10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
Form 10-Q
____________________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 000-22513
____________________________________
Amazon.com, Inc.
(Exact Name of Registrant as Specified in its Charter)
____________________________________
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Delaware | | 91-1646860 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
410 Terry Avenue North, Seattle, WA 98109-5210
(206) 266-1000
(Address and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | x | Accelerated filer | | ¨ |
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Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
468,762,005 shares of common stock, par value $0.01 per share, outstanding as of October 14, 2015
AMAZON.COM, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2015
INDEX
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PART I. FINANCIAL INFORMATION | |
Item 1 | | |
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Item 2 | | |
Item 3 | | |
Item 4 | | |
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PART II. OTHER INFORMATION | |
Item 1 | | |
Item 1A | | |
Item 2 | | |
Item 3 | | |
Item 4 | | |
Item 5 | | |
Item 6 | | |
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PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | $ | 10,269 |
| | $ | 5,057 |
| | $ | 14,557 |
| | $ | 8,658 |
| | $ | 5,258 |
| | $ | 3,872 |
|
OPERATING ACTIVITIES: | | | | | | | | | | | |
Net income (loss) | 79 |
| | (437 | ) | | 114 |
| | (455 | ) | | 328 |
| | (216 | ) |
Adjustments to reconcile net income (loss) to net cash from operating activities: | | | | | | | | | | | |
Depreciation of property and equipment, including internal-use software and website development, and other amortization, including capitalized content costs | 1,599 |
| | 1,247 |
| | 4,529 |
| | 3,366 |
| | 5,908 |
| | 4,329 |
|
Stock-based compensation | 544 |
| | 377 |
| | 1,513 |
| | 1,089 |
| | 1,921 |
| | 1,414 |
|
Other operating expense (income), net | 34 |
| | 31 |
| | 120 |
| | 93 |
| | 156 |
| | 133 |
|
Losses (gains) on sales of marketable securities, net | 2 |
| | (3 | ) | | 4 |
| | (4 | ) | | 4 |
| | (3 | ) |
Other expense (income), net | 56 |
| | 42 |
| | 166 |
| | (16 | ) | | 244 |
| | 36 |
|
Deferred income taxes | (63 | ) | | (270 | ) | | (108 | ) | | (503 | ) | | 76 |
| | (613 | ) |
Excess tax benefits from stock-based compensation | (95 | ) | | — |
| | (212 | ) | | (121 | ) | | (96 | ) | | (199 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | |
Inventories | (1,537 | ) | | (845 | ) | | (844 | ) | | (54 | ) | | (1,983 | ) | | (1,383 | ) |
Accounts receivable, net and other | (588 | ) | | (362 | ) | | (577 | ) | | 66 |
| | (1,681 | ) | | (1,173 | ) |
Accounts payable | 2,030 |
| | 1,724 |
| | (1,846 | ) | | (3,294 | ) | | 3,207 |
| | 1,834 |
|
Accrued expenses and other | 143 |
| | 4 |
| | (925 | ) | | (742 | ) | | 525 |
| | 847 |
|
Additions to unearned revenue | 1,779 |
| | 1,069 |
| | 4,979 |
| | 3,055 |
| | 6,358 |
| | 3,874 |
|
Amortization of previously unearned revenue | (1,373 | ) | | (811 | ) | | (3,805 | ) | | (2,353 | ) | | (5,144 | ) | | (3,175 | ) |
Net cash provided by (used in) operating activities | 2,610 |
| | 1,766 |
| | 3,108 |
| | 127 |
| | 9,823 |
| | 5,705 |
|
INVESTING ACTIVITIES: | | | | | | | | | | | |
Purchases of property and equipment, including internal-use software and website development | (1,195 | ) | | (1,378 | ) | | (3,280 | ) | | (3,748 | ) | | (4,424 | ) | | (4,628 | ) |
Acquisitions, net of cash acquired, and other | (105 | ) | | (860 | ) | | (478 | ) | | (926 | ) | | (531 | ) | | (986 | ) |
Sales and maturities of marketable securities | 1,045 |
| | 1,439 |
| | 1,890 |
| | 2,994 |
| | 2,244 |
| | 3,509 |
|
Purchases of marketable securities | (1,122 | ) | | (147 | ) | | (2,732 | ) | | (920 | ) | | (4,354 | ) | | (1,339 | ) |
Net cash provided by (used in) investing activities | (1,377 | ) | | (946 | ) | | (4,600 | ) | | (2,600 | ) | | (7,065 | ) | | (3,444 | ) |
FINANCING ACTIVITIES: | | | | | | | | | | | |
Excess tax benefits from stock-based compensation | 95 |
| | — |
| | 212 |
| | 121 |
| | 96 |
| | 199 |
|
Proceeds from long-term debt and other | 33 |
| | 28 |
| | 260 |
| | 379 |
| | 6,241 |
| | 628 |
|
Repayments of long-term debt and other | (181 | ) | | (84 | ) | | (712 | ) | | (331 | ) | | (894 | ) | | (371 | ) |
Principal repayments of capital lease obligations | (656 | ) | | (343 | ) | | (1,738 | ) | | (878 | ) | | (2,144 | ) | | (1,103 | ) |
Principal repayments of finance lease obligations | (21 | ) | | (13 | ) | | (95 | ) | | (68 | ) | | (163 | ) | | (73 | ) |
Net cash provided by (used in) financing activities | (730 | ) | | (412 | ) | | (2,073 | ) | | (777 | ) | | 3,136 |
| | (720 | ) |
Foreign-currency effect on cash and cash equivalents | (63 | ) | | (207 | ) | | (283 | ) | | (150 | ) | | (443 | ) | | (155 | ) |
Net increase (decrease) in cash and cash equivalents | 440 |
| | 201 |
| | (3,848 | ) | | (3,400 | ) | | 5,451 |
| | 1,386 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 10,709 |
| | $ | 5,258 |
| | $ | 10,709 |
| | $ | 5,258 |
| | $ | 10,709 |
| | $ | 5,258 |
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SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | | |
Cash paid for interest on long-term debt | $ | 7 |
| | $ | 7 |
| | $ | 177 |
| | $ | 56 |
| | $ | 212 |
| | $ | 93 |
|
Cash paid for income taxes (net of refunds) | 80 |
| | 38 |
| | 200 |
| | 148 |
| | 230 |
| | 173 |
|
Property and equipment acquired under capital leases | 1,047 |
| | 1,158 |
| | 3,385 |
| | 2,794 |
| | 4,599 |
| | 3,347 |
|
Property and equipment acquired under build-to-suit leases | 125 |
| | 343 |
| | 381 |
| | 707 |
| | 595 |
| | 920 |
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See accompanying notes to consolidated financial statements.
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net product sales | $ | 18,463 |
| | $ | 16,022 |
| | $ | 52,650 |
| | $ | 46,978 |
|
Net service sales | 6,895 |
| | 4,557 |
| | 18,609 |
| | 12,681 |
|
Total net sales | 25,358 |
| | 20,579 |
| | 71,259 |
| | 59,659 |
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Operating expenses (1): | | | | | | | |
Cost of sales | 16,755 |
| | 14,627 |
| | 47,310 |
| | 42,080 |
|
Fulfillment | 3,230 |
| | 2,643 |
| | 8,865 |
| | 7,342 |
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Marketing | 1,264 |
| | 993 |
| | 3,496 |
| | 2,806 |
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Technology and content | 3,197 |
| | 2,423 |
| | 8,971 |
| | 6,639 |
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General and administrative | 463 |
| | 406 |
| | 1,357 |
| | 1,110 |
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Other operating expense (income), net | 43 |
| | 31 |
| | 136 |
| | 94 |
|
Total operating expenses | 24,952 |
| | 21,123 |
| | 70,135 |
| | 60,071 |
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Income (loss) from operations | 406 |
| | (544 | ) | | 1,124 |
| | (412 | ) |
Interest income | 13 |
| | 9 |
| | 37 |
| | 31 |
|
Interest expense | (116 | ) | | (49 | ) | | (344 | ) | | (136 | ) |
Other income (expense), net | (56 | ) | | (50 | ) | | (187 | ) | | (23 | ) |
Total non-operating income (expense) | (159 | ) | | (90 | ) | | (494 | ) | | (128 | ) |
Income (loss) before income taxes | 247 |
| | (634 | ) | | 630 |
| | (540 | ) |
Benefit (provision) for income taxes | (161 | ) | | 205 |
| | (498 | ) | | 38 |
|
Equity-method investment activity, net of tax | (7 | ) | | (8 | ) | | (18 | ) | | 47 |
|
Net income (loss) | $ | 79 |
| | $ | (437 | ) | | $ | 114 |
| | $ | (455 | ) |
Basic earnings per share | $ | 0.17 |
| | $ | (0.95 | ) | | $ | 0.24 |
| | $ | (0.99 | ) |
Diluted earnings per share | $ | 0.17 |
| | $ | (0.95 | ) | | $ | 0.24 |
| | $ | (0.99 | ) |
Weighted average shares used in computation of earnings per share: | | | | | | | |
Basic | 468 |
| | 463 |
| | 467 |
| | 461 |
|
Diluted | 478 |
| | 463 |
| | 476 |
| | 461 |
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_____________ | | | | | | | |
(1) Includes stock-based compensation as follows: | | | | | | | |
Fulfillment | $ | 122 |
| | $ | 93 |
| | $ | 344 |
| | $ | 278 |
|
Marketing | 48 |
| | 32 |
| | 133 |
| | 91 |
|
Technology and content | 309 |
| | 204 |
| | 861 |
| | 579 |
|
General and administrative | 65 |
| | 48 |
| | 175 |
| | 141 |
|
See accompanying notes to consolidated financial statements.
