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ADOBE INC._10-K_2024-01-17_796343-0000796343-24-000006.html

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto. Discussion regarding our financial condition and results of operations for fiscal 2022 as compared to fiscal 2021 is included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 2, 2022, filed with the SEC on January 17, 2023.CRITICAL ACCOUNTING POLICIES AND ESTIMATESIn preparing our Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We evaluate our assumptions, judgments and estimates on a regular basis. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition and income taxes have the greatest potential impact on our Consolidated Financial Statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates, and consequently, we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.Revenue Recognition Our contracts with customers may include multiple goods and services. For example, some of our offerings include both on-premise and/or on-device software licenses and cloud services. Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. We have concluded that the on-premise/on-device software licenses and cloud services provided in our Creative Cloud and Document Cloud subscription offerings are not distinct from each other such that revenue from each offering should be recognized ratably over the subscription period for which the cloud services are provided. In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or document workflow solution that operates seamlessly across multiple devices and teams. We fulfill this promise by providing access to a solution that integrates cloud-based and on-premise/on-device features that, together through their integration, provide functionalities, utility and workflow efficiencies that could not be obtained from either the on-premise/on-device software or cloud services on their own.Cloud-based features that are integral to our Creative Cloud and Document Cloud offerings and that work together with the on-premise/on-device software include, but are not limited to: Creative Cloud Libraries, which enable customers to access their work, settings, preferences and other assets seamlessly across desktop and mobile devices and collaborate across teams in real time; shared reviews which enable simultaneous editing and commenting of digital assets across desktop, mobile and web; automatic cloud rendering of a design which enables it to be worked on in multiple mediums; and Sensei, Adobe’s cloud-hosted artificial intelligence and machine learning framework, which enables features such as automated photo-editing, photograph content-awareness, natural language processing, optical character recognition and automated document tagging.Accounting for Income TaxesWe use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Significant judgment is required in determining our current provision for income taxes and deferred tax assets or liabilities. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.Our assumptions, judgments and estimates relative to the current provision for income taxes take into account our interpretation and application of current tax laws and possible outcomes of current and future examinations conducted by domestic and foreign tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and associated reserves. To the extent that the final 36Table of Contentsdetermination of any of these examinations is different from the amounts recorded, such differences will affect the provision for income taxes and the effective tax rate in the period in which such determination is made.Recent Accounting Pronouncements See Note 1 of our Notes to Consolidated Financial Statements for information regarding recent accounting pronouncements that are of significance or potential significance to us. RESULTS OF OPERATIONSOverview of 2023For our fiscal 2023, we experienced strong demand across our Digital Media and Digital Experience offerings, driven by our innovative product roadmap. As we execute on our long-term growth initiatives and deliver product innovation, we have continued to experience growth in software-based subscription revenue across our portfolio of offerings.Digital MediaIn our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich content and immersive 3D experiences. Creative Cloud includes Adobe Express, a web and mobile app designed to enable a broad spectrum of users, including novice content creators, communicators and creative professionals, to create, edit and customize content quickly and easily with content-first, task-based solutions. In September 2023, we released Adobe Firefly, a group of creative generative AI models designed to generate high quality images and text effects. Adobe Firefly-powered generative AI features are also available across Creative Cloud apps including Adobe Photoshop and Adobe Express. Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and syncing of files across users’ devices, machine learning and artificial intelligence, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers.We offer Creative Cloud for individuals, students, teams and enterprises. We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by attracting new users with new features and products like Adobe Express and Adobe Firefly that make creative tools accessible to first-time creators and communicators, and delivering new features and technologies to existing customers with our latest releases such as share for review and generative AI capabilities. We have also built out a marketplace for Creative Cloud subscribers to enable the delivery and purchase of stock content in our Adobe Stock service. Overall, our strategy with Creative Cloud is designed to enable us to increase our revenue with existing users, continue to attract new customers, and grow our recurring and predictable revenue stream that is recognized ratably.We continue to implement strategies that are designed to accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new and enhanced desktop, web and mobile apps, as well as targeted promotions and offers that attract past customers and potential users to experience and ultimately subscribe to Creative Cloud. Because of the shift towards Creative Cloud subscriptions and Enterprise Term License Agreements (“ETLAs”), revenue from perpetual licensing of our Creative products has been immaterial to our business.We are also a market leader with our Document Cloud offerings built around our Adobe Acrobat family of products, with a set of integrated mobile apps and cloud-based document services which enable users to create, collaborate, review, approve, sign and track documents regardless of platform or application source type. Document Cloud, which enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat, Adobe Acrobat Sign and Adobe Scan. Adobe Acrobat is offered both through subscription and perpetual licenses, and is also included in our Creative Cloud All Apps subscription offering.As part of our Creative Cloud and Document Cloud strategies, we utilize a data-driven operating model (“DDOM”) and our Adobe Experience Cloud solutions to raise awareness of our products, drive new customer acquisition, engagement and retention, and optimize customer journeys, which continue to contribute strong product-led growth in the business.Annualized Recurring Revenue (“ARR”) is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment. ARR should be viewed independently of revenue, deferred revenue and remaining performance obligations as ARR is a performance metric and is not intended to be combined with any of these items. We adjust our reported ARR on an annual basis to reflect any exchange rate changes. Our reported ARR results in the 37Table of Contentscurrent fiscal year are based on currency rates set at the beginning of the year and held constant throughout the year for measurement purposes. We calculate ARR as follows:Creative ARRAnnual Value of Creative Cloud Subscriptions and Services+ Annual Creative ETLA Contract Value Document Cloud ARRAnnual Value of Document Cloud Subscriptions and Services +Annual Document Cloud ETLA Contract ValueDigital Media ARRCreative ARR+ Document Cloud ARRCreative ARR exiting fiscal 2023 was $12.37 billion, up from $10.98 billion at the end of fiscal 2022. Document Cloud ARR exiting fiscal 2023 was $2.81 billion, up from $2.28 billion at the end of fiscal 2022. Total Digital Media ARR grew to $15.17 billion at the end of fiscal 2023, up from $13.26 billion at the end of fiscal 2022. Revaluing our ending ARR for fiscal 2023 using currency rates determined at the beginning of fiscal 2024, our Digital Media ARR at the end of fiscal 2023 would be $15.33 billion or approximately $160 million higher than the ARR reported above.Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in fiscal 2023 was $11.52 billion, up from $10.46 billion in fiscal 2022 and representing 10% year-over-year growth. Document Cloud revenue in fiscal 2023 was $2.70 billion, up from $2.38 billion in fiscal 2022 and representing 13% year-over-year growth. Total Digital Media segment revenue grew to $14.22 billion in fiscal 2023, up from $12.84 billion in fiscal 2022 and representing 11% year-over-year growth driven by strong net new user growth.Digital ExperienceWe are a market leader in the fast-growing category addressed by our Digital Experience segment. The Adobe Experience Cloud apps and services are designed to manage customer journeys, enable personalized experiences at scale and deliver intelligence for businesses of any size in any industry. Our differentiation and competitive advantage are strengthened by our ability to use the Adobe Experience Platform to integrate our comprehensive set of solutions.Adobe Experience Cloud delivers solutions for our customers across the following strategic growth pillars:•Data insights and audiences. Our products, including Adobe Analytics, Customer Journey Analytics, Adobe Product Analytics, and our Real-time Customer Data Platform, deliver actionable data in real time to provide highly tailored and adaptive experiences across platforms.•Content and commerce. Our products help customers manage, deliver, monetize, and optimize content delivery through Adobe Experience Manager and build multi-channel commerce experiences for B2B and B2C customers on a single platform with Adobe Commerce.•Customer journeys. Our products help businesses manage, test, target and personalize customer journeys delivered as campaigns across B2B and B2C use cases, including through Adobe Marketo Engage, Adobe Campaign, Adobe Target and Adobe Journey Optimizer. •Marketing planning and workflow. Our products help businesses intelligently measure, optimize, and plan marketing investments through the Adobe Mix Modeler, and allow businesses to strategically plan, manage, collaborate, and execute on workflows for marketing campaigns and other projects at speed and scale with our enterprise work management app, Adobe Workfront.In addition to chief marketing officers, chief revenue officers and digital marketers, users of our Digital Experience solutions include advertisers, campaign managers, publishers, data analysts, content managers, social marketers, marketing executives and information management and technology executives. These customers often are involved in workflows that integrate other Adobe products, such as our Digital Media offerings. By combining the creativity of our Digital Media business with the science of our Digital Experience business, such as with our new Adobe GenStudio solution, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.38Table of ContentsWe utilize a direct sales force to market and license our Digital Experience solutions, as well as an extensive ecosystem of partners, including marketing agencies, systems integrators and independent software vendors that help license and deploy our solutions to their customers. We have made significant investments to broaden the scale and size of all of these routes to market, and our recent financial results reflect the success of these investments and our experience-led growth strategy.Digital Experience revenue was $4.89 billion in fiscal 2023, up from $4.42 billion in fiscal 2022 which represents 11% year-over-year growth. Driving this growth was the increase in subscription revenue, which grew to $4.33 billion in fiscal 2023 from $3.88 billion in fiscal 2022, representing 12% year-over-year growth.Macroeconomic ConditionsAs a corporation with an extensive global footprint, we are subject to risks and exposures from the evolving macroeconomic environment, including the effects of increased global inflationary pressures and interest rates, fluctuations in foreign currency exchange rates, potential economic slowdowns or recessions and geopolitical pressures, including the unknown impacts of current and future trade regulations. We continuously monitor the direct and indirect impacts of these circumstances on our business and financial results. For example, foreign currency exchange rate fluctuations have negatively impacted our revenue and earnings during fiscal 2023, and may continue to negatively impact our financial results in fiscal 2024.While our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, remain uncertain. See the section titled “Risk Factors” in Part I, Item 1A of this report for further discussion of the possible impact of these macroeconomic issues on our business.Financial Performance Summary for Fiscal 2023•Total Digital Media ARR of approximately $15.17 billion as of December 1, 2023 increased by $1.91 billion, or 14%, from $13.26 billion as of December 2, 2022.•Creative revenue of $11.52 billion increased by $1.06 billion, or 10%, during fiscal 2023, from $10.46 billion in fiscal 2022. Document Cloud revenue of $2.70 billion increased by $316 million, or 13%, during fiscal 2023, from $2.38 billion in fiscal 2022.•Digital Experience revenue of $4.89 billion increased by $471 million, or 11%, during fiscal 2023, from $4.42 billion in fiscal 2022.•Remaining performance obligations of $17.22 billion as of December 1, 2023 increased by $2.02 billion, or 13%, from $15.19 billion as of December 2, 2022.•Cost of revenue of $2.35 billion increased by $189 million, or 9%, during fiscal 2023, from $2.17 billion in fiscal 2022.•Operating expenses of $10.41 billion increased by $1.06 billion, or 11%, during fiscal 2023, from $9.34 billion in fiscal 2022.•Net income of $5.43 billion increased by $672 million, or 14%, during fiscal 2023, from $4.76 billion in fiscal 2022.•Cash flows from operations of $7.30 billion during fiscal 2023 decreased by $536 million, or 7%, from $7.84 billion in fiscal 2022.39Table of ContentsRevenueRevenue for fiscal 2021 benefited from an extra week in the first quarter of fiscal 2021 due to our 52/53 week financial calendar whereby fiscal 2021 was a 53-week year compared with fiscal 2023 and 2022 which were 52-week years.(dollars in millions)202320222021% Change2023-2022Subscription$18,284 $16,388 $14,573 12 %Percentage of total revenue94 %93 %92 % Product460 532 555 (14)%Percentage of total revenue2 %3 %4 % Services and other665 686 657 (3)%Percentage of total revenue4 %4 %4 % Total revenue$19,409 $17,606 $15,785 10 %SubscriptionOur subscription revenue is comprised primarily of fees we charge for our subscription and hosted service offerings, and related support, including Creative Cloud and certain of our Adobe Experience Cloud and Document Cloud services. We primarily recognize subscription revenue ratably over the term of agreements with our customers, beginning with commencement of service. Subscription revenue related to certain offerings, where fees are based on a number of transactions and invoicing is aligned to the pattern of performance, customer benefit and consumption, are recognized on a usage basis.We have the following reportable segments: Digital Media, Digital Experience, and Publishing and Advertising. Subscription revenue by reportable segment for fiscal 2023, 2022 and 2021 is as follows:(dollars in millions)202320222021% Change2023-2022Digital Media$13,838 $12,385 $11,048 12 %Digital Experience4,331 3,880 3,379 12 %Publishing and Advertising115 123 146 (7)%Total subscription revenue$18,284 $16,388 $14,573 12 %ProductOur product revenue is comprised primarily of fees related to licenses for on-premise software purchased on a perpetual basis, for a fixed period of time or based on usage for certain of our original equipment manufacturer and royalty agreements. We primarily recognize product revenue at the point in time the software is available to the customer, provided all other revenue recognition criteria are met.Services and OtherOur services and other revenue is comprised primarily of fees related to consulting, training, maintenance and support for certain on-premise licenses that are recognized at a point in time and our advertising offerings. We typically sell our consulting contracts on a time-and-materials or fixed-fee basis. These revenues are recognized as the services are performed for time-and-materials contracts and on a relative performance basis for fixed-fee contracts. Training revenues are recognized as the services are performed. Our maintenance and support offerings, which entitle customers, partners and developers to receive desktop product upgrades and enhancements or technical support, depending on the offering, are generally recognized ratably over the term of the arrangement. Transaction-based advertising revenue is recognized on a usage basis as we satisfy the performance obligations to our customers.Segments In fiscal 2023, we categorized our products into the following reportable segments:•Digital Media—Our Digital Media segment provides products and services that enable individuals, teams, businesses, and enterprises to create, publish and promote their content anywhere and accelerate their productivity by transforming how they view, share, engage with and collaborate on documents and creative content. Our customers include creative professionals, including photographers, video editors, graphic and experience designers 40Table of Contentsand game developers; communicators, including content creators, students, marketers and knowledge workers; and consumers. •Digital Experience—Our Digital Experience segment provides an integrated platform and set of products, services and solutions that enable businesses to create, manage, execute, measure, monetize and optimize customer experiences that span from analytics to commerce. Our customers include marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers and executives across the C-suite. •Publishing and Advertising—Our Publishing and Advertising segment contains legacy products and services that address diverse market opportunities, including eLearning solutions, technical document publishing, web conferencing, document and forms platform, web app development, high-end printing and our Adobe Advertising offerings.Segment Information(dollars in millions)202320222021% Change2023-2022Digital Media$14,216 $12,842 $11,520 11 %Percentage of total revenue73 %73 %73 % Digital Experience4,893 4,422 3,867 11 %Percentage of total revenue25 %25 %24 % Publishing and Advertising300 342 398 (12)%Percentage of total revenue2 %2 %3 % Total revenue$19,409 $17,606 $15,785 10 %Digital MediaRevenue by major offerings in our Digital Media reportable segment for fiscal 2023, 2022 and 2021 were as follows:(dollars in millions)202320222021% Change2023-2022Creative Cloud$11,517 $10,459 $9,546 10 %Document Cloud2,699 2,383 1,974 13 %Total Digital Media revenue$14,216 $12,842 $11,520 11 %Revenue from Digital Media increased $1.37 billion during fiscal 2023 as compared to fiscal 2022, driven by increases in revenue associated with our Creative and Document Cloud subscription offerings due to continued demand amid an increasingly digital environment, strong engagement across customer segments and migrating our customers to higher valued subscription offerings with increased revenue per subscription, partially offset by the impact of foreign currency exchange rate fluctuations. Digital ExperienceRevenue from Digital Experience increased $471 million during fiscal 2023 as compared to fiscal 2022 primarily due to net new additions across our subscription offerings, partially offset by the impact of foreign currency exchange rate fluctuations. Geographical Information(dollars in millions)202320222021% Change2023-2022Americas$11,654 $10,251 $8,996 14 %Percentage of total revenue60 %58 %57 % EMEA4,881 4,593 4,252 6 %Percentage of total revenue25 %26 %27 % APAC2,874 2,762 2,537 4 %Percentage of total revenue15 %16 %16 % Total revenue$19,409 $17,606 $15,785 10 %41Table of ContentsOverall revenue during fiscal 2023 increased in all geographic regions as compared to fiscal 2022. Within each geographic region, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above. Included in the overall change in revenue for fiscal 2023 as compared to fiscal 2022 were impacts associated with foreign currency which were mitigated in part by our foreign currency hedging program. During fiscal 2023, the U.S. Dollar primarily strengthened against EMEA and APAC foreign currencies as compared to fiscal 2022, which decreased revenue in U.S. Dollar equivalents by approximately $371 million. During fiscal 2023, the foreign currency impacts to revenue were offset in part by net hedging gains from our cash flow hedging program of $41 million.See Note 2 of our Notes to Consolidated Financial Statements for additional details of revenue by geography.Cost of Revenue(dollars in millions)202320222021% Change2023-2022Subscription$1,822 $1,646 $1,374 11 %Percentage of total revenue9 %9 %9 % Product29 35 41 (17)%Percentage of total revenue*** Services and other503 484 450 4 %Percentage of total revenue3 %3 %3 % Total cost of revenue$2,354 $2,165 $1,865 9 %_________________________________________(*) Percentage is less than 1%.SubscriptionCost of subscription revenue consists of third-party hosting services and data center costs, including expenses related to operating our network infrastructure. Cost of subscription revenue also includes compensation costs associated with network operations, implementation, account management and technical support personnel, royalty fees, software costs and amortization of certain intangible assets.Cost of subscription revenue increased due to the following: Components of% Change2023-2022Hosting services and data center costs7 %Loss contingency3 Royalty costs2 Amortization of intangibles(1)Total change11 %Cost of subscription revenue during fiscal 2023 included a loss contingency associated with an IP litigation matter.Product Cost of product revenue is primarily comprised of third-party royalties, localization costs and costs associated with the manufacturing of our products.Services and OtherCost of services and other revenue is primarily comprised of compensation and contracted costs incurred to provide consulting services, training and product support, and hosting services and data center costs.Cost of services and other revenue increased during fiscal 2023 as compared to fiscal 2022 primarily due to increases in compensation costs partially offset by decreases in professional and consulting fees.42Table of ContentsOperating Expenses(dollars in millions)202320222021% Change2023-2022Research and development$3,473 $2,987 $2,540 16 %Percentage of total revenue18 %17 %16 % Sales and marketing5,351 4,968 4,321 8 %Percentage of total revenue28 %28 %27 % General and administrative1,413 1,219 1,085 16 %Percentage of total revenue7 %7 %7 % Amortization of intangibles168 169 172 (1)%Percentage of total revenue1 %1 %1 % Total operating expenses$10,405 $9,343 $8,118 11 %Research and Development Research and development expenses consist primarily of compensation and contracted costs associated with software development, third-party hosting services and data center costs, related facilities costs and expenses associated with computer equipment and software used in development activities.Research and development expenses increased due to the following: Components of% Change2023-2022Incentive compensation, cash and stock-based6 %Base compensation and related benefits6 Hosting services and data center costs2 Various individually insignificant items2 Total change16 %Investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced offerings and solutions. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our subscription and service offerings, apps and tools.Sales and MarketingSales and marketing expenses consist primarily of compensation costs, amortization of contract acquisition costs, including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows and events, public relations and other market development programs.Sales and marketing expenses increased due to the following: Components of% Change2023-2022Base compensation and related benefits3 %Incentive compensation, cash and stock-based3 Various individually insignificant items2 Total change8 %General and AdministrativeGeneral and administrative expenses consist primarily of compensation and contracted costs, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.43Table of ContentsGeneral and administrative expenses increased due to the following: Components of% Change2023-2022Professional and consulting fees9 %Base compensation and related benefits5 Incentive compensation, cash and stock-based3 Various individually insignificant items(1)Total change16 %Professional and consulting fees increased from fiscal 2023 as compared to fiscal 2022 primarily due to transaction costs associated with our intended acquisition of Figma. Non-Operating Income (Expense), Net(dollars in millions)202320222021% Change2023-2022Interest expense$(113)$(112)$(113)1 %Percentage of total revenue(1)%(1)%(1)%Investment gains (losses), net16 (19)16 **Percentage of total revenue*** Other income (expense), net246 41 — **Percentage of total revenue1 %**Total non-operating income (expense), net$149 $(90)$(97)**_________________________________________(*) Percentage is less than 1%.(**) Percentage is not meaningful.Interest ExpenseInterest expense represents interest associated with our debt instruments. Interest on our senior notes is payable semi-annually, in arrears, on February 1 and August 1.Investment Gains (Losses), NetInvestment gains (losses), net consists principally of unrealized holding gains and losses associated with our deferred compensation plan assets.Other Income (Expense), Net Other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Other income (expense), net also includes realized gains and losses on fixed income investments and foreign exchange gains and losses.Other income (expense), increased during fiscal 2023 as compared to fiscal 2022 primarily due to increases in interest income driven by higher average interest rates and cash equivalent balances.Provision for Income Taxes (dollars in millions)202320222021% Change2023-2022Provision for income taxes$1,371 $1,252 $883 10 %Percentage of total revenue7 %7 %6 % Effective tax rate20 %21 %15 % Our effective tax rate decreased by approximately one percentage point during fiscal 2023 as compared to fiscal 2022, primarily due to an increase in the net tax benefit from effects of non-U.S. operations in fiscal 2023.Our effective tax rate for fiscal 2023 was lower than the U.S. federal statutory tax rate of 21% primarily due to the tax benefits from the U.S. federal research tax credit and non-U.S. operations, partially offset by state taxes.44Table of ContentsWe recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized based on evaluation of all available positive and negative evidence. On the basis of this evaluation, we continue to maintain a valuation allowance to reduce our deferred tax assets to the amount realizable. The total valuation allowance was $405 million as of December 1, 2023, primarily related to certain state credits. We are a U.S.-based multinational company subject to tax in multiple domestic and foreign tax jurisdictions. The current U.S. tax law subjects the earnings of certain foreign subsidiaries to U.S. tax and generally allows an exemption from taxation for distributions from foreign subsidiaries.In the current global tax policy environment, the domestic and foreign governing bodies continue to consider, and in some cases introduce, changes in regulations applicable to corporate multinationals such as Adobe. As regulations are issued, we account for finalized regulations in the period of enactment. Beginning in 2023, under the provisions introduced by the U.S. Tax Act, we are required to capitalize and amortize research and development costs. If the rule is not modified, there will continue to be an adverse impact on our effective rates for income taxes paid, which is partially offset by a benefit to our effective tax rates from the increase in the foreign-derived intangible income deduction.See Note 10 of our Notes to Consolidated Financial Statements for further information regarding our provision for income taxes. Accounting for Uncertainty in Income TaxesThe gross liabilities for unrecognized tax benefits excluding interest and penalties were $501 million, $321 million and $289 million at the end of fiscal 2023, 2022 and 2021, respectively. If the total unrecognized tax benefits as of December 1, 2023, December 2, 2022 and December 3, 2021 were recognized, $356 million, $203 million and $199 million would decrease the respective effective tax rates.As of December 1, 2023 and December 2, 2022, the combined amounts of accrued interest and penalties included in long-term income taxes payable related to tax positions taken on our tax returns were not material.The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of our tax assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Although the timing of resolution, settlement and closing of audits is not certain, it is reasonably possible that the underlying unrecognized tax benefits may decrease by up to $60 million over the next 12 months.Our future effective tax rates may be materially affected by changes in the tax rates in jurisdictions where our income is earned, changes in jurisdictions in which our profits are determined to be earned and taxed, changes in the valuation of our deferred tax assets and liabilities, changes in or interpretation of tax rules and regulations in the jurisdictions in which we do business, or unexpected changes in business and market conditions that could reduce certain tax benefits.In addition, tax laws in the United States as well as other countries and jurisdictions in which we conduct business are subject to change as new laws are passed and/or new interpretations are made available. These countries, governmental bodies, such as the European Commission of the European Union, and intergovernmental economic organizations, such as the Organization for Economic Cooperation and Development, have made or could make unprecedented assertions about how taxation is determined and, in some cases, have proposed or enacted new laws that are contrary to the way in which rules and regulations have historically been interpreted and applied. Changes in our operating landscape, such as changes in laws and/or interpretations of tax rules, could adversely affect our effective tax rates and/or cause us to respond by making changes to our business structure which could adversely affect our operations and financial results.Moreover, we are subject to the examination of our income tax returns by domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from these examinations. Our policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. While we believe our tax estimates are reasonable, we cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our financial position and results of operations.45Table of Contents LIQUIDITY AND CAPITAL RESOURCESCash Flows Our primary source of cash is receipts from revenue. Our primary uses of cash are general business expenses including payroll, income taxes, marketing and third-party hosting services, as well as our stock repurchase program as described below. Other customary sources of cash include proceeds from the maturities and sales of short-term investments. Other customary uses of cash include business acquisitions, repayment of maturing senior notes, purchases of property and equipment and payments for taxes related to net share settlement of equity awards.This data should be read in conjunction with our Consolidated Statements of Cash Flows.As of(in millions)December 1, 2023December 2, 2022Cash and cash equivalents$7,141 $4,236 Short-term investments$701 $1,860 Working capital$2,833 $868 Stockholders’ equity$16,518 $14,051 A summary of our cash flows for fiscal 2023, 2022 and 2021 is as follows:(in millions)202320222021Net cash provided by operating activities$7,302 $7,838 $7,230 Net cash provided by (used for) investing activities776 (570)(3,537)Net cash used for financing activities(5,182)(6,825)(4,301)Effect of foreign currency exchange rates on cash and cash equivalents9 (51)(26)Net change in cash and cash equivalents$2,905 $392 $(634)Cash Flows from Operating ActivitiesFor fiscal 2023, net cash provided by operating activities of $7.30 billion was primarily comprised of net income adjusted for the net effect of non-cash items. Beginning in 2023, under the provisions introduced by the U.S. Tax Act, we are required to capitalize and amortize research and development costs. This had an adverse impact on our effective rate for income taxes paid and, consequently, on our cash flows from operations. In addition, the primary working capital uses of cash were increases in prepaid expenses attributable to the timing of billings. These impacts were partially offset by working capital sources of cash driven by increases in deferred revenue from our Digital Media and Digital Experience offerings.Cash Flows from Investing ActivitiesFor fiscal 2023, net cash provided by investing activities of $776 million was primarily due to maturities and sales of short-term investments partially offset by ongoing capital expenditures.Cash Flows from Financing ActivitiesFor fiscal 2023, net cash used for financing activities of $5.18 billion was primarily due to payments for our common stock repurchases, taxes paid related to the net share settlement of equity awards and the repayment of our 2023 Notes. These uses of cash were offset in part by proceeds from re-issuance of treasury stock mainly for our employee stock purchase plan. See the section titled “Stock Repurchase Program” below.Liquidity and Capital Resources ConsiderationsOur existing cash, cash equivalents and investment balances may fluctuate during fiscal 2024 due to changes in our planned cash outlay. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, risks detailed in the section titled “Risk Factors” in Part I, Item 1A of this report. Based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital, operating resource expenditure and capital expenditure requirements for the next twelve months and for the foreseeable future.46Table of ContentsOur cash equivalent and short-term investment portfolio as of December 1, 2023 consisted of asset-backed securities, corporate debt securities, money market funds, time deposits, U.S. agency securities and U.S. Treasury securities. We use professional investment management firms to manage a large portion of our invested cash.We expect to continue our investing activities, including short-term and long-term investments, purchases of computer and server hardware to operate our network infrastructure, sales and marketing, product support and administrative staff, and facilities expansion. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business.On September 15, 2022, we entered into a definitive merger agreement under which we intended to acquire Figma, Inc. (“Figma”) for approximately $20 billion, comprised of approximately half cash and half stock. On December 17, 2023, we entered into a mutual termination agreement with Figma to terminate the proposed merger. In accordance with the terms of the termination agreement, on December 20, 2023, we paid Figma a termination fee of $1 billion using cash on hand.Term Loan Credit AgreementIn January 2023, we entered into a delayed draw credit agreement, providing for a senior unsecured term loan (the “Term Loan”) of up to $3.5 billion for the purpose of partially funding the purchase price and related fees for our acquisition of Figma. As of December 1, 2023, there were no outstanding borrowings under the Term Loan. Subsequent to December 1, 2023, following execution of the mutual termination agreement with Figma discussed above, the delayed draw term loan agreement was terminated.Revolving Credit AgreementWe have a $1.5 billion senior unsecured revolving credit agreement (the “Revolving Credit Agreement”) with a syndicate of lenders, providing for loans to us and certain of our subsidiaries through June 30, 2027. Subject to the agreement of lenders, we may obtain up to an additional $500 million in commitments, for a maximum aggregate commitment of $2 billion. As of December 1, 2023, there were no outstanding borrowings under the Revolving Credit Agreement and the entire $1.5 billion credit line remains available for borrowing. Under the terms of our Revolving Credit Agreement, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists. We do not anticipate paying any cash dividends in the foreseeable future.Commercial Paper Program In September 2023, we established a commercial paper program under which we may issue unsecured commercial paper up to a total of $3 billion outstanding at any time, with maturities of up to 397 days from the date of issue. The net proceeds from the issuance of commercial paper are expected to be used for general corporate purposes, which may include working capital, capital expenditures, acquisitions, stock repurchases, refinancing indebtedness or any other general corporate purposes. As of December 1, 2023, there were no outstanding borrowings under the commercial paper program.Senior NotesWe have $3.65 billion senior notes outstanding, which rank equally with our other unsecured and unsubordinated indebtedness. As of December 1, 2023, the carrying value of our senior notes was $3.63 billion and our maximum commitment for interest payments was $321 million for the remaining duration of our outstanding senior notes. Interest is payable semi-annually, in arrears on February 1 and August 1. Our senior notes do not contain any financial covenants. See Note 17 of our Notes to Consolidated Financial Statements for further details regarding our debt.Contractual ObligationsOur purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 1, 2023, the value of our non-cancellable unconditional purchase obligations was $4.93 billion, primarily relating to contracts with vendors for third-party hosting and data center services. Subsequent to December 1, 2023, we executed agreements associated with certain of our long-term supplier commitments that increased our minimum purchase obligations by $2.3 billion through December 2028. See Note 16 of our Notes to Consolidated Financial Statements for additional information regarding our purchase obligations.We lease certain facilities and data centers under non-cancellable operating lease arrangements that expire at various dates through 2032. As of December 1, 2023, the value of our obligations under operating leases was $484 million. See Note 18 of our Notes to Consolidated Financial Statements for additional information regarding our lease obligations.47Table of ContentsOtherBeginning in 2023, under the provisions introduced by the U.S. Tax Act, we are required to capitalize and amortize research and development costs. If the rule is not modified, there will continue to be an adverse impact to our effective rates for income taxes paid, which is partially offset by a benefit from the increase in the foreign-derived intangible income deduction.Stock Repurchase ProgramTo facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase our shares in the open market or enter into structured repurchase agreements with third parties. In December 2020, our Board of Directors granted authority to repurchase up to $15 billion in our common stock through the end of fiscal 2024.During fiscal 2023, we repurchased a total of 11.5 million shares, including approximately 7.5 million shares at an average price of $429.65 through structured repurchase agreements, as well as 4.0 million shares at an average purchase price of $348.46 through an accelerated share repurchase agreement.During the fourth quarter of fiscal 2023, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $1 billion. As of December 1, 2023, $354 million of prepayment remained under our outstanding structured stock repurchase agreement.Subsequent to December 1, 2023, as part of the December 2020 stock repurchase authority, we entered into an accelerated share repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $2 billion and received an initial delivery of 2.5 million shares, which represents approximately 75% of our prepayment. Upon completion of the $2 billion accelerated share repurchase agreement, $150 million remains under our December 2020 authority.See section titled “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of this report for stock repurchases during the quarter ended December 1, 2023 and Note 14 of our Notes to Consolidated Financial Statements for further details regarding our stock repurchase program.IndemnificationsIn the ordinary course of business, we provide indemnifications of varying scope to customers and channel partners against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid.48Table of ContentsITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKAll market risk sensitive instruments were entered into for non-trading purposes.Foreign Currency RiskForeign Currency Exposures and Hedging InstrumentsIn countries outside the United States, we transact business in U.S. Dollars and various other currencies, which subject us to exposure from movements in exchange rates. We may use foreign exchange option contracts and forward contracts to hedge a portion of our forecasted foreign currency denominated revenue and expenses. Additionally, we hedge our net recognized foreign currency monetary assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. Our significant foreign currency revenue exposures for fiscal 2023, 2022 and 2021 were as follows:(in millions)202320222021Euro€2,842 €2,487 €2,209 Japanese Yen¥129,127 ¥118,456 ¥104,829 British Pounds£818 £737 £669 Australian Dollars$973 $876 $768 As of December 1, 2023, the total notional amounts of all outstanding foreign exchange contracts, including options and forwards, were $3.83 billion, which included the notional equivalent of $1.52 billion in Euros, $773 million in Indian Rupees, $634 million in British Pounds, $409 million in Japanese Yen, $350 million in Australian Dollars and $135 million in other foreign currencies. As of December 1, 2023, all contracts were set to expire at various dates through November 2024. The bank counterparties in these contracts could expose us to credit-related losses that would be largely mitigated with master netting arrangements with the same counterparty by permitting net settlement transactions. In addition, we enter into collateral security agreements that provide for collateral to be received or posted when the net fair value of these contracts fluctuates from contractually established thresholds.A sensitivity analysis was performed on all of our foreign exchange derivatives as of December 1, 2023. This sensitivity analysis measures the hypothetical market value resulting from a 10% shift in the value of exchange rates relative to the U.S. Dollar. For option contracts, the Black-Scholes option pricing model was used. A 10% increase in the value of the U.S. Dollar and a corresponding decrease in the value of the hedged foreign currency asset would lead to an increase in the fair value of our financial hedging instruments by $142 million. A 10% decrease in the value of the U.S. Dollar would lead to a decrease in the fair value of these financial instruments by $1 million.As a general rule, we do not use foreign exchange contracts to hedge local currency denominated operating expenses in countries where a natural hedge exists. For example, in many countries, revenue in the local currencies substantially offsets the local currency denominated operating expenses. We also have long-term investment exposures consisting of the capitalization and retained earnings in our non-U.S. Dollar functional currency foreign subsidiaries. As of December 1, 2023 and December 2, 2022, this long-term investment exposure totaled an absolute notional equivalent of $1.03 billion and $770 million, respectively. At this time, we do not hedge these long-term investment exposures.We do not use foreign exchange contracts for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. We regularly review our hedging program and assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.Cash Flow Hedges of Forecasted Foreign Currency Revenue and ExpensesWe may use foreign exchange purchased options or forward contracts to hedge foreign currency revenue denominated in Euros, British Pounds, Japanese Yen and Australian Dollars, or foreign currency expenses in Indian Rupees. We hedge these cash flow exposures to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. We enter into these foreign exchange contracts to hedge forecasted revenue and expenses in the normal course of business and accordingly, they are not speculative in nature.We record changes in fair value of these cash flow hedges of foreign currency denominated revenue and expenses in accumulated other comprehensive income (loss) in our Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction affects earnings, we reclassify the related gain or loss on the cash flow hedge to revenue or 49Table of Contentsoperating expenses, as applicable. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to revenue or operating expenses, as applicable. For the fiscal year ended December 1, 2023, there were no net gains or losses recognized in revenue or operating expenses relating to hedges of forecasted transactions that did not occur.Non-Designated Hedges of Foreign Currency Assets and LiabilitiesOur derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These foreign exchange contracts are carried at fair value with changes in fair value of these contracts recorded to other income (expense), net in our Consolidated Statements of Income. These contracts reduce the impact of currency exchange rate movements on our assets and liabilities. At December 1, 2023, the outstanding balance sheet hedging derivatives had maturities of 180 days or less.See Note 6 of our Notes to Consolidated Financial Statements for information regarding our derivative financial instruments.Interest Rate RiskShort-Term Investments and Fixed Income SecuritiesAt December 1, 2023, we had debt securities classified as short-term investments of $701 million. Changes in interest rates could adversely affect the market value of these investments. A sensitivity analysis was performed on our short-term investment portfolio as of December 1, 2023, based on an estimate of the hypothetical changes in market value of the portfolio that would result from an immediate parallel shift in the yield curve. A 150 basis point increase in interest rates would lead to a $6 million decrease in the market value of our short-term investments. Conversely, a 150 basis point decrease in interest rates would lead to a $6 million increase in the market value of our short-term investments.Senior NotesAs of December 1, 2023, we had $3.65 billion of senior notes outstanding which bear interest at fixed rates, and therefore do not subject us to financial statement risk associated with changes in interest rates. As of December 1, 2023, the total carrying amount of our senior notes was $3.63 billion and the related fair value based on observable market prices in less active markets was $3.39 billion.See Note 17 of our Notes to Consolidated Financial Statements for information regarding our senior notes.50Table of Contents

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion should be read in conjunction with the consolidated financial statements as of December 30, 2023 and December 31, 2022 and for each of the three years in the period ended December 30, 2023 and related notes, which are included in this Annual Report on Form 10-K as well as with the other sections of this Annual Report on Form 10-K, “Part II, Item 8: Financial Statements and Supplementary Data.”IntroductionIn this section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for 2023 compared to 2022, an analysis of changes in our financial condition and a discussion of our off-balance sheet arrangements. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.OverviewDuring 2023 we successfully launched multiple leadership products across our business and made important progress on our artificial intelligence (AI) strategy. In Data Center, we launched several 4th Gen AMD EPYC™ processors, including our AMD EPYC 97x4 processors, formerly codenamed “Bergamo,” built with our “Zen 4c” architecture core and designed to deliver leadership cloud-native computing, and our AMD EPYC 8004 Series processors, formerly codenamed “Siena”, that bring the “Zen 4c” core into a purpose-built CPU. In addition, we announced the extension of our 3rd Gen AMD EPYC processor family with six new offerings to meet the needs of general IT and mainstream computing for businesses seeking to leverage the economics of established platforms. For our AI Data Center solutions, we announced the availability of the AMD Instinct™ MI300X accelerators that are designed to deliver leadership performance for generative AI workloads and high performance computing (HPC) applications. In addition, we unveiled the AMD Instinct MI300A APU, which integrate the CPU and GPU cores on a single package delivering an efficient platform while also providing the compute performance to accelerate training on the latest AI models. We enhanced the performance and features of our AMD RoCm™ software by releasing our latest AMD ROCm 6 open software platform for AI and HPC workloads.We expanded our Embedded processor portfolio with powerful, scalable offerings for a variety of embedded applications such as the AMD Ryzen™ Embedded 7000 Series processor family. We launched the AMD Versal™ Premium VP1902 adaptive SoC designed to help chipmakers streamline the verification of application-specific integrated circuits (SICs) and SoC designs, and we introduced the Spartan™ Ultrascale+™ FPGA ideal for cost-sensitive applications requiring low power and high I/O. We launched the AMD Alveo™ MA35D media accelerator to power live interactive streaming services at scale, as well as the AMD Alveo UL3524 accelerator card. We expanded our Zynq™ UltraScale™ RFSoC digital front-end portfolio with two additional devices to enable the expansion and deployment of 4G/5G radios where lower cost, power and spectrum-efficient radios are required to address increased wireless connectivity. For our adaptive System-on-Modules (SOMs), we announced the addition of AMD Kria™ K24 SOM and KD240 Drives Starter Kit which offer power-efficient compute in a small factor and target cost-sensitive industrial and commercial edge applications. We continued to expand our Client product portfolio by launching our Ryzen 7000 Series Mobile processors bringing the power of “Zen 4” and AMD RDNA 3 integrated graphics architecture to notebook users. We expanded our commercial portfolio with AMD Ryzen PRO 7000 Series Mobile processors to bring advanced and power efficient x86 processors to business notebooks and mobile workstations. We announced our Ryzen 7045HX3D gaming mobile processor with AMD 3D V-cache technology with leadership mobile gaming performance. We also introduced AMD Ryzen X3D desktop processors, the Ryzen 9 7900X3D and Ryzen 9 7950X3D processors with 3D V-Cache technology. For handheld PC gaming consoles, we introduced the AMD Ryzen Z1 and Z1 Extreme processors featuring RDNA 3 architecture based graphics, to bring portability and battery life to handled PC gaming consoles. 44Table of ContentsIn Gaming, we introduced the AMD Radeon RX 7900M graphics for laptops, delivering desktop-class performance for gaming and content creation. We also introduced the new AMD Radeon™ PRO W7000 Series graphics, our first professional graphic cards built on advanced AMD chiplet design to deliver leadership performance and unique features: the AMD Radeon PRO W7600 and AMD Radeon PRO W7500. We designed these workstation graphics cards for mainstream professional workflows. We also unveiled the AMD Radeon RX 7800 XT and Radeon RX 7700 XT graphics cards optimized to deliver high-performance and high-refresh 1440p gaming experiences along with AMD FidelityFX™ Super Resolution 3 designed to offer performance boosts in supported games.We expanded our AI engagements with a broad set of data center customers during the year. In our Data Center GPU business, demand for our Data Center GPUs products was very strong as we had large hyperscaler customers committed to deploy our next generation AMD Instinct MI300 accelerators. Our AI strategy is focused on three areas: first, to deliver a broad portfolio and multigenerational roadmap of leadership CPUs, GPUs and adaptive computing solutions for AI inference and training; second, to extend the open software platform we have established to enable our AI hardware to be deployed broadly and with ease; and third, expand the deep and collaborative engagements we have established across the ecosystems to accelerate deployments of AMD-based AI solutions at scale. To help execute our AI strategy and accelerate our AI business, we brought together multiple AI teams across AMD to execute our end-to-end AI hardware strategy and drive development of a comprehensive software ecosystem that will span our full product portfolio. We strengthened our AI software capabilities with strategic acquisitions during the year. In August 2023, we acquired Mipsology SAS, an AI software company to help develop the full AMD AI software stack and expand the open ecosystem of software tools, libraries and models. We further expanded our open AI software capabilities with the acquisition of Nod, Inc., an open AI software company, in October 2023. Nod, Inc.’s software technology helps accelerate the deployment of AI solutions optimized for AMD Instinct data center accelerators, Ryzen AI processors, EPYC processors, Versal SoCs and Radeon GPUs.Against the backdrop of a mixed demand environment, net revenue for 2023 was $22.7 billion, a decrease of 4% compared to 2022 net revenue of $23.6 billion. The decrease in net revenue was primarily due to a 25% decrease in Client segment revenue primarily due to lower processor sales and a 9% decrease in Gaming segment revenue primarily due to lower semi-custom product sales. This decrease was partially offset by a 17% increase in Embedded segment revenue primarily due to the inclusion of embedded product revenue from Xilinx, Inc. (Xilinx) for the full twelve months period in 2023, as compared to a partial period from February 14, 2022 (the Xilinx Acquisition Date) in the prior year period, and a 7% increase in Data Center segment revenue primarily driven by higher sales of AMD Instinct GPUs and 4th Gen AMD EPYC CPUs. Gross margin, as a percentage of net revenue for 2023, was 46%, compared to 45% in 2022. The increase in gross margin was primarily due to higher Embedded segment revenue and lower amortization of acquisition-related intangible assets, partially offset by lower Client segment revenue and product mix. Operating income for 2023 was $401 million compared to operating income of $1.3 billion for 2022. The decrease in operating income was primarily due to lower Client segment performance and increased R&D investments, partially offset by lower amortization of acquisition-related intangible assets. Net income for 2023 was $854 million compared to $1.3 billion in the prior year. The decrease in net income was primarily driven by lower operating income.Cash, cash equivalents and short-term investments as of December 30, 2023 were $5.8 billion, compared to $5.9 billion at the end of 2022. Our aggregate principal amount of total debt as of December 30, 2023 and December 31, 2022 was $2.5 billion.During the twelve months ended December 30, 2023, we returned a total of $985 million to shareholders through the repurchase of 9.7 million shares of common stock under our stock repurchase program. As of December 30, 2023, $5.6 billion remained available for future stock repurchases under this program. The repurchase program does not obligate us to acquire any common stock, has no termination date and may be suspended or discontinued at any time.We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements. 45Table of ContentsCritical Accounting EstimatesOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, goodwill, long-lived and intangible assets, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.Management believes the following critical accounting estimates are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments.Revenue Allowances. Revenue contracts with our customers include variable amounts which we evaluate under ASC 606-10-32-8 through 14 in order to determine the net amount of consideration to which we are entitled and which we recognize as revenue. We determine the net amount of consideration to which we are entitled by estimating the most likely amount of consideration we expect to receive from the customer after adjustments to the contract price for rights of return and rebates to our original equipment manufacturers (OEM) customers and rights of return, rebates and price protection on unsold merchandise to our distributor customers.We base our determination of necessary adjustments to the contract price by reference to actual historical activity and experience, including actual historical returns, rebates and credits issued to OEM and distributor customers adjusted, as applicable, to include adjustments, if any, for known events or current economic conditions, or both.Our estimates of necessary adjustments for distributor price incentives and price protection on unsold products held by distributors are based on actual historical incentives provided to distributor customers and known future price movements based on our internal and external market data analysis.Our estimates of necessary adjustments for OEM price incentives utilize, in addition to known pricing agreements, actual historical rebate attainment rates and estimates of future OEM rebate program attainment based on internal and external market data analysis.We offer incentive programs through cooperative advertising and marketing promotions. Where funds provided for such programs can be estimated, we recognize a reduction to revenue at the time the related revenue is recognized; otherwise, we recognize such reduction to revenue at the later of when: i) the related revenue transaction occurs; or ii) the program is offered. For transactions where we reimburse a customer for a portion of the customer’s cost to perform specific product advertising or marketing and promotional activities, such amounts are recognized as a reduction to revenue unless they qualify for expense recognition.We also provide limited product return rights to certain OEMs and to most distribution customers. These return rights are generally limited to a contractual percentage of the customer’s prior quarter shipments, although, from time to time we may approve additional product returns beyond the contractual arrangements based on the applicable facts and circumstances. In order to estimate adjustments to revenue to account for these returns, including product restocking rights provided to distributor and OEM customers, we utilize relevant, trended actual historical product return rate information gathered, adjusted for actual known information or events, as applicable.Overall, our estimates of adjustments to contract price due to variable consideration under our contracts with OEM and distributor customers, based on our assumptions and include adjustments, if any, for known events, have been materially consistent with actual results; however, these estimates are subject to management’s judgment and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenue and operating results.46Table of ContentsInventory Valuation. We value inventory at standard cost, adjusted to approximate the lower of actual cost or estimated net realizable value using assumptions about future demand and market conditions. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances. In determining excess or obsolescence reserves for products, we consider assumptions such as changes in business and economic conditions, other-than-temporary decreases in demand for our products, and changes in technology or customer requirements. In determining the lower of cost or net realizable value reserves, we consider assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices. If in any period we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales, resulting in a negative impact to our gross margin in that period. If in any period we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, related revenue would be recorded with a lower or no offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period. Overall, our estimates of inventory carrying value adjustments have been materially consistent with actual results.Goodwill. Goodwill is the excess of the aggregate of the consideration transferred over the identifiable assets acquired and liabilities assumed in connection with business combinations. Our reporting units are at the operating segment level. Our goodwill is contained within four reporting units: Data Center, Client, Gaming and Embedded. We perform our goodwill impairment analysis as of the first day of the fourth quarter of each year and, if certain events or circumstances indicate that an impairment loss may have been incurred, on a more frequent basis. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment, which occurs when the carrying value of a reporting unit exceeds its fair value. Significant judgment is required in estimating the fair value of our reporting units to determine if the fair values of those units exceed their carrying values and an impairment to goodwill is required when a quantitative goodwill impairment test is performed. We typically obtain the assistance of third-party valuation specialists to help in determining the fair value of our reporting units. Changes in operating plans or adverse changes in the business or in the macroeconomic environment in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of our reporting units’ goodwill. Based on our annual qualitative impairment test, we concluded it is not more likely than not that the fair value of each reporting unit exceeded its carrying amount. Long-Lived and Intangible Assets. Long-lived and intangible assets to be held and used are reviewed for impairment if indicators of potential impairment exist and at least annually for indefinite-lived intangible assets. Impairment indicators are reviewed on a quarterly basis. Assets are grouped and evaluated for impairment at the lowest level of identifiable cash flows. When indicators of impairment exist and assets are held for use, we estimate future undiscounted cash flows attributable to the related asset groups. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the asset group or based on appraisals.Income Taxes. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.We regularly assess the likelihood that we will be able to recover our deferred tax assets. Unless recovery is considered more-likely-than-not (a probability level of more than 50%), we will record a charge to income tax expense in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable or maintain the valuation allowance recorded in prior periods. When considering all available evidence, if we determine it is more-likely-than-not we will realize our deferred tax assets, we will reverse some or all of the existing valuation allowance, which would result in a credit to income tax expense and the establishment of an asset in the period of reversal.In determining the need to establish or maintain a valuation allowance, we consider the four sources of jurisdictional taxable income: (i) carryback of net operating losses to prior years; (ii) future reversals of existing taxable temporary differences; (iii) viable and prudent tax planning strategies; and (iv) future taxable income exclusive of reversing temporary differences and carryforwards. 47Table of ContentsThrough the end of 2023, we continue to maintain a valuation allowance of approximately $2.1 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to limitations, under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. Certain state and foreign valuation allowances are maintained due to a lack of sufficient sources of future taxable income.In addition, the calculation of our tax liabilities involves addressing uncertainties in the application of complex, multi-jurisdictional tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing authorities. Results of OperationsAdditional information on our reportable segments is contained in Note 4 – Segment Reporting of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).Our operating results tend to vary seasonally. Historically, our net revenue has been generally higher in the second half of the year than in the first half of the year, although market conditions and product transitions could impact these trends.The following table provides a summary of net revenue and operating income (loss) by segment for 2023 and 2022:Year EndedDecember 30,2023December 31,2022(In millions)Net revenue:Data Center$6,496 $6,043 Client4,651 6,201 Gaming6,212 6,805 Embedded5,321 4,552 Total net revenue$22,680 $23,601 Operating income (loss):Data Center$1,267 $1,848 Client(46)1,190 Gaming971 953 Embedded2,628 2,252 All Other(4,419)(4,979)Total operating income$401 $1,264 Data CenterData Center net revenue of $6.5 billion in 2023 increased by 7%, compared to net revenue of $6.0 billion in 2022. The increase was primarily driven by higher sales of AMD Instinct GPUs and 4th Gen AMD EPYC CPUs.Data Center operating income was $1.3 billion in 2023, compared to operating income of $1.8 billion in 2022. The decrease in operating income was primarily due to product mix and higher research and development (R&D) investment. ClientClient net revenue of $4.7 billion in 2023 decreased by 25%, compared to net revenue of $6.2 billion in 2022, primarily due to lower sales of Ryzen mobile and desktop processors, resulting from a 16% decrease in average selling price and a 12% decrease in unit shipments. Lower Ryzen processor sales were due to weak PC market conditions and inventory correction across the PC supply chain that impacted the first half of 2023. Client operating loss was $46 million in 2023, compared to operating income of $1.2 billion in 2022. The decrease in operating income was primarily due to lower revenue. 48Table of ContentsGamingGaming net revenue of $6.2 billion in 2023 decreased by 9%, compared to net revenue of $6.8 billion in 2022. The decrease in net revenue was primarily due to lower semi-custom product revenue. Gaming operating income was $971 million in 2023, compared to operating income of $953 million in 2022. The increase in operating income was primarily driven by product mix, partially offset by higher R&D investment. EmbeddedEmbedded net revenue of $5.3 billion in 2023 increased by 17%, compared to net revenue of $4.6 billion in 2022. The increase in net revenue was primarily driven by the inclusion of embedded product revenue from Xilinx, Inc. (Xilinx) for the full twelve months period in 2023, as compared to a partial period from February 14, 2022 (the Xilinx Acquisition Date) in the prior year period. Embedded operating income was $2.6 billion in 2023, compared to operating income of $2.3 billion in 2022. The increase in operating income was primarily driven by the inclusion of Xilinx for the full twelve months period as compared to a partial period from the Xilinx Acquisition Date in the prior year period.All OtherAll Other operating loss of $4.4 billion in 2023 primarily consisted of $2.8 billion of amortization of acquisition-related intangibles, $1.4 billion of stock-based compensation expense, and $258 million of acquisition-related and other costs. All Other operating loss of $5.0 billion in 2022 primarily consisted of $3.5 billion of amortization of acquisition-related intangibles, $1.1 billion of stock-based compensation expense and $452 million of acquisition-related and other costs.Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Income (expense) and Income TaxesThe following is a summary of certain consolidated statement of operations data for 2023 and 2022:December 30, 2023December 31, 2022 (In millions, except for percentages)Net revenue$22,680 $23,601 Cost of sales11,278 11,550 Amortization of acquisition-related intangibles942 1,448 Gross profit10,460 10,603 Gross margin46%45%Research and development5,872 5,005 Marketing, general and administrative2,352 2,336 Amortization of acquisition-related intangibles1,869 2,100 Licensing gain(34)(102)Interest expense(106)(88)Other income (expense), net197 8 Income tax (benefit)(346)(122)Gross MarginGross margin as a percentage of net revenue was 46% in 2023 compared to 45% in 2022. The increase in gross margin was primarily driven by higher Embedded segment revenue and lower amortization of acquisition-related intangible assets, partially offset by lower Client segment revenue and product mix.ExpensesResearch and Development ExpensesResearch and development expenses of $5.9 billion in 2023 increased by $867 million, or 17%, compared to $5.0 billion in 2022. The increase was primarily due to higher employee-related costs due to an increase in headcount to support increased investment in AI. 49Table of ContentsMarketing, General and Administrative ExpensesMarketing, general and administrative expenses of $2.4 billion in 2023 increased by $16 million, or 1%, compared to $2.3 billion in 2022. The increase was primarily due to an increase in employee-related costs. Amortization of Acquisition-Related IntangiblesAmortization of acquisition-related intangibles of $2.8 billion for 2023 decreased by $737 million, or 21%, compared to $3.5 billion in 2022. The decrease was primarily due to certain acquisition-related intangibles being fully amortized in the first half of the current fiscal year.Licensing GainWe recognized $34 million of licensing gain from royalty income and $102 million of licensing gain from milestone achievement and royalty income associated with the licensed IP to the THATIC JV, our two joint ventures with Higon Information Technology Co., Ltd., a third-party Chinese entity, in 2023 and 2022, respectively. Interest ExpenseInterest expense of $106 million in 2023 increased by $18 million compared to $88 million in 2022, primarily due to interest expense from our 3.924% Senior Notes Due 2032 (3.924% Notes) and our 4.393% Senior Notes Due 2052 (4.393% Notes) that were issued in June 2022.Other Income (expense), netOther income (expense), net is primarily comprised of interest income from short-term investments, changes in valuation of equity investments and foreign currency transaction gains and losses.Other income (expense), net was $197 million in 2023 compared to $8 million of Other income, net in 2022. The change was primarily due to an increase in interest income driven by rising interest rates.Income Tax BenefitWe recorded an income tax benefit of $346 million and $122 million in 2023 and 2022, respectively, representing effective tax rates of (68%) and (10%), respectively. The increase in income tax benefit in 2023 was primarily due to the lower pre-tax income coupled with a $185 million foreign-derived intangible income tax benefit and $169 million of research and development tax credits.Global Minimum TaxThe OECD is continuing discussions surrounding fundamental changes in allocation of profits among tax jurisdictions in which companies do business, as well as the implementation of a global minimum tax (namely the “Pillar One” and “Pillar Two” proposals). The Council of the European Union has adopted the global corporate 15% minimum tax as provided for in Pillar Two and has directed EU member states to implement legislation enacting Pillar Two. Many countries, including non-EU member states, have implemented laws based on Pillar Two proposals, with effective dates starting in 2024. Although many countries have already introduced Pillar Two legislation applicable to the Company effective in 2024, certain jurisdictions in which we operate have not adopted corresponding legislation to date. The impact associated with Pillar Two will be accounted for as period costs. We continue to evaluate the impact of proposed and enacted legislative changes to our effective tax rate and cash flows as new guidance becomes available.International SalesInternational sales as a percentage of net revenue were 65% in 2023 and 66% in 2022. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Substantially all of our sales transactions are denominated in U.S. dollars.50Table of ContentsFINANCIAL CONDITIONLiquidity and Capital ResourcesAs of December 30, 2023, our cash, cash equivalents and short-term investments were $5.8 billion compared to $5.9 billion as of December 31, 2022. The percentage of cash and cash equivalents held domestically was 77% as of December 30, 2023, and 73% as of December 31, 2022.Our operating, investing and financing cash flow activities for 2023 and 2022 were as follows:December 30, 2023December 31, 2022 (In millions)Net cash provided by (used in):Operating activities$1,667 $3,565 Investing activities(1,423)1,999 Financing activities(1,146)(3,264)Net increase (decrease) in cash and cash equivalents$(902)$2,300 We have $3.0 billion available under an unsecured revolving credit agreement (Revolving Credit Agreement) that expires on April 29, 2027. No funds were drawn from this credit facility during the year ended December 30, 2023.We also have a commercial paper program to issue unsecured commercial paper notes up to a maximum principal amount outstanding, at any time, of $3.0 billion, with a maturity of up to 397 days from the date of issue. We did not issue any commercial paper during the year ended December 30, 2023.Our aggregate principal debt obligations were $2.5 billion as of December 30, 2023. Our 2.95% Notes with a principal amount of $750 million are due in June 2024. As of December 30, 2023, we had unconditional purchase commitments of approximately $4.6 billion, of which $3.9 billion are in fiscal year 2024. On an ongoing basis, we work with our suppliers on the timing of payments and deliveries of purchase commitments, taking into account business conditions. Our contractual obligations and purchase commitments relate primarily to our obligations to purchase wafers and substrates from third parties and future payments related to certain software and technology licenses and IP licenses. See Note 16 – Commitments and Guarantees.We believe our cash, cash equivalents, short-term investments and cash flows from operations along with our Revolving Credit Facility and commercial paper program will be sufficient to fund operations, including capital expenditures and purchase commitments, over the next 12 months and beyond. We believe we will be able to access the capital markets should we require additional funds. However, we cannot assure that such funds will be available on favorable terms, or at all.Operating ActivitiesOur working capital cash inflows and outflows from operations consist primarily of cash collections from our customers, payments for inventory purchases and payments for employee-related expenditures.Net cash provided by operating activities was $1.7 billion in 2023, primarily due to our net income of $854 million in 2023, adjusted for non-cash adjustments of $3.9 billion and net cash outflows of $3.0 billion from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $1.3 billion increase in accounts receivable driven primarily by higher revenue in the last month of 2023 compared to the last month of 2022, and a $580 million increase in inventories driven primarily by build of advanced process nodes to support the ramp of new products.51Table of ContentsNet cash provided by operating activities was $3.6 billion in 2022, primarily due to our net income of $1.3 billion in 2022, adjusted for non-cash adjustments of $4.1 billion and net cash outflows of $1.8 billion from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $1.4 billion increase in inventories driven primarily by build of advanced process nodes to support the ramp of new products, a $1.1 billion increase in accounts receivable driven primarily by higher revenue in the fourth quarter of 2022 compared to the fourth quarter of 2021, and a $1.2 billion increase in prepaid expenses and other assets due primarily to prepayments under long-term supply agreements in 2022, offset by an $931 million increase in accounts payable primarily due to timing of payments to our suppliers, and a $546 million increase in accrued liabilities and other driven mainly by higher customer-related accruals.Investing ActivitiesNet cash used in investing activities was $1.4 billion in 2023, which primarily consisted of cash used for purchases of short-term investments of $3.7 billion, $546 million for purchases of property and equipment, and cash used in acquisitions, net of cash acquired of $131 million, partially offset by proceeds from maturities of short-term investments of $2.7 billion and sale of short-term investments of $300 million.Net cash provided by investing activities was $2 billion in 2022, which primarily consisted of higher cash provided by maturities of short-term investments of $4.3 billion and cash acquired as part of the acquisition of Xilinx of $2.4 billion, partially offset by higher cash used for purchases of short-term investments of $2.7 billion, cash used in the acquisition of Pensando Systems Inc. (“Pensando”) of $1.5 billion and $450 million for purchases of property and equipment.Financing ActivitiesNet cash used in financing activities was $1.1 billion in 2023, which primarily consisted of common stock repurchases of $985 million under the Repurchase Program and repurchases to cover tax withholding on employee equity plans of $427 million, partially offset by proceeds from the issuance of common stock under our employee equity plans of $268 million. Net cash used in financing activities was $3.3 billion in 2022, which primarily consisted of common stock repurchases of $3.7 billion under the Repurchase Program, higher repurchases to cover tax withholding on employee equity plans of $406 million and repayment of debt of $312 million, partially offset by proceeds from the issuance of debt of $991 million and higher proceeds from the issuance of common stock under our employee equity plans of $167 million. Off-Balance Sheet ArrangementsAs of December 30, 2023, we had no off-balance sheet arrangements.52Table of ContentsITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and long-term debt. We usually invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of December 30, 2023, our investment portfolio consisted of fixed income instruments, time deposits and commercial paper. Our primary aim with our investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. In accordance with our investment policy, we place investments with high credit quality issuers and limit the amount of credit exposure to any one issuer based upon the issuer's credit rating. These securities are subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 50 basis-point (half percentage point) increase or decrease in interest rates compared to rates at December 30, 2023 would have affected the fair value of our cash equivalent and investment portfolio by approximately $7 million. As of December 30, 2023, all of our outstanding long-term debt had fixed interest rates. Consequently, our exposure to market risk for changes in interest rates on reported interest expense and corresponding cash flows is minimal.We will continue to monitor our exposure to interest rate risk.Default Risk. We mitigate default risk in our investment portfolio by investing in only high credit quality securities and by constantly positioning our portfolio to respond to a significant reduction in a credit rating of any investment issuer or guarantor. Our portfolio includes investments in marketable debt securities with active secondary or resale markets to ensure portfolio liquidity. We are averse to principal loss and strive to preserve our invested funds by limiting default risk and market risk.We actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated debt securities with relatively short maturities and do not invest in securities which we believe involve a higher degree of risk. As of December 30, 2023, all of our investments in debt securities were A-rated by at least one of the rating agencies. While we believe we take prudent measures to mitigate investment-related risks, such risks cannot be fully eliminated as there are circumstances outside of our control.Foreign Exchange Risk. As a result of our foreign operations, we incur costs and we carry assets and liabilities that are denominated in foreign currencies, while sales of products are primarily denominated in U.S. dollars. We maintain a foreign currency hedging strategy which uses derivative financial instruments to mitigate the risks associated with changes in foreign currency exchange rates. This strategy takes into consideration all of our exposures. We do not use derivative financial instruments for trading or speculative purposes. The following table provides information about our foreign currency forward contracts as of December 30, 2023 and December 31, 2022. All of our foreign currency forward contracts mature within 24 months. December 30, 2023December 31, 2022NotionalAmountAverageContractRateEstimatedFair ValueGain (Loss)NotionalAmountAverageContractRateEstimatedFair ValueGain (Loss) (In millions except contract rates)Foreign currency forward contracts:Chinese Renminbi$655 6.7593 $(10)$599 6.7848 $(3)Canadian Dollar645 1.3479 11 607 1.3137 (16)Indian Rupee514 84.6922 1 516 82.1493 (9)Taiwan Dollar171 29.3064 (3)207 29.1231 (4)Singapore Dollar495 1.3314 6 259 1.3600 4 Euro303 0.9017 1 142 0.9334 1 Pound Sterling167 0.8057 2 88 0.8204 (1)Japanese Yen— — — 2 133.7593 — Australian Dollar— — — 1 1.4689 — Total$2,950 $8 $2,421 $(28)53Table of Contents

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+Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations—SBU Performance Analysis of this Form 10-K for reconciliation and definitions of Adjusted EBITDA.10 | 2023 Annual ReportFor financial reporting purposes, the Company's corporate activities are reported within "Corporate and Other" because they do not require separate disclosure. See Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 18—Segment and Geographic Information included in

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+Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThis Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), should be read in conjunction with our consolidated financial statements and notes thereto that appear elsewhere in this annual report on Form 10-K. See “Risk Factors” elsewhere in this annual report on Form 10-K for a discussion of certain risks associated with our business. The following discussion contains forward-looking statements. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures or other events that may be announced after the date hereof.OverviewWe provide solutions to power and protect life online through our massively distributed edge and cloud platform, which we refer to as Akamai Connected Cloud. Akamai Connected Cloud underpins our cloud computing, security and content delivery solutions, and is central to our financial success. The key factors that influence our financial success are our ability to build on recurring revenue commitments for our security and performance offerings, increase traffic on our network, continue to develop, scale and successfully bring to market our cloud computing platform and compute-to-edge solutions that meet the needs of professional users and enterprises, effectively manage the prices we charge for our solutions, develop new products and appropriately manage our capital spending and other expenses. The purpose of this discussion and analysis section is to provide material information relevant to an assessment of our financial condition and results of operations from management’s perspective, including to describe and explain key trends, events and other factors that impacted our reported results and that are likely to impact our future performance.RevenueWe primarily derive revenue from the sale of services to customers executing contracts having terms of one year or longer, which allows us to have a consistent and predictable base level of revenue. Services included in our contracts consist of security solutions, the delivery of content, applications and software over the internet, cloud computing solutions and professional services. In addition to a base level of revenue, we are also dependent on our ability to increase our product offerings and to cross-sell additional services to our new and existing customers, particularly for our security and compute solution portfolios. Our revenue is also impacted by customer renewals, the rate of adoption and timing of customer offerings, variability of one-time events, usage of cloud computing services and the amount of traffic we serve on our network. Geopolitical, economic and other developments that impact our customers' businesses can also impact our ability to attract new customers or continue to cross-sell additional services to existing customers. Over the longer term, our ability to expand our product portfolio and to effectively manage the prices we charge for our solutions are key factors impacting our revenue growth.We have observed the following trends related to our revenue in recent years:•Increased sales of our security solutions, led by application security solutions and segmentation solutions from our acquisition of Guardicore Ltd., and increased sales of our compute solutions, primarily attributable to our acquisition of Linode in early 2022, have made a significant contribution to revenue growth. During 2023, security represented the largest share of revenue with security and compute revenue representing over half of our total revenue. We plan to continue to invest in these areas with a focus on further advancing our product portfolios.•Traffic on our network continues to grow at a modest pace as compared to prior years, and is impacted by a number of external factors. Most recently, as we and our customers manage through a time of economic headwinds and uncertainty, traffic growth rates have been impacted. Conversely, our rate of traffic growth increased significantly during the onset of the COVID-19 pandemic and the associated stay-at-home orders across the globe. However, as these orders were lifted and more return-to-work policies were adopted, our traffic growth rates declined. These traffic fluctuations may continue to impact our delivery revenue.•The prices paid by some of our delivery and security customers have declined in recent years due to competition and contract renewals, which negatively impacts our revenue growth rates. We have been able to mitigate some of the negative impacts to our revenue growth rates by upselling incremental solutions to our existing delivery and security customers. We are taking steps upon contract renewals to optimize how we charge certain high-volume traffic delivery customers, including charging a premium for higher-cost destinations and continuing to maintain alignment between customer traffic volumes and unit pricing.•Revenue from our international operations has generally been growing at a faster pace in recent years than from our U.S. operations, particularly from new customer acquisition and cross-selling of incremental solutions. Because we 25Table of Contentspublicly report in U.S. dollars, our reported revenue results are negatively impacted when the dollar strengthens and benefit when the dollar weakens.•We have experienced variations in certain types of revenue from quarter-to-quarter. In particular, we typically experience higher revenue in the fourth quarter of each year for some of our solutions as a result of holiday season activity. In addition, we experience quarterly variations in revenue attributable to, among other things, the timing of large customer contract renewals; the frequency and timing of purchases of custom solutions or licensed software; the nature and timing of software and gaming releases by our customers; and whether there are large live sporting or other events or situations that impact the amount of media traffic on our network.ExpensesOur level of profitability is impacted by our expenses, including direct costs to support our revenue such as bandwidth and co-location costs, which includes energy to power our network. We have observed the following trends related to our profitability in recent years:•Network bandwidth costs represent a significant portion of our cost of revenue. Historically, we have been able to mitigate increases in these costs by reducing our network bandwidth costs per unit and investing in internal-use software development to improve the performance and efficiency of our network. We will need to continue to effectively manage our bandwidth costs to maintain or improve current levels of profitability.•Co-location costs are also a significant portion of our cost of revenue. As we continue to build out our new compute locations to provide us with the ability to scale our platform, we expect to enter into longer term leases that include certain financial commitments in order to achieve more favorable unit economics. The costs of the financial commitments are expensed ratably over the life of the lease, and, as a result, in some cases, we are incurring costs in advance of these compute locations being fully utilized. We continue to improve our internal-use software and remain disciplined in managing our hardware deployments, particularly for our delivery platform, which enables us to use servers more efficiently. With these efficiencies we have been able to moderate the impact of rising energy costs. We expect to continue to scale our network in the future, which we believe will allow us to effectively manage our co-location costs to maintain or improve current levels of profitability.•Network build-out and supporting service costs represent another significant portion of our cost of revenue. These costs include maintenance and supporting services incurred as we continue to build out our compute infrastructure and maintain our global network, and costs of third-party cloud providers used for some of our operations. We have seen these costs increase in recent years as a result of our network expansion, and particularly the build out of our compute infrastructure. We had also experienced increased costs from third-party cloud providers, but have recently begun to mitigate those costs by migrating to our own cloud solutions and optimizing third-party cloud spend. We will need to continue to effectively manage our network build-out and supporting service costs and continue to migrate third-party cloud services to Akamai Connected Cloud to maintain or improve current levels of profitability.•Our employees are core to the operations of our business, and payroll and related costs, including stock-based compensation, is our largest expense. It is important to the success of operations that we offer competitive compensation packages. However, we remain disciplined in allocating our resources to support our faster growing security and compute solutions, including maintaining operational efficiencies to mitigate the rising cost of talent. In 2023, we redesigned one of our non-executive short-term incentive compensation programs by shifting certain employees from a cash-based to stock-based program. We also introduced a non-executive incentive program tied to our initiative to migrate certain third-party cloud services onto Akamai Connected Cloud. These programs are designed to better align employee incentives with the interests of our stockholders.•Depreciation expense related to our network equipment also contributes to our overall expense levels. In recent years, we have invested in our network as traffic levels have increased and as part of building out our compute infrastructure, which increased our capital expenditures and resulting depreciation expense. We plan to continue to make investments in capital expenditures, however, the focus is to further invest in support of our faster growing compute solutions. Due to the software and hardware initiatives we have undertaken to manage our global network more efficiently, the useful lives of our servers have been extended from five to six years effective January 1, 2023, which has offset increased depreciation expense from our network expansion and the build out of our compute infrastructure.26Table of Contents•Growth in our international operations incrementally increases our exposure to foreign currency fluctuations. Because we publicly report in U.S. dollars, our expenses are positively impacted when the dollar strengthens and are negatively impacted when the dollar weakens.Recent AcquisitionsWe acquired certain customer contracts from Lumen Technologies, Inc. ("Lumen") in October 2023 and from StackPath, LLC ("StackPath") in August 2023. These acquisitions are intended to further strengthen our existing content delivery and other businesses as we transition the acquired customers to our Akamai Connected Cloud and offer our portfolio of other services to these customers. Revenue attributable to these asset acquisitions was $20.3 million during the year ended December 31, 2023. We also acquired Neosec, Inc ("Neosec") in May 2023, which is intended to complement our application and API security portfolio by extending its visibility into the rapidly growing API threat landscape, and StorageOS, Inc. ("StorageOS"), also known as Ondat, in March 2023, which is intended to strengthen our cloud computing offerings. Neither Neosec or Ondat included a significant number of employees when we completed the acquisitions.In March 2022, we acquired Linode, an infrastructure-as-a-service platform provider, which allows for developer-friendly cloud computing capabilities. The acquisition was intended to enhance our computing services by enabling us to create a unique cloud platform to build, run and secure applications from the cloud to the edge. Linode had approximately 250 employees when we completed the acquisition.In October 2021, we acquired Guardicore whose micro-segmentation solution is designed to limit user access to only those applications that are authorized to communicate with each other, thereby limiting the spread of malware and protecting the flow of enterprise data across the network. Guardicore had approximately 270 employees when we completed the acquisition.Global Economic ConditionsGlobal macroeconomic and geopolitical conditions continue to impact our business and revenue growth rates. We, along with our customers, continue to manage through an uncertain period of fluctuating inflation, economic uncertainty, uncertain energy supplies, heightened geopolitical tensions, potential for supply chain disruptions, changes in international tax laws, fluctuations in foreign exchange rates and elevated interest rates. To the extent these macroeconomic conditions continue, we expect that it may adversely affect our business, operations and financial results.27Table of ContentsResults of OperationsThe following sets forth, as a percentage of revenue, consolidated statements of income data for the years indicated: 202320222021Revenue100.0 %100.0 %100.0 %Costs and operating expenses:Cost of revenue (exclusive of amortization of acquired intangible assets shown below)39.6 38.3 36.7 Research and development10.7 10.8 9.7 Sales and marketing14.0 13.9 13.3 General and administrative15.8 16.2 16.0 Amortization of acquired intangible assets1.8 1.8 1.4 Restructuring charge1.5 0.4 0.3 Total costs and operating expenses83.4 81.4 77.4 Income from operations16.6 18.6 22.6 Interest and marketable securities income, net1.2 0.1 0.5 Interest expense(0.5)(0.3)(2.1)Other (expense) income, net(0.3)(0.3)0.1 Income before provision for income taxes17.0 18.1 21.1 Provision for income taxes(2.8)(3.5)(1.8)Gain (loss) from equity method investment— (0.2)(0.4)Net income14.2 %14.4 %18.9 %RevenueRevenue by solution category during the periods presented was as follows (in thousands):For the Years Ended December 31,For the Years Ended December 31,20232022% Change% Change at Constant Currency20222021% Change% Change at Constant CurrencySecurity$1,765,267 $1,541,941 14.5 %14.7 %$1,541,941 $1,334,836 15.5 %19.7 %Delivery1,542,434 1,669,257 (7.6)(7.1)1,669,257 1,873,243 (10.9)(7.8)Compute504,219 405,456 24.4 24.7 405,456 253,144 60.2 64.0 Total revenue$3,811,920 $3,616,654 5.4 %5.8 %$3,616,654 $3,461,223 4.5 %8.0 %The increases in our revenue in 2023 as compared to 2022, and 2022 as compared to 2021, was primarily the result of continued growth in sales of our security solutions and the acquisition of Linode in March 2022 which contributed to the growth in our compute solutions. The increase in 2023 as compared to 2022 was partially offset by a decline in revenue from our delivery solutions due to the pricing impact of renewals and moderated traffic growth. The increase in 2022 as compared to 2021 was negatively impacted by the significant strengthening of the U.S. dollar and a decline in revenue from our delivery solutions due to a reduction in traffic growth and pricing impact of renewals.The increase in security solutions revenue for 2023 as compared to 2022, and 2022 as compared to 2021, was due to growth in a number of key products in our security solutions portfolio, including our segmentation and web application firewall solutions, denial of service and bot management solutions. The increase in security solutions revenue for 2023 as compared to 2022 was also due to growth in certain products that combine elements of our security and delivery offerings to provide robust security solutions.The decrease in delivery solutions revenue for 2023 as compared to 2022 was due to the pricing impact of renewals and moderated traffic growth. The decrease in delivery solutions revenue for 2022 as compared to 2021 was due to a reduction in traffic growth rates as our largest customers are not experiencing the same traffic growth rates as they once were. 28Table of ContentsThe increase in compute solutions revenue in 2023 as compared to 2022, and 2022 as compared to 2021, was due to growth in compute products, including continued growth in cloud optimization solutions and through the acquisition of Linode in the first quarter of 2022. The increase in compute solutions revenue in 2023 as compared to 2022 was also due to a price increase for some of our compute solutions in 2023.Revenue derived in the U.S. and internationally during the periods presented is as follows (in thousands):For the Years Ended December 31,For the Years Ended December 31,20232022% Change% Change at Constant Currency20222021% Change% Change at Constant CurrencyU.S.$1,968,779 $1,902,051 3.5 %3.5 %$1,902,051 $1,837,508 3.5 %3.5 %As a percentage of revenue51.6 %52.6 %52.6 %53.1 %International1,843,141 1,714,603 7.5 8.3 1,714,603 1,623,715 5.6 %13.2 As a percentage of revenue48.4 %47.4 %47.4 %46.9 %Total revenue$3,811,920 $3,616,654 5.4 %5.8 %$3,616,654 $3,461,223 4.5 %8.0 %For each of the years ended December 31, 2023, 2022 and 2021, no single country outside of the U.S. accounted for 10% or more of revenue. Changes in foreign currency exchange rates negatively impacted our revenue by $13.9 million in 2023 as compared to 2022, and negatively impacted our revenue by $122.1 million in 2022 as compared to 2021.Cost of RevenueCost of revenue consisted of the following for the periods presented (in thousands): For the Years Ended December 31,For the Years Ended December 31, 20232022% Change20222021% ChangeBandwidth fees$228,038$205,26811.1 %$205,268$209,288(1.9)%Co-location fees256,062197,37529.7 197,375177,95010.9 Network build-out and supporting services215,557195,66910.2 195,669157,23424.4 Payroll and related costs325,851298,2699.2 298,269276,5447.9 Acquisition-related costs3,1904,982(36.0)4,982—100.0 Stock-based compensation, including amortization of prior capitalized amounts73,78657,14629.1 57,14657,390(0.4)Depreciation of network equipment231,500259,359(10.7)259,359226,38414.6 Amortization of internal-use software177,079165,7516.8 165,751164,1661.0 Total cost of revenue$1,511,063$1,383,8199.2 %$1,383,819$1,268,9569.1 %As a percentage of revenue39.6 %38.3 %38.3 %36.7 %The increase in cost of revenue for 2023 as compared to 2022 was primarily due to:•co-location fees as a result of investment in Akamai Connected Cloud, particularly as we build out our compute infrastructure to support future growth and scalability;•bandwidth fees to support the increase in traffic served on our network and for traffic served from higher cost regions;29Table of Contents•network build-out and supporting services due to our infrastructure investment in Akamai Connected Cloud and costs associated with the transition services agreements to support the migration of customer contracts acquired from Lumen and StackPath; and•payroll and related costs, including stock-based compensation, as a result of headcount growth to support our network, the increased expected achievement of our performance-based compensation plans and higher average equity awards to employees driven by the talent market; additionally, stock-based compensation increased due to the shift in one of our compensation programs from cash-based to stock-based.The increase in cost of revenue for 2023 as compared to 2022 was partially offset by lower depreciation expense of network equipment due to software and hardware initiatives we have implemented to manage our global network more efficiently. As a result, we increased the expected average useful life of our servers from five to six years effective January 1, 2023, which resulted in a reduction to depreciation expense of $62.7 million for the year ended December 31, 2023.Additionally, due to our focus on third-party cloud application costs, including migrating third-party cloud services to our own cloud solutions and optimizing third-party cloud spending which are included in network build-out and supporting services, our third-party cloud costs decreased for 2023 as compared to 2022. The increase in cost of revenue for 2022 as compared to 2021 was primarily due to increased network build-out and supporting services, particularly related to increased supporting services for third-party cloud applications, and increased investment in our network in prior years to support traffic growth, which resulted in higher depreciation costs of our network equipment and growth in expenses related to our co-location facilities including energy to power our network.During 2024, we expect our cost of revenue to increase as compared to 2023, in particular our co-location costs, due to investments in our network to support the continued growth of our compute solutions. We plan to continue to focus our efforts on managing our operating margins, including our bandwidth and network build-out costs. Specifically, we are continuing to take steps to migrate third-party cloud services onto Akamai Connected Cloud, which we expect will continue to reduce third-party cloud services costs. Research and Development ExpensesResearch and development expenses consisted of the following for the periods presented (in thousands):For the Years Ended December 31,For the Years Ended December 31, 20232022% Change20222021% ChangePayroll and related costs$494,803 $468,928 5.5 %$468,928 $456,138 2.8 %Stock-based compensation123,896 78,116 58.6 78,116 65,951 18.4 Capitalized salaries and related costs(239,928)(183,540)30.7 (183,540)(200,530)(8.5)Acquisition-related costs721 2,832 (74.5)2,832 — 100.0 Other expenses26,556 25,098 5.8 25,098 13,813 81.7 Total research and development$406,048 $391,434 3.7 %$391,434 $335,372 16.7 %As a percentage of revenue10.7 %10.8 %10.8 %9.7 %The increase in research and development expenses for 2023 as compared to 2022 was due to higher payroll and related costs, including stock-based compensation, as a result of headcount growth from our strategic initiatives, annual merit increases, the increased expected achievement of our performance-based compensation plans, a new compensation program tied to our initiative to migrate third-party cloud services onto Akamai Connected Cloud and higher average equity awards to employees driven by the talent market. Additionally, stock-based compensation increased due to the shift in one of our compensation programs from cash-based to stock-based. These increases were partially offset by an increase in capitalized salaries and related costs as we focused resources to work on development activities related to our platform.The increase in research and development expenses for 2022 as compared to 2021 was due to higher payroll and related costs and related stock-based compensation as a result of headcount growth from employees joining us through acquisitions, a reduction in capitalized salaries and related costs as a result of a shift in resources to work on core maintenance activities related to our platform and an increase in other expenses due to an increase in the use of third-party cloud services to support our research and development activities.30Table of ContentsResearch and development costs are expensed as incurred, other than certain internal-use software development costs eligible for capitalization. Capitalized development costs consist of payroll and related costs for personnel and external consulting expenses involved in the development of internal-use software used to deliver our services and operate our network. For the years ended December 31, 2023, 2022 and 2021, we capitalized $77.0 million, $30.0 million and $32.2 million, respectively, of stock-based compensation. These capitalized internal-use software development costs are amortized to cost of revenue over their estimated useful lives, ranging from two to ten years based on the software developed and its expected useful life.We expect our research and development costs to increase in 2024, in particular payroll and related costs, including stock-based compensation, in support of our faster growing security and compute solutions. However, we plan to continue to focus our efforts on managing our operating margins.Sales and Marketing ExpensesSales and marketing expenses consisted of the following for the periods presented (in thousands):For the Years Ended December 31,For the Years Ended December 31, 20232022% Change20222021% ChangePayroll and related costs$376,305 $374,110 0.6 %$374,110 $366,501 2.1 %Stock-based compensation66,453 47,789 39.1 47,789 46,342 3.1 Marketing programs and related costs59,151 55,033 7.5 55,033 40,553 35.7 Acquisition-related costs1,387 2,166 (36.0)2,166 — 100.0 Other expenses29,930 23,311 28.4 23,311 8,571 172.0 Total sales and marketing$533,226 $502,409 6.1 %$502,409 $461,967 8.8 %As a percentage of revenue14.0 %13.9 %13.9 %13.3 %The increase in sales and marketing expenses for 2023 as compared to 2022 was due to higher payroll and related costs, including stock-based compensation, as a result of annual merit increases, headcount growth and the increased expected achievement of our performance-based compensation plans and other expenses due to increased travel expenses associated with customer meetings and sales events. Additionally, stock-based compensation increased due to the shift in one of our compensation programs from cash-based to stock-based.The increase in sales and marketing expenses for 2022 as compared to 2021 was primarily due to increased marketing programs and related costs due to advertising and customer events held in 2022. Other expenses also increased due to travel associated with customer events and meetings, as well as a sales recognition event during 2022 that did not occur in 2021. Such events and travel costs were higher in 2022 than in 2021 due to the rollback of COVID-19 pandemic-related restrictions that had been in place in the prior year.We expect sales and marketing costs to increase in 2024 as compared to 2023, due to our continued investment in go-to-market efforts. However, we plan to continue to carefully manage costs in an effort to manage our operating margins. 