Costco Wholesale (COST) 10-Q2023 Q3 Quarterly report

Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At May 7, 2023, Costco operated 852 warehouses worldwide: 586 in the United States (U.S.) located in 46 states, Washington, D.C., and Puerto Rico, 107 in Canada, 40 in Mexico, 32 in Japan, 29 in the United Kingdom (U.K.), 18 in Korea, 14 in Taiwan, 14 in Australia, four in Spain, three in China, two in France, and one each in Iceland, New Zealand, and Sweden. The Company operates e-commerce websites in the U.S., Canada, U.K., Mexico, Korea, Taiwan, Japan, and Australia.

The condensed consolidated financial statements include the accounts of Costco, its wholly-owned subsidiaries, and a subsidiary in which it has a controlling interest. All material inter-company transactions among the Company and its consolidated subsidiaries have been eliminated in consolidation. Unless otherwise noted, references to net income relate to net income attributable to Costco.

These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended August 28, 2022.

The Company operates on a 52/53 week fiscal year basis, with the fiscal year ending on the Sunday closest to August 31. Fiscal 2023 is a 53-week year ending on September 3, 2023. References to the third quarter of 2023 and 2022 relate to the 12-week fiscal quarters ended May 7, 2023, and May 8, 2022. References to the first thirty-six weeks of 2023 and 2022 relate to the 36 weeks ended May 7, 2023, and May 8, 2022.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable. Actual results could differ from those estimates and assumptions.

Reclassifications were made to the condensed consolidated statement of cash flows for the first thirty-six weeks of 2022 to conform with current year presentation.

The Company leases land, buildings, equipment, and other assets at warehouses, offices, or within the operations that support supply chain and distribution channels. The Company reviews lease right-of-use assets for impairment when events or changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable. The Company also occasionally revisits and modifies the terms of its leasing arrangements. During the first quarter and third quarter of 2023, the Company recognized charges of $93 and $298, primarily related to the impairment of certain leased assets associated with charter shipping activities. This charge is included in merchandise costs.

The maturities of available-for-sale and held-to-maturity securities at May 7, 2023 are as follows:

The table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicates the level within the fair-value hierarchy reflecting the valuation techniques utilized.

At May 7, 2023, and August 28, 2022, the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers between levels during the first thirty-six weeks of 2023 or 2022.

The carrying value of the Company’s long-term debt consisted of the following:

The fair value of the Senior Notes is estimated using Level 2 inputs. Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japan subsidiary, valued using Level 3 inputs. The fair value of the Company's long-term debt, including the current portion, was approximately $5,907 and $6,033 at May 7, 2023, and August 28, 2022.

A quarterly cash dividend of $1.02 per share was declared on April 19, 2023 and paid on May 19, 2023. The Company's quarterly dividend was $0.90 per share in the third quarter of 2022 and dividends totaled $2.82 and $2.48 per share in the first thirty-six weeks of 2023 and 2022.

The Company's share repurchase program is conducted under a $4,000 authorization by the Board of Directors, which expires in January 2027. At May 7, 2023, the remaining amount available under the program was $3,793. The following table summarizes the Company's stock repurchase activity:

These amounts may differ from the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each quarter. Purchases are made from time to time, as conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1.

The 2019 Incentive Plan authorized the issuance of 17,500,000 shares (10,000,000 RSUs) of common stock for future grants, plus the remaining shares that were available for grant and the future forfeited shares from grants under the previous plan, up to a maximum of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes.

At May 7, 2023, 8,724,000 shares were available to be granted as RSUs, and the following awards were outstanding:

The remaining unrecognized compensation cost related to RSUs unvested at May 7, 2023, was $930, and the weighted-average period over which this cost will be recognized is 1.7 years.

The following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and of potentially dilutive common shares outstanding (shares in 000s):

The Company is involved in a number of claims, proceedings and litigations arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. The Company has recorded immaterial accruals with respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will monitor the matter for developments that will make the contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties.

PAGA, asserting the same Labor Code violations and seeking civil penalties and attorneys' fees. The case has been stayed pending arbitration of the plaintiff’s individual claims.

The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows; it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year.

