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3M CO_10-Q_2023-10-24_66740-0000066740-23-000092.html

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AFLAC INC_10-Q_2023-11-02_4977-0000004977-23-000177.html

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ALLIANT ENERGY CORP_10-Q_2023-11-03_352541-0000352541-23-000108.html

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ALTRIA GROUP, INC._10-Q_2023-10-26_764180-0000764180-23-000126.html

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AMERICAN ELECTRIC POWER CO INC_10-Q_2023-11-02_4904-0000004904-23-000121.html

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AMERICAN EXPRESS CO_10-Q_2023-10-20_4962-0000004962-23-000038.html

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AMERICAN INTERNATIONAL GROUP, INC._10-Q_2023-11-02_5272-0000005272-23-000045.html

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AMERIPRISE FINANCIAL INC_10-Q_2023-11-02_820027-0000820027-23-000105.html

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AMGEN INC_10-Q_2023-10-31_318154-0000318154-23-000064.html

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AMPHENOL CORP -DE-_10-Q_2023-10-27_820313-0001558370-23-016952.html

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ANALOG DEVICES INC_10-K_2023-11-21_6281-0000006281-23-000203.html

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (all tabular amounts in thousands except per share amounts)The following discussion includes results of operations and financial condition for the fiscal year ended October 28, 2023 (fiscal 2023) and the fiscal year ended October 29, 2022 (fiscal 2022) and year-over-year comparisons between fiscal 2023 and fiscal 2022. For discussion on results of operations and financial condition for fiscal 2022 and the fiscal year ended October 30, 2021 (fiscal 2021) and year-over-year comparisons between fiscal 2022 and fiscal 2021, please refer to 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 fiscal 2022 filed with the Securities and Exchange Commission on November 22, 2022. Our fiscal year is the 52-week or 53-week period ending on the Saturday closest to the last day in October. Fiscal 2023 and fiscal 2022 were 52-week fiscal periods. Results of OperationsOverview Fiscal Year2023 over 2022 20232022 $ Change% ChangeRevenue$12,305,539 $12,013,953 $291,586 2 %Gross margin %64.0 %62.7 %Net income$3,314,579 $2,748,561 $566,018 21 %Net income as a % of revenue26.9 %22.9 %Diluted EPS$6.55 $5.25 $1.30 25 %Revenue Trends by End MarketThe following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the "ship to" customer information and the end customer product or application into which our product will be incorporated. As data systems for capturing and tracking this data and our methodology evolves and improves, the categorization of products by end market can vary over time. When this occurs, we reclassify revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market. Fiscal 2023Fiscal 2022Revenue% ofTotalRevenue (1)Y/Y%Revenue% ofTotalRevenue (1)Industrial$6,555,222 53 %6 %$6,186,114 51 %Automotive2,915,199 24 %19 %2,442,705 20 %Communications1,619,517 13 %(13)%1,863,156 16 %Consumer1,215,601 10 %(20)%1,521,978 13 %Total Revenue$12,305,539 100 %2 %$12,013,953 100 %_______________________________________(1)The sum of the individual percentages may not equal the total due to rounding.Revenue increased 2% in fiscal 2023 as compared to fiscal 2022 primarily as a result of broad-based demand for our products sold into the Industrial end market, namely aerospace and defense and instrumentation, as well as the Automotive end market, namely cabin electronics and battery management systems. These increases were partially offset by a decrease in revenue in the Consumer end market primarily due to weakening market trends and a decrease in revenue in the Communications end market due to the timing of infrastructure deployment cycles.Revenue by Sales ChannelThe following table summarizes revenue by sales channel. We sell our products globally through a direct sales force, third party distributors, independent sales representatives and via our website. Distributors are customers that buy products with the intention of reselling them. Direct customers are non-distributor customers and consist primarily of original equipment manufacturers (OEMs). Other customers include the U.S. government, government prime contractors and certain commercial customers for which revenue is recorded over time. 28Fiscal 2023Fiscal 2022Revenue% ofTotalRevenue (1)Revenue% ofTotalRevenue (1)Distributors$7,534,894 61 %$7,458,478 62 %Direct customers4,603,166 37 %4,423,883 37 %Other167,479 1 %131,592 1 %Total Revenue$12,305,539 100 %$12,013,953 100 %_______________________________________(1)The sum of the individual percentages may not equal the total due to rounding.As indicated in the table above, the percentage of total revenue sold via each channel has remained relatively consistent in the periods presented, but can fluctuate from time to time based on end customer demand.Revenue Trends by Geographic RegionRevenue by geographic region, based upon the geographic location of the distributors or OEMs who purchased the Company's products, for fiscal 2023 and fiscal 2022 was as follows:Fiscal Year2023 over 202220232022 $ Change% Change (1)United States$4,165,296 $4,025,398 $139,898 3 %Rest of North and South America88,579 72,497 16,082 22 %Europe3,001,871 2,534,423 467,448 18 %Japan1,397,119 1,221,549 175,570 14 %China2,229,631 2,563,536 (333,905)(13)%Rest of Asia1,423,043 1,596,550 (173,507)(11)%Total Revenue$12,305,539 $12,013,953 $291,586 2 %_______________________________________(1)The sum of the individual percentages may not equal the total due to rounding.In all periods presented, the predominant regions comprising “Rest of North and South America” are Canada and Mexico; the predominant regions comprising “Europe” are Germany, Sweden and the Netherlands; and the predominant regions comprising “Rest of Asia” are Taiwan, Malaysia, South Korea and Singapore.Total revenue increased in fiscal 2023 as compared to fiscal 2022 due to the revenue trends discussed above, partially offset by weaker customer demand in China and Rest of Asia primarily due to deteriorating macroeconomic conditions in those regions. Gross Margin Fiscal Year2023 over 2022 20232022$ Change% ChangeGross margin$7,877,218 $7,532,474 $344,744 5 %Gross margin %64.0 %62.7 %Gross margin percentage in fiscal 2023 increased by 130 basis points compared to fiscal 2022. Fiscal 2022 included $271.4 million of additional cost of goods sold that did not repeat in fiscal 2023 related to a nonrecurring fair value adjustment recorded to inventory. This increase in gross margin percentage was partially offset by lower utilization of our factories due to decreasing customer demand during fiscal 2023.Research and Development (R&D) Fiscal Year2023 over 2022 20232022$ Change% ChangeR&D expenses$1,660,194 $1,700,518 $(40,324)(2)%R&D expenses as a % of revenue13 %14 %R&D expenses decreased in fiscal 2023 as compared to fiscal 2022 primarily as a result of lower employee related variable compensation expenses, partially offset by higher salary and benefit expenses.29R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth. We expect to continue the development of innovative technologies and processes for new products. We believe that a continued commitment to R&D is essential to maintain product leadership with our existing products as well as to provide innovative new product offerings. Selling, Marketing, General and Administrative (SMG&A) Fiscal Year2023 over 2022 20232022$ Change% ChangeSMG&A expenses$1,273,584 $1,266,175 $7,409 1 %SMG&A expenses as a % of revenue10 %11 %SMG&A expenses increased in fiscal 2023 as compared to fiscal 2022, primarily as a result of higher employee related salary and benefit expenses and discretionary spending, partially offset by lower variable compensation expenses and acquisition-related transaction costs.Amortization of Intangibles Fiscal Year2023 over 2022 20232022$ Change% ChangeAmortization expenses$959,618 $1,012,572 $(52,954)(5)%Amortization expenses as a % of revenue8 %8 %Amortization expenses decreased in fiscal 2023 as compared to fiscal 2022, primarily as a result of a portion of our acquired intangible assets becoming fully amortized during fiscal 2023. Special Charges, Net Fiscal Year2023 over 2022 20232022$ Change% ChangeSpecial charges, net$160,710 $274,509 $(113,799)(41)%Special charges, net as a % of revenue1 %2 %Special charges, net decreased in fiscal 2023 as compared to fiscal 2022, primarily due to increased charges recorded in fiscal 2022 related to our Global Repositioning Actions offset by $160.7 million of charges recorded in fiscal 2023 primarily related to $114.0 million recorded for our plan committed to during the three months ended October 28, 2023, to reorganize our business (the Q4 2023 Plan). The Q4 2023 Plan, consisting of voluntary and involuntary reductions-in-force, and other cost-savings initiatives, was commenced to adjust our cost structure and business activities to better align with weaker market demand and continued economic uncertainty in our end markets, as well as make certain strategic shifts in our workforce necessary to achieve our long-term vision. See Note 5, Special Charges, Net, of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information. Operating Income Fiscal Year2023 over 2022 20232022$ Change% ChangeOperating income$3,823,112 $3,278,700 $544,412 17 %Operating income as a % of revenue31.1 %27.3 %The increase in operating income in fiscal 2023 as compared to fiscal 2022 was primarily the result of a $344.7 million increase in gross margin, a $113.8 million decrease in special charges, net, a $53.0 million decrease in amortization expenses and a $40.3 million decrease in R&D expenses, partially offset by a $7.4 million increase in SMG&A expenses, as more fully described above under the headings Gross Margin, Special Charges, Net, Amortization of Intangibles, Research and Development (R&D) and Selling, Marketing, General and Administrative (SMG&A).Nonoperating Expense (Income) Fiscal Year2023 over 2022 20232022$ Change% ChangeNonoperating expense (income)$215,109 $179,951 $35,158 20 %The year-over-year increase in nonoperating expense in fiscal 2023 as compared to fiscal 2022 was primarily the result of 30higher interest expense related to our debt obligations and lower net gains from other investments, partially offset by higher interest income.Provision for (Benefit From) Income Taxes Fiscal Year2023 over 2022 20232022$ Change% ChangeProvision for (benefit from) income taxes$293,424 $350,188 $(56,764)(16)%Effective income tax rate8.1 %11.3 %Our effective tax rates for fiscal 2023 and fiscal 2022 were below the U.S. statutory rate of 21% due to lower statutory tax rates applicable to our operations in the foreign jurisdictions in which we earn income. For fiscal 2023 and fiscal 2022 our pretax income was primarily generated in Ireland at a tax rate of 12.5%. Our effective tax rate for fiscal 2023 also included the effects of the mandatory capitalization and amortization of research and development expenses which began in fiscal 2023 under the Tax Cuts and Jobs Act of 2017. The mandatory capitalization requirement decreased our effective tax rate primarily by increasing the foreign-derived intangible income deduction. Our effective tax rate for fiscal 2023 was also impacted by a discrete income tax benefit recorded of $81.7 million resulting from the approval granted by the Joint Committee on Taxation of our federal corporate income tax relief claim which reduced the amount of transition tax owed under the Tax Cuts and Jobs Act of 2017.See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion. Net Income Fiscal Year2023 over 2022 20232022$ Change% ChangeNet income$3,314,579 $2,748,561 $566,018 21 %Net income, as a % of revenue26.9 %22.9 %Diluted EPS$6.55 $5.25 $1.30 25 %The increase in net income in fiscal 2023 as compared to fiscal 2022 was a result of a $544.4 million increase in operating income and a $56.8 million decrease in provision for income taxes, partially offset by a $35.2 million increase in nonoperating expense, as more fully described above under the headings Operating Income, Provision for (Benefit From) Income Taxes and Nonoperating (Income) Expense.Liquidity and Capital ResourcesAt October 28, 2023, our principal source of liquidity was $958.1 million of cash and cash equivalents, of which approximately $201.1 million was held in the United States and the balance of our cash and cash equivalents was held outside the United States in various foreign subsidiaries. We manage our worldwide cash requirements by, among other things, reviewing available funds held by our foreign subsidiaries and the cost effectiveness by which those funds can be accessed in the United States. We do not expect current regulatory restrictions or taxes on repatriation to have a material adverse effect on our overall liquidity, financial condition or results of operations. Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less, including money market funds. We maintain these balances with counterparties with high credit ratings, and continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk.We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing, will be sufficient to fund operations, capital expenditures, research and development efforts and dividend payments (if any) in the immediate future and for at least the next twelve months. Fiscal Year 20232022Net cash provided by operating activities$4,817,634 $4,475,402 Net cash provided by operating activities as a % of revenue39 %37 %Net cash used for investing activities$(1,266,385)$(657,368)Net cash used for financing activities$(4,063,760)$(4,290,720)The following changes contributed to the net change in cash and cash equivalents from fiscal 2022 to fiscal 2023. 31Operating ActivitiesCash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. The increase in cash provided by operating activities during fiscal 2023 as compared to fiscal 2022 was primarily a result of higher net income adjusted for noncash items offset by changes in working capital. Investing ActivitiesInvesting cash flows generally consist of capital expenditures and cash used for acquisitions. The increase in cash used for investing activities during fiscal 2023 as compared to fiscal 2022 was primarily the result of an increase in cash used for capital expenditures.Financing ActivitiesFinancing cash flows generally consist of payments of dividends to shareholders, repurchases of common stock, issuance and repayment of debt and proceeds from the sale of shares of common stock pursuant to employee equity incentive plans. The decrease in cash used for financing activities during fiscal 2023 as compared to fiscal 2022 was primarily the result of the net proceeds from the issuance of commercial paper notes during fiscal 2023 and lower debt repayments, partially offset by higher common stock repurchases.Working Capital Fiscal Year 20232022$ Change% ChangeAccounts receivable, net$1,469,734 $1,800,462 $(330,728)(18)%Days sales outstanding (1)48 50 Inventory$1,642,214 $1,399,914 $242,300 17 %Days cost of sales in inventory (1)125 106 _______________________________________(1)We use the average of the current year and prior year ending net accounts receivable and ending inventory balance in our calculation of days sales outstanding and days cost of sales in inventory, respectively. Cost of sales amounts used in the calculation of days cost of sales in inventory include accounting adjustments related to amortization of developed technology intangible assets acquired and depreciation related to the write-up of fixed assets to fair value as a result of the acquisition of Maxim. The decrease in accounts receivable for fiscal 2023 compared to fiscal 2022 was primarily the result of variations in the timing of collections and billings and decreased revenue levels in the fourth quarter of fiscal 2023 as compared to the fourth quarter of fiscal 2022.Inventory increased in fiscal 2023 as compared to fiscal 2022, primarily as a result of our efforts to balance manufacturing production, demand and inventory levels. Our inventory levels are impacted by our need to support forecasted sales demand and variations between those forecasts and actual demand. Current liabilities increased to $3.2 billion at October 28, 2023 from $2.4 billion recorded at the end of fiscal 2022, primarily due to increases in commercial paper notes and current debt, partially offset by lower accrued liabilities.Revolving Credit Facility Our Third Amended and Restated Revolving Credit Agreement, dated as of June 23, 2021, with Bank of America N.A. as administrative agent and the other banks identified therein as lenders, which was subsequently amended on December 20, 2022 and July 24, 2023 (as amended, the Revolving Credit Agreement) provides for a five year unsecured revolving credit facility in an aggregate principal amount not to exceed $2.5 billion (subject to certain terms and conditions). We may borrow under this revolving credit facility in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. The terms of the Revolving Credit Agreement impose restrictions on our ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Revolving Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.5 to 1.0. As of October 28, 2023, we were in compliance with these covenants. See Note 13, Revolving Credit Facility, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our revolving credit facility.32DebtAs of October 28, 2023, we had approximately $6.4 billion of carrying value outstanding on our senior notes. The difference in the carrying value of the debt and the principal is due to the unamortized discount and issuance fees and other adjustments on these instruments. The indentures governing certain of our debt instruments contain covenants that may limit our ability to: incur, create, assume or guarantee any debt or borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of our assets to, any other party. As of October 28, 2023, we were compliant with these covenants. See Note 14, Debt of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our outstanding debt.Commercial Paper ProgramDuring fiscal 2023, we established a commercial paper program under which we may issue short-term, unsecured commercial paper notes in amounts up to a maximum aggregate face amount of $2.5 billion outstanding at any time, with maturities of up to 397 days from the date of issuance. As of October 28, 2023, we had $547.2 million of outstanding borrowings under the commercial paper program recorded in the Consolidated Balance Sheet. We intend to use the net proceeds of the commercial paper program for general corporate purposes, including without limitation, repayment of indebtedness, stock repurchases, acquisitions, capital expenditures and working capital.Stock Repurchase ProgramOur common stock repurchase program has been in place since August 2004. Since inception, our Board of Directors has authorized us to repurchase $16.7 billion of our common stock under the program, which includes the $8.5 billion authorization approved by the Board of Directors on August 25, 2021. Under the program, we may repurchase outstanding shares of our common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized under the program. As of October 28, 2023, $2.1 billion remained available for repurchase under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. We also repurchase shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units/awards or the exercise of stock options. Future repurchases of common stock will be dependent upon our financial position, results of operations, outlook, liquidity and other factors we deem relevant.Capital ExpendituresNet additions to property, plant and equipment were $1.3 billion in fiscal 2023 as we invested to enhance our global resiliency. We expect capital expenditures for fiscal 2024 to be between approximately $600.0 million and $800.0 million. These capital expenditures will be funded with a combination of cash on hand and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing. DividendsOn November 20, 2023, our Board of Directors declared a cash dividend of $0.86 per outstanding share of common stock. The dividend will be paid on December 14, 2023 to all shareholders of record at the close of business on December 4, 2023 and is expected to total approximately $426.8 million. We currently expect quarterly dividends to continue in future periods, although they remain subject to determination and declaration by our Board of Directors. The payment of future dividends, if any, will be based on several factors, including our financial performance, outlook and liquidity.33Contractual ObligationsThe table below summarizes our material contractual obligations in specified periods as of October 28, 2023: Payment due by period Less than More than(thousands)Total1 Year1-3 Years3-5 Years5 YearsDebt obligations (1)$7,064,301 $1,047,224 $400,000 $2,090,212 $3,526,865 Interest payments associated with debt obligations2,253,446 209,595 341,514 273,176 1,429,161 Transition tax (2)484,244 196,066 288,178 — — Operating leases (3)494,662 80,998 148,565 118,203 146,896 Inventory-related purchase commitments (4)705,607 170,042 361,255 130,977 43,333 Total$11,002,260 $1,703,925 $1,539,512 $2,612,568 $5,146,255 _______________________________________(1)Debt obligations are assumed to be held to maturity. (2)Tax obligation relates to the one-time tax on deemed repatriated earnings under the Tax Cuts and Jobs Act and includes a reduction resulting from the approval granted by the Joint Committee on Taxation of our federal corporate income tax relief claim which reduced the amount of transition tax owed.(3)Certain of our operating lease obligations include escalation clauses. These escalating payment requirements are reflected in the table.(4)We have supplier commitments for the purchase of materials and supplies in advance or with minimum purchase quantities. As of October 28, 2023, our total liabilities associated with uncertain tax positions was $186.2 million, which are included in non-current income taxes payable in our Consolidated Balance Sheets contained in Item 8 of this Annual Report on Form 10-K. Due to the complexity associated with our tax uncertainties, we cannot make a reasonably reliable estimate of the period in which we expect to settle the non-current liabilities associated with these uncertain tax positions. Therefore, we have not included these uncertain tax positions in the above contractual obligations table.New Accounting PronouncementsFrom time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) and are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards will not have a material impact on our future financial condition and results of operations. See Note 2s, New Accounting Pronouncements, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for a description of recently issued and adopted accounting pronouncements, including the dates of adoption and impact on our historical financial condition and results of operations.Critical Accounting Policies and EstimatesManagement’s discussion and analysis of the financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future based on available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. We also have other policies that we consider key accounting policies; however, the application of these policies does not require us to make significant estimates or judgments that are difficult or subjective.Revenue RecognitionRecognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration that we expect to receive in exchange for those products or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of our shipping terms permit us to recognize revenue at point of shipment or delivery. Certain shipping terms require the goods to be through customs or be received by the customer before title passes. In those instances, we defer the revenue recognized until title and control of the promised goods have passed to the customer. Shipping costs are charged to selling, marketing, general and administrative expense as incurred. Sales taxes are excluded from revenue.34Revenue from contracts with the United States government, government prime contractors and certain commercial customers is recorded over time using either units delivered or costs incurred as the measurement basis for progress toward completion. These measures are used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontract costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance, estimated gross margin, including the impact of final contract settlements, and estimated losses are recognized in the period in which the changes or losses are determined.Performance Obligations: Substantially all of our contracts with customers contain a single performance obligation, the sale of mixed-signal integrated circuit (IC) products. Such sales represent a single performance obligation because the sale is one type of good or includes multiple goods that are neither capable of being distinct nor separable from the other promises in the contract. This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. Unsatisfied performance obligations primarily represent contracts for products with future delivery dates and with an original expected duration of one year or less. We generally warrant that our products will meet their published specifications, and that we will repair or replace defective products, for one year from the date title passes from us to the customer. Specific accruals are recorded for known product warranty issues. Transaction Price: The transaction price reflects our expectations about the consideration we will be entitled to receive from the customer and may include fixed or variable amounts. Fixed consideration primarily includes sales to direct customers and sales to distributors in which both the sale to the distributor and the sale to the end customer occur within the same reporting period. Variable consideration includes sales in which the amount of consideration that we will receive is unknown as of the end of a reporting period. The vast majority of such consideration are credits issued to the distributor due to price protection, but also include sales made to distributors under agreements that allow certain rights of return, referred to as stock rotation. Price protection represents price discounts granted to certain distributors to allow the distributor to earn an appropriate margin on sales negotiated with certain customers and in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. Stock rotation allows distributors limited levels of returns in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. A liability for distributor credits covering variable consideration is made based on management's estimate of historical experience rates as well as considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the provisions we have made based on our historical estimates.Contract Balances: Accounts receivable represents our unconditional right to receive consideration from our customers. Payments are typically due within 30 to 45 days of invoicing and do not include a significant financing component. To date, there have been no material impairment losses on accounts receivable. There were no material contract assets or contract liabilities recorded on the Consolidated Balance Sheets in any of the periods presented.Inventory ValuationWe value inventories at the lower of cost (first-in, first-out method) or net realizable value. Because of the cyclical nature of the semiconductor industry, changes in inventory levels, obsolescence of technology, and product life cycles, we write down inventories to net realizable value. We employ a variety of methodologies to determine the net realizable value of inventory. While a portion of the calculation is determined via reference to the age of inventory and lower of cost or net realizable value calculations, an element of the calculation is subject to significant judgments made by us about future demand for our inventory. If actual demand for our products is less than our estimates, additional adjustments to existing inventories may need to be recorded in future periods. To date, our actual results have not been materially different than our estimates.Long-Lived AssetsWe review property, plant, and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is determined by comparison of their carrying value to the estimated future undiscounted cash flows that the assets are expected to generate over their remaining estimated lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. Material impairment adjustments related to our property, plant, and equipment are reflected in our financial statements for the periods presented. Any deterioration in our business in the future could lead to such impairment adjustments in future periods. Evaluation of impairment of long-lived assets requires estimates of future operating results that are used in the preparation of the expected future undiscounted cash flows. Actual future operating results and the remaining economic lives of our long-lived assets could differ from the estimates used in assessing the recoverability of these assets. These differences could 35result in impairment charges, which could have a material adverse impact on our results of operations. In addition, in certain instances, assets may not be impaired but their estimated useful lives may have decreased. In these situations, we amortize the remaining net book values over the revised useful lives. GoodwillGoodwill is subject to impairment tests annually or more frequently if events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable, utilizing either the qualitative or quantitative method. We test goodwill for impairment at the reporting unit level, which we determined is consistent with our identified operating segments, on an annual basis on the first day of the fourth quarter (on or about July 30) or more frequently if we believe indicators of impairment exist or we reorganize our operating segments or reporting units. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value. When using the qualitative method, we consider several factors, including the following:–the amount by which the fair values of each reporting unit exceeded their carrying values as of the date of the most recent quantitative impairment analysis, which indicated there would need to be substantial negative developments in the markets in which these reporting units operate in order for there to be potential impairment;–the carrying values of these reporting units as of the assessment date compared to their previously calculated fair values as of the date of the most recent quantitative impairment analysis;–the current forecasts as compared to the forecasts included in the most recent quantitative impairment analysis;–public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors' businesses;–changes in the value of major U.S. stock indices that could suggest declines in overall market stability that could impact the valuation of our reporting units;–changes in our market capitalization and overall enterprise valuation to determine if there were any significant decreases that could be an indication that the valuation of our reporting units had significantly decreased; and–whether there had been any significant increases to the weighted-average cost of capital rates for each reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach.If we elect not to use this option, or we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the quantitative goodwill impairment test. The quantitative goodwill impairment test requires an entity to compare the fair value of a reporting unit with its carrying amount. If fair value is determined to be less than carrying value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, we consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. We determine the fair value of our reporting units using a weighting of the income and market approaches. Under the income approach, we use a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, we use the guideline public company method. Under this method we utilize information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. In order to assess the reasonableness of the calculated reporting unit fair values, we reconcile the aggregate fair values of our reporting units determined, as described above, to our total company market capitalization, allowing for a reasonable control premium. In fiscal 2023, we used the qualitative method of assessing goodwill for our reporting units. In fiscal 2022, we used a combination of the qualitative and quantitative methods of assessing goodwill for all reporting units. In all periods presented, we concluded the reporting units' fair values exceeded their carrying amounts as of the assessment dates and no risk of impairment existed.Business CombinationsUnder the acquisition method of accounting, we recognize tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We record the excess of the fair value of the purchase consideration over the value of the net assets acquired as goodwill. The accounting for business combinations requires us to make significant estimates and assumptions, especially with respect to intangible assets and the fair value of contingent payment obligations. Critical estimates in valuing purchased technology, customer lists and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges which could be material. In addition, we have estimated the economic lives of certain acquired 36assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.We record contingent consideration resulting from a business combination at its fair value on the acquisition date. We generally determine the fair value of the contingent consideration using the income approach methodology of valuation. Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as an adjustment to operating expenses within the Consolidated Statements of Income. Changes in the fair value of the contingent consideration can result from changes in assumed discount periods and rates, and from changes pertaining to the achievement of the defined milestones. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense we record in any given period.Accounting for Income TaxesWe make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of income tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of the recognition of certain expenses for tax and financial statement purposes. We assess the likelihood of the realization of deferred tax assets and record a corresponding valuation allowance as necessary if we determine those deferred tax assets may not be realized due to the uncertainty of the timing and amount to be realized of certain state and international tax credit carryovers. In reaching our conclusion, we evaluate certain relevant criteria including the existence of deferred tax liabilities that can be used to realize deferred tax assets, the taxable income in prior carryback years in the impacted state and international jurisdictions that can be used to absorb net operating losses and taxable income in future years. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets, which may result in an increase or decrease to our income tax provision in future periods.We account for uncertain tax positions by first determining if it is “more likely than not” that a tax position will be sustained by the appropriate taxing authorities prior to recording any benefit in the financial statements. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained. For those tax positions where it is more likely than not that a tax position 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 financial statements. We classify interest and penalties related to uncertain tax positions within the provision for (benefit from) income taxes line of the Consolidated Statements of Income. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in known facts or circumstances, changes in tax law, effectively settled issues under audit, and new guidance on legislative interpretations. A change in these factors could result in the recognition of an increase or decrease to our income tax provision, which could materially impact our consolidated financial position and results of operations.In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement and royalty arrangements among related entities. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and income tax liabilities. In the event our assumptions are incorrect, the differences could have a material impact on our income tax provision and operating results in the period in which such determination is made. In addition to the factors described above, our current and expected effective tax rate is based on then-current tax law. Significant changes during the year in enacted tax law could affect these estimates.See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion.Stock-Based CompensationStock-based compensation expense associated with stock related awards is recognized in the Consolidated Statements of Income. Determining the amount of stock-based compensation to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of restricted stock units and market-based and performance-based awards. The grant-date fair value of restricted stock units with a service condition and restricted stock units with both service and performance conditions is calculated using the value of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting. For restricted stock units with both service and performance conditions, this grant-date fair value is also impacted by the number of units that are expected to vest during the performance period and is adjusted through the related stock-based compensation expense at each reporting period based on the probability 37of achievement of that performance condition. If we determine that an award is unlikely to vest, any previously recorded stock-based compensation expense is reversed in the period of that determination. The grant date fair value of restricted stock units and performance-based stock options with both service and market conditions are calculated using the Monte Carlo simulation model to estimate the probability of satisfying the performance condition stipulated in the award grant, including the possibility that the market condition may not be satisfied.The use of valuation models requires us to make estimates of key assumptions which are based on historical information and judgment regarding market factors and trends. We recognize the expense related to equity awards on a straight-line basis over the vesting period. See Note 2r, Stock-Based Compensation, and Note 3, Stock-Based Compensation and Shareholders' Equity, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for more information related to stock-based compensation.ContingenciesFrom time to time, in the ordinary course of business, various claims, charges and litigation are asserted or commenced against us arising from, or related to, among other things, contractual matters, patents, trademarks, personal injury, environmental matters, product liability, insurance coverage, employment or employment benefits. We periodically assess each matter to determine if a contingent liability should be recorded. In making this determination, we may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the information we obtain, combined with our judgment regarding all the facts and circumstances of each matter, we determine whether it is probable that a contingent loss may be incurred and whether the amount of such loss can be reasonably estimated. If a loss is probable and reasonably estimable, we record a contingent loss. In determining the amount of a contingent loss, we consider advice received from experts in the specific matter, current status of legal proceedings, settlement negotiations that may be ongoing, prior case history and other factors. If the judgments and estimates made by us are incorrect, we may need to record additional contingent losses that could materially adversely impact our results of operations.38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate ExposureOur interest income and expense are sensitive to changes in the general level of interest rates. In this regard, changes in interest rates affect the interest earned or paid on our marketable securities and debt, as well as the fair value of our investments and debt.Based on our floating rate debt outstanding as of October 28, 2023 and October 29, 2022, inclusive of our commercial paper notes and interest rate swap outstanding, as applicable, our annual interest expense would change by approximately $20.5 million and $5.0 million, respectively, for each 100 basis point increase in interest rates. Based on our cash and marketable securities outstanding as of October 28, 2023 and October 29, 2022, our annual interest income would change by approximately $9.6 million and $14.7 million, respectively, for each 100 basis point increase in interest rates.To provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of our investment portfolio assuming an immediate 100 basis point parallel shift in the yield curve. Based on investment positions as of October 28, 2023 and October 29, 2022, a hypothetical 100 basis point increase in interest rates across all maturities would not materially impact the fair market value of the portfolio in either period. If significant, such losses would only be realized if we sold the investments prior to maturity.As of October 28, 2023 we had $1.0 billion notional of fixed for floating interest rate swaps outstanding, with the swap payable having a fair value of $81.6 million. A hypothetical 100 basis point increase in interest rates would increase the swap payable by approximately $57.0 million with a corresponding adjustment to the carrying value of the related debt.As of October 28, 2023, we had $6.5 billion in principal amount of senior unsecured notes outstanding, with a fair value of $5.3 billion. We also had $547.2 million of commercial paper notes outstanding. As commercial paper notes issuances are at then-current rates and with very short maturities, the carrying value will approximate the fair value. The fair value of our notes is subject to interest rate risk, market risk and other factors. Generally, the fair value of our notes will increase as interest rates fall and decrease as interest rates rise. The fair values of our notes as of October 28, 2023 and October 29, 2022, assuming a hypothetical 100 basis point increase in market interest rates, are as follows:October 28, 2023October 29, 2022(thousands)Principal Amount OutstandingFair Value Fair Value given an increase in interest rates of 100 basis pointsPrincipal Amount OutstandingFair Value Fair Value given an increase in interest rates of 100 basis pointsCommercial paper notes$547,225 $547,185 $546,875 $— $— $— 2024 Notes, due October 2024500,000 499,473 495,058 500,000 491,982 483,035 2025 Notes, due April 2025400,000 385,231 380,013 400,000 383,378 374,686 2026 Notes, due December 2026900,000 851,023 826,888 900,000 851,479 820,203 Maxim Notes, due June 2027— — — 59,788 54,771 52,534 2027 Notes, due June 2027440,212 408,595 395,208 440,212 410,091 393,294 2028 Notes, due October 2028750,000 628,999 600,812 750,000 621,093 588,044 2031 Notes, due October 20311,000,000 773,404 721,064 1,000,000 786,772 727,579 2032 Notes, due October 2032300,000 269,828 251,153 300,000 278,359 257,337 2036 Notes, due December 2036144,278 118,554 108,085 144,278 126,274 114,389 2041 Notes, due October 2041750,000 479,078 422,949 750,000 513,709 450,337 2045 Notes, due December 2045332,587 292,248 259,323 332,587 313,931 276,820 2051 Notes, due October 20511,000,000 590,666 507,297 1,000,000 640,766 545,958 39Foreign Currency ExposureAs more fully described in Note 2i, Derivative and Hedging Agreements, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K, we regularly hedge our non-U.S. dollar-based exposures by entering into forward foreign currency exchange contracts. The terms of these contracts are for periods matching the duration of the underlying exposure and generally range from one to twelve months. Currently, our largest foreign currency exposure is the Euro, primarily because our European operations have the highest proportion of our local currency denominated expenses. Relative to the net unhedged foreign currency exposures existing at October 28, 2023 and October 29, 2022, an immediate 10% unfavorable movement in foreign currency exchange rates would result in approximately $66.5 million of losses and $69.5 million of losses, respectively, in changes in earnings or cash flows over the course of the year.The market risk associated with our derivative instruments results from currency exchange rates that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to our foreign exchange instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of our counterparties as of October 28, 2023, we do not believe that there is significant risk of nonperformance by them. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of our exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed our obligations to the counterparties.The following table illustrates the effect that an immediate 10% unfavorable or favorable movement in foreign currency exchange rates, relative to the U.S. dollar, would have on the fair value of our forward exchange contracts as of October 28, 2023 and October 29, 2022:October 28, 2023October 29, 2022Fair value of forward exchange contracts$(11,575)$(16,984)Fair value of forward exchange contracts after a 10% unfavorable movement in foreign currency exchange rates asset$49,284 $21,193 Fair value of forward exchange contracts after a 10% favorable movement in foreign currency exchange rates liability$(70,461)$(51,604)The calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, such changes typically affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency selling prices.40REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and the Board of Directors of Analog Devices, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Analog Devices, Inc. (the Company) as of October 28, 2023 and October 29, 2022, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended October 28, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 28, 2023 and October 29, 2022, and the results of its operations and its cash flows for each of the three years in the period ended October 28, 2023, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 28, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 21, 2023 expressed an unqualified opinion thereon.Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.Revenue Recognition – Measuring Price Protection CreditsDescription of the MatterAs described in Note 2n to the consolidated financial statements, the Company's sales contracts provide certain distributors with credits for price protection and rights of return, which results in variable consideration. During 2023, sales to distributors were $7.5 billion net of expected price protection credits and rights of return for which the liability balance as of October 28, 2023 was $525.4 million, of which the vast majority relates to the price protection credits.Auditing the Company's measurement for price protection credits under distributor contracts involved especially challenging judgment because the calculation involves subjective management assumptions about estimates of expected price protection credits. For example, estimated price protection credits included in the transaction price reflects management's evaluation of contractual terms, historical experience and assumptions about future economic conditions. Changes in those assumptions can have a material effect on the amount recognized for price protection credits.41How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process to calculate the price protection credits. For example, we tested controls over the appropriateness of assumptions management used as well as controls over the completeness and accuracy of the data underlying estimates of expected price protection credits.Our audit procedures included, among others, inspecting contractual terms in distributor agreements and testing the underlying data used in management’s calculation for completeness and accuracy as well as evaluating the significant assumptions used in the estimation of the price protection credits. We evaluated the Company’s methods and assumptions used in the estimates, which included comparing the assumptions to historical trends. We inspected and tested the results of the Company's retrospective review analysis of actual price protection credits claimed by distributors, evaluated the estimates made based on historical experience and performed sensitivity analyses of the Company’s significant assumptions to assess the impact on the price protection credits. We also evaluated whether the Company appropriately considered new information that could significantly change the estimated future price protection credits./s/ Ernst & Young LLPWe have served as the Company’s auditor since 1967. Boston, MassachusettsNovember 21, 202342