31Table of ContentsGeneral and Administrative ExpensesGeneral and administrative expenses consisted of the following for the periods presented (in thousands):For the Years Ended December 31,For the Years Ended December 31, 20232022% Change20222021% ChangePayroll and related costs$218,272 $213,772 2.1 %$213,772 $223,238 (4.2)%Stock-based compensation94,316 62,926 49.9 62,926 63,324 (0.6)Depreciation and amortization65,817 74,225 (11.3)74,225 81,934 (9.4)Facilities-related costs90,061 103,473 (13.0)103,473 100,769 2.7 Provision for doubtful accounts1,649 7,042 (76.6)7,042 763 822.9 Acquisition-related costs8,050 19,071 (57.8)19,071 13,317 43.2 Software and related service costs55,714 50,320 10.7 50,320 40,861 23.1 Other expenses66,972 53,377 25.5 53,377 28,818 85.2 Total general and administrative$600,851 $584,206 2.8 %$584,206 $553,024 5.6 %As a percentage of revenue15.8 %16.2 %16.2 %16.0 %The increase in general and administrative expenses for 2023 as compared to 2022 was due to higher payroll and related costs, including stock-based compensation, as a result of annual merit increases, headcount growth, the increased expected achievement of our performance-based compensation plans and higher average equity awards to employees driven by the talent market and other expenses due to increased professional service fees to support our business. Additionally, stock-based compensation increased due to the shift in one of our compensation programs from cash-based to stock-based. These increases were partially offset by decreases in facilities-related costs as a result of growth in sublease income from the execution of our FlexBase program and acquisition-related costs in connection with our acquisition of Linode in the first quarter of 2022.The increase in general and administrative expenses for 2022 as compared to 2021 was primarily due to increased software and related service costs as we transition to and expand usage of cloud-based applications to support our operations, other expenses related to an increase in professional service fees to support our business and acquisition-related costs primarily related to our acquisition of Linode. These increases were partially offset by a decrease in payroll and related costs due to a decline in performance-based compensation program achievement.General and administrative expenses for 2023, 2022 and 2021 are broken out by category as follows (in thousands):For the Years Ended December 31,For the Years Ended December 31,20232022% Change20222021% ChangeGlobal functions$246,753 $212,674 16.0 %$212,674 $212,456 0.1 %As a percentage of revenue6.5 %5.9 %5.9 %6.1 %Infrastructure344,399345,391 (0.3)345,391 326,480 5.8 As a percentage of revenue9.0 %9.6 %9.6 %9.4 %Other9,69926,141 (62.9)26,141 14,088 85.6 Total general and administrative expenses$600,851 $584,206 2.8 %$584,206 $553,024 5.6 %As a percentage of revenue15.8 %16.2 %16.2 %16.0 %Global functions expense includes payroll, stock-based compensation and other employee-related costs for administrative functions, including finance, purchasing, order entry, human resources, legal, information technology and executive personnel, as well as third-party professional service fees. Infrastructure expense includes payroll, stock-based compensation and other employee-related costs for our network infrastructure functions, as well as facility rent expense, depreciation and amortization of facility- and IT-related assets, software and related service costs, business insurance and taxes. Our network infrastructure function is responsible for network planning, sourcing, architecture evaluation and platform security. Other expense includes acquisition-related costs and provision for doubtful accounts.32Table of ContentsDuring 2024, we expect our general and administrative expenses to increase as compared to 2023, in particular payroll and related costs, including stock-based compensation, due to the impact of mid-year merit increases and headcount growth to support the operations of the business. However, we plan to continue to control costs, including reducing our real estate expenses due to excess capacity created by our FlexBase program, in an effort to manage our operating margins.Amortization of Acquired Intangible AssetsFor the Years Ended December 31,For the Years Ended December 31,(in thousands)20232022% Change20222021% ChangeAmortization of acquired intangible assets$66,751 $64,983 2.7 %$64,983 $48,019 35.3 %As a percentage of revenue1.8 %1.8 %1.8 %1.4 %The increase in amortization of acquired intangible assets for 2023 as compared to 2022, as well as 2022 as compared to 2021, was the result of amortization of acquired intangible assets related to our recent acquisitions. Based on acquired intangible assets as of December 31, 2023, future amortization is expected to be $84.8 million, $80.5 million, $76.1 million, $62.0 million and $49.6 million for the years ending December 31, 2024, 2025, 2026, 2027 and 2028, respectively.Restructuring ChargeFor the Years Ended December 31,For the Years Ended December 31,(in thousands)20232022% Change20222021% ChangeRestructuring charge$56,643 $13,529 318.7 %$13,529 $10,737 26.0 %As a percentage of revenue1.5 %0.4 %0.4 %0.3 %The restructuring charge in 2023 was driven by our FlexBase program as we exited certain facilities that were no longer needed, resulting in impairments of right-of-use-assets and leasehold improvements. Additional charges related to this action may occur; however, we do not expect such charges will materially impact our financial condition or results of operations, and we expect to continue to evaluate our facility footprint going forward. Additionally, the restructuring charge in 2023 included the result of certain actions initiated in the first quarter of 2023. Management's commitment to an action to restructure certain parts of the company was to enable the prioritization of investments in the fastest growing areas of the business. The restructuring charge for this action includes severance and related expenses for certain headcount reductions.The restructuring charge in 2022 was primarily related to software impairment charges related to our investment with Mitsubishi UFJ Financial Group ("MUFG") in the joint venture Global Open Network, Inc. ("GO-NET"), and MUFG's decision to suspend GO-NET's operations, and impairments of right-of-use-assets for facilities that are no longer needed as a result of our FlexBase program.The restructuring charge in 2021 was primarily the result of management's actions initiated in the fourth quarter of 2020 to better position us to become more agile in delivering our solutions. The restructuring charge for this action includes severance and related expenses for certain headcount reductions and software charges for software not yet placed into service that will not be implemented due to this action. In addition to the 2020 action, additional charges were incurred in 2021, related to management’s launch of its new FlexBase program in May 2022. The restructuring charge incurred for this program in 2021 includes impairments of lease-related assets for certain facilities that are no longer needed. These restructuring charges were partially offset by the release of a lease obligation for a facility previously exited as part of management actions initiated in late 2019. 33Table of ContentsNon-Operating Income (Expense)For the Years Ended December 31,For the Years Ended December 31,(in thousands)20232022% Change20222021% ChangeInterest and marketable securities income, net$45,194 $3,258 1,287.2 %$3,258 $15,620 (79.1)%As a percentage of revenue1.2 %0.1 %0.1 %0.5 %Interest expense$(17,709)$(11,096)59.6 %$(11,096)$(72,332)(84.7)%As a percentage of revenue(0.5)%(0.3)%(0.3)%(2.1)%Other (expense) income, net$(12,296)$(10,433)17.9 %$(10,433)$1,785 (684.5)%As a percentage of revenue(0.3)%(0.3)%(0.3)%0.1 %Interest and marketable securities income, net primarily consists of interest earned on invested cash and marketable securities balances and income and losses on mutual funds that are associated with our employee non-qualified deferred compensation plan. The increase to interest and marketable securities income, net for 2023 as compared to 2022 was the result of increased marketable securities balances as a result of our August 2023 issuance of $1,265.0 million in par value of convertible senior notes due 2029 and higher interest rates, as well as increased gains associated with the non-qualified deferred compensation plan. The decrease to interest and marketable securities income, net for 2022 as compared to 2021 was due to increased losses associated with the non-qualified deferred compensation plan and lower interest earned on invested cash balances and marketable securities as a result of lower marketable securities balances in 2022 due to the funding of our acquisitions of Linode and Guardicore.Interest expense is related to our debt transactions, which are described in Note 11 to the consolidated financial statements included elsewhere in this annual report on Form 10-K. The increase to interest expense for 2023 as compared to 2022 was primarily due to the August 2023 issuance of $1,265.0 million in par value of convertible senior notes due 2029. The decrease to interest expense for 2022 as compared to 2021 was the result of the adoption of the new guidance for accounting for convertible senior notes on January 1, 2022, which resulted in the elimination of the amortization of debt discounts.Other (expense) income, net primarily represents net foreign exchange gains and losses mainly due to foreign exchange rate fluctuations on intercompany transactions and other non-operating expense and income items as well as gains and losses on equity investments. Other (expense) income, net for 2022 includes impairments of $8.9 million from equity investments, partially offset by a favorable impact of changes in foreign currency exchange rates. Other (expense) income, net for 2021 includes a $3.7 million gain from the sale of an equity investment. Other income (expense), net may fluctuate in the future based on changes in foreign currency exchange rates or other events.Provision for Income TaxesFor the Years Ended December 31,For the Years Ended December 31,(in thousands)20232022% Change20222021% ChangeProvision for income taxes$106,373 $126,696 (16.0)%$126,696 $62,571 102.5 %As a percentage of revenue2.8 %3.5 %3.5 %1.8 %Effective income tax rate16.3 %19.3 %19.3 %8.6 %The decrease in the provision for income taxes for 2023 as compared to 2022 was mainly due to a reduction in intercompany sales of intellectual property and the tax on global intangible low-taxed income. These items were partially offset by a decrease in the excess tax benefit related to stock-based compensation and the revaluation of certain foreign income tax liabilities due to foreign exchange rate fluctuations.The increase in the provision for income taxes for 2022 as compared to 2021 was mainly due to an intercompany sale of intellectual property, an increase in the tax on global intangible low-taxed income, a decrease in foreign income taxed at lower rates and a decrease in the excess tax benefit related to stock-based compensation. These amounts were partially offset by a decrease in profitability.For the year ended December 31, 2023, our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by non-deductible stock-based compensation and the tax on global intangible low-taxed income.34Table of ContentsFor the year ended December 31, 2022, our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by non-deductible stock-based compensation, tax on global intangible low-taxed income and an intercompany sale of intellectual property.For the year ended December 31, 2021, our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by non-deductible stock-based compensation and state income taxes.Our effective income tax rate may fluctuate between fiscal years and from quarter to quarter due to items arising from discrete events, such as tax benefits from the settlement of employee equity awards, tax law changes and settlements of tax audits and assessments. Our effective income tax rate is also impacted by, and may fluctuate in any given period because of, the composition of income in foreign jurisdictions where tax rates differ depending on the local statutory rates. The Organisation for Economic Co-operation and Development (“OECD”) and participating OECD member countries continue to work toward the enactment of a 15% global minimum corporate tax rate. The global minimum tax is a significant structural change to the international taxation framework, which is expected to affect us beginning in 2024. Although global enactment has begun, the OECD and participating countries continue to work on defining the underlying rules and administrative procedures. We are currently monitoring these developments and evaluating the impact. While we anticipate that our effective income tax rate will increase as a result of these changes, we do not expect it to have a material impact to our results of operations or cash flows.See "Risk Factors" and refer to Note 19 to the consolidated financial statements included elsewhere in this annual report on Form 10-K for additional information regarding unrecognized tax benefits that, if recognized, would impact the effective income tax rate in the next 12 months.(Gain) Loss from Equity Method InvestmentFor the Years Ended December 31,For the Years Ended December 31,(in thousands)20232022% Change20222021% Change(Gain) loss from equity method investment$(1,475)$7,635 (119.3)%$7,635 $14,008 (45.5)%As a percentage of revenue— %0.2 %0.2 %0.4 %The amounts reflected in (gain) loss from equity method investment relate to our investment with MUFG in a joint venture, GO-NET. GO-NET intended to operate a blockchain-based online payment network. In February 2022, MUFG, the majority owner of GO-NET, announced it was preparing to suspend the operations of GO-NET and to ultimately liquidate it. The gain from equity method investment in 2023 was related to the liquidation and disbursement of our portion of GO-NET's remaining assets, which were previously impaired. The loss from equity method investment in 2022 was the result of our impairment of our investment in GO-NET in the first quarter of 2022 since the operations will no longer generate future cash flows. We recorded a loss of $14.0 million in 2021, which reflects our share of the losses incurred by GO-NET during that year. We do not expect additional activity related to this investment.Non-GAAP Financial MeasuresIn addition to providing financial measurements based on generally accepted accounting principles in the United States of America ("GAAP") we provide additional financial metrics that are not prepared in accordance with GAAP ("non-GAAP financial measures"). Management uses non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes, to measure executive compensation and to evaluate our financial performance. These non-GAAP financial measures are non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income, non-GAAP net income per diluted share, Adjusted EBITDA, Adjusted EBITDA margin, capital expenditures and impact of foreign currency exchange rates, as discussed below.Management believes that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they facilitate comparison of financial results across accounting periods and to those of our peer companies. Management also believes that these non-GAAP financial measures enable investors to evaluate our operating results and future prospects in the same manner as management. These non-GAAP 35Table of Contentsfinancial measures may exclude expenses and gains that may be unusual in nature, infrequent or not reflective of our ongoing operating results.The non-GAAP financial measures do not replace the presentation of our GAAP financial measures and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP.The non-GAAP adjustments, and our basis for excluding them from non-GAAP financial measures, are outlined below:•Amortization of acquired intangible assets – We have incurred amortization of intangible assets, included in our GAAP financial statements, related to various acquisitions we have made. The amount of an acquisition's purchase price allocated to intangible assets and term of its related amortization can vary significantly and is unique to each acquisition; therefore, we exclude amortization of acquired intangible assets from our non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results. •Stock-based compensation and amortization of capitalized stock-based compensation – Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to interpret; therefore, we believe it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from our non-GAAP financial measures in order to highlight the performance of our core business and to be consistent with the way many investors evaluate our performance and compare our operating results to peer companies. •Acquisition-related costs – Acquisition-related costs include transaction fees, advisory fees, due diligence costs and other direct costs associated with strategic activities, as well as certain additional compensation costs payable to employees acquired from the Linode acquisition if employed for a certain period of time. The additional compensation cost was initiated by and determined by the seller and is in addition to normal levels of compensation, including retention programs, offered by Akamai. Acquisition-related costs are impacted by the timing and size of the acquisitions, and we exclude acquisition-related costs from our non-GAAP financial measures to provide a useful comparison of operating results to prior periods and to peer companies because such amounts vary significantly based on the magnitude of our acquisition transactions and do not reflect our core operations. •Restructuring charge – We have incurred restructuring charges from programs that have significantly changed either the scope of the business undertaken by us or the manner in which that business is conducted. These charges include severance and related expenses for workforce reductions, impairments of long-lived assets that will no longer be used in operations (including right-of-use assets, other facility-related property and equipment and internal-use software) and termination fees for any contracts cancelled as part of these programs. We exclude these items from our non-GAAP financial measures when evaluating our continuing business performance as such items vary significantly based on the magnitude of the restructuring action and do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or past operations of our business.•Amortization of debt discount and issuance costs and amortization of capitalized interest expense – We have convertible senior notes outstanding that mature in 2029, 2027 and 2025. The issuance costs of the convertible senior notes are amortized to interest expense and are excluded from our non-GAAP results because management believes the non-cash amortization expense is not representative of ongoing operating performance. The imputed interest rates of the 2027 and 2025 convertible senior notes were 3.10% and 4.26%, respectively. This is a result of the debt discounts recorded for the conversion features that, prior to January 1, 2022, were required to be separately accounted for as equity under GAAP, thereby reducing the carrying values of the convertible debt instruments. The debt discounts were amortized as interest expense. On January 1, 2022, we adopted the new guidance for accounting for convertible instruments. This new guidance eliminated separate accounting for the equity portion, and thus the amortization of the debt discount that was recorded as interest expense. Prior to January 1, 2022, we excluded this non-cash interest expense from our non-GAAP results because it was not representative of ongoing operating performance. After January 1, 2022, this interest expense is no longer included in or excluded from GAAP or non-GAAP results.36Table of Contents•Gains and losses on investments – We have recorded gains and losses from the disposition, changes to fair value and impairment of certain investments. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to these gains and losses are not representative of our core business operations and ongoing operating performance. •Gains and losses from equity method investment – We record income or losses on our share of earnings and losses from our equity method investment, and any gains from returns of investments or impairments. We exclude such income and losses because we do not have direct control over the operations of the investment and the related income and losses are not representative of our core business operations. •Income tax effect of non-GAAP adjustments and certain discrete tax items – The non-GAAP adjustments described above are reported on a pre-tax basis. The income tax effect of non-GAAP adjustments is the difference between GAAP and non-GAAP income tax expense. Non-GAAP income tax expense is computed on non-GAAP pre-tax income (GAAP pre-tax income adjusted for non-GAAP adjustments) and excludes certain discrete tax items (such as the impact of intercompany sales of intellectual property related to our acquisitions), if any. We believe that applying the non-GAAP adjustments and their related income tax effect allows us to highlight income attributable to our core operations.The following table reconciles GAAP income from operations to non-GAAP income from operations and non-GAAP operating margin for the years ended December 31, 2023, 2022 and 2021 (in thousands): 202320222021Income from operations$637,338 $676,274 $783,148 Amortization of acquired intangible assets66,751 64,983 48,019 Stock-based compensation328,467 217,185 202,759 Amortization of capitalized stock-based compensation and capitalized interest expense32,981 31,768 35,894 Restructuring charge56,643 13,529 10,737 Acquisition-related costs13,345 29,049 13,317 Non-GAAP income from operations$1,135,525 $1,032,788 $1,093,874 GAAP operating margin16.7 %18.7 %22.6 %Non-GAAP operating margin29.8 %28.6 %31.6 %The following table reconciles GAAP net income to non-GAAP net income for the years ended December 31, 2023, 2022 and 2021 (in thousands): 202320222021Net income$547,629 $523,672 $651,642 Amortization of acquired intangible assets66,751 64,983 48,019 Stock-based compensation328,467 217,185 202,759 Amortization of capitalized stock-based compensation and capitalized interest expense32,981 31,768 35,894 Restructuring charge56,643 13,529 10,737 Acquisition-related costs13,345 29,049 13,317 Amortization of debt discount and issuance costs5,341 4,395 66,025 (Gain) loss on investments(311)8,260 (3,680)(Gain) loss from equity method investment(1,475)7,635 14,008 Income tax effect of above non-GAAP adjustments and certain discrete tax items(89,364)(42,768)(96,164)Non-GAAP net income$960,007 $857,708 $942,557 37Table of ContentsThe following table reconciles GAAP net income per diluted share to non-GAAP net income per diluted share for the years ended December 31, 2023, 2022 and 2021 (in thousands, except per share data): 202320222021GAAP net income per diluted share$3.52 $3.26 $3.93 Adjustments to net income:Amortization of acquired intangible assets0.43 0.40 0.29 Stock-based compensation2.11 1.35 1.22 Amortization of capitalized stock-based compensation and capitalized interest expense0.21 0.20 0.22 Restructuring charge0.36 0.08 0.06 Acquisition-related costs0.09 0.18 0.08 Amortization of debt discount and issuance costs0.03 0.03 0.40 (Gain) loss on investments— 0.05 (0.02)(Gain) loss from equity method investment(0.01)0.05 0.08 Income tax effect of above non-GAAP adjustments and certain discrete tax items(0.58)(0.27)(0.58)Adjustment for shares (1)0.02 0.02 0.06 Non-GAAP net income per diluted share (2)$6.20 $5.37 $5.74 Shares used in GAAP per diluted share calculations155,397 160,467 165,804 Impact of benefit from note hedge transactions (1)(574)(720)(1,600)Shares used in non-GAAP per diluted share calculations (1)154,823 159,747 164,204 (1) Shares used in non-GAAP per diluted share calculations have been adjusted for the periods presented for the benefit of our note hedge transactions. During the periods presented, our average stock price was in excess of $95.10, which is the initial conversion price of our convertible senior notes due in 2025. See further discussion below.(2) May not foot due to rounding.Non-GAAP net income per diluted share is calculated as non-GAAP net income divided by weighted average diluted common shares outstanding. Diluted weighted average common shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to us pursuant to the note hedge transactions entered into in connection with the issuance of $1,265 million of convertible senior notes due 2029 and the issuances of $1,150 million of convertible senior notes due 2027 and 2025, respectively. Under GAAP, shares delivered under hedge transactions are not considered offsetting shares in the fully-diluted share calculation until they are delivered. However, we would receive a benefit from the note hedge transactions and would not allow the dilution to occur, so management believes that adjusting for this benefit provides a meaningful view of operating performance. With respect to the convertible senior notes due in each of 2029, 2027 and 2025, unless our weighted average stock price is greater than $126.31, $116.18 and $95.10, respectively, the initial conversion prices, there will be no difference between GAAP and non-GAAP diluted weighted average common shares outstanding.We consider Adjusted EBITDA to be another important indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Adjusted EBITDA eliminates items that we do not consider to be part of our core operations. We define Adjusted EBITDA as GAAP net income excluding the following items: interest and marketable securities income and losses; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; foreign exchange gains and losses; interest expense; amortization of capitalized interest expense; certain gains and losses on investments; income and losses from equity method investments; and other non-recurring or unusual items that may arise from time to time. Adjusted EBITDA margin represents Adjusted EBITDA stated as a percentage of revenue.38Table of ContentsThe following table reconciles GAAP net income to Adjusted EBITDA and Adjusted EBITDA margin for the years ended December 31, 2023, 2022 and 2021 (in thousands): 202320222021Net income$547,629 $523,672 $651,642 Amortization of acquired intangible assets66,751 64,983 48,019 Stock-based compensation328,467 217,185 202,759 Amortization of capitalized stock-based compensation and capitalized interest expense32,981 31,768 35,894 Restructuring charge56,643 13,529 10,737 Acquisition-related costs13,345 29,049 13,317 Interest and marketable securities income, net(45,194)(3,258)(15,620)Interest expense17,709 11,096 72,332 Provision for income taxes106,373 126,696 62,571 Depreciation and amortization472,035 496,909 467,048 (Gain) loss on investments(311)8,260 (3,680)(Gain) loss from equity method investment(1,475)7,635 14,008 Other expense, net12,607 2,173 1,895 Adjusted EBITDA$1,607,560 $1,529,697 $1,560,922 Net income margin14.4 %14.5 %18.8 %Adjusted EBITDA margin42.2 %42.3 %45.1 %Impact of Foreign Currency Exchange RatesRevenue and earnings from our international operations have historically been an important contributor to our financial results. Consequently, our financial results have been impacted, and management expects they will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, when the local currencies of our international subsidiaries weaken, generally our consolidated results stated in U.S. dollars are negatively impacted.Because exchange rates are a meaningful factor in understanding period-to-period comparisons, management believes the presentation of the impact of foreign currency exchange rates on revenue and earnings enhances the understanding of our financial results and evaluation of performance in comparison to prior periods. The dollar impact of changes in foreign currency exchange rates presented is calculated by translating current period results using monthly average foreign currency exchange rates from the comparative period and comparing them to the reported amount. The percentage change at constant currency presented is calculated by comparing the prior period amounts as reported and the current period amounts translated using the same monthly average foreign currency exchange rates from the comparative period.Liquidity and Capital ResourcesTo date, we have financed our operations primarily through public and private sales of debt and equity securities and cash generated by operations. As of December 31, 2023, our cash, cash equivalents and marketable securities, which primarily consisted of corporate bonds, U.S. government agency obligations and money market funds, totaled $2.3 billion. We place our cash investments in instruments that meet high-quality credit standards, as specified in our investment policy. Our investment policy also limits the amount of our credit exposure to any one issue or issuer and seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity at all times.Changes in cash, cash equivalents and marketable securities are dependent upon changes in, among other things, working capital items such as accounts receivable, deferred revenue, accounts payable, various accrued expenses and operating lease obligations, as well as changes in our capital and financial structure due to common stock repurchases, debt repayments and issuances, acquisitions, purchases and sales of marketable securities, cash paid for acquisitions and similar events. We believe that our strong balance sheet and cash position are important competitive differentiators that provide the financial stability and flexibility to enable us to continue to make investments at opportune times. We expect to continue to evaluate strategic investments to strengthen our business.39Table of ContentsAs of December 31, 2023, we had cash and cash equivalents of $232.9 million held in accounts outside the U.S. The U.S. Tax Cuts and Jobs Act establishes a territorial tax system in the U.S., which provides companies with the potential ability to repatriate earnings with minimal U.S. federal income tax impact. As a result, our liquidity is not expected to be materially impacted by the amount of cash and cash equivalents held in accounts outside the U.S.Cash Provided by Operating ActivitiesFor the Years Ended December 31,(in thousands)202320222021Net income$547,629 $523,672 $651,642 Non-cash reconciling items included in net income931,507 756,321 793,445 Changes in operating assets and liabilities(130,697)(5,317)(40,524)Net cash flows provided by operating activities$1,348,439 $1,274,676 $1,404,563 The increase in cash provided by operating activities for 2023 as compared to 2022 was due to increased profitability in 2023, as well as cash paid for income taxes related to an intercompany sale of intellectual property and additional compensation costs paid to employees acquired from the Linode acquisition based on an agreement with the acquiree, both of which occurred in 2022 and did not re-occur in 2023.The decrease in cash provided by operating activities for 2022 as compared to 2021 was primarily due to income taxes paid on an intercompany sale of intellectual property, lower profitability and timing of vendor payments.Cash Used in Investing ActivitiesFor the Years Ended December 31,(in thousands)202320222021Cash paid for business acquisitions, net of cash acquired$(106,171)$(872,091)$(598,825)Cash paid for asset acquisitions(120,985)— — Purchases of property and equipment and capitalization of internal-use software development costs(730,040)(458,302)(545,230)Net marketable securities activity(884,973)714,205 501,478 Other, net(6,069)(6,122)(4,322)Net cash used in investing activities$(1,848,238)$(622,310)$(646,899)The increase in cash used in investing activities in 2023 as compared to 2022 was due to an increase in purchases of marketable securities with the proceeds from our August 2023 issuance of convertible senior notes and purchases of property and equipment related to our compute infrastructure build-out. These increases were partially offset by cash paid for the acquisition of Linode in March 2022 and by net marketable securities activity as we sold marketable securities during 2022 to fund the acquisition.The decrease in cash used in investing activities in 2022 as compared to 2021 was due to a decrease in purchases of marketable securities, as we did not reinvest our matured securities in order to fund our acquisition of Linode in March 2022, and a decrease in purchases of property and equipment as we reduced spending related to our delivery solutions as we focused on higher growth initiatives, partially offset by cash paid for the acquisition of Linode.40Table of ContentsCash Provided by (Used in) Financing ActivitiesFor the Years Ended December 31,(in thousands)202320222021Activity related to convertible senior notes$1,101,028 $— $— Activity related to stock-based compensation(3,243)(25,774)(39,480)Repurchases of common stock(654,046)(608,010)(522,255)Other, net(360)(393)(268)Net cash provided by (used in) financing activities$443,379 $(634,177)$(562,003)The increase in cash provided by financing activities in 2023 as compared to 2022 was due to the net proceeds from our convertible senior notes due 2029 that were issued in August 2023. This increase was partially offset by an increase in repurchases of our common stock.The increase in cash used in financing activities in 2022 as compared to 2021 was primarily the result of increased repurchases of our common stock.Our board of directors authorized a share repurchase program that is effective from January 2022 through December 2024, and during 2023, 2022 and 2021, we repurchased 7.8 million, 6.4 million and 4.7 million shares of our common stock, respectively, at an average price per share of $83.83, $94.96 and $109.97, respectively. Our goal for the share repurchase program is to offset the dilution created by our employee equity compensation programs over time and provide the flexibility to return capital to stockholders as business and market conditions warrant, while still preserving our ability to pursue other strategic opportunities. The timing and amount of any future common stock repurchases will be determined by our management based on its evaluation of market conditions and other factors.Convertible Senior NotesIn August 2023, we issued $1,265.0 million in principal amount of convertible senior notes due 2029 and entered into related convertible note hedge and warrant transactions. We intend to use a portion of the net proceeds to repay at maturity our $1,150.0 million outstanding aggregate principle amount of convertible senior notes due in 2025. Additionally, we used a portion of the net proceeds of the offering for repurchases of our common stock.As of December 31, 2023, we had $3,565.0 million of convertible senior notes outstanding that are senior unsecured obligations and bear interest payable semi-annually in arrears. These notes mature between May 2025 and February 2029. The terms of the notes and the hedge and warrant transactions are discussed more fully in Note 11 to the consolidated financial statements included elsewhere in this annual report on Form 10-K. Revolving Credit FacilityIn November 2022, we entered into a five-year revolving credit agreement ("2022 Credit Agreement") which replaced the revolving credit agreement that we entered into in May 2018. The 2022 Credit Agreement allows us to borrow up to $500.0 million at various interest rates and contains customary representations and warranties, affirmative and negative covenants and events of default. As of December 31, 2023, we were in compliance with all covenants. There were no outstanding borrowings under the 2022 Credit Agreement as of December 31, 2023. The terms of the revolving credit agreements are discussed more fully in Note 11 to the consolidated financial statements included elsewhere in this annual report on Form 10-K. Operating LeasesWe have entered into operating leases for real estate assets related to office space and co-location assets related to space or racks at co-location facilities and related equipment for our servers and other networking equipment. As of December 31, 2023 the total obligation under these agreements was $1,144.2 million, of which $224.2 million is payable in the next 12 months. We have also executed additional operating leases that will commence in 2024 for $195.0 million. The operating lease terms and maturities are discussed more fully in Note 12 to the consolidated financial statements included elsewhere in this annual report on Form 10-K41Table of ContentsPurchase Commitments We enter into long-term agreements with network and internet service providers for bandwidth, as well as execute purchase orders for the purchase of goods or services in the ordinary course of business, which may contain minimum commitments. These minimum commitments may vary from period to period depending on the timing and length of contract renewals with our vendors, and on our plans for network expansion, including our expansion plans related to our compute business.Liquidity OutlookBased on our present business plan, we expect our current cash, cash equivalents and marketable securities balances and our forecasted cash flows from operations to be sufficient to meet our foreseeable cash needs for at least the next 12 months. Our foreseeable cash needs, in addition to our recurring operating costs, include our expected capital expenditures, investments in information technology, potential strategic acquisitions, anticipated share repurchases, lease and purchase commitments and settlements of other liabilities.Off-Balance Sheet ArrangementsWe have entered into indemnification agreements with third parties, including vendors, customers, landlords, our officers and directors, shareholders of acquired companies, joint venture partners and third parties to which we license technology. Generally, these indemnification agreements require us to reimburse losses suffered by a third party due to various events, such as lawsuits arising from patent or copyright infringement or our negligence. These indemnification obligations are considered off-balance sheet arrangements in accordance with the authoritative guidance for guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. See Note 13 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for further discussion of these indemnification agreements. The fair value of guarantees issued or modified during 2023 and 2022 was determined to be immaterial.Significant Accounting Policies and EstimatesSee Note 2 to the consolidated financial statements included elsewhere in this annual report on Form 10-K for information regarding recent and newly adopted accounting pronouncements. Application of Critical Accounting Policies and EstimatesOverviewOur MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, accounts receivable and related reserves, valuation and impairment of marketable securities, capitalized internal-use software development costs, goodwill and acquired intangible assets, income tax reserves, impairment and useful lives of long-lived assets and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results may differ from these estimates. For a complete description of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this annual report on Form 10-K.DefinitionsWe define our critical accounting policies as those policies that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our consolidated financial statements. Our estimates are based upon assumptions and judgments about matters that are highly uncertain at the time an accounting estimate is made and applied and require us to assess a range of potential outcomes.42Table of ContentsReview of Critical Accounting Policies and EstimatesRevenue RecognitionOur contracts with customers sometimes include promises to transfer multiple services to a customer. Determining whether services are distinct performance obligations often requires the exercise of judgment by management. Advanced features that enhance a main product or service and are highly interrelated are generally not considered distinct; rather, they are combined with the service they relate to into one performance obligation. Different determinations related to combining services into performance obligations could result in differences in the timing and amount of revenue recognized in a period.Determination of the standalone selling price ("SSP") for each distinct performance obligation in a contract also requires the exercise of judgment by management. SSP is based on observable inputs such as the price we charge for the service when sold separately, or the discounted list price per management’s approved price list. In cases where services are not sold separately or price list rates are not available, a cost-plus-margin approach or adjusted market approach is used to determine SSP. Changes to SSP could result in differences in the allocation of transaction price among performance obligations, which could result in differences in the timing and amount of revenue recognized in a period.From time to time, we enter into contracts to sell services or license technology to unrelated enterprises at or about the same time that we enter into contracts to purchase products or services from the same enterprises. Consideration payable to a customer is reviewed as part of the transaction price. If the payment to the customer does not represent payment for a distinct service, revenue is recognized only up to the net amount of consideration after customer payment obligations are considered. Different determinations on whether a payment represents a distinct service could result in differences in the amount of revenue recognized.We may also resell licenses or services of third parties. If we are acting as an agent in an arrangement with a customer to provide third party services, the transaction price reflects only the net amount to which we will be entitled, after accounting for payments made to the third party responsible for satisfying the performance obligation. Different determinations on whether we are acting as an agent or a principal could change the amount of revenue recognized.Accounts Receivable and Related ReservesTrade accounts receivable are recorded at the invoiced amounts and do not bear interest. In addition to trade accounts receivable, our accounts receivable balance includes unbilled accounts that represent revenue recorded for customers that is typically billed within one month. We record allowances against our accounts receivable balance, primarily for current expected credit losses. Increases and decreases in the allowance for current expected credit losses are included as a component of general and administrative expense in the consolidated statements of income.Estimates are used in determining our allowance for current expected credit losses using historical loss rates for the previous twelve months as well as expectations about the future where we have been able to develop forecasts to supports our estimates. In addition, the allowance for current expected credit losses considers outstanding balances on a customer-specific, account-by-account basis. We assess collectability based upon a review of customer receivables from prior sales with collection issues where we no longer believe that the customer has the ability to pay for services previously provided. We also perform ongoing credit evaluations of our customers. If such an evaluation indicates that payment is no longer reasonably assured for services provided, any future services provided to that customer will result in the creation of a cash basis reserve until we receive consistent payments. Valuation and Impairment of Marketable SecuritiesWe measure the fair value of our financial assets and liabilities at the end of each reporting period. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We have certain financial assets and liabilities recorded at fair value (principally cash equivalents and short- and long-term marketable securities) that have been classified as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we can access at the reporting date. Fair values determined by Level 2 inputs utilize data points other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Fair values determined by Level 3 inputs are based on unobservable data points for the asset or liability.43Table of ContentsMarketable securities are considered to be impaired when a decline in fair value below cost basis is determined to be other-than-temporary. We periodically evaluate whether a decline in fair value below cost basis is other-than-temporary by considering available evidence regarding these investments including, among other factors, the duration of the period that, and extent to which, the fair value is less than cost basis; the financial health of, and business outlook for, the issuer, including industry and sector performance and operational and financing cash flow factors; overall market conditions and trends; and our intent and ability to retain our investment in the security for a period of time sufficient to allow for an anticipated recovery in market value. Once a decline in fair value is determined to be other-than-temporary, a write-down is recorded and a new cost basis in the security is established. Assessing the above factors involves inherent uncertainty. Write-downs, if recorded, could be materially different from the actual market performance of marketable securities in our portfolio if, among other things, relevant information related to our investments and marketable securities was not publicly available or other factors not considered by us would have been relevant to the determination of impairment.Impairment of Long-Lived AssetsWe review our long-lived assets, such as property and equipment, operating lease right-of-use assets and acquired intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events that would trigger an impairment review include a change in the use of the asset or forecasted negative cash flows related to the asset. When such events occur, we compare the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If this comparison indicates that impairment is present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the asset. The estimates required to apply this accounting policy include forecasted usage of the long-lived assets, the useful lives of these assets and expected future cash flows. Changes in these estimates could materially impact results from operations.Goodwill and Acquired Intangible AssetsWe test goodwill for impairment on an annual basis, as of December 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have concluded that we have one reporting unit and that our chief operating decision maker is our chief executive officer and the executive management team. We have assigned the entire balance of goodwill to our one reporting unit. The fair value of the reporting unit was based on our market capitalization as of each of December 31, 2023 and 2022, and it was substantially in excess of the carrying value of the reporting unit at each date. Acquired intangible assets consist of completed technologies, customer relationships, trademarks and trade names, non-compete agreements and acquired license rights. We engage third party valuation specialists to assist us with the initial measurement of the fair value of acquired intangible assets. Fair value and useful life determinations may be based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in calculating present values. The value of our acquired intangible assets could be different if we had used different assumption. Acquired intangible assets, other than goodwill, are amortized over their estimated useful lives based upon the estimated economic value derived from the related intangible assets.Income Taxes Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards by using expected tax rates in effect in the years during which the differences are expected to reverse or the carryforwards are expected to be realized.We currently have net deferred tax assets, comprised of net operating loss ("NOL"), carryforwards, tax credit carryforwards and deductible temporary differences. Our management periodically weighs the positive and negative evidence to determine if it is more-likely-than-not that some or all of the deferred tax assets will be realized. In determining our net deferred tax assets and valuation allowances, annualized effective tax rates and cash paid for income taxes, management is required to make judgments and estimates about domestic and foreign profitability, the timing and extent of the utilization of NOL carryforwards, applicable tax rates, transfer pricing methodologies and tax planning strategies. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from our projections.We have recorded certain tax reserves to address potential exposures involving our income tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. Our estimate of the value of our tax reserves contains assumptions based on past experiences and judgments about 44Table of Contentsthe interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the costs of the ultimate tax liability or benefit from these matters may be more or less than the amount that we estimated.Uncertainty in income taxes is recognized in our consolidated financial statements using a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed more-likely-than-not to be sustained based on technical merit, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that we believe has a greater than 50% likelihood of being realized upon ultimate settlement.Accounting for Stock-Based CompensationWe issue stock awards as part of our compensation program which includes stock options, restricted stock, restricted stock units, deferred stock units and employee stock purchases related to our employee stock purchase plan. For equity classified awards, we measure the fair value of these awards at the grant date and recognize such fair value as expense over the vesting period. For liability classified awards, the fair value is determined each reporting period beginning at the grant date until final vesting. We have selected the Black-Scholes option pricing model to determine the fair value of stock option awards and the Monte Carlo simulation model to determine the fair value of market-based restricted stock unit awards. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected life of the stock awards and the volatility of the underlying common stock. Our assumptions may differ from those used in prior periods. Changes to the assumptions may have an impact on the fair value of stock awards, which could have an impact on our financial statements. Judgment is also required in estimating the number of stock awards that are expected to be forfeited. Should our actual forfeiture rates differ significantly from our estimates, our stock-based compensation expense and results of operations could be materially impacted. In addition, for awards that vest and become exercisable only upon achievement of specified performance conditions, we make judgments and estimates each quarter about the probability that such performance conditions will be met or achieved. Changes to the estimates we make from time to time may have an impact on our stock-based compensation expense and our results of operations.Capitalized Internal-Use Software CostsWe capitalize salaries and related costs, including stock-based compensation, of employees and consultants who devote time to the development of internal-use software development projects, as well as interest expense related to our convertible senior notes. Capitalization begins during the application development stage, once the preliminary project stage has been completed. If a project constitutes an enhancement to previously-developed software, we assess whether the enhancement creates additional functionality to the software, thus qualifying the work incurred for capitalization. Once the project is available for general release, capitalization ceases and we estimate the useful life of the asset and begin amortization. We periodically assess whether triggering events are present to review internal-use software for impairment. Changes in our estimates related to internal-use software would increase or decrease operating expenses or amortization recorded during the period.Item 7A. Quantitative and Qualitative Disclosures About Market RiskInterest Rate RiskOur portfolio of cash equivalents and short- and long-term investments is maintained in a variety of securities, including money market funds, time deposits, commercial paper, corporate bonds, U.S. government agency obligations and mutual funds. The majority of our investments are classified as available-for-sale securities and carried at fair market value with cumulative unrealized gains or losses recorded as a component of accumulated other comprehensive loss within stockholders' equity. A sharp rise in interest rates could have an adverse impact on the fair market value of certain securities in our portfolio. We do not currently hedge our interest rate exposure and do not enter into financial instruments for trading or speculative purposes. If market interest rates were to increase by 100 basis points from December 31, 2023 levels, the fair value of our available-for-sale portfolio would decline by approximately $19.2 million. In August 2023, we issued $1,265 million in aggregate principal amount of 1.125% convertible senior notes due 2029. In August 2019, we issued $1,150.0 million aggregate principal amount of 0.375% convertible senior notes due 2027. In May 2018, we issued $1,150.0 million aggregate principal amount of 0.125% convertible senior notes due 2025. These notes have a fixed annual interest rate, so they do not give rise to financial or economic interest exposure associated with changes in interest rates. However, the fair value of fixed rate debt instruments fluctuates when interest rates change. Additionally, the fair value 45Table of Contentscan be affected when the market price of our common stock fluctuates. We carry the notes at face value less an unamortized discount on our consolidated balance sheet, and we present the fair value for required disclosure purposes only.Our exposure to risk for changes in interest rates relates primarily to any borrowings under our 2022 Credit Agreement, which has a variable rate of interest. There were no outstanding borrowings under the 2022 Credit Agreement as of December 31, 2023.Foreign Currency RiskGrowth in our international operations will incrementally increase our exposure to foreign currency fluctuations as well as other risks typical of international operations that could impact our business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions. Due to the strengthening U.S. dollar, our revenue results have been negatively impacted. The strengthening U.S. dollar has the opposite effect on expenses that are denominated in foreign currencies, but only partially offsets the impact to our revenue. A hypothetical 10% strengthening or weakening in the value of the U.S. dollar relative to the foreign currencies in which our revenues and expenses are denominated would not result in a material impact to our consolidated financial statements.Transaction ExposureForeign exchange rate fluctuations may adversely impact our consolidated results of operations as exchange rate fluctuations on transactions denominated in currencies other than functional currencies result in gains and losses that are reflected in our consolidated statements of income. We enter into short-term foreign currency forward contracts to offset foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of these derivatives, as well as re-measurement gains and losses, are recognized in our consolidated statements of income within other income (expense), net. Foreign currency transaction gains and losses from these forward contracts were determined to be immaterial during the years ended December 31, 2023, 2022 and 2021. We do not enter into derivative financial instruments for trading or speculative purposes.Translation ExposureTo the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions will result in increased revenue and operating expenses. Conversely, our revenue and operating expenses will decrease when the U.S. dollar strengthens against foreign currencies.Foreign exchange rate fluctuations may also adversely impact our consolidated financial condition as the assets and liabilities of our international operations are translated into U.S. dollars in preparing our consolidated balance sheet. These gains or losses are recorded as a component of accumulated other comprehensive loss within stockholders' equity.Credit RiskConcentrations of credit risk with respect to accounts receivable are limited to certain customers to which we make substantial sales. Our customer base consists of a large number of geographically dispersed customers diversified across numerous industries. We believe that our accounts receivable credit risk exposure is limited. As of December 31, 2023, no customer had an accounts receivable balance greater than 10%, and as of December 31, 2022, there was one customer with an accounts receivable balance greater than 10% of our accounts receivable. We believe that at December 31, 2023, the concentration of credit risk related to accounts receivable was insignificant.46Table of Contents

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+Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.A discussion regarding our financial condition and results of operations for fiscal 2023 compared to fiscal 2022 is presented under Results of Operations of this Form 10-K. Discussions regarding our financial condition and results of operations for fiscal 2022 compared to 2021 have been omitted from this Annual Report on Form 10-K, but can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 27, 2023, which is available without charge on the SEC's website at www.sec.gov and on our investor relations website at investor.aligntech.com.Executive Overview of ResultsTrends and Uncertainties Our business strategic priorities focus on four principal pillars for growth: (i) international expansion; (ii) GP dentist treatment; (iii) patient demand; and (iv) orthodontic utilization. Our growth strategy depends on our ability to facilitate the digital transformation of dentistry happening around the world, our continuous focus on innovation, and expansion to meet and exceed evolving customer expectations as the array of products and services available to them increases.We strive to deliver on each of our strategic growth drivers through a variety of interrelated enterprise-wide efforts including:•Continuing penetration and adoption of Invisalign products, intraoral scanners and CAD/CAM solutions in international markets by investing in manufacturing operations, research and development, clinical treatment planning, sales and marketing and building our quality and regulatory capabilities in existing and emerging markets globally. For instance, in 2022, we opened a new aligner fabrication facility in Wroclaw, Poland as a part of our strategy to bring operational facilities closer to customers to serve them more quickly and respond to their needs more effectively as well as new treatment planning operations in targeted regional geographies. We have also diversified our research and development activities throughout Europe, which has created a longer term, more stable environment for consistent hiring, retention and innovation in a variety of high technology sectors. We are in over 100 markets and have 13 fabrication and treatment locations throughout the world. 38•Targeting growth opportunities with international orthodontists and GP customers, particularly with adopters of digital dentistry platforms by tailoring our sales and marketing strategies, manufacturing operations and resources around the unique needs of each customer channel. As we continue growing, we intend to opportunistically expand our research, development, manufacturing, treatment planning, and sales and marketing operations to meet local and regional demand thoughtfully and deliberately. Over the longer-term, we expect international revenues to grow faster than Americas' revenues as a result of growing international demand, our continued investment in international market expansion, the size of the market opportunities and our relatively low market penetration in these regions.•Building confidence within the GP and orthodontic communities through training and education efforts to increase their adoption and utilization of digital dental practice transformation and clear aligner treatment. We continue to expand our clear aligner customer base by educating new doctors on the benefits of digital dentistry through the Invisalign system. We furthermore demonstrate to GPs and orthodontists how the iTero portfolio of intraoral scanners and CAD/CAM restorative services and workflows can increase revenues and profitability for their dental practices by enhancing patient experiences and creating operational practice efficiencies.•Investing in research and development that allows us to innovate, develop and bring to market products and solutions that deliver the ever-increasing clinical precision and predictability that doctors expect with the speed and convenience their patients require.•Creating demand and enabling patient conversion through targeted investments in advertising and public relations through social media, influencers and other forms of digital communications to encourage treatment by Invisalign trained doctors. We believe that well-designed, targeted sales and marketing promotions that build on our strong brand awareness allow us to differentiate our products and solutions from traditional and emerging competitors. To increase awareness and educate young adults, parents and teens about the benefits of the Invisalign brand, in 2023 we continued to invest in and create campaigns across markets in media platforms such as TikTok, Instagram, YouTube, SnapChat, WeChat, and Douyin. We expect to make further investments to create additional demand for Invisalign system treatment driving more consumers to dental professionals for those treatments.•Pursuing new product lines that complement our doctor-prescribed principal products currently available in certain e-commerce and retail channels in the U.S. Similarly, in 2023, we continued our focus on our doctor subscription plan and grew our underpenetrated share of the retainer business through strategic marketing campaigns focused on driving adoption and increasing market share in the U.S., Canada, Iberia and the Nordics.•Increasing global orthodontic utilization rates as doctors’ clinical confidence in the efficacy and predictability of the Invisalign system increases with advancements in products and technology and as patients and doctors demand treatments that emphasize convenience and safety through fewer visits and less invasive and quicker treatments. In addition, the teenage and younger market makes up about 70% of the approximately 22 million total annual global orthodontic case starts. We continue to emphasize the benefits of the Invisalign system for teenage and younger patient treatments through education, training and sales and marketing programs. In 2023, we had record shipments to teenage and younger patients. We expect utilization rates to continue to rise. However, our utilization rates will fluctuate from period to period due to a variety of factors, which may include seasonal trends in our business, consumer demand due to macroeconomic factors, and adoption rates for new products and features. Macroeconomic Challenges and Military Conflict in Ukraine and the Middle East Our revenues are susceptible to fluctuations caused by macroeconomic conditions, inflation, changes to currency exchange rates, rising interest rates, actual and threatened wars and military actions, threats of or actual recessions, supply chain challenges, market volatility, and other factors, each of which impacts customer confidence, consumer sentiment and demand. Many of these same factors also impact our costs and those of our suppliers through higher raw material prices, transportation costs, labor costs, supply and distribution operations. In 2023, we believe that sales of our products were primarily harmed by macroeconomic conditions that ultimately adversely impacted disposable income and consumer demand. In particular, dental practices and industry research firms reported deteriorating orthodontic trends for the third and fourth quarters of 2023, including decreased patient visits and increased patient appointment cancellations, along with fewer case starts overall, especially among adult patients. The impact of declining demand varied by time and region, making operational results uncertain and difficult to predict.Additionally, many of our international operations are denominated in currencies other than the U.S. dollar. In 2023, the macroeconomic slowing or contraction resulted in foreign exchange volatility causing the U.S dollar to strengthen against other currencies. This negatively impacted our financial condition and results of operation compared to 2022. Foreign exchange 39volatility and the subsequent strengthening or weakening of the U.S dollar against other currencies remains uncertain and unpredictable.Moreover, military conflicts increase the unpredictability of the volatile macroeconomic conditions. While the military conflict between Russia and Ukraine did not materially impact our 2023 financial condition and results of operations, we expect the conflict will continue to create market uncertainties and dampen consumer sentiment and demand, particularly in Europe.Similarly, the recent conflict in the Middle East may further exacerbate general and regional macroeconomic instability, particularly if fighting is prolonged, it spreads to other locations, creates shipping and logistical challenges or cost increases, or leads to sanctions or boycotts. Our iTero business is headquartered in Israel and the timing and cost of shipping our products has been impacted. Additionally, we have employees and consultants in Israel that have been called for military service and they may be unavailable for an unknown period of time. The conflict may continue to spread to other areas which may further impact our business. We continue to monitor the potential for violence and military actions that may directly or indirectly impact our personnel, manufacturing, supply chain, and sales. Changing Product PreferencesAs the markets for clear aligners and digital processes and workflows used to transform the practice of dentistry continue to mature, we anticipate customer and patient expectations and demands will evolve. We expect to meet customer demands with innovative treatment options that include more choices to address a wider scope of treatment goals and budgets based on our existing and new products. This may result in larger and unpredictable variations in geographic and product mix and selling prices with uncertain implications on our financial statements and business operations.We strive to manage the challenges from the trends and uncertainties, including the macroeconomic conditions, military conflict and the evolution of our target markets, by focusing on improving our operations, building flexibility and efficiencies in our processes, adjusting our business models to changing circumstances and offering products that meet market demand. Specifically, we are managing cost impacts through pricing actions, implementing cost saving measures and slowing hiring. We also continue to innovate and introduce new and enhanced products that augment our doctor customer and patient experiences. For instance, in the first quarter of 2023, we successfully launched the Invisalign Comprehensive 3in3 product. The 3in3 configuration offers doctors Invisalign Comprehensive treatment with a three-year treatment expiration date and three additional clear aligners included prior to the treatment expiration date. We anticipate adoption of the Invisalign Comprehensive 3in3 product will continue to increase in 2024. The 3in3 product allows us to recognize more revenue up front but is offered at a lower price as compared to our traditional Invisalign comprehensive product that has a five-year treatment expiration date with unlimited additional clear aligner prior to the treatment end date.Further discussion of the impact of these challenges on our business may be found in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”Key Financial and Operating MetricsWe measure our performance against these strategic priorities by the achievement of key financial and operating metrics. For the year ended December 31, 2023, our business operations reflect the following:◦Revenues of $3,862.3 million, an increase of 3.4% year-over-year;◦Clear Aligner revenues of $3,199.3 million, an increase of 4.1% year-over-year;▪Americas Clear Aligner case revenues of $1,463.0 million, a decrease of 0.6% year-over-year;▪International Clear Aligner case revenues of $1,449.5 million, an increase of 7.4% year-over-year;▪Clear Aligner volume increase of 0.4% year-over-year and Clear Aligner volume increase for teenage patients of 7.8% year-over-year;◦Imaging Systems and CAD/CAM Services revenues of $662.9 million, an increase of 0.1% year-over-year;◦Income from operations of $643.3 million and operating margin of 16.7%;◦Effective tax rate of 30.6%;◦Net income of $445.1 million with diluted net income per share of $5.81;◦Cash, cash equivalents and marketable securities of $980.8 million as of December 31, 2023;◦Operating cash flow of $785.8 million;◦Capital expenditures of $177.7 million, predominantly related to purchases of property, plant and equipment; and◦Number of employees was 21,610 as of December 31, 2023, a decrease of 6.7% year-over-year. Other Statistical Data and Trends40•As of December 31, 2023, 17 million people worldwide have been treated with our Invisalign system. Management measures these results by comparing to the millions of people who can benefit from straighter teeth and uses this data to target opportunities to expand the market for orthodontics by educating consumers about the benefits of straighter teeth using the Invisalign system.•For the fourth quarter of 2023, total Invisalign cases submitted with a digital scanner in the Americas increased to 95.1%, up from 92.7%* in the fourth quarter of 2022 and international scans increased to 88.1%, up from 86.8% in the fourth quarter of 2022. For the fourth quarter of 2023, 98.0% of Invisalign cases submitted by North American orthodontists were submitted digitally. •The total utilization rate in 2023 was 19.1 cases per doctor compared to 19.3* cases per doctor in 2022 and 20.9* cases per doctor in 2021. Our utilization rates have declined in 2023 due to the macroeconomic conditions and other factors as described in the Trends and Uncertainties section above. In general, we expect utilization rates to rise over time although they are likely to fluctuate from period to period.•North America: The utilization rate among our North American orthodontist customers was 94.5 cases per doctor in 2023 compared to 94.9* cases per doctor in 2022 and 99.7* cases per doctor in 2021 and the utilization rate among our North American GP customers was 14.0 cases per doctor in 2023 compared to 13.9 cases per doctor in 2022 and 14.3 cases per doctor in 2021. •International: International doctor utilization rate was 16.3 cases per doctor in 2023 compared to 16.2 cases per doctor in 2022 and 17.5 cases per doctor in 2021.* Invisalign utilization rates are calculated by the number of cases shipped divided by the number of doctors to whom cases were shipped. Our International region includes Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). Latin America (“LATAM”) is excluded from the International region based on its immateriality to the year; however is included in the Total utilization.During the third quarter of 2023, we began including Touch Up case revenues in Americas and/or International net revenues that were previously included in Non-Case revenues and have recast business metrics for the periods presented above accordingly. Results of Operations41Net Revenues by Reportable Segment We group our operations into two reportable segments: Clear Aligner segment and Systems and Services segment.•Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:•Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First. •Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go and Invisalign Go Plus. •We also offer in the U.S., Canada, and EMEA, a Doctor Subscription Program which is our monthly subscription-based clear aligner program. The program allows doctors the flexibility to order retainers and low-stage “touch-up” clear aligners within their subscribed tier and is designed for a segment of experienced Invisalign trained doctors who are currently not regularly using our retainers or low-stage aligners. The low-stage aligners, the Touch up product, are included as a Non-Comprehensive Product.•Non-Case products include, but are not limited to, retention products including retention aligners ordered through the Doctor Subscription Program, Invisalign training, adjusting tools used by dental professionals during the course of treatment and Invisalign Accessory Products that are complementary to our doctor-prescribed principal products such as aligner cases (clamshells), teeth whitening products, cleaning solutions (crystals, foam and other material) and other oral health products available in certain commerce channels in select markets.•Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options. Our services include subscription software, disposables, rentals, leases, pay per scan services, as well as exocad’s CAD/CAM software solutions that integrate workflows to dental labs and dental practices.Net revenues for our Clear Aligner and Systems and Services segments by region for the year ended December 31, 2023, 2022 and 2021 are as follows (in millions): Year Ended December 31,Year Ended December 31,Net Revenues20232022Change20222021ChangeClear Aligner revenues: Americas$1,463.0 $1,471.9 $(9.0)(0.6)%$1,471.9 $1,548.8 $(76.9)(5.0)% International1,449.5 1,349.0 100.5 7.4 %1,349.0 1,498.7 (149.7)(10.0)% Non-case 286.9 251.7 35.2 14.0 %251.7 199.6 52.1 26.1 %Total Clear Aligner net revenues $3,199.3 $3,072.6 $126.7 4.1 %$3,072.6 $3,247.1 $(174.5)(5.4)%Systems and Services net revenues662.9 662.1 0.9 0.1 %662.1 705.5 (43.5)(6.2)%Total net revenues$3,862.3 $3,734.6 $127.6 3.4 %$3,734.6 $3,952.6 $(217.9)(5.5)%During 2023, we began including Touch Up case revenues in Americas and/or International net revenues. Touch Up case revenues were previously recorded in Non-case revenues. We have recast the year ended December 31, 2022 and 2021 to reflect this change. Amount and percentage changes are based on recast amounts. Certain tables may not sum or recalculate due to rounding.42Clear Aligner Case VolumeCase volume data which represents Clear Aligner case shipments for the year ended December 31, 2023, 2022 and 2021 is as follows (in thousands): Year Ended December 31,Year Ended December 31,20232022Change20222021ChangeTotal case volume2,408.5 2,398.4 10.2 0.4 %2,398.4 2,559.6 (161.3)(6.3)%During 2023, we began including Touch Up case revenues in Americas and/or International net revenues. Touch Up case revenues were previously recorded in Non-case revenues. We have recast the year ended December 31, 2022 and 2021 to reflect this change. Amount and percentage changes are based recast amounts. Certain tables may not sum or recalculate due to rounding.Total net revenues increased by $127.6 million in 2023 as compared to 2022, primarily due to an increase in Clear Aligner average selling price (“ASP”), an increase in Clear Aligner non-case revenue and higher Systems and Services services mix, partially offset by a decrease in both scanner volumes and ASP’s.Clear Aligner - AmericasAmericas net revenues decreased by $9.0 million in 2023 as compared to 2022, primarily due to a 2.1% decrease in case volumes, resulting in a reduction of net revenues of $31.4 million, partially offset by a $22.4 million increase due to higher ASP. Higher ASP includes price increases which increased net revenues by $68.6 million along with higher additional aligners which increased net revenues by $43.9 million. The increases in ASP were partially offset by higher promotional discounts which decreased net revenues by $44.3 million, a product mix shift to lower priced products which reduced net revenues by $37.6 million and higher sales credits which lowered net revenues $11.5 million.Clear Aligner - InternationalInternational net revenues increased by $100.5 million in 2023 as compared to 2022 due to a 3.5% increase in case volumes, resulting in an increase of net revenues by $46.9 million, and higher ASP increasing net revenues by $53.6 million. Higher ASP was largely due to higher additional aligners increasing net revenues by $100.8 million and price increases on most products which increased net revenues by $96.9 million. The increases in ASP were partially offset by a product mix shift to lower priced products reducing net revenues by $68.2 million, higher promotional discounts which reduced net revenues by $52.5 million, and unfavorable foreign exchange rates which decreased net revenues by $27.2 million. Clear Aligner - Non-CaseNon-case net revenues increased by $35.2 million in 2023 compared to 2022 mainly due to increased volume of Vivera retainers across all regions which includes retention aligners ordered through our Doctor Subscription Program. Systems and ServicesSystems and Services net revenues decreased by $0.9 million in 2023 as compared to 2022 primarily due to a lower number of scanners sold which lowered net revenues by $26.1 million and lower scanner ASP which reduced net revenues by $23.9 million. The decrease in scanner net revenues was mostly offset by higher service revenues of $31.8 million and other revenues which increased $19.1 million primarily due to revenue from sales of certified pre-owned scanners, CAD/CAM software, and scanner rentals.43Cost of net revenues and gross profit (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeClear AlignerCost of net revenues$911.3 $844.4 $66.9 $844.4 $772.7 $71.7 % of net segment revenues28.5 %27.5 %27.5 %23.8 %Gross profit$2,288.0 $2,228.2 $59.9 $2,228.2 $2,474.4 $(246.2)Gross margin %71.5 %72.5 %72.5 %76.2 %Systems and ServicesCost of net revenues$244.1 $256.4 $(12.3)$256.4 $244.5 $11.9 % of net segment revenues36.8 %38.7 %38.7 %34.7 %Gross profit$418.8 $405.6 $13.2 $405.6 $461.0 $(55.4)Gross margin %63.2 %61.3 %61.3 %65.3 %Total cost of net revenues$1,155.4 $1,100.9 $54.5 $1,100.9 $1,017.2 $83.6 % of net revenues29.9 %29.5 %29.5 %25.7 %Gross profit$2,706.9 $2,633.8 $73.1 $2,633.8 $2,935.4 $(301.6)Gross margin %70.1 %70.5 %70.5 %74.3 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.Clear AlignerThe gross margin percentage decreased in 2023 as compared to 2022 primarily due to a increased manufacturing spend offset by higher ASP.Systems and ServicesThe gross margin percentage increased in 2023 as compared to 2022 primarily due to lower purchase price variance and higher service revenue mix, partially offset by lower ASP.Selling, general and administrative (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeSelling, general and administrative$1,703.4 $1,674.5 $28.9 $1,674.5 $1,708.6 $(34.2)% of net revenues44.1 %44.8 %44.8 %43.2 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Selling, general and administrative expense generally includes personnel-related costs, including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, market research, marketing materials, clinical education, trade shows and industry events, legal and outside service costs, equipment, software and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology (“IT”).Selling, general and administrative expense increased in 2023 compared to 2022 primarily due to higher employee costs, including higher salaries expense, fringe benefits, stock-based compensation and bonus, offset by lower advertising and marketing and outside service provider costs. 44Research and development (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeResearch and development$346.8 $305.3 $41.6 $305.3 $250.3 $54.9 % of net revenues9.0 %8.2 %8.2 %6.3 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Research and development expense generally includes personnel-related costs, including payroll and stock-based compensation, outside service costs associated with the research and development of new products and enhancements to existing products, software, equipment, material and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and IT.Research and development expense increased in 2023 compared to 2022 primarily due to higher employee costs, including higher salaries expense, fringe benefits, stock-based compensation and bonus as we continue to focus our investments in innovation and research.Restructuring and other charges (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeRestructuring and other charges$13.3 $11.5 $1.9 $11.5 $— $11.5 % of net revenues0.3 %0.3 %0.3 %— %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Restructuring and other charges incurred during 2023 was primarily related to post employment benefits, including employee severance. Income from operations (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeClear AlignerIncome from operations$1,182.3 $1,134.4 $47.8 $1,134.4 $1,325.9 $(191.4)Operating margin %37.0 %36.9 %36.9 %40.8 %Systems and ServicesIncome from operations$191.4 $179.8 $11.6 $179.8 $259.1 $(79.4)Operating margin %28.9 %27.2 %27.2 %36.7 %Total income from operations 1$643.3 $642.6 $0.7 $642.6 $976.4 $(333.8)Operating margin %16.7 %17.2 %17.2 %24.7 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.1 Refer to Note 15 “Segments and Geographical Information” of the Notes to Consolidated Financial Statements for details on unallocated corporate expenses and the reconciliation to Consolidated Income from Operations.Clear AlignerOperating margin percentage remained relatively flat in 2023 compared to 2022 primarily due to a decrease in gross margin which was offset by operating leverage. Systems and ServicesOperating margin percentage increased in 2023 compared to 2022 primarily due to higher gross margin. Interest income (in millions):45 Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeInterest income$17.3 $5.4 $11.9 $5.4 $3.1 $2.3 % of net revenues0.4 %0.1 %0.1 %0.1 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Interest income generally includes interest earned on cash, cash equivalents and investment balances.Interest income increased in 2023 compared to 2022 primarily due to higher interest rates during 2023.Other income (expense), net (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeOther income (expense), net$(19.4)$(48.9)$29.5 $(48.9)$32.9 $(81.8)% of net revenues(0.5)%(1.3)%(1.3)%0.8 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Other income (expense), net, generally includes foreign exchange gains and losses, gains and losses on foreign currency forward contracts, interest expense, gains and losses on equity investments and other miscellaneous charges.Other income (expense), net decreased in 2023 compared to 2022 primarily due to the favorable impact of foreign exchange rates offset slightly by losses in investments in private companies.Provision for (benefit from) income taxes (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeProvision for (benefit from) income taxes$196.2 $237.5 $(41.3)$237.5 $240.4 $(2.9)Effective tax rates30.6 %39.6 %39.6 %23.7 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.The decrease in our effective tax rate for the year ended December 31, 2023 compared to the same period in 2022 is primarily attributable to the application of newly issued tax guidance, including IRS Notice 2023-55 and a change in our jurisdictional mix of income.Liquidity and Capital ResourcesLiquidity and TrendsAs of December 31, 2023 and 2022, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):December 31, 20232022Cash and cash equivalents$937,438 $942,050 Marketable securities, short-term 35,304 57,534 Marketable securities, long-term8,022 41,978 Total$980,764 $1,041,562 As of December 31, 2023 and 2022, approximately $784.7 million and $653.7 million, respectively, of cash, cash equivalents and marketable securities were held by our foreign subsidiaries. We intend to reinvest our foreign subsidiary earnings indefinitely outside of the U.S. and do not expect to incur significant additional costs upon repatriation of these foreign earnings. We generate sufficient domestic operating cash flow and have access to $300.0 million under our revolving line of 46credit. We believe that our current cash balances and the borrowing capacity under our credit facility, if necessary, will be sufficient to fund our business for at least the next 12 months.Our material cash requirements as of December 31, 2023 are as below:•Our purchase commitments consist primarily of open purchase orders for goods and services, including manufacturing inventory, supplies and services, sales and marketing, research and development services and technological services, issued in the normal course of business. Our purchase commitments totaled $1,234.5 million. We anticipate a majority, an estimated $861.5 million, will be payable within the next 12 months. These purchase commitments exclude capital expenditures. •We expect our investments in capital expenditures to be approximately $100.0 million for the next 12 months. Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity due to international expansion. Despite the challenging market conditions, we intend to expand our investments in research and development, manufacturing, treatment planning, sales and marketing operations to meet actual and anticipated local and regional demands. •We have future operating lease payments of $153.5 million, which includes $13.3 million for leases that have not yet commenced as of December 31, 2023. Refer to Note 4 “Leases” of the Notes to Consolidated Financial Statements for details on the lease payments. •We have approximately $650.0 million available for repurchases of our common stock under the stock repurchase program authorized by our Board of Directors in January 2023 (“January 2023 Repurchase Program”). Our stock repurchase program is subject to periodic evaluations to determine when and if repurchases are in the best interests of our stockholders, taking into account prevailing market conditions. Refer to Note 10 “Common Stock Repurchase Programs” of the Notes to Consolidated Financial Statements for details on our stock repurchase programs. Beginning in fiscal year 2023 our stock repurchases, net of certain issuances, were subject to a 1% excise tax. This excise tax is not expected to have a material impact on our liquidity or capital resources.•On January 2, 2024 we completed the acquisition of the remaining interest in privately held Cubicure GmbH for total purchase consideration of approximately $87 million. We paid approximately $79 million in cash, which represents the total purchase consideration less credit for our previously owned interest.•As of December 31, 2023, we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material impact on our liquidity or capital resources. Sources and Use of Cash The following table summarizes our Consolidated Statements of Cash Flows for the year ended December 31, 2023, 2022 and 2021 (in thousands): Year Ended December 31, 202320222021Net cash provided by (used in):Operating activities$785,776 $568,732 $1,172,544 Investing activities(195,943)(213,316)(563,430)Financing activities(598,340)(501,686)(458,332)Effects of foreign exchange rate changes on cash, cash equivalents, and restricted cash 4,671 (11,514)(12,117)Net (decrease) increase in cash, cash equivalents, and restricted cash$(3,836)$(157,784)$138,665 Operating ActivitiesFor the year ended December 31, 2023, cash flows from operations of $785.8 million resulted primarily from our net income of approximately $445.1 million as well as the following:Significant adjustments to net income•Stock-based compensation of $154.0 million related to equity awards granted to employees and directors; and47•Depreciation and amortization of $142.4 million related to our investments in property, plant and equipment and intangible assets.Significant changes in working capital •Inflow of $46.3 million, net from accrued and other long-term liabilities primarily due to higher incentive accruals for 2023, as well as timing of payments of other activities;•Inflow of $86.7 million, net from deferred revenues due to the deferral of revenue on shipments;•Inflow of $30.2 million, net from inventories primarily due to lower purchases of materials used in manufacturing; and•Outflow of $104.6 million, net from accounts receivable due to timing of collections and increased revenues.For the year ended December 31, 2022, cash flows from operations of $568.7 million resulted primarily from our net income of approximately $361.6 million as well as the following:Significant adjustments to net income•Stock-based compensation of $133.4 million related to equity awards granted to employees and directors;•Depreciation and amortization of $125.8 million related to our investments in property, plant and equipment and intangible assets; andSignificant changes in working capital•Inflow of $241.9 million, net from deferred revenues due to the deferral of revenue on shipments over the period as well as timing of revenue recognition;•Outflow of $130.1 million, net from inventories primarily due to lower shipment volumes over the period in addition to our efforts to manage stock at appropriate levels as required; and •Outflow of $121.9 million, net from accrued and other long-term liabilities primarily due to the payment of our 2021 corporate bonus as well as timing payment of other activities.Investing ActivitiesNet cash used in investing activities was $195.9 million for the year ended December 31, 2023 which primarily consisted of purchases of property, plant and equipment of $177.7 million which included a building acquisition for $24.5 million, an investment in the equity of a privately held company of $77.0 million and purchases of marketable securities of $2.9 million, partially offset by sales and maturities of marketable securities of $61.4 million. Net cash used in investing activities was $213.3 million for the year ended December 31, 2022 which primarily consisted of purchases of property, plant and equipment of $291.9 million, purchases of marketable securities of $28.0 million and $12.3 million cash paid relating to a business acquisition. These outflows were partially offset by sales and maturities of marketable securities of $121.1 million.Financing ActivitiesNet cash used in financing activities was $598.3 million for the year ended December 31, 2023 which consisted of payments to repurchase shares of our common stock of $602.4 million and payroll taxes paid for equity awards through share withholdings of $22.6 million, which were partially offset by $26.6 million of proceeds from the issuance of common stock. Net cash used in financing activities was $501.7 million for the year ended December 31, 2022 which consisted of payments to repurchase shares of our common stock of $475.0 million and payroll taxes paid for equity awards through share withholdings of $52.8 million, which were partially offset by $26.1 million of proceeds from the issuance of common stock.Critical Accounting Estimates Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. We 48evaluate our estimates on an on-going basis and use authoritative pronouncements, historical experience and other assumptions as the basis for making the estimates. Actual results could differ from those estimates.We believe the following critical accounting estimates affect our more significant judgments used in the preparation of our consolidated financial statements. For further information on all of our significant accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.Revenue RecognitionOur revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments. We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period. We measure and allocate revenues according to ASC 606-10, “Revenues from Contracts with Customers.”Determining the standalone selling price (“SSP”) in order to allocate consideration from the contract to the individual performance obligations is the result of various factors, such as historical prices, changing trends and market conditions, costs, and gross margins. While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenues recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.We allocate consideration for each clear aligner treatment plan based on each unit’s SSP. Management considers a variety of factors such as same or similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. In addition to historical data, we take into consideration changing trends and market conditions. For treatment plans with multiple options, we also consider usage rates, which is the number of times a customer is expected to order more aligners after the initial shipment. Our process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country and channel.We estimate the SSP of each element in a scanner system and services sale taking into consideration same or similar product historical prices as well as our discounting strategies. For CAD/CAM services, we estimate the SSP of each element, including the initial software license and maintenance and support, using data such as historical prices.Unfulfilled Performance Obligations for Clear Aligners and ScannersOur unfulfilled performance obligations, including deferred revenues and backlog, and the estimated revenues expected to be recognized in the future related to these performance obligations are $1,578.3 million and $1,515.4 million as of December 31, 2023 and 2022, respectively. This includes performance obligations from the Clear Aligner reportable segment, primarily the shipment of additional aligners, which are fulfilled over six months to five years. This also includes performance obligations from our Systems and Services reportable segment, primarily services and support, which are fulfilled over one to five years, and contracted deliveries of additional scanners. The estimate includes both product and service unfulfilled performance obligations and the time range reflects our best estimate of when we will transfer control to the customer and may change based on customer usage patterns, timing of shipments, readiness of customers' facilities for installation, and manufacturing availability.Impairment of Goodwill and Finite-Lived Intangible AssetsGoodwillWe evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators of impairment are identified between annual testing dates. Goodwill is tested for impairment between annual testing dates when events or circumstances indicate that the fair value of a reporting unit has been reduced below its carrying value. When an indicator of impairment is identified we perform a quantitative impairment assessment in which we determine the fair value of a reporting unit and compare it to the carrying value of the respective reporting unit. We generally determine the fair value of a reporting unit via a discounted cash flow analysis and allocate the net assets of the Company to each reporting unit to determine carrying value. We will record an impairment charge when our quantitative impairment analysis indicates that the carrying value of a reporting unit exceeds its fair value. Both the determination of fair value and carrying value of a reporting unit require management to exercise significant judgement related to operating assumptions and estimates and allocation methodologies. 49Finite-Lived Intangible AssetsFinite-lived intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset (asset group) may not be recoverable. When an impairment indicator is identified, we perform a recoverability test, in which the estimated, undiscounted future cash flows expected to result from the use and eventual disposition of the asset (asset group) are compared to the carrying value of the asset (asset group). When our recoverability test results in undiscounted cash flows more than carrying value, no impairment is recorded. However, when our recoverability test results in undiscounted cash flows that are less than carrying value, we determine the fair value of the asset (asset group) and reduce the carrying amount of the asset (asset group), through an impairment charge, to its fair value. The process of identifying impairment indicators, preparing an undiscounted cash flow and determining the fair value of the asset (asset group) require management to exercise significant judgement related to various assumptions and estimates.If we were to have impairments to goodwill or finite-lived intangible assets, it could adversely affect our operating results. During the years ended 2023 and 2022, we did not have any impairment charges related to our goodwill or finite-lived intangible assets. Accounting for Income Taxes We are subject to income taxes in the U.S. and numerous foreign jurisdictions. The evaluation of our uncertain tax positions involves significant judgment in the interpretation and application of U.S. GAAP and complex domestic and international tax laws related to the allocation of international taxation rights between countries. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of both of our historical and future performance as well as other relevant factors. Realization of our deferred tax assets is dependent on our ability to generate future taxable income which is determined based on assumptions such as estimated growth rates in revenues, gross margins, future cash flows and discount rates. The accuracy of these estimates could be affected by unforeseen events or actual results, and the sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities. Accounting for Legal Proceedings and LitigationEstimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information. The final outcome of legal proceedings is dependent on many variables difficult to predict and, therefore, the ultimate cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new information or changes in judgments and estimates could have a material adverse effect on our business, financial condition, and results of operations or cash flows.Recent Accounting PronouncementsSee Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on results of operations and financial condition, which is incorporated herein.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.In the normal course of business, we are exposed to interest rate, foreign currency exchange and inflation risks that could impact our financial position and results of operations. In addition, we are subject to the broad market risk that is created by the global market disruptions and uncertainties resulting from macroeconomic challenges, various military conflicts and consumer confidence. Further discussion on these risks may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors”.Interest Rate RiskChanges in interest rates could impact our anticipated interest income on our cash and cash equivalents and investments in marketable securities. Our investments are fixed-rate short-term and long-term securities. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, and, as a result, our future investment income may fall short of expectations or we may suffer losses in principal if forced to sell securities which have declined in market value due. As of December 31, 2023, we had approximately $43.3 million invested in available-for-sale marketable securities. An immediate 10% change in interest rates would not have a material adverse impact on our future operating results and cash flows.50We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. As of December 31, 2023, we are not subject to risks from immediate interest rate increases on our unsecured revolving line of credit facility.Currency Rate RiskAs a result of our international business activities, our financial results have been affected by factors such as changes in foreign currency exchange rates as well as economic conditions in foreign markets, and there is no assurance that exchange rate fluctuations will not harm our business in the future. We generally sell our products in the local currency of the respective countries. This provides some natural hedging because most of the subsidiaries’ operating expenses are generally denominated in their local currencies. We enter into foreign currency forward contracts for currencies where we have exposures, primarily the Euro, British Pound, Chinese Yuan, Polish Zloty and Canadian Dollar, to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and intercompany receivables and payables. These forward contracts are not designated as hedging instruments and are generally one month in original maturity and are marked to market through earnings every period. The gains and losses on these forward contracts are intended to offset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. We do not enter into foreign currency forward contracts for trading or speculative purposes. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates. It is difficult to predict the impact forward contracts could have on our results of operations.Although we will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use forward contracts to minimize the effect of these fluctuations, the impact of an aggregate change of 10% in foreign currency exchange rates relative to the U.S. dollar on our results of operations and financial position could be material. Inflation RiskThe economy has been impacted by certain macroeconomic challenges which have contributed to a rising inflationary trend that have impacted both our revenues and costs globally, and which we expect will continue into the foreseeable future. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. There can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.51

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+ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis MDA includes information relating to Alliant Energy, IPL and WPL, as well as AEF and Corporate Services. Where appropriate, information relating to a specific entity has been segregated and labeled as such. The following discussion and analysis should be read in conjunction with the Financial Statements and Notes included in this report. Unless otherwise noted, all “per share” references in MDA refer to earnings per diluted share. In addition, this MDA includes certain financial information for 2023 compared to 2022. Refer to MDA in the combined 2022 Form 10-K for details on certain financial information for 2022 compared to 2021.OVERVIEWMission, Purpose and StrategyAlliant Energy’s mission is to deliver affordable energy solutions and exceptional service that its customers and the communities it serves count on - affordably, safely, reliably, and sustainably. This mission aligns with Alliant Energy’s purpose - to serve customers and build stronger communities - which guides it through the ever-changing dynamics of the economy and the energy industry. Alliant Energy takes its responsibility as a corporate citizen seriously and remains a careful steward of the environment and supports the communities in its service territories. Alliant Energy’s mission and purpose are supported by a strategy focused on meeting the evolving expectations of customers while providing an attractive return for investors, and pursuing emerging technologies and safe, sustainable methods of energy production. This strategy includes the following key elements:Providing affordable energy solutions for customers - Alliant Energy’s strategy focuses on affordable energy solutions that support retention and growth of its existing customers and attract new customers to its service territories.Key Highlights - •Alliant Energy’s Clean Energy Blueprint, also known as the roadmap for its transition to cleaner energy, continues to add clean energy resources in Iowa and Wisconsin. As a result, Alliant Energy directly reinvests in the communities it serves through the addition of skilled jobs, economic development and increased tax revenue. In Wisconsin, WPL completed 639 MW of solar generation in 2023, adding to the 250 MW of solar generation placed in service in 2022, and expects to add another 200 MW of solar generation in 2024, resulting in approximately 1,100 MW of solar generation resources in aggregate. In Iowa, IPL expects to complete 400 MW of solar generation by the end of 2024. Completion of these projects is expected to result in approximately 1,500 MW of additional zero-fuel cost solar generation resources for Alliant Energy in aggregate by the end of 2024. The execution of Alliant Energy’s strategy is expected to result in cost benefits for its utility customers by continuing to add renewable energy projects that generate fuel cost benefits and renewable tax credits that are provided to its electric customers.•Alliant Energy, IPL and WPL currently expect to utilize various provisions of the Inflation Reduction Act of 2022 to enhance tax benefits expected from wind, solar and battery storage projects in Iowa and Wisconsin, including transferring certain future tax credits from such projects to other corporate taxpayers. The Inflation Reduction Act of 2022 is expected to result in more cost benefits for IPL’s and WPL’s customers, higher rate base amounts, and improvements in long-term cash flows over the life of the solar, battery storage and wind repowering projects. Refer to Note 1(c) for discussion of $98 million of proceeds from renewable tax credits transferred to other corporate taxpayers in 2023.•Reductions in Iowa corporate income tax rates resulting from tax reform enacted in 2022 are expected to provide cost benefits to IPL’s electric and gas customers in the future.•IPL maintaining flat base rates for its retail electric and gas customers in 2021, 2022 and 2023.•Significant fuel cost reductions achieved in 2021, 2022 and 2023 as a result of shortening the term of IPL’s DAEC PPA by 5 years, and beginning in 2023 with the May 2023 retirement of Lansing.•Issuance of new long-term debt at historically low interest rates for IPL ($300 million of 3.1% senior debentures due 2051) and WPL ($300 million of 1.95% green bonds due 2031) in 2021 and WPL ($600 million of 3.95% green bonds due 2032) in 2022.•In 2023, the U.S. Department of Energy Office of Clean Energy selected the Columbia Energy Storage Project, a first of its kind in the U.S., 20 MW CO2-based long-duration energy storage system at the retiring coal-fired Columbia site, for award negotiations to receive up to $30 million in grant funding. Alliant Energy, with support from various project partners, currently expects to submit project plans to the PSCW in 2024 after award negotiations with the DOE are finished. Any grant proceeds would reduce the cost of the project for WPL’s customers.•Levelized cost recovery mechanism for the remaining net book value of Edgewater Unit 5, which helps reduce customer costs.Making customer-focused investments - Alliant Energy’s strategic priorities include making significant customer-focused investments toward cleaner and more reliable, resilient, and sustainable customer energy solutions. Alliant Energy’s strategy drives a capital allocation process focused on: 1) transitioning its generation portfolio to meet the growing interest of customers for reliable and sustainable sources of energy, 2) upgrading its electric and gas distribution systems to strengthen safety, reliability and resiliency, as well as enable distributed energy solutions in its service territories, and 3) enhancing its customers’ and employees’ experience with evolving technology and greater flexibility.27Table of ContentsKey Highlights (refer to “Customer Investments” for details) - •Development and acquisition of additional renewable energy, including approximately 1,100 MW of solar generation at WPL with in-service dates in 2022-2024, approximately 275 MW of battery storage at WPL with in-service dates in 2024 and 2025, and approximately 400 MW of solar generation at IPL with in-service dates in 2024. In addition, IPL and WPL continue to evaluate additional opportunities to add more renewable generation, including repowering of existing wind farms and additional solar generation and distributed energy resources, including community solar and small-scale energy storage systems.•Plans to construct and/or acquire additional renewable, battery and natural gas resources to meet the requirements of MISO’s seasonal resource adequacy process establishing capacity planning reserve margin and capacity accreditation requirements effective with the 2023/2024 MISO Planning Year.•Requested PSCW approval to construct improvements at the natural gas-fired Neenah Energy Facility and Sheboygan Falls Energy Facility, which would increase the capacity and efficiency of the EGUs. A decision from the PSCW is currently expected by the second quarter of 2024.•Improving reliability and resiliency with more underground electric distribution, and enabling distributed energy solutions with higher capacity lines. Currently, approximately 27% of Alliant Energy’s electric distribution system is underground.•Alliant Energy continues to partner with its commercial and industrial customers to help develop renewable solutions to enhance their sustainability initiatives, including various customer- and community-hosted solar facilities in Iowa and Wisconsin. Four such facilities were completed in Wisconsin in 2021 and 2022, and several more are currently planned to be completed in 2024 in Iowa and Wisconsin.•Installing fiber optic routes between Alliant Energy’s facilities to enhance its communications network to improve resiliency and reliability of, and enable and strengthen, the integrated grid network focused on less densely populated rural areas.Growing customer demand - Alliant Energy’s strategy supports expanding electric and gas usage in its service territories by promoting electrification initiatives and economic development.Key Highlights - •Alliant’s Energy was named a Top Utility in Economic Development by Site Selection Magazine for the fifth year in a row, and was named a Top Utility by Business Facilities Magazine for the fourth year in a row.