after the conflict ends. For more information, refer to Part I, Item 1A, “Risk Factors”. As of December 31, 2022, ADM’s assets in Ukraine consisted primarily of current assets that were less than 1% of the Company’s total current assets and an immaterial amount of non-current assets. Of the total current assets in Ukraine, majority related to inventories that represented less than 1% of ADM’s total inventories. 30Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)This section of the Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.Market Factors Influencing Operations or Results in the Twelve Months Ended December 31, 2022 The Company is subject to a variety of market factors which affect the Company’s operating results. In Ag Services and Oilseeds, strong global demand continued due to a short crop in South America. The conflict in Ukraine resulted in even tighter global stocks of commodities and created high volatility, which had a positive impact on North and South American origination prices. Global Trade results were driven by market disconnects, tight supply, strong destination marketing margins, and firm ocean freight rates. North American origination was negatively impacted by weather-related supply disruption and delayed planting and lower river levels. Crushing margins continued to benefit from strong protein and renewable diesel demand and tight oilseeds stocks. In Refined Products and Other, margins were driven by strong oil demand and tight supply with volatile energy markets driving up biodiesel margins. In Carbohydrate Solutions, demand for starches and sweeteners was solid with margins remaining steady despite higher input costs. Ethanol demand for domestic gasoline was lower, in part due to high gas prices, while export demand remained strong, driven by favorable blending economics and government incentives. Corn milling margins benefited from strong co-product results, as prices for oil and feed products rose in line with higher underlying corn prices. Corn costs were volatile and higher, in part due to a relatively low projected corn stocks-to-use ratio and uncertainty caused by the conflict in Ukraine. Nutrition benefited from overall strong demand in various food, beverage, and dietary supplement categories. In Human Nutrition, demand for flavors, flavor systems, specialty proteins, bioactives, and fibers was strong, but higher energy, transportation, and raw material costs, and a strong U.S. dollar adversely impacted results. In Animal Nutrition, amino acids pricing and margins improved due to a tighter global supply environment but the devaluation of certain currencies, a bird flu outbreak, and weak demand in other product lines, with some premix and additives customers cutting products out of formulation due to increased ingredient, freight, and energy costs, adversely impacted results. Increased competition in Brazil also contributed to the weak demand in that country. ADM’s productivity initiatives are improving the Company’s capabilities to help mitigate the impact of inflation.Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Net earnings attributable to controlling interests increased 60% or $1.6 billion, to $4.3 billion. Segment operating profit increased 41% or $1.9 billion, to $6.5 billion, and included a net charge of $100 million consisting of charges totaling $147 million related to the impairment of certain assets, restructuring, and contingencies/settlements, partially offset by gains on the sale of certain assets of $47 million. Included in segment operating profit in the prior year was a net charge of $136 million consisting of charges totaling $213 million related to the impairment of certain assets, restructuring, and settlement, partially offset by gains on the sale of ethanol and certain other assets of $77 million. Adjusted segment operating profit (a non-GAAP measure) increased $1.9 billion to $6.6 billion due primarily to higher results in most businesses except in Vantage Corn Processors. Corporate results in the current year were a net charge of $1.3 billion and included a mark-to-market gain of $9 million on the conversion option of the exchangeable bonds issued in August 2020. Corporate results in the prior year were a net charge of $1.3 billion and included a pension settlement charge of $83 million, loss on debt extinguishment of $36 million, a mark-to-market gain of $19 million on the conversion option of the exchangeable bonds issued in August 2020, acquisition-related expenses of $7 million, and a restructuring charge of $4 million.Income taxes of $868 million increased $290 million. The Company’s effective tax rate for 2022 was 16.6% compared to 17.4% for 2021. The change in the rate was due primarily to changes in the geographic mix of pretax earnings and the impact of discrete tax items.Analysis of Statements of EarningsProcessed volumes by product for the years ended December 31, 2022 and 2021 are as follows (in metric tons):(In thousands)20222021ChangeOilseeds32,952 35,125 (2,173)Corn18,558 19,126 (568) Total51,510 54,251 (2,741)31Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to the current margin environment and seasonal local supply and demand conditions. The overall decrease in oilseeds processed volumes was primarily related to decreased crush rates resulting from the decline in seeds availability, a temporarily idled facility in Paraguay due to crop failure, weather-related challenges, and the indefinite shutdown of a Ukraine facility since February 2022. The overall decrease in corn processed volumes was primarily related to reduced volumes of fuel alcohol due to market conditions, the sale of the Peoria, Illinois facility in November 2021, and logistical challenges surrounding railcar availability since the second quarter of 2022.Revenues by segment for the years ended December 31, 2022 and 2021 are as follows:(In millions)20222021ChangeAg Services and Oilseeds Ag Services$53,181 $45,017 $8,164 Crushing13,139 11,368 1,771 Refined Products and Other13,243 10,662 2,581 Total Ag Services and Oilseeds79,563 67,047 12,516 Carbohydrate Solutions Starches and Sweeteners10,251 7,611 2,640 Vantage Corn Processors3,710 3,499 211 Total Carbohydrate Solutions13,961 11,110 2,851 NutritionHuman Nutrition3,769 3,189 580 Animal Nutrition3,867 3,523 344 Total Nutrition7,636 6,712 924 Other Business396 380 16 Total Other Business396 380 16 Total$101,556 $85,249 $16,307 Revenues and cost of products sold in agricultural merchandising and processing businesses are significantly correlated to the underlying commodity prices and volumes. In periods of significant changes in market prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Ag Services and Oilseeds, generally have a relatively equal impact from market price changes which generally result in an insignificant impact to gross profit. Revenues increased $16.3 billion to $101.6 billion due to higher sales prices ($17.1 billion), partially offset by lower sales volumes ($0.8 billion). Higher sales prices of corn, wheat, oil, soybean, and meal, and higher sales volumes of rice, flavors, biodiesel, and corn, were partially offset by lower sales prices of rice and flavors, and lower sales volumes of wheat and oil. Ag Services and Oilseeds revenues increased 19% to $79.6 billion due to higher sales prices ($14.3 billion), partially offset by lower sales volumes ($1.8 billion). Carbohydrate Solutions revenues increased 26% to $14.0 billion due to higher sales prices ($2.6 billion) and higher sales volumes ($0.3 billion), despite the loss of USD-grade industrial alcohol volumes from the divested Peoria, Illinois facility. Nutrition revenues increased 14% to $7.6 billion due to higher sales prices ($0.2 billion) and higher sales volumes ($0.7 billion).Cost of products sold increased $14.7 billion to $94.0 billion due principally to higher average commodity costs and higher manufacturing expenses. Manufacturing expenses increased $0.9 billion to $7.0 billion due principally to higher energy costs, higher maintenance expenses, increased operating supplies, and higher salaries and benefit costs. 32Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)Foreign currency translation impacts decreased revenues by $2.6 billion and cost of products sold by $2.4 billion.Gross profit increased $1.6 billion or 26%, to $7.6 billion due to higher results in Ag Services and Oilseeds ($1.3 billion), Starches and Sweeteners ($477 million), and Nutrition ($149 million), partially offset by lower results in Vantage Corn Processors ($352 million). These factors are explained in the segment operating profit discussion on page 35. Selling, general, and administrative expenses increased 12% to $3.4 billion due principally to provisions for bad debt, higher IT and project-related expenses, higher salaries and benefit costs, increased travel expenses, and amortization of intangibles from new acquisitions.Asset impairment, exit, and restructuring costs decreased $98 million to $66 million. Charges in the current year consisted of $37 million of impairments related to certain long-lived assets and $28 million of restructuring charges, presented as specified items within segment operating profit, and $1 million of restructuring charges in Corporate. Charges in the prior year consisted primarily of $125 million of impairments related to certain long-lived assets, goodwill, and other intangible assets and $35 million of restructuring charges, presented as specified items within segment operating profit, and $4 million of restructuring charges in Corporate.Equity in earnings of unconsolidated affiliates increased $237 million to $832 million due to higher earnings from the Company’s investments in Wilmar and Olenex.Loss on debt extinguishment in the prior year of $36 million was related to the early redemption of $500 million aggregate principal amount of 2.750% notes due in March 2025.Interest and investment income increased $197 million to $293 million due primarily to higher interest income, partially offset by lower revaluation gains of $37 million compared to $49 million in the prior period.Interest expense increased $131 million to $396 million due to higher long-term debt balances and increased short-term rates on the Company’s U.S. and European commercial paper borrowing programs. Interest expense in the current year also included a $9 million mark-to-market gain adjustment related to the conversion option of the exchangeable bonds issued in August 2020 compared to a $19 million mark-to-market gain adjustment in the prior year. Other income - net of $358 million increased $264 million. Current year income included a legal recovery related to the 2019 and 2020 closure of the Company’s Reserve, Louisiana, export facility of $110 million, net foreign exchange gains of $105 million, a $50 million one-time payment from the USDA Biofuel Producer Recovery Program, gains on disposals of individually insignificant assets in the ordinary course of business, and the non-service components of net pension benefit income of $25 million, partially offset by other net expense. Prior year income included gains on the sale of ethanol and certain other assets and disposals of individually insignificant assets in the ordinary course of business, net foreign exchange gains of $24 million, the non-service components of net pension benefit income of $33 million, and other income, partially offset by a non-cash pension settlement charge of $83 million related to the purchase of group annuity contracts that irrevocably transferred the future benefit obligations and annuity administration for certain salaried and hourly retirees and terminated vested participants under the Company’s ADM Retirement Plant and ADM Pension Plan for Hourly-Wage Employees.33Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)Segment operating profit, adjusted segment operating profit (a non-GAAP measure), and earnings before income taxes for the years ended December 31, 2022 and 2021 are as follows:Segment Operating Profit20222021Change(In millions)Ag Services and Oilseeds Ag Services$1,374 $770 $604 Crushing1,621 975 646 Refined Products and Other837 652 185 Wilmar554 378 176 Total Ag Services and Oilseeds4,386 2,775 1,611 Carbohydrate Solutions Starches and Sweeteners1,323 913 410 Vantage Corn Processors37 370 (333)Total Carbohydrate Solutions1,360 1,283 77 NutritionHuman Nutrition 566 537 29 Animal Nutrition170 154 16 Total Nutrition736 691 45 Other Business167 25 142 Total Other167 25 142 Specified Items:Gains on sale of assets47 77 (30)Impairment, restructuring, and settlement charges(147)(213)66 Total Specified Items(100)(136)36 Total Segment Operating Profit$6,549 $4,638 $1,911 Adjusted Segment Operating Profit(1)$6,649 $4,774 $1,875 Segment Operating Profit$6,549 $4,638 $1,911 Corporate(1,316)(1,325)9 Earnings Before Income Taxes$5,233 $3,313 $1,920 (1) Adjusted segment operating profit is segment operating profit excluding the listed specified items.34Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)Ag Services and Oilseeds operating profit increased 58%. Ag Services results were significantly higher versus the prior year. Global trade results were higher, driven by strong performances in destination marketing and global ocean freight. North American origination volumes were lower but margins were higher year-over-year. South America results were higher, driven by better origination margins on good demand for grain. Crushing was higher year-over-year driven by robust protein and renewable diesel demand. Positive net timing effects in the current year versus negative timing effects in the prior year helped drive higher year-over-year results. Refined Products and Other results were higher than the prior year, driven by higher margins due to strong oils demand. Biodiesel margins also benefited from direct sales compared to the historical auction sales. Equity earnings from Wilmar were higher versus the prior year.Carbohydrate Solutions operating profit increased 6%. Starches and Sweeteners, including ethanol production from the wet mills, delivered higher results versus the prior year, driven by solid margins across sweeteners and starches, strong contributions from corn co-products, and effective risk management, partially offset by weaker ethanol margins. Sales volumes for starches and sweeteners continued their recovery and the biosolutions platform continued to deliver revenue growth as demand for plant-based products expanded into more diverse applications. Vantage Corn Processors results were lower versus the prior year as ethanol margins decreased from the 2021 strong positioning gains and industrial alcohol results from the now-sold Peoria, Illinois facility, partially offset by the $50 million one-time payment from the USDA Biofuel Producer Recovery Program. Nutrition operating profit increased 7%. Human Nutrition delivered higher year-over-year results. Flavors results were lower driven by demand fulfillment challenges, the impact of the strong U.S. dollar in EMEA, softer demand in Asia Pacific, and higher costs in North America. Strong sales growth in alternative proteins, including contribution from the Sojaprotein acquisition, and good demand for texturants offset some higher operating costs to help deliver better year-over-year results in Specialty Ingredients. Health and Wellness was also higher year-over-year, powered by probiotics, including the contribution from the November 2021 Deerland Probiotics and Enzymes acquisition, and robust demand for fiber and Vitamin E. Animal Nutrition profits were higher than the prior year due primarily to strength in amino acids.Other Business operating profit increased 568%. Higher short-term interest rates drove improved earnings in ADM Investor Services and improved underwriting performance resulted in better captive insurance results.Corporate results are as follows:(In millions)20222021ChangeInterest expense - net$(333)$(277)$(56)Unallocated corporate costs(1,026)(957)(69)Loss on sale of assets(3)— (3)Expenses related to acquisitions(2)(7)5 Loss on debt extinguishment— (36)36 Gain on debt conversion option9 19 (10)Restructuring and settlement charges(1)(87)86 Other income40 20 20 Total Corporate$(1,316)$(1,325)$9 35Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)Corporate results were a net charge of $1.3 billion in the current year compared to $1.3 billion in the prior year. Interest expense-net increased $56 million due primarily to higher long-term debt balances and increased average rates on the Company’s U.S. and European commercial paper borrowing programs. Unallocated corporate costs increased $69 million due primarily to higher IT and project-related costs and higher costs in the Company’s centers of excellence, partially offset by lower incentive compensation accruals. Loss on debt extinguishment in the prior year related to the early redemption of $500 million aggregate principal amount of 2.750% notes due in March 2025. Gain on debt conversion option was related to the mark-to-market adjustment of the conversion option of the exchangeable bonds issued in August 2020. Impairment, restructuring, and settlement charges in the prior year included a non-cash pension settlement charge of $83 million related to the purchase of group annuity contracts that irrevocably transferred the future benefit obligations and annuity administration for certain salaried and hourly retirees and terminated vested participants under the Company’s ADM Retirement Plan and ADM Pension Plan for Hourly-Wage Employees to independent third parties, and individually insignificant restructuring charges. Other income in the current year included investment revaluation gains of $37 million, the non-service components of net pension benefit income of $25 million, and foreign exchange gains from hedge activity, partially offset by railroad maintenance expenses of $67 million. Other income in the prior year included investment revaluation gains of $49 million, the non-service components of net pension benefit income of $16 million, and foreign exchange gains from hedge activity, partially offset by railroad maintenance expenses of $67 million.Non-GAAP Financial MeasuresThe Company uses adjusted earnings per share (EPS), adjusted EBITDA, and adjusted segment operating profit, non-GAAP financial measures as defined by the SEC, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures. Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of specified items. Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. Adjusted segment operating profit is segment operating profit adjusted, where applicable, for specified items. Management believes that adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are useful measures of the Company’s performance because they provide investors additional information about the Company’s operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are not intended to replace or be an alternative to diluted EPS, earnings before income taxes, and segment operating profit, respectively, the most directly comparable amounts reported under GAAP. 36Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)The table below provides a reconciliation of diluted EPS to adjusted EPS for the years ended December 31, 2022 and 2021.20222021In millionsPer shareIn millionsPer shareAverage number of shares outstanding - diluted563 566 Net earnings and reported EPS (fully diluted)$4,340 $7.71 $2,709 $4.79 Adjustments:Gains on sale of assets (net of tax of $11 million in 2022 and $20 million in 2021) (1)(33)(0.06)(57)(0.10)Asset impairment, restructuring, and settlement charges (net of tax of $33 million in 2022 and $63 million in 2021) (1)115 0.21 237 0.42 Expenses related to acquisitions (net of tax of $1 million in 2022 and $2 million in 2021) (1)1 — 5 0.01 Loss on debt extinguishment (net of tax of $9 million in 2021) (1)— — 27 0.05 Gain on debt conversion option (net of tax of $0) (1)(9)(0.02)(19)(0.03)Tax adjustments7 0.01 33 0.05 Adjusted net earnings and adjusted EPS$4,421 $7.85 $2,935 $5.19 (1) Tax effected using the U.S. and applicable tax rates.The tables below provide a reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the years ended December 31, 2022 and 2021.(In millions)20222021ChangeEarnings before income taxes$5,233 $3,313 $1,920 Interest expense396 265 131 Depreciation and amortization1,028 996 32 Gains on sale of assets(44)(77)33 Asset impairment, restructuring, and settlement charges148 300 (152)Railroad maintenance expense67 67 — Expenses related to acquisitions2 7 (5)Loss on debt extinguishment— 36 (36)Adjusted EBITDA$6,830 $4,907 $1,923 (In millions)20222021ChangeAg Services and Oilseeds$4,740 $3,145 1,595 Carbohydrate Solutions1,675 1,616 59 Nutrition996 912 84 Other Business227 32 195 Corporate(808)(798)(10)Adjusted EBITDA$6,830 $4,907 $1,923 37Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)Liquidity and Capital ResourcesA Company objective is to have sufficient liquidity, balance sheet strength, and financial flexibility to fund the operating and capital requirements of a capital intensive agricultural commodity-based business. The Company depends on access to credit markets, which can be impacted by its credit rating and factors outside of ADM’s control, to fund its working capital needs and capital expenditures. The primary source of funds to finance ADM’s operations, capital expenditures, and advancement of its growth strategy is cash generated by operations and lines of credit, including a commercial paper borrowing facility and accounts receivable securitization programs. In addition, the Company believes it has access to funds from public and private equity and debt capital markets in both U.S. and international markets.Cash provided by operating activities was $3.5 billion in 2022 compared to $6.6 billion in 2021. Working capital changes as described below decreased cash by $1.5 billion in the current year compared to an increase of $2.7 billion in the prior year. Segregated investments increased approximately $1.5 billion due to increased trading activity in the Company’s futures commission and brokerage business. Trade receivables increased $1.7 billion primarily due to higher revenues. Inventories increased $0.3 billion due to higher inventory prices, partially offset by lower inventory volumes. Trade payables increased $1.4 billion due to increased payables related to inventory purchases and higher costs and expenses from increased operating activity during the fourth quarter of the current year compared to the same period last year. Payables to brokerage customers increased $0.9 billion due to increased customer trading activity in the Company’s futures commission and brokerage business.Cash used in investing activities was $1.4 billion this year compared to $2.7 billion last year. Capital expenditures in the current year were $1.3 billion compared to $1.2 billion in the prior year. Net assets of businesses acquired in the prior year of $1.6 billion were related to the acquisitions of P4, Sojaprotein, and Deerland. Proceeds from sales of assets and businesses of $0.1 billion in the current year related to the sale of certain assets compared to $0.2 billion in the prior year related to the sale of the ethanol production complex in Peoria, Illinois and certain other assets.Cash used in financing activities was $2.5 billion this year compared to $1.1 billion last year. Long-term debt borrowings in the current year of $0.8 billion consisted of the $750 million aggregate principal amount of 2.900% Notes due 2032. Long-term debt borrowings in the prior year of $1.3 billion consisted of the $750 million aggregate principal amount of 2.700% Notes due 2051 issued on September 10, 2021 and the €0.5 billion aggregate principal amount of Fixed-to-Floating Rate Senior Notes due 2022 issued in a private placement on March 25, 2021. The Company expects to apply an amount equal to the proceeds from the borrowings in the current year to finance or refinance eligible green projects and/or eligible social projects. Proceeds from the borrowings in the prior year were used to redeem debt and for general corporate purposes. Long-term debt payments in the current year of $0.5 billion consisted of the €0.5 billion aggregate principal amount of fixed-to-floating rate senior notes due 2022 issued in a private placement on March 25, 2021. Long-term debt payments in the prior year of $0.5 billion consisted of the early redemption of the $500 million aggregate principal amount of 2.750% notes due 2025 in September 2021. Net payments on short-term credit arrangements were $0.4 billion in the current year compared to $1.1 billion in the prior year. Share repurchases in the current year were $1.5 billion compared to an insignificant amount in the prior year. Dividends paid in the current year were $0.9 billion compared to $0.8 billion in the prior year. At December 31, 2022, ADM had $1.0 billion of cash and cash equivalents and a current ratio, defined as current assets divided by current liabilities, of 1.5 to 1. Included in working capital is $9.0 billion of readily marketable commodity inventories. At December 31, 2022, the Company’s capital resources included shareholders’ equity of $24.3 billion and lines of credit, including the accounts receivable securitization programs described below, totaling $12.4 billion, of which $9.3 billion was unused. ADM’s ratio of long-term debt to total capital (the sum of long-term debt and shareholders’ equity) was 24% and 26% at December 31, 2022 and 2021, respectively. The Company uses this ratio as a measure of ADM’s long-term indebtedness and an indicator of financial flexibility. The Company’s ratio of net debt (the sum of short-term debt, current maturities of long-term debt, and long-term debt less the sum of cash and cash equivalents and short-term marketable securities) to capital (the sum of net debt and shareholders’ equity) was 25% and 28% at December 31, 2022 and 2021, respectively. Of the Company’s total lines of credit, $5.0 billion supported the commercial paper borrowing programs, against which there was $0.3 billion of commercial paper outstanding at December 31, 2022.As of December 31, 2022, the Company had $1.0 billion of cash and cash equivalents, $0.5 billion of which is cash held by foreign subsidiaries whose undistributed earnings are considered indefinitely reinvested. Based on the Company’s historical ability to generate sufficient cash flows from its U.S. operations and unused and available U.S. credit capacity of $5.7 billion, the Company has asserted that these funds are indefinitely reinvested outside the U.S. 38Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)The Company has accounts receivable securitization programs (the “Programs”) with certain commercial paper conduit purchasers and committed purchasers. The Programs provide the Company with up to $2.6 billion in funding against accounts receivable transferred into the Programs and expand the Company’s access to liquidity through efficient use of its balance sheet assets (see Note 19 in Item 8 for more information and disclosures on the Programs). As of December 31, 2022, the Company utilized $2.6 billion of its facility under the Programs. On November 5, 2014, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 100,000,000 shares of the Company’s common stock during the period commencing January 1, 2015 and ending December 31, 2019. On August 7, 2019, the Company’s Board of Directors approved the extension of the stock repurchase program through December 31, 2024 and the repurchase of up to an additional 100,000,000 shares under the extended program. The Company has acquired approximately 112.2 million shares under this program and its extension as of December 31, 2022.As of December 31, 2022, the Company has total available liquidity of $10.3 billion comprised of cash and cash equivalents and unused lines of credit.In 2023, the Company expects capital expenditures of $1.3 billion and additional cash outlays of approximately $1.0 billion in dividends and up to $1.0 billion in opportunistic share repurchases, subject to other strategic uses of capital and the evolution of operating cash flows and the working capital position throughout the year.The Company’s purchase obligations as of December 31, 2022 and 2021 were $15.8 billion and $18.6 billion, respectively. The change is primarily related to a decrease in obligations to purchase agricultural commodity inventories and other commitments. As of December 31, 2022, the Company expects to make payments related to purchase obligations of $14.8 billion within the next twelve months. The Company’s other material cash requirements within the next 12 months include commercial paper outstanding of $0.3 billion, current maturities of long-term debt of $0.9 billion, interest payments of $0.3 billion, operating lease payments of $0.3 billion, transition tax liability of $37 million, and pension and other postretirement plan contributions of $107 million. The Company expects to make payments related to purchase obligations and other material cash requirements beyond the next twelve months of $16.8 billion. The Company’s credit facilities and certain debentures require the Company to comply with specified financial and non-financial covenants including maintenance of minimum tangible net worth as well as limitations related to incurring liens, secured debt, and certain other financing arrangements. The Company was in compliance with these covenants as of December 31, 2022.The three major credit rating agencies have maintained the Company’s credit ratings at solid investment grade levels with stable outlooks. Critical Accounting Policies and EstimatesThe process of preparing financial statements requires management to make estimates and judgments that affect the carrying values of the Company’s assets and liabilities as well as the recognition of revenues and expenses. These estimates and judgments are based on the Company’s historical experience and management’s knowledge and understanding of current facts and circumstances. Certain of the Company’s accounting policies and estimates are considered critical, as these policies and estimates are important to the depiction of the Company’s financial statements and require significant or complex judgment by management. Critical accounting estimates are those estimates made in accordance with GAAP which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on ADM’s financial condition and results of operations. Management has discussed with the Company’s Audit Committee the development, selection, disclosure, and application of these critical accounting policies and estimates. Following are the accounting policies and estimates management considers critical to the Company’s financial statements.39Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)Fair Value Measurements - Inventories and Commodity DerivativesDescription: Certain of the Company’s inventory, inventory-related payables, and commodity derivative assets and liabilities as of December 31, 2022 are valued at estimated fair values, including $9.0 billion of merchandisable agricultural commodity inventories, $1.3 billion of commodity derivative assets, $1.3 billion of commodity derivative liabilities, and $1.3 billion of inventory-related payables. Commodity derivative assets and liabilities include forward purchase and sales contracts for agricultural commodities. Merchandisable agricultural commodities are freely traded, have quoted market prices, and may be sold without significant additional processing.Judgments and Uncertainties: Management estimates fair value for its commodity-related assets and liabilities based on exchange-quoted prices, adjusted for differences in local markets. The Company’s inventory, inventory-related payables, and commodity derivative fair value measurements are mainly based on observable market quotations without significant adjustments and are therefore reported as Level 2 within the fair value hierarchy. Level 3 fair value measurements of approximately $3.3 billion of assets and $0.7 billion of liabilities represent fair value estimates where unobservable price components represent 10% or more of the total fair value price. For more information concerning amounts reported as Level 3, see Note 4 in Item 8. Sensitivity of Estimate to Change: Changes in the market values of these inventories and commodity contracts are recognized in the statement of earnings as a component of cost of products sold. If management used different methods or factors to estimate market value, amounts reported could differ materially. Additionally, if market conditions change subsequent to year-end, amounts reported in future periods could differ materially.Derivatives – Designated Hedging ActivitiesDescription: The Company, from time to time, uses derivative contracts designated as cash flow hedges to hedge the purchase or sales price of anticipated volumes of commodities to be purchased and processed in a future month. See Note 5 in Item 8 for additional information.Judgments and Uncertainties: Assuming normal market conditions, the change in the market value of such derivative contracts has historically been, and is expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.Sensitivity of Estimate to Change: Gains and losses arising from open and closed hedging transactions are deferred in accumulated other comprehensive income, net of applicable income taxes, and recognized as a component of cost of products sold and revenues in the statement of earnings when the hedged item is recognized in earnings. If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the changes in the market value of these exchange-traded futures and exchange-traded and over-the-counter (OTC) option contracts would be recorded immediately in the statement of earnings as a component of revenues and/or cost of products sold. Income TaxesDescription: The Company accounts for income taxes in accordance with the applicable accounting standards. These standards prescribe a minimum threshold a tax position is required to meet before being recognized in the consolidated financial statements. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur. Judgments and Uncertainties: ADM calculates its provision for income taxes based on the statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which it operates. The Company uses judgment in evaluating the Company’s tax positions and determining its annual tax provision.40Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)Sensitivity of Estimate to Change: While ADM considers all of its tax positions fully supportable, the Company faces challenges from U.S. and foreign tax authorities regarding the amount of taxes due. The Company recognizes a tax position in its consolidated financial statements when it is determined to be more likely than not to be sustained upon examination, based on its technical merits. The position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. For example, the Company has received tax assessments from tax authorities in Argentina and the Netherlands, challenging income tax positions taken by subsidiaries of the Company. The Company evaluated its tax positions for these matters and concluded, based in part upon advice from legal counsel, that it was appropriate to recognize the tax benefits of these positions that are more likely than not to be sustained upon examination, based on their technical merits (see Note 13 in Item 8 for additional information). Business CombinationsDescription: The Company’s acquisitions are accounted for in accordance with Accounting Standards Codification (ASC) Topic 805, Business Combinations, as amended. The consideration transferred is allocated to various assets acquired and liabilities assumed at their estimated fair values as of the acquisition date with the residual allocated to goodwill. The Company accounts for any redeemable noncontrolling interest in temporary equity - redeemable noncontrolling interest at redemption value with periodic changes recorded in retained earnings. Judgments and Uncertainties: Fair values allocated to assets acquired and liabilities assumed in business combinations require management to make significant judgments, estimates, and assumptions, especially with respect to intangible assets. Management makes estimates of fair values based upon assumptions it believes to be reasonable. These estimates are based upon historical experience and information obtained from the management of the acquired companies and are inherently uncertain. The estimated fair values related to intangible assets primarily consist of customer relationships, trademarks, and developed technology which are determined primarily using discounted cash flow models. Estimates in the discounted cash flow models include, but are not limited to, certain assumptions that form the basis of the forecasted results (e.g. revenue growth rates, customer attrition rates, and royalty rates). These significant assumptions are forward looking and could be affected by future economic and market conditions. Sensitivity of Estimate to Change: During the measurement period, which may take up to one year from the acquisition date, adjustments due to changes in the estimated fair value of assets acquired and liabilities assumed may be recorded as adjustments to the consideration transferred and related allocations. Upon the conclusion of the measurement period or the final determination of the values of assets acquired and liabilities assumed, whichever comes first, any such adjustments are charged to the consolidated statements of earnings. GoodwillDescription: Goodwill is subject to annual impairment tests. The Company evaluates goodwill for impairment at the reporting unit level annually on October 1 or whenever there are indicators that the carrying value may not be fully recoverable. The Company has seven reporting units with goodwill identified at one level below the operating segment using the criteria in ASC 350, Intangibles - Goodwill and Other (Topic 350).Judgments and Uncertainties: The Company adopted the provisions of Topic 350, which permits, but does not require, a company to qualitatively assess indicators of a reporting unit’s fair value. If after completing the qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is prepared to estimate fair value. Critical estimates in the determination of the fair value of each reporting unit include, but are not limited to, future expected cash flows, revenue growth, and discount rates. During the year ended December 31, 2022, the Company evaluated goodwill for impairment using a qualitative assessment in five reporting units and using a quantitative assessment in two reporting units. Sensitivity of Estimate to Change: The Company recorded goodwill impairment charges of $5 million and $1 million during the years ended December 31, 2021 and 2020, respectively (see Note 18 in Item 8 for more information). There was no goodwill impairment charge recorded for the year ended December 31, 2022. The estimated fair values of the reporting units evaluated for impairment using a quantitative assessment were substantially in excess of their carrying values. If management used different estimates and assumptions in its impairment tests, then the Company could recognize different amounts of expense over future periods.41Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe market risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising from adverse changes in: commodity market prices as they relate to the Company’s net commodity position, foreign currency exchange rates, and interest rates as described below.CommoditiesThe availability and prices of agricultural commodities are subject to wide fluctuations due to factors such as changes in weather conditions, crop disease, plantings, government programs and policies, competition, changes in global demand, changes in customer preferences and standards of living, and global production of similar and competitive crops.The Company manages its exposure to adverse price movements of agricultural commodities used for, and produced in, its business operations, by entering into derivative and non-derivative contracts which reduce the Company’s overall short or long commodity position. Additionally, the Company uses exchange-traded futures and exchange-traded and over-the-counter option contracts as components of merchandising strategies designed to enhance margins. The results of these strategies can be significantly impacted by factors such as the correlation between the value of exchange-traded commodities futures contracts and the cash prices of the underlying commodities, counterparty contract defaults, and volatility of freight markets. In addition, the Company, from time-to-time, enters into derivative contracts which are designated as hedges of specific volumes of commodities that will be purchased and processed, or sold, in a future month. The changes in the market value of such futures contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Gains and losses arising from open and closed designated hedging transactions are deferred in other comprehensive income, net of applicable taxes, and recognized as a component of cost of products sold or revenues in the statement of earnings when the hedged item is recognized.The Company’s commodity position consists of merchandisable agricultural commodity inventories, related purchase and sales contracts, energy and freight contracts, and exchange-traded futures and exchange-traded and over-the-counter option contracts including contracts used to hedge anticipated transactions.The fair value of the Company’s commodity position is a summation of the fair values calculated for each commodity by valuing all of the commodity positions at quoted market prices for the period, where available, or utilizing a close proxy. The Company has established metrics to monitor the amount of market risk exposure, which consist of volumetric limits, and value-at-risk (VaR) limits. VaR measures the potential loss, at a 95% confidence level, that could be incurred over a one year period. Volumetric limits are monitored daily and VaR calculations and sensitivity analysis are monitored weekly.In addition to measuring the hypothetical loss resulting from an adverse two standard deviation move in market prices (assuming no correlations) over a one year period using VaR, sensitivity analysis is performed measuring the potential loss in fair value resulting from a hypothetical 10% adverse change in market prices. The highest, lowest, and average weekly position for the years ended December 31, 2022 and 2021 together with the market risk from a hypothetical 10% adverse price change is as follows: December 31, 2022December 31, 2021Long/(Short)Fair ValueMarket RiskFair ValueMarket Risk (In millions)Highest position$986 $99 $1,426 $143 Lowest position44 4 (98)(10)Average position388 39 671 67 The change in fair value of the average position was due to the decrease in prices of certain commodities and, to a lesser extent, the overall decrease in average quantities.42Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)CurrenciesThe Company has consolidated subsidiaries in more than 70 countries. For the majority of the Company’s subsidiaries located outside the United States, the local currency is the functional currency except certain significant subsidiaries in Switzerland where Euro is the functional currency, and Brazil and Argentina where U.S. dollar is the functional currency. To reduce the risks associated with foreign currency exchange rate fluctuations, the Company enters into currency exchange contracts to minimize its foreign currency position related to transactions denominated primarily in Euro, British pound, Canadian dollar, and Brazilian real currencies. These currencies represent the major functional or local currencies in which recurring business transactions occur. The Company also uses currency exchange contracts as hedges against amounts indefinitely invested in foreign subsidiaries and affiliates. The currency exchange contracts used are forward contracts, swaps with banks, exchange-traded futures contracts, and over-the-counter options. The changes in market value of such contracts have a high correlation to the price changes in the currency of the related transactions. The potential loss in fair value for such net currency position resulting from a hypothetical 10% adverse change in foreign currency exchange rates is not material. Effective April 1, 2022, the Company changed the functional currency of its Turkish entities to the U.S. dollar which did not have a material impact on the Company’s consolidated financial statements. The amount the Company considers indefinitely invested in foreign subsidiaries and corporate joint ventures translated into dollars using the year-end exchange rates is $13.0 billion and $10.6 billion ($15.5 billion and $12.7 billion at historical rates) at December 31, 2022 and 2021, respectively. The increase is due to the increase in retained earnings of the foreign subsidiaries of $2.8 billion partially offset by the depreciation of foreign currencies versus the U.S. dollar of $0.4 billion. The potential loss in fair value, which would principally be recognized in Other Comprehensive Income, resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates is $1.6 billion and $1.3 billion for December 31, 2022 and 2021, respectively. Actual results may differ.InterestThe fair value of the Company’s long-term debt is estimated using quoted market prices, where available, and discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. Market risk is estimated as the potential increase in fair value resulting from a hypothetical 50 basis points decrease in interest rates. Actual results may differ.December 31, 2022December 31, 2021 (In millions)Fair value of long-term debt$7,502 $9,512 Fair value amount over (under) carrying value(232)1,500 Market risk342 490 The decrease in the fair value of long-term debt at December 31, 2022 is primarily due to higher interest rates.43