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net income (loss) | $ | 79 |
| | $ | (437 | ) | | $ | 114 |
| | $ | (455 | ) |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments, net of tax of $4, $(1), $3, and $0 | (56 | ) | | (248 | ) | | (170 | ) | | (209 | ) |
Net change in unrealized gains (losses) on available-for-sale securities: | | | | | | | |
Unrealized gains (losses), net of tax of $3, $2, $(5), and $1 | (3 | ) | | (1 | ) | | 3 |
| | 2 |
|
Reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $(1), $(1), $(1), and $(1) | 1 |
| | (2 | ) | | 3 |
| | (2 | ) |
Net unrealized gains (losses) on available-for-sale securities | (2 | ) | | (3 | ) | | 6 |
| | — |
|
Total other comprehensive income (loss) | (58 | ) | | (251 | ) | | (164 | ) | | (209 | ) |
Comprehensive income (loss) | $ | 21 |
| | $ | (688 | ) | | $ | (50 | ) | | $ | (664 | ) |
See accompanying notes to consolidated financial statements.
AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
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| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| (unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 10,709 |
| | $ | 14,557 |
|
Marketable securities | 3,719 |
| | 2,859 |
|
Inventories | 8,981 |
| | 8,299 |
|
Accounts receivable, net and other | 5,440 |
| | 5,612 |
|
Total current assets | 28,849 |
| | 31,327 |
|
Property and equipment, net | 20,636 |
| | 16,967 |
|
Goodwill | 3,529 |
| | 3,319 |
|
Other assets | 3,216 |
| | 2,892 |
|
Total assets | $ | 56,230 |
| | $ | 54,505 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 14,437 |
| | $ | 16,459 |
|
Accrued expenses and other | 9,157 |
| | 9,807 |
|
Unearned revenue | 3,063 |
| | 1,823 |
|
Total current liabilities | 26,657 |
| | 28,089 |
|
Long-term debt | 8,243 |
| | 8,265 |
|
Other long-term liabilities | 8,900 |
| | 7,410 |
|
Commitments and contingencies (Note 3) |
|
| |
|
|
Stockholders’ equity: | | | |
Preferred stock, $0.01 par value: | | | |
Authorized shares — 500 | | | |
Issued and outstanding shares — none | — |
| | — |
|
Common stock, $0.01 par value: | | | |
Authorized shares — 5,000 | | | |
Issued shares — 492 and 488 | | | |
Outstanding shares — 469 and 465 | 5 |
| | 5 |
|
Treasury stock, at cost | (1,837 | ) | | (1,837 | ) |
Additional paid-in capital | 12,874 |
| | 11,135 |
|
Accumulated other comprehensive loss | (675 | ) | | (511 | ) |
Retained earnings | 2,063 |
| | 1,949 |
|
Total stockholders’ equity | 12,430 |
| | 10,741 |
|
Total liabilities and stockholders’ equity | $ | 56,230 |
| | $ | 54,505 |
|
See accompanying notes to consolidated financial statements.
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 — ACCOUNTING POLICIES
Unaudited Interim Financial Information
We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2015 due to seasonal and other factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2014 Annual Report on Form 10-K.
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation, including the expanded presentation of “Net cash provided by (used in) financing activities” on our consolidated statements of cash flows and recasting the segment financial information within “Note 4 — Acquisitions, Goodwill, and Acquired Intangible Assets” and “Note 8 — Segment Information” as a result of changing our reportable segments to include an Amazon Web Services (“AWS”) segment.
Principles of Consolidation
The consolidated financial statements include the accounts of Amazon.com, Inc., its wholly-owned subsidiaries, and those entities in which we have a variable interest and of which we are the primary beneficiary, including certain entities in India and China (collectively, the “Company”). Intercompany balances and transactions between consolidated entities are eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, determining the selling price of products and services in multiple element revenue arrangements and determining the amortization period of these elements, incentive discount offers, sales returns, vendor funding, stock-based compensation forfeiture rates, income taxes, valuation and impairment of investments, inventory valuation and inventory purchase commitments, collectability of receivables, valuation of acquired intangibles and goodwill, depreciable lives of property and equipment, internal-use software and website development costs, acquisition purchase price allocations, investments in equity interests, and contingencies. Actual results could differ materially from those estimates.
Earnings per Share
Basic earnings per share is calculated using our weighted-average outstanding common shares. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. In periods when we have a net loss, stock awards are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect. In Q3 2014 and for the nine months ended September 30, 2014, we excluded stock awards of 18 million and 17 million.
The following table shows the calculation of diluted shares (in millions):
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| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Shares used in computation of basic earnings per share | 468 |
| | 463 |
| | 467 |
| | 461 |
|
Total dilutive effect of outstanding stock awards | 10 |
| | — |
| | 9 |
| | — |
|
Shares used in computation of diluted earnings per share | 478 |
| | 463 |
| | 476 |
| | 461 |
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, account, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. We are continuing to evaluate our method of adoption and the impact this ASU will have on our consolidated financial statements.
In July 2015, the FASB issued an ASU modifying the accounting for inventory. Under this ASU, the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. The ASU defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The ASU is applicable to inventory that is accounted for under the first-in, first-out method and is effective for reporting periods after December 15, 2016, with early adoption permitted. We do not expect adoption to have a material impact on our consolidated financial statements.
Note 2 — CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
As of September 30, 2015, and December 31, 2014, our cash, cash equivalents, and marketable securities primarily consisted of cash, U.S. and foreign government and agency securities, AAA-rated money market funds, and other investment grade securities. Cash equivalents and marketable securities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
We measure the fair value of money market funds and equity securities based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. We did not hold any cash, cash equivalents, or marketable securities categorized as Level 3 assets as of September 30, 2015, or December 31, 2014.
The following table summarizes, by major security type, our cash, cash equivalents, and marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in millions):
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| | | | | | | | | | | | | | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Total Estimated Fair Value | | Total Estimated Fair Value |
Cash | $ | 5,026 |
| | $ | — |
| | $ | — |
| | $ | 5,026 |
| | $ | 4,155 |
|
Level 1 securities: | | | | | | | | | |
Money market funds | 5,921 |
| | — |
| | — |
| | 5,921 |
| | 10,718 |
|
Equity securities | 4 |
| | 14 |
| | — |
| | 18 |
| | 4 |
|
Level 2 securities: | | | | | | | | | |
Foreign government and agency securities | 48 |
| | — |
| | — |
| | 48 |
| | 80 |
|
U.S. government and agency securities | 3,009 |
| | 2 |
| | (2 | ) | | 3,009 |
| | 2,406 |
|
Corporate debt securities | 483 |
| | 1 |
| | (1 | ) | | 483 |
| | 401 |
|
Asset-backed securities | 120 |
| | — |
| | — |
| | 120 |
| | 69 |
|
Other fixed income securities | 42 |
| | — |
| | — |
| | 42 |
| | 33 |
|
| $ | 14,653 |
| | $ | 17 |
| | $ | (3 | ) | | $ | 14,667 |
| | $ | 17,866 |
|
Less restricted cash, cash equivalents, and marketable securities (1) | | | | | | | (239 | ) | | (450 | ) |
Total cash, cash equivalents, and marketable securities | | | | | | | $ | 14,428 |
| | $ | 17,416 |
|
___________________
| |
(1) | We are required to pledge or otherwise restrict a portion of our cash, cash equivalents, and marketable securities as collateral for standby and trade letters of credit, guarantees, debt, real estate leases, and amounts due to third-party sellers in certain jurisdictions. We classify cash, cash equivalents, and marketable securities with use restrictions of less than twelve months as “Accounts receivable, net and other” and of twelve months or longer as non-current “Other assets” on our consolidated balance sheets. See “Note 3 — Commitments and Contingencies.” |
The following table summarizes the contractual maturities of our cash equivalents and marketable fixed-income securities as of September 30, 2015 (in millions):
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
Due within one year | $ | 8,053 |
| | $ | 8,054 |
|
Due after one year through five years | 1,252 |
| | 1,252 |
|
Due after five years through ten years | 141 |
| | 141 |
|
Due after ten years | 177 |
| | 176 |
|
Total | $ | 9,623 |
| | $ | 9,623 |
|
Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.