•Alliant Energy has various development-ready sites throughout Iowa and Wisconsin, including the 1,300-acre Big Cedar Industrial Center Mega-site in Cedar Rapids, Iowa, and the 465-acre Prairie View Industrial Center Super Park in Ames, Iowa, which are rail-served, ready-to-build manufacturing and industrial sites in close proximity to the regional airport, interstate freeways and IPL’s electric services. The Big Cedar Industrial Center Mega-site also accesses Travero’s rail-served warehouse in Iowa. In addition, the Beaver Dam Commerce Park is a 520-acre ready-to-build manufacturing and industrial site in Beaver Dam, Wisconsin, with access to commercial and freight airports, interstate freeways and WPL’s electric services.RESULTS OF OPERATIONSFinancial Results Overview - The table below includes EPS for Utilities and Corporate Services, ATC Holdings, and Non-utility and Parent, which are non-GAAP financial measures. Alliant Energy believes these non-GAAP financial measures are useful to investors because they facilitate an understanding of segment performance and trends, and provide additional information about Alliant Energy’s operations on a basis consistent with the measures that management uses to manage its operations and evaluate its performance. Alliant Energy’s net income and EPS attributable to Alliant Energy common shareowners were as follows (dollars in millions, except per share amounts):20232022Income (Loss)EPSIncome (Loss)EPSUtilities and Corporate Services$724$2.86$690$2.74ATC Holdings350.14290.12Non-utility and Parent(56)(0.22)(33)(0.13)Alliant Energy Consolidated$703$2.78$686$2.73Alliant Energy’s Utilities and Corporate Services net income increased by $34 million in 2023 compared to 2022. The increase was primarily due to higher revenue requirements and AFUDC from capital investments and lower other operation and maintenance expenses at IPL and WPL. These items were partially offset by higher interest expense, lower retail electric and gas sales primarily due to temperature impacts, and higher depreciation expense.Alliant Energy’s Non-utility and Parent net income decreased by $23 million in 2023 compared to 2022, primarily due to higher interest expense.28Table of ContentsNet Income Variances - The following items contributed to increased (decreased) net income for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPLRevenues:Changes in electric utility (Refer to details below)($76)($98)$22Changes in gas utility (Refer to details below)(102)(51)(51)Changes in other utility33—Changes in non-utility(3)——Changes in total revenues(178)(146)(29)Operating expenses:Changes in electric production fuel and purchased power (Refer to details below)94101(8)Changes in electric transmission service (Refer to details below)(10)(13)3Changes in cost of gas sold (Refer to details below)904049Changes in other operation and maintenance (Refer to details below)29167Changes in depreciation and amortization (Refer to Note 2 for discussion of reductions to WPL’s depreciation and amortization expense, which was partially offset by WPL’s solar generation placed in service in 2022)(5)(7)3Changes in taxes other than income taxes(5)—(5)Changes in total operating expenses19313749Changes in operating income15(9)20Other income and deductions:Changes in interest expense (Higher primarily due to financings completed in 2023 and 2022, and higher interest rates)(69)(7)(28)Changes in equity income from unconsolidated investments, net (Refer to Note 6 for details)10——Changes in AFUDC (Higher primarily due to higher levels of CWIP balances related to solar generation and battery storage)401030Changes in Other (Refer to Note 13(a) for details of IPL’s qualified pension plan settlement losses in 2022)342Changes in total other income and deductions(16)74Changes in income before income taxes(1)(2)24Changes in income taxes (Refer to Note 12 for details)1886Changes in net income$17$6$3029Table of ContentsElectric and Gas Revenues and Sales Summary - Electric and gas revenues (in millions), and MWh and Dth sales (in thousands), were as follows:ElectricGasRevenuesMWhs SoldRevenuesDths Sold20232022202320222023202220232022Alliant EnergyRetail$3,008 $3,019 24,940 25,409 $495 $588 46,405 55,021 Sales for resale:Wholesale213 233 2,859 2,866 N/AN/AN/AN/ABulk power and other71 111 4,730 3,734 N/AN/AN/AN/ATransportation/Other53 58 58 62 45 54 115,177 104,812 $3,345 $3,421 32,587 32,071 $540 $642 161,582 159,833 IPLRetail$1,661 $1,747 13,909 14,270 $273 $317 23,128 28,492 Sales for resale:Wholesale62 64 766 771 N/AN/AN/AN/ABulk power and other11 13 1,465 1,401 N/AN/AN/AN/ATransportation/Other27 35 32 33 27 34 43,232 43,264 $1,761 $1,859 16,172 16,475 $300 $351 66,360 71,756 WPLRetail$1,347 $1,272 11,031 11,139 $222 $271 23,277 26,529 Sales for resale:Wholesale151 169 2,093 2,095 N/AN/AN/AN/ABulk power and other60 98 3,265 2,333 N/AN/AN/AN/ATransportation/Other26 23 26 29 18 20 71,945 61,548 $1,584 $1,562 16,415 15,596 $240 $291 95,222 88,077 Sales Trends and Temperatures - Alliant Energy’s retail electric and gas sales volumes decreased 2% and 16%, respectively, in 2023 compared to 2022, primarily due to changes in temperatures.Estimated increases (decreases) to operating income from the impacts of temperatures were as follows (in millions):ElectricGas20232022Change20232022ChangeIPL($1)$16($17)($8)$5($13)WPL(5)10(15)(6)2(8)Total Alliant Energy($6)$26($32)($14)$7($21)Electric Sales for Resale - Bulk Power and Other - Bulk power and other volume changes were due to changes in sales in the wholesale energy markets operated by MISO. These changes are impacted by several factors, including the availability and dispatch of Alliant Energy’s EGUs and electricity demand within these wholesale energy markets. Changes in bulk power and other revenues were largely offset by changes in fuel-related costs, and therefore did not have a significant impact on operating income.Gas Transportation/Other - Gas transportation/other sales volume changes were largely due to changes in the gas volumes supplied to Alliant Energy’s natural gas-fired EGUs caused by the availability and dispatch of such EGUs. 30Table of ContentsElectric Utility Revenue Variances - The following items contributed to increased (decreased) electric utility revenues for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPL(Lower) higher revenues due to changes in retail electric fuel-related costs (Refer to Electric Production Fuel and Purchased Power Expenses Variances below)($62)($96)$34Lower sales for resale bulk power and other revenues (a)(40)(2)(38)Lower wholesale revenues primarily due to lower fuel-related costs(20)(2)(18)Estimated changes in sales volumes caused by temperatures(32)(17)(15)Changes in WPL refunds/collections of previous over-/under-collection of retail electric fuel-related costs (offset in electric production fuel and purchased power expenses) (Refer to Note 2)49—49Higher revenues at IPL related to changes in the electric transmission service cost rider (mostly offset in electric transmission service expense) (Refer to Electric Transmission Service Expense Variances below)1919—Higher revenues at IPL related to changes in the renewable energy rider (mostly offset by changes in income taxes)1313—Changes in WPL electric fuel-related costs, net of recoveries (b)12—12Other(15)(13)(2)($76)($98)$22(a)Alliant Energy’s sales for resale bulk power and other revenues decreased primarily due to lower prices for electricity sold by IPL and WPL to MISO wholesale energy markets. These changes were largely offset by changes in fuel-related costs.(b)WPL’s cost recovery mechanism for retail fuel-related expenses supports deferrals of amounts that fall outside an approved fuel monitoring range of forecasted fuel-related expenses determined by the PSCW each year. The difference between revenue collected and actual fuel-related expenses incurred within the fuel monitoring range increases or decreases Alliant Energy’s and WPL’s electric utility revenues. WPL estimates the increase (decrease) to electric utility revenues from amounts within the fuel monitoring range were approximately $6 million and ($6) million in 2023 and 2022, respectively. Refer to Note 2 for discussion of deferred fuel-related costs that were outside the approved fuel monitoring range in 2023, 2022 and 2021.Gas Utility Revenue Variances - The following items contributed to increased (decreased) gas utility revenues for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPLLower revenues due to changes in gas costs (Refer to Cost of Gas Sold Expense Variances below)($91)($42)($49)Estimated changes in sales volumes caused by temperatures(21)(13)(8)Higher revenue requirements at WPL (a)8—8Higher revenues at IPL related to changes in recovery amounts for energy efficiency costs through the energy efficiency rider (mostly offset by changes in energy efficiency expense) (Refer to Note 1(g))55—Other(3)(1)(2)($102)($51)($51)(a)In December 2022, the PSCW issued an order authorizing an annual base rate increase of $9 million for WPL’s retail gas customers, covering the 2023 forward-looking Test Period, which reflects changes in weighted average cost of capital, updated depreciation rates and modifications to certain regulatory asset and regulatory liability amortizations.Electric Production Fuel and Purchased Power Expenses Variances - The following items contributed to (increased) decreased electric production fuel and purchased power expenses for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPLLower electric production fuel costs (a)$99$52$47Lower purchased power expense (b)1527145Changes in regulatory recovery of retail electric fuel-related costs (Refer to Notes 1(g) and 2)(109)42(151)Changes in WPL refunds/collections of previous over-/under-collection of retail electric fuel-related costs (offset in electric utility revenue) (Refer to Note 2)(49)—(49)Other1——$94$101($8)31Table of Contents(a)Electric production fuel costs decreased primarily due to lower natural gas prices in 2023 compared to 2022 and lower coal volumes utilized due to IPL’s retirement of Lansing in May 2023, partially offset by higher natural gas volumes due to higher dispatch of IPL’s and WPL’s natural gas-fired EGUs in 2023.(b)Purchased power expense decreased primarily due to lower prices for electricity purchased by IPL and WPL from MISO wholesale energy markets, and decreased volumes of electricity purchased due to lower retail and wholesale electric sales and less reliance on wholesale energy market purchases due to higher dispatch of IPL’s and WPL’s natural gas-fired EGUs.Electric Transmission Service Expense Variances - The following items contributed to (increased) decreased electric transmission service expense for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPLChanges in regulatory recovery for the difference between actual electric transmission service costs and those costs used to determine rates (Refer to Note 1(g))($12)($15)$3Other22—($10)($13)$3Cost of Gas Sold Expense Variances - The following items contributed to (increased) decreased cost of gas sold expense for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPLLower natural gas prices and lower retail gas volumes primarily due to changes in temperatures$77$24$53Changes in the regulatory recovery of gas costs (Refer to Note 1(g))1418(4)Other(1)(2)—$90$40$49Other Operation and Maintenance Expenses Variances - The following items contributed to (increased) decreased other operation and maintenance expenses for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPLLower incentive compensation expense$7$4$3Non-utility Travero (mostly offset by lower non-utility revenues)4——Higher energy efficiency expense at IPL (mostly offset by higher revenues)(5)(5)—Lower (higher) generation and energy delivery expenses(1)5(6)Other (includes lower costs due to cost controls and operational efficiencies)241210$29$16$7Other Future Considerations - In addition to items discussed in this report, the following key items could impact Alliant Energy’s, IPL’s and WPL’s future financial condition or results of operations:•Financing Plans - Alliant Energy currently expects to issue up to $25 million of common stock in 2024 through its Shareowner Direct Plan. IPL, WPL and AEF currently expect to issue up to $700 million, $300 million and $700 million of long-term debt, respectively, in 2024. IPL and AEF have $500 million and $300 million of long-term debt, respectively, maturing in 2024.•Common Stock Dividends - Alliant Energy announced a 6% increase in its targeted 2024 annual common stock dividend to $1.92 per share, which is equivalent to a quarterly rate of $0.48 per share, beginning with the February 2024 dividend payment. The timing and amount of future dividends is subject to an approved dividend declaration from Alliant Energy’s Board of Directors, and is dependent upon earnings expectations, capital requirements, and general financial business conditions, among other factors.•Cash Flows From Operating Activities - Alliant Energy, IPL and WPL currently expect an increase in future cash flows from operating activities resulting from the transfer of future renewable tax credits to other corporate taxpayers pursuant to the Inflation Reduction Act of 2022. In addition, Alliant Energy and WPL currently expect an increase in future cash flows from operating activities resulting from higher earnings on increasing rate base at WPL.•IPL’s Electric Sales Trends - In July 2025, IPL’s wholesale power agreement with Southern Minnesota Energy Cooperative will expire. Sales to Southern Minnesota Energy Cooperative represented approximately 5% of IPL's total electric sales in 2023.•Higher Earnings on Increasing Rate Base - Alliant Energy and WPL currently expect an increase in earnings in 2024 compared to 2023 due to impacts from increasing revenue requirements related to investments in the utility business.•Depreciation and Amortization Expense - Alliant Energy, IPL and WPL currently expect an increase in depreciation and amortization expense in 2024 compared to 2023 due to capital projects placed in service in 2023 and 2024 and lower amortization of WPL’s West Riverside liquidated damages. Refer to Note 2 for discussion of WPL’s West Riverside liquidated damages.•Interest Expense - Alliant Energy, IPL and WPL currently expect an increase in interest expense in 2024 compared to 2023 due to financings completed in 2023 and planned in 2024 as discussed above.32Table of Contents•AFUDC - Alliant Energy and WPL currently expect a decrease and IPL currently expects an increase in AFUDC in 2024 compared to 2023 largely due to changes in CWIP balances related to construction activity on capital projects.CUSTOMER INVESTMENTSAlliant Energy’s, IPL’s and WPL’s strategic priorities include making significant customer-focused investments toward cleaner energy and more reliable, resilient and sustainable customer solutions. These priorities include:Clean Energy BlueprintAlliant Energy has developed a Clean Energy Blueprint, or the roadmap for its transition to cleaner energy, as a guide to meet customer demand for affordable, safe, reliable and sustainable energy in Iowa and Wisconsin. This strategy includes the development and acquisition of additional renewable energy, including approximately 1,100 MW of solar generation at WPL with in-service dates in 2022-2024, approximately 275 MW of battery storage at WPL with in-service dates in 2024 and 2025, and approximately 400 MW of solar generation at IPL with in-service dates in 2024. In order to support reliable and sustainable energy and meet MISO’s seasonal resource adequacy requirements, Alliant Energy, IPL and WPL continue to evaluate additional opportunities for renewables and battery storage projects, dispatchable gas generation projects, and distributed energy resources, as well as repowering existing wind farms. Estimated capital expenditures for these planned projects for 2024 through 2027 are included in the “Renewables and battery storage projects” line in the construction and acquisition table in “Liquidity and Capital Resources.”WPL’s Generation Projects - In 2021 and 2022, WPL received orders from the PSCW for its first and second solar CAs authorizing WPL to acquire, construct, own, and/or operate 675 MW and 414 MW, respectively, of new solar generation in various Wisconsin counties. In 2022 and 2023, 250 MW and 639 MW of solar projects were placed in service, respectively, and a 200 MW solar project is expected to be placed in service in 2024. The 1,089 MW of new solar generation is expected to help replace energy and capacity being eliminated with the planned retirements of the coal-fired Edgewater Generating Station (414 MW) by June 1, 2025, and Columbia Units 1 and 2 (595 MW in aggregate) by June 1, 2026, which are the last coal-fired EGUs at WPL.In June 2023, WPL filed requests with the PSCW for approval to construct improvements at the natural gas-fired Neenah Energy Facility and Sheboygan Falls Energy Facility, which would increase the capacity and efficiency of the EGUs. A decision from the PSCW is currently expected by the second quarter of 2024.In August 2023, WPL received an order from the PSCW authorizing WPL to construct, own and operate 175 MW of battery storage, with 100 MW and 75 MW at the Grant County and Wood County solar projects, respectively, which are currently expected to be placed in service in 2024.In December 2023, WPL received an order from the PSCW authorizing WPL to construct, own and operate approximately 99 MW of battery storage at the Edgewater Generating Station, which is currently expected to be placed in service in 2025.IPL’s Generation Projects - In October 2023, the IUB issued an order approving a modified non-unanimous settlement agreement with the Iowa Office of Consumer Advocate among other stakeholders, for advance rate-making principles for up to 400 MW of solar generation, subject to a cost target of $1,650/kilowatt, including AFUDC and transmission upgrade costs among other costs, and a related return on common equity of no less than 10.25% with the opportunity to request a higher return on common equity in future IPL retail electric rate review filings. Any reasonable and prudent costs incurred in excess of the cost target are eligible for recovery at the return on common equity determined in IPL retail electric rate review filings. The IUB’s order also included a consumer protection plan, which monitors IPL’s achievement of certain aggregate summer capacity factors for the up to 400 MW of solar generation projects during June, July and August each calendar year over 30 years. Actual three-year rolling average summer capacity factors will be compared to target capacity factors, which may result in surpluses or deficits that would be offset against one another and contribute to an accumulated balance in a given calendar year. Surpluses or deficits will be capped at $3 million in aggregate per year. At the end of the program, any accumulated deficit balance would be addressed in IPL’s next rate review, and any accumulated surplus balance would not result in any return to IPL. In November 2023, IPL accepted these advance rate-making principles.In 2023, the IUB issued GCU Certificates granting IPL approval to construct, own and operate up to 150 MW of solar generation at the Wever project in Lee County, Iowa and up to 50 MW of solar generation at the Creston project in Union County, Iowa. These solar projects are included in the IUB’s October 2023 order approving advance rate-making principles for up to 400 MW of solar generation. The IUB also issued GCU Certificates granting IPL approval to construct, own and operate up to 100 MW of battery storage (75 MW at the Wever project and 25 MW at the Creston project), which was not included in the IUB’s October 2023 order approving advance rate-making principles, and is subject to future regulatory approval.The 400 MW of new solar generation would help replace a portion of the energy and capacity eliminated with the May 2023 retirement of the coal-fired Lansing Generating Station (275 MW) and the reduction of energy and capacity resulting from the December 2021 fuel switch of the Burlington Generating Station (212 MW) from coal to natural gas. In addition, IPL’s plans include additional renewables and distributed energy resources, including community solar and small-scale energy storage systems, and repowering existing wind farms, to add energy and capacity.33Table of ContentsWPL’s West Riverside Natural Gas-fired Generating Station - In 2020, WPL completed the construction of West Riverside, a 723 MW natural gas-fired combined-cycle EGU in Beloit, Wisconsin. WPL entered into agreements with neighboring utilities and electric cooperatives that provide each of them options to purchase a partial ownership interest in West Riverside. The purchase price for such options is based on the ownership interest acquired and the net book value of West Riverside on the date of the purchase. The timing and ownership amount of the options are as follows:CounterpartyOption Amount and TimingWEC Energy Group, Inc. (WEC)100 MW were acquired by WEC in June 2023 pursuant to PSCW and FERC approval; additionally, WEC exercised its second and final option to purchase an additional 100 MW, subject to PSCW and FERC approval (a)Madison Gas and Electric Company (MGE)25 MW were acquired by MGE in March 2023 pursuant to PSCW and FERC approval; additionally, MGE exercised its second and final option to purchase an additional 25 MW, subject to PSCW and FERC approvalElectric cooperativesApproximately 60 MW were acquired January 2018(a)Upon WEC’s exercise of its options, WPL may exercise reciprocal options, subject to approval by the PSCW, to purchase up to 200 MW of any natural-gas combined-cycle EGU that WEC places in service prior to May 2030.Plant Retirements and Fuel Switching - The current strategy includes the retirement, or fuel switch from coal to natural gas, of various EGUs in the next several years. IPL retired the coal-fired Lansing Generating Station (275 MW) in May 2023, and currently expects to fuel switch or retire Prairie Creek Units 1 and 3 (65 MW in aggregate) by December 31, 2025. WPL currently expects to retire the coal-fired Edgewater Generating Station (414 MW) by June 1, 2025, and Columbia Units 1 and 2 (595 MW in aggregate) by June 1, 2026. Alliant Energy, IPL and WPL are working with MISO, state regulatory commissions and other regulatory agencies, as required, to determine the timing of these actions, which are subject to change depending on operational, regulatory, market and other factors. Refer to Note 3 for additional details on these EGUs.Environmental Stewardship - Alliant Energy’s environmental stewardship is focused on meeting its customers’ energy needs affordably, safely, reliably and sustainably. Alliant Energy proactively considers future environmental compliance requirements and proposed regulations in its planning, decision-making, construction and ongoing operations activities. Alliant Energy is focused on executing a long-term strategy to deliver reliable and affordable energy with lower emissions independent of changing policies and political landscape. To achieve these long-term goals, Alliant Energy will transition away from coal-fired EGUs by incorporating renewable energy, distributed energy resources, energy efficiency, demand response, natural gas-fired EGUs and other technologies such as energy storage.Alliant Energy’s current voluntary environmental-related goals and achievements include the following: •Exceeded its 2020 targets by reducing air emissions for sulfur dioxide by over 90%, nitrogen oxides by over 80% and mercury by over 90% from 2005 levels.•By 2030, reduce GHG emissions from its utility operations by 50% from 2005 levels, reduce its electric utility water supply by 75% from 2005 levels and electrify 100% of its owned light-duty fleet vehicles.•By 2040, eliminate all coal-fired EGUs from its generating fleet and reduce GHG emissions from its utility operations by 80% from 2005 levels.•By 2050, aspire to achieve net-zero GHG emissions from its utility operations.Alliant Energy’s aspirational GHG goal includes EPA reportable emissions based on applicable regulatory compliance requirements for CO2, methane and nitrous oxide from its owned fossil-fueled EGUs and distribution of natural gas. In addition, Alliant Energy’s environmental stewardship efforts include a goal to partner to plant more than 1 million trees by the end of 2030. Future updates to sustainable energy plans and attaining these goals will depend on future economic developments, evolving energy technologies and emerging trends in Alliant Energy’s service territories.Other Customer-focused InvestmentsElectric and Gas Distribution Systems - Customer-focused investments include replacing, modernizing and upgrading infrastructure in the electric and gas distribution systems. Electric system investments will focus on areas such as improving reliability and resiliency with more underground electric distribution and enabling distributed energy solutions with higher capacity lines. Gas system investments will focus on pipeline replacement to ensure safety and pipeline expansion to support reliability and economic development. Estimated capital expenditures for expected and current electric and gas distribution infrastructure projects for 2024 through 2027 are included in the “Electric and gas distribution systems” lines in the construction and acquisition expenditures table in “Liquidity and Capital Resources.”Fiber Optic Telecommunication Network - Alliant Energy is currently installing fiber optic routes between its facilities to enhance its communications network to improve resiliency and reliability of, and enable and strengthen, the integrated grid network focused on less densely populated rural areas.34Table of ContentsGas Pipeline Expansion - IPL and WPL currently expect to make investments to extend various gas distribution systems to provide natural gas to unserved or underserved areas in their service territories.Gas Pipeline Safety - The Pipeline and Hazardous Materials Safety Administration published various final rules from 2019 through 2022 that updated safety requirements for gas transmission pipelines, and updated procedures were implemented to address these rules. Plans to address certain requirements for specific pipelines were developed and implemented, with identified remediation efforts to be completed by July 2035. In anticipation of these rule changes, Alliant Energy, IPL and WPL have been proactively replacing certain of IPL’s transmission pipelines, making modifications to certain of WPL’s transmission pipelines, and updating practices for assessment and operation of these pipelines. Alliant Energy, IPL, and WPL also continue to evaluate the impact of these final rules and resulting remediation plans on their financial condition and results of operations.Technology - Alliant Energy, IPL and WPL currently plan to make investments in technology to enhance productivity and efficiency through automation, customer self-service and telework. Estimated capital expenditures for expected and current technology projects for 2024 through 2027 are included in the “Other” line in the construction and acquisition expenditures table in “Liquidity and Capital Resources.”Non-utility business - Alliant Energy continues to explore growth of its Travero businesses and other limited scope opportunities outside of, but complementary to, Alliant Energy’s core utility business. This non-utility strategy continues to evolve through exploration of modest strategic opportunities that are accretive to earnings and cash flows.RATE MATTERSRate ReviewsRetail Base Rate Filings - Base rate changes reflect both returns on additions to infrastructure and recovery of changes in costs incurred or expected to be incurred to provide electric and gas service to retail customers. Given that a portion of the rate changes will offset changes in costs, revenues from rate changes should not be expected to result in an equal change in net income for either IPL or WPL.WPL’s Retail Electric and Gas Rate Reviews (2024/2025 Forward-looking Test Period) - In December 2023, the PSCW issued an order authorizing annual base rate increases of $49 million and $13 million for WPL’s retail electric and gas customers, respectively, effective January 1, 2024, for the 2024 forward-looking Test Period. The PSCW’s order also authorized WPL to implement an additional $60 million increase in annual rates for its retail electric customers, effective January 1, 2025, for the 2025 forward-looking Test Period. The key drivers for the annual base rate increases include revenue requirement impacts of increasing electric and gas rate base, including investments in solar generation and battery storage. The order extends, with certain modifications, an earnings sharing mechanism through 2025. Under the earnings sharing mechanism, WPL will defer a portion of its earnings if its annual regulatory return on common equity exceeds 9.95% during the 2024/2025 Test Period. WPL must defer 50% of its excess earnings between 9.95% and 10.55%, and 100% of any excess earnings above 10.55%. The PSCW also authorized WPL to defer the incremental under-/over-collection of solar and battery storage renewable tax credits that are outside of the approved amounts. In addition, the PSCW authorized continued recovery of and a return on the remaining net book value of Edgewater Unit 5, which is currently expected to be retired by June 1, 2025. Refer to Note 3 for details of the PSCW’s February 2024 oral decision approving WPL’s deferral request to seek recovery of solar generation construction costs that exceed amounts previously approved by the PSCW in a future regulatory proceeding.IPL’s Retail Electric and Gas Rate Reviews (October 2024 Through September 2025 Forward-looking Test Period) - In October 2023, IPL filed a retail electric and gas rate review with the IUB for the October 2024 through September 2025 forward-looking Test Period. The key drivers for the filing include revenue requirement impacts of increasing electric and gas rate base, including investments in solar generation and repowering of the existing Franklin County wind farm, as well as certain incremental costs and benefits incurred resulting from the 2020 derecho windstorm. The filing requested approval for IPL to implement increases in annual rates for its retail electric and gas customers of $160 million and $14 million, respectively, with any granted rate changes expected to be effective on October 1, 2024. IPL’s filing also requested approval to implement an additional $124 million increase in annual rates for its retail electric customers in 2025, with any granted rate changes expected to be effective on October 1, 2025. IPL also requested a return on common equity of 10% and a 52% common equity component of its regulatory capital structure, as well as to receive continued recovery of and a return on the remaining net book value of the Lansing Generating Station through 2037, which was retired in May 2023. A decision from the IUB is currently expected in the third quarter of 2024.WPL’s Retail Fuel-related Rate Filing (2022 Forward-looking Test Period) - In August 2023, the PSCW authorized WPL to collect $117 million in higher rates, plus interest, from its retail electric customers from October 2023 through December 2025 for fuel-related costs incurred by WPL in 2022 that were higher than fuel-related costs used to determine rates for such period.WPL’s Retail Fuel-related Rate Filing (2023 Forward-looking Test Period) - In December 2022, the PSCW authorized WPL to collect $47 million in higher rates in 2023 from its retail electric customers to reflect an increase in expected fuel-related costs for 2023 compared to WPL’s approved 2022 fuel-related costs.35Table of ContentsRate Review Details - Details related to IPL’s and WPL’s key jurisdictions were as follows:AverageAuthorized ReturnCommon EquityRegulatoryRate Baseon CommonComponent of RegulatoryEffectiveBody(in millions)Equity (a)Capital StructureDateIPL Retail Electric (2020 Test Period)Marshalltown (b)IUB$55911.00%51.0%2/26/2020Emery (b)IUB16512.23%51.0%2/26/2020Whispering Willow - East (b)IUB16311.70%51.0%2/26/2020Renewable energy rider (c)IUB1,4919.80%51.0%1/1/2024Other (b)IUB3,7679.50%51.0%2/26/2020IPL Retail Gas (2020 Test Period) (b)IUB5579.60%51.0%1/10/2020IPL Wholesale ElectricFERC16910.97%51.0%1/1/2023WPL Retail Electric and GasElectric (2024 Test Period) (d)PSCW5,3799.80%53.9%1/1/2024Gas (2024 Test Period) (d)PSCW5149.80%53.9%1/1/2024WPL Wholesale ElectricFERC50710.90%55.0%1/1/2023(a)Authorized returns on common equity may not be indicative of actual returns earned or projections of future returns.(b)Average rate base amounts reflect IPL’s allocated retail share of rate base and do not include CWIP, and were calculated using a forecasted 13-month average for the test period.(c)Average rate base amounts recovered through IPL’s renewable energy rider mechanism include construction costs incurred to fund IPL’s 1,000 MW of wind generation facilities placed in service in 2019 and 2020 (11.00% return on common equity), production tax credit carryforwards for the 1,000 MW of wind generation facilities (5.00% return on common equity) and certain transmission facilities classified as intangible assets (9.50% return on common equity), and were calculated using a 13-month average.(d)Average rate base amounts reflect WPL’s allocated retail share of rate base and do not include CWIP or a cash working capital allowance, and were calculated using a forecasted 13-month average for the test period. The PSCW provides a return on selected CWIP and a cash working capital allowance by adjusting the percentage return on rate base.LEGISLATIVE MATTERSIn August 2022, the Inflation Reduction Act of 2022 was enacted. The most significant provisions of the new legislation for Alliant Energy, IPL and WPL relate to a 10-year extension of tax credits for clean energy projects, a new production tax credit for eligible solar projects, a new stand-alone investment tax credit for battery storage projects and the right to transfer renewable tax credits generated after 2022 to other corporate taxpayers. The new legislation also includes a requirement for corporations with income over $1 billion to pay a 15% minimum tax; however, Alliant Energy is currently below this income level. Alliant Energy, IPL and WPL are utilizing various provisions of the new legislation to enhance the tax benefits expected from their announced solar and battery storage projects, including transferring the future tax credits from such projects to other corporate taxpayers, as well as the repowering of existing wind farms. The impact of these changes is expected to result in more cost benefits for IPL’s and WPL’s customers, higher rate base amounts, additional financing needs expected to be satisfied with additional long-term debt and common stock issuances, and improvements in long-term cash flows over the life of the solar, battery storage and wind repowering projects. Refer to Note 1(c) for discussion of the transfer of renewable tax credits to other corporate taxpayers in 2023.Refer to Note 12 for discussion of Iowa tax reform enacted in March 2022.In November 2021, the Infrastructure Investment and Jobs Act (IIJA Act) was enacted. The most significant provisions of the IIJA Act for Alliant Energy relate to a variety of infrastructure-related priorities, including transportation, environmental, energy and broadband infrastructure. In addition, the IIJA Act is intended to accelerate research, development, demonstration and deployment of carbon-free technologies, including hydrogen and carbon capture and storage.In March 2021, the American Rescue Plan Act of 2021 (Act) was enacted. The most significant provision of the Act for Alliant Energy is reduced minimum pension plan funding requirements, which Alliant Energy adopted in August 2021. The Act also provides additional funding to the Low Income Home Energy Assistance Program, which assists certain of Alliant Energy’s customers with managing their energy costs, as well as provides financial support for certain of Alliant Energy’s residential, small business and non-profit customers.36Table of ContentsLIQUIDITY AND CAPITAL RESOURCESOverview - Alliant Energy, IPL and WPL expect to maintain adequate liquidity to operate their businesses and implement their strategy as a result of operating cash flows generated by their utility business, and available capacity under a single revolving credit facility and IPL’s sales of accounts receivable program, supplemented by periodic issuances of long-term debt and Alliant Energy equity securities. As summarized below, Alliant Energy, IPL and WPL believe they have the ability to generate and obtain adequate amounts of cash to meet their requirements and plans for cash in the next 12 months and beyond.Liquidity Position - At December 31, 2023, Alliant Energy had $62 million of cash and cash equivalents, $525 million ($293 million at the parent company, $150 million at IPL and $82 million at WPL) of available capacity under the single revolving credit facility and $4 million of available capacity at IPL under its sales of accounts receivable program.Capital Structure - Alliant Energy, IPL and WPL plan to maintain debt-to-total capitalization ratios that are consistent with investment-grade credit ratings. IPL and WPL expect to maintain capital structures consistent with the authorized levels approved by regulators. Financial capital structures as of December 31, 2023 were as follows (Common Equity (CE); Long-term Debt (including current maturities) (LD); Short-term Debt (SD)):Alliant Energy, IPL and WPL intend to manage their capital structures and liquidity positions in such a way that facilitates their ability to raise funds reliably and on reasonable terms and conditions, while maintaining capital structures consistent with those approved by regulators. In addition to capital structures, other important factors used to determine the characteristics of future financings include financial coverage ratios, capital spending plans, regulatory orders and rate-making considerations, levels of debt imputed by rating agencies, market conditions, the impact of tax initiatives and legislation, and any potential proceeds from asset sales. The PSCW factors certain imputed debt adjustments, including certain lease obligations, in establishing a regulatory capital structure as part of WPL’s retail rate reviews. The IUB does not make any explicit adjustments for imputed debt in establishing capital ratios used in determining customer rates, although such adjustments are considered by IPL in recommending an appropriate capital structure. Debt imputations by rating agencies include, among others, pension and OPEB obligations, the sales of accounts receivable program and certain lease obligations.Credit and Capital Markets - Alliant Energy, IPL and WPL maintain a single revolving credit facility to provide backstop liquidity to their commercial paper programs, and ensure a committed source of liquidity in the event the commercial paper market becomes disrupted. In addition, IPL maintains a sales of accounts receivable program as an alternative financing source; however, if customer arrears were to exceed certain levels, IPL’s access to the program may be restricted.Primary Sources and Uses of Cash - Alliant Energy’s most significant source of cash is from electric and gas sales to IPL’s and WPL’s customers. Cash from these sales reimburses IPL and WPL for prudently-incurred expenses to provide service to their utility customers and generally provides IPL and WPL a return of and a return on the assets used to provide such services. Capital needed to retire debt and fund capital expenditures related to large strategic projects is expected to be met primarily through external financings.Cash Flows - Selected information from the cash flows statements was as follows (in millions):Alliant EnergyIPLWPL202320222023202220232022Cash, cash equivalents and restricted cash, January 1$24 $40 $15 $34 $5 $2 Cash flows from (used for):Operating activities867 486 261 83 578 299 Investing activities(1,401)(933)(326)215 (946)(1,033)Financing activities573 431 103 (317)370 737 Net increase (decrease)39 (16)38 (19)2 3 Cash, cash equivalents and restricted cash, December 31$63 $24 $53 $15 $7 $5 37Table of ContentsOperating Activities - The following items contributed to increased (decreased) operating activity cash flows for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPLTiming of WPL’s fuel-related cost recoveries from retail electric customers$200$—$200Changes in gas stored underground1044559Changes in income taxes paid/refunded94816Changes in the sales of accounts receivable at IPL8585—Lower (higher) contributions to qualified defined benefit pension plans3850(12)Timing of intercompany payments and receipts—2835Changes in interest payments(67)(2)(35)Decreased collections from IPL’s and WPL’s retail customers caused by temperature impacts on electric and gas sales(53)(30)(23)Changes in cash collateral and deposit balances at Corporate Services(33)——Other (primarily due to other changes in working capital)13(79)49$381$178$279Income Tax Payments and Refunds - Income tax (payments) refunds were as follows (in millions):20232022IPL$117$36WPL(50)(56)Other subsidiaries2114Alliant Energy$88($6)Alliant Energy, IPL and WPL currently do not expect to make any significant federal income tax payments over the next few years based on their current credit carryforward positions; however, some tax payments and refunds may occur for state taxes and between consolidated group members (including IPL and WPL) under the tax sharing agreement between Alliant Energy and its subsidiaries. Refer to Note 12 for discussion of the carryforward positions.As discussed in “Legislative Matters,” the Inflation Reduction Act of 2022 provides the right to transfer renewable tax credits to other corporate taxpayers. Refer to the cash flows statements and Note 1(c) for details of renewable tax credits transferred to other corporate taxpayers in 2023. Alliant Energy, IPL and WPL currently intend to transfer all eligible renewable tax credits in the future, and as a result, expect an increase in future cash flows from operating activities.Higher Earnings on Increasing Rate Base - Refer to “Other Future Considerations” for discussion of expected increases in future cash flows from operating activities resulting from higher earnings on increasing rate base at WPL.Pension Plan Contributions - Alliant Energy, IPL and WPL currently expect to make $12 million, $— and $10 million of pension plan contributions in 2024, respectively, based on the funded status and assumed return on assets for each plan as of the December 31, 2023 measurement date. Refer to Note 13(a) for discussion of pension plan contributions in 2023 and the current funded levels of pension plans.Investing Activities - The following items contributed to increased (decreased) investing activity cash flows for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPL(Higher) lower utility construction and acquisition expenditures (a)($339)($340)$1Changes in the amount of cash receipts on sold receivables(145)(145)—Higher non-utility construction and acquisition expenditures(31)——Proceeds from sales of partial ownership interests in West Riverside in 2023120—120Other (b)(73)(56)(34)($468)($541)$87(a)Largely due to higher expenditures for IPL’s solar generation.