Comparative Analysis Problem: Amazon.com, Inc vs. WalMart Stores, Inc

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timer Asked: Feb 10th, 2017
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Question Description

Write a 1,050-word comparative analysis using

- The financial statements of Amazon.com, Inc. presented in the attached "Amazon 2014 Annual Report" - The Notes to Consolidated Financial Statements begin on page 43

- And the financial statements for Walmart Stores, Inc., presented in the attached "Walmart 2014 annual report" - The Notes to Consolidated Financial Statements begin on page 40.

  • Compute these 2014 values for each company based on the information in the financial statements:
    • Inventory turnover (Use cost of sales and inventories)
    • Days of inventory
  • Conclusions concerning the management of the inventory can you draw from this data.

Show work on the attached spreadsheet and submit with analysis.

Name Section Date Chapter 6 Comparative Analysis Problem 2 Amazon.com, Inc. vs. Wal-Mart Stores, Inc. (a) Amazon.com Inventory turnover: Days in inventory: (b) 377 Wal-Mart
To our shareowners: A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades. When you find one of these, don’t just swipe right, get married. Well, I’m pleased to report that Amazon hasn’t been monogamous in this regard. After two decades of risk taking and teamwork, and with generous helpings of good fortune all along the way, we are now happily wed to what I believe are three such life partners: Marketplace, Prime, and AWS. Each of these offerings was a bold bet at first, and sensible people worried (often!) that they could not work. But at this point, it’s become pretty clear how special they are and how lucky we are to have them. It’s also clear that there are no sinecures in business. We know it’s our job to always nourish and fortify them. We’ll approach the job with our usual tools: customer obsession rather than competitor focus, heartfelt passion for invention, commitment to operational excellence, and a willingness to think long-term. With good execution and a bit of continuing good luck, Marketplace, Prime, and AWS can be serving customers and earning financial returns for many years to come. Marketplace Marketplace’s early days were not easy. First, we launched Amazon Auctions. I think seven people came, if you count my parents and siblings. Auctions transformed into zShops, which was basically a fixed price version of Auctions. Again, no customers. But then we morphed zShops into Marketplace. Internally, Marketplace was known as SDP for Single Detail Page. The idea was to take our most valuable retail real estate – our product detail pages – and let third-party sellers compete against our own retail category managers. It was more convenient for customers, and within a year, it accounted for 5% of units. Today, more than 40% of our units are sold by more than two million third-party sellers worldwide. Customers ordered more than two billion units from sellers in 2014. The success of this hybrid model accelerated the Amazon flywheel. Customers were initially drawn by our fast-growing selection of Amazon-sold products at great prices with a great customer experience. By then allowing third parties to offer products side-by-side, we became more attractive to customers, which drew even more sellers. This also added to our economies of scale, which we passed along by lowering prices and eliminating shipping fees for qualifying orders. Having introduced these programs in the U.S., we rolled them out as quickly as we could to our other geographies. The result was a marketplace that became seamlessly integrated with all of our global websites. We work hard to reduce the workload for sellers and increase the success of their businesses. Through our Selling Coach program, we generate a steady stream of automated machine-learned “nudges” (more than 70 million in a typical week) – alerting sellers about opportunities to avoid going out-of-stock, add selection that’s selling, and sharpen their prices to be more competitive. These nudges translate to billions in increased sales to sellers. To further globalize Marketplace, we’re now helping sellers in each of our geographies – and in countries where we don’t have a presence – reach out to our customers in countries outside their home geographies. We hosted merchants from more than 100 different countries last year, and helped them connect with customers in 185 nations. Almost one-fifth of our overall third-party sales now occur outside the sellers’ home countries, and our merchants’ cross-border sales nearly doubled last year. In the EU, sellers can open a single account, manage their business in multiple languages, and make products available across our five EU websites. More recently, we’ve started consolidating cross-border shipments for sellers and helping them obtain ocean shipping from Asia to Europe and North America at preferential, bulk rates. Marketplace is the heart of our fast-growing operations in India, since all of our selection in India is offered by third-party sellers. Amazon.in now offers more selection than any other e-commerce site in India – with more than 20 million products offered from over 21,000 sellers. With our Easy Ship service, we pick up products from a seller and handle delivery all the way to the end customer. Building upon Easy Ship, the India team recently piloted Kirana Now, a service that delivers everyday essentials from local kirana (mom and pop) stores to customers in two to four hours, adding convenience for our customers and increasing sales for the stores participating in the service. Perhaps most important for sellers, we’ve created Fulfillment by Amazon. But I’ll save that for after we discuss Prime. Amazon Prime Ten years ago, we launched Amazon Prime, originally designed as an all-you-can-eat free and fast shipping program. We were told repeatedly that it was a risky move, and in some ways it was. In its first year, we gave up many millions of dollars in shipping revenue, and there was no simple math to show that it would be worth it. Our decision to go ahead was built on the positive results we’d seen earlier when we introduced Free Super Saver Shipping, and an intuition that customers would quickly grasp that they were being offered the best deal in the history of shopping. In addition, analysis told us that, if we achieved scale, we would be able to significantly lower the cost of fast shipping. Our owned-inventory retail business was the foundation of Prime. In addition to creating retail teams to build each of our category-specific online “stores,” we have created large-scale systems to automate much of inventory replenishment, inventory placement, and product pricing. The precise delivery-date promise of Prime required operating our fulfillment centers in a new way, and pulling all of this together is one of the great accomplishments of our global operations team. Our worldwide network of fulfillment centers has expanded from 13 in 2005, when we launched Prime, to 109 this year. We are now on our eighth generation of fulfillment center design, employing proprietary software to manage receipt, stowing, picking, and shipment. Amazon Robotics, which began with our acquisition of Kiva in 2012, has now deployed more than 15,000 robots to support the stowing and retrieval of products at a higher density and lower cost than ever before. Our ownedinventory retail business remains our best customer-acquisition vehicle for Prime and a critical part of building out categories that attract traffic and third-party sellers. Though fast delivery remains a core Prime benefit, we are finding new ways to pump energy into Prime. Two of the most important are digital and devices. In 2011 we added Prime Instant Video as a benefit, now with tens of thousands of movies and TV episodes available for unlimited streaming in the U.S., and we’ve started expanding the program into the U.K. and Germany as well. We’re investing a significant amount on this content, and it’s important that we monitor its impact. We ask ourselves, is it worth it? Is it driving Prime? Among other things, we watch Prime free trial starts, conversion to paid membership, renewal rates, and product purchase rates by members entering through this channel. We like what we see so far and plan to keep investing here. While most of our PIV spend is on licensed content, we’re also starting to develop original content. The team is off to a strong start. Our show Transparent became the first from a streaming service to win a Golden Globe for best series and Tumble Leaf won the Annie for best animated series for preschoolers. In addition to the critical acclaim, the numbers are promising. An advantage of our original programming is that its first run is on Prime – it hasn’t already appeared anywhere else. Together with the quality of the shows, that first run status appears to be one of the factors leading to the attractive numbers. We also like the fixed cost nature of original programming. We get to spread that fixed cost across our large membership base. Finally, our business model for original content is unique. I’m pretty sure we’re the first company to have figured out how to make winning a Golden Globe pay off in increased sales of power tools and baby wipes! Amazon designed and manufactured devices – from Kindle to Fire TV to Echo – also pump energy into Prime services such as Prime Instant Video and Prime Music, and generally drive higher engagement with every element of the Amazon ecosystem. And there’s more to come – our device team has a strong and exciting roadmap ahead. Prime isn’t done improving on its original fast and free shipping promise either. The recently launched Prime Now offers Prime members free two-hour delivery on tens of thousands of items or one-hour delivery for a $7.99 fee. Lots of early reviews read like this one, “In the past six weeks my husband and I have made an embarrassing number of orders through Amazon Prime Now. It’s cheap, easy, and insanely fast.” We’ve launched in Manhattan, Brooklyn, Miami, Baltimore, Dallas, Atlanta, and Austin, and more cities are coming soon. Now, I’d like to talk about Fulfillment by Amazon. FBA is so important because it is glue that inextricably links Marketplace and Prime. Thanks to FBA, Marketplace and Prime are no longer two things. In fact, at this point, I can’t really think about them separately. Their economics and customer experiences are now happily and deeply intertwined. FBA is a service for Marketplace sellers. When a seller decides to use FBA, they stow their inventory in our fulfillment centers. We take on all logistics, customer service, and product returns. If a customer orders an FBA item and an Amazon owned-inventory item, we can ship both items to the customer in one box – a huge efficiency gain. But even more important, when a seller joins FBA, their items can become Prime eligible. Maintaining a firm grasp of the obvious is more difficult than one would think it should be. But it’s useful to try. If you ask, what do sellers want? The correct (and obvious) answer is: they want more sales. So, what happens when sellers join FBA and their items become Prime eligible? They get more sales. Notice also what happens from a Prime member’s point of view. Every time a seller joins FBA, Prime members get more Prime eligible selection. The value of membership goes up. This is powerful for our flywheel. FBA completes the circle: Marketplace pumps energy into Prime, and Prime pumps energy into Marketplace. In a 2014 survey of U.S. sellers, 71% of FBA merchants reported more than a 20% increase in unit sales after joining FBA. In the holiday period, worldwide FBA units shipped grew 50% over the prior year and represented more than 40% of paid third-party units. Paid Prime memberships grew more than 50% in the U.S. last year and 53% worldwide. FBA is a win for customers and a win for sellers. Amazon Web Services A radical idea when it was launched nine years ago, Amazon Web Services is now big and growing fast. Startups were the early adopters. On-demand, pay-as-you-go cloud storage and compute resources dramatically increased the speed of starting a new business. Companies like Pinterest, Dropbox, and Airbnb all used AWS services and remain customers today. Since then, large enterprises have been coming on board as well, and they’re choosing to use AWS for the same primary reason the startups did: speed and agility. Having lower IT cost is attractive, and sometimes the absolute cost savings can be enormous. But cost savings alone could never overcome deficiencies in performance or functionality. Enterprises are dependent on IT – it’s mission critical. So, the proposition, “I can save you a significant amount on your annual IT bill and my service is almost as good as what you have now,” won’t get too many customers. What customers really want in this arena is “better and faster,” and if “better and faster” can come with a side dish of cost savings, terrific. But the cost savings is the gravy, not the steak. IT is so high leverage. You don’t want to imagine a competitor whose IT department is more nimble than yours. Every company has a list of technology projects that the business would like to see implemented as soon as possible. The painful reality is that tough triage decisions are always made, and many projects never get done. Even those that get resourced are often delivered late or with incomplete functionality. If an IT department can figure out how to deliver a larger number of business-enabling technology projects faster, they’ll be creating significant and real value for their organization. These are the main reasons AWS is growing so quickly. IT departments are recognizing that when they adopt AWS, they get more done. They spend less time on low value-add activities like managing datacenters, networking, operating system patches, capacity planning, database scaling, and so on and so on. Just as important, they get access to powerful APIs and tools that dramatically simplify building scalable, secure, robust, high-performance systems. And those APIs and tools are continuously and seamlessly upgraded behind the scenes, without customer effort. Today, AWS has more than a million active customers as companies and organizations of all sizes use AWS in every imaginable business segment. AWS usage grew by approximately 90% in the fourth quarter of 2014 versus the prior year. Companies like GE, Major League Baseball, Tata Motors, and Qantas are building new applications on AWS – these range from apps for crowdsourcing and personalized healthcare to mobile apps for managing fleets of trucks. Other customers, like NTT DOCOMO, the Financial Times, and the Securities and Exchange Commission are using AWS to analyze and take action on vast amounts of data. And many customers like Condé Nast, Kellogg’s, and News Corp are migrating legacy critical applications and, in some cases, entire datacenters to AWS. We’ve increased our pace of innovation as we’ve gone along – from nearly 160 new features and services in 2012, to 280 in 2013, and 516 last year. There are many that would be interesting to talk about – from WorkDocs and WorkMail to AWS Lambda and the EC2 Container Service to the AWS Marketplace – but for purposes of brevity, I’m going to limit myself to one: our recently introduced Amazon Aurora. We hope Aurora will offer customers a new normal for a very important (but also very problematic) technology that is a critical underpinning of many applications: the relational database. Aurora is a MySQL-compatible database engine that offers the speed and availability of high-end commercial databases with the simplicity and cost effectiveness of open source databases. Aurora’s performance is up to 5x better than typical MySQL databases, at one-tenth the cost of commercial database packages. Relational databases is an arena that’s been a pain point for organizations and developers for a long time, and we’re very excited about Aurora. I believe AWS is one of those dreamy business offerings that can be serving customers and earning financial returns for many years into the future. Why am I optimistic? For one thing, the size of the opportunity is big, ultimately encompassing global spend on servers, networking, datacenters, infrastructure software, databases, data warehouses, and more. Similar to the way I think about Amazon retail, for all practical purposes, I believe AWS is market-size unconstrained. Second, its current leadership position (which is significant) is a strong ongoing advantage. We work hard – very hard – to make AWS as easy to use as possible. Even so, it’s still a necessarily complex set of tools with rich functionality and a non-trivial learning curve. Once you’ve become proficient at building complex systems with AWS, you do not want to have to learn a new set of tools and APIs assuming the set you already understand works for you. This is in no way something we can rest on, but if we continue to serve our customers in a truly outstanding way, they will have a rational preference to stick with us. In addition, also because of our leadership position, we now have thousands of what are effectively AWS ambassadors roaming the world. Software developers changing jobs, moving from one company to another, become our best sales people: “We used AWS where I used to work, and we should consider it here. I think we’d get more done.” It’s a good sign that proficiency with AWS and its services is already something software developers are adding to their resumes. Finally, I’m optimistic that AWS will have strong returns on capital. This is one we as a team examine because AWS is capital intensive. The good news is we like what we see when we do these analyses. Structurally, AWS is far less capital intensive than the mode it’s replacing – do-it-yourself datacenters – which have low utilization rates, almost always below 20%. Pooling of workloads across customers gives AWS much higher utilization rates, and correspondingly higher capital efficiency. Further, once again our leadership position helps: scale economies can provide us a relative advantage on capital efficiency. We’ll continue to watch and shape the business for good returns on capital. AWS is young, and it is still growing and evolving. We think we can continue to lead if we continue to execute with our customers’ needs foremost in mind. Career Choice Before closing, I want to take a moment to update shareowners on something we’re excited about and proud of. Three years ago we launched an innovative employee benefit – the Career Choice program, where we pre-pay 95% of tuition for employees to take courses for in-demand fields, such as airplane mechanic or nursing, regardless of whether the skills are relevant to a career at Amazon. The idea was simple: enable choice. We know that, for some of our fulfillment and customer service center employees, Amazon will be a career. For others, Amazon might be a stepping stone on the way to a job somewhere else – a job that may require new skills. If the right training can make the difference, we want to help, and so far we have been able to help over 2,000 employees who have participated in the program in eight different countries. There’s been so much interest that we are now building onsite classrooms so college and technical classes can be taught inside our fulfillment centers, making it even easier for associates to achieve these goals. There are now eight FCs offering 15 classes taught onsite in our purpose-built classrooms with high-end technology features, and designed with glass walls to inspire others to participate and generate encouragement from peers. We believe Career Choice is an innovative way to draw great talent to serve customers in our fulfillment and customer service centers. These jobs can become gateways to great careers with Amazon as we expand around the world or enable employees the opportunity to follow their passion in other in-demand technical fields, like our very first Career Choice graduate did when she started a new career as a nurse in her community. I would also like to invite you to come join the more than 24,000 people who have signed up so far to see the magic that happens after you click buy on Amazon.com by touring one of our fulfillment centers. In addition to U.S. tours, we are now offering tours at sites around the world, including Rugeley in the U.K. and Graben in Germany and continuing to expand. You can sign up for a tour at www.amazon.com/fctours. * * * Marketplace, Prime, and Amazon Web Services are three big ideas. We’re lucky to have them, and we’re determined to improve and nurture them – make them even better for customers. You can also count on us to work hard to find a fourth. We’ve already got a number of candidates in work, and as we promised some twenty years ago, we’ll continue to make bold bets. With the opportunities unfolding in front of us to serve customers better through invention, we assure you we won’t stop trying. As always, I attach a copy of our original 1997 letter. Our approach remains the same, because it’s still Day 1. Jeffrey P. Bezos Founder and Chief Executive Officer Amazon.com, Inc. 1997 LETTER TO SHAREHOLDERS (Reprinted from the 1997 Annual Report) To our shareholders: Amazon.com passed many milestones in 1997: by year-end, we had served more than 1.5 million customers, yielding 838% revenue growth to $147.8 million, and extended our market leadership despite aggressive competitive entry. But this is Day 1 for the Internet and, if we execute well, for Amazon.com. Today, online commerce saves customers money and precious time. Tomorrow, through personalization, online commerce will accelerate the very process of discovery. Amazon.com uses the Internet to create real value for its customers and, by doing so, hopes to create an enduring franchise, even in established and large markets. We have a window of opportunity as larger players marshal the resources to pursue the online opportunity and as customers, new to purchasing online, are receptive to forming new relationships. The competitive landscape has continued to evolve at a fast pace. Many large players have moved online with credible offerings and have devoted substantial energy and resources to building awareness, traffic, and sales. Our goal is to move quickly to solidify and extend our current position while we begin to pursue the online commerce opportunities in other areas. We see substantial opportunity in the large markets we are targeting. This strategy is not without risk: it requires serious investment and crisp execution against established franchise leaders. It’s All About the Long Term We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital. Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise. Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies. Accordingly, we want to share with you our fundamental management and decision-making approach so that you, our shareholders, may confirm that it is consistent with your investment philosophy: • We will continue to focus relentlessly on our customers. • We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions. • We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will continue to learn from both our successes and our failures. • We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case. • When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows. • We will share our strategic thought processes with you when we make bold choices (to the extent competitive pressures allow), so that you may evaluate for yourselves whether we are making rational long-term leadership investments. • We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture, particularly in a business incurring net losses. • We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model. • We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner. We aren’t so bold as to claim that the above is the “right” investment philosophy, but it’s ours, and we would be remiss if we weren’t clear in the approach we have taken and will continue to take. With this foundation, we would like to turn to a review of our business focus, our progress in 1997, and our outlook for the future. Obsess Over Customers From the beginning, our focus has been on offering our customers compelling value. We realized that the Web was, and still is, the World Wide Wait. Therefore, we set out to offer customers something they simply could not get any other way, and began serving them with books. We brought them much more selection than was possible in a physical store (our store would now occupy 6 football fields), and presented it in a useful, easyto-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day. We maintained a dogged focus on improving the shopping experience, and in 1997 substantially enhanced our store. We now offer customers gift certificates, 1-ClickSM shopping, and vastly more reviews, content, browsing options, and recommendation features. We dramatically lowered prices, further increasing customer value. Word of mouth remains the most powerful customer acquisition tool we have, and we are grateful for the trust our customers have placed in us. Repeat purchases and word of mouth have combined to make Amazon.com the market leader in online bookselling. By many measures, Amazon.com came a long way in 1997: • Sales grew from $15.7 million in 1996 to $147.8 million – an 838% increase. • Cumulative customer accounts grew from 180,000 to 1,510,000 – a 738% increase. • The percentage of orders from repeat customers grew from over 46% in the fourth quarter of 1996 to over 58% in the same period in 1997. • In terms of audience reach, per Media Metrix, our Web site went from a rank of 90th to within the top 20. • We established long-term relationships with many important strategic partners, including America Online, Yahoo!, Excite, Netscape, GeoCities, AltaVista, @Home, and Prodigy. Infrastructure During 1997, we worked hard to expand our business infrastructure to support these greatly increased traffic, sales, and service levels: • Amazon.com’s employee base grew from 158 to 614, and we significantly strengthened our management team. • Distribution center capacity grew from 50,000 to 285,000 square feet, including a 70% expansion of our Seattle facilities and the launch of our second distribution center in Delaware in November. • Inventories rose to over 200,000 titles at year-end, enabling us to improve availability for our customers. • Our cash and investment balances at year-end were $125 million, thanks to our initial public offering in May 1997 and our $75 million loan, affording us substantial strategic flexibility. Our Employees The past year’s success is the product of a talented, smart, hard-working group, and I take great pride in being a part of this team. Setting the bar high in our approach to hiring has been, and will continue to be, the single most important element of Amazon.com’s success. It’s not easy to work here (when I interview people I tell them, “You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three”), but we are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about. Such things aren’t meant to be easy. We are incredibly fortunate to have this group of dedicated employees whose sacrifices and passion build Amazon.com. Goals for 1998 We are still in the early stages of learning how to bring new value to our customers through Internet commerce and merchandising. Our goal remains to continue to solidify and extend our brand and customer base. This requires sustained investment in systems and infrastructure to support outstanding customer convenience, selection, and service while we grow. We are planning to add music to our product offering, and over time we believe that other products may be prudent investments. We also believe there are significant opportunities to better serve our customers overseas, such as reducing delivery times and better tailoring the customer experience. To be certain, a big part of the challenge for us will lie not in finding new ways to expand our business, but in prioritizing our investments. We now know vastly more about online commerce than when Amazon.com was founded, but we still have so much to learn. Though we are optimistic, we must remain vigilant and maintain a sense of urgency. The challenges and hurdles we will face to make our long-term vision for Amazon.com a reality are several: aggressive, capable, well-funded competition; considerable growth challenges and execution risk; the risks of product and geographic expansion; and the need for large continuing investments to meet an expanding market opportunity. However, as we’ve long said, online bookselling, and online commerce in general, should prove to be a very large market, and it’s likely that a number of companies will see significant benefit. We feel good about what we’ve done, and even more excited about what we want to do. 1997 was indeed an incredible year. We at Amazon.com are grateful to our customers for their business and trust, to each other for our hard work, and to our shareholders for their support and encouragement. Jeffrey P. Bezos Founder and Chief Executive Officer Amazon.com, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________________________ FORM 10-K ____________________________________ (Mark One) _ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 or … 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) Delaware 91-1646860 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 410 Terry Avenue North Seattle, Washington 98109-5210 (206) 266-1000 (Address and telephone number, including area code, of registrant’s principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, par value $.01 per share NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None ____________________________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes _ No … Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes … No _ 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 _ 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 _ No … Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _ 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. Large accelerated filer Non-accelerated filer _ … (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2014 Number of shares of common stock outstanding as of January 16, 2015 Yes … … … No _ $ 122,614,381,040 464,383,939 ____________________________________ DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2015, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. AMAZON.COM, INC. FORM 10-K For the Fiscal Year Ended December 31, 2014 INDEX Page PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures 3 6 14 15 15 15 Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART II Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities Selected Consolidated Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operation Quantitative and Qualitative Disclosure About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 16 17 18 34 36 72 72 74 Item 10. Item 11. Item 12. Item 13. Item 14. PART III Directors, Executive Officers, and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services 74 74 74 74 74 Item 5. PART IV Item 15. Exhibits, Financial Statement Schedules Signatures 75 76 2 AMAZON.COM, INC. PART I Item 1. Business This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates, and projections as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 1A of Part I—“Risk Factors.” Amazon.com, Inc. was incorporated in 1994 in the state of Washington and reincorporated in 1996 in the state of Delaware. Our principal corporate offices are located in Seattle, Washington. We completed our initial public offering in May 1997 and our common stock is listed on the NASDAQ Global Select Market under the symbol “AMZN.” As used herein, “Amazon.com,” “we,” “our,” and similar terms include Amazon.com, Inc. and its subsidiaries, unless the context indicates otherwise. General Amazon.com opened its virtual doors on the World Wide Web in July 1995. We seek to be Earth’s most customer-centric company. We are guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking. In each of our two geographic segments, we serve our primary customer sets, consisting of consumers, sellers, enterprises, and content creators. In addition, we provide services, such as advertising services and co-branded credit card agreements. We manage our business primarily on a geographic basis. Accordingly, we have organized our operations into two segments: North America and International. While each reportable operating segment provides similar products and services, a majority of our technology costs are incurred in the U.S. and included in our North America segment. Additional information on our operating segments and product information is contained in Item 8 of Part II, “Financial Statements and Supplementary Data—Note 12—Segment Information.” See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Supplemental Information” for supplemental information about our net sales. Our company-sponsored research and development expense is set forth within “Technology and content” in Item 8 of Part II, “Financial Statements and Supplementary Data—Consolidated Statements of Operations.” Consumers We serve consumers through our retail websites and focus on selection, price, and convenience. We design our websites to enable millions of unique products to be sold by us and by third parties across dozens of product categories. Customers access our websites directly and through our mobile websites and apps. We also manufacture and sell electronic devices, including Kindle e-readers, Fire tablets, Fire TVs, Echo, and Fire phones. We strive to offer our customers the lowest prices possible through low everyday product pricing and shipping offers, and to improve our operating efficiencies so that we can continue to lower prices for our customers. We also provide easy-to-use functionality, fast and reliable fulfillment, and timely customer service. In addition, we offer Amazon Prime, an annual membership program that includes unlimited free shipping on millions of items, access to unlimited instant streaming of thousands of movies and TV episodes, and access to hundreds of thousands of books to borrow and read for free on a Kindle device. We fulfill customer orders in a number of ways, including through: North America and International fulfillment and delivery networks that we operate; co-sourced and outsourced arrangements in certain countries; and digital delivery. We operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.” Sellers We offer programs that enable sellers to sell their products on our websites and their own branded websites and to fulfill orders through us. We are not the seller of record in these transactions, but instead earn fixed fees, revenue share fees, per-unit activity fees, or some combination thereof. Enterprises We serve developers and enterprises of all sizes through Amazon Web Services (“AWS”), which offers a broad set of global compute, storage, database, analytics, applications, and deployment services that enable virtually any type of business. 3 Content Creators We serve authors and independent publishers with Kindle Direct Publishing, an online platform that lets independent authors and publishers choose a 70% royalty option and make their books available in the Kindle Store, along with Amazon’s own publishing arm, Amazon Publishing. We also offer programs that allow authors, musicians, filmmakers, app developers, and others to publish and sell content. Competition Our businesses are rapidly evolving and intensely competitive. Our current and potential competitors include: (1) physicalworld retailers, publishers, vendors, distributors, manufacturers, and producers of our products; (2) other online e-commerce and mobile e-commerce sites, including sites that sell or distribute digital content; (3) media companies, web portals, comparison shopping websites, web search engines, and social networks, either directly or in collaboration with other retailers; (4) companies that provide e-commerce services, including website development, fulfillment, customer service, and payment processing; (5) companies that provide information storage or computing services or products, including infrastructure and other web services; and (6) companies that design, manufacture, market, or sell consumer electronics, telecommunication, and electronic devices. We believe that the principal competitive factors in our retail businesses include selection, price, and convenience, including fast and reliable fulfillment. Additional competitive factors for our seller and enterprise services include the quality, speed, and reliability of our services and tools. Many of our current and potential competitors have greater resources, longer histories, more customers, and greater brand recognition. They may secure better terms from suppliers, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing. Other companies also may enter into business combinations or alliances that strengthen their competitive positions. Intellectual Property We regard our trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, and others to protect our proprietary rights. We have registered, or applied for the registration of, a number of U.S. and international domain names, trademarks, service marks, and copyrights. Additionally, we have filed U.S. and international patent applications covering certain of our proprietary technology. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights to third parties. Seasonality Our business is affected by seasonality, which historically has resulted in higher sales volume during our fourth quarter, which ends December 31. We recognized 33%, 34%, and 35% of our annual revenue during the fourth quarter of 2014, 2013, and 2012. Employees We employed approximately 154,100 full-time and part-time employees as of December 31, 2014. However, employment levels fluctuate due to seasonal factors affecting our business. Additionally, we utilize independent contractors and temporary personnel to supplement our workforce. We have works councils, statutory employee representation obligations, and union agreements in certain countries outside the United States. We consider our employee relations to be good. Competition for qualified personnel in our industry has historically been intense, particularly for software engineers, computer scientists, and other technical staff. Available Information Our investor relations website is www.amazon.com/ir and we encourage investors to use it as a way of easily finding information about us. We promptly make available on this website, free of charge, the reports that we file or furnish with the Securities and Exchange Commission (“SEC”), corporate governance information (including our Code of Business Conduct and Ethics), and select press releases and social media postings. 4 Executive Officers and Directors The following tables set forth certain information regarding our Executive Officers and Directors as of January 16, 2015: Executive Officers of the Registrant Name Age Jeffrey P. Bezos Jeffrey M. Blackburn Andrew R. Jassy Diego Piacentini Shelley L. Reynolds Thomas J. Szkutak Jeffrey A. Wilke David A. Zapolsky 51 45 47 54 50 54 48 51 Position President, Chief Executive Officer, and Chairman of the Board Senior Vice President, Business Development Senior Vice President, Amazon Web Services Senior Vice President, International Consumer Business Vice President, Worldwide Controller, and Principal Accounting Officer Senior Vice President and Chief Financial Officer Senior Vice President, Consumer Business Senior Vice President, General Counsel, and Secretary Jeffrey P. Bezos. Mr. Bezos has been Chairman of the Board of Amazon.com since founding it in 1994 and Chief Executive Officer since May 1996. Mr. Bezos served as President of the Company from founding until June 1999 and again from October 2000 to the present. Jeffrey M. Blackburn. Mr. Blackburn has served as Senior Vice President, Business Development, since April 2006. Andrew R. Jassy. Mr. Jassy has served as Senior Vice President, Amazon Web Services, since April 2006. Diego Piacentini. Mr. Piacentini has served as Senior Vice President, International Consumer Business, since February 2012, and as Senior Vice President, International Retail, from January 2007 until February 2012. Shelley L. Reynolds. Ms. Reynolds has served as Vice President, Worldwide Controller, and Principal Accounting Officer since April 2007. Thomas J. Szkutak. Mr. Szkutak has served as Senior Vice President and Chief Financial Officer since joining Amazon.com in October 2002. Mr. Szkutak plans to retire in June 2015. Jeffrey A. Wilke. Mr. Wilke has served as Senior Vice President, Consumer Business, since February 2012, and as Senior Vice President, North America Retail, from January 2007 until February 2012. David A. Zapolsky. Mr. Zapolsky has served as Senior Vice President, General Counsel, and Secretary since May 2014, Vice President, General Counsel, and Secretary from September 2012 to May 2014, and as Vice President and Associate General Counsel for Litigation and Regulatory matters from April 2002 until September 2012. Board of Directors Name Age Jeffrey P. Bezos Tom A. Alberg John Seely Brown William B. Gordon Jamie S. Gorelick Judith A. McGrath Alain Monié Jonathan J. Rubinstein Thomas O. Ryder Patricia Q. Stonesifer 51 74 74 64 64 62 64 58 70 58 Position President, Chief Executive Officer, and Chairman of the Board Managing Director, Madrona Venture Group Visiting Scholar and Advisor to the Provost, University of Southern California Partner, Kleiner Perkins Caufield & Byers Partner, Wilmer Cutler Pickering Hale and Dorr LLP President, Astronauts Wanted * No experience necessary Chief Executive Officer, Ingram Micro Inc. Former Chairman and CEO, Palm, Inc. Retired, Former Chairman, Reader’s Digest Association, Inc. President and Chief Executive Officer, Martha’s Table 5 Item 1A. Risk Factors Please carefully consider the following risk factors. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected. In addition, the current global economic climate amplifies many of these risks. We Face Intense Competition Our businesses are rapidly evolving and intensely competitive, and we have many competitors in different industries, including retail, e-commerce services, digital content and electronic devices, and web and infrastructure computing services. Some of our current and potential competitors have greater resources, longer histories, more customers, and/or greater brand recognition. They may secure better terms from vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing. Competition may intensify as our competitors enter into business combinations or alliances and established companies in other market segments expand to become competitive with our business. In addition, new and enhanced technologies, including search, web and infrastructure computing services, digital content, and electronic devices, may increase our competition. The Internet facilitates competitive entry and comparison shopping, and increased competition may reduce our sales and profits. Our Expansion Places a Significant Strain on our Management, Operational, Financial, and Other Resources We are rapidly and significantly expanding our global operations, including increasing our product and service offerings and scaling our infrastructure to support our retail and services businesses. This expansion increases the complexity of our business and places significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. We may not be able to manage growth effectively, which could damage our reputation, limit our growth, and negatively affect our operating results. Our Expansion into New Products, Services, Technologies, and Geographic Regions Subjects Us to Additional Business, Legal, Financial, and Competitive Risks We may have limited or no experience in our newer market segments, and our customers may not adopt our new offerings. These offerings may present new and difficult technology challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues. In addition, profitability, if any, in our newer activities may be lower than in our older activities, and we may not be successful enough in these newer activities to recoup our investments in them. If any of this were to occur, it could damage our reputation, limit our growth, and negatively affect our operating results. We May Experience Significant Fluctuations in Our Operating Results and Growth Rate We may not be able to accurately forecast our growth rate. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments is fixed, and we may not be able to adjust our spending quickly enough if our sales are less than expected. Our revenue growth may not be sustainable, and our percentage growth rates may decrease. Our revenue and operating profit growth depends on the continued growth of demand for the products and services offered by us or our sellers, and our business is affected by general economic and business conditions worldwide. A softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth. Our sales and operating results will also fluctuate for many other reasons, including due to risks described elsewhere in this section and the following: • our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ demands; • our ability to retain and expand our network of sellers; • our ability to offer products on favorable terms, manage inventory, and fulfill orders; • the introduction of competitive websites, products, services, price decreases, or improvements; • changes in usage or adoption rates of the Internet, e-commerce, electronic devices, and web services, including outside the U.S.; • timing, effectiveness, and costs of expansion and upgrades of our systems and infrastructure; 6 • the success of our geographic, service, and product line expansions; • the extent to which we finance, and the terms of any such financing for, our current operations and future growth; • the outcomes of legal proceedings and claims, which may include significant monetary damages or injunctive relief and could have a material adverse impact on our operating results; • variations in the mix of products and services we sell; • variations in our level of merchandise and vendor returns; • the extent to which we offer free shipping, continue to reduce prices worldwide, and provide additional benefits to our customers; • the extent to which we invest in technology and content, fulfillment, and other expense categories; • increases in the prices of fuel and gasoline, as well as increases in the prices of other energy products and commodities like paper and packing supplies; • the extent to which our equity-method investees record significant operating and non-operating items; • the extent to which operators of the networks between our customers and our websites successfully charge fees to grant our customers unimpaired and unconstrained access to our online services; • our ability to collect amounts owed to us when they become due; • the extent to which use of our services is affected by spyware, viruses, phishing and other spam emails, denial of service attacks, data theft, computer intrusions, outages, and similar events; and • terrorist attacks and armed hostilities. Our International Operations Expose Us to a Number of Risks Our international activities are significant to our revenues and profits, and we plan to further expand internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop, and maintain international operations and websites, and promote our brand internationally. Our international operations may not be profitable on a sustained basis. In addition to risks described elsewhere in this section, our international sales and operations are subject to a number of risks, including: • local economic and political conditions; • government regulation of e-commerce and other services, electronic devices, and competition, and restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs), nationalization, and restrictions on foreign ownership; • restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services, and content, including uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal precedent, and varying rules, regulations, and practices regarding the physical and digital distribution of media products and enforcement of intellectual property rights; • business licensing or certification requirements, such as for imports, exports, web services, and electronic devices; • limitations on the repatriation and investment of funds and foreign currency exchange restrictions; • limited fulfillment and technology infrastructure; • shorter payable and longer receivable cycles and the resultant negative impact on cash flow; • laws and regulations regarding consumer and data protection, privacy, network security, encryption, payments, and restrictions on pricing or discounts; • lower levels of use of the Internet; • lower levels of consumer spending and fewer opportunities for growth compared to the U.S.; • lower levels of credit card usage and increased payment risk; • difficulty in staffing, developing, and managing foreign operations as a result of distance, language, and cultural differences; 7 • different employee/employer relationships and the existence of works councils and labor unions; • compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties; • laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans, and taxes; and • geopolitical events, including war and terrorism. As international e-commerce and other online and web services grow, competition will intensify. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer, as well as their more established local brand names. We may not be able to hire, train, retain, and manage required personnel, which may limit our international growth. The People’s Republic of China (“PRC”) and India regulate Amazon’s and its affiliates’ businesses and operations in country through regulations and license requirements that may restrict (i) foreign investment in and operation of the Internet, IT infrastructure, data centers, retail, delivery, and other sectors, (ii) Internet content, and (iii) the sale of media and other products and services. For example, in order to meet local ownership and regulatory licensing requirements, www.amazon.cn is operated by PRC companies that are indirectly owned, either wholly or partially, by PRC nationals. In addition, we provide certain technology services in conjunction with third parties that hold PRC licenses to provide services. In India, the government restricts the ownership or control of Indian companies by foreign entities involved in online multi-brand retail trading activities. For www.amazon.in, we provide certain marketing tools and logistics services to third party sellers to enable them to sell online and deliver to customers. Although we believe these structures and activities comply with existing laws, they involve unique risks, and the PRC is actively considering changes in its foreign investment rules that could impact these structures and activities. There are substantial uncertainties regarding the interpretation of PRC and Indian laws and regulations, and it is possible that the government will ultimately take a view contrary to ours. In addition, our Chinese and Indian businesses and operations may be unable to continue to operate if we or our affiliates are unable to access sufficient funding or in China enforce contractual relationships with respect to management and control of such businesses. If our international activities were found to be in violation of any existing or future PRC, Indian or other laws or regulations or if interpretations of those laws and regulations were to change, our businesses in those countries could be subject to fines and other financial penalties, have licenses revoked, or be forced to shut down entirely. If We Do Not Successfully Optimize and Operate Our Fulfillment and Data Centers, Our Business Could Be Harmed If we do not adequately predict customer demand or otherwise optimize and operate our fulfillment and data centers successfully, it could result in excess or insufficient fulfillment or data center capacity, or result in increased costs, impairment charges, or both, or harm our business in other ways. As we continue to add fulfillment, warehouse, and data center capability or add new businesses with different requirements, our fulfillment and data center networks become increasingly complex and operating them becomes more challenging. There can be no assurance that we will be able to operate our networks effectively. In addition, a failure to optimize inventory in our fulfillment centers will increase our net shipping cost by requiring longzone or partial shipments. Orders from several of our websites are fulfilled primarily from a single location, and we have only a limited ability to reroute orders to third parties for drop-shipping. We and our co-sourcers may be unable to adequately staff our fulfillment and customer service centers. If the other businesses on whose behalf we perform inventory fulfillment services deliver product to our fulfillment centers in excess of forecasts, we may be unable to secure sufficient storage space and may be unable to optimize our fulfillment centers. We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it could negatively impact our operating results and customer experience. In addition, our ability to receive inbound inventory efficiently and ship completed orders to customers also may be negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism, acts of God, and similar factors. Third parties either drop-ship or otherwise fulfill an increasing portion of our customers’ orders, and we are increasingly reliant on the reliability, quality, and future procurement of their services. Under some of our commercial agreements, we maintain the inventory of other companies, thereby increasing the complexity of tracking inventory and operating our fulfillment centers. Our failure to properly handle such inventory or the inability of these other companies to accurately forecast product demand would result in unexpected costs and other harm to our business and reputation. 8 The Seasonality of Our Business Places Increased Strain on Our Operations We expect a disproportionate amount of our net sales to occur during our fourth quarter. If we do not stock or restock popular products in sufficient amounts such that we fail to meet customer demand, it could significantly affect our revenue and our future growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs and incur commitment costs, which could reduce profitability. We may experience an increase in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our websites within a short period of time due to increased holiday demand, we may experience system interruptions that make our websites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. In addition, we may be unable to adequately staff our fulfillment and customer service centers during these peak periods and delivery and other fulfillment companies and customer service co-sourcers may be unable to meet the seasonal demand. We also face risks described elsewhere in this Item 1A relating to fulfillment center optimization and inventory. We generally have payment terms with our retail vendors that extend beyond the amount of time necessary to collect proceeds from our consumer customers. As a result of holiday sales, as of December 31 of each year, our cash, cash equivalents, and marketable securities balances typically reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). This operating cycle results in a corresponding increase in accounts payable as of December 31. Our accounts payable balance generally declines during the first three months of the year, resulting in a corresponding decline in our cash, cash equivalents, and marketable securities balances. Our Business Could Suffer if We Are Unsuccessful in Making, Integrating, and Maintaining Commercial Agreements, Strategic Alliances, and Other Business Relationships We provide e-commerce and other services to businesses through commercial agreements, strategic alliances, and business relationships. Under these agreements, we provide web services, technology, fulfillment, computing, digital storage, and other services, as well as enable sellers to offer products or services through our websites. These arrangements are complex and require substantial infrastructure capacity, personnel, and other resource commitments, which may limit the amount of business we can service. We may not be able to implement, maintain, and develop the components of these commercial relationships, which may include web services, fulfillment, customer service, inventory management, tax collection, payment processing, hardware, content, and third-party software, and engaging third parties to perform services. The amount of compensation we receive under certain of our commercial agreements is partially dependent on the volume of the other company’s sales. Therefore, if the other company’s offering is not successful, the compensation we receive may be lower than expected or the agreement may be terminated. Moreover, we may not be able to enter into additional commercial relationships and strategic alliances on favorable terms. We also may be subject to claims from businesses to which we provide these services if we are unsuccessful in implementing, maintaining, or developing these services. As our agreements terminate, we may be unable to renew or replace these agreements on comparable terms, or at all. We may in the future enter into amendments on less favorable terms or encounter parties that have difficulty meeting their contractual obligations to us, which could adversely affect our operating results. Our present and future e-commerce services agreements, other commercial agreements, and strategic alliances create additional risks such as: • disruption of our ongoing business, including loss of management focus on existing businesses; • impairment of other relationships; • variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and • difficulty integrating under the commercial agreements. Our Business Could Suffer if We Are Unsuccessful in Making, Integrating, and Maintaining Acquisitions and Investments We have acquired and invested in a number of companies, and we may acquire or invest in or enter into joint ventures with additional companies. These transactions create risks such as: • disruption of our ongoing business, including loss of management focus on existing businesses; • problems retaining key personnel; • additional operating losses and expenses of the businesses we acquired or in which we invested; • the potential impairment of tangible and intangible assets and goodwill, including as a result of acquisitions; 9 • the potential impairment of customer and other relationships of the company we acquired or in which we invested or our own customers as a result of any integration of operations; • the difficulty of incorporating acquired technology and rights into our offerings and unanticipated expenses related to such integration; • the difficulty of integrating a new company’s accounting, financial reporting, management, information and information security, human resource, and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented; • for investments in which an investee’s financial performance is incorporated into our financial results, either in full or in part, the dependence on the investee’s accounting, financial reporting, and similar systems, controls, and processes; • the difficulty of implementing at companies we acquire the controls, procedures, and policies appropriate for a larger public company; • potential unknown liabilities associated with a company we acquire or in which we invest; and • for foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory risks associated with specific countries. As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which could reduce our profitability and harm our business. In addition, valuations supporting our acquisitions and strategic investments could change rapidly given the current global economic climate. We could determine that such valuations have experienced impairments or other-thantemporary declines in fair value which could adversely impact our financial results. We Have Foreign Exchange Risk The results of operations of, and certain of our intercompany balances associated with, our international websites and product and service offerings are exposed to foreign exchange rate fluctuations. Upon translation, operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. As we have expanded our international operations, our exposure to exchange rate fluctuations has increased. We also hold cash equivalents and/or marketable securities in foreign currencies including British Pounds, Chinese Yuan, Euros, and Japanese Yen. If the U.S. Dollar strengthens compared to these currencies, cash equivalents, and marketable securities balances, when translated, may be materially less than expected and vice versa. The Loss of Key Senior Management Personnel Could Negatively Affect Our Business We depend on our senior management and other key personnel, particularly Jeffrey P. Bezos, our President, CEO, and Chairman. We do not have “key person” life insurance policies. The loss of any of our executive officers or other key employees could harm our business. We Could Be Harmed by Data Loss or Other Security Breaches As a result of our services being web-based and the fact that we process, store, and transmit large amounts of data, including personal information, for our customers, failure to prevent or mitigate data loss or other security breaches, including breaches of our vendors’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability for us, and otherwise harm our business. We use third party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. Some subsidiaries had past security breaches, and, although they did not have a material adverse effect on our operating results, there can be no assurance of a similar result in the future. Although we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third party vendor, such measures cannot provide absolute security. We Face Risks Related to System Interruption and Lack of Redundancy We experience occasional system interruptions and delays that make our websites and services unavailable or slow to respond and prevent us from efficiently fulfilling orders or providing services to third parties, which may reduce our net sales and the attractiveness of our products and services. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure, and take other steps to improve the efficiency of our systems, it could cause system interruptions or delays and adversely affect our operating results. 10 Our computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic breakins, and similar events or disruptions. Any of these events could cause system interruption, delays, and loss of critical data, and could prevent us from accepting and fulfilling customer orders and providing services, which could make our product and service offerings less attractive and subject us to liability. Our systems are not fully redundant and our disaster recovery planning may not be sufficient. In addition, we may have inadequate insurance coverage to compensate for any related losses. Any of these events could damage our reputation and be expensive to remedy. We Face Significant Inventory Risk In addition to risks described elsewhere in this Item 1A relating to fulfillment center and inventory optimization by us and third parties, we are exposed to significant inventory risks that may adversely affect our operating results as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise, changes in consumer demand and consumer spending patterns, changes in consumer tastes with respect to our products, and other factors. We endeavor to accurately predict these trends and avoid overstocking or understocking products we manufacture and/or sell. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. In addition, when we begin selling or manufacturing a new product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand. The acquisition of certain types of inventory or components may require significant lead-time and prepayment and they may not be returnable. We carry a broad selection and significant inventory levels of certain products, such as consumer electronics, and we may be unable to sell products in sufficient quantities or during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect our operating results. We May Not Be Able to Adequately Protect Our Intellectual Property Rights or May Be Accused of Infringing Intellectual Property Rights of Third Parties We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, and others to protect our proprietary rights. Effective intellectual property protection may not be available in every country in which our products and services are made available. We also may not be able to acquire or maintain appropriate domain names in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights. We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights. Other parties also may claim that we infringe their proprietary rights. We have been subject to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the intellectual property rights of third parties. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us, or the payment of damages, including to satisfy indemnification obligations. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. In addition, we may not be able to obtain or utilize on terms that are favorable to us, or at all, licenses or other rights with respect to intellectual property we do not own. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. Our digital content offerings depend in part on effective digital rights management technology to control access to digital content. If the digital rights management technology that we use is compromised or otherwise malfunctions, we could be subject to claims, and content providers may be unwilling to include their content in our service. We Have a Rapidly Evolving Business Model and Our Stock Price Is Highly Volatile We have a rapidly evolving business model. The trading price of our common stock fluctuates significantly in response to, among other risks, the risks described elsewhere in this Item 1A, as well as: • changes in interest rates; 11 • conditions or trends in the Internet and the industry segments we operate in; • quarterly variations in operating results; • fluctuations in the stock market in general and market prices for Internet-related companies in particular; • changes in financial estimates by us or securities analysts and recommendations by securities analysts; • changes in our capital structure, including issuance of additional debt or equity to the public; • changes in the valuation methodology of, or performance by, other e-commerce or technology companies; and • transactions in our common stock by major investors and certain analyst reports, news, and speculation. Volatility in our stock price could adversely affect our business and financing opportunities and force us to increase our cash compensation to employees or grant larger stock awards than we have historically, which could hurt our operating results or reduce the percentage ownership of our existing stockholders, or both. Government Regulation Is Evolving and Unfavorable Changes Could Harm Our Business We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, electronic devices, and other services. Existing and future laws and regulations may impede our growth. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, web services, the provision of online payment services, information reporting requirements, unencumbered Internet access to our services, the design and operation of websites, the characteristics and quality of products and services, and the commercial operation of unmanned aircraft systems. It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce, digital content, and web services. Jurisdictions may regulate consumer-to-consumer online businesses, including certain aspects of our seller programs. Unfavorable regulations and laws could diminish the demand for our products and services and increase our cost of doing business. We Do Not Collect Sales or Consumption Taxes in Some Jurisdictions U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales taxes with respect to remote sales. However, an increasing number of states have considered or adopted laws or administrative practices that attempt to impose obligations on out-of-state retailers to collect taxes on their behalf. We support a Federal law that would allow states to require sales tax collection under a nationwide system. More than half of our revenue is already earned in jurisdictions where we collect sales tax or its equivalent. A successful assertion by one or more states or foreign countries requiring us to collect taxes where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest. We Could be Subject to Additional Income Tax Liabilities 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 12 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. Our Supplier Relationships Subject Us to a Number of Risks We have significant suppliers, including licensors, and in some cases, limited or single-sources of supply, that are important to our sourcing, services, manufacturing, and any related ongoing servicing of merchandise and content. We do not have long-term arrangements with most of our suppliers to guarantee availability of merchandise, content, components, or services, particular payment terms, or the extension of credit limits. If our current suppliers were to stop selling or licensing merchandise, content, components, or services to us on acceptable terms, or delay delivery, including as a result of one or more supplier bankruptcies due to poor economic conditions, as a result of natural disasters, or for other reasons, we may be unable to procure alternatives from other suppliers in a timely and efficient manner and on acceptable terms, or at all. In addition, if our suppliers or other vendors violate applicable laws, regulations, our code of standards and responsibilities, or implement practices regarded as unethical, unsafe, or hazardous to the environment, it could damage our reputation, limit our growth, and negatively affect our operating results. We May be Subject to Risks Related to Government Contracts and Related Procurement Regulations Our contracts with U.S., as well as state, local, and foreign, government entities are subject to various procurement regulations and other requirements relating to their formation, administration, and performance. We may be subject to audits and investigations relating to our government contracts, and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contract, refunding or suspending of payments, forfeiture of profits, payment of fines, and suspension or debarment from future government business. In addition, such contracts may provide for termination by the government at any time, without cause. We May Be Subject to Product Liability Claims if People or Property Are Harmed by the Products We Sell Some of the products we sell or manufacture may expose us to product liability claims relating to personal injury, death, or environmental or property damage, and may require product recalls or other actions. Certain third parties also sell products using our e-commerce platform that may increase our exposure to product liability claims, such as if these sellers do not have sufficient protection from such claims. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our agreements with our vendors and sellers do not indemnify us from product liability. We Are Subject to Payments-Related Risks We accept payments using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift cards, direct debit from a customer’s bank account, consumer invoicing, physical bank check, and payment upon delivery. For existing and future payment options we offer to our customers, we may become subject to additional regulations and compliance requirements (including obligations to implement enhanced authentication processes that could result in significant costs and reduce the ease of use of our payments products), as well as fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide certain Amazon-branded payment methods and payment processing services, including the processing of credit cards, debit cards, electronic checks, and promotional financing. In each case, it could disrupt our business if these companies become unwilling or unable to provide these services to us. We also offer co-branded credit card programs, which could adversely affect our operating results if terminated. We are also subject to payment card association operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected. 13 In addition, we provide regulated services in certain jurisdictions because we enable customers to keep account balances with us and transfer money to third parties, and because we provide services to third parties to facilitate payments on their behalf. In these jurisdictions, we may be subject to requirements for licensing, regulatory inspection, bonding and capital maintenance, the use, handling, and segregation of transferred funds, consumer disclosures, and authentication. We are also subject to or voluntarily comply with a number of other laws and regulations relating to payments, money laundering, international money transfers, privacy and information security, and electronic fund transfers. If we were found to be in violation of applicable laws or regulations, we could be subject to additional requirements and civil and criminal penalties, or forced to cease providing certain services. We Could Be Liable for Fraudulent or Unlawful Activities of Sellers The law relating to the liability of providers of online payment services is currently unsettled. In addition, governmental agencies could require changes in the way this business is conducted. Under our seller programs, we may be unable to prevent sellers from collecting payments, fraudulently or otherwise, when buyers never receive the products they ordered or when the products received are materially different from the sellers’ descriptions. Under our A2Z Guarantee, we reimburse buyers for payments up to certain limits in these situations, and as our marketplace seller sales grow, the cost of this program will increase and could negatively affect our operating results. We also may be unable to prevent sellers on our sites or through other seller sites from selling unlawful goods, selling goods in an unlawful manner, or violating the proprietary rights of others, and could face civil or criminal liability for unlawful activities by our sellers. Item 1B. Unresolved Staff Comments None. 14 Item 2. Properties As of December 31, 2014, we operated the following facilities (in thousands): Description of Use Square Footage (1) Owned office space Leased office space Leased office space Sub-total Owned fulfillment, data centers, and other Leased fulfillment, data centers, and other Owned fulfillment, data centers, and other Leased fulfillment, data centers, and other Sub-total Total 1,802 5,672 3,371 10,845 735 57,898 272 43,969 102,874 113,719 Location North America North America International North America North America International International Lease Expirations From 2015 through 2028 From 2015 through 2027 From 2015 through 2029 From 2015 through 2033 ___________________ (1) For leased properties, represents the total leased space excluding sub-leased space. We own and lease our corporate headquarters in Seattle, Washington. Additionally, we own and lease corporate office, fulfillment, sortation, delivery, warehouse operations, data center, customer service, and other facilities, principally in North America, Europe, and Asia. Item 3. Legal Proceedings See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 8—Commitments and Contingencies— Legal Proceedings.” Item 4. Mine Safety Disclosures Not applicable. 15 PART II Item 5. Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities Market Information Our common stock is traded on the NASDAQ Global Select Market under the symbol “AMZN.” The following table sets forth the high and low per share sale prices for our common stock for the periods indicated, as reported by the NASDAQ Global Select Market. High Year ended December 31, 2013 First Quarter Second Quarter Third Quarter Fourth Quarter Year ended December 31, 2014 First Quarter Second Quarter Third Quarter Fourth Quarter Low $ 284.72 $ 283.34 320.57 405.63 252.07 245.75 277.16 296.50 $ 408.06 $ 348.30 364.85 341.26 330.88 284.38 304.59 284.00 Holders As of January 16, 2015, there were 2,744 shareholders of record of our common stock, although there is a much larger number of beneficial owners. Dividends We have never declared or paid cash dividends on our common stock. See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Recent Sales of Unregistered Securities None. Issuer Purchases of Equity Securities None. 16 Item 6. Selected Consolidated Financial Data The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 8 of Part II, “Financial Statements and Supplementary Data,” and the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results. Year Ended December 31, 2014 2013 2012 2011 2010 (in millions, except per share data) Statements of Operations: Net sales Income from operations Net income (loss) Basic earnings per share (1) Diluted earnings per share (1) Weighted average shares used in computation of earnings per share: Basic Diluted Statements of Cash Flows: Net cash provided by (used in) operating activities Purchases of property and equipment, including internal-use software and website development Free cash flow (2) $ $ $ $ $ $ 88,988 178 (241) (0.52) (0.52) $ $ $ $ $ $ $ $ $ $ 61,093 676 (39) (0.09) (0.09) $ $ $ $ $ 48,077 862 631 1.39 1.37 $ $ $ $ $ 462 462 457 465 453 453 453 461 6,842 $ 5,475 $ 4,180 $ 3,903 $ (4,893) $ 74,452 745 274 0.60 0.59 1,949 $ (3,444) (3,785) 2,031 $ 395 $ (1,811) 2,092 $ 34,204 1,406 1,152 2.58 2.53 447 456 3,495 (979) 2,516 December 31, 2014 2013 2012 2011 2010 (in millions) Balance Sheets: Total assets Total long-term obligations $ $ 54,505 $ 15,675 $ 40,159 $ 7,433 $ 32,555 $ 5,361 $ 25,278 $ 2,625 $ 18,797 1,561 ___________________ (1) For further discussion of earnings per share, see Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1— Description of Business and Accounting Policies.” (2) 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 Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Non-GAAP Financial Measures” for additional information as well as alternative free cash flow measures. 17 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Annual Report on Form 10-K 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 Annual Report on Form 10-K are forwardlooking. 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 consumer 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 I, “Risk Factors.” Overview Our primary source of revenue is the sale of a wide range of products and services to customers. The products offered on our consumer-facing websites primarily include merchandise and content we have purchased for resale from vendors and those offered by third-party sellers, and we also manufacture and sell electronic devices. Generally, we recognize gross revenue from items we sell from our inventory as product sales and recognize our net share of revenue of items sold by other sellers as service sales. We also offer other services such as AWS, fulfillment, publishing, digital content subscriptions, advertising, and cobranded credit cards. Our financial focus is on long-term, sustainable growth in free cash flow1 per share. Free cash flow is driven primarily by increasing operating income and efficiently managing working capital2 and cash capital expenditures. Increases in operating income primarily result from increases in sales of products and services and efficiently managing our operating costs, partially offset by investments we make in longer-term strategic initiatives. To increase sales of products and services, we focus on improving all aspects of the customer experience, including lowering prices, improving availability, offering faster delivery and performance times, increasing selection, increasing product categories and service offerings, expanding product information, improving ease of use, improving reliability, and earning customer trust. We also seek to efficiently manage shareholder dilution while maintaining the flexibility to issue shares for strategic purposes, such as financings, acquisitions, and aligning employee compensation with shareholders’ interests. We utilize restricted stock units as our primary vehicle for equity compensation because we believe this compensation model aligns the long-term interests of our shareholders and employees. In measuring shareholder dilution, we include all vested and unvested stock awards outstanding, without regard to estimated forfeitures. Total shares outstanding plus outstanding stock awards were 483 million and 476 million as of December 31, 2014 and 2013. We seek to reduce our variable costs per unit and work to leverage our fixed costs. Our variable costs include product and content costs, payment processing and related transaction costs, picking, packaging, and preparing orders for shipment, transportation, customer service support, costs necessary to run AWS, and a portion of our marketing costs. Our fixed costs include the costs necessary to run our technology infrastructure; to build, enhance, and add features to our websites and web services, our electronic devices, and digital offerings; and to build and optimize our fulfillment centers. Variable costs generally change directly with sales volume, while fixed costs generally are dependent on the timing of capacity needs, geographic expansion, category expansion, and other factors. To decrease our variable costs on a per unit basis and enable us to lower prices for customers, we seek to increase our direct sourcing, increase discounts from suppliers, and reduce defects in our processes. To minimize growth in fixed costs, we seek to improve process efficiencies and maintain a lean culture. _______________________ (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 “Results of Operations—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. 18 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 2014, 2013, and 2012. 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 other 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. Accounts payable days5 were 73, 74, and 76 for 2014, 2013, and 2012. We expect some variability in accounts payable days over time since they are affected by several factors, including the mix of product sales, the mix of sales by other sellers, the mix of suppliers, seasonality, and changes in payment terms over time, including the effect of balancing pricing and timing of payment terms with suppliers. We expect spending in technology and content will increase over time as we add computer scientists, designers, software and hardware engineers, and merchandising employees. Our technology and content investment and capital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems and operations. We seek to efficiently invest in several areas of technology and content such as web services, expansion of new and existing product categories and offerings, and initiatives to expand our ecosystem of digital products and services, as well as in technology infrastructure to enhance the customer experience and improve our process efficiencies. We believe that advances in technology, specifically the speed and reduced cost of processing power and the advances of wireless connectivity, will continue to improve the consumer experience on the Internet and increase its ubiquity in people’s lives. To best take advantage of these continued advances in technology, we are investing in initiatives to build and deploy innovative and efficient software and electronic devices. We are also investing in AWS, which provides technology services that give developers and enterprises of all sizes access to technology infrastructure that enables virtually any type of business. Our financial reporting currency is the U.S. Dollar and changes in foreign exchange rates significantly affect our reported results and consolidated trends. For example, if the U.S. Dollar weakens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be higher than if currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be lower than if currencies had remained constant. We believe that our increasing diversification beyond the U.S. economy through our growing international businesses benefits our shareholders over the long-term. We also believe it is useful to evaluate our operating results and growth rates before and after the effect of currency changes. In addition, the remeasurement of our intercompany balances can result in significant gains and charges associated with the effect of movements in foreign currency exchange rates. Currency volatilities may continue, which may significantly impact (either positively or negatively) our reported results and consolidated trends and comparisons. For additional information about each line item summarized above, refer to Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of Business and Accounting Policies.” Critical Accounting Judgments The preparation of financial statements in conformity with generally accepted accounting principles of the United States (“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.” 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. _______________________ (3) The operating cycle is the number of days of sales in inventory plus the 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. (5) Accounts payable days, calculated as the quotient of accounts payable to current quarter cost of sales, multiplied by the number of days in the current quarter. 19 Inventories Inventories, consisting of products available for sale, are primarily accounted for using the first-in first-out (“FIFO”) method, and are valued at the lower of cost or market value. This valuation requires us to make judgments, based on currentlyavailable 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 December 31, 2014, we would have recorded an additional cost of sales of approximately $95 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. Our annual testing date is October 1. We test goodwill for impairment 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 year, 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 December 31, 2014, would have had no impact on the carrying value of our goodwill. Financial and credit market volatility directly impacts our 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 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 December 31, 2014 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. 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 $30 million impact on our 2014 operating income. Our estimated forfeiture rate as of December 31, 2014 and 2013 was 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 20 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 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of Business and Accounting Policies—Recent Accounting Pronouncements.” 21 Liquidity and Capital Resources Cash flow information is as follows (in millions): Year Ended December 31, 2014 Cash provided by (used in): Operating activities Investing activities Financing activities $ 6,842 $ (5,065) 4,432 2013 5,475 $ (4,276) (539) 2012 4,180 (3,595) 2,259 Our financial focus is on long-term, sustainable growth in free cash flow. Free cash flow, a non-GAAP financial measure, was $1.9 billion for 2014, compared to $2.0 billion and $395 million for 2013 and 2012. See “Results of Operations—NonGAAP Financial Measures” for a reconciliation of free cash flow to cash provided by operating activities. The decrease in free cash flow for 2014, compared to the comparable prior year period, was due to increased cash capital expenditures partially offset by higher operating cash flows. The increase in free cash flow for 2013, compared to the comparable prior year period, was due to higher operating cash flows and decreased cash capital expenditures. Operating cash flows and free cash flows can be volatile and are sensitive to many factors, including changes in working capital, the timing and magnitude of capital expenditures, including our decision to finance property and equipment under capital leases and other financing 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 $17.4 billion, $12.4 billion, and $11.4 billion as of December 31, 2014, 2013, and 2012. Cash and cash equivalents also reflects net proceeds from the issuance of $6.0 billion of long-term debt as of December 31, 2014. Amounts held in foreign currencies were $5.4 billion, $5.6 billion, and $5.1 billion as of December 31, 2014, 2013, and 2012, and were primarily British Pounds, Chinese Yuan, Euros, and Japanese Yen. Cash provided by operating activities was $6.8 billion, $5.5 billion, and $4.2 billion in 2014, 2013, and 2012. 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 in 2014, compared to the comparable prior year period, was primarily due to the increase in non-cash charges to net income, including depreciation, amortization, and stock-based compensation, partially offset by changes in working capital. The increase in operating cash flow in 2013, compared to the comparable prior year period, was primarily due to the increase in net income, excluding depreciation, amortization, and stock-based compensation, partially offset by changes 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 $(5.1) billion, $(4.3) billion, and $(3.6) billion in 2014, 2013, and 2012, with the variability caused primarily by changes in capital expenditures, purchases, maturities, and sales of marketable securities and other investments, and changes in cash paid for acquisitions. Cash capital expenditures were $4.9 billion, $3.4 billion, and $3.8 billion during 2014, 2013, and 2012. In December 2012, we acquired 11 buildings comprising 1.8 million square feet of our previously leased corporate office space and three city blocks in Seattle, Washington for $1.4 billion. Excluding this acquisition, increases in capital expenditures primarily reflect additional capacity to support our fulfillment operations and additional investments in support of continued business growth due to investments in technology infrastructure, including AWS, during all three periods. We expect this trend to continue over time. Capital expenditures included $537 million, $493 million, and $381 million for internal-use software and website development during 2014, 2013, and 2012. Stock-based compensation capitalized for internaluse software and website development costs does not affect cash flows. In 2014, 2013, and 2012, we made cash payments, net of acquired cash, related to acquisition and other investment activity of $979 million, $312 million, and $745 million. 22 Additionally, in January 2015, we signed an agreement to acquire a technology company for approximately $350 million in cash, which we expect to satisfy with cash on hand. We expect the acquisition to close in the first half of 2015, subject to closing conditions. Cash provided by (used in) financing activities was $4.4 billion, $(539) million, and $2.3 billion in 2014, 2013, and 2012. Cash outflows from financing activities result from common stock repurchases, principal payments on obligations related to capital and finance leases, and repayments of long-term debt. Principal payments on obligations related to capital leases, finance leases, and repayments of long-term debt were $1.9 billion, $1.0 billion, and $588 million in 2014, 2013, and 2012. Property and equipment acquired under capital leases were $4.0 billion, $1.9 billion, and $802 million in 2014, 2013, and 2012, with the increases reflecting additional investments in support of continued business growth primarily due to investments in technology infrastructure for AWS. We expect this trend to continue over time. We repurchased 5.3 million shares of common stock for $960 million in 2012 under the $2.0 billion repurchase program authorized by our Board of Directors in January 2010. Cash inflows from financing activities primarily result from proceeds from long-term debt and tax benefits relating to excess stock-based compensation deductions. Proceeds from long-term debt and other were $6.4 billion, $394 million, and $3.4 billion in 2014, 2013, and 2012. During 2014, cash inflows from financing activities consisted primarily of net proceeds from the issuance of $6.0 billion of senior nonconvertible unsecured debt in five tranches maturing in 2019 through 2044. During 2012, cash inflows from financing activities consisted primarily of net proceeds from the issuance of $3.0 billion of senior nonconvertible unsecured debt in three tranches maturing in 2015 through 2022. See Item 8 of Part II, “Financial Statements and Supplementary Data— Note 6—Long-Term Debt” for additional discussion of the notes. 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 $6 million, $78 million, and $429 million in 2014, 2013, and 2012. In September 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. We had no borrowings outstanding under the Credit Agreement as of December 31, 2014. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 6—LongTerm Debt” for additional information. In 2014, 2013, and 2012 we recorded net tax provisions of $167 million, $161 million, and $428 million. 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. As of December 31, 2014, cash, cash equivalents, and marketable securities held by foreign subsidiaries were $4.6 billion, which included undistributed earnings of foreign subsidiaries indefinitely invested outside of the U.S. of $2.5 billion. We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized to reduce our U.S. taxable income. In December 2014, U.S. legislation was enacted providing a one year extension of accelerated depreciation deductions on qualifying property through 2014. Cash taxes paid (net of refunds) were $177 million, $169 million, and $112 million for 2014, 2013, and 2012. 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 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 December 31, 2014 and 2013, restricted cash, cash equivalents, and marketable securities were $450 million and $301 million. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 8— 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 $4.5 billion as of December 31, 2014. Purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions. On average, our high inventory velocity means we generally collect from consumers before our payments to suppliers come due. Inventory turnover was 9 for 2014, 2013, and 2012. 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. 23 We believe that cash flows generated from operations and 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 I, “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, capital infrastructure and technologies, which might affect our liquidity requirements or cause us to secure additional financing, or 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. 24 Results of Operations We have organized our operations into two segments: North America and International. We present our segment information along the same lines that our Chief Executive Officer reviews our operating results in assessing performance and allocating resources. 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, and non-retail activities such as AWS, 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): Year Ended December 31, 2014 Net Sales: North America International $ Total consolidated $ Year-over-year Percentage Growth: North America International Total consolidated Year-over-year Percentage Growth, excluding effect of foreign exchange rates: North America International Total consolidated Net Sales Mix: North America International Total consolidated 2013 55,469 33,519 88,988 $ $ 2012 44,517 29,935 74,452 $ $ 34,813 26,280 61,093 25% 12 20 28% 14 22 30% 23 27 25% 14 20 28% 19 24 30% 27 29 62% 38 100% 60% 40 100% 57% 43 100% Sales increased 20%, 22%, and 27% in 2014, 2013, and 2012, compared to the comparable prior year periods. Changes in foreign currency exchange rates impacted net sales by $(636) million, $(1.3) billion, and $(854) million for 2014, 2013, and 2012. For a discussion of the effect on sales growth of foreign exchange rates, see “Effect of Foreign Exchange Rates” below. North America sales increased 25%, 28%, and 30% in 2014, 2013, and 2012, compared to the comparable prior year periods. The sales growth in each year primarily reflects increased unit sales, including sales by marketplace sellers, and AWS, which was partially offset by AWS pricing changes. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, by sales in faster growing categories such as electronics and other general merchandise, by increased in-stock inventory availability, and by increased selection of product offerings. International sales increased 12%, 14%, and 23% in 2014, 2013, and 2012, compared to the comparable prior year periods. The sales growth in each year 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, by sales in faster growing categories such as electronics and other general merchandise, by increased in-stock inventory availability, and by increased selection of product offerings. Additionally, changes in foreign currency exchange rates impacted International net sales by $(580) million, $(1.3) billion, and $(853) million in 2014, 2013, and 2012. 25 Supplemental Information Supplemental information about outbound shipping results is as follows (in millions): Year Ended December 31, 2014 Outbound Shipping Activity: Shipping revenue (1)(2)(3) Shipping costs (4) $ Net shipping cost $ Year-over-year Percentage Growth: Shipping revenue Shipping costs Net shipping cost Percent of Net Sales: Shipping revenue Shipping costs Net shipping cost 4,486 (8,709) (4,223) 2013 $ $ 3,097 (6,635) (3,538) 2012 $ $ 2,280 (5,134) (2,854) 45 % 31 19 36 % 29 24 47 % 29 17 5.1 % (9.8) (4.7)% 4.1 % (8.9) (4.8)% 3.7 % (8.4) (4.7)% ___________________ (1) Excludes amounts earned 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. We expect our net 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. 26 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. Year Ended December 31, 2014 Net Sales: North America Media Electronics and other general merchandise Other (1) Total North America International Media Electronics and other general merchandise Other (1) Total International Consolidated Media Electronics and other general merchandise Other (1) Total consolidated Year-over-year Percentage Growth: North America Media Electronics and other general merchandise Other Total North America International Media Electronics and other general merchandise Other Total International Consolidated Media Electronics and other general merchandise Other Total consolidated Year-over-year Percentage Growth, excluding effect of foreign exchange rates: International Media Electronics and other general merchandise Other Total International Consolidated Media Electronics and other general merchandise Other Total consolidated Consolidated Net Sales Mix: Media Electronics and other general merchandise Other Total consolidated $ 2013 11,567 $ 38,517 10,809 5,385 $ $ 10,938 $ $ 34,813 10,907 $ 10,753 18,817 212 211 33,519 $ $ 22,505 $ 172 $ 26,280 21,716 $ 19,942 48,802 5,597 3,934 7% 15,355 29,935 60,886 $ 2,351 44,517 22,369 $ 74,452 38,628 2,523 $ 61,093 18% 15% 28 29 34 45 58 64 25 28 30 —% 1% 9% 19 23 1 22 11 12 14 23 4% 9% 35 12% 25 26 35 42 56 59 20 22 27 2% 7% 12% 21 27 40 1 26 15 14 19 27 12% 14% 26 5% 28 36 42 56 59 20 24 29 25% 29% 33% 68 66 63 7 5 4 100% 100% 100% _____________________________ (1) Includes sales from non-retail activities, such as AWS sales, which are included in the North America segment, and advertising services and our co-branded credit card agreements, which are included in both segments. 27 9,189 23,273 3,723 55,469 88,988 $ 29,985 $ $ 2012 Operating Expenses Information about operating expenses with and without stock-based compensation is as follows (in millions): Year Ended December 31, 2014 As Reported Stock-Based Compensation Year Ended December 31, 2013 Net As Reported Stock-Based Compensation Year Ended December 31, 2012 Stock-Based Compensation As Reported Net Net Operating Expenses: Cost of sales $ 62,752 $ — $ 62,752 $ 54,181 $ — $ 54,181 $ 45,971 $ — $ 45,971 Fulfillment 10,766 (375) 10,391 8,585 (294) 8,291 6,419 (212) 6,207 Marketing 4,332 (125) 4,207 3,133 (88) 3,045 2,408 (61) 2,347 Technology and content 9,275 (804) 8,471 6,565 (603) 5,962 4,564 (434) 4,130 General and administrative 1,552 (193) 1,359 1,129 (149) 980 896 (126) 770 Other operating expense (income), net Total operating expenses Year-over-year Percentage Growth: Fulfillment 133 $ 88,810 — $ (1,497) 133 114 $ 87,313 $ 73,707 — $ (1,134) 114 159 $ 72,573 $ 60,417 — $ (833) 159 $ 59,584 25% 25% 34% 34% 40% 40% Marketing 38 38 30 30 48 47 Technology and content 41 42 44 44 57 58 General and administrative 37 39 26 27 36 36 Fulfillment 12.1% 11.7% 11.5% 11.1% 10.5% 10.2% Marketing 4.9 4.7 4.2 4.1 3.9 3.8 10.4 9.5 8.8 8.0 7.5 6.8 1.7 1.5 1.5 1.3 1.5 1.3 Percent of Net Sales: Technology and content General and administrative Operating expenses without stock-based compensation are non-GAAP financial measures. See “Non-GAAP Financial Measures” and Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of Business and Accounting Policies—Stock-Based Compensation.” We recorded charges related to Fire phone inventory valuation and supplier commitment costs, substantially all of which, $170 million, was recorded during the third quarter of 2014. Cost of Sales Cost of sales consists of the purchase price of consumer products and digital media content where we record revenue gross, including Prime Instant Video, packaging supplies, and inbound and outbound shipping costs, including sortation and delivery centers, and related equipment costs. Shipping costs to receive products from our suppliers are included in our inventory, and recognized as cost of sales upon sale of products to our customers. The increase in cost of sales in absolute dollars in 2014, 2013, and 2012, compared to the comparable prior year periods, is primarily due to increased product, digital media content, and shipping costs resulting from increased sales, as well as from expansion of digital offerings. The increase in 2014 was also impacted by Fire phone inventory valuation and supplier commitment costs. Consolidated gross profit and gross margin for each of the periods presented were as follows (in millions): Year Ended December 31, Gross profit Gross margin $ 2014 2013 2012 26,236 $ 29.5% 20,271 $ 27.2% 15,122 24.8% Gross margin increased in 2014, compared to the comparable prior year periods, primarily due to service sales increasing as a percentage of total sales. Service sales represent third-party seller fees earned (including commissions) and related shipping fees, digital content subscriptions, and non-retail activities such as AWS, advertising services, and our co-branded credit card agreements. 28 We believe that income (loss) from operations is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services. Fulfillment Fulfillment costs as a percentage of net sales may vary due to several factors, such as payment processing and related transaction costs, our level of productivity and accuracy, changes in volume, size, and weight of units received and fulfilled, timing of fulfillment capacity expansion, the extent we utilize fulfillment services provided by third parties, mix of products and services sold, and our ability to affect customer service contacts per unit by implementing improvements in our operations and enhancements to our customer self-service features. Additionally, because payment processing and fulfillment costs associated with seller transactions are based on the gross purchase price of underlying transactions, and payment processing and related transaction and fulfillment costs are higher as a percentage of sales versus our retail sales, sales by our sellers have higher fulfillment costs as a percent of net sales. The increase in fulfillment costs in absolute dollars in 2014, 2013, and 2012, compared to the comparable prior year periods, is primarily due to variable costs corresponding with increased physical and digital product and service sales volume, inventory levels, and sales mix; costs from expanding fulfillment capacity; and payment processing and related transaction costs. We seek to expand our fulfillment capacity to accommodate greater selection and in-stock inventory levels and to meet anticipated shipment volumes from sales of our own products as well as sales by third parties for which we provide the fulfillment services. We evaluate our facility requirements as necessary. Marketing We direct customers to our websites primarily through a number of targeted online marketing channels, such as our Associates program, sponsored search, portal advertising, email marketing campaigns, and other initiatives. Our marketing expenses are largely variable, based on growth in sales and changes in rates. To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing expense. The increase in marketing costs in absolute dollars in 2014, 2013, and 2012, compared to the comparable prior year periods, is primarily due to increased spending on online marketing channels, such as our sponsored search programs, payroll and related expenses, and television advertising. While costs associated with Amazon Prime memberships and other shipping offers are not included in marketing expense, we view these offers as effective worldwide marketing tools, and intend to continue offering them indefinitely. Technology and Content We seek to efficiently invest in several areas of technology and content such as technology infrastructure, including AWS, expansion of new and existing product categories and offerings, and initiatives to expand our ecosystem of digital products and services, as well as in technology infrastructure so we may continue to enhance the customer experience and improve our process efficiency through rapid technology developments while operating at an ever increasing scale. We expect spending in technology and content to increase over time as we continue to add employees and technology infrastructure. Digital media content where we record revenue gross, including Prime Instant Video, is included in cost of sales. Technology costs consist principally of research and development activities including payroll and related expenses for employees involved in application, production, maintenance, operation, and platform development for new and existing products and services, as well as AWS and other technology infrastructure expenses. Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection. The increase in technology and content costs in absolute dollars in 2014, 2013, and 2012, compared to the comparable prior year periods, is primarily due to increased spending on technology infrastructure, including AWS, and increases in payroll and related expenses, including those associated with our initiatives to expand our ecosystem of digital products and services. We expect these trends to continue over time as we invest in these areas by increasing payroll and related expenses and adding technology infrastructure. For 2014, 2013, and 2012, we capitalized $641 million (including $104 million of stock-based compensation), $581 million (including $87 million of stock-based compensation), and $454 million (including $74 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized 29 amounts was $559 million, $451 million, and $327 million for 2014, 2013, and 2012. A majority of our technology costs are incurred in the U.S., most of which are allocated to our North America segment. Infrastructure, other technology, and operating costs incurred to support AWS are included in technology and content. General and Administrative The increase in general and administrative costs in absolute dollars in 2014, 2013, and 2012, compared to the comparable prior year periods, is primarily due to increases in payroll and related expenses and professional service fees. Stock-Based Compensation Stock-based compensation was $1.5 billion, $1.1 billion, and $833 million during 2014, 2013, and 2012. The increase in 2014, 2013, and 2012, compared to the comparable prior year periods, is primarily due to an increase in the number of stockbased compensation awards granted to existing and new employees. Other Operating Expense (Income), Net Other operating expense (income), net was $133 million, $114 million, and $159 million during 2014, 2013, and 2012, and was primarily related to the amortization of intangible assets. Income from Operations For the reasons discussed above, income from operations decreased 76% in 2014, increased 10% in 2013, and decreased 22% in 2012. Interest Income and Expense Our interest income was $39 million, $38 million, and $40 million during 2014, 2013, and 2012. We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities and AAA-rated money market funds. Our interest income corresponds with the average balance of invested funds based on the prevailing rates, which vary depending on the geographies and currencies in which they are invested. The primary components of our interest expense are related to our long-term debt and capital and finance lease arrangements. Interest expense was $210 million, $141 million, and $92 million in 2014, 2013, and 2012. Our long-term debt was $8.3 billion and $3.2 billion as of December 31, 2014 and 2013. Our other long-term liabilities were $7.4 billion and $4.2 billion as of December 31, 2014 and 2013. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 6—Long-Term Debt and Note 7—Other Long-Term Liabilities” for additional information. Other Income (Expense), Net Other income (expense), net was $(118) million, $(136) million, and $(80) million during 2014, 2013, and 2012. The primary component of other income (expense), net is related to foreign-currency gains (losses). Income Taxes Our effective tax rate is subject to significant variation due to several factors, including variability in 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. We recorded a provision for income taxes of $167 million, $161 million, and $428 million in 2014, 2013, and 2012. Our provision for income taxes in 2014 was higher than in 2013 primarily due to the increased losses in certain foreign subsidiaries for which we may not realize a tax benefit and audit-related developments, partially offset by the favorable impact of earnings in lower tax rate jurisdictions. Losses for which we may not realize a related tax benefit reduce our pre-tax income without a corresponding reduction in our tax expense, and therefore increase our effective tax rate. We have recorded valuation allowances against the deferred tax assets associated with losses for which we may not realize a related tax benefit. Income earned in lower tax jurisdictions is primarily related to our European operations, which are headquartered in Luxembourg. In 2013, our provision for income taxes was lower than in 2012 primarily due to a decline in the proportion of our losses for which we may not realize a related tax benefit, the favorable impact of earnings in lower tax rate jurisdictions, and the 30 retroactive extension in 2013 of the U.S. federal research and development credit to 2012. In 2013, we recognized tax benefits for a greater proportion of losses for which we may not realize a tax benefit, primarily due to losses of certain foreign subsidiaries, as compared to 2012. The favorable impact of earnings in lower tax rate jurisdictions was primarily related to our European operations. We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized to reduce our U.S. taxable income. In December 2014, U.S. legislation was enacted providing a one year extension of accelerated depreciation deductions on qualifying property and the U.S. federal research and development credit through December 31, 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 2014. See Item 8 of Part II, “Financial Statements and Supplementary Data-Note 11-Income Taxes” for additional information. Equity-Method Investment Activity, Net of Tax Equity-method investment activity, net of tax, was $37 million, $(71) million, and $(155) million in 2014, 2013, and 2012. Details of the activity are provided below (in millions): Year Ended December 31, 2014 Equity in earnings (loss) of LivingSocial: Impairment charges recorded by LivingSocial Gain on existing equity interests, LivingSocial acquisitions Operating and other earnings (losses) (1) $ Total equity in earnings (loss) of LivingSocial Other equity-method investment activity: Amazon dilution gains on LivingSocial investment Other, net Total other equity-method investment activity Equity-method investment activity, net of tax $ 2013 2012 — $ — 36 36 (12) $ — (58) (70) (170) 75 (96) (191) — 1 1 37 $ — (1) (1) (71) $ 37 (1) 36 (155) ___________________ (1) Includes a $65 million gain related to LivingSocial’s disposal of its Korean operations in the first quarter of 2014. Effect of Foreign Exchange Rates The effect on our consolidated statements of operations from changes in foreign exchange rates versus the U.S. Dollar is as follows (in millions): Year Ended December 31, 2014 At Prior Year Rates (1) Net sales Operating expenses Income (loss) from operations Exchange Rate Effect (2) $ 89,624 $ 89,466 158 As Reported Year Ended December 31, 2013 At Prior Year Rates (1) Exchange Rate Effect (2) (636) $ 88,988 $ 75,736 $ (656) 20 As Reported Year Ended December 31, 2012 At Prior Year Rates (1) Exchange Rate Effect (2) As Reported (1,284) $ 74,452 $ 61,947 $ (854) $ 61,093 88,810 74,962 (1,255) 73,707 61,257 (840) 60,417 178 774 (29) 745 690 (14) 676 ___________________ (1) Represents the outcome that would have resulted had foreign exchange rates in the reported period been the same as those in effect in the comparable prior year period for operating results. (2) Represents the increase or decrease in reported amounts resulting from changes in foreign exchange rates from those in effect in the comparable prior year period for operating results. 31 Non-GAAP Financial Measures Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations define and prescribe the conditions for use of certain non-GAAP financial information. Our measures of “Free cash flow,” operating expenses with and without stock-based compensation, and the effect of foreign exchange rates on our consolidated statements of operations, meet the definition of non-GAAP financial measures. We provide multiple measures of free cash flow, and ratios based on them, because we believe these measures provide additional perspective on the impact of acquiring property and equipment with cash and through capital and finance leases. Free cash flow is cash flow from operations reduced by “Purchases of property and equipment, including internal-use software and website development,” which are included in cash flow from investing activities. The following is a reconciliation of free cash flow to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for 2014, 2013, and 2012 (in millions): Year Ended December 31, 2014 2013 2012 Net cash provided by (used in) operating activities Purchases of property and equipment, including internal-use software and website development $ 6,842 $ 5,475 $ 4,180 Free cash flow $ (4,893) 1,949 $ (3,444) 2,031 $ (3,785) 395 Net cash provided by (used in) investing activities $ (5,065) $ (4,276) $ (3,595) Net cash provided by (used in) financing activities $ 4,432 $ (539) $ 2,259 Free cash flow less lease principal repayments is free cash flow reduced by “Principal repayments of capital lease obligations,” and “Principal repayments of finance lease obligations,” which are included in cash flow from financing activities. The following is a reconciliation of free cash flow less lease principal repayments to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for 2014, 2013, and 2012 (in millions): Year Ended December 31, 2014 2013 2012 Net cash provided by (used in) operating activities Purchases of property and equipment, including internal-use software and website development Principal repayments of capital lease obligations Principal repayments of finance lease obligations $ 6,842 $ 5,475 $ 4,180 Free cash flow less lease principal repayments $ (4,893) (1,285) (135) 529 $ (3,444) (775) (5) 1,251 $ (3,785) (486) (20) (111) Net cash provided by (used in) investing activities $ (5,065) $ (4,276) $ (3,595) Net cash provided by (used in) financing activities $ 4,432 $ (539) $ 32 2,259 Free cash flow less finance principal lease repayments and capital acquired under capital leases is free cash flow reduced by “Principal repayments of finance lease obligations,” which are included in cash flow from financing activities, and property and equipment acquired under capital leases. In this measure, property and equipment acquired under capital leases is reflected as if these assets had been acquired with cash. The following is a reconciliation of free cash flow less finance principal lease repayments and capital acquired under capital leases to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for 2014, 2013, and 2012 (in millions): Year Ended December 31, 2014 Net cash provided by (used in) operating activities Purchases of property and equipment, including internal-use software and website development Property and equipment acquired under capital leases Principal repayments of finance lease obligations $ 6,842 $ 2013 2012 5,475 $ 4,180 (4,893) (4,008) (3,444) (1,867) (3,785) (802) (135) (5) (20) Free cash flow less finance principal lease repayments and capital acquired under capital leases $ (2,194) $ 159 $ (427) Net cash provided by (used in) investing activities $ (5,065) $ (4,276) $ (3,595) Net cash provided by (used in) financing activities $ 4,432 $ (539) $ 2,259 All of these free cash flow measures have limitations as they omit certain components of the overall cash flow statement and do not represent the residual cash flow available for discretionary expenditures. For example, these measures of free cash flow do not incorporate the portion of payments representing principal reductions of debt or cash payments for business acquisitions. Additionally, our mix of property and equipment acquisitions with cash or other financing options may change over time. Therefore, we believe it is important to view free cash flow measures only as a complement to our entire consolidated statements of cash flows. Operating expenses with and without stock-based compensation is provided to show the impact of stock-based compensation, which is non-cash and excluded from our internal operating plans and measurement of financial performance (although we consider the dilutive impact to our shareholders when awarding stock-based compensation and value such awards accordingly). In addition, unlike other centrally-incurred operating costs, stock-based compensation is not allocated to segment results and therefore excluding it from operating expenses is consistent with our segment presentation in our footnotes to the consolidated financial statements. Operating expenses without stock-based compensation has limitations since it does not include all expenses primarily related to our workforce. More specifically, if we did not pay out a portion of our compensation in the form of stock-based compensation, our cash salary expense included in the “Fulfillment,” “Marketing,” “Technology and content,” and “General and administrative” line items would be higher. Information regarding the effect of foreign exchange rates, versus the U.S. Dollar, on our consolidated statements of operations is provided to show reported period operating results had the foreign exchange rates remained the same as those in effect in the comparable prior year period. Guidance We provided guidance on January 29, 2015, in our earnings release furnished on Form 8-K as set forth below. These forward-looking statements reflect Amazon.com’s expectations as of January 29, 2015, and are subject to substantial uncertainty. Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the rate of growth of the Internet and online commerce, as well as those outlined in Item 1A of Part I, “Risk Factors.” First Quarter 2015 Guidance • • • Net sales are expected to be between $20.9 billion and $22.9 billion, or to grow between 6% and 16% compared with first quarter 2014. Operating income (loss) is expected to be between $(450) million and $50 million, compared to $146 million in first quarter 2014. This guidance includes approximately $450 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions, investments, restructurings, or legal settlements are concluded and that there are no further revisions to stock-based compensation estimates. 33 Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk for the effect of interest rate changes, foreign currency fluctuations, and changes in the market values of our investments. Information relating to quantitative and qualitative disclosures about market risk is set forth below and in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources.” Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our long-term debt. Our long-term debt is carried at amortized cost and fluctuations in interest rates do not impact our consolidated financial statements. However, the fair value of our debt, on which we pay interest at a fixed rate, will generally fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. All of our cash equivalent and marketable fixed income securities are designated as available-for-sale and, accordingly, are presented at fair value on our consolidated balance sheets. We generally invest our excess cash in investment grade short- to intermediateterm fixed income securities and AAA-rated money market funds. Fixed income securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. The following table provides information about our current and long-term cash equivalent and marketable fixed income securities, including principal cash flows by expected maturity and the related weighted average interest rates as of December 31, 2014 (in millions, except percentages): 2015 Money market funds Weighted average interest rate $ 0.09% Corporate debt securities Weighted average interest rate Foreign government and agency securities Weighted average interest rate Other securities Weighted average interest rate — 2018 $ —% — Total $ 10,718 —% 0.09% — 392 1.65% —% —% 1.25% 19 1 1.11% 1.91% 2.17% 7 — — — —% —% —% 49 — — — —% —% —% —% — — —% —% 156 0.33% 0.79% 19 43 0.64% 0.95% 1.10% 1 27 0.04% 0.05% 12 10 7 4 0.48% 1.01% 1.23% 0.57% $ — — 342 553 Thereafter $ —% 1.48% $ — 22 1.05% $ 12,700 2019 $ —% 154 1,865 Weighted average interest rate 2017 $ 131 1.05% Asset backed securities — —% 85 Weighted average interest rate U.S. government and agency securities 2016 $ 10,718 Estimated Fair Value as of December 31, 2014 373 $ 45 $ 1 — —% $ — $ 10,718 401 2,383 2,406 0.46% 69 69 0.88% 77 80 0.02% 33 33 0.81% $ 13,672 Cash equivalent and marketable fixed income securities $ 13,707 As of December 31, 2014, we had $9.9 billion of debt, including the current portion, primarily consisting of the following fixed rate unsecured debt (in millions): 0.65% Notes due on November 27, 2015 1.20% Notes due on November 29, 2017 2.50% Notes due on November 29, 2022 2.60% Notes due on December 5, 2019 3.30% Notes due on December 5, 2021 3.80% Notes due on December 5, 2024 4.80% Notes due on December 5, 2034 4.95% Notes due on December 5, 2044 $ $ $ $ $ $ $ $ 34 750 1,000 1,250 1,000 1,000 1,250 1,250 1,500 The fair value of our debt will fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. Based upon quoted market prices and Level 2 inputs, the fair value of our total debt was $10.0 billion as of December 31, 2014. Foreign Exchange Risk During 2014, net sales from our International segment accounted for 38% of our consolidated revenues. Net sales and related expenses generated from our internationally focused websites, as well as those relating to www.amazon.ca and www.amazon.com.mx (which are included in our North America segment), are denominated in the functional currencies of the corresponding websites and primarily include British Pounds, Chinese Yuan, Euros, and Japanese Yen. The results of operations of, and certain of our intercompany balances associated with, our internationally-focused websites are exposed to foreign exchange rate fluctuations. Upon consolidation, as foreign exchange rates vary, net sales and other operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. For example, as a result of fluctuations in foreign exchange rates during 2014, International segment revenues decreased $580 million in comparison with the prior year. We have foreign exchange risk related to foreign-denominated cash, cash equivalents, and marketable securities (“foreign funds”). Based on the balance of foreign funds as of December 31, 2014, of $5.4 billion, an assumed 5%, 10%, and 20% adverse change to foreign exchange would result in fair value declines of $270 million, $535 million, and $1.1 billion. All investments are classified as “available-for-sale.” Fluctuations in fair value are recorded in “Accumulated other comprehensive loss,” a separate component of stockholders’ equity. We have foreign exchange risk related to our intercompany balances denominated in various foreign currencies. Based on the intercompany balances as of December 31, 2014, an assumed 5%, 10%, and 20% adverse change to foreign exchange would result in losses of $145 million, $310 million, and $700 million, recorded to “Other income (expense), net.” See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Effect of Foreign Exchange Rates” for additional information on the effect on reported results of changes in foreign exchange rates. Investment Risk As of December 31, 2014, our recorded basis in equity investments was $209 million. These investments primarily relate to equity-method and cost-method investments in private companies. We review our investments for impairment when events and circumstances indicate that the decline in fair value of such assets below the carrying value is other-than-temporary. Our analysis includes review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. The current global economic climate provides additional uncertainty. Valuations of private companies are inherently more complex due to the lack of readily available market data. As such, we believe that market sensitivities are not practicable. 