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 and wages), energy and certain commodities, geopolitical conditions (including tariffs), 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 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 2023 Form 10-K, filed with the United States Securities and Exchange Commission on October 11, 2023. We operate membership warehouses and e-commerce sites based on the concept that offering members low prices on a limited selection of quality 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). Comparable sales is 18 Table of Contents defined as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and sales related to e-commerce sites operating for more than one year. The measure is intended as supplemental information and is not a substitute for net sales presented in accordance with U.S. GAAP and should be reviewed in conjunction with results reported in accordance with U.S. GAAP. 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); and inflation or deflation 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 selling general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available 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. 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, negatively impacting gross margin and gross margin in the near term as a percentage of net sales (gross margin percentage). We believe our gasoline business enhances traffic in our warehouses; it generally has a lower gross margin percentage and lower SG&A expense relative to our non-gasoline businesses. A higher penetration of gasoline sales will generally lower our gross margin percentage. 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. 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. Negative aspects of such growth include lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets. 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, has a lower gross-margin percentage than our warehouse operations. The membership format is an integral part of our business and 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 Executive memberships, 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 worldwide 19 Table of Contents renewal rate may be adversely impacted by lower renewal rates in newer markets, which historically have been less than rates in mature 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, increasing productivity and enhancing employee satisfaction requires 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 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 is calculated based on the difference between the current and prior period's 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. Results expressed excluding the impacts of foreign exchange and gasoline prices are intended as supplemental information and are not a substitute for net sales presented in accordance with U.S. GAAP and should be reviewed in conjunction with results reported in accordance with U.S. GAAP. Our fiscal year ends on the Sunday closest to August 31. References to the third quarter of 2024 and 2023 relate to the 12-week fiscal quarters ended May 12, 2024, and May 7, 2023. References to the first thirty-six weeks of 2024 and 2023 relate to the 36 weeks ended May 12, 2024, and May 7, 2023. Certain percentages presented are calculated using actual results prior to rounding. Highlights for the third quarter of 2024 versus 2023 include: • Net sales increased 9% to $57,392, driven by an increase in comparable sales and sales at 24 net new warehouses opened since the end of the third quarter of 2023; • Membership fee revenue increased 8% to $1,123, driven by new member sign-ups and upgrades to Executive Membership; • Gross margin percentage increased 52 basis points, driven primarily by the absence of a charge of $298, $0.50 per diluted share, recorded in the third quarter of 2023 predominantly related to the discontinuation of our charter shipping activities; • SG&A expenses as a percentage of net sales decreased 15 basis points, primarily due to warehouse operations and other businesses, largely attributable to improved productivity; • A quarterly cash dividend of $1.16 per share was declared on April 10, 2024, and paid on May 10, 2024; and • Net income was $1,681, $3.78 per diluted share, compared to $1,302, $2.93 per diluted share in 2023. 