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+Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the fiscal year ended January 29, 2022, for discussion of the results of operations for the year ended January 29, 2022, compared to the year ended January 30, 2021, which is incorporated by reference herein. Overview We are driven by our purpose to enrich lives through technology and our vision to personalize and humanize technology solutions for every stage of life. We accomplish this by leveraging our combination of technology and a human touch to meet our customers’ everyday needs, whether they come to us online, visit our stores or invite us into their homes. We have operations in the U.S. and Canada. We have two reportable segments: Domestic and International. The Domestic segment is comprised of our operations in all states, districts and territories of the U.S. and our Best Buy Health business, and includes the brand names Best Buy, Best Buy Ads, Best Buy Business, Best Buy Health, CST, Current Health, Geek Squad, Lively, Magnolia, Pacific Kitchen and Home, TechLiquidators and Yardbird and the domain names bestbuy.com, currenthealth.com, lively.com, techliquidators.com and yardbird.com. The International segment is comprised of all operations in Canada under the brand names Best Buy, Best Buy Mobile and Geek Squad and the domain name bestbuy.ca. Our fiscal year ends on the Saturday nearest the end of January. Fiscal 2023, fiscal 2022 and fiscal 2021 included 52 weeks. Our business, like that of many retailers, is seasonal. A large proportion of our revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season. Comparable Sales Throughout this MD&A, we refer to comparable sales. Comparable sales is a metric used by management to evaluate the performance of our existing stores, websites and call centers by measuring the change in net sales for a particular period over the comparable prior-period of equivalent length. Comparable sales includes revenue from stores, websites and call centers operating for at least 14 full months. Revenue from online sales is included in comparable sales and represents sales initiated on a website or app, regardless of whether customers choose to pick up product in store, curbside, at an alternative pick-up location or take delivery direct to their homes. Revenue from acquisitions is included in comparable sales beginning with the first full quarter following the first anniversary of the date of the acquisition. Comparable sales also includes credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. Revenue from stores closed more than 14 days, including but not limited to relocated, remodeled, expanded and downsized stores, or stores impacted by natural disasters, is excluded from comparable sales until at least 14 full months after reopening. Comparable sales excludes the impact of revenue from discontinued operations, the impact of profit-share revenue from our services plan portfolio and the effect of fluctuations in foreign currency exchange rates (applicable to our International segment only). All periods presented apply this methodology consistently. On November 2, 2021, we acquired all outstanding shares of Current Health Ltd. (“Current Health”). On November 4, 2021, we acquired all outstanding shares of Two Peaks, LLC d/b/a Yardbird Furniture (“Yardbird”). Consistent with our comparable sales policy, the results of Current Health and Yardbird are excluded from our comparable sales calculation until the first quarter of fiscal 2024. We believe comparable sales is a meaningful supplemental metric for investors to evaluate revenue performance resulting from growth in existing stores, websites and call centers versus the portion resulting from opening new stores or closing existing stores. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers’ methods. Non-GAAP Financial Measures This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”), as well as certain adjusted or non-GAAP financial measures, such as constant currency, non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted earnings per share (“EPS”). We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, provide additional useful information for evaluating current period performance and assessing future performance. For these reasons, internal management reporting, including budgets, forecasts and financial targets used for short-term incentives are based on non-GAAP financial measures. Generally, our non-GAAP financial measures include adjustments for items such as restructuring charges, goodwill and intangible asset impairments, price-fixing settlements, gains and losses on certain investments, intangible asset amortization, certain acquisition-related costs and the tax effect of all such items. In addition, certain other items may be excluded from non-GAAP financial measures when we believe doing so provides greater clarity to management and our investors. We provide reconciliations of the most comparable financial measures presented in accordance with GAAP to presented non-GAAP financial measures that enable investors to understand the adjustments made in arriving at the non-GAAP financial measures and to evaluate performance using the same metrics as management. These non-GAAP financial measures should be considered in addition to, and not superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Non-GAAP financial measures may be calculated differently from similarly titled measures used by other companies, thereby limiting their usefulness for comparative purposes.‎ 23 In our discussions of the operating results of our consolidated business and our International segment, we sometimes refer to the impact of changes in foreign currency exchange rates or the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert the International segment’s operating results from local currencies into U.S. dollars for reporting purposes. We also may use the term “constant currency,” which represents results adjusted to exclude foreign currency impacts. We calculate those impacts as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period currency exchange rates. We believe the disclosure of revenue changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates. Refer to the Non-GAAP Financial Measures section below for detailed reconciliations of items impacting non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS in the presented periods. Business Strategy Update During fiscal 2023, our team delivered strong execution and relentless focus on customer service during what continues to be a challenging environment for our industry. Throughout the fiscal year, we remained committed to balancing our near-term response to current conditions and managing well what is in our control, while also advancing our strategic initiatives and investing in areas important for our long-term performance. During the first year of the pandemic, we said we believed customer shopping behavior would be permanently changed in a way that is even more digital and puts customers entirely in control to shop how they want. And our strategy was to embrace that reality, and to lead not follow. In fiscal 2023, digital sales comprised 33% of our Domestic revenue compared to 19% in fiscal 2020. Sales via phone, chat and virtual have also remained significantly higher. Even with that shift, our stores remain a cornerstone of our differentiation. Not only was 67% of our Domestic revenue transacted in our stores, more than half of our identified customers engaged in cross-channel shopping experiences, and more than 40% of online sales were picked up in stores. Further, we play an important role for our vendors as the only national consumer electronics specialty retailer who can showcase their products and help commercialize their new technology. Therefore, we are focused on evolving our omnichannel retail strategy over time, including our portfolio of stores, operating model and digital tools, to provide customers with differentiated experiences and enhance our omnichannel fulfillment. We continue to advance our other strategic initiatives as well. We are building customer relationships through membership, including evolving our free My Best Buy program and our paid Best Buy Totaltech membership option. In Best Buy Health, we are essentially nurturing a startup within a large-scale organization and leveraging Best Buy’s core assets, including the Geek Squad, to grow, build and establish the Care at Home space, an emerging part of the healthcare industry. As we enter fiscal 2024, macroeconomic headwinds will likely result in continued pressure, and we are preparing for sales in the consumer electronics industry to decline again this year. In particular, our customers are facing economic challenges from the dual pressures of high inflation and the resulting interest rate increases, and it is difficult to predict how such factors will impact us in the near term. However, we expect several factors to drive the eventual return of industry growth over time, including the natural upgrade and replacement cycles for the technology bought earlier in the pandemic and continued vendor innovation. In addition, macro technology trends like cloud, augmented reality and expanded broadband access have the potential to drive new products and demand. While our product categories tend to experience slightly different timing nuances, in general, we believe they are poised for growth in the coming years. In addition, we are continuing our expansion into newer categories like wellness technology, personal electric transportation, outdoor living and electric car charging. We remain excited about our industry and our future. There are more technology products than ever in people’s homes, technology is increasingly a necessity in our lives, and we believe we are uniquely there for our customers as they continue to navigate this innovative space. 24 Results of Operations Consolidated Results Selected consolidated financial data was as follows ($ in millions, except per share amounts): Consolidated Performance Summary2023 2022 2021Revenue$ 46,298 $ 51,761 $ 47,262 Revenue % change (10.6)% 9.5 % 8.3 %Comparable sales % change (9.9)% 10.4 % 9.7 %Gross profit$ 9,912 $ 11,640 $ 10,573 Gross profit as a % of revenue(1) 21.4 % 22.5 % 22.4 %SG&A$ 7,970 $ 8,635 $ 7,928 SG&A as a % of revenue(1) 17.2 % 16.7 % 16.8 %Restructuring charges$ 147 $ (34) $ 254 Operating income$ 1,795 $ 3,039 $ 2,391 Operating income as a % of revenue 3.9 % 5.9 % 5.1 %Net earnings$ 1,419 $ 2,454 $ 1,798 Diluted earnings per share$ 6.29 $ 9.84 $ 6.84 (1)Because retailers vary in how they record costs of operating their supply chain between cost of sales and SG&A, our gross profit rate and SG&A rate may not be comparable to other retailers' corresponding rates. For additional information regarding costs classified in cost of sales and SG&A, refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. In fiscal 2023, we generated $46.3 billion in revenue and our comparable sales declined 9.9%. Our comparable sales decline was due to multiple factors, including the following: (1) the lapping of strong sales in fiscal 2022 and fiscal 2021 that were driven by heightened demand during the pandemic for stay-at-home focused purchases and the benefit of government stimulus payments; (2) the shift of consumer spending back into service areas such as travel and entertainment and away from durable goods; and (3) macroeconomic pressures, including high inflation, that resulted in overall softness in customer demand within the consumer electronics industry. Revenue, gross profit rate, SG&A and operating income rate changes in fiscal 2023 were primarily driven by our Domestic segment. For further discussion of each segment’s rate changes, see Segment Performance Summary, below. Segment Performance Summary Domestic Segment Selected financial data for the Domestic segment was as follows ($ in millions): Domestic Segment Performance Summary2023 2022 2021Revenue$ 42,794 $ 47,830 $ 43,293 Revenue % change (10.5)% 10.5 % 7.9 %Comparable sales % change(1) (10.3)% 11.0 % 9.2 %Gross profit$ 9,106 $ 10,702 $ 9,720 Gross profit as a % of revenue 21.3 % 22.4 % 22.5 %SG&A$ 7,332 $ 7,946 $ 7,239 SG&A as a % of revenue 17.1 % 16.6 % 16.7 %Restructuring charges$ 140 $ (39) $ 133 Operating income$ 1,634 $ 2,795 $ 2,348 Operating income as a % of revenue 3.8 % 5.8 % 5.4 %Selected Online Revenue Data Total online revenue$ 14,212 $ 16,430 $ 18,674 Online revenue as a % of total segment revenue 33.2 % 34.4 % 43.1 %Comparable online sales% change(1) (13.5)% (12.0)% 144.4 %(1)Comparable online sales are included in the comparable sales calculation. The decrease in revenue in fiscal 2023 was primarily driven by comparable sales declines across most of our product categories, particularly computing, home theater, mobile phones and appliances. Online revenue of $14.2 billion decreased 13.5% on a comparable basis in fiscal 2023. These decreases in revenue were primarily due to the reasons described within the Consolidated Results section, above. 25 Domestic segment stores open at the end of each of the last three fiscal years were as follows: 2021 2022 2023 Total Stores‎at End of‎Fiscal Year Stores‎Opened Stores‎Closed(1) Total Stores‎at End of‎Fiscal Year Stores‎Opened Stores‎Closed Total Stores‎at End of‎Fiscal YearBest Buy 956 2 (20) 938 1 (14) 925 Outlet Centers 14 2 - 16 3 - 19 Pacific Sales 21 - - 21 - (1) 20 Yardbird - 9 - 9 5 - 14 Total Domestic segment stores 991 13 (20) 984 9 (15) 978 (1)Excludes stores that were temporarily closed as a result of the COVID-19 pandemic. We continuously monitor store performance as part of a market-driven, omnichannel strategy. As we approach the expiration of leases, we evaluate various options for each location, including whether a store should remain open. In fiscal 2024, we currently expect to close approximately 20 to 30 Best Buy stores and to increase the number of Outlet Centers to approximately 30. Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows: Revenue Mix Summary Comparable Sales Summary 2023 2022 2023 2022Computing and Mobile Phones 43 % 44 % (12.0)% 5.1 %Consumer Electronics 30 % 31 % (12.2)% 15.9 %Appliances 15 % 14 % (5.7)% 24.1 %Entertainment 6 % 6 % (5.5)% 7.4 %Services 5 % 5 % (2.5)% 5.9 %Other 1 % -% 1.6 % N/A Total 100 % 100 % (10.3)% 11.0 % Notable comparable sales changes by revenue category were as follows: • Computing and Mobile Phones: The 12.0% comparable sales decline was driven primarily by computing, mobile phones, wearables and tablets.• Consumer Electronics: The 12.2% comparable sales decline was driven primarily by home theater, digital imaging and headphones.• Appliances: The 5.7% comparable sales decline was driven primarily by large appliances.• Entertainment: The 5.5% comparable sales decline was driven primarily by virtual reality and gaming software.• Services: The 2.5% comparable sales decline was driven primarily by the launch of our Best Buy Totaltech membership offering that includes benefits that were previously stand-alone revenue-generating services, such as warranty services. Our gross profit rate decreased in fiscal 2023, primarily due to lower product margin rates, including increased promotions, lower services margin rates, driven by the incremental customer benefits and associated costs from our Best Buy Totaltech membership offering compared to our previous Total Tech Support offer, and higher supply chain costs. These decreases were partially offset by higher profit-sharing revenue from our private label and co-branded credit card arrangement and an approximately $30 million profit-sharing benefit from our services plan portfolio. Our SG&A decreased in fiscal 2023, primarily due to lower short-term incentive compensation expense of approximately $455 million compared to the prior year and decreased store payroll expenses. We were below the required thresholds for most short-term incentive compensation performance metrics in the current year while lapping short-term incentive amounts near maximum levels in the prior year. The restructuring charges incurred in fiscal 2023 primarily related to employee termination benefits related to an enterprise-wide restructuring initiative that commenced in the second quarter of fiscal 2023 to better align our spending with critical strategies and operations, as well as optimize our cost structure. Refer to Note 3, Restructuring, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information. Our operating income rate decreased in fiscal 2023, primarily driven by the unfavorable gross profit rate described above and decreased leverage from lower sales volume on our fixed expenses, which resulted in an unfavorable SG&A rate. 26 International Segment Selected financial data for the International segment was as follows ($ in millions): International Segment Performance Summary2023 2022 2021Revenue$ 3,504 $ 3,931 $ 3,969 Revenue % change (10.9)% (1.0)% 12.6 %Comparable sales % change (5.4)% 3.3 % 15.0 %Gross profit$ 806 $ 938 $ 853 Gross profit as a % of revenue 23.0 % 23.9 % 21.5 %SG&A$ 638 $ 689 $ 689 SG&A as a % of revenue 18.2 % 17.5 % 17.4 %Restructuring charges$ 7 $ 5 $ 121 Operating income$ 161 $ 244 $ 43 Operating income as a % of revenue 4.6 % 6.2 % 1.1 % The decrease in revenue in fiscal 2023 was primarily driven by lower sales in Canada due to comparable sales declines across most of our product categories and the negative impact from unfavorable foreign currency exchange rates. International segment stores open at the end of each of the last three fiscal years were as follows: 2021 2022 2023 Total Stores‎at End of‎Fiscal Year Stores‎Opened Stores‎Closed(1) Total Stores‎at End of‎Fiscal Year Stores‎Opened Stores‎Closed Total Stores‎at End of‎Fiscal YearCanada Best Buy 131 - (4) 127 - - 127 Best Buy Mobile 33 - - 33 - - 33 Mexico Best Buy 4 - (4) - - - - Best Buy Express - - - - - - - Total International segment stores 168 - (8) 160 - - 160 (1)Excludes stores that were temporarily closed as a result of the COVID-19 pandemic. International segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows: Revenue Mix Summary Comparable Sales Summary 2023 2022 2023 2022Computing and Mobile Phones 45 % 45 % (6.1)% 1.6 %Consumer Electronics 30 % 30 % (6.2)% 4.0 %Appliances 10 % 10 % 0.3 % 6.2 %Entertainment 8 % 8 % (8.6)% 3.5 %Services 5 % 5 % (2.1)% 7.9 %Other 2 % 2 % 1.1 % 8.8 %Total 100 % 100 % (5.4)% 3.3 % Notable comparable sales changes by revenue category were as follows: • Computing and Mobile Phones: The 6.1% comparable sales decline was driven primarily by computing and tablets, partially offset by comparable sales growth in mobile phones.• Consumer Electronics: The 6.2% comparable sales decline was driven primarily by home theater and health and fitness.• Appliances: The 0.3% comparable sales growth was driven by small appliances.• Entertainment: The 8.6% comparable sales decline was driven primarily by gaming and virtual reality.• Services: The 2.1% comparable sales decline was driven primarily by warranty services. Our gross profit rate decreased in fiscal 2023, primarily driven by lower product margin rates and higher supply chain costs in Canada. Our SG&A decreased in fiscal 2023, primarily due to lower short-term incentive compensation expense and the favorable impact of foreign currency rates. The restructuring charges incurred in fiscal 2023 primarily related to employee termination benefits related to an enterprise-wide restructuring initiative that commenced in the second quarter of fiscal 2023 to better align our spending with critical strategies and operations, as well as optimize our cost structure. Refer to Note 3, Restructuring, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information. Our operating income rate decreased in fiscal 2023, primarily driven by the unfavorable gross profit rate described above and decreased leverage from lower sales volume on our fixed expenses, which resulted in an unfavorable SG&A rate.‎ 27 Additional Consolidated Results Income Tax Expense Income tax expense decreased in fiscal 2023, primarily due to the impact of decreased pre-tax earnings, partially offset by reduced benefits from the resolution of tax matters. Our effective tax rate increased in fiscal 2023, primarily due to reduced tax benefits from the resolution of tax matters, stock-based compensation and federal tax credits, partially offset by the impact of lower pre-tax earnings. Non-GAAP Financial Measures Reconciliations of operating income, effective tax rate and diluted EPS (GAAP financial measures) to non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS (non-GAAP financial measures), respectively, were as follows ($ in millions, except per share amounts): 2023 2022 2021Operating income$ 1,795 $ 3,039 $ 2,391 % of revenue 3.9 % 5.9 % 5.1 %Restructuring - inventory markdowns(1) - (6) 23 Price-fixing settlement(2) - - (21) Intangible asset amortization(3) 86 82 80 Restructuring charges(4) 147 (34) 254 Acquisition-related transaction costs(3) - 11 - Non-GAAP operating income$ 2,028 $ 3,092 $ 2,727 % of revenue 4.4 % 6.0 % 5.8 % Effective tax rate 20.7 % 19.0 % 24.3 %Price-fixing settlement(2) -% -% 0.2 %Intangible asset amortization(3) 0.1 % 0.1 % (0.6)%Restructuring charges(4) 0.2 % (0.1)% (1.0)%Gain on investments, net(5) -% -% 0.1 %Non-GAAP effective tax rate 21.0 % 19.0 % 23.0 % Diluted EPS$ 6.29 $ 9.84 $ 6.84 Restructuring - inventory markdowns(1) - (0.02) 0.09 Price-fixing settlement(2) - - (0.08) Intangible asset amortization(3) 0.38 0.33 0.30 Restructuring charges(4) 0.65 (0.14) 0.97 Acquisition-related transaction costs(3) - 0.04 - Gain on investments, net(5) - - (0.05) Income tax impact of non-GAAP adjustments(6) (0.24) (0.04) (0.16) Non-GAAP diluted EPS$ 7.08 $ 10.01 $ 7.91 For additional information regarding the nature of charges discussed below, refer to Note 2, Acquisitions; Note 3, Restructuring; Note 4, Goodwill and Intangible Assets; and Note 11, Income Taxes, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.(1)Represents inventory markdowns and subsequent adjustments recorded within cost of sales associated with the exit from operations in Mexico.(2)Represents a price-fixing litigation settlement received in relation to products purchased and sold in prior fiscal years.(3)Represents charges associated with acquisitions, including: (1) the non-cash amortization of definite-lived intangible assets, including customer relationships, tradenames and developed technology; and (2) acquisition-related transaction and due diligence costs, primarily comprised of professional fees.(4)Represents restructuring charges, including: (1) charges in fiscal 2023 associated with an enterprise-wide initiative to better align our spending with critical strategies and operations, as well as to optimize our cost structure; and (2) charges in fiscal 2021 and subsequent adjustments in fiscal 2022 associated with actions taken in the Domestic segment to better align the company’s organizational structure with its strategic focus and the exit from operations in Mexico in the International segment.(5)Represents an increase in the fair value of a minority equity investment in fiscal 2021.(6)The non-GAAP adjustments primarily relate to the U.S., Canada and Mexico. As such, the income tax charge is calculated using the statutory tax rate of 24.5% for the U.S. and 26.4% for Canada applied to the non-GAAP adjustments of each country. There is no income tax charge for Mexico non-GAAP items and a minimal amount of U.S. non-GAAP items, as there was no tax benefit recognized on these expenses in the calculation of GAAP income tax expense. Our non-GAAP operating income rate decreased in fiscal 2023, primarily driven by our Domestic segment’s lower gross profit rate and decreased leverage from lower sales volume on our fixed expenses, which resulted in an unfavorable SG&A rate. Our non-GAAP effective tax rate increased in fiscal 2023, primarily due to reduced tax benefits from the resolution of tax matters, stock-based compensation and federal tax credits, partially offset by the impact of lower pre-tax earnings. Our non-GAAP diluted EPS decreased in fiscal 2023, primarily driven by the decrease in non-GAAP operating income, partially offset by lower diluted weighted-average common shares outstanding from share repurchases. 28 Liquidity and Capital Resources We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment required to support our business strategies, the performance of our business, capital expenditures, dividends, credit facilities, short-term borrowing arrangements and working capital management. We modify our approach to managing these variables as changes in our operating environment arise. For example, capital expenditures and share repurchases are a component of our cash flow and capital management strategy, which, to a large extent, we can adjust in response to economic and other changes in our business environment. We have a disciplined approach to capital allocation, which focuses on investing in key priorities that support our strategy. Cash and cash equivalents were as follows ($ in millions): January 28, 2023 January 29, 2022Cash and cash equivalents$ 1,874 $ 2,936 The decrease in cash and cash equivalents in fiscal 2023 was primarily driven by share repurchases, capital expenditures and dividend payments. These decreases were partially offset by positive cash flows from operations, primarily driven by earnings. Our cash deposits held at financial institutions may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit. We limit exposure relating to financial instruments by diversifying the financial instruments among various counterparties, which consist primarily of major financial institutions. Cash Flows Cash flows were as follows ($ in millions): 2023 2022 2021Total cash provided by (used in): Operating activities$ 1,824 $ 3,252 $ 4,927 Investing activities (962) (1,372) (788) Financing activities (1,806) (4,297) (876) Effect of exchange rate changes on cash (8) (3) 7 Increase (decrease) in cash, cash equivalents and restricted cash$ (952) $ (2,420) $ 3,270 Operating Activities The decrease in cash provided by operating activities in fiscal 2023 was primarily due to lower earnings and higher incentive compensation payments in the current year as a result of strong fiscal 2022 results, partially offset by the timing and volume of inventory purchases and payments. Investing Activities The decrease in cash used in investing activities in fiscal 2023 was primarily driven by the acquisitions of Current Health and Yardbird in fiscal 2022 and a decrease in purchases of investments, partially offset by an increase in capital spending for initiatives to support our business. Financing Activities The decrease in cash used in financing activities in fiscal 2023 was primarily driven by lower share repurchases. Sources of Liquidity Funds generated by operating activities, available cash and cash equivalents, our credit facilities and other debt arrangements are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures, share repurchases, dividends and strategic initiatives, including business combinations. However, in the event our liquidity is insufficient, we may be required to limit our spending. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms. We have a $1.25 billion five-year senior unsecured revolving credit facility agreement (the “Five-Year Facility Agreement”) with a syndicate of banks. The Five-Year Facility Agreement permits borrowings of up to $1.25 billion and expires in May 2026. There were no borrowings outstanding under the Five-Year Facility Agreement as of January 28, 2023, or January 29, 2022. Our ability to continue to access the Five-Year Facility Agreement is subject to our compliance with its terms and conditions, including financial covenants. The financial covenants require us to maintain certain financial ratios. As of January 28, 2023, we were in compliance with all financial covenants. If an event of default were to occur with respect to any of our other debt, it would likely constitute an event of default under the Five-Year Facility Agreement as well. 29 Our credit ratings and outlook as of March 15, 2023, remained unchanged from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, and are summarized below. Rating AgencyRating OutlookStandard & Poor'sBBB+ StableMoody'sA3 Stable Credit rating agencies review their ratings periodically, and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the retail and consumer electronics industries, our financial position and changes in our business strategy. If changes in our credit ratings were to occur, they could impact, among other things, interest costs for certain of our credit facilities, our future borrowing costs, access to capital markets, vendor financing terms and future new-store leasing costs. Restricted Cash Our liquidity is also affected by restricted cash balances that are primarily restricted to cover product protection plans provided under our Best Buy Totaltech membership offering and other self-insurance liabilities. Restricted cash, which is included in Other current assets on our Consolidated Balance Sheets, was $379 million and $269 million as of January 28, 2023, and January 29, 2022, respectively. The increase in restricted cash was primarily due to our Best Buy Totaltech membership offering and growth in the membership base, partially offset by a decrease in restricted cash for other self-insurance liabilities. Capital Expenditures Capital expenditures were as follows ($ in millions): 2023 2022 2021E-commerce and information technology$ 540 $ 549 $ 539 Store-related projects(1) 355 178 117 Supply chain 35 10 57 Total capital expenditures(2)$ 930 $ 737 $ 713 (1)Store-related projects are primarily comprised of store remodels and various merchandising projects.(2)Total capital expenditures exclude non-cash capital expenditures of $35 million, $46 million and $32 million in fiscal 2023, fiscal 2022 and fiscal 2021, respectively. Non-cash capital expenditures are comprised of additions to property and equipment included in accounts payable, as well as finance leases. We currently expect capital expenditures to approximate $850 million in fiscal 2024. Debt and Capital As of January 28, 2023, we had $500 million of principal amount of notes due October 1, 2028 (“2028 Notes”) and $650 million of principal amount of notes due October 1, 2030 (“2030 Notes”). Refer to Note 8, Debt, in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our outstanding debt. Share Repurchases and Dividends We repurchase our common stock and pay dividends pursuant to programs approved by our Board. The payment of cash dividends is also subject to customary legal and contractual restrictions. Our long-term capital allocation strategy is to first fund operations and investments in growth and then return excess cash over time to shareholders through dividends and share repurchases while maintaining investment-grade credit metrics. Our share repurchase plans are evaluated on an ongoing basis, considering factors such as our financial condition and cash flows, our economic outlook, the impact of tax laws, our liquidity needs, and the health and stability of global credit markets. The timing and amount of future repurchases may vary depending on such factors. On February 28, 2022, our Board approved a new $5.0 billion share repurchase program, which replaced the $5.0 billion share repurchase program authorized on February 16, 2021. There is no expiration date governing the period over which we can repurchase shares under this authorization. Share repurchase and dividend activity were as follows ($ and shares in millions, except per share amounts): 2023 2022 2021Total cost of shares repurchased$ 1,001 $ 3,504 $ 318 Average price per share$ 84.78 $ 108.97 $ 102.63 Total number of shares repurchased 11.8 32.2 3.1 Regular quarterly cash dividends per share$ 3.52 $ 2.80 $ 2.20 Cash dividends declared and paid$ 789 $ 688 $ 568 The total cost of shares repurchased decreased in fiscal 2023 from decreases in the volume of repurchases and the average price per share.‎ 30 Cash dividends declared and paid increased in fiscal 2023, primarily due to an increase in the regular quarterly cash dividend per share. On March 2, 2023, we announced the Board’s approval of a 5% increase in the regular quarterly dividend to $0.92 per share. Other Financial Measures Our current ratio, calculated as current assets divided by current liabilities, remained unchanged at 1.0 as of January 28, 2023, and January 29, 2022. Our debt to earnings ratio, calculated as total debt (including current portion) divided by net earnings increased to 0.8 as of January 28, 2023, compared to 0.5 at January 29, 2022, primarily due to lower net earnings. Off-Balance-Sheet Arrangements and Contractual Obligations We do not have outstanding off-balance-sheet arrangements. Contractual obligations as of January 28, 2023, were as follows ($ in millions): Payments Due by PeriodContractual ObligationsTotal Less Than ‎1 Year 1-3 Years 3-5 Years More Than ‎5 YearsPurchase obligations(1)$ 3,086 $ 2,874 $ 188 $ 24 $ - Operating lease obligations(2)(3) 3,033 707 1,214 729 383 Long-term debt obligations(4) 1,150 - - - 1,150 Interest payments(5) 241 47 76 69 49 Finance lease obligations(2) 46 16 22 4 4 Total$ 7,556 $ 3,644 $ 1,500 $ 826 $ 1,586 For additional information regarding the nature of contractual obligations discussed below, refer to Note 6, Derivative Instruments; Note 7, Leases; Note 8, Debt; and Note 13, Contingencies and Commitments, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.(1)Purchase obligations include agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include agreements that are cancelable without penalty. Additionally, although they do not contain legally binding purchase commitments, we included open purchase orders in the table above. Substantially all open purchase orders are fulfilled within 30 days.(2)Lease obligations exclude $63 million of legally binding fixed costs for leases signed but not yet commenced.(3)Operating lease obligations exclude payments to landlords covering real estate taxes and common area maintenance. These charges, if included, would increase total operating lease obligations by $0.7 billion as of January 28, 2023.(4)Represents principal amounts only and excludes interest rate swap valuation adjustments related to our long-term debt obligations.(5)Interest payments related to our 2028 Notes and 2030 Notes include the variable interest rate payments included in our interest rate swaps. Additionally, we have $1.25 billion in undrawn capacity on our Five-Year Facility Agreement as of January 28, 2023, which, if drawn upon, would be included in either short-term or long-term debt on our Consolidated Balance Sheets. Critical Accounting Estimates The preparation of our financial statements requires us to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors believed to be relevant at the time our consolidated financial statements are prepared. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. We have not made any material changes to our accounting policies or methodologies during the past three fiscal years. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results. These estimates require our most difficult, subjective or complex judgments and generally incorporate significant uncertainty. Vendor Allowances DescriptionWe receive funds from our merchandise vendors through a variety of programs and arrangements, primarily in the form of purchases-based or sales-based volumes and for product advertising and placement. We recognize allowances based on purchases and sales as a reduction of cost of sales when the associated inventory is sold. Allowances for advertising and placement are recognized as a reduction of cost of sales ratably over the corresponding performance period. Funds that are determined to be a reimbursement of specific, incremental and identifiable costs incurred to sell a vendor's products are recorded as an offset to the related expense within SG&A when incurred. Judgments and uncertainties involved in the estimateDue to the quantity and diverse nature of our vendor agreements, estimates are made to determine the amount of funding to be recognized in earnings or deferred as an offset to inventory. These estimates require a detailed analysis of complex factors, including (1) proper classification of the type of funding received; and (2) the methodology to estimate the portion of purchases-based funding that should be recognized in cost of sales in each period, which considers factors such as inventory turn by product category and actual sell-through of inventory. 31 Effect if actual results differ from assumptionsA 10% change in our vendor funding deferral as of January 28, 2023, would have affected net earnings by approximately $45 million in fiscal 2023. The level of vendor funding deferral has remained relatively stable over the last three fiscal years. Goodwill DescriptionGoodwill is evaluated for impairment annually in the fiscal fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. The impairment test involves a comparison of the fair value of each reporting unit with its carrying value. Fair value reflects our estimate of the price a potential market participant would be willing to pay for the reporting unit in an arms-length transaction. We have goodwill in two reporting units – Best Buy Domestic (comprising our core U.S. Best Buy business) and Best Buy Health – with carrying values of $492 million and $891 million, respectively, as of January 28, 2023. Judgments and uncertainties involved in the estimateDetermining the fair value of a reporting unit requires complex analysis and judgment. We use a combination of discounted cash flow (“DCF”) models and market data, such as earnings multiples and quoted market prices, for observable comparable companies. DCF models require detailed forecasts of cash flow drivers, such as revenue growth rates, margin rates and capital investments, and estimates of weighted-average cost of capital rates. These estimates incorporate many uncertain factors, such as the effectiveness of our strategy, changes in customer behavior, technological changes, competitor actions, regulatory changes and macroeconomic trends. Effects if actual results differ from assumptionsFor our Best Buy Domestic reporting unit, fair value exceeded book value by a substantial margin in fiscal 2023 and fiscal 2022. Compared to fiscal 2022, the excess of fair value over book value in fiscal 2023 decreased approximately in line with the decline in Best Buy’s market capitalization over the same period, reflecting the macroeconomic factors that affected our fiscal year 2023 performance and our expectations for the future. Barring a fundamental, material further deterioration of these factors, we believe the risk of future goodwill impairment within our Best Buy Domestic reporting unit is remote. Our Best Buy Health reporting unit is subject to a greater level of uncertainty, since it operates in a less mature, rapidly-changing and high-growth environment. In both fiscal 2023 and fiscal 2022, the excess of fair value over book value for this reporting unit was substantial. In fiscal 2023, the excess decreased more significantly than our Best Buy Domestic reporting unit, primarily due to the effects of macroeconomic factors, driving, for example, lower forecasted revenue growth rates in some categories and higher estimates of weighted-average cost of capital rates. The risk of further deterioration in these factors, along with the more uncertain environment in which Best Buy Health operates, cause the likelihood of goodwill impairment for our Best Buy Health reporting unit to be higher than for our Best Buy Domestic reporting unit. Inventory Markdown DescriptionOur merchandise inventories were $5.1 billion as of January 28, 2023. We value our inventory at the lower of cost or net realizable value through the establishment of inventory markdown adjustments. Markdown adjustments reflect the excess of cost over the net recovery we expect to realize from the ultimate sale or other disposal of inventory and establish a new cost basis. No adjustment is recorded for inventory that we expect to return to our vendors for full credit. Judgments and uncertainties involved in the estimateMarkdown adjustments involve uncertainty because the calculations require management to make assumptions and to apply judgment about the expected revenue and incremental costs we will generate for current inventory. Such estimates include the evaluation of historical recovery rates, as well as factors such as product type and condition, forecasted consumer demand, product lifecycles, promotional environment, vendor return rights and the expected sales channel of ultimate disposition. We also apply judgment in the assumptions about other components of net realizable value, such as vendor allowances and selling costs. Effect if actual results differ from assumptionsA 10% change in our markdown adjustment as of January 28, 2023, would have affected net earnings by approximately $14 million in fiscal 2023. The level of markdown adjustments has remained relatively stable over the last three fiscal years. Tax Contingencies DescriptionOur income tax returns are routinely examined by domestic and foreign tax authorities. Taxing authorities audit our tax filing positions, including the timing and amount of income and deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various taxing authorities. In evaluating the exposures associated with our various tax filing positions, we may record a liability for such exposures. A number of years may elapse before a particular matter, for which we have established a liability, is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provisions in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings and the results of tax audits. 32 Judgments and uncertainties involved in the estimateOur liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and apply judgment to estimate the exposures associated with our various tax filing positions. Such assumptions can include complex and uncertain external factors, such as changes in tax law, interpretations of tax law and the timing of such changes, and uncertain internal factors such as taxable earnings by jurisdiction, the magnitude and timing of certain transactions and capital spending. Effect if actual results differ from assumptionsAlthough we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may reduce our effective income tax rate in the period of resolution. See Note 11, Income Taxes, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information. Service Revenue DescriptionWe sell membership plans that include access to benefits such as technical support, delivery and installation, price discounts on certain products and services, product protection plans and anti-virus software. We allocate the transaction price to all performance obligations identified in the contract based on their relative fair value. For performance obligations provided over the term of the contract, we typically recognize revenue on a usage basis, an input method of measuring progress over the related contract term. This method involves the estimation of expected usage patterns, primarily derived from historical information. Judgments and uncertainties involved in the estimateThere is judgment in (1) measuring the relative standalone selling price for bundled performance obligations; and (2) assessing the appropriate recognition and methodology for each performance obligation, and for those based on usage, estimating the expected pattern of consumption across a large portfolio of customers. When insufficient reliable and relevant history is available to estimate usage, we generally recognize revenue ratably over the life of the contract until such history has accumulated. Effect if actual results differ from assumptionsA 10% change in the amount of services membership deferred revenue as of January 28, 2023, would have affected net earnings by approximately $40 million in fiscal 2023. The amount of services membership deferred revenue has increased over the last three fiscal years, primarily driven by the national launch of our Best Buy Totaltech membership offering, which resulted in higher membership sales and the initial deferral of more revenue than under the previous Total Tech Support offer. New Accounting Pronouncements We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. In addition to the risks inherent in our operations, we are exposed to certain market risks. Interest Rate Risk We are exposed to changes in short-term market interest rates and these changes in rates will impact our net interest expense. Our cash, cash equivalents and restricted cash generate interest income that will vary based on changes in short-term interest rates. In addition, we have swapped a portion of our fixed-rate debt to floating rate such that the interest expense on this debt will vary with short-term interest rates. Refer to Note 6, Derivative Instruments, and Note 8, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information regarding our interest rate swaps. As of January 28, 2023, we had $2.3 billion of cash, cash equivalents and restricted cash and $500 million of debt that has been swapped to floating rate, and therefore the net balance exposed to interest rate changes was $1.8 billion. As of January 28, 2023, a 50-basis point increase in short-term interest rates would have led to an estimated $9 million reduction in net interest expense, and conversely a 50-basis point decrease in short-term interest rates would have led to an estimated $9 million increase in net interest expense. 33 Foreign Currency Exchange Rate Risk We have market risk arising from changes in foreign currency exchange rates related to operations in our International segment. On a limited basis, we utilize foreign exchange forward contracts to manage foreign currency exposure to certain forecasted inventory purchases, recognized receivable and payable balances and our investment in our Canadian operations. Our primary objective in holding derivatives is to reduce the volatility of net earnings and cash flows, as well as net asset value associated with changes in foreign currency exchange rates. Our foreign currency risk management strategy includes both hedging instruments and derivatives that are not designated as hedging instruments. Refer to Note 6, Derivative Instruments, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information regarding these instruments. During fiscal 2023, foreign currency exchange rate fluctuations were primarily driven by the strength of the U.S. dollar compared to the Canadian dollar compared to the prior-year period, which had a negative overall impact on our revenue as this foreign currency revenue translated into less U.S. dollars. We estimate that foreign currency exchange rate fluctuations had a net unfavorable impact on our revenue of approximately $162 million. The impact of foreign exchange rate fluctuations on our net earnings in fiscal 2023 was not significant. ‎ 34

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+ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. General Company Overview The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those Financial Statements included elsewhere in this Annual Report on Form 10-K. In addition, please see “Information Regarding Non-GAAP Financial Measures” below regarding important information on non-GAAP financial measures contained in our discussion and analysis. We are a diversified insurance agency, wholesale brokerage, insurance programs and services organization headquartered in Daytona Beach, Florida. As an insurance intermediary, our principal sources of revenue are commissions paid by insurance companies and, to a lesser extent, fees paid directly by customers. Commission revenues generally represent a percentage of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance companies and the insureds’ underlying “insurable exposure units,” which are units that insurance companies use to measure or express insurance exposed to risk (such as property values, sales or payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control. We also participate in capitalized captive insurance facilities (the "Captives") for the purpose of having additional capacity to place coverage, drive additional revenues and to participate in underwriting. The Company has traditionally participated in underwriting profits through profit-sharing contingent commissions. These Captives give us another way to deliver incremental revenue growth and continue to participate in underwriting results while limiting exposure to claims expenses. The Captives focus on property insurance for earthquake and wind exposed properties underwritten by certain managing general agents. The Captives limit the Company's exposure to claims expenses either through reinsurance or by only participating in certain tranches of the underwriting. We have increased revenues every year from 1993 to 2022, with the exception of 2009, when our revenues declined 1.0%. Our revenues grew from $95.6 million in 1993 to $3.6 billion in 2022, reflecting a compound annual growth rate of 13.3%. In the same 29-year period, we increased net income from $8.1 million to $671.8 million in 2022, a 16.5% compound annual growth rate. The volume of business from new and existing customers, fluctuations in insurable exposure units, changes in premium rate levels, changes in general economic and competitive conditions, a health pandemic or a reduction of purchased limits the occurrence of catastrophic weather events all affect our revenues. For example, higher levels of inflation, an increase the value of insurable exposure units, or a general decline in economic activity, could decrease the value of insurable exposure units. Conversely, increasing costs of litigation settlements and awards could cause some customers to seek higher levels of insurance coverage. Historically, we have grown our revenues as a result of our focus on net new business and acquisitions. We foster a strong, decentralized sales and service culture, which enables responsiveness to changing business conditions and drives accountability for results. The term “core commissions and fees” excludes profit-sharing contingent commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. The net change in core commissions and fees reflects the aggregate changes attributable to: (i) net new and lost accounts; (ii) net changes in our customers’ exposure units; (iii) net changes in insurance premium rates or the commission rate paid to us by our carrier partners; (iv) the net change in fees paid to us by our customers; and (v) any businesses acquired or disposed of. We also earn profit-sharing contingent commissions, which are commissions based primarily on underwriting results, but in select situations may reflect additional considerations for volume, growth and/or retention. These commissions, which are included in our commissions and fees in the Consolidated Statements of Income, are accrued throughout the year based on actual premiums written and are primarily received in the first and second quarters of each subsequent year, based upon the aforementioned considerations for the prior year(s). Over the last three years, profit-sharing contingent commissions have averaged approximately 3.0% of commissions and fees revenue. Fee revenues primarily relate to services other than securing coverage for our customers, and to a lesser extent as fees negotiated in lieu of commissions. Fee revenues are generated by: (i) our Services segment, which is primarily a fee-based business that provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services; (ii) our National Programs and Wholesale Brokerage segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies; and (iii) our Retail segment in our large-account customer base, where we primarily earn fees for securing insurance for our customers, and in our automobile dealer services (“F&I”) businesses where we earn fees for 26 assisting our customers with creating and selling warranty and service risk management programs. Fee revenues as a percentage of our total commissions and fees, represented 25.8% in 2022 and 27.4% in 2021. For the year ended December 31, 2022, our commissions and fees growth rate was 16.9% and our consolidated Organic Revenue growth rate was 8.1%. Historically, investment income has consisted primarily of interest earnings on operating cash and where permitted, on premiums and advance premiums collected and held in a fiduciary capacity before being remitted to insurance companies. Our policy as it relates to the Company’s capital is to invest available funds in high-quality, short-term money-market funds and fixed income investment securities. Investment income also includes gains and losses realized from the sale of investments. Other income primarily reflects legal settlements and other revenues. Income before income taxes for the year ended December 31, 2022 increased by $113.3 million, or 14.9% over 2021, driven by new business and growth from existing customers, acquisitions we completed in the last twelve months and the year-over-year change in estimated acquisition earn-out payables, which were partially offset by incremental operating costs, increased amortization expense as a result of our recent acquisitions along with increased interest expense associated with higher average debt balances from debt issued and bank financing in the first quarter of 2022 to fund the acquisitions of GRP (Jersey) Holdco Limited and its businesses ("GRP"), Orchid Underwriters Agency and CrossCover Insurance Services ("Orchid") and BdB Limited companies ("BdB") as well as increases in the floating-rate benchmark used on our adjustable rate debt and the net change in any gain or loss associated with the sales of businesses or books of business. Information Regarding Non-GAAP Financial Measures In the discussion and analysis of our results of operations, in addition to reporting financial results in accordance with generally accepted accounting principles (“GAAP”), we provide references to the following non-GAAP financial measures as defined in Regulation G of the SEC rules: Total Revenues - Adjusted, Organic Revenue, EBITDAC, EBITDAC Margin, EBITDAC - Adjusted and EBITDAC Margin - Adjusted. We present these measures because we believe such information is of interest to the investment community and because we believe it provides additional meaningful methods to evaluate the Company’s operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis due to the impact of certain items that have a high degree of variability and that we believe are not indicative of ongoing performance. This non-GAAP financial information should be considered in addition to, not in lieu of, the Company’s consolidated income statements as of the relevant date. Consistent with Regulation G, a description of such information is provided below and tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Annual Report on Form 10-K under “Results of Operations - Segment Information.” We view Organic Revenue and Organic Revenue growth as important indicators when assessing and evaluating our performance on a consolidated basis and for each of our four segments, because they allow us to determine a comparable, but non-GAAP, measurement of revenue growth that is associated with the revenue sources that were a part of our business in both the current and prior year. We also view Total Revenues - Adjusted, EBITDAC, EBITDAC - Adjusted, EBITDAC Margin and EBITDAC Margin - Adjusted as important indicators when assessing and evaluating our performance, as they present more comparable measurements of our operating margins in a meaningful and consistent manner. As disclosed in our most recent proxy statement, we use Organic Revenue and EBITDAC Margin as key performance metrics for our short-term and long-term incentive compensation plans for executive officers and other key employees. Beginning January 1, 2022, we include guaranteed supplemental commissions ("GSCs") as part of core commissions and fees and, therefore, GSCs are a component of Organic Revenue. All current and prior periods contained within this Annual Report on Form 10-K have been adjusted for this treatment. GSCs are a stable source of revenue that are highly correlated to core commissions, so isolating them separately provided no meaningful incremental value in evaluating our revenue. Beginning January 1, 2022, the following, in addition to the change in estimated acquisition earn-out payables, are excluded from certain non-GAAP measures, as we believe these amounts are not indicative of the ongoing operating performance of the business and are not easily comparable from period-to-period: •“(Gain)/loss on disposal,” a caption on our consolidated statements of income which reflects net proceeds received as compared to net book value related to sales of books of business and other divestiture transactions, such as the disposal of a business through sale or closure. •“Acquisition/Integration Costs,” which represent the acquisition and integration costs (e.g., costs associated with regulatory filings, legal/accounting services, due diligence and the costs of integrating our information technology systems) arising out of our acquisitions of GRP, Orchid and BdB, which are not expected to occur on an ongoing basis in the future. •The period-over-period impact of foreign currency translation (“Foreign Currency Translation”), which is calculated by applying current-year foreign exchange rates to the various functional currencies in our business to our reporting currency of U.S. dollars for the same period in the prior year. We are presenting EBITDAC - Adjusted and EBITDAC Margin - Adjusted for the current and prior year periods contained within this Annual Report on Form 10-K so these non-GAAP financial measures compare both periods on the same basis. 