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+ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.INTRODUCTIONThis section provides management’s discussion of the financial condition, changes in financial condition and results of operations of Atmos Energy Corporation and its consolidated subsidiaries with specific information on results of operations and liquidity and capital resources. It includes management’s interpretation of our financial results, the factors affecting these results, the major factors expected to affect future operating results and future investment and financing plans. This discussion should be read in conjunction with our consolidated financial statements and notes thereto.Several factors exist that could influence our future financial performance, some of which are described in Item 1A above, “Risk Factors”. They should be considered in connection with evaluating forward-looking statements contained in this report or otherwise made by or on behalf of us since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements.Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995The statements contained in this Annual Report on Form 10-K may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of our documents or oral presentations, the words “anticipate”, “believe”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “objective”, “plan”, “projection”, “seek”, “strategy” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: federal, state and local regulatory and political trends and decisions, including the impact of rate proceedings before various state regulatory commissions; increased federal regulatory oversight and potential penalties; possible increased federal, state and local regulation of the safety of our operations; possible significant costs and liabilities resulting from pipeline integrity and other similar programs and related repairs; the inherent hazards and risks involved in distributing, transporting and storing natural gas; the availability and accessibility of contracted gas supplies, interstate pipeline and/or storage services; increased competition from energy suppliers and alternative forms of energy; failure to attract and retain a qualified workforce; natural disasters, terrorist activities or other events and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which are beyond our control; increased dependence on technology that may hinder the Company's business if such technologies fail; the threat of cyber-attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems or result in the loss or exposure of confidential or sensitive customer, employee 22Table of Contentsor Company information; the impact of new cybersecurity compliance requirements; adverse weather conditions; the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change; the impact of climate change; the capital-intensive nature of our business; our ability to continue to access the credit and capital markets to execute our business strategy; market risks beyond our control affecting our risk management activities, including commodity price volatility, counterparty performance or creditworthiness and interest rate risk; the concentration of our operations in Texas; the impact of adverse economic conditions on our customers; changes in the availability and price of natural gas; and increased costs of providing health care benefits, along with pension and postretirement health care benefits and increased funding requirements. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.CRITICAL ACCOUNTING POLICIESOur consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from estimates.Our significant accounting policies are discussed in Note 2 to our consolidated financial statements. The accounting policies discussed below are both important to the presentation of our financial condition and results of operations and require management to make difficult, subjective or complex accounting estimates. Accordingly, these critical accounting policies are reviewed periodically by the Audit Committee of the Board of Directors.Critical Accounting PolicySummary of PolicyFactors Influencing Application of the PolicyRegulationOur distribution and pipeline operations meet the criteria of a cost-based, rate-regulated entity under accounting principles generally accepted in the United States. Accordingly, the financial results for these operations reflect the effects of the ratemaking and accounting practices and policies of the various regulatory commissions to which we are subject.As a result, certain costs that would normally be expensed under accounting principles generally accepted in the United States are permitted to be capitalized or deferred on the balance sheet because it is probable they can be recovered through rates. Further, regulation may impact the period in which revenues or expenses are recognized. The amounts expected to be recovered or recognized are based upon historical experience and our understanding of the regulations.Discontinuing the application of this method of accounting for regulatory assets and liabilities or changes in the accounting for our various regulatory mechanisms could significantly increase our operating expenses as fewer costs would likely be capitalized or deferred on the balance sheet, which could reduce our net income.Decisions of regulatory authoritiesIssuance of new regulations or regulatory mechanismsAssessing the probability of the recoverability of deferred costsContinuing to meet the criteria of a cost-based, rate regulated entity for accounting purposes23Table of ContentsCritical Accounting PolicySummary of PolicyFactors Influencing Application of the PolicyPension and other postretirement plansPension and other postretirement plan costs and liabilities are determined on an actuarial basis using a September 30 measurement date and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets, assumed discount rates and current demographic and actuarial mortality data. The assumed discount rate and the expected return are the assumptions that generally have the most significant impact on our pension costs and liabilities. The assumed discount rate, the assumed health care cost trend rate and assumed rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities.The discount rate is utilized principally in calculating the actuarial present value of our pension and postretirement obligations and net periodic pension and postretirement benefit plan costs. When establishing our discount rate, we consider high quality corporate bond rates based on bonds available in the marketplace that are suitable for settling the obligations, changes in those rates from the prior year and the implied discount rate that is derived from matching our projected benefit disbursements with currently available high quality corporate bonds.The expected long-term rate of return on assets is utilized in calculating the expected return on plan assets component of our annual pension and postretirement plan costs. We estimate the expected return on plan assets by evaluating expected bond returns, equity risk premiums, asset allocations, the effects of active plan management, the impact of periodic plan asset rebalancing and historical performance. We also consider the guidance from our investment advisors in making a final determination of our expected rate of return on assets. To the extent the actual rate of return on assets realized over the course of a year is greater than or less than the assumed rate, that year’s annual pension or postretirement plan costs are not affected. Rather, this gain or loss reduces or increases future pension or postretirement plan costs over a period of approximately ten to twelve years.The market-related value of our plan assets represents the fair market value of the plan assets, adjusted to smooth out short-term market fluctuations over a five-year period. The use of this methodology will delay the impact of current market fluctuations on the pension expense for the period.We estimate the assumed health care cost trend rate used in determining our postretirement net expense based upon our actual health care cost experience, the effects of recently enacted legislation and general economic conditions. Our assumed rate of retirement is estimated based upon our annual review of our participant census information as of the measurement date.General economic and market conditionsAssumed investment returns by asset classAssumed future salary increasesAssumed discount rateProjected timing of future cash disbursementsHealth care cost experience trendsParticipant demographic informationActuarial mortality assumptionsImpact of legislationImpact of regulationImpairment assessmentsWe review the carrying value of our long-lived assets, including goodwill and identifiable intangibles, whenever events or changes in circumstance indicate that such carrying values may not be recoverable, and at least annually for goodwill, as required by U.S. accounting standards.The evaluation of our goodwill balances and other long-lived assets or identifiable assets for which uncertainty exists regarding the recoverability of the carrying value of such assets involves the assessment of future cash flows and external market conditions and other subjective factors that could impact the estimation of future cash flows including, but not limited to the commodity prices, the amount and timing of future cash flows, future growth rates and the discount rate. Unforeseen events and changes in circumstances or market conditions could adversely affect these estimates, which could result in an impairment charge.General economic and market conditionsProjected timing and amount of future discounted cash flowsJudgment in the evaluation of relevant data24Table of ContentsRESULTS OF OPERATIONSOverviewAtmos Energy strives to operate its businesses safely and reliably while delivering superior financial results. Our commitment to modernizing our natural gas distribution and transmission systems requires a significant level of capital spending. We have the ability to begin recovering a significant portion of these investments timely through rate designs and mechanisms that reduce or eliminate regulatory lag and separate the recovery of our approved rate from customer usage patterns. The execution of our capital spending program, the ability to recover these investments timely and our ability to access the capital markets to satisfy our financing needs are the primary drivers that affect our financial performance.The following table details our consolidated net income by segment during the last three fiscal years: For the Fiscal Year Ended September 30 202320222021 (In thousands)Distribution segment$580,397 $521,977 $445,862 Pipeline and storage segment305,465 252,421 219,701 Net income$885,862 $774,398 $665,563 During fiscal 2023, we recorded net income of $885.9 million, or $6.10 per diluted share, compared to net income of $774.4 million, or $5.60 per diluted share in the prior year. The year-over-year increase in net income of $111.5 million largely reflects positive rate outcomes driven by safety and reliability spending, partially offset by increased line locating costs, system maintenance activities and an increase in depreciation expense and property taxes associated with increased capital investments.During the year ended September 30, 2023, we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of $263.1 million. Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, our total fiscal 2023 rate outcomes were $268.8 million. Additionally, we had ratemaking efforts in progress at September 30, 2023, seeking a total increase in annual operating income of $264.6 million. During fiscal year 2023, we refunded $160.3 million in excess deferred tax liabilities to customers. These refunds also reduced our income tax expense, resulting in an immaterial impact to our fiscal 2023 and 2022 results.Capital expenditures for fiscal 2023 were $2.8 billion. Over 85 percent was invested to improve the safety and reliability of our distribution and transportation systems, with a significant portion of this investment incurred under regulatory mechanisms that reduce regulatory lag to six months or less. During fiscal 2023, we completed approximately $1.6 billion of long-term debt and equity financing. As of September 30, 2023, our equity capitalization was 61.5 percent. As of September 30, 2023, we had approximately $2.7 billion in total liquidity, consisting of $15.4 million in cash and cash equivalents, $466.8 million in funds available through equity forward sales agreements and $2,252.5 million in undrawn capacity under our credit facilities.Distribution SegmentThe distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. The primary factors that impact the results of our distribution operations are our ability to earn our authorized rates of return, competitive factors in the energy industry and economic conditions in our service areas.Our ability to earn our authorized rates is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions to minimize regulatory lag and, ultimately, separate the recovery of our approved rates from customer usage patterns. Improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions. The “Ratemaking Activity” section of this Form 10-K describes our current rate strategy, progress towards implementing that strategy and recent ratemaking initiatives in more detail. During fiscal 2023, we completed regulatory proceedings in our distribution segment resulting in a $178.2 million increase in annual operating income. Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, our total fiscal 2023 annualized rate outcomes in our distribution segment were $183.8 million.Our distribution operations are also affected by the cost of natural gas. We are generally able to pass the cost of gas through to our customers without markup under purchased gas cost adjustment mechanisms; therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Revenues in our Texas and Mississippi service areas include franchise fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of 25Table of Contentsthese taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the associated tax expense as a component of taxes, other than income.The cost of gas typically does not have a direct impact on our operating income because these costs are recovered through our purchased gas cost adjustment mechanisms. However, higher gas costs may adversely impact our accounts receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us to collect from our customers the gas cost portion of our bad debt expense on approximately 80 percent of our residential and commercial revenues. Additionally, higher gas costs may require us to increase borrowings under our credit facilities, resulting in higher interest expense. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or, in the case of industrial consumers, to use alternative energy sources. Review of Financial and Operating ResultsFinancial and operational highlights for our distribution segment for the fiscal years ended September 30, 2023, 2022 and 2021 are presented below. For the Fiscal Year Ended September 30 2023202220212023 vs. 20222022 vs. 2021 (In thousands, unless otherwise noted)Operating revenues$4,099,690 $4,035,194 $3,241,973 $64,496 $793,221 Purchased gas cost2,061,920 2,210,302 1,501,695 (148,382)708,607 Operating expenses1,345,144 1,220,347 1,121,764 124,797 98,583 Operating income692,626 604,545 618,514 88,081 (13,969)Other non-operating income (expense)24,988 6,946 (20,694)18,042 27,640 Interest charges77,185 49,921 36,629 27,264 13,292 Income before income taxes640,429 561,570 561,191 78,859 379 Income tax expense60,032 39,593 115,329 20,439 (75,736)Net income$580,397 $521,977 $445,862 $58,420 $76,115 Consolidated distribution sales volumes — MMcf289,948 292,266 308,833 (2,318)(16,567)Consolidated distribution transportation volumes — MMcf152,963 152,709 152,513 254 196 Total consolidated distribution throughput — MMcf442,911 444,975 461,346 (2,064)(16,371)Consolidated distribution average cost of gas per Mcf sold$7.11 $7.56 $4.86 $(0.45)$2.70 Fiscal year ended September 30, 2023 compared with fiscal year ended September 30, 2022 Operating income for our distribution segment increased 14.6 percent. Key drivers for the change in operating income include:•a $166.4 million increase in rate adjustments, primarily in our Mid-Tex Division.•an $18.4 million increase related to residential customer growth, primarily in our Mid-Tex Division, and increased industrial load.•an $11.7 million increase in consumption, net of WNA.•a $7.5 million decrease in refunds of excess deferred taxes to customers, which is substantially offset in income tax expense.Partially offset by:•a $65.4 million increase in depreciation expense and property taxes associated with increased capital investments.•a $20.2 million increase in line locate spending, primarily in our Mid-Tex Division.•a $4.9 million increase in bad debt expense primarily due to higher customer bills.•a $21.6 million increase in other operation and maintenance expense primarily due to increased insurance premiums, travel spending, information technology spending and other administrative costs.Other non-operating income increased $18.0 million primarily due to a higher allowance for funds used during construction (AFUDC) related to increased capital spending as well as unrealized gains on equity investments in the current 26Table of Contentsperiod compared to unrealized losses on equity investments in the prior period. Interest charges increased $27.3 million primarily due to the issuance of long-term debt during the first quarter of fiscal 2023.The fiscal year ended September 30, 2022 compared with fiscal year ended September 30, 2021 for our distribution segment is described in 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 September 30, 2022.The following table shows our operating income by distribution division, in order of total rate base, for the fiscal years ended September 30, 2023, 2022 and 2021. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes. For the Fiscal Year Ended September 30 2023202220212023 vs. 20222022 vs. 2021 (In thousands)Mid-Tex$345,545 $315,644 $310,293 $29,901 $5,351 Kentucky/Mid-States87,258 84,098 73,259 3,160 10,839 Louisiana80,942 73,486 72,388 7,456 1,098 West Texas62,351 53,604 51,104 8,747 2,500 Mississippi78,517 65,947 65,337 12,570 610 Colorado-Kansas40,674 26,000 32,778 14,674 (6,778)Other(2,661)(14,234)13,355 11,573 (27,589)Total$692,626 $604,545 $618,514 $88,081 $(13,969)Pipeline and Storage SegmentOur pipeline and storage segment consists of the pipeline and storage operations of our Atmos Pipeline–Texas Division (APT) and our natural gas transmission operations in Louisiana. APT is one of the largest intrastate pipeline operations in Texas with a heavy concentration in the established natural gas producing areas of central, northern and eastern Texas, extending into or near the major producing areas of the Barnett Shale, the Texas Gulf Coast and the Permian Basin of West Texas. APT provides transportation and storage services to our Mid-Tex Division, other third-party local distribution companies, industrial and electric generation customers, as well as marketers and producers. Over 80 percent of this segment's revenues are derived from these APT services. As part of its pipeline operations, APT owns and operates five underground storage facilities in Texas.Our natural gas transmission operations in Louisiana are comprised of a 21-mile pipeline located in the New Orleans, Louisiana area that is primarily used to aggregate gas supply for our distribution division in Louisiana under a long-term contract and, on a more limited basis, to third parties. The demand fee charged to our Louisiana distribution division for these services is subject to regulatory approval by the Louisiana Public Service Commission. We also manage two asset management plans, which have been approved by applicable state regulatory commissions. Generally, these asset management plans require us to share with our distribution customers a significant portion of the cost savings earned from these arrangements.Our pipeline and storage segment is impacted by seasonal weather patterns, competitive factors in the energy industry and economic conditions in our Texas and Louisiana service areas. Natural gas prices do not directly impact the results of this segment as revenues are derived from the transportation and storage of natural gas. However, natural gas prices and demand for natural gas could influence the level of drilling activity in the supply areas that we serve, which may influence the level of throughput we may be able to transport on our pipelines. Further, natural gas price differences between the various hubs that we serve in Texas could influence the volumes of gas transported for shippers through our Texas pipeline system and rates for such transportation.The results of APT are also significantly impacted by the natural gas requirements of its local distribution company customers. Additionally, its operations may be impacted by the timing of when costs and expenses are incurred and when these costs and expenses are recovered through its tariffs. APT annually uses GRIP to recover capital costs incurred in the prior calendar year. On February 10, 2023, APT made a GRIP filing that covered changes in net property, plant and equipment investment from January 1, 2022 through December 31, 2022 with a requested increase in operating income of $84.9 million. On May 17, 2023, the Texas Railroad Commission (RRC) approved the Company's GRIP filing. Additionally, GRIP requires a utility to file a statement of intent at least once every five years to review its costs and expenses, including capital costs filed for recovery under GRIP. On May 19, 2023, APT filed its statement of intent seeking $107.4 million in additional annual operating income. On October 24, 2023, APT and the intervening parties in its general rate case filed a Joint Notice of Settlement and Proposed Order. See "Ratemaking Activity" above for further information.27Table of ContentsThe demand fee our Louisiana natural gas transmission pipeline charges to our Louisiana distribution division increases five percent annually and has been approved by the Louisiana Public Service Commission until September 30, 2027.Review of Financial and Operating ResultsFinancial and operational highlights for our pipeline and storage segment for the fiscal years ended September 30, 2023, 2022 and 2021 are presented below. For the Fiscal Year Ended September 30 2023202220212023 vs. 20222022 vs. 2021 (In thousands, unless otherwise noted)Mid-Tex / Affiliate transportation revenue$621,987 $546,038 $497,730 $75,949 $48,308 Third-party transportation revenue154,018 136,907 127,874 17,111 9,033 Other revenue9,169 10,715 11,743 (1,546)(1,028)Total operating revenues785,174 693,660 637,347 91,514 56,313 Total purchased gas cost(1,220)(1,583)1,582 363 (3,165)Operating expenses411,873 378,806 349,281 33,067 29,525 Operating income374,521 316,437 286,484 58,084 29,953 Other non-operating income44,787 26,791 18,549 17,996 8,242 Interest charges60,096 52,890 46,925 7,206 5,965 Income before income taxes359,212 290,338 258,108 68,874 32,230 Income tax expense53,747 37,917 38,407 15,830 (490)Net income$305,465 $252,421 $219,701 $53,044 $32,720 Gross pipeline transportation volumes — MMcf834,847 776,608 799,724 58,239 (23,116)Consolidated pipeline transportation volumes — MMcf635,508 580,488 585,857 55,020 (5,369)Fiscal year ended September 30, 2023 compared with fiscal year ended September 30, 2022Operating income for our pipeline and storage segment increased 18.4 percent. Key drivers for the change in operating income include:•an $87.3 million increase due to rate adjustments from GRIP filings approved in May 2022 and 2023. The increase in rates was driven by increased safety and reliability spending.•a $5.2 million net increase in APT's through-system activities primarily associated with increased volumes.Partially offset by:•a $33.1 million increase in operating expenses primarily attributable to increased depreciation expense and property taxes associated with increased capital investments, employee-related costs, and pipeline inspection activities.Other non-operating income increased $18.0 million primarily due to higher AFUDC largely as a result of increased capital spending. Interest charges increased $7.2 million primarily due to the issuance of long-term debt during the first quarter of fiscal 2023.The fiscal year ended September 30, 2022 compared with fiscal year ended September 30, 2021 for our pipeline and storage segment is described in 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 September 30, 2022.INFLATION REDUCTION ACT OF 2022In August 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the Inflation Reduction Act) into law. The Inflation Reduction Act includes a new corporate alternative minimum tax (the Corporate AMT) of 15% on the adjusted financial statement income (AFSI) of corporations with average AFSI exceeding $1.0 billion over a three-year period. We currently anticipate this tax will apply to us within the next three years, and it could materially impact our cash tax payments. However, we don't anticipate any impact to our results of operations. Also, the Inflation Reduction Act imposes a methane emissions charge for methane emissions in excess of 25,000 metric tons carbon dioxide equivalent per year. Based on our preliminary evaluation of the regulations, we currently do not anticipate this provision of the Inflation Reduction Act will have a material impact on our financial position, results of operations or cash flows. Additionally, the Inflation Reduction Act 28Table of Contentsimposes an excise tax of 1% tax on the fair market value of net stock repurchases made after December 31, 2022. The impact of this provision will be dependent on the extent of share repurchases made in future periods.LIQUIDITY AND CAPITAL RESOURCESThe liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. Additionally, we have a $1.5 billion commercial paper program and four committed revolving credit facilities with $2.5 billion in total availability from third-party lenders. The commercial paper program and credit facilities provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company's desired capital structure. Additionally, we have various uncommitted trade credit lines with our gas suppliers that we utilize to purchase natural gas on a monthly basis. We have a shelf registration statement on file with the Securities and Exchange Commission (SEC) that allows us to issue up to $5.0 billion in common stock and/or debt securities. As of the date of this report, $3.1 billion of securities remained available for issuance under the shelf registration statement, which expires March 31, 2026.We also have an at-the-market (ATM) equity sales program that allows us to issue and sell shares of our common stock up to an aggregate offering price of $1.0 billion (including shares of common stock that may be sold pursuant to forward sale agreements entered into in connection with the ATM equity sales program), which expires March 31, 2026. At September 30, 2023, $760.5 million of equity is available for issuance under this ATM equity sales program. Additionally, as of September 30, 2023, we had $466.8 million in available proceeds from outstanding forward sale agreements.On September 26, 2023, we settled $700 million of forward starting interest rate swaps associated with a debt issuance that was completed on October 10, 2023. The following table summarizes our existing forward starting interest rate swaps as of September 30, 2023.Planned Debt Issuance DateAmount HedgedEffective Interest Rate(In thousands)Fiscal 2025$600,000 1.75 %Fiscal 2026300,000 2.16 %$900,000 The liquidity provided by these sources is expected to be sufficient to fund the Company's working capital needs and capital expenditures program. Additionally, we expect to continue to be able to obtain financing upon reasonable terms as necessary.The following table presents our capitalization as of September 30, 2023 and 2022: September 30 20232022 (In thousands, except percentages)Short-term debt$241,933 1.4 %$184,967 1.1 %Long-term debt (1)6,555,701 37.1 %7,962,104 45.3 %Shareholders’ equity (2)10,870,064 61.5 %9,419,091 53.6 %Total capitalization, including short-term debt$17,667,698 100.0 %$17,566,162 100.0 %(1)Inclusive of our finance leases, but exclusive of AEK's securitized long-term debt.(2)Excluding the $2.2 billion of incremental financing issued to pay for the purchased gas costs incurred during Winter Storm Uri, our equity capitalization ratio would have been 61.3% at September 30, 2022.Cash FlowsOur internally generated funds may change in the future due to a number of factors, some of which we cannot control. These factors include regulatory changes, the price for our services, the demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks and other factors.Cash flows from operating, investing and financing activities for the years ended September 30, 2023, 2022 and 2021 are presented below.29Table of Contents For the Fiscal Year Ended September 30 2023202220212023 vs. 20222022 vs. 2021 (In thousands)Total cash provided by (used in)Operating activities$3,459,743 $977,584 $(1,084,251)$2,482,159 $2,061,835 Investing activities(2,795,280)(2,429,958)(1,963,655)(365,322)(466,303)Financing activities(696,769)1,387,205 3,143,821 (2,083,974)(1,756,616)Change in cash and cash equivalents and restricted cash and cash equivalents(32,306)(65,169)95,915 32,863 (161,084)Cash and cash equivalents and restricted cash and cash equivalents at beginning of period51,554 116,723 20,808 (65,169)95,915 Cash and cash equivalents and restricted cash and cash equivalents at end of period$19,248 $51,554 $116,723 $(32,306)$(65,169)Cash flows for the fiscal year ended September 30, 2022 compared with fiscal year ended September 30, 2021 is described in 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 September 30, 2022.Cash flows from operating activitiesFor the fiscal year ended September 30, 2023, cash flow provided by operating activities was $3,459.7 million compared with $977.6 million in the prior year. Fiscal 2023 operating cash flow included $2,021.9 million of cash received as a result of the conclusion of Texas securitization proceedings. Excluding this cash inflow, operating cash flow in fiscal 2023 was $1,437.8 million. The year-over-year increase in operating cash flow reflects the positive effects of successful rate case outcomes achieved in fiscal 2022 and 2023 and decreased purchases of gas stored underground.Cash flows from investing activitiesOur capital expenditures are primarily used to improve the safety and reliability of our distribution and transmission system through pipeline replacement and system modernization and to enhance and expand our system to meet customer needs. Over the last three fiscal years, approximately 87 percent of our capital spending has been committed to improving the safety and reliability of our system. For the fiscal year ended September 30, 2023, we had $2.8 billion in capital expenditures compared with $2.4 billion for the fiscal year ended September 30, 2022. Capital spending increased by $361.6 million, or 15 percent, as a result of planned increases to modernize our system and improve pipeline system safety and reliability in Texas and further enhance the safety, reliability, versatility and supply diversification of APT's system.Cash flows from financing activitiesOur financing activities used $696.8 million of cash for fiscal year 2023 compared with $1,387.2 million of cash provided by financing activities for fiscal year 2022.During the fiscal year ended September 30, 2023, we repaid $2.2 billion in long-term debt, and we received approximately $1.6 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of $500 million of 5.75% senior notes due October 2052 and $300 million of 5.45% senior notes due October 2032, and received net proceeds from the offering, after the underwriting discount and offering expenses, of $789.4 million. Additionally, during the fiscal year ended September 30, 2023, we settled 7,272,261 shares that had been sold on a forward basis for net proceeds of $806.9 million. The net proceeds were used primarily to support capital spending and for other general corporate purposes. We also received $171.1 million from the settlement of forward starting interest rate swaps related to a debt issuance completed in October 2023. Cash dividends increased due to an 8.8 percent increase in our dividend rate and an increase in shares outstanding. Finally, Atmos Energy Kansas Securitization I, LLC, a special-purpose, wholly-owned subsidiary of Atmos Energy, issued $95 million in securitized long-term debt.During the fiscal year ended September 30, 2022, we received $1.6 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of $600 million of 2.85% senior notes due February 2052. We also completed a public offering of $200 million of 2.625% senior notes due September 2029 that were used to repay our $200 million floating-rate term loan. Additionally, during the year ended September 30, 2022, we settled 7,907,833 shares that had been sold on a forward basis for net proceeds of $776.8 million. The net proceeds were used primarily to support capital spending and for other general corporate purposes. We also received $197.1 million from the settlement of forward starting interest rate swaps related to a debt issuance completed in October 2022. Additionally, cash dividends increased due to an 8.8 percent increase in our dividend rate and an increase in shares outstanding.30Table of ContentsThe following table shows the number of shares issued for the fiscal years ended September 30, 2023, 2022 and 2021: For the Fiscal Year Ended September 30 202320222021Shares issued:Direct Stock Purchase Plan64,871 68,693 79,921 Retirement Savings Plan and Trust69,716 72,339 84,265 1998 Long-Term Incentive Plan (LTIP)189,337 427,929 242,216 Equity Issuance (1)7,272,261 7,907,883 6,130,875 Total shares issued7,596,185 8,476,844 6,537,277 (1)Share amounts do not include shares issued under forward sale agreements until the shares have been settled.Credit RatingsOur credit ratings directly affect our ability to obtain short-term and long-term financing, in addition to the cost of such financing. In determining our credit ratings, the rating agencies consider a number of quantitative factors, including but not limited to, debt to total capitalization, operating cash flow relative to outstanding debt, operating cash flow coverage of interest and operating cash flow less dividends to debt. In addition, the rating agencies consider qualitative factors such as consistency of our earnings over time, the risks associated with our business and the regulatory structures that govern our rates in the states where we operate.Our debt is rated by two rating agencies: Standard & Poor’s Corporation (S&P) and Moody’s Investors Service (Moody’s). As of September 30, 2023, our outlook and current debt ratings, which are all considered investment grade are as follows: S&PMoody’s Senior unsecured long-term debt A-A1 Short-term debt A-2P-1 OutlookStableStable A significant degradation in our operating performance or a significant reduction in our liquidity caused by more limited access to the private and public credit markets as a result of deteriorating global or national financial and credit conditions could trigger a negative change in our ratings outlook or even a reduction in our credit ratings by the two credit rating agencies. This would mean more limited access to the private and public credit markets and an increase in the costs of such borrowings.A credit rating is not a recommendation to buy, sell or hold securities. The highest investment grade credit rating is AAA for S&P and Aaa for Moody’s. The lowest investment grade credit rating is BBB- for S&P and Baa3 for Moody’s. Our credit ratings may be revised or withdrawn at any time by the rating agencies, and each rating should be evaluated independently of any other rating. There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered, or withdrawn entirely, by a rating agency if, in its judgment, circumstances so warrant.Debt CovenantsWe were in compliance with all of our debt covenants as of September 30, 2023. Our debt covenants are described in Note 8 to the consolidated financial statements.31Table of ContentsContractual Obligations and Commercial CommitmentsThe following table provides information about contractual obligations and commercial commitments at September 30, 2023. Payments Due by PeriodTotalLess than 1year1-3 years 3-5 yearsMore than 5years (In thousands) Contractual ObligationsLong-term debt (1)$6,560,000 $— $10,000 $650,000 $5,900,000 Short-term debt (1)241,933 241,933 — — — Securitized long-term debt95,000 9,922 16,842 18,647 49,589 Interest charges (2)4,981,621 265,077 532,354 514,413 3,669,777 Interest charges on securitized long-term debt26,779 5,709 8,134 6,329 6,607 Finance leases (3)69,880 3,375 6,940 7,203 52,362 Operating leases (4)277,989 41,325 59,035 44,721 132,908 Financial instrument obligations (5)15,408 14,584 824 — — Pension and postretirement benefit plan contributions (6)310,710 31,784 80,759 52,600 145,567 Uncertain tax positions (7)58,638 — 58,638 — — Total contractual obligations $12,637,958 $613,709 $773,526 $1,293,913 $9,956,810 (1)Long-term and short-term debt excludes our finance lease obligations, which are separately reported within this table. See Note 8 to the consolidated financial statements for further details. (2)Interest charges were calculated using the coupon rate for each debt issuance through the contractual maturity date.(3)Finance lease payments shown above include interest totaling $19.5 million. See Note 7 to the consolidated financial statements.(4)Operating lease payments shown above include interest totaling $47.7 million. See Note 7 to the consolidated financial statements.(5)Represents liabilities for natural gas commodity financial instruments that were valued as of September 30, 2023. The ultimate settlement amounts of these remaining liabilities are unknown because they are subject to continuing market risk until the financial instruments are settled.(6)Represents expected contributions to our defined benefit and postretirement benefit plans, which are discussed in Note 11 to the consolidated financial statements.(7)Represents liabilities associated with uncertain tax positions claimed or expected to be claimed on tax returns. The amount does not include interest and penalties that may be applied to these positions. See Note 15 to the consolidated financial statements for further details.We maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of individual contracts. Our Mid-Tex Division also maintains a limited number of long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at market and fixed prices. At September 30, 2023, we were committed to purchase 65.5 Bcf within one year and 72.3 Bcf within two to three years under indexed contracts. At September 30, 2023, we were committed to purchase 20.6 Bcf within one year under fixed price contracts with a weighted average price of $2.80 per Mcf. Risk Management ActivitiesIn our distribution and pipeline and storage segments, we use a combination of physical storage, fixed physical contracts and fixed financial contracts to reduce our exposure to unusually large winter-period gas price increases. Additionally, we manage interest rate risk by entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings. We record our financial instruments as a component of risk management assets and liabilities, which are classified as current or noncurrent based upon the anticipated settlement date of the underlying financial instrument. Substantially all of our financial instruments are valued using external market quotes and indices.32Table of ContentsThe following table shows the components of the change in fair value of our financial instruments for the fiscal year ended September 30, 2023 (in thousands):Fair value of contracts at September 30, 2022$377,862 Contracts realized/settled(174,107)Fair value of new contracts5,379 Other changes in value161,122 Fair value of contracts at September 30, 2023370,256 Netting of cash collateral— Cash collateral and fair value of contracts at September 30, 2023$370,256 The fair value of our financial instruments at September 30, 2023, is presented below by time period and fair value source: Fair Value of Contracts at September 30, 2023 Maturity in years Source of Fair ValueLessthan 11-34-5Greaterthan 5TotalFairValue (In thousands)Prices actively quoted$(10,513)$380,769 $— $— $370,256 Prices based on models and other valuation methods— — — — — Total Fair Value$(10,513)$380,769 $— $— $370,256 RECENT ACCOUNTING DEVELOPMENTSRecent accounting developments and their impact on our financial position, results of operations and cash flows are described in Note 2 to the consolidated financial statements. ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk.We are exposed to risks associated with commodity prices and interest rates. Commodity price risk is the potential loss that we may incur as a result of changes in the fair value of a particular instrument or commodity. Interest-rate risk is the potential increased cost we could incur when we issue debt instruments or to provide financing and liquidity for our business activities. Additionally, interest-rate risk could affect our ability to issue cost effective equity instruments.We conduct risk management activities in our distribution and pipeline and storage segments. In our distribution segment, we use a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season. Our risk management activities and related accounting treatment are described in further detail in Note 16 to the consolidated financial statements. Additionally, our earnings are affected by changes in short-term interest rates as a result of our issuance of short-term commercial paper and our other short-term borrowings.Commodity Price RiskWe purchase natural gas for our distribution operations. Substantially all of the costs of gas purchased for distribution operations are recovered from our customers through purchased gas cost adjustment mechanisms. Therefore, our distribution operations have limited commodity price risk exposure.Interest Rate RiskOur earnings are exposed to changes in short-term interest rates associated with our short-term commercial paper program and other short-term borrowings. We use a sensitivity analysis to estimate our short-term interest rate risk. For purposes of this analysis, we estimate our short-term interest rate risk as the difference between our actual interest expense for the period and estimated interest expense for the period assuming a hypothetical average one percent increase in the interest rates associated with our short-term borrowings. Had interest rates associated with our short-term borrowings increased by an average of one percent, our interest expense would not have materially increased during 2023.33Table of Contents