Note 3 — COMMITMENTS AND CONTINGENCIES
Commitments
We have entered into non-cancellable operating, capital, and finance leases for equipment and office, fulfillment, sortation, delivery, data center, and renewable energy facilities. Rental expense under operating lease agreements was $291 million and $252 million for Q3 2015 and Q3 2014, and $824 million and $700 million for the nine months ended September 30, 2015 and 2014.
The following summarizes our principal contractual commitments, excluding open orders for purchases that support normal operations, as of September 30, 2015 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Year Ended December 31, | | | | |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total |
Debt principal and interest | $ | 1,237 |
| | $ | 323 |
| | $ | 1,322 |
| | $ | 310 |
| | $ | 1,272 |
| | $ | 9,403 |
| | $ | 13,867 |
|
Capital lease obligations, including interest | 729 |
| | 2,758 |
| | 2,119 |
| | 860 |
| | 239 |
| | 162 |
| | 6,867 |
|
Finance lease obligations, including interest | 40 |
| | 161 |
| | 163 |
| | 167 |
| | 171 |
| | 1,658 |
| | 2,360 |
|
Operating leases | 317 |
| | 964 |
| | 878 |
| | 779 |
| | 688 |
| | 2,875 |
| | 6,501 |
|
Unconditional purchase obligations (1) | 116 |
| | 632 |
| | 539 |
| | 386 |
| | 152 |
| | 43 |
| | 1,868 |
|
Other commitments (2) (3) | 446 |
| | 482 |
| | 240 |
| | 170 |
| | 107 |
| | 963 |
| | 2,408 |
|
Total commitments | $ | 2,885 |
| | $ | 5,320 |
| | $ | 5,261 |
| | $ | 2,672 |
| | $ | 2,629 |
| | $ | 15,104 |
| | $ | 33,871 |
|
___________________
| |
(1) | Includes unconditional purchase obligations related to long-term agreements to acquire and license digital content that are not reflected on the consolidated balance sheets. For those agreements with variable terms, we do not estimate the total obligation beyond any minimum quantities and/or pricing as of the reporting date. Purchase obligations associated with renewal provisions solely at the option of the content provider are included to the extent such commitments are fixed or a minimum amount is specified. |
| |
(2) | Includes the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements that have not been placed in service and media content liabilities associated with long-term media content assets with initial terms greater than one year. |
| |
(3) | Excludes $895 million of tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any. |
Pledged Assets
As of September 30, 2015, and December 31, 2014, we have pledged or otherwise restricted $377 million and $602 million of our cash, cash equivalents, and marketable securities, and certain property and equipment as collateral for standby and trade letters of credit, guarantees, debt relating to certain international operations, real estate leases, and amounts due to third-party sellers in certain jurisdictions.
Legal Proceedings
The Company is involved from time to time in claims, proceedings, and litigation, including the matters described in Item 8 of Part II, “Financial Statements and Supplementary Data — Note 8 — Commitments and Contingencies — Legal Proceedings” of our 2014 Annual Report on Form 10-K and in Item 1 of Part I, “Financial Statements — Note 3 — Commitments and Contingencies — Legal Proceedings” of our Quarterly Reports on Form 10-Q for the Periods Ended March 31, 2015 and June 30, 2015, as supplemented by the following:
In November 2007, an Austrian copyright collection society, Austro-Mechana, filed lawsuits against Amazon.com International Sales, Inc., Amazon EU Sarl, Amazon.de GmbH, Amazon.com GmbH, and Amazon Logistik in the Commercial Court of Vienna, Austria and in the District Court of Munich, Germany seeking to collect a tariff on blank digital media sold by our EU-based retail websites to customers located in Austria. In July 2008, the German court stayed the German case pending a final decision in the Austrian case. In July 2010, the Austrian court ruled in favor of Austro-Mechana and ordered us to report all sales of products to which the tariff potentially applies for a determination of damages. We contested Austro-Mechana’s claim and in September 2010 commenced an appeal in the Commercial Court of Vienna. We lost this appeal and in March 2011 commenced an appeal in the Supreme Court of Austria. In October 2011, the Austrian Supreme Court referred the case to the European Court of Justice (“ECJ”). In July 2013, the ECJ ruled that EU law does not preclude application of the tariff where certain conditions are met and directed the case back to the Austrian Supreme Court for further proceedings. In October 2013, the Austrian Supreme Court referred the case back to the Commercial Court of Vienna for further fact finding to determine whether the tariff on blank digital media meets the conditions set by the ECJ. In August 2015, the Commercial Court of Vienna ruled that the Austrian tariff regime does not meet the conditions the ECJ set and dismissed Austro-Mechana’s claims. In September 2015, Austro-Mechana appealed that judgment to the Higher Commercial Court of Vienna. In addition, in December 2012, a German copyright collection society, Zentralstelle für private Überspielungsrechte (“ZPU”), filed a complaint against
Amazon EU Sarl, Amazon Media EU Sarl, Amazon Services Europe Sarl, Amazon Payments Europe SCA, Amazon Europe Holding Technologies SCS, and Amazon Eurasia Holdings Sarl in the District Court of Luxembourg seeking to collect a tariff on blank digital media sold by the Amazon.de retail website to customers located in Germany. In January 2013, a Belgian copyright collection society, AUVIBEL, filed a complaint against Amazon EU Sarl in the Court of First Instance of Brussels, Belgium, seeking to collect a tariff on blank digital media sold by the Amazon.fr retail website to customers located in Belgium. In November 2013, the Belgian court ruled in favor of AUVIBEL and ordered us to report all sales of products to which the tariff potentially applies for a determination of damages. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.
In July 2013, Telebuyer, LLC filed a complaint against Amazon.com, Inc., Amazon Web Services, LLC, and VADATA, Inc. in the United States District Court for the Eastern District of Virginia. The complaint alleges, among other things, that certain features used on our retail website-including high resolution video and still images, user-indicated areas of interest, targeted follow-up communications, vendor proposals, on-line chat, Gold Box and Lightning Deals, and vendor ratings-infringe seven U.S. patents: Nos. 6,323,894, 7,835,508, 7,835,509, 7,839,984, 8,059,796, and 8,098,272, all entitled “Commercial Product Routing System With Video Vending Capability,” and 8,315,364, entitled “Commercial Product Routing System With Mobile Wireless And Video Vending Capability.” The complaint seeks an unspecified amount of damages, interest, and injunctive relief. In September 2013, the case was transferred to the United States District Court for the Western District of Washington. In July 2015, the court invalidated all asserted claims of all asserted patents and dismissed the case with prejudice. In August 2015, Telebuyer appealed that judgment to the United States Court of Appeals for the Federal Circuit. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.
In September 2013, Personalized Media Communications, LLC filed a complaint against Amazon.com, Inc. and Amazon Web Services, LLC in the United States District Court for the District of Delaware. The complaint alleges, among other things, that the use of certain Kindle devices, Kindle apps and/or Amazon.com, Inc.’s website to purchase and receive electronic media infringes nine U.S. Patents: Nos. 5,887,243, 7,801,304, 7,805,749, 7,940,931, 7,769,170, 7,864,956, 7,827,587, 8,046,791, and 7,883,252, all entitled “Signal Processing Apparatus And Methods.” The complaint also alleges, among other things, that CloudFront, S3, and EC2 web services infringe three of those patents, Nos. 7,801,304, 7,864,956, and 7,827,587. The complaint seeks an unspecified amount of damages, interest, and injunctive relief. In August 2015, the court invalidated all asserted claims of all asserted patents and dismissed the case with prejudice. In September 2015, Personalized Media appealed that judgment to the United States Court of Appeals for the Federal Circuit. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.
In December 2013, Appistry, Inc. filed a complaint against Amazon.com, Inc. and Amazon Web Services, Inc. for patent infringement in the United States District Court for the Eastern District of Missouri. The complaint alleges, among other things, that Amazon’s Elastic Compute Cloud infringes U.S. Patent Nos. 8,200,746, entitled “System And Method For Territory-Based Processing Of Information,” and 8,341,209, entitled “System And Method For Processing Information Via Networked Computers Including Request Handlers, Process Handlers, And Task Handlers.” The complaint seeks injunctive relief, an unspecified amount of damages, treble damages, costs, and interest. In March 2015, the case was transferred to the United States District Court for the Western District of Washington. In July 2015, the court granted our motion for judgment on the pleadings and invalidated the patents-in-suit. In August 2015, the court entered judgment in our favor. In September 2015, the plaintiff appealed that judgment to the United States Court of Appeals for the Federal Circuit, and filed a new complaint against Amazon.com, Inc. and Amazon Web Services, Inc. in the United States District Court for the Western District of Washington. The 2015 complaint alleges, among other things, that Amazon’s Elastic Compute Cloud, Simple Workflow, and Herd infringe U.S. Patent Nos. 8,682,959, entitled “System And Method For Fault Tolerant Processing Of Information Via Networked Computers Including Request Handlers, Process Handlers, And Task Handlers,” and 9,049,267, entitled “System And Method For Processing Information Via Networked Computers Including Request Handlers, Process Handlers, And Task Handlers.” The 2015 complaint seeks injunctive relief, an unspecified amount of damages, treble damages, costs, and interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.