35 Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Ernst & Young LLP, Independent Registered Public Accounting Firm Consolidated Statements of Cash Flows Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Stockholders’ Equity Notes to Consolidated Financial Statements 36 37 38 39 40 41 42 43 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Amazon.com, Inc. We have audited the accompanying consolidated balance sheets of Amazon.com, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amazon.com, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Amazon.com, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 29, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Seattle, Washington January 29, 2015 37 AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2014 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD OPERATING ACTIVITIES: $ Net income (loss) 2013 2012 8,658 $ 8,084 $ (241) 274 5,269 (39) 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 4,746 3,253 2,159 Stock-based compensation 1,497 1,134 833 129 114 154 Other operating expense (income), net Losses (gains) on sales of marketable securities, net (3) Other expense (income), net 62 166 (316) (156) (265) (6) (78) (429) Inventories (1,193) (1,410) (999) Accounts receivable, net and other (1,039) Deferred income taxes Excess tax benefits from stock-based compensation 1 (9) 253 Changes in operating assets and liabilities: Accounts payable 1,759 Accrued expenses and other Additions to unearned revenue Amortization of previously unearned revenue Net cash provided by (used in) operating activities INVESTING ACTIVITIES: Purchases of property and equipment, including internal-use software and website development Acquisitions, net of cash acquired, and other Sales and maturities of marketable securities and other investments (846) 1,888 (861) 2,070 706 736 1,038 4,433 2,691 1,796 (3,692) (2,292) (1,521) 6,842 5,475 4,180 (4,893) (3,444) (3,785) (979) (312) (745) 3,349 2,306 4,237 Purchases of marketable securities and other investments (2,542) (2,826) (3,302) Net cash provided by (used in) investing activities FINANCING ACTIVITIES: (5,065) (4,276) (3,595) Excess tax benefits from stock-based compensation Common stock repurchased Proceeds from long-term debt and other 6 78 429 — — (960) 6,359 Repayments of long-term debt 394 3,378 (513) (231) (82) Principal repayments of capital lease obligations (1,285) (775) (486) Principal repayments of finance lease obligations (135) (5) (20) Net cash provided by (used in) financing activities Foreign-currency effect on cash and cash equivalents 4,432 Net increase (decrease) in cash and cash equivalents 5,899 (310) (539) (86) 2,259 (29) 574 2,815 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,557 $ 8,658 $ 8,084 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest on long-term debt $ 91 $ 97 $ 31 Cash paid for income taxes (net of refunds) Property and equipment acquired under capital leases Property and equipment acquired under build-to-suit leases 177 169 112 4,008 1,867 802 920 877 29 See accompanying notes to consolidated financial statements. 38 AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) Year Ended December 31, 2014 Net product sales Net service sales $ Total net sales Operating expenses (1): Cost of sales Fulfillment Marketing Technology and content General and administrative Other operating expense (income), net 2013 70,080 $ 18,908 88,988 60,903 $ 13,549 74,452 51,733 9,360 61,093 54,181 8,585 3,133 6,565 1,129 114 73,707 745 38 (141) (136) (239) 506 (161) (71) 274 $ 45,971 6,419 2,408 4,564 896 159 60,417 676 40 (92) (80) (132) 544 (428) (155) (39) 0.60 $ 0.59 $ (0.09) (0.09) Net income (loss) $ 62,752 10,766 4,332 9,275 1,552 133 88,810 178 39 (210) (118) (289) (111) (167) 37 (241) $ Basic earnings per share Diluted earnings per share Weighted average shares used in computation of earnings per share: Basic $ $ (0.52) $ (0.52) $ Total operating expenses Income from operations Interest income Interest expense Other income (expense), net Total non-operating income (expense) Income (loss) before income taxes Provision for income taxes Equity-method investment activity, net of tax Diluted _____________ (1) Includes stock-based compensation as follows: Fulfillment Marketing Technology and content General and administrative $ 462 457 453 462 465 453 375 $ 125 804 193 294 $ 88 603 149 212 61 434 126 See accompanying notes to consolidated financial statements. 39 2012 AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions) Year Ended December 31, 2014 Net income (loss) $ Other comprehensive income (loss): Foreign currency translation adjustments, net of tax of $(3), $(20), and $(30) Net change in unrealized gains on available-for-sale securities: Unrealized gains (losses), net of tax of $1, $3, and $(3) Reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $(1), $(1), and $3 Net unrealized gains (losses) on available-for-sale securities Total other comprehensive income (loss) Comprehensive income (loss) $ 2013 (241) $ (325) 2 (3) (1) (326) (567) $ See accompanying notes to consolidated financial statements. 40 2012 274 $ (39) 63 76 (10) 8 1 (9) 54 328 $ (7) 1 77 38 AMAZON.COM, INC. CONSOLIDATED BALANCE SHEETS (in millions, except per share data) December 31, 2014 2013 ASSETS Current assets: Cash and cash equivalents Marketable securities Inventories Accounts receivable, net and other $ Total current assets Property and equipment, net Goodwill Other assets Total assets $ LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued expenses and other Unearned revenue $ Total current liabilities Long-term debt Other long-term liabilities Commitments and contingencies (Note 8) 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 — 488 and 483 Outstanding shares — 465 and 459 Treasury stock, at cost Additional paid-in capital Accumulated other comprehensive loss Retained earnings 14,557 $ 2,859 8,299 5,612 31,327 16,967 3,319 2,892 54,505 $ 8,658 3,789 7,411 4,767 24,625 10,949 2,655 1,930 40,159 16,459 $ 9,807 1,823 28,089 8,265 7,410 15,133 6,688 1,159 22,980 3,191 4,242 — Total stockholders’ equity Total liabilities and stockholders’ equity $ See accompanying notes to consolidated financial statements. 41 5 (1,837) 11,135 (511) 1,949 10,741 54,505 $ — 5 (1,837) 9,573 (185) 2,190 9,746 40,159 AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in millions) Common Stock Shares 455 $ — — 4 (5) Balance as of January 1, 2012 Net loss Other comprehensive income Exercise of common stock options Repurchase of common stock Treasury Stock Amount 5 $ — — — — Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Stockholders’ Equity (877) $ — — — (960) 6,990 $ — — 8 — (316) $ — 77 — — 1,955 $ (39) — — — 7,757 (39) 77 8 (960) Excess tax benefits from stock-based compensation — — — 429 — — 429 Stock-based compensation and issuance of employee benefit plan stock — — — 854 — — 854 — 454 — — 5 — — 5 — — — — — 1,916 274 — — — 66 8,192 274 54 4 — — — — 73 — 459 — — 6 — 5 — — — Excess tax benefits from stock-based compensation — — — 6 — — 6 Stock-based compensation and issuance of employee benefit plan stock — — — 1,510 — — 1,510 Issuance of common stock for acquisition activity — — — 44 — — 44 (511) $ 1,949 $ Issuance of common stock for acquisition activity Balance as of December 31, 2012 Net income Other comprehensive income Exercise of common stock options Repurchase of common stock Excess tax benefits from stock-based compensation Stock-based compensation and issuance of employee benefit plan stock Balance as of December 31, 2013 Net loss Other comprehensive loss Exercise of common stock options Balance as of December 31, 2014 465 $ — (1,837) — — — — — — (1,837) — — — 5 $ 66 8,347 — — 4 — 73 1,149 9,573 — — 2 (1,837) $ 11,135 $ See accompanying notes to consolidated financial statements. 42 — (239) — 54 — — — — (185) — (326) — — 2,190 (241) — — 1,149 9,746 (241) (326) 2 10,741 AMAZON.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1—DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Description of Business Amazon.com opened its virtual doors on the World Wide Web in July 1995. We seek to be Earth’s most customer-centric company. In each of our two geographic segments, we serve our primary customer sets, consisting of consumers, sellers, enterprises, and content creators. We serve consumers through our retail websites and focus on selection, price, and convenience. We also manufacture and sell electronic devices. We offer programs that enable sellers to sell their products on our websites and their own branded websites and to fulfill orders through us, and programs that allow authors, musicians, filmmakers, app developers, and others to publish and sell content. We serve developers and enterprises of all sizes through AWS, which provides access to technology infrastructure that enables virtually any type of business. In addition, we provide services, such as advertising services and co-branded credit card agreements. We have organized our operations into two segments: North America and International. See “Note 12—Segment Information.” 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 components of the provision for income taxes in “Note 11—Income Taxes.” 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 (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 lives 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 of 17 million and 15 million in 2014 and 2012, were excluded as their inclusion would have an antidilutive effect. The following table shows the calculation of diluted shares (in millions): Year Ended December 31, 2014 Shares used in computation of basic earnings per share Total dilutive effect of outstanding stock awards 2013 462 — 462 Shares used in computation of diluted earnings per share 43 2012 457 8 465 453 — 453 Revenue We recognize revenue from product sales or services rendered when the following four criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using estimated selling prices if we do not have vendor-specific objective evidence or third-party evidence of the selling prices of the deliverables. We allocate the arrangement price to each of the elements based on the relative selling prices of each element. Estimated selling prices are management’s best estimates of the prices that we would charge our customers if we were to sell the standalone elements separately and include considerations of customer demand, prices charged by us and others for similar deliverables, and the price if largely based on the cost of producing the product or service. Sales of our digital devices, including Kindle e-readers, Fire tablets, Fire TVs, Echo, and Fire phones, are considered arrangements with multiple deliverables, consisting of the device, undelivered software upgrades and/or undelivered nonsoftware services such as cloud storage and free trial memberships to other services. The revenue allocated to the device, which is the substantial portion of the total sale price, and related costs are generally recognized upon delivery. Revenue related to undelivered software upgrades and/or undelivered non-software services is deferred and recognized generally on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided for each of these devices. Sales of Amazon Prime memberships are also considered arrangements with multiple deliverables, including shipping benefits, Prime Instant Video, Prime Music, Prime Photo, and access to the Kindle Owners’ Lending Library. The revenue related to the deliverables is amortized over the life of the membership based on the estimated delivery of services. Amazon Prime membership fees are allocated between product sales and service sales. Costs to deliver Amazon Prime benefits are recognized as cost of sales as incurred. As we add more benefits to the Prime membership, we will update the method of determining the estimated selling prices of each element as well as the allocation of Prime membership fees. We evaluate whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when we are primarily obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded at the gross sale price. We generally record the net amounts as commissions earned if we are not primarily obligated and do not have latitude in establishing prices. Such amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two. Product sales represent revenue from the sale of products and related shipping fees and digital media content where we record revenue gross. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title passes to customers. Retail sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier. Amazon’s electronic devices sold through retailers are recognized at the point of sale to consumers. Service sales represent third-party seller fees earned (including commissions) and related shipping fees, digital content subscriptions, and non-retail activities such as AWS, advertising services, and our co-branded credit card agreements. Service sales, net of promotional discounts and return allowances, are recognized when service has been rendered. Return allowances, which reduce revenue, are estimated using historical experience. Allowance for returns was $147 million, $167 million, and $198 million as of December 31, 2014, 2013, and 2012. Additions to the allowance were $1.1 billion, $907 million, and $702 million, and deductions to the allowance were $1.1 billion, $938 million, and $659 million as of December 31, 2014, 2013, and 2012. Revenue from product sales and services rendered is recorded net of sales and consumption taxes. Additionally, we periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when accepted by our customers, are treated as a reduction to the purchase price of the related transaction, while inducement offers, when accepted by our customers, are treated as a reduction to purchase price based on estimated future redemption rates. Redemption rates are estimated using our historical experience for similar inducement offers. Current discount offers and inducement offers are presented as a net amount in “Total net sales.” Cost of Sales Cost of sales consists of the purchase price of consumer products and digital media content where we record revenue gross, including Prime Instant Video, packaging supplies, and inbound and outbound shipping costs, including sortation and delivery centers, and related equipment costs. Shipping costs to receive products from our suppliers are included in our inventory, and 44 recognized as cost of sales upon sale of products to our customers. Payment processing and related transaction costs, including those associated with seller transactions, are classified in “Fulfillment” on our consolidated statements of operations. Vendor Agreements We have agreements with our vendors to receive funds for cooperative marketing efforts, promotions, and volume rebates. We generally consider amounts received from vendors to be a reduction of the prices we pay for their goods or services, and therefore record those amounts as a reduction of the cost of inventory or cost of services. Vendor rebates are typically dependent upon reaching minimum purchase thresholds. We evaluate the likelihood of reaching purchase thresholds using past experience and current year forecasts. When volume rebates can be reasonably estimated, we record a portion of the rebate as we make progress towards the purchase threshold. When we receive direct reimbursements for costs incurred by us in advertising the vendor’s product or service, the amount we receive is recorded as an offset to “Marketing” on our consolidated statements of operations. Fulfillment Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting, and warehousing inventories; picking, packaging, and preparing customer orders for shipment; payment processing and related transaction costs, including costs associated with our guarantee for certain seller transactions; responding to inquiries from customers; and supply chain management for our manufactured electronic devices. Fulfillment costs also include amounts paid to third parties that assist us in fulfillment and customer service operations. Marketing Marketing costs consist primarily of targeted online advertising, television advertising, public relations expenditures, and payroll and related expenses for personnel engaged in marketing, business development, and selling activities. We pay commissions to participants in our Associates program when their customer referrals result in product sales and classify such costs as “Marketing” on our consolidated statements of operations. We also participate in cooperative advertising arrangements with certain of our vendors, and other third parties. Advertising and other promotional costs are expensed as incurred and were $3.3 billion, $2.4 billion, and $2.0 billion in 2014, 2013, and 2012. Prepaid advertising costs were not significant as of December 31, 2014 and 2013. Technology and Content Technology costs consist principally of research and development activities including payroll and related expenses for employees involved in application, production, maintenance, operation, and platform development for new and existing products and services, as well as AWS and other technology infrastructure expenses. Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection. Technology and content costs are expensed as incurred, except for certain costs relating to the development of internal-use software and website development, including software used to upgrade and enhance our websites and applications supporting our business, which are capitalized and amortized over two years. General and Administrative General and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions, including accounting, finance, tax, legal, and human resources, among others; costs associated with use by these functions of facilities and equipment, such as depreciation expense and rent; professional fees and litigation costs; and other general corporate costs. Stock-Based Compensation Compensation cost for all stock awards expected to vest is measured at fair value on the date of grant and recognized over the service period. 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 are estimated on the date of grant using a Black-Scholes model. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method. The estimated number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated 45 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. Other Operating Expense (Income), Net Other operating expense (income), net, consists primarily of intangible asset amortization expense and expenses related to legal settlements. Other Income (Expense), Net Other income (expense), net, consists primarily of foreign currency losses of $(127) million, $(137) million, and $(95) million in 2014, 2013, and 2012, and realized gains and losses on marketable securities sales of $3 million, $(1) million, and $10 million in 2014, 2013, and 2012. Income Taxes Income tax expense includes U.S. (federal and state) and foreign income taxes. 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. Undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the U.S were $2.5 billion as of December 31, 2014. Determination of the unrecognized deferred tax liability that would be incurred if such amounts were repatriated is not practicable. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe they will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income and capital gains by taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. We allocate our valuation allowance to current and long-term deferred tax assets on a pro-rata basis. We utilize a two-step approach to recognizing and measuring uncertain income tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating our tax positions and estimating our tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We include interest and penalties related to our tax contingencies in income tax expense. Fair Value of Financial Instruments 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. For our cash, cash equivalents, or marketable securities, 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 December 31, 2014, or December 31, 2013. 46 As part of entering into commercial agreements, we often obtain equity warrant assets giving us the right to acquire stock primarily in private companies. We record these assets in “Other assets” on the accompanying consolidated balance sheets. Equity warrant assets are classified as Level 3 assets, and the balances and related activity for our equity warrant assets were not significant for the periods ended December 31, 2014, 2013, and 2012. Cash and Cash Equivalents We classify all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash equivalents. Inventories Inventories, consisting of products available for sale, are primarily accounted for using the FIFO 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. We provide Fulfillment by Amazon services in connection with certain of our sellers’ programs. Third-party sellers maintain ownership of their inventory, regardless of whether fulfillment is provided by us or the third-party sellers, and therefore these products are not included in our inventories. We also purchase electronic device components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers. A portion of our reported purchase commitments arising from these agreements consists of firm, non-cancellable commitments. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs. Accounts Receivable, Net and Other Included in “Accounts receivable, net and other” on our consolidated balance sheets are amounts primarily related to vendor and customer receivables. As of December 31, 2014 and 2013, vendor receivables, net, were $1.4 billion and $1.3 billion, and customer receivables, net, were $1.9 billion and $1.7 billion. We estimate losses on receivables based on known troubled accounts and historical experience of losses incurred. Receivables are considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the agreement. The allowance for doubtful accounts was $190 million, $153 million, and $116 million as of December 31, 2014, 2013, and 2012. Additions to the allowance were $225 million, $172 million, and $136 million, and deductions to the allowance were $188 million, $135 million, and $102 million as of December 31, 2014, 2013, and 2012. Internal-use Software and Website Development Costs incurred to develop software for internal use and our websites are capitalized and amortized over the estimated useful life of the software. Costs related to design or maintenance of internal-use software and website development are expensed as incurred. For the years ended 2014, 2013, and 2012, we capitalized $641 million (including $104 million of stockbased compensation), $581 million (including $87 million of stock-based compensation), and $454 million (including $74 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $559 million, $451 million, and $327 million for 2014, 2013, and 2012. Property and Equipment, Net Property and equipment are stated at cost less accumulated depreciation. Property includes buildings and land that we own, along with property we have acquired under build-to-suit, financing, and capital lease arrangements. Equipment includes assets such as furniture and fixtures, heavy equipment, servers and networking equipment, and internal-use software and website development. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets (generally the lesser of 40 years or the remaining life of the underlying building, two years for assets such as internal-use software, three years for our servers, five years for networking equipment, five years for furniture and fixtures, and ten years for heavy equipment). Depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of operations. 47 Leases and Asset Retirement Obligations We categorize leases at their inception as either operating or capital leases. On certain of our lease agreements, we may receive rent holidays and other incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Additionally, incentives we receive are treated as a reduction of our costs over the term of the agreement. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the non-cancellable term of the lease. We establish assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extent we are involved in the construction of structural improvements or take construction risk prior to commencement of a lease. Upon occupancy of facilities under build-to-suit leases, we assess whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If we continue to be the deemed owner, the facilities are accounted for as finance leases. We establish assets and liabilities for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Such assets are depreciated over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated retirement 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. We test goodwill for impairment 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. We conduct our annual impairment test as of October 1 of each year, and have determined there to be no impairment for any of the periods presented. There were no triggering events identified from the date of our assessment through December 31, 2014 that would require an update to our annual impairment test. See “Note 4—Acquisitions, Goodwill, and Acquired Intangible Assets.” Other Assets Included in “Other assets” on our consolidated balance sheets are amounts primarily related to acquired intangible assets, net of amortization; acquired digital media content, net of amortization; long-term deferred tax assets; certain equity investments; marketable securities restricted for longer than one year, the majority of which are attributable to collateralization of bank guarantees and debt related to our international operations; intellectual property rights, net of amortization; and equity warrant assets. Content Costs We obtain video and music content to be made available to Prime members through licensing agreements that have a wide range of licensing provisions and generally have terms from one to five years with fixed payment schedules. When the license fee for a specific movie, television, or music title is determinable or reasonably estimable and available for streaming, we recognize an asset representing the fee per title and a corresponding liability for the amounts owed. We relieve the liability as payments are made and we amortize the asset as cost of sales on a straight-line basis over each title’s contractual window of availability, which typically ranges from six months to five years. If we are unable to reasonably estimate the cost per title, no asset or liability is recorded and licensing costs are expensed as incurred. We also develop original content. The production costs of internally developed content are capitalized only if persuasive evidence exists that the production will generate revenue. Because we have limited history to support the economic benefits of our content, we have generally expensed such costs as incurred. As we develop more experience or otherwise obtain the necessary evidence that future revenue will be earned through licensing or Prime membership activity, a portion of future production costs may be capitalized. Investments We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities and AAArated money market funds. Such investments are included in “Cash and cash equivalents,” or “Marketable securities” on the accompanying consolidated balance sheets, classified as available-for-sale, and reported at fair value with unrealized gains and losses included in “Accumulated other comprehensive loss.” 48 Equity investments are accounted for using the equity method of accounting if the investment gives us the ability to exercise significant influence, but not control, over an investee. The total of our investments in equity-method investees, including identifiable intangible assets, deferred tax liabilities, and goodwill, is included within “Other assets” on our consolidated balance sheets. Our share of the earnings or losses as reported by equity-method investees, amortization of the related intangible assets, and related gains or losses, if any, are classified as “Equity-method investment activity, net of tax” on our consolidated statements of operations. Our share of the net income or loss of our equity-method investees includes operating and non-operating gains and charges, which can have a significant impact on our reported equity-method investment activity and the carrying value of those investments. In the event that net losses of the investee reduce our equity-method investment carrying amount to zero, additional net losses may be recorded if other investments in the investee, not accounted for under the equity method, are at-risk even if we have not committed to provide financial support to the investee. We regularly evaluate these investments, which are not carried at fair value, for other-than-temporary impairment. We also consider whether our equitymethod investments generate sufficient cash flows from their operating or financing activities to meet their obligations and repay their liabilities when they come due. We record purchases, including incremental purchases, of shares in equity-method investees at cost. Reductions in our ownership percentage of an investee, including through dilution, are generally valued at fair value, with the difference between fair value and our recorded cost reflected as a gain or loss in our equity-method investment activity. In the event we no longer have the ability to exercise significant influence over an equity-method investee, we would discontinue accounting for the investment under the equity method. Equity investments without readily determinable fair values for which we do not have the ability to exercise significant influence are accounted for using the cost method of accounting and classified as “Other assets” on our consolidated balance sheets. Under the cost method, investments are carried at cost and are adjusted only for other-than-temporary declines in fair value, certain distributions, and additional investments. Equity investments that have readily determinable fair values are classified as available-for-sale and are included in “Marketable securities” in our consolidated balance sheets and are recorded at fair value with unrealized gains and losses, net of tax, included in “Accumulated other comprehensive loss.” We periodically evaluate whether declines in fair values of our investments below their book value are other-thantemporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as our ability and intent to hold the investment until a forecasted recovery occurs. Additionally, we assess whether we have plans to sell the security or it is more likely than not we will be required to sell any investment before recovery of its amortized cost basis. Factors considered include quoted market prices; recent financial results and operating trends; implied values from any recent transactions or offers of investee securities; credit quality of debt instrument issuers; other publicly available information that may affect the value of our investments; duration and severity of the decline in value; and our strategy and intentions for holding the investment. Long-Lived Assets Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value. Long-lived assets are considered held for sale when certain criteria are met, including when management has committed to a plan to sell the asset, the asset is available for sale in its immediate condition, and the sale is probable within one year of the reporting date. Assets held for sale are reported at the lower of cost or fair value less costs to sell. Assets held for sale were not significant as of December 31, 2014 or 2013. Accrued Expenses and Other Included in “Accrued expenses and other” on our consolidated balance sheets are liabilities primarily related to unredeemed gift cards, leases and asset retirement obligations, current debt, acquired digital media content, and other operating expenses. 49 As of December 31, 2014 and 2013 our liabilities for unredeemed gift cards was $1.7 billion and $1.4 billion. We reduce the liability for a gift card when redeemed by a customer. If a gift card is not redeemed, we recognize revenue when it expires or when the likelihood of its redemption becomes remote, generally two years from the date of issuance. Unearned Revenue Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period. Unearned revenue primarily relates to prepayments of Amazon Prime memberships and AWS services. Foreign Currency We have internationally-focused websites for the United Kingdom, Germany, France, Japan, Canada, China, Italy, Spain, Brazil, India, Mexico, Australia, and the Netherlands. Net sales generated from these websites, as well as most of the related expenses directly incurred from those operations, are denominated in local functional currencies. The functional currency of our subsidiaries that either operate or support these websites is generally the same as the local currency. Assets and liabilities of these subsidiaries are translated into U.S. Dollars at period-end foreign exchange rates, and revenues and expenses are translated at average rates prevailing throughout the period. Translation adjustments are included in “Accumulated other comprehensive loss,” a separate component of stockholders’ equity, and in the “Foreign-currency effect on cash and cash equivalents,” on our consolidated statements of cash flows. Transaction gains and losses including intercompany transactions denominated in a currency other than the functional currency of the entity involved are included in “Other income (expense), net” on our consolidated statements of operations. In connection with the settlement and remeasurement of intercompany balances, we recorded losses of $98 million, $84 million, and $95 million in 2014, 2013, and 2012. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board issued an Accounting Standard Update (“ASU”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption prohibited. We are currently evaluating the impact this ASU will have on our consolidated financial statements. 50 Note 2—CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES As of December 31, 2014 and 2013, 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. 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): December 31, 2014 Cost or Amortized Cost Cash Level 1 securities: Money market funds Equity securities Level 2 securities: Foreign government and agency securities U.S. government and agency securities Corporate debt securities Asset-backed securities Other fixed income securities $ $ 4,155 $ Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value — $ — $ 10,718 2 — 2 — — 10,718 4 80 2,407 401 69 33 17,865 $ — 1 1 — — 4 $ — (2) (1) — — (3) $ 80 2,406 401 69 33 17,866 Less: Restricted cash, cash equivalents, and marketable securities (1) Total cash, cash equivalents, and marketable securities $ 4,155 (450) 17,416 December 31, 2013 Cost or Amortized Cost Cash Level 1 securities: Money market funds Equity securities Level 2 securities: Foreign government and agency securities U.S. government and agency securities Corporate debt securities Asset-backed securities Other fixed income securities $ $ Less: Restricted cash, cash equivalents, and marketable securities (1) Total cash, cash equivalents, and marketable securities Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value 3,008 $ — $ — $ 3,008 5,914 3 — 1 — — 5,914 4 2 1 3 — — 7 $ (1) (3) (1) — — (5) $ 757 2,224 739 65 36 12,746 $ $ 758 2,222 741 65 36 12,748 (301) 12,447 ___________________ (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 8—Commitments and Contingencies.” 51 The following table summarizes gross gains and gross losses realized on sales of available-for-sale marketable securities (in millions): Year Ended December 31, 2014 Realized gains Realized losses 2013 $ 8 $ 5 2012 6 $ 7 20 10 The following table summarizes the contractual maturities of our cash equivalents and marketable fixed-income securities as of December 31, 2014 (in millions): Amortized Cost Due within one year Due after one year through five years Due after five years through ten years Due after ten years $ Total Estimated Fair Value 12,553 $ 798 132 224 13,707 $ $ 12,552 799 132 224 13,707 Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions. Note 3—PROPERTY AND EQUIPMENT Property and equipment, at cost, consisted of the following (in millions): December 31, 2014 Gross property and equipment (1): Land and buildings Equipment and internal-use software (2) Other corporate assets Construction in progress Gross property and equipment Total accumulated depreciation (1) Total property and equipment, net $ $ 2013 7,150 $ 14,213 304 1,063 22,730 5,763 16,967 $ 4,584 9,274 231 720 14,809 3,860 10,949 ___________________ (1) Excludes the original cost and accumulated depreciation of fully-depreciated assets. (2) Includes internal-use software of $1.3 billion and $1.1 billion as of December 31, 2014 and 2013. Depreciation expense on property and equipment was $3.6 billion, $2.5 billion, and $1.7 billion, which includes amortization of property and equipment acquired under capital leases of $1.5 billion, $826 million, and $510 million for 2014, 2013, and 2012. Gross assets remaining under capital leases were $7.9 billion and $4.2 billion as of December 31, 2014 and 2013. Accumulated depreciation associated with capital leases was $3.3 billion and $1.9 billion as of December 31, 2014 and 2013. We capitalize construction in progress and record a corresponding long-term liability for build-to-suit lease agreements where we are considered the owner, for accounting purposes, during the construction period. For buildings under build-to-suit lease arrangements where we have taken occupancy, which do not qualify for sales recognition under the sale-leaseback accounting guidance, we determined that we continue to be the deemed owner of these buildings. This is principally due to our significant investment in tenant improvements. As a result, the buildings are being depreciated over the shorter of their useful lives or the related leases’ terms. Additionally, certain build-to-suit lease arrangements and finance leases provide purchase options. Upon occupancy, the long-term construction obligations are considered long-term finance lease obligations with amounts payable during the next 12 months recorded as “Accrued expenses and other.” Gross assets remaining under finance leases were $1.4 billion and $578 million as of December 31, 2014 and 2013. Accumulated depreciation associated with finance leases was $87 million and $22 million as of December 31, 2014 and 2013. 52 Cash paid for interest on capital and finance leases was $86 million, $41 million, and $51 million for 2014, 2013, and 2012. Note 4—ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS 2014 Acquisition Activity On September 25, 2014, we acquired Twitch Interactive, Inc. (“Twitch”) for approximately $842 million in cash, as adjusted for the assumption of options and other items. During 2014, we acquired certain other companies for an aggregate purchase price of $20 million. We acquired Twitch because of its user community and the live streaming experience it provides. The primary reasons for our other 2014 acquisitions 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 Stock options assumed Indemnification holdback $ Allocation Goodwill Intangible assets (1): Marketing-related Contract-based Technology-based Customer-related $ 813 44 5 862 $ 707 $ 23 1 33 173 230 16 64 34 (88) (101) 862 Property and equipment Deferred tax assets Other assets acquired Deferred tax liabilities Other liabilities assumed ___________________ (1) Acquired intangible assets have estimated useful lives of between one and five years, with a weighted-average amortization period of five years. The fair value of assumed stock options of $39 million, estimated using the Black-Scholes model, will be expensed over the remaining service period. 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 or accelerated basis over their estimated useful lives. Subsequent to September 30, 2014, we made minor measurement period adjustments to the preliminary purchase price allocation that impacted goodwill, customer-related intangible assets, property and equipment, and deferred taxes and are reflected in the table above. We have not retrospectively adjusted our previously reported consolidated financial statements. 53 Pro Forma Financial Information – 2014 Acquisition Activity (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 $40 million and $30 million for the year ended December 31, 2014. The following pro forma financial information presents our results as if the current year acquisitions had occurred at the beginning of 2013 (in millions): Year Ended December 31, 2014 Net sales Net income (loss) $ $ 2013 89,041 $ (287) $ 74,505 180 2013 Acquisition Activity In 2013, we acquired several companies in cash transactions for an aggregate purchase price of $195 million, resulting in goodwill of $103 million and acquired intangible assets of $83 million. The primary reasons for these acquisitions were to expand our customer base and sales channels and to obtain certain technologies to be used in product development. We determined the estimated fair value of identifiable intangible assets acquired primarily by using the income and cost approaches. These assets are included within “Other assets” on our consolidated balance sheets and are being amortized to operating expenses on a straight-line or accelerated basis over their estimated useful lives. Acquisition-related costs were expensed as incurred and were 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. 2012 Acquisition Activity In May 2012, we acquired Kiva Systems, Inc. (“Kiva”) for a purchase price of $678 million. The primary reason for this acquisition was to improve fulfillment center productivity. Acquisition-related costs were expensed as incurred and were not significant. The aggregate purchase price of this acquisition was allocated as follows (in millions): Purchase Price Cash paid, net of cash acquired Stock options assumed $ Allocation Goodwill Intangible assets (1): Marketing-related Contract-based Technology-based Customer-related $ 613 65 678 $ 560 $ 5 3 168 17 193 9 34 41 (81) (78) 678 Property and equipment Deferred tax assets Other assets acquired Deferred tax liabilities Other liabilities assumed ___________________ (1) Acquired intangible assets have estimated useful lives of between four and 10 years, with a weighted-average amortization period of five years. The fair value of assumed stock options was estimated using the Black-Scholes model. We determined the estimated fair value of identifiable intangible assets acquired primarily by using the income and cost approaches. These assets are included 54 within “Other assets” on our consolidated balance sheets and are being amortized to operating expenses on a straight-line or accelerated basis over their estimated useful lives. Pro forma results of operations have not been presented because the effect of this acquisition was 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 sales growth from future product and service offerings and new customers and fulfillment center productivity, together with certain intangible assets that do not qualify for separate recognition. The following summarizes our goodwill activity in 2014 and 2013 by segment (in millions): North America Goodwill - January 1, 2013 New acquisitions Other adjustments (1) Goodwill - December 31, 2013 New acquisitions (2) Other adjustments (1) Goodwill - December 31, 2014 $ $ International 1,937 $ 99 (3) 2,033 553 (2) 2,584 $ Consolidated 615 $ 4 3 622 162 (49) 735 $ 2,552 103 — 2,655 715 (51) 3,319 ___________________ (1) Primarily includes changes in foreign exchange rates. (2) Primarily includes the goodwill of Twitch. Intangible Assets Acquired intangible assets, included within “Other assets” on our consolidated balance sheets, consist of the following (in millions): December 31, Weighted Average Life Remaining Marketing-related Contract-based Technology- and content-based Customer-related Acquired intangibles (2) Acquired Intangibles, Gross (1) 2014 Accumulated Amortization (1) Acquired Intangibles, Net Acquired Intangibles, Gross (1) 2013 Accumulated Amortization (1) Acquired Intangibles, Net 5.3 $ 2.2 457 $ 172 (199) $ (125) 258 $ 47 429 $ 173 (156) $ (110) 273 63 3.5 2.5 370 535 (129) (317) 241 218 278 368 (74) (263) 204 105 (770) $ 764 $ (603) $ 645 3.5 $ 1,534 $ 1,248 $ ___________________ (1) Excludes the original cost and accumulated amortization of fully-amortized intangibles. (2) Intangible assets have estimated useful lives of between one and 10 years. 55 Amortization expense for acquired intangibles was $181 million, $168 million, and $163 million in 2014, 2013, and 2012. Expected future amortization expense of acquired intangible assets as of December 31, 2014 is as follows (in millions): Year Ended December 31, 2015 2016 2017 2018 2019 Thereafter $ 202 185 161 106 79 31 764 $ Note 5—EQUITY-METHOD INVESTMENTS LivingSocial’s summarized condensed financial information, as provided to us by LivingSocial, is as follows (in millions): Year Ended December 31, 2014 Statement of Operations: Revenue Gross profit Operating expenses Operating loss from continuing operations Net loss from continuing operations Net income (loss) from discontinued operations, net of tax (1) Net income (loss) $ 2013 231 $ 194 296 (102) (73) 173 100 $ $ 2012 302 $ 253 282 (29) (16) (156) (172) $ 347 280 367 (87) (79) (574) (653) ___________________ (1) In January 2014, LivingSocial completed the sale of its Korean operations for approximately $260 million and, in the first quarter of 2014, recognized a gain on disposal of $205 million, net of tax. The statement of operations information above has been recast to present the Korean operations, and certain other operations, as discontinued operations. December 31, 2014 Balance Sheet: Current assets Non-current assets Current liabilities Non-current liabilities Redeemable stock $ 2013 163 $ 29 137 34 366 182 61 301 33 315 Balance sheet financial information as of December 31, 2013 included $146 million in assets and $122 million in liabilities that LivingSocial classified as held for sale for its Korean operations. As of December 31, 2014, our total investment in LivingSocial is approximately 31% of voting stock and has a book value of $75 million. 56 Note 6—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 December 31, 2014 and 2013, the unamortized discount on the Notes was $96 million and $23 million. We also have other long-term debt with a carrying amount, including the current portion, of $881 million and $967 million as of December 31, 2014 and 2013. The face value of our total long-term debt obligations is as follows (in millions): December 31, 2014 0.65% Notes due on November 27, 2015 (1) 1.20% Notes due on November 29, 2017 (1) 2.50% Notes due on November 29, 2022 (1) 2.60% Notes due on December 5, 2019 (2) 3.30% Notes due on December 5, 2021 (2) 3.80% Notes due on December 5, 2024 (2) 4.80% Notes due on December 5, 2034 (2) 4.95% Notes due on December 5, 2044 (2) Other long-term debt $ Total debt Less current portion of long-term debt Face value of long-term debt $ 750 $ 1,000 1,250 1,000 1,000 1,250 1,250 1,500 881 9,881 (1,520) 8,361 $ 2013 750 1,000 1,250 — — — — — 967 3,967 (753) 3,214 _____________________________ (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 $9.1 billion and $2.9 billion as of December 31, 2014 and 2013, 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 5.5% as of December 31, 2014 and 2013. 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 December 31, 2014 and 2013. As of December 31, 2014, future principal payments for our total debt were as follows (in millions): Year Ended December 31, 2015 2016 2017 2018 2019 Thereafter $ $ 1,520 36 1,037 38 1,000 6,250 9,881 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 December 31, 2014. 57 Note 7—OTHER LONG-TERM LIABILITIES Our other long-term liabilities are summarized as follows (in millions): December 31, 2014 Long-term capital lease obligations Long-term finance lease obligations Construction liabilities Tax contingencies Long-term deferred tax liabilities Other Total other long-term liabilities $ $ 2013 3,026 $ 1,198 467 510 1,021 1,188 7,410 $ 1,435 555 385 457 571 839 4,242 Capital and Finance Leases Certain of our equipment, primarily related to technology infrastructure, and buildings have been acquired under capital leases. Long-term capital lease obligations are as follows (in millions): December 31, 2014 Gross capital lease obligations Less imputed interest Present value of net minimum lease payments Less current portion of capital lease obligations Total long-term capital lease obligations $ $ 5,182 (143) 5,039 (2,013) 3,026 We continue to be the deemed owner after occupancy of certain facilities that were constructed as build-to-suit lease arrangements and previously reflected as “Construction liabilities.” As such, these arrangements are accounted for as finance leases. Long-term finance lease obligations are as follows (in millions): December 31, 2014 Gross finance lease obligations Less imputed interest $ Present value of net minimum lease payments Less current portion of finance lease obligations Total long-term finance lease obligations $ 1,629 (364) 1,265 (67) 1,198 Construction Liabilities We capitalize construction in progress and record a corresponding long-term liability for build-to-suit lease agreements where we are considered the owner during the construction period for accounting purposes. These liabilities primarily relate to our corporate buildings and fulfillment, sortation, delivery, and data centers. Tax Contingencies We have recorded tax reserves for tax contingencies, inclusive of accrued interest and penalties, for U.S. and foreign income taxes. These contingencies primarily relate to transfer pricing, state income taxes, and research and development credits. See “Note 11—Income Taxes” for discussion of tax contingencies. 58 Note 8—COMMITMENTS AND CONTINGENCIES Commitments We have entered into non-cancellable operating, capital, and finance leases for equipment and office, fulfillment, sortation, delivery, and data center facilities. Rental expense under operating lease agreements was $961 million, $759 million, and $561 million for 2014, 2013, and 2012. The following summarizes our principal contractual commitments, excluding open orders for purchases that support normal operations, as of December 31, 2014 (in millions): Year Ended December 31, 2015 Operating and capital commitments: Debt principal and interest Capital leases, including interest Finance lease obligations, including interest Operating leases Unconditional purchase obligations (1) Other commitments (2) (3) Total commitments 2016 2017 $ 1,842 $ 323 $ 1,322 $ 2,060 1,727 1,030 2018 2019 Thereafter 310 $ 1,272 $ 178 89 Total 9,403 $ 14,472 98 5,182 110 112 115 117 119 1,056 1,629 868 791 728 634 549 2,343 5,913 489 435 351 118 38 3 1,434 928 333 160 140 90 845 2,496 $ 6,297 $ 3,721 $ 3,706 $ 1,497 $ 2,157 $ 13,748 $ 31,126 ___________________ (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 $710 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 December 31, 2014 and 2013, we have pledged or otherwise restricted $602 million and $482 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. Suppliers During 2014, no vendor accounted for 10% or more of our purchases. We generally do not have long-term contracts or arrangements with our vendors to guarantee the availability of merchandise, particular payment terms, or the extension of credit limits. Legal Proceedings The Company is involved from time to time in claims, proceedings, and litigation, including 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 59 European Court of Justice (ECJ). In July 2013, the European Court of Justice 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 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 May 2009, Big Baboon, Inc. filed a complaint against Amazon.com, Inc. and Amazon Payments, Inc. for patent infringement in the United States District Court for the Central District of California. The complaint alleges, among other things, that our third-party selling and payments technology infringes patents owned by Big Baboon, Inc. purporting to cover an “Integrated Business-to-Business Web Commerce And Business Automation System” (U.S. Patent Nos. 6,115,690 and 6,343,275) and seeks injunctive relief, monetary damages, treble damages, costs, and attorneys’ fees. In February 2011, the Court entered an order staying the lawsuit pending the outcome of the Patent and Trademark Office’s re-examination of the patent. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In April 2011, Walker Digital LLC filed several complaints against Amazon.com, Inc. for patent infringement in the United States District Court for the District of Delaware. The complaints allege that we infringe several of the plaintiff’s U.S. patents by, among other things, providing “cross benefits” to customers through our promotions (U.S. Patent Nos. 7,831,470 and 7,827,056), using a customer’s identified original product to offer a substitute product (U.S. Patent No. 7,236,942), using our product recommendations and personalization features to offer complementary products together (U.S. Patent Nos. 6,601,036 and 6,138,105), enabling customers to subscribe to a delivery schedule for products they routinely use at reduced prices (U.S. Patent No. 5,970,470), and offering personalized advertising based on customers’ preferences identified using a data pattern (U.S. Patent No. 7,933,893). Another complaint, filed in the same court in October 2011, alleges that we infringe plaintiff’s U.S. Patent No. 8,041,711 by offering personalized advertising based on customer preferences that associate data with resource locators. Another complaint, filed in the same court in February 2012, alleges that we infringe plaintiff’s U.S. Patent No. 8,112,359 by using product information received from customers to identify and offer substitute products using a manufacturer database. In January 2013, the plaintiff filed another complaint in the same court alleging that we infringe U.S. Patent No. 6,381,582 by allowing customers to make local payments for products ordered online. All of the complaints seek monetary damages, interest, injunctive relief, costs, and attorneys’ fees. In March 2013, the complaints asserting U.S. Patent Nos. 7,236,942 and 7,933,893 were voluntarily dismissed with prejudice. In April 2013, the case asserting U.S. Patent No. 8,041,711 was stayed pending final resolution of the reexamination of that patent. In June 2013, the court granted defendants’ motions to dismiss the complaints asserting U.S. Patent Nos. 7,831,470, 7,827,056, and 8,112,359 for lack of standing. In July 2013, we filed motions seeking entry of a final judgment dismissing those claims with prejudice and for attorneys’ fees, and plaintiff filed notices of appeal from the June 2013 order granting the motions to dismiss. In October 2013, the court ruled that its dismissals are with prejudice, and Walker has appealed those rulings. In March 2014, the court stayed the case asserting U.S. Patent Nos. 6,601,036 and 6,138,105 pending the appeal of the cases asserting U.S. Patent Nos. 7,831,470, 7,827,056, and 8,112,359. In September 2014, the court dismissed the matter asserting U.S. Patent No. 6,381,582 with prejudice. In January 2015, the court dismissed with prejudice the complaint asserting U.S. Patent No. 8,041,711, and the United States Court of Appeals for the Federal Circuit affirmed the dismissal of the complaints asserting U.S. Patent Nos. 7,831,470, 7,827,056, and 8,112,359. We dispute the remaining allegations of wrongdoing and intend to defend ourselves vigorously in these matters. In March 2012, OIP Technologies, Inc. filed a complaint against Amazon.com, Inc. for patent infringement in the United States District Court for the Northern District of California. The complaint alleged, among other things, that certain aspects of our pricing methods infringed U.S. Patent No. 7,970,713, entitled “Method And Apparatus For Automatic Pricing In Electronic Commerce.” The complaint sought three times an unspecified amount of damages, attorneys’ fees, and interest. In September 2012, the court invalidated the plaintiff’s patent and dismissed the case with prejudice. In September 2012, OIP appealed the judgment of the district court to the United States Court of Appeals for the Federal Circuit, which, in November 2012, stayed all proceedings pending its decision in a separate case that raises a related question of law and, in June 2013, continued the stay pending a decision by the United States Supreme Court. In July 2014, the court of appeals lifted the stay. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In June 2012, Hand Held Products, Inc., a subsidiary of Honeywell, filed a complaint against Amazon.com, Inc., AMZN Mobile, LLC, AmazonFresh, LLC, A9.com, Inc., A9 Innovations, LLC, and Quidsi, Inc. in the United States District Court for the District of Delaware. The complaint alleges, among other things, that the use of mobile barcode reader applications, 60 including Amazon Mobile, Amazon Price Check, Flow, and AmazonFresh, infringes U.S. Patent No. 6,015,088, entitled “Decoding Of Real Time Video Imaging.” The complaint seeks an unspecified amount of damages, interest, and an injunction. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In July 2012, Norman Blagman filed a purported class-action complaint against Amazon.com, Inc. for copyright infringement in the United States District Court for the Southern District of New York. The complaint alleges, among other things, that Amazon.com, Inc. sells digital music in our Amazon MP3 Store obtained from defendant Orchard Enterprises and other unnamed “digital music aggregators” without obtaining mechanical licenses for the compositions embodied in that music. The complaint seeks certification as a class action, statutory damages, attorneys’ fees, and interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In August 2012, an Australian quasi-government entity named Commonwealth Scientific and Industrial Research Organization filed a complaint against Amazon.com, Inc. in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that the sale of “products which are operable according to the Institute of Electrical and Electronics Engineers (“IEEE”) 802.11a, g, n, and/or draft n standards” infringe U.S. Patent No. 5,487,069, entitled “Wireless LAN.” The complaint seeks an unspecified amount of damages, enhanced damages, attorneys’ fees, and injunctive relief. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In November 2012, Lexington Luminance LLC filed a complaint against Amazon.com, Inc. and Amazon Digital Services, Inc. in the United States District Court for the District of Massachusetts. The complaint alleges, among other things, that certain light-emitting diodes in certain Kindle devices infringe U.S. Patent No. 6,936,851, entitled “Semiconductor Light-Emitting Device And Method For Manufacturing Same.” The complaint seeks an unspecified amount of damages and an injunction or, in the absence of an injunction, a compulsory ongoing royalty. In March 2014, the Court invalidated the plaintiff’s patent and dismissed the case with prejudice, and the plaintiff appealed the 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 May 2013, Adaptix, Inc. filed a complaint against Amazon.com, Inc. in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that certain Kindle devices infringe U.S. Patent Nos. 7,454,212 and 6,947,748, both entitled “OFDMA With Adaptive Subcarrier-Cluster Configuration And Selective Loading.” The complaint seeks an unspecified amount of damages, interest, injunctive relief, and attorneys’ fees. In March 2014, the case was transferred to the United States District Court for the Northern District of California. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. 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. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In August 2013, Cellular Communications Equipment, LLC filed a complaint against Amazon.com, Inc. in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that certain Kindle devices infringe U.S. Patent Nos.: 6,819,923, entitled “Method For Communication Of Neighbor Cell Information”; 7,215,962, entitled “Method For An Intersystem Connection Handover”; 7,941,174, entitled “Method For Multicode Transmission By A Subscriber Station”; and 8,055,820 entitled “Apparatus, System, And Method For Designating A Buffer Status Reporting Format Based On Detected Pre-Selected Buffer Conditions.” In March 2014, the plaintiff filed an amended complaint that alleges, among other things, that certain Kindle devices infringe U.S. Patent No. 8,055,820, entitled “Apparatus, System, And Method For Designating A Buffer Status Reporting Format Based On Detected Pre-Selected Buffer Conditions.” The amended complaint seeks an unspecified amount of damages and interest. In January 2015, the court dismissed with prejudice the claim of infringement of U.S. Patent No. 7,215,962. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. Beginning in August 2013, a number of complaints were filed alleging, among other things, that Amazon.com, Inc. and several of its subsidiaries failed to compensate hourly workers for time spent waiting in security lines and otherwise violated federal and state wage and hour statutes and common law. In August 2013, Busk v. Integrity Staffing Solutions, Inc. and Amazon.com, Inc. was filed in the United States District Court for the District of Nevada, and Vance v. Amazon.com, Inc., Zappos.com Inc., another affiliate of Amazon.com, Inc., and Kelly Services, Inc. was filed in the United States District Court for the Western District of Kentucky. In September 2013, Allison v. Amazon.com, Inc. and Integrity Staffing Solutions, Inc. was filed in the United States District Court for the Western District of Washington, and Johnson v. Amazon.com, Inc. and an 61 affiliate of Amazon.com, Inc. was filed in the United States District Court for the Western District of Kentucky. In October 2013, Davis v. Amazon.com, Inc., an affiliate of Amazon.com, Inc., and Integrity Staffing Solutions, Inc. was filed in the United States District Court for the Middle District of Tennessee. The plaintiffs variously purport to represent a nationwide class of certain current and former employees under the Fair Labor Standards Act and/or state-law-based subclasses for certain current and former employees in states including Arizona, California, Pennsylvania, South Carolina, Kentucky, and Nevada, and one complaint asserts nationwide breach of contract and unjust enrichment claims. The complaints seek an unspecified amount of damages, interest, injunctive relief, and attorneys’ fees. We have been named in several other similar cases. In December 2014, the Supreme Court ruled in Busk that time spent waiting for and undergoing security screening is not compensable working time under the federal wage and hour statute. We dispute any remaining allegations of wrongdoing and intend to defend ourselves vigorously in these matters. 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. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In October 2013, Mobile Telecommunications Technologies, LLC filed a complaint against Amazon.com, Inc. for patent infringement in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that our network operation centers and our mobile devices, such as Kindle Fire models based on the Android operating system that provide XMPP-compliant messaging services and applications, infringe U.S. Patent No. 5,809,428, entitled “Method And Device For Processing Undelivered Data Messages In A Two-Way Wireless Communications System.” The complaint also alleges that Amazon’s mobile devices infringe U.S. Patent No. 5,754,946, entitled “Nationwide Communication System,” and that Amazon.com, Inc. infringes U.S. Patent No. 5,786,748, entitled “Method And Apparatus For Giving Notification Of Express Mail Delivery,” by providing tracking and notification services to customers who purchase products directly from Amazon.com, Inc. The complaint seeks an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, interest, and injunctive relief. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In October 2013, Tuxis Technologies, LLC filed a complaint against Amazon.com, Inc. for patent infringement in the United States District Court for District of Delaware. The complaint alleges, among other things, that “the Amazon.com website” with “recommendation features” infringes U.S. Patent No. 6,055,513, entitled “Methods And Apparatus For Intelligent Selection Of Goods And Services In Telephonic And Electronic Commerce.” The complaint seeks an unspecified amount of damages, attorneys’ fees, costs, and interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In November 2013, Memory Integrity, LLC filed a complaint against Amazon.com, Inc. for patent infringement in the United States District Court for the District of Delaware. The complaint alleges, among other things, that certain Kindle devices infringe U.S. Patent No. 7,296,121, entitled “Reducing Probe Traffic In Multiprocessor Systems.” The complaint seeks an unspecified amount of damages, costs, expenses, and interest. In December 2014, the case was stayed pending resolution of review petitions filed with the United States Patent and Trademark Office. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In November 2013, Vantage Point Technology, Inc. filed a complaint against Amazon.com, Inc. for patent infringement in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that Kindle devices with a Cortex A-9 core processor and OMAP 4430 chipset, Kindle device HD tablets with a Cortex A-9 core processor and OMAP 4470 chipset, and Kindle devices with a Cortex A-8 core processor and Freescale MX50 family chipset infringe U.S. Patent No. 5,463,750, entitled “Method And Apparatus For Translating Virtual Addresses In A Data Processing System Having Multiple Instruction Pipelines And Separate TLB’s For Each Pipeline.” The complaint seeks an unspecified amount of damages, enhanced damages, costs, and interest. 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 monetary damages, treble damages, costs, and interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. 62 In December 2013, ContentGuard Holdings, Inc. filed a complaint against Amazon.com, Inc. for patent infringement in the United States District Court for Eastern District of Texas. The complaint alleges, among other things, that certain digital rights management software used by various Kindle Fire software applications, including the Kindle Reader and Amazon Instant Video, infringe seven U.S. Patents: Nos. 6,963,859, entitled “Content Rendering Repository”; 7,523,072, entitled “System For Controlling The Distribution And Use Of Digital Works”; 7,269,576, entitled “Content Rendering Apparatus”; 8,370,956, entitled “System And Method For Rendering Digital Content In Accordance With Usage Rights Information”; 8,393,007, entitled “System And Method For Distributing Digital Content In Accordance With Usage Rights Information”; 7,225,160, entitled “Digital Works Having Usage Rights And Method For Creating The Same”; and 8,583,556, entitled “Method For Providing A Digital Asset For Distribution.” In January 2014, ContentGuard filed an amended complaint that, among other things, added HTC Corporation and HTC America as defendants. The complaint seeks an unspecified amount of damages, an injunction, enhanced damages, attorneys’ fees, costs, and interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. 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 monetary damages, costs, and interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In April 2014, Spansion LLC filed complaints for patent infringement against Amazon.com, Inc. in both the United States District Court for the Northern District of California and the United States International Trade Commission. The complaints allege, among other things, that certain Kindle devices infringe U.S. Patent Nos. 6,246,611, entitled “System For Erasing A Memory Cell,” and 6,744,666, entitled “Method And System To Minimize Page Programming Time For Flash Memory Devices.” The district court complaint seeks an unspecified amount of damages, enhanced damages, attorneys’ fees, interest, and injunctive relief. The International Trade Commission complaint seeks an exclusion order preventing the importation of certain Kindle devices into the United States, as well as a cease-and-desist order barring sale of certain Kindle devices after importation. In June 2014, the district court case was stayed pending resolution of the International Trade Commission action. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters. In June 2014, SimpleAir, Inc. filed a complaint against Amazon.com, Inc. in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that Amazon Device Messaging and Simple Notification Service infringe U.S Patent Nos. 7,035,914, 8,090,803, 8,572,279, 8,601,154, and 8,639,838, all of which are entitled “System and Method for Transmission of Data.” The complaint seeks an unspecified amount of damages, pre-judgment interest, costs, attorneys’ fees, enhanced damages, and injunctive relief. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In December 2014, Smartflash LLC and Smartflash Technologies Limited filed a complaint against Amazon.com, Inc., Amazon.com, LLC, AMZN Mobile, LLC, Amazon Web Services, Inc. and Audible, Inc. for patent infringement in the United States District Court for Eastern District of Texas. The complaint alleges, among other things, that Amazon Appstore, Amazon Instant Video, Amazon Music, Audible Audiobooks, the Amazon Mobile Ad Network, certain Kindle and Fire devices, Kindle ebookstore, Amazon’s proprietary Android operating system, and the servers involved in operating Amazon Appstore, Amazon Instant Video, Amazon Music, the Fire TV app, Audible Audiobooks, Cloud Drive, Cloud Player, Amazon Web Services, and Amazon Mobile Ad Network infringe seven related U.S. Patents: Nos. 7,334,720; 7,942,317; 8,033,458; 8,061,598; 8,118,221; 8,336,772; and 8,794,516, all entitled “Data Storage and Access Systems.” The complaint seeks an unspecified amount of damages, an injunction, enhanced damages, attorneys’ fees, costs, and 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 loss 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 11—Income Taxes.” 63 Note 9—STOCKHOLDERS’ EQUITY Preferred Stock We have authorized 500 million shares of $0.01 par value preferred stock. No preferred stock was outstanding for any period presented. Common Stock Common shares outstanding plus shares underlying outstanding stock awards totaled 483 million, 476 million, and 470 million, as of December 31, 2014, 2013, and 2012. These totals include all vested and unvested stock awards outstanding, including those awards we estimate will be forfeited. Stock Repurchase Activity In January 2010, our Board of Directors authorized the Company to repurchase up to $2.0 billion of our common stock with no fixed expiration. We have $763 million remaining under the $2.0 billion repurchase program. Stock Award Plans Employees vest in restricted stock unit awards and stock options over the corresponding service term, generally between two and five years. Stock Award Activity Stock options outstanding, which were primarily obtained through acquisitions, totaled 0.4 million, 0.2 million and 0.4 million, as of December 31, 2014, 2013, and 2012. The after-tax compensation expense for stock options was not material for 2014, 2013, and 2012, as well as the total intrinsic value for stock options outstanding, the amount of cash received from the exercise of stock options, and the related tax benefits. The following table summarizes our restricted stock unit activity (in millions): Weighted Average Grant-Date Fair Value Number of Units Outstanding as of January 1, 2012 Units granted Units vested Units forfeited Outstanding as of December 31, 2012 Units granted Units vested Units forfeited Outstanding as of December 31, 2013 Units granted Units vested Units forfeited Outstanding as of December 31, 2014 13.1 $ 8.2 (4.2) (1.7) 15.4 7.2 (4.5) (1.8) 16.3 8.5 (5.1) (2.3) 17.4 $ 143 209 110 168 184 283 160 209 233 328 202 264 285 Scheduled vesting for outstanding restricted stock units as of December 31, 2014, is as follows (in millions): Year Ended December 31, 2015 Scheduled vesting—restricted stock units 2016 5.9 6.1 64 2017 3.4 2018 1.7 2019 0.2 Thereafter 0.1 Total 17.4 As of December 31, 2014, there was $2.2 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 1.2 years. During 2014 and 2013, the fair value of restricted stock units that vested was $1.7 billion and $1.4 billion. As matching contributions under our 401(k) savings plan, we granted 0.2 million and 0.1 million shares of common stock in 2014 and 2013. Shares granted as matching contributions under our 401(k) plan are included in outstanding common stock when issued, and recorded as stock-based compensation expense. Common Stock Available for Future Issuance As of December 31, 2014, common stock available for future issuance to employees is 137 million shares. Note 10—ACCUMULATED OTHER COMPREHENSIVE LOSS Changes in the composition of accumulated other comprehensive loss for 2014, 2013, and 2012 are as follows (in millions): Foreign currency translation adjustments Balances as of January 1, 2012 Other comprehensive income Balances as of December 31, 2012 Other comprehensive income (loss) Balances as of December 31, 2013 Other comprehensive income (loss) Balances as of December 31, 2014 $ Unrealized gains on available-for-sale securities (326) $ 76 (250) 63 (187) (325) (512) $ $ Total 10 $ 1 11 (9) 2 (1) 1 $ (316) 77 (239) 54 (185) (326) (511) Amounts included in accumulated other comprehensive loss are recorded net of their related income tax effects. Note 11—INCOME TAXES In 2014, 2013, and 2012, we recorded net tax provisions of $167 million, $161 million, and $428 million. We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized to reduce our U.S. taxable income. In December 2014, U.S. legislation was enacted providing a one year extension of accelerated depreciation deductions on qualifying property and the U.S. federal research and development credit through 2014. As such, cash taxes paid, net of refunds, were $177 million, $169 million, and $112 million for 2014, 2013, and 2012. The components of the provision for income taxes, net are as follows (in millions): Year Ended December 31, 2014 Current taxes: U.S. Federal U.S. State International Current taxes Deferred taxes: U.S. Federal U.S. State International Deferred taxes Provision for income taxes, net $ $ 65 2013 2012 214 $ 65 204 483 99 $ 45 173 317 528 34 131 693 (125) (11) (180) (316) 167 $ (114) (19) (23) (156) 161 $ (129) (27) (109) (265) 428 U.S. and international components of income before income taxes are as follows (in millions): Year Ended December 31, 2014 U.S. International $ Income (loss) before income taxes 2013 292 $ (403) (111) $ $ 2012 704 $ (198) 506 $ 882 (338) 544 The items accounting for differences between income taxes computed at the federal statutory rate and the provision recorded for income taxes are as follows (in millions): Year Ended December 31, 2014 Income taxes computed at the federal statutory rate Effect of: Impact of foreign tax differential State taxes, net of federal benefits Tax credits Nondeductible compensation Domestic production activities deduction Other, net Total 2013 2012 $ (39) $ 177 $ 191 $ 136 29 (85) 117 (20) 29 167 $ (41) 14 (84) 86 (11) 20 161 $ 172 1 (24) 72 — 16 428 Our provision for income taxes in 2014 was higher than in 2013 primarily due to the increased losses in certain foreign subsidiaries for which we may not realize a tax benefit and audit-related developments, partially offset by the favorable impact of earnings in lower tax rate jurisdictions. Losses for which we may not realize a related tax benefit reduce our pre-tax income without a corresponding reduction in our tax expense, and therefore increase our effective tax rate. We have recorded valuation allowances against the deferred tax assets associated with losses for which we may not realize a related tax benefit. Income earned in lower tax jurisdictions is primarily related to our European operations, which are headquartered in Luxembourg. In 2013, our provision for income taxes was lower than in 2012 primarily due to a decline in the proportion of our losses for which we may not realize a related tax benefit, the favorable impact of earnings in lower tax rate jurisdictions, and the retroactive extension in 2013 of the U.S. federal research and development credit to 2012. In 2013, we recognized tax benefits for a greater proportion of losses for which we may not realize a related tax benefit, primarily due to losses of certain foreign subsidiaries, as compared to 2012. The favorable impact of earnings in lower tax rate jurisdictions was primarily related to our European operations. 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. Undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the U.S were $2.5 billion as of December 31, 2014. Determination of the unrecognized deferred tax liability that would be incurred if such amounts were repatriated is not practicable. 66 Deferred income tax assets and liabilities are as follows (in millions): December 31, 2014 (1) Deferred tax assets: Net operating losses U.S. - Federal/States (2) Net operating losses foreign (3) Accrued liabilities, reserves, & other expenses Stock-based compensation Deferred revenue Assets held for investment Other items Tax credits (4) Total gross deferred tax assets Less valuation allowance (5) Deferred tax assets, net of valuation allowance Deferred tax liabilities: Depreciation & amortization Acquisition related intangible assets Other items Net deferred tax assets, net of valuation allowance $ $ 2013 357 $ 669 780 534 156 154 242 115 3,007 (901) 2,106 53 427 590 396 249 164 177 107 2,163 (698) 1,465 (1,609) (195) (31) 271 $ (1,021) (201) (16) 227 ___________________ (1) Deferred tax assets related to net operating losses and tax credits are presented net of tax contingencies. (2) Excluding $261 million and $81 million of deferred tax assets as of December 31, 2014 and 2013, related to net operating losses that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders’ equity. (3) Excluding $2 million and $2 million of deferred tax assets as of December 31, 2014 and 2013, related to net operating losses that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders’ equity. (4) Excluding $268 million and $227 million of deferred tax assets as of December 31, 2014 and 2013, related to tax credits that result from excess stock-based compensation and for which any benefit realized will be recorded to stockholders’ equity. (5) Relates primarily to deferred tax assets that would only be realizable upon the generation of net income in certain foreign taxing jurisdictions and future capital gains. As of December 31, 2014, our federal, foreign, and state net operating loss carryforwards for income tax purposes were approximately $1.9 billion, $2.5 billion, and $1.1 billion. The federal and state net operating loss carryforwards are subject to limitations under Section 382 of the Internal Revenue Code and applicable state tax law. If not utilized, a portion of the federal, foreign, and state net operating loss carryforwards will begin to expire in 2020, 2015, and 2015, respectively. As of December 31, 2014, our tax credit carryforwards for income tax purposes were approximately $506 million. If not utilized, a portion of the tax credit carryforwards will begin to expire in 2017. The Company’s consolidated balance sheets reflect deferred tax assets related to net operating losses and tax credit carryforwards excluding amounts resulting from excess stock-based compensation. Amounts related to excess stock-based compensation are accounted for as an increase to additional paid-in capital if and when realized through a reduction in income taxes payable. Tax Contingencies We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for taxrelated uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. 67 The reconciliation of our tax contingencies is as follows (in millions): December 31, 2014 Gross tax contingencies – January 1 Gross increases to tax positions in prior periods Gross decreases to tax positions in prior periods Gross increases to current period tax positions Audit settlements paid Lapse of statute of limitations Gross tax contingencies – December 31 (1) $ $ 2013 407 $ 351 (50) 20 (16) (2) 710 $ 2012 294 $ 78 (18) 54 (1) — 407 $ 229 91 (47) 26 (4) (1) 294 ___________________ (1) As of December 31, 2014, we had $710 million of tax contingencies, of which $604 million, if fully recognized, would decrease our effective tax rate. As of December 31, 2014 and 2013, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $41 million and $33 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2014, 2013, and 2012 was $8 million, $8 million, and $1 million. 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, Amazon 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 or thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. While we have not yet received a final assessment from the FTA, in September 2012, we received proposed tax assessment notices for calendar years 2006 through 2010 relating to the allocation of income between foreign jurisdictions. The notices propose additional French tax of approximately $250 million, including interest and penalties through the date of the assessment. We disagree with the proposed 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, 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. 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 tax filings in years through 2014. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes. 68 Note 12—SEGMENT INFORMATION We have organized our operations into two segments: North America and International. We present our segment information along the same lines that our Chief Executive Officer reviews our operating results in assessing performance and allocating resources. We expect to change our reportable segments to report North America, International, and AWS, beginning with the first quarter of 2015. We allocate to segment results the operating expenses “Fulfillment,” “Marketing,” “Technology and content,” and “General and administrative,” but exclude from our allocations the portions of these expense lines attributable to stock-based compensation. We do not allocate the line item “Other operating expense (income), net” to our segment operating results. Our “Technology and content” costs included in our segments are primarily based on the geographic location of where the costs are incurred, the majority of these costs are incurred in the U.S. and included in our North America segment. There are no internal revenue transactions between our reporting segments. North America The North America segment consists of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through North America-focused websites such as www.amazon.com and www.amazon.ca and include amounts earned from AWS. This segment includes export sales from www.amazon.com and www.amazon.ca. International The International segment consists of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through internationally-focused websites. This segment includes export sales from these internationally based websites (including export sales from these sites to customers in the U.S. and Canada), but excludes export sales from our U.S. and Canadian websites. Information on reportable segments and reconciliation to consolidated net income (loss) is as follows (in millions): Year Ended December 31, 2014 North America Net sales Segment operating expenses (1) Segment operating income International Net sales Segment operating expenses (1) Segment operating income (loss) Consolidated Net sales Segment operating expenses (1) Segment operating income Stock-based compensation Other operating income (expense), net Income from operations Total non-operating income (expense) Provision for income taxes Equity-method investment activity, net of tax Net income (loss) $ $ $ $ $ $ 2013 2012 55,469 $ 53,364 2,105 $ 44,517 $ 42,631 1,886 $ 34,813 33,221 1,592 33,519 $ 33,816 (297) $ 29,935 $ 29,828 107 $ 26,280 26,204 76 88,988 $ 87,180 1,808 (1,497) (133) 178 (289) (167) 37 (241) $ 74,452 $ 72,459 1,993 (1,134) (114) 745 (239) (161) (71) 274 $ 61,093 59,425 1,668 (833) (159) 676 (132) (428) (155) (39) ___________________ (1) Represents operating expenses, excluding stock-based compensation and “Other operating expense (income), net,” which are not allocated to segments. 69 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. Year Ended December 31, 2014 Net Sales: Media Electronics and other general merchandise Other (1) $ 2013 22,505 $ 60,886 5,597 88,988 $ $ 21,716 $ 48,802 3,934 74,452 $ 2012 19,942 38,628 2,523 61,093 ___________________ (1) Includes sales from non-retail activities, such as AWS, advertising services, and our co-branded credit card agreements. Net sales generated from these internationally-focused websites are denominated in local functional currencies. Revenues are translated at average rates prevailing throughout the period. Net sales attributed to foreign countries are as follows (in millions): Year Ended December 31, 2014 Germany Japan United Kingdom $ 2013 11,919 $ 7,912 8,341 2012 10,535 $ 7,639 7,291 8,732 7,800 6,478 Total assets, property and equipment, net, and total property and equipment additions, by geography, reconciled to consolidated amounts are (in millions): December 31, 2014 North America Total assets Property and equipment, net Total property and equipment additions International Total assets Property and equipment, net Total property and equipment additions Consolidated Total assets Property and equipment, net Total property and equipment additions 2013 2012 $ 39,157 $ 13,163 7,464 26,108 $ 8,447 4,837 20,703 5,481 3,348 $ 15,348 $ 3,804 2,017 14,051 $ 2,502 1,536 11,852 1,579 969 $ 54,505 $ 16,967 9,481 40,159 $ 10,949 6,373 32,555 7,060 4,317 Except for the U.S., property and equipment, net, in any single country was less than 10% of consolidated property and equipment, net. 70 Depreciation expense, by segment, is as follows (in millions): Year Ended December 31, 2014 North America International Consolidated $ $ 2013 2,701 $ 915 3,616 $ 2012 1,863 $ 597 2,460 $ 1,229 424 1,653 Note 13—QUARTERLY RESULTS (UNAUDITED) The following tables contain selected unaudited statement of operations information for each quarter of 2014 and 2013. The following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. Our business is affected by seasonality, which historically has resulted in higher sales volume during our fourth quarter. Unaudited quarterly results are as follows (in millions, except per share data): Year Ended December 31, 2014 (1) Third Quarter Fourth Quarter Net sales Income (loss) from operations Income (loss) before income taxes Benefit (provision) for income taxes Net income (loss) Basic earnings per share Diluted earnings per share Shares used in computation of earnings per share: Basic Diluted $ Second Quarter First Quarter 29,328 $ 591 429 (205) 214 0.46 0.45 20,579 $ (544) (634) 205 (437) (0.95) (0.95) 19,340 $ (15) (27) (94) (126) (0.27) (0.27) 464 472 463 463 461 461 19,741 146 120 (73) 108 0.23 0.23 460 468 Year Ended December 31, 2013 (1) Fourth Quarter Net sales Income (loss) from operations Income (loss) before income taxes Benefit (provision) for income taxes Net income (loss) Basic earnings per share Diluted earnings per share Shares used in computation of earnings per share: Basic Diluted $ Third Quarter Second Quarter First Quarter 25,587 $ 510 451 (179) 239 0.52 0.51 17,092 $ (25) (43) 12 (41) (0.09) (0.09) 15,704 $ 79 17 (13) (7) (0.02) (0.02) 458 467 457 457 456 456 16,070 181 81 18 82 0.18 0.18 455 463 ___________________ (1) The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year-to-date periods. This is due to the effects of rounding and changes in the number of weighted-average shares outstanding for each period. 71 Item 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We carried out an evaluation required by the Securities Exchange Act of 1934 (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of December 31, 2014. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2014, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Ernst & Young has independently assessed the effectiveness of our internal control over financial reporting and its report is included below. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended December 31, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on Controls Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. 72 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Amazon.com, Inc. We have audited Amazon.com, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Amazon.com, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Amazon.com, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Amazon.com, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 of Amazon.com, Inc. and our report dated January 29, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Seattle, Washington January 29, 2015 73 Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers, and Corporate Governance Information regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I “Business— Executive Officers of the Registrant.” Information required by Item 10 of Part III regarding our Directors and any material changes to the process by which security holders may recommend nominees to the Board of Directors is included in our Proxy Statement relating to our 2015 Annual Meeting of Shareholders, and is incorporated herein by reference. Information relating to our Code of Business Conduct and Ethics and to compliance with Section 16(a) of the 1934 Act is set forth in our Proxy Statement relating to our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. To the extent permissible under NASDAQ rules, we intend to disclose amendments to our Code of Business Conduct and Ethics, as well as waivers of the provisions thereof, on our investor relations website under the heading “Corporate Governance” at www.amazon.com/ir. Item 11. Executive Compensation Information required by Item 11 of Part III is included in our Proxy Statement relating to our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information required by Item 12 of Part III is included in our Proxy Statement relating to our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence Information required by Item 13 of Part III is included in our Proxy Statement relating to our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services Information required by Item 14 of Part III is included in our Proxy Statement relating our 2015 Annual Meeting of Shareholders and is incorporated herein by reference. 74 PART IV Item 15. Exhibits, Financial Statement Schedules (a) List of Documents Filed as a Part of This Report: (1) Index to Consolidated Financial Statements: Report of Ernst & Young LLP, Independent Registered Public Accounting Firm Consolidated Statements of Cash Flows for each of the three years ended December 31, 2014 Consolidated Statements of Operations for each of the three years ended December 31, 2014 Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2014 Consolidated Balance Sheets as of December 31, 2014 and 2013 Consolidated Statements of Stockholders’ Equity for each of the three years ended December 31, 2014 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (2) Index to Financial Statement Schedules: All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or because it is not required. (3) Index to Exhibits See exhibits listed under the Exhibit Index below. 75 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, as of January 29, 2015. AMAZON.COM, INC. By: /s/ Jeffrey P. Bezos Jeffrey P. Bezos President, Chief Executive Officer, and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of January 29, 2015. Signature Title /s/ Jeffrey P. Bezos Jeffrey P. Bezos Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer) /s/ Thomas J. Szkutak Thomas J. Szkutak Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Shelley Reynolds Shelley Reynolds Vice President, Worldwide Controller (Principal Accounting Officer) /s/ Tom A. Alberg Tom A. Alberg Director /s/ John Seely Brown John Seely Brown Director /s/ William B. Gordon William B. Gordon Director /s/ Jamie S. Gorelick Jamie S. Gorelick Director /s/ Judith A. McGrath Judith A. McGrath Director /s/ Alain Monié Alain Monié Director /s/ Jonathan J. Rubinstein Jonathan J. Rubinstein Director /s/ Thomas O. Ryder Thomas O. Ryder Director /s/ Patricia Q. Stonesifer Patricia Q. Stonesifer Director 76 EXHIBIT INDEX Exhibit Number Description 2.1 Form of Purchase and Sale Agreement dated as of October 1, 2012, between Acorn Development LLC, a wholly owned subsidiary of the Company, and Lake Union III LLC, Lake Union IV LLC, City Place V LLC, City Place II LLC, City Place III LLC, City Place IV LLC, and City Place V LLC, respectively (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2012). 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2000). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to the Company’s Current Report on Form 8-K, filed February 18, 2009). 4.1 Indenture, dated as of November 29, 2012, between Amazon.com, Inc. and Wells Fargo Bank, National Association, as trustee, and Form of 0.650% Note due 2015, Form of 1.200% Note due 2017, and Form of 2.500% Note due 2022 (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 29, 2012). 4.2 Officers’ Certificate Establishing the Terms of Notes, dated as of December 5, 2014, containing Form of 2.600% Note due 2019, Form of 3.300% Note due 2021, Form of 3.800% Note due 2024, Form of 4.800% Note due 2034, and Form of 4.950% Note due 2044 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 5, 2014). 10.1† 1997 Stock Incentive Plan (amended and restated) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2013). 10.2† 1999 Nonofficer Employee Stock Option Plan (amended and restated) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2013). 10.3† Offer Letter of Employment to Diego Piacentini, dated January 17, 2000 (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2000). 10.4† Form of Indemnification Agreement between the Company and each of its Directors (incorporated by reference to the Company’s Registration Statement on Form S-1 (Registration No. 333-23795) filed March 24, 1997). 10.5† Form of Restricted Stock Unit Agreement for Officers and Employees (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002). 10.6† Form of Restricted Stock Unit Agreement for Directors (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002). 10.7† Form of Restricted Stock Agreement (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2001). 10.8† Form of Global Restricted Stock Unit Award Agreement for Executive Officers (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2014). 10.9 Credit Agreement, dated as of September 5, 2014, among Amazon.com, Inc., Bank of America, N.A., as administrative agent, and the other lenders party thereto, and conformed page thereto (incorporated by reference to the Company’s Current Report on Form 8-K, filed September 5, 2014, and Quarterly Report on Form 10-Q for the Quarter ended September 30, 2014, respectively). 12.1 Computation of Ratio of Earnings to Fixed Charges. 21.1 List of Significant Subsidiaries. 23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. 31.1 Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 31.2 Certification of Thomas J. Szkutak, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 32.1 Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350. 77 32.2 Certification of Thomas J. Szkutak, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350. 101 The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, (v) Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. ___________________ † Executive Compensation Plan or Agreement 78 Stock Price Performance Graph The graph set forth below compares cumulative total return on the common stock with the cumulative total return of the Morgan Stanley Technology Index, the S&P 500 Index, and the S&P 500 Retailing Index, resulting from an initial investment of $100 in each and, except in the case of the Morgan Stanley Technology Index, assuming the reinvestment of any dividends, based on closing prices. Measurement points are the last trading day of each of Amazon’s fiscal years ended December 31, 2009, 2010, 2011, 2012, 2013, and 2014. $350 $300 Dollars $250 $200 $150 $100 $50 $0 2009 2010 2011 2012 2013 2014 Year Ended December 31 Cumulative Total Return Year Ended December 31, Legend Amazon.com, Inc. 2009 2010 2011 2012 2013 2014 $100 $134 $129 $186 $296 $231 Morgan Stanley Technology Index 100 115 102 119 156 176 S&P 500 Index 100 115 117 136 180 205 S&P 500 Retailing Index 100 125 131 165 241 267 Note: Stock price performance shown in the Stock Price Performance Graph for the common stock is historical and not necessarily indicative of future price performance. amazon.com amazon.ca amazon.in amazon.co.uk amazon.cn amazon.de a m a z o n . it amazon.com.mx amazon.fr a m a z o n . es amazon.com.au amazon.co.jp amazon.com.br amazon.nl
2015 Annual Report 9:00 p.m. China With 24 new stores in FY 15, Walmart customers have more access to quality food they can trust. 9:00 a.m. ET Canada 8:00 a.m. CT United States A broad assortment that is locally relevant makes Walmart a favorite in Canada. By using Easy Reorder on SamsClub.com, business members conveniently order online and use Club Pickup to access merchandise. Click & Collect lets Asda shoppers order online and collect their groceries at various pickup points. Supercenter customers enjoy low prices and fast, friendly checkout. 2015 Annual Report 7:00 a.m. MT United States 2:00 p.m. United Kingdom 10:00 a.m. Brazil Walmartbrasil.com’s expanded assortment puts a million items within reach. 8:00 a.m. Mexico Bodega Aurerra Express shoppers find low prices on favorite brands close to where they live and work. Wal-Mart Stores, Inc. (NYSE: WMT) 702 S.W. 8th Street Bentonville, Arkansas 72716 USA 479-273-4000 walmart.com Winning the future of retail One customer at a time Walmart shoppers are driven by value. We continue to expand everyday low prices to more markets globally. “Technology-driven savers” are a fast growing segment of our customer base. Globally, we’re investing to improve mobile capabilities and to test alternative access points. For example, Asda now has Click & Collect at all stores. Walmart’s investor relations app: our company at your fingertips Walmart’s enhanced digital annual report has expanded content. T EN O ASS R Global Responsibility Report: of forestland preserved via managed forestry trees consumed via recycling less energy – the same used by 4.4 homes for a year 426 metric tons 45,573 kWh 417,714 fewer of greenhouse gas offset – the equivalent of taking 85.5 cars off the road for a year converted to clean renewable sources (printing plant using RECs) gallons of water consumed Savings baselines were developed using the national averages of similar coated papers and printing practices by EarthColor Printing. FSC® is not responsible for any calculations on saving resources by choosing this paper. NT RI % 0 Customers want more choice, more items than they ever did before. Walmart.com increased assortment by 60% in fiscal 2015, and we’ll surpass 10 million items this year. 117,618 kWh ED US IN 10 Customers want to save time and money, and have an enjoyable shopping experience. We’re investing to increase associate wages and training to improve the service in our stores and clubs. 894 fewer G Every day, we offer affordable food, apparel and other merchandise to customers in 27 countries globally. We believe it is our responsibility to operate in a way that is sustainable for the planet and people who work all along our supply chains, that creates economic opportunity for our associates while growing our suppliers and the economy more broadly, and that strengthens the communities where we operate. To learn more, read our GRR at corporate.walmart.com/ microsites/globalresponsibility-report-2015. 4.65 acre GY I CE The minimized environmental footprint of this report is the result of an extensive, collaborative effort of Walmart and our supply chain partners. The environmental and social impact continues to be an important consideration. It is printed on paper from well-managed forests containing recycled PCW fiber that is Elementally Chlorine Free (ECF). It is printed using 100 percent renewable wind power (RECs), along with environmental manufacturing principles that were utilized in the printing process. These practices include environmentally responsible procurement, lean manufacturing, green chemistry principles, the recycling of residual materials and reduced volatile organic compound inks and coatings. TM ER EN Our sustainable, next-generation report W R PR I SS CE EXP Customer Proposition Walmart’s IR app gives shareholders anytime and anywhere access to financial and company news from their mobile devices. Find presentations, quarterly results, global footprint map and the stock price on your iPad, iPhone or Android device. Download the free app from iTunes or Google Play. P AC CE We’re driving innovation and sustainability – and reducing costs – with our enhanced digital annual report. Visit www.stock.walmart.com to hear directly from our leaders, associates and customers. Also, visit this website to enroll to receive future materials electronically for our Annual Shareholders’  Meetings. IND EN E Supplied by Community Energy Rainforest Alliance CertifiedTM SmartWood Program Labeling Guidelines We’re investing to win in retail by providing our customers what they want, when they want it, at unrivaled prices. Doug McMillon President and Chief Executive Officer Wal-Mart Stores, Inc. Our framework for growth What is the strategic plan to drive Walmart’s continued growth in a changing retail environment around the world? Given the breadth of our business, strategic clarity is really important. We’re thinking about the future through the lens of the customer. Customers are channel agnostic – shopping in stores, online or with their phones is more seamless than it used to be. We’re thinking the same way. Walmart possesses unique assets and capabilities to serve customers with our stores, clubs, global supply chain, data and great associates. We want to enable customers to find what they want, at a value, in a convenient, enjoyable way, regardless of how they shop. Our customer proposition is focused on four areas – price, access, assortment and experience. Each dimension is important, and we take a holistic view to how they integrate with each other. Our plan provides a framework to ignite, energize and accelerate change, as we make decisions and investments. How does Walmart’s everyday low price (EDLP) philosophy translate across markets globally? We serve value conscious customers, regardless of household income, all over the world. So, we’ll always be aggressive on price. EDLP builds customer trust, both in stores and online. That’s especially important in a digital era where there’s greater price transparency. To deliver price leadership, we continue to focus on driving everyday low cost (EDLC) through improvements in supply chain, processes and other efficiencies. How are you providing greater access for customers to shop Walmart? Through our more than 11,000 stores, websites and mobile apps, customers can access Walmart in more ways than ever before. It’s vital to have relevant formats in each market we serve. But the future of retail is not just in-store or online – it’s putting the two together in new ways. I’m excited that we’re leaders in integrating digital and physical retail in a seamless fashion. We’ll continue to test and learn as we explore options for convenient merchandise pickup or delivery to save customers’ time. How are you expanding the assortment with your e-commerce offering? Customers want more merchandise choices, and they expect to find almost anything when shopping Walmart. In our stores, we’re focused on providing quality merchandise, desirable national brands and great private brand options. On the e-commerce front, we provide those same things through an expanded assortment of approximately 8 million items on walmart.com in the U.S. Interestingly, 75 percent of walmart.com sales come from non-store inventory, thus providing incremental sales growth beyond our stores. And, this is a global effort. In Brazil, for example, our online assortment, including from marketplace partners, grew 10-fold last year. What are your most important objectives to improve customer experience, both in stores and online? Retail has always been a people business, and we win when associates exceed customer expectations. That’s why we’re investing in higher wages and increased training and development for our U.S. associates. We’ll also equip them with information and technology to facilitate great customer service. We’re focused on running great stores and websites by improving in-stock and driving a faster checkout, both online and in stores. I’m excited about the progress we’ll make for customers this year. 2015 Annual Report 1 Save Money. Live Better. Dear Shareholders, Associates and Customers: It’s an exciting time for Walmart. From the U.S. to the U.K., from Mexico to China, and across all the markets we serve, retail is changing in fundamental ways. Our future is bright because we’re increasing our investments in associates, stores and e-commerce capabilities to prepare for the way customers will want to shop with us in this new era of retail. Each week, we serve close to 260 million customers in our stores, in 27 countries, and through our websites globally. While language and culture may differ, remarkable similarities exist globally in what customers expect from a retailer. Whether it’s a young mom in Toronto or a retired couple in Phoenix, customers everywhere want to save money and save time. They want to shop on their terms in a manner that’s easy and convenient. They seek broad choices in assortment. And, regardless of how they shop, in stores or on their mobile device, they expect a great price and experience. At Walmart, our enterprise strategy guides how we fulfill those expectations and deliver on our customer proposition. We’ll drive sales growth by executing well, in stores and e-commerce, every time we serve customers. Walmart U.S. team is implementing a broad range of initiatives focused on strengthening our assortment (especially the fresh offering), driving the integration of e-commerce with our stores, and improving the customer experience. For example, in February, we announced a $1 billion investment in our U.S. hourly associates to provide higher wages, more training and increased opportunities to build a career with Walmart. These are strategic investments in our people to reignite the sense of ownership they have in our stores and foster an improved customer experience to drive sales growth. Walmart International produced solid constant currency sales and operating income growth. On a constant currency basis, net sales surpassed $141 billion, while operating income increased to more than $6 billion. I’m pleased that we’re running better stores in our International markets. Operations in Canada, Mexico and China continue to improve, leading to stronger sales and profitability. The U.K. market has become fiercely competitive, and in Brazil, we continue to work on improving performance. Across International, our commitment to a compelling fresh food offering and innovations in e-commerce, like grocery home shopping, will be important growth drivers for the future. The emphasis of the Sam’s Club team on making membership more rewarding helped drive net sales of $58 billion and an increase of more than 10 percent in membership income. Members appreciate the value-added benefits offered by Sam’s Club like Plus Cash Rewards and the suite of comprehensive business member services. The team is focused on bringing merchandise excitement and newness to drive sales. In addition, Sam’s Club continues to strengthen digital integration with clubs through initiatives like Club Pickup. Our 22 percent growth in global e-commerce sales surpassed the overall market and was supported by enhancements to our Delivering a solid financial performance I’m encouraged that Walmart’s fiscal 2015 revenue grew by more than $9 billion to nearly $486 billion and earnings per share were $4.99, a nearly 3 percent increase from the prior year. But, we have higher expectations. Our priority is to run great stores, clubs and e-commerce everywhere we operate to grow the business. Walmart U.S. delivered net sales of $288 billion, a more than 3 percent increase, and improved its sales and operating income trends each consecutive quarter during the year. I’m pleased by the positive comp sales growth, especially the strong performance from Neighborhood Markets, but we’re not satisfied. The 2 2015 Annual Report Almost 260M Customers served weekly in our stores in 27 countries and through websites globally 16% $486B Fiscal 2015 total shareholder return Consolidated fiscal 2015 revenue technology, assortment and supply chain. The investments in our global technology platform provide a foundation that strengthens usability and conversion across our e-commerce websites and mobile apps. We’re also investing in more fulfillment centers around the world to enable faster delivery of merchandise to customers. Each of our business segments continues to increase the integration of e-commerce and mobile assets with our stores and clubs. For example, we’re testing Click & Collect pickup points in many of our key markets. Asda already has Click & Collect capabilities in all stores. Investing in customer relevance As we invest to expand our global e-commerce capabilities and build more stores, we keep customer expectations at the forefront. The type of store format or fulfillment center we build, the location of where we put a club, or the functionality of a website are all predicated on how we can better serve our customers. And, as we make these choices, we’re striving to balance sales growth and profitability. We’re being thoughtful with our investments, ensuring we have the infrastructure in place for sustainable growth. Walmart’s strong balance sheet and robust cash flow provide a solid foundation to support these investments. While we grow, we remain focused on expense management and EDLC. When we operate and grow efficiently, we’ll generate increased value for shareholders. Engaged associates fuel our success Highly motivated and engaged associates are essential to providing customers with excellent service. And, it’s only through associates who are merchant-minded that we’ll continue to connect customers with new items that they want and need. Although technology has transformed our business, retail is still a people business. Walmart has always provided a ladder of opportunity – one that today is available to our 2.2 million associates globally. Regardless of your background, Walmart will give you the opportunity to grow a career as far as your ability and hard work will take you. I am one of many leaders in our company who benefited from this opportunity to begin as an hourly associate and grow into roles with increased responsibility. Talent is the essential enabler to reach our objectives. I’m excited by the new initiatives we’ve put in place around the world to better train and equip our associates for success. For example, the steps we’ve taken in the U.S., China and Mexico to strengthen compensation structures and increase training opportunities give associates more ownership and accountability, so they can react faster to customers’ needs. Adding new talent is also important as we work to grow digital retail and fully align our organization with a changing retail environment. Some of the brightest minds in retail are joining Walmart because they know this is an organization that’s embracing innovation to deliver a better future for customers. Committed to a better world We’re not only thinking differently about retail, we’re thinking differently about the world. Walmart is a powerful change agent, and we’re committed to global responsibility initiatives that make our world better. I’m proud of our work to advance environmental sustainability, to support women’s economic empowerment, and to offer healthier food choices for our customers. We continue to look for more ways to lead and have an even greater impact on the communities that we serve. We’ll also remain steadfast in our commitment to compliance, ethics and doing business the right way. I’m pleased with the enhancements we’ve made, including better technology, to strengthen these organizations and build world-class compliance. My career at Walmart began more than three decades ago, and I’ve never been more excited about our future than I am today. Walmart has a great purpose – to save people money so they can live better. We’re embracing change so we can deliver that promise more effectively. As I look back over this past year, we’ve made great strides towards our goals. We know where our customers’ expectations are going, and we’re ideally positioned to deliver for them. Walmart has great assets and capabilities, but there’s more we must do. We’re continuing to build a Walmart that excels globally at the integration of digital and physical retail, providing our customers with a seamless experience to shop whenever, wherever and however they want. It’s a great opportunity. I’m excited about the next steps in our journey. Sincerely, 2015 Annual Report 3 Delivering an improved shopping experience In fiscal 2015, Walmart U.S. delivered a 3.1 percent increase in net sales to $288 billion. Comp sales growth of 0.6 percent included more than 6 percent growth in our Neighborhood Market format. Operating income declined 2.1 percent to $21.3 billion, due primarily to increased health-care costs. We improved sales and operating income trends each consecutive quarter in fiscal 2015. Our new leadership team, led by Greg Foran, is focused on improving our customer experience through assortment, price and access. Enhancing the customer experience We’re focused on exceeding our customers’ expectations by strengthening the shopping experience. We’ve expanded the Checkout Promise to provide a faster checkout experience, with more lanes available during peak hours and weekends. In February, we announced an array of changes for associates and a bold new approach to our jobs. These changes to training, scheduling and pay will lead to expanded career opportunities and increased wages for hundreds of thousands of 4 2015 Annual Report and relevant, and we’ve refreshed our mobile app. We’ll continue to test, learn and innovate as we explore initiatives, such as online grocery delivery and Walmart Grocery Pickup, to provide greater access to our brand anytime and anywhere. And, we’ll accomplish all of this through investments in technology, systems and our supply chain, including our more than 4,500 stores. These investments will give our customers better access to merchandise and make the shopping experience more rewarding. full-time and part-time hourly store associates. Across the country, all entry-level associates now earn a minimum of $9.00 per hour, and by February 2016, current associates will earn at least $10.00 per hour. Our people will have more control over their schedules and access to training that provides a pathway to greater career opportunities. These investments are designed to reignite our associate pride and ownership to improve service to our customers. Focusing on a quality assortment We’re an agent for our customer, driving value through improving quality and expanding key brands, at an everyday low price. Customers expect a consistent high quality fresh food experience, which is a key traffic driver to our stores. We’ll continue to strengthen our fresh departments by improving quality, consistency, and presentation, especially with more locally sourced fresh fruits and vegetables. Operational enhancements, from product flow and forecasting, to associate training and development, will ensure a superior fresh offering. Additionally, by leveraging our unified physical and digital capabilities, customers have access to approximately 8 million items across our entire product offering, with more to come this year. Maintaining price leadership Customers want value and we’re committed to delivering EDLP. We’re focused on executing a consistent pricing strategy that will provide transparent pricing for our customers through new tools and capabilities. We’ll continue to work with our supplier partners to achieve EDLC. This will allow us to invest in and strengthen our EDLP pricing strategy and offer the value our customers seek. Aligning formats and channels with customers’ needs Customers want to save time and money, and Walmart has an ability to serve them anytime, anywhere. While our supercenters provide a convenient one-stop solution, we’ll reinvent the format to exceed customer expectations. And, we’re upgrading our Neighborhood Markets to accentuate our fresh and organic offering. Overall, we expect to add approximately 15 to 16 million total net retail square feet in fiscal 2016, representing between 240 and 270 units. Providing career opportunities for U.S. veterans We’re proud of our five-year commitment to hire 100,000 veterans by 2018. Over the past two years, we’ve hired approximately 80,000 veterans to join the Walmart team. And, more than 6,000 have been promoted to roles of greater responsibility and higher pay. They possess discipline, training and a passion for service to improve our business for customers. With our extensive store base, distribution network and e-commerce capabilities, we’re best-positioned to succeed at the integration of digital and physical retail. We’ll continue to make the walmart.com experience more intuitive, personalized 2015 Annual Report 5 International Driving increased profitability through balanced growth In fiscal 2015, Walmart International’s net sales increased 3.6 percent on a constant currency basis, to $141.4 billion. We grew operating income faster than sales, demonstrating balanced growth and improved profitability. We also added 9.4 million square feet of retail space and 183 stores, bringing our total portfolio to more than 6,200 stores and 10 e-commerce websites in 26 countries. By remaining focused on being in good businesses and being the best-in-class retailer, we’re ensuring a balanced portfolio for customers with the right formats and merchandise, supported by EDLP to drive sales growth. Delivering sales through customer relevance We’re passionate about driving sales wherever we operate. Customers around the world choose Walmart for our low prices, convenient access to compelling merchandise and a shopping experience that meets their expectations. EDLP, enabled by being a low-cost operator, is the foundation of our customer proposition. In fiscal 2015, we continued to make progress on the transition to EDLP in markets such as Brazil 6 2015 Annual Report and Africa. In other highly competitive markets such as the U.K. and Canada, we remained focused on price investment to drive sales. We’re also leveraging best practices globally – improving our fresh and private brand assortments and driving greater operational efficiency. Our EDLC agenda had a strong year, with our ‘We Operate for Less’ and ‘We Buy for Less’ programs saving us $150 million in China, for example. We’re also providing customers greater convenience by opening more small-format stores. And, when necessary, we’ve closed underperforming stores and divested non-core elements of our business. We’ll continue to strategically optimize our global positioning across key geographies and formats to maximize future growth potential. Accelerating e-commerce and digital/physical integration In all markets, we’re committed to providing customers convenient access to Walmart. We’re innovating through e-commerce, mobile and various pickup sites to provide customers more shopping options than ever before. We’re especially focused on grocery home shopping, with expanded operations in the U.K., Mexico and Japan. Asda doubled its Click & Collect sites, and in Japan, we automated the order picking process to fulfill Seiyu.com grocery orders more efficiently and sustainably. E-commerce sales growth has been strong. Brazil e-commerce sales in fiscal 2015 grew faster than the market despite strong competitive pressures, and in China, Yihaodian saw traffic increase more than 60 percent. No matter the shopper preference, we’ll continue to strive to be the destination of choice. Building world-class talent and trust With nearly 800,000 associates serving customers in the International business, we’re committed to investing in our people’s success through training initiatives and opportunity, ensuring we have high performing associates in all markets. We’re leveraging our global leadership talent by giving them opportunities in various markets, such as Mexico and Brazil, to lead improvements in business performance. Our leadership team is focused on a common goal to be the most trusted retailer everywhere we operate. We aim to strengthen customer trust with a strong focus on EDLP, high quality fresh food and excellent customer service. For example, in China, we’ve invested to improve our distribution network for fresh products and also utilized Walmart’s “Worry Free Fresh” program to provide a money-back guarantee if our produce and meats don’t meet customer expectations. Our commitment to having world-class compliance and leading on social and environmental issues also contributes to building trust with customers. In fiscal 2015, we continued to execute a comprehensive compliance-focused training program, including areas encompassing anti-corruption, food safety and other compliance areas. Our consistent focus on good corporate citizenship helps strengthen community relationships. Empowering women entrepreneurs around the world Walmart’s Global Women’s Economic Empowerment Initiative provides training, access to markets and career opportunities to nearly 1 million women, many on farms and in factories. We’re committed to affording them economic opportunities and increasing our sourcing from women-owned businesses. 2015 Annual Report 7 Creating a more rewarding member experience In fiscal 2015, Sam’s Club’s commitment to creating the most valued membership organization in the U.S. contributed to growth in net sales, operating income and enhanced member engagement. Overall net sales increased 1.5 percent to $58 billion, while comp sales, excluding fuel, were up 0.6 percent. Membership income grew 10.3 percent, driving operating income growth, without fuel, of 2 percent to $1.9 billion. The most valuable card in a member’s wallet Delivering exceptional value is what a Sam’s Club membership is all about, and we’re finding more ways to strengthen our member engagement. We expect that our increased hourly wages and additional investments in training, announced in February, will provide greater career opportunities for our club associates and allow us to continue delivering award-winning service to members. In addition, Plus members appreciate the benefits of our Cash Rewards program. Response has been strong, On the menu: smart and healthy food choices for members Whether they’re millennials or boomers, Sam’s Club members are seeking healthier food options – and we deliver. Last year, we more than doubled our organic portfolio. And, “healthy for you” items such as breakfast bars, squeezable fruit pouches and protein drinks are resonating with members as well. 8 2015 Annual Report increasing the percentage of members who choose to become Plus members. Putting money back in the pockets of Plus members after they make qualifying purchases at the club significantly enhances the value of this membership. And, all of our members are enthusiastic about our cash back credit card. This secure, chip-enabled 5-3-1 MasterCard® offers the best cash-back program in the market. We’ve also expanded our portfolio of services to provide more convenience and value. We’re helping small business members take care of back office needs by providing easy access to leading providers of affordable health insurance plans, payroll services, merchant payment processing and legal services. Our goal is to curate a suite of anywhere, anytime business member services with exclusive savings that make the Sam’s Club membership the most valuable “business card” for these members, while supporting the small business community. We also launched a Sam’s Club Travel app in December to give all members faster access to outstanding travel savings. mobile app allow members to search for products, track Instant Savings and purchase exciting merchandise whenever and wherever they want. Club Pickup, which had been aimed at our Business members, was relaunched in fiscal 2015 so both Savings and Business members can order online and then pick up their merchandise at their local club at a convenient time for them. And, the online Easy Reorder tool allows members to see past purchases and quickly add them to their current cart. Members can shop Sam’s Club in a matter of minutes – no matter how big the order. As we grow, we’ll also give greater access through new clubs. In fiscal 2016, Sam’s Club will open 9 to 12 new and relocated clubs, and remodel at least 55 clubs, while investing in innovation at SamsClub.com. Brands and values that delight members in club and online Having great merchandise builds members’ trust and loyalty. Sam’s Club members look for household staples, as well as new, exciting, on-trend merchandise – from children’s apparel to home décor – at members-only prices. We’re focused on infusing newness across every merchandise category – building excitement, driving traffic, enhancing engagement and increasing retention of club members. Members increasingly shop Sam’s Club for healthy options, including organics, active wear and nutrition bars that support their active lifestyles. In addition, our award-winning pharmacists, free health screening services and immunizations make Sam’s Club an important health-care destination for many members. Integrating digital and physical access for member convenience We’re focused on giving members the choices they want by continuing to integrate digital and physical retail. Improved digital access through our investments in SamsClub.com and our 2015 Annual Report 9 Integrating digital and physical retail for Walmart customers 11 Countries with dedicated Walmart e-commerce websites blueChip_12 1.2M sq. ft. Average size of our 4 new U.S. e-commerce fulfillment centers opening in FY 16 $12.2B Global e-commerce sales in FY 15 (22% growth) 10 2015 Annual Report 60% Increase in walmart.com assortment in FY 15 (to 8 million items) 70% Approximate walmart.com traffic from mobile devices during FY 15 Q4 holidays Investing in our e-commerce capabilities Walmart’s e-commerce investments around the world are focused on four priorities: a global technology platform, a next generation fulfillment network, talent and the integration of digital and physical retail. Our new technology platform makes shopping easier on any device and enables deployment of innovation to multiple markets quickly. Our new, highly automated fulfillment centers allow more orders to be shipped faster, and at a lower cost, to customers’ doorsteps. We’re attracting many of the industry’s top engineers and scientists as we build a technology company inside the world’s largest retailer. And, we continue to use our stores to test innovations like order pickup and grocery home shopping to position Walmart as the global leader in integrating digital and physical retailing. 