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+Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsBusiness Overview232023 in Summary23Outlook26Results of Operations26Reconciliations of Non-GAAP Financial Measures33Liquidity and Capital Resources39Pension Benefits43Critical Accounting Policies and Estimates44This Management’s Discussion and Analysis contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about business outlook. These forward-looking statements are based on management’s expectations and assumptions as of the date of this Annual Report on Form 10-K and are not guarantees of future performance. Actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors not anticipated by management, including, without limitation, those described in "Forward-Looking Statements" and Item 1A, Risk Factors, of this Annual Report on Form 10-K.This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this Annual Report on Form 10-K. Unless otherwise stated, financial information is presented in millions of U.S. Dollars, except for per share data. Except for net income, which includes the results of discontinued operations, financial information is presented on a continuing operations basis.The financial measures discussed below are presented in accordance with U.S. generally accepted accounting principles ("GAAP"), except as noted. We present certain financial measures on an "adjusted," or "non-GAAP," basis because we believe such measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance. For each non-GAAP financial measure, including adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate, and capital expenditures, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These reconciliations and explanations regarding the use of non-GAAP measures are presented under the “Reconciliations of Non-GAAP Financial Measures” section beginning on page 33.Comparisons included in the discussion that follows are for fiscal year 2023 versus ("vs.") fiscal year 2022. A discussion of changes from fiscal year 2021 to fiscal year 2022 and other financial information related to fiscal year 2021 is available in Part II, 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 30 September 2022, which was filed with the SEC on 22 November 2022.For information concerning activity with our related parties, refer to Note 24, Supplemental Information, to the consolidated financial statements.22Table of ContentsBUSINESS OVERVIEWFounded in 1940, Air Products and Chemicals, Inc. is a world-leading industrial gases company that has built a reputation for its innovative culture, operational excellence, and commitment to safety and the environment. Approximately 23,000 passionate, talented, and committed employees from diverse backgrounds together are driven by Air Products’ higher purpose to create innovative solutions that benefit the environment, enhance sustainability, and reimagine what is possible to address the challenges facing customers, communities, and the world. Our products and services enable our customers to improve their environmental performance, product quality, and productivity. Our core business provides essential gases, related equipment, and applications expertise to customers in dozens of industries, including refining, chemicals, metals, electronics, manufacturing, medical, and food. We also develop, engineer, build, own, and operate some of the world’s largest clean hydrogen projects that will support the transition to low- and zero-carbon energy in the heavy-duty transportation and industrial sectors. Additionally, we are the world leader in the supply of LNG process technology and equipment and provide turbomachinery, membrane systems, and cryogenic containers globally. For additional information on our product and service offerings, including production, distribution, and end use, refer to Item 1, Business, of this Annual Report on Form 10-K.Air Products conducts business in approximately 50 countries and regions throughout the world. Our industrial gases business is organized and operated regionally in the Americas, Asia, Europe, and Middle East and India segments and generates the majority of our sales via our on-site and merchant supply modes. Approximately half our total revenue is generated through the on-site supply mode, which is governed by contracts that are generally long-term in nature with provisions that allow us to pass through changes in energy costs to our customers. Our Corporate and other segment includes the results of our sale of equipment businesses, costs for corporate support functions and global management activities, and other income and expenses not directly associated with the regional segments, such as foreign exchange gains and losses. For additional information regarding our supply modes and business segments, refer to Note 6, Revenue Recognition, and Note 25, Business Segment and Geographic Information, to the consolidated financial statements.2023 IN SUMMARYIn fiscal year 2023, we achieved earnings growth through pricing discipline in our merchant business as well as improved on-site volumes, including higher demand for hydrogen, despite inflation, higher maintenance activities, and higher costs to support our long-term strategy. Due to the structure of our contracts, which generally contain fixed monthly charges and/or minimum purchase requirements, our on-site business generates stable cash flow and consistently contributes about half our total sales, regardless of the economic environment. We also recognized higher income from our equity affiliates due to the contribution of the second phase of the Jazan gasification and power project and positive results from other unconsolidated joint ventures across the regions.Additionally, we successfully secured capital to fund low- and zero-carbon hydrogen growth projects. In March, we issued our inaugural green bonds in concurrent $600 and €700 million debt offerings, making Air Products the first U.S. chemical company to qualify green and blue hydrogen projects as an eligible expenditure category. Additionally, in May, our NEOM Green Hydrogen Company joint venture completed financial close on the world’s largest green hydrogen-based ammonia production facility, securing $6.1 billion of non-recourse financing from local, regional, and international banks and financial institutions. This funding is an important strategic milestone that will allow us to continue executing projects that will accelerate the energy transition while creating long-term value for our shareholders.In addition to investing in high return projects, we believe creating shareholder value includes paying quarterly cash dividends on our common stock, which we have increased for 41 consecutive years. In fiscal year 2023, we increased our dividend to $1.75 per share, representing an 8% increase, or $0.13 per share, from the previous dividend of $1.62 per share.23Table of ContentsFiscal Year 2023 Highlights•Sales of $12.6 billion decreased 1%, or $98.6, as lower energy cost pass-through to customers of 6% and unfavorable currency of 3% were mostly offset by higher pricing of 5% and higher volumes of 3%.•Operating income of $2.5 billion increased 7%, or $155.8, as our pricing actions and higher volumes were partially offset by higher costs and unfavorable currency. Additionally, we recorded higher charges for business and asset actions in fiscal year 2023 compared to fiscal year 2022. Operating margin of 19.8% increased 140 basis points ("bp") from 18.4% in the prior year, which included a positive impact from lower energy cost pass-through to customers in 2023.•Equity affiliates' income of $604.3 increased 26%, or $122.8, primarily due to a higher contribution from the Jazan Integrated Gasification and Power Company ("JIGPC") joint venture, which completed the second phase of the asset purchase associated with the Jazan gasification and power project in January 2023, as well as higher income from our affiliates in Italy and Mexico. The prior year included recognition of the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, which was partially offset by an impairment charge related to two small affiliates in our Asia segment. •Net income of $2.3 billion increased 3%, or $72.1, primarily due to favorable pricing, net of power and fuel costs, partially offset by a charge for business and asset actions, higher non-service pension costs, and higher other costs. Net income margin of 18.6% increased 80 bp from 17.8% in the prior year, which included a positive impact from lower energy cost pass-through.•Adjusted EBITDA of $4.7 billion increased 11%, or $454.8, and adjusted EBITDA margin of 37.3% increased 390 bp from 33.4% in the prior year.•Diluted EPS of $10.30 increased 2%, or $0.22 per share, and adjusted diluted EPS of $11.51 increased 12%, or $1.26 per share. A summary table of changes in diluted EPS is presented below.24Table of ContentsChanges in Diluted EPS Attributable to Air ProductsThe per share impacts presented in the table below were calculated independently and may not sum to the total change in diluted EPS due to rounding.Fiscal Year Ended 30 September20232022Increase (Decrease)Total Diluted EPS$10.33 $10.14 $0.19 Less: Diluted EPS from income from discontinued operations0.03 0.06 (0.03)Diluted EPS From Continuing Operations$10.30 $10.08 $0.22 % Change from prior year2 %Operating ImpactsUnderlying businessVolume$0.22 Price, net of variable costs2.39 Other costs(1.11)Currency(0.29)Business and asset actions(0.65)Total Operating Impacts$0.56 Other ImpactsEquity affiliates' income$0.40 Equity method investment impairment charge0.05 Interest expense(0.18)Other non-operating income/expense, net, excluding discrete item below0.11 Non-service pension cost/benefit, net(0.44)Change in effective tax rate(0.12)Noncontrolling interests(0.15)Weighted average diluted shares(0.01)Total Other Impacts($0.34)Total Change in Diluted EPS From Continuing Operations$0.22 % Change from prior year2 %The table below summarizes the diluted per share impact of our non-GAAP adjustments in fiscal years 2023 and 2022:Fiscal Year Ended 30 September20232022Increase (Decrease)Diluted EPS From Continuing Operations$10.30 $10.08 $0.22 Business and asset actions0.92 0.27 0.65 Equity method investment impairment charge— 0.05 (0.05)Non-service pension cost (benefit), net0.29 (0.15)0.44 Adjusted Diluted EPS From Continuing Operations$11.51 $10.25 $1.26 % Change from prior year12 %25Table of ContentsOUTLOOKThe guidance below should be read in conjunction with the Forward-Looking Statements of this Annual Report on Form 10-K.The first pillar of our two-pillar growth strategy is our core industrial gas business, which is supported by a consistent stream of revenue due to the structure of our on-site contracts. We expect new on-site projects, including the natural gas-to-syngas processing facility in Uzbekistan, as well as several new LNG sale of equipment projects to contribute to our results in 2024. To mitigate the impact of ongoing inflationary pressures, we are focused on actions we can control, such as maintaining pricing discipline in our merchant business. Additionally, we expect to see cost improvement in certain areas of our organization as a result of strategic business actions taken earlier in 2023.The second pillar of our strategy is our blue and green hydrogen projects, many of which are already under execution. We anticipate benefits from tax incentives created by the U.S. Inflation Reduction Act of 2022 for carbon sequestration and clean hydrogen production in future years once our projects in these areas come on-stream, such as our blue hydrogen and blue ammonia clean energy complex in Louisiana. We are also gaining support from foreign regulators for our projects outside the U.S., including the recently announced blue hydrogen project in the Netherlands. We believe the infrastructure readiness we are preparing now will continue to be a competitive advantage for Air Products, allowing us to create sustainable growth opportunities that deliver value to our shareholders, customers, employees, and communities around the world.RESULTS OF OPERATIONSDISCUSSION OF CONSOLIDATED RESULTSChange vs. Prior YearFiscal Year Ended 30 September20232022$%/bpGAAP MeasuresSales$12,600.0$12,698.6($98.6)(1 %)Operating income2,494.62,338.8155.8 7 %Operating margin19.8 %18.4 %140 bpEquity affiliates’ income$604.3$481.5$122.8 26 %Net income2,338.62,266.572.1 3 %Net income margin18.6 %17.8 %80 bpNon-GAAP MeasuresAdjusted EBITDA$4,701.8$4,247.0$454.8 11 %Adjusted EBITDA margin37.3 %33.4 %390 bpSalesThe table below summarizes the major factors that impacted consolidated sales for the periods presented:Volume3 %Price5 %Energy cost pass-through to customers(6 %)Currency(3 %)Total Consolidated Sales Change(1 %)Sales of $12.6 billion decreased 1%, or $98.6, as lower energy cost pass-through to customers of 6% and unfavorable currency of 3% were mostly offset by higher pricing of 5% and higher volumes of 3%. Lower natural gas prices in the Americas and Europe segments drove the lower energy cost pass-through to our on-site customers. Unfavorable currency was primarily attributable to strengthening of the U.S. Dollar against the Chinese Renminbi. Pricing actions in our merchant business improved sales across each of our regional segments, while the volume improvement was primarily attributable to our on-site business in the Americas and Asia segments.26Table of ContentsCost of Sales and Gross MarginCost of sales of $8.8 billion decreased 5%, or $505.5, due to lower energy cost pass-through to customers of $791 and a favorable impact from currency of $213, partially offset by higher costs associated with sales volumes of $311 and unfavorable other costs of $188. The unfavorable costs were driven by inflation, project development activities, and planned maintenance. Gross margin of 29.9% increased 340 bp from 26.5% in the prior year primarily due to favorable pricing and lower energy cost pass-through to customers, partially offset by the impact of higher costs. The favorable impact from lower energy cost pass-through to customers was about 200 bp. Selling and Administrative ExpenseSelling and administrative expense of $957.0 increased 6%, or $56.4, primarily due to higher employee compensation, inflation, and additional costs to support growth, partially offset by a favorable impact from currency. Selling and administrative expense as a percentage of sales increased to 7.6% from 7.1% in the prior year.Research and Development ExpenseResearch and development expense of $105.6 increased 3%, or $2.7. Research and development expense as a percentage of sales of 0.8% was flat versus the prior year.Business and Asset ActionsIn fiscal year 2023, we recorded a charge of $244.6 ($204.9 attributable to Air Products after tax, or $0.92 per share) for strategic actions intended to optimize costs and focus resources on our growth projects. Of the expense, $217.6 resulted from noncash charges to write off assets associated with exited projects that were previously under construction. The remaining expense included $27.0 for severance and other benefits associated with position eliminations and restructuring of certain organizations globally. Refer to Note 4, Business and Asset Actions, for additional information.In fiscal year 2022, we divested our small industrial gas business in Russia due to Russia's invasion of Ukraine. As a result, we recorded a noncash charge of $73.7 ($61.0 after tax, or $0.27 per share), which included transaction costs and cumulative currency translation losses.Other Income (Expense), NetOther income of $34.8 decreased 38%, or $21.1, primarily due to lower income from the sale of assets and fees charged to our equity affiliates for use of patents and technology as well as an unfavorable foreign exchange impact.Operating Income and MarginOperating income of $2.5 billion increased 7%, or $155.8. Positive pricing, net of power and fuel costs, of $649 and higher volumes of $58 were partially offset by higher costs of $302 and an unfavorable currency impact of $78. The higher costs were driven by inflation, planned maintenance, and incentive compensation, as well as project development and other costs related to the execution of our growth strategy. Additionally, as discussed above, we recorded higher charges for business and asset actions in fiscal year 2023 compared to fiscal year 2022. Operating margin of 19.8% increased 140 bp from 18.4% in the prior year, primarily due to the impact of pricing as well as lower energy cost pass-through to customers, which positively impacted margin by about 100 basis points, partially offset by higher charges for business and asset actions and higher other costs.Equity Affiliates’ IncomeEquity affiliates' income of $604.3 increased 26%, or $122.8, primarily due to a higher contribution from the JIGPC joint venture, which completed the second phase of the asset purchase associated with the Jazan gasification and power project in January 2023, as well as higher income from our affiliates in Italy and Mexico. Additionally, the prior year included an impairment charge of $14.8 ($11.1 after tax, or $0.05 per share) related to two small affiliates in the Asia segment. These impacts were partially offset by the prior year recognition of the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs.For additional information on our equity affiliates, refer to Note 9, Equity Affiliates, to the consolidated financial statements.27Table of ContentsInterest ExpenseFiscal Year Ended 30 September20232022Interest incurred$292.9 $169.0 Less: Capitalized interest115.4 41.0 Interest expense$177.5 $128.0 Interest incurred increased 73%, or $123.9, driven by a higher average interest rate on variable-rate instruments in our debt portfolio as well as a higher debt balance, which is largely attributable to the U.S. Dollar- and Euro-denominated fixed-rate notes issued in March 2023 under our new Green Finance Framework as well as borrowings on our foreign credit facilities. Capitalized interest increased $74.4 due to a higher carrying value of projects under construction.Other Non-Operating Income (Expense), NetOther non-operating expense was $39.0 versus income of $62.4 in the prior year primarily due to higher non-service pension costs in 2023, which were driven by higher interest cost and lower expected returns on plan assets for the U.S. salaried pension plan and the U.K. pension plan. This impact was partially offset by higher interest income on cash and cash items due to higher interest rates.Discontinued OperationsIncome from discontinued operations, net of tax, was $7.4 ($0.03 per share) and $12.6 ($0.06 per share) in fiscal years 2023 and 2022, respectively. This primarily resulted from the release of unrecognized tax benefits on uncertain tax positions taken with respect to the sale of our former Performance Materials Division for which the statute of limitations expired. Net Income and Net Income MarginNet income of $2.3 billion increased 3%, or $72.1, primarily due to favorable pricing, net of power and fuel costs, partially offset by the charge for business and asset actions, higher non-service pension costs, and higher other costs. Net income margin of 18.6% increased 80 bp from 17.8% in the prior year due to the factors noted above as well as lower energy cost pass-through to customers, which positively impacted margin by about 100 bp.Adjusted EBITDA and Adjusted EBITDA MarginAdjusted EBITDA of $4.7 billion increased 11%, or $454.8, primarily due to higher pricing, net of power and fuel costs, partially offset by higher costs. Adjusted EBITDA margin of 37.3% increased 390 bp from 33.4% in the prior year due to the factors noted above as well as lower energy cost pass-through to customers, which positively impacted margin by about 200 bp.Effective Tax RateThe effective tax rate equals the income tax provision divided by income from continuing operations before taxes. Refer to Note 23, Income Taxes, to the consolidated financial statements for details on factors affecting the effective tax rate.Our effective tax rate was 19.1% and 18.2% for the fiscal years ended 30 September 2023 and 2022, respectively. During fiscal year 2023, we recorded a charge for business and asset actions of $244.6 ($204.9 attributable to Air Products after tax). Refer to Note 4, Business and Asset Actions, to the consolidated financial statements for additional information. The charge included certain losses for which we could not recognize an income tax benefit and were subject to a valuation allowance of $36.0. Partially offsetting the valuation allowance cost was a $15.9 income tax benefit from a tax election related to a non-U.S. subsidiary.Our effective tax rate for the current year was higher due to lower excess tax benefits on share-based compensation and the discrete tax impact of our business and asset actions discussed above. In addition, certain recurring income tax benefits had less of an impact on our effective tax rate in the current year as they did not increase in proportion to the increase in income. Our current rate is also higher due to nonrecurring benefits in several foreign jurisdictions due to the impact of tax rate changes and productivity credit claims in the prior year.Our adjusted effective tax rate, which does not include the impact of our business and asset actions discussed above, was 18.9% and 18.1% for the fiscal years ended 30 September 2023 and 2022, respectively. 28Table of ContentsDISCUSSION OF RESULTS BY BUSINESS SEGMENTAmericasChange vs. Prior YearFiscal Year Ended 30 September20232022$%/bpSales$5,369.3$5,368.9$0.4 —%Operating income1,439.71,174.4265.3 23%Operating margin26.8 %21.9 %490 bpEquity affiliates’ income$109.2$98.2$11.011%Adjusted EBITDA2,198.21,902.1296.1 16%Adjusted EBITDA margin40.9 %35.4 %550 bpThe table below summarizes the major factors that impacted sales in the Americas segment for the periods presented:Volume6 %Price6 %Energy cost pass-through to customers(11 %)Currency(1 %)Total Americas Sales Change— %Sales of $5.4 billion were flat as higher volumes of 6% and higher pricing of 6% were offset by lower energy cost pass-through to customers of 11% and an unfavorable currency impact of 1%. The volume improvement was primarily attributable to our on-site business, including better demand for hydrogen. Additionally, we recovered higher costs in our merchant business through continued focus on pricing actions. Energy cost pass-through to our on-site customers was lower due to lower natural gas prices.Operating income of $1.4 billion increased 23%, or $265.3, due to positive pricing, net of power and fuel costs, of $306 and favorable volumes of $78, partially offset by higher costs of $112 and an unfavorable currency impact of $7. Higher costs were driven by inflation, planned maintenance, and higher incentive compensation. Operating margin of 26.8% increased 490 bp from 21.9% in the prior year primarily due to favorable pricing and lower energy cost pass-through to customers, partially offset by higher costs. The favorable impact from lower energy cost pass-through to customers was about 250 bp.Equity affiliates’ income of $109.2 increased 11%, or $11.0, driven by an affiliate in Mexico.29Table of ContentsAsiaChange vs. Prior YearFiscal Year Ended 30 September20232022$%/bpSales$3,216.1$3,143.3$72.8 2%Operating income906.5898.38.2 1%Operating margin28.2 %28.6 %(40 bp)Equity affiliates’ income$29.7$22.1$7.634%Adjusted EBITDA1,369.71,356.912.8 1%Adjusted EBITDA margin42.6 %43.2 %(60 bp)The table below summarizes the major factors that impacted sales in the Asia segment for the periods presented:Volume3 %Price3 %Energy cost pass-through to customers2 %Currency(6 %)Total Asia Sales Change2 %Sales of $3.2 billion increased 2%, or $72.8, due to higher volumes of 3%, positive pricing of 3%, and higher energy cost pass-through to customers of 2%, partially offset by unfavorable currency impacts of 6%. Positive volume contributions from several new traditional industrial gas plants in our on-site business were partially offset by weak economic growth in China and lower activity in the electronics manufacturing industry. Higher power costs across the region were recovered by our merchant pricing actions. In our on-site business, the higher power costs increased energy cost pass-through to our customers. The unfavorable currency impact was primarily attributable to the strengthening of the U.S. Dollar against the Chinese Renminbi.Operating income of $906.5 increased 1%, or $8.2, due to positive pricing, net of power and fuel costs, of $59 and higher volumes of $31, partially offset by an unfavorable currency impact of $56 and higher costs of $26. The higher costs were driven by project development, higher planned maintenance, and inflation. Operating margin of 28.2% decreased 40 bp from 28.6% in the prior year as higher costs were partially offset by our pricing actions.Equity affiliates’ income of $29.7 increased 34%, or $7.6, driven by an affiliate in Thailand.30Table of ContentsEuropeChange vs. Prior YearFiscal Year Ended 30 September20232022$%/bpSales$2,963.1$3,086.1($123.0)(4%)Operating income663.4503.4160.0 32%Operating margin22.4 %16.3 %610 bpEquity affiliates’ income$102.5$78.2$24.331%Adjusted EBITDA962.1776.8185.3 24%Adjusted EBITDA margin32.5 %25.2 %730 bpThe table below summarizes the major factors that impacted sales in the Europe segment for the periods presented:Volume— %Price7 %Energy cost pass-through to customers(9 %)Currency(2 %)Total Europe Sales Change(4 %)Sales of $3.0 billion decreased 4%, or $123.0, due to lower energy cost pass-through to customers of 9% and an unfavorable currency impact of 2%, partially offset by higher pricing of 7%. Energy cost pass-through to our on-site customers was lower, reflecting lower natural gas prices across the region. Currency negatively impacted sales due to the strengthening of the U.S. Dollar against the Euro and the British Pound Sterling. The pricing improvement was attributable to our merchant business. Volumes were flat as improvement in hydrogen in our on-site business was offset by lower demand for merchant products. Operating income of $663.4 increased 32%, or $160.0, as higher pricing, net of power and fuel costs, of $275 was partially offset by higher costs of $100 driven by inflation, higher incentive compensation, and planned maintenance, unfavorable business mix of $8, and an unfavorable currency impact of $7. Operating margin of 22.4% increased 610 bp from 16.3% in the prior year due to the factors noted above as well as lower energy cost pass-through to customers, which positively impacted margin by about 100 bp.Equity affiliates’ income of $102.5 increased 31%, or $24.3, driven by an affiliate in Italy.31Table of ContentsMiddle East and IndiaChange vs. Prior YearFiscal Year Ended 30 September20232022$%Sales$162.5 $129.5 $33.0 25 %Operating income16.9 21.1 (4.2)(20 %)Equity affiliates’ income349.8 293.9 55.9 19 %Adjusted EBITDA394.2 341.9 52.3 15 %Sales of $162.5 increased 25%, or $33.0, driven by higher merchant volumes. Despite higher sales, operating income of $16.9 decreased 20%, or $4.2, primarily due to higher costs for business development and planned maintenance.Equity affiliates' income of $349.8 increased 19%, or $55.9. In January 2023, we made an additional investment in the JIGPC joint venture, which completed the second phase of the asset purchase associated with the Jazan gasification and power project. The resulting higher contribution from JIGPC was partially offset by a prior year net benefit recognized for the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs.Corporate and otherChange vs. Prior YearFiscal Year Ended 30 September20232022$%Sales$889.0 $970.8($81.8)(8 %)Operating loss(287.3)(184.7)(102.6)(56 %)Adjusted EBITDA(222.4)(130.7)(91.7)(70 %)Sales of $889.0 decreased 8%, or $81.8, and operating loss of $287.3 increased $102.6, primarily due to lower contributions from our sale of equipment businesses. Our Corporate and other segment also incurs costs to provide corporate support functions and global management activities that benefit all segments, which have increased to support our growth strategy.32Table of ContentsRECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES(Millions of U.S. Dollars unless otherwise indicated, except for per share data)We present certain financial measures, other than in accordance with U.S. generally accepted accounting principles ("GAAP"), on an "adjusted" or "non-GAAP" basis. On a consolidated basis, these measures include adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, the adjusted effective tax rate, and capital expenditures. On a segment basis, these measures include adjusted EBITDA and adjusted EBITDA margin. In addition to these measures, we also present certain supplemental non-GAAP financial measures to help the reader understand the impact that certain disclosed items, or "non-GAAP adjustments," have on the calculation of our adjusted diluted EPS. For each non-GAAP financial measure, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. In many cases, non-GAAP financial measures are determined by adjusting the most directly comparable GAAP measure to exclude non-GAAP adjustments that we believe are not representative of our underlying business performance. For example, we exclude the impact of the non-service components of net periodic benefit/cost for our defined benefit pension plans as further discussed below. Additionally, we may exclude certain expenses associated with cost reduction actions, impairment charges, and gains on disclosed transactions. The reader should be aware that we may recognize similar losses or gains in the future. When applicable, the tax impact of our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax impact of our non-GAAP adjustments. These tax impacts are primarily driven by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions.We provide these non-GAAP financial measures to allow investors, potential investors, securities analysts, and others to evaluate the performance of our business in the same manner as our management. We believe these measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. However, we caution readers not to consider these measures in isolation or as a substitute for the most directly comparable measures calculated in accordance with GAAP. Readers should also consider the limitations associated with these non-GAAP financial measures, including the potential lack of comparability of these measures from one company to another. NON-GAAP ADJUSTMENT FOR NON-SERVICE PENSION COST (BENEFIT), NETOur adjusted EPS and the adjusted effective tax rate exclude the impact of non-service related components of net periodic benefit/cost for our defined benefit pension plans. The prior year non-GAAP financial measures presented above and reconciled below have been recast accordingly to conform to the fiscal year 2023 presentation. Non-service related components are recurring, non-operating items that include interest cost, expected returns on plan assets, prior service cost amortization, actuarial loss amortization, as well as special termination benefits, curtailments, and settlements. The net impact of non-service related components is reflected within “Other non-operating income (expense), net” on our consolidated income statements. Adjusting for the impact of non-service pension components provides management and users of our financial statements with a more accurate representation of our underlying business performance because these components are driven by factors that are unrelated to our operations, such as recent changes to the allocation of our pension plan assets associated with de-risking as well as volatility in equity and debt markets. Further, non-service related components are not indicative of our defined benefit plans’ future contribution needs due to the funded status of the plans. 