In March 2014, Kaavo, Inc. filed a complaint against Amazon.com, Inc. and Amazon Web Services, Inc. for patent infringement in the United States District Court for the District of Delaware. The complaint alleges, among other things, that Amazon Web Services’ Elastic Beanstalk and CloudFormation infringe U.S. Patent No. 8,271,974, entitled “Cloud Computing Lifecycle Management For N-Tier Applications.” The complaint seeks injunctive relief, an unspecified amount of damages, costs, and interest. In June 2015, the case was stayed pending resolution of a motion for judgment on the pleadings in a related case. In July 2015, Kaavo Inc. filed another complaint against Amazon.com, Inc. and Amazon Web Services, Inc. in the United States District Court for the District of Delaware. The 2015 complaint alleges, among other things, that CloudFormation infringes U.S. Patent No. 9,043,751, entitled “Methods And Devices For Managing A Cloud Computing Environment.” The 2015 complaint seeks injunctive relief, an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, and interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.
In October 2015, St. Luke Technologies, LLC filed a complaint against Amazon.com, Inc. and Amazon Web Services, Inc. for patent infringement in the United States District Court for the Eastern District of Texas alleging, among other things,
that AWS WorkMail, Identity and Access Management, CloudTrail, Key Management Service, and Data Stores infringe U.S. Patent Nos. 8,316,237, 7,181,017, 7,869,591, and 8,904,181, all entitled “System and Method for Secure Three-Party Communication,” and that WorkMail, Identity and Access Management, CloudTrail, Key Management Service, Data Stores, DynamoDB, SDK, and the “AWS platform” infringe U.S. Patent Nos. 7,587,368, 8,498,941, 8,380,630, and 8,600,895, all entitled “Information Record Infrastructure, System and Method.” The complaint seeks an unspecified amount of damages together with pre- and post-judgment interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.
The outcomes of our legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. In addition, for some matters for which a loss is probable or reasonably possible, an estimate of the amount of loss or range of losses is not possible and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies.
See also “Note 7 — Income Taxes.”
Note 4 — ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS
2015 Acquisition Activity
During the nine months ended September 30, 2015, we acquired certain companies for an aggregate purchase price of $393 million. The primary reasons for these acquisitions, none of which was individually material to our consolidated financial statements, were to acquire technologies and know-how to enable Amazon to serve customers more effectively.
Acquisition-related costs were expensed as incurred and not significant. The aggregate purchase price of these acquisitions was allocated as follows (in millions):
|
| | | |
Purchase Price | |
Cash paid, net of cash acquired | $ | 340 |
|
Indemnification holdback | 53 |
|
| $ | 393 |
|
Allocation | |
Goodwill | $ | 239 |
|
Intangible assets (1): | |
Contract-based | 1 |
|
Technology-based | 181 |
|
Customer-related | 4 |
|
| 186 |
|
Property and equipment | 1 |
|
Deferred tax assets | 34 |
|
Other assets acquired | 23 |
|
Deferred tax liabilities | (65 | ) |
Other liabilities assumed | (25 | ) |
| $ | 393 |
|
___________________ | |
(1) | Acquired intangible assets have estimated useful lives of between one and six years, with a weighted-average amortization period of five years. |
We determined the estimated fair value of identifiable intangible assets acquired primarily by using the income approach. These assets are included within “Other assets” on our consolidated balance sheets and are being amortized to operating expenses on a straight-line basis over their estimated useful lives.
On October 19, 2015, we acquired Elemental Technologies, Inc. (“Elemental”), for total consideration of approximately $296 million. The acquisition combines Elemental’s video solutions with the AWS Cloud platform to provide customers integrated solutions to efficiently and economically scale video infrastructures. We are currently in the process of estimating the fair values of the assets acquired and liabilities assumed and will include the impact of this acquisition in our 2015 Annual Report on Form 10-K.
Pro Forma Financial Information (unaudited)
The acquired companies were consolidated into our financial statements starting on their respective acquisition dates. The aggregate net sales and operating loss of the companies acquired was $7 million and $(78) million for the nine months ended September 30, 2015. The following financial information, which excludes certain acquired companies for which the pro forma impact is not meaningful, presents our results as if the companies acquired during the nine months ended September 30, 2015 had occurred at the beginning of 2014 (in millions):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
Net sales | $ | 71,261 |
| | $ | 59,660 |
|
Net income (loss) | $ | 126 |
| | $ | (486 | ) |
2014 Acquisition Activity
During the nine months ended September 30, 2014, we acquired companies for an aggregate purchase price of approximately $862 million in cash, as adjusted for the assumption of options and other items, which resulted in goodwill of $707 million and acquired intangible assets of $230 million. The primary reasons for these acquisitions were to acquire technologies and know-how to enable Amazon to serve customers more effectively. We determined the estimated fair value of identifiable intangible assets acquired primarily by using the income approach. These assets are included within “Other assets” on our consolidated balance sheets and are being amortized to operating expenses on a straight-line basis over their estimated useful lives. Acquisition-related costs were expensed as incurred and not significant.
Pro forma results of operations have not been presented because the effects of these acquisitions, individually and in the aggregate, were not material to our consolidated results of operations.
Goodwill
The goodwill of the acquired companies is generally not deductible for tax purposes and is primarily related to expected improvements in technology performance and functionality, as well as sales growth from future product and service offerings and new customers, together with certain intangible assets that do not qualify for separate recognition.
The following summarizes our goodwill activity during the nine months ended September 30, 2015 by segment (in millions):
|
| | | | | | | | | | | | | | | |
| North America | | International | | AWS | | Consolidated |
Goodwill - January 1, 2015 | $ | 1,978 |
| | $ | 735 |
| | $ | 606 |
| | $ | 3,319 |
|
New acquisitions | 41 |
| | 17 |
| | 181 |
| | 239 |
|
Other adjustments (1) | (5 | ) | | (22 | ) | | (2 | ) | | (29 | ) |
Goodwill - September 30, 2015 | $ | 2,014 |
| | $ | 730 |
| | $ | 785 |
| | $ | 3,529 |
|
___________________
| |
(1) | Primarily includes changes in foreign exchange rates. |
During the second quarter of 2015, we changed the measurement date of our annual goodwill impairment test from October 1 to April 1. This change was not material to our consolidated financial statements as it did not result in the delay, acceleration, or avoidance of an impairment charge. We believe this timing better aligns the goodwill impairment test with our strategic business planning process, which is a key component of the goodwill impairment test. We completed the required annual testing of goodwill for impairment for all reporting units as of April 1, 2015 and determined that goodwill is not impaired.
Note 5 — LONG-TERM DEBT
In December 2014 and November 2012, we issued $6.0 billion and $3.0 billion of unsecured senior notes as described in the table below (collectively, the “Notes”). As of September 30, 2015, and December 31, 2014, the unamortized discount on the Notes was $91 million and $96 million. We also have other long-term debt with a carrying amount, including the current portion, of $451 million and $881 million as of September 30, 2015, and December 31, 2014. The face value of our total long-term debt obligations is as follows (in millions):
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
0.65% Notes due on November 27, 2015 (1) | $ | 750 |
| | $ | 750 |
|
1.20% Notes due on November 29, 2017 (1) | 1,000 |
| | 1,000 |
|
2.50% Notes due on November 29, 2022 (1) | 1,250 |
| | 1,250 |
|
2.60% Notes due on December 5, 2019 (2) | 1,000 |
| | 1,000 |
|
3.30% Notes due on December 5, 2021 (2) | 1,000 |
| | 1,000 |
|
3.80% Notes due on December 5, 2024 (2) | 1,250 |
| | 1,250 |
|
4.80% Notes due on December 5, 2034 (2) | 1,250 |
| | 1,250 |
|
4.95% Notes due on December 5, 2044 (2) | 1,500 |
| | 1,500 |
|
Other long-term debt | 451 |
| | 881 |
|
Total debt | 9,451 |
| | 9,881 |
|
Less current portion of long-term debt | (1,117 | ) | | (1,520 | ) |
Face value of long-term debt | $ | 8,334 |
| | $ | 8,361 |
|
_____________________________
| |
(1) | Issued in November 2012, effective interest rates of the 2015, 2017, and 2022 Notes were 0.84%, 1.38%, and 2.66%. |
| |
(2) | Issued in December 2014, effective interest rates of the 2019, 2021, 2024, 2034, and 2044 Notes were 2.73%, 3.43%, 3.90%, 4.92%, and 5.11%. |
Interest on the Notes issued in 2014 is payable semi-annually in arrears in June and December. Interest on the Notes issued in 2012 is payable semi-annually in arrears in May and November. We may redeem the Notes at any time in whole, or from time to time, in part at specified redemption prices. We are not subject to any financial covenants under the Notes. The proceeds from the Notes are used for general corporate purposes. The estimated fair value of the Notes was approximately $9.2 billion and $9.1 billion as of September 30, 2015, and December 31, 2014, which is based on quoted prices for our publicly-traded debt as of those dates.