2015 Annual Report 11 Fostering opportunities for Walmart associates globally $1B Walmart’s incremental investment in higher wages, education and training for U.S. store and club associates 57% “Walmart will continue to provide a ladder of opportunity that any associate can climb. If you work hard, develop new skills and care for our customers, there should be no limit to what you can do here.” Doug McMillon President and Chief Executive Officer Wal-Mart Stores, Inc. 12 12 20152015 Annual Annual Report Report Of our associates are women 2.2M Dedicated associates globally $500M Bonuses earned by hourly associates in fiscal 2015 4 of 5 75% Of store operations management joined Walmart as hourly associates Are proud to work at Walmart Based on survey results from more than 2 million associates worldwide 3,600 Global eCommerce associates around the world 2015 Annual Report 13 We’re delivering strong governance for shareholders. S. Robson Walton Chairman of the Board of Directors Wal-Mart Stores, Inc. Across our markets, Walmart is in a period of rapid change, and our Board of Directors is highly engaged in overseeing the development and execution of Walmart’s enterprise strategy. Under Doug’s leadership, management is focused on driving long-term growth and profitability. We’re investing in our associates and e-commerce, and integrating our e-commerce offering with our stores and clubs to exceed customers’ expectations. I’m proud that the Board fully supported a $1 billion investment in our U.S. store and club hourly associates to increase pay and provide a pathway to greater career opportunities. We also endorsed a more than $300 million incremental investment in e-commerce to continue development of fulfillment and technology capabilities in fiscal 2016. These commitments are expected to improve the store and digital experience for our customers. Walmart has an exceptional Board of Directors comprised of a diverse mix of highly qualified members committed to upholding strong governance standards and demonstrating integrity in all activities. Our Board continually reviews our composition, leadership structure, and our way of working to ensure that we’re fully leveraging these talented individuals. Our Board’s diversity is broad – from ethnicity 14 2015 Annual Report and gender, to business experience and tenure. The median length of service on our Board is approximately 6½ years. This includes a healthy mix of directors with fresh perspectives who joined our Board over the past few years, combined with longer-serving directors with expertise in our business and broader retail acumen. Because change is inevitable, succession planning is one of our key responsibilities. Greg Penner, who has served on the Board since 2008, became the Board’s Vice Chairman this past year, and he has taken a more active leadership role in Board and management interactions focused on strategy, management development and Board processes. As part of our standard refreshment, we have a rigorous Board candidate evaluation process to ensure that we maintain the right skill sets for our growing business. Two board additions in 2014, Kevin Systrom and Tom Horton, underscore the benefits of this approach and demonstrate how we’re strengthening our oversight to keep pace with the changing retail dynamics. Committed to Board independence Our Board is dedicated and challenges management to grow Walmart in the best interest of our stakeholders. In fact, most directors attended all of our Board and committee meetings last year, with the overall meeting attendance for the year being 98 percent. The Walton family has a passion to see the company succeed, and we’re proud to have representation on Walmart’s Board. But, we also recognize the importance of having an independent board with diverse experiences and viewpoints. Today, the majority of our board members are independent. Dr. James Cash serves as our Lead Independent Director, adding exceptional value to our governance processes. And, we’ve had separate Chairman and CEO roles since 1988. This structure allows our management team to focus on long-term value creation for all shareholders and avoids the temptation to respond to short-term pressure that’s not best for our business. Listening to our shareholders All of us believe it’s important for the company to hear from shareholders and respond accordingly. Over the past year, management engaged in a proactive outreach with many of our largest shareholders to discuss Walmart’s strategy, governance and compensation practices, as well as our environmental and social initiatives. These meetings were insightful, and the feedback was shared with the Board. We’ll continue to evaluate and act upon the recommendations that the Board feels are in the best interest of all of our shareholders. This is an exciting time for Walmart and retail in general. Our future is bright for our customers, associates and shareholders. Despite all the change that’s occurring, Walmart remains true to delivering on the purpose we’ve always had, to save people money so they can live better. And, we’re committed to growing the company in an ethical and compliant way, endeavoring to always do the right thing. Board of Directors Pictured below from left to right: S. Robson Walton (Chairman) Mr. Walton is Chairman of the Board of Directors of Wal-Mart Stores, Inc. Kevin Y. Systrom Mr. Systrom is the Chief Executive Officer and co-founder of Instagram, a social media application. Marissa A. Mayer Ms. Mayer is the Chief Executive Officer and President and Director of Yahoo!, Inc., a digital media company. Timothy P. Flynn Mr. Flynn is the retired Chairman of KPMG International, a professional services firm. Aida M. Alvarez Ms. Alvarez is the former Administrator of the U.S. Small Business Administration and was a member of President Clinton’s Cabinet from 1997 to 2001. Douglas N. Daft Mr. Daft is the retired Chairman of the Board of Directors and Chief Executive Officer of The Coca-Cola Company, a beverage manufacturer, where he served in that capacity from February 2000 until May 2004, and in various other capacities since 1969. Thomas W. Horton Mr. Horton is the former Chairman of American Airlines Group Inc. and the former Chairman of American Airlines, Inc. He also previously served as the Chairman and Chief Executive Officer of AMR Corporation and CEO of American Airlines, Inc. Michael T. Duke Mr. Duke is the former Chairman of the Executive Committee of the Board of Directors of Wal-Mart Stores, Inc., where he served in that capacity until January 31, 2015. He previously served as the President and Chief Executive Officer of Wal-Mart Stores, Inc. from February 2009 to January 2014. James I. Cash, Jr., Ph.D. (Lead Independent Director) Dr. Cash is the James E. Robison Emeritus Professor of Business Administration at Harvard Business School, where he served from July 1976 to October 2003. Board Committees: Name Audit Comp., Nominating & Governance Executive Gregory B. Penner (Vice Chairman) Mr. Penner is the Vice Chairman of the Board of Directors of Wal-Mart Stores, Inc. and a General Partner at Madrone Capital Partners, an investment firm. Linda S. Wolf Ms. Wolf is the retired Chairman of the Board of Directors and Chief Executive Officer of Leo Burnett Worldwide, Inc., an advertising agency and division of Publicis Groupe S.A. C. Douglas McMillon Mr. McMillon is the President and Chief Executive Officer of Wal-Mart Stores, Inc. Jim C. Walton Mr. Walton is the Chairman of the Board of Directors and Chief Executive Officer of Arvest Bank Group, Inc., a group of banks operating in the states of Arkansas, Kansas, Missouri and Oklahoma. Global Comp. Strategic Planning Tech & & Finance e-commerce S. Robson Walton (FE) Timothy P. Flynn Name Audit Pamela J. Craig Ms. Craig is the retired Chief Financial Officer of Accenture plc, a global management consulting, technology services, and outsourcing company. Steven S Reinemund Mr. Reinemund is the retired Dean of Business and Professor of Leadership and Strategy at Wake Forest University. He previously served as the Chairman of the Board and Chairman and Chief Executive Officer of PepsiCo, Inc. Comp., Nominating & Governance Linda S. Wolf (C) Thomas W. Horton Jim C. Walton Michael T. Duke James I. Cash, Jr., Ph.D.(FE) Marissa A. Mayer Douglas N. Daft Kevin Y. Systrom Roger C. Corbett Aida M. Alvarez Pamela J. Craig(FE) (C) Executive Steven S Reinemund (C) Committee Chair Global Comp. Strategic Planning Tech & & Finance e-commerce (C) C. Douglas McMillon (C) (FE) Gregory B. Penner Roger C. Corbett Mr. Corbett is the retired Chief Executive Officer and Group Managing Director of Woolworths Limited, the largest retail company in Australia. (FE) (C) (C) Financial Expert 2015 Annual Report 15 A solid fiscal 2015 performance; investing for a stronger future Charles M. Holley, Jr. Executive Vice President and Chief Financial Officer Wal-Mart Stores, Inc. Walmart had a solid year in fiscal 2015 as each operating segment improved its performance as the year progressed. While net sales grew nearly 2 percent and operating income increased 1 percent, our underlying performance was actually stronger. Our results were impacted by significant headwinds from currency exchange rate fluctuations. These currency headwinds may continue throughout this current year. Our top priority is to run great stores in all of our markets. That is the only way to have sustainable increases in comp sales, as well as top line growth. We’re pleased that e-commerce sales rose faster than the market globally last year at approximately 22 percent. As we continue to integrate our websites and mobile apps with our stores and clubs, we’ll enable customers to shop anytime and anywhere they want. Walmart is well-positioned to deliver for customers because we have the financial strength to invest in growth. Our AA credit rating, unmatched in retail, is a testament to our financial discipline and strong balance sheet. We’ve consistently delivered strong cash flow for many years. In fact, in fiscal 2015, Walmart generated free cash flow of more than $16 billion, the best performance in over a decade. Our return on investment was 16.9 percent, as we continue to invest in store growth and e-commerce initiatives. Retail is changing and we’re investing to serve customers more effectively, which we believe will benefit shareholders over time. We know that customers expect value, a broad assortment, and various options in how and where they shop. They also want an enjoyable shopping experience, both in stores and online. Our fiscal 2016 investments in associate wages and training, as well as our stepped-up investments in global e-commerce, will strengthen our ability to deliver a great experience for customers. These important investments will make us even more relevant in the future. Investing for customers to drive growth We take a long-term view as we position our business for the future. Globally, customers will always need to shop in stores, and we will continue to serve customers with a variety of formats. That is why we will add 26–30 million net retail square feet this year with new stores and clubs around the world, to bring Walmart closer to customers. $64B* 19%* $64B* Consolidated net sales growth Earnings per share growth Returned to shareholders through dividends and share repurchases *Data reflects five-year period including fiscal 2011 through 2015. 16 2015 Annual Report Sometimes, it is more convenient for customers to shop online and have their order delivered to their doorstep. Other times, they may want to pick up their online order when they are already shopping at our store. We are building the capabilities to provide customers with best-in-class e-commerce – from user-friendly websites and mobile apps to high-tech fulfillment centers and the infrastructure required for grocery home shopping. Our incremental investments in and around e-commerce will be well over $1 billion this year, and we will continue to seek the right balance between sales growth and profitability as we grow our e-commerce business. Investing in our people and shareholders This year, we’re making a $1 billion incremental investment in strategic people initiatives within our U.S. businesses. This wage restructuring and expanded training opportunities will help hourly associates earn higher pay and advance their careers. This investment will benefit our customers through a better store and club experience, leading to higher sales and returns. I’m proud of Walmart’s long record of consistent returns to shareholders. After growth initiatives, we use our remaining cash flows to provide shareholder returns through dividends and share repurchases. Last year, we returned over $7 billion to shareholders. This year, we increased our annual dividend to $1.96 per share, representing 42 consecutive years of dividend increases. As I close, I encourage you to review our financial results in the next section. Walmart’s business is strong, and we are confident that our strategic investments will make Walmart’s future even brighter. Executive Officers Neil M. Ashe Rollin L. Ford Executive Vice President, President and Chief Executive Officer, Global eCommerce Executive Vice President and Chief Administrative Officer Daniel J. Bartlett Jeffrey J. Gearhart Executive Vice President, Corporate Affairs Executive Vice President, Global Governance and Corporate Secretary Rosalind G. Brewer Executive Vice President, President and Chief Executive Officer, Sam’s Club M. Susan Chambers Executive Vice President, Global People David Cheesewright Executive Vice President, President and Chief Executive Officer, Walmart International Charles M. Holley, Jr. Executive Vice President and Chief Financial Officer C. Douglas McMillon President and Chief Executive Officer Steven P. Whaley Senior Vice President and Controller Greg S. Foran Executive Vice President, President and Chief Executive Officer, Walmart U.S. 18 Five-Year Financial Summary 40 Notes to Consolidated Financial Statements 19 Management’s Discussion and Analysis of Financial Condition and Results of Operations 60 Report of Independent Registered Public Accounting Firm 36 Consolidated Statements of Income Consolidated Statements of Comprehensive Income 37 Consolidated Balance Sheets 61 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 38 Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest 39 Consolidated Statements of Cash Flows 62 Management’s Report to Our Shareholders 63 Unit Counts as of January 31, 2015 64 Corporate and Stock Information 2015 Annual Report 17 Five-Year Financial Summary As of and for the Fiscal Years Ended January 31, (Amounts in millions, except per share and unit count data) Operating results Total revenues Percentage change in total revenues from previous fiscal year Net sales Percentage change in net sales from previous fiscal year Increase (decrease) in calendar comparable sales (1) in the United States Walmart U.S. Sam’s Club Gross profit margin Operating, selling, general and administrative expenses, as a percentage of net sales Operating income Income from continuing operations attributable to Walmart Net income per common share: Diluted income per common share from continuing operations attributable to Walmart Dividends declared per common share Financial position Inventories Property, equipment and capital lease assets, net Total assets Long-term debt and long-term capital lease obligations (excluding amounts due within one year) Total Walmart shareholders’ equity 2015 2014 2013 2012 2011 $485,651 $  476,294 $468,651 $446,509 $421,395 2.0% 1.6% 5.0% 6.0% 3.4% 482,229 473,076 465,604 443,416 418,500 1.9% 1.6% 5.0% 6.0% 3.4% 0.5% (0.5)% 2.4% 1.6% (0.6)% 0.6% (0.6)% 2.0% 0.3% (1.5)% 0.0% 0.3% 4.1% 8.4% 3.9% 24.3% 24.3% 24.3% 24.5% 24.8% 19.4% 19.3% 19.0% 19.2% 19.4% $ 27,147 $ 26,872 $ 27,725 $ 26,491 $ 25,508 16,182 15,918 16,963 15,734 15,340 $   4.99 $   4.85 $   5.01 $   4.53 $   4.18 1.92 1.88 1.59 1.46 1.21 $ 45,141 $ 44,858 $ 43,803 $ 40,714 $ 36,437 116,655 117,907 116,681 112,324 107,878 203,706 204,751 203,105 193,406 180,782 43,692 44,559 41,417 47,079 43,842 81,394 76,255 76,343 71,315 68,542 Unit counts Walmart U.S. segment 4,516 4,203 4,005 3,868 3,804 Walmart International segment 6,290 6,107 5,783 5,287 4,191 Sam’s Club segment 647 632 620 611 609 11,453 10,942 10,408 9,766 8,604 Total units (1) C  omparable sales include sales from stores and clubs open for the previous 12 months, including remodels, relocations and expansions, as well as e-commerce sales. ­Comparable store and club sales include fuel. 18 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Wal-Mart Stores, Inc. (“Walmart,” the “Company” or “we”) is engaged in the operation of retail, wholesale and other units in various formats around the world. Our operations consist of three reportable segments: Walmart U.S., Walmart International and Sam’s Club. • Walmart U.S. is our largest segment and operates retail stores in all 50 states in the United States (“U.S.”), Washington D.C. and Puerto Rico, with three primary store formats, as well as digital retail. Walmart U.S. generated approximately 60% of our net sales in fiscal 2015 and, of our three segments, Walmart U.S. is the largest and has historically had the highest gross profit as a percentage of net sales (“gross profit rate”). In addition, Walmart U.S. has historically contributed the greatest amount to the Company’s net sales and operating income. • Walmart International consists of operations in 26 countries outside of the U.S. and includes retail, wholesale and other businesses. These businesses consist of numerous formats, including supercenters, supermarkets, hypermarkets, warehouse clubs, including Sam’s Clubs, cash & carry, home improvement, specialty electronics, restaurants, apparel stores, drug stores and convenience stores, as well as digital retail. Walmart International generated approximately 28% of our fiscal 2015 net sales. The overall gross profit rate for Walmart International is lower than that of Walmart U.S. because of its merchandise mix. Walmart International is our second largest segment and has grown through acquisitions, as well as by adding retail, wholesale and other units. • Sam’s Club consists of membership-only warehouse clubs and operates in 48 states in the U.S. and in Puerto Rico, as well as digital retail. Sam’s Club accounted for approximately 12% of our fiscal 2015 net sales. As a membership-only warehouse club, membership income is a significant component of the segment’s operating income. As a result, Sam’s Club operates with a lower gross profit rate and lower operating expenses as a percentage of net sales than our other segments. Each of our segments contributes to the Company’s operating results differently, but each has generally maintained a consistent contribution rate to the Company’s net sales and operating income in recent years. Through the operations in each of our segments, we help people around the world save money and live better – anytime and anywhere – in retail stores or through our e-commerce and mobile capabilities. Through innovation, we are striving to create a customer-centric experience that seamlessly integrates digital and physical shopping. Physical retail encompasses our brick and mortar presence in each of the markets we operate. Digital retail is comprised of our e-commerce websites and mobile commerce applications. Each week, we serve nearly 260 million customers who visit our over 11,000 stores under 72 banners in 27 countries and e-commerce websites in 11 countries. Our strategy is to lead on price, invest to differentiate on access, be competitive on assortment and deliver a great experience. By leading on price we earn the trust of our customers every day by providing a broad assortment of quality merchandise and services at everyday low prices (“EDLP”), while fostering a culture that rewards and embraces mutual respect, integrity and diversity. EDLP is our pricing philosophy under which we price items at a low price every day so our customers trust that our prices will not change under frequent promotional activity. Price leadership is core to who we are. Everyday low cost (“EDLC”) is our commitment to control expenses so those cost savings can be passed along to our customers. Our digital and physical presence provides customers access to our broad assortment anytime and anywhere. We strive to give our customers and members a great digital and physical shopping experience. Our fiscal year ends on January 31 for our U.S. and Canadian operations. We consolidate all other operations generally using a one-month lag and on a calendar year basis. Our business is seasonal to a certain extent due to calendar events and national and religious holidays, as well as weather patterns. Historically, our highest sales volume and operating income have occurred in the fiscal quarter ending January 31. This discussion, which presents our results for the fiscal years ended January 31, 2015 (“fiscal 2015”), January 31, 2014 (“fiscal 2014”) and January 31, 2013 (“fiscal 2013”), should be read in conjunction with our Consolidated Financial Statements and the accompanying notes. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. We also discuss certain performance metrics that management uses to assess the Company’s performance. Additionally, the discussion provides information about the financial results of the three segments of our business to provide a better understanding of how each of those segments and its results of operations affect the financial condition and results of operations of the Company as a whole. Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss segment operating income, comparable store and club sales and other measures. Management measures the results of the Company’s segments using each segment’s operating income, including certain corporate overhead allocations, as well as other measures. From time to time, we revise the measurement of each segment’s operating income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by our chief operating decision maker. When we do so, the previous period amounts and balances are reclassified to conform to the current period’s presentation. The amounts disclosed for “Corporate and support” in the leverage discussion of the Company’s performance metrics consist of corporate overhead and other items not allocated to any of the Company’s segments. Comparable store and club sales is a metric that indicates the ­performance of our existing U.S. stores and clubs by measuring the change in sales for such stores and clubs, including e-commerce sales, for a particular period from the corresponding period in the previous year. Walmart’s definition of comparable store and club sales includes sales from stores and clubs open for the previous 12 months, including remodels, relocations, expansions and conversions, as well as ­e-commerce sales. We measure the e-commerce sales impact by including those sales initiated through our websites and fulfilled through our e-commerce distribution facilities, as well as an estimate for sales initiated online, but fulfilled through our stores and clubs. Changes in format are excluded from comparable store and club sales when the conversion is accompanied by a relocation or expansion that results in a change in retail square feet of more than five percent. Comparable store and club sales are also referred to as “same-store” sales by others within the retail industry. The method of calculating comparable store and club sales 2015 Annual Report 19 Management’s Discussion and Analysis of Financial Condition and Results of Operations v­ aries across the retail industry. As a result, our calculation of comparable store and club sales is not necessarily comparable to similarly titled ­measures reported by other companies. In discussing our operating results, the term currency exchange rates refers to the currency exchange rates we use to convert the operating results for all countries where the functional currency is not the U.S. dollar. We calculate the effect of changes in currency exchange rates as the ­difference between current period activity translated using the current period’s currency exchange rates, and the comparable prior year period’s currency exchange rates. Throughout our discussion, we refer to the results of this calculation as the impact of currency exchange rate fluctuations. When we refer to constant currency operating results, we are referring to our operating results without the impact of the currency exchange rate fluctuations and without the impact of acquisitions until the acquisitions are included in both comparable periods. The disclosure of constant currency amounts or results permits investors to understand better Walmart’s underlying performance without the effects of currency exchange rate fluctuations or acquisitions. Volatility in currency exchange rates may impact the results, including net sales and operating income, of the Company and the Walmart International segment in the future. We made certain reclassifications to prior period amounts or balances to conform to the presentation in the current fiscal year. These reclassifications did not impact the Company’s operating income or consolidated net income. Additionally, certain prior period segment asset and expense allocations have been reclassified among segments to be comparable with the current period presentation. The Retail Industry We operate in the highly competitive retail industry in all of the markets we serve. We face strong sales competition from other discount, department, drug, dollar, variety and specialty stores, warehouse clubs and supermarkets, as well as e-commerce and catalog businesses. Many of these competitors are national, regional or international chains or have a national or international online presence. We compete with a number of companies for prime retail site locations, as well as in attracting and retaining quality employees (whom we call “associates”). We, along with other retail companies, are influenced by a number of factors including, but not limited to: catastrophic events, weather, competitive pressures, consumer disposable income, consumer debt levels and buying patterns, consumer credit availability, cost of goods, currency exchange rate fluctuations, customer preferences, deflation, inflation, fuel and energy prices, general economic conditions, insurance costs, interest rates, labor costs, tax rates, cybersecurity attacks and unemployment. Further information on the factors that can affect our operating results and on certain risks to our Company and an investment in its securities can be located in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, and in the discussion under “Cautionary Statement Regarding Forward-Looking Statements and Information” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015. Company Performance Metrics Our performance metrics emphasize three priorities for improving ­shareholder value: growth, leverage and returns. Our priority of growth focuses on sales through growth in net sales, comparable store and club sales, including e-commerce sales, and unit square feet growth; the ­priority of leverage encompasses our objective to increase our operating income at the same rate as or a faster rate than the growth in net sales by growing our operating, selling, general and administrative expenses (“operating expenses”) at a slower rate than the growth of our net sales; and the priority of returns focuses on how efficiently we employ assets through return on investment and how effectively we manage working capital through free cash flow. While all three priorities are important, our top priority is growth, with increased investment in digital retail and our associates. Sales growth will contribute to improving leverage and returns over time. Growth Net Sales Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 Net Sales 2013 Percent Percent Percent Percent Percent of Total Change Net Sales of Total Change Net Sales of Total Walmart U.S. Walmart International Sam’s Club $288,049 59.8% 3.1% $279,406 59.0% 1.8% 136,160 28.2% (0.3)% 136,513 28.9% 1.3% 58,020 12.0% 1.5% 57,157 12.1% 1.3% $274,433 59.0% 134,748 28.9% 56,423 12.1% Net sales $482,229 100.0% 1.9% $473,076 100.0% 1.6% $465,604 100.0% Our consolidated net sales increased 1.9% and 1.6% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. The increase in net sales for fiscal 2015 was primarily due to 3.0% year-over-year growth in retail square feet, positive comparable sales in the U.S. and higher e-commerce sales across the Company. The increase was partially offset by $5.3 billion of negative impact from fluctuations in currency exchange rates for fiscal 2015. The increase in net sales for fiscal 2014 was due to 3.1% growth in retail square feet, higher e-commerce sales, the impact of fiscal 2013 acquisitions and positive comparable club sales at Sam’s Club. The increase in net sales for fiscal 2014 was partially offset by $5.1 billion of negative impact from fluctuations in currency exchange rates. 20 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations Calendar Comparable Store and Club Sales Comparable store and club sales is a metric which indicates the performance of our existing U.S. stores and clubs by measuring the change in sales for such stores and clubs, including e-commerce sales, for a particular period over the corresponding period in the previous year. The retail industry generally reports comparable store and club sales using the retail calendar (also known as the 4-5-4 calendar). To be consistent with the retail industry, we ­provide comparable store and club sales using the retail calendar in our quarterly earnings releases. However, when we discuss our comparable store and club sales below, we are referring to our calendar comparable store and club sales calculated using our fiscal calendar. As our fiscal calendar ­differs from the retail calendar, our calendar comparable store and club sales also differ from the retail calendar comparable store and club sales ­provided in our quarterly earnings releases. Calendar comparable store and club sales, as well as the impact of fuel, for fiscal 2015 and 2014, were as follows: Fiscal Years Ended January 31, 2015 2014 With Fuel 2015 2014 Fuel Impact Walmart U.S. Sam’s Club 0.6% (0.6)% 0.0% 0.0% 0.0% 0.3% (0.6)% (0.3)% Total U.S. 0.5% (0.5)% (0.1)% (0.1)% Comparable store and club sales in the U.S., including fuel, increased 0.5% in fiscal 2015 and decreased 0.5% in fiscal 2014, when compared to the ­previous fiscal year. The fiscal 2015 total U.S. comparable store and club sales were positively impacted by higher traffic and lower gas prices during the end of the fiscal year. E-commerce sales positively impacted comparable sales approximately 0.3% and 0.2% for Walmart U.S. and Sam’s Club, respectively, for the fiscal year ended January 31, 2015. For fiscal 2014, the total U.S. comparable store and club sales were negatively impacted by lower consumer spending primarily due to the slow recovery in general economic conditions, the 2% increase in the 2013 payroll tax rate, and the reduction in government food benefits and severe winter storms that occurred during the fourth quarter. These factors were partially offset by increased member traffic at Sam’s Club primarily coming from Savings Members. Additionally, e-commerce sales positively impacted the Walmart U.S. comparable store and Sam’s Club comparable club sales percentages by approximately 0.3% for fiscal 2014. As we continue to add new stores and clubs in the U.S., we do so with an understanding that additional stores and clubs may take sales away from existing units. We estimate the negative impact on comparable store and club sales as a result of opening new stores and clubs was approximately 0.9% and 0.8% in fiscal 2015 and 2014, respectively. Our estimate is calculated primarily by comparing the sales trends of the impacted stores and clubs, which are identified based on their proximity to the new stores and clubs, to those of nearby non-impacted stores and clubs, in each case, as measured after the new stores and clubs are opened. Leverage Operating Income Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Operating Percent Percent Income of Total Change Operating Percent Income of Total Walmart U.S. Walmart International Sam’s Club Corporate and support $21,336 78.6% (2.1)% $21,787 81.0% 3.2% $21,103 76.1% 6,171 22.7% 19.8% 5,153 19.2% (19.0)% 6,365 23.0% 1,976 7.3% 7.2% 1,843 6.9% (0.9)% 1,859 6.7% (2,336) (8.6)% (22.2)% (1,911) (7.1)% (19.3)% (1,602) (5.8)% Operating income $27,147 100.0% 1.0% $26,872 100.0% (3.1)% $27,725 100.0% Operating Percent Percent Income of Total Change We believe comparing both the growth of our operating expenses and our operating income to the growth of our net sales are meaningful measures, as they indicate how effectively we manage costs and leverage operating expenses. Our objective for a fiscal year is to grow operating expenses at a slower rate than net sales and to grow operating income at the same rate as or a faster rate than net sales. On occasion, we may make strategic growth investments that may, at times, cause our operating expenses to grow at a faster rate than net sales and that may result in our operating income growing at a slower rate than net sales. 2015 Annual Report 21 Management’s Discussion and Analysis of Financial Condition and Results of Operations Operating Expenses For fiscal 2015, operating expenses increased 2.3%, when compared to the previous fiscal year, while net sales increased 1.9%, respectively, when compared to the previous fiscal year. Accordingly, we did not meet our objective of growing operating expenses at a slower rate than net sales. Our continued investments in digital retail, higher health-care expenses in the U.S. from increased enrollment and medical cost inflation, the $249 million impact of wage and hour litigation in the U.S., as well as expenses of $148 million related to the closure of approximately 30 underperforming stores in Japan were the primary factors that caused us not to leverage for fiscal 2015. For fiscal 2014, we did not meet our objective of growing operating expenses at a slower rate than net sales as operating expenses as a percentage of net sales increased 27 basis points. Overall, lower than anticipated sales, higher investment in key areas, such as global leverage and digital retail initiatives, and the nearly $1.0 billion of increased expenses for various matters described in the Walmart International segment discussion, were the primary cause for the increase in operating expenses as a percentage of net sales. During the first quarter of fiscal 2016, the Company announced a new associate wage structure combined with comprehensive associate training and educational programs. We anticipate the additional expenses in fiscal 2016 resulting from these programs will be approximately $1.0 billion, which may impact our ability to leverage operating expenses in fiscal 2016. Operating Income For fiscal 2015, we did not meet our objective of growing operating income at the same rate or a faster rate than net sales as operating income increased 1.0%, while net sales increased 1.9% when compared to the previous fiscal year. This was primarily due to the factors we ­discussed for not leveraging operating expenses. For fiscal 2014, we also did not meet our objective of growing operating income at a faster rate than net sales as operating income decreased 3.1% while net sales increased 1.6%, when compared to the previous fiscal year. This was ­primarily due to the factors we discussed for not leveraging operating expenses, partially offset by increases in membership and other income of 5.6%. Returns Return on Investment Management believes return on investment (“ROI”) is a meaningful ­metric to share with investors because it helps investors assess how effectively Walmart is deploying its assets. Trends in ROI can fluctuate over time as management balances long-term potential strategic ­initiatives with possible short-term impacts. ROI was 16.9% and 17.0% for the fiscal years ended January 31, 2015 and 2014, respectively. The slight change in ROI was primarily due to ­continued investments in store growth and digital retail initiatives, offset by currency exchange rate fluctuations. We define ROI as adjusted operating income (operating income plus interest income, depreciation and amortization, and rent expense) for the trailing 12 months divided by average invested capital during that period. We consider average invested capital to be the average of our beginning and ending total assets, plus average accumulated depreciation and average amortization, less average accounts payable and average accrued liabilities for that period, plus a rent factor equal to the rent for the fiscal year or trailing 12 months multiplied by a factor of eight. When we have discontinued operations, we exclude the impact of the discontinued operations. Our calculation of ROI is considered a non-GAAP financial measure because we calculate ROI using financial measures that exclude and include amounts that are included and excluded in the most directly comparable GAAP financial measure. For example, we exclude the impact of depreciation and amortization from our reported operating income in calculating the numerator of our calculation of ROI. In addition, we include a factor of eight for rent expense that estimates the ­hypothetical capitalization of our operating leases. We consider return on assets (“ROA”) to be the financial measure computed in accordance with generally accepted accounting principles (“GAAP”) that is the most directly comparable financial measure to our calculation of ROI. ROI differs from ROA (which is consolidated income from continuing operations for the period divided by average total assets of continuing operations for the period) because ROI: adjusts operating income to exclude certain expense items and adds interest income; adjusts total assets of con­tinuing operations for the impact of accumulated depreciation and amortization, accounts payable and accrued liabilities; and incorporates a factor of rent to arrive at total invested capital. Although ROI is a standard financial metric, numerous methods exist for calculating a company’s ROI. As a result, the method used by ­management to calculate our ROI may differ from the methods used by other companies to calculate their ROI. We urge you to understand the methods used by other companies to calculate their ROI before ­comparing our ROI to that of such other companies. 22 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations The calculation of ROI, along with a reconciliation to the calculation of ROA, the most comparable GAAP financial measure, is as follows: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 CALCULATION OF RETURN ON INVESTMENT Numerator Operating income $ 27,147 $ 26,872 + Interest income 113 119 + Depreciation and amortization 9,173 8,870 + Rent 2,777 2,828 = Adjusted operating income $ 39,210 $ 38,689 Denominator Average total assets of continuing operations (1) $203,999 $203,680 + Average accumulated depreciation and amortization (1) 63,375 57,907 - Average accounts payable (1) 37,913 37,748 - Average accrued liabilities (1) 18,973 18,802 + Rent x 8 22,216 22,624 = Average invested capital $232,704 $227,661 Return on investment (ROI) 16.9% 17.0% CALCULATION OF RETURN ON ASSETS Numerator Income from continuing operations $ 16,814 $ 16,551 Denominator Average total assets of continuing operations (1) $203,999 $203,680 Return on assets (ROA) 8.2% 8.1% Certain Balance Sheet Data Total assets of continuing operations Accumulated depreciation and amortization Accounts payable Accrued liabilities As of January 31, 2015 2014 2013 $203,706 $204,291 $203,068 65,979 60,771 55,043 38,410 37,415 38,080 19,152 18,793 18,808 (1) T he average is based on the addition of the account balance at the end of the current period to the account balance at the end of the prior period and dividing by 2. Free Cash Flow Free cash flow is considered a non-GAAP financial measure. Management believes, however, that free cash flow, which measures our ability to ­generate additional cash from our business operations, is an important financial measure for use in evaluating the Company’s financial performance. Free cash flow should be considered in addition to, rather than as a substitute for, consolidated income from continuing operations as a measure of our performance and net cash provided by operating ­activities as a measure of our liquidity. We define free cash flow as net cash provided by operating activities in a period minus payments for property and equipment made in that period. We generated free cash flow of $16.4 billion, $10.1 billion and $12.7 billion for fiscal 2015, 2014 and 2013, respectively. The increase in free cash flow for fiscal 2015, when compared to the previous fiscal year, was primarily due to the timing of payments for accounts payable and accrued liabilities, as well as the timing of income tax payments, combined with lower capital expenditures. The fiscal 2014 decline in free cash flow, when compared to the previous fiscal year, was primarily due to the timing of income tax payments, as well as lower income from ­continuing operations and slightly higher capital expenditures. Walmart’s definition of free cash flow is limited in that it does not ­represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous ­methods may exist for calculating a company’s free cash flow. As a result, the method used by Walmart’s management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow. We urge you to understand the methods used by other companies to calculate their free cash flow before comparing our free cash flow to that of such other companies. The following table sets forth a reconciliation of free cash flow, a ­non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly ­comparable to free cash flow, as well as information regarding net cash used in investing activities and net cash used in financing activities. (Amounts in millions) Net cash provided by operating activities Payments for property and equipment Fiscal Years Ended January 31, 2015 2014 2013 $ 28,564 $ 23,257 $ 25,591 (12,174) (13,115) (12,898) Free cash flow $ 16,390 $ 10,142 $ 12,693 Net cash used in investing activities (1) $(11,125) $(12,526) $(12,637) Net cash used in financing activities (15,071) (10,789) (11,946) (1) “Net cash used in investing activities” includes payments for property and equipment, which is also included in our computation of free cash flow. 2015 Annual Report 23 Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Consolidated Results of Operations (Amounts in millions, except unit counts) Fiscal Years Ended January 31, 2015 2014 2013 Total revenues Percentage change from comparable period Net sales Percentage change from comparable period Total U.S. calendar comparable store and club sales increase (decrease) Gross profit margin as a percentage of net sales Operating income Operating income as a percentage of net sales Income from continuing operations Unit counts at period end Retail square feet at period end $485,651 $476,294 $468,651 2.0% 1.6% 5.0% $482,229 $473,076 $465,604 1.9% 1.6% 5.0% 0.5% (0.5)% 2.4% 24.3% 24.3% 24.3% $ 27,147 $ 26,872 $ 27,725 5.6% 5.7% 6.0% $ 16,814 $ 16,551 $ 17,704 11,453 10,942 10,408 1,135 1,101 1,070 Our total revenues, which are mostly comprised of net sales, but also include membership and other income, increased 2.0% and 1.6% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. The increase in total revenues was consistent with the 1.9% and 1.6% increases in net sales. The increase in net sales was primarily due to 3.0% year-over-year growth in retail square feet, positive comparable sales in the U.S. and higher e-commerce sales across the Company. The increase was partially offset by $5.3 billion of negative impact from fluctuations in currency exchange rates for fiscal 2015. The increase in net sales for fiscal 2014 was due to 3.1% growth in retail square feet, higher e-commerce sales, the impact of fiscal 2013 acquisitions and positive comparable club sales at Sam’s Club. The increase in net sales for fiscal 2014 was partially offset by $5.1 billion of negative impact from fluctuations in currency exchange rates. An increase in membership and other income in both fiscal years, primarily due to growth in membership income at Sam’s Club, also contributed to the increase in total revenues. Our gross profit rate was relatively flat for fiscal 2015, when compared to the previous fiscal year. While the gross profit rate at Walmart International increased, the gross profit rate at Walmart U.S. and Sam’s Club decreased. Our gross profit rate decreased 3 basis points for fiscal 2014, when ­compared to the previous fiscal year, primarily due to our ongoing investment in price, as well as merchandise mix. 24 2015 Annual Report For fiscal 2015, we did not meet our objective of growing operating expenses at a slower rate than net sales as operating expenses as a ­percentage of net sales increased 6 basis points when c­ ompared to the same period in the previous fiscal year. Our continued investments in digital retail, higher health-care expenses in the U.S. from increased enrollment and medical cost inflation, the $249 million impact of wage and hour litigation in the U.S., as well as expenses of $148 million related to the closure of approximately 30 underperforming stores in Japan were the primary factors that caused us not to leverage for fiscal 2015. For fiscal 2014, we did not meet our objective of growing operating expenses at a slower rate than net sales as operating expenses as a p ­ ercentage of net sales increased 27 basis points. Overall, lower than anticipated net sales, higher investment in key areas, such as global leverage and e-commerce initiatives, and nearly $1.0 billion of increased expenses for various matters described in the Walmart International ­segment discussion, were the primary cause for the increase in operating expenses as a percentage of net sales. For fiscal 2015, we did not meet our objective of growing operating income at the same rate or a faster rate than net sales as operating income increased 1.0% while net sales increased 1.9% when compared to the previous fiscal year. This was primarily due to the factors we ­discussed for not leveraging operating expenses. For fiscal 2014, we also did not meet our objective of growing operating income at a faster rate than net sales as operating income decreased 3.1% while net sales increased 1.6%, when compared to the previous fiscal year. This was ­primarily due to the factors we discussed for not leveraging operating expenses, partially offset by increases in membership and other income. Our effective income tax rates were 32.2%, 32.9% and 31.0%, for fiscal 2015, 2014 and 2013, respectively. The reconciliation from the U.S. statutory rate to the effective income tax rates for fiscal 2015, 2014 and 2013 is presented in Note 9 in the “Notes to Consolidated Financial Statements.” As a result of the factors discussed above, we reported $16.8 billion, $16.6 billion and $17.7 billion of consolidated income from continuing operations for fiscal 2015, 2014 and 2013, respectively, an increase of $263.0 million for fiscal 2015 and a decrease of $1.1 billion for fiscal 2014 when compared to the previous fiscal year. Diluted income from ­continuing operations per common share attributable to Walmart (“EPS”) was $4.99, $4.85 and $5.01 for fiscal 2015, 2014 and 2013, respectively. Management’s Discussion and Analysis of Financial Condition and Results of Operations Walmart U.S. Segment (Amounts in millions, except unit counts) Net sales Percentage change from comparable period Calendar comparable store sales increase (decrease) Operating income Operating income as a percentage of net sales Unit counts at period end Retail square feet at period end Walmart International Segment Fiscal Years Ended January 31, 2015 2014 2013 $288,049 $279,406 $274,433 3.1% 1.8% 3.9% 0.6% (0.6)% 2.0% $ 21,336 $ 21,787 $ 21,103 7.4% 7.8% 7.7% 4,516 4,203 4,005 680 659 641 Net sales for the Walmart U.S. segment increased 3.1% and 1.8% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. For fiscal 2015, the increase in net sales was due to year-over-year growth in retail square feet of 3.2%, as well as an increase in comparable store sales of 0.6%. Positive traffic and lower gas prices late in the fiscal year contributed to the increase in comparable store sales. For fiscal 2014, the increase in net sales was due to year-over-year growth in retail square feet of 2.9%, partially offset by a decline in comparable store sales of 0.6%. Fiscal 2014 comparable store sales were negatively impacted by lower consumer spending primarily due to the slow recovery in general economic conditions, the 2% increase in the 2013 payroll tax rate and the reduction in government food benefits. The fiscal 2015 gross profit rate decreased 12 basis points compared to the previous fiscal year. The decrease in the gross profit rate was primarily the result of the segment’s strategic focus on price investment, pharmacy cost inflation, reductions in third-party reimbursement rates and changes in merchandise mix. The fiscal year 2014 gross profit rate was relatively flat when compared to the previous fiscal year primarily due to price investment and low price leadership, partially offset by cost of goods savings initiatives and supply chain productivity. Walmart U.S. did not leverage operating expenses for fiscal 2015, as ­operating expenses as a percentage of segment net sales increased 24 basis points. The increase in operating expenses as a percentage of segment net sales was primarily driven by higher health-care expenses from increased enrollment and medical cost inflation. In addition, expenses from severe winter storms early in the year contributed to the increase in operating expenses as a percentage of segment net sales. Walmart U.S. leveraged operating expenses for fiscal 2014, driven by ­productivity initiatives as well as lower incentive expenses in fiscal 2014. As a result of the factors discussed above, segment operating income was $21.3 billion, $21.8 billion and $21.1 billion during fiscal 2015, 2014 and 2013, respectively. Walmart U.S. did not grow operating income faster than sales during fiscal 2015, but grew operating income faster than sales during fiscal 2014. (Amounts in millions, except unit counts) Net sales Percentage change from comparable period Operating income Operating income as a percentage of net sales Unit counts at period end Retail square feet at period end Fiscal Years Ended January 31, 2015 2014 2013 $136,160 $136,513 $134,748 (0.3)% 1.3% 7.4% $  6,171 $  5,153 $  6,365 4.5% 3.8% 4.7% 6,290 6,107 5,783 368 358 346 Net sales for the Walmart International segment decreased 0.3% and increased 1.3% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. For fiscal 2015, the decrease in net sales was due to $5.3 billion of negative impact from fluctuations in currency exchange rates, partially offset by year-over-year net growth in retail square feet of 2.6% and higher e-commerce sales in each country with e-commerce operations, particularly in the United Kingdom, China and Brazil. For fiscal 2014, the increase in net sales was due to year-over-year net growth in retail square feet of 3.6% and the impact of fiscal 2013 acquisitions, which accounted for $730 million of the net sales increase. In addition, higher e-commerce sales in each country with e-commerce operations contributed to the increase. The increase in net sales was partially offset by $5.1 billion of negative impact from fluctuations in currency exchange rates. Gross profit rate increased 12 basis points for fiscal 2015 and decreased 10 basis points for fiscal 2014, when compared to the previous fiscal year. The fiscal 2015 increase in gross profit rate was primarily due to changes in the merchandise mix in a number of the segment’s larger operations. The fiscal 2014 decrease in gross profit rate was primarily due to price investments in certain countries, including Brazil, Canada and Mexico. Operating expenses as a percentage of net sales decreased 51 basis points for fiscal 2015, when compared to the previous fiscal year. The decrease was due to the nearly $1.0 billion of aggregated expenses incurred in fiscal 2014 detailed below, which were partially offset by fiscal 2015 expenses of $148 million related to the closure of approximately 30 underperforming stores in Japan. For fiscal 2014, operating expenses as a percentage of net sales increased 80 basis points, when compared to the previous fiscal year. Operating expenses as a percentage of net sales were primarily impacted by the nearly $1.0 billion of aggregated expenses for the following matters: • Charges for contingencies for non-income taxes and employment claims in Brazil; • Charges for the closure of 29 units in China and 25 units in Brazil due to poor performance; • Store lease expenses in China and Mexico to correct a historical accounting practice that did not conform to our global accounting ­policies; and • Expenses for the termination of the joint venture, franchise and supply agreements related to our former partner’s retail store operations in India. 2015 Annual Report 25 Management’s Discussion and Analysis of Financial Condition and Results of Operations As a result of the factors discussed above, segment operating income was $6.2 billion, $5.2 billion and $6.4 billion for fiscal 2015, 2014 and 2013, respectively. Fluctuations in currency exchange rates negatively impacted operating income $225 million, $26 million and $111 million in fiscal 2015, 2014 and 2013 respectively. Although currency fluctuations caused net sales for Walmart International to decline, operating income grew for fiscal 2015. Operating income did not grow faster than net sales in fiscal 2014. Sam’s Club Segment We believe the information in the following table under the caption “Excluding Fuel” is useful to investors because it permits investors to understand the effect of the Sam’s Club segment’s fuel sales on its results of operations, which are impacted by the volatility of fuel prices. Volatility in fuel prices may continue to impact the operating results of the Sam’s Club segment in the future. (Amounts in millions, except unit counts) Fiscal Years Ended January 31, 2015 2014 2013 Including Fuel Net sales Percentage change from comparable period Calendar comparable club sales increase Operating income Operating income as a percentage of net sales Unit counts at period end Retail square feet at period end Excluding Fuel Net sales Percentage change from comparable period Operating income Operating income as a percentage of net sales $58,020 $57,157 $56,423 1.5% 1.3% 4.9% 0.0% 0.3% 4.1% $ 1,976 $ 1,843 $ 1,859 3.4% 3.2% 3.3% 647 632 620 87 84 83 $51,630 $50,574 $49,789 2.1% 1.6% 4.6% $ 1,854 $ 1,817 $ 1,812 3.6% 3.6% 3.6% Net sales for the Sam’s Club segment increased 1.5% and 1.3% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. The fiscal 2015 increase in net sales was primarily due to year-over-year growth in retail square feet of 2.5%, driven by the addition of 15 new clubs, partially offset by a decrease in fuel sales due to the lower average selling price. Comparable club sales were flat for fiscal 2015. The fiscal 2014 increase in net sales was due to year-over-year growth in retail square feet of 2.1%, driven by the addition of 12 new clubs, as well as positive comparable club sales of 0.3%. The fiscal 2014 positive comparable club sales were the result of increased member traffic primarily coming from our Savings Members, partially offset by severe winter storms that occurred in the fourth quarter of fiscal 2014. Gross profit rate decreased 12 basis points for fiscal 2015 and was flat for fiscal 2014, when compared to the previous fiscal year. For fiscal 2015, the gross profit rate decreased primarily due to the segment’s investment in the Cash Rewards program, changes in merchandise mix, and commodity cost inflation, partially offset by an increased gross profit rate on fuel sales. For fiscal 2014, our gross profit was negatively impacted by an increase to our product warranty liabilities, which was offset by a favorable impact from merchandise mix. 26 2015 Annual Report Membership and other income increased 7.7% and 14.1% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. For fiscal 2015, the increase was primarily the result of increased membership upgrades, Plus Member renewals and an increase in members from the opening of 15 new clubs. For fiscal 2014, the increase was primarily due to improved contract terms relating to the profit sharing arrangement with our credit card provider, increased membership fees that were introduced on May 15, 2013, $24 million of income from the sale of two real estate properties and an increase in members from the opening of 12 new clubs. Sam’s Club leveraged operating expenses for fiscal 2015, as operating expenses as a percentage of segment net sales decreased 16 basis points compared to the previous fiscal year. The decrease in operating expenses as a percentage of segment net sales for fiscal 2015 was primarily due to better expense management in a number of areas, including the opti­ mization of the new in-club staffing structure announced in fiscal 2014, which resulted in decreases in wage expense and payroll taxes. This was partially offset by higher health-care expenses, mostly from increased enrollment and medical cost inflation. For fiscal 2014, Sam’s Club did not leverage expenses, as operating expenses as a percentage of segment net sales increased 26 basis points, when compared to the previous fiscal year. The increase in operating expenses as a percentage of segment net sales was primarily due to a $59 million charge for the implementation of the new in-club staffing structure and the pending closure of one club, as well as a state excise tax refund credit we received in the previous ­fiscal year. As a result of the factors discussed above, operating income was ­ $2.0 billion, $1.8 billion and $1.9 billion for fiscal 2015, 2014 and 2013, respectively. Sam’s Club did grow operating income faster than net sales in fiscal 2015, but did not grow operating income faster than sales in fiscal 2014. Liquidity and Capital Resources Liquidity The strength and stability of our operations have historically supplied us with a significant source of liquidity. Our cash flows provided by operating activities, supplemented with our long-term debt and short-term borrowings, have been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our operations. Generally, some or all of the remaining available cash flow has been used to fund the dividends on our common stock and share repurchases. We believe our sources of liquidity will continue to be adequate to fund operations, finance our global expansion activities, pay dividends and fund our share repurchases for the foreseeable future. Net Cash Provided by Operating Activities (Amounts in millions) Net cash provided by operating activities Fiscal Years Ended January 31, 2015 2014 2013 $28,564 $23,257 $25,591 Management’s Discussion and Analysis of Financial Condition and Results of Operations Net cash provided by operating activities was $28.6 billion, $23.3 billion and $25.6 billion for fiscal 2015, 2014 and 2013, respectively. The increase in net cash provided by operating activities for fiscal 2015, when ­compared to the previous fiscal year, was primarily due to the timing of payments for accounts payable and accrued liabilities, as well as the timing of income tax payments. The decrease in cash flows provided by operating activities in fiscal 2014, when compared to the previous fiscal year, was primarily due to the timing of income tax payments, as well as lower income from continuing operations. During the first quarter of fiscal 2016, the Company announced a new associate wage structure combined with comprehensive associate ­training and educational programs. We anticipate cash flows provided by operating activities will be sufficient to fund these programs. Cash Equivalents and Working Capital Cash and cash equivalents were $9.1 billion and $7.3 billion for fiscal 2015 and 2014, respectively. Our working capital deficit was $2.0 billion and $8.2 billion at January 31, 2015 and 2014, respectively. The decrease in our working capital deficit is primarily the result of using less of our net cash provided by operating activities for share repurchases and capital ­expenditures during fiscal 2015, which allowed us to reduce our shortterm borrowings. We generally operate with a working capital deficit due to our efficient use of cash in funding operations, consistent access to the capital markets and in providing returns to our shareholders in the form of payments of cash dividends and share repurchases. We use intercompany financing arrangements in an effort to ensure cash can be made available in the country in which it is needed with the minimum cost possible. We do not believe it will be necessary to repatriate cash and cash equivalents held outside of the U.S. and anticipate our domestic liquidity needs will be met through cash flows provided by operating activities, supplemented with long-term debt and short-term borrowings. Accordingly, we intend, with only certain exceptions, to ­continue to indefinitely reinvest our cash and cash equivalents held ­outside of the U.S. in our foreign operations. When the income earned, either from operations or through intercompany financing arrangements, and indefinitely reinvested outside of the U.S. is taxed at local country tax rates, which are generally lower than the U.S. statutory rate, we realize an effective tax rate benefit. If our intentions with respect to reinvestment were to change, most of the amounts held within our foreign operations could be repatriated to the U.S., although any repatriation under current U.S. tax laws would be subject to U.S. federal income taxes, less applicable foreign tax credits. As of January 31, 2015 and 2014, cash and cash ­equivalents of approximately $1.7 billion and $1.9 billion, respectively, may not be freely transferable to the U.S. due to local laws or other restrictions. We do not expect local laws, other limitations or potential taxes on anticipated future repatriations of cash amounts held outside of the U.S. to have a material effect on our overall liquidity, financial ­condition or results of operations. Net Cash Used in Investing Activities Fiscal Years Ended January 31, (Amounts in millions) Net cash used in investing activities 2015 2014 2013 $(11,125) $(12,526) $(12,637) Net cash used in investing activities was $11.1 billion, $12.5 billion and $12.6 billion for fiscal 2015, 2014 and 2013, respectively, and generally consisted of payments to add stores, remodel numerous existing stores, expand our digital retail capabilities and invest in other technologies. Net cash used in investing activities decreased $1.4 billion for fiscal 2015, when compared to the previous fiscal year, primarily due to lower capital expenditures. The following table provides additional capital expenditure detail: (Amounts in millions) Capital Expenditures New stores and clubs, including expansions and relocations Information systems, distribution, digital retail and other Remodels Total U.S. Walmart International Total capital expenditures Allocation of Capital Expenditures Fiscal Years Ending January 31, 2015 2014 $ 4,128 $ 5,083 3,288 2,539 822 1,030 8,238 8,652 3,936 4,463 $12,174 $13,115 Also reducing net cash used in investing activities were cash proceeds of $671 million received from the sale of the Vips Restaurant Business in Mexico (“Vips”) on May 12, 2014, which is further described in Note 13 to our Consolidated Financial Statements. We continue to focus on striving to seamlessly integrate the digital and physical shopping experience for our customers and expanded in digital retail in each of our segments during fiscal 2015, with Walmart U.S. and Sam’s Club focused on digital retail in the U.S. and Walmart International focused on digital retail in countries outside of the U.S. Some of our fiscal 2015 accomplishments in this area were to successfully launch our new web platform in the U.S., grow mobile and increase our third-party marketplace offering. 