(b)Largely due to higher cash payments related to cost of removal obligations at IPL and WPL.Construction and Acquisition Expenditures - Construction and acquisition expenditures and financing plans are reviewed, approved and updated as part of the strategic planning process. Changes may result from a number of reasons, including regulatory requirements, changing legislation, not obtaining favorable and acceptable regulatory approval on certain projects, changing costs of projects due to market conditions, improvements in technology, and improvements to ensure resiliency and reliability of the electric and gas distribution systems. Alliant Energy, IPL and WPL have not yet entered into contractual commitments relating to the majority of their anticipated future construction and acquisition expenditures. As a result, they 38Table of Contentshave some discretion with regard to the level and timing of these expenditures. The table below summarizes anticipated construction and acquisition expenditures (in millions), which are focused on the transition to cleaner energy and strengthening the resiliency and reliability of IPL’s and WPL’s electric grid, and include renewables and battery storage projects, dispatchable gas generation projects and wind repowering projects. Cost estimates represent Alliant Energy’s, IPL’s and WPL’s portion of construction expenditures and exclude AFUDC and capitalized interest, if applicable. Refer to “Customer Investments” for further discussion of certain key projects impacting construction and acquisition plans related to the utility business.Alliant EnergyIPLWPL202420252026202720242025202620272024202520262027Generation:Renewables and battery storage projects$1,140 $665 $780 $775 $575 $275 $445 $205 $565 $390 $335 $570 Gas projects120 325 610 500 55 135 310 125 15 125 295 375 Other100 80 50 40 55 40 20 15 45 40 30 25 Distribution:Electric systems610 620 670 685 355 365 380 395 255 255 290 290 Gas systems85 85 85 85 40 40 40 40 45 45 45 45 Other220 205 240 280 45 50 50 45 40 30 25 30 $2,275 $1,980 $2,435 $2,365 $1,125 $905 $1,245 $825 $965 $885 $1,020 $1,335 Renewables and Battery Storage - Refer to “Customer Investments” for further discussion of regulatory filings with the IUB and PSCW related to future renewable and battery storage projects.West Riverside Options - WPL entered into agreements with neighboring utilities that provide them options to purchase a partial ownership interest in West Riverside. Upon exercise of such options and the resulting sales, WPL receives proceeds from the sales. Refer to “Customer Investments” for additional information, including partial sales in 2023 and potential additional partial sales in the future.Financing Activities - The following items contributed to increased (decreased) financing activity cash flows for 2023 compared to 2022 (in millions):Alliant EnergyIPLWPLHigher net proceeds from common stock issuances$221$—$—Lower payments to retire long-term debt125—250Higher (lower) net proceeds from issuance of long-term debt117296(291)Net changes in the amount of commercial paper outstanding(294)—(26)(Higher) lower common stock dividends(28)41(8)Higher (lower) capital contributions from IPL’s and WPL’s parent company, Alliant Energy—80(285)Other13(7)$142$420($367)FERC and Public Utility Holding Company Act Financing Authorizations - Under the Public Utility Holding Company Act of 2005, FERC has authority over the issuance of utility securities, except to the extent that a public utility’s primary state regulatory commission has retained jurisdiction over such matters. FERC currently has authority over the issuance of securities by IPL. FERC does not have authority over the issuance of securities by Alliant Energy, WPL, AEF or Corporate Services. In 2023, IPL received authorization from FERC to issue securities in 2024 and 2025 as follows (in millions):Long-term debt securities issuances in aggregate$1,700Short-term debt securities outstanding at any time (including borrowings from its parent)400Preferred stock issuances in aggregate300State Regulatory Financing Authorizations - In March 2023, WPL received authorization from the PSCW to have up to $500 million of short-term borrowings and/or letters of credit outstanding at any time through the expiration date of WPL’s credit facility agreement. As of December 31, 2023, WPL also had authority to issue up to $900 million of long-term debt securities in aggregate through December 2025 pursuant to a February 2023 PSCW order.Shelf Registrations - Alliant Energy, IPL and WPL have current shelf registration statements on file with the SEC for availability to issue unspecified amounts of securities through December 2026. Alliant Energy’s shelf registration statement may be used to issue common stock, debt and other securities. IPL’s and WPL’s shelf registration statements may be used to issue preferred stock and debt securities.39Table of ContentsCommon Stock Dividends - Payment of common stock dividends is subject to dividend declaration by Alliant Energy’s Board of Directors and is dependent upon, among other factors, regulatory limitations, earnings, cash flows, capital requirements and general financial condition of subsidiaries. Alliant Energy’s general long-term goal is to maintain a dividend payout ratio that is competitive with the industry average. Based on that, Alliant Energy’s goal is to maintain a dividend payout ratio of approximately 60% to 70% of consolidated earnings from continuing operations. Refer to “Results of Operations” for discussion of expected common stock dividends in 2024.Common Stock Issuances - Refer to Note 7 for discussion of common stock issuances by Alliant Energy in 2022 and 2023, and “Results of Operations” for discussion of expected issuances of common stock in 2024.Short-term Debt - In January 2024, Alliant Energy, IPL and WPL extended their single revolving credit facility agreement, which expires in December 2028 and is discussed in Note 9(a). There are currently 13 lenders that participate in the credit facility, with respective commitments ranging from $20 million to $130 million. Subject to certain conditions, Alliant Energy, IPL and WPL may exercise one extension option, which would extend the maturity date by one year. The credit facility has a provision to expand the facility size up to an additional $300 million, for a potential total commitment of $1.3 billion, subject to lender approval for Alliant Energy and subject to lender and regulatory approvals for IPL and WPL.The credit agreement contains customary events of default, including a cross-default provision that would be triggered if Alliant Energy or certain of its significant subsidiaries (including IPL and WPL) defaults on debt (other than non-recourse debt) totaling $100 million or more. IPL and WPL are subject to a similar cross-default provision with respect to their own respective consolidated debt. A default by Alliant Energy or its non-utility subsidiaries would not trigger a cross-default at IPL or WPL, nor would a default by either of IPL or WPL constitute a cross-default event for the other. If an event of default under the credit agreement occurs and is continuing, then the lenders may declare any outstanding obligations of the defaulting borrower under the credit agreement immediately due and payable.The single credit facility agreement contains a financial covenant, which requires Alliant Energy, IPL and WPL to maintain certain debt-to-capital ratios in order to borrow under the credit facility. AEF’s term loan credit agreement contains a financial covenant, which requires Alliant Energy to maintain a certain debt-to-capital ratio in order to borrow under the term loan credit agreement. The required debt-to-capital ratios compared to the actual debt-to-capital ratios at December 31, 2023 were as follows:Alliant EnergyIPLWPLRequirement, not to exceed65%65%65%Actual59%50%48%The debt component of the capital ratios includes, when applicable, long- and short-term debt (excluding non-recourse debt and hybrid securities to the extent the total carrying value of such hybrid securities does not exceed 15% of consolidated capital of the applicable borrower), finance lease obligations, certain letters of credit, guarantees of the foregoing and new synthetic leases. Unfunded vested benefits under qualified pension plans and sales of accounts receivable are not included in the debt-to-capital ratios. The equity component of the capital ratios excludes accumulated other comprehensive income (loss).Long-term Debt - Refer to Note 9(b) for discussion of issuances and retirements of long-term debt in 2023, and “Results of Operations” for discussion of expected issuances and retirements of long-term debt in 2024. In 2022, WPL issued $600 million of 3.95% green bond debentures due 2032, and an amount in excess of the net proceeds was disbursed for the development and acquisition of WPL’s solar EGUs. In 2022, AEF entered into a $300 million variable rate term loan credit agreement and used the borrowings under this agreement to retire its $300 million variable rate term loan credit agreement that expired in 2022. In 2022, AEF increased the amount outstanding under the new term loan credit agreement by $100 million and used the additional borrowings to reduce Alliant Energy’s outstanding commercial paper and for general corporate purposes. In 2022, AEF issued $350 million of 3.6% senior notes due 2032 and used the net proceeds to reduce Alliant Energy’s outstanding commercial paper and for general corporate purposes.Impact of Credit Ratings on Liquidity and Collateral Obligations -Ratings Triggers - The long-term debt of Alliant Energy and its subsidiaries is not subject to any repayment requirements as a result of explicit credit rating downgrades or so-called “ratings triggers.” However, Alliant Energy and its subsidiaries are parties to various agreements that contain provisions dependent on credit ratings. In the event of a significant downgrade, Alliant Energy or its subsidiaries may need to provide credit support, such as letters of credit or cash collateral equal to the amount of any exposure, or may need to unwind contracts or pay underlying obligations. In the event of a significant downgrade, management believes Alliant Energy, IPL and WPL have sufficient liquidity to cover counterparty credit support or collateral requirements under these various agreements. In addition, a downgrade in the credit ratings of Alliant Energy, IPL or WPL could also result in them paying higher interest rates in future financings, reduce flexibility with future financing plans, reduce their pool of potential lenders, increase their borrowing costs under existing credit facilities or limit their access to the commercial paper market. Credit ratings and outlooks as of the date of this report are as follows:40Table of ContentsStandard & Poor’s Ratings ServicesMoody’s Investors ServiceAlliant Energy:Corporate/issuerA-Baa2Commercial paperA-2P-2Senior unsecured long-term debtBBB+N/AOutlookStableStableIPL:Corporate/issuerA-Baa1Commercial paperA-2P-2Senior unsecured long-term debtA-Baa1OutlookStableStableWPL:Corporate/issuerABaa1Commercial paperA-1P-2Senior unsecured long-term debtABaa1OutlookNegativeStableStandard & Poor’s Ratings Services and Moody’s Investors Service issued credit ratings of BBB+ and Baa2, respectively, for the senior notes issued by AEF in 2018, 2020, 2022 and 2023 (with Alliant Energy as guarantor). Credit ratings are not recommendations to buy or sell securities and are subject to change, and each rating should be evaluated independently of any other rating. Each of Alliant Energy, IPL or WPL assumes no obligation to update their respective credit ratings. Refer to Note 15 for additional information on ratings triggers for commodity contracts accounted for as derivatives.Off-Balance Sheet Arrangements -Special Purpose Entities - IPL maintains a Receivables Agreement whereby it may sell its customer accounts receivables, unbilled revenues and certain other accounts receivables to a third party through wholly-owned and consolidated special purpose entities. The purchase commitment from the third party to which IPL sells its receivables expires in March 2024. IPL currently expects to amend and extend the purchase commitment. In 2023 and 2022, IPL evaluated the third party that purchases IPL’s receivable assets under the Receivables Agreement and believes that the third party is a VIE; however, IPL concluded consolidation of the third party was not required.In addition, IPL’s sales of accounts receivable program agreement contains a cross-default provision that is triggered if IPL or Alliant Energy incurs an event of default on debt totaling $100 million or more. If an event of default under IPL’s sales of accounts receivable program agreement occurs, then the counterparty could terminate such agreement. Refer to Note 5(b) for additional information regarding IPL’s sales of accounts receivable program.Guarantees and Indemnifications - At December 31, 2023, various guarantees and indemnifications are outstanding related to Alliant Energy’s cash equity ownership interest in a non-utility wind farm, prior divestiture activities and transfers of renewable tax credits to other corporate taxpayers. Refer to Note 17(d) for additional information.Certain Financial Commitments - Contractual Obligations - Alliant Energy, IPL and WPL have various long-term contractual obligations as of December 31, 2023, which include long-term debt maturities in Note 9(b), operating and finance leases in Note 10, capital purchase obligations in Note 17(a), and other purchase obligations in Note 17(b). At December 31, 2023, Alliant Energy, IPL and WPL had no uncertain tax positions recorded as liabilities. Refer to Note 13(a) for anticipated pension and OPEB funding amounts. Refer to “Construction and Acquisition Expenditures” above for additional information on construction and acquisition programs. In addition, at December 31, 2023, there were various other liabilities included on the balance sheets that, due to the nature of the liabilities, the timing of payments cannot be estimated.OTHER MATTERSMarket Risk Sensitive Instruments and Positions - Primary market risk exposures are associated with commodity prices, counterparty credit risk, investment prices and interest rates. Risk management policies are used to monitor and assist in mitigating these market risks and derivative instruments are used to manage some of the exposures related to commodity prices and interest rates. Refer to Notes 1(h) and 15 for further discussion of derivative instruments, and Note 1(g) for details of utility cost recovery mechanisms that significantly reduce commodity risk.Commodity Price - Alliant Energy, IPL and WPL are exposed to the impact of market fluctuations in the price and transportation costs of commodities they procure and market. Established policies and procedures mitigate risks associated with these market fluctuations, including the use of various commodity derivatives and contracts of various durations for the forward sale and purchase of these commodities. Exposure to commodity price risks in the utility businesses is also significantly mitigated by current rate-making structures in place for recovery of fuel-related costs as well as the cost of natural gas purchased for resale. IPL’s electric and gas tariffs and WPL’s wholesale electric and gas tariffs provide for subsequent monthly adjustments to their tariff rates for material changes in prudently incurred commodity costs. IPL’s and WPL’s rate mechanisms, combined with commodity derivatives, significantly reduce commodity risk associated with their electric and gas 41Table of Contentsservice. WPL’s retail electric service is exposed to the impact of changes in commodity prices due largely to the current retail recovery mechanism in place in Wisconsin for fuel-related costs.Counterparty Credit Risk - Alliant Energy, IPL, and WPL are exposed to credit risk related to losses resulting from counterparties’ nonperformance of their contractual obligations. Alliant Energy, IPL and WPL maintain credit policies intended to minimize overall credit risk and actively monitor these policies to reflect changes and scope of operations. Alliant Energy, IPL, and WPL conduct credit reviews for certain counterparties, and employ credit risk controls such as letters of credit, parental guarantees, master netting agreements and termination provisions. Credit exposure is monitored, and when necessary, activity with a specific counterparty is limited until credit enhancement is provided. Distress in the financial markets could increase Alliant Energy’s, IPL’s and WPL’s credit risk.Investment Price - Alliant Energy, IPL and WPL are exposed to investment price risk as a result of their investments in securities, largely related to securities held by their pension and OPEB plans, as well as unconsolidated investments accounted for under the equity method of accounting. Refer to Note 13(a) for details of the securities held by their pension and OPEB plans, and Note 6 for details of equity investments. Refer to “Critical Accounting Estimates” for the impact on retirement plan costs of changes in the rate of returns earned by plan assets.Interest Rate - Alliant Energy, IPL and WPL are exposed to risk resulting from changes in interest rates associated with variable-rate borrowings. In addition, Alliant Energy and IPL are exposed to risk resulting from changes in interest rates on cash amounts outstanding under IPL’s sales of accounts receivable program. Assuming the impact of a hypothetical 100 basis point increase in interest rates on variable-rate borrowings and cash amounts outstanding under IPL’s sales of accounts receivable program at December 31, 2023, Alliant Energy’s, IPL’s and WPL’s annual pre-tax expense would increase by approximately $5 million, $0 and $3 million, respectively. Refer to Notes 5(b) and 9 for additional information on cash amounts outstanding under IPL’s sales of accounts receivable program, and short- and long-term variable-rate borrowings, respectively. Refer to “Critical Accounting Estimates” for the impacts of changes in discount rates on retirement plan obligations and costs.Critical Accounting Estimates - Alliant Energy’s, IPL’s and WPL’s financial statements are prepared in conformity with GAAP, which requires management to apply accounting policies, judgments and assumptions, and make estimates that affect results of operations and the amounts of assets and liabilities reported in the financial statements. The following accounting estimates are critical to the business and the understanding of financial results as they require critical assumptions and judgments by management. The results of these assumptions and judgments form the basis for making estimates regarding the results of operations and the amounts of assets and liabilities that are not readily apparent from other sources. Actual financial results may differ materially from estimates. Management has discussed these critical accounting estimates with the Audit Committee of the Board of Directors. Refer to Note 1 for additional discussion of accounting estimates used in the preparation of the financial statements.Regulatory Assets and Regulatory Liabilities - IPL and WPL are regulated by various federal and state regulatory agencies. As a result, they are subject to GAAP for regulated operations, which recognizes that the actions of a regulator can provide reasonable assurance of the existence of an asset or liability. Regulatory assets or regulatory liabilities arise as a result of a difference between GAAP and actions imposed by the regulatory agencies in the rate-making process. Regulatory assets generally represent incurred costs that have been deferred as such costs are probable of recovery in future customer rates. Regulatory liabilities generally represent obligations to make refunds to customers or amounts collected in rates for which the related costs have not yet been incurred. Regulatory assets and regulatory liabilities are recognized in accordance with the rulings of applicable federal and state regulators, and future regulatory rulings may impact the carrying value and accounting treatment of regulatory assets and regulatory liabilities. Note 2 provides details of the nature and amounts of regulatory assets and regulatory liabilities assessed at December 31, 2023.Assumptions and judgments are made each reporting period regarding whether regulatory assets are probable of future recovery and regulatory liabilities are probable future obligations by considering factors such as regulatory environment changes, rate orders issued by the applicable regulatory agencies, historical decisions by such regulatory agencies regarding similar regulatory assets and regulatory liabilities, and subsequent events of such regulatory agencies. The decisions made by regulatory authorities have an impact on the recovery of costs, the rate of return on invested capital and the timing and amount of assets to be recovered by rates. A change in these decisions may result in a material impact on results of operations and the amount of assets and liabilities in the financial statements.In May 2023, IPL retired the Lansing Generating Station. IPL is currently allowed a full recovery of and a full return on this EGU from both its retail and wholesale customers, and IPL’s retail electric rate review for the October 2024 through September 2025 forward-looking Test Period includes a request for continued recovery of and a return on the remaining net book value of Lansing through 2037. As a result, Alliant Energy and IPL concluded that no impairment was required as of December 31, 2023.42Table of ContentsIncome Taxes - Alliant Energy, IPL and WPL are subject to income taxes in various jurisdictions. Assumptions and judgments are made each reporting period to estimate income tax assets, liabilities, benefits and expenses. Judgments and assumptions are supported by historical data and reasonable projections. Significant changes in these judgments and assumptions could have a material impact on financial condition and results of operations. Alliant Energy’s and IPL’s critical assumptions and judgments for 2023 included estimates of qualifying deductions for repairs expenditures and allocation of mixed service costs due to the impact of Iowa rate-making principles on such property-related differences. Critical assumptions and judgments also include projections of future taxable income used to determine the ability to utilize federal credit carryforwards prior to their expiration. Refer to Note 12 for further discussion of tax matters.Effect of Rate-making on Property-related Differences - Alliant Energy’s and IPL’s effective income tax rates are normally impacted by certain property-related differences at IPL for which deferred tax is not recorded in the income statement pursuant to Iowa rate-making principles. Changes in methods or assumptions regarding the amount of IPL’s qualifying repairs expenditures, allocation of mixed service costs, and costs related to retirement or removal of depreciable property could result in a material impact on Alliant Energy’s and IPL’s financial condition and results of operations.Carryforward Utilization - Significant federal tax credit carryforwards exist for Alliant Energy, IPL and WPL as of December 31, 2023. Based on projections of current and future taxable income, Alliant Energy, IPL and WPL plan to utilize all of these carryforwards more than five years before expiration. Changes in tax regulations or assumptions regarding current and future taxable income could require valuation allowances in the future resulting in a material impact on financial condition and results of operations.Long-Lived Assets - Periodic assessments regarding the recoverability of certain long-lived assets are completed when factors indicate the carrying value of such assets may not be recoverable or such assets are planned to be sold. These assessments require significant assumptions and judgments by management. The long-lived assets assessed for impairment generally include certain assets within regulated operations that may not be fully recovered from IPL’s and WPL’s customers as a result of regulatory decisions in the future, and assets within non-utility operations that are proposed to be sold or are currently generating operating losses.Regulated Operations - Alliant Energy’s, IPL’s and WPL’s long-lived assets within their regulated operations that were assessed for impairment and/or plant abandonment in 2023 included WPL’s generating units subject to early retirement, and IPL’s and WPL’s solar generation projects recently completed or under construction.Generating Units Subject to Early Retirement - Alliant Energy, IPL and WPL evaluate future plans for their electric generation fleet and have announced the early retirement of certain EGUs. When it becomes probable that an EGU will be retired before the end of its useful life, Alliant Energy, IPL and WPL must assess whether the EGU meets the criteria to be considered probable of abandonment. EGUs that are considered probable of abandonment generally have material remaining net book values and are expected to cease operations in the near term significantly before the end of their original estimated useful lives. If an EGU meets such criteria to be considered probable of abandonment, Alliant Energy, IPL and WPL must assess the probability of full recovery of the remaining carrying value of such EGU. If it is probable that regulators will not allow full recovery of and a full return on the remaining net book value of the abandoned EGU, an impairment charge is recognized equal to the difference between the remaining carrying value and the present value of the future revenues expected from the abandoned EGU.Alliant Energy and WPL concluded that Edgewater Unit 5 (expected to be retired by June 1, 2025) and Columbia Units 1 and 2 (expected to be retired by June 1, 2026), met the criteria to be considered probable of abandonment as of December 31, 2023. WPL is currently allowed a full recovery of and a full return on these EGUs from both its retail and wholesale customers, and as a result, Alliant Energy and WPL concluded that no impairment was required as of December 31, 2023. Alliant Energy, IPL and WPL evaluated their other EGUs that are subject to early retirement and determined that no other EGUs met the criteria to be considered probable of abandonment as of December 31, 2023. Note 3 provides additional details on these EGUs.Solar Generation Projects Recently Completed or Under Construction - Alliant Energy, IPL and WPL review property, plant and equipment for possible impairment whenever events or changes in circumstances indicate all or a portion of the carrying value of the assets may be disallowed for rate-making purposes. If IPL or WPL is disallowed recovery of any portion of, or is only allowed a partial return on, the carrying value of the solar generation projects recently completed or under construction, then an impairment charge is recognized. “Customer Investments” provides details of IPL’s and WPL’s solar generation projects recently completed or under construction.IPL accepted the IUB’s advance rate-making principles approved in October 2023 for 400 MW of solar generation. IPL currently expects estimated construction costs associated with the 400 MW of new solar generation will exceed the cost target of $1,650/kilowatt, including AFUDC and transmission upgrade costs among other costs, approved by the IUB by approximately 10%. Alliant Energy and IPL concluded that there was not a probable disallowance of anticipated higher rate base amounts as of December 31, 2023 given construction costs were reasonably and prudently incurred.WPL previously received authorization from the PSCW to acquire, construct, own and/or operate approximately 1,100 MW of new solar generation. Alliant Energy and WPL currently expect estimated construction costs associated with this solar 43Table of Contentsgeneration will exceed amounts previously approved by the PSCW by approximately $180 million. In December 2023, the PSCW issued an order authorizing annual base rate increases for WPL’s retail electric customers for the 2024/2025 forward-looking Test Period, which did not include revenue requirement for the estimated construction costs that exceed amounts previously approved by the PSCW. In February 2024, the PSCW issued an oral decision approving WPL’s deferral request to seek recovery of these costs in a future regulatory proceeding. Alliant Energy and WPL concluded that there was not a probable disallowance of anticipated higher rate base amounts as of December 31, 2023 given construction costs were reasonably and prudently incurred.Pensions and Other Postretirement Benefits - Alliant Energy, IPL and WPL sponsor various defined benefit pension and OPEB plans that provide benefits to a significant portion of their employees and retirees. Assumptions and judgments are made periodically to estimate the obligations and costs related to their retirement plans. There are many judgments and assumptions involved in determining an entity’s pension and other postretirement liabilities and costs each period including employee demographics (including life expectancies and compensation levels), discount rates, assumed rates of return and funding. Changes made to plan provisions may also impact current and future benefits costs. Judgments and assumptions are supported by historical data and reasonable projections and are reviewed at least annually. The following table shows the impacts of changing certain key actuarial assumptions discussed above (in millions):Defined Benefit Pension PlansOPEB PlansChange in Actuarial AssumptionImpact on Projected Benefit Obligation at December 31, 2023Impact on 2024 Net Periodic Benefit CostsImpact on Accumulated Benefit Obligation at December 31, 2023Impact on 2024 Net Periodic Benefit CostsAlliant Energy1% change in discount rate$85$6$12$—1% change in expected rate of returnN/A7N/A1IPL1% change in discount rate3935—1% change in expected rate of returnN/A3N/A1WPL1% change in discount rate3834—1% change in expected rate of returnN/A3N/A—Contingencies - Assumptions and judgments are made each reporting period regarding the future outcome of contingent events. Loss contingency amounts are recorded for any contingent events for which the likelihood of loss is probable and able to be reasonably estimated based upon current available information. The amounts recorded may differ from actuals when the uncertainty is resolved. The estimates made in accounting for contingencies, and the gains and losses that are recorded upon the ultimate resolution of these uncertainties, could have a significant effect on results of operations and the amount of assets and liabilities in the financial statements.Certain contingencies, such as Alliant Energy Resources, LLC’s guarantees of the partnership obligations of an affiliate of Whiting Petroleum, require estimation each reporting period of the expected credit losses on those contingencies, which requires significant judgment and may result in the recognition of a credit loss liability. With respect to Alliant Energy’s guarantees of the partnership obligations of an affiliate of Whiting Petroleum, the most significant judgments in determining the credit loss liability were the estimate of the exposure under the guarantees and the methodology used for calculating the credit loss liability. As of December 31, 2023, Alliant Energy currently estimates the exposure to be a portion of the known partnership abandonment obligations. The methodology used to determine the credit loss liability considers both quantitative and qualitative information, which utilizes potential outcomes in a range of possible estimated amounts. Factors considered include market and external data points, the creditworthiness of the other partners, Whiting Petroleum’s emergence from bankruptcy in 2020 as well as subsequent bankruptcy developments, payments by Whiting Petroleum related to abandonment obligations, forecasted cash flow expenditures associated with the abandonment obligations based on information made available to Alliant Energy, and Whiting Petroleum’s business combination with Oasis Petroleum Inc. in 2022.Note 17 provides further discussion of contingencies assessed at December 31, 2023 that may have a material impact on financial condition and results of operations, including various pending legal proceedings, guarantees and indemnifications.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk are reported in “Other Matters - Market Risk Sensitive Instruments and Positions” in MDA.

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