27 Non-GAAP Revenue Measures •Total Revenues - Adjusted is our total revenues, excluding the period-over-period impact of Foreign Currency Translation. •Organic Revenue is our core commissions and fees less: (i) the core commissions and fees earned for the first twelve months by newly acquired operations; (ii) divested business (core commissions and fees generated from offices, books of business or niches sold or terminated during the comparable period); and (iii) the period-over-period impact of Foreign Currency Translation. The term “core commissions and fees” excludes profit-sharing contingent commissions and therefore represents the revenues earned directly from specific insurance policies sold and specific fee-based services rendered. Organic Revenue can be expressed as a dollar amount or a percentage rate when describing Organic Revenue growth. Non-GAAP Earnings Measures •EBITDAC is defined as income before interest, income taxes, depreciation, amortization and the change in estimated acquisition earn-out payables. •EBITDAC Margin is defined as EBITDAC divided by total revenues. •EBITDAC - Adjusted is defined as EBITDAC, excluding (i) (gain)/loss on disposal, (ii) Acquisition/Integration Costs and (iii) the period-over-period impact of Foreign Currency Translation. •EBITDAC Margin - Adjusted is defined as EBITDAC - Adjusted divided by Total Revenues - Adjusted. Our industry peers may provide similar supplemental non-GAAP information with respect to one or more of these measures, although they may not use the same or comparable terminology and may not make identical adjustments and, therefore, comparability may be limited. This supplemental non-GAAP financial information should be considered in addition to, and not in lieu of, the Company's Consolidated Financial Statements. Acquisitions Part of our business strategy is to attract high-quality insurance intermediaries and service organizations to join our operations. From 1993 through the fourth quarter of 2022, we acquired 610 insurance intermediary operations. Critical Accounting Policies Our Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We continually evaluate our estimates, which are based upon a combination of historical experience and assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for our judgments about the recognition of revenues, expenses, carrying values of our assets and liabilities, of which values are not readily apparent from other sources. Actual results may differ from these estimates. We believe that of our significant accounting and reporting policies, the more critical policies include our accounting for revenue recognition, business combinations and purchase price allocations, intangible asset impairments, non-cash stock-based compensation and reserves for litigation. In particular, the accounting for these areas is subject to uncertainty because it requires significant use of judgment to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Revenue Recognition The majority of our revenue is commissions derived from our performance as agents and brokers, acting on behalf of insurance carriers to sell products to customers that are seeking to transfer risk, and conversely, acting on behalf of those customers in negotiating with insurance carriers seeking to acquire risk in exchange for premiums. In the majority of these arrangements, our performance obligation is complete upon the effective date of the bound policy, as such, that is when the associated revenue is recognized. In some arrangements, where we are compensated through commissions, we also perform other services for our customer beyond binding of coverage. In those arrangements we apportion the commission between binding of coverage and other services based on their relative fair value and recognize the associated revenue as those performance obligations are satisfied. Where the Company’s performance obligations have been completed, but the final amount of compensation is unknown due to variable factors, we estimate the amount of such compensation. We refine those estimates upon our receipt of additional information or final settlement, whichever occurs first. To a lesser extent, the Company earns revenues in the form of fees. Like commissions, fees paid to us in lieu of commission, are recognized upon the effective date of the bound policy. When we are paid a fee for service, however, the associated revenue is recognized over a period of time that coincides with when the customer simultaneously receives and consumes the benefit of our work, which characterizes 28 most of our claims processing arrangements and various services performed in our property and casualty, and employee benefits practices. Other fees are typically recognized upon the completion of the delivery of the agreed-upon services to the customer. To a much lesser extent, the Company earned revenues starting in 2022 in the form of net retained earned premiums in connection with the Captives. These premiums are reported net of the ceded premiums for reinsurance and recognized evenly over the associated policy periods. Management determines a policy cancellation reserve based upon historical cancellation experience adjusted in accordance with known circumstances. Please see Note 2 “Revenues” in the “Notes to Consolidated Financial Statements” for additional information regarding the nature and timing of our revenues. Business Combinations and Purchase Price Allocations We have acquired significant intangible assets through acquisitions of businesses. These assets generally consist of purchased customer accounts, non-compete agreements, and the excess of purchase prices over the fair value of identifiable net assets acquired (goodwill). The determination of estimated useful lives and the allocation of purchase price to intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. In connection with acquisitions, we record the estimated value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer accounts and non-compete agreements. Purchased customer accounts include the right to represent insureds or claimants supported by the physical records and files obtained from acquired businesses that contain information about insurance policies, customers and other matters essential to policy renewals of delivery of services. Their value primarily represents the present value of the underlying cash flows expected to be received over the estimated future duration of the acquired customer relationships. The valuation of purchased customer accounts involves significant estimates and assumptions concerning matters such as cancellation frequency, expenses and discount rates. Any change in these assumptions could affect the carrying value of purchased customer accounts. Non-compete agreements are valued based upon their duration and any unique features of the particular agreements. Purchased customer accounts and non-compete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which typically range from 3 to 15 years. The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and intangible assets is assigned to goodwill and is not amortized. The recorded purchase prices for all acquisitions include an estimation of the fair value of liabilities associated with any potential earn-out provisions, where an earn-out is part of the negotiated transaction. Subsequent changes in the fair value of earn-out obligations are recorded in the Consolidated Statement of Income as a result of updated expectations for the performance of the associated business. The fair value of earn-out obligations is based upon the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements. In determining fair value, the acquired business’s future performance is estimated using financial projections developed by management for the acquired business, and this estimate reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated based on the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These estimates are then discounted to a present value using a risk-adjusted rate that takes into consideration the likelihood that the forecast earn-out payments will be made. Intangible Assets Impairment Goodwill is subject to at least an annual assessment for impairment, measured by a fair-value-based test. Amortizable intangible assets are amortized over their useful lives and are subject to an impairment review based upon an estimate of the undiscounted future cash flows resulting from the use of the assets. To determine if there is potential impairment of goodwill, we compare the fair value of each reporting unit with its carrying value. The Company may elect to first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the Company does not perform a qualitative assessment, or as a result of the qualitative assessment, it is not determined that the fair value of the reporting unit more likely than not exceeds the carrying amount, the Company will calculate the fair value of the reporting unit for comparison against the carrying value. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based upon multiples of EBITDAC, or on a discounted cash flow basis. Management assesses the recoverability of our goodwill and our amortizable intangibles and other long-lived assets annually and whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Any of the following factors, if present, may trigger an impairment review: (i) a significant underperformance relative to historical or projected future operating results, (ii) a significant negative industry or economic trend, and (iii) a significant decline in our market capitalization. If the recoverability of these assets is unlikely because of the existence of one or more of the above-referenced factors, an impairment analysis is performed. Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or related assumptions change in the future, we may be required to revise the assessment and, if appropriate, record an impairment charge. We completed our most recent evaluation of impairment for goodwill as of November 30, 2022 and determined that the fair value of goodwill exceeded the carrying value of such assets. Additionally, there have been no impairments recorded for amortizable intangible assets for the years ended December 31, 2022 and 2021. 29 Non-Cash Stock-Based Compensation We grant non-vested stock awards to our employees, with the related compensation expense recognized in the financial statements over the associated service period based upon the grant-date fair value of those awards, subject to any performance modification. During the performance measurement period, we review the probable outcome of the performance conditions associated with our performance awards and adjust the expense recognition accruals with the expected performance outcome. During the first quarter of 2021, the performance conditions for approximately 1.2 million shares of the Company’s common stock granted under the Company’s 2010 SIP and approximately 22,000 shares of the Company’s common stock granted under the Company’s 2019 SIP were determined by the Compensation Committee to have been satisfied relative to the performance-based grants issued in 2018 and 2020. These grants had a performance measurement period that concluded on December 31, 2020. The vesting condition for these grants requires continuous employment for a period of up to five years from the 2018 grant date and four years from the 2020 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges. The awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share. During the first quarter of 2022, the performance conditions for approximately 1.3 million shares of the Company’s common stock granted under the Company’s 2010 SIP and approximately 22,000 shares of the Company’s common stock granted under the Company’s 2019 SIP were determined by the Compensation Committee to have been satisfied relative to the performance-based grants issued in 2019 and 2021. These grants had a performance measurement period that concluded on December 31, 2021. The vesting condition for these grants requires continuous employment for a period of up to five years from the 2019 grant date and four years from the 2021 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges. The awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share. During the first quarter of 2023, the performance conditions for approximately 970,000 shares of the Company’s common stock granted under the under the Company’s 2019 SIP were determined by the Compensation Committee to have been satisfied relative to the performance-based grants issued in 2020 and 2022. These grants had a performance measurement period that concluded on December 31, 2022. The vesting condition for these grants requires continuous employment for a period of up to five years from the 2020 grant date and four years from the 2022 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges. The awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share. Litigation and Claims We are subject to numerous litigation claims that arise in the ordinary course of business. If it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss is estimable, an accrual for the costs to resolve these claims is recorded in accrued expenses in the accompanying Consolidated Financial Statements. Professional fees related to these claims are included in other operating expenses in the accompanying Consolidated Statement of Income as incurred. Management, with the assistance of in-house and outside counsel, determines whether it is probable that a liability has been incurred and estimates the amount of loss based upon analysis of individual issues. New developments or changes in settlement strategy in dealing with these matters may significantly affect the required reserves and affect our net income. 30 RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 The following discussion and analysis regarding results of operations and liquidity and capital resources should be considered in conjunction with the accompanying Consolidated Financial Statements and related Notes. For a comparison of our results of operations and liquidity and capital resources for the years ended December 31, 2021 and 2020, please see Part II, Item 7 of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2022. Financial information relating to our Consolidated Financial Results is as follows: (in millions, except percentages) 2022 % Change 2021 REVENUES Core commissions and fees $ 3,474.5 17.2 % $ 2,965.3 Profit-sharing contingent commissions 88.7 7.9 % 82.2 Investment income 6.5 NMF 1.1 Other income, net 3.7 32.1 % 2.8 Total revenues 3,573.4 17.1 % 3,051.4 EXPENSES Employee compensation and benefits 1,816.9 11.0 % 1,636.9 Other operating expenses 596.8 48.1 % 403.0 (Gain)/loss on disposal (4.5 ) (53.1 )% (9.6 ) Amortization 146.6 22.6 % 119.6 Depreciation 39.2 17.7 % 33.3 Interest 141.2 117.2 % 65.0 Change in estimated acquisition earn-out payables (38.9 ) (196.3 )% 40.4 Total expenses 2,697.3 17.9 % 2,288.6 Income before income taxes 876.1 14.9 % 762.8 Income taxes 204.3 16.3 % 175.7 NET INCOME $ 671.8 14.4 % $ 587.1 Income Before Income Taxes Margin (1) 24.5 % 25.0 % EBITDAC - Adjusted (2) $ 1,170.9 15.9 % $ 1,010.1 EBITDAC Margin - Adjusted (2) 32.8 % 33.2 % Organic Revenue growth rate (2) 8.1 % 10.4 % Employee compensation and benefits relative to total revenues 50.8 % 53.6 % Other operating expenses relative to total revenues 16.7 % 13.2 % Capital expenditures $ 52.6 16.9 % $ 45.0 Total assets at December 31 $ 13,973.5 42.7 % $ 9,795.4 (1)“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues (2)A non-GAAP financial measure NMF = Not a meaningful figure Commissions and Fees Commissions and fees, including profit-sharing contingent commissions for 2022, increased $515.7 million to $3,563.2 million, or 16.9% over 2021. Core commissions and fees in 2022 increased $509.2 million, composed of (i) $239.9 million of net new and renewal business, which reflects an Organic Revenue growth rate of 8.1%; (ii) $288.6 million from acquisitions that had no comparable revenues in the same period of 2021; (iii) an offsetting decrease from the impact of foreign currency translation of $4.5 million; and (iv) an offsetting decrease of $14.8 million related to commissions and fees revenue from business divested in the preceding twelve months. Profit-sharing contingent commissions for 2022 increased by $6.5 million, or 7.9%, compared to the same period in 2021. This increase was the result of recent acquisitions and qualifying for certain profit-sharing contingent commissions in 2022 that we did not qualify for in the prior year, partially offset by reduced profit-sharing contingent commissions relating to the impacts from the estimated insured property losses associated with Hurricane Ian. Investment Income Investment income for 2022 was $6.5 million, compared with $1.1 million in 2021. The increase was primarily driven by higher average interest rates compared to 2021. Other Income, Net Other income for 2022 was $3.7 million, compared with $2.8 million in 2021. 31 Employee Compensation and Benefits Employee compensation and benefits expense as a percentage of total revenues was 50.8% for the year ended December 31, 2022 as compared to 53.6% for the year ended December 31, 2021, and increased 11.0%, or $180.0 million. This increase included $128.6 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2021. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2022 and 2021 increased by $51.4 million or 3.2%. This underlying employee compensation and benefits expense increase was primarily related to: (i) increased claims associated with our self-insured employee health plan; (ii) an increase in salaries attributable to inflation; (iii) an increase in producer compensation associated with revenue growth; partially offset by (iv) the year-over-year decrease of approximately $36.6 million in the value of deferred compensation liabilities driven by changes in the market prices of our employees' investment elections associated with our deferred compensation plan, which was substantially offset within other operating expenses as we hold assets to fund these liabilities that closely match the investment elections of our employees. Other Operating Expenses Other operating expenses represented 16.7% of total revenues for 2022 as compared to 13.2% for the year ended December 31, 2021. Other operating expenses for 2022 increased $193.8 million, or 48.1%, from the same period of 2021. The net increase included: (i) $73.7 million of other operating expenses related to stand-alone acquisitions that had no comparable costs in the same period of 2021; (ii) increased variable costs with travel and entertainment being the largest driver; (iii) acquisition and integration costs associated with the acquisitions of Orchid, GRP, and BdB, and; (iv) the year-over-year increase of approximately $36.6 million in the value of assets held to fund the associated liabilities within our deferred compensation plan, which was substantially offset within employee compensation and benefits as noted above. Gain or Loss on Disposal The Company recognized net gains on disposals of $4.5 million in 2022 and $9.6 million in 2021. The gains on disposal were due to activity associated with sales of businesses or book of business. Although we do not routinely sell businesses or customer accounts, we periodically sell an office or a book of business (one or more customer accounts) that we believe does not produce reasonable margins or demonstrate a potential for growth, or because doing so is in the Company’s best interest. Amortization Amortization expense for 2022 increased $27.0 million to $146.6 million, or 22.6% over 2021. This increase reflects the amortization of new intangibles from businesses acquired within the past twelve months, partially offset by certain intangible assets becoming fully amortized. Depreciation Depreciation expense for 2022 increased $5.9 million to $39.2 million, or 17.7% over 2021. Changes in depreciation expense reflect the addition of fixed assets resulting from business initiatives, net additions of fixed assets resulting from businesses acquired in the past twelve months, partially offset by fixed assets which became fully depreciated. Interest Expense Interest expense for 2022 increased $76.2 million to $141.2 million, or 117.2%, from 2021. The increase is due to higher average debt balances resulting from debt issuance and bank financing in the first quarter of 2022 to fund the acquisitions of Orchid, GRP, and BdB, as well as increases in the floating rate benchmark used on our adjustable-rate debt. Change in Estimated Acquisition Earn-Out Payables Accounting Standards Codification (“ASC”) Topic 805-Business Combinations is the authoritative guidance requiring an acquirer to recognize 100% of the fair value of acquired assets, including goodwill and assumed liabilities (with only limited exceptions) upon initially obtaining control of an acquired entity. Additionally, the fair value of contingent consideration arrangements (such as earn-out purchase price arrangements) at the acquisition date must be included in the purchase price consideration. The recorded purchase price for acquisitions includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in these earn-out obligations are required to be recorded in the Consolidated Statement of Income when incurred or reasonably estimated. Estimations of potential earn-out obligations are typically based upon future earnings of the acquired operations or entities, usually for periods ranging from one to three years. 32 The net charge or credit to the Consolidated Statements of Income for the period is the combination of the net change in the estimated acquisition earn-out payables balance, and the interest expense imputed on the outstanding balance of the estimated acquisition earn-out payables. As of December 31, 2022, the fair values of the estimated acquisition earn-out payables were reevaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The resulting net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, 2022 and 2021 were as follows: (in millions) 2022 2021 Change in fair value of estimated acquisition earn-out payables $ (45.9 ) $ 34.2 Interest expense accretion 7.0 6.2 Net change in earnings from estimated acquisition earn-out payables $ (38.9 ) $ 40.4 For the years ended December 31, 2022 and 2021, the fair value of estimated earn-out payables was reevaluated and decreased by $45.9 million for 2022 and increased by $34.2 million for 2021, which are credits and charges respectively, exclusive of interest expense accretion, to the Consolidated Statements of Income for 2022 and 2021. As of December 31, 2022, the estimated acquisition earn-out payables equaled $251.6 million, of which $119.3 million was recorded as accounts payable and $132.3 million was recorded as other non-current liabilities. As of December 31, 2021, the estimated acquisition earn-out payables equaled $291.0 million, of which $78.4 million was recorded as accounts payable and $212.6 million was recorded as other non-current liabilities. Income Taxes The effective tax rate on income from operations was 23.3% in 2022 and 23.0% in 2021. RESULTS OF OPERATIONS — SEGMENT INFORMATION As discussed in Note 16 “Segment Information” of the Notes to Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage and Services. On a segmented basis, changes in amortization, depreciation and interest expenses generally result from activity associated with acquisitions. Likewise, other revenues in each segment reflects net gains primarily from legal settlements and miscellaneous income. As such, in evaluating the operational efficiency of a segment, management focuses on the Organic Revenue growth rate and EBITDAC margin. The reconciliation of total commissions and fees included in the Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, including by segment, and the growth rates for Organic Revenue for the year ended December 31, 2022 are as follows: 2022 Retail(1) National Programs Wholesale Brokerage Services Total (in millions, except percentages) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Commissions and fees $ 2,080.4 $ 1,764.9 $ 858.1 $ 701.1 $ 452.8 $ 402.6 $ 171.9 $ 178.9 $ 3,563.2 $ 3,047.5 Total change $ 315.5 $ 157.0 $ 50.2 $ (7.0 ) $ 515.7 Total growth % 17.9 % 22.4 % 12.5 % (3.9 )% 16.9 % Profit-sharing contingent commissions (48.8 ) (38.9 ) (27.6 ) (35.3 ) (12.3 ) (8.0 ) — — (88.7 ) (82.2 ) Core commissions and fees $ 2,031.6 $ 1,726.0 $ 830.5 $ 665.8 $ 440.5 $ 394.6 $ 171.9 $ 178.9 $ 3,474.5 $ 2,965.3 Acquisitions (205.1 ) — (64.9 ) — (18.6 ) — — — (288.6 ) — Dispositions — (7.2 ) — (3.3 ) — (2.4 ) — (1.9 ) — (14.8 ) Foreign currency translation — (3.9 ) — (0.6 ) — — — — — (4.5 ) Organic Revenue(2) $ 1,826.5 $ 1,714.9 $ 765.6 $ 661.9 $ 421.9 $ 392.2 $ 171.9 $ 177.0 $ 3,185.9 $ 2,946.0 Organic Revenue growth(2) $ 111.6 $ 103.7 $ 29.7 $ (5.1 ) $ 239.9 Organic Revenue growth rate(2) 6.5 % 15.7 % 7.6 % (2.9 )% 8.1 % (1)The Retail segment includes commissions and fees reported in the “Other” column of the Segment Information table in Note 16 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items. (2)A non-GAAP financial measure. 33 The reconciliation of total commissions and fees included in the Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, including by segment, and the growth rates for Organic Revenue for the year ended December 31, 2021, by segment, are as follows: 2021 Retail(1) National Programs Wholesale Brokerage Services Total (in millions, except percentages) 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Commissions and fees $ 1,764.9 $ 1,470.1 $ 701.1 $ 609.8 $ 402.6 $ 352.2 $ 178.9 $ 174.0 $ 3,047.5 $ 2,606.1 Total change $ 294.8 $ 91.3 $ 50.4 $ 4.9 $ 441.4 Total growth % 20.1 % 15.0 % 14.3 % 2.8 % 16.9 % Profit-sharing contingent commissions (38.9 ) (35.8 ) (35.3 ) (27.3 ) (8.0 ) (7.9 ) — — (82.2 ) (71.0 ) Core commissions and fees $ 1,726.0 $ 1,434.3 $ 665.8 $ 582.5 $ 394.6 $ 344.3 $ 178.9 $ 174.0 $ 2,965.3 $ 2,535.1 Acquisitions (139.0 ) — (8.2 ) — (23.0 ) — — — (170.2 ) — Dispositions — (4.4 ) — (0.5 ) — — — (0.4 ) — (5.3 ) Foreign currency translation — — — 1.2 — — — — — 1.2 Organic Revenue(2) $ 1,587.0 $ 1,429.9 $ 657.6 $ 583.2 $ 371.6 $ 344.3 $ 178.9 $ 173.6 $ 2,795.1 $ 2,531.0 Organic Revenue growth(2) $ 157.1 $ 74.4 $ 27.3 $ 5.3 $ 264.1 Organic Revenue growth rate(2) 11.0 % 12.8 % 7.9 % 3.1 % 10.4 % (1)The Retail segment includes commissions and fees reported in the “Other” column of the Segment Information table in Note 16 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items. (2)A non-GAAP financial measure. The reconciliation of Total Revenues to Total Revenues - Adjusted, a non-GAAP measure, income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and EBITDAC - Adjusted, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, and EBITDAC Margin - Adjusted, a non-GAAP measure, including by segment, for the year ended December 31, 2022, is as follows: (in millions) Retail NationalPrograms WholesaleBrokerage Services Other Total Total Revenues $ 2,084.3 $ 859.5 $ 453.4 $ 171.9 $ 4.3 $ 3,573.4 Total Revenues - Adjusted(2) 2,084.3 859.5 453.4 171.9 4.3 3,573.4 Income before income taxes 466.7 271.1 117.7 24.1 (3.5 ) 876.1 Income Before Income Taxes Margin(1) 22.4 % 31.5 % 26.0 % 14.0 % NMF 24.5 % Amortization 96.7 35.4 9.4 5.1 — 146.6 Depreciation 12.8 15.3 2.7 1.6 6.8 39.2 Interest 94.3 33.0 12.9 2.1 (1.1 ) 141.2 Change in estimated acquisition earn-out payables (26.3 ) (10.9 ) (1.7 ) — — (38.9 ) EBITDAC(2) $ 644.2 $ 343.9 $ 141.0 $ 32.9 $ 2.2 $ 1,164.2 EBITDAC Margin(2) 30.9 % 40.0 % 31.1 % 19.1 % NMF 32.6 % (Gain)/loss on disposal (8.4 ) 0.8 3.1 — — (4.5 ) Acquisition/Integration Costs 7.6 0.5 1.5 — 1.6 11.2 EBITDAC - Adjusted(2) $ 643.4 $ 345.2 $ 145.6 $ 32.9 $ 3.8 $ 1,170.9 EBITDAC Margin - Adjusted(2) 30.9 % 40.2 % 32.1 % 19.1 % NMF 32.8 % (1)“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues (2)A non-GAAP financial measure. Current year not adjusted for foreign currency translation as the prior year is converted at current year rates. NMF = Not a meaningful figure 34 The reconciliation of Total Revenues to Total Revenues - Adjusted, a non-GAAP measure, income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and EBITDAC - Adjusted, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, and EBITDAC Margin - Adjusted, a non-GAAP measure, including by segment, for the year ended December 31, 2021, is as follows: (in millions) Retail NationalPrograms WholesaleBrokerage Services Other Total Total Revenues $ 1,767.9 $ 701.9 $ 403.4 $ 178.9 $ (0.7 ) $ 3,051.4 Foreign Currency Translation (4.1 ) (0.7 ) — — — (4.8 ) Total Revenues - Adjusted(2) 1,763.8 701.2 403.4 178.9 (0.7 ) 3,046.6 Income before income taxes 334.4 242.3 94.8 28.3 63.0 762.8 Income Before Income Taxes Margin(1) 18.9 % 34.5 % 23.5 % 15.8 % NMF 25.0 % Amortization 77.8 27.4 9.1 5.3 — 119.6 Depreciation 11.2 9.8 2.6 1.5 8.2 33.3 Interest 91.4 11.4 16.0 2.9 (56.7 ) 65.0 Change in estimated acquisition earn-out payables 40.8 (7.7 ) 7.3 — — 40.4 EBITDAC(2) $ 555.6 $ 283.2 $ 129.8 $ 38.0 $ 14.5 $ 1,021.1 'EBITDAC Margin(2) 31.4 % 40.3 % 32.2 % 21.2 % NMF 33.5 % (Gain)/loss on disposal (5.1 ) (4.5 ) — — — (9.6 ) Acquisition/Integration Costs — — — — — — Foreign Currency Translation (1.0 ) (0.4 ) — — — (1.4 ) EBITDAC - Adjusted(2) $ 549.5 $ 278.3 $ 129.8 $ 38.0 $ 14.5 $ 1,010.1 EBITDAC Margin - Adjusted(2) 31.2 % 39.7 % 32.2 % 21.2 % NMF 33.2 % (1)“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues (2)A non-GAAP financial measure NMF = Not a meaningful figure 35 Retail Segment The Retail segment provides a broad range of insurance products and services to commercial, public and quasi-public, professional and individual insured customers, and non-insurance risk-mitigating products through our automobile dealer services (“F&I”) businesses. Approximately 77.3% of the Retail segment’s commissions and fees revenue is commission based. Financial information relating to our Retail segment for the twelve months ended December 31, 2022 and 2021 is as follows: (in millions, except percentages) 2022 % Change 2021 REVENUES Core commissions and fees $ 2,032.8 17.7 % $ 1,727.7 Profit-sharing contingent commissions 48.8 25.4 % 38.9 Investment income 0.1 (66.7 )% 0.3 Other income, net 2.6 160.0 % 1.0 Total revenues 2,084.3 17.9 % 1,767.9 EXPENSES Employee compensation and benefits 1,093.0 15.1 % 949.3 Other operating expenses 355.5 32.6 % 268.1 (Gain)/loss on disposal (8.4 ) 64.7 % (5.1 ) Amortization 96.7 24.3 % 77.8 Depreciation 12.8 14.3 % 11.2 Interest 94.3 3.2 % 91.4 Change in estimated acquisition earn-out payables (26.3 ) (164.5 )% 40.8 Total expenses 1,617.6 12.8 % 1,433.5 Income before income taxes $ 466.7 39.6 % $ 334.4 Income Before Income Taxes Margin (1) 22.4 % 18.9 % EBITDAC - Adjusted (2) $ 643.4 17.1 % $ 549.5 EBITDAC Margin - Adjusted (2) 30.9 % 31.2 % Organic Revenue growth rate (2) 6.5 % 11.0 % Employee compensation and benefits relative to total revenues 52.4 % 53.7 % Other operating expenses relative to total revenues 17.1 % 15.2 % Capital expenditures $ 18.6 129.6 % $ 8.1 Total assets at December 31 $ 7,458.6 48.0 % $ 5,040.7 (1)“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues (2)A non-GAAP financial measure NMF = Not a meaningful figure The Retail segment’s total revenues in 2022 increased 17.9%, or $316.4 million, over 2021, to $2,084.3 million. The $305.1 million increase in core commissions and fees was driven by the following: (i) $111.6 million related to net new and renewal business; (ii) approximately $205.1 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2021; (iii) an offsetting decrease from the impact of foreign currency translation of $3.9 million; and (iv) an offsetting decrease of $7.2 million related to commissions and fees recorded in 2021 from businesses since divested. Profit-sharing contingent commissions in 2022 increased 25.4%, or $9.9 million, over 2021, to $48.8. The Retail segment’s growth rate for total commissions and fees was 17.8% and the Organic Revenue growth rate was 6.5% for 2022. The Organic Revenue growth rate was driven by net new business written during the preceding twelve months and growth on renewals of existing customers. Renewal business was impacted by rate increases in most lines of business with continued increases in employee benefits, commercial and condominium property, partially offset by continued premium rate reductions in workers’ compensation. Income before income taxes for 2022 increased 39.6%, or $132.3 million, over the same period in 2021, to $466.7 million. The primary factors driving this increase were: (i) the profit associated with the net increase in revenue as described above; (ii) the drivers of EBITDAC described below; (iii) amortization and depreciation growing faster than total revenues; and (iv) a decrease in the change in estimated acquisition earn-out payables. EBITDAC - Adjusted for 2022 increased 17.1%, or $93.9 million, from the same period in 2022, to $643.4 million. EBITDAC Margin - Adjusted for 2022 decreased to 30.9% from 31.2% in the same period in 2021. EBITDAC Margin was impacted by increased variable operating expenses, which are largely travel and meeting related. National Programs Segment The National Programs segment manages over 40 programs supported by approximately 100 well-capitalized carrier partners. In most cases, the insurance carriers that support these programs have delegated underwriting and, in many instances, claims-handling authority to our programs operations. These programs are generally distributed through a nationwide network of independent agents and Brown & Brown retail 36 agents, and offer targeted products and services designed for specific industries, trade groups, professions, public entities and market niches. This segment also operates our write-your-own flood insurance carrier, WNFIC and participates in two Captives. WNFIC’s underwriting business consists of policies written under and fully ceded to the NFIP and excess flood and private flood policies which are fully reinsured in the private market. The Captives provide additional underwriting capacity and allow us to participate in underwriting results. The Company has traditionally participated in underwriting profits through profit-sharing contingent commissions. These Captives give us another way to continue to participate in underwriting results while limiting exposure to claims expenses. The Captives focus on property insurance for earthquake and wind exposed properties underwritten by certain managing general agents. The Captives limit the Company's exposure to claims expenses either through reinsurance or by participating in limited tranches of the underwriting risk. The National Programs segment operations can be grouped into five broad categories: Professional Programs, Personal Lines Programs, Commercial Programs, Public Entity-Related Programs and Specialty Programs. Approximately 76.1% of the National Programs segment’s commissions and fees revenue is commission based. Financial information relating to our National Programs segment for the twelve months ended December 31, 2022 and 2021 is as follows: (in millions, except percentages) 2022 % Change 2021 REVENUES Core commissions and fees $ 830.5 24.7 % $ 665.8 Profit-sharing contingent commissions 27.6 (21.8 )% 35.3 Investment income 1.3 116.7 % 0.6 Other income, net 0.1 (50.0 )% 0.2 Total revenues 859.5 22.5 % 701.9 EXPENSES Employee compensation and benefits 318.7 8.1 % 294.7 Other operating expenses 196.1 52.6 % 128.5 (Gain)/loss on disposal 0.8 (117.8 )% (4.5 ) Amortization 35.4 29.2 % 27.4 Depreciation 15.3 56.1 % 9.8 Interest 33.0 189.5 % 11.4 Change in estimated acquisition earn-out payables (10.9 ) 41.6 % (7.7 ) Total expenses 588.4 28.0 % 459.6 Income before income taxes $ 271.1 11.9 % $ 242.3 Income Before Income Taxes Margin (1) 31.5 % 34.5 % EBITDAC - Adjusted (2) $ 345.2 24.0 % $ 278.3 EBITDAC Margin - Adjusted (2) 40.2 % 39.7 % Organic Revenue growth rate (2) 15.7 % 12.8 % Employee compensation and benefits relative to total revenues 37.1 % 42.0 % Other operating expenses relative to total revenues 22.8 % 18.3 % Capital expenditures $ 20.2 49.6 % $ 13.5 Total assets at December 31 $ 4,467.8 51.8 % $ 2,943.0 (1)“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues (2)A non-GAAP financial measure NMF = Not a meaningful figure The National Programs segment’s total revenue for 2022 increased 22.5%, or $157.6 million, as compared to the same period in 2021, to $859.5 million. The $164.7 million increase in core commissions and fees revenue was driven by: (i) approximately $103.7 million of net new and renewal business; (ii) $64.9 million from acquisitions that had no comparable revenues in the same period of 2021; (iii) an offsetting decrease from the impact of foreign currency translation of $0.6 million; and (iv) an offsetting decrease of $3.3 million related to commissions and fees revenue from business divested in the preceding twelve months. Profit-sharing contingent commissions in 2022 decreased 21.8%, or $7.7 million, from 2021, to $27.6 primarily relating to the impacts from the estimated insured property losses associated with Hurricane Ian. The National Programs segment’s growth rate for total commissions and fees was 22.4% and the Organic Revenue growth rate was 15.7% for 2022. The Organic Revenue growth was driven primarily by an increase in lender placed coverage, good new business and retention, exposure unit expansion and rate increases for many programs. Income before income taxes for 2022 increased 11.9%, or $28.8 million, from the same period in 2021, to $271.1 million. Income before income taxes increased due to the drivers of EBITDAC described below. This was partially offset by an increase in intercompany interest expense and increased amortization expense associated with recent acquisitions. EBITDAC - Adjusted for 2022 increased 24.0%, or $66.9 million, from the same period in 2021, to $345.2 million. EBITDAC Margin - Adjusted for 2022 increased to 40.2% from 39.7% in the prior year due to strong total revenue growth along with leverage our expense base. 37 Wholesale Brokerage Segment The Wholesale Brokerage segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, including Brown & Brown retail agents. Approximately 84.9% of the Wholesale Brokerage segment’s commissions and fees revenue is commission based. Financial information relating to our Wholesale Brokerage segment for the twelve months ended December 31, 2022 and 2021 is as follows: (in millions, except percentages) 2022 % Change 2021 REVENUES Core commissions and fees $ 440.5 11.6 % $ 394.6 Profit-sharing contingent commissions 12.3 53.8 % 8.0 Investment income 0.3 50.0 % 0.2 Other income, net 0.3 (50.0 )% 0.6 Total revenues 453.4 12.4 % 403.4 EXPENSES Employee compensation and benefits 239.3 12.5 % 212.8 Other operating expenses 70.0 15.1 % 60.8 (Gain)/loss on disposal 3.1 — — Amortization 9.4 3.3 % 9.1 Depreciation 2.7 3.8 % 2.6 Interest 12.9 (19.4 )% 16.0 Change in estimated acquisition earn-out payables (1.7 ) (123.3 )% 7.3 Total expenses 335.7 8.8 % 308.6 Income before income taxes $ 117.7 24.2 % $ 94.8 Income Before Income Taxes Margin (1) 26.0 % 23.5 % EBITDAC - Adjusted (2) $ 145.6 12.2 % $ 129.8 EBITDAC Margin - Adjusted (2) 32.1 % 32.2 % Organic Revenue growth rate (2) 7.6 % 7.9 % Employee compensation and benefits relative to total revenues 52.8 % 52.7 % Other operating expenses relative to total revenues 15.4 % 15.0 % Capital expenditures $ 2.8 75.0 % $ 1.6 Total assets at December 31 $ 1,401.6 21.4 % $ 1,154.4 (1)“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues (2)A non-GAAP financial measure NMF = Not a meaningful figure The Wholesale Brokerage segment’s total revenues for 2022 increased 12.4%, or $50.0 million, over 2021, to $453.4 million. The $45.9 million increase in core commissions and fees was driven by the following: (i) approximately $29.7 million of net new and renewal business; (ii) $18.6 million from acquisitions that had no comparable revenues in the same period of 2021; and (iii) an offsetting decrease of $2.4 million related to commissions and fees revenue from business divested in the preceding twelve months. Profit-sharing contingent commissions for 2022 increased $4.3 million compared to 2021, to $12.3 million. The Wholesale Brokerage segment’s growth rate for total commissions and fees was 12.5%, and the Organic Revenue growth rate was 7.6% for 2022. The Organic Revenue growth rate was driven by new business, good retention as well as rate increases for most lines of coverage, which was partially offset by shrinking capacity in the catastrophe exposed personal lines market. Income before income taxes for 2022 increased 24.2%, or $22.9 million, over 2021, to $117.7 million, primarily due to the following: (i) the drivers of EBITDAC - Adjusted described below; (ii) decrease in the change in estimated acquisition earn-out payables; and (iii) lower intercompany interest expense; partially offset by (iv) acquisition/integration costs. EBITDAC - Adjusted for 2022 increased 12.2%, or $15.8 million, from the same period in 2021, to $145.6 million. EBITDAC Margin for 2022 decreased to 32.1% from 32.2% in the same period in 2021. EBITDAC Margin - Adjusted decreased due to: (i) higher broker compensation; (ii) increased variable operating expenses, which are primarily travel and meeting related; partially offset by (iii) higher profit-sharing contingent commissions; and (iv) leveraging our expense base in connection with revenue growth. Services Segment The Services segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas. The Services segment also provides Medicare Set-aside account services, Social Security disability and Medicare benefits advocacy services, and claims adjusting services. 38 Unlike the other segments, nearly all of the Services segment’s revenue is generated from fees which are not significantly affected by fluctuations in general insurance premiums. Financial information relating to our Services segment for the twelve months ended December 31, 2022 and 2021 is as follows: (in millions, except percentages) 2022 % Change 2021 REVENUES Core commissions and fees $ 171.9 (3.9 )% $ 178.9 Profit-sharing contingent commissions — — — Investment income — — — Other income, net — — — Total revenues 171.9 (3.9 )% 178.9 EXPENSES Employee compensation and benefits 90.6 1.0 % 89.7 Other operating expenses 48.4 (5.5 )% 51.2 (Gain)/loss on disposal — — — Amortization 5.1 (3.8 )% 5.3 Depreciation 1.6 6.7 % 1.5 Interest 2.1 (27.6 )% 2.9 Change in estimated acquisition earn-out payables — — — Total expenses 147.8 (1.9 )% 150.6 Income before income taxes $ 24.1 (14.8 )% $ 28.3 Income Before Income Taxes Margin (1) 14.0 % 15.8 % EBITDAC - Adjusted (2) $ 32.9 (13.4 )% $ 38.0 EBITDAC Margin - Adjusted (2) 19.1 % 21.2 % Organic Revenue growth rate (2) (2.9 )% 3.1 % Employee compensation and benefits relative to total revenues 52.7 % 50.2 % Other operating expenses relative to total revenues 28.2 % 28.6 % Capital expenditures $ 1.0 (37.5 )% $ 1.6 Total assets at December 31 $ 295.0 (1.4 )% $ 299.2 (1)“Income Before Income Taxes Margin” is defined as income before income taxes divided by total revenues (2)A non-GAAP financial measure NMF = Not a meaningful figure The Services segment’s total revenues for 2022 decreased 3.9%, or $7.0 million, from 2021, to $171.9 million. The $7.0 million decrease in core commissions and fees, was driven by: (i) higher COVID-19 travel restricted claims in 2021; and (ii) a lack of weather-related claims coupled with reduced severity in 2022 and (iii) partially offset by new business resulting in Organic Revenue decreasing by 2.9% in 2022. Income before income taxes for 2022 decreased 14.8%, or $4.2 million, from 2021, to $24.1 million due to the drivers of EBITDAC described below. EBITDAC - Adjusted for 2022 decreased 13.4%, or $5.1 million, from the same period in 2021, to $32.9 million. EBITDAC Margin - Adjusted for 2022 decreased to 19.1% from 21.2% in the same period in 2021. The decrease in EBITDAC and EBITDAC Margin was driven primarily by lower revenues. Other As discussed in Note 16 of the Notes to Consolidated Financial Statements, the “Other” column in the Segment Information table includes any income and expenses not allocated to reportable segments, and corporate-related items, including the intercompany interest expense charges to reporting segments. LIQUIDITY AND CAPITAL RESOURCES The Company seeks to maintain a conservative balance sheet and strong liquidity profile. Our capital requirements to operate as an insurance intermediary are low and we have been able to grow and invest in our business principally through cash that has been generated from operations. We have the ability to utilize our Revolving Credit Facility, which as of December 31, 2022 provided up to $800.0 million in available cash. We believe that we have access to additional funds, if needed, through the capital markets or private placements to obtain further debt financing under the current market conditions. The Company believes that its existing cash, cash equivalents, short-term investment portfolio and funds generated from operations, together with the funds available under the Revolving Credit Facility and the Loan Agreement (the “Loan Agreement"), will be sufficient to satisfy its normal liquidity needs, including principal payments on our long-term debt, for the next twelve months. 