2015 Annual Report 27 Management’s Discussion and Analysis of Financial Condition and Results of Operations Growth Activities In fiscal 2016, we plan to add between 26 and 30 million square feet, which will include a continued investment in Neighborhood Markets and a moderation of Supercenter growth in the U.S. compared to recent fiscal years. In addition, we plan to accelerate the growth of our digital retail capabilities by investing $1.2 billion to $1.5 billion in e-commerce websites and mobile commerce applications that will include technology, infrastructure and other areas to better serve our customers and support our stores and clubs. We anticipate financing these growth activities through cash flows provided by operating activities and future debt financings. The following table provides our estimated range for fiscal 2016 capital expenditures, as well as our estimated range for growth in retail square feet. Our anticipated digital retail expenditures are included in our estimated range for fiscal 2016 capital expenditures. The amounts in the table do not include capital expenditures or growth in retail square feet from any pending or future acquisitions. Fiscal 2016 Projected Capital Expenditures (in billions) Fiscal 2016 Projected Growth in Retail Square Feet (in thousands) Walmart U.S. Walmart International Sam’s Club Corporate and support $  6.1 to $  6.6 3.7 to    4.2 0.8 to    0.8 1.0 to    1.3 15,000 to 16,000 10,000 to 13,000 1,000 to   1,000 — to       — Total $11.6 to $12.9 26,000 to 30,000 Net Cash Used in Financing Activities Fiscal Years Ended January 31, 2015 2014 2013 (Amounts in millions) Net cash used in financing activities $(15,071) $(10,789) $(11,946) Cash flows used in financing activities generally consist of transactions related to our short-term and long-term debt, as well as dividends paid and the repurchase of Company stock. Transactions with noncontrolling interest shareholders are also classified as cash flows from financing activities. 28 2015 Annual Report Short-term Borrowings Short-term borrowings decreased $6.3 billion for fiscal 2015 and increased $0.9 billion for fiscal 2014, when compared to the previous ­fiscal year. We generally utilize the liquidity provided by short-term ­borrowings to provide funding used for our operations, dividend ­payments, share repurchases, capital expenditures and other cash requirements. However, more cash provided from operating activities combined with less cash used for share repurchases and capital ­expenditures during fiscal 2015, allowed us to minimize our short-term borrowings at January 31, 2015. In addition to our short-term borrowings, we also have various undrawn committed lines of credit that provide $15.0 billion of additional liquidity, if needed. Long-term Debt The following table provides the changes in our long-term debt for fiscal 2015: (Amounts in millions) Balances as of February 1, 2014 Proceeds from issuance of long-term debt Payments of long-term debt Reclassifications of long-term debt Other Balances as of January 31, 2015 Long-term debt due within Long-term one year debt Total $ 4,103 $41,771 $45,874 — (3,904) 5,174 — 5,174 (3,904) 4,267 344 (4,267) (1,592) — (1,248) $ 4,810 $41,086 $45,896 Our total outstanding long-term debt balance was relatively flat as of January 31, 2015 compared to the balance as of January 31, 2014. During fiscal 2015, we used the proceeds from the issuance of long-term debt to pay down and refinance existing debt and for other corporate purposes. Dividends Our total dividend payments were $6.2 billion, $6.1 billion and $5.4 billion for fiscal 2015, 2014 and 2013, respectively, and on February 19, 2015, the Board of Directors approved the fiscal 2016 annual dividend of $1.96 per share, an increase compared to the fiscal 2015 annual dividend of $1.92 per share. For fiscal 2016, the annual dividend will be paid in four quarterly installments of $0.49 per share, according to the following record and payable dates: Record Date Payable Date March 13, 2015 May 8, 2015 August 7, 2015 December 4, 2015 April 6, 2015 June 1, 2015 September 8, 2015 January 4, 2016 Management’s Discussion and Analysis of Financial Condition and Results of Operations Company Share Repurchase Program From time to time, we repurchase shares of our common stock under share repurchase programs authorized by the Board of Directors. The current $15.0 billion share repurchase program has no expiration date or other restrictions limiting the period over which we can make share repurchases. At January 31, 2015, authorization for $10.3 billion of share repurchases remained under the current share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status. We regularly review share repurchase activity and consider several factors in determining when to execute share repurchases, including, among other things, current cash needs, capacity for leverage, cost of borrowings, our results of operations and the market price of our common stock. The following table provides, on a settlement date basis, the number of shares repurchased, average price paid per share and total cash paid for share repurchases for fiscal 2015, 2014 and 2013: (Amounts in millions, except per share data) Total number of shares repurchased Average price paid per share Total cash paid for share repurchases Capital Resources We believe cash flows from continuing operations, our current cash ­position and access to capital markets will continue to be sufficient to meet our anticipated operating cash needs, including to fund seasonal buildups in merchandise inventories, and to fund our capital expenditures, dividend payments and share repurchases. We have strong commercial paper and long-term debt ratings that have enabled and should continue to enable us to refinance our debt as it becomes due at favorable rates in capital markets. At January 31, 2015, the ratings assigned to our commercial paper and rated series of our ­outstanding long-term debt were as follows: Rating agency Standard & Poor’s Moody’s Investors Service Fitch Ratings Commercial paper Long-term debt A-1+ P-1 F1+ AA Aa2 AA Fiscal Years Ended January 31, 2015 2014 2013 13.4 89.1 113.2 $75.82 $74.99 $67.15 $1,015 $6,683 $7,600 We decreased the total cash paid for share repurchases by $5.7 billion for fiscal 2015, compared to the previous fiscal year, as a result of current cash needs, capacity for leverage and increased cash used in transactions with noncontrolling interests described further below. In addition, our results of operations influenced our share repurchase activity. Transactions with Noncontrolling Interests As described in Note 13 to our Consolidated Financial Statements, during fiscal 2015, we completed the purchase of substantially all of the remaining noncontrolling interest in Walmart Chile for approximately $1.5 billion, using existing cash to complete this transaction. Credit rating agencies review their ratings periodically and, therefore, the credit ratings assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain consistent over time. Factors that could affect our credit ratings include changes in our operating performance, the general economic environment, conditions in the retail industry, our financial position, including our total debt and capitalization, and changes in our business strategy. Any downgrade of our credit ratings by a credit rating agency could increase our future borrowing costs or impair our ability to access capital and credit markets on terms com­ mercially acceptable to us. In addition, any downgrade of our current short-term credit ratings could impair our ability to access the commercial paper markets with the same flexibility that we have experienced historically, potentially requiring us to rely more heavily on more ­expensive types of debt financing. The credit rating agency ratings are not recommendations to buy, sell or hold our commercial paper or debt securities. Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated ­independently of any other rating. Moreover, each credit rating is specific to the security to which it applies. We monitor our credit rating and our capacity for long-term financing using various qualitative and quantitative factors, including our debt-tototal capitalization, as support for our long-term financing decisions. For the purpose of the debt-to-total capitalization calculation, debt is defined as the sum of short-term borrowings, long-term debt due within one year, obligations under capital leases due within one year, long-term debt and long-term obligations under capital leases. Total capitalization is defined as debt plus total Walmart shareholders’ equity. At January 31, 2015 and 2014, the ratio of our debt-to-total capitalization was 38.2% and 42.6%, respectively. The decrease in our debt-to-total capitalization ratio was the result of using less cash for share repurchases and capital expenditures during fiscal 2015, which allowed us to minimize our short-term borrowings at January 31, 2015. The reduced share repurchases also resulted in increased growth in retained earnings. These impacts were partially offset by additional currency translation losses recorded in accumulated other comprehensive income (loss). 2015 Annual Report 29 Management’s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations and Other Commercial Commitments The following table sets forth certain information concerning our obligations and commitments to make contractual future payments, such as debt and lease agreements, and certain contingent commitments: Payments Due During Fiscal Years Ending January 31, (Amounts in millions) Recorded contractual obligations: Long-term debt (1) Short-term borrowings Capital lease obligations (2) Unrecorded contractual obligations: Non-cancelable operating leases Estimated interest on long-term debt Trade letters of credit Stand-by letters of credit Purchase obligations Total commercial commitments Total 2016 2017-2018 2019-2020 Thereafter $ 45,896 $ 4,810 $ 3,835 $ 4,032 $33,219 1,592 1,592 — — — 5,454 504 920 778 3,252 17,910 1,759 3,097 2,590 10,464 32,910 1,950 3,690 3,399 23,871 2,723 2,723 — — — 1,898 1,898 — — — 10,712 6,548 3,428 652 84 $119,095 $21,784 $14,970 $11,451 $70,890 (1) “Long-term debt” includes the fair value of our derivatives classified as fair value hedges. (2) “Capital lease obligations” includes executory costs and imputed interest related to capital lease obligations that are not yet recorded. Refer to Note 11 in the “Notes to the Consolidated Financial Statements” for more information. Additionally, the Company has $15.0 billion in undrawn committed lines of credit which, if drawn upon, would be included in the current liabilities section of the Company’s Consolidated Balance Sheets. Estimated interest payments are based on our principal amounts and expected maturities of all debt outstanding at January 31, 2015, and management’s forecasted market rates for our variable rate debt. Purchase obligations include legally binding contracts, such as firm ­commitments for inventory and utility purchases, as well as commitments to make capital expenditures, software acquisition and license ­commitments and legally binding service contracts. Purchase orders for inventory and other services are not included in the table above. Purchase orders represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current inventory needs and are fulfilled by our suppliers within short time periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. The expected timing for payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid with respect to some unrecorded contractual commitments may be different depending on the timing of receipt of goods or services or changes to agreed-upon amounts for some obligations. In addition to the amounts shown in the table above, $838 million of unrecognized tax benefits are considered uncertain tax positions and have been recorded as liabilities. The timing of the payment, if any, ­associated with these liabilities is uncertain. Refer to Note 9 in the 30 2015 Annual Report “Notes to Consolidated Financial Statements” for additional discussion of unrecognized tax benefits. Off Balance Sheet Arrangements In addition to the unrecorded contractual obligations presented above, we have entered into certain arrangements, as discussed below, for which the timing of payment, if any, is unknown. The Company has future lease commitments for land and buildings for approximately 282 future locations. These lease commitments have lease terms ranging from 1 to 30 years and provide for certain minimum ­rentals. If executed, payments under operating leases would increase by $58 million for fiscal 2016, based on current estimates. In connection with certain long-term debt issuances, we could be liable for early termination payments if certain unlikely events were to occur. At January 31, 2015, the aggregate termination payment would have been $64 million. The arrangement pursuant to which this payment could be made will expire in fiscal 2019. Market Risk In addition to the risks inherent in our operations, we are exposed to ­certain market risks, including changes in interest rates and fluctuations in currency exchange rates. The analysis presented below for each of our market risk sensitive ­instruments is based on a hypothetical scenario used to calibrate ­potential risk and does not represent our view of future market changes. The effect of a change in a particular assumption is calculated without adjusting any other assumption. In reality, however, a change in one ­factor could cause a change in another, which may magnify or negate other sensitivities. Management’s Discussion and Analysis of Financial Condition and Results of Operations Interest Rate Risk We are exposed to changes in interest rates as a result of our short-term borrowings and long-term debt issuances. We hedge a portion of our interest rate risk by managing the mix of fixed and variable rate debt and by entering into interest rate swaps. For fiscal 2015, the net fair value of our interest rate swaps decreased approximately $158 million primarily due to fluctuations in market interest rates and the termination of forward starting receive variable-rate, pay fixed-rate swaps in October and April 2014 concurrently with the issuance of debt. The table below provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table represents the principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table represents the contractual cash flows and weighted-average interest rates by the contractual maturity date, unless otherwise noted. The notional amounts are used to calculate contractual cash flows to be exchanged under the contracts. The weighted-average variable rates are based upon prevailing market rates at January 31, 2015. (Amounts in millions) Expected Maturity Date Fiscal 2016 Fiscal 2017 Fiscal 2018 Fiscal 2019 Fiscal 2020 Thereafter Total Liabilities Short-term borrowings: Variable rate $1,592 $  — $  — $  — $  — $   — $  1,592 Weighted-average interest rate 0.5% —% —% —% —% —% 0.5% Long-term debt (1): Fixed rate $4,055 $2,055 $1,523 $3,518 $514 $33,219 $44,884 Weighted-average interest rate 2.5% 1.9% 4.0% 3.1% 4.3% 4.9% 4.4% Variable rate $  755 $  257 $  — $  — $  — $   — $  1,012 Weighted-average interest rate 3.8% 4.2% —% —% —% —% 3.9% Interest rate derivatives Interest rate swaps: Variable to fixed $  255 $  — $  — $  — $  — $   — $   255 Weighted-average pay rate 0.9% —% —% —% —% —% 0.9% Weighted-average receive rate 0.6% —% —% —% —% —% 0.6% Fixed to variable $  — $  — $  — $  — $  — $   500 $   500 Weighted-average pay rate —% —% —% —% —% 1.5% 1.5% Weighted-average receive rate —% —% —% —% —% 3.3% 3.3% (1) The long-term debt amounts in the table exclude the Company’s derivatives classified as fair value hedges. As of January 31, 2015, our variable rate borrowings, including the effect of our commercial paper and interest rate swaps, represented 7% of our total short-term and long-term debt. Based on January 31, 2015 debt ­levels, a 100 basis point change in prevailing market rates would cause our annual interest costs to change by approximately $23 million. Foreign Currency Risk We are exposed to fluctuations in foreign currency exchange rates as a result of our net investments and operations in countries other than the U.S. For fiscal 2015, movements in currency exchange rates and the related impact on the translation of the balance sheets of the Company’s subsidiaries in Canada, the United Kingdom, Japan, Mexico and Chile were the primary cause of the $3.6 billion net loss in the currency translation and other category of accumulated other comprehensive income (loss). We hedge a portion of our foreign currency risk by entering into currency swaps and designating certain foreign-currency-denominated long-term debt as net investment hedges. We hold currency swaps to hedge the currency exchange component of our net investments and also to hedge the currency exchange rate fluctuation exposure associated with the forecasted payments of principal and interest of non-U.S. denominated debt. The aggregate fair value of these swaps was in a liability position of $110 million at January 31, 2015 and in an asset position of $550 million at January 31, 2014. The change in the fair value of these swaps was due to fluctuations in currency exchange rates, primarily the strengthening of the U.S. dollar relative to other currencies in the latter half of fiscal 2015. A hypothetical 10% increase or decrease in the currency exchange rates underlying these swaps from the market rate at January 31, 2015 would have resulted in a loss or gain in the value of the swaps of $435 million. A hypothetical 10% change in interest rates underlying these swaps from the market rates in effect at January 31, 2015 would have resulted in a loss or gain in value of the swaps of $20 million. 2015 Annual Report 31 Management’s Discussion and Analysis of Financial Condition and Results of Operations In addition to currency swaps, we have designated foreign-currencydenominated long-term debt as nonderivative hedges of net investments of certain of our foreign operations. At January 31, 2015 and 2014, we had £2.5 billion of outstanding long-term debt designated as a hedge of our net investment in the United Kingdom. At January 31, 2015, a hypothetical 10% increase or decrease in the value of the U.S. dollar relative to the British pound would have resulted in a gain or loss in the value of the debt of $342 million. In addition, we had outstanding long-term debt of ¥100 billion at January 31, 2015 and ¥200 billion at January 31, 2014, that was designated as a hedge of our net investment in Japan. At January 31, 2015, a hypothetical 10% increase or decrease in value of the U.S. dollar relative to the Japanese yen would have resulted in a gain or loss in the value of the debt of $77 million. Other Matters We discuss our existing FCPA investigation and related matters in the Annual Report on Form 10-K for fiscal 2015, including certain risks arising therefrom, in Part I, Item 1A of the Form 10-K under the caption “Risk Factors” and in Note 10 to our Consolidated Financial Statements, which is captioned “Contingencies,” under the sub-caption “FCPA Investigation and Related Matters.” We also discuss various legal proceedings related to the FCPA investigation in Item 3 of the Form 10-K under the caption “Item 3. Legal Proceedings,” under the sub-caption “II. Certain Other Proceedings.” We discuss our “equal value” claims against our United Kingdom subsidiary, ASDA Stores, Ltd., in the Annual Report on Form 10-K for fiscal 2015, including certain risks arising therefrom, in Part I, Item 1A of the Form 10-K under the caption “Risk Factors” and in Note 10 to our Consolidated Financial Statements, which is captioned “Contingencies,” under the sub-caption “Legal Proceedings.” Summary of Critical Accounting Estimates Management strives to report our financial results in a clear and ­understandable manner, although in some cases accounting and ­disclosure rules are complex and require us to use technical terminology. In preparing the Company’s Consolidated Financial Statements, we follow accounting principles generally accepted in the U.S. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations as reflected in our financial statements. These judgments and estimates are based on past events and expectations of future outcomes. Actual results may differ from our estimates. Management continually reviews our accounting policies, how they are applied and how they are reported and disclosed in our financial statements. Following is a summary of our critical accounting estimates and how they are applied in preparation of the financial statements. 32 2015 Annual Report Inventories We value inventories at the lower of cost or market as determined primarily by the retail method of accounting, using the last-in, first-out (“LIFO”) method for substantially all of the Walmart U.S. segment’s inventories. The inventory at the Walmart International segment is valued primarily by the retail inventory method of accounting, using the first-in, first-out (“FIFO”) method. The retail method of accounting results in inventory being valued at the lower of cost or market since permanent markdowns are immediately recorded as a reduction of the retail value of inventory. The inventory at the Sam’s Club segment is valued based on the weighted-average cost using the LIFO method. Under the retail method of accounting, inventory is valued at the lower of cost or market, which is determined by applying a cost-to-retail ratio to each merchandise grouping’s retail value. The FIFO cost-to-retail ratio is generally based on the fiscal year purchase activity. The cost-to-retail ratio for measuring any LIFO provision is based on the initial margin of the fiscal year purchase activity less the impact of any permanent markdowns. The retail method of accounting requires management to make certain judgments and estimates that may significantly impact the ending inventory valuation at cost, as well as the amount of gross profit recognized. Judgments made include recording markdowns used to sell inventory and shrinkage. When management determines the ability to sell inventory has diminished, markdowns for clearance activity and the related cost impact are recorded. Factors considered in the determination of markdowns include current and anticipated demand, customer preferences and age of merchandise, as well as seasonal and fashion trends. Changes in weather and customer preferences could cause material changes in the amount and timing of markdowns from year to year. When necessary, we record a LIFO provision for the estimated annual effect of inflation, and these estimates are adjusted to actual results determined at year-end. Our LIFO provision is calculated based on ­inventory levels, markup rates and internally generated retail price ­indices. At January 31, 2015 and 2014, our inventories valued at LIFO approximated those inventories as if they were valued at FIFO. We provide for estimated inventory losses, or shrinkage, between ­physical inventory counts on the basis of a percentage of sales. Following annual inventory counts, the provision is adjusted to reflect updated historical results. Management’s Discussion and Analysis of Financial Condition and Results of Operations Impairment of Assets We evaluate long-lived assets other than goodwill and assets with ­indefinite lives for indicators of impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. Management’s judgments regarding the existence of impairment indicators are based on market conditions and operational performance, such as operating income and cash flows. The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally at the individual store level or, in certain markets, at the market group level. The variability of these factors depends on a number of ­conditions, including uncertainty about future events and changes in demographics. Thus, our accounting estimates may change from period to period. These factors could cause management to conclude that ­indicators of impairment exist and require impairment tests be ­performed, which could result in management determining the value of long-lived assets is impaired, resulting in a write-down of the related long-lived assets. Goodwill and other indefinite-lived acquired intangible assets are not amortized, but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the value of a certain asset may be impaired. Generally, this evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is ­necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the ­reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units have generated sufficient returns to recover the cost of goodwill and other indefinite-lived acquired intangible assets. Because of the nature of the factors used in these tests, if different ­conditions occur in future periods, future operating results could be materially impacted. As of January 31, 2015, the fair value of certain recently acquired indefinite-lived intangible assets approximated their carrying value of $419 million. Any deterioration in the fair value of these assets would result in a related impairment charge. Management will continue to monitor the fair value of these assets in future periods. Income Taxes Income taxes have a significant effect on our net earnings. We are ­subject to income taxes in the U.S. and numerous foreign jurisdictions. Accordingly, the determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our effective income tax rate is affected by many factors, including changes in our assessment of certain tax ­contingencies, increases and decreases in valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items and the mix of earnings among our U.S. and international ­operations where the statutory rates are generally lower than the U.S. statutory rate, and may fluctuate as a result. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. The benefits of uncertain tax positions are recorded in our financial statements only after determining a more likely than not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the financial statements as appropriate. We account for uncertain tax positions by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. This determination requires the use of significant judgment in evaluating our tax positions and assessing the timing and amounts of deductible and taxable items. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent that a portion is not more likely than not to be realized. Many factors are considered when assessing whether it is more likely than not that the deferred tax assets will be realized, including recent cumulative earnings, expectations of future taxable income, carryforward periods and other relevant quan­ titative and qualitative factors. The recoverability of the deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary ­differences, forecasted operating earnings and available tax planning strategies. This evaluation relies heavily on estimates. Cautionary Statement Regarding Forward-Looking Statements This Annual Report to Shareholders contains statements that we believe are “forward-looking statements” entitled to the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking Statements Those forward-looking statements include statements: in our Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding: • volatility of currency exchange rates possibly affecting future results of Walmart and Walmart International; • our objectives of growing net sales at a faster rate than operating expenses and operating income at a faster rate than net sales and our strategic growth investments affecting those metrics in certain ways; • the possible fluctuation of our effective tax rate for future periods; • volatility of fuel prices possibly affecting the operating results of our Sam’s Club segment in the future; • meeting our liquidity needs through sources other than cash held outside of the U.S., intending to permanently reinvest such cash outside of the U.S., and our ability to repatriate cash held outside of the U.S. (which statements also appear in Note 1 to our Consolidated Financial Statements); • the recently announced new associate wage structure and comprehensive associate training and educational programs adversely affecting Walmart’s ability to leverage in the future and cash provided by operating activities being sufficient to fund those programs; 2015 Annual Report 33 Management’s Discussion and Analysis of Financial Condition and Results of Operations • our fiscal 2016 global expansion plans, continued investment in Neighborhood Markets, moderation in U.S. supercenter growth, growing our retail square feet and expanding our digital retail capabilities and our plans to finance our growth activities; • our estimated range of capital expenditures (including digital retail capital expenditures) in fiscal 2016 for each of our reportable segments, in the “Corporate and support” category and in total; • the estimated/projected growth in retail square feet in total and by reportable segment in fiscal 2016; • our cash flows from continuing operations, current cash position and access to debt and capital markets continuing to be sufficient to meet our cash needs for operations and other specified purposes; and • the amount of increases in payments under operating leases if certain leases are executed (which statement also appears in Note 11 to our Consolidated Financial Statements); in the Notes to our Consolidated Financial Statements regarding: • any portion of our net investment and cash flow instruments that is an ineffective hedge being insignificant and the amounts related to our derivatives expected to be reclassified from accumulated other comprehensive income (loss) to net income during the next 12 months being insignificant (Note 8); • the realization of certain net deferred tax assets, tax audit resolutions over fiscal 2016 reducing unrecognized tax benefits within a certain range or beyond and the reasons for that reduction, any change not having a significant impact on our Consolidated Financial Statements and the possibility that the resolution of a group of related non-income tax matters might result in a material liability to Walmart (Note 9); • an adverse decision in, or settlement of, certain litigation possibly resulting in material liability to us and matters relating to an FCPA investigation not having a material adverse effect on our business (Note 10); in this Annual Report regarding: • under “Our framework for growth,” our strategic plan, Walmart always being aggressive on price and equipping customers with information and technology to facilitate great customer service; • in our Chief Executive Officer’s letter, driving sales growth by executing well in stores and e-commerce, our objective of running great stores, clubs and e-commerce to grow our business, investment in increased wages and other initiatives for our U.S. associates, our fresh food offering and e-commerce innovations being future growth drivers and generating increased shareholder value when we operate and grow efficiently and our commitment to compliance, ethics and doing business the right way; • under “Delivering an improved shopping experience.,” in connection with our Walmart U.S. segment, certain wage increases for U.S. associates, continuing to strengthen fresh departments, certain factors ensuring a superior fresh offering to Walmart U.S.’s customers, addition of items sold on walmart.com, continuing to work with supplier partners to ensure everyday low cost and ensuring everyday low cost allowing investment in and strengthening of the segment’s everyday low cost pricing strategy and offering value to customers, the ranges of the number of units and amount of retail square feet to be added by Walmart U.S. in fiscal 2016, and transparent pricing for customers occurring through new tools and capabilities; • under “Driving increased profitability through balanced growth.,” in connection with our Walmart International segment, the segment strategically optimizing its global positioning across key geographies and formats to maximize growth potential and its objective of strengthening customer trust with a focus on everyday low price, high quality fresh food and excellent customer service; 34 2015 Annual Report  nder “Creating a more rewarding member experience.,” in connec•u tion with our Sam’s Club segment, Sam’s Club’s goal of having a suite of business member services making membership in Sam’s Club such members’ most valuable business card and the range for the number of new and relocated clubs to be opened, and the number of clubs to be remodeled, in fiscal 2016; and • under “A solid FY 15 performance; investing for a stronger future,” currency exchange rates possibly continuing to be a headwind to operating results in fiscal 2016, the range of net retail square footage we will add in fiscal 2016, Walmart enabling customers to shop anytime and anywhere, incremental e-commerce investment in fiscal 2016 and Walmart continuing to seek the right balance between sales growth and profitability as we grow our e-commerce business and the investment in wages and other initiatives for U.S. associates leading to higher sales and returns. The forward-looking statements described above are identified by the use in such statements of one or more of the words or phrases “aim,” “anticipate,” “could be,” “could reduce,” “estimated,” “expansion,” “expect,” “goal,” “grow,” “intend,” “investment,” “is expected,” “may cause,” “may continue,” “may fluctuate,” “may impact,” “may not be,” “may result,” “objective,” “plan,” “priority is to,” “projected,” “should continue,” “more to come,” “we’ll,” “we’ll accomplish,” “we’ll also equip,” “we’ll always be,” “we’ll continue,” “we’ll drive,” “we’ll generate,” “we’ll reinvent,” “will add,” “will allow,” “will be,” “will be met,” “will be paid,” “will continue,” “will depend,” “will ensure,” “will have,” “will impact,” “will include,” “will increase,” “will open,” “would be,” and “would increase,” variations of such words and phrases and other similar words or phrases. The forward-looking statements included in this Annual Report and that we make elsewhere are subject to certain risks, factors and uncertainties that could materially affect our actual results and the realization of our objectives and plans. These risks, factors and uncertainties include, but are not limited to: Risks, Factors and Uncertainties Relating to the Markets in which We Operate • economic, geo-political, financial markets, capital markets and business conditions, changes, trends and events globally and in one or more of the markets in which we operate; • unemployment and underemployment levels globally and in one or more of the markets in which we operate; • monetary policies of the U.S. government, the Board of Governors of the Federal Reserve System, other governments or central banks, economic or sovereign debt crises and disruptions in the financial markets; • supply of and demand for particular commodities and commodity prices, including the prices of crude oil, natural gas, refined petroleum products and electricity; • inflation and deflation; • currency exchange rate fluctuations and volatility; • fluctuations in market rates of interest; • market labor costs in the U.S.; • market selling prices of gasoline and diesel fuel; • c ompetitive initiatives of other retailers, other competitive pressures and new competitors entering a market; • a doption of or changes in tax, labor and other laws and regulations and interpretations thereof that affect our business, including changes in corporate and personal tax rates and the imposition of new taxes and surcharges; Management’s Discussion and Analysis of Financial Condition and Results of Operations Risks, Factors and Uncertainties Relating to Consumers Generally and Our Customers • c onsumer confidence, disposable income, debt levels, credit availability, spending levels, shopping patterns and demand for certain merchandise in one or more of the markets in which we operate; • consumer acceptance of our stores and clubs, e-commerce websites and mobile commerce applications, our digital and physical retail initiatives, programs and merchandise offerings, including our fresh food offerings, globally in one or more of the markets in which we operate; Risks, Factors and Uncertainties Specifically Relating to Our Operations in Any or All of the Markets in which We Operate • our historical financial performance, including our U.S. and Walmart International cash flows, for one or more periods or historical financial position as of one or more dates completed or occurring after the date the pertinent forward-looking statement is made; • the cost of the goods we sell; • t he availability, at an acceptable cost, of adequate supplies of consistent, high-quality produce from suppliers in the local markets in which we operate; • the availability of persons with the skills and abilities necessary to meet our needs for managing and staffing our operations, including to manage and staff new and relocated units; • t he mix of merchandise we sell globally or in one or more of the markets in which we operate; • the size of and turnover in our hourly workforce; • our selling prices of gasoline and diesel fuel; • c yberattacks on our information systems, including any of those used to operate our e-commerce websites and our information security costs and any costs and liabilities we would incur as a result of a successful cyberattack; • disruption in the availability of our e-commerce websites and mobile commerce applications; • t he availability of attractive opportunities for investment in retail operations in the markets in which we currently operate and in new markets and for investment in digital retail acquisitions and initiatives; •d  isruption in our supply chain, including of the availability and transport of goods from domestic and foreign suppliers to our stores and other facilities; • the mix of our earnings from our U.S. and operations in one or more of the markets in which we operate; • the amounts of our net sales and expenses for a period denominated in particular currencies other than the U.S. dollar; • changes in our assessment of certain tax contingencies, increases or decreases in valuation allowances, outcome of administrative audits, the impact of discrete items on our effective tax rate and the resolution of other tax matters; • developments in and the outcome of legal and regulatory proceedings to which we are a party or are subject and the expenses associated therewith; • the requirements for expenditures in connection with the FCPA-related matters; • unanticipated changes in operating philosophy, plans and objectives; • a vailability and the cost of acceptable building sites for new and relocated stores, clubs and other facilities; • r eal estate, zoning, land use and other laws, ordinances, legal restrictions and initiatives that may prevent Walmart from building, or that impose limitations on Walmart’s ability to build new units in certain locations or relocate or expand existing units; • availability of necessary utilities for new or expanded units; and • availability of skilled labor and labor, material and other construction costs in areas in which new or relocated units are proposed to be constructed or existing units are proposed to be expanded or remodeled. Other Risk Factors; No Duty to Update We discuss certain of these factors more fully, as well as certain other risk factors that may affect the results and other matters discussed in the forward-looking statements identified above, in our filings with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K under the heading “Item 1A. Risk Factors.” We filed our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, with the SEC on April 1, 2015. The forward-looking statements described above are made based on knowledge of our business and the environment in which we operate and assumptions that we believe to be reasonable at the time such forward-looking statements are made. However, as a consequence of the risks, factors and uncertainties we discuss above, and in the other reports mentioned above, other risks not known to us at this time, changes in facts, assumptions not being realized or other circumstances, our actual results may differ materially from those results discussed in or implied or contemplated by such forwardlooking statements. We cannot assure the reader that the results or developments expected or anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. You are urged to consider all of these risks, factors and uncertainties carefully in evaluating the forward-looking statements and not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Annual Report speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances, except as may be required by applicable law. 2015 Annual Report 35 Consolidated Statements of Income Fiscal Years Ended January 31, (Amounts in millions, except per share data) 2015 2014 2013 Revenues: Net sales Membership and other income Total revenues Costs and expenses: Cost of sales Operating, selling, general and administrative expenses $482,229 $473,076 $465,604 3,422 3,218 3,047 485,651 476,294 468,651 365,086 358,069 352,297 93,418 91,353 88,629 Operating income 27,147 26,872 27,725 Interest: Debt 2,161 2,072 1,977 Capital leases 300 263 272 Interest income (113) (119) (186) Interest, net 2,348 2,216 2,063 Income from continuing operations before income taxes 24,799 24,656 25,662 Provision for income taxes: Current 8,504 8,619 7,976 Deferred (519) (514) (18) Total provision for income taxes 7,985 8,105 7,958 Income from continuing operations 16,814 16,551 17,704 Income from discontinued operations, net of income taxes 285 144 52 17,099 16,695 17,756 Consolidated net income Less consolidated net income attributable to noncontrolling interest (736) (673) (757) $ 16,363 Consolidated net income attributable to Walmart Basic net income per common share: Basic income per common share from continuing operations attributable to Walmart Basic income per common share from discontinued operations attributable to Walmart $   4.90 $   5.04 $   4.99 $   4.85 $   5.01 0.06 0.03 0.01 Diluted net income per common share attributable to Walmart $   5.05 Weighted-average common shares outstanding: Basic Diluted $ 16,999 $   5.01 $   4.87 $   5.03 0.06 0.03 0.01 Basic net income per common share attributable to Walmart $   5.07 Diluted net income per common share: Diluted income per common share from continuing operations attributable to Walmart Diluted income per common share from discontinued operations attributable to Walmart $ 16,022 $   4.88 $   5.02 3,230 3,269 3,374 3,243 3,283 3,389 Dividends declared per common share $   1.92 $   1.88 $   1.59 See accompanying notes. Consolidated Statements of Comprehensive Income Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Consolidated net income $17,099 $16,695 $17,756 Less consolidated net income attributable to nonredeemable noncontrolling interest (736) (606) (684) Less consolidated net income attributable to redeemable noncontrolling interest — (67) (73) Consolidated net income attributable to Walmart 16,363 16,022 16,999 Other comprehensive income (loss), net of income taxes Currency translation and other Derivative instruments Minimum pension liability (4,179) (3,146) 1,042 (470) 207 136 (69) 153 (166) Other comprehensive income (loss), net of income taxes (4,718) (2,786) 1,012 Less other comprehensive income (loss) attributable to nonredeemable noncontrolling interest 546 311 (138) Less other comprehensive income (loss) attributable to redeemable noncontrolling interest — 66 (51) Other comprehensive income (loss) attributable to Walmart (4,172) (2,409) 823 Comprehensive income, net of income taxes 12,381 13,909 18,768 Less comprehensive income (loss) attributable to nonredeemable noncontrolling interest (190) (295) (822) Less comprehensive income (loss) attributable to redeemable noncontrolling interest — (1) (124) Comprehensive income attributable to Walmart See accompanying notes. 36 2015 Annual Report $12,191 $13,613 $17,822 Consolidated Balance Sheets As of January 31, (Amounts in millions) 2015 2014 ASSETS Current assets: Cash and cash equivalents Receivables, net Inventories Prepaid expenses and other Current assets of discontinued operations Total current assets Property and equipment: Property and equipment Less accumulated depreciation Property and equipment, net Property under capital leases: Property under capital leases Less accumulated amortization Property under capital leases, net Goodwill Other assets and deferred charges $  9,135 $  7,281 6,778 6,677 45,141 44,858 2,224 1,909 — 460 63,278 61,185 177,395 173,089 (63,115) (57,725) 114,280 115,364 5,239 5,589 (2,864) (3,046) 2,375 2,543 18,102 19,510 5,671 6,149 Total assets $203,706 $204,751 LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND EQUITY Current liabilities: Short-term borrowings Accounts payable Accrued liabilities Accrued income taxes Long-term debt due within one year Obligations under capital leases due within one year Current liabilities of discontinued operations $  1,592 $  7,670 38,410 37,415 19,152 18,793 1,021 966 4,810 4,103 287 309 — 89 Total current liabilities 65,272 69,345 Long-term debt Long-term obligations under capital leases Deferred income taxes and other 41,086 41,771 2,606 2,788 8,805 8,017 Redeemable noncontrolling interest — 1,491 Commitments and contingencies Equity: Common stock Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) 323 323 2,462 2,362 85,777 76,566 (7,168) (2,996) Total Walmart shareholders’ equity Nonredeemable noncontrolling interest 81,394 76,255 4,543 5,084 Total equity 85,937 81,339 Total liabilities, redeemable noncontrolling interest, and equity $203,706 $204,751 See accompanying notes. 2015 Annual Report 37 Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest Capital  in Common Stock Excess of Retained (Amounts in millions) Shares Amount Par Value Earnings Balances as of February 1, 2012 Consolidated net income Other comprehensive income, net of income taxes Cash dividends declared ($1.59 per share) Purchase of Company stock Nonredeemable noncontrolling interest of acquired entity Other 3,418 — $342 $  3,692 — — Accumulated Total Other Walmart Nonredeemable Comprehensive Shareholders’ Noncontrolling Total Income (Loss) Equity Interest Equity Redeemable Noncontrolling Interest $68,691 16,999 $(1,410) — $71,315 16,999 $4,446 684 $75,761 17,683 $  404 73 — — — — 823 823 138 961 51 — (115) — (11) — (357) (5,361) (7,341) — — (5,361) (7,709) — — (5,361) (7,709) — — — 11 — 1 — 285 — (10) — — — 276 469 (342) 469 (66) — (9) 76,343 16,022 5,395 595 81,738 16,617 519 78 Balances as of January 31, 2013 3,314 — Consolidated net income Other comprehensive loss, net of income taxes — Cash dividends declared ($1.88 per share) — Purchase of Company stock (87) Redemption value adjustment of redeemable noncontrolling interest — Other 6 332 3,620 72,978 — — 16,022 (587) — — — — (2,409) (2,409) (311) (2,720) (66) — (9) — (294) (6,139) (6,254) — — (6,139) (6,557) — — (6,139) (6,557) — — — — (1,019) 55 — (41) — — (1,019) 14 — (595) (1,019) (581) 1,019 (59) Balances as of January 31, 2014 3,233 323 2,362 76,566 (2,996) 76,255 5,084 81,339 1,491 — — — 16,363 — 16,363 736 17,099 — Consolidated net income Other comprehensive income, net of income taxes — — — — (4,172) (4,172) (546) (4,718) — Cash dividends declared ($1.92 per share) — — — (6,185) — (6,185) — (6,185) — Purchase of Company stock (13) (1) (29) (950) — (980) — (980) — Purchase of redeemable noncontrolling interest — — — — — — — — (1,491) Other 8 1 129 (17) — 113 (731) (618) — Balances as of January 31, 2015 See accompanying notes. 38 2015 Annual Report 3,228 $323 $  2,462 $85,777 $(7,168) $81,394 $4,543 $85,937 $   — Consolidated Statements of Cash Flows Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Cash flows from operating activities: Consolidated net income Income from discontinued operations, net of income taxes $ 17,099 $ 16,695 $ 17,756 (285) (144) (52) Income from continuing operations Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Other operating activities Changes in certain assets and liabilities, net of effects of acquisitions: Receivables, net Inventories Accounts payable Accrued liabilities Accrued income taxes 16,814 16,551 17,704 Net cash provided by operating activities 28,564 23,257 25,591 Cash flows from investing activities: Payments for property and equipment Proceeds from the disposal of property and equipment Proceeds from the disposal of certain operations Other investing activities (12,174) (13,115) (12,898) 570 727 532 671 — — (192) (138) (271) Net cash used in investing activities (11,125) (12,526) (12,637) Cash flows from financing activities: Net change in short-term borrowings Proceeds from issuance of long-term debt Payments of long-term debt Dividends paid Purchase of Company stock Dividends paid to noncontrolling interest Purchase of noncontrolling interest Other financing activities Net cash used in financing activities 9,173 8,870 8,478 (503) (279) (133) 785 938 602 (569) (566) (614) (1,229) (1,667) (2,759) 2,678 531 1,061 1,249 103 271 166 (1,224) 981 (6,288) 911 2,754 5,174 7,072 211 (3,904) (4,968) (1,478) (6,185) (6,139) (5,361) (1,015) (6,683) (7,600) (600) (426) (282) (1,844) (296) (132) (409) (260) (58) (15,071) (10,789) (11,946) Effect of exchange rates on cash and cash equivalents (514) (442) 223 Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 1,854 (500) 1,231 7,281 7,781 6,550 Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Income taxes paid Interest paid $  9,135 $  7,281 $  7,781 8,169 8,641 7,304 2,433 2,362 2,262 See accompanying notes. 2015 Annual Report 39 Notes to Consolidated Financial Statements 1 Summary of Significant Accounting Policies General Wal-Mart Stores, Inc. (“Walmart” or the “Company”) helps people around the world save money and live better – anytime and anywhere – in retail stores or through the Company’s e-commerce and mobile capabilities. Through innovation, the Company is striving to create a customer-centric experience that seamlessly integrates digital and physical shopping. Each week, the Company serves nearly 260 million customers who visit its over 11,000 stores under 72 banners in 27 countries and e-commerce websites in 11 countries. The Company’s strategy is to lead on price, invest to differentiate on access, be competitive on assortment and deliver a great experience. The Company’s operations comprise three reportable segments: Walmart U.S., Walmart International and Sam’s Club. Principles of Consolidation The Consolidated Financial Statements include the accounts of Walmart and its subsidiaries as of and for the fiscal years ended January 31, 2015 (“fiscal 2015”), January 31, 2014 (“fiscal 2014”) and January 31, 2013 (“fiscal 2013”). All material intercompany accounts and transactions have been eliminated in consolidation. Investments in unconsolidated affiliates, which are 50% or less owned and do not otherwise meet consolidation requirements, are accounted for primarily using the equity method. These investments are immaterial to the Company’s Consolidated Financial Statements. The Company’s Consolidated Financial Statements are based on a fiscal year ending on January 31, for the United States (“U.S.”) and Canadian operations. The Company consolidates all other operations generally using a one-month lag and based on a calendar year. There were no ­significant intervening events during January 2015 that materially affected the Consolidated Financial Statements. Use of Estimates The Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles. Those principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Management’s estimates and assumptions also affect the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of ­revenues and expenses during the reporting period. Actual results may differ from those estimates. Cash and Cash Equivalents The Company considers investments with a maturity when purchased of three months or less to be cash equivalents. All credit card, debit card and electronic benefits transfer transactions that process in less than seven days are classified as cash and cash equivalents. The amounts due from banks for these transactions classified as cash and cash equivalents totaled $2.9 billion and $1.6 billion at January 31, 2015 and 2014, respectively. In addition, cash and cash equivalents included restricted cash of $345 million and $654 million at January 31, 2015 and 2014, respectively, which was primarily related to cash collateral holdings from various counterparties, as required by certain derivative and trust agreements. 40 2015 Annual Report The Company’s cash balances are held in various locations around the world. Of the Company’s $9.1 billion and $7.3 billion of cash and cash equivalents at January 31, 2015 and 2014, respectively, $6.3 billion and $5.8 billion, respectively, were held outside of the U.S. and were generally utilized to support liquidity needs in the Company’s non-U.S. operations. The Company uses intercompany financing arrangements in an effort to ensure cash can be made available in the country in which it is needed with the minimum cost possible. Management does not believe it will be necessary to repatriate cash and cash equivalents held outside of the U.S. and anticipates the Company’s domestic liquidity needs will be met through cash flows provided by operating activities, supplemented with long-term debt and short-term borrowings. Accordingly, the Company intends, with only certain exceptions, to continue to indefinitely reinvest the Company’s cash and cash equivalents held outside of the U.S. in our ­foreign operations. When the income earned, either from operations or through intercompany financing arrangements, and indefinitely ­reinvested outside of the U.S. is taxed at local country tax rates, which are generally lower than the U.S. statutory rate, the Company realizes an effective tax rate benefit. If the Company’s intentions with respect to reinvestment were to change, most of the amounts held within the Company’s foreign operations could be repatriated to the U.S., although any repatriation under current U.S. tax laws would be subject to U.S. ­federal income taxes, less applicable foreign tax credits. As of January 31, 2015 and 2014, cash and cash equivalents of approximately $1.7 billion and $1.9 billion, respectively, may not be freely transferable to the U.S. due to local laws or other restrictions. The Company does not expect local laws, other limitations or potential taxes on anticipated future ­repatriations of cash amounts held outside of the U.S. to have a material effect on the Company’s overall liquidity, financial condition or results of operations. Receivables Receivables are stated at their carrying values, net of a reserve for ­doubtful accounts. Receivables consist primarily of amounts due from: • insurance companies resulting from pharmacy sales; • banks for customer credit and debit cards and electronic bank transfers that take in excess of seven days to process; • consumer financing programs in certain international operations; • suppliers for marketing or incentive programs; and • real estate transactions. The Walmart International segment offers a limited number of consumer credit products, primarily through its financial institutions in select ­markets. The receivable balance from consumer credit products was $1.2 billion, net of a reserve for doubtful accounts of $114 million at January 31, 2015, compared to a receivable balance of $1.3 billion, net of a reserve for doubtful accounts of $119 million at January 31, 2014. These balances are included in receivables, net, in the Company’s Consolidated Balance Sheets. Notes to Consolidated Financial Statements Inventories The Company values inventories at the lower of cost or market as ­determined primarily by the retail inventory method of accounting, using the last-in, first-out (“LIFO”) method for substantially all of the Walmart U.S. segment’s inventories. The inventory at the Walmart International segment is valued primarily by the retail inventory method of accounting, using the first-in, first-out (“FIFO”) method. The retail inventory method of accounting results in inventory being valued at the lower of cost or market since permanent markdowns are immediately recorded as a reduction of the retail value of inventory. The inventory at the Sam’s Club segment is valued based on the weighted-average cost using the LIFO method. At January 31, 2015 and January 31, 2014, the Company’s inventories valued at LIFO approximated those inventories as if they were valued at FIFO. Property and Equipment Property and equipment are stated at cost. Gains or losses on disposition are recognized as earned or incurred. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred. The following table summarizes the Company’s property and equipment balances and includes the estimated useful lives that are generally used to depreciate the assets on a straight-line basis: Estimated (Amounts in millions) Useful Lives Land Buildings and improvements Fixtures and equipment Transportation equipment Construction in progress Fiscal Years Ended January 31, 2015 2014 N/A $ 26,261 $ 26,184 3-40 years 97,496 95,488 2-30 years 45,044 42,971 3-15 years 2,807 2,785 N/A 5,787 5,661 Property and equipment $177,395 $173,089 Accumulated depreciation (63,115) (57,725) Property and equipment, net $114,280 $115,364 Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the remaining expected lease term. Depreciation expense for property and equipment, including amortization of property under capital leases, for fiscal 2015, 2014 and 2013 was $9.1 billion, $8.8 billion and $8.4 billion, respectively. Interest costs capitalized on construction projects were $59 million, $78 million and $74 million in fiscal 2015, 2014 and 2013, respectively. Long-Lived Assets Long-lived assets are stated at cost. Management reviews long-lived assets for indicators of impairment whenever events or changes in ­circumstances indicate that the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows, which is at the individual store or club level or, in certain circumstances, a market group of stores. Undiscounted cash flows expected to be ­generated by the related assets are estimated over the assets’ useful lives based on updated projections. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related asset or asset group as determined by an appropriate market appraisal or other valuation technique. Impairment charges of long-lived assets for fiscal 2015, 2014 and 2013 were not significant. Goodwill and Other Acquired Intangible Assets Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is allocated to the appropriate reporting unit when acquired. Other acquired intangible assets are stated at the fair value acquired as determined by a valuation technique commensurate with the intended use of the related asset. Goodwill and indefinite-lived intangible assets are not amortized; rather, they are evaluated for impairment annually and whenever events or changes in circumstances indicate that the value of the asset may be impaired. Definite-lived intangible assets are considered long-lived assets and are amortized on a straight-line basis over the periods that expected economic benefits will be provided. Goodwill is evaluated for impairment using either a qualitative or ­quantitative approach for each of the Company’s reporting units. Generally, a qualitative assessment is first performed to determine whether a quantitative goodwill impairment test is necessary. If man­ agement determines, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the ­reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative goodwill impairment test would be required. The quantitative test for goodwill impairment is performed by ­determining the fair value of the related reporting units. Fair value is measured based on the discounted cash flow method and relative ­market-based approaches. The Company’s reporting units were evaluated using a quantitative impairment test. Management determined the fair value of each reporting unit is greater than the carrying amount and, accordingly, the Company has not recorded any impairment charges related to goodwill. The following table reflects goodwill activity, by reportable segment, for fiscal 2015 and 2014: Walmart (Amounts in millions) Walmart U.S. International Sam’s Club Total Balances as of February 1, 2013 $443 $19,741 $313 $20,497 Changes in currency translation and other — (1,000) — (1,000) Acquisitions (1) 8 5 — 13 Balances as of January 31, 2014 451 18,746 313 19,510 Changes in currency translation and other — (1,418) — (1,418) Acquisitions (1) 10 — — 10 Balances as of January 31, 2015 $461 $17,328 $313 $18,102 (1) G  oodwill recorded for fiscal 2015 and 2014 acquisitions relates to acquisitions that are not significant, individually or in the aggregate, to the Company’s ­Consolidated Financial Statements. 2015 Annual Report 41 Notes to Consolidated Financial Statements Indefinite-lived intangible assets are included in other assets and deferred charges in the Company’s Consolidated Balance Sheets. These assets are evaluated for impairment based on their fair values using valuation techniques which are updated annually based on the most recent variables and assumptions. There were no impairment charges related to indefinite-lived intangible assets recorded for fiscal 2015, 2014 and 2013. Self Insurance Reserves The Company uses a combination of insurance and self insurance for a number of risks, including, but not limited to, workers’ compensation, general liability, auto liability, product liability and the Company’s obligation for employee-related health care benefits. Liabilities relating to the claims associated with these risks are estimated by considering historical claims experience, frequency, severity, demographic factors and other actuarial assumptions, including incurred but not reported claims. In estimating its liability for such claims, the Company periodically analyzes its historical trends, including loss development, and applies appropriate loss development factors to the incurred costs associated with the claims. To limit exposure to certain risks, the Company maintains ­stop-loss insurance coverage for workers’ compensation of $5 million per occurrence, and in most instances, $15 million per occurrence for general liability. Income Taxes Income taxes are accounted for under the balance sheet method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (“temporary differences”). Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent that a portion is not more likely than not to be realized. Many factors are considered when assessing whether it is more likely than not that the deferred tax assets will be realized, including recent cumulative earnings, expectations of future taxable income, carryforward periods, and other relevant quantitative and qualitative factors. The recoverability of the deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. In determining the provision for income taxes, an annual effective income tax rate is used based on annual income, permanent differences between book and tax income, and statutory income tax rates. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur. The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company records interest and penalties related to unrecognized tax benefits in interest expense and operating, selling, general and administrative expenses, respectively, in the Company’s Consolidated Statements of Income. Refer to Note 9 for additional income tax disclosures. 