20 Table of Contents RESULTS OF OPERATIONS Net Sales 12 Weeks Ended 36 Weeks Ended May 12, 2024 May 7, 2023 May 12, 2024 May 7, 2023 Net Sales $ 57,392 $ 52,604 $ 171,440 $ 160,280 Changes in net sales: U.S. 9 % 1 % 6 % 6 % Canada 10 % — % 9 % 2 % Other International 10 % 8 % 12 % 5 % Total Company 9 % 2 % 7 % 5 % Changes in comparable sales (1) : U.S. 6 % — % 4 % 5 % Canada 8 % (1) % 8 % 2 % Other International 8 % 4 % 9 % 2 % Total Company 7 % — % 5 % 4 % E-commerce 21 % (10) % 15 % (8) % Changes in comparable sales excluding the impact of changes in foreign-currency and gasoline prices (1) : U.S. 6 % 2 % 4 % 5 % Canada 7 % 7 % 8 % 8 % Other International 8 % 8 % 8 % 9 % Total Company 7 % 3 % 5 % 6 % E-commerce 21 % (9) % 15 % (7) % _______________ (1) Comparable sales for the third quarter and first thirty-six weeks of 2024 were calculated using comparable retail weeks. Net Sales The improvement in net sales for the third quarter and first thirty-six weeks of 2024 was attributable to an increase in comparable sales and sales at the 24 net new warehouses opened since the end of the third quarter of 2023. Sales increased $3,892 or 9% and $9,458 or 7% in core merchandise categories during the third quarter and first thirty-six weeks of 2024, due to increases in all categories. Sales in warehouse ancillary and other businesses increased $896 or 8% during the third quarter of 2024, led by gasoline, and $1,702 or 5% during the first thirty-six weeks of 2024, led by pharmacy. During the third quarter of 2024, higher gasoline prices positively impacted net sales by $149, 28 basis points, compared to 2023, with a 2% increase in the average price per gallon. C hanges in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $108, 21 basis points, compared to the third quarter of 2023, primarily attributable to our Other International operations. During the first thirty-six weeks of 2024 , l ower gasoline prices negatively impacted net sales by $423, 26 basis points, compared to 2023, with a 2% decrease in the average price per gallon. C hanges in foreign currencies relative to the U.S. dollar positively impacted net sales by approximately $180, 11 basis points, compared to the first thirty-six weeks of 2023, attributable to our Other International operations, partially offset by our Canadian operations. 21 Table of Contents Comparable Sales Comparable sales increased 7% in the third quarter of 2024 and were positively impacted by increased shopping frequen cy and a slightly higher average ticket. Comparable sales increased 5% in the first thirty-six weeks of 2024 and were positively impacted by increased shopping frequency, partially offset by a slight decrease in average ticket. Membership Fees 12 Weeks Ended 36 Weeks Ended May 12, 2024 May 7, 2023 May 12, 2024 May 7, 2023 Membership fees $ 1,123 $ 1,044 $ 3,316 $ 3,071 Membership fees increase 8 % 6 % 8 % 6 % Total paid members (000s) 74,500 69,100 — — Total cardholders (000s) 133,900 124,700 — — Membership fee revenue increased 8% in both the third quarter and first thirty-six weeks of 2024, driven by new member sign-ups and upgrades to Executive Membership. At the end of the third quarter of 2024, our renewal rates were 93.0% in the U.S. and Canada and 90.5% worldwide. Renewal rates benefited from higher penetration of Executive members. 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. Gross Margin 12 Weeks Ended 36 Weeks Ended May 12, 2024 May 7, 2023 May 12, 2024 May 7, 2023 Net sales $ 57,392 $ 52,604 $ 171,440 $ 160,280 Less merchandise costs 51,173 47,175 152,770 143,367 Gross margin $ 6,219 $ 5,429 $ 18,670 $ 16,913 Gross margin percentage 10.84 % 10.32 % 10.89 % 10.55 % Quarterly Results Gross margin percentage increased 52 basis points. Excluding the impact of gasoline price inflation on net sales, gross margin percentage was 10.86%, an increase of 54 basis points. The 54 basis-point increase was positively impacted by: 56 basis points due to the absence of a charge related to the discontinuation of our charter shipping activities that was recorded in the third quarter of 2023; two basis points due to core merchandise categories, and two basis points due to a LIFO benefit. This increase was partially offset by five basis points due to warehouse ancillary and other businesses, predominantly gasoline, partially offset by e-commerce, and one basis point due to increased 2% rewards. The gross margin in core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), increased 10 basis points. The increase was primarily due to non-foods, partially offset by fresh foods. This measure eliminates the impact of changes in sales penetration and gross margin from our warehouse ancillary and other businesses. Gross margin percentage 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. and Canadian segments. Our U.S. segment performed similarly to the consolidated results above. Our Canadian segment gross margin increased primarily due to increases in 22 Table of Contents core merchandise categories, partially offset by increased 2% rewards. Gross margin decreased in