The other debt, including the current portion, had a weighted average interest rate of 3.7% and 5.5% as of September 30, 2015, and December 31, 2014. We used the net proceeds from the issuance of this debt primarily to fund certain international operations. The estimated fair value of the other long-term debt, which is based on Level 2 inputs, approximated its carrying value as of September 30, 2015, and December 31, 2014.
On September 5, 2014, we entered into an unsecured revolving credit facility (the “Credit Agreement”) with a syndicate of lenders that provides us with a borrowing capacity of up to $2.0 billion. The Credit Agreement has a term of two years, but it may be extended for up to three additional one-year terms if approved by the lenders. The initial interest rate applicable to outstanding balances under the Credit Agreement is the London interbank offered rate (“LIBOR”) plus 0.625%, under our current credit ratings. If our credit ratings are downgraded this rate could increase to as much as LIBOR plus 1.00%. There were no borrowings outstanding under the Credit Agreement as of September 30, 2015.
Note 6 — STOCKHOLDERS’ EQUITY
Stock Award Activity
Common shares outstanding plus shares underlying outstanding stock awards totaled 489 million as of September 30, 2015, and 483 million as of December 31, 2014. These totals include all vested and unvested stock awards outstanding, including those awards we estimate will be forfeited. The compensation expense for stock options, the total intrinsic value for stock options outstanding, the amount of cash received from the exercise of stock options, and the related tax benefits were not material for the nine months ended September 30, 2015.
The following table summarizes our restricted stock unit activity for the nine months ended September 30, 2015 (in millions):
|
| | | | | | |
| Number of Units | | Weighted Average Grant-Date Fair Value |
Outstanding as of December 31, 2014 | 17.4 |
| | $ | 285 |
|
Units granted | 8.7 |
| | 400 |
|
Units vested | (3.8 | ) | | 244 |
|
Units forfeited | (2.2 | ) | | 312 |
|
Outstanding as of September 30, 2015 | 20.1 |
| | $ | 339 |
|
Scheduled vesting for outstanding restricted stock units as of September 30, 2015, is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Year Ended December 31, | | | | |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total |
Scheduled vesting—restricted stock units | 1.8 |
| | 6.5 |
| | 6.9 |
| | 3.3 |
| | 1.3 |
| | 0.3 |
| | 20.1 |
|
As of September 30, 2015, there was $3.1 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on an accelerated basis with approximately half of the compensation expected to be expensed in the next twelve months, and has a weighted average recognition period of 1.1 years.
Note 7 — INCOME TAXES
Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, changes in how we do business, acquisitions (including integrations) and investments, audit-related developments, foreign currency gains (losses), changes in law, regulations, and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
In 2015, our effective tax rate will be significantly affected by the favorable impact of earnings in lower tax rate jurisdictions and the adverse effect of losses incurred in certain foreign jurisdictions for which we may not realize a tax benefit. Income earned in lower tax jurisdictions is primarily related to our European operations, which are headquartered in Luxembourg. Losses for which we may not realize a related tax benefit, primarily due to losses of foreign subsidiaries, reduce our pre-tax income without a corresponding reduction in our tax expense, and therefore increase our effective tax rate. We record valuation allowances against the deferred tax assets associated with losses for which we may not realize a related tax benefit. Our effective tax rate may also be adversely impacted by the amount of our pre-tax income, or loss, relative to our income tax expense, nondeductible expenses, and changes in tax law such as the expiration of the U.S. federal research and development credit at the end of 2014.
Our income tax provision for the nine months ended September 30, 2015 was $498 million, which included $37 million of discrete tax items primarily attributed to acquisition integrations. Our income tax benefit for the nine months ended September 30, 2014 was $38 million, which included $82 million of discrete tax items primarily attributable to audit-related developments. Cash paid for income taxes (net of refunds) was $80 million and $38 million in Q3 2015 and Q3 2014, and $200 million and $148 million for the nine months ended September 30, 2015 and 2014.
As of September 30, 2015, and December 31, 2014, tax contingencies were $895 million and $710 million. We expect the total amount of tax contingencies will grow in 2015. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach
resolution of income tax examinations in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on prior years’ tax filings.
We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2005 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods. As previously disclosed, we have received Notices of Proposed Adjustment from the IRS for transactions undertaken in the 2005 and 2006 calendar years relating to transfer pricing with our foreign subsidiaries. The IRS is seeking to increase our U.S. taxable income by an amount that would result in additional federal tax of approximately $1.5 billion, subject to interest. To date, we have not resolved this matter administratively and are currently contesting it in U.S. Tax Court. We continue to disagree with these IRS positions and intend to defend ourselves vigorously in this matter. In addition to the risk of additional tax for 2005 and 2006 transactions, if this litigation is adversely determined or if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, we could be subject to significant additional tax liabilities.
Certain of our subsidiaries are under examination or investigation or may be subject to examination or investigation by the French Tax Administration (“FTA”) for calendar year 2006 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. In September 2012, we received proposed tax assessment notices for calendar years 2006 through 2010 relating to the allocation of income between foreign jurisdictions. In June 2015, we received final tax collection notices for these years assessing additional French tax of €196 million, including interest and penalties through September 2012. We disagree with the assessment and intend to contest it vigorously. We plan to pursue all available administrative remedies at the FTA, and if we are not able to resolve this matter with the FTA, we plan to pursue judicial remedies. In addition to the risk of additional tax for years 2006 through 2010, if this litigation is adversely determined or if the FTA were to seek adjustments of a similar nature for subsequent years, we could be subject to significant additional tax liabilities. In addition, in October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. If this matter is adversely resolved, Luxembourg may be required to assess, and we may be required to pay, additional amounts with respect to current and prior periods and our taxes in the future could increase. We are also subject to taxation in various states and other foreign jurisdictions including Canada, China, Germany, India, Japan, Luxembourg, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments in respect of these particular jurisdictions for 2003 and thereafter.
Note 8 — SEGMENT INFORMATION
Beginning in the first quarter of 2015, we changed our reportable segments to North America, International, and AWS. These segments reflect the way the Company evaluates its business performance and manages its operations.
We allocate to segment results the operating expenses “Fulfillment,” “Marketing,” “Technology and content,” and “General and administrative” based on usage, which is generally reflected in the segment in which the costs are incurred. The majority of technology infrastructure costs are allocated to the AWS segment based on usage. The majority of the remaining non-infrastructure technology costs are incurred in the U.S. and are allocated to our North America segment. We exclude from our allocations the portions of these operating expense lines attributable to stock-based compensation. We do not allocate the line item “Other operating expense (income), net” to our segment operating results. There are no internal revenue transactions between our reportable segments.
North America
The North America segment consists primarily of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through North America-focused websites such as www.amazon.com, www.amazon.ca, and www.amazon.com.mx. This segment includes export sales from these websites.
International
The International segment consists primarily of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through internationally-focused websites such as www.amazon.com.au, www.amazon.com.br, www.amazon.cn, www.amazon.fr, www.amazon.de, www.amazon.in, www.amazon.it, www.amazon.co.jp, www.amazon.nl, www.amazon.es, and www.amazon.co.uk. This segment includes export sales from these internationally-focused websites (including export sales from these sites to customers in the U.S., Mexico, and Canada), but excludes export sales from our North American websites.
AWS
The AWS segment consists of amounts earned from global sales of compute, storage, database, and other AWS service offerings for start-ups, enterprises, government agencies, and academic institutions.