39 The Revolving Credit Facility contains an expansion option for up to an additional $500.0 million of borrowing capacity, subject to the approval of participating lenders. In addition, under the Term Loan Credit Agreement, the unsecured term loan in the initial amount of $300.0 million may be increased by up to $150.0 million, subject to the approval of participating lenders. On March 31, 2022, the Company entered into a Loan Agreement which provided term loan capacity of $800.0 million. Additionally, the Company may, subject to satisfaction of certain conditions, including receipt of additional term loan commitments by new or existing lenders, increase either Term Loan Commitment under the existing Loan Agreement or the term loans issued thereunder or issue new tranches of term loans in an aggregate additional amount of up to $400.0 million. Including the expansion options under all existing credit agreements, the Company has access to up to $1.9 billion of incremental borrowing capacity as of December 31, 2022. Our cash and cash equivalents of $650.0 million at December 31, 2022 reflected a decrease of $43.3 million from the $693.2 million balance at December 31, 2021. During 2022, $881.4 million of cash was generated from operating activities, representing an increase of 9.0%. During this period, $1,927.7 million of cash was used for acquisitions, $106.3 million was used for acquisition earn-out payments, $52.6 million was used to purchase additional fixed assets, $119.5 million was used for payment of dividends, $74.1 million was used for share repurchases and $61.3 million was used to pay outstanding principal balances owed on long-term debt. We hold approximately $225.4 million in cash outside of the U.S., which we currently have no plans to repatriate in the near future. Our cash and cash equivalents of $693.2 million at December 31, 2021 reflected an increase of $37.0 million from the $656.2 million balance at December 31, 2020. During 2021, $808.8 million of cash was generated from operating activities, representing an increase of 13.4%. During this period, $366.8 million of cash was used for acquisitions, $83.6 million was used for acquisition earn-out payments, $45.0 million was used to purchase additional fixed assets, $107.2 million was used for payment of dividends, $82.6 million was used for share repurchases and $73.1 million was used to pay outstanding principal balances owed on long-term debt. Our ratio of current assets to current liabilities (the “current ratio”) was 1.09 and 1.25 for December 31, 2022 and December 31, 2021, respectively. Contractual Cash Obligations As of December 31, 2022, our contractual cash obligations were as follows: Payments Due by Period (in millions) Total Less Than1 Year 1-3 Years 4-5 Years After 5Years Long-term debt $ 3,975.6 $ 250.6 $ 943.7 $ 531.3 $ 2,250.0 Other liabilities 149.5 8.4 15.4 11.2 114.5 Operating leases(1) 278.3 53.0 97.0 62.1 66.2 Interest obligations 1,572.4 179.7 286.5 208.8 897.4 Maximum future acquisition contingency payments(2) 542.8 181.1 355.5 6.2 — Total contractual cash obligations(3) $ 6,518.6 $ 672.8 $ 1,698.1 $ 819.6 $ 3,328.1 (1)Includes $12.4 million of future lease commitments expected to commence in 2023. (2)Includes $251.6 million of current and non-current estimated earn-out payables. Earn-out payables for acquisitions not denominated in U.S. dollars are measured at the current foreign exchange rate. Four of the estimated acquisition earn-out payables assumed in connection with the acquisition of GRP included provisions with no maximum potential earn-out amount. The amount recorded for these acquisitions as of December 31, 2022, is $3.0 million. The Company deems a significant increase to this amount to be unlikely. (3)Does not include approximately $32.6 million of current liability for a dividend of $0.1150 per share approved by the board of directors onJanuary 18, 2023 and paid on February 15, 2023. Debt Total debt at December 31, 2022 was $3,942.1 million net of unamortized discount and debt issuance costs, which was an increase of $1,919.2 million compared to December 31, 2021. The increase includes: (i) the issuance of $1,200.0 million in aggregate principal amount of Senior Notes on March 17, 2022, exclusive of debt issuance costs and discounts applied to the principal; (ii) the drawdown of $350.0 million of the Revolving Credit Facility in conjunction with the acquisition payment for Orchid on March 31, 2022; (iii) the aggregate drawdown of $800.0 million under the Loan Agreement in connection with the funding of the acquisitions of GRP and BdB which occurred on various dates on or before the final draw on April 28, 2022; and (iv) net of the amortization of discounted debt related to our various unsecured Senior Notes, and debt issuance cost amortization of $3.8 million; offset by decreases due to: (i) the scheduled principal amortization balances related to our various existing floating-rate debt term notes in total of $61.3 million; (ii) added discounted debt balances related to the issuance of $600.0 million in aggregate principal amount of the Company’s 4.200% Senior Notes due 2032 (the “2032 Notes”) and $600.0 million in aggregate principal amount of the Company’s 4.950% Senior Notes due 2052 (the “2052 Notes,” and together with the 2032 Notes, the “Notes”) of $10.4 million; (iii) debt issuance costs related to the Notes and the Loan Agreement of $13.0 million; and (iv) through December 31, 2022 the 40 Company repaying $350.0 million of debt related to the outstanding amount drawn under the Revolving Credit Facility under the Second Amended and Restated Credit Agreement. During the twelve months ended December 31, 2022, the Company repaid $12.5 million of principal related to the Second Amended and Restated Credit Agreement term loan through the quarterly scheduled amortized principal payments. The Second Amended and Restated Credit Agreement term loan had an outstanding balance of $234.4 million as of December 31, 2022. The Company's next scheduled amortized principal payment is due March 31, 2023 and is equal to $3.1 million. During the twelve months ended December 31, 2022, the Company repaid $30.0 million of principal related to the Term Loan Credit Agreement through quarterly scheduled amortized principal payments. The Term Loan Credit Agreement had an outstanding balance of $210.0 million as of December 31, 2022. As of December 31, 2022, the total term loan balance of $210.0 million is presented under current portion of long-term debt as the agreement and underlying debt instruments are within one-year of maturity. The Company is evaluating options with regard to the loan's remaining balance, including retiring the balance at maturity or refinancing the balance or a portion thereof. The Company’s next scheduled amortized principal payment is due March 31, 2023 and is equal to $7.5 million. During the twelve months ended December 31, 2022, the Company repaid $18.8 million of principal related to the Term Loans issued under the Term A-2 Loan Commitment (“Term A-2 Loans”) through quarterly scheduled amortized principal payments. The Term A-2 Loans had an outstanding balance of $481.3 million as of December 31, 2022. The Company’s next scheduled amortized principal payment is due March 31, 2023 and is equal to $6.3 million. On March 17, 2022, the Company completed the issuance of $600.0 million aggregate principal amount of the Company’s 4.200% Senior Notes due 2032 and $600.0 million aggregate principal amount of the Company’s 4.950% Senior Notes due 2052 (and together with the 2032 Notes, the “Notes”). The net proceeds to the Company from the issuance of the Notes, after deducting underwriting discounts and estimated offering expenses, were approximately $1,178.2 million. The Senior Notes were given investment grade ratings of BBB- stable outlook and Baa3 stable outlook. The 2032 Notes bear interest at the rate of 4.200% per year and will mature on March 17, 2032. The 2052 Notes bear interest at the rate of 4.950% per year and will mature on March 17, 2052. Interest on the Notes is payable semi-annually in arrears. The Notes are senior unsecured obligations of the Company and rank equal in right of payment to all of the Company’s existing and future senior unsecured indebtedness. The Company may redeem the Notes in whole or in part at any time and from time to time, at the “make whole” redemption prices specified in the Prospectus Supplement for the Notes being redeemed, plus accrued and unpaid interest thereon to, but excluding the redemption date. The Company used the net proceeds from the offering of the Notes, together with borrowings under its Revolving Credit Facility, cash on hand and other borrowings, to fund the cash consideration and other amounts payable under the GRP Acquisition Agreement and to pay fees and expenses associated with the foregoing. As of December 31, 2022, there was a total outstanding debt balance of $1,200.0 million exclusive of the associated discount balance on both Notes. On March 31, 2022, the Company entered into the Loan Agreement with the lenders named therein, BMO Harris Bank N.A., as administrative agent, Fifth Third Bank, National Association, PNC Bank, National Association, U.S. Bank National Association and Wells Fargo Bank, National Association, as co-syndication agents and BMO Capital Markets Corp., BofA Securities, Inc., JPMorgan Chase Bank, N.A. and Truist Securities, Inc., as joint bookrunners and joint lead arrangers. The Loan Agreement evidences commitments for (i) unsecured delayed draw term loans in an aggregate amount of up to $300.0 million (the “Term A-1 Loan Commitment”) and (ii) unsecured delayed draw term loans in an amount of up to $500.0 million (the “Term A-2 Commitment” and, together with the Term A-1 Loan Commitments, the “Term Loan Commitments”). The Company may, subject to satisfaction of certain conditions, including receipt of additional term loan commitments by new or existing lenders, increase either Term Loan Commitment or the term loans issued thereunder or issue new tranches of term loans in an aggregate additional amount of up to $400.0 million. The Company may borrow term loans (the “Term Loans”) under either of the Term Loan Commitments during the period from the Effective Date (the "Effective Date") until the date which is the first anniversary thereof. Once borrowed, Term Loans issued under the Term A-1 Loan Commitment (“Term A-1 Loans”) are due and payable on the date that is the third anniversary of the Effective Date unless such maturity date is extended as provided under the Loan Agreement. Once borrowed, Term Loans issued under the Term A-2 Loan Commitment (“Term A-2 Loans”) are repayable in installments until the fifth anniversary the Effective Date with any remaining outstanding amounts due and payable on such fifth anniversary of the Effective Date unless such maturity date is extended as provided under the Loan Agreement. While outstanding, the undrawn Term Loan Commitments accrue a commitment fee of 0.15% beginning on the earlier of the initial funding of Term Loans under the Loan Agreement and the date that is 120 days from the Effective Date. Once drawn, Term A-1 Loans will bear interest at the annual rate of Adjusted Term SOFR plus 1.125% or Base Rate plus 0.125% (subject to a pricing grid for changes in the Company’s credit rating and/or leverage) and Term A-2 Loans will bear interest at the annual rate of Adjusted Term SOFR plus 1.25% or Base Rate plus 0.25% (subject to a pricing grid for changes in the Company’s credit rating and/or leverage). The Loan Agreement includes various covenants (including financial covenants), limitations and events of default customary for similar facilities for similarly rated borrowers. As of December 31, 2022 the outstanding balance on the Loan Agreement was $781.3 million. On March 31, 2022 the Company borrowed $350.0 million of available proceeds on the Revolving Credit Facility under the Second Amended and Restated Credit Agreement. The proceeds were used in conjunction with the funding of the Orchid acquisition along with funds from cash on hand. As of December 31, 2022 the outstanding loan balance was repaid. Total debt at December 31, 2021 was $2,022.9 million net of unamortized discount and debt issuance costs, which was a decrease of $73.0 million compared to December 31, 2020. The decrease includes: (i) the repayment of the principal balance of $73.1 million for scheduled 41 principal amortization balances related to our various existing floating rate debt term notes; (ii) an additional $2.7 million including debt issuance costs related to the Company's refinanced credit facility, the Second Amended and Restated Credit Agreement (as defined below), on October 27, 2021; offset by (iii) net of the amortization of discounted debt related to our various unsecured Senior Notes, and debt issuance cost amortization of $2.8 million. During the twelve months ended December 31, 2021, the Company repaid $30.0 million of principal related to the amended and restated credit agreement term loan through quarterly scheduled amortized principal payments each equaling $10.0 million on March 31, 2021, June 30, 2021, September 30, 2021 and on October 27, 2021 in conjunction with the closing of the Second Amended and Restated Credit Agreement, the Company repaid an additional $10.0 million of outstanding principal related to the term loan under the amended and restated credit agreement. On December 31, 2021, the Company repaid $3.1 million under the Second Amended and Restated Credit Agreement as part of a scheduled amortized principal payment/ The Second Amended and Restated Credit Agreement term loan had an outstanding balance of $246.9 million as of December 31, 2021. During the twelve months ended December 31, 2021, the Company repaid $30.0 million of principal related to the term loan credit agreement through quarterly scheduled amortized principal payments each equaling $7.5 million on March 31, 2021, June 30, 2021, September 30, 2021 and December 31, 2021. The term loan credit agreement had an outstanding balance of $240.0 million as of December 31, 2021. On October 27, 2021, the Company entered into an amended and restated credit agreement (the “Second Amended and Restated Credit Agreement”) with the lenders named therein, JPMorgan Chase Bank, N.A. as administrative agent, Bank of America, N.A., Truist Bank and BMO Harris Bank N.A. as co-syndication agents, and U.S. Bank National Association, Fifth Third Bank, National Association, Wells Fargo Bank, National Association, PNC Bank, National Association, Morgan Stanley Senior Funding, Inc. and Citizens Bank, N.A. as co-documentation agents. The Second Amended and Restated Credit Agreement amended and restated the credit agreement dated April 17, 2014, among certain of such parties, as amended by that certain amended and restated credit agreement dated June 28, 2017 (the “Original Credit Agreement”). The Second Amended and Restated Credit Agreement, among other certain terms, extended the maturity of the Revolving Credit Facility of $800.0 million and unsecured term loans associated with the agreement of $250.0 million to October 27, 2026. At the time of the renewal, the Company added an additional $2.7 million in debt issuance costs related to the transaction. The Company carried forward $0.6 million of existing debt issuance costs related to the previous credit facility agreements while expensing $0.1 million in debt issuance costs due to certain lenders exiting the renewed facility agreement. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates and equity prices. We are exposed to market risk through our investments, revolving credit line, term loan agreements and international operations. Our invested assets are held primarily as cash and cash equivalents, restricted cash, available-for-sale marketable debt securities, non-marketable debt securities, certificates of deposit, U.S. treasury securities, and professionally managed short duration fixed income funds. These investments are subject to interest rate risk. The fair value of our invested assets at December 31, 2022 and December 31, 2021, approximated their respective carrying values due to their short-term duration and therefore, such market risk is not considered to be material. We do not actively invest or trade in equity securities. In addition, we generally dispose of any significant equity securities received in conjunction with an acquisition shortly after the acquisition date. As of December 31, 2022, we had $781.2 million outstanding under the Loan Agreement tied to the Secured Overnight Financing Rate (“SOFR”) and $444.4 million of borrowings outstanding under certain credit agreements tied to the overnight London Interbank Offered Rate (“LIBOR”). These aforementioned notes bear interest on a floating basis and are therefore subject to changes in the associated interest expense. The effect of an immediate hypothetical 10% change in interest rates would not have a material effect on our Consolidated Financial Statements. As of July 2017, the UK Financial Conduct Authority (“FCA”) has urged banks and institutions to discontinue their use of the LIBOR benchmark rate for floating-rate debt, and other financial instruments tied to the rate after 2021. However, on November 30, 2020, the ICE Benchmark Administration Limited (“IBA”), announced that it would consult in early December 2020 on its intention to cease the publication of the one-week and two-month U.S. dollar LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining U.S. dollar LIBOR settings (overnight and one, three, six and twelve months) immediately following the LIBOR publication on June 30, 2023. In connection to the released statement from the IBA, on December 4, 2020, the FCA released a similar statement in support of the continuation of the LIBOR rate beyond 2021. The Alternative Reference Rates Committee (“ARRC”) has recommended the Secured Overnight Financing Rate (“SOFR”) as the best alternative rate to LIBOR post discontinuance and has proposed a transition plan and timeline designed to encourage the adoption of SOFR from LIBOR. Post consultation on March 5, 2021, IBA confirmed its proposed dates to stop publishing the London interbank offered rate for dollars ("USD LIBOR") on a representative basis. When the Company entered into the Second Amended and Restated Credit on October 27, 2021, it included provisions regarding transition from LIBOR to SOFR in preparation of the LIBOR cessation. On March 31, 2022, the Company entered into the Loan Agreement which bears interest tied to the annual rate for the adjusted Secured Overnight Financing Rate ("Adjusted Term SOFR"). In the coming periods, 42 the Company will assess any other current agreements with benchmark rates tied to LIBOR with an expectation that the Company will be prepared for a termination of LIBOR benchmarks prior to June 30, 2023 when typical rate settings will no longer be available. The majority of our international operations do not have material transactions in currencies other than their functional currency which would expose the Company to transactional currency rate risk. We are subject to translational exchange rate risk having businesses operating outside of the U.S. in the following functional currencies, British pounds, Canadian dollar and euros. Based upon our foreign currency rate exposure as of December 31, 2022, an immediate 10% hypothetical change of foreign currency exchange rates would not have a material effect on our Consolidated Financial Statements. 43

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+ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements included in

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+Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our Consolidated Financial Statements, including the notes to those statements, and the Section entitled "Special Note Regarding Forward-Looking Statements," included elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially from the results discussed in any forward-looking statements, which may be due to factors discussed in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period operating and financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.OverviewOur mission is to make it easier for everyone to experience the world. We connect consumers who wish to make travel reservations with travel service providers around the world through our online platforms. We offer these services through six primary consumer-facing brands: Booking.com, Priceline, agoda, Rentalcars.com, KAYAK, and OpenTable. See Note 1 to our Consolidated Financial Statements for information on our operating segments. See Note 17 to our Consolidated Financial Statements for information related to revenue by geographic area.We derive substantially all of our revenues from enabling consumers to make travel service reservations. We also earn revenues from advertising services, restaurant reservations and restaurant management services, and various other services, such as travel-related insurance revenues.TrendsThe COVID-19 pandemic and the resulting implementation of travel restrictions by governments around the world resulted in a significant decline in travel activities and consumer demand for related services. Accommodation room nights, which include the impact of cancellations, declined rapidly as the COVID-19 pandemic spread in 2020. Since the beginning of the second quarter of 2020 and through 2022, changes in accommodation room nights versus the comparable period in 2019 have generally improved as government-imposed travel restrictions have eased, vaccines and other medical interventions have become more widespread, and consumer demand for travel has generally rebounded. In 2021, room nights were 66% higher than in 2020 but still 30% lower than in 2019. On a regional basis, considering where the traveler is booking from, North America was the only region in 2021 to have room nights increase versus 2019. In 2022, global room nights were 52% higher than in 2021 and 6% higher than in 2019. The year-over-year growth in room nights in 2022 was driven primarily by the continued recovery in Europe, Asia, and Rest of World, as well as by continued growth in North America.37The comparison of room nights in 2021 and 2022 to the comparable period in 2019 avoids the distortion created from comparing to a prior year period that was significantly impacted by the COVID-19 pandemic.Quarterly Room Nights and Change versus 2019In early March 2022, following Russia's invasion of Ukraine, we suspended the booking of travel services in Russia and Belarus. This led to the loss of new bookings from bookers in these countries. Excluding room nights from bookers in Russia, Ukraine, and Belarus in both 2022 and 2019, our overall room nights in 2022 were up about 10% versus 2019.We have observed an improvement in cancellation rates since the high in April 2020, though we have seen periods of elevated cancellation rates typically coinciding with significant increases in COVID-19 cases and newly imposed travel restrictions. The cancellation rate in 2022 improved compared to the cancellation rates in 2021 and 2019. In 2022, a higher share of our room nights were booked with flexible cancellation policies, as compared to 2019 and 2021, which could result in higher cancellation rates in future periods. Because we recognize revenue from bookings when the traveler checks in, our reported revenue is not at risk of being reversed due to cancellations. Increases in cancellation rates can negatively impact our marketing efficiency as a result of incurring performance marketing expense at the time a booking is made even though that booking could be canceled in the future if it was booked under a flexible cancellation policy. There are many factors in addition to cancellation rates that contribute to marketing efficiency including average daily rates ("ADRs"), costs per click, foreign currency exchange rates, our ability to convert paid traffic to booking consumers, the timing and effectiveness of our brand marketing campaigns, and the extent to which consumers come directly to our platforms for bookings. Significant increases in cancellation rates such as those experienced during the second quarter of 2020 may increase our customer service costs. 38Since the second quarter of 2020, government-imposed travel restrictions have generally limited international travel (travelers booking a stay at a property located outside their own country) more than domestic travel (travelers booking a stay within their own country). We believe the continued easing of government-imposed travel restrictions in many countries throughout the world in 2022 helped drive an increase in the mix of our room nights booked for international travel versus 2021, however, the mix remained below 2019 levels. We saw an increase in the mix of our room nights booked on a mobile device in 2022 compared to 2019. When comparing 2022 to 2021, we saw a decrease in the mix of our room nights booked on a mobile device in 2022 due to a year-over-year increase in the mix of our room nights booked for international travel and a year-over-year expansion of the booking window. Room nights booked on a mobile device generally have a lower mix of international travel and a shorter booking window than room nights booked on a desktop. The mix of our room nights booked on a mobile app in 2022 was above 2019 and 2021. We continue to see favorable repeat direct booking behavior from consumers in our mobile apps, which allow us more opportunities to engage directly with consumers. The revenue earned on a transaction from a mobile device may be less than a typical desktop transaction as we see different consumer purchasing patterns across devices. For example, accommodation reservations made on a mobile device typically are for shorter lengths of stay and have lower accommodation ADRs.Our global ADRs increased approximately 25%, on a constant currency basis, in 2022 as compared to 2019, driven primarily by higher ADRs for accommodations located in Europe as well as increases in ADRs across all other regions as compared to 2019. In addition, we estimate that our global ADRs in 2022, as compared to 2019, benefited by approximately two percentage points from changes in the geographical mix of our business driven primarily by slower room night recovery in Asia, which is a low ADR region, and stronger room night performance in North America, which is a high ADR region. Our global ADRs increased approximately 15%, on a constant currency basis, in 2022 as compared to 2021, driven primarily by higher ADRs in Europe as well as increases in ADRs across all other regions as compared to 2021. The increase in our global ADRs in 2022, as compared to 2021, was negatively impacted by approximately three percentage points from changes in geographical mix in our business driven primarily by stronger year-over-year room night growth in Asia and lower year-over-year room night growth in North America. Prior to the COVID-19 outbreak, we observed a trend of declining constant-currency accommodation ADRs partially driven by the negative impact of the changing geographical mix of our business (e.g., lower ADR regions like Asia were generally growing faster than higher ADR regions like Western Europe and North America) as well as pricing pressures within local markets from time to time. Those declining ADR trends resulted in accommodation gross bookings growing less than room nights. As the travel market continues to recover from the impact of the COVID-19 pandemic and with all regions experiencing general inflation in prices, we have seen travel industry ADRs generally increasing from pandemic lows in 2020. While our ADRs have continued to increase in 2022 as compared to 2019, it remains highly uncertain what the trend in industry ADRs will look like going forward.We focus on relentless innovation to grow our business by, among other things, providing a best-in-class user experience with intuitive, easy-to-use online platforms to ensure that we are meeting the needs of online consumers while aiming to exceed their expectations. As part of these ongoing efforts, we have a long-term strategy to build a seamless offering of multiple elements of travel, allowing us to provide a more tailored and flexible consumer experience, which we refer to as the "Connected Trip," and we expect these efforts to increase room night growth and revenue growth over time. We may see a negative impact on our operating margins in the near term as we incur the expenses associated with Connected Trip-related investments. Further, to the extent our non-accommodation services (e.g., airline ticket reservation services) have lower margins and increase as a percentage of our total business, our operating margins may be negatively affected. As part of our strategy to provide more payment options to consumers and travel service providers, increase the number and variety of accommodations available on Booking.com, and enable our long-term Connected Trip strategy, Booking.com increasingly processes transactions on a merchant basis, where it facilitates payments from travelers for the services provided. This allows Booking.com to process transactions for travel service providers and to increase its ability to offer secure and flexible transaction terms to consumers, such as the form and timing of payment. We believe that expanding these types of service offerings will benefit consumers and travel service providers, as well as our gross bookings, room night, and earnings growth rates. However, this results in additional expenses for personnel, payment processing, chargebacks (including those related to fraud), and other expenses related to these transactions, which are recorded in "Personnel" and "Sales and other expenses" in our Consolidated Statements of Operations, as well as associated incremental revenues (e.g., credit card rebates), which are recorded in "Merchant revenues." To the extent more of our business is generated on a merchant basis, we incur a greater level of these merchant-related expenses, which negatively impacts our operating margins despite increases in associated incremental revenues. The mix of our gross bookings generated on a merchant basis was 44% in 2022, an increase from 34% in 2021 and 27% in 2019.39We have established widely used and recognized e-commerce brands through marketing and promotional campaigns. Our total marketing expenses, which are comprised of performance and brand marketing expenses that are substantially variable in nature, were $6.0 billion in 2022, up 58% versus 2021 and up 21% versus 2019 as a result of the improving demand environment and our efforts to invest in marketing. Our performance marketing expense, which represents a substantial majority of our marketing expense, is primarily related to the use of online search engines (primarily Google), meta-search and travel research services, and affiliate marketing to generate traffic to our platforms. Our brand marketing expense is primarily related to costs associated with producing and airing television advertising, online video advertising (for example, on YouTube and Facebook), and online display advertising.Marketing efficiency, expressed as marketing expense as a percentage of gross bookings, and performance marketing returns on investment ("ROIs") are impacted by a number of factors that are subject to variability and are in some cases outside of our control, including ADRs, costs per click, cancellation rates, foreign currency exchange rates, our ability to convert paid traffic to booking customers, and the timing and effectiveness of our brand marketing campaigns. In recent years, we observed periods of stable or increasing ROIs. Although it is difficult to predict how performance marketing ROIs will change in the future, ROIs could be negatively impacted by increased levels of competition and other factors. When evaluating our performance marketing spend, we typically consider several factors for each channel, such as the customer experience on the advertising platform, the incremental traffic we receive, and anticipated repeat rates.Marketing efficiency can also be impacted by the extent to which consumers come directly to our platforms for bookings. Marketing expenses as a percentage of total gross bookings in 2022 were lower than 2019 despite lower performance marketing ROIs due to an increase in the share of room nights booked by consumers coming directly to our platforms. Performance marketing ROIs were lower in 2022 versus 2019 due to our efforts to invest in marketing during the recovery in the travel industry in 2022. See Part I, Item 1A, Risk Factors - "We rely on marketing channels to generate a significant amount of traffic to our platforms and grow our business," and "Our business could be negatively affected by changes in online search and meta-search algorithms and dynamics or traffic-generating arrangements."Historically, our growth has primarily been generated by the worldwide accommodation reservation business of Booking.com due in part to the availability of a large number of properties through Booking.com. Booking.com included over 2.7 million properties on its website at December 31, 2022, consisting of over 400,000 hotels, motels, and resorts and approximately 2.3 million alternative accommodation properties (including homes, apartments, and other unique places to stay), and representing an increase from approximately 2.4 million properties at December 31, 2021. The year-over-year increase in total properties was driven primarily by an increase in alternative accommodation properties.The mix of Booking.com’s room nights booked for alternative accommodation properties in 2022 was approximately 30%, up slightly versus 2019 and 2021. We have observed an overall longer-term trend of an increasing mix of room nights booked for alternative accommodation properties as consumer demand for these types of properties has grown, and as we have increased the number and variety of alternative accommodation properties available to consumers on Booking.com. We may experience lower profit margins due to additional costs, such as increased customer service costs, related to offering alternative accommodations on our platforms. As our alternative accommodation business has grown, these different characteristics have negatively impacted our profit margins and this trend may continue. Although we believe that providing an extensive collection of properties, excellent customer service, and an intuitive, easy-to-use consumer experience are important factors influencing a consumer's decision to make a reservation, for many consumers, the price of the travel service is the primary factor determining whether a consumer will book a reservation. Discounting and couponing (i.e., merchandising) occurs across all of the major regions in which we operate, particularly in Asia. In some cases, our competitors are willing to make little or no profit on a transaction, or offer travel services at a loss, in order to gain market share. As a result, it is increasingly important to offer travel services, such as accommodation reservations, at a competitive price, whether through discounts, coupons, closed-user group rates or loyalty programs, increased flexibility in cancellation policies, or otherwise. These initiatives have resulted and, in the future, may result in lower ADRs and lower revenue as a percentage of gross bookings. Total revenue as a percentage of gross bookings was negatively impacted by investments in merchandising in 2022 compared to 2021 and 2019.Many taxing authorities are increasingly focused on ways to increase tax revenues and have targeted large multinational technology companies in these efforts. As a result, many countries and some U.S. states have implemented or are considering the adoption of a digital services tax or similar tax that imposes a tax on revenue earned from digital advertisements or the use of online platforms, even when there is no physical presence in the jurisdiction. Currently, rates for this tax range from 1.5% to 10% of revenue deemed generated in the jurisdiction. The digital services taxes currently in effect, which we record in "General and administrative" expense in the Consolidated Statements of Operations, have negatively impacted our 40results of operations. While the Organisation for Economic Co-operation and Development has been working on multinational tax changes that could require all member parties to remove all digital services taxes, the timing for completion of that project has been delayed and many details remain uncertain. If that project is significantly delayed or not completed more countries could implement digital services taxes, which could negatively impact our results of operations and cash flows. For more information, see Part I, Item 1A, Risk Factors - "We may have exposure to additional tax liabilities."Increased regulatory focus on online businesses, including online travel businesses like ours, could result in increased compliance costs or otherwise adversely affect our business. For example, the Digital Markets Act ("DMA") and Digital Services Act ("DSA") give regulators in the EU more instruments to investigate and regulate digital businesses and impose new rules and requirements on platforms designated as "gatekeepers" under the DMA and online platforms more generally, with separate rules for "Very Large Online Platforms" under the DSA. For more information on the impacts of regulations on our business, see Note 16 to our Consolidated Financial Statements and Part I, Item 1A, Risk Factors - "Our business is subject to various competition/anti-trust, consumer protection, and online commerce laws, rules, and regulations around the world, and as the size of our business grows, scrutiny of our business by legislators and regulators in these areas may intensify." Our businesses outside of the U.S. (see Note 17 to our Consolidated Financial Statements) represent a substantial majority of our financial results, but because we report our results in U.S. Dollars, we face exposure to movements in foreign currency exchange rates as the financial results and the financial condition of our businesses outside of the U.S. are translated from local currency (principally Euros and British Pounds Sterling) into U.S. Dollars. For example, the U.S. Dollar strengthened in 2022 versus both the Euro and British Pound Sterling by 11% and 10%, respectively, as compared to 2021. As aresult of the movements in foreign currency exchange rates, both the absolute amounts of and percentage changes in our foreign-currency-denominated net assets, gross bookings, revenues, operating expenses, and net income as expressed in U.S. Dollars are affected. Our total revenues increased by 56% in 2022 as compared to 2021, but without the impact of changes in foreign currency exchange rates our total revenue increased year-over-year on a constant-currency basis by approximately 71%. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins have not been significantly impacted by currency fluctuations. We designate certain portions of the aggregate principal value of our Euro-denominated debt as a hedge of the foreign currency exposure of the net investment in certain Euro functional currency subsidiaries. Foreign currency transaction gains or losses on the Euro-denominated debt that is not designated as a hedging instrument for accounting purposes are recognized in "Other income (expense), net" in the Consolidated Statements of Operations (see Notes 12 and 21 to our Consolidated Financial Statements). Such foreign currency transaction gains or losses are dependent on the amount of net assets of the Euro functional currency subsidiaries, the amount of the Euro-denominated debt that is designated as a hedge, and fluctuations in foreign currency exchange rates. For more information, see Part I, Item 1A, Risk Factors - "We are exposed to fluctuations in foreign currency exchange rates."We generally enter into derivative instruments to minimize the impact of foreign currency exchange rate fluctuations. See Note 6 to our Consolidated Financial Statements for additional information related to our derivative contracts.Other FactorsOver the long term, we intend to continue to invest in marketing and promotion, technology, and personnel within parameters consistent with attempts to improve long-term operating results, even if those expenditures create pressure on operating margins. In recent years, we have experienced pressure on operating margins as we invested in initiatives to drive future growth. We also intend to broaden the scope of our business, including exploring strategic alternatives such as acquisitions.The competition for technology talent in our industry is intense, including among established technology companies, startups, and companies transitioning to digital, and this level of competition could continue in the future. As a result of the competitive labor market and inflationary pressure on compensation, our personnel expenses to attract and retain key talent are increasing, which may adversely affect our results of operations. See Part I, Item 1A, Risk Factors - "We rely on the performance of highly skilled employees; and, if we are unable to retain or motivate key employees or hire, retain, and motivate well-qualified employees, our business would be harmed."41OutlookIn January 2023, we saw an improvement in the monthly room night growth rate versus 2019 relative to the fourth quarter of 2022, with room nights growing about 26% versus January 2019, driven primarily by improvements in Europe, Rest of World, and Asia. On a year-over-year basis, room night growth in January 2023 was 60%, due in part to the negative impact of the Omicron variant on January 2022 room nights. While there continues to be uncertainty around the month to month trends, we assume that room night growth in the first quarter of 2023 will grow by over 30% relative to the first quarter of 2022. Given that assumption for room night growth, we expect the following for the first quarter of 2023:•the year-over-year growth in gross bookings will be about four percentage points better than the year-over-year growth in room nights;•revenues as a percentage of gross bookings will be higher than it was in the first quarter of 2022; and•operating profit will be higher than in the first quarter of 2022.For the full year, assuming gross bookings increase in 2023 compared to 2022 by a low teens percentage, we expect the following for full-year 2023:•revenues as a percentage of gross bookings will be higher than it was in 2022; and•operating profit will be higher than in 2019 and 2022.Critical Accounting EstimatesManagement's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Our significant accounting policies and estimates are more fully described in Note 2 to our Consolidated Financial Statements. Certain of our accounting estimates are particularly important to our financial position and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We use our judgment to determine the appropriate assumptions to be used in the determination of `certain estimates and we evaluate our estimates on an ongoing basis. Estimates are based on historical experience, terms of existing contracts, our observance of trends in the travel industry, and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions. Matters that involve significant estimates and judgments of management include the following:Valuation of Investments in Private CompaniesSee Notes 2, 5, and 6 to our Consolidated Financial Statements for additional information related to the investments in private companies and information on fair value measurements, including the three levels of inputs to the valuation techniques used to measure fair value. When inputs that are observable, either directly or indirectly (observable market data), are available at the measurement date and are not significantly adjusted using unobservable inputs, the observable inputs would be classified as Level 2 inputs. When little or no market data is available, the fair value of these investments are measured using unobservable inputs ("Level 3 inputs"). Our investments measured using Level 3 inputs primarily consist of investments in privately-held companies that were classified as either debt securities or equity securities without readily determinable fair values. Fair values of privately held securities are estimated using a variety of valuation methodologies, including both market and income approaches. We use valuation techniques appropriate for the type of investment and the information available about the investee as of the valuation date to determine fair value. Recent financing transactions in the investee are generally considered the best indication of the enterprise value and therefore used as a basis to estimate fair value. However, based on a number of factors, such as the proximity to the valuation date or the volume or other terms of these financing transactions, we may also use other valuation techniques to supplement this data, including the income approach. When a recent financing transaction occurs and represents fair value, we also use the calibration process, as appropriate, when estimating fair value on subsequent measurement dates. Calibration is the process of using observed transactions in the investee company's own instruments to ensure that the valuation techniques that will be employed to value the investee company investment on subsequent measurement dates begin with assumptions that are consistent with the original observed transaction as well as any more recent observed transactions in the instruments issued by the investee company. In July 2021, Yanolja announced a new round of funding which was completed in October 2021 along with certain other transactions. As a result of these observable transactions, we increased the carrying value of our investment in Yanolja to 42$306 million as of December 31, 2021. During the three months ended June 30, 2022, considering the significant adverse changes in the market valuations of companies in the travel and technology industries, we evaluated our investment in Yanolja for impairment and recognized an impairment charge of $184 million resulting in an adjusted carrying value of $122 million at June 30, 2022 and December 31, 2022. As discussed below, we used unobservable inputs to determine fair value. We used a combination of the market approach and the income approach in estimating the fair value of our investment in Yanolja as of June 30, 2022. The market approach estimates value using prices and other relevant information generated by market transactions involving identical or comparable companies. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate based on a company’s weighted-average cost of capital, and is adjusted to reflect the risks inherent in its cash flows. The key unobservable inputs and ranges used in estimating the fair value of our investment in Yanolja as of June 30, 2022 include, for the market approach, percentage decrease in the calibrated earnings before interest, taxes, depreciation, and amortization ("EBITDA") multiple (36%) and for the income approach, the weighted average cost of capital (10%-14%) and terminal EBITDA multiple (14x-16x). Significant changes in any of these inputs in isolation would result in significantly different fair value measurements. Generally, a change in the assumption used for EBITDA multiples would result in a directionally similar change in the fair value and a change in the assumption used for weighted average cost of capital would result in a directionally opposite change in the fair value. The determination of the fair values of investments in private companies, where we are a minority shareholder and have access to limited information from the investee, reflects numerous assumptions that are subject to various risks and uncertainties, including key assumptions regarding the investee’s expected growth rates and operating margin, as well as other key assumptions with respect to matters outside of our control, such as discount rates and market comparables. It requires significant judgments and estimates and actual results could be materially different than those judgments and estimates used. Future events and changing market conditions may lead us to re-evaluate the assumptions reflected in our valuation, which may result in a need to recognize additional impairment charges that could have a material adverse effect on our results of operations.Valuation of Goodwill and other Long-lived AssetsThe application of the acquisition method of accounting for business combinations requires the use of significant estimates and assumptions to determine the fair value of the assets acquired and liabilities assumed. Our estimates of the fair value are based upon assumptions that we believe are reasonable. When we deem appropriate, we utilize assistance from third-party valuation firms. The consideration transferred is allocated to the assets acquired and liabilities assumed based on their respective values at the acquisition date. The excess of the consideration transferred over the net of the amounts allocated to the identifiable assets acquired and liabilities assumed is recognized as goodwill. Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination.A substantial portion of our intangible assets and goodwill relates to the acquisitions of OpenTable, KAYAK, and Getaroom. See Note 18 to our Consolidated Financial Statements for additional information related to the acquisition of Getaroom in December 2021.We review long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The assessment of possible impairment is based upon the ability to recover the carrying value of the assets from the estimated undiscounted future net cash flows, before interest and taxes, of the related asset group. We test goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We test goodwill at a reporting unit level and our annual goodwill impairment tests are performed as of September 30. As of September 30, 2022, we performed our annual goodwill impairment test and concluded that there was no impairment of goodwill. The estimation of fair values of our reporting units reflect numerous assumptions that are subject to various risks and uncertainties, including key assumptions regarding each reporting unit’s expected growth rates and operating margin and the competitive environment, as well as other key assumptions with respect to matters outside of our control, such as discount rates and market comparables. Generally, changes in the assumptions used for comparable company multiples would result in directionally similar changes in the fair value and changes in the assumptions used for discount rates would result in directionally opposite changes in the fair value. The estimation of fair value requires significant judgments and estimates and actual results could be materially different than the judgments and estimates used. During 2022, there have been significant adverse changes in the market valuation of companies in the travel and technology industries. Discount rates have also been impacted during the period due to rising interest rates and adverse changes in the macroeconomic environment. Future events and changing market conditions, including economic uncertainties such as inflation, rising interest rates and risks of a potential 43recession, may lead us to re-evaluate the assumptions used to estimate the fair values of our reporting units, which may result in a need to recognize additional goodwill impairment charges that could have a material adverse effect on our results of operations.During the year ended December 31, 2020, as a result of the deterioration of the Company’s business due to the COVID-19 pandemic, the Company recorded significant goodwill impairment charges (described below) related to the OpenTable and KAYAK reporting unit. For the 2020 annual goodwill impairment test and subsequent annual tests, including as of September 30, 2022, the estimated fair value of OpenTable and KAYAK was determined using a combination of standard valuation techniques, including an income approach (discounted cash flows) and a market approach (applying comparable company multiples). The carrying value of goodwill assigned to the OpenTable and KAYAK reporting unit was $973 million as of September 30, 2022. Future events and changing market conditions, including adverse changes in discount rates and market comparables, may require us to revise our assumptions and estimate a lower fair value for the OpenTable and KAYAK reporting unit at a future date, which may result in a need to recognize additional goodwill impairment charges that could have a material adverse effect on our results of operations. If the discount rate used in the income approach as of September 30, 2022 increases or decreases by 0.5%, the impact to the estimated fair value of OpenTable and KAYAK, at September 30, 2022, would have ranged from a decrease of approximately $98 million to an increase of approximately $111 million. If the comparable company multiple used in the market approach as of September 30, 2022 increases or decreases by 1x, the impact to the estimated fair value of OpenTable and KAYAK, at September 30, 2022, would have ranged from an increase of approximately $159 million to a decrease of approximately $159 million.2020 Interim Goodwill Impairment TestDue to the significant and negative financial impact of the COVID-19 pandemic (see Note 2), we performed an interim period goodwill impairment test at March 31, 2020 and recognized a goodwill impairment charge of $489 million related to the OpenTable and KAYAK reporting unit for the three months ended March 31, 2020, which is not tax-deductible, resulting in an adjusted carrying value of goodwill for OpenTable and KAYAK of $1.5 billion at March 31, 2020. The goodwill impairment was primarily driven by a significant reduction in the forecasted near-term cash flows of OpenTable and KAYAK as well as the significant decline in comparable companies' market values as a result of the COVID-19 pandemic. The estimated fair value of OpenTable and KAYAK was determined using a combination of standard valuation techniques, including an income approach (discounted cash flows) and a market approach (applying the recent decline in enterprise values of comparable publicly-traded companies to the recently calculated fair value for OpenTable and KAYAK as well as applying comparable company multiples). The income approach estimates fair value utilizing long-term growth rates and discount rates applied to the cash flow projections. In the cash flow projections, we assumed at the time that OpenTable and KAYAK would experience a significant decline in near-term cash flows with a recovery to 2019 levels of financial performance (including profitability) occurring in 2023. The shape and timing of the recovery was a key assumption in our fair value calculation (both in the income and market approaches). 