42 2015 Annual Report Revenue Recognition Sales The Company recognizes sales revenue, net of sales taxes and estimated sales returns, at the time it sells merchandise to the customer. Membership Fee Revenue The Company recognizes membership fee revenue both in the U.S. and internationally over the term of the membership, which is typically 12 months. The following table summarizes membership fee activity for fiscal 2015, 2014 and 2013: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Deferred membership fee revenue, beginning of year $   641 $    575 $    559 Cash received from members 1,410 1,249 1,133 Membership fee revenue recognized (1,292) (1,183) (1,117) Deferred membership fee revenue, end of year $   759 $    641 $    575 Membership fee revenue is included in membership and other income in the Company’s Consolidated Statements of Income. The deferred membership fee is included in accrued liabilities in the Company’s Consolidated Balance Sheets. Shopping Cards Customer purchases of shopping cards are not recognized as revenue until the card is redeemed and the customer purchases merchandise using the shopping card. Shopping cards in the U.S. do not carry an ­expiration date; therefore, customers and members can redeem their shopping cards for merchandise indefinitely. Shopping cards in certain foreign countries where the Company does business may have expiration dates. A certain number of shopping cards, both with and without expiration dates, will not be fully redeemed. Management estimates unredeemed shopping cards and recognizes revenue for these amounts over shopping card historical usage periods based on historical redemption rates. Management periodically reviews and updates its estimates of usage periods and redemption rates. Financial and Other Services The Company recognizes revenue from service transactions at the time the service is performed. Generally, revenue from services is classified as a component of net sales in the Company’s Consolidated Statements of Income. Cost of Sales Cost of sales includes actual product cost, the cost of transportation to the Company’s distribution facilities, stores and clubs from suppliers, the cost of transportation from the Company’s distribution facilities to the stores, clubs and customers and the cost of warehousing for the Sam’s Club segment and import distribution centers. Cost of sales is reduced by supplier payments that are not a reimbursement of specific, ­incremental and identifiable costs. Notes to Consolidated Financial Statements Payments from Suppliers The Company receives consideration from suppliers for various programs, primarily volume incentives, warehouse allowances and reimbursements for specific programs such as markdowns, margin protection, advertising and supplier-specific fixtures. Payments from suppliers are accounted for as a reduction of cost of sales and are recognized in the Company’s Consolidated Statements of Income when the related inventory is sold, except when the payment is a reimbursement of specific, incremental and identifiable costs. Operating, Selling, General and Administrative Expenses Operating, selling, general and administrative expenses include all ­operating costs of the Company, except cost of sales, as described above. As a result, the majority of the cost of warehousing and occupancy for the Walmart U.S. and Walmart International segments’ distribution ­facilities is included in operating, selling, general and administrative expenses. Because the Company does not include most of the cost of its Walmart U.S. and Walmart International segments’ distribution facilities in cost of sales, its gross profit and gross profit as a percentage of net sales may not be comparable to those of other retailers that may include all costs related to their distribution facilities in cost of sales and in the calculation of gross profit. Advertising Costs Advertising costs are expensed as incurred and were $2.4 billion for both fiscal 2015 and fiscal 2014 and $2.3 billion for fiscal 2013. Advertising costs consist primarily of print, television and digital advertisements and are recorded in operating, selling, general and administrative expenses in the Company’s Consolidated Statements of Income. Reimbursements from suppliers that are for specific, incremental and identifiable advertising costs are recognized as a reduction of advertising costs in operating, selling, general and administrative expenses. Leases The Company estimates the expected term of a lease by assuming the exercise of renewal options where an economic penalty exists that would preclude the abandonment of the lease at the end of the initial non-cancelable term and the exercise of such renewal is at the sole discretion of the Company. The expected term is used in the determination of whether a store or club lease is a capital or operating lease and in the calculation of straight-line rent expense. Additionally, the useful life of leasehold improvements is limited by the expected lease term or the economic life of the asset, whichever is shorter. If significant expenditures are made for leasehold improvements late in the expected term of a lease and renewal is reasonably assured, the useful life of the leasehold improvement is limited to the end of the renewal period or economic life of the asset, whichever is shorter. Rent abatements and escalations are considered in the calculation of minimum lease payments in the Company’s capital lease tests and in determining straight-line rent expense for operating leases. Pre-Opening Costs The cost of start-up activities, including organization costs, related to new store openings, store remodels, relocations, expansions and conversions are expensed as incurred and included in operating, selling, general and administrative expenses in the Company’s Consolidated Statements of Income. Pre-opening costs totaled $317 million, $338 million and $316 million for fiscal 2015, 2014 and 2013, respectively. Currency Translation The assets and liabilities of all international subsidiaries are translated from the respective local currency to the U.S. dollar using exchange rates at the balance sheet date. Related translation adjustments are recorded as a component of accumulated other comprehensive income (loss). The income statements of all international subsidiaries are translated from the respective local currencies to the U.S. dollar using average exchange rates for the period covered by the income statements. Reclassifications Certain reclassifications have been made to previous fiscal year amounts and balances to conform to the presentation in the current fiscal year. These reclassifications did not impact consolidated operating income or net income. Additionally, certain segment asset and expense allocations have been reclassified among segments in the current period. See Note 14 for further discussion of the Company’s segments. Recent Accounting Pronouncements In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which provides guidance for the recognition of discontinued operations, changes the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. This ASU applies to prospective transactions beginning on or after December 15, 2014, with early adoption permitted. The Company adopted this ASU for the fiscal year ended January 31, 2015 and adoption did not materially impact the Company’s consolidated net income, financial position or cash flows. In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on February 1, 2017. Companies may use either a full retrospective or a modified ­retrospective approach to adopt this ASU. Management is currently ­evaluating this standard, including which transition approach to use, and does not expect this ASU to materially impact the Company’s ­consolidated net income, financial position or cash flows. 2015 Annual Report 43 Notes to Consolidated Financial Statements 2 Net Income Per Common Share Basic income per common share from continuing operations ­attributable to Walmart is based on the weighted-average common shares outstanding during the relevant period. Diluted income per ­common share from continuing operations attributable to Walmart is based on the weighted-average common shares outstanding during the relevant period adjusted for the dilutive effect of share-based awards. The Company did not have significant share-based awards outstanding that were antidilutive and not included in the calculation of diluted income per common share from continuing operations attributable to Walmart for fiscal 2015, 2014 and 2013. The following table provides a reconciliation of the numerators and denominators used to determine basic and diluted income per common share from continuing operations attributable to Walmart: Fiscal Years Ended January 31, (Amounts in millions, except per share data) Numerator Income from continuing operations Less income from continuing operations attributable to noncontrolling interest Income from continuing operations attributable to Walmart Denominator Weighted-average common shares outstanding, basic Dilutive impact of stock options and other share-based awards Weighted-average common shares outstanding, diluted Income per common share from continuing operations attributable to Walmart Basic Diluted 2015 2014 2013 $16,814 $16,551 $17,704 (632) (633) (741) $16,182 $15,918 $16,963 3,230 3,269 3,374 13 14 15 3,243 3,283 3,389 $  5.01 $  4.87 $  5.03 4.99 4.85 5.01 3 Shareholders’ Equity Share-Based Compensation The Company has awarded share-based compensation to associates and nonemployee directors of the Company. The compensation expense recognized for all plans was $462 million, $388 million and $378 million for fiscal 2015, 2014 and 2013, respectively. Share-based compensation expense is included in operating, selling, general and administrative expenses in the Company’s Consolidated Statements of Income. The 44 2015 Annual Report total income tax benefit recognized for share-based compensation was $173 million, $145 million and $142 million for fiscal 2015, 2014 and 2013, respectively. The following table summarizes the Company’s share-based compensation expense by award type: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Restricted stock and performance share units $157 $141 $152 Restricted stock units 277 224 195 Other 28 23 31 Share-based compensation expense $462 $388 $378 The Company’s shareholder-approved Stock Incentive Plan of 2010 (the “Plan”) became effective June 4, 2010 and amended and restated the Company’s Stock Incentive Plan of 2005. The Plan was established to grant stock options, restricted (non-vested) stock, performance share units and other equity compensation awards for which 210 million shares of common stock issued or to be issued under the Plan have been ­registered under the Securities Act of 1933, as amended. The Company believes that such awards serve to align the interests of its associates with those of its shareholders. The Plan’s award types are summarized as follows: • Restricted Stock and Performance Share Units. Restricted stock awards are for shares that vest based on the passage of time and include restrictions related to employment. Performance share units vest based on the passage of time and achievement of performance criteria and may range from 0% to 150% of the original award amount. Vesting periods for these awards are generally between one and three years. Restricted stock and performance share units may be settled or deferred in stock and are accounted for as equity in the Company’s Consolidated Balance Sheets. The fair value of restricted stock awards is determined on the date of grant and is expensed ratably over the vesting period. The fair value of performance share units is determined on the date of grant using the Company’s stock price discounted for the expected dividend yield through the vesting period and is recognized over the vesting period. • Restricted Stock Units. Restricted stock units provide rights to Company stock after a specified service period; 50% vest three years from the grant date and the remaining 50% vest five years from the grant date. The fair value of each restricted stock unit is determined on the date of grant using the stock price discounted for the expected dividend yield through the vesting period and is recognized ratably over the vesting period. The expected dividend yield is based on the anticipated dividends over the vesting period. The weighted-average discount for the dividend yield used to determine the fair value of restricted stock units granted in fiscal 2015, 2014 and 2013 was 9.5%, 10.3% and 12.2%, respectively. In addition to the Plan, the Company’s subsidiary in the United Kingdom has stock option plans for certain colleagues which generally vest over three years. The stock option share-based compensation expense is included in the other line in the table above. Notes to Consolidated Financial Statements The following table shows the activity for restricted stock and performance share units and restricted stock units during fiscal 2015: Restricted Stock and Performance Share Units (1) Restricted Stock Units Weighted-Average Weighted-Average Grant-Date Grant-Date Fair Value Fair Value (Shares in thousands) Shares Per Share Shares Per Share Outstanding at February 1, 2014 9,951 $63.26 17,785 $55.87 Granted 3,328 75.30 5,671 69.39 Vested/exercised (2,799) 55.64 (4,554) 47.81 Forfeited or expired (1,757) 62.35 (1,334) 61.63 Outstanding at January 31, 2015 8,723 $68.89 17,568 $61.00 (1) Assumes payout rate at 100% for Performance Share Units. The following table includes additional information related to restricted stock and performance share units and restricted stock units: (Amounts in millions) Fair value of restricted stock and performance share units vested Fair value of restricted stock units vested Unrecognized compensation cost for restricted stock and performance share units Unrecognized compensation cost for restricted stock units Weighted average remaining period to expense for restricted stock and performance share units (years) Weighted average remaining period to expense for restricted stock units (years) Fiscal Years Ended January 31, 2015 2014 2013 $156 $116 $155 218 189 168 154 200 233 570 497 437    1.3   2.0    2.0    1.7    2.1    1.7 Share Repurchase Program From time to time, the Company repurchases shares of its common stock under share repurchase programs authorized by the Board of Directors. On June 6, 2013, the Company’s Board of Directors replaced the previous $15.0 billion share repurchase program, which had approximately $712 million of remaining authorization for share repurchases as of that date, with a new $15.0 billion share repurchase program, which was announced on June 7, 2013. As was the case with the replaced share repurchase program, the current share repurchase program has no ­expiration date or other restrictions limiting the period over which the Company can make share repurchases. At January 31, 2015, authorization for $10.3 billion of share repurchases remained under the current share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status. The Company considers several factors in determining when to execute share repurchases, including, among other things, current cash needs, capacity for leverage, cost of borrowings, its results of operations and the market price of its common stock. The following table provides, on a settlement date basis, the number of shares repurchased, average price paid per share and total cash paid for share repurchases for fiscal 2015, 2014 and 2013: Fiscal Years Ended January 31, (Amounts in millions, except per share data) 2015 2014 2013 Total number of shares repurchased Average price paid per share Total cash paid for share repurchases 13.4 89.1 113.2 $75.82 $74.99 $67.15 $1,015 $6,683 $7,600 2015 Annual Report 45 Notes to Consolidated Financial Statements 4 Accumulated Other Comprehensive Income (Loss) The following table provides the fiscal 2015, 2014 and 2013 changes in the composition of total accumulated other comprehensive income (loss), including the amounts reclassified out of accumulated other comprehensive income (loss) by component for fiscal 2015 and 2014: (Amounts in millions and net of income taxes) Currency Translation Derivative Minimum and Other Instruments Pension Liability Balances as of January 31, 2012 Other comprehensive income (loss) before reclassifications $ (806) 853 $    (7) 136 $(597) (166) Total $(1,410) 823 Balances as of January 31, 2013 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) 47 129 (763) (587) (2,769) 194 149 (2,426) — 13 4 17 Balances as of January 31, 2014 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) (2,722) (3,633) — 336 (496) 26 (610) (58) (11) (2,996) (4,187) 15 $(6,355) $(134) $(679) $(7,168) Balances as of January 31, 2015 Amounts reclassified from accumulated other comprehensive income (loss) for derivative instruments are recorded in interest, net, in the Company’s Consolidated Statements of Income, and the amounts for the minimum pension liability are recorded in operating, selling, general and administrative expenses in the Company’s Consolidated Statements of Income. The Company’s unrealized net gains and losses on net investment hedges, included in the currency translation and other category of accumulated other comprehensive income (loss), were not significant as of January 31, 2015 and January 31, 2014. 5 Accrued Liabilities The Company’s accrued liabilities consist of the following: As of January 31, 2015 2014 (Amounts in millions) Accrued wages and benefits (1) Self-insurance (2) Accrued non-income taxes (3) Other (4) $ 4,954 $ 4,652 3,306 3,477 2,592 2,554 8,300 8,110 Total accrued liabilities $19,152 $18,793 (1) A  ccrued wages and benefits include accrued wages, salaries, vacation, bonuses and other incentive plans. (2) S elf-insurance consists of all insurance-related liabilities, such as workers’ compensation, general liability, vehicle liability, property liability and employee-related health care benefits. (3) Accrued non-income taxes include accrued payroll, value added, sales and miscellaneous other taxes. (4) Other accrued liabilities consist of various items such as maintenance, utilities, advertising and interest. 46 2015 Annual Report Notes to Consolidated Financial Statements 6 Short-term Borrowings and Long-term Debt Short-term borrowings consist of commercial paper and lines of credit. Short-term borrowings outstanding at January 31, 2015 and 2014 were $1.6 billion and $7.7 billion, respectively. The following table includes additional information related to the Company’s short-term borrowings for fiscal 2015, 2014 and 2013: Fiscal Years Ended January 31, 2015 2014 2013 (Amounts in millions) $11,581 $13,318 $8,740 7,009 8,971 6,007 0.5% 0.1% 0.1% Maximum amount outstanding at any month-end Average daily short-term borrowings Weighted-average interest rate The Company has various committed lines of credit, committed with 23 financial institutions, totaling $15.0 billion as of January 31, 2015 and with 24 financial institutions, totaling $15.4 billion as of January 31, 2014. The committed lines of credit are summarized in the following table: Fiscal Years Ended January 31, 2015 2014 (Amounts in millions) Available Drawn Undrawn Available Drawn Undrawn Five-year credit facility 364-day revolving credit facility (2) $ 6,000 $  — $ 6,000 $ 6,000 $  — $ 6,000 9,000 — 9,000 9,400 — 9,400 Total $15,000 (1) $  — $15,000 $15,400 $  — $15,400 (1) I n June 2014, the Company renewed and extended its existing five-year credit facility, which is used to support its commercial paper program. (2) In June 2014, the Company renewed and extended its existing 364-day revolving credit facility, which is used to support its commercial paper program. The committed lines of credit mature at various times between June 2015 and June 2019, carry interest rates generally ranging between LIBOR plus 10 basis points and LIBOR plus 75 basis points, and incur commitment fees ranging between 1.5 and 4.0 basis points. In conjunction with the lines of credit listed in the table above, the Company has agreed to observe certain covenants, the most restrictive of which relates to the maximum amount of secured debt. Apart from the committed lines of credit, the Company has trade and stand-by letters of credit totaling $4.6 billion and $4.7 billion at January 31, 2015 and 2014, respectively. These letters of credit are utilized in normal business activities. 2015 Annual Report 47 Notes to Consolidated Financial Statements The Company’s long-term debt, which includes the fair value instruments further discussed in Note 8, consists of the following: January 31, 2015 (Amounts in millions) Maturity Dates By Fiscal Year Amount Unsecured debt Fixed Variable 2016-2045 2019 January 31, 2014 Average Average Rate (1) Amount Rate (1) $36,000 4.3% $35,500 4.3% 500 5.4% 500 5.4% Total U.S. dollar denominated 36,500 36,000 Fixed 2023-2030 2,821 3.3% 1,356 4.9% Variable — — Total Euro denominated 2,821 1,356 Fixed 2031-2039 5,271 5.3% 5,770 5.3% Variable — — Total Sterling denominated 5,271 5,770 Fixed 2016-2021 596 1.0% 1,490 1.3% Variable 2016 255 0.6% 457 0.7% Total Yen denominated 851 1,947 Total unsecured debt 45,443 45,073 Total other debt (in USD) (2) 453 801 45,896 45,874 Total debt Less amounts due within one year (4,810) (4,103) Long-term debt $41,086 $41,771 (1) T he average rate represents the weighted-average stated rate for each corresponding debt category, based on year-end balances and year-end interest rates. Interest costs are also impacted by certain derivative financial instruments described in Note 8. (2) A  portion of other debt at January 31, 2015 and 2014 includes secured debt in the amount of $139 million and $572 million, respectively, which was collateralized by property that had an aggregate carrying amount of approximately $19 million and $471 million, respectively. At January 31, 2015 and 2014, the Company had $500 million in debt with embedded put options. The issuance of money market puttable reset ­securities in the amount of $500 million is structured to be remarketed in connection with the annual reset of the interest rate. If, for any reason, the remarketing of the notes does not occur at the time of any interest rate reset, the holders of the notes must sell, and the Company must repurchase, the notes at par. Accordingly, this issuance has been classified as long-term debt due within one year in the Company’s Consolidated Balance Sheets. Annual maturities of long-term debt during the next five years and thereafter are as follows: 48 (Amounts in millions) Fiscal Year Annual Maturities 2016 2017 2018 2019 2020 Thereafter $  4,810 2,312 1,523 3,518 514 33,219 Total $45,896 2015 Annual Report Notes to Consolidated Financial Statements Debt Issuances Information on significant long-term debt issued during fiscal 2015 is as follows: (Amounts in millions) Issue Date Principal Amount Maturity Date Fixed vs. Floating Interest Rate April 8, 2014 April 8, 2014 April 22, 2014 April 22, 2014 April 22, 2014 October 22, 2014 850 Euro 650 Euro 500 USD 1,000 USD 1,000 USD 500 USD April 8, 2022 April 8, 2026 April 21, 2017 April 22, 2024 April 22, 2044 April 22, 2024 Fixed Fixed Fixed Fixed Fixed Fixed 1.900% 2.550% 1.000% 3.300% 4.300% 3.300% Proceeds $  1,161 885 499 992 985 508 Total $5,030 Information on significant long-term debt issued during fiscal 2014 is as follows: (Amounts in millions) Issue Date Principal Amount Maturity Date Fixed vs. Floating Interest Rate April 11, 2013 April 11, 2013 April 11, 2013 April 11, 2013 October 2, 2013 October 2, 2013 1,000 USD 1,250 USD 1,750 USD 1,000 USD 1,000 USD 750 USD April 11, 2016 April 11, 2018 April 11, 2023 April 11, 2043 December 15, 2018 October 2, 2043 Fixed Fixed Fixed Fixed Fixed Fixed 0.600% 1.130% 2.550% 4.000% 1.950% 4.750% Proceeds $   997 1,244 1,738 988 995 738 Total $6,700 During fiscal 2015 and 2014, the Company also received additional proceeds from other, smaller long-term debt issuances by several of its non-U.S. operations. The proceeds in both fiscal years were used to pay down and refinance existing debt and for other general corporate purposes. Maturities On February 3, 2014, $500 million of 3.000% Notes matured and were repaid; on April 14, 2014, $1.0 billion of 1.625% Notes matured and were repaid; on May 15, 2014, $1.0 billion of 3.200% Notes matured and were repaid; and on August 6, 2014, ¥100 billion of floating rate Notes matured and were repaid. On April 15, 2013, $1.0 billion of 4.250% Notes matured and were repaid; on May 1, 2013, $1.5 billion of 4.550% Notes matured and were repaid; on June 1, 2013, $500 million of 7.250% Notes matured and were repaid; on August 5, 2013, ¥25 billion of 2.010% and ¥50 billion of floating rate Notes matured and were repaid; and on October 25, 2013, $750 million of 0.750% Notes matured and were repaid. During fiscal 2015 and 2014, the Company also repaid other, smaller long-term debt as it matured in several of its non-U.S. operations. 7 Fair Value Measurements The Company records and discloses certain financial and non-financial assets and liabilities at fair value. The fair value of an asset is the price at which the asset could be sold in an ordinary transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. The fair value of a liability is the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using the fair value hierarchy, which ­prioritizes the inputs used in measuring fair value. The levels of the fair value hierarchy are: • Level 1: observable inputs such as quoted prices in active markets; • Level 2: inputs other than quoted prices in active markets that are either directly or indirectly observable; and • Level 3: unobservable inputs for which little or no market data exists, therefore requiring the Company to develop its own assumptions. 2015 Annual Report 49 Notes to Consolidated Financial Statements Recurring Fair Value Measurements The Company holds derivative instruments that are required to be measured at fair value on a recurring basis. The fair values are the estimated amounts the Company would receive or pay upon termination of the related derivative agreements as of the reporting dates. The fair values have been measured using the income approach and Level 2 inputs, which include the relevant interest rate and foreign currency forward curves. As of January 31, 2015 and 2014, the notional amounts and fair values of these derivatives were as follows: January 31, 2015 January 31, 2014 Notional Amount Fair Value Notional Amount (Amounts in millions) Receive fixed-rate, pay variable-rate interest rate swaps designated as fair value hedges Receive fixed-rate, pay fixed-rate cross-currency interest rate swaps designated as net investment hedges Receive fixed-rate, pay fixed-rate cross-currency interest rate swaps designated as cash flow hedges Receive variable-rate, pay fixed-rate interest rate swaps designated as cash flow hedges Receive variable-rate, pay fixed-rate forward starting interest rate swaps designated as cash flow hedges Total $   500 $   12 $1,000 Fair Value $  5 1,250 207 1,250 97 4,329 (317) 3,004 453 255 (1) 457 (2) — — 2,500 166 $6,334 $ (99) $8,211 $719 Nonrecurring Fair Value Measurements In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company’s assets and liabilities are also subject to ­nonrecurring fair value measurements. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company did not record any significant impairment charges to assets measured at fair value on a nonrecurring basis during the fiscal years ended January 31, 2015, or 2014. Other Fair Value Disclosures The Company records cash and cash equivalents and short-term borrowings at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities. The Company’s long-term debt is also recorded at cost. The fair value is estimated using Level 2 inputs based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying value and fair value of the Company’s long-term debt as of January 31, 2015 and 2014, are as follows: January 31, 2015 Carrying Value (Amounts in millions) Long-term debt, including amounts due within one year Fair Value January 31, 2014 Carrying Value Fair Value $45,896 $56,237 $45,874 $50,757 8 Derivative Financial Instruments The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates, as well as to maintain an appropriate mix of fixed- and variable-rate debt. Use of derivative financial instruments in hedging programs subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative financial instrument will change. In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to a derivative financial instrument represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) from the counterparty when appropriate. 50 2015 Annual Report The Company only enters into derivative transactions with counterparties rated “A-” or better by nationally recognized credit rating agencies. Subsequent to entering into derivative transactions, the Company regularly monitors the credit ratings of its counterparties. In connection with various derivative agreements, including master netting arrangements, the Company held cash collateral from counterparties of $323 million and $641 million at January 31, 2015 and January 31, 2014, respectively. The Company records cash collateral received as amounts due to the counterparties exclusive of any derivative asset. Furthermore, as part of the master netting arrangements with these counterparties, the Company is also required to post collateral if the Company’s net ­derivative liability position exceeds $150 million with any counterparty. The Company did not have any cash collateral posted with counterparties at January 31, 2015 or January 31, 2014. The Company records cash ­collateral it posts with counterparties as amounts receivable from those counterparties exclusive of any derivative liability. Notes to Consolidated Financial Statements The Company uses derivative financial instruments for the purpose of hedging its exposure to interest and currency exchange rate risks and, accordingly, the contractual terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative financial instrument is recorded using hedge accounting, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, ­liabilities or firm commitments through earnings or be recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Any hedge ineffectiveness is immediately ­recognized in earnings. The Company’s net investment and cash flow instruments are highly effective hedges and the ineffective portion has not been, and is not expected to be, significant. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are recorded at fair value with unrealized gains or losses reported in earnings during the period of the change. Fair Value Instruments The Company is a party to receive fixed-rate, pay variable-rate interest rate swaps that the Company uses to hedge the fair value of fixed-rate debt. The notional amounts are used to measure interest to be paid or received and do not represent the Company’s exposure due to credit loss. The Company’s interest rate swaps that receive fixed-interest rate payments and pay variable-interest rate payments are designated as fair value hedges. As the specific terms and notional amounts of the derivative instruments match those of the fixed-rate debt being hedged, the derivative instruments are assumed to be perfectly effective hedges. Changes in the fair values of these derivative instruments are recorded in earnings, but are offset by corresponding changes in the fair values of the hedged items, also recorded in earnings, and, accordingly, do not impact the Company’s Consolidated Statements of Income. These fair value instruments will mature in October 2020. Net Investment Instruments The Company is a party to cross-currency interest rate swaps that the Company uses to hedge its net investments. The agreements are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. All changes in the fair value of these instruments are recorded in accumulated other comprehensive income (loss), offsetting the currency translation adjustment of the related investment that is also recorded in accumulated other comprehensive income (loss). These instruments will mature on dates ranging from October 2023 to February 2030. The Company has issued foreign-currency-denominated long-term debt as hedges of net investments of certain of its foreign operations. These foreign-currency-denominated long-term debt issuances are designated and qualify as nonderivative hedging instruments. Accordingly, the ­foreign currency translation of these debt instruments is recorded in accumulated other comprehensive income (loss), offsetting the foreign currency translation adjustment of the related net investments that is also recorded in accumulated other comprehensive income (loss). At January 31, 2015 and January 31, 2014, the Company had ¥100 billion and ¥200 billion, respectively, of outstanding long-term debt designated as a hedge of its net investment in Japan, as well as outstanding long-term debt of £2.5 billion at January 31, 2015 and 2014 that was designated as a hedge of its net investment in the United Kingdom. These nonderivative net investment hedges will mature on dates ranging from July 2015 to January 2039. Cash Flow Instruments The Company is a party to receive variable-rate, pay fixed-rate interest rate swaps that the Company uses to hedge the interest rate risk of certain non-U.S. denominated debt. The swaps are designated as cash flow hedges of interest expense risk. Amounts reported in accumulated other comprehensive income (loss) related to these derivatives are reclassified from accumulated other comprehensive income (loss) to earnings as interest is expensed for the Company’s variable-rate debt, converting the variable-rate interest expense into fixed-rate interest expense. These cash flow instruments will mature in July 2015. The Company is also a party to receive fixed-rate, pay fixed-rate ­cross-currency interest rate swaps to hedge the currency exposure ­associated with the forecasted payments of principal and interest of ­certain non-U.S. denominated debt. The swaps are designated as cash flow hedges of the currency risk related to payments on the non-U.S. denominated debt. The effective portion of changes in the fair value of derivatives designated as cash flow hedges of foreign exchange risk is recorded in accumulated other comprehensive income (loss) and is ­subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The hedged items are recognized foreign currency-denominated liabilities that are remeasured at spot exchange rates each period, and the assessment of effectiveness (and measurement of any ineffectiveness) is based on total changes in the related derivative’s cash flows. As a result, the amount reclassified into earnings each period includes an amount that offsets the related transaction gain or loss arising from that remeasurement and the ­adjustment to earnings for the period’s allocable portion of the initial spot-forward difference associated with the hedging instrument. These cash flow instruments will mature on dates ranging from April 2022 to March 2034. The Company used forward starting receive variable-rate, pay fixed-rate swaps (“forward starting swaps”) to hedge its exposure to the variability in future cash flows due to changes in the LIBOR swap rate for debt ­issuances forecasted to occur in the future. These forward starting swaps were terminated in October 2014, April 2014 and April 2013 concurrently with the issuance of the hedged debt. Upon termination of the forward starting swaps, the Company received net cash payments from the related counterparties of $96 million in fiscal 2015 and made net cash ­payments to the related counterparties of $74 million in fiscal 2014. The payments were recorded in accumulated other comprehensive income (loss) and will be reclassified to earnings over the life of the related debt through May 2044, effectively adjusting interest expense to reflect the fixed interest rates entered into by the forward starting swaps. 2015 Annual Report 51 Notes to Consolidated Financial Statements Financial Statement Presentation Although subject to master netting arrangements, the Company does not offset derivative assets and derivative liabilities in its Consolidated Balance Sheets. Derivative instruments with an unrealized gain are recorded in the Company’s Consolidated Balance Sheets as either current or non-current assets, based on maturity date, and those hedging instruments with an unrealized loss are recorded as either current or non-current liabilities, based on maturity date. The Company’s derivative instruments, as well as its nonderivative debt instruments designated and qualifying as net investment hedges, were classified as follows in the Company’s Consolidated Balance Sheets: January 31, 2015 January 31, 2014 Fair Value Net Investment Cash Flow Instruments Instruments Instruments (Amounts in millions) Fair Value Net Investment Cash Flow Instruments Instruments Instruments Derivative instruments Prepaid expenses and other Other assets and deferred charges $— $    — $  — 12 207 293 $ 5 $   — $ — — 97 619 $12 $  5 Derivative asset subtotals Accrued liabilities Deferred income taxes and other Derivative liability subtotals $  207 $293 $   97 $619 $— $    — $   1 — — 610 $— $   — $  1 — — 1 $— $— $    — $611 $   — $  2 Nonderivative hedging instruments Long-term debt due within one year Long-term debt $— $   766 $  — — 3,850 — $— $  973 $  — — 5,095 — Nonderivative hedge liability subtotals $— $— $4,616 $  — $6,068 $ — Gains and losses related to the Company’s derivatives primarily relate to interest rate hedges, which are recorded in interest, net, in the Company’s Consolidated Statements of Income. Amounts related to the Company’s derivatives expected to be reclassified from accumulated other comprehensive income (loss) to net income during the next 12 months are not significant. 9 Taxes Income from Continuing Operations The components of income from continuing operations before income taxes are as follows: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 U.S. $18,610 $19,412 $19,352 Non-U.S. 6,189 5,244 6,310 Total income from continuing operations before income taxes $24,799 $24,656 $25,662 A summary of the provision for income taxes is as follows: (Amounts in millions) 2015 2014 2013 Current: U.S. federal U.S. state and local International Total current tax provision Deferred: U.S. federal U.S. state and local International Total deferred tax expense (benefit) Total provision for income taxes 52 2015 Annual Report Fiscal Years Ended January 31, $6,165 $6,377 $5,611 810 719 622 1,529 1,523 1,743 8,504 8,619 7,976 (387) (72) 38 (55) 37 (8) (77) (479) (48) (519) (514) (18) $7,985 $8,105 $7,958 Notes to Consolidated Financial Statements Effective Income Tax Rate Reconciliation The Company’s effective income tax rate is typically lower than the U.S. statutory tax rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures and certain U.S. tax credits as further discussed in the “Cash and Cash Equivalents” section of the Company’s significant accounting policies in Note 1. The Company’s non-U.S. income is generally subject to local country tax rates that are below the 35% U.S. statutory tax rate. Certain non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. A reconciliation of the significant differences between the U.S. statutory tax rate and the effective income tax rate on pretax income from continuing operations is as follows: Fiscal Years Ended January 31, 2015 2014 2013 U.S. statutory tax rate U.S. state income taxes, net of federal income tax benefit Income taxed outside the U.S. Net impact of repatriated international earnings Other, net 35.0% 35.0% 35.0% Effective income tax rate 32.2% 32.9% 31.0% 1.8% 2.0% 1.7% (2.7)% (2.8)% (2.6)% (1.5)% (1.4)% (2.5)% (0.4)% 0.1% (0.6)% Deferred Taxes The significant components of the Company’s deferred tax account ­balances are as follows: January 31, (Amounts in millions) 2015 2014 Deferred tax assets: Loss and tax credit carryforwards $ 3,255 $ 3,566 Accrued liabilities 3,395 2,986 Share-based compensation 184 126 Other 1,119 1,573 Total deferred tax assets Valuation allowances Deferred tax assets, net of valuation allowance 7,953 8,251 (1,504) (1,801) 6,449 6,450 Deferred tax liabilities: Property and equipment 5,972 6,295 Inventories 1,825 1,641 Other 1,618 1,827 Total deferred tax liabilities 9,415 9,763 Net deferred tax liabilities $ 2,966 $ 3,313 The deferred taxes are classified as follows in the Company’s Consolidated Balance Sheets: January 31, (Amounts in millions) 2015 2014 Balance Sheet classification: Assets: Prepaid expenses and other $  728 $  822 Other assets and deferred charges 1,033 1,151 Asset subtotals 1,761 1,973 Liabilities: Accrued liabilities Deferred income taxes and other 56 176 4,671 5,110 4,727 5,286 Liability subtotals Net deferred tax liabilities $2,966 $3,313 Unremitted Earnings U.S. income taxes have not been provided on accumulated but ­undistributed earnings of the Company’s international subsidiaries of approximately $23.3 billion and $21.4 billion as of January 31, 2015 and 2014, respectively, as the Company intends to permanently reinvest these amounts outside of the U.S. However, if any portion were to be ­distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable because of the complexities with its hypothetical calculation. The Company provides deferred or current income taxes on earnings of international subsidiaries in the period that the Company determines it will remit those earnings. Net Operating Losses, Tax Credit Carryforwards and Valuation Allowances At January 31, 2015, the Company had net operating loss and capital loss carryforwards totaling approximately $5.6 billion. Of these carryforwards, approximately $2.9 billion will expire, if not utilized, in various years through 2033. The remaining carryforwards have no expiration. At January 31, 2015, the Company had foreign tax credit carryforwards of $2.0 billion, which will expire in various years through 2025, if not utilized. The recoverability of these future tax deductions and credits is evaluated by assessing the adequacy of future expected taxable income from all sources, including taxable income in prior carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent management does not consider it more likely than not that a deferred tax asset will be realized, a valuation allowance is established. If a valuation allowance has been established and management subsequently determines that it is more likely than not that the deferred tax assets will be realized, the valuation allowance is released. 2015 Annual Report 53 Notes to Consolidated Financial Statements As of January 31, 2015 and 2014, the Company had valuation allowances recorded of approximately $1.5 billion and $1.8 billion, respectively, on deferred tax assets associated primarily with net operating loss ­carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. The $0.3 billion net decrease in the valuation allowance during fiscal 2015 related to releases arising from the use of deferred tax assets, changes in judgment regarding the future realization of deferred tax assets, increases from ­certain net operating losses and deductible temporary differences ­arising in fiscal 2015, decreases due to operating loss expirations and fluctuations in currency exchange rates. Management believes that it is more likely than not that the remaining net deferred tax assets will be fully realized. Uncertain Tax Positions The benefits of uncertain tax positions are recorded in the Company’s Consolidated Financial Statements only after determining a more likely than not probability that the uncertain tax positions will withstand ­challenge, if any, from taxing authorities. As of January 31, 2015 and 2014, the amount of unrecognized tax benefits related to continuing operations was $838 million and $763 million, respectively. The amount of unrecognized tax benefits that would affect the Company’s effective income tax rate was $763 million and $698 million for January 31, 2015 and 2014, respectively. A reconciliation of unrecognized tax benefits from continuing operations was as follows: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Unrecognized tax benefits, beginning of year Increases related to prior year tax positions Decreases related to prior year tax positions Increases related to current year tax positions Settlements during the period Lapse in statutes of limitations Unrecognized tax benefits, end of year $763 $ 818 $ 611 7 41 88 (17) (112) (232) 174 133 431 (89) (117) (80) — — — $838 $ 763 $ 818 The Company classifies interest and penalties related to uncertain tax benefits as interest expense and as operating, selling, general and administrative expenses, respectively. During fiscal 2015, 2014 and 2013, the Company recognized interest and penalty expense (benefit) related to uncertain tax positions of $18 million, $(7) million and $2 million, respectively. As of January 31, 2015 and 2014, accrued interest related to uncertain tax positions of $57 million and $40 million, respectively, was recorded in the Company’s Consolidated Balance Sheets. The Company did not have any accrued penalties recorded for income taxes as of January 31, 2015 or 2014. 54 2015 Annual Report During the next twelve months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits by between $50 million and $350 million, either because the tax positions are sustained on audit or because the Company agrees to their disallowance. The Company is focused on resolving tax audits as expeditiously as possible. As a result of these efforts, unrecognized tax benefits could potentially be reduced beyond the provided range during the next twelve months. The Company does not expect any change to have a significant impact to its Consolidated Financial Statements. The Company remains subject to income tax examinations for its U.S. federal income taxes generally for fiscal 2013 through 2015. The Company also remains subject to income tax examinations for ­international income taxes for fiscal 2000 through 2015, and for U.S. state and local income taxes generally for the fiscal years ended 2006 through 2015. Other Taxes The Company is subject to tax examinations for payroll, value added, sales-based and other non-income taxes. A number of these examinations are ongoing in various jurisdictions, including Brazil. In certain cases, the Company has received assessments from the respective taxing authorities in connection with these examinations. Where a probable loss has occurred, the Company has made accruals, which are reflected in the Company’s Consolidated Financial Statements. While the possible losses or range of possible losses associated with these matters are individually immaterial, a group of related matters, if decided adversely to the Company, could result in a liability material to the Company’s Consolidated Financial Statements. 10 Contingencies Legal Proceedings The Company is involved in a number of legal proceedings. The Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s Consolidated Financial Statements. For some matters, a liability is not probable or the amount cannot be ­reasonably estimated and therefore an accrual has not been made. However, where a liability is reasonably possible and may be material, such matters have been disclosed. The Company may enter into ­discussions regarding settlement of these matters, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company’s shareholders. Unless stated otherwise, the matters, or groups of related matters, ­discussed below, if decided adversely to or settled by the Company, ­individually or in the aggregate, may result in a liability material to the Company’s financial condition or results of operations. Wage-and-Hour Class Action: The Company is a defendant in Braun/Hummel v. Wal-Mart Stores, Inc., a class-action lawsuit commenced in March 2002 in the Court of Common Pleas in Philadelphia, Pennsylvania. The plaintiffs allege that the Company failed to pay class members for all hours worked and prevented class members from taking their full meal and rest breaks. On October 13, 2006, a jury awarded ­back-pay damages to the plaintiffs of approximately $78 million on their claims for off-the-clock work and missed rest breaks. The jury found in favor of the Company on the plaintiffs’ meal-period claims. Notes to Consolidated Financial Statements On November 14, 2007, the trial judge entered a final judgment in the approximate amount of $188 million, which included the jury’s back-pay award plus statutory penalties, prejudgment interest and attorneys’ fees. By operation of law, post-judgment interest accrues on the judgment amount at the rate of six percent per annum from the date of entry of the judgment, which was November 14, 2007, until the judgment is paid, unless the judgment is set aside on appeal. On December 7, 2007, the Company filed its Notice of Appeal. On June 10, 2011, the Pennsylvania Superior Court of Appeals issued an opinion upholding the trial court’s certification of the class, the jury’s back pay award, and the awards of statutory penalties and prejudgment interest, but reversing the award of attorneys’ fees. On September 9, 2011, the Company filed a Petition for Allowance of Appeal with the Pennsylvania Supreme Court. On July 2, 2012, the Pennsylvania Supreme Court granted the Company’s Petition. On December 15, 2014, the Pennsylvania Supreme Court issued its ­opinion affirming the Superior Court of Appeals’ decision. At that time, the Company recorded expenses of $249 million for the judgment amount and post-judgment interest incurred to date. The Company will continue to accrue for the post-judgment interest until final resolution. However, the Company continues to believe it has substantial factual and legal defenses to the claims at issue and, on March 13, 2015, the Company filed a petition for writ of certiorari with the U.S. Supreme Court. ASDA Equal Value Claims: ASDA Stores, Ltd. (“ASDA”), a wholly-owned subsidiary of the Company, is a defendant in over 4,000 “equal value” claims that are proceeding before an Employment Tribunal in Manchester (the “Employment Tribunal”) in the United Kingdom (“UK”) on behalf of current and former ASDA store employees, who allege that the work performed by female employees in ASDA’s retail stores is of equal value in terms of, among other things, the demands of their jobs to that of male employees working in ASDA’s warehouse and distribution facilities, and that the disparity in pay between these different job positions is not objectively justified. Claimants are requesting differential back pay based on higher wage rates in the warehouse and distribution facilities and those higher wage rates on a prospective basis as part of these equal value proceedings. ASDA believes that further claims may be asserted in the near future. On March 23, 2015, ASDA asked the Employment Tribunal to stay all proceedings, contending that the High Court, which is the superior first instance civil court in the UK that is headquartered in the Royal Courts of Justice in the City of London, is the more convenient and appropriate forum to hear these claims. On March 23, 2015, ASDA also asked the Employment Tribunal to “strike out” substantially all of the claims for failing to comply with Employment Tribunal rules. At present, the Company cannot predict the number of such claims that may be filed, and cannot reasonably estimate any loss or range of loss that may arise from these proceedings. The Company believes it has substantial factual and legal defenses to these claims, and intends to defend the claims vigorously FCPA Investigation and Related Matters The Audit Committee (the “Audit Committee”) of the Board of Directors of the Company, which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries, including Wal-Mart de México, S.A.B. de C.V. (“Walmex”), and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters. The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance program through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). Since the implementation of the global review and the enhanced anti-corruption compliance program, the Audit Committee and the Company have identified or been made aware of additional allegations regarding potential violations of the FCPA. When such allegations are reported or identified, the Audit Committee and the Company, together with their third party advisors, conduct inquiries and when warranted based on those inquiries, open investigations. Inquiries or investigations regarding allegations of potential FCPA violations have been commenced in a number of foreign markets where the Company operates, including, but not limited to, Brazil, China and India. The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have been filed by several of the Company’s shareholders against it, certain of its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers. The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the on-going government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, debarment or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigations and review. In addition, the Company has incurred and expects to continue to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting the review and investigations. These costs will be expensed as incurred. For the fiscal years ended January 31, 2015, 2014 and 2013, the Company incurred the following third-party expenses in connection with the FCPA investigation and related matters: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Ongoing inquiries and investigations Global compliance program and organizational enhancements $121 $173 $100 Total $173 $282 $157 52 109 57 2015 Annual Report 55 Notes to Consolidated Financial Statements These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company expects that there will be on-going media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain ­audiences of the Company’s role as a corporate citizen. The Company’s process of assessing and responding to the governmental investigations and the shareholder lawsuits continues. While the Company believes that it is probable that it will incur a loss from these matters, given the on-going nature and complexity of the review, inquiries and investigations, the Company cannot reasonably estimate any loss or range of loss that may arise from these matters. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future. 11 Commitments The Company has long-term leases for stores and equipment. Rentals (including amounts applicable to taxes, insurance, maintenance, other operating expenses and contingent rentals) under operating leases and other short-term rental arrangements were $2.8 billion in both fiscal 2015 and 2014 and $2.6 billion in fiscal 2013. Aggregate minimum annual rentals at January 31, 2015, under ­non-cancelable leases are as follows: (Amounts in millions) Fiscal Year Operating Capital Leases Leases 2016 $  1,759 $  504 2017 1,615 476 2018 1,482 444 2019 1,354 408 2020 1,236 370 Thereafter 10,464 3,252 Total minimum rentals $17,910 $5,454 Less estimated executory costs 49 Net minimum lease payments Less imputed interest 5,405 2,512 Present value of minimum lease payments $2,893 Certain of the Company’s leases provide for the payment of contingent rentals based on a percentage of sales. Such contingent rentals were not material for fiscal 2015, 2014 and 2013. Substantially all of the Company’s store leases have renewal options, some of which may trigger an escalation in rentals. The Company has future lease commitments for land and buildings for approximately 282 future locations. These lease commitments have lease terms ranging from 1 to 30 years and provide for certain minimum ­rentals. If executed, payments under operating leases would increase by $58 million for fiscal 2016, based on current cost estimates. In connection with certain long-term debt issuances, the Company could be liable for early termination payments if certain unlikely events were to occur. At January 31, 2015, the aggregate termination payment would have been $64 million. The arrangement pursuant to which this payment could be made will expire in fiscal 2019. 12 Retirement-Related Benefits The Company offers a 401(k) plan for associates in the U.S. under which eligible associates can begin contributing to the plan immediately upon hire. The Company also offers a 401(k) type plan for associates in Puerto Rico under which associates can begin to contribute generally after one year of employment. Under these plans, after one year of employment, the Company matches 100% of participant contributions up to 6% of annual eligible earnings. The matching contributions immediately vest at 100% for each associate. Participants can contribute up to 50% of their pretax earnings, but not more than the statutory limits. Participants age 50 or older may defer additional earnings in catch-up contributions up to the maximum statutory limits. Associates in international countries who are not U.S. citizens are covered by various defined contribution post-employment benefit arrangements. These plans are administered based upon the legislative and tax ­requirements in the countries in which they are established. Additionally, the Company’s subsidiaries in the United Kingdom and Japan have sponsored defined benefit pension plans. The plan in the United Kingdom was underfunded by $85 million and $69 million at January 31, 2015 and 2014, respectively. The plan in Japan was underfunded by $223 million and $281 million at January 31, 2015 and 2014, respectively. These underfunded amounts are recorded as liabilities in the Company’s Consolidated Balance Sheets in deferred income taxes and other. Certain other international operations also have defined ­benefit arrangements that are not significant. The following table summarizes the contribution expense related to the Company’s retirement-related benefits for fiscal 2015, 2014 and 2013: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Defined contribution plans: U.S. $  898 $  877 $  818 International 167 165 166 Defined benefit plans: International 5 20 26 Total contribution expense for retirement-related benefits $1,070 $1,062 $1,010 56 2015 Annual Report Notes to Consolidated Financial Statements 13 Acquisitions, Disposals and Related Items 14 Segments In fiscal 2015, the Company completed the following transactions that impact the operations of Walmart International: The Company is engaged in the operation of retail, wholesale and other units located in the U.S., Africa, Argentina, Brazil, Canada, Central America, Chile, China, India, Japan, Mexico and the United Kingdom. The Company’s operations are conducted in three business segments: Walmart U.S., Walmart International and Sam’s Club. The Company defines its segments as those operations whose results its chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. The Company sells similar individual products and services in each of its segments. It is impractical to segregate and identify revenues for each of these individual products and services. Walmart Chile In fiscal 2014, the redeemable noncontrolling interest shareholders ­exercised put options that required the Company to purchase their shares in Walmart Chile. At that time, the Company recorded an ­ increase to redeemable noncontrolling interest of $1.0 billion, with a ­corresponding decrease to capital in excess of par value, to reflect the redemption value of the redeemable noncontrolling interest at $1.5 billion. In February 2014, the Company completed this transaction using existing cash of the Company, increasing its ownership interest in Walmart Chile to 99.7 percent. In March 2014, the Company completed a tender offer for most of the remaining noncontrolling interest shares at the same value per share as was paid to the redeemable noncontrolling interest shareholders. As a result of completing these transactions, the Company owns substantially all of Walmart Chile. Vips Restaurant Business in Mexico In September 2013, Walmex, a majority-owned subsidiary of the Company, entered into a definitive agreement with Alsea S.A.B. de C.V. to sell the Vips restaurant business (“Vips”) in Mexico. The sale of Vips was completed on May 12, 2014. Upon completion of the sale, the Company received $671 million of cash and recognized a net gain of $262 million, which is recorded in discontinued operations in the Company’s Consolidated Statements of Income for the fiscal year ended January 31, 2015. The Walmart U.S. segment includes the Company’s mass merchant ­concept in the U.S. operating under the “Walmart” or “Wal-Mart” brands, as well as walmart.com. The Walmart International segment consists of the Company’s operations outside of the U.S., including various retail websites. The Sam’s Club segment includes the warehouse membership clubs in the U.S., as well as samsclub.com. Corporate and support consists of corporate overhead and other items not allocated to any of the Company’s segments. The Company measures the results of its segments using, among other measures, each segment’s net sales and operating income, which includes certain corporate overhead allocations. From time to time, the Company revises the measurement of each segment’s operating income, including any corporate overhead allocations, as determined by the information regularly reviewed by its CODM. When the measurement of a segment changes, previous period amounts and balances are reclassified to be comparable to the current period’s presentation. 2015 Annual Report 57 Notes to Consolidated Financial Statements Information for the Company’s segments, as well as for Corporate and support, including the reconciliation to income from continuing operations before income taxes, is provided in the following table: (Amounts in millions) Walmart U.S. Corporate and support Consolidated Fiscal Year Ended January 31, 2015 Net sales $288,049 $136,160 $58,020 $   — Operating income (loss) 21,336 6,171 1,976 (2,336) Interest expense, net $482,229 27,147 (2,348) Income from continuing operations before income taxes $  24,799 Total assets Depreciation and amortization Capital expenditures 7,825 3,370 1,199 $203,706 9,173 12,174 Fiscal Year Ended January 31, 2014 Net sales $279,406 $136,513 $57,157 $   — Operating income (loss) 21,787 5,153 1,843 (1,911) Interest expense, net $473,076 26,872 (2,216) Income from continuing operations before income taxes $  24,656 Total assets Depreciation and amortization Capital expenditures $    6,583 3,135 1,203 $204,751 8,870 13,115 Fiscal Year Ended January 31, 2013 Net sales $274,433 $134,748 $56,423 $   — 21,103 6,365 1,859 (1,602) Operating income (loss) Interest expense, net $465,604 27,725 (2,063) Income from continuing operations before income taxes $  25,662 Total assets Depreciation and amortization Capital expenditures $203,105 8,478 12,898 101,381 2,665 6,286 $  98,745 2,640 6,378 $ 96,234 2,644 5,994 Total revenues, consisting of net sales and membership and other income, and long-lived assets, consisting primarily of property and equipment, net, aggregated by the Company’s U.S. and non-U.S. operations for fiscal 2015, 2014 and 2013, are as follows: Fiscal Years Ended January 31, 2015 2014 2013 (Amounts in millions) Total revenues U.S. operations Non-U.S. operations $348,227 $338,681 $332,788 137,424 137,613 135,863 Total revenues $485,651 $476,294 $468,651 Long-lived assets U.S. operations Non-U.S. operations $ 80,879 $ 79,644 $ 77,692 35,776 38,263 38,989 $116,655 $117,907 $116,681 Total long-lived assets No individual country outside of the U.S. had total revenues or long-lived assets that were material to the consolidated totals. Additionally, the Company did not generate material total revenues from any single customer. 