33Table of ContentsADJUSTED DILUTED EPSThe table below provides a reconciliation to the most directly comparable GAAP measure for each of the major components used to calculate adjusted diluted EPS from continuing operations, which we view as a key performance metric. In periods that we have non-GAAP adjustments, we believe it is important for the reader to understand the per share impact of each such adjustment because management does not consider these impacts when evaluating underlying business performance. Per share impacts are calculated independently and may not sum to total diluted EPS and total adjusted diluted EPS due to rounding.2023 vs. 2022Operating IncomeEquity Affiliates' IncomeOther Non-Operating Income/Expense, NetIncome Tax ProvisionNet Income Attributable to Air ProductsDiluted EPS2023 GAAP$2,494.6 $604.3 ($39.0)$551.2 $2,292.8 $10.30 2022 GAAP2,338.8 481.5 62.4 500.8 2,243.5 10.08 $ Change GAAP$0.22 % Change GAAP2 %2023 GAAP$2,494.6 $604.3 ($39.0)$551.2 $2,292.8 $10.30 Business and asset actions(A)244.6 — — 34.7 204.9 0.92 Non-service pension cost, net— — 86.8 21.6 65.2 0.29 2023 Non-GAAP ("Adjusted")$2,739.2 $604.3 $47.8 $607.5 $2,562.9 $11.51 2022 GAAP$2,338.8 $481.5 $62.4 $500.8 $2,243.5 $10.08 Business and asset actions73.7 — — 12.7 61.0 0.27 Equity method investment impairment charge— 14.8 — 3.7 11.1 0.05 Non-service pension benefit, net— — (44.7)(10.8)(33.9)(0.15)2022 Non-GAAP ("Adjusted")$2,412.5 $496.3 $17.7 $506.4 $2,281.7 $10.25 $ Change Non-GAAP ("Adjusted")$1.26 % Change Non-GAAP ("Adjusted")12 %(A ) Charge includes $5.0 attributable to noncontrolling interests.34Table of ContentsADJUSTED EBITDA AND ADJUSTED EBITDA MARGINWe define adjusted EBITDA as net income less income from discontinued operations, net of tax, and excluding non-GAAP adjustments, which we do not believe to be indicative of underlying business trends, before interest expense, other non-operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA and adjusted EBITDA margin provide useful metrics for management to assess operating performance. Margins are calculated independently for each period by dividing each line item by consolidated sales for the respective period and may not sum to total margin due to rounding. The tables below present consolidated sales and a reconciliation of net income on a GAAP basis to adjusted EBITDA and net income margin on a GAAP basis to adjusted EBITDA margin:20232022$Margin$MarginSales$12,600.0 $12,698.6 Net income and net income margin$2,338.6 18.6 %$2,266.5 17.8 %Less: Income from discontinued operations, net of tax7.4 0.1 %12.6 0.1 %Add: Interest expense177.5 1.4 %128.0 1.0 %Less: Other non-operating income (expense), net(39.0)(0.3 %)62.4 0.5 %Add: Income tax provision551.2 4.4 %500.8 3.9 %Add: Depreciation and amortization1,358.3 10.8 %1,338.2 10.5 %Add: Business and asset actions244.6 1.9 %73.7 0.6 %Add: Equity method investment impairment charge— — %14.8 0.1 %Adjusted EBITDA and adjusted EBITDA margin$4,701.8 37.3 %$4,247.0 33.4 %2023vs. 2022Change GAAPNet income $ change$72.1Net income % change3%Net income margin change80 bpChange Non-GAAPAdjusted EBITDA $ change$454.8Adjusted EBITDA % change11%Adjusted EBITDA margin change390 bp35Table of ContentsThe tables below present sales and a reconciliation of operating income and operating margin by segment to adjusted EBITDA and adjusted EBITDA margin by segment for the fiscal years ended 30 September 2023 and 2022:AmericasChange vs. Prior YearFiscal Year Ended 30 September20232022$%/bpSales$5,369.3 $5,368.9 $0.4 — %Operating income$1,439.7 $1,174.4 $265.3 23 %Operating margin26.8 %21.9 %490 bpReconciliation of GAAP to Non-GAAP:Operating income$1,439.7 $1,174.4 Add: Depreciation and amortization649.3 629.5 Add: Equity affiliates' income109.2 98.2 Adjusted EBITDA$2,198.2 $1,902.1 $296.1 16 %Adjusted EBITDA margin40.9 %35.4 %550 bpAsiaChange vs. Prior YearFiscal Year Ended 30 September20232022$%/bpSales$3,216.1 $3,143.3 $72.8 2 %Operating income$906.5 $898.3 $8.2 1 %Operating margin28.2 %28.6 %(40) bpReconciliation of GAAP to Non-GAAP:Operating income$906.5 $898.3 Add: Depreciation and amortization433.5 436.5 Add: Equity affiliates' income29.7 22.1 Adjusted EBITDA$1,369.7 $1,356.9 $12.8 1 %Adjusted EBITDA margin42.6 %43.2 %(60) bpEuropeChange vs. Prior YearFiscal Year Ended 30 September20232022$%/bpSales$2,963.1 $3,086.1 ($123.0)(4 %)Operating income$663.4 $503.4 $160.0 32 %Operating margin22.4 %16.3 %610 bpReconciliation of GAAP to Non-GAAP:Operating income$663.4 $503.4 Add: Depreciation and amortization196.2 195.2 Add: Equity affiliates' income102.5 78.2 Adjusted EBITDA$962.1 $776.8 $185.3 24 %Adjusted EBITDA margin32.5 %25.2 %730 bp36Table of ContentsMiddle East and IndiaChange vs. Prior YearFiscal Year Ended 30 September20232022$%/bpSales$162.5 $129.5 $33.0 25 %Operating income$16.9 $21.1 ($4.2)(20 %)Reconciliation of GAAP to Non-GAAP:Operating income$16.9 $21.1 Add: Depreciation and amortization27.5 26.9 Add: Equity affiliates' income349.8 293.9 Adjusted EBITDA$394.2 $341.9 $52.3 15 %Corporate and otherChange vs. Prior YearFiscal Year Ended 30 September20232022$%/bpSales$889.0 $970.8 ($81.8)(8 %)Operating loss($287.3)($184.7)($102.6)(56 %)Reconciliation of GAAP to Non-GAAP:Operating loss($287.3)($184.7)Add: Depreciation and amortization51.8 50.1 Add: Equity affiliates' income13.1 3.9 Adjusted EBITDA($222.4)($130.7)($91.7)(70 %)37Table of ContentsADJUSTED EFFECTIVE TAX RATEThe effective tax rate equals the income tax provision divided by income from continuing operations before taxes. We calculate our adjusted effective tax rate by adjusting the numerator and denominator to exclude the tax and before tax impacts of our non-GAAP adjustments, respectively. The table below presents a reconciliation of the GAAP effective tax rate to our adjusted effective tax rate:Fiscal Year Ended 30 September20232022Income tax provision$551.2 $500.8 Income from continuing operations before taxes2,882.4 2,754.7 Effective tax rate19.1 %18.2 %Income tax provision$551.2 $500.8 Business and asset actions34.7 12.7 Equity method investment impairment charge— 3.7 Non-service pension tax impact21.6 (10.8)Adjusted income tax provision$607.5 $506.4 Income from continuing operations before taxes$2,882.4 $2,754.7 Business and asset actions244.6 73.7 Equity method investment impairment charge— 14.8 Non-service pension cost (benefit), net86.8 (44.7)Adjusted income from continuing operations before taxes$3,213.8 $2,798.5 Adjusted effective tax rate18.9 %18.1 %CAPITAL EXPENDITURESCapital expenditures is a non-GAAP financial measure that we define as the sum of cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), investment in and advances to unconsolidated affiliates, and investment in financing receivables on our consolidated statements of cash flows. Additionally, we adjust additions to plant and equipment to exclude NEOM Green Hydrogen Company (“NGHC”) expenditures funded by the joint venture's non-recourse project financing as well as our partners’ equity contributions to arrive at a measure that we believe is more representative of our investment activities. Substantially all the funding we provide to NGHC is limited for use by the venture for capital expenditures. A reconciliation of cash used for investing activities to our reported capital expenditures is provided below:Fiscal Year Ended 30 September20232022Cash used for investing activities$5,916.4 $3,857.2 Proceeds from sale of assets and investments25.4 46.2 Purchases of investments(640.1)(1,637.8)Proceeds from investments897.0 2,377.4 Other investing activities4.8 7.0 NGHC expenditures not funded by Air Products' equity(A)(979.1)— Capital expenditures$5,224.4 $4,650.0 (A)Reflects the portion of "Additions to plant and equipment, including long-term deposits" that is associated with NGHC, less our approximate cash investment in the joint venture.38Table of ContentsLIQUIDITY AND CAPITAL RESOURCESWe believe we have sufficient cash, cash flows from operations, and funding sources to meet our liquidity needs. As further discussed in the "Cash Flows From Financing Activities" section below, we have the ability to raise capital through a variety of financing activities, including accessing capital or commercial paper markets or drawing upon our credit facilities.As of 30 September 2023, we had $1,497.1 of foreign cash and cash items compared to total cash and cash items of $1,617.0. We do not expect that a significant portion of the earnings of our foreign subsidiaries and affiliates will be subject to U.S. income tax upon repatriation to the U.S. Depending on the country in which the subsidiaries and affiliates reside, the repatriation of these earnings may be subject to foreign withholding and other taxes. However, since we have significant current investment plans outside the U.S., it is our intent to permanently reinvest the majority of our foreign cash and cash items that would be subject to additional taxes outside the U.S.Cash Flows From OperationsFiscal Year Ended 30 September20232022Net income from continuing operations attributable to Air Products$2,292.8 $2,243.5 Adjustments to reconcile income to cash provided by operating activities:Depreciation and amortization1,358.3 1,338.2 Deferred income taxes(24.7)32.3 Business and asset actions244.6 73.7 Undistributed earnings of equity method investments(261.2)(214.7)Gain on sale of assets and investments(15.8)(24.1)Share-based compensation59.9 48.4 Noncurrent lease receivables79.6 94.0 Other adjustments(103.0)(304.9)Working capital changes that provided (used) cash, excluding effects of acquisitions:Trade receivables130.7 (475.2)Inventories(129.4)(94.3)Other receivables(93.8)(1.8)Payables and accrued liabilities(213.3)532.5 Other working capital(119.0)(77.0)Cash Provided by Operating Activities$3,205.7 $3,170.6 In fiscal year 2023, cash provided by operating activities was $3,205.7. Business and asset actions of $244.6 included noncash charges to write off assets related to our exit from certain projects previously under construction as well as an expense for severance and other benefits. Refer to Note 4, Business and Asset Actions, to the consolidated financial statements for additional information. The impacts associated with our operating leases are reflected within "Other adjustments," which included a lump-sum payment of $209 for a land lease associated with the NGHC joint venture. Working capital accounts resulted in a net use of cash of $424.8. The use of cash of $213.3 within payables and accrued liabilities primarily resulted from lower prices for the purchase of natural gas, a decrease in value of derivatives that hedge intercompany loans, and payments for incentive compensation under the fiscal year 2022 plan. Inventories resulted in a use of cash of $129.4 primarily due to additional packaged gases inventory, including helium. The use of cash of $119.0 within other working capital was primarily driven by the timing of income tax payments. The source of cash of $130.7 from trade receivables was primarily attributable to collection of higher natural gas costs contractually passed through to on-site customers in fiscal year 2023.39Table of ContentsIn fiscal year 2022, cash provided by operating activities was $3,170.6. Undistributed earnings of equity method investments of $214.7 reflects activity from the JIGPC joint venture, which began contributing to our results in late October 2021. We received cash distributions of approximately $155 from this joint venture during fiscal year 2022. Other adjustments of $304.9 included adjustments for noncash currency impacts of intercompany balances, deferred costs associated with new projects, contributions to pension plans, and payments made for leasing activities. Working capital accounts resulted in a net use of cash of $115.8. The use of cash of $475.2 within trade receivables included the impacts of higher underlying sales and higher natural gas costs passed through to our on-site customers. The source of cash of $532.5 within payables and accrued liabilities primarily resulted from higher natural gas costs and customer advances for sale of equipment projects. Other working capital accounts resulted in a use of cash of $77.0 primarily due to contract fulfillment costs and the timing of income tax payments.Cash Flows From Investing ActivitiesFiscal Year Ended 30 September20232022Additions to plant and equipment, including long-term deposits($4,626.4)($2,926.5)Acquisitions, less cash acquired— (65.1)Investment in and advances to unconsolidated affiliates(912.0)(1,658.4)Investment in financing receivables(665.1)— Proceeds from sale of assets and investments25.4 46.2 Purchases of investments(640.1)(1,637.8)Proceeds from investments897.0 2,377.4 Other investing activities4.8 7.0 Cash Used for Investing Activities($5,916.4)($3,857.2)In fiscal year 2023, cash used for investing activities was $5,916.4. The use of cash primarily resulted from capital expenditures of $4,626.4 for additions to plant and equipment, including long-term deposits, investments in and advances to unconsolidated affiliates of $912.0, and investments in financing receivables of $665.1. Refer to the Capital Expenditures section below for further detail. Maturities of time deposits and short-term treasury securities provided cash of $897.0, which exceeded purchases of investments of $640.1.In fiscal year 2022, cash used for investing activities was $3,857.2. Capital expenditures primarily included $2,926.5 for additions to plant and equipment, including long-term deposits, and $1,658.4 for investments in and advances to unconsolidated affiliates. Proceeds from investments of $2,377.4 resulted from maturities of time deposits and short-term treasury securities and exceeded purchases of investments of $1,637.8.Capital ExpendituresThe components of our capital expenditures are detailed in the table below. Refer to page 38 for a definition of this non-GAAP measure as well as a reconciliation to cash used for investing activities.Fiscal Year Ended 30 September20232022Additions to plant and equipment, including long-term deposits$4,626.4 $2,926.5 Acquisitions, less cash acquired— 65.1 Investment in and advances to unconsolidated affiliates(A)912.0 1,658.4 Investment in financing receivables665.1 — NGHC expenditures not funded by Air Products' equity(B)(979.1)— Capital Expenditures$5,224.4 $4,650.0 (A)Includes contributions from noncontrolling partners in consolidated subsidiaries as discussed below.(B)Reflects the portion of "Additions to plant and equipment, including long-term deposits" that is associated with NGHC, less our approximate cash investment in the joint venture.40Table of ContentsCapital expenditures in fiscal year 2023 totaled $5,224.4 compared to $4,650.0 in fiscal year 2022. The increase of $574.4 was driven by spending for plant and equipment, which was largely attributable to purchases associated with our low- and zero-carbon hydrogen projects, as well as ongoing maintenance capital spending. Higher spending for plant and equipment was partially offset by lower investments in and advances to unconsolidated affiliates, as the second phase of our investment in JIGPC of $908 in fiscal year 2023 was lower than the initial investment of $1.6 billion completed in fiscal year 2022. These investments included approximately $130 and $73 in fiscal years 2023 and 2022, respectively, received from a noncontrolling partner in one of our subsidiaries. We expect to complete a remaining investment of approximately $115. Refer to Note 9, Equity Affiliates, to the consolidated financial statements for additional information. Fiscal year 2023 also included an investment in financing receivables of $665.1, primarily for progress payments towards the purchase of a natural gas-to-syngas processing facility in Uzbekistan. Refer to Note 5, Acquisitions, to the consolidated financial statements for additional information.Outlook for Investing ActivitiesIt is not possible, without unreasonable efforts, to reconcile our forecasted capital expenditures to future cash used for investing activities because we are unable to identify the timing or occurrence of our future investment activity, which is driven by our assessment of competing opportunities at the time we enter into transactions. These decisions, either individually or in the aggregate, could have a significant effect on our cash used for investing activities.We expect capital expenditures for fiscal year 2024 to be approximately $5.0 billion to $5.5 billion, which is driven by clean hydrogen and sustainable aviation fuel projects such as those being executed in California and Louisiana, United States, as well as Alberta, Canada. We anticipate capital expenditures to be funded with our current cash balance, cash generated from continuing operations, and additional financing activities.As of the end of fiscal year 2023, we have committed capital of approximately $15 billion to projects intended to accelerate the energy transition. These low- and zero-carbon hydrogen and other first mover projects demonstrate our commitment to making investments that will make a meaningful difference on climate issues, allowing us to support our customers’ sustainability journeys, conserve resources, and care for our employees and communities.Cash Flows From Financing ActivitiesFiscal Year Ended 30 September20232022Long-term debt proceeds$3,516.2 $766.2 Payments on long-term debt(615.4)(400.0)Net increase in commercial paper and short-term borrowings268.2 17.9 Dividends paid to shareholders(1,496.6)(1,383.3)Proceeds from stock option exercises 24.0 19.3 Investments by noncontrolling interests234.9 21.0 Distributions to noncontrolling interests(115.9)(4.8)Other financing activities(205.8)(36.9)Cash Provided by (Used for) Financing Activities$1,609.6 ($1,000.6)In fiscal year 2023, cash provided by financing activities was $1,609.6. As further discussed below, the source of cash was primarily attributable to long-term debt proceeds of $3,516.2 as well as an increase in commercial paper and short-term borrowings of $268.2. These cash inflows were partially offset by dividend payments to shareholders of $1,496.6 and payments on long-term debt of $615.4.The long-term debt proceeds included proceeds from our inaugural multi-currency green bonds that were issued during the second quarter in concurrent U.S. Dollar- and Euro-denominated fixed-rate note offerings with aggregate principal amounts of $600 and €700 million, respectively. Consistent with our Green Finance Framework, we have allocated the net proceeds to finance or refinance, in whole or in part, existing or future projects that are expected to have environmental benefits, including those related to pollution prevention and control, renewable energy generation and procurement, and sustainable aviation fuel. We expect to issue our first allocation report in 2024. Additionally, as further discussed below, the NGHC joint venture borrowed approximately $1.4 billion. These proceeds were partially offset by financing fees of approximately $150, which are reflected within "Other financing activities". Refer to the Credit Facilities section below as well as Note 16, Debt, to the consolidated financial statements for additional information.41Table of ContentsIn fiscal year 2022, cash used for financing activities was $1,000.6. The use of cash was primarily driven by dividend payments to shareholders of $1,383.3 and payments on long-term debt of $400.0 for the repayment of a 3.0% Senior Note. These uses of cash were partially offset by long-term debt proceeds and short-term borrowings of $766.2 and $17.9, respectively. Financing and Capital StructureTotal debt increased from $7,644.8 as of 30 September 2022 to $10,305.8 as of 30 September 2023, primarily due to non-recourse project financing secured by the NGHC joint venture for construction of the NEOM Green Hydrogen project, issuance of our inaugural green U.S. Dollar- and Euro-denominated fixed-rate notes, and an increase in outstanding commercial paper. Total debt includes related party debt of $328.3 and $781.0 as of 30 September 2023 and 30 September 2022, respectively. Various debt agreements to which we are a party include financial covenants and other restrictions, including restrictions pertaining to the ability to create property liens and enter into certain sale and leaseback transactions. As of 30 September 2023, we were in compliance with all of the financial and other covenants under our debt agreements.2021 Credit AgreementWe have a five-year $2.75 billion revolving credit agreement maturing 31 March 2026 with a syndicate of banks (the “2021 Credit Agreement”), under which senior unsecured debt is available to us and certain of our subsidiaries. The 2021 Credit Agreement provides a source of liquidity and supports our commercial paper program. No borrowings were outstanding under the 2021 Credit Agreement as of 30 September 2023. At this time, we do not expect to access the facility for additional liquidity.The only financial covenant in the 2021 Credit Agreement is a maximum ratio of total debt to total capitalization (equal to total debt plus total equity) not to exceed 70%. The 2021 Credit Agreement defines total debt as the aggregate principal amount of all indebtedness, excluding limited recourse debt of any project finance subsidiary. Accordingly, this calculation does not consider borrowings associated with NGHC. Total debt to total capitalization was 36.6% and 35.8% as of 30 September 2023 and 30 September 2022, respectively. Foreign Credit FacilitiesWe also have credit facilities available to certain of our foreign subsidiaries totaling $1,596.8, of which $1,041.4 was borrowed and outstanding as of 30 September 2023. The amount borrowed and outstanding as of 30 September 2022 was $457.5. The increase from 30 September 2022 was driven by borrowings on a new variable-rate Saudi Riyal loan facility that matures in October 2026. The interest rate on the facility is based on the Saudi Arabian Interbank Offered Rate plus an annual margin of 1.35%. We entered into this facility in October 2022 and utilized a portion of the proceeds to repay a variable-rate 4.10% Saudi Riyal Loan Facility of $195.6, which was presented within long-term debt on our consolidated balance sheet as of 30 September 2022.NEOM Green Hydrogen Project FinancingIn May 2023, NGHC secured non-recourse project financing of approximately $6.1 billion, which is expected to fund approximately 73% of the NEOM Green Hydrogen Project and will be drawn over the construction period. At the same time, NGHC secured additional non-recourse credit facilities totaling approximately $500 primarily for working capital needs. As of 30 September 2023, the joint venture had borrowed $1.4 billion of the available financing. Refer to Note 3, Variable Interest Entities, to the consolidated financial statements for additional information. DividendsThe Board of Directors determines whether to declare cash dividends on our common stock and the timing and amount based on financial condition and other factors it deems relevant. In fiscal year 2023, the Board of Directors increased the quarterly dividend to $1.75 per share, representing an 8% increase, or $0.13 per share, from the previous dividend of $1.62 per share. We expect to continue increasing our quarterly dividend as we have done for the last 41 consecutive years.Dividends are paid quarterly, usually during the sixth week after the close of the fiscal quarter. On 21 July 2023, the Board of Directors declared a quarterly dividend of $1.75 per share that was payable on 13 November 2023 to shareholders of record at the close of business on 2 October 2023. On 15 November 2023, the Board of Directors declared a quarterly dividend of $1.75 per share that is payable on 12 February 2024 to shareholders of record at the close of business on 2 January 2024.Discontinued OperationsIn fiscal years 2023 and 2022, cash provided by operating activities of discontinued operations of $0.6 and $59.6, respectively, resulted from cash received as part of state tax refunds related to the sale of our former Performance Materials Division in fiscal year 2017.42Table of ContentsPENSION BENEFITSWe and certain of our subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of our worldwide employees. The principal defined benefit pension plans are the U.S. salaried pension plan and the U.K. pension plan. These plans were closed to new participants in 2005, after which defined contribution plans were offered to new employees. The shift to defined contribution plans is expected to continue to reduce volatility of both plan expense and contributions. For additional information, refer to Note 17, Retirement Benefits, to the consolidated financial statements.Net Periodic Cost (Benefit)The table below summarizes the components of net periodic cost/benefit for our U.S. and international defined benefit pension plans for the fiscal years ended 30 September:20232022Service cost$23.2 $39.8 Non-service related costs (benefits)86.8 (44.7)Other0.9 1.3 Net Periodic Cost (Benefit)$110.9 ($3.6)Net periodic cost was $110.9 in fiscal year 2023 versus a benefit of $3.6 in the prior year. The increased costs from the prior year were primarily attributable to higher non-service costs, which were driven by higher interest cost and lower expected returns on plan assets due to a smaller beginning balance of plan assets. The net impact of non-service related items are reflected within "Other non-operating income (expense), net" on our consolidated income statements.Service costs result from benefits earned by active employees and are reflected as operating expenses primarily within "Cost of sales" and "Selling and administrative expense" on our consolidated income statements. The amount of service costs capitalized in fiscal years 2023 and 2022 was not material.The table below summarizes the assumptions used in the calculation of net periodic cost/benefit for the fiscal years ended 30 September:20232022Weighted average discount rate – Service cost5.1 %2.4 %Weighted average discount rate – Interest cost 5.3 %2.0 %Weighted average expected rate of return on plan assets5.3 %5.1 %Weighted average expected rate of compensation increase3.5 %3.4 %2024 OutlookIn fiscal year 2024, we expect to recognize pension expense of approximately $120 to $130 primarily driven by approximately $100 to $110 of non-service related costs, including lower estimated expected returns on plan assets due to a smaller beginning balance of plan assets and higher interest cost, partially offset by a decrease in actuarial loss amortization.In fiscal year 2023, we recognized net actuarial losses of $4.4 in other comprehensive income. Actuarial gains and losses are amortized into pension expense over prospective periods to the extent they are not offset by future gains or losses. Future changes in the discount rate and actual returns on plan assets could impact the actuarial gain or loss and resulting amortization in years beyond fiscal year 2024.43Table of ContentsPension FundingFunded StatusThe projected benefit obligation represents the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future salary increases. The plan funded status is calculated as the difference between the projected benefit obligation and the fair value of plan assets at the end of the period.The table below summarizes the projected benefit obligation, the fair value of plan assets, and the funded status for our U.S. and international plans as of 30 September:20232022Projected benefit obligation$3,511.2 $3,588.3 Fair value of plan assets at end of year3,433.0 3,526.0 Plan Funded Status($78.2)($62.3)The net unfunded liability of $78.2 as of 30 September 2023 increased $15.9 from $62.3 as of 30 September 2022, as increases to the projected benefit obligation from the service and interest cost components of net period pension cost were greater than actuarial gains from higher discount rates. Company ContributionsPension funding includes both contributions to funded plans and benefit payments for unfunded plans, which are primarily non-qualified plans. With respect to funded plans, our funding policy is that contributions, combined with appreciation and earnings, will be sufficient to pay benefits without creating unnecessary surpluses.In addition, we make contributions to satisfy all legal funding requirements while managing our capacity to benefit from tax deductions attributable to plan contributions. With the assistance of third-party actuaries, we analyze the liabilities and demographics of each plan, which help guide the level of contributions. During 2023 and 2022, our cash contributions to funded pension plans and benefit payments for unfunded pension plans were $32.6 and $44.7, respectively.For fiscal year 2024, cash contributions to defined benefit plans are estimated to be $35 to $45. The estimate is based on expected contributions to certain international plans and anticipated benefit payments for unfunded plans, which are dependent upon the timing of retirements. Actual future contributions will depend on future funding legislation, discount rates, investment performance, plan design, and various other factors.CRITICAL ACCOUNTING POLICIES AND ESTIMATESRefer to Note 1, Basis of Presentation and Major Accounting Policies, and Note 2, New Accounting Guidance, to the consolidated financial statements for a description of our major accounting policies and information concerning implementation and impact of new accounting guidance.The accounting policies discussed below are those policies that we consider to be the most critical to understanding our financial statements because they require management's most difficult, subjective, or complex judgments, often as the result of the need to make estimates about the effects of matters that are inherently uncertain. These estimates reflect our best judgment about current and/or future economic and market conditions and their effect based on information available as of the date of our consolidated financial statements. If conditions change, actual results may differ materially from these estimates. Our management has reviewed these critical accounting policies and estimates and related disclosures with the Audit and Finance Committee of our Board of Directors.Depreciable Lives of Plant and EquipmentPlant and equipment, net at 30 September 2023 totaled $17,472.1, and depreciation expense totaled $1,325.8 during fiscal year 2023. Plant and equipment is recorded at cost and depreciated using the straight-line method, which deducts equal amounts of the cost of each asset from earnings every year over its estimated economic useful life.Economic useful life is the duration of time an asset is expected to be productively employed by us, which may be less than its physical life. Assumptions on the following factors, among others, affect the determination of estimated economic useful life: wear and tear, obsolescence, technical standards, contract life, market demand, competitive position, raw material availability, and geographic location.44Table of ContentsThe estimated economic useful life of an asset is monitored to determine its appropriateness, especially when business circumstances change. For example, changes in technology, changes in the estimated future demand for products, excessive wear and tear, or unanticipated government actions may result in a shorter estimated useful life than originally anticipated. In these cases, we would depreciate the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year on a prospective basis.Our regional segments have numerous long-term customer supply contracts for which we construct an on-site plant adjacent to or near the customer’s facility. These contracts typically have initial contract terms of 10 to 20 years. Depreciable lives of the production assets related to long-term supply contracts are generally matched to the contract lives. Extensions to the contract term of supply frequently occur prior to the expiration of the initial term. As contract terms are extended, the depreciable life of the associated production assets is adjusted to match the new contract term, as long as it does not exceed the remaining physical life of the asset.Our regional segments also have contracts for liquid or gaseous bulk supply and, for smaller customers, packaged gases. The depreciable lives of production facilities associated with these contracts are generally 15 years. These depreciable lives have been determined based on historical experience combined with judgment on future assumptions such as technological advances, potential obsolescence, competitors’ actions, etc. In addition, we may purchase assets through transactions accounted for as either an asset acquisition or a business combination. Depreciable lives are assigned to acquired assets based on the age and condition of the assets, the remaining duration of long-term supply contracts served by the assets, and our historical experience with similar assets. Management monitors its assumptions and may potentially need to adjust depreciable life as circumstances change. Impairment of AssetsThere were no triggering events in fiscal year 2023 that would require impairment testing for any of our asset groups, reporting units that contain goodwill, or indefinite-lived intangibles assets. We completed our annual impairment tests for goodwill and other indefinite-lived intangible assets and concluded there were no indications of impairment. Refer to the “Impairment of Assets” subsections below for additional detail. Impairment of Assets: Plant and EquipmentPlant and equipment meeting the held for sale criteria are reported at the lower of carrying amount or fair value less cost to sell. Plant and equipment to be disposed of other than by sale may be reviewed for impairment upon the occurrence of certain triggering events, such as unexpected contract terminations or unexpected foreign government-imposed restrictions or expropriations. Plant and equipment held for use is grouped for impairment testing at the lowest level for which there is identifiable cash flows. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such circumstances may include:•a significant decrease in the market value of a long-lived asset grouping;•a significant adverse change in the manner in which the asset grouping is being used or in its physical condition;•an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the long-lived asset;•a reduction in revenues that is other than temporary;•a history of operating or cash flow losses associated with the use of the asset grouping; or•changes in the expected useful life of the long-lived assets.If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by that asset group is compared to the carrying value to determine whether impairment exists. If an asset group is determined to be impaired, the loss is measured based on the difference between the asset group’s fair value and its carrying value. An estimate of the asset group’s fair value is based on the discounted value of its estimated cash flows.45Table of ContentsThe assumptions underlying the undiscounted future cash flow projections require significant management judgment. Factors that management must estimate include industry and market conditions, sales volume and prices, costs to produce, inflation, etc. The assumptions underlying the cash flow projections represent management’s best estimates at the time of the impairment review and could include probability weighting of cash flow projections associated with multiple potential future scenarios. Changes in key assumptions or actual conditions that differ from estimates could result in an impairment charge. We use reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.In fiscal year 2023, there was no need to test for impairment on any of our asset groupings as no events or changes in circumstances indicated that the carrying amount of our asset groupings may not be recoverable.Impairment of Assets: GoodwillThe acquisition method of accounting for business combinations requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price (plus the fair value of any noncontrolling interest and previously held equity interest in the acquiree) over the fair value of identifiable net assets of an acquired entity. Goodwill was $861.7 as of 30 September 2023. Disclosures related to goodwill are included in Note 11, Goodwill, to the consolidated financial statements.We review goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill might not be recoverable. The tests are done at the reporting unit level, which is defined as being equal to or one level below the operating segment for which discrete financial information is available and whose operating results are reviewed by segment managers regularly. We have five reportable business segments, seven operating segments and 11 reporting units, eight of which include a goodwill balance. Refer to Note 25, Business Segment and Geographic Information, for additional information. Reporting units are primarily based on products and subregions within each reportable segment. The majority of our goodwill is assigned to reporting units within our regional industrial gases segments.As part of the goodwill impairment testing, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. However, we choose to bypass the qualitative assessment and conduct quantitative testing to determine if the carrying value of the reporting unit exceeds its fair value. An impairment loss will be recognized for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. To determine the fair value of a reporting unit, we initially use an income approach valuation model, representing the present value of estimated future cash flows. Our valuation model uses a discrete growth period and an estimated exit trading multiple. The income approach is an appropriate valuation method due to our capital-intensive nature, the long-term contractual nature of our business, and the relatively consistent cash flows generated by our reporting units. The principal assumptions utilized in our income approach valuation model include revenue growth rates, operating profit and/or adjusted EBITDA margins, discount rate, and exit multiple. Projected revenue growth rates and operating profit and/or adjusted EBITDA assumptions are consistent with those utilized in our operating plan and/or revised forecasts and long-term financial planning process. The discount rate assumption is calculated based on an estimated market-participant risk-adjusted weighted-average cost of capital, which includes factors such as the risk-free rate of return, cost of debt, and expected equity premiums. The exit multiple is determined from comparable industry transactions and where appropriate, reflects expected long-term growth rates. If our initial review under the income approach indicates there may be impairment, we incorporate results under the market approach to further evaluate the existence of impairment. When the market approach is utilized, fair value is estimated based on market multiples of revenue and earnings derived from comparable publicly-traded industrial gases companies and/or regional manufacturing companies engaged in the same or similar lines of business as the reporting unit, adjusted to reflect differences in size and growth prospects. When both the income and market approach are utilized, we review relevant facts and circumstances and make a qualitative assessment to determine the proper weighting. Management judgment is required in the determination of each assumption utilized in the valuation model, and actual results could differ from the estimates.In the fourth quarter of fiscal year 2023, we conducted our annual goodwill impairment test, noting no indications of impairment. The fair value of all our reporting units substantially exceeded their carrying value.46Table of ContentsFuture events that could have a negative impact on the level of excess fair value over carrying value of the reporting units include, but are not limited to: long-term economic weakness, decline in market share, pricing pressures, inability to successfully implement cost improvement measures, increases to our cost of capital, changes in the strategy of the reporting unit, and changes to the structure of our business as a result of future reorganizations or divestitures of assets or businesses. Negative changes in one or more of these factors, among others, could result in impairment charges.Impairment of Assets: Intangible AssetsIntangible assets, net with determinable lives at 30 September 2023 totaled $297.5 and consisted primarily of customer relationships, purchased patents and technology, and land use rights. These intangible assets are tested for impairment as part of the long-lived asset grouping impairment tests. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. See the impairment discussion above under "Impairment of Assets – Plant and Equipment" for a description of how impairment losses are determined.Indefinite-lived intangible assets at 30 September 2023 totaled $37.1 and consisted of trade names and trademarks. Indefinite-lived intangibles are subject to impairment testing at least annually or more frequently if events or changes in circumstances indicate that potential impairment exists. The impairment test for indefinite-lived intangible assets involves calculating the fair value of the indefinite-lived intangible assets and comparing the fair value to their carrying value. If the fair value is less than the carrying value, the difference is recorded as an impairment loss. To determine fair value, we utilize the royalty savings method, a form of the income approach. This method values an intangible asset by estimating the royalties avoided through ownership of the asset.Disclosures related to intangible assets other than goodwill are included in Note 12, Intangible Assets, to the consolidated financial statements.In the fourth quarter of fiscal year 2023, we conducted our annual impairment test of indefinite-lived intangibles, noting no indications of impairment.Impairment of Assets: Equity Method InvestmentsInvestments in and advances to equity affiliates totaled $4,617.8 at 30 September 2023. The majority of our equity method investments are ventures with other industrial gas companies. Summarized financial information of our equity affiliates is included in Note 9, Equity Affiliates, to the consolidated financial statements. We review our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. An impairment loss is recognized in the event that an other-than-temporary decline in fair value below the carrying value of an investment occurs. We estimate the fair value of our investments under the income approach, which considers the estimated discounted future cash flows expected to be generated by the investee, and/or the market approach, which considers market multiples of revenue and earnings derived from comparable publicly-traded industrial gas companies. Changes in key assumptions about the financial condition of an investee or actual conditions that differ from estimates could result in an impairment charge.In fiscal year 2023, there was no need to test any of our equity affiliate investments for impairment as no events or changes in circumstances indicated that the carrying amount of the investments may not be recoverable.Revenue Recognition: Cost Incurred Input MethodRevenue from equipment sale contracts is generally recognized over time as we have an enforceable right to payment for performance completed to date and our performance under the contract terms does not create an asset with alternative use. We use a cost incurred input method to recognize revenue by which costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations. Costs incurred include material, labor, and overhead costs and represent work contributing and proportionate to the transfer of control to the customer. Accounting for contracts using the cost incurred input method requires management judgment relative to assessing risks and their impact on the estimates of revenues and costs. Our estimates are impacted by factors such as the potential for incentives or penalties on performance, schedule delays, technical issues, cost inflation, labor productivity, the complexity of work performed, the availability of materials, and performance of subcontractors. When adjustments in estimated total contract revenues or estimated total costs are required, any changes in the estimated profit from prior estimates are recognized in the current period for the inception-to-date effect of such change. When estimates of total costs to be incurred on a contract exceed estimates of total revenues to be earned, a provision for the entire estimated loss on the contract is recorded in the period in which the loss is determined.47Table of ContentsIn addition to the typical risks associated with underlying performance of engineering, project procurement, and construction activities, our sale of equipment projects within our Corporate and other segment require monitoring of risks associated with schedule, geography, and other aspects of the contract and their effects on our estimates of total revenues and total costs to complete the contract. Changes in estimates on projects accounted for under the cost incurred input method unfavorably impacted operating income by approximately $115 in fiscal year 2023 and $30 in fiscal year 2022. We assess the performance of our sale of equipment projects as they progress. Our earnings could be positively or negatively impacted by changes to our contractual revenues and cost forecasts on these projects.Revenue Recognition: On-site Customer ContractsFor customers who require large volumes of gases on a long-term basis, we produce and supply gases under long-term contracts from large facilities that we build, own, and operate on or near the customer’s facilities. Certain of these on-site contracts contain complex terms and provisions regarding tolling arrangements, minimum payment requirements, variable components, pricing provisions, and amendments, which require significant judgment to determine the amount and timing of revenue recognition.Income TaxesWe account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax basis of assets and liabilities measured using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As of 30 September 2023, accrued income taxes, including the amount recorded as noncurrent, was $240.6, and net deferred tax liabilities were $1,106.4. Tax liabilities related to uncertain tax positions as of 30 September 2023 were $96.5, excluding interest and penalties. Income tax expense for the fiscal year ended 30 September 2023 was $551.2.Management judgment is required concerning the ultimate outcome of tax contingencies and the realization of deferred tax assets.Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We believe that our recorded tax liabilities adequately provide for these assessments.Deferred tax assets are recorded for operating losses and tax credit carryforwards. However, when we do not expect sufficient sources of future taxable income to realize the benefit of the operating losses or tax credit carryforwards, these deferred tax assets are reduced by a valuation allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of the deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income and available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of a change in the valuation allowance is reported in income tax expense.A 1% increase or decrease in our effective tax rate may result in a decrease or increase to net income, respectively, of approximately $29.Disclosures related to income taxes are included in Note 23, Income Taxes, to the consolidated financial statements.48Table of ContentsPension and Other Postretirement BenefitsThe amounts recognized in the consolidated financial statements for pension and other postretirement benefits are determined on an actuarial basis utilizing numerous assumptions. The discussion that follows provides information on the significant assumptions, expense, and obligations associated with the defined benefit plans.Actuarial models are used in calculating the expense and liability related to the various defined benefit plans. These models have an underlying assumption that the employees render service over their service lives on a relatively consistent basis; therefore, the expense of benefits earned should follow a similar pattern.Several assumptions and statistical variables are used in the models to calculate the expense and liability related to the plans. We determine assumptions about the discount rate, the expected rate of return on plan assets, and the rate of compensation increase. Note 17, Retirement Benefits, to the consolidated financial statements includes disclosure of these rates on a weighted-average basis for both the U.S. and international plans. The actuarial models also use assumptions about demographic factors such as retirement age, mortality, and turnover rates. Mortality rates are based on the most recent U.S. and international mortality tables. We believe the actuarial assumptions are reasonable. However, actual results could vary materially from these actuarial assumptions due to economic events and differences in rates of retirement, mortality, and turnover. One of the assumptions used in the actuarial models is the discount rate used to measure benefit obligations. This rate reflects the prevailing market rate for high-quality, fixed-income debt instruments with maturities corresponding to the expected timing of benefit payments as of the annual measurement date for each of the various plans. We measure the service cost and interest cost components of pension expense by applying spot rates along the yield curve to the relevant projected cash flows. The rates along the yield curve are used to discount the future cash flows of benefit obligations back to the measurement date. These rates change from year to year based on market conditions that affect corporate bond yields. A higher discount rate decreases the present value of the benefit obligations and results in lower pension expense. With respect to impacts on pension benefit obligations, a 50 bp increase or decrease in the discount rate may result in a decrease or increase, respectively, to pension expense of approximately $15 per year.The expected rate of return on plan assets represents an estimate of the long-term average rate of return to be earned by plan assets reflecting current asset allocations. In determining estimated asset class returns, we take into account historical and future expected long-term returns and the value of active management, as well as the interest rate environment. Asset allocation is determined based on long-term return, volatility and correlation characteristics of the asset classes, the profiles of the plans’ liabilities, and acceptable levels of risk. Lower returns on the plan assets result in higher pension expense. A 50 bp increase or decrease in the estimated rate of return on plan assets may result in a decrease or increase, respectively, to pension expense of approximately $17 per year.We use a market-related valuation method for recognizing certain investment gains or losses for our significant pension plans. Investment gains or losses are the difference between the expected return and actual return on plan assets. The expected return on plan assets is determined based on a market-related value of plan assets. This is a calculated value that recognizes investment gains and losses on equities over a five-year period from the year in which they occur and reduces year-to-year volatility. The market-related value for non-equity investments equals the actual fair value. Expense in future periods will be impacted as gains or losses are recognized in the market-related value of assets.The expected rate of compensation increase is another key assumption. We determine this rate based on review of the underlying long-term salary increase trend characteristic of labor markets and historical experience, as well as comparison to peer companies. A 50 bp increase or decrease in the expected rate of compensation may result in an increase or decrease to pension expense, respectively, of approximately $4 per year.49Table of ContentsLoss ContingenciesIn the normal course of business, we encounter contingencies, or situations involving varying degrees of uncertainty as to the outcome and effect on our company. We accrue a liability for loss contingencies when it is considered probable that a liability has been incurred and the amount of loss can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued.Contingencies include those associated with litigation and environmental matters, for which our accounting policy is discussed in Note 1, Basis of Presentation and Major Accounting Policies, to the consolidated financial statements, and details are provided in Note 18, Commitments and Contingencies, to the consolidated financial statements. Significant judgment is required to determine both the probability and whether the amount of loss associated with a contingency can be reasonably estimated. These determinations are made based on the best available information at the time. As additional information becomes available, we reassess probability and estimates of loss contingencies. Revisions to the estimates associated with loss contingencies could have a significant impact on our results of operations in the period in which an accrual for loss contingencies is recorded or adjusted. For example, due to the inherent uncertainties related to environmental exposures, a significant increase to environmental liabilities could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or our proportionate share of the liability increases. Similarly, a future charge for regulatory fines or damage awards associated with litigation could have a significant impact on our net income in the period in which it is recorded.Item 7A. Quantitative and Qualitative Disclosures About Market RiskOur earnings, cash flows, and financial position are exposed to market risks arising from fluctuations in interest rates and foreign currency exchange rates. It is our policy to minimize our cash flow exposure to adverse changes in currency exchange rates and to manage the financial risks inherent in funding with debt capital.We address these financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. We have established counterparty credit guidelines and generally enter into transactions with financial institutions of investment grade or better, thereby minimizing the risk of credit loss. All instruments are entered into for other than trading purposes. For details on the types and use of these derivative instruments and related major accounting policies, refer to Note 1, Basis of Presentation and Major Accounting Policies, and Note 14, Financial Instruments, to the consolidated financial statements. Additionally, we mitigate adverse energy price impacts through our cost pass-through contracts with customers and price increases.Our derivative and other financial instruments consist of long-term debt, including the current portion and amounts owed to related parties; interest rate swaps; cross currency interest rate swaps; and foreign exchange-forward contracts. The net market value of these financial instruments combined is referred to below as the "net financial instrument position" and is disclosed in Note 15, Fair Value Measurements, to the consolidated financial statements. Our net financial instrument position increased from a liability of $6,898.6 at 30 September 2022 to a liability of $8,990.8 at 30 September 2023. The increase was primarily due to NEOM Green Hydrogen Project financing and the issuance of U.S. Dollar- and Euro-denominated fixed-rate notes during the fiscal year.The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market rates and prices. Market values are the present values of projected future cash flows based on the market rates and prices chosen. The market values for interest rate risk and foreign currency risk are calculated by us using a third-party software model that utilizes standard pricing models to determine the present value of the instruments based on market conditions as of the valuation date, such as interest rates, spot and forward exchange rates, and implied volatility.50Table of ContentsInterest Rate RiskOur debt portfolio as of 30 September 2023, including the effect of currency and interest rate swap agreements, was composed of 80% fixed-rate debt and 20% variable-rate debt. Our debt portfolio as of 30 September 2022, including the effect of currency and interest rate swap agreements, was composed of 79% fixed-rate debt and 21% variable-rate debt.The sensitivity analysis related to the interest rate risk on the fixed portion of our debt portfolio assumes an instantaneous 100 bp parallel move in interest rates from the level at 30 September 2023, with all other variables held constant. A 100 bp increase in market interest rates would result in a decrease of $728 and $364 in the net liability position of financial instruments at 30 September 2023 and 2022, respectively. A 100 bp decrease in market interest rates would result in an increase of $845 and $425 in the net liability position of financial instruments at 30 September 2023 and 2022, respectively.Based on the variable-rate debt included in our debt portfolio, including the interest rate swap agreements, a 100 bp increase in interest rates would result in an additional $21 and $16 of interest incurred per year at 30 September 2023 and 2022, respectively. A 100 bp decline in interest rates would lower interest incurred by $21 and $16 per year at 30 September 2023 and 2022, respectively.Foreign Currency Exchange Rate RiskThe sensitivity analysis related to foreign currency exchange rates assumes an instantaneous 10% change in the foreign currency exchange rates from their levels at 30 September 2023 and 2022, with all other variables held constant. A 10% strengthening or weakening of the functional currency of an entity versus all other currencies would result in a decrease or increase, respectively, of $308 and $165 in the net liability position of financial instruments at 30 September 2023 and 2022, respectively. The increase in sensitivity is primarily due to the issuance of Euro-denominated fixed-rate notes during the fiscal year.The primary currency pairs for which we have exchange rate exposure are the Euro and U.S. Dollar and Chinese Renminbi and U.S. Dollar. Foreign currency debt, cross currency interest rate swaps, and foreign exchange-forward contracts are used in countries where we do business, thereby reducing our net asset exposure. Foreign exchange-forward contracts and cross currency interest rate swaps are also used to hedge our firm and highly anticipated foreign currency cash flows. Thus, there is either an asset or liability or cash flow exposure related to all of the financial instruments in the above sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite direction and materially equal to the impact on the instruments in the analysis.The majority of our sales are denominated in foreign currencies as they are derived outside the United States. Therefore, financial results will be affected by changes in foreign currency rates. The Chinese Renminbi and the Euro represent the largest exposures in terms of our foreign earnings. We estimate that a 10% reduction in either the Chinese Renminbi or the Euro versus the U.S. Dollar would lower our annual operating income by approximately $55 and $20, respectively.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 and accompanying notes included in Part II, Item 8 of this Form 10-K. This Item generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are not included, 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 September 24, 2022.Fiscal PeriodThe Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. An additional week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters, which occurred in the first quarter of 2023. The Company’s fiscal year 2023 spanned 53 weeks, whereas fiscal years 2022 and 2021 spanned 52 weeks each.Fiscal Year HighlightsThe Company’s total net sales were $383.3 billion and net income was $97.0 billion during 2023.The Company’s total net sales decreased 3% or $11.0 billion during 2023 compared to 2022. The weakness in foreign currencies relative to the U.S. dollar accounted for more than the entire year-over-year decrease in total net sales, which consisted primarily of lower net sales of Mac and iPhone, partially offset by higher net sales of Services.The Company announces new product, service and software offerings at various times during the year. Significant announcements during fiscal year 2023 included the following:First Quarter 2023:•iPad and iPad Pro;•Next-generation Apple TV 4K; and•MLS Season Pass, a Major League Soccer subscription streaming service.Second Quarter 2023:•MacBook Pro 14”, MacBook Pro 16” and Mac mini; and•Second-generation HomePod.Third Quarter 2023:•MacBook Air 15”, Mac Studio and Mac Pro;•Apple Vision Pro™, the Company’s first spatial computer featuring its new visionOS™, expected to be available in early calendar year 2024; and•iOS 17, macOS Sonoma, iPadOS 17, tvOS 17 and watchOS 10, updates to the Company’s operating systems.Fourth Quarter 2023:•iPhone 15, iPhone 15 Plus, iPhone 15 Pro and iPhone 15 Pro Max; and•Apple Watch Series 9 and Apple Watch Ultra 2.In May 2023, the Company announced a new share repurchase program of up to $90 billion and raised its quarterly dividend from $0.23 to $0.24 per share beginning in May 2023. During 2023, the Company repurchased $76.6 billion of its common stock and paid dividends and dividend equivalents of $15.0 billion.Macroeconomic ConditionsMacroeconomic conditions, including inflation, changes in interest rates, and currency fluctuations, have directly and indirectly impacted, and could in the future materially impact, the Company’s results of operations and financial condition.Apple Inc. | 2023 Form 10-K | 20Segment Operating PerformanceThe following table shows net sales by reportable segment for 2023, 2022 and 2021 (dollars in millions):2023Change2022Change2021Net sales by reportable segment:Americas$162,560 (4)%$169,658 11 %$153,306 Europe94,294 (1)%95,118 7 %89,307 Greater China72,559 (2)%74,200 9 %68,366 Japan24,257 (7)%25,977 (9)%28,482 Rest of Asia Pacific29,615 1 %29,375 11 %26,356 Total net sales$383,285 (3)%$394,328 8 %$365,817 AmericasAmericas net sales decreased 4% or $7.1 billion during 2023 compared to 2022 due to lower net sales of iPhone and Mac, partially offset by higher net sales of Services.EuropeEurope net sales decreased 1% or $824 million during 2023 compared to 2022. The weakness in foreign currencies relative to the U.S. dollar accounted for more than the entire year-over-year decrease in Europe net sales, which consisted primarily of lower net sales of Mac and Wearables, Home and Accessories, partially offset by higher net sales of iPhone and Services.Greater ChinaGreater China net sales decreased 2% or $1.6 billion during 2023 compared to 2022. The weakness in the renminbi relative to the U.S. dollar accounted for more than the entire year-over-year decrease in Greater China net sales, which consisted primarily of lower net sales of Mac and iPhone.JapanJapan net sales decreased 7% or $1.7 billion during 2023 compared to 2022. The weakness in the yen relative to the U.S. dollar accounted for more than the entire year-over-year decrease in Japan net sales, which consisted primarily of lower net sales of iPhone, Wearables, Home and Accessories and Mac.Rest of Asia PacificRest of Asia Pacific net sales increased 1% or $240 million during 2023 compared to 2022. The weakness in foreign currencies relative to the U.S. dollar had a significantly unfavorable year-over-year impact on Rest of Asia Pacific net sales. The net sales increase consisted of higher net sales of iPhone and Services, partially offset by lower net sales of Mac and iPad.Apple Inc. | 2023 Form 10-K | 21Products and Services PerformanceThe following table shows net sales by category for 2023, 2022 and 2021 (dollars in millions):2023Change2022Change2021Net sales by category:iPhone (1)$200,583 (2)%$205,489 7 %$191,973 Mac (1)29,357 (27)%40,177 14 %35,190 iPad (1)28,300 (3)%29,292 (8)%31,862 Wearables, Home and Accessories (1)39,845 (3)%41,241 7 %38,367 Services (2)85,200 9 %78,129 14 %68,425 Total net sales$383,285 (3)%$394,328 8 %$365,817 (1)Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.(2)Services net sales include amortization of the deferred value of services bundled in the sales price of certain products.iPhoneiPhone net sales decreased 2% or $4.9 billion during 2023 compared to 2022 due to lower net sales of non-Pro iPhone models, partially offset by higher net sales of Pro iPhone models.MacMac net sales decreased 27% or $10.8 billion during 2023 compared to 2022 due primarily to lower net sales of laptops.iPadiPad net sales decreased 3% or $1.0 billion during 2023 compared to 2022 due primarily to lower net sales of iPad mini and iPad Air, partially offset by the combined net sales of iPad 9th and 10th generation.Wearables, Home and AccessoriesWearables, Home and Accessories net sales decreased 3% or $1.4 billion during 2023 compared to 2022 due primarily to lower net sales of Wearables and Accessories.ServicesServices net sales increased 9% or $7.1 billion during 2023 compared to 2022 due to higher net sales across all lines of business.Apple Inc. | 2023 Form 10-K | 22Gross MarginProducts and Services gross margin and gross margin percentage for 2023, 2022 and 2021 were as follows (dollars in millions):202320222021Gross margin:Products$108,803 $114,728 $105,126 Services60,345 56,054 47,710 Total gross margin$169,148 $170,782 $152,836 Gross margin percentage:Products36.5 %36.3 %35.3 %Services70.8 %71.7 %69.7 %Total gross margin percentage44.1 %43.3 %41.8 %Products Gross MarginProducts gross margin decreased during 2023 compared to 2022 due to the weakness in foreign currencies relative to the U.S. dollar and lower Products volume, partially offset by cost savings and a different Products mix.Products gross margin percentage increased during 2023 compared to 2022 due to cost savings and a different Products mix, partially offset by the weakness in foreign currencies relative to the U.S. dollar and decreased leverage.Services Gross MarginServices gross margin increased during 2023 compared to 2022 due primarily to higher Services net sales, partially offset by the weakness in foreign currencies relative to the U.S. dollar and higher Services costs.Services gross margin percentage decreased during 2023 compared to 2022 due to higher Services costs and the weakness in foreign currencies relative to the U.S. dollar, partially offset by a different Services mix.The Company’s future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors.” As a result, the Company believes, in general, gross margins will be subject to volatility and downward pressure.Operating ExpensesOperating expenses for 2023, 2022 and 2021 were as follows (dollars in millions):2023Change2022Change2021Research and development$29,915 14 %$26,251 20 %$21,914 Percentage of total net sales8 %7 %6 %Selling, general and administrative$24,932 (1)%$25,094 14 %$21,973 Percentage of total net sales7 %6 %6 %Total operating expenses$54,847 7 %$51,345 17 %$43,887 Percentage of total net sales14 %13 %12 %Research and DevelopmentThe year-over-year growth in R&D expense in 2023 was driven primarily by increases in headcount-related expenses.Selling, General and AdministrativeSelling, general and administrative expense was relatively flat in 2023 compared to 2022.Apple Inc. | 2023 Form 10-K | 23Provision for Income TaxesProvision for income taxes, effective tax rate and statutory federal income tax rate for 2023, 2022 and 2021 were as follows (dollars in millions):202320222021Provision for income taxes$16,741 $19,300 $14,527 Effective tax rate14.7 %16.2 %13.3 %Statutory federal income tax rate21 %21 %21 %The Company’s effective tax rate for 2023 and 2022 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate on foreign earnings, the impact of the U.S. federal R&D credit, and tax benefits from share-based compensation, partially offset by state income taxes.The Company’s effective tax rate for 2023 was lower compared to 2022 due primarily to a lower effective tax rate on foreign earnings and the impact of U.S. foreign tax credit regulations issued by the U.S. Department of the Treasury in 2022, partially offset by lower tax benefits from share-based compensation.Liquidity and Capital ResourcesThe Company believes its balances of cash, cash equivalents and unrestricted marketable securities, which totaled $148.3 billion as of September 30, 2023, along with cash generated by ongoing operations and continued access to debt markets, will be sufficient to satisfy its cash requirements and capital return program over the next 12 months and beyond.The Company’s material cash requirements include the following contractual obligations:DebtAs of September 30, 2023, the Company had outstanding fixed-rate notes with varying maturities for an aggregate principal amount of $106.6 billion (collectively the “Notes”), with $9.9 billion payable within 12 months. Future interest payments associated with the Notes total $41.1 billion, with $2.9 billion payable within 12 months.The Company also issues unsecured short-term promissory notes pursuant to a commercial paper program. As of September 30, 2023, the Company had $6.0 billion of commercial paper outstanding, all of which was payable within 12 months.LeasesThe Company has lease arrangements for certain equipment and facilities, including corporate, data center, manufacturing and retail space. As of September 30, 2023, the Company had fixed lease payment obligations of $15.8 billion, with $2.0 billion payable within 12 months.Manufacturing Purchase ObligationsThe Company utilizes several outsourcing partners to manufacture subassemblies for the Company’s products and to perform final assembly and testing of finished products. The Company also obtains individual components for its products from a wide variety of individual suppliers. As of September 30, 2023, the Company had manufacturing purchase obligations of $53.1 billion, with $52.9 billion payable within 12 months. The Company’s manufacturing purchase obligations are primarily noncancelable.Other Purchase ObligationsThe Company’s other purchase obligations primarily consist of noncancelable obligations to acquire capital assets, including assets related to product manufacturing, and noncancelable obligations related to supplier arrangements, licensed intellectual property and content, and distribution rights. As of September 30, 2023, the Company had other purchase obligations of $21.9 billion, with $5.6 billion payable within 12 months.Deemed Repatriation Tax PayableAs of September 30, 2023, the balance of the deemed repatriation tax payable imposed by the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) was $22.0 billion, with $6.5 billion expected to be paid within 12 months.Apple Inc. | 2023 Form 10-K | 24Capital Return ProgramIn addition to its contractual cash requirements, the Company has an authorized share repurchase program. The program does not obligate the Company to acquire a minimum amount of shares. As of September 30, 2023, the Company’s quarterly cash dividend was $0.24 per share. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors.Critical Accounting EstimatesThe preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.Uncertain Tax PositionsThe Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. The evaluation of the Company’s uncertain tax positions involves significant judgment in the interpretation and application of GAAP and complex domestic and international tax laws, including the Act and matters related to the allocation of international taxation rights between countries. Although management believes the Company’s reserves are reasonable, no assurance can be given that the final outcome of these uncertainties will not be different from that which is reflected in the Company’s reserves. Reserves are adjusted considering changing facts and circumstances, such as the closing of a tax examination. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.Legal and Other ContingenciesThe Company is subject to various legal proceedings and claims that arise in the ordinary course of business, the outcomes of which are inherently uncertain. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment. Resolution of legal matters in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.Apple Inc. | 2023 Form 10-K | 25Item 7A. Quantitative and Qualitative Disclosures About Market RiskThe Company is exposed to economic risk from interest rates and foreign exchange rates. The Company uses various strategies to manage these risks; however, they may still impact the Company’s consolidated financial statements.Interest Rate RiskThe Company is primarily exposed to fluctuations in U.S. interest rates and their impact on the Company’s investment portfolio and term debt. Increases in interest rates will negatively affect the fair value of the Company’s investment portfolio and increase the interest expense on the Company’s term debt. To protect against interest rate risk, the Company may use derivative instruments, offset interest rate–sensitive assets and liabilities, or control duration of the investment and term debt portfolios.The following table sets forth potential impacts on the Company’s investment portfolio and term debt, including the effects of any associated derivatives, that would result from a hypothetical increase in relevant interest rates as of September 30, 2023 and September 24, 2022 (dollars in millions):Interest RateSensitive InstrumentHypothetical InterestRate IncreasePotential Impact20232022Investment portfolio100 basis points, all tenorsDecline in fair value$3,089 $4,022 Term debt100 basis points, all tenorsIncrease in annual interest expense$194 $201 Foreign Exchange Rate RiskThe Company’s exposure to foreign exchange rate risk relates primarily to the Company being a net receiver of currencies other than the U.S. dollar. Changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars. Fluctuations in exchange rates may also affect the fair values of certain of the Company’s assets and liabilities. To protect against foreign exchange rate risk, the Company may use derivative instruments, offset exposures, or adjust local currency pricing of its products and services. However, the Company may choose to not hedge certain foreign currency exposures for a variety of reasons, including accounting considerations or prohibitive cost.The Company applied a value-at-risk (“VAR”) model to its foreign currency derivative positions to assess the potential impact of fluctuations in exchange rates. The VAR model used a Monte Carlo simulation. The VAR is the maximum expected loss in fair value, for a given confidence interval, to the Company’s foreign currency derivative positions due to adverse movements in rates. Based on the results of the model, the Company estimates, with 95% confidence, a maximum one-day loss in fair value of $669 million and $1.0 billion as of September 30, 2023 and September 24, 2022, respectively. Changes in the Company’s underlying foreign currency exposures, which were excluded from the assessment, generally offset changes in the fair values of the Company’s foreign currency derivatives.Apple Inc. | 2023 Form 10-K | 26

