COSTCO WHOLESALE CORP /NEW 10-Q

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, percentages and warehouse count data) FORWARD-LOOKING STATEMENTS 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. OVERVIEW 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 18 Table of Contents 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 second 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, offering seasonal merchandise outside its season, 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. 19 Table of Contents 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. Our operating model is generally the same across our U.S., Canadian, and Other International operating segments (see Note 9 to the condensed consolidated financial statements included in Part I, Item 1, of this Report). Certain operations in the Other International segment have relatively higher rates of square footage growth, lower wage and benefit costs as a percentage of sales, less or no direct membership warehouse competition, or lack e-commerce or business delivery. In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which 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 second quarter of 2023 and 2022 relate to the 12-week fiscal quarters ended February 12, 2023, and February 13, 2022. References to the first half of 2023 and 2022 relate to the 24 weeks ended February 12, 2023, and February 13, 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. Highlights for the second quarter of 2023 versus 2022 include: • Net sales increased 6% to $54,239, driven by an increase in comparable sales of 5% and sales at 20 net new warehouses opened since the end of the second quarter of 2022; • Membership fee revenue increased 6% to $1,027, driven by new member sign-ups, upgrades to Executive Membership, and a higher renewal rate; • Gross margin percentage increased eight basis points, driven primarily by a LIFO charge recorded in the second quarter of 2022. This was partially offset by decreases in core merchandise categories; • SG&A expenses as a percentage of net sales increased 13 basis points, primarily due to central operating costs; • Net income was $1,466, $3.30 per diluted share, compared to $1,299, $2.92 per diluted share in 2022; and • A quarterly cash dividend of $0.90 per share was declared on January 19, 2023 and paid on February 17, 2023. 20 Table of Contents RESULTS OF OPERATIONS Net Sales 12 Weeks Ended 24 Weeks Ended February 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 Net Sales $ 54,239 $ 50,937 $ 107,676 $ 100,354 Changes in net sales: U.S 7 % 17 % 9 % 17 % Canada 4 % 17 % 4 % 18 % Other International 7 % 10 % 4 % 14 % Total Company 6 % 16 % 7 % 16 % Changes in comparable sales: U.S 6 % 16 % 8 % 15 % Canada 4 % 16 % 3 % 17 % Other International 4 % 6 % — % 10 % Total Company 5 % 14 % 6 % 15 % E-commerce (10) % 13 % (7) % 13 % Changes in comparable sales excluding the impact of changes in foreign-currency and gasoline prices: U.S 6 % 11 % 6 % 11 % Canada 10 % 12 % 9 % 10 % Other International 10 % 9 % 9 % 10 % Total Company 7 % 11 % 7 % 11 % E-commerce (9) % 13 % (6) % 13 % Net Sales Net sales increased $3,302 or 6%, and $7,322 or 7% during the second quarter and first half of 2023. This improvement was attributable to an increase in comparable sales of 5% and 6% in the second quarter and first half of 2023, and sales at the 20 net new warehouses opened since the end of the second quarter of 2022. Sales increased $2,490, or 6% and $4,523, or 6% in core merchandise categories during the second quarter and first half of 2023, led by foods and sundries and fresh foods; while non-foods decreased. Sales increased $812, or 9% and $2,799, or 15% in warehouse ancillary and other businesses during the second quarter and first half of 2023, led by gasoline, pharmacy and travel. During the second quarter of 2023, c hanges in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $937, 184 basis points, compared to the second quarter of 2022, attributable to our Canadian and Other International operations. T he volume of gasoline sold increased approximately 9%, positively impacting net sales by $565, 111 basis points. Changes in gasoline prices did not materially impact net sales for the current quarter. During the first half of 2023, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $2,471, 246 basis points, compared to the first half of 2022, attributable to our Canadian and Other International Operations. Higher gasoline prices positively impacted net sales by $1,254, 125 basis points, compared to 2022, with a 9% increase in the average price per gallon. The volume of gasoline sold increased approximately 10%, positively impacting net sales by $1,215, 121 basis points. 