The following table provides information for the Company's reportable segments:

The following table summarizes net sales by merchandise category; sales from e-commerce websites and business centers have been allocated to the applicable merchandise categories:

Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For these purposes, forward-looking statements are statements that address activities, events, conditions or developments that the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth, changes in comparable sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation, and the demand for our products and services. In some cases, forward-looking statements can be identified because they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Such forward-looking statements involve risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, inflation or deflation, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real estate, capital spending, actions of vendors, rising costs associated with employees (generally including health-care costs), energy and certain commodities, geopolitical conditions (including tariffs and the Ukraine conflict), the ability to maintain effective internal control over financial reporting, regulatory and other impacts related to climate change, public-health related factors, and other risks identified from time to time in the Company's public statements and reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update these statements, except as required by law.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q), as well as our consolidated financial statements, the accompanying Notes to Financial Statements, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K, filed with the United States Securities and Exchange Commission on October 5, 2022.

We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limited selection of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers. We often sell inventory before we are required to pay for it, even while taking advantage of early payment discounts.

We believe that the most important driver of our profitability is increasing net sales, particularly comparable sales. Net sales includes our core merchandise categories (foods and sundries, non-foods, and fresh foods), warehouse ancillary (gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and other businesses (e-commerce, business centers, travel and other). We define

comparable sales as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and sales related to e-commerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to our international operations); inflation and changes in the cost of gasoline and associated competitive conditions. The higher our comparable sales exclusive of these items, the more we can leverage our SG&A expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long-term. Another substantial factor in net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Net sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and regional wholesalers and retailers, including those with e-commerce operations. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and merchandise mix, including increasing the penetration of our private-label items, and through online offerings.

Our philosophy is to provide our members with quality goods and services at competitive prices. We do not focus in the short-term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” – consistently providing the most competitive values. Merchandise costs in the third quarter of 2023 continued to be impacted by inflation. The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to cost increases. Those strategies can include, but are not limited to, working with our suppliers to share in absorbing cost increases, earlier-than-usual purchasing and in greater volumes, as well as passing cost increases on to our members. Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting gross margin and gross margin as a percentage of net sales (gross margin percentage).

We believe our gasoline business enhances traffic in our warehouses, but it generally has a lower gross margin percentage relative to our non-gasoline businesses. It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline businesses. A higher penetration of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline prices may significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively impacts our gross margin percentage but decreases our SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. Additionally, government actions in various countries relating to tariffs, particularly China and the United States, have affected the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. Higher tariffs could adversely impact our results.

We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available and desirable sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are continuing to decline in significance as they relate to the results of our total operations. Our rate of square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business, domestically and internationally, generally has a lower gross margin percentage than our warehouse operations.

The membership format is an integral part of our business and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members,

and sustain high renewal rates materially influences our profitability. Our paid-membership growth rate may be adversely impacted when warehouse openings occur in existing markets as compared to new markets.

Our financial performance depends heavily on controlling costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, particularly health care and utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction require maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business operates on very low margins, modest changes in various items in the consolidated statements of income, particularly merchandise costs and SG&A expenses, can have substantial impacts on net income.

In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies into U.S. dollars. This impact of foreign-exchange rate changes is calculated based on the difference between the current and prior period's currency exchange rates. The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and prior period's average price per gallon sold.

Our fiscal year ends on the Sunday closest to August 31. References to the third quarter of 2023 and 2022 relate to the 12-week fiscal quarters ended May 7, 2023, and May 8, 2022. References to the first thirty-six weeks of 2023 and 2022 relate to the 36 weeks ended May 7, 2023, and May 8, 2022. Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise noted, references to net income relate to net income attributable to Costco.

Comparable sales were positively impacted by an increase in shopping frequency, largely offset by a decrease in average ticket in the third quarter of 2023. Comparable sales increased 4% in the first thirty-six weeks of 2023, driven by an increase in shopping frequency.

Membership fee revenue increased 6% in both the third quarter and first thirty-six weeks of 2023, driven by new member sign-ups, upgrades to Executive Membership, and a higher renewal rate. Changes in foreign currencies relative to the U.S. dollar negatively impacted membership fees by $17 and $70 in the third quarter and first thirty-six weeks of 2023. At the end of the third quarter of 2023, our renewal rates were 92.6% in the U.S. and Canada and 90.5% worldwide. Renewal rates continue to benefit from more members auto renewing and increased penetration of Executive members, who on average renew at a higher rate. Our renewal rate, which excludes affiliates of Business members, is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date.