2020 Annual Goodwill Impairment TestAs of September 30, 2020, we performed our annual goodwill impairment test and recognized a goodwill impairment charge of $573 million for the OpenTable and KAYAK reporting unit for the three months ended September 30, 2020, which is not tax-deductible, resulting in an adjusted carrying value of goodwill for OpenTable and KAYAK of $1.0 billion at September 30, 2020. The goodwill impairment was primarily driven by a significant reduction in the forecasted cash flows of OpenTable and KAYAK, reflecting a longer assumed recovery period to 2019 levels of profitability, mainly due to the continued material adverse impact of the COVID-19 pandemic, including its impact on the flight vertical at KAYAK, and the lowered outlook for monetization opportunities in restaurant reservation services.The estimated fair value of OpenTable and KAYAK was determined using a combination of standard valuation techniques, including an income approach (discounted cash flows) and a market approach (applying comparable company multiples). The income approach, applied as of September 30, 2020, reflected a reduction in the forecasted cash flows of OpenTable and KAYAK and a longer assumed recovery period to 2019 levels of profitability, driven primarily by a lowered outlook for monetization opportunities in restaurant reservation services and slower than previously expected recovery trends for airline travel, which is a key vertical for KAYAK. For the interim goodwill impairment test at March 31, 2020, we assumed a recovery to 2019 levels of financial performance would occur in 2023 for OpenTable and KAYAK. Based on our evaluation of all relevant information available as of September 30, 2020 for the annual goodwill impairment test, we expected at the time that OpenTable and KAYAK would not return to the 2019 level of profitability within five years from that date, and that it was uncertain whether the shape of the recovery would ultimately match our expectations. An increase or decrease of one percentage point to the profitability growth rates used in the cash flow projections would have resulted in an increase or 44decrease of approximately $100 million to the estimated fair value of OpenTable and KAYAK as of September 30, 2020. The discount rate is determined based on the reporting unit’s estimated weighted-average cost of capital and adjusted to reflect the risks inherent in its cash flows, which requires significant judgments. The discount rate used for the annual goodwill impairment test as of September 30, 2020 was higher than the discount rate used for the interim goodwill impairment test as of March 31, 2020. If the discount rate used in the income approach increases or decreases by 0.5%, the impact to the estimated fair value of OpenTable and KAYAK, at September 30, 2020, would have ranged from a decrease of approximately $65 million to an increase of approximately $70 million.Income Taxes We determine our tax expense based on our income and statutory tax rates applicable in the various jurisdictions in which we operate. Due to the complex nature of tax legislation and frequent changes with such associated legislation, significant judgment is required in computing our tax expense and determining our tax positions. The U.S. Tax Cuts and Jobs Act (the "Tax Act") enacted in December 2017 made significant changes to U.S. federal tax law, including a one-time deemed repatriation tax imposed on accumulated unremitted international earnings, to be paid over eight years. We do not intend to indefinitely reinvest our international earnings that were subject to U.S. taxation pursuant to the mandatory deemed repatriation or subject to U.S. taxation as global intangible low-taxed income ("GILTI"). We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of temporary differences, and tax planning strategies and record valuation allowances as required. We are subject to ongoing tax examinations and assessments in various jurisdictions. We have been audited in many jurisdictions and from time to time face challenges regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions that we have taken on our tax returns. Although we believe that our tax filing positions are reasonable and comply with applicable law, we regularly review our tax filing positions, especially in light of tax law or business practice changes, and we may change our positions or determine that previous positions should be amended, either of which could result in additional tax liabilities. The final determination of tax audits or tax disputes may be different from what is reflected in our historical income tax provisions and accruals. The evaluation of tax positions and recognition of income tax benefits require significant judgment and we consult with external tax and legal counsel as appropriate. We consider the technical merits of our tax positions along with the applicable tax statutes, related interpretations and precedents, and our expectation of the outcome of proceedings (or negotiations) with tax authorities. We recognize liabilities when we believe that uncertain positions may not be fully sustained upon audit by the tax authorities, including any related appeals or litigation processes. Liabilities recognized for uncertain tax positions are based on a two-step approach for recognition and measurement. First, we evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained based on its technical merits. Second, we measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Interest and penalties attributable to uncertain tax positions, if any, are recognized as a component of income tax expense. The tax benefits ultimately realized by us may be different than what is recorded in the financial statements due to future events such as our settling the matter with the tax authorities and our success in sustaining our tax positions. See Notes 15 and 16 to our Consolidated Financial Statements for additional information.ContingenciesLoss contingencies (other than income tax-related contingencies disclosed above) arise from actual or possible claims and assessments and pending or threatened litigation that may be brought against us. Based on our assessment of loss contingencies at each balance sheet date, a loss is recorded in the financial statements if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If the amount of the loss cannot be reasonably estimated, we disclose information about the contingency in the financial statements. We also disclose information in our financial statements about reasonably possible loss contingencies. The determination of whether a loss is probable and whether the amount of the loss can be reasonably estimated requires significant judgment and evaluation of all the underlying facts and circumstances, including judgments about the potential actions of third-party claimants, regulatory authorities, and courts. Claims, assessments, and litigations involve significant uncertainties such as the complexity of the facts, the legal theories involved, the nature of the claims, the judgment of the courts, the applicable methodology for determining potential damages, and, in the case of class actions, whether a class action can be certified and the extent to which members of a class would or would not file a claim.45On a quarterly basis, we update our analysis and estimates considering all available information, including the impact of negotiations, settlements, rulings, and advice of legal counsel. Changes in our assessment of whether a loss is probable, our estimate of the loss, or our determination of whether the amount of loss can be reasonably estimated could have a material impact on our results of operations and financial position. Changes in our assumptions regarding a particular matter or the effectiveness of our strategies related to legal and other proceedings could also have a material impact on our results of operations and financial position. For all loss contingencies, until a matter is finally resolved, there may be an exposure to loss in excess of the liability accrued for the matter and such amounts could be material.See Note 16 to our Consolidated Financial Statements for additional information.Recent Accounting Pronouncements See Note 2 to our Consolidated Financial Statements for details, which is incorporated into this Item 7 by reference thereto.46Results of Operations Year Ended December 31, 2022 compared to Year Ended December 31, 2021We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period operating and financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates. Foreign exchange rate fluctuations negatively impacted our year-over-year growth in gross bookings, revenues, and operating expenses for the year ended December 31, 2022. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins have not been significantly impacted by currency fluctuations. Operating and Statistical Metrics Our financial results are driven by certain operating metrics that encompass the booking and other business activity generated by our travel and travel-related services. Specifically, reservations of room nights, rental car days, and airline tickets capture the volume of units booked through our online travel companies' ("OTC") brands by our travel reservation services customers. Gross bookings is an operating and statistical metric that captures the total dollar value, generally inclusive of taxes and fees, of all travel services booked through our OTC brands by our customers, net of cancellations, and is widely used in the travel business. Our non-OTC brands (KAYAK and OpenTable) have different business metrics from those of our OTC brands, so search queries through KAYAK and restaurant reservations through OpenTable do not contribute to our gross bookings.Room nights, rental car days, and airline tickets reserved through our services for the years ended December 31, 2022 and 2021 were as follows:Year Ended December 31,Increase (Decrease)(in millions)20222021Room nights89659151.6 %Rental car days624730.7 %Airline tickets231549.9 % Room nights, rental car days, and airline tickets reserved through our services increased significantly in 2022 compared to 2021, due primarily to the continued improvement in travel demand trends as the impact of the COVID-19 pandemic lessened in 2022 versus 2021. Gross bookings resulting from reservations of room nights, rental car days, and airline tickets made through our agency and merchant categories for the years ended December 31, 2022 and 2021 were as follows (numbers may not total due to rounding): Year Ended December 31,Increase (Decrease)(in millions)20222021Agency gross bookings$67,379 $50,741 32.8 %Merchant gross bookings53,873 25,845 108.4 %Total gross bookings$121,253 $76,586 58.3 % Agency gross bookings are derived from travel-related transactions where we do not facilitate payments from travelers for the services provided, while merchant gross bookings are derived from services where we facilitate payments. Agency and merchant gross bookings increased in 2022 compared to 2021 due primarily to the continued improvement in travel demand trends. Merchant gross bookings increased more than agency gross bookings due to the expansion of merchant accommodation reservation services at Booking.com.The year-over-year increase in gross bookings in 2022 was due primarily to the increase in room nights and the increase in accommodation ADRs of approximately 15% on a constant-currency basis, partially offset by the negative impact of foreign exchange rate fluctuations. Gross bookings resulting from reservations of airline tickets increased 86% year-over-year in 2022 due to higher unit growth and ticket price increases. Gross bookings resulting from reservations of rental car days increased 26% year-over-year in 2022 due primarily to higher unit growth. 47 RevenuesOnline travel reservation servicesSubstantially all of our revenues are generated by providing online travel reservation services, which facilitate online travel purchases between travel service providers and travelers. Revenues from online travel reservation services are classified into two categories: •Agency. Agency revenues are derived from travel-related transactions where we do not facilitate payments from travelers for the services provided. Agency revenues consist almost entirely of travel reservation commissions from our accommodation, rental car, and airline reservation services. Substantially all of our agency revenue is from Booking.com's accommodation reservations. •Merchant. Merchant revenues are derived from travel-related transactions where we facilitate payments from travelers for the services provided, generally at the time of booking. Merchant revenues are derived from transactions where travelers book accommodation, rental car, airline reservations, and other travel related services. The majority of our merchant revenue is from Booking.com's accommodation reservations. Merchant revenues include:◦travel reservation commissions and transaction net revenues (i.e., the amount charged to travelers, including the impact of merchandising, less the amount owed to travel service providers) in connection with our merchant reservation services; ◦revenues from facilitating payments, such as credit card processing rebates and customer processing fees; and ◦ancillary fees, including travel-related insurance revenues. Advertising and other revenuesAdvertising and other revenues are derived primarily from:•revenues earned by KAYAK for (a) sending referrals to OTCs and travel service providers and (b) advertising placements on its platforms; and •revenues earned by OpenTable for (a) restaurant reservation services (fees paid by restaurants for diners seated through OpenTable's online reservation service) and (b) subscription fees for restaurant management services. Year Ended December 31,Increase (Decrease)(in millions)20222021Agency revenues$9,003 $6,663 35.1 %Merchant revenues7,193 3,696 94.6 %Advertising and other revenues894 599 49.4 %Total revenues$17,090 $10,958 56.0 %Agency, merchant, and advertising and other revenues increased in 2022 compared to 2021 due primarily to the continued improvement in gross bookings as the impact of the COVID-19 pandemic lessened in 2022 versus 2021, partially offset by the negative impact of foreign exchange rate fluctuations. Merchant revenues in 2022 increased more than agency revenues due to the expansion of merchant accommodation reservation services at Booking.com.Total revenues as a percentage of gross bookings was 14.1% in 2022, down from 14.3% in 2021 due to investments in merchandising and an increase in the mix of airline ticket gross bookings, partially offset by increased revenues from facilitating payments.48Operating Expenses Marketing Expenses Year Ended December 31,Increase (Decrease)(in millions)20222021Marketing expenses$5,993 $3,801 57.6 %% of Total gross bookings4.9 %5.0 %% of Total revenues35.1 %34.7 % Marketing expenses consist primarily of the costs of: •search engine keyword purchases;•referrals from meta-search and travel research websites; •affiliate programs; •offline and online brand marketing; and •other performance-based marketing and incentives. We adjust our marketing spend based on our growth and profitability objectives, as well as the travel demand and expected ROIs in our marketing channels. We rely on our marketing channels to generate a significant amount of traffic to our websites. Our marketing expenses, which are substantially variable in nature, increased significantly in 2022 compared to 2021, due primarily to the continued improvement in travel demand as the impact of the COVID-19 pandemic lessened in 2022 versus 2021. Marketing expenses as a percentage of total gross bookings decreased slightly in 2022 compared to 2021 due to year-over-year increases in the mix of direct traffic, partially offset by year-over-year decreases in performance marketing ROIs. Performance marketing ROIs were lower in 2022 versus 2021 due to our efforts to invest in marketing during the recovery in the travel industry in 2022.Sales and Other Expenses Year Ended December 31,Increase (Decrease)(in millions)20222021Sales and other expenses$1,818 $881 106.3 %% of Total gross bookings1.5 %1.2 %% of Total revenues10.6 %8.0 % Sales and other expenses consist primarily of: •credit card and other payment processing fees associated with merchant transactions; •fees paid to third parties that provide call center, website content translations, and other services; •chargeback provisions and fraud prevention expenses associated with merchant transactions; •provisions for expected credit losses, primarily related to accommodation commission receivables and prepayments to certain customers; and•customer relations costs. Sales and other expenses, which are substantially variable in nature, increased significantly in 2022 compared to 2021, due primarily to an increase in merchant transaction costs of $573 million, and an increase in third-party call center costs of $235 million. Merchant transactions increased year-over-year in 2022 due to the continued improvement in travel demand trends as the impact of the COVID-19 pandemic lessened in 2022 versus 2021, as well as the expansion of merchant accommodation reservation services at Booking.com. The year-over-year increase in third-party call center costs in 2022 was due in part to the transfer of certain customer service operations of Booking.com to Majorel, which shifted costs from personnel expenses to sales and other expenses.49Personnel Year Ended December 31,Increase (Decrease)(in millions)20222021Personnel$2,465 $2,314 6.5 %% of Total revenues14.4 %21.1 % Personnel expenses consist primarily of: •salaries; •bonuses;•stock-based compensation; •payroll taxes; and •employee health and other benefits. Personnel expenses, excluding stock-based compensation, increased 6% in 2022 compared to 2021, due to an increase in salary expense of $139 million and an increase in bonus expense accruals of $66 million, partially offset by the $136 million expense, recorded in 2021, associated with the return of government assistance received through various government aid programs. Employee headcount of approximately 21,600 as of December 31, 2022 increased by 6% as compared to December 31, 2021. Personnel expenses in 2022 and employee headcount as of December 31, 2022 were reduced due to the transfer of certain customer service operations of Booking.com to Majorel which shifted costs from personnel expenses to sales and other expenses. Stock-based compensation expense was $404 million in 2022 compared to $370 million in 2021.General and Administrative Year Ended December 31,Increase (Decrease)(in millions)20222021General and administrative$934 $620 50.9 %% of Total revenues5.5 %5.7 % General and administrative expenses consist primarily of: •indirect taxes such as digital services taxes and travel transaction taxes;•fees for outside professionals;•occupancy and office expenses; and•personnel-related expenses such as travel, relocation, recruiting, and training expenses. General and administrative expenses increased in 2022 compared to 2021 due to an increase of $167 million in indirect taxes driven by higher digital services taxes, as well as the $46 million accrual related to the potential settlement of an Italian indirect tax matter. See Note 16 to our Consolidated Financial Statements. The year-over-year increase in general and administrative expenses was also driven by an increase of $75 million in personnel-related expenses and an increase of $53 million in fees for professional services. The year-over-year increase in digital services taxes was driven by the improvement in revenue.Information Technology Year Ended December 31,Increase (Decrease)(in millions)20222021Information technology$526 $412 27.6 %% of Total revenues3.1 %3.8 %Information technology expenses consist primarily of: •software license and system maintenance fees;•cloud computing costs and outsourced data center costs;•payments to contractors; and •data communications and other expenses associated with operating our services. 50Information technology expenses increased in 2022 compared to 2021 due to increased cloud computing costs, payments to contractors, and software license fees. Depreciation and Amortization Year Ended December 31,Increase (Decrease)(in millions)20222021Depreciation and amortization$451 $421 6.9 %% of Total revenues2.6 %3.8 % Depreciation and amortization expenses consist of: •amortization of intangible assets with determinable lives; •amortization of internally-developed and purchased software; •depreciation of computer equipment; and •depreciation of leasehold improvements, furniture and fixtures, and office equipment. Depreciation and amortization expenses increased in 2022 compared to 2021 due to increased amortization expense related to the acquisition of Getaroom, partially offset by decreased depreciation of computer equipment and leasehold improvements.Restructuring, Disposal, and Other Exit Activities Year Ended December 31,Increase (Decrease)(in millions)20222021Restructuring, disposal, and other exit activities$(199)$13 *% of Total revenues(1.2)%0.1 %* Not meaningful Restructuring, disposal, and other exit activities in 2022 includes the gain of $240 million on the sale and leaseback transaction related to Booking.com's future headquarters building (see Note 10 to our Consolidated Financial Statements), partially offset by a loss of $41 million related to the transfer of certain customer service operations of Booking.com to Majorel. Restructuring, disposal, and other exit activities for the year ended December 31, 2021 principally relate to the restructuring charges as a result of restructuring actions taken in 2020 and are primarily related to employee severance and other termination benefits at Booking.com (see Note 19 to our Consolidated Financial Statements).Interest Expense Year Ended December 31,Increase (Decrease)(in millions)20222021Interest expense$391 $334 16.9 % Interest expense increased for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to higher interest rates relating to our cash management activities (with related income recorded in interest income) and the issuance of senior notes in November 2022. This was offset in part by the impact of the adoption on January 1, 2022 of the new accounting standards update for convertible instruments, the redemption of senior notes with higher interest rates in April 2021, and the maturity in September 2021 of convertible senior notes. The amortization of debt discount on convertible debt was recorded in Interest expense. With the adoption of the new accounting standards update, such amortization is not recorded in the financial statements for periods after January 1, 2022 (see Note 2 to our Consolidated Financial Statements).Other Income (Expense), Net Year Ended December 31,Increase (Decrease)(in millions)20222021Other income (expense), net$(788)$(697)13.1 %51The following table sets forth the composition of "Other income (expense), net" for the years ended December 31, 2022 and 2021:Year Ended December 31,(in millions)20222021Interest and dividend income$219 $16 Net losses on equity securities(963)(569)Foreign currency transaction (losses) gains(43)111 Loss on early extinguishment of debt— (242)Other(1)(13)Other income (expense), net$(788)$(697)See Note 21 to our Consolidated Financial Statements for additional information. Interest and dividend income increased for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the impact of higher interest rates on cash management activities (with related expenses recorded in interest expense) and investment activities. See Notes 5 and 6 to our Consolidated Financial Statements for additional information related to net losses on equity securities and the impairment of an investment in equity securities. Foreign currency transaction (losses) gains for the year ended December 31, 2022 includes gains of $46 million related to our Euro-denominated debt and accrued interest that were not designated as net investment hedges and losses of $52 million on derivative contracts. Foreign currency transaction gains for the year ended December 31, 2021 includes gains of $135 million related to our Euro-denominated debt and accrued interest that were not designated as net investment hedges and losses of $30 million on derivative contracts. Loss on early extinguishment of debt is related to our Senior Notes due April 2025 and our Senior Notes due April 2027 that were redeemed in April 2021 (see Note 12 to our Consolidated Financial Statements).Income Taxes Year Ended December 31,Increase (Decrease)(in millions)20222021Income tax expense$865 $300 188.6 %% of Income before income taxes22.1 %20.5 % Our 2022 effective tax rate differs from the U.S. federal statutory tax rate of 21%, primarily due to higher international tax rates, a valuation allowance recorded against deferred tax assets related to certain unrealized losses on equity securities, certain non-deductible expenses, and an increase in unrecognized tax benefits, partially offset by the benefit of the Netherlands Innovation Box Tax (discussed below). Our 2021 effective tax rate differs from the U.S. federal statutory tax rate of 21%, primarily due to the benefit of the Netherlands Innovation Box Tax, partially offset by higher international tax rates and an increase in unrecognized tax benefits. Our effective tax rate was higher for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to lower benefit resulting from the Netherlands Innovation Box Tax and higher valuation allowance recorded against deferred tax assets related to certain unrealized losses on equity securities, partially offset by lower international tax rates. Under Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 9% ("Innovation Box Tax") for periods beginning on or after January 1, 2021 rather than the Dutch statutory rate of 25%. Previously, the Innovation Box Tax rate was 7%. Effective January 1, 2022, the Netherlands corporate income tax rate increased from 25% to 25.8%. A portion of Booking.com's earnings during the years ended December 31, 2022 and 2021 qualified for Innovation Box Tax treatment, which had a significant beneficial impact on our effective tax rates for these periods. For more information regarding the Innovation Box Tax, see Part I, Item 1A, Risk Factors - "We may not be able to maintain our 'Innovation Box Tax' benefit."52Results of OperationsYear Ended December 31, 2021 compared to Year Ended December 31, 2020For a comparison of our results of operations for the fiscal years ended December 31, 2021 and 2020, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 23, 2022.53Liquidity and Capital Resources Our financial results and prospects are almost entirely dependent on facilitating the sale of travel-related services. The COVID-19 pandemic and the resulting implementation of restrictive measures resulted in a significant decline in travel activities and consumer demand for related services, in 2020 in particular. For more information, see Note 2 to our Consolidated Financial Statements and Part I, Item 1A, Risk Factors - "The COVID-19 pandemic has materially adversely affected, and may further adversely impact, our business and financial performance."Marketing expenses and personnel expenses are the most significant operating expenses for our business. We rely on marketing channels to generate a significant amount of traffic to our websites. See our Consolidated Statements of Operations and "Trends" and "Results of Operations" above for additional information on marketing expenses and personnel expenses including stock-based compensation expenses.Our continued access to sources of liquidity depends on multiple factors, including global economic conditions, the condition of global financial markets, the availability of sufficient amounts of financing, our ability to meet debt covenant requirements, our operating performance, and our credit ratings. If our credit ratings were to be downgraded, or financing sources were to ascribe higher risk to our rating levels, our industry or us, our access to capital and the cost of any financing would be negatively impacted. There is no guarantee that additional debt financing will be available in the future to fund our obligations, or that it will be available on commercially reasonable terms, in which case we may need to seek other sources of funding. In addition, the terms of future debt agreements could include more restrictive covenants than those we are currently subject to, which could restrict our business operations. For more information, see Part I, Item 1A, Risk Factors - "Our liquidity, credit ratings, and ongoing access to capital could be materially and negatively affected by global financial conditions and events."At December 31, 2022, we had $15.2 billion in cash, cash equivalents, and short-term and long-term investments, of which approximately $9.3 billion is held by our international subsidiaries. Cash, cash equivalents, and long-term investments held by our international subsidiaries are denominated primarily in Euros, Hong Kong Dollars, and British Pounds Sterling. Cash equivalents and short-term and long-term investments are principally comprised of money market fund investments, time deposits and certificates of deposit, government and corporate debt securities, equity securities of Meituan, Grab Holdings Limited ("Grab") and DiDi Global Inc. ("DiDi"), and our investments in private companies. We completed the sale of our investment in equity securities of Meituan in February 2023 and received gross proceeds of $1.7 billion. See Notes 5 and 6 to our Consolidated Financial Statements.Deferred merchant bookings of $2.2 billion at December 31, 2022 represents cash payments received from travelers in advance of us completing our performance obligations and are comprised principally of amounts estimated to be payable to travel service providers as well as our estimated future revenue for our commission or margin and fees. The amounts are mostly subject to refunds for cancellations.At December 31, 2022, we had a remaining transition tax liability of $811 million as a result of the Tax Act, which included $711 million reported as "Long-term U.S. transition tax liability" and $100 million included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheet. This liability will be paid over the next four years. In accordance with the Tax Act, generally, future repatriation of our international cash will not be subject to a U.S. federal income tax liability as a dividend, but will be subject to U.S. state income taxes and international withholding taxes, which have been accrued by us. In August 2022, the Inflation Reduction Act of 2022 was enacted into law in the United States. The key provisions applicable to us include a 15% corporate minimum tax on book income. In addition, see Part I, Item 1A, Risk Factors - "We may have exposure to additional tax liabilities."In August 2019, we entered into a $2.0 billion five-year unsecured revolving credit facility with a group of lenders. The revolving credit facility provides for the issuance of up to $80 million of letters of credit as well as borrowings of up to $100 million on same-day notice, referred to as swingline loans. The proceeds of loans made under the facility can be used for working capital and general corporate purposes, including acquisitions, share repurchases and debt repayments. At December 31, 2022, there were no borrowings outstanding and $14 million of letters of credit issued under this revolving credit facility. The revolving credit facility contains a maximum leverage ratio covenant. After a 2020 amendment to the revolving credit facility, the permitted maximum leverage ratio is increased through and including the three months ending March 31, 2023 and we may not declare or make any cash distribution or repurchase any of our shares (with certain exceptions including in connection with tax withholding related to shares issued to employees) unless we are in compliance on a pro forma basis with the maximum leverage ratio covenant then in effect. Such restriction ends upon delivery of financial statements required for the three months ending June 30, 2023, or we have the ability to terminate this restriction earlier if we demonstrate compliance with the original maximum leverage ratio covenant in the revolving credit facility. At December 31, 2022, we were 54in compliance with the relevant maximum leverage ratio covenant. There can be no assurance that we will be able to meet the maximum leverage ratio covenant at any particular time, and our ability to borrow under the revolving credit facility depends on compliance with the covenant. Further, the lenders have the right to require repayment of any amounts borrowed under the facility if we are not in compliance with the covenant.In November 2022, the Company issued senior notes for an aggregate principal amount of 3.5 billion Euros with interest rates ranging from 4.0% to 4.75% and with maturity dates ranging from November 2026 to November 2034. The Company paid $19 million in debt issuance costs during the year ended December 31, 2022 related to the issuance of these senior notes. A portion of the proceeds from the issuance of these senior notes were used to repay the Senior Notes due November 2022 (the "November 2022 Notes"). In addition, we intend to repay the Senior Notes due March 2023 from these proceeds upon maturity. The remaining proceeds from the issuance of these senior notes are available to be used for general corporate purposes.In November 2022, we repaid $778 million on the maturity of the November 2022 Notes. In March 2022, the Company repaid $1.1 billion on the maturity of Senior Notes due March 2022. In addition, the Company paid the applicable accrued and unpaid interest relating to these senior notes. At December 31, 2022, we had outstanding senior notes with varying maturities for an aggregate principal amount of $12.5 billion, with $500 million payable within the next twelve months. The senior notes had a cumulative interest to maturity of $2.4 billion, with $365 million payable within the next twelve months. See Note 12 to our Consolidated Financial Statements for additional information related to our debt arrangements, including principal amounts, interest rates and maturity dates.During the year ended December 31, 2022, we repurchased shares of our common stock for an aggregate cost of $6.7 billion. At December 31, 2022, we had a total remaining amount of $3.9 billion authorized by our Board of Directors to repurchase our common stock. In February 2023, our Board authorized a program to repurchase up to an additional $20.0 billion of our common stock. We expect to complete repurchases under the two authorizations within the next four years, assuming we remain in compliance with the applicable maximum leverage ratio covenant under the credit facility amendment. The Inflation Reduction Act of 2022 has mandated a 1% excise tax on stock repurchases effective from January 1, 2023. See Notes 12 and 13 to our Consolidated Financial Statements. Stock repurchases subsequent to December 31, 2022 were approximately $542 million as of February 22, 2023. In November 2021, the Company entered into an agreement to acquire global flight booking provider Etraveli Group for approximately 1.6 billion Euros ($1.7 billion). Completion of the acquisition is subject to certain closing conditions, including regulatory approvals. In December 2022, we entered into a sale and leaseback transaction for Booking.com’s future headquarters building. The building was sold for an aggregate consideration of approximately 566 million Euros ($601 million) and we concurrently entered into an agreement to lease the building from the purchaser for an initial term of 16.5 years, with up to five renewal options of five years each. The annual base rent under the lease is 24 million Euros ($26 million) and will increase annually based on the consumer price index, subject to a specified ceiling. See Note 10 to our Consolidated Financial Statements for additional information.At December 31, 2022, we had lease obligations of $867 million. See Note 10 to our Consolidated Financial Statements for more information on our obligations related to operating and financing leases. Additionally, at December 31, 2022, we had, in the aggregate, $378 million of non-cancellable purchase obligations individually greater than $10 million payable over the next five years, of which $143 million is payable within the next twelve months. Such purchase obligations relate to agreements to purchase goods and services that are enforceable and legally binding, that specify all significant terms, including the quantities to be purchased, price provisions, and the approximate timing of the transaction. At December 31, 2022 there were $452 million of standby letters of credit and bank guarantees issued on our behalf. These are obtained primarily for regulatory purposes.See Note 16 to our Consolidated Financial Statements for additional information related to our commitments and contingencies.We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures, and other obligations through at least the next twelve months. However, if we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business plans, 55either of which could have a material adverse effect on our business, our ability to compete or our future growth prospects, financial condition, and results of operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted. We may not generate sufficient cash flow from operations in the future, revenue growth or sustained profitability may not be realized, and future borrowings or equity sales may not be available in amounts sufficient to make anticipated capital expenditures, finance our strategies, or repay our indebtedness.Cash Flow AnalysisYear Ended December 31, 2022 compared to Year Ended December 31, 2021Net cash provided by operating activities for the year ended December 31, 2022 was $6.6 billion, resulting from net income of $3.1 billion, a favorable net impact of $1.7 billion from adjustments for non-cash items and the gain on the sale and leaseback transaction, and a favorable net change in working capital and long-term assets and liabilities of $1.8 billion. Non-cash items were principally associated with net losses on equity securities, depreciation and amortization, stock-based compensation expense and other stock-based payments, deferred income tax benefit, provision for expected credit losses and chargebacks, and operating lease amortization. For the year ended December 31, 2022, deferred merchant bookings and other current liabilities increased by $3.7 billion, and accounts receivable increased by $1.2 billion, primarily due to increases in business volumes.Net cash provided by operating activities for the year ended December 31, 2021 was $2.8 billion, resulting from net income of $1.2 billion, a favorable impact of $1.4 billion from adjustments for non-cash items and the loss on early extinguishment of debt, and a favorable net change in working capital and other long-term assets and liabilities of $269 million. Non-cash items were principally associated with net losses on equity securities, deferred income tax benefit, depreciation and amortization, stock-based compensation expense and other stock-based payments, and operating lease amortization. For the year ended December 31, 2021, accounts receivable increased by $1.0 billion and deferred merchant bookings and other current liabilities increased by $1.5 billion, primarily due to increases in business volumes.Net cash used in investing activities for the year ended December 31, 2022 was $518 million, principally resulting from purchases of investments of $768 million, primarily in various corporate and government debt securities (see Note 5), as well as from purchases of property and equipment of $368 million. This was partially offset by proceeds from the sale and leaseback transaction of $601 million and proceeds from the sales and maturities of investments of $32 million. Net cash used in investing activities for the year ended December 31, 2021 was $1.0 billion, principally resulting from the acquisition of Getaroom of $1.2 billion and purchases of property and equipment of $304 million. This was partially offset by proceeds from the sales and maturities of investments of $508 million, net of purchases of $17 million.Net cash used in financing activities for the year ended December 31, 2022 was $4.9 billion, almost entirely resulting from payments for the repurchase of common stock of $6.6 billion and payments on the maturity of debt of $1.9 billion. This was partially offset by the proceeds from the issuance of long-term debt of $3.6 billion. Net cash used in financing activities for the year ended December 31, 2021 was $1.2 billion, almost entirely resulting from payments on the redemption and conversion of debt of $3.1 billion and payments for the repurchase of common stock of $163 million, partially offset by the proceeds from the issuance of long-term debt of $2.0 billion. Year Ended December 31, 2021 compared to Year Ended December 31, 2020 For a comparison of our cash flow activities for the fiscal years ended December 31, 2021 and 2020, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 23, 2022.ContingenciesFor information related to the French and other tax assessments and other tax matters, see Note 16 to our Consolidated Financial Statements and Part I, Item IA, Risk Factors - "We may have exposure to additional tax liabilities."For information related to the pension matter and our other contingent liabilities, see Note 16 to our Consolidated Financial Statements.56Item 7A. Quantitative and Qualitative Disclosures About Market Risk We have exposure to several types of market risk: changes in interest rates, foreign currency exchange rates, and equity prices.We manage our exposure to interest rate risk and foreign currency risk through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. We use foreign currency exchange derivative contracts to manage short-term foreign currency risk.The objective of our policies is to mitigate potential income statement, cash flow, and fair value exposures resulting from possible future adverse fluctuations in rates. We evaluate our exposure to market risk by assessing the anticipated near-term and long-term fluctuations in interest rates and foreign currency exchange rates. This evaluation includes the review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions, and the review of market projections as to expected future rates. We utilize this information to determine our own investment strategies as well as to determine if the use of derivative financial instruments is appropriate to mitigate any potential future market exposure that we may face. Our policy does not allow speculation in derivative instruments for profit or, except in certain limited situations, execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. To the extent that changes in interest rates and foreign currency exchange rates affect general economic conditions, we would also be affected by such changes.At December 31, 2022 and 2021, the outstanding aggregate principal amount of our debt was $12.5 billion and $11.1 billion, respectively. We estimate that the fair value of such debt was approximately $12.4 billion and $12.1 billion at December 31, 2022 and 2021, respectively. As of December 31, 2022, the outstanding principal amount of the Company's debt exceeds the fair value of debt mainly due to the increase in interest rates partially offset by the conversion premium on the convertible senior notes due in May 2025. The estimated fair value of the Company's debt in excess of the outstanding principal amount at December 31, 2021 primarily relates to the conversion premium on the convertible senior notes due in May 2025 and the outstanding senior notes due in April 2030. Excluding the effect on the fair value of our convertible senior notes, a hypothetical 100 basis point (1.0%) decrease in interest rates would have resulted in an increase in the estimated fair value of our other debt of approximately $522 million and $401 million at December 31, 2022 and 2021, respectively. Our convertible senior notes are more sensitive to the equity market price volatility of our shares than changes in interest rates. The fair value of the convertible senior notes will likely increase as the market price of our shares increases and will likely decrease as the market price of our shares falls. Our businesses outside of the U.S. (see Note 17 to our Consolidated Financial Statements) represent a substantial majority of our financial results, but because we report our results in U.S. Dollars, we face exposure to movements in foreign currency exchange rates as the financial results and the financial condition of our businesses outside of the U.S. are translated from local currencies (principally Euros and British Pounds Sterling) into U.S. Dollars. If the U.S. Dollar weakens against the local currencies, the translation of these foreign-currency-denominated balances will result in increased net assets, gross bookings, revenues, operating expenses, and net income. Similarly, our net assets, gross bookings, revenues, operating expenses and net income will decrease if the U.S. Dollar strengthens against the local currencies. For example, the U.S. Dollar strengthened in 2022 versus both the Euro and British Pound Sterling by 11% and 10%, respectively, as compared to 2021. Our total revenues increased by 56% for the year ended December 31, 2022 as compared to the year ended December 31, 2021, but without the impact of changes in foreign currency exchange rates, our total revenues increased year-over-year on a constant-currency basis by approximately 71%. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins have not been significantly impacted by currency fluctuations. Additionally, foreign currency exchange rate fluctuations on transactions denominated in currencies other than the functional currency result in gains and losses that are reflected in our Consolidated Statements of Operations. As of December 31, 2022, we had a significant investment that was denominated in Hong Kong Dollars and the related impact from the movements in foreign currency exchange rates was recognized in "Other income (expense), net" in the Consolidated Statements of Operations. See Note 5 to our Consolidated financial Statements.As of December 31, 2022 and 2021, the carrying value of our Euro denominated debt was $7.6 billion and $6.2 billion, respectively. We designate certain portions of the aggregate principal value of our Euro-denominated debt as a hedge of the foreign currency exposure of the net investment in certain Euro functional currency subsidiaries. The foreign currency transaction gains or losses on the Euro-denominated debt that is not designated as a hedging instrument for accounting purposes are recognized in "Other income (expense), net" in our Consolidated Statements of Operations (see Notes 12 and 21 to our Consolidated Financial Statements). Such foreign currency transaction gains or losses are dependent on the amount of net assets 57of the Euro functional currency subsidiaries, the amount of the Euro-denominated debt that is designated as a hedge, and fluctuations in foreign currency exchange rates.We generally enter into derivative instruments to hedge our exposure to the impact of movements in foreign currency exchange rates on our transactional balances denominated in currencies other than the functional currency. We will continue to evaluate the use of derivative instruments in the future. See Note 6 to our Consolidated Financial Statements for additional information related to our derivative contracts. We are exposed to equity price risk as it relates to changes in fair values of our investments in equity securities of publicly-traded companies and private companies. We recorded net losses of $963 million and $569 million and net gains of $1.7 billion for the years ended December 31, 2022, 2021 and 2020, respectively, related to these equity securities (see Notes 5 and 6 to our Consolidated Financial Statements). The estimated fair value of our investments in equity securities of publicly-traded companies and private companies at December 31, 2022 and 2021 was $2.2 billion and $3.2 billion, respectively. Our investments in private companies are measured at cost less impairment, if any. Such investments are also required to be measured at fair value as of the date of certain observable transactions for the identical or a similar investment of the same issuer. A hypothetical 10% decrease in the fair values at December 31, 2022 and 2021 of our investments in equity securities of publicly-traded companies and private companies would have resulted in a loss, before tax, of approximately $220 million and $320 million, respectively, being recognized in net income.