21 Table of Contents Comparable Sales Comparable sales increased 5% and 6% in the second quarter and first half of 2023 and were positively impacted by increases in shopping frequency and the average ticket, which includes the effects of inflation and changes in foreign currency. Membership Fees 12 Weeks Ended 24 Weeks Ended February 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 Membership fees $ 1,027 $ 967 $ 2,027 $ 1,913 Membership fees increase 6 % 10 % 6 % 10 % Total paid members (000s) 68,100 63,400 — — Total cardholders (000s) 123,000 114,800 — — Membership fee revenue increased 6% in both the second quarter and first half of 2023, driven by sign-ups, upgrades to Executive Membership, and a higher renewal rate. Changes in foreign currencies relative to the U.S. dollar negatively impacted membership fees by $20 and $52 in the second quarter and first half of 2023. At the end of the second quarter of 2023, our renewal rates were 92.6% in the U.S. and Canada and 90.5% worldwide. Renewal rates continue to benefit from more members auto renewing and increased penetration of Executive members, who 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. Gross Margin 12 Weeks Ended 24 Weeks Ended February 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 Net sales $ 54,239 $ 50,937 $ 107,676 $ 100,354 Less merchandise costs 48,423 45,517 96,192 89,469 Gross margin $ 5,816 $ 5,420 $ 11,484 $ 10,885 Gross margin percentage 10.72 % 10.64 % 10.67 % 10.85 % Quarterly Results Total gross margin percentage increased eight basis points compared to the second quarter of 2022. Excluding the impact of gasoline price inflation on net sales, gross margin percentage was 10.73%, an increase of nine basis points. This was driven primarily by a 14 basis-point increase due to a LIFO charge recorded in the second quarter of 2022. Warehouse ancillary and other business also positively impacted gross margin by three basis points, predominantly gasoline, partially offset by e-commerce and pharmacy. Core merchandise categories negatively impacted gross margin by six basis points, predominantly in non-foods and fresh foods, partially offset by foods and sundries. Gross margin was negatively impacted by two basis points due to increased 2% rewards. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $91, compared to the second quarter of 2022, attributable to our Canadian and Other International operations. The gross margin in core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), decreased 26 basis points. The decrease was across all categories, most significantly in fresh foods. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses. 22 Table of Contents 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), increased in our U.S. segment, largely due to the LIFO charge discussed above and an increase in our warehouse ancillary and other businesses, predominantly gasoline, partially offset by e-commerce. Gross margin percentage decreased in our Canadian and Other International segment due to decreases in core merchandise categories and increased 2% rewards, partially offset by warehouse ancillary and other businesses. Year-to-date Results Total gross margin percentage decreased 18 basis points compared to the first half of 2022. Excluding the impact of gasoline price inflation on net sales, gross margin percentage was 10.79%, a decrease of six basis points. This was primarily due to an 18 basis-point decrease in core merchandise categories, predominantly in non-foods and fresh foods, partially offset by foods and sundries, and a nine basis-point charge primarily related to downsizing our charter shipping activities during the first quarter of 2023. Gross margin was also negatively impacted by three basis points due to increased 2% rewards. Warehouse ancillary and other businesses positively impacted gross margin by 16 basis points, predominantly gasoline, partially offset by e-commerce. A smaller LIFO charge in the first half of 2023 compared to the first half of 2022 positively contributed eight basis points. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $244, compared to the first half of 2022, attributable to our Canadian and Other International operations. The gross margin in core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), decreased 29 basis points. The decrease was primarily due to fresh foods and non-foods. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses. Segment gross margin percentage increased in our U.S. segment, due to warehouse ancillary and other businesses and a smaller LIFO charge, partially offset by the charge related to downsizing our charter shipping activities and decreases in certain core merchandise categories, non-foods and fresh foods, partially offset by foods and sundries. Gross margin decreased in our Canadian and Other International segment due to decreases in core merchandise categories, partially offset by warehouse ancillary and other businesses. All segments were negatively impacted by increased 2% rewards. Selling, General and Administrative Expenses 12 Weeks Ended 24 Weeks Ended February 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 SG&A expenses $ 4,940 $ 4,575 $ 9,857 $ 9,293 SG&A expenses as a percentage of net sales 9.11 % 8.98 % 9.15 % 9.26 % Quarterly Results SG&A expenses as a percentage of net sales increased 13 basis points. The effect of gasoline price inflation had no impact on SG&A expenses as a percentage of sales. The comparison to last year was negatively impacted by nine basis points in central operating costs partially attributable to a charge related to a tax audit covering multiple years. Warehouse operations and other businesses and stock compensation were both higher by two basis points. Changes in foreign currencies relative to the U.S. dollar decreased SG&A expenses by approximately $75 compared to the second quarter of 2022. 