We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period. Our membership counts include active memberships and memberships that have not renewed within the 12 months prior to the reporting date.

Total gross margin percentage increased 13 basis points compared to the third quarter of 2022. Excluding the impact of gasoline price deflation on net sales, gross margin percentage was 10.16%, a decrease of three basis points. This was driven by a net 52 basis-point decrease due to a charge, primarily for the discontinuation of our charter shipping activities and the benefit from the absence of a charge related to granting employees additional vacation as was recorded in the third quarter of 2022. Increased 2% rewards negatively impacted gross margin by nine basis points. Gross margin was positively impacted by 25 basis points due to the absence of a LIFO charge as was recorded in the third quarter of 2022. Core merchandise categories positively impacted gross margin by 24 basis points, due to foods and sundries,

The gross margin in core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), increased 17 basis points. The increase was primarily due to foods and sundries and non-foods, partially offset by fresh foods. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.

Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage), performed similarly to the consolidated results above in our U.S. segment. Gross margin percentage increased in our Canadian and Other International segment due to increases in core merchandise categories and warehouse ancillary and other businesses. All segments were negatively impacted by increased 2% rewards.

The gross margin in core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), decreased 14 basis points. The decrease was primarily due to fresh foods and non-foods, partially offset by foods and sundries.

Gross margin percentage was flat in our U.S. segment due to the charge related to the discontinuation of our charter shipping activities discussed above, offset by a smaller LIFO charge and increases in warehouse ancillary and other businesses, primarily gasoline. Gross margin percentage decreased in our Canadian and Other International segment due to decreases in core merchandise categories, partially offset by warehouse ancillary and other businesses. All segments were negatively impacted by increased 2% rewards.

SG&A expenses as a percentage of net sales increased 49 basis points. SG&A expenses as a percentage of net sales excluding the impact of gasoline price deflation was 8.96%, an increase of 34 basis points. The comparison to last year was negatively impacted by 35 basis points in warehouse operations and other businesses, largely attributable to the increased wages and benefits that were effective in March and July 2022, and March 2023 and slower sales growth. Central operating costs were also higher by nine basis points, and preopening costs were higher by one basis point. SG&A was positively impacted by 11 basis points due to the absence of a charge related to granting our employees additional vacation as was recorded in the prior year. Changes in foreign currencies relative to the U.S. dollar decreased SG&A expenses by approximately $65 compared to the third quarter of 2022.

SG&A expenses as a percentage of net sales increased 10 basis points. SG&A expenses as a percentage of net sales excluding the impact of gasoline price inflation was 9.16%, an increase of 12 basis points. The comparison to last year was negatively impacted by 16 basis points in warehouse operations and other businesses, largely attributable to the increased wages and benefits that were effective in March and July 2022, and March 2023 and slower sales growth. Central operating costs were also higher by seven basis points. SG&A was positively impacted by 11 basis points due to the absence of a write-off of certain information technology assets and a charge related to granting our employees additional vacation as were recorded in the prior year. Changes in foreign currencies relative to the U.S. dollar decreased SG&A expenses by approximately $261 compared to the first thirty-six weeks of 2022.

Interest expense is primarily related to Senior Notes and financing leases. The decrease in interest expense for the first thirty-six weeks of 2023 was due to repayment of the 2.300% Senior Notes on December 1, 2021.

The increase in interest income in the third quarter and first thirty-six weeks of 2023 was due to higher global interest rates. Foreign-currency transaction gains (losses), net, include mark-to-market adjustments for forward foreign-exchange contracts and the revaluation or settlement of monetary assets and liabilities by our Canadian and Other International operations. See Derivatives and Foreign Currency sections in Item 8, Note 1 of our Annual Report on Form 10-K, for the fiscal year ended August 28, 2022.

The effective tax rate for the first thirty-six weeks of 2023 was impacted by net discrete tax benefits of $57, primarily due to excess tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.2%.

The effective tax rate for the first thirty-six weeks of 2022 was impacted by net discrete tax benefits of $114, primarily due to excess tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.3%.

The following table summarizes our significant sources and uses of cash and cash equivalents:

Our primary sources of liquidity are cash flows from operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $13,708 and $11,049 at May 7, 2023, and August 28, 2022. Of these balances, unsettled credit and debit card receivables represented approximately $2,236 and $2,010 at May 7, 2023, and August 28, 2022. These receivables generally settle within four days.