58 Walmart International Sam’s Club 2015 Annual Report 80,505 2,665 3,936 $  85,370 2,658 4,463 $ 85,695 2,605 4,640 13,995 473 753 $14,053 437 1,071 $13,479 410 868 $ 7,697 2,819 1,396 15 Subsequent Event Dividends Declared On February 19, 2015, the Board of Directors approved the fiscal 2016 annual dividend at $1.96 per share, an increase from the fiscal 2015 ­dividend of $1.92 per share. For fiscal 2016, the annual dividend will be paid in four quarterly installments of $0.49 per share, according to the ­following record and payable dates: Record Date Payable Date March 13, 2015 May 8, 2015 August 7, 2015 December 4, 2015 April 6, 2015 June 1, 2015 September 8, 2015 January 4, 2016 Notes to Consolidated Financial Statements 16 Quarterly Financial Data (Unaudited) (Amounts in millions, except per share data) Total revenues Net sales Cost of sales Income from continuing operations Consolidated net income Consolidated net income attributable to Walmart Fiscal Year Ended January 31, 2015 Q1 Q2 Q3 Q4 Total $114,960 114,167 86,714 3,711 3,726 3,593 $120,125 119,336 90,010 4,089 4,359 4,093 $119,001 118,076 89,247 3,826 3,826 3,711 $131,565 130,650 99,115 5,188 5,188 4,966 $485,651 482,229 365,086 16,814 17,099 16,363 Basic net income per common share (1): Basic income per common share from continuing operations attributable to Walmart Basic income (loss) per common share from discontinued operations attributable to Walmart 1.10 1.22 1.15 1.54 5.01 0.01 0.05 — — 0.06 Basic net income per common share attributable to Walmart 1.11 1.27 1.15 1.54 5.07 Diluted net income per common share (1): Diluted income per common share from continuing operations attributable to Walmart Diluted income (loss) per common share from discontinued operations attributable to Walmart 1.10 1.21 1.15 1.53 4.99 0.01 0.05 — — 0.06 Diluted net income per common share attributable to Walmart 1.11 1.26 1.15 1.53 5.05 Fiscal Year Ended January 31, 2014 Q1 Q2 Q3 Q4 Total Total revenues Net sales Cost of sales Income from continuing operations Consolidated net income Consolidated net income attributable to Walmart $114,071 113,313 85,991 3,932 3,944 3,784 $116,829 116,101 87,420 4,205 4,216 4,069 $115,688 114,876 86,687 3,870 3,885 3,738 $129,706 128,786 97,971 4,544 4,650 4,431 $476,294 473,076 358,069 16,551 16,695 16,022 Basic net income per common share (1): Basic income per common share from continuing operations attributable to Walmart Basic income (loss) per common share from discontinued operations attributable to Walmart 1.14 1.24 1.14 1.35 4.87 0.01 — 0.01 0.02 0.03 Basic net income per common share attributable to Walmart 1.15 1.24 1.15 1.37 4.90 Diluted net income per common share : Diluted income per common share from continuing operations attributable to Walmart Diluted income (loss) per common share from discontinued operations attributable to Walmart 1.14 1.23 1.14 1.34 4.85 — 0.01 — 0.02 0.03 Diluted net income per common share attributable to Walmart 1.14 1.24 1.14 1.36 4.88 (1) (1) T he sum of quarterly income per common share attributable to Walmart data may not agree to annual amounts due to rounding. 2015 Annual Report 59 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Wal-Mart Stores, Inc. We have audited the accompanying consolidated balance sheets of ­Wal-Mart Stores, Inc. as of January 31, 2015 and 2014, and the related ­consolidated statements of income, comprehensive income, shareholders’ equity and redeemable noncontrolling interest, and cash flows for each of the three years in the period ended January 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wal-Mart Stores, Inc. at January 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2015, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Wal-Mart Stores, Inc.’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 1, 2015 expressed an unqualified opinion thereon. Rogers, Arkansas April 1, 2015 60 2015 Annual Report Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting The Board of Directors and Shareholders of Wal-Mart Stores, Inc. We have audited Wal-Mart Stores, Inc.’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Wal-Mart Stores, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report to Our Shareholders.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those ­policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit prep­ aration of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the c­ ompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial r­ eporting may not prevent or detect misstatements. Also, projections of any ­evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in ­conditions, or that the degree of compliance with the policies or ­procedures may deteriorate. In our opinion, Wal-Mart Stores, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Wal-Mart Stores, Inc. as of January 31, 2015 and 2014, and related consolidated statements of income, comprehensive income, shareholders’ equity and redeemable noncontrolling interest and cash flows for each of the three years in the period ended January 31, 2015 and our report dated April 1, 2015 expressed an unqualified opinion thereon. Rogers, Arkansas April 1, 2015 2015 Annual Report 61 Management’s Report to Our Shareholders Wal-Mart Stores, Inc. Management of Wal-Mart Stores, Inc. (“Walmart,” the “company” or “we”) is responsible for the preparation, integrity and objectivity of Walmart’s Consolidated Financial Statements and other financial information contained in this Annual Report to Shareholders. Those Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States. In preparing those Consolidated Financial Statements, management is required to make certain estimates and judgments, which are based upon currently available information and management’s view of current conditions and circumstances. The Audit Committee of the Board of Directors, which consists solely of independent directors, oversees our process of reporting financial information and the audit of our Consolidated Financial Statements. The Audit Committee stays informed of the financial condition of Walmart and regularly reviews management’s financial policies and procedures, the independence of our independent auditors, our internal control over financial reporting and the objectivity of our financial reporting. Both the independent auditors and the internal auditors have free access to the Audit Committee and meet with the Audit Committee periodically, both with and without management present. Acting through our Audit Committee, we have retained Ernst & Young LLP, an independent registered public accounting firm, to audit our Consolidated Financial Statements found in this Annual Report to Shareholders. We have made available to Ernst & Young LLP all of our financial records and related data in connection with their audit of our Consolidated Financial Statements. We have filed with the Securities and Exchange Commission (“SEC”) the required certifications related to our Consolidated Financial Statements as of and for the year ended January 31, 2015. These certifications are attached as exhibits to our Annual Report on Form 10-K for the year ended January 31, 2015. Additionally, we have also provided to the New York Stock Exchange the required annual certification of our Chief Executive Officer regarding our compliance with the New York Stock Exchange’s corporate ­governance listing standards. Report on Internal Control Over Financial Reporting Management has responsibility for establishing and maintaining ­adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of January 31, 2015. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control-Integrated Framework (2013). Management concluded that based on its assessment, Walmart’s internal control over financial reporting was effective as of January 31, 2015. The Company’s internal control over financial reporting as of January 31, 2015, has been audited by Ernst & Young LLP as stated in their report which appears in this Annual Report to Shareholders. 62 2015 Annual Report Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be timely disclosed is accumulated and communicated to management in a timely fashion. Management has assessed the effectiveness of these disclosure controls and procedures as of January 31, 2015, and determined they were effective as of that date to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, was accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure and were effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Report on Ethical Standards Our Company was founded on the belief that open communications and the highest standards of ethics are necessary to be successful. Our long-standing “Open Door” communication policy helps management be aware of and address issues in a timely and effective manner. Through the open door policy all associates are encouraged to inform management at the appropriate level when they are concerned about any matter ­pertaining to Walmart. Walmart has adopted a Statement of Ethics to guide our associates in the continued observance of high ethical standards such as honesty, integrity and compliance with the law in the conduct of Walmart’s business. Familiarity and compliance with the Statement of Ethics is required of all associates who are part of management. The Company also maintains a separate Code of Ethics for our senior financial officers. Walmart also has in place a Related-Party Transaction Policy. This policy applies to Walmart’s senior officers and directors and requires material related-party trans­ actions to be reviewed by the Audit Committee. The senior officers and directors are required to report material related-party transactions to Walmart. We maintain a global ethics office which oversees and administers an ethics helpline. The ethics helpline provides a channel for associates to make confidential and anonymous complaints regarding potential violations of our statements of ethics, including violations related to financial or accounting matters. C. Douglas McMillon President and Chief Executive Officer Charles M. Holley, Jr. Executive Vice President and Chief Financial Officer Unit Counts as of January 31, 2015 Wal-Mart Stores, Inc. United States The Walmart U.S. and Sam’s Club segments comprise the Company’s operations in the U.S. As of January 31, 2015, unit counts for Walmart U.S. and Sam’s Club are summarized by format for each state and territory as follows: Walmart U.S. Sam’s Club Neighborhood Markets and Discount other small State or Territory Supercenters Stores formats Clubs Washington 51 10 5 3 69 Washington D.C. 2 — — — 2 West Virginia 38 — 1 5 44 Wisconsin 80 8 5 12 105 Wyoming 11 — — 2 13 Puerto Rico 12 6 26 11 55 5,163 U.S. Total 3,407 470 639 647 Grand Total Alabama 99 1 24 14 138 Alaska 8 2 — 3 13 Arizona 79 3 26 16 124 Arkansas 75 8 38 7 128 California 117 92 64 33 306 Colorado 67 5 18 15 105 Connecticut 12 22 2 3 39 Delaware 6 3 — 1 10 Florida 216 13 65 46 340 Georgia 150 3 29 23 205 Hawaii — 10 — 2 12 Idaho 22 1 2 1 26 Illinois 133 23 8 33 197 Indiana 92 9 9 16 126 Iowa 57 3 — 8 68 Kansas 57 4 18 9 88 Kentucky 76 8 8 9 101 Louisiana 87 2 23 15 127 Maine 19 3 — 3 25 Maryland 26 21 — 12 59 Massachusetts 26 23 — 3 52 Michigan 89 5 — 26 120 Minnesota 64 6 — 14 84 Mississippi 62 4 9 7 82 Missouri 109 11 16 18 154 Montana 13 — — 2 15 Nebraska 35 — 7 5 47 Nevada 30 2 11 7 50 New Hampshire 17 10 — 4 31 New Jersey 25 34 — 10 69 New Mexico 35 2 6 7 50 New York 77 22 2 16 117 138 6 43 23 210 North Carolina North Dakota 14 — — 3 17 Ohio 139 7 — 29 175 Oklahoma 79 9 30 11 129 28 7 10 — 45 Oregon Pennsylvania 114 22 — 24 160 5 4 — 1 10 Rhode Island South Carolina 81 — 11 12 104 South Dakota 14 — — 2 16 Tennessee 113 2 10 16 141 Texas 363 24 91 81 559 Utah 40 — 10 8 58 1 4 — — 5 Vermont Virginia 104 6 12 16 138 International The Walmart International segment comprises the Company’s ­operations outside of the U.S. and is represented in three major brand categories. Unit counts (1) as of January 31, 2015 for Walmart International are summarized by brand category for each geographic market as follows: Geographic Market Retail Wholesale Other (2) Total Africa Argentina Brazil Canada Central America (4) Chile China India Japan Mexico United Kingdom 302 94 — 396 105 — — 105 468 76 13 557 394 — — 394 689 1 — 690 377 3 24 404 400 11 — 411 — 20 — 20 372 — 59 431 2,120 160 10 2,290 589 — 3 592 International total 5,816 365 109 6,290 (3) (1) W  almart International unit counts, with the exception of Canada, are stated as of December 31, 2014, to correspond with the balance sheet date of the related geographic market. Canada unit counts are stated as of January 31, 2015. (2) “ Other” includes restaurants, drug stores, convenience stores and banks operating under varying banners. (3) A  frica unit counts by country are Botswana (11), Ghana (1), Lesotho (3), Malawi (2), Mozambique (5), Namibia (4), Nigeria (6), South Africa (360), Swaziland (1), ­Tanzania (1), Uganda (1) and Zambia (1). (4) C  entral America unit counts by country are Costa Rica (217), El Salvador (89), ­Guatemala (217), Honduras (81) and Nicaragua (86). 2015 Annual Report 63 Corporate and Stock Information Listing New York Stock Exchange Stock Symbol: WMT Dividends payable per share For fiscal 2016, dividends will be paid based on the following schedule: April 6, 2015 $0.49 June 1, 2015 $0.49 September 8, 2015 $0.49 January 4, 2016 $0.49 Annual meeting Our Annual Meeting of Shareholders will be held on Friday, June 5, 2015, at 7:30 a.m. (Central Time) in the Bud Walton Arena on the University of Arkansas campus, Fayetteville, Arkansas. Communication with shareholders Wal-Mart Stores, Inc. periodically communicates with its shareholders and other members of the investment community about our operations. For further information regarding our policy on shareholder and investor communications refer to our website, www.stock.walmart.com. The following reports are available without charge upon request by ­writing the Company c/o Investor Relations or by calling (479) 273-8446. These reports are also available via the corporate website. • Annual Report on Form 10-K • Quarterly Reports on Form 10-Q • Earnings Releases • Current Reports on Form 8-K • Annual Shareholders’ Meeting Proxy Statement • Global Responsibility Report • Diversity and Inclusion Report (Includes the content previously reported in the “Workforce Diversity Report”) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High Low 2016 1st Quarter (1) Through April 1, 2015. 64 2015 Annual Report S&P 500 Index S&P 500 Retailing Index High $150 $100 $ 50 $ 0 The high and low market price per share for the Company’s common stock for the first quarter of fiscal 2016, were as follows: (1) Wal-Mart Stores, Inc. $200 $79.99 $72.27 $79.50 $68.13 79.76 73.54 79.96 72.90 79.37 72.61 79.00 71.51 90.97 75.59 81.37 73.64 Comparison of 5-Year Cumulative Total Return* Among Wal-Mart Stores, Inc., the S&P 500 Index, and S&P 500 Retailing Index $250 2015 2014 High Low Stock Performance Chart This graph compares the cumulative total shareholder return on Walmart’s common stock during the five fiscal years ending with fiscal 2015 to the cumulative total returns on the S&P 500 Retailing Index and the S&P 500 Index. The comparison assumes $100 was invested on February 1, 2010, in shares of our common stock and in each of the ­indices shown and assumes that all of the dividends were reinvested. $300 Market price of common stock The high and low market price per share for the Company’s common stock in fiscal 2015 and 2014 were as follows: For fiscal 2014, dividends were paid based on the following schedule: April 1, 2013 $0.47 June 3, 2013 $0.47 September 3, 2013 $0.47 January 2, 2014 $0.47 $350 Independent registered public accounting firm Ernst & Young LLP 5417 Pinnacle Point Dr., Suite 501 Rogers, AR 72758 Dividends paid per share For fiscal 2015, dividends were paid based on the following schedule: April 1, 2014 $0.48 June 2, 2014 $0.48 September 3, 2014 $0.48 January 5, 2015 $0.48 Low $88.00 $80.43 2010 2011 2012 2013 2014 2015 Fiscal Years *Assumes $100 Invested on February 1, 2010 Assumes Dividends Reinvested Fiscal Year Ending January 31, 2015 Shareholders As of March 30, 2015, there were 249,876 holders of record of Walmart’s common stock. Designed and produced by Corporate Reports Inc./Atlanta   www.corporatereport.com Corporate information Stock Registrar and Transfer Agent: Computershare Trust Company, N.A. P.O. Box 43069 Providence, Rhode Island 02940-3069 1-800-438-6278 TDD for hearing-impaired inside the U.S. 1-800-952-9245 Internet: http://www.computershare.com Walmart shoppers are driven by value. We continue to expand everyday low prices to more markets globally. “Technology-driven savers” are a fast growing segment of our customer base. Globally, we’re investing to improve mobile capabilities and to test alternative access points. For example, Asda now has Click & Collect at all stores. Walmart’s investor relations app: our company at your fingertips Walmart’s enhanced digital annual report has expanded content. T EN O ASS R Global Responsibility Report: of forestland preserved via managed forestry trees consumed via recycling less energy – the same used by 4.4 homes for a year 426 metric tons 45,573 kWh 417,714 fewer of greenhouse gas offset – the equivalent of taking 85.5 cars off the road for a year converted to clean renewable sources (printing plant using RECs) gallons of water consumed Savings baselines were developed using the national averages of similar coated papers and printing practices by EarthColor Printing. FSC® is not responsible for any calculations on saving resources by choosing this paper. NT RI % 0 Customers want more choice, more items than they ever did before. Walmart.com increased assortment by 60% in fiscal 2015, and we’ll surpass 10 million items this year. 117,618 kWh ED US IN 10 Customers want to save time and money, and have an enjoyable shopping experience. We’re investing to increase associate wages and training to improve the service in our stores and clubs. 894 fewer G Every day, we offer affordable food, apparel and other merchandise to customers in 27 countries globally. We believe it is our responsibility to operate in a way that is sustainable for the planet and people who work all along our supply chains, that creates economic opportunity for our associates while growing our suppliers and the economy more broadly, and that strengthens the communities where we operate. To learn more, read our GRR at corporate.walmart.com/ microsites/globalresponsibility-report-2015. 4.65 acre GY I CE The minimized environmental footprint of this report is the result of an extensive, collaborative effort of Walmart and our supply chain partners. The environmental and social impact continues to be an important consideration. It is printed on paper from well-managed forests containing recycled PCW fiber that is Elementally Chlorine Free (ECF). It is printed using 100 percent renewable wind power (RECs), along with environmental manufacturing principles that were utilized in the printing process. These practices include environmentally responsible procurement, lean manufacturing, green chemistry principles, the recycling of residual materials and reduced volatile organic compound inks and coatings. TM ER EN Our sustainable, next-generation report W R PR I SS CE EXP Customer Proposition Walmart’s IR app gives shareholders anytime and anywhere access to financial and company news from their mobile devices. Find presentations, quarterly results, global footprint map and the stock price on your iPad, iPhone or Android device. Download the free app from iTunes or Google Play. P AC CE We’re driving innovation and sustainability – and reducing costs – with our enhanced digital annual report. Visit www.stock.walmart.com to hear directly from our leaders, associates and customers. Also, visit this website to enroll to receive future materials electronically for our Annual Shareholders’  Meetings. IND EN E Supplied by Community Energy Rainforest Alliance CertifiedTM SmartWood Program Labeling Guidelines 2015 Annual Report 9:00 p.m. China With 24 new stores in FY 15, Walmart customers have more access to quality food they can trust. 9:00 a.m. ET Canada 8:00 a.m. CT United States A broad assortment that is locally relevant makes Walmart a favorite in Canada. By using Easy Reorder on SamsClub.com, business members conveniently order online and use Club Pickup to access merchandise. Click & Collect lets Asda shoppers order online and collect their groceries at various pickup points. Supercenter customers enjoy low prices and fast, friendly checkout. 2015 Annual Report 7:00 a.m. MT United States 2:00 p.m. United Kingdom 10:00 a.m. Brazil Walmartbrasil.com’s expanded assortment puts a million items within reach. 8:00 a.m. Mexico Bodega Aurerra Express shoppers find low prices on favorite brands close to where they live and work. Wal-Mart Stores, Inc. (NYSE: WMT) 702 S.W. 8th Street Bentonville, Arkansas 72716 USA 479-273-4000 walmart.com Winning the future of retail One customer at a time
2015 Annual Report 9:00 p.m. China With 24 new stores in FY 15, Walmart customers have more access to quality food they can trust. 9:00 a.m. ET Canada 8:00 a.m. CT United States A broad assortment that is locally relevant makes Walmart a favorite in Canada. By using Easy Reorder on SamsClub.com, business members conveniently order online and use Club Pickup to access merchandise. Click & Collect lets Asda shoppers order online and collect their groceries at various pickup points. Supercenter customers enjoy low prices and fast, friendly checkout. 2015 Annual Report 7:00 a.m. MT United States 2:00 p.m. United Kingdom 10:00 a.m. Brazil Walmartbrasil.com’s expanded assortment puts a million items within reach. 8:00 a.m. Mexico Bodega Aurerra Express shoppers find low prices on favorite brands close to where they live and work. Wal-Mart Stores, Inc. (NYSE: WMT) 702 S.W. 8th Street Bentonville, Arkansas 72716 USA 479-273-4000 walmart.com Winning the future of retail One customer at a time Walmart shoppers are driven by value. We continue to expand everyday low prices to more markets globally. “Technology-driven savers” are a fast growing segment of our customer base. Globally, we’re investing to improve mobile capabilities and to test alternative access points. For example, Asda now has Click & Collect at all stores. Walmart’s investor relations app: our company at your fingertips Walmart’s enhanced digital annual report has expanded content. T EN O ASS R Global Responsibility Report: of forestland preserved via managed forestry trees consumed via recycling less energy – the same used by 4.4 homes for a year 426 metric tons 45,573 kWh 417,714 fewer of greenhouse gas offset – the equivalent of taking 85.5 cars off the road for a year converted to clean renewable sources (printing plant using RECs) gallons of water consumed Savings baselines were developed using the national averages of similar coated papers and printing practices by EarthColor Printing. FSC® is not responsible for any calculations on saving resources by choosing this paper. NT RI % 0 Customers want more choice, more items than they ever did before. Walmart.com increased assortment by 60% in fiscal 2015, and we’ll surpass 10 million items this year. 117,618 kWh ED US IN 10 Customers want to save time and money, and have an enjoyable shopping experience. We’re investing to increase associate wages and training to improve the service in our stores and clubs. 894 fewer G Every day, we offer affordable food, apparel and other merchandise to customers in 27 countries globally. We believe it is our responsibility to operate in a way that is sustainable for the planet and people who work all along our supply chains, that creates economic opportunity for our associates while growing our suppliers and the economy more broadly, and that strengthens the communities where we operate. To learn more, read our GRR at corporate.walmart.com/ microsites/globalresponsibility-report-2015. 4.65 acre GY I CE The minimized environmental footprint of this report is the result of an extensive, collaborative effort of Walmart and our supply chain partners. The environmental and social impact continues to be an important consideration. It is printed on paper from well-managed forests containing recycled PCW fiber that is Elementally Chlorine Free (ECF). It is printed using 100 percent renewable wind power (RECs), along with environmental manufacturing principles that were utilized in the printing process. These practices include environmentally responsible procurement, lean manufacturing, green chemistry principles, the recycling of residual materials and reduced volatile organic compound inks and coatings. TM ER EN Our sustainable, next-generation report W R PR I SS CE EXP Customer Proposition Walmart’s IR app gives shareholders anytime and anywhere access to financial and company news from their mobile devices. Find presentations, quarterly results, global footprint map and the stock price on your iPad, iPhone or Android device. Download the free app from iTunes or Google Play. P AC CE We’re driving innovation and sustainability – and reducing costs – with our enhanced digital annual report. Visit www.stock.walmart.com to hear directly from our leaders, associates and customers. Also, visit this website to enroll to receive future materials electronically for our Annual Shareholders’  Meetings. IND EN E Supplied by Community Energy Rainforest Alliance CertifiedTM SmartWood Program Labeling Guidelines We’re investing to win in retail by providing our customers what they want, when they want it, at unrivaled prices. Doug McMillon President and Chief Executive Officer Wal-Mart Stores, Inc. Our framework for growth What is the strategic plan to drive Walmart’s continued growth in a changing retail environment around the world? Given the breadth of our business, strategic clarity is really important. We’re thinking about the future through the lens of the customer. Customers are channel agnostic – shopping in stores, online or with their phones is more seamless than it used to be. We’re thinking the same way. Walmart possesses unique assets and capabilities to serve customers with our stores, clubs, global supply chain, data and great associates. We want to enable customers to find what they want, at a value, in a convenient, enjoyable way, regardless of how they shop. Our customer proposition is focused on four areas – price, access, assortment and experience. Each dimension is important, and we take a holistic view to how they integrate with each other. Our plan provides a framework to ignite, energize and accelerate change, as we make decisions and investments. How does Walmart’s everyday low price (EDLP) philosophy translate across markets globally? We serve value conscious customers, regardless of household income, all over the world. So, we’ll always be aggressive on price. EDLP builds customer trust, both in stores and online. That’s especially important in a digital era where there’s greater price transparency. To deliver price leadership, we continue to focus on driving everyday low cost (EDLC) through improvements in supply chain, processes and other efficiencies. How are you providing greater access for customers to shop Walmart? Through our more than 11,000 stores, websites and mobile apps, customers can access Walmart in more ways than ever before. It’s vital to have relevant formats in each market we serve. But the future of retail is not just in-store or online – it’s putting the two together in new ways. I’m excited that we’re leaders in integrating digital and physical retail in a seamless fashion. We’ll continue to test and learn as we explore options for convenient merchandise pickup or delivery to save customers’ time. How are you expanding the assortment with your e-commerce offering? Customers want more merchandise choices, and they expect to find almost anything when shopping Walmart. In our stores, we’re focused on providing quality merchandise, desirable national brands and great private brand options. On the e-commerce front, we provide those same things through an expanded assortment of approximately 8 million items on walmart.com in the U.S. Interestingly, 75 percent of walmart.com sales come from non-store inventory, thus providing incremental sales growth beyond our stores. And, this is a global effort. In Brazil, for example, our online assortment, including from marketplace partners, grew 10-fold last year. What are your most important objectives to improve customer experience, both in stores and online? Retail has always been a people business, and we win when associates exceed customer expectations. That’s why we’re investing in higher wages and increased training and development for our U.S. associates. We’ll also equip them with information and technology to facilitate great customer service. We’re focused on running great stores and websites by improving in-stock and driving a faster checkout, both online and in stores. I’m excited about the progress we’ll make for customers this year. 2015 Annual Report 1 Save Money. Live Better. Dear Shareholders, Associates and Customers: It’s an exciting time for Walmart. From the U.S. to the U.K., from Mexico to China, and across all the markets we serve, retail is changing in fundamental ways. Our future is bright because we’re increasing our investments in associates, stores and e-commerce capabilities to prepare for the way customers will want to shop with us in this new era of retail. Each week, we serve close to 260 million customers in our stores, in 27 countries, and through our websites globally. While language and culture may differ, remarkable similarities exist globally in what customers expect from a retailer. Whether it’s a young mom in Toronto or a retired couple in Phoenix, customers everywhere want to save money and save time. They want to shop on their terms in a manner that’s easy and convenient. They seek broad choices in assortment. And, regardless of how they shop, in stores or on their mobile device, they expect a great price and experience. At Walmart, our enterprise strategy guides how we fulfill those expectations and deliver on our customer proposition. We’ll drive sales growth by executing well, in stores and e-commerce, every time we serve customers. Walmart U.S. team is implementing a broad range of initiatives focused on strengthening our assortment (especially the fresh offering), driving the integration of e-commerce with our stores, and improving the customer experience. For example, in February, we announced a $1 billion investment in our U.S. hourly associates to provide higher wages, more training and increased opportunities to build a career with Walmart. These are strategic investments in our people to reignite the sense of ownership they have in our stores and foster an improved customer experience to drive sales growth. Walmart International produced solid constant currency sales and operating income growth. On a constant currency basis, net sales surpassed $141 billion, while operating income increased to more than $6 billion. I’m pleased that we’re running better stores in our International markets. Operations in Canada, Mexico and China continue to improve, leading to stronger sales and profitability. The U.K. market has become fiercely competitive, and in Brazil, we continue to work on improving performance. Across International, our commitment to a compelling fresh food offering and innovations in e-commerce, like grocery home shopping, will be important growth drivers for the future. The emphasis of the Sam’s Club team on making membership more rewarding helped drive net sales of $58 billion and an increase of more than 10 percent in membership income. Members appreciate the value-added benefits offered by Sam’s Club like Plus Cash Rewards and the suite of comprehensive business member services. The team is focused on bringing merchandise excitement and newness to drive sales. In addition, Sam’s Club continues to strengthen digital integration with clubs through initiatives like Club Pickup. Our 22 percent growth in global e-commerce sales surpassed the overall market and was supported by enhancements to our Delivering a solid financial performance I’m encouraged that Walmart’s fiscal 2015 revenue grew by more than $9 billion to nearly $486 billion and earnings per share were $4.99, a nearly 3 percent increase from the prior year. But, we have higher expectations. Our priority is to run great stores, clubs and e-commerce everywhere we operate to grow the business. Walmart U.S. delivered net sales of $288 billion, a more than 3 percent increase, and improved its sales and operating income trends each consecutive quarter during the year. I’m pleased by the positive comp sales growth, especially the strong performance from Neighborhood Markets, but we’re not satisfied. The 2 2015 Annual Report Almost 260M Customers served weekly in our stores in 27 countries and through websites globally 16% $486B Fiscal 2015 total shareholder return Consolidated fiscal 2015 revenue technology, assortment and supply chain. The investments in our global technology platform provide a foundation that strengthens usability and conversion across our e-commerce websites and mobile apps. We’re also investing in more fulfillment centers around the world to enable faster delivery of merchandise to customers. Each of our business segments continues to increase the integration of e-commerce and mobile assets with our stores and clubs. For example, we’re testing Click & Collect pickup points in many of our key markets. Asda already has Click & Collect capabilities in all stores. Investing in customer relevance As we invest to expand our global e-commerce capabilities and build more stores, we keep customer expectations at the forefront. The type of store format or fulfillment center we build, the location of where we put a club, or the functionality of a website are all predicated on how we can better serve our customers. And, as we make these choices, we’re striving to balance sales growth and profitability. We’re being thoughtful with our investments, ensuring we have the infrastructure in place for sustainable growth. Walmart’s strong balance sheet and robust cash flow provide a solid foundation to support these investments. While we grow, we remain focused on expense management and EDLC. When we operate and grow efficiently, we’ll generate increased value for shareholders. Engaged associates fuel our success Highly motivated and engaged associates are essential to providing customers with excellent service. And, it’s only through associates who are merchant-minded that we’ll continue to connect customers with new items that they want and need. Although technology has transformed our business, retail is still a people business. Walmart has always provided a ladder of opportunity – one that today is available to our 2.2 million associates globally. Regardless of your background, Walmart will give you the opportunity to grow a career as far as your ability and hard work will take you. I am one of many leaders in our company who benefited from this opportunity to begin as an hourly associate and grow into roles with increased responsibility. Talent is the essential enabler to reach our objectives. I’m excited by the new initiatives we’ve put in place around the world to better train and equip our associates for success. For example, the steps we’ve taken in the U.S., China and Mexico to strengthen compensation structures and increase training opportunities give associates more ownership and accountability, so they can react faster to customers’ needs. Adding new talent is also important as we work to grow digital retail and fully align our organization with a changing retail environment. Some of the brightest minds in retail are joining Walmart because they know this is an organization that’s embracing innovation to deliver a better future for customers. Committed to a better world We’re not only thinking differently about retail, we’re thinking differently about the world. Walmart is a powerful change agent, and we’re committed to global responsibility initiatives that make our world better. I’m proud of our work to advance environmental sustainability, to support women’s economic empowerment, and to offer healthier food choices for our customers. We continue to look for more ways to lead and have an even greater impact on the communities that we serve. We’ll also remain steadfast in our commitment to compliance, ethics and doing business the right way. I’m pleased with the enhancements we’ve made, including better technology, to strengthen these organizations and build world-class compliance. My career at Walmart began more than three decades ago, and I’ve never been more excited about our future than I am today. Walmart has a great purpose – to save people money so they can live better. We’re embracing change so we can deliver that promise more effectively. As I look back over this past year, we’ve made great strides towards our goals. We know where our customers’ expectations are going, and we’re ideally positioned to deliver for them. Walmart has great assets and capabilities, but there’s more we must do. We’re continuing to build a Walmart that excels globally at the integration of digital and physical retail, providing our customers with a seamless experience to shop whenever, wherever and however they want. It’s a great opportunity. I’m excited about the next steps in our journey. Sincerely, 2015 Annual Report 3 Delivering an improved shopping experience In fiscal 2015, Walmart U.S. delivered a 3.1 percent increase in net sales to $288 billion. Comp sales growth of 0.6 percent included more than 6 percent growth in our Neighborhood Market format. Operating income declined 2.1 percent to $21.3 billion, due primarily to increased health-care costs. We improved sales and operating income trends each consecutive quarter in fiscal 2015. Our new leadership team, led by Greg Foran, is focused on improving our customer experience through assortment, price and access. Enhancing the customer experience We’re focused on exceeding our customers’ expectations by strengthening the shopping experience. We’ve expanded the Checkout Promise to provide a faster checkout experience, with more lanes available during peak hours and weekends. In February, we announced an array of changes for associates and a bold new approach to our jobs. These changes to training, scheduling and pay will lead to expanded career opportunities and increased wages for hundreds of thousands of 4 2015 Annual Report and relevant, and we’ve refreshed our mobile app. We’ll continue to test, learn and innovate as we explore initiatives, such as online grocery delivery and Walmart Grocery Pickup, to provide greater access to our brand anytime and anywhere. And, we’ll accomplish all of this through investments in technology, systems and our supply chain, including our more than 4,500 stores. These investments will give our customers better access to merchandise and make the shopping experience more rewarding. full-time and part-time hourly store associates. Across the country, all entry-level associates now earn a minimum of $9.00 per hour, and by February 2016, current associates will earn at least $10.00 per hour. Our people will have more control over their schedules and access to training that provides a pathway to greater career opportunities. These investments are designed to reignite our associate pride and ownership to improve service to our customers. Focusing on a quality assortment We’re an agent for our customer, driving value through improving quality and expanding key brands, at an everyday low price. Customers expect a consistent high quality fresh food experience, which is a key traffic driver to our stores. We’ll continue to strengthen our fresh departments by improving quality, consistency, and presentation, especially with more locally sourced fresh fruits and vegetables. Operational enhancements, from product flow and forecasting, to associate training and development, will ensure a superior fresh offering. Additionally, by leveraging our unified physical and digital capabilities, customers have access to approximately 8 million items across our entire product offering, with more to come this year. Maintaining price leadership Customers want value and we’re committed to delivering EDLP. We’re focused on executing a consistent pricing strategy that will provide transparent pricing for our customers through new tools and capabilities. We’ll continue to work with our supplier partners to achieve EDLC. This will allow us to invest in and strengthen our EDLP pricing strategy and offer the value our customers seek. Aligning formats and channels with customers’ needs Customers want to save time and money, and Walmart has an ability to serve them anytime, anywhere. While our supercenters provide a convenient one-stop solution, we’ll reinvent the format to exceed customer expectations. And, we’re upgrading our Neighborhood Markets to accentuate our fresh and organic offering. Overall, we expect to add approximately 15 to 16 million total net retail square feet in fiscal 2016, representing between 240 and 270 units. Providing career opportunities for U.S. veterans We’re proud of our five-year commitment to hire 100,000 veterans by 2018. Over the past two years, we’ve hired approximately 80,000 veterans to join the Walmart team. And, more than 6,000 have been promoted to roles of greater responsibility and higher pay. They possess discipline, training and a passion for service to improve our business for customers. With our extensive store base, distribution network and e-commerce capabilities, we’re best-positioned to succeed at the integration of digital and physical retail. We’ll continue to make the walmart.com experience more intuitive, personalized 2015 Annual Report 5 International Driving increased profitability through balanced growth In fiscal 2015, Walmart International’s net sales increased 3.6 percent on a constant currency basis, to $141.4 billion. We grew operating income faster than sales, demonstrating balanced growth and improved profitability. We also added 9.4 million square feet of retail space and 183 stores, bringing our total portfolio to more than 6,200 stores and 10 e-commerce websites in 26 countries. By remaining focused on being in good businesses and being the best-in-class retailer, we’re ensuring a balanced portfolio for customers with the right formats and merchandise, supported by EDLP to drive sales growth. Delivering sales through customer relevance We’re passionate about driving sales wherever we operate. Customers around the world choose Walmart for our low prices, convenient access to compelling merchandise and a shopping experience that meets their expectations. EDLP, enabled by being a low-cost operator, is the foundation of our customer proposition. In fiscal 2015, we continued to make progress on the transition to EDLP in markets such as Brazil 6 2015 Annual Report and Africa. In other highly competitive markets such as the U.K. and Canada, we remained focused on price investment to drive sales. We’re also leveraging best practices globally – improving our fresh and private brand assortments and driving greater operational efficiency. Our EDLC agenda had a strong year, with our ‘We Operate for Less’ and ‘We Buy for Less’ programs saving us $150 million in China, for example. We’re also providing customers greater convenience by opening more small-format stores. And, when necessary, we’ve closed underperforming stores and divested non-core elements of our business. We’ll continue to strategically optimize our global positioning across key geographies and formats to maximize future growth potential. Accelerating e-commerce and digital/physical integration In all markets, we’re committed to providing customers convenient access to Walmart. We’re innovating through e-commerce, mobile and various pickup sites to provide customers more shopping options than ever before. We’re especially focused on grocery home shopping, with expanded operations in the U.K., Mexico and Japan. Asda doubled its Click & Collect sites, and in Japan, we automated the order picking process to fulfill Seiyu.com grocery orders more efficiently and sustainably. E-commerce sales growth has been strong. Brazil e-commerce sales in fiscal 2015 grew faster than the market despite strong competitive pressures, and in China, Yihaodian saw traffic increase more than 60 percent. No matter the shopper preference, we’ll continue to strive to be the destination of choice. Building world-class talent and trust With nearly 800,000 associates serving customers in the International business, we’re committed to investing in our people’s success through training initiatives and opportunity, ensuring we have high performing associates in all markets. We’re leveraging our global leadership talent by giving them opportunities in various markets, such as Mexico and Brazil, to lead improvements in business performance. Our leadership team is focused on a common goal to be the most trusted retailer everywhere we operate. We aim to strengthen customer trust with a strong focus on EDLP, high quality fresh food and excellent customer service. For example, in China, we’ve invested to improve our distribution network for fresh products and also utilized Walmart’s “Worry Free Fresh” program to provide a money-back guarantee if our produce and meats don’t meet customer expectations. Our commitment to having world-class compliance and leading on social and environmental issues also contributes to building trust with customers. In fiscal 2015, we continued to execute a comprehensive compliance-focused training program, including areas encompassing anti-corruption, food safety and other compliance areas. Our consistent focus on good corporate citizenship helps strengthen community relationships. Empowering women entrepreneurs around the world Walmart’s Global Women’s Economic Empowerment Initiative provides training, access to markets and career opportunities to nearly 1 million women, many on farms and in factories. We’re committed to affording them economic opportunities and increasing our sourcing from women-owned businesses. 2015 Annual Report 7 Creating a more rewarding member experience In fiscal 2015, Sam’s Club’s commitment to creating the most valued membership organization in the U.S. contributed to growth in net sales, operating income and enhanced member engagement. Overall net sales increased 1.5 percent to $58 billion, while comp sales, excluding fuel, were up 0.6 percent. Membership income grew 10.3 percent, driving operating income growth, without fuel, of 2 percent to $1.9 billion. The most valuable card in a member’s wallet Delivering exceptional value is what a Sam’s Club membership is all about, and we’re finding more ways to strengthen our member engagement. We expect that our increased hourly wages and additional investments in training, announced in February, will provide greater career opportunities for our club associates and allow us to continue delivering award-winning service to members. In addition, Plus members appreciate the benefits of our Cash Rewards program. Response has been strong, On the menu: smart and healthy food choices for members Whether they’re millennials or boomers, Sam’s Club members are seeking healthier food options – and we deliver. Last year, we more than doubled our organic portfolio. And, “healthy for you” items such as breakfast bars, squeezable fruit pouches and protein drinks are resonating with members as well. 8 2015 Annual Report increasing the percentage of members who choose to become Plus members. Putting money back in the pockets of Plus members after they make qualifying purchases at the club significantly enhances the value of this membership. And, all of our members are enthusiastic about our cash back credit card. This secure, chip-enabled 5-3-1 MasterCard® offers the best cash-back program in the market. We’ve also expanded our portfolio of services to provide more convenience and value. We’re helping small business members take care of back office needs by providing easy access to leading providers of affordable health insurance plans, payroll services, merchant payment processing and legal services. Our goal is to curate a suite of anywhere, anytime business member services with exclusive savings that make the Sam’s Club membership the most valuable “business card” for these members, while supporting the small business community. We also launched a Sam’s Club Travel app in December to give all members faster access to outstanding travel savings. mobile app allow members to search for products, track Instant Savings and purchase exciting merchandise whenever and wherever they want. Club Pickup, which had been aimed at our Business members, was relaunched in fiscal 2015 so both Savings and Business members can order online and then pick up their merchandise at their local club at a convenient time for them. And, the online Easy Reorder tool allows members to see past purchases and quickly add them to their current cart. Members can shop Sam’s Club in a matter of minutes – no matter how big the order. As we grow, we’ll also give greater access through new clubs. In fiscal 2016, Sam’s Club will open 9 to 12 new and relocated clubs, and remodel at least 55 clubs, while investing in innovation at SamsClub.com. Brands and values that delight members in club and online Having great merchandise builds members’ trust and loyalty. Sam’s Club members look for household staples, as well as new, exciting, on-trend merchandise – from children’s apparel to home décor – at members-only prices. We’re focused on infusing newness across every merchandise category – building excitement, driving traffic, enhancing engagement and increasing retention of club members. Members increasingly shop Sam’s Club for healthy options, including organics, active wear and nutrition bars that support their active lifestyles. In addition, our award-winning pharmacists, free health screening services and immunizations make Sam’s Club an important health-care destination for many members. Integrating digital and physical access for member convenience We’re focused on giving members the choices they want by continuing to integrate digital and physical retail. Improved digital access through our investments in SamsClub.com and our 2015 Annual Report 9 Integrating digital and physical retail for Walmart customers 11 Countries with dedicated Walmart e-commerce websites blueChip_12 1.2M sq. ft. Average size of our 4 new U.S. e-commerce fulfillment centers opening in FY 16 $12.2B Global e-commerce sales in FY 15 (22% growth) 10 2015 Annual Report 60% Increase in walmart.com assortment in FY 15 (to 8 million items) 70% Approximate walmart.com traffic from mobile devices during FY 15 Q4 holidays Investing in our e-commerce capabilities Walmart’s e-commerce investments around the world are focused on four priorities: a global technology platform, a next generation fulfillment network, talent and the integration of digital and physical retail. Our new technology platform makes shopping easier on any device and enables deployment of innovation to multiple markets quickly. Our new, highly automated fulfillment centers allow more orders to be shipped faster, and at a lower cost, to customers’ doorsteps. We’re attracting many of the industry’s top engineers and scientists as we build a technology company inside the world’s largest retailer. And, we continue to use our stores to test innovations like order pickup and grocery home shopping to position Walmart as the global leader in integrating digital and physical retailing. 2015 Annual Report 11 Fostering opportunities for Walmart associates globally $1B Walmart’s incremental investment in higher wages, education and training for U.S. store and club associates 57% “Walmart will continue to provide a ladder of opportunity that any associate can climb. If you work hard, develop new skills and care for our customers, there should be no limit to what you can do here.” Doug McMillon President and Chief Executive Officer Wal-Mart Stores, Inc. 12 12 20152015 Annual Annual Report Report Of our associates are women 2.2M Dedicated associates globally $500M Bonuses earned by hourly associates in fiscal 2015 4 of 5 75% Of store operations management joined Walmart as hourly associates Are proud to work at Walmart Based on survey results from more than 2 million associates worldwide 3,600 Global eCommerce associates around the world 2015 Annual Report 13 We’re delivering strong governance for shareholders. S. Robson Walton Chairman of the Board of Directors Wal-Mart Stores, Inc. Across our markets, Walmart is in a period of rapid change, and our Board of Directors is highly engaged in overseeing the development and execution of Walmart’s enterprise strategy. Under Doug’s leadership, management is focused on driving long-term growth and profitability. We’re investing in our associates and e-commerce, and integrating our e-commerce offering with our stores and clubs to exceed customers’ expectations. I’m proud that the Board fully supported a $1 billion investment in our U.S. store and club hourly associates to increase pay and provide a pathway to greater career opportunities. We also endorsed a more than $300 million incremental investment in e-commerce to continue development of fulfillment and technology capabilities in fiscal 2016. These commitments are expected to improve the store and digital experience for our customers. Walmart has an exceptional Board of Directors comprised of a diverse mix of highly qualified members committed to upholding strong governance standards and demonstrating integrity in all activities. Our Board continually reviews our composition, leadership structure, and our way of working to ensure that we’re fully leveraging these talented individuals. Our Board’s diversity is broad – from ethnicity 14 2015 Annual Report and gender, to business experience and tenure. The median length of service on our Board is approximately 6½ years. This includes a healthy mix of directors with fresh perspectives who joined our Board over the past few years, combined with longer-serving directors with expertise in our business and broader retail acumen. Because change is inevitable, succession planning is one of our key responsibilities. Greg Penner, who has served on the Board since 2008, became the Board’s Vice Chairman this past year, and he has taken a more active leadership role in Board and management interactions focused on strategy, management development and Board processes. As part of our standard refreshment, we have a rigorous Board candidate evaluation process to ensure that we maintain the right skill sets for our growing business. Two board additions in 2014, Kevin Systrom and Tom Horton, underscore the benefits of this approach and demonstrate how we’re strengthening our oversight to keep pace with the changing retail dynamics. Committed to Board independence Our Board is dedicated and challenges management to grow Walmart in the best interest of our stakeholders. In fact, most directors attended all of our Board and committee meetings last year, with the overall meeting attendance for the year being 98 percent. The Walton family has a passion to see the company succeed, and we’re proud to have representation on Walmart’s Board. But, we also recognize the importance of having an independent board with diverse experiences and viewpoints. Today, the majority of our board members are independent. Dr. James Cash serves as our Lead Independent Director, adding exceptional value to our governance processes. And, we’ve had separate Chairman and CEO roles since 1988. This structure allows our management team to focus on long-term value creation for all shareholders and avoids the temptation to respond to short-term pressure that’s not best for our business. Listening to our shareholders All of us believe it’s important for the company to hear from shareholders and respond accordingly. Over the past year, management engaged in a proactive outreach with many of our largest shareholders to discuss Walmart’s strategy, governance and compensation practices, as well as our environmental and social initiatives. These meetings were insightful, and the feedback was shared with the Board. We’ll continue to evaluate and act upon the recommendations that the Board feels are in the best interest of all of our shareholders. This is an exciting time for Walmart and retail in general. Our future is bright for our customers, associates and shareholders. Despite all the change that’s occurring, Walmart remains true to delivering on the purpose we’ve always had, to save people money so they can live better. And, we’re committed to growing the company in an ethical and compliant way, endeavoring to always do the right thing. Board of Directors Pictured below from left to right: S. Robson Walton (Chairman) Mr. Walton is Chairman of the Board of Directors of Wal-Mart Stores, Inc. Kevin Y. Systrom Mr. Systrom is the Chief Executive Officer and co-founder of Instagram, a social media application. Marissa A. Mayer Ms. Mayer is the Chief Executive Officer and President and Director of Yahoo!, Inc., a digital media company. Timothy P. Flynn Mr. Flynn is the retired Chairman of KPMG International, a professional services firm. Aida M. Alvarez Ms. Alvarez is the former Administrator of the U.S. Small Business Administration and was a member of President Clinton’s Cabinet from 1997 to 2001. Douglas N. Daft Mr. Daft is the retired Chairman of the Board of Directors and Chief Executive Officer of The Coca-Cola Company, a beverage manufacturer, where he served in that capacity from February 2000 until May 2004, and in various other capacities since 1969. Thomas W. Horton Mr. Horton is the former Chairman of American Airlines Group Inc. and the former Chairman of American Airlines, Inc. He also previously served as the Chairman and Chief Executive Officer of AMR Corporation and CEO of American Airlines, Inc. Michael T. Duke Mr. Duke is the former Chairman of the Executive Committee of the Board of Directors of Wal-Mart Stores, Inc., where he served in that capacity until January 31, 2015. He previously served as the President and Chief Executive Officer of Wal-Mart Stores, Inc. from February 2009 to January 2014. James I. Cash, Jr., Ph.D. (Lead Independent Director) Dr. Cash is the James E. Robison Emeritus Professor of Business Administration at Harvard Business School, where he served from July 1976 to October 2003. Board Committees: Name Audit Comp., Nominating & Governance Executive Gregory B. Penner (Vice Chairman) Mr. Penner is the Vice Chairman of the Board of Directors of Wal-Mart Stores, Inc. and a General Partner at Madrone Capital Partners, an investment firm. Linda S. Wolf Ms. Wolf is the retired Chairman of the Board of Directors and Chief Executive Officer of Leo Burnett Worldwide, Inc., an advertising agency and division of Publicis Groupe S.A. C. Douglas McMillon Mr. McMillon is the President and Chief Executive Officer of Wal-Mart Stores, Inc. Jim C. Walton Mr. Walton is the Chairman of the Board of Directors and Chief Executive Officer of Arvest Bank Group, Inc., a group of banks operating in the states of Arkansas, Kansas, Missouri and Oklahoma. Global Comp. Strategic Planning Tech & & Finance e-commerce S. Robson Walton (FE) Timothy P. Flynn Name Audit Pamela J. Craig Ms. Craig is the retired Chief Financial Officer of Accenture plc, a global management consulting, technology services, and outsourcing company. Steven S Reinemund Mr. Reinemund is the retired Dean of Business and Professor of Leadership and Strategy at Wake Forest University. He previously served as the Chairman of the Board and Chairman and Chief Executive Officer of PepsiCo, Inc. Comp., Nominating & Governance Linda S. Wolf (C) Thomas W. Horton Jim C. Walton Michael T. Duke James I. Cash, Jr., Ph.D.(FE) Marissa A. Mayer Douglas N. Daft Kevin Y. Systrom Roger C. Corbett Aida M. Alvarez Pamela J. Craig(FE) (C) Executive Steven S Reinemund (C) Committee Chair Global Comp. Strategic Planning Tech & & Finance e-commerce (C) C. Douglas McMillon (C) (FE) Gregory B. Penner Roger C. Corbett Mr. Corbett is the retired Chief Executive Officer and Group Managing Director of Woolworths Limited, the largest retail company in Australia. (FE) (C) (C) Financial Expert 2015 Annual Report 15 A solid fiscal 2015 performance; investing for a stronger future Charles M. Holley, Jr. Executive Vice President and Chief Financial Officer Wal-Mart Stores, Inc. Walmart had a solid year in fiscal 2015 as each operating segment improved its performance as the year progressed. While net sales grew nearly 2 percent and operating income increased 1 percent, our underlying performance was actually stronger. Our results were impacted by significant headwinds from currency exchange rate fluctuations. These currency headwinds may continue throughout this current year. Our top priority is to run great stores in all of our markets. That is the only way to have sustainable increases in comp sales, as well as top line growth. We’re pleased that e-commerce sales rose faster than the market globally last year at approximately 22 percent. As we continue to integrate our websites and mobile apps with our stores and clubs, we’ll enable customers to shop anytime and anywhere they want. Walmart is well-positioned to deliver for customers because we have the financial strength to invest in growth. Our AA credit rating, unmatched in retail, is a testament to our financial discipline and strong balance sheet. We’ve consistently delivered strong cash flow for many years. In fact, in fiscal 2015, Walmart generated free cash flow of more than $16 billion, the best performance in over a decade. Our return on investment was 16.9 percent, as we continue to invest in store growth and e-commerce initiatives. Retail is changing and we’re investing to serve customers more effectively, which we believe will benefit shareholders over time. We know that customers expect value, a broad assortment, and various options in how and where they shop. They also want an enjoyable shopping experience, both in stores and online. Our fiscal 2016 investments in associate wages and training, as well as our stepped-up investments in global e-commerce, will strengthen our ability to deliver a great experience for customers. These important investments will make us even more relevant in the future. Investing for customers to drive growth We take a long-term view as we position our business for the future. Globally, customers will always need to shop in stores, and we will continue to serve customers with a variety of formats. That is why we will add 26–30 million net retail square feet this year with new stores and clubs around the world, to bring Walmart closer to customers. $64B* 19%* $64B* Consolidated net sales growth Earnings per share growth Returned to shareholders through dividends and share repurchases *Data reflects five-year period including fiscal 2011 through 2015. 16 2015 Annual Report Sometimes, it is more convenient for customers to shop online and have their order delivered to their doorstep. Other times, they may want to pick up their online order when they are already shopping at our store. We are building the capabilities to provide customers with best-in-class e-commerce – from user-friendly websites and mobile apps to high-tech fulfillment centers and the infrastructure required for grocery home shopping. Our incremental investments in and around e-commerce will be well over $1 billion this year, and we will continue to seek the right balance between sales growth and profitability as we grow our e-commerce business. Investing in our people and shareholders This year, we’re making a $1 billion incremental investment in strategic people initiatives within our U.S. businesses. This wage restructuring and expanded training opportunities will help hourly associates earn higher pay and advance their careers. This investment will benefit our customers through a better store and club experience, leading to higher sales and returns. I’m proud of