our Other International segment, due to decreases in core merchandise categories and increased 2% rewards. Year-to-date Results Gross margin percentage increased 34 basis points. Excluding the impact of gasoline price deflation on net sales, gross margin percentage was 10.86%, an increase of 31 basis points. The 31 basis-point increase was positively impacted by: 24 basis points due to the absence of charges related to the discontinuation of our charter shipping activities that were recorded in the first and third quarters of 2023; nine basis points due to warehouse ancillary and other business, primarily e-commerce; and two basis points due to a LIFO benefit. This increase was partially offset by four basis point s due to increased 2% rewards. Our core merchandise categories were flat. The gross margin in core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), increased 13 basis points. The increase was primarily due to non-foods, partially offset by fresh foods. Segment gross margin percentage increased in our U.S. and Canadian segments. Our U.S. segment performed similarly to the consolidated results above. Our Canadian segment gross margin increased, primarily due to increases in core merchandise categories and warehouse ancillary and other businesses, partially offset by increased 2% rewards. Gross margin percentage decreased in our Other International segment, primarily due to decreases in core merchandise categories and increased 2% rewards. Selling, General and Administrative Expenses 12 Weeks Ended 36 Weeks Ended May 12, 2024 May 7, 2023 May 12, 2024 May 7, 2023 SG&A expenses $ 5,145 $ 4,794 $ 15,743 $ 14,651 SG&A expenses as a percentage of net sales 8.96 % 9.11 % 9.18 % 9.14 % Quarterly Results SG&A expenses as a percentage of net sales decreased 15 basis points. SG&A expenses as a percentage of net sales excluding the impact of gasoline price inflation was 8.99%, a decrease of 12 basis points. The comparison to last year was favorably impacted by 12 basis points due to warehouse operations and other businesses, largely attributable to improved productivity. Year-to-date Results SG&A expenses as a percentage of net sales increased four basis points. SG&A expenses as a percentage of net sales excluding the impact of gasoline price deflation was 9.16%, an increase of two basis points. The comparison to last year was negatively impacted by three basis points in warehouse operations and other businesses, driven by our U.S. operations, which included the impact of wage increases in March and September 2023, partially offset by one basis point due to central operating costs. SG&A expenses as a percentage of net sales were lower in our Canadian and Other International operations. Interest Expense 12 Weeks Ended 36 Weeks Ended May 12, 2024 May 7, 2023 May 12, 2024 May 7, 2023 Interest expense $ 41 $ 36 $ 120 $ 104 Interest expense is primarily related to Senior Notes and financing leases. 23 Table of Contents Interest Income and Other, Net 12 Weeks Ended 36 Weeks Ended May 12, 2024 May 7, 2023 May 12, 2024 May 7, 2023 Interest income $ 94 $ 110 $ 395 $ 269 Foreign-currency transaction gains, net 20 9 54 3 Other, net 14 9 55 23 Interest income and other, net $ 128 $ 128 $ 504 $ 295 The decrease in interest income in the third quarter was due to lower average cash and investment balances, caused by the payment of the special dividend. The increase in interest income in the first thirty-six weeks of 2024 was primarily due to higher global interest rates and higher average cash and investment balances, prior to the payment of the special dividend. Foreign-currency transaction gains, net, include revaluation or settlement of monetary assets and liabilities by our Canadian and Other International operations and mark-to-market adjustments for forward foreign-exchange contracts. See Derivatives and Foreign Currency sections in Item 8, Note 1 of our Annual Report on Form 10-K, for the fiscal year ended September 3, 2023. Provision for Income Taxes 12 Weeks Ended 36 Weeks Ended May 12, 2024 May 7, 2023 May 12, 2024 May 7, 2023 Provision for income taxes $ 603 $ 469 $ 1,614 $ 1,392 Effective tax rate 26.4 % 26.5 % 24.4 % 25.2 % The effective tax rate for the first thirty-six weeks of 2024 was favorably impacted by net discrete tax benefits of $146. This included $94 related to the portion of the special dividend payable through our 401(k) plan in the second quarter and $44 of excess tax benefits related to stock compensation in the first quarter. Excluding discrete net tax benefits, the tax rate was 26.6%. 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 in the first quarter. Excluding discrete net tax benefits, the tax rate was 26.2%. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes our significant sources and uses of cash and cash equivalents: 36 Weeks Ended May 12, 2024 May 7, 2023 Net cash provided by operating activities $ 8,381 $ 7,343 Net cash used in investing activities (2,706) (3,147) Net cash used in financing activities (8,948) (1,950) 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 $11,499 and $15,234 at May 12, 2024, and September 3, 2023. Of these balances, unsettled credit and debit card receivables represented approximately $2,391 and $2,282 at May 12, 2024, and September 3, 2023. These receivables generally settle within four days. 24 Table of Contents 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 $8,381 in the first thirty-six weeks of 2024, compared to $7,343 in the first thirty-six weeks of 2023. Our cash flow provided by operations is primarily fr om net sales and membership fees. Cash flow used in operations generally consists of payments to mercha ndise suppliers, warehouse operating costs, including wages and employee benefits, utilities, credit and debit card processing fees, and operating leases. 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 levels and turnover, payment terms with suppliers, and early payments to obtain discounts. Cash Flows from Investing Activities Net cash used in investing activities totaled $2,706 in the first thirty-six weeks of 2024, compared to $3,147 in the first thirty-six weeks of 2023, and is primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments. 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 thirty-six weeks of 2024, we spent $3,133 on capital expenditures, and it is our current intention to spend a total of approximately $4,300 to $4,500 during fiscal 2024. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. We opened 16 new warehouses, includ ing one relocation, in the first thirty-six weeks of 2024 and plan to open 14 additional new warehouses in the remainder of fiscal 2024. 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 $8,948 in the first thirty-six weeks of 2024, compared to $1,950 in the first thirty-six weeks of 2023. Cash flow used in financing activities during the first thirty-six weeks of 2024 was primarily related to the payment of dividends, repayments of short-term borrowings, repurchases of common stock, and withholding taxes on stock-based awards. Cash flow provided by financing activities included proceeds from short-term borrowings and four Guaranteed Senior Notes totaling approximately $500, at fixed interest rates ranging from 1.400% to 2.120% issued by our Japan subsidiary. Subsequent to the end of the quarter on May 18, 2024, we paid the outstanding principal balance and interest on the 2.750% Senior Notes using cash and cash equivalents and short-term investments. 25 Table of Contents Dividends A quarterly cash dividend of $1.16 per share was declared on April 10, 2024, payable to shareholders of record on April 26, 2024, which was paid on May 10, 2024. On January 12, 2024, an aggregate payment of approximately $6,655 was made in connection with a special dividend of $15.00 per share, declared on December 13, 2023. Share Repurchase Program On January 19, 2023, the Board of Directors authorized a share repurchase program in the amount of $4,000, which expires in January 2027. During the first thirty-six weeks of 2024 and 2023, we repurchased 749,000 and 908,000 shares of common stock, at an average price per share of $646.07 and $492.30, totaling approximately $484 and $447. 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 $3,079 at the end of the third quarter. Bank Credit Facilities and Commercial Paper Programs We maintain bank credit facilities for working capital and general corporate purposes. At May 12, 2024, we had borrowing capacity under these facilities of $1,145. Our international operations maintain $656 of this capacity under bank credit facilities, of which $160 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 immaterial at the end of the third quarter of 2024 and at the end of fiscal 2023. The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $204. The outstanding commitments under these facilities at the end of the third quarter of 2024 totaled $187, 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. 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 September 3, 2023. There have been no material changes to the critical accounting estimates previously disclosed in that Report. Recent Accounting Pronouncements See discussion of Recent Accounting Pronouncements in Note 1 to the condensed consolidated financial statements included in Part I, Item 1 of this Report. 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 September 3, 2023.