Information on reportable segments and reconciliation to consolidated net income (loss) is as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
North America | | | | | | | |
Net sales | $ | 15,006 |
| | $ | 11,699 |
| | $ | 42,208 |
| | $ | 33,499 |
|
Segment operating expenses (1) | 14,478 |
| | 11,759 |
| | 40,461 |
| | 32,940 |
|
Segment operating income (loss) | $ | 528 |
| | $ | (60 | ) | | $ | 1,747 |
| | $ | 559 |
|
International | | | | | | | |
Net sales | $ | 8,267 |
| | $ | 7,711 |
| | $ | 23,577 |
| | $ | 22,936 |
|
Segment operating expenses (1) | 8,323 |
| | 7,885 |
| | 23,728 |
| | 23,144 |
|
Segment operating income (loss) | $ | (56 | ) | | $ | (174 | ) | | $ | (151 | ) | | $ | (208 | ) |
AWS | | | | | | | |
Net sales | $ | 2,085 |
| | $ | 1,169 |
| | $ | 5,474 |
| | $ | 3,224 |
|
Segment operating expenses (1) | 1,564 |
| | 1,071 |
| | 4,297 |
| | 2,804 |
|
Segment operating income (loss) | $ | 521 |
| | $ | 98 |
| | $ | 1,177 |
| | $ | 420 |
|
Consolidated | | | | | | | |
Net sales | $ | 25,358 |
| | $ | 20,579 |
| | $ | 71,259 |
| | $ | 59,659 |
|
Segment operating expenses (1) | 24,365 |
| | 20,715 |
| | 68,486 |
| | 58,888 |
|
Segment operating income (loss) | 993 |
| | (136 | ) | | 2,773 |
| | 771 |
|
Stock-based compensation | (544 | ) | | (377 | ) | | (1,513 | ) | | (1,089 | ) |
Other operating income (expense), net | (43 | ) | | (31 | ) | | (136 | ) | | (94 | ) |
Income (loss) from operations | 406 |
| | (544 | ) | | 1,124 |
| | (412 | ) |
Total non-operating income (expense) | (159 | ) | | (90 | ) | | (494 | ) | | (128 | ) |
Benefit (provision) for income taxes | (161 | ) | | 205 |
| | (498 | ) | | 38 |
|
Equity-method investment activity, net of tax | (7 | ) | | (8 | ) | | (18 | ) | | 47 |
|
Net income (loss) | $ | 79 |
| | $ | (437 | ) | | $ | 114 |
| | $ | (455 | ) |
___________________
| |
(1) | Excludes stock-based compensation and “Other operating expense (income), net” which are not allocated to segments. |
We have aggregated our products and services into groups of similar products and services and provided the supplemental disclosure of net sales (in millions) below. We evaluate whether additional disclosure is appropriate when a product or service category begins to approach a significant level of net sales. For the periods presented, no individual product or service represented more than 10% of net sales.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net Sales: | | | |
Media | $ | 5,283 |
| | $ | 5,244 |
| | $ | 15,286 |
| | $ | 15,554 |
|
Electronics and other general merchandise | 17,741 |
| | 13,953 |
| | 49,782 |
| | 40,248 |
|
AWS | 2,085 |
| | 1,169 |
| | 5,474 |
| | 3,224 |
|
Other (1) | 249 |
| | 213 |
| | 717 |
| | 633 |
|
Consolidated | $ | 25,358 |
| | $ | 20,579 |
| | $ | 71,259 |
| | $ | 59,659 |
|
___________________
| |
(1) | Includes sales from non-retail activities, such as certain advertising services and our co-branded credit card agreements. |
|
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet and online commerce, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of legal proceedings and claims, fulfillment, sortation, delivery, and data center optimization, risks of inventory management, seasonality, the degree to which the Company enters into, maintains, and develops commercial agreements, acquisitions and strategic transactions, payments risks, and risks of fulfillment throughput and productivity. In addition, the current global economic climate amplifies many of these risks. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are described in greater detail in Item 1A of Part II, “Risk Factors.”
For additional information, see Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2014 Annual Report on Form 10-K.
Critical Accounting Judgments
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business and Accounting Policies,” of our 2014 Annual Report on Form 10-K and Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies,” of this Form 10-Q. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Inventories
Inventories, consisting of products available for sale, are primarily accounted for using the first-in first-out method, and are valued at the lower of cost or market value. This valuation requires us to make judgments, based on currently-available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future. As a measure of sensitivity, for every 1% of additional inventory valuation allowance as of September 30, 2015, we would have recorded an additional cost of sales of approximately $100 million.
In addition, we enter into supplier commitments for certain electronic device components. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs.
Goodwill
We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. During the second quarter of 2015, we changed the measurement date of our annual goodwill impairment test from October 1 to April 1. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value or qualitative
factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions. Certain estimates of discounted cash flows involve businesses and geographies with limited financial history and developing revenue models. Changes in these forecasts could significantly change the amount of impairment recorded, if any.
During the quarter, management monitored the actual performance of the business relative to the fair value assumptions used during our annual goodwill impairment test. For the periods presented, no triggering events were identified that required an interim impairment test. As a measure of sensitivity, a 10% decrease in the fair value of any of our reporting units as of April 1, 2015, would have had no impact on the carrying value of our goodwill.
Financial and credit market volatility directly impacts the fair value measurement through our weighted average cost of capital that we use to determine a discount rate and through our stock price that we use to determine our market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are short-term in nature or a longer-term trend. We have not made any significant changes to the accounting methodology used to evaluate goodwill for impairment. Changes in our estimated future cash flows and asset fair values may cause us to realize material impairment charges in the future. As a measure of sensitivity, a prolonged 20% decrease from our September 30, 2015 closing stock price would not be an indicator of possible impairment.
Stock-Based Compensation
We measure compensation cost for stock awards at fair value and recognize it as compensation expense over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock and the fair value of stock options is estimated on the date of grant using a Black-Scholes model. The estimated number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including employee classification, economic environment, and historical experience. We update our estimated forfeiture rate quarterly. We have not made any significant changes to the accounting methodology used to evaluate stock-based compensation. Changes in our estimates and assumptions may cause us to realize material changes in stock-based compensation expense in the future. As a measure of sensitivity, a 1% change to our estimated forfeiture rate would have had an approximately $51 million impact on our Q3 2015 operating income. Our estimated forfeiture rates as of September 30, 2015, and December 31, 2014, were 28% and 27%.
We utilize the accelerated method, rather than the straight-line method, for recognizing compensation expense. For example, over 50% of the compensation cost related to an award vesting ratably over four years is expensed in the first year. If forfeited early in the life of an award, the compensation expense adjustment is much greater under an accelerated method than under a straight-line method.
Income Taxes
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. Our effective tax rates could be adversely affected by earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions (including integrations) and investments, changes in our deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations, including fundamental changes to the tax laws applicable to corporate multinationals. The U.S., many countries in the European Union, and a number of other countries are actively considering changes in this regard.
Except as required under U.S. tax laws, we do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. If our intent changes or if these funds are needed for our U.S. operations, we would be required to accrue or pay U.S. taxes on some or all of these undistributed earnings and our effective tax rate would be adversely affected. We are also subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax liabilities against us. In addition, in October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in
Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. If this matter is adversely resolved, Luxembourg may be required to assess, and we may be required to pay, additional amounts with respect to current and prior periods and our taxes in the future could increase. Although we believe our tax estimates are reasonable, the final outcome of tax audits, investigations, and any related litigation could be materially different from our historical income tax provisions and accruals. Developments in an audit, litigation, or the relevant laws, regulations, administrative practices, principles, and interpretations could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. For instance, the IRS is seeking to increase our U.S. taxable income related to transfer pricing with our foreign subsidiaries for transactions undertaken in 2005 and 2006, and we are currently contesting the matter in U.S. Tax Court. In addition to the risk of additional tax for 2005 and 2006 transactions, if this litigation is adversely determined or if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, Amazon could be subject to significant additional tax liabilities.
Recent Accounting Pronouncements
See Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies — Recent Accounting Pronouncements.”
Liquidity and Capital Resources
Cash flow information is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Operating activities | $ | 2,610 |
| | $ | 1,766 |
| | $ | 3,108 |
| | $ | 127 |
| | $ | 9,823 |
| | $ | 5,705 |
|
Investing activities | (1,377 | ) | | (946 | ) | | (4,600 | ) | | (2,600 | ) | | (7,065 | ) | | (3,444 | ) |
Financing activities | (730 | ) | | (412 | ) | | (2,073 | ) | | (777 | ) | | 3,136 |
| | (720 | ) |
Our financial focus is on long-term, sustainable growth in free cash flow1. Free cash flow, a non-GAAP financial measure, was $5.4 billion for the trailing twelve months ended September 30, 2015, compared to $1.1 billion for the trailing twelve months ended September 30, 2014. See “Non-GAAP Financial Measures” for a reconciliation of free cash flow to cash provided by operating activities. The increase in free cash flow for the trailing twelve months ended September 30, 2015, compared to the comparable prior year period, was primarily due to higher operating cash flows. Operating cash flows and free cash flows can be volatile and are sensitive to many factors, including changes in working capital2, the timing and magnitude of capital expenditures, including our decision to finance property and equipment under capital leases and other finance lease arrangements, and our net income (loss). Working capital at any specific point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.
Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, which, at fair value, were $14.4 billion and $17.4 billion as of September 30, 2015, and December 31, 2014. Amounts held in foreign currencies were $4.5 billion and $5.4 billion as of September 30, 2015, and December 31, 2014, and were primarily British Pounds, Chinese Yuan, Euros, and Japanese Yen.
Cash provided by (used in) operating activities was $2.6 billion and $1.8 billion for Q3 2015 and Q3 2014 and $3.1 billion and $127 million for the nine months ended September 30, 2015 and 2014. Our operating cash flows result primarily from cash received from our consumer, seller, and enterprise customers, advertising agreements, and our co-branded credit card agreements, offset by cash payments we make for products and services, employee compensation (less amounts capitalized related to internal use software that are reflected as cash used in investing activities), payment processing and related transaction costs, operating leases, and interest payments on our long-term obligations. Cash received from our consumer, seller, and enterprise customers, and other activities generally corresponds to our net sales. Because consumers primarily use credit cards to buy from us, our receivables from consumers settle quickly. The increase in operating cash flow for the trailing twelve months ended September 30, 2015, compared to the comparable prior year period, was primarily due to the increase in non-cash charges to net income (loss), including depreciation, amortization, and stock-based compensation, and an increase in working capital.