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K and with Part I, Item 1A, “Risk Factors.” Please refer to the cautionary language at the beginning of Part I of this Annual Report on Form 10-K regarding forward-looking statements.Business OverviewCadence is a leader in electronic system design, building upon more than 30 years of computational software expertise. We apply our underlying Intelligent System Design strategy to deliver computational software, hardware and IP that turn design concepts into reality. We enable our customers to develop electronic products. Our products and services are designed to give our customers a competitive edge in their development of integrated ICs, SoCs, and increasingly sophisticated electronic devices and systems. Our products and services do this by optimizing performance, minimizing power consumption, shortening the time to bring our customers’ products to market, improving engineering productivity and reducing their design, development and manufacturing costs.Our strategy is to provide the technology necessary for our customers to develop products across a variety of vertical markets including consumer, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial, healthcare and life sciences. Our products and services enable our customers to develop complex and innovative electronic products, so demand for our technology is driven by our customers’ investment in new designs and products. Historically, the industry that provided the tools used by IC engineers was referred to as Electronic Design Automation (“EDA”). Today, our offerings include and extend beyond EDA.We group our products into categories related to major design activities:•Custom IC Design and Simulation;•Digital IC Design and Signoff;•Functional Verification;•IP; and•System Design and Analysis.28Table of ContentsConsistent with our Intelligent System Design strategy, we completed our acquisitions of OpenEye and Future Facilities during fiscal 2022. Both of these acquisitions are expected to add important new technologies and capabilities to our System Design and Analysis technology portfolio that we believe will enhance our ability to pursue attractive opportunities in the markets we serve. During fiscal 2022, these acquisitions increased expenses, including amortization of acquired intangible assets more than revenue.For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Categories.”Management uses certain performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the headings “Results of Operations” and “Liquidity and Capital Resources.”Fiscal Year EndOn September 7, 2022, our Board of Directors approved a change in our fiscal year end from the Saturday closest to December 31 of each year to December 31 of each year. Our fiscal quarters will end on March 31, June 30, and September 30. The fiscal year change is effective beginning with our 2023 fiscal year, which began on January 1, 2023.Macroeconomic EnvironmentOur business is subject to the effects of expanded trade restrictions, the ongoing geopolitical conflict in Ukraine and other areas of the world, the COVID-19 pandemic, volatility in foreign currency exchange rates, global inflation and the rise in interest rates. We have been impacted by expanded trade restrictions, including restrictions concerning advanced node IC production in China, the inclusion of additional Chinese technology companies on the BIS’s “Unverified List” and regulations governing the sale of certain technologies. Based on our current assessments, we expect the impact of these expanded trade restrictions on our business to be limited. We also continuously monitor geopolitical conflicts around the world and their effects on our business. During the first half of fiscal 2022, due to the ongoing conflict between Russia and Ukraine and the corresponding sanctions imposed by the United States and other countries, we terminated our operations in Russia. The termination of our operations in Russia has not limited our ability to develop or support our products and has not had a material impact on our results of operations, financial condition, liquidity or cash flows. We do not have operations or employees in Ukraine.Since its inception, the COVID-19 pandemic has posed a variety of challenges to our day-to-day operations. Despite these challenges, the pandemic has not had a material, adverse impact on our results of operations, financial condition, liquidity or cash flows. While we are unable to accurately predict the full impact that COVID-19 and its continuing repercussions will have on our results of operations, financial condition, liquidity and cash flows, we have implemented policies and practices that have enabled us to support critical operations and execute our strategy. While our business model provides some resilience against these factors, we will continue to monitor the direct and indirect impacts of these or similar circumstances on our business and financial results. For additional information on the potential impact of macroeconomic conditions on our business, see Part I, Item 1A, “Risk Factors.”Results of OperationsThe discussion of our fiscal 2022 consolidated results of operations include year-over-year comparisons to fiscal 2021 for revenue, cost of revenue, operating expenses, operating margin, other non-operating expenses, income taxes and cash flows. For a discussion of the fiscal 2021 changes compared to fiscal 2020, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, filed on February 22, 2022.Results of operations for fiscal 2022, as compared to fiscal 2021, reflect the following:•revenue growth that exceeded the growth of our costs and expenses;•increased revenue from software, IP and other arrangements where revenue is recognized over time;•growth in revenue from emulation and prototyping hardware and IP where revenue is recognized up-front;•continued investment in research and development activities and technical sales support; and•increased provision for income taxes primarily due to changes to tax laws in the United States.RevenueWe primarily generate revenue from licensing our software and IP, selling or leasing our emulation and prototyping hardware technology, providing maintenance for our software, hardware and IP, providing engineering services and earning royalties generated from the use of our IP. The timing of our revenue is significantly affected by the mix of software, hardware and IP products generating revenue in any given period and whether the revenue is recognized over time or at a point in time, upon completion of delivery.29Table of ContentsGenerally, between 85% and 90% of our annual revenue is characterized as recurring revenue. Recurring revenue includes revenue recognized over time from our software arrangements, services, royalties, maintenance on IP licenses and hardware, and operating leases of hardware. Recurring revenue also includes revenue recognized at varying points in time over the term of other arrangements with non-cancelable commitments, whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of products or services. The remainder of our revenue is recognized at a point in time and is characterized as up-front revenue. Up-front revenue is primarily generated by our sales of emulation and prototyping hardware and individual IP licenses. The percentage of our recurring and up-front revenue and fluctuations in revenue within our geographies are impacted by delivery of hardware and IP products to our customers in any single fiscal period. The following table shows the percentage of our revenue that is classified as recurring or up-front for fiscal 2022 and 2021: 20222021Revenue recognized over time83 %85 %Revenue from arrangements with non-cancelable commitments2 %3 %Recurring revenue85 %88 %Up-front revenue15 %12 %Total100 %100 %While the percentage of revenue characterized as recurring compared to revenue characterized as up-front may vary between fiscal quarters, the overall mix of revenue is relatively consistent on an annual basis or over the course of twelve consecutive months. The following table shows the percentage of recurring revenue for the twelve-month periods ending concurrently with our five most recent fiscal quarters: Trailing Twelve Months Ended December 31,2022October 1,2022July 2,2022April 2,2022January 1,2022Recurring revenue85 %86 %87 %87 %88 %Up-front revenue15 %14 %13 %13 %12 %Total100 %100 %100 %100 %100 %Revenue by YearThe following table shows our revenue for fiscal 2022 and 2021 and the change in revenue between years: Change 202220212022 vs. 2021 (In millions, except percentages)Product and maintenance$3,340.2 $2,812.9 $527.3 19 %Services221.5 175.3 46.2 26 %Total revenue$3,561.7 $2,988.2 $573.5 19 %Product and maintenance revenue increased during fiscal 2022, as compared to fiscal 2021, primarily due to increased revenue in each of our five product categories. This growth was driven by our customers investing in new, complex designs for their products that include the design of electronic systems for consumer, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial and healthcare. Services revenue increased during fiscal 2022, as compared to fiscal 2021, primarily due to increased revenue from our custom IP offerings. Services revenue may fluctuate from period to period based on the timing of fulfillment of our services and IP performance obligations.No one customer accounted for 10% or more of total revenue during fiscal 2022 or 2021.30Table of ContentsRevenue by Product CategoryThe following table shows the percentage of product and related maintenance revenue contributed by each of our five product categories and services during fiscal 2022 and 2021: 20222021Custom IC Design and Simulation22 %23 %Digital IC Design and Signoff28 %29 %Functional Verification, including Emulation and Prototyping Hardware26 %24 %IP12 %13 %System Design and Analysis12 %11 %Total100 %100 %Revenue by product category fluctuates from period to period based on demand for our products and services, our available resources and our ability to deliver and support them. Certain of our licensing arrangements allow customers the ability to remix among software products. Additionally, we have arrangements with customers that include a combination of our products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product categories based upon the expected usage of our products. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ. Revenue by Geography Change 202220212022 vs. 2021 (In millions, except percentages)United States$1,577.9 $1,293.0 $284.9 22 %Other Americas53.1 42.1 11.0 26 %China521.5 378.1 143.4 38 %Other Asia629.5 566.8 62.7 11 %Europe, Middle East and Africa582.4 523.4 59.0 11 %Japan197.3 184.8 12.5 7 %Total revenue$3,561.7 $2,988.2 $573.5 19 %Revenue in each of the six geographies presented in the table above increased during fiscal 2022, as compared to fiscal 2021, due to increased revenue from our software offerings. Revenue in the United States and China also increased during fiscal 2022, as compared to fiscal 2021, due to increased revenue from our hardware and IP offerings.Revenue by Geography as a Percent of Total Revenue 20222021United States44 %43 %Other Americas2 %2 %China15 %13 %Other Asia18 %19 %Europe, Middle East and Africa16 %17 %Japan5 %6 %Total100 %100 %Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies. For an additional description of how changes in foreign exchange rates affect our consolidated financial statements, see the discussion under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”31Table of ContentsCost of Revenue Change 202220212022 vs. 2021 (In millions, except percentages)Cost of product and maintenance$273.6 $222.6 $51.0 23 %Cost of services98.0 84.4 13.6 16 %Total cost of revenue$371.6 $307.0 $64.6 21 %The following table shows cost of revenue as a percentage of related revenue for fiscal 2022 and 2021: 20222021Cost of product and maintenance8 %8 %Cost of services44 %48 %Cost of Product and MaintenanceCost of product and maintenance includes costs associated with the sale and lease of our emulation and prototyping hardware and licensing of our software and IP products, certain employee salary and benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, costs of technical documentation and royalties payable to third-party vendors. Cost of product and maintenance depends primarily on our hardware product sales in any given period, but is also affected by employee salary and benefits and other employee-related costs, reserves for inventory, and the timing and extent to which we acquire intangible assets, license third-party technology or IP, and sell our products that include such acquired or licensed technology or IP.A summary of cost of product and maintenance for fiscal 2022 and 2021 is as follows: Change 202220212022 vs. 2021 (In millions, except percentages)Product and maintenance-related costs$232.3 $175.0 $57.3 33 %Amortization of acquired intangibles41.3 47.6 (6.3)(13)%Total cost of product and maintenance$273.6 $222.6 $51.0 23 %Product and maintenance-related costs increased during fiscal 2022, when compared to fiscal 2021, due to the following: Change 2022 vs. 2021 (In millions)Emulation and prototyping hardware costs$51.6 Salary, benefits and other employee-related costs4.9 Other items0.8 Total change in product and maintenance-related costs$57.3 Costs associated with our emulation and prototyping hardware products include components, assembly, testing, applicable reserves and overhead. These costs make our cost of emulation and prototyping hardware products higher, as a percentage of revenue, than our cost of software and IP products. The increase in emulation and prototyping hardware costs during fiscal 2022, as compared to fiscal 2021, was primarily due to increased revenue from emulation and prototyping hardware products.Amortization of acquired intangibles included in cost of product and maintenance decreased during fiscal 2022, as compared to fiscal 2021, primarily due to certain technology-related intangible assets becoming fully amortized during fiscal 2022 and during fiscal 2021, partially offset by technology-related intangible assets acquired during fiscal 2022.32Table of ContentsCost of ServicesCost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects and costs to maintain the infrastructure necessary to manage a services organization. Cost of services may fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects rather than internal development projects.Operating ExpensesOur operating expenses include marketing and sales, research and development, and general and administrative expense. Factors that tend to cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, our annual mid-year promotion and pay raise cycle, stock-based compensation, restructuring and other employment separation activities, foreign exchange rate movements, acquisition-related costs, volatility in variable compensation programs that are driven by operating results, and charitable donations. During fiscal 2021, we offered a voluntary retirement program to eligible employees in the United States. This program resulted in a one-time charge for voluntary termination and post-employment benefits of $26.8 million. As of December 31, 2022, liabilities related to the voluntary retirement program were $0.4 million and were included in accounts payable and accrued liabilities on our consolidated balance sheet. We expect to make cash payments to settle these liabilities during fiscal 2023.Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our consolidated financial statements, see the discussion in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”Our operating expenses for fiscal 2022 and 2021 were as follows: Change 202220212022 vs. 2021 (In millions, except percentages)Marketing and sales$604.2 $560.3 $43.9 8 %Research and development1,251.6 1,134.3 117.3 10 %General and administrative242.1 189.0 53.1 28 %Total operating expenses$2,097.9 $1,883.6 $214.3 11 %Our operating expenses, as a percentage of total revenue, for fiscal 2022 and 2021 were as follows: 20222021Marketing and sales17 %19 %Research and development35 %38 %General and administrative7 %6 %Total operating expenses59 %63 %33Table of Contents Marketing and SalesThe changes in marketing and sales expense were due to the following: Change 2022 vs. 2021 (In millions)Salary, benefits and other employee-related costs$24.0 Stock-based compensation11.5 Marketing programs and events9.9 Facilities and other infrastructure costs3.9 Travel and sales meetings3.3 Professional services(3.2)Voluntary retirement program(6.7)Other items1.2 Total change in marketing and sales expense$43.9 Salary, benefits and other employee-related costs and stock-based compensation included in marketing and sales increased during fiscal 2022, as compared to fiscal 2021, primarily due to increased business levels and our continued investment in attracting and retaining talent dedicated to technical sales support. Costs related to marketing programs and events increased during fiscal 2022, as compared to fiscal 2021, primarily due to an increased number of in-person meetings and events.Research and Development The changes in research and development expense were due to the following: Change 2022 vs. 2021 (In millions)Salary, benefits and other employee-related costs$76.6 Stock-based compensation27.7 Facilities and other infrastructure costs11.5 Professional services9.3 Travel5.2 Voluntary retirement program(14.7)Other items1.7 Total change in research and development expense$117.3 Salary, benefits and other employee-related costs and stock-based compensation included in research and development expense increased during fiscal 2022, as compared to fiscal 2021, primarily due to our continued investment in attracting and retaining talent for research and development activities. Facilities and other infrastructure costs increased during fiscal 2022, as compared to fiscal 2021, primarily due to an increase in costs associated with our acquisitions and our growing work force.34Table of ContentsGeneral and AdministrativeThe changes in general and administrative expense were due to the following: Change 2022 vs. 2021 (In millions)Stock-based compensation$20.0 Professional services15.2 Legal fees and related costs12.5 Contributions to non-profit organizations8.7 Salary, benefits and other employee-related costs8.5 Voluntary retirement program(2.6)Foreign service tax refund(13.5)Other items4.3 Total change in general and administrative expense$53.1 As a result of the transition of our Chief Executive Officer and creation of the Executive Chair role in December of 2021, general and administrative expense for fiscal 2022 includes incremental compensation costs, as compared to fiscal 2021. The increase in stock-based compensation included in general and administrative expense during fiscal 2022, as compared to fiscal 2021, is primarily due to equity awards granted to executives. Professional services and legal fees included in general and administrative expense increased during fiscal 2022, as compared to fiscal 2021, primarily due to an increase in acquisition-related professional services, legal fees and costs for other matters. The increase in contributions to non-profit organizations during fiscal 2022, as compared to fiscal 2021, is primarily related to increased contributions to the Cadence Giving Foundation in an effort to give back to the communities where our employees live and work.During fiscal 2022, as compared to fiscal 2021, we benefited from a non-recurring foreign service tax refund, offsetting the increase in other categories of general and administrative expense.Amortization of Acquired IntangiblesAmortization of acquired intangibles consists primarily of amortization of customer relationships, acquired backlog, trade names, trademarks and patents. Amortization in any given period depends primarily on the timing and extent to which we acquire intangible assets. Change 202220212022 vs. 2021 (In millions, except percentages)Amortization of acquired intangibles$18.5 $19.6 $(1.1)(6)%Amortization of acquired intangibles decreased during fiscal 2022, as compared to fiscal 2021, primarily due to certain intangible assets becoming fully amortized during the first half of fiscal 2022 and during fiscal 2021, partially offset by intangible assets acquired during fiscal 2022.Operating marginOperating margin represents income from operations as a percentage of total revenue. Our operating margin for fiscal 2022 and 2021 was as follows:20222021Operating margin30 %26 %Operating margin increased during fiscal 2022, as compared to fiscal 2021, primarily because revenue growth in each of our five product categories exceeded growth in operating expenses.35Table of ContentsInterest ExpenseInterest expense for fiscal 2022 and 2021 was comprised of the following: 20222021 (In millions)Contractual cash interest expense:2024 Notes$15.3 $15.3 2025 Term Loan4.1 — Revolving credit facility2.8 0.7 Amortization of debt discount:2024 Notes0.9 0.8 Other(0.2)0.2 Total interest expense$22.9 $17.0 Interest expense increased during fiscal 2022, as compared to fiscal 2021, primarily due to increased interest expense associated with amounts outstanding under our 2025 Term Loan and our 2021 Credit Facility. Interest rates under our 2025 Term Loan and 2021 Credit Facility are variable, so interest expense is affected by changes in interest rates, particularly for periods when we maintain a balance outstanding under the revolving credit facility. As of December 31, 2022, we had outstanding borrowings of $100.0 million under our 2021 Credit Facility to fund domestic working capital and for other general corporate requirements. For an additional description of our debt arrangements, including our 2025 Term Loan and 2021 Credit Facility, see Note 5 in the notes to consolidated financial statements.Income TaxesThe following table presents the provision for income taxes and the effective tax rate for fiscal 2022 and 2021: 20222021 (In millions, except percentages)Provision for income taxes$196.4 $72.5 Effective tax rate18.8 %9.4 %The United States enacted the Tax Cuts and Jobs Act in December 2017, which requires companies to capitalize all of their R&D costs, including software development costs, incurred in tax years beginning after December 31, 2021. Beginning in fiscal 2022, we began capitalizing and amortizing R&D costs over five years for domestic research and fifteen years for international research rather than expensing these costs as incurred. As a result, our fiscal 2022 effective tax rate and our cash tax payments increased significantly as compared to fiscal 2021. We recognized increases to our deferred tax assets as we begin to capitalize domestic research costs.Our provision for income taxes for fiscal 2022 was primarily attributable to federal, state and foreign income taxes on our fiscal 2022 income, partially offset by the tax benefit of $42.1 million related to stock-based compensation that vested or was exercised during the period. We also recognized a tax benefit of $68.7 million related to the release of the valuation allowance on our California R&D tax credits because we expect to utilize these tax credits based on strong current earnings and future taxable income projections. Our provision for fiscal 2021 was primarily attributable to federal, state and foreign income taxes on our fiscal 2021 income, partially offset by the tax benefit of $22.1 million related to our foreign-derived intangible income, and the tax benefit of $64.3 million related to stock-based compensation that vested or was exercised during the period. We also recognized a tax benefit of $10.5 million related to the release of the valuation allowance on our Massachusetts R&D tax credits because we expect to utilize these tax credits prior to expiration based on strong current earnings and future taxable income projections.We maintain valuation allowances on certain federal, state, and foreign deferred tax assets. While we believe our current valuation allowance is sufficient, we assess the need for an adjustment to the valuation allowance on a quarterly basis. The assessment is based on our estimates of future sources of taxable income in the jurisdictions in which we operate and the periods over which our deferred tax assets will be realizable. In the event we determine that we will be able to realize all or part of our net deferred tax assets in the future, the valuation allowance will be reversed in the period in which we make such determination. The release of a valuation allowance would result in an increase to our net deferred tax assets and a decrease to income tax expense in the period in which the release is recorded. 36Table of ContentsOur future effective tax rates may also be materially impacted by tax amounts associated with our foreign earnings at rates different from the United States federal statutory rate, research credits, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, closure of statutes of limitations or settlement of tax audits and changes in tax law. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and Hungary. Our future effective tax rates may be adversely affected if our earnings were to be lower in countries where we have lower statutory tax rates. We currently expect that our fiscal 2023 effective tax rate will be approximately 26%. We expect that our quarterly effective tax rates will vary from our fiscal 2023 effective tax rate as a result of recognizing the income tax effects of stock-based awards in the quarterly periods that the awards vest or are settled and other items that we cannot anticipate. For additional discussion about how our effective tax rate could be affected by various risks, see Part I, Item 1A, “Risk Factors.” For further discussion regarding our income taxes, see Note 8 in the notes to consolidated financial statements.Liquidity and Capital Resources As ofChange December 31,2022January 1,20222022 vs. 2021 (In millions)Cash and cash equivalents$882.3 $1,088.9 $(206.6)Net working capital359.1 744.5 (385.4)Cash and Cash EquivalentsAs of December 31, 2022, our principal sources of liquidity consisted of $882.3 million of cash and cash equivalents as compared to $1,088.9 million as of January 1, 2022.Our primary sources of cash and cash equivalents during fiscal 2022 were cash generated from operations, proceeds from debt, and proceeds from the exercise of stock options and proceeds from stock purchases under our employee stock purchase plan.Our primary uses of cash and cash equivalents during fiscal 2022 were payments related to salaries and benefits, operating expenses, repurchases of our common stock, payments for business combinations, net of cash acquired, payments for income taxes, purchases of inventory, payment of employee taxes on vesting of restricted stock and purchases of property, plant and equipment. Approximately 76% of our cash and cash equivalents were held by our foreign subsidiaries as of December 31, 2022. Our cash and cash equivalents held by our foreign subsidiaries may vary from period to period due to the timing of collections and repatriation of foreign earnings. We expect that current cash and cash equivalent balances and cash flows that are generated from operations and financing activities will be sufficient to meet the needs of our domestic and international operating activities and other capital and liquidity requirements, including acquisitions and share repurchases, for at least the next 12 months and thereafter for the foreseeable future.Net Working CapitalNet working capital is comprised of current assets less current liabilities, as shown on our consolidated balance sheets. The decrease in our net working capital as of December 31, 2022, as compared to January 1, 2022, is primarily due to our use of cash for investing and financing activities and the timing of cash receipts from customers and disbursements made to vendors.Cash Flows from Operating ActivitiesCash flows from operating activities during fiscal 2022 and 2021 were as follows: Change 202220212022 vs. 2021 (In millions)Cash provided by operating activities$1,241.9 $1,101.0 $140.9 Cash flows from operating activities include net income, adjusted for certain non-cash items, as well as changes in the balances of certain assets and liabilities. Our cash flows from operating activities are significantly influenced by business levels and the payment terms set forth in our customer agreements. The increase in cash flows from operating activities during fiscal 2022, as compared to fiscal 2021, was primarily due to improved results from operations and timing of cash receipts from customers and disbursements made to vendors.37Table of ContentsCash Flows Used for Investing ActivitiesCash flows used for investing activities during fiscal 2022 and 2021 were as follows: Change 202220212022 vs. 2021 (In millions)Cash used for investing activities$(738.6)$(293.0)$(445.6)The increase in cash used for investing activities during fiscal 2022, as compared to fiscal 2021, was primarily due to an increase in cash paid in business combinations, net of cash acquired, and an increase in payments for purchases of property, plant and equipment. We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, acquiring other companies and businesses, purchasing software licenses, and making strategic investments.Cash Flows Used for Financing ActivitiesCash flows used for financing activities during fiscal 2022 and 2021 were as follows: Change 202220212022 vs. 2021 (In millions)Cash used for financing activities$(657.0)$(643.8)$(13.2)The increase in cash used for financing activities during fiscal 2022, as compared to fiscal 2021, was primarily due to an increase in payments for repurchases of our common stock, partially offset by an increase in proceeds from debt.Other Factors Affecting Liquidity and Capital ResourcesStock Repurchase ProgramIn August 2022, our Board of Directors increased the prior authorization to repurchase shares of our common stock by authorizing an additional $1.0 billion. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors. As of December 31, 2022, approximately $1.1 billion of the share repurchase authorization remained available to repurchase shares of our common stock. See Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for additional information on share repurchases.Revolving Credit FacilityIn June 2021, we entered into a five-year senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent, as amended in September 2022 (the “2021 Credit Facility”). The 2021 Credit Facility provides for borrowings up to $700.0 million, with the right to request increased capacity up to an additional $350.0 million upon receipt of lender commitments, for total maximum borrowings of $1.05 billion. The 2021 Credit Facility expires on June 30, 2026. Any outstanding loans drawn under the 2021 Credit Facility are due at maturity on June 30, 2026, subject to an option to extend the maturity date. Outstanding borrowings may be repaid at any time prior to maturity. Interest rates associated with the 2021 Credit Facility are variable, so interest expense is impacted by changes in interest rates, particularly for periods when there are outstanding borrowings under the revolving credit facility. As of December 31, 2022, there were $100.0 million of borrowings outstanding under the 2021 Credit Facility, and we were in compliance with all financial covenants associated with such credit facility.38Table of Contents2024 NotesIn October 2014, we issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024 (the “2024 Notes”). We received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Interest is payable in cash semi-annually. The 2024 Notes are unsecured and rank equal in right of payment to all of our existing and future senior indebtedness. As of December 31, 2022, we were in compliance with all covenants associated with the 2024 Notes.2025 Term LoanIn September 2022, we entered into a $300.0 million three-year senior non-amortizing term loan facility due on September 7, 2025 with a group of lenders led by Bank of America, N.A., as administrative agent (the “2025 Term Loan”). The 2025 Term Loan is unsecured and ranks equal in right of payment to all of our unsecured indebtedness. Proceeds from the 2025 Term Loan were used to fund our acquisition of OpenEye. Interest rates associated with the 2025 Term Loan are variable, so interest expense is impacted by changes in interest rates. As of December 31, 2022, we were in compliance with all financial covenants associated with the 2025 Term Loan. For additional information relating to our debt arrangements, see Note 5 in the notes to consolidated financial statements. For additional information relating to OpenEye and other acquisitions, see Note 6 in the notes to consolidated financial statements.Other Liquidity RequirementsA summary of other capital and liquidity requirements as of December 31, 2022 is as follows:TotalDue in LessThan 1 Year(In millions)Operating lease obligations(1)$207.6 $41.4 Purchase obligations92.6 80.3 Contractual interest payments (2)73.6 31.9 Tax assessment (3)48.7 48.7 Income tax payable18.5 18.5 Other long-term contractual obligations (4)89.7 — Total$530.7 $220.8 _________________(1) This table includes future payments under leases that had commenced as of December 31, 2022 as well as leases that had been signed but not yet commenced as of December 31, 2022.(2) Contractual interest payments on our variable rate indebtedness were calculated based on outstanding borrowings and the weighted average interest rates as of December 31, 2022.(3) In 2022, we received a tax audit assessment from the Korea taxing authorities primarily related to value-added taxes for years 2017-2019. We are required to pay these assessed taxes, prior to being allowed to contest or litigate the assessment. We paid the assessment in January 2023. Payment of this amount is not an admission that we are subject to such taxes, and we continue to defend our position vigorously. (4) Included in other long-term contractual obligations are long-term income tax liabilities of $63 million related to unrecognized tax benefits. The remaining portion of other long-term contractual obligations is primarily liabilities associated with defined benefit retirement plans and acquisitions.We expect that current cash and cash equivalent balances, cash flows that are generated from operations and financing activities will be sufficient to meet the needs of our domestic and international operating activities, and other capital and liquidity requirements, including acquisitions and share repurchases for at least the next 12 months and thereafter for the foreseeable future.As of December 31, 2022, we did not have any significant off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our operating results or financial condition.39Table of ContentsCritical Accounting EstimatesIn preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary.We believe that the assumptions, judgments and estimates involved in the accounting for income taxes, revenue recognition and business combinations have the greatest potential impact on our consolidated financial statements; therefore, we consider these to be our critical accounting estimates. For information on our significant accounting policies, see Note 2 in the notes to consolidated financial statements.Revenue Recognition Our contracts with customers often include promises to transfer multiple software and/or IP licenses, hardware and services, including professional services, technical support services, and rights to unspecified updates to a customer. These contracts require us to apply judgment in identifying and evaluating any terms and conditions in contracts which may impact revenue recognition. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. In some arrangements, such as most of our IP license arrangements, we have concluded that the licenses and associated services are distinct from each other. In other arrangements, like our time-based software arrangements, the licenses and certain services are not distinct from each other. Our time-based software arrangements include multiple software licenses and updates to the licensed software products, as well as technical support, and we have concluded that these promised goods and services are a single, combined performance obligation.Judgment is required to determine the stand-alone selling prices (“SSPs”) for each distinct performance obligation. We rarely license or sell products on a standalone basis, so we are required to estimate the SSP for each performance obligation. In instances where the SSP is not directly observable because we do not sell the license, product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual performance obligations due to the stratification of those items by classes of customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region of the customer in determining the SSP.Revenue is recognized over time for our combined performance obligations that include software licenses, updates, and technical support as well as for maintenance and professional services that are separate performance obligations. For our professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. For our other performance obligations recognized over time, revenue is generally recognized using a time-based measure of progress reflecting generally consistent efforts to satisfy those performance obligations throughout the arrangement term.If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. We exercise significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. Our judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.We are required to estimate the total consideration expected to be received from contracts with customers. In some circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on our expectations of the term of the contract. Generally, we have not experienced significant returns or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on our results of operations during the periods involved.Accounting for Income TaxesWe are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. Our provision for income taxes could be adversely affected by our earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions and investments, changes in our deferred tax assets and liabilities including changes in our assessment of valuation allowances, changes in the relevant tax laws or interpretations of these tax laws, and developments in current and future tax examinations. 40Table of ContentsWe only recognize the tax benefit of an income tax position if we judge that it is more likely than not that the tax position will be sustained, solely on its technical merits, in a tax audit including resolution of any related appeals or litigation processes. To make this judgment, we must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If we judge that an income tax position meets this recognition threshold, then we must measure the amount of the tax benefit to be recognized by estimating the largest amount of tax benefit that has a greater than 50% cumulative probability of being realized upon settlement with a taxing authority that has full knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible settlement outcomes. We must reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax law, effectively settled issues under audit, the lapse of applicable statute of limitations, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision. For a more detailed description of our unrecognized tax benefits, see Note 8 in the notes to consolidated financial statements.Business CombinationsWhen we acquire businesses, we allocate the purchase price to the acquired tangible assets and assumed liabilities, including deferred revenue, liabilities associated with the fair value of contingent consideration and acquired identifiable intangible assets. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires us to make significant estimates in determining the fair values of these acquired assets and assumed liabilities, especially with respect to intangible assets and goodwill. These estimates are based on information obtained from management of the acquired companies, our assessment of this information, and historical experience. These estimates can include, but are not limited to, the cash flows that an acquired business is expected to generate in the future, the cash flows that specific assets acquired with that business are expected to generate in the future, the appropriate weighted average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable, and if different estimates were used, the purchase price for the acquisition could be allocated to the acquired assets and assumed liabilities differently from the allocation that we have made to the acquired assets and assumed liabilities. In addition, unanticipated events and circumstances may occur that may affect the accuracy or validity of such estimates, and if such events occur, we may be required to adjust the value allocated to acquired assets or assumed liabilities.We also make significant judgments and estimates when we assign useful lives to the definite-lived intangible assets identified as part of our acquisitions. These estimates are inherently uncertain and if we used different estimates, the useful life over which we amortize intangible assets would be different. In addition, unanticipated events and circumstances may occur that may impact the useful life assigned to our intangible assets, which would impact our amortization of intangible assets expense and our results of operations.During fiscal 2022, we acquired intangible assets of $178.6 million. The fair value of the intangible assets acquired was determined using variations of the income approach that utilizes unobservable inputs classified as Level 3 measurements.With our acquisitions of OpenEye and Future Facilities, we acquired combined intangible assets of $155.5 million. For existing technology acquired with OpenEye and Future Facilities, the fair value was determined by applying the relief-from-royalty method. This method is based on the application of a royalty rate to forecasted revenue to quantify the benefit of owning the intangible asset rather than paying a royalty for use of the asset. To estimate royalty savings over time, we projected revenue from the acquired existing technology over the estimated remaining life of the technology, including the effect of assumed technological obsolescence, before applying an assumed royalty rate. For both OpenEye and Future Facilities, we assumed technological obsolescence at a rate of 10% annually, before applying an assumed royalty rate of 25%.The fair value for agreements and relationships acquired with our acquisitions of OpenEye and Future Facilities was determined by using the multi-period excess earnings method. This method reflects the present value of the projected cash flows that are expected to be generated from existing customers, less charges representing the contribution of other assets to those cash flows. Projected income from existing customer relationships was determined using customer retention rates between 95% and 100% for OpenEye and 95% for Future Facilities. The present value of operating cash flows from existing customers was determined using discount rates ranging from 10% to 11%.We also completed three other business combinations with combined intangible assets of $23.1 million. The fair value of certain intangible assets acquired was determined using the multi-period excess earnings method, a variation of the income approach that utilizes unobservable inputs classified as Level 3 measurements. This method estimates the revenue and cash flows derived from the acquired assets, net of investment in supporting assets. The resulting cash flow, which is attributable solely to the assets acquired, is then discounted at a rate of return commensurate with the associated risk of the asset to calculate the present value. We assumed discount rates ranging from 11.5% to 24.5%. The fair value of the remaining intangible assets acquired was determined using the relief-from-royalty method using a technological obsolescence rate of approximately 12% annually, before applying a royalty rate of 25%.We believe that our estimates and assumptions related to the fair value of our acquired intangible assets are reasonable, but significant judgment is involved.New Accounting StandardsFor additional information about the adoption of new accounting standards, see Note 2 in the notes to consolidated financial statements.41Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskForeign Currency RiskA material portion of our revenue, expenses and business activities are transacted in the U.S. dollar. In certain foreign countries where we price our products and services in U.S. dollars, a decrease in value of the local currency relative to the U.S. dollar results in an increase in the prices for our products and services compared to those products of our competitors that are priced in local currency. This could result in our prices being uncompetitive in certain markets.In certain countries where we may invoice customers in the local currency, our revenue benefits from a weaker dollar and are adversely affected by a stronger dollar. The opposite impact occurs in countries where we record expenses in local currencies. In those cases, our costs and expenses benefit from a stronger dollar and are adversely affected by a weaker dollar. The fluctuations in our operating expenses outside the United States resulting from volatility in foreign exchange rates are not generally moderated by corresponding fluctuations in revenue from existing contracts.We enter into foreign currency forward exchange contracts to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates. These forward contracts are not designated as accounting hedges, so the unrealized gains and losses are recognized in other income (expense), net, in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities or other current assets.We do not use forward contracts for trading purposes. Our forward contracts generally have maturities of 90 days or less. We enter into foreign currency forward exchange contracts based on estimated future asset and liability exposures, and the effectiveness of our hedging program depends on our ability to estimate these future asset and liability exposures. Recognized gains and losses with respect to our current hedging activities will ultimately depend on how accurately we are able to match the amount of foreign currency forward exchange contracts with actual underlying asset and liability exposures.The following table provides information about our foreign currency forward exchange contracts as of December 31, 2022. The information is provided in United States dollar equivalent amounts. The table presents the notional amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates expressed as units of the foreign currency per United States dollar, which in some cases may not be the market convention for quoting a particular currency. All of these forward contracts matured during February 2023.NotionalPrincipalWeightedAverageContractRate (In millions) Forward Contracts:European union euro$139.5 0.95 British pound105.7 0.83 Japanese yen68.3 135.15 Israeli shekel58.5 3.42 Indian rupee35.9 81.84 Swedish krona26.4 10.35 Chinese renminbi18.2 6.99 Canadian dollar15.5 1.33 South Korean Won9.9 1,303.03 Taiwan dollar7.1 30.47 Singapore dollar4.0 1.37 Total$489.0 Estimated fair value$5.3 As of January 1, 2022, our foreign currency exchange contracts had an aggregate principal amount of $469.4 million, and an estimated fair value of negative $0.3 million.42Table of ContentsWe have performed sensitivity analyses as of December 31, 2022 and January 1, 2022, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% change in the value of the U.S. dollar relative to applicable foreign currency exchange rates, with all other variables held constant. The foreign currency exchange rates we used in performing the sensitivity analysis were based on market rates in effect at each respective date. The sensitivity analyses indicated that a hypothetical 10% decrease in the value of the U.S. dollar would result in a decrease to the fair value of our foreign currency forward exchange contracts of $4.2 million and $5.7 million as of December 31, 2022 and January 1, 2022, respectively, while a hypothetical 10% increase in the value of the U.S. dollar would result in an increase to the fair value of our foreign currency forward exchange contracts of $7.2 million and $8.5 million as of December 31, 2022 and January 1, 2022, respectively.We actively monitor our foreign currency risks, but our foreign currency hedging activities may not substantially offset the impact of fluctuations in currency exchange rates on our results of operations, cash flows and financial position.Interest Rate RiskOur exposure to market risk for changes in interest rates relates primarily to our portfolio of cash and cash equivalents and any balances outstanding on our 2021 Credit Facility and 2025 Term Loan. We are exposed to interest rate fluctuations in many of the world’s leading industrialized countries, but our interest income and expense is most sensitive to fluctuations in the general level of United States interest rates. In this regard, changes in United States interest rates affect the interest earned on our cash and cash equivalents and the costs associated with foreign currency hedges. All highly liquid securities with a maturity of three months or less at the date of purchase are considered to be cash equivalents. The carrying value of our interest-bearing instruments approximated fair value as of December 31, 2022.Interest rates under our 2021 Credit Facility and 2025 Term Loan are variable, so interest expense could be adversely affected by changes in interest rates, particularly for periods when we maintain a balance outstanding under the revolving credit facility. As of December 31, 2022, there were $100.0 million of borrowings outstanding under our 2021 Credit Facility and $300.0 million of borrowings outstanding under our 2025 Term Loan. Interest rates for our 2021 Credit Facility and 2025 Term Loan can fluctuate based on changes in market interest rates and in interest rate margins that vary based on the credit ratings of our unsecured debt. Assuming all loans were fully drawn and we were to fully exercise our right to increase borrowing capacity under our 2021 Credit Facility and made no prepayments on our 2025 Term Loan, each quarter point change in interest rates would result in a $3.4 million change in annual interest expense on our indebtedness under our 2021 Credit Facility and 2025 Term Loan. For an additional description of the 2021 Credit Facility and 2025 Term Loan, see Note 5 in the notes to consolidated financial statements. Equity Price RiskEquity InvestmentsWe have a portfolio of equity investments that includes marketable equity securities and non-marketable investments. Our equity investments are made primarily in connection with our strategic investment program. Under our strategic investment program, from time to time, we make cash investments in companies with technologies that are potentially strategically important to us. See Note 14 in the notes to consolidated financial statements for an additional description of these investments.

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

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+ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSBUSINESS OVERVIEWBusiness SummaryCarrier Global Corporation is the leading global provider of healthy, safe, sustainable and intelligent building and cold chain solutions with a focus on providing differentiated, digitally-enabled lifecycle solutions to our customers. Our portfolio includes industry-leading brands such as Carrier, Toshiba, Automated Logic, Carrier Transicold, Kidde, Edwards and LenelS2 that offer innovative HVAC, refrigeration, fire, security and building automation technologies to help make the world safer and more comfortable. We also provide a broad array of related building services, including audit, design, installation, system integration, repair, maintenance and monitoring. Our operations are classified into three segments: HVAC, Refrigeration and Fire & Security. Our worldwide operations are affected by global and regional industrial, economic and political factors and trends. These include the mega-trends of urbanization, climate change and increasing requirements for food safety driven by the food needs of our growing global population and the rising standards of living in emerging markets. We believe that our business segments are well positioned to benefit from favorable secular trends, including these mega-trends and from the strength of our industry-leading brands and track record of innovation. In addition, we regularly review our end markets to proactively identify trends and adapt our strategies accordingly. Our business is also affected by changes in the general level of economic activity, such as changes in business and consumer spending, construction and shipping activity as well as short-term economic factors such as currency fluctuations, commodity price volatility and supply disruptions. We continue to invest in our business, take pricing actions to mitigate supply chain and inflationary pressures, develop new products and services in order to remain competitive in our markets and use risk management strategies to mitigate various exposures. We believe that we have industry-leading global brands, which form the foundation of our business strategy. Coupled with our focus on growth, innovation and operational efficiency, we expect to drive long-term future growth and increased value for our shareowners.Significant EventsAcquisition of Toshiba Carrier CorporationOn February 6, 2022, we entered into a binding agreement to acquire a majority ownership interest in TCC, a VRF and light commercial HVAC joint venture between Carrier and Toshiba Corporation. TCC designs and manufactures flexible, energy-efficient and high-performance VRF and light commercial HVAC systems as well as commercial products, compressors and heat pumps. The acquisition included all of TCC's advanced research and development centers and global manufacturing operations, product pipeline and the long-term use of Toshiba's iconic brand. The acquisition was completed on August 1, 2022. As a result, the assets, liabilities and results of operations of TCC are consolidated in the accompanying Consolidated Financial Statements as of the date of acquisition and reported within our HVAC segment. Upon closing, Toshiba Corporation retained a 5% ownership interest in TCC. Supply Chain ChallengesThe ongoing global economic recovery from the COVID-19 pandemic has caused significant challenges for global supply chains resulting in inflationary cost pressures, component shortages and transportation delays. As a result, we have incurred incremental costs for commodities and components used in our products as well as component shortages that have negatively 30Table of Contents impacted our sales and results of operations. We expect that these challenges will continue to have an impact on our businesses for the foreseeable future.We continue to take proactive steps to limit the impact of these challenges and are working closely with our suppliers to ensure availability of products and implement other cost savings initiatives. In addition, we continue to invest in our supply chain to improve its resilience with a focus on automation, dual sourcing of critical components and localized manufacturing when feasible. To date, there has been limited disruption to the availability of our products, though it is possible that more significant disruptions could occur if these supply chain challenges continue.Russia's Invasion of UkraineIn February 2022, Russian forces initiated a military action against Ukraine. As a result, the European Union, the United States, the United Kingdom and other countries have imposed sanctions that have increased global economic and political uncertainty. We operated in Russia through a Russia-based subsidiary and a joint venture which represented less than 1% of our total assets and revenue. On March 10, 2022, we announced that we were suspending business operations in Russia, honoring existing contractual obligations in a manner that fully complies with all sanctions and trade controls imposed. As of December 31, 2022, we have ceased all operations in Russia. While neither Russia nor Ukraine constitute a material portion of our business, the conflict could lead to disruption, instability and volatility in global markets and industries that could negatively impact our results of operations. We continue to monitor the evolving impacts of this conflict and its effect on the global economy and geopolitical landscape.Sale of Chubb Fire & Security BusinessOn July 26, 2021, we entered into a stock purchase agreement to sell our Chubb business to APi. Chubb, which was reported within our Fire & Security segment, delivered essential fire safety and security solutions from design and installation to monitoring, service and maintenance across more than 17 countries around the globe. On January 3, 2022, we completed the Chubb Sale for net proceeds of $2.9 billion and recognized a gain on the sale of $1.1 billion during the year ended December 31, 2022. Impact of the COVID-19 PandemicIn early 2020, the World Health Organization declared the outbreak of a respiratory disease known as COVID-19 as a global pandemic. In response, many countries implemented containment and mitigation measures to combat the outbreak, which severely restricted the level of economic activity and caused a significant contraction in the global economy. As a result, we took several preemptive actions to manage liquidity, preserve the health and safety of our employees and customers as well as maintaining the continuity of our operations. The preparation of financial statements requires management to use judgments in making estimates and assumptions based on the relevant information available at the end of each period, which can have a significant effect on reported amounts. However, due to significant uncertainty surrounding the pandemic, including a resurgence in cases and the spread of COVID-19 variants, management's judgments could change. While our results of operations, cash flows and financial condition could be negatively impacted, the extent of any continuing impact cannot be estimated with certainty at this time. RESULTS OF OPERATIONSThis discussion summarizes the significant factors affecting our consolidated results of operations, financial condition and liquidity for the year ended December 31, 2022 compared with December 31, 2021. This discussion should be read in conjunction with Item 8, the Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K. A detailed discussion of the year ended December 31, 2021 compared with December 31, 2020 is not included herein and can be found in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in the Company's 2021 Annual Report on Form 10-K, filed with the SEC on February 8, 2022, under the heading "Results of Operations," which is incorporated herein by reference.31Table of Contents Year Ended December 31, 2022 Compared with Year Ended December 31, 2021 As a result of the Chubb Sale, we do not have any remaining ownership interest in Chubb and no longer consolidate Chubb in our financial statements as of January 3, 2022. Therefore, this Management’s Discussion and Analysis of Financial Condition and Results of Operations only includes the financial results of Chubb in periods prior to the date of sale. As a result, prior period results may not be comparable to the current period.The results of TCC's operations are included in our consolidated results since the acquisition date of August 1, 2022. Prior to the acquisition, we accounted for our minority ownership in TCC under the equity method of accounting and recognized our portion of earnings within Equity method investment in net earnings as part of operating expenses. As a result, prior period results may not be comparable to the current period.The following represents our consolidated net sales and operating results:(In millions)20222021Period Change% ChangeNet sales$20,421 $20,613 $(192)(1)%Cost of products and services sold(14,957)(14,633)(324)2 %Gross margin5,464 5,980 (516)(9)%Operating expenses(949)(3,335)2,386 (72)%Operating profit4,515 2,645 1,870 71 %Non-operating income (expense), net(223)(245)22 (9)%Income from operations before income taxes4,292 2,400 1,892 79 %Income tax expense(708)(699)(9)1 %Net income from operations3,584 1,701 1,883 111 %Less: Non-controlling interest in subsidiaries' earnings from operations50 37 13 35 %Net income attributable to common shareowners$3,534 $1,664 $1,870 112 %Net Sales For the year ended December 31, 2022, Net sales was $20.4 billion, a 1% decrease compared with the same period of 2021. The components of the year-over-year change were as follows:2022Organic / Operational8 %Foreign currency translation(3)%Acquisitions and divestitures, net(6)%Total % change(1)%Organic sales for the year ended December 31, 2022 increased by 8% compared with the same period of 2021. We continue to benefit from the demand for energy-efficient, digital products and healthy building solutions. In addition, pricing improvements more than offset inflationary impacts in each of our segments. The organic increase was primarily driven by our HVAC segment due to pricing improvements in our North America residential and light commercial business and improved global end-markets in our Commercial HVAC business. Refrigeration results were flat as each of the segment's businesses experienced challenges in certain end markets during the second half of the year. Pricing improvements in our Fire & Security segment were the primary driver of growth compared with the prior year while supply chain and logistics constraints continue to be challenging. Refer to "Segment Review" below for a discussion of Net sales by segment.32Table of Contents Gross MarginFor the year ended December 31, 2022, gross margin was $5.5 billion, a 9% decrease compared with the same period of 2021. The components were as follows:(In millions)20222021Net sales$20,421 $20,613 Cost of products and services sold(14,957)(14,633)Gross margin$5,464 $5,980 Percentage of net sales26.8 %29.0 %Gross margin decreased by $516 million compared with the year ended December 31, 2021. A main driver of the decrease related to incremental costs of products and services sold associated with TCC since the date of acquisition, which included inventory step-up, backlog amortization and intangible asset amortization resulting from the recognition of acquired assets at fair value. These costs had a 50 basis point impact on gross margin as a percentage of Net sales. In addition, each of our segments continue to be impacted by the higher cost of commodities and components used in our products, certain supply chain constraints and higher freight costs. However, these impacts were partially offset by ongoing customer demand, pricing improvements and our continued focus on productivity initiatives. Although pricing improvements more than offset inflationary impacts and supply chain challenges, gross margin as a percentage of Net sales decreased by 220 basis points compared with the same period of 2021.Operating ExpensesFor the year ended December 31, 2022, operating expenses, including Equity method investment net earnings, was $0.9 billion, a 72% decrease compared with the same period of 2021. The components were as follows:For the Year Ended December 31,(In millions)20222021Selling, general and administrative$(2,512)$(3,120)Research and development(539)(503)Equity method investment net earnings262 249 Other income (expense), net1,840 39 Operating expenses$(949)$(3,335)Percentage of net sales4.6 %16.2 %For the year ended December 31, 2022, Selling, general and administrative expenses were $2.5 billion, a 19% decrease compared with the same period of 2021. The decrease is primarily due to the Chubb Sale on January 3, 2022. In addition, lower restructuring charges and the benefit provided by changes in the fair value of cash-settled equity awards further contributed to the decrease. These amounts were partially offset by incremental selling, general and administrative expenses associated with TCC since the date of acquisition and $31 million of acquisition-related costs. The year ended December 31, 2021 included $43 million of costs related to the Chubb Sale and $20 million of costs related to the Separation.Research and development costs relate to new product development and new technology innovation. Due to the variable nature of program development schedules, year-over-year spending levels can fluctuate. In addition, we continue to invest to prepare for future energy efficiency and refrigerant regulation changes and in digital controls technologies.Investments over which we do not exercise control, but have significant influence, are accounted for using the equity method of accounting. For the year ended December 31, 2022, Equity method investment net earnings were $262 million, a 5% increase compared with the same period of 2021. The increase was primarily related to a $27 million gain on the sale of two minority owned subsidiaries by one of our joint ventures. In addition, higher earnings in HVAC joint ventures in Asia and North America further benefited earnings. These amounts were partially offset by the increase in our ownership interest in TCC on August 1, 2022. As a result, TCC is no longer accounted for under the equity method of accounting since the date of acquisition.33Table of Contents Other income (expense), net primarily includes the impact of gains and losses related to the sale of interests in our equity method investments, foreign currency gains and losses on transactions that are denominated in a currency other than an entity's functional currency and hedging-related activities. In connection with the TCC acquisition, the carrying value of our previously held TCC equity investments were recognized at fair value at the date of acquisition. As a result, we recognized a $705 million non-cash gain associated with the increase in our ownership interest. In addition, we completed the Chubb Sale and recognized a net gain on the sale of $1.1 billion during the twelve months ended December 31, 2022.Non-Operating Income (Expense), netFor the year ended December 31, 2022, Non-operating income (expense), net was $223 million, a 9% decrease compared with the same period of 2021. The components were as follows:For the Year Ended December 31,(In millions)20222021Non-service pension benefit (expense)$(4)$61 Interest expense(302)(319)Interest income83 13 Interest (expense) income, net(219)(306)Non-operating income (expense), net$(223)$(245)Non-operating income (expense), net includes the results from activities other than normal business operations such as interest expense, interest income and the non-service components of pension and post-retirement obligations. Interest expense is affected by the amount of debt outstanding and the interest rates on that debt. For the year ended December 31, 2022, interest expense was $302 million, a 5% decrease compared with the same period of 2021. During the year ended December 31, 2022, we completed tender offers to repurchase approximately $1.15 billion aggregate principal of our 2.242% Notes due 2025 and 2.493% Notes due 2027. Upon settlement, we wrote off $5 million of unamortized deferred financing costs in Interest expense and recognized a net gain of $33 million in Interest income. During the year ended December 31, 2021, we incurred a make-whole premium of $17 million and write-off of $2 million of unamortized deferred financing costs as a result of the redemption of our $500 million 1.923% Notes originally due in February 2023.Income Taxes 20222021Effective tax rate16.5 %29.1 %The effective tax rate for the year ended December 31, 2022 was lower than our statutory U.S. federal income tax rate. The decrease was driven by a lower effective tax rate on the $705 million non-cash gain resulting from the recognition of our previously held TCC equity investments at fair value upon acquisition of TCC, a lower effective tax rate on the $1.1 billion Chubb gain and $45 million of foreign tax credits generated and utilized in the current year. The effective tax rate for the year ended December 31, 2021 was higher than our statutory U.S. federal income tax rate. The increase was driven by a net tax charge of $157 million primarily relating to the re-organization and disentanglement of certain Chubb subsidiaries executed in advance of the planned divestiture of Chubb and a $43 million deferred tax charge as a result of the tax rate increase from 19% to 25% in the United Kingdom. These amounts were partially offset by a favorable tax adjustment of $70 million due to foreign tax credits generated and expected to be utilized in the current year and $21 million resulting from the re-organization of a German subsidiary.34Table of Contents Segment ReviewWe conduct our operations through three reportable segments: •The HVAC segment provides products, controls, services and solutions to meet the heating, cooling and ventilation needs of residential and commercial customers while enhancing building performance, health, energy efficiency and sustainability.•The Refrigeration segment includes transport refrigeration and monitoring products, services and digital solutions for trucks, trailers, shipping containers, intermodal and rail, as well as commercial refrigeration products. •The Fire & Security segment provides a wide range of residential, commercial and industrial technologies designed to help protect people and property.We determine our segments based on how our Chief Executive Officer, who is the Chief Operating Decision Maker (the "CODM"), allocates resources, assesses performance and makes operational decisions. The CODM allocates resources and evaluates the financial performance of each of our segments based on Net sales and Operating profit. Adjustments to reconcile segment reporting to the consolidated results are included in Note 21 - Segment Financial Data.Summary performance for each of our segments is as follows:Net SalesOperating ProfitOperating Margin(In millions)202220212022202120222021HVAC$13,408 $11,390 $2,610 $1,738 19.5 %15.3 %Refrigeration3,883 4,127 483 476 12.4 %11.5 %Fire & Security3,570 5,515 1,630 662 45.7 %12.0 %Total segment$20,861 $21,032 $4,723 $2,876 22.6 %13.7 %HVAC SegmentFor the year ended December 31, 2022, Net sales in our HVAC segment was $13.4 billion, an 18% increase compared with the same period of 2021. The components of the year-over-year change were as follows:Net salesOrganic / Operational12 %Foreign currency translation(2)%Acquisitions and divestitures, net8 %Total % change18 %The organic increase in Net sales of 12% was driven by continued strong results across each of the segment's businesses. Increased sales in our North America residential and light commercial business (up 14%) were primarily driven by pricing improvements and end market demand. These amounts were partially offset by volume reductions in certain end markets. Increased sales in our Commercial HVAC business (up 9%) benefited from pricing improvements and ongoing customer demand in our end-markets. The business saw growth in North America and Asia while growth in Europe was tempered by current economic conditions and inflationary cost pressures which impacted end-market demand. Increased sales in our Global Comfort Solutions business (up 8%) were primarily driven by pricing improvements. While current demand remains strong, supply chain and logistics constraints continue to be challenging, negatively impacting our sales and results of operations. In addition, results for 2021 reflected a significant rebound in demand after initial weakness associated with the COVID-19 pandemic.On August 1, 2022, the Commercial HVAC business acquired a majority ownership interest in TCC, a VRF and light commercial HVAC joint venture between Carrier and Toshiba Corporation. The results of TCC have been included in our Consolidated Financial Statements since the date of acquisition. The transaction added 7% to Net sales for the year ended December 31, 2022 and is included in Acquisitions and divestitures, net.35Table of Contents On June 1, 2021, the Commercial HVAC business acquired a 70% controlling interest in Guangdong Giwee Group and its subsidiaries ("Giwee") and subsequently acquired the remaining 30% ownership interest on September 7, 2021. Giwee is a China-based manufacturer offering a portfolio of HVAC products including variable refrigerant flow, modular chillers and light commercial air conditioners. The results of Giwee have been included in our Consolidated Financial Statements since the date of acquisition. The transaction added 1% to Net sales during the year ended December 31, 2022 and is included in Acquisitions and divestitures, net. For the year ended December 31, 2022, Operating profit in our HVAC segment was $2.6 billion, a 50% increase compared with the same period of 2021. The components of the year-over-year change were as follows:Operating profitOrganic / Operational10 %Foreign currency translation(1)%Acquisitions and divestitures, net(1)%Restructuring1 %Other41 %Total % change50 %The operational profit increase of 10% was primarily attributable to pricing improvements compared with the prior year. Higher earnings from equity method investments in Asia and North America also benefited operational profit and included a $27 million gain on the sale of two minority owned subsidiaries by one of our joint ventures. These amounts were partially offset by the increase in our ownership interest in TCC on August 1, 2022. As a result, TCC is no longer accounted for under the equity method of accounting since the date of acquisition. In addition, productivity initiatives provided further benefits to operational profit. These amounts were partially offset by the higher costs of commodities and components used in our products as well as higher freight and logistics costs. In connection with the TCC acquisition, the carrying value of our previously held TCC equity investments were recognized at fair value at the date of acquisition. As a result, we recognized a $705 million non-cash gain associated with the increase in our ownership interest in Other. In addition, amounts reported in Other include a $22 million charge resulting from a litigation matter recognized during the year ended December 31, 2022.Refrigeration SegmentFor the year ended December 31, 2022, Net sales in our Refrigeration segment was $3.9 billion, a 6% decrease compared with the same period of 2021. The components of the year-over-year change were as follows:Net salesOrganic / Operational— %Foreign currency translation(6)%Total % change(6)%Organic Net sales were flat compared to the prior year as each of the segment's businesses experienced challenges in certain end markets during the second half of the year. Results for Commercial refrigeration were flat compared with the prior year, primarily driven by continued supply chain constraints and lower volumes in Europe as economic conditions and inflationary cost pressures impacted end-market demand. In addition, ongoing growth in Asia was more than offset by fourth quarter COVID-19 impacts. These impacts were offset by pricing improvements. Transport refrigeration sales were flat compared to the prior year as pricing improvements and strong end market demand in the U.S. and Europe were offset by continued weakness in the marine sector. The year ended December 31, 2021 reflected a significant rebound in demand associated with the cyclical decline that began in late 2019 as well as the demand for global transportation and COVID-19 vaccine-related cargo monitoring. In addition, supply chain and logistics constraints continue to be challenging, negatively impacting our sales and results of operations.36Table of Contents For the year ended December 31, 2022, Operating profit in our Refrigeration segment was $483 million, a 2% increase compared with the same period of 2021. The components of the year-over-year change were as follows:Operating profitOrganic / Operational5 %Foreign currency translation(7)%Restructuring3 %Other1 %Total % change2 %The increase in operational profit of 5% was primarily attributable to pricing improvements compared with the prior year. In addition, favorable productivity initiatives and lower selling, general and administrative costs further benefited operational profit. These amounts were partially offset by the higher costs of commodities and components used in our products and higher freight and logistic costs.Fire & Security SegmentFor the year ended December 31, 2022, Net sales in our Fire & Security segment was $3.6 billion, a 35% decrease compared with the same period of 2021. The components of the year-over-year change were as follows:Net salesOrganic / Operational5 %Foreign currency translation(2)%Acquisitions and divestitures, net(38)%Total % change(35)%The organic increase in Net sales of 5% was primarily driven by pricing improvements compared with the prior year. The segment primarily saw growth in both residential and commercial sales in the Americas and Europe as sales in China decreased as a result of current economic conditions and reduced end-market demand. Global industrial sales also benefited segment results with pricing improvements and strong demand. Results for 2021 reflected a significant rebound in demand after initial weakness associated with the COVID-19 pandemic. In addition, supply chain constraints continue to be challenging, negatively impacting our sales and results of operations.Acquisitions and divestitures, net primarily relates to the prior year results of our Chubb business, the sale of which was completed on January 3, 2022. During the year ended December 31, 2021, Net sales in our Fire & Security segment were $5.5 billion, which included $2.2 billion from our Chubb business. Absent the results of Chubb, Net sales increased 6% from $3.3 billion to $3.6 billion.For the year ended December 31, 2022, Operating profit in our Fire & Security segment was $1.6 billion, a 146% increase compared with the same period of 2021. The components of the year-over-year change were as follows:Operating profitOrganic / Operational(5)%Foreign currency translation(2)%Acquisitions and divestitures, net(15)%Restructuring2 %Other166 %Total % change146 %The operational profit decrease of 5% was primarily attributable to the higher costs of commodities and components used in our products and higher freight and logistics costs. In addition, unfavorable mix and lower volumes further impacted results 37Table of Contents compared with the prior year. These amounts were partially offset by pricing improvements and favorable productivity initiatives. Acquisitions and divestitures, net primarily relates to the prior year results of our Chubb business, the sale of which was completed on January 3, 2022. Amounts reported during the year ended December 31, 2021 include $42 million of transaction costs associated with the divestiture. Amounts reported in Other represent the net gain on the Chubb Sale of $1.1 billion.LIQUIDITY AND FINANCIAL CONDITIONWe assess liquidity in terms of our ability to generate adequate amounts of cash necessary to fund our current and future cash requirements to support our business and strategic initiatives. In doing so, we review and analyze our cash on hand, working capital, debt service requirements and capital expenditures. We rely on operating cash flows as our primary source of liquidity. In addition, we have access to other sources of capital to finance our strategic initiatives and fund growth.As of December 31, 2022, we had cash and cash equivalents of $3.5 billion, of which approximately 42% was held by our foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds and the cost effectiveness with which we can access funds held by foreign subsidiaries. On occasion, we are required to maintain cash deposits in connection with contractual obligations related to acquisitions or divestitures or other legal obligations. As of December 31, 2022 and 2021, the amount of such restricted cash was $7 million and $39 million, respectively.We maintain a $2.0 billion unsecured, unsubordinated commercial paper program which we can use for general corporate purposes, including working capital and potential acquisitions. In addition, we maintain our $2.0 billion revolving credit agreement with various banks (the "Revolving Credit Facility") that matures on April 3, 2025 which supports our commercial paper borrowing program and cash requirements. The Revolving Credit Facility has a commitment fee of 0.125% that is charged on the unused commitments. Borrowings under the Revolving Credit Facility are available in U.S. Dollars, Euros and Pounds Sterling and bear interest at a variable interest rate plus a ratings-based margin, which was 125 basis points as of December 31, 2022. As of December 31, 2022, we had no borrowings outstanding under our commercial paper program and our Revolving Credit Facility. We believe that our available cash and operating cash flows will be sufficient to meet our future operating cash needs. Our committed credit facilities and access to the debt and equity markets provide additional sources of short-term and long-term capital to fund current operations, debt maturities and future investment opportunities. Although we believe that the arrangements currently in place permit us to finance our operations on acceptable terms and conditions, our access to and the availability of financing on acceptable terms and conditions in the future will be impacted by many factors, including: (1) our credit ratings or absence of credit ratings; (2) the liquidity of the overall capital markets; and (3) the state of the economy, including the impact of the COVID-19 pandemic. There can be no assurance that we will be able to obtain additional financing on terms favorable to us, if at all.The following table contains several key measures of our financial condition and liquidity:As of December 31, (In millions)20222021Cash and cash equivalents$3,520 $2,987 Total debt$8,842 $9,696 Net debt (total debt less cash and cash equivalents)$5,322 $6,709 Total equity$8,076 $7,094 Total capitalization (total debt plus total equity)$16,918 $16,790 Net capitalization (total debt plus total equity less cash and cash equivalents)$13,398 $13,803 Total debt to total capitalization52 %58 %Net debt to net capitalization40 %49 %Borrowings and Lines of CreditOur short-term obligations primarily consist of current maturities of long-term debt. Our long-term obligations primarily consist of long-term notes with maturity dates ranging between 2025 and 2050. Interest payments related to long-term notes are 38Table of Contents expected to approximate $249 million per year, reflecting an approximate weighted-average interest rate of 2.85%. Any borrowings from the Revolving Credit Facility are subject to variable interest rates. See Note 7 - Borrowings and Lines of Credit in the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information regarding the terms of our long-term debt obligations. Scheduled maturities of long-term debt, excluding amortization of discount, are as follows:(In millions)2023$140 2024$2 2025$1,202 2026$2 2027$1,306 Thereafter$6,251 On March 15, 2022, we commenced tender offers to repurchase up to $1.15 billion aggregate principal of our 2.242% Notes due 2025 and 2.493% Notes due 2027. The tender offers included payment of applicable accrued and unpaid interest up to the settlement date, along with a fixed spread for early repayment. Based on participation, we elected to settle the tender offers on March 30, 2022. The aggregate principal amount of Senior Notes validly tendered and accepted was approximately $1.15 billion and included $800 million of Notes due 2025 and $350 million of Notes due 2027. Upon settlement, we recognized a net gain of $33 million and wrote off $5 million of unamortized deferred financing costs during the three months ended March 31, 2022.On July 15, 2022, we entered into a five-year, JPY 54 billion (approximately $400 million) senior unsecured term loan facility with MUFG Bank Ltd., as administrative agent and lender, and certain other lenders (the "Japanese Term Loan Facility"). Borrowings bear interest at a rate equal to the Tokyo Term Risk Free Rate plus 0.75%. In addition, it is subject to customary covenants including a covenant to maintain a maximum consolidated leverage ratio. On July 25, 2022, we borrowed JPY 54 billion under the Japanese Term Loan Facility and used the proceeds to fund a portion of the TCC acquisition and to pay related fees and expenses.The Revolving Credit Facility, the Japanese Term Loan Facility and the indentures for our long-term notes contain affirmative and negative covenants customary for financings of this type, which among other things, limit our ability to incur additional liens, to make certain fundamental changes and to enter into sale and leaseback transactions. As of December 31, 2022, we were compliant with the covenants under the agreements governing our outstanding indebtedness.The following table presents our credit ratings and outlook as of December 31, 2022:Rating AgencyLong-term Rating (1)Short-term RatingOutlook (2)S&PBBBA2PositiveMoody'sBaa3P3StableFitch Ratings BBB-F3Stable(1) The long-term rating for S&P was affirmed on May 14, 2021, and for Moody's on March 30, 2022. Fitch Ratings' long-term rating was issued on June 3, 2021.(2) S&P revised its outlook to positive from stable on May 20, 2022.Acquisitions and DivestituresOn January 3, 2022, we completed the Chubb Sale for net proceeds of $2.9 billion. Consistent with our capital allocation strategy, the net proceeds will be used to fund investments in organic and inorganic growth initiatives and capital returns to shareowners as well as for general corporate purposes.On February 6, 2022, we entered into a binding agreement to acquire a majority ownership interest in TCC for $930 million, less cash acquired. The transaction was completed on August 1, 2022 and funded through the Japanese Term Loan Facility and cash on hand. Upon closing, Toshiba Corporation retained a 5% ownership interest in TCC. In addition, during the year ended December 31, 2022, we acquired other consolidated businesses and minority-owned businesses. The aggregate cash paid for these acquisitions, net of cash acquired, totaled $77 million and was funded through cash on hand.39Table of Contents Share Repurchase ProgramWe may purchase our outstanding common stock from time to time subject to market conditions and at our discretion. Repurchases occur in the open market or through one or more other public or private transactions pursuant to plans complying with Rules 10b5-1 and 10b-18 under the Exchange Act. In July 2021, our Board of Directors approved a $1.75 billion increase to our existing $350 million share repurchase program authorizing the repurchase of up to $2.1 billion of our outstanding common stock. In October 2022, our Board of Directors approved an additional $2.0 billion increase to our existing $2.1 billion share repurchase program. Since inception, we repurchased 42.1 million shares of our common stock for an aggregate purchase price of $1.9 billion. As of December 31, 2022, we have approximately $2.2 billion remaining under the current authorization.DividendsWe paid dividends on our common stock of $0.60 per share during the year ended December 31, 2022, totaling $509 million. On December 7, 2022, the Board of Directors declared a dividend of $0.185 per share of common stock which represents a 23% increase over the prior quarterly dividend. It is payable on February 10, 2023 to shareowners of record at the close of business on December 22, 2022.Discussion of Cash FlowsFor the Years Ended December 31, (In millions)20222021Cash provided by (used in):Operating activities$1,743 $2,237 Investing activities1,745 (692)Financing activities(2,931)(1,562)Effect of foreign exchange rate changes on cash and cash equivalents(56)(16)Net increase (decrease) in cash and cash equivalents and restricted cash$501 $(33)Cash flows from operating activities primarily represent inflows and outflows associated with our operations. Primary activities include net income from operations adjusted for non-cash transactions, working capital changes and changes in other assets and liabilities. We define working capital as the assets and liabilities, other than cash, generated through our primary operating activities. The year-over-year decrease in net cash provided by operating activities was driven by higher working capital balances. Ongoing customer demand and an increase in safety stock led to higher inventory balances. In addition, higher account receivable balances more than offset higher accounts payable balances.Cash flows from investing activities primarily represent inflows and outflows associated with long-term assets. Primary activities include capital expenditures, acquisitions, divestitures and proceeds from the sale of fixed assets. During the year ended December 31, 2022, net cash provided by investing activities was $1.7 billion. The primary driver of the inflow related to the net proceeds from the Chubb Sale. This amount was partially offset by the acquisition of TCC and several other businesses and minority-owned businesses, which totaled $506 million, net of cash acquired and $353 million of capital expenditures. During the year ended December 31, 2021, net cash used in investing activities was $692 million. The primary driver of the outflow related to the acquisition of several businesses and a minority-owned business, which totaled $366 million, net of cash acquired and $344 million of capital expenditures.Cash flows from financing activities primarily represent inflows and outflows associated with equity or borrowings. Primary activities include debt transactions, paying dividends to shareowners and the repurchase of our common stock. During the year ended December 31, 2022 net cash used in financing activities was $2.9 billion. The primary driver of the outflow related to the payment of $1.4 billion to repurchase shares of our common stock. In addition, we settled our tender offers for $1.15 billion and paid $509 million in dividends to our common shareowners. During the year ended December 31, 2021 net cash used in financing activities was $1.6 billion. The primary drivers of the outflow resulted from the repurchase of $527 million of our common stock, the redemption of our 1.923% Notes of $500 million and the payment of $417 million in dividends to our common shareowners.40Table of Contents Summary of Other Sources and Uses of Cash We continue to actively manage and strengthen our business and product portfolio to meet the current and future needs of our customers. This is accomplished through research and development activities with a focus on new product development and new technology innovation as well as sustaining activities with a focus on improving existing products and reducing production costs. We also pursue potential acquisitions to complement existing products and services to enhance our product portfolio. In addition, we routinely conduct discussions, evaluate targets and enter into agreements regarding possible acquisitions, divestitures, joint ventures and equity investments to manage our business portfolio. Rapid changes in legislation, regulations and government policies, including with respect to regulations intended to combat climate change, affect our operations and business in the countries, regions and localities in which we operate and sell our products. We are committed to comply with these regulations and to environmental stewardship. As a result, we have set goals to invest over $2 billion by 2030 to develop healthy, safe, sustainable and intelligent buildings and cold chain solutions that incorporate sustainable design principles and reduce lifecycle impacts. In addition, to reach our goal to achieve carbon neutrality in our operations by 2030, we expect to incur capital expenditures for climate-related projects including upgrading our facilities, equipment and controls to optimize energy efficiency, transition our energy consumption from a dependency on fossil fuels to renewable energy and expanding the electrification of our fleet vehicles. See section entitled Environmental Goals under the headings "Other Matters Relating to Our Business as a Whole" for additional information. We also have obligations related to environmental and asbestos matters, pension and post-retirement benefits and taxes. See Note 10 - Employee Benefit Plans, Note 17 - Income Taxes, and Note 23 - Commitments and Contingent Liabilities in the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.CRITICAL ACCOUNTING ESTIMATESOur financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgement in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets, liabilities, sales and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results could differ from management's estimates.Goodwill and Indefinite-Lived Intangible AssetsIn accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350, Intangibles - Goodwill and Other ("ASC 350"), goodwill and other indefinite-lived intangible assets are tested and reviewed annually for impairment or whenever there is a material change in events or circumstances that indicate that the fair value of the asset is more likely than not less than the carrying amount of the asset. We test our reporting units and indefinite-lived intangible assets for impairment annually as of the first day of our third quarter, or more frequently if events or circumstances occur.ASC 350 provides entities with an option to perform a qualitative assessment (commonly referred to as “step zero”) to determine whether a quantitative analysis for impairment is necessary. In performing step zero for our impairment test, we are required to make assumptions and judgments, including but not limited to the following: the evaluation of macroeconomic conditions as related to our business, industry and market trends, and the overall future financial performance of our reporting units and future opportunities in the markets in which they operate. If impairment indicators are present after performing step zero, we would perform a quantitative impairment analysis to estimate fair value.For our 2022 impairment test, we elected to perform a quantitative test on our Commercial HVAC reporting unit prior to the TCC acquisition and the subsequent creation of a separate Global Comfort Solutions reporting unit. We utilized a discounted cash flow method under the income approach to estimate the fair value of the Commercial HVAC reporting unit prior to the reorganization, the results of which did not indicate any goodwill impairment. We then reassigned goodwill among our Commercial HVAC and Global Comfort Solutions reporting units using a relative fair value approach and performed a goodwill impairment assessment using a discounted cash flow method under the income approach to estimate the fair value of the reporting units. The results did not indicate any goodwill impairment. For each test, we relied on our estimates of future cash flows, long-term growth rates, discount rates and income tax rates and explicitly addressed factors such as timing, growth and margins with due consideration given to forecasting, market and geographic risk.41Table of Contents For the remaining goodwill and indefinite-lived intangible assets tests, we elected to perform qualitative step zero assessments to determine if it was more likely than not that the fair values of our reporting units and indefinite-lived intangible assets were below carrying value. We considered macroeconomic factors including global economic growth, general macroeconomic trends for the markets in which our reporting units operate and where the intangible assets are utilized and the forecasted growth of the global industrial products industry. In addition to these macroeconomic factors, among other things, we considered the reporting units’ current results and forecasts, changes in the nature of each business, any significant legal, regulatory, contractual, political or other business climate factors, changes in the industry and competitive environment, changes in the composition or carrying amount of net assets and any intention to sell or dispose of a reporting unit or cease the use of any indefinite-lived intangible assets. Based upon our qualitative analysis, we determined that our goodwill and indefinite-lived intangible assets were not impaired.Revenue Recognition from Contracts with CustomersRevenue is recognized when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. A significant portion of our performance obligations are recognized at a point-in-time when control of the product transfers to the customer, which is generally the time of shipment. The remaining portion of our performance obligations are recognized over time as the customer simultaneously obtains control as we perform work under a contract, or if the product being produced for the customer has no alternative use and we have a contractual right to payment. A performance obligation is a distinct good, service or a bundle of goods and services promised in a contract. Some of our contracts with customers contain a single performance obligation, while others contain multiple performance obligations most commonly when a contract spans multiple phases of a product life-cycle such as production, installation, maintenance and support. We identify performance obligations at the inception of a contract and allocate the transaction price to each distinct performance obligation. Revenue is recognized when or as the performance obligation is satisfied. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on its relative stand-alone selling price.We primarily generate revenue from the sale of products to customers and recognize revenue at a point in time when control transfers to the customer. Transfer of control is generally based on the shipping terms of the contract. In addition, we recognize revenue on an over-time basis on installation and service contracts. For over-time performance obligations requiring the installation of equipment, revenue is recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs include direct costs such as labor, materials and subcontractors’ costs and, where applicable, indirect costs.The transaction price allocated to performance obligations reflects our expectations about the consideration we will be entitled to receive from a customer. We include variable consideration in the estimated transaction price when there is a basis to reasonably estimate the amount and when it is probable that a significant reversal of revenue recognized would not occur when the uncertainty associated with variable consideration is subsequently resolved. In addition, we customarily offer our customers incentives to purchase products to ensure an adequate supply of our products in distribution channels. The principal incentive programs provide reimbursements to distributors for offering promotional pricing for products. We account for estimated incentive payments as a reduction in sales at the time a sale is recognized.Income TaxesWe account for income taxes in accordance with ASC 740, Income Taxes ("ASC 740"). Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. We recognize future tax benefits to the extent that realizing these benefits is considered in our judgment to be more likely than not. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided. We review the realizability of our deferred tax asset valuation allowances on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required and will adjust our estimate if significant events so dictate. To the extent that the ultimate results differ from our original or adjusted estimates, the effect will be recorded in the provision for income taxes in the period that the matter is finally resolved.42Table of Contents In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements.Employee Benefit PlansWe provide a range of benefit plans to eligible current and former employees. We account for our benefits plans in accordance with ASC 715, Compensation – Retirement Benefits ("ASC 715"), which requires balance sheet recognition of the overfunded or underfunded status of pension plans. The determination of the amounts associated with these benefits is performed by actuaries and dependent on various actuarial assumptions including discount rates, expected return on plan assets, compensation increases, mortality and health care cost trends. Actual results may differ from the actuarial assumptions and are generally recorded in Accumulated other comprehensive income (loss) and amortized into Net income from operations over future periods. We review our actuarial assumptions at each measurement date and make modifications to the assumptions based on current rates and trends, if appropriate.A change in any of these assumptions would have an effect on net periodic pension and post-retirement benefit costs reported in the Consolidated Financial Statements. The following table summarizes the estimated sensitivity of our 2022 projected benefit obligation and net periodic pension (benefit) cost to a 25 basis point change in the discount rate:(In millions)Increase in Discount Rate of 25 bpsDecrease in Discount Rate of 25 bpsProjected benefit obligation$(20)$21 Net periodic pension (benefit) cost$(1)$1 Net periodic pension (benefit) cost is also sensitive to changes in the expected return on plan assets. An increase or decrease of 25 basis points in the expected return on plan assets would have decreased or increased 2022 pension expense by approximately $1 million. Contingent LiabilitiesWe are involved in various litigation, claims and administrative proceedings, including those related to environmental (including asbestos) and legal matters. In accordance with ASC 450, Contingencies ("ASC 450"), we record accruals for loss contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. These accruals are generally based upon a range of possible outcomes. If no amount within the range is a better estimate than any other, we accrue the minimum amount. In addition, these estimates are reviewed periodically and adjusted to reflect additional information when it becomes available. We are unable to predict the final outcome of these matters based on the information currently available. However, we do not believe that the resolution of any of these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition. As described in Note 23 – Commitments and Contingent Liabilities in the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K, contractual, regulatory and other matters, including asbestos claims, may arise in the ordinary course of business that subject us to claims or litigation. We have recorded reserves in the consolidated financial statements related to these matters, which are developed using input derived from actuarial estimates and historical and anticipated experience depending on the nature of the reserve, and in certain instances in consultation with legal counsel, internal and external consultants and engineers. Subject to the uncertainties inherent in estimating future costs for these types of liabilities, we believe our estimated reserves are reasonable and do not believe the final determination of the liabilities with respect to these matters would have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition. See the "Risk Factors" section in this Annual Report on Form 10-K for additional information.43Table of Contents Recent Accounting PronouncementsSee Note 3 – Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements and their effect on our financial statements.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMarket Risk and Risk ManagementWe are exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices which could impact our results of operations and financial condition. There has been no significant change in our exposure to market risk for the year ended December 31, 2022.Foreign Currency Exposures. We have operations throughout the world that manufacture and sell products in various international markets. As a result, we are exposed to exchange rate movements in relation to our reporting currency, the U.S. dollar. Many of our non-U.S. operations have a functional currency other than the U.S. dollar. Therefore, our reported results will be higher or lower depending on the weakening or strengthening of the U.S. dollar against the respective foreign currency. We actively manage material currency exposures that are associated with purchases and sales and other assets and liabilities at the legal entity level; however, we do not hedge currency translation risk. In connection with the TCC acquisition, we entered into cross currency swaps and the Japanese Term Loan Facility to fund the Yen-denominated purchase price. We designated the cross currency swaps and the Japanese Term Loan Facility as a hedge of our investment in certain subsidiaries whose functional currency is the Japanese Yen in order to manage foreign currency translation risk. As a result, changes in the fair value of the cross currency swaps and the carrying value of the Japanese Term Loan Facility associated with foreign exchange rate movements are recorded in Equity in the Consolidated Balance Sheet. To the extent that any hedge is not fully effective at offsetting changes in the underlying hedged item, there could be a net earnings impact.Commodity Price Exposures. We are exposed to volatility in the prices of commodities used in some of our products and when appropriate, we use fixed price contracts to manage this exposure. In addition, we are exposed to fuel costs to ship our products and materials. We do not have commodity hedge contracts in place at December 31, 2022. Interest Rate Exposures. Substantially all of our long-term debt has fixed interest rates. As a result, any fluctuation in market interest rates is not expected to have a material effect on our results of operations.44Table of Contents

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+Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended December 25, 2021, filed with the SEC on February 16, 2022. In addition to historical consolidated financial information, the following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Certain percentage changes may not recalculate due to rounding.OverviewWe are a full service, leading, non-clinical global drug development partner. For over 75 years, we have been in the business of providing the research models required in the research and development of new drugs, devices, and therapies. Over this time, we have built upon our original core competency of laboratory animal medicine and science (research model technologies) to develop a diverse portfolio of discovery and safety assessment services, both Good Laboratory Practice (GLP) and non-GLP, that supports our clients from target identification through non-clinical development. We also provide a suite of products and services to support our clients’ manufacturing activities, including our contract development and manufacturing organization (CDMO) business. Utilizing our broad portfolio of products and services enables our clients to create a more efficient and flexible drug development model, which reduces their costs, enhances their productivity and effectiveness, and increases speed to market.Our client base includes major global pharmaceutical companies, many biotechnology companies; agricultural and industrial chemical, life science, veterinary medicine, medical device, diagnostic and consumer product companies; contract research and contract manufacturing organizations; and other commercial entities, as well as leading hospitals, academic institutions, and government agencies around the world. We currently operate in over 150 locations and in 21 countries worldwide, which numbers exclude certain Insourcing Solutions (IS) sites.Segment ReportingOur three reportable segments are Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing). Our RMS reportable segment includes the Research Models, Research Model Services, and Cell Solutions businesses. Research Models includes the commercial production and sale of small research models, as well as the supply of large research models. Research Model Services includes: Genetically Engineered Models and Services (GEMS), which performs contract breeding and other services associated with genetically engineered models; Research Animal Diagnostic Services (RADS), which provides health monitoring and diagnostics services related to research models; and Insourcing Solutions (IS), which provides colony management of our clients’ research operations (including recruitment, training, staffing, and management services) within our clients’ facilities as well as our own vivarium space, utilizing both our Charles River Accelerator and Development Lab (CRADL) and our Explora BioLabs options. Cell Solutions provides controlled, consistent, customized primary cells and blood components derived from normal and mobilized peripheral blood, bone marrow, and cord blood. Our DSA segment is comprised of two businesses: Discovery Services and Safety Assessment. We provide regulated and non-regulated DSA services to support the research, development, and regulatory-required safety testing of potential new drugs, including therapeutic discovery and optimization plus in vitro and in vivo studies, laboratory support services, and strategic non-clinical consulting and program management to support product development.Our Manufacturing reportable segment includes Microbial Solutions, which provides in vitro (non-animal) lot-release testing products, microbial detection products, and species identification services and Biologics Solutions (Biologics), which performs specialized testing of biologics (Biologics Testing Solutions) as well as contract development and manufacturing products and services (CDMO). In December of 2022, we sold the Avian Vaccine Services (Avian) business, reported in the Manufacturing segment, which supplied specific-pathogen-free chicken eggs and chickens.39CHARLES RIVER LABORATORIES INTERNATIONAL, INC.U.S. Department of Justice Investigation into Non-Human Primate Supply ChainOn February 16, 2023, we were informed by the U.S. Department of Justice (DOJ) that in conjunction with the U.S. Fish and Wildlife Service (USFWS), it had commenced an investigation into our conduct regarding several shipments of non-human primates from Cambodia. On February 17, 2023 we received a grand jury subpoena requesting certain documents related to such investigation. We are aware of a parallel civil investigation being undertaken by the DOJ and USFWS. We are cooperating with the DOJ and the USFWS and believe that the concerns raised with respect to our conduct are without merit. We maintain a global supplier onboarding and oversight program incorporating risk-based due diligence, auditing, and monitoring practices to help ensure the quality of our supplier relationships and compliance with applicable U.S. and international laws and regulations, and has operated under the belief that all shipments of non-human primates we received satisfied the material requirements, documentation and related processes and procedures of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) documentation and related processes and procedures, which guides the release of each import by USFWS. Notwithstanding our efforts and good-faith belief, in connection with the civil investigation, we have voluntarily suspended future shipments of non-human primates from Cambodia until such time that we and USFWS can agree upon and implement additional procedures to reasonably ensure that non-human primates imported to the United States from Cambodia are purpose-bred. While these discussions with USFWS are ongoing, we have also agreed to continue to care for the Cambodia-sourced non-human primates from certain recent shipments that are now in the United States. The carrying value of the inventory related to these shipments is approximately $20 million. We are not able to predict what action, if any, might be taken in the future by the DOJ, USFWS or other governmental authorities as a result of the investigations. Neither the DOJ nor USFWS has provided us with any specific timeline or indication as to when these investigations or discussions regarding future processes and procedures will be concluded or resolved. Because it is in the early stages, we cannot predict the timing, outcome or possible impact of the investigations, including without limitation any potential fines, penalties or liabilities. Refer to Item 1A, “Risk Factors” and Item 3, “Legal Proceedings” disclosed herein for our assessment of risk factors surrounding this matter. Aside from the matter above, we believe there are no other matters pending against us that could have a material impact on our business, financial condition, or results of operations.Russia-Ukraine ConflictIn February 2022, the Russian Federation launched an invasion of the country of Ukraine resulting in conflict in the region and a variety of sanctions against the Russian Federation enacted by several governments, including the U.S, United Kingdom, Canada and European Union. The conflict has had and continues to have, direct and indirect adverse effects on financial markets and global supply chain disruptions. We do not have any direct operations in either Russia or Ukraine and there were no material impacts to our financial statements during fiscal year 2022 as a result of the situation. We will continue to monitor the situation as it evolves for potential impacts to our operating and financial results such as increased inflation, supply chain, or cybersecurity risks in subsequent periods. Refer to Item 1A, “Risk Factors” disclosed herein for our assessment of risk factors surrounding inflationary, supply chain and cybersecurity risks. Recent AcquisitionsOur strategy is to augment internal growth of existing businesses with complementary acquisitions. We continue to make strategic acquisitions designed to expand our portfolio of products and services to support the drug discovery and development continuum. Our recent acquisitions are described below.Fiscal Year 2023 AcquisitionOn January 30, 2023, we acquired SAMDI Tech, Inc., (SAMDI), a leading provider of high-quality, label-free high-throughput screening (HTS) solutions for drug discovery research. The acquisition of SAMDI will provide clients with seamless access to the premier, label-free HTS MS platform and create a comprehensive, library of drug discovery solutions. The preliminary purchase price of SAMDI was $60 million, inclusive of a 20% strategic equity interest previously owned by us. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business will be reported as part of our DSA reportable segment.Fiscal Year 2022 AcquisitionOn April 5, 2022, we acquired Explora BioLabs Holdings, Inc. (Explora BioLabs), a provider of contract vivarium research services, providing biopharmaceutical clients with turnkey in vivo vivarium facilities, management and related services to efficiently conduct their early-stage research activities. The acquisition of Explora BioLabs complements our existing Insourcing Solutions business, specifically our CRADL™ footprint, and offers incremental opportunities to partner with an emerging client base, many of which are engaged in cell and gene therapy development. The purchase price of Explora BioLabs was $284.5 million, net of $6.6 million in cash. The acquisition was funded through proceeds from our Credit Facility. This business is reported as part of our RMS reportable segment.40CHARLES RIVER LABORATORIES INTERNATIONAL, INC.Fiscal Year 2021 AcquisitionsOn June 28, 2021, we acquired Vigene Biosciences, Inc. (Vigene), a gene therapy CDMO, providing viral vector-based gene delivery solutions. The acquisition enables clients to seamlessly conduct analytical testing, process development, and manufacturing for advanced modalities with the same scientific partner. The purchase price of Vigene was $323.9 million, net of $2.7 million in cash, and includes $34.5 million of contingent consideration (maximum contingent payments of up to $57.5 million based on future performance). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our Manufacturing reportable segment. As of December 31, 2022, the fair value of the contingent consideration was zero as certain financial targets have not and are not expected to be achieved.On March 30, 2021, we acquired Retrogenix Limited (Retrogenix), an outsourced discovery services provider specializing in bioanalytical services utilizing its proprietary cell microarray technology. The acquisition of Retrogenix enhances our scientific expertise with additional large molecule and cell therapy discovery capabilities. The purchase price of Retrogenix was $53.9 million, net of $8.5 million in cash. Included in the purchase price are additional payments up to $6.9 million, which are contingent on future performance. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment.On March 29, 2021, we acquired Cognate BioServices, Inc. (Cognate), a cell and gene therapy CDMO offering comprehensive manufacturing solutions for cell therapies, as well as for the production of plasmid DNA and other inputs in the CDMO value chain. The acquisition of Cognate establishes us as a scientific partner for cell and gene therapy development, testing, and manufacturing, providing clients with an integrated solution from basic research and discovery through cGMP production. The purchase price of Cognate was $877.9 million, net of $70.5 million in cash, and includes $15.7 million of consideration for an approximate 2% ownership interest not initially acquired, but redeemed in April 2022 with the ultimate payout tied to performance in 2021. The acquisition was funded through a combination of available cash and proceeds from our Credit Facility and Senior Notes issued in fiscal 2021. This business is reported as part of our Manufacturing reportable segment.On March 3, 2021, we acquired certain assets from a distributor that supports our DSA reportable segment. The purchase price was $35.4 million, which includes $19.5 million in cash paid ($5.5 million of which was paid in fiscal 2020), and $15.9 million of contingent consideration (the maximum contingent contractual payments are up to $17.5 million). The business is reported as part of our DSA reportable segment. As of December 31, 2022, the fair value of the contingent consideration was zero as certain operational targets were not achieved.On December 31, 2020, we acquired Distributed Bio, Inc. (Distributed Bio), a next-generation antibody discovery company with technologies specializing in enhancing the probability of success for delivering high-quality, readily formattable antibody fragments to support antibody and cell and gene therapy candidates to biopharmaceutical clients. The acquisition of Distributed Bio expands our capabilities with an innovative, large-molecule discovery platform, and creates an integrated, end-to-end platform for therapeutic antibody and cell and gene therapy discovery and development. The purchase price of Distributed Bio was $97.0 million, net of $0.8 million in cash. The total consideration includes $80.8 million cash paid, settlement of $3.0 million in convertible promissory notes previously issued by us during prior fiscal years, and $14.1 million of contingent consideration (the maximum contingent contractual payments are up to $21.0 million). The acquisition was funded through a combination of available cash and proceeds from our Credit Facility. This business is reported as part of our DSA reportable segment. During fiscal year 2022, $7.0 million of contingent consideration was paid as certain operational milestones were achieved. Other financial targets associated with the contingent consideration were not met and the fair value of the remaining contingent consideration is zero as of December 31, 2022.Recent DivestituresWe routinely evaluate strategic fit and fundamental performance of our global infrastructure and divest operations that do not meet key business criteria. As part of this assessment, we determined that this capital could be better deployed in other long-term growth opportunities. On December 20, 2022, we completed the sale of our Avian Vaccine Services (Avian) business to a private investor group for a preliminary purchase price of $169 million in cash, subject to certain customary closing adjustments, and future contingent payments up to an additional $30 million. This business was reported in our Manufacturing reportable segment.On October 12, 2021, we completed two separate divestitures. We sold our RMS Japan operations to The Jackson Laboratory for a purchase price of $70.9 million, which included $7.9 million in cash, $3.8 million pension over funding, and certain post-closing adjustments. We also sold our gene therapy CDMO site in Sweden to a private investor group for a purchase price of $59.6 million, net of $0.2 million in cash and certain post-closing adjustments. Included in the purchase price are contingent payments fair valued at $15.3 million, (the maximum contingent contractual payments are up to $25.0 million based on future performance), as well as a purchase obligation of approximately $10 million between the parties. As of December 31, 2022, the fair value of the contingent payments was reduced to $7.5 million as certain financial targets are not expected to be achieved. 41CHARLES RIVER LABORATORIES INTERNATIONAL, INC.Fiscal QuartersOur fiscal year is typically based on 52-weeks, with each quarter composed of 13 weeks ending on the last Saturday on, or closest to, March 31, June 30, September 30, and December 31. A 53rd week in the fourth quarter of the fiscal year is occasionally necessary to align with a December 31 calendar year-end, which occurred in fiscal year 2022.Business TrendsThe demand and pricing for our products and services continued to increase meaningfully in fiscal year 2022. Many of our pharmaceutical and biotechnology clients continued to intensify their use of strategic outsourcing to improve their operating efficiency and to access capabilities that they do not maintain internally. The COVID-19 pandemic abated and emerging macroeconomic challenges, including cost inflation, interest rates, and foreign exchanges headwinds, did not have a meaningful impact on client demand in 2022. A reduction in the biotechnology funding environment from peak levels in 2021 also did not have a meaningful impact on demand from small and mid-size biotechnology clients, which continued to be the primary driver of revenue growth. Many of our large biopharmaceutical clients have continued to increase investments in their drug discovery and early-stage development efforts and have strengthened their relationships with outsourced partners, like Charles River, and biotechnology companies to assist them in bringing new drugs to market. Our ability to continue to deliver our leading suite of research and non-clinical development solutions has endeavored our clients to increasingly choose to partner with us for our flexible and efficient outsourcing solutions, broad scientific capabilities, and global scale, resulting in strong revenue growth across all three of our reportable segments in fiscal year 2022.Demand and pricing for our Research Models and Services increased meaningfully due to our clients’ focus on scientific innovation resulting in increased biomedical research activity, which drove robust revenue growth in fiscal year 2022. This was particularly true in North America and China, with China reporting healthy growth rates despite a modest impact from COVID-19 in 2022. Demand for research model services continued to perform very well, led by our Insourcing Solutions business, particularly our CRADL™ operations. Clients are increasingly adopting CRADL™’s flexible model to access laboratory space without having to invest in internal infrastructure. To support client demand, we are continuing to expand CRADL™’s footprint both organically and through the acquisition of Explora BioLabs in April 2022. We are confident that research models and services will remain essential tools for our clients’ drug discovery and early-stage development efforts.Our DSA reportable segment continued to benefit from these trends in fiscal year 2022. Robust Safety Assessment revenue growth was primarily driven by unprecedented client demand and increased pricing, which was supported by record backlog levels. We believe that our comprehensive scientific capabilities and global scale, as well as the breadth and depth of our scientific expertise, quality, and responsiveness remain key criteria when our clients make the decision to outsource to us. Biotechnology clients continue to move their programs forward and utilize outsourcing to achieve their goal of more efficient and effective drug research to bring innovative new therapies to market. We continued to enhance our Discovery Services capabilities to provide clients with a comprehensive portfolio that enables them to start working with us at the earliest stages of the discovery process. We have accomplished this in recent years through acquisitions and by adding cutting-edge capabilities to our discovery toolkit through technology partnerships. In fiscal year 2022, demand in our Discovery Services business also increased, but moderated from prior-year levels as some clients took longer to commence new projects.Demand for our products and services that support our clients’ manufacturing activities increased across most of our Manufacturing Solutions businesses in fiscal year 2022. Demand for our Microbial Solutions business remained strong as manufacturers continued to increase their use of our rapid microbial testing solutions. Within our Biologics Solutions business, biologics testing services continued to benefit from robust demand driven by our analytical testing services to address the rapidly growing proportion of biologic drugs in the pipeline and on the market, including cell and gene therapies. We enhanced our Biologics Solutions portfolio in 2021 with the acquisitions of Cognate (March 2021) and Vigene (June 2021) to expand our scientific capabilities into the cell and gene therapy CDMO sector. Demand for our CDMO services was negatively impacted in fiscal year 2022 by the loss of a large COVID-19 project in 2021 that we were unable to backfill and other integration-related challenges that required resources and investments to enhance infrastructure and optimize processes within the business. We believe the initiatives that we have implemented to improve the performance of our CDMO business are beginning to gain traction, and will enable Charles River to be a premier scientific partner for development, testing, and manufacturing of advanced drug modalities and further enhance our presence in the high-growth cell and gene therapy sector.Overview of Results of Operations and LiquidityRevenue for fiscal year 2022 was $4.0 billion compared to $3.5 billion in fiscal year 2021. The 2022 increase as compared to the corresponding period in 2021 was $435.9 million, or 12.3%, and was primarily due to the increased demand within our DSA segment, the impact of the 53rd week, and our recent acquisitions; partially offset by the recent divestitures (principally RMS Japan and CDMO Sweden), and the negative effect of changes in foreign currency exchange rates when compared to the corresponding period in 2021.42CHARLES RIVER LABORATORIES INTERNATIONAL, INC.In fiscal year 2022, our operating income and operating income margin were $651.0 million and 16.4%, respectively, compared with $589.9 million and 16.7%, respectively, in fiscal year 2021. The increase in operating income was primarily due to the contribution of higher revenue described above; partially offset by higher amortization related to our recent acquisitions, higher operating costs associated with our CDMO business, higher staffing costs, and modest inflationary pressures compared to the corresponding period in 2021. These increased costs were the primary driver of the decreased operating income margin compared to the corresponding period in 2021.Net income attributable to common shareholders increased to $486.2 million in fiscal year 2022, from $391.0 million in the corresponding period of 2021. The increase in net income attributable to common shareholders of $95.2 million was primarily due to the increase in operating income described above, the gain on the divestiture of our Avian business of $123.4 million, partially offset by higher provision for income taxes compared to the corresponding period in 2021.During fiscal year 2022, our cash flows from operations was $619.6 million compared with $760.8 million for fiscal year 2021. The decrease was driven by changes in our working capital balances, principally the timing of our revenue and collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits) and timing of payments to vendors, increased inventory purchases to support growth initiatives of our businesses, principally Safety Assessment, and higher variable compensation payments in 2022 as compared to the same period in 2021.Critical Accounting Policies and EstimatesOur discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S.). The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. Our significant accounting policies are more fully described in Note 1, “Description of Business and Summary of Significant Accounting Policies”, to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.An accounting policy is deemed to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the impact of the estimates and assumptions on our consolidated financial statements is or may be material. We believe the following represent our critical accounting policies and estimates used in the preparation of our financial statements:Revenue RecognitionRevenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer (“transaction price”).To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the amount to which we expect to be entitled. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Generally, we do not extend payment terms beyond one year. Applying the practical expedient, we do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. Our contracts do not generally contain significant financing components.Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.43CHARLES RIVER LABORATORIES INTERNATIONAL, INC.Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the impact on the existing transaction price and measure of progress for the performance obligation to which it relates is generally recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.Product revenue is generally recognized when the customer obtains control of our product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of value to the customer, we generally measure our progress using either cost-to-cost (input method) or right-to-invoice (output method). We use the cost-to-cost measure of progress when it best depicts the transfer of value to the customer which occurs as we incur costs on our contract, generally related to fixed fee service contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. Revenue is recorded proportionally as costs are incurred. The right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hours incurred. Revenue is recorded in the amount invoiced since that amount corresponds directly to the value of our performance to date. During fiscal year 2022, $2.4 billion, or approximately 60%, of our total revenue recognized ($4.0 billion) is DSA service revenue transferred over time.Income TaxesWe prepare and file income tax returns based on our interpretation of each jurisdiction’s tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and the effects of tax planning strategies. Our valuation allowance was $294.8 million as of December 31, 2022. In the event actual results differ from our estimates, we will adjust our estimates in future periods and may establish additional allowances or reversals as necessary. We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors, that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the controversy process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; we have no plans to appeal or litigate any aspect of the tax position; and we believe that it is highly unlikely that the taxing authority would re-examine the related tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.We generally receive a tax deduction upon the exercise of non-qualified stock options by employees, or the vesting of restricted stock and performance share units held by employees. The stock price, timing, and amount of vesting and exercising of stock-based compensation could materially impact our current tax expense.44CHARLES RIVER LABORATORIES INTERNATIONAL, INC.Goodwill and Intangible AssetsWe use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represents a significant portion of the purchase price in many of our acquisitions, requires the use of significant judgment with regard to (i) the fair value; and (ii) whether such intangibles are amortizable or non-amortizable and, if the former, the period and the method by which the intangible asset will be amortized. We utilize commonly accepted valuation techniques, such as the income, cost and market approaches, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets.In our recent acquisitions, customer relationship intangible assets (also referred to as client relationships) have been the most significant identifiable assets acquired. To determine the fair value of the acquired client relationships, we utilized the multiple period excess earnings model (a commonly accepted valuation technique), which includes the following key assumptions: projections of cash flows from the acquired entities, which included future revenue growth rates, operating income margins, and customer attrition rates; as well as discount rates based on an analysis of the acquired entities’ weighted average cost of capital. The value of the client relationship acquired was $64.0 million for fiscal year 2022 and $378.1 million for fiscal year 2021 related to business combinations. We review definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. No significant impairments were recognized during fiscal years 2022 and 2021.We evaluate goodwill for impairment annually, during the fourth quarter, and when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount. Events or circumstances that might require an interim evaluation include unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts. Estimates of future cash flows require assumptions related to revenue and operating income growth, asset-related expenditures, working capital levels and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill for impairment.We perform the quantitative impairment test where we compare the fair value of our reporting units to their carrying values. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units, then we would record an impairment loss equal to the difference. In fiscal years 2022 and 2021 we performed the quantitative goodwill impairment test for our reporting units. Fair value was determined by using a weighted combination of a market-based approach and an income approach, as this combination was deemed to be the most indicative of our fair value in an orderly transaction between market participants. Under the market-based approach, we utilized information about our company as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach, we determined fair value based on the estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Our 2022 and 2021 impairment tests indicated that goodwill was not impaired.Valuation and Impairment of Long-Lived AssetsLong-lived assets to be held and used, including property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, the following:•significant underperformance relative to expected historical or projected future operating results;•significant negative industry or economic trends; or•significant changes or developments in strategy or operations that negatively affect the utilization of our long-lived assets.Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset, net of any sublease income, if applicable, and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. We measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model. Significant judgments are required to estimate future cash flows, including the selection of appropriate discount rates and other assumptions. We may also estimate fair value based on 45CHARLES RIVER LABORATORIES INTERNATIONAL, INC.market prices for similar assets, as appropriate. Changes in these estimates and assumptions could materially affect the determination of fair value for these assets. No significant impairments were recognized during fiscal year 2022 and 2021.Pension and Other Post-Retirement Benefit PlansSeveral of our U.S. and non-U.S. subsidiaries sponsor defined benefit pension and other post-retirement benefit plans. We recognize the funded status of our defined benefit pension and other postretirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. We measure plan assets and benefit obligations as of the date of our fiscal year end.The cost and obligations of these arrangements are calculated using many assumptions to estimate the benefits that the employee earns while working, the amount of which cannot be completely determined until the benefit payments cease. Major assumptions used in the accounting for these employee benefit plans include the expected return on plan assets, withdrawal and mortality rates, discount rate, and rate of increase in employee compensation levels. Assumptions are determined based on our data and appropriate market indicators, and are evaluated each year as of the plans’ measurement date. Should any of these assumptions change, they would have an effect on net periodic pension costs and the unfunded benefit obligation.The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In determining the expected long-term rate of return on plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance.The discount rate reflects the rate we would have to pay to purchase high-quality investments that would provide cash sufficient to settle our current pension obligations. A 25-basis point change in the discount rate changes the projected benefit obligation by approximately $7 million for all our plans.The rate of compensation increase reflects the expected annual salary increases for the plan participants based on historical experience and the current employee compensation strategy.New Accounting PronouncementsFor a discussion of new accounting pronouncements, refer to Note 1, “Description of Business and Summary of Significant Accounting Policies” to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K.46CHARLES RIVER LABORATORIES INTERNATIONAL, INC.Results of OperationsFiscal Year 2022 Compared to Fiscal Year 2021Revenue and Operating IncomeThe following tables present consolidated revenue by type and by reportable segment:Fiscal Year20222021$ change% change(in thousands, except percentages)Service revenue$3,216,904 $2,755,579 $461,325 16.7 %Product revenue759,156 784,581 (25,425)(3.2)%$3,976,060 $3,540,160 $435,900 12.3 %Fiscal Year20222021$ change% changeImpact of FX(in thousands, except percentages)RMS$739,175 $690,437 $48,738 7.1 %(3.3)%DSA2,447,316 2,107,231 340,085 16.1 %(3.3)%Manufacturing789,569 742,492 47,077 6.3 %(4.4)%Total revenue$3,976,060 $3,540,160 $435,900 12.3 %(3.5)%The following table presents operating income by reportable segment:Fiscal Year20222021$ change% changeImpact of FX(in thousands, except percentages)RMS$160,410 $166,814 $(6,404)(3.8)%(3.8)%DSA532,889 406,978 125,911 30.9 %(0.3)%Manufacturing167,084 246,390 (79,306)(32.2)%(5.8)%Unallocated corporate(209,408)(230,320)20,912 (9.1)%(0.8)%Total operating income$650,975 $589,862 $61,113 10.4 %(3.3)%Operating income % of revenue16.4 %16.7 %(30) bpsThe following presents and discusses our consolidated financial results by each of our reportable segments:RMSFiscal Year20222021$ change% changeImpact of FX(in thousands, except percentages)Revenue$739,175 $690,437 $48,738 7.1 %(3.3)%Cost of revenue (excluding amortization of intangible assets)455,607 414,119 41,488 10.0 %Selling, general and administrative102,795 93,211 9,584 10.3 %Amortization of intangible assets20,363 16,293 4,070 25.0 %Operating income$160,410 $166,814 $(6,404)(3.8)%(3.8)%Operating income % of revenue21.7 %24.2 %(250) bpsRMS revenue increased $48.7 million due primarily to higher research model services revenue, specifically the Insourcing Solutions business, which included the acquisition of Explora BioLabs contributing $44.6 million, higher research model product revenue in North America and China, and the impact of the 53rd week, which contributed $7.4 million to revenue; partially offset by the divestiture of RMS Japan, which decreased product revenue by $39.0 million, lower Cell Solutions revenue, and the effect of changes in foreign currency exchange rates.RMS operating income decreased $6.4 million compared to fiscal year 2021. RMS operating income as a percentage of revenue for fiscal year 2022 was 21.7%, a decrease of 250 bps from 24.2% for fiscal year 2021. Operating income and operating income as a percentage of revenue decreased primarily due to the divestiture of RMS Japan, higher operating cost associated with our 47CHARLES RIVER LABORATORIES INTERNATIONAL, INC.Insourcing Solutions and Cell Solutions businesses, a modest COVID-related impact in China, and foreign exchange impact discussed above.DSAFiscal Year20222021$ change% changeImpact of FX(in thousands, except percentages)Revenue$2,447,316 $2,107,231 $340,085 16.1 %(3.3)%Cost of revenue (excluding amortization of intangible assets)1,617,760 1,422,850 194,910 13.7 %Selling, general and administrative213,870 192,143 21,727 11.3 %Amortization of intangible assets82,797 85,260 (2,463)(2.9)%Operating income$532,889 $406,978 $125,911 30.9 %(0.3)%Operating income % of revenue21.8 %19.3 %250 bpsDSA revenue increased $340.1 million due primarily to service revenue which increased in both the Safety Assessment and Discovery Services businesses due principally to increased demand (principally biotechnology clients) and pricing of services; the impact of the 53rd week, which contributed $37.1 million to revenue, and the acquisition of Retrogenix which contributed $3.3 million to Discovery Services revenue; partially offset by the effect of changes in foreign currency exchange rates.DSA operating income increased $125.9 million compared to fiscal year 2021. DSA operating income as a percentage of revenue for fiscal year 2022 was 21.8%, an increase of 250 bps from 19.3% for fiscal year 2021. Operating income and operating income as a percentage of revenue increased primarily due to the contribution of higher revenue described above as well as lower acquisition related costs and adjustments to contingent consideration arrangements related to certain acquisitions; partially offset by higher staffing costs, modest inflationary pressures compared to fiscal year 2021, and foreign exchange impact discussed above.ManufacturingFiscal Year20222021$ change% changeImpact of FX(in thousands, except percentages)Revenue$789,569 $742,492 $47,077 6.3 %(4.4)%Cost of revenue (excluding amortization of intangible assets)440,042 368,155 71,887 19.5 %Selling, general and administrative139,027 104,642 34,385 32.9 %Amortization of intangible assets43,416 23,305 20,111 86.3 %Operating income$167,084 $246,390 $(79,306)(32.2)%(5.8)%Operating income % of revenue21.2 %33.2 %(1,200) bpsManufacturing revenue increased $47.1 million due primarily to our Biologics Solutions business, which includes the CDMO business acquisitions of Cognate and Vigene, which collectively contributed $43.8 million, higher service revenue within our Biologics Testing Solutions business, increased revenue in our Microbial Solutions business (principally due to increased demand of endotoxin products), and the impact of the 53rd week, which contributed $8.2 million to revenue; partially offset by the divestiture of the CDMO Sweden business, which decreased revenue by $9.9 million, and the effect of changes in foreign currency exchange rates. Manufacturing operating income decreased $79.3 million compared to fiscal year 2021. Manufacturing operating income as a percentage of revenue for fiscal year 2022 was 21.2%, a decrease of 1,200 bps from 33.2% for fiscal year 2021. Operating income and operating income as a percentage of revenue decreased primarily due to higher amortization of intangible assets, higher operating costs associated with our CDMO acquisitions, the absence of a favorable adjustment related to a contingent consideration arrangement recorded during 2021; partially offset by a favorable ruling from tax authorities on certain indirect tax positions recorded within selling, general and administrative expense and foreign exchange impact discussed above.48CHARLES RIVER LABORATORIES INTERNATIONAL, INC.Unallocated CorporateFiscal Year20222021$ change% change(in thousands, except percentages)Unallocated corporate$209,408 $230,320 $(20,912)(9.1)%Unallocated corporate % of revenue5.3 %6.5 %(120) bpsUnallocated corporate costs consist of selling, general and administrative expenses that are not directly related or allocated to the reportable segments. The decrease in unallocated corporate costs of $20.9 million, or 9.1%, compared to fiscal year 2021 is primarily related to decreased costs associated with the evaluation and integration of our acquisition activity. Costs as a percentage of revenue for fiscal year 2022 was 5.3%, a decrease of 120 bps from 6.5% for fiscal year 2021.Other Income (Expense) Fiscal YearDecember 31, 2022December 25, 2021$ change% change(in thousands, except percentages)Other income (expense):Interest income$780 $652 $128 19.6 %Interest expense(59,291)(73,910)14,619 (19.8)%Other income (expense), net30,523 (35,894)66,417 (185.0)%Total other expense, net$(27,988)$(109,152)$81,164 (74.4)%Interest expense for fiscal year 2022 was $59.3 million, a decrease of $14.6 million, or 19.8%, compared to $73.9 million in fiscal year 2021. The decrease was due primarily to the absence of $26 million of debt extinguishment costs associated with the repayment of the 2026 Senior Notes and related write-off of deferred financing costs incurred in fiscal year 2021, higher foreign currency gains recognized in connection with a debt-related foreign exchange forward contract in fiscal year 2022 compared to fiscal year 2021; partially offset by higher interest rates on our variable debt in fiscal year 2022 compared to fiscal year 2021.Other income, net for fiscal year 2022 was $30.5 million, an increase of $66.4 million, or 185.0%, compared to Other expense, net of $35.9 million for fiscal year 2021. The increase was due primarily to a gain on the divestiture of our Avian business of $123.4 million during fiscal year 2022 compared to a gain on the divestiture of our RMS Japan business of $22.7 million during fiscal year 2021; partially offset by higher foreign currency losses recognized in connection with a U.S. dollar denominated loan borrowed by a non-U.S. entity with a different functional currency in fiscal year 2022 as compared to fiscal year 2021, and net losses on our life insurance investments for fiscal year 2022 as compared to gains in fiscal year 2021.Income TaxesFiscal Year20222021$ change% change(in thousands, except percentages)Provision for income taxes$130,379 $81,873 $48,506 59.2 %Effective tax rate20.9 %17.0 %390 bpsIncome tax expense for fiscal year 2022 was $130.4 million, an increase of $48.5 million compared to $81.9 million for fiscal year 2021. Our effective tax rate was 20.9% for fiscal year 2022 compared to 17.0% for fiscal year 2021. The increase in our effective tax rate in fiscal year 2022 compared to fiscal year 2021 was primarily attributable to a decreased tax benefit from stock-based compensation deductions and tax expense related to the divestiture of Avian.49CHARLES RIVER LABORATORIES INTERNATIONAL, INC.Liquidity and Capital ResourcesLiquidity and Cash FlowsWe currently require cash to fund our working capital needs, capital expansion, acquisitions, and to pay our debt, lease, venture capital and strategic equity investments, and pension obligations. Our principal sources of liquidity have been our cash flows from operations, recent divestitures, supplemented by long-term borrowings. Based on our current business plan, we believe that our existing funds, when combined with cash generated from operations and our access to financing resources, are sufficient to fund our operations for the foreseeable future. The following table presents our cash, cash equivalents and short-term investments:December 31, 2022December 25, 2021(in thousands)Cash and cash equivalents:Held in U.S. entities$15,813 $28,157 Held in non-U.S. entities218,099 213,057 Total cash and cash equivalents233,912 241,214 Short-term investments:Held in non-U.S. entities998 1,063 Total cash, cash equivalents and short-term investments$234,910 $242,277 The following table presents our net cash provided by operating activities:Fiscal Year20222021(in thousands)Net income$492,608 $398,837 Adjustments to reconcile net income to net cash provided by operating activities279,586 319,020 Changes in assets and liabilities(152,554)42,942 Net cash provided by operating activities$619,640 $760,799 Net cash provided by cash flows from operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income for (1) non-cash operating items such as depreciation and amortization, stock-based compensation, loss on debt extinguishment and other financing costs, deferred income taxes, gains and/or losses on venture capital and strategic equity investments, gains and/or losses on divestitures, changes in fair value of contingent consideration, as well as (2) changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. During fiscal year 2022, our cash flows from operations was $619.6 million compared with $760.8 million for fiscal year 2021. The decrease was driven by changes in our working capital balances, principally the timing of our revenue and collections of net contract balances from customers (collectively trade receivables and contract assets, net; deferred revenue; and customer contract deposits) and timing of payments to vendors, increased inventory purchases to support growth initiatives of our businesses, principally Safety Assessment, and higher variable compensation payments in 2022 as compared to the same period in 2021.The following table presents our net cash used in investing activities:Fiscal Year20222021(in thousands)Acquisitions of businesses and assets, net of cash acquired$(283,392)$(1,293,095)Capital expenditures(324,733)(228,772)Proceeds from sale of businesses, net163,275 122,694 Investments, net(153,725)(39,023)Other, net(9,347)264 Net cash used in investing activities$(607,922)$(1,437,932)The primary use of cash used in investing activities in fiscal year 2022 related to capital expenditures to support the growth of the business, the acquisition of Explora BioLabs, and investments in certain venture capital and strategic equity investments; 50CHARLES RIVER LABORATORIES INTERNATIONAL, INC.partially offset by the proceeds from the divestiture of Avian. The primary use of cash used in investing activities in fiscal year 2021 related to the acquisitions of Cognate, Vigene, Distributed Bio, Retrogenix, and certain assets from a distributor, capital expenditures to support the growth of the business, and investments in certain venture capital and strategic equity investments; partially offset by the proceeds from the divestitures of RMS Japan and CDMO Sweden.The following table presents our net cash used in financing activities:Fiscal Year20222021(in thousands)Proceeds from long-term debt and revolving credit facility$2,952,430 $6,951,113 Payments on long-term debt, revolving credit facility, and finance lease obligations(2,932,636)(6,242,877)Proceeds from exercises of stock options25,110 45,652 Purchase of treasury stock(38,651)(40,707)Payment of debt extinguishment and financing costs— (38,255)Purchases of additional equity interests, net(30,533)— Payment of contingent considerations(10,356)(2,328)Other, net(7,761)— Net cash (used in) provided by financing activities$(42,397)$672,598 For fiscal year 2022, net cash used in financing activities reflected the net proceeds of $19.8 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:•Borrowings under our Credit Facility of $300 million, which were used primarily for the acquisition of Explora BioLabs;•Net repayments of $100 million on our Credit Facility throughout fiscal year 2022;•Payments of $2.0 billion partially offset by $1.9 billion of proceeds in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.Net cash used in financing activities also reflected treasury stock purchases of $38.7 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements, approximately $15 million payment to purchase an additional 10% interest in a subsidiary, $15.7 million payment to acquire the remaining 2% ownership interest in Cognate, $10.4 million of contingent consideration payments, and $5.3 million of dividends paid to noncontrolling interests; partially offset by proceeds from exercises of employee stock options of $25.1 million.For fiscal year 2021, net cash provided by financing activities reflected the net proceeds of $708.2 million on our Credit Facility, Senior Notes, and finance lease obligations. Included in the net proceeds are the following amounts:•Payments of approximately $147 million on our term loan;•Proceeds of $1.0 billion from the issuance of the 2029 and 2031 Senior Notes, which were used to prepay our $500 million 2026 Senior Notes;•Borrowings under our Credit Facility of $1.3 billion, which were used primarily for the acquisitions of Cognate, Vigene, Distributed Bio, Retrogenix and certain assets from a distributor;•Net payments of $710 million made to our Credit Facility throughout fiscal year 2021;•Gross proceeds and payments of approximately $1.5 billion, but having a net impact of zero, were incurred as part of amending and restating our Credit Facility;•Gross proceeds and payments of approximately $3.0 billion in connection with a non-U.S. Euro functional currency entity repaying Euro loans and replacing the Euro loans with U.S. dollar denominated loans. A series of forward currency contracts were executed to mitigate any foreign currency gains or losses on the U.S. dollar denominated loans. These proceeds and payments are presented as gross financing activities.Net cash provided by financing activities also reflected proceeds from exercises of employee stock options of $45.7 million, partially offset by treasury stock purchases of $40.7 million made due to the netting of common stock upon vesting of stock-based awards in order to satisfy individual statutory tax withholding requirements. Additionally we paid $21 million of debt 51CHARLES RIVER LABORATORIES INTERNATIONAL, INC.extinguishment costs associated with the 2026 Senior Notes repayment and $17 million of debt financing costs associated with the 2029 and 2031 Senior Notes issuances and amending and restating the Credit Agreement.Financing and Market RiskWe are exposed to market risk from changes in interest rates and currency exchange rates, which could affect our future results of operations and financial condition. We manage our exposure to these risks through our regular operating and financing activities.Amounts outstanding under our Credit Facility and our Senior Notes were as follows:December 31, 2022December 25, 2021(in thousands)Revolving facility$1,197,586 $1,161,431 4.25% Senior Notes due 2028500,000 500,000 3.75% Senior Notes due 2029500,000 500,000 4.0% Senior Notes due 2031500,000 500,000 Total$2,697,586 $2,661,431 The interest rates applicable to the Credit Facility are equal to (A) for revolving loans denominated in U.S. dollars, at our option, either the base rate (which is the higher of (1) the prime rate, (2) the federal funds rate plus 0.50%, or (3) the one-month adjusted LIBOR rate plus 1%) or the adjusted LIBOR rate, (B) for revolving loans denominated in euros, the adjusted EURIBOR rate and (C) for revolving loans denominated in sterling, the daily simple SONIA rate, in each case, plus an interest rate margin based upon our leverage ratio.Our 2028 Senior Notes have semi annual interest payments due May 1 and November 1. Our 2029 and 2031 Senior Notes have semi annual interest payments due March 15 and September 15. During the fourth fiscal quarter of 2022, we entered into an interest rate swap with a notional amount of $500.0 million to manage interest rate fluctuation related to our floating rate borrowings under the Credit Facility, at a fixed rate of 4.700% making the total interest rate 5.825% at our current spread. We designated this derivative instrument as a cash flow hedge at the inception of the contract and expect it to be highly effective.Our off-balance sheet commitments related to our outstanding letters of credit as of December 31, 2022 were $18.6 million.Foreign Currency Exchange Rate RiskWe operate on a global basis and have exposure to some foreign currency exchange rate fluctuations for our financial position, results of operations, and cash flows.While the financial results of our global activities are reported in U.S. dollars, our foreign subsidiaries typically conduct their operations in their respective local currency. The principal functional currencies of our foreign subsidiaries are the Euro, British Pound, and Canadian Dollar. During fiscal year 2022, the most significant drivers of foreign currency translation adjustment we recorded as part of other comprehensive income (loss) were the British Pound, Euro, Canadian Dollar, and Hungarian Forint.Fluctuations in the foreign currency exchange rates of the countries in which we do business will affect our financial position, results of operations, and cash flows. As the U.S. dollar strengthens against other currencies, the value of our non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally decline when reported in U.S. dollars. The impact to net income as a result of a U.S. dollar strengthening will be partially mitigated by the value of non-U.S. expenses, which will decline when reported in U.S. dollars. As the U.S. dollar weakens versus other currencies, the value of the non-U.S. revenue, expenses, assets, liabilities, and cash flows will generally increase when reported in U.S. dollars. For fiscal year 2022, our revenue would have decreased by $118.2 million and our operating income would have decreased by $4.0 million, if the U.S. dollar exchange rate had strengthened by 10%, with all other variables held constant.We attempt to minimize this exposure by using certain financial instruments in accordance with our overall risk management and our hedge policy. We do not enter into speculative derivative agreements.We entered into foreign exchange forward contracts during fiscal years December 31, 2022 and 2021 to limit our foreign currency exposure related to a U.S. dollar denominated loan borrowed by a non-U.S. Euro functional currency entity under the Credit Facility. Refer to Note 8. Debt and Other Financing Arrangements to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K for further details regarding these types of forward contracts.52CHARLES RIVER LABORATORIES INTERNATIONAL, INC.Repurchases of Common StockDuring fiscal year 2022, we did not repurchase any shares under our authorized $1.3 billion stock repurchase program. As of December 31, 2022, we had $129.1 million remaining on the authorized stock repurchase program. Our stock-based compensation plans permit the netting of common stock upon vesting of restricted stock, restricted stock units, and performance share units in order to satisfy individual statutory tax withholding requirements. During fiscal year 2022, we acquired $0.1 million shares for $38.7 million through such netting.Commitments and Other Purchasing ArrangementsWe lease properties and equipment for use in our operations. In addition to rent, the leases may require us to pay additional amounts for taxes, insurance, maintenance, and other operating expenses. As of December 31, 2022, we had $622.6 million of operating leases inclusive of future minimum rental commitments under non-cancellable operating leases, net of income from subleases as well as $43.8 million of financing leases.In addition to the obligations on the balance sheet at December 31, 2022, we entered into unconditional purchase obligations in the ordinary course of business. Unconditional purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable at any time without penalty. As of December 31, 2022, we had approximately $375 million of unconditional purchase obligations, the majority of which are expected to be settled during 2023.We invest in several venture capital funds that invest in start-up companies, primarily in the life sciences industry. Our total commitment to the funds as of December 31, 2022 was $193.1 million, of which we funded $127.8 million through December 31, 2022. Refer to Note 5. Venture Capital and Strategic Equity Investments to our consolidated financial statements contained in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K for further details.In connection with certain business and asset acquisitions, we agreed to make additional payments based upon the achievement of certain financial targets and other milestones in connection with the respective acquisition. As of December 31, 2022 we had approximately $57 million of gross contingent payments, of which $13 million are expected to be paid.We have certain federal and state income tax liabilities of $43.1 million relating to the one-time Transition Tax on unrepatriated earnings under the 2017 Tax Act. The Transition Tax will be paid, interest free, over an eight-year period through 2026.Item 7A. Quantitative and Qualitative Disclosures about Market RiskThe information called for by this item is incorporated herein by reference to “Item 7. Management’s Discussion and Analysis of Results of Operations - Liquidity and Capital Resources” of this Report; and Note 1 “Description of Business and Summary of Significant Accounting Policies - Fair Value” included in Item 8 of this Report. 53CHARLES RIVER LABORATORIES INTERNATIONAL, INC.