Archer-Daniels-Midland Co_10-Q_2023-10-24_7084-0000007084-23-000039.html

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Arthur J. Gallagher & Co._10-Q_2023-10-27_354190-0000950170-23-056014.html

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Autodesk, Inc._10-Q_2023-12-04_769397-0000769397-23-000193.html

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BANK OF AMERICA CORP -DE-_10-Q_2023-10-31_70858-0000070858-23-000272.html

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BEST BUY CO INC_10-Q_2023-12-01_764478-0000764478-23-000053.html

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BIO-TECHNE Corp_10-Q_2023-11-07_842023-0001558370-23-018018.html

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BIOGEN INC._10-Q_2023-11-08_875045-0000875045-23-000038.html

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BROWN & BROWN, INC._10-Q_2023-10-26_79282-0000950170-23-055281.html

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CADENCE DESIGN SYSTEMS INC_10-Q_2023-10-23_813672-0000813672-23-000068.html

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CARDINAL HEALTH INC_10-Q_2023-11-03_721371-0000721371-23-000084.html

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CINTAS CORP_10-Q_2023-10-05_723254-0000723254-23-000037.html

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CISCO SYSTEMS, INC._10-Q_2023-11-21_858877-0000858877-23-000031.html

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CITIGROUP INC_10-Q_2023-11-03_831001-0000831001-23-000132.html

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CITIZENS FINANCIAL GROUP INC-RI_10-Q_2023-11-06_759944-0000759944-23-000149.html

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CMS ENERGY CORP_10-Q_2023-10-26_811156-0000811156-23-000072.html

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CVS HEALTH Corp_10-Q_2023-11-01_64803-0000064803-23-000047.html

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Coterra Energy Inc._10-Q_2023-11-07_858470-0000858470-23-000056.html

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DEERE & CO_10-K_2023-12-15_315189-0001558370-23-019812.html

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+ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.See the information under the caption “Management’s Discussion and Analysis.”ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.We are exposed to a variety of market risks, including interest rates and currency exchange rates. We attempt to actively manage these risks. See the information under “Management’s Discussion and Analysis,” under “Financial Instrument Market Risk Information” and in Note 26 to the Consolidated Financial Statements.

DELTA AIR LINES, INC._10-Q_2023-10-12_27904-0000027904-23-000013.html

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DOMINION ENERGY, INC_10-Q_2023-11-08_715957-0000950170-23-061178.html

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EDISON INTERNATIONAL_10-Q_2023-11-01_827052-0000827052-23-000084.html

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ELECTRONIC ARTS INC._10-Q_2023-11-07_712515-0000712515-23-000048.html

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ELI LILLY & Co_10-Q_2023-11-02_59478-0000059478-23-000284.html

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EMERSON ELECTRIC CO_10-K_2023-11-13_32604-0000032604-23-000044.html

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ENTERGY CORP -DE-_10-Q_2023-11-02_65984-0000065984-23-000094.html

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EOG RESOURCES INC_10-Q_2023-11-02_821189-0000821189-23-000051.html

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EQT Corp_10-Q_2023-10-26_33213-0000033213-23-000041.html

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EQUIFAX INC_10-Q_2023-10-23_33185-0000033185-23-000045.html

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EVERSOURCE ENERGY_10-Q_2023-11-07_72741-0000072741-23-000020.html

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EXPEDITORS INTERNATIONAL OF WASHINGTON INC_10-Q_2023-11-08_746515-0000950170-23-061159.html

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EXXON MOBIL CORP_10-Q_2023-10-31_34088-0000034088-23-000056.html

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FAIR ISAAC CORP_10-K_2023-11-08_814547-0000814547-23-000022.html