23 Table of Contents Year-to-date Results SG&A expenses as a percentage of net sales decreased 11 basis points. SG&A expenses as a percentage of net sales excluding the impact of gasoline price inflation was flat compared to the first half of 2022. The comparison to last year was favorably impacted by 12 basis points from a write-off of certain information technology assets in the prior year. Warehouse operations and other businesses were higher by six basis points, largely attributable to the wage increases we instituted in 2022. Central operating costs were also higher by six basis points. Changes in foreign currencies relative to the U.S. dollar decreased SG&A expenses by approximately $196 compared to the first half of 2022. Interest Expense 12 Weeks Ended 24 Weeks Ended February 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 Interest expense $ 34 $ 36 $ 68 $ 75 Interest expense is primarily related to Senior Notes and financing leases. The decrease in interest expense for the first half of 2023 was due to repayment of the 2.300% Senior Notes on December 1, 2021. Interest Income and Other, Net 12 Weeks Ended 24 Weeks Ended February 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 Interest income $ 105 $ 6 $ 159 $ 15 Foreign-currency transaction gains (losses), net 3 12 (6) 38 Other, net 6 7 14 14 Interest income and other, net $ 114 $ 25 $ 167 $ 67 The increase in interest income in the second quarter and first half of 2023 was due to higher global interest rates. Foreign-currency 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. Provision for Income Taxes 12 Weeks Ended 24 Weeks Ended February 12, 2023 February 13, 2022 February 12, 2023 February 13, 2022 Provision for income taxes $ 517 $ 481 $ 923 $ 832 Effective tax rate 26.1 % 26.7 % 24.6 % 23.8 % The effective tax rate for the first half of 2023 was impacted by net discrete tax benefits of $57, primarily due to excess tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.1% for the first half of 2023. The effective tax rate for the first half of 2022 was impacted by net discrete tax benefits of $91, primarily due to excess tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.4% for the first half of 2022. 24 Table of Contents LIQUIDITY AND CAPITAL RESOURCES The following table summarizes our significant sources and uses of cash and cash equivalents: 24 Weeks Ended February 12, 2023 February 13, 2022 Net cash provided by operating activities $ 5,802 $ 3,659 Net cash used in investing activities (1,865) (1,393) Net cash used in financing activities (1,215) (1,667) Our primary sources of liquidity are cash flows from operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $13,705 and $11,049 at February 12, 2023, and August 28, 2022. Of these balances, unsettled credit and debit card receivables represented approximately $2,083 and $2,010 at February 12, 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. Cash Flows from Operating Activities Net cash provided by operating activities totaled $5,802 in the first half of 2023, compared to $3,659 in the first half of 2022. Our cash 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. Cash Flows from Investing Activities Net cash used in investing activities totaled $1,865 in the first half of 2023, compared to $1,393 in the first half of 2022, and is primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments. 25 Table of Contents Capital Expenditure Plans 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 half of 2023, we spent $1,947 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 12 new warehouses, including two relocations, in the first half of 2023 and plan to open 15 additional new warehouses, including one relocation, 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. Cash Flows from Financing Activities Net cash used in financing activities totaled $1,215 in the first half of 2023, compared to $1,667 in the first half of 2022. Cash flow used in financing activities during the first half of 2023 was primarily related to the payment of dividends, withholding taxes on stock-based awards, and repurchases of common stock. In the first half of 2022, cash flow used in financing activities was primarily due to the repayment of our 2.300% Senior Notes. Dividends A quarterly cash dividend of $0.90 per share was declared on January 19, 2023, payable to shareholders of record on February 3, 2023, which was paid on February 17, 2023. Share Repurchase Program 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 half of 2023 and 2022, we repurchased 579,000 and 236,000 shares of common stock, at an average price per share of $492.06 and $498.00, totaling approximately $285 and $118. These amounts may differ from the accompanying condensed 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 $3,955 at the end of the second quarter. Bank Credit Facilities and Commercial Paper Programs We maintain bank credit facilities for working capital and general corporate purposes. At February 12, 2023, we had borrowing capacity under these facilities of $1,269. Our international operations maintain $781 of this capacity under bank credit facilities, of which $177 is guaranteed by the Company. Short-term borrowings outstanding under the bank credit facilities were $45 and $88 at the end of the second 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 $231. The outstanding commitments under these facilities at the end of the second quarter of 2023 totaled $191, most of which were standby letters of credit that do not expire or have 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. 26 Table of Contents Critical Accounting Estimates 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. Recent Accounting Pronouncements 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. Item 3—Quantitative and Qualitative Disclosures about Market Risk 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.