Cash provided by (used in) investing activities corresponds with cash capital expenditures, including leasehold improvements, internal-use software and website development costs, cash outlays for acquisitions, investments in other companies and intellectual property rights, and purchases, sales, and maturities of marketable securities. Cash provided by (used in) investing activities was $(1.4) billion and $(946) million for Q3 2015 and Q3 2014, and $(4.6) billion and $(2.6) billion for the nine months ended September 30, 2015 and 2014, with the variability caused primarily by changes in capital expenditures, purchases, maturities, and sales of marketable securities, and changes in cash paid for acquisitions. Cash capital expenditures were $1.2 billion and $1.4 billion during Q3 2015 and Q3 2014, and $3.3 billion and $3.7 billion for the nine months ended September 30, 2015 and 2014. This primarily reflects additional investments in support of continued business growth due to investments in technology infrastructure, the majority of which is to support AWS, and additional capacity to support our fulfillment operations. Capital expenditures included $127 million and $131 million for internal-use software and website development during Q3 2015 and Q3 2014, and $406 million and $400 million for the nine months ended September 30, 2015 and 2014. Stock-based compensation capitalized for internal-use software and website development costs does not affect cash flows. We made cash payments, net of acquired cash, related to acquisition and other investment activity of $105 million and $860 million during Q3 2015 and Q3 2014, and $478 million and $926 million for the nine months ended September 30, 2015 and 2014.
______________________
| |
(1) | Free cash flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less cash expenditures for purchases of property and equipment, including internal-use software and website development, both of which are presented on our consolidated statements of cash flows. See “Non-GAAP Financial Measures” below for additional information as well as alternative free cash flow measures. |
| |
(2) | Working capital consists of accounts receivable, inventory, and accounts payable. |
Additionally, on October 19, 2015, we acquired Elemental for total consideration of approximately $296 million.
Cash provided by (used in) financing activities was $(730) million and $(412) million for Q3 2015 and Q3 2014, and $(2.1) billion and $(777) million for the nine months ended September 30, 2015 and 2014. Cash outflows from financing activities result from principal payments on obligations related to capital and finance leases and repayments of long-term debt and other. Principal payments on obligations related to capital leases, finance leases, and repayments of long-term debt and other were $858 million and $440 million in Q3 2015 and Q3 2014, and $2.5 billion and $1.3 billion for the nine months ended September 30, 2015 and 2014. In addition, on November 27, 2015, $750 million of our unsecured senior notes mature. Property and equipment acquired under capital leases was $1.0 billion and $1.2 billion during Q3 2015 and Q3 2014, and $3.4 billion and $2.8 billion for the nine months ended September 30, 2015 and 2014. This reflects additional investments in support of continued business growth primarily due to investments in technology infrastructure for AWS. We expect this trend toward additional investment to continue over time. Cash inflows from financing activities primarily result from proceeds from long-term debt and other and tax benefits relating to excess stock-based compensation deductions. Proceeds from long-term debt and other were $33 million and $28 million in Q3 2015 and Q3 2014, and $260 million and $379 million for the nine months ended September 30, 2015 and 2014. Tax benefits relating to excess stock-based compensation deductions are presented as financing cash flows. Cash inflows from tax benefits related to stock-based compensation deductions were $95 million and $0 in Q3 2015 and Q3 2014, and $212 million and $121 million for the nine months ended September 30, 2015 and 2014.
We had no borrowings outstanding under our $2.0 billion Credit Agreement as of September 30, 2015. See Item 1 of Part I, “Financial Statements — Note 5 — Long-Term Debt” for additional information.
We recorded a tax provision of $161 million and a tax benefit of $205 million in Q3 2015 and Q3 2014, and a tax provision of $498 million and a tax benefit of $38 million for the nine months ended September 30, 2015 and 2014. Except as required under U.S. tax laws, we do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. If our intent changes or if these funds are needed for our U.S. operations, we would be required to accrue or pay U.S. taxes on some or all of these undistributed earnings, and our effective tax rate would be adversely affected. We have tax benefits relating to excess stock-based compensation deductions that are being utilized to reduce our U.S. taxable income. In 2014, we also had accelerated depreciation deductions on qualifying property that reduced our U.S. taxable income as a result of U.S. legislation that expired in December 2014. Cash paid for income taxes (net of refunds) was $80 million and $38 million for Q3 2015 and Q3 2014, and $200 million and $148 million for the nine months ended September 30, 2015 and 2014. As of December 31, 2014, our federal net operating loss carryforward was approximately $1.9 billion and we had approximately $443 million of federal tax credits potentially available to offset future tax liabilities. Our federal tax credits are primarily related to the U.S. federal research and development credit, which expired in December 2014. As we utilize our federal net operating losses and tax credits, we expect cash paid for taxes to significantly increase. We endeavor to manage our global taxes on a cash basis, rather than on a financial reporting basis.
Our liquidity is also affected by restricted cash balances that are pledged as collateral for standby and trade letters of credit, guarantees, debt, and real estate leases. To the extent we process payments for third-party sellers or offer certain types of stored value to our customers, some jurisdictions may restrict our use of those funds. These restrictions would result in the reclassification of a portion of our cash and cash equivalents from “Cash and cash equivalents” to “Accounts receivable, net and other” on our consolidated balance sheets. As of September 30, 2015, and December 31, 2014, restricted cash, cash equivalents, and marketable securities were $239 million and $450 million. See Item 1 of Part I, “Financial Statements — Note 3 — Commitments and Contingencies” for additional discussion of our principal contractual commitments, as well as our pledged assets. Purchase obligations and open purchase orders, consisting of inventory and significant non-inventory commitments, were $7.8 billion as of September 30, 2015. Purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions.
Because of our model we are able to turn our inventory quickly and have a cash-generating operating cycle3. On average, our high inventory velocity means we generally collect from consumers before our payments to suppliers come due. Inventory turnover4 was 9 for Q3 2015 and Q3 2014. We expect variability in inventory turnover over time since it is affected by several factors, including our product mix, the mix of sales by us and by third-party sellers, our continuing focus on in-stock inventory availability and selection of product offerings, our investment in new geographies and product lines, and the extent to which we choose to utilize third-party fulfillment providers.
_______________________
| |
(3) | The operating cycle is number of days of sales in inventory plus number of days of sales in accounts receivable minus accounts payable days. |
| |
(4) | Inventory turnover is the quotient of trailing twelve month cost of sales to average inventory over five quarter ends. |
We believe that cash flows generated from operations, our cash, cash equivalents, and marketable securities balances, and borrowing available under our credit agreements will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part II, “Risk Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, obtain capital, finance, and operating lease arrangements, repurchase common stock, pay dividends, or repurchase, refinance, or otherwise restructure our debt for strategic reasons or to further strengthen our financial position.
The sale of additional equity or convertible debt securities would likely be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, and technologies, which might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that additional lines-of-credit or financing instruments will be available in amounts or on terms acceptable to us, if at all.
Results of Operations
Beginning in the first quarter of 2015, we changed our reportable segments to North America, International, and AWS. These segments reflect changes in the way the Company evaluates its business performance and manages its operations. See Item 1 of Part I, “Financial Statements — Note 8 — Segment Information.”
Net Sales
Net sales include product and service sales. Product sales represent revenue from the sale of products and related shipping fees and digital media content where we record revenue gross. Service sales represent third-party seller fees earned (including commissions) and related shipping fees, digital content subscriptions, AWS sales, advertising services, and our co-branded credit card agreements. Amazon Prime membership fees are allocated between product sales and service sales and amortized over the life of the membership according to the estimated delivery of services. Net sales information is as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net Sales: | | | | | | | |
North America | $ | 15,006 |
| | $ | 11,699 |
| | $ | 42,208 |
| | $ | 33,499 |
|
International | 8,267 |
| | 7,711 |
| | 23,577 |
| | 22,936 |
|
AWS | 2,085 |
| | 1,169 |
| | 5,474 |
| | 3,224 |
|
Total consolidated | $ | 25,358 |
| | $ | 20,579 |
| | $ | 71,259 |
| | $ | 59,659 |
|
Year-over-year Percentage Growth: | | | | | | | |
North America | 28 | % | | 23 | % | | 26 | % | | 24 | % |
International | 7 |
| | 14 |
| | 3 |
| | 17 |
|
AWS | 78 |
| | 43 |
| | 70 |
| | 50 |
|
Total consolidated | 23 |
| | 20 |
| | 19 |
| | 22 |
|
Year-over-year Percentage Growth, excluding effect of foreign exchange rates: | | | | | | | |
North America | 29 | % | | 23 | % | | 26 | % | | 24 | % |
International | 24 |
| | 13 |
| | 20 |
| | 15 |
|
AWS | 78 |
| | 43 |
| | 70 |
| | 50 |
|
Total consolidated | 30 |
| | 20 |
| | 26 |
| | 22 |
|
Net Sales Mix: | | | | | | | |
North America | 59 | % | | 57 | % | | 59 | % | | 56 | % |
International | 33 |
| | 37 |
| | 33 |
| | 39 |
|
AWS | 8 |
| | 6 |
| | 8 |
| | 5 |
|
Total consolidated | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Sales increased 23% in Q3 2015 and 19% for the nine months ended September 30, 2015, compared to the comparable prior year periods. Changes in foreign currency exchange rates impacted net sales by $(1.3) billion and $13 million for Q3 2015 and Q3 2014, and by $(4.0) billion and $259 million for the nine months ended September 30, 2015 and 2014. For a discussion of the effect on sales growth of foreign exchange rates, see “Effect of Foreign Exchange Rates” below.