Material contractual obligations arising in the normal course of business primarily consist of purchase obligations, long-term debt and related interest payments, leases, and construction and land purchase obligations.

Purchase obligations consist of contracts primarily related to merchandise, equipment, and third-party services, the majority of which are due in the next 12 months. Construction and land purchase obligations consist of contracts primarily related to the development and opening of new and relocated warehouses, the majority of which (other than leases) are due in the next 12 months.

Management believes that our cash and investment position and operating cash flows with capacity under existing and available credit agreements will be sufficient to meet our liquidity and capital requirements for the foreseeable future. We believe that our U.S. current and projected asset position is sufficient to meet our U.S. liquidity requirements.

Net cash provided by operating activities totaled $7,343 in the first thirty-six weeks of 2023, compared to $4,886 in the first thirty-six weeks of 2022. Our cash flow provided by operations is primarily from net sales and membership fees. Cash flow used in operations generally consists of payments to merchandise suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including inventory turnover, the forward deployment of inventory to accelerate delivery times, payment terms with suppliers, and early payments to obtain discounts.

Net cash used in investing activities totaled $3,147 in the first thirty-six weeks of 2023, compared to $2,428 in the first thirty-six weeks of 2022, and is primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments.

Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations, and working capital. In the first thirty-six weeks of 2023, we spent $2,767 on capital expenditures, and it is our current intention to spend approximately $3,800 to $4,200 during fiscal 2023. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. We opened 17 new warehouses, including three relocations, in the first thirty-six weeks of 2023 and plan to open nine additional new warehouses in the remainder of fiscal 2023. There can be no assurance that current expectations will be realized, and plans are subject to change upon further review of our capital expenditure needs and the economic environment.

Net cash used in financing activities totaled $1,950 in the first thirty-six weeks of 2023, compared to $2,343 in the first thirty-six weeks of 2022. Cash flow used in financing activities during the first thirty-six weeks of 2023 was primarily related to the payment of dividends, repurchases of common stock, and withholding taxes on stock-based awards. In the first thirty-six weeks of 2022, cash flow used in financing activities included the repayment of our 2.300% Senior Notes and the payment of dividends.

A quarterly cash dividend of $1.02 per share was declared on April 19, 2023, payable to shareholders of record on May 5, 2023, which was paid on May 19, 2023.

On January 19, 2023, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in January 2027. During the first thirty-six weeks of 2023 and 2022, we repurchased 908,000 and 490,000 shares of common stock, at an average price per share of $492.30 and $523.61, totaling approximately $447 and $257. These amounts may differ from the accompanying condensed consolidated statements of cash flows due to changes in unsettled repurchases at the end of a quarter. Purchases are made from time to time, as conditions warrant, in the open market or in block purchases, pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act. The remaining amount available to be purchased under our approved plan was $3,793 at the end of the third quarter.

We maintain bank credit facilities for working capital and general corporate purposes. At May 7, 2023, we had borrowing capacity under these facilities of $1,312. Our international operations maintain $824 of this capacity under bank credit facilities, of which $174 is guaranteed by the Company. Short-term borrowings outstanding under the bank credit facilities, which are included in other current liabilities on the consolidated balance sheets, were $54 and $88 at the end of the third quarter of 2023 and at the end of fiscal 2022.

The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $226. The outstanding commitments under these facilities at the end of the third quarter of 2023 totaled $189, most of which were standby letters of credit that do not expire or have expiration dates within one year. The bank credit facilities have various expiration dates, most within one year, and we generally intend to renew these facilities. The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercial letters of credit outstanding.

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires that we make estimates and judgments. We base these on historical experience and on assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K, for the fiscal year ended August 28, 2022. There have been no material changes to the critical accounting estimates previously disclosed in that Report.

There have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form 10-K, for the fiscal year ended August 28, 2022.

Our direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year ended August 28, 2022.

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of May 7, 2023 and, based on their evaluation, have concluded the disclosure controls and procedures were effective as of such date.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the third quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the other information set forth in the Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K, for the fiscal year ended August 28, 2022. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.

The following table sets forth information on our common stock repurchase program activity for the third quarter of 2023 (amounts in millions, except share and per share data):

None.

Not applicable.

None.

The following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.