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOur Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes the following: a business overview that provides a high-level summary of our strategies and initiatives, highlights from fiscal year 2023 and key performance metrics for our Software segment; a more detailed analysis of our results of operations; our capital resources and liquidity, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments; and a summary of our critical accounting estimates that involve a significant level of estimation uncertainty. Our MD&A should be read in conjunction with Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ from those referred to herein due to a number of factors, including but not limited to risks described in Item 1A, Risk Factors, in this Annual Report on Form 10-K.Our MD&A focuses on discussion of year-over-year comparisons between fiscal 2023 and fiscal 2022. Discussion of fiscal 2021 results and year-over-year comparisons between fiscal 2022 and fiscal 2021 that are not included in this Annual Report on 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 September 30, 2022.BUSINESS OVERVIEWStrategies and InitiativesIn fiscal 2023, our B2B scoring solutions, including the flagship FICO® Score, continued to be the standard measure of consumer credit risk in the U.S. We continued to promote adoption of our most predictive scores, FICO® Score 10 and 10 T. Internationally, we launched FICO® Score 10 in Canada, FICO® Score 6 in South Africa, and FICO® Score 4 and FICO® Extended Score 4 in Mexico, further expanding our financial inclusion initiatives. We also remained committed to expanding usage of the FICO® Resilience Index, a complement to FICO Scores that identifies consumers who are more resilient to economic stress relative to other consumers within the same FICO Score bands. We continued to develop scores that use alternative data to enhance conventional credit bureau data and generate scores for otherwise un-scorable consumers.During fiscal 2023, we continued to advance and drive growth through our platform-first, cloud delivered strategy in our Software segment. This strategic focus has led us to exit non-strategic products and services in the past few years, allowing us to dedicate our resources to expanding the capabilities and market penetration of FICO® Platform. We also continued our transition from private data centers to external service providers to host our technology infrastructure.We also continued to enhance stockholder value by returning cash to stockholders through our stock repurchase programs. During fiscal 2023, we repurchased 0.6 million shares at a total repurchase price of $407.3 million.Highlights from Fiscal 2023•Total revenue was $1.5 billion during fiscal 2023, a 10% increase from fiscal 2022.•Annual Recurring Revenue for our Software segment as of September 30, 2023 was $669.4 million, a 22% increase from September 30, 2022.•Dollar-Based Net Retention Rate for our Software segment during the fourth quarter of fiscal 2023 was 120%.•Operating income was $642.8 million during fiscal 2023, a 19% increase from fiscal 2022.•Net income was $429.4 million during fiscal 2023, a 15% increase from fiscal 2022.•Diluted EPS was $16.93 during fiscal 2023, a 19% increase from fiscal 2022.•Cash flow from operating activities was $468.9 million during fiscal 2023, compared with $509.5 million during fiscal 2022.•Cash and cash equivalents were $136.8 million as of September 30, 2023, compared with $133.2 million as of September 30, 2022.•Total debt balance was $1.9 billion as of September 30, 2023 and September 30, 2022.•Total share repurchases during fiscal 2023 were $407.3 million, compared with $1.1 billion during fiscal 2022.31Table of ContentsKey performance metrics for Software segmentAnnual Contract Value Bookings (“ACV Bookings”)Management regards ACV Bookings as an important indicator of future revenues, but they are not comparable to, nor are they a substitute for, an analysis of our revenues and other U.S. generally accepted accounting principles (“U.S. GAAP”) measures. We define ACV Bookings as the average annualized value of software contracts signed in the current reporting period that generate current and future on-premises and SaaS software revenue. We only include contracts with an initial term of at least 24 months and we exclude perpetual licenses and other software revenues that are non-recurring in nature. For renewals of existing software subscription contracts, we count only incremental annual revenue expected over the current contract as ACV Bookings.ACV Bookings is calculated by dividing the total expected contract value by the contract term in years. The expected contract value equals the fixed amount — including guaranteed minimums, if any — stated in the contract, plus estimates of future usage-based fees. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimates and actual results occur due to variability in the estimated usage. This variability can be the result of the economic trends in our customers’ industries; individual performance of our customers relative to their competitors; and regulatory and other factors that affect the business environment in which our customers operate.We disclose estimated revenue expected to be recognized in the future related to remaining performance obligations in Note 11 to the accompanying consolidated financial statements. However, we believe ACV Bookings is a more meaningful measure of our business as it includes estimated revenues and future billings excluded from Note 11, such as usage-based fees and guaranteed minimums derived from our on-premises software licenses, among others.The following table summarizes our ACV Bookings during the periods indicated:Quarter Ended September 30,Year Ended September 30,2023202220232022(In millions)Total on-premises and SaaS software (*)$28.0 $29.2 $93.9 $84.5 (*) During fiscal 2023, we sold certain assets related to our Siron compliance business. The amounts above exclude this product line for all periods presented.Annual Recurring Revenue (“ARR”)Accounting Standards Codification Topic 606, Revenue from Contacts with Customers, requires us to recognize a significant portion of revenue from our on-premises software subscriptions at the point in time when the software is first made available to the customer, or at the beginning of the subscription term, despite the fact that our contracts typically call for billing these amounts ratably over the life of the subscription. The remaining portion of our on-premises software subscription revenue including maintenance and usage-based fees are recognized over the life of the contract. This point-in-time recognition of a portion of our on-premises software subscription revenue creates significant variability in the revenue recognized period to period based on the timing of the subscription start date and the subscription term. Furthermore, this point-in-time revenue recognition can create a significant difference between the timing of our revenue recognition and the actual customer billing under the contract. We use ARR to measure the underlying performance of our subscription-based contracts and mitigate the impact of this variability. ARR is defined as the annualized revenue run-rate of on-premises and SaaS software agreements within a quarterly reporting period, and as such, is different from the timing and amount of revenue recognized. All components of our software licensing and subscription arrangements that are not expected to recur (primarily perpetual licenses) are excluded. We calculate ARR as the quarterly recurring revenue run-rate multiplied by four.32Table of ContentsThe following table summarizes our ARR for on-premises and SaaS software at each of the dates presented:December 31, 2021March 31, 2022June 30, 2022September 30, 2022December 31, 2022March 31, 2023June 30, 2023September 30, 2023ARR (*)(In millions)Platform (**)$90.9$95.4$107.2$113.1$132.8$152.5$164.1$173.2Non-Platform433.4430.6432.3437.0450.1461.0481.8496.2 Total$524.3$526.0$539.5$550.1$582.9$613.5$645.9$669.4PercentagePlatform17 %18 %20 %21 %23 %25 %25 %26 %Non-Platform83 %82 %80 %79 %77 %75 %75 %74 % Total100 %100 %100 %100 %100 %100 %100 %100 %YoY ChangePlatform71 %64 %62 %54 %46 %60 %53 %53 %Non-Platform3 %3 %2 %2 %4 %7 %11 %14 % Total11 %10 %10 %10 %11 %17 %20 %22 %(*) During fiscal 2023, we sold certain assets related to our Siron compliance business. The amounts and percentages above exclude this product line at all dates presented.(**) FICO platform software is a set of interoperable capabilities which use software assets owned and/or governed by FICO for building solutions and services which conform to FICO architectural standards based on key elements of Cloud Native Computing design principles. These standards encompass shared security context and access using FICO standard application programming interfaces.Dollar-Based Net Retention Rate (“DBNRR”)We consider DBNRR to be an important measure of our success in retaining and growing revenue from our existing customers. To calculate DBNRR for any period, we compare the ARR at the end of the prior comparable quarter (“base ARR”) to the ARR from that same cohort of customers at the end of the current quarter (“retained ARR”); we then divide the retained ARR by the base ARR to arrive at the DBNRR. Our calculation includes the positive impact among this cohort of customers of selling additional products, price increases and increases in usage-based fees, and the negative impact of customer attrition, price decreases, and decreases in usage-based fees during the period. However, the calculation does not include the positive impact from sales to any new customers acquired during the period. Our DBNRR may increase or decrease from period to period as a result of various factors, including the timing of new sales and customer renewal rates.The following table summarizes our DBNRR for on-premises and SaaS software for each of the periods presented:Quarter EndedDecember 31, 2021March 31, 2022June 30, 2022September 30, 2022December 31, 2022March 31, 2023June 30, 2023September 30, 2023DBNRR (*)Platform146 %144 %137 %129 %130 %146 %142 %145 %Non-Platform102 %102 %101 %101 %103 %105 %109 %111 % Total109 %109 %109 %109 %110 %114 %117 %120 %(*) During fiscal 2023, we sold certain assets related to our Siron compliance business. The percentages above exclude this product line for all periods presented.33Table of ContentsRESULTS OF OPERATIONSWe are organized into two reportable segments: Scores and Software. Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance. Segment revenues, operating income, and related financial information, including disaggregation of revenue, for the years ended September 30, 2023, 2022 and 2021 are set forth in Note 11 and Note 17 to the accompanying consolidated financial statements.RevenuesThe following tables set forth certain summary information on a segment basis related to our revenues for fiscal 2023, 2022 and 2021: Year Ended September 30,Period-to-Period ChangePeriod-to-PeriodPercentage ChangeSegment2023202220212023 to 20222022 to 20212023 to 20222022 to 2021 (In thousands)(In thousands) Scores$773,828 $706,643 $654,147 $67,185 $52,496 10 %8 %Software739,729 670,627 662,389 69,102 8,238 10 %1 % Total $1,513,557 $1,377,270 $1,316,536 136,287 60,734 10 %5 % Percentage of RevenuesYear Ended September 30,Segment202320222021Scores51 %51 %50 %Software49 %49 %50 % Total100 %100 %100 %Scores Scores segment revenues increased $67.2 million in fiscal 2023 from 2022 due to an increase of $85.6 million in our business-to-business scores revenue, partially offset by a decrease of $18.4 million in our business-to-consumer revenue. The increase in business-to-business scores revenue was primarily attributable to a higher unit price, partially offset by a decrease in mortgage originations volume. The decrease in business-to-consumer revenue was primarily attributable to a decrease in direct sales generated from the myFICO.com website.34Table of ContentsSoftware Year Ended September 30,Period-to-Period ChangePeriod-to-PeriodPercentage Change 2023202220212023 to 20222022 to 20212023 to 20222022 to 2021 (In thousands)(In thousands) On-premises and SaaS software$640,182 $564,751 $517,888 $75,431 $46,863 13 %9 %Professional services99,547 105,876 144,501 (6,329)(38,625)(6)%(27)%Total$739,729 $670,627 $662,389 69,102 8,238 10 %1 %Year Ended September 30,Period-to-Period ChangePeriod-to-PeriodPercentage Change2023202220212023 to 20222022 to 20212023 to 20222022 to 2021(In thousands)(In thousands)Software recognized at a point in time (1)$72,843 $75,647 $59,024 $(2,804)$16,623 (4)%28 %Software recognized over contract term (2)567,339 489,104 458,864 78,235 30,240 16 %7 %Total on-premises and SaaS software$640,182 $564,751 $517,888 $75,431 46,863 13 %9 %(1)Includes license portion of our on-premises subscription software and perpetual license, both of which are recognized when the software is made available to the customer, or at the start of the subscription. (2)Includes maintenance portion and usage-based fees of our on-premises subscription software, maintenance revenue on perpetual licenses, as well as SaaS revenue.Software segment revenues increased $69.1 million in fiscal 2023 from 2022 due to a $75.4 million increase in on-premises and SaaS software revenue, partially offset by a $6.3 million decrease in services revenue. The increase in our on-premises and SaaS software revenue was primarily attributable to an increase in revenue recognized over the contract term largely driven by SaaS growth.35Table of ContentsOperating Expenses and Other Income (Expense), NetThe following tables set forth certain summary information related to our consolidated statements of income and comprehensive income for fiscal 2023, 2022 and 2021: Year Ended September 30,Period-to-Period ChangePeriod-to-PeriodPercentage Change 2023202220212023 to 20222022 to 20212023 to 20222022 to 2021 (In thousands, except employees)(In thousands, exceptemployees) Revenues$1,513,557 $1,377,270 $1,316,536 $136,287 $60,734 10 %5 %Operating expenses:Cost of revenues311,053 302,174 332,462 8,879 (30,288)3 %(9)%Research and development159,950 146,758 171,231 13,192 (24,473)9 %(14)%Selling, general and administrative400,565 383,863 396,281 16,702 (12,418)4 %(3)%Amortization of intangible assets1,100 2,061 3,255 (961)(1,194)(47)%(37)%Restructuring charges— — 7,957 — (7,957)— %(100)%Gains on product line asset sales and business divestiture(1,941)— (100,139)(1,941)100,139 — %(100)%Total operating expenses870,727 834,856 811,047 35,871 23,809 4 %3 %Operating income642,830 542,414 505,489 100,416 36,925 19 %7 %Interest expense, net(95,546)(68,967)(40,092)(26,579)(28,875)39 %72 %Other income (expense), net6,340 (2,138)7,745 8,478 (9,883)(397)%(128)%Income before income taxes553,624 471,309 473,142 82,315 (1,833)17 %— %Provision for income taxes124,249 97,768 81,058 26,481 16,710 27 %21 %Net income$429,375 $373,541 $392,084 55,834 (18,543)15 %(5)%Number of employees at fiscal year-end3,455 3,404 3,650 51 (246)1 %(7)% 36Table of Contents Percentage of RevenuesYear Ended September 30, 202320222021Revenues100 %100 %100 %Operating expenses:Cost of revenues21 %22 %25 %Research and development11 %11 %13 %Selling, general and administrative26 %28 %30 %Amortization of intangible assets— %— %— % Restructuring charges— %— %1 %Gains on product line asset sales and business divestiture— %— %(7)%Total operating expenses58 %61 %62 %Operating income42 %39 %38 %Interest expense, net(6)%(5)%(3)%Other income (expense), net— %— %1 %Income before income taxes36 %34 %36 %Provision for income taxes8 %7 %6 %Net income28 %27 %30 %Cost of RevenuesCost of revenues consists primarily of employee salaries, incentives, and benefits for personnel directly involved in delivering software products, operating SaaS infrastructure, and providing support, implementation and consulting services; overhead, facilities and data center costs; software royalty fees; credit bureau data and processing services; third-party hosting fees related to our SaaS services; travel costs; and outside services.The fiscal 2023 over 2022 increase in cost of revenues of $8.9 million was primarily attributable to a $23.4 million increase in personnel and labor costs, partially offset by a $12.9 million decrease in infrastructure and facilities costs, and a $3.9 million decrease in direct materials costs. The increase in personnel and labor costs was primarily attributable to increases in employee time allocated to cost of revenues, increased stock-based compensation expense, increased incentive expense and increased headcount. The decrease in infrastructure and facilities costs was primarily attributable to a one-time reimbursement from a third-party data center provider for implementation costs previously incurred. The decrease in direct materials costs was primarily attributable to a decrease in credit bureau data costs associated with decreased business-to-consumer scoring solutions revenue through the myFICO.com website. Cost of revenues as a percentage of revenues decreased to 21% during fiscal 2023 from 22% during fiscal 2022, primarily due to increased sales of our higher margin Scores products and the one-time reimbursement from a third-party data center provider for implementation costs previously incurred.Research and DevelopmentResearch and development expenses include personnel and related overhead costs incurred in the development of new products and services, including research of mathematical and statistical models and development of new versions of Software products.The fiscal 2023 over 2022 increase in research and development expenses of $13.2 million was primarily attributable to a $10.7 million increase in personnel and labor costs as a result of increases in time allocated to research and development activities, and a $1.4 million increase in infrastructure and facilities costs primarily attributable to increased third-party data center hosting fees and SaaS costs. Research and development expenses as a percentage of revenues remained consistent at 11% during fiscal 2023 and 2022.Selling, General and AdministrativeSelling, general and administrative expenses consist principally of employee salaries, incentives, commissions and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; and business development expenses.37Table of ContentsThe fiscal 2023 over 2022 increase in selling, general and administrative expenses of $16.7 million was primarily attributable to a $10.9 million increase in personnel and labor costs, a $5.2 million increase in marketing and business development costs, a $3.3 million increase in travel costs, and a $2.2 million increase in outside services expenses, partially offset by a $4.9 million decrease in infrastructure and facilities costs. The increase in personnel and labor costs was primarily a result of increased fringe benefit costs related to our supplemental retirement and savings plan. The increases in marketing, business development and travel costs were primarily attributable to increased costs for a company-wide marketing event held during both fiscal 2023 and 2022, with higher costs incurred for the fiscal 2023 event due to the increased scope of the event. In addition, as COVID-19 related restrictions have been relaxed, we held more corporate events, increased advertising and promotional expenses and increased travel costs. The increase in outside services expenses was primarily attributable to increased legal expenses. The decrease in infrastructure and facilities costs was primarily attributable to a decrease in software royalty fees and maintenance allocated to selling, general and administrative expenses, and a favorable adjustment from the termination of an office lease related to our consolidation of office space. Selling, general and administrative expenses as a percentage of revenues decreased to 26% during fiscal 2023 from 28% during fiscal 2022.Amortization of Intangible AssetsAmortization of intangible assets consists of expense related to intangible assets recorded in connection with our acquisitions. Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are amortized using the straight-line method over periods ranging from five to ten years.Amortization expense was $1.1 million and $2.1 million for fiscal 2023 and 2022, respectively. Restructuring ChargesThere were no restructuring charges incurred during fiscal 2023 and 2022.Gains on Product Line Asset Sales and Business DivestitureThe $1.9 million gain on product line asset sale during fiscal 2023 was attributable to the sale of certain assets related to our Siron compliance business in December 2022.Interest Expense, NetInterest expense includes interest on the senior notes issued in December 2021, December 2019, and May 2018, as well as interest and credit agreement fees on the revolving line of credit and term loan. On our consolidated statements of income and comprehensive income, interest expense is netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements.The fiscal 2023 from 2022 increase in net interest expense of $26.6 million was primarily attributable to a higher average outstanding debt balance, as well as a higher average interest rate on our revolving line of credit and term loan during fiscal 2023.Other Income (Expense), NetOther income (expense), net consists primarily of unrealized investment gains/losses and realized gains/losses on certain investments classified as trading securities, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances held by our various reporting entities into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.The fiscal 2023 over 2022 change in other income (expense), net of $8.5 million, from $2.1 million in other expense, net to $6.3 million in other income, net, was primarily attributable to net unrealized gains on investments classified as trading securities in our supplemental retirement and savings plan in the current year compared to losses in the prior year, partially offset by an increase in foreign currency exchange losses.Provision for Income TaxesOur effective tax rates were 22.4%, 20.7% and 17.1% in fiscal 2023, 2022 and 2021, respectively.The increase in our effective tax rate in fiscal 2023 compared to fiscal 2022 was due to the increase in pretax income overall, in addition to a one-time increase related to the divestiture of a non-U.S. subsidiary.38Table of ContentsOperating IncomeThe following tables set forth certain summary information on a segment basis related to our operating income for fiscal 2023, 2022 and 2021: Year Ended September 30,Period-to-PeriodChangePeriod-to-PeriodPercentage ChangeSegment2023202220212023 to 20222022 to 20212023 to 20222022 to 2021 (In thousands)(In thousands) Scores$681,071 $619,355 $563,609 $61,716 $55,746 10 %10 %Software241,191 183,122 107,101 58,069 76,021 32 %71 %Unallocated corporate expenses(156,426)(142,647)(141,691)(13,779)(956)10 %1 %Total segment operating income765,836 659,830 529,019 106,006 130,811 16 %25 %Unallocated share-based compensation(123,847)(115,355)(112,457)(8,492)(2,898)7 %3 %Unallocated amortization expense(1,100)(2,061)(3,255)961 1,194 (47)%(37)%Unallocated restructuring charges— — (7,957)— 7,957 — %(100)%Gains on product line asset sales and business divestiture1,941 — 100,139 1,941 (100,139)— %(100)%Operating income$642,830 $542,414 $505,489 100,416 36,925 19 %7 %Scores Year Ended September 30,Percentage of Revenues 202320222021202320222021 (In thousands) Segment revenues$773,828 $706,643 $654,147 100 %100 %100 %Segment operating expenses(92,757)(87,288)(90,538)(12)%(12)%(14)%Segment operating income$681,071 $619,355 $563,609 88 %88 %86 %Software Year Ended September 30,Percentage of Revenues 202320222021202320222021 (In thousands) Segment revenues$739,729 $670,627 $662,389 100 %100 %100 %Segment operating expenses(498,538)(487,505)(555,288)(67)%(73)%(84)%Segment operating income$241,191 $183,122 $107,101 33 %27 %16 %The fiscal 2023 over 2022 increase in operating income of $100.4 million was primarily attributable to a $136.3 million increase in segment revenues, partially offset by a $16.5 million increase in segment operating expenses, a $13.8 million increase in corporate expenses, and an $8.5 million increase in share-based compensation cost.At the segment level, the $106.0 million increase in segment operating income was the result of a $61.7 million increase in our Scores segment operating income and a $58.1 million increase in our Software segment operating income, partially offset by a $13.8 million increase in corporate expenses.39Table of ContentsThe $61.7 million increase in our Scores segment operating income was attributable to a $67.2 million increase in segment revenue, partially offset by a $5.5 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores was 88%, consistent with fiscal 2022.The $58.1 million increase in our Software segment operating income was attributable to a $69.1 million increase in segment revenue, partially offset by a $11.0 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Software increased to 33% from 27%, primarily attributable to an increase in software revenue recognized over the contract term due to SaaS growth, a one-time reimbursement from a third-party data center provider for implementation costs previously incurred, and a decrease in sales of our lower-margin professional services.CAPITAL RESOURCES AND LIQUIDITYOutlookAs of September 30, 2023, we had $136.8 million in cash and cash equivalents, which included $110.4 million held by our foreign subsidiaries. We believe our cash and cash equivalents balances, including those held by our foreign subsidiaries, as well as available borrowings from our $600 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future, including the $15.0 million principal payments on our term loan due over the next 12 months. Under our current financing arrangements, we have no other significant debt obligations maturing over the next twelve months. For jurisdictions outside the U.S. where cash may be repatriated in the future, the Company expects the net impact of any repatriations to be immaterial to the Company’s overall tax liability. In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and cash equivalents to fund such activities in the future. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.Summary of Cash Flows Year Ended September 30, 202320222021 (In thousands)Cash provided by (used in):Operating activities$468,915 $509,450 $423,817 Investing activities(15,954)(5,671)137,850 Financing activities(455,001)(547,165)(523,571)Effect of exchange rate changes on cash5,616 (18,766)(136)Increase (decrease) in cash and cash equivalents$3,576 $(62,152)$37,960 Cash Flows from Operating ActivitiesOur primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities totaled $468.9 million in fiscal 2023 compared to $509.5 million in fiscal 2022. The $40.6 million decrease was attributable to a $68.9 million decrease in non-cash items and a $27.5 million decrease that resulted from timing of receipts and payments in our ordinary course of business, partially offset by a $55.8 million increase in net income.Cash Flows from Investing ActivitiesNet cash used in investing activities totaled $16.0 million in fiscal 2023 compared to $5.7 million in fiscal 2022. The $10.3 million increase was primarily attributable to an $8.4 million decrease in cash proceeds from the product line asset sales, net of cash transferred and a $3.0 million decrease in proceeds from sale of marketable securities.40Table of ContentsCash Flows from Financing ActivitiesNet cash used in financing activities totaled $455.0 million in fiscal 2023 compared to $547.2 million in fiscal 2022. The $92.2 million decrease was primarily attributable to a $698.7 million decrease in repurchases of common stock and an $8.8 million decrease in payments on debt issuance costs, partially offset by a $550.0 million decrease in proceeds from the issuance of senior notes, a $45.8 million decrease in proceeds, net of payments, on our revolving line of credit and term loan, and a $25.7 million increase in taxes paid related to net share settlement of equity awards.Repurchases of Common StockIn October 2022, our Board of Directors approved a stock repurchase program replacing our previously authorized program. This program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions. As of September 30, 2023, we had $120.5 million remaining under our current stock repurchase program. During fiscal 2023 and 2022, we expended $407.3 million and $1.1 billion, respectively, under our current and previously authorized stock repurchase programs.Revolving Line of Credit and Term LoanWe have a $600 million unsecured revolving line of credit and a $300 million unsecured term loan with a syndicate of banks that mature on August 19, 2026. Borrowings under the revolving line of credit and term loan can be used for working capital and general corporate purposes and may also be used for the refinancing of existing debt, acquisitions, and the repurchase of our common stock. The term loan requires principal payments in consecutive quarterly installments of $3.75 million on the last business day of each quarter. In November 2022, we amended our credit agreement to replace the LIBOR reference rate with the Secured Overnight Financing Rate (“SOFR”) reference rate. Interest rates on amounts borrowed under the revolving line of credit and term loan are based on (i) an adjusted base rate, which is the greatest of (a) the prime rate, (b) the Federal Funds rate plus 0.5%, and (c) one-month adjusted term SOFR rate plus 1%, plus, in each case, an applicable margin, or (ii) an adjusted term SOFR rate plus an applicable margin. The applicable margin for base rate borrowings and for SOFR borrowings is determined based on our consolidated leverage ratio. The applicable margin for base rate borrowings ranges from 0% to 0.75% per annum and for SOFR borrowings ranges from 1% to 1.75% per annum. In addition, we must pay certain credit facility fees. The revolving line of credit and term loan contain certain restrictive covenants including a maximum consolidated leverage ratio of 3.5 to 1.0, subject to a step up to 4.0 to 1.0 following certain permitted acquisitions and subject to certain conditions, and a minimum interest coverage ratio of 3.0 to 1.0. The credit agreement also contains other covenants typical of unsecured credit facilities.As of September 30, 2023, we had $300.0 million in borrowings outstanding under the revolving line of credit at a weighted-average interest rate of 6.678%, of which $35.0 million was classified as a current liability and $265.0 million was classified as a long-term liability. In addition, as of September 30, 2023, we had $273.8 million in outstanding balance under the term loan at an interest rate of 6.752%, of which $15.0 million was classified as a current liability and $258.8 million was classified as a long-term liability. The current and long-term revolving line of credit and term loan liabilities were recorded in current maturities on debt and long-term debt, respectively, within the accompanying consolidated balance sheets. We were in compliance with all financial covenants under this credit agreement as of September 30, 2023.Senior NotesOn May 8, 2018, we issued $400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”). The 2018 Senior Notes require interest payments semi-annually at a rate of 5.25% per annum and will mature on May 15, 2026. On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes”). The 2019 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028. On December 17, 2021, we issued $550 million of additional senior notes of the same class as the 2019 Senior Notes in a private offering to qualified institutional investors (the “2021 Senior Notes,” and collectively with the 2018 Senior Notes and the 2019 Senior Notes, the “Senior Notes”). The 2021 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028, the same date as the 2019 Senior Notes. The indentures for the Senior Notes contain certain covenants typical of unsecured obligations. As of September 30, 2023, the carrying value of the Senior Notes was $1.3 billion and we were in compliance with all financial covenants under these obligations.41Table of ContentsContractual ObligationsThe following table presents a summary of our contractual obligations at September 30, 2023: Year Ending September 30,ThereafterTotal 20242025202620272028 (In thousands)Senior Notes (1)$— $— $400,000 $— $900,000 $— $1,300,000 Revolving line of credit and term loan (1)15,000 15,000 543,750 — — — 573,750 Interest due on Senior Notes57,000 57,000 57,000 36,000 36,000 — 243,000 Operating lease obligations17,731 11,872 8,901 3,949 268 160 42,881 Unrecognized tax benefits (2)— — — — — — 13,849 Total commitments$89,731 $83,872 $1,009,651 $39,949 $936,268 $160 $2,173,480 (1)Represents the unpaid principal payments due under the Senior Notes, revolving line of credit, and term loan.(2)Represents unrecognized tax benefits related to uncertain tax positions. As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the section of the table showing payment by fiscal year.CRITICAL ACCOUNTING POLICIES AND ESTIMATESWe prepare our consolidated financial statements in conformity with U.S. GAAP. These accounting principles require management to make certain judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including those relating to revenue recognition, goodwill resulting from business combinations and other long-lived assets — impairment assessment, share-based compensation, income taxes, and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on the specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such differences could be material to our financial condition and results of operations. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting estimates, which involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results.Revenue RecognitionContracts with CustomersOur revenue is primarily derived from on-premises software and SaaS subscriptions, professional services and scoring services. For contracts with customers that contain various combinations of products and services, we evaluate whether the products or services are distinct — distinct products or services will be accounted for as separate performance obligations, while non-distinct products or services are combined with others to form a single performance obligation. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative standalone selling price (“SSP”) basis. Revenue is recognized when control of the promised goods or services is transferred to our customers.42Table of ContentsOur on-premises software is primarily sold on a subscription basis, which includes a term-based license and post-contract support or maintenance, both of which generally represent distinct performance obligations and are accounted for separately. The transaction price is either a fixed fee, or a usage-based fee — sometimes subject to a guaranteed minimum. When the amount is fixed, including the guaranteed minimum in a usage-based fee, license revenue is recognized at the point in time when the software is made available to the customer. Maintenance revenue is recognized ratably over the contract period as customers simultaneously consume and receive benefits. Any usage-based fees not subject to a guaranteed minimum or earned in excess of the minimum amount are recognized when the subsequent usage occurs. We occasionally sell software arrangements consisting of on-premises perpetual licenses and maintenance. License revenue is recognized at a point in time when the software is made available to the customer and maintenance revenue is recognized ratably over the contract term.Our SaaS products provide customers with access to and standard support for our software on a subscription basis, delivered through our own infrastructure or third-party cloud services. The SaaS transaction contracts typically include a guaranteed minimum fee per period that allows up to a certain level of usage and a consumption-based variable fee in excess of the minimum threshold; or a consumption-based variable fee not subject to a minimum threshold. The nature of our SaaS arrangements is to provide continuous access to our hosted solutions in the cloud, i.e., a stand-ready obligation that comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). We estimate the total variable consideration at contract inception — subject to any constraints that may apply — and update the estimates as new information becomes available and recognize the amount ratably over the SaaS service period, unless we determine it is appropriate to allocate the variable amount to each distinct service period and recognize revenue as each distinct service period is performed.Our professional services include software implementation, consulting, model development and training. Professional services are sold either standalone, or together with other products or services and generally represent distinct performance obligations. The transaction price can be a fixed amount or a variable amount based upon the time and materials expended. Revenue on fixed-price services is recognized using an input method based on labor hours expended, which we believe provides a faithful depiction of the transfer of services. Revenue on services provided on a time and materials basis is recognized by applying the “right-to-invoice” practical expedient as the amount to which we have a right to invoice the customer corresponds directly with the value of our performance to the customer. Our scoring services include both business-to-business and business-to-consumer offerings. Our business-to-business scoring services typically include a license that grants consumer reporting agencies the right to use our scoring solutions in exchange for a usage-based royalty. Revenue is generally recognized when the usage occurs. Business-to-consumer offerings provide consumers with access to their FICO® Scores and credit reports, as well as other value-add services. These are provided as either a one-time or ongoing subscription service renewed monthly or annually, all with a fixed consideration. The nature of the subscription service is a stand-ready obligation to generate credit reports, provide credit monitoring, and other services for our customers, which comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). Revenue from one-time or monthly subscription services is recognized during the period when service is performed. Revenue from annual subscription services is recognized ratably over the subscription period.Significant JudgmentsOur contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct and should be accounted for separately may require significant judgment. Specifically, when implementation service is included in the original software or SaaS offerings, judgment is required to determine if the implementation service significantly modifies or customizes the software or SaaS service in such a way that the risks of providing it and the customization service are inseparable. In rare instances, contracts may include significant modification or customization of the software of SaaS service and will result in the combination of software or SaaS service and implementation service as one performance obligation.We determine the SSPs using data from our historical standalone sales, or, in instances where such information is not available (such as when we do not sell the product or service separately), we consider factors such as the stated contract prices, our overall pricing practices and objectives, go-to-market strategy, size and type of the transactions, and effects of the geographic area on pricing, among others. When the selling price of a product or service is highly variable, we may use the residual approach to determine the SSP of that product or service. Significant judgment may be required to determine the SSP for each distinct performance obligation when it involves the consideration of many market conditions and entity-specific factors discussed above.43Table of ContentsSignificant judgment may be required to determine the timing of satisfaction of a performance obligation in certain professional services contracts with a fixed consideration, in which we measure progress using an input method based on labor hours expended. In order to estimate the total hours of the project, we make assumptions about labor utilization, efficiency of processes, the customer’s specification and IT environment, among others. For certain complex projects, due to the risks and uncertainties inherent with the estimation process and factors relating to the assumptions, actual progress may differ due to the change in estimated total hours. Adjustments to estimates are made in the period in which the facts requiring such revisions become known and, accordingly, recognized revenues are subject to revisions as the contract progresses to completion.Capitalized Commission CostsWe capitalize incremental commission fees paid as a result of obtaining customer contracts. Capitalized commission costs are amortized on a straight-line basis over ten years — determined using a portfolio approach — based on the transfer of goods or services to which the assets relate, taking into consideration both the initial and future contracts as we do not typically pay a commission on a contract renewal. The amortization costs are included in selling, general, and administrative expenses of our consolidated statements of income and comprehensive income.We apply a practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are recorded within selling, general, and administrative expenses.Goodwill and Other Long-Lived Assets - Impairment AssessmentGoodwill represents the excess of cost over the fair value of identifiable assets acquired and liabilities assumed in business combinations. We assess goodwill for impairment for each of our reporting units on an annual basis during our fourth fiscal quarter using a July 1 measurement date unless circumstances require a more frequent measurement. We have determined that our reporting units are the same as our reportable segments. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit's carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying value, we would bypass the two-step impairment test. Events and circumstances we consider in performing the “step zero” qualitative assessment include macro-economic conditions, market and industry conditions, internal cost factors, share price fluctuations, and the operational stability and overall financial performance of the reporting units. If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying amount, we would perform the first step (“step one”) of the two-step impairment test and calculate the estimated fair value of the reporting unit by using discounted cash flow valuation models and by comparing our reporting units to guideline publicly-traded companies. These methods require estimates of our future revenues, profits, capital expenditures, working capital, and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. Alternatively, we may bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing step one of the goodwill impairment test.For fiscal 2022 and 2023, we performed a step zero qualitative analysis for our annual assessment of goodwill impairment. After evaluating and weighing all relevant events and circumstances, we concluded that it is not more likely than not that the fair value of either of our reporting units was less than their carrying amounts. Consequently, we did not perform a step one quantitative analysis and determined goodwill was not impaired for either of our reporting units for fiscal 2022 and 2023.44Table of ContentsOur other long-lived assets are assessed for potential impairment when there is evidence that events and circumstances related to our financial performance and economic environment indicate the carrying amount of the assets may not be recoverable. When impairment indicators are identified, we test for impairment using undiscounted projected cash flows. If such tests indicate impairment, then we measure and record the impairment as the difference between the carrying value of the asset and the fair value of the asset. Significant management judgment is required in forecasting future operating results used in the preparation of the projected cash flows. Should different conditions prevail, material write downs of our other long-lived assets could occur. We did not recognize any impairment charges on other long-lived assets in fiscal 2023 and 2022. As discussed above, while we believe that the assumptions and estimates utilized were appropriate based on the information available to management, different assumptions, judgments and estimates could materially affect our impairment assessments for our goodwill and other long-lived assets. Historically, there have been no significant changes in our estimates or assumptions that would have had a material impact for our goodwill or other long-lived assets impairment assessment. We believe our projected operating results and cash flows would need to be significantly less favorable to have a material impact on our impairment assessment. However, based upon our historical experience with operations, we do not believe there is a reasonable likelihood of a significant change in our projections.Share-Based CompensationWe measure share-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award (generally three to four years). We use the Black-Scholes valuation model to determine the fair value of our stock options and a Monte Carlo valuation model to determine the fair value of our market share units. Our valuation models and generally accepted valuation techniques require us to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, expected dividend yield, employee turnover rates and employee stock option exercise behaviors. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions. See Note 15 to the accompanying consolidated financial statements for further discussion of our share-based employee benefit plans.Income TaxesWe estimate our income taxes based on the various jurisdictions where we conduct business, which involves significant judgment in determining our income tax provision. We estimate our current tax liability using currently enacted tax rates and laws and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities recorded on our consolidated balance sheets using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled. We then assess the likelihood our deferred tax assets will be realized and to the extent we believe realization is not more likely than not, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding income tax expense in our consolidated statements of income and comprehensive income. In assessing the need for the valuation allowance, we consider future taxable income in the jurisdictions we operate; our ability to carry back tax attributes to prior years; an analysis of our deferred tax assets and the periods over which they will be realizable; and ongoing prudent and feasible tax planning strategies. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we record the increase.We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the technical merits of the tax position indicate it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions and they are evaluated on a quarterly basis. Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results.45Table of ContentsContingencies and LitigationWe are subject to various proceedings, lawsuits and claims relating to products and services, technology, labor, stockholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. If the potential loss is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. If the potential loss is considered less than probable or the amount cannot be reasonably estimated, disclosure of the matter is considered. The amount of loss accrual or disclosure, if any, is determined after analysis of each matter, and is subject to adjustment if warranted by new developments or revised strategies. Due to uncertainties related to these matters, accruals or disclosures are based on the best information available at the time. Significant judgment is required in both the assessment of likelihood and in the determination of a range of potential losses. Revisions in the estimates of the potential liabilities could have a material impact on our consolidated financial position or consolidated results of operations. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.New Accounting PronouncementsFor information about recent accounting pronouncements not yet adopted and the impact on our consolidated financial statements, refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Nature of Business and Summary of Significant Accounting Policies, in our accompanying Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.Item 7A. Quantitative and Qualitative Disclosures about Market RiskMarket Risk DisclosuresWe are exposed to market risk related to changes in interest rates and foreign exchange rates. We do not use derivative financial instruments for speculative or trading purposes.Interest Rate We maintain an investment portfolio consisting of bank deposits and money market funds. The funds provide daily liquidity and may be subject to interest rate risk and fall in value if market interest rates increase. We do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. The following table presents the principal amounts and related weighted-average yields for our investments with interest rate risk at September 30, 2023 and 2022: September 30, 2023September 30, 2022 Cost BasisCarryingAmountAverageYieldCost BasisCarryingAmountAverageYield (Dollars in thousands)Cash and cash equivalents$136,778 $136,778 3.05 %$133,202 $133,202 1.23 %On May 8, 2018, we issued $400 million of senior notes in a private placement to qualified institutional investors (the “2018 Senior Notes”). On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes”). On December 17, 2021, we issued $550 million of additional senior notes of the same class as the 2019 Senior Notes in a private placement to qualified institutional investors (the “2021 Senior Notes” and collectively with the 2018 Senior Notes and 2019 Senior Notes, the “Senior Notes”). The fair value of the Senior Notes may increase or decrease due to various factors, including fluctuations in market interest rates and fluctuations in general economic conditions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity” for additional information on the Senior Notes. The following table presents the face values and fair values for the Senior Notes at September 30, 2023 and 2022: September 30, 2023September 30, 2022 Face Value (*)Fair ValueFace Value (*)Fair Value (In thousands)The 2018 Senior Notes400,000 386,000 400,000 381,500 The 2019 Senior Notes and the 2021 Senior Notes900,000 803,250 900,000 767,250 Total$1,300,000 $1,189,250 $1,300,000 $1,148,750 46Table of Contents(*) The carrying value of the Senior Notes was the face value reduced by the net debt issuance costs of $11.5 million and $14.3 million at September 30, 2023 and 2022, respectively. We have interest rate risk with respect to our unsecured revolving line of credit and term loan. Interest rates on amounts borrowed under the revolving line of credit and term loan are based on (i) an adjusted base rate, which is the greatest of (a) the prime rate, (b) the Federal Funds rate plus 0.5%, and (c) one-month adjusted term SOFR rate plus 1%, plus, in each case, an applicable margin, or (ii) an adjusted term SOFR rate plus an applicable margin. The applicable margin for base rate borrowings and for SOFR borrowings is determined based on our consolidated leverage ratio. The applicable margin for base rate borrowings ranges from 0% to 0.75% per annum and for SOFR borrowings ranges from 1% to 1.75% per annum. A change in interest rates on this variable rate debt impacts the interest incurred and cash flows, but does not impact the fair value of the instrument. As of September 30, 2023, we had $300.0 million in borrowings outstanding under the revolving line of credit at a weighted-average interest rate of 6.678% and $273.8 million in outstanding balance of the term loan at an interest rate of 6.752%.Foreign Currency Forward ContractsWe maintain a program to manage our foreign exchange rate risk on existing foreign-currency-denominated receivable and cash balances by entering into forward contracts to sell or buy foreign currencies. At period end, foreign-currency-denominated receivable and cash balances held by our various reporting entities are remeasured into their respective functional currencies at current market rates. The change in value from this remeasurement is then reported as a foreign exchange gain or loss for that period in our accompanying consolidated statements of income and comprehensive income and the resulting gain or loss on the forward contract mitigates the foreign exchange rate risk of the associated assets. All of our foreign currency forward contracts have maturity periods of less than three months. Such derivative financial instruments are subject to market risk.The following tables summarize our outstanding foreign currency forward contracts, by currency, at September 30, 2023 and 2022: September 30, 2023 Contract AmountFair Value ForeignCurrencyUSDUSD (In thousands)Sell foreign currency:Euro (EUR)EUR12,900 $13,621 — Buy foreign currency:British pound (GBP)GBP10,700 $13,100 — Singapore dollar (SGD)SGD8,569 $6,300 — September 30, 2022 Contract AmountFair Value ForeignCurrencyUSDUSD (In thousands)Sell foreign currency:Euro (EUR)EUR13,500 $13,158 — Buy foreign currency:British pound (GBP)GBP11,848 $13,100 — Singapore dollar (SGD)SGD6,169 $4,300 — The foreign currency forward contracts were entered into on September 30, 2023 and 2022; therefore, their fair value was $0 at each of these dates.47Table of Contents