North America sales increased 28% in Q3 2015 and 26% for the nine months ended September 30, 2015, compared to the comparable prior year periods. The sales growth primarily reflects increased unit sales, including sales by marketplace sellers. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, from sales in faster growing categories such as electronics and other general merchandise, increased in-stock inventory availability, and increased selection of product offerings.
International sales increased 7% in Q3 2015 and 3% for the nine months ended September 30, 2015, compared to the comparable prior year periods. The sales growth primarily reflects increased unit sales, including sales by marketplace sellers, offset by the unfavorable effect of foreign exchange rates. Changes in foreign currency exchange rates impacted International net sales by $(1.3) billion and $21 million for Q3 2015 and Q3 2014, and $(3.9) billion and $292 million for the nine months ended September 30, 2015 and 2014. Increased unit sales were driven largely by our continued efforts to reduce prices for our
customers, including from our shipping offers, from sales in faster growing categories such as electronics and other general merchandise, increased in-stock inventory availability, and increased selection of product offerings.
AWS sales increased 78% in Q3 2015 and 70% for the nine months ended September 30, 2015, compared to the comparable prior year periods. The sales growth primarily reflects increased customer usage, partially offset by pricing changes. Pricing changes were driven largely by our continued efforts to reduce prices for our customers.
Segment Operating Income (Loss)
Segment operating income (loss) is as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Segment Operating Income (Loss) | | | | | | | |
North America | $ | 528 |
| | $ | (60 | ) | | $ | 1,747 |
| | $ | 559 |
|
International | (56 | ) | | (174 | ) | | (151 | ) | | (208 | ) |
AWS | 521 |
| | 98 |
| | 1,177 |
| | 420 |
|
The increase in North America segment operating income in absolute dollars in Q3 2015 and for the nine months ended September 30, 2015, compared to the comparable prior year periods, is primarily due to increased unit sales, including sales by marketplace sellers, partially offset by increased levels of operating expenses to expand our fulfillment capacity and spending on technology infrastructure. There was a favorable impact from foreign exchange rates of $11 million and $24 million for Q3 2015 and for the nine months ended September 30, 2015.
The decrease in International segment operating loss in absolute dollars in Q3 2015 and for the nine months ended September 30, 2015, compared to the comparable prior year periods, is primarily due to increased unit sales, including sales by marketplace sellers, partially offset by increased levels of operating expenses to expand our fulfillment capacity and spending on technology infrastructure and marketing efforts. There was an unfavorable impact from foreign exchange rates of $64 million and $232 million for Q3 2015 and for the nine months ended September 30, 2015.
The increase in AWS segment operating income in absolute dollars in Q3 2015 and for the nine months ended September 30, 2015, compared to the comparable prior year periods, is primarily due to increased customer usage and cost structure productivity, partially offset by pricing changes and increased spending on technology infrastructure, which was primarily driven by additional investments to support the business growth. There was a favorable impact from foreign exchange rates of $78 million and $204 million for Q3 2015 and for the nine months ended September 30, 2015.
Supplemental Information
Supplemental information about outbound shipping results for our North America and International segments is as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Outbound Shipping Activity: | | | | | | | |
Shipping revenue (1)(2)(3) | $ | 1,494 |
| | $ | 1,048 |
| | $ | 4,192 |
| | $ | 2,786 |
|
Shipping costs (4) | (2,720 | ) | | (2,020 | ) | | (7,369 | ) | | (5,661 | ) |
Net shipping cost | $ | (1,226 | ) | | $ | (972 | ) | | $ | (3,177 | ) | | $ | (2,875 | ) |
Year-over-year Percentage Growth: | | | | | | | |
Shipping revenue | 43 | % | | 45 | % | | 50 | % | | 39 | % |
Shipping costs | 35 |
| | 32 |
| | 30 |
| | 32 |
|
Net shipping cost | 26 |
| | 20 |
| | 11 |
| | 25 |
|
Percent of Net Sales: (5) | | | | | | | |
Shipping revenue | 6.4 | % | | 5.4 | % | | 6.4 | % | | 5.0 | % |
Shipping costs | (11.7 | ) | | (10.4 | ) | | (11.2 | ) | | (10.0 | ) |
Net shipping cost | (5.3 | )% | | (5.0 | )% | | (4.8 | )% | | (5.0 | )% |
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(1) | Excludes amounts charged on shipping activities by third-party sellers where we do not provide the fulfillment service. |
| |
(2) | Includes a portion of amounts earned from Amazon Prime memberships. |
| |
(3) | Includes amounts earned from Fulfillment by Amazon programs related to shipping services. |
| |
(4) | Includes sortation and delivery center costs. |
| |
(5) | Includes North America and International segment net sales. |
We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, our product mix shifts to the electronics and other general merchandise category, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services. We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing placement of fulfillment centers, negotiating better terms with our suppliers, and achieving better operating efficiencies. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers.
We have aggregated our North America and International segment products and services into groups of similar products and services and provided the supplemental disclosure of net sales (in millions) below. We evaluate whether additional disclosure is appropriate when a product or service category begins to approach a significant level of net sales. For the periods presented no individual product or service represented more than 10% of net sales.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net Sales: | | | |
North America | | | | | | | |
Media | $ | 2,963 |
| | $ | 2,734 |
| | $ | 8,552 |
| | $ | 8,022 |
|
Electronics and other general merchandise | 11,840 |
| | 8,793 |
| | 33,077 |
| | 24,988 |
|
Other (1) | 203 |
| | 172 |
| | 579 |
| | 489 |
|
Total North America | $ | 15,006 |
| | $ | 11,699 |
| | $ | 42,208 |
| | $ | 33,499 |
|
International | | | | | | | |
Media | $ | 2,320 |
| | $ | 2,510 |
| | $ | 6,734 |
| | $ | 7,532 |
|
Electronics and other general merchandise | 5,901 |
| | 5,160 |
| | 16,705 |
| | 15,260 |
|
Other (1) | 46 |
| | 41 |
| | 138 |
| | 144 |
|
Total International | $ | 8,267 |
| | $ | 7,711 |
| | $ | 23,577 |
| | $ | 22,936 |
|
Year-over-year Percentage Growth: | | | | | | | |
North America | | | | | | | |
Media | 8 | % | | 5 | % | | 7 | % | | 10 | % |
Electronics and other general merchandise | 35 |
| | 31 |
| | 32 |
| | 29 |
|
Other | 18 |
| | 20 |
| | 19 |
| | 19 |
|
Total North America | 28 |
| | 23 |
| | 26 |
| | 24 |
|
International | | | | | | | |
Media | (8 | )% | | 4 | % | | (11 | )% | | 5 | % |
Electronics and other general merchandise | 14 |
| | 20 |
| | 9 |
| | 24 |
|
Other | 10 |
| | (18 | ) | | (4 | ) | | (1 | ) |
Total International | 7 |
| | 14 |
| | 3 |
| | 17 |
|
Year-over-year Percentage Growth, excluding the effect of foreign exchange rates: | | | | | | | |
North America | | | | | | | |
Media | 9 | % | | 5 | % | | 7 | % | | 10 | % |
Electronics and other general merchandise | 35 |
| | 31 |
| | 33 |
| | 29 |
|
Other | 18 |
| | 20 |
| | 18 |
| | 19 |
|
Total North America | 29 |
| | 23 |
| | 26 |
| | 24 |
|
International | | | | | | | |
Media | 6 | % | | 3 | % | | 4 | % | | 4 | % |
Electronics and other general merchandise | 32 |
| | 19 |
| | 28 |
| | 22 |
|
Other | 26 |
| | (19 | ) | | 11 |
| | (3 | ) |
Total International | 24 |
| | 13 |
| | 20 |
| | 15 |
|
_____________________________
| |
(1) | Includes sales from non-retail activities, such as certain advertising services and our co-branded credit card agreements. |
Operating Expenses
Information about operating expenses with and without stock-based compensation is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| As Reported | | Stock-Based Compensation | | Net | | As Reported | | Stock-Based Compensation | | Net | | As Reported | | Stock-Based Compensation | | Net | | As Reported | | Stock-Based Compensation | | Net |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales | $ | 16,755 |
| | $ | — |
| | $ | 16,755 |
| | $ | 14,627 |
| | $ | — |
| | $ | 14,627 |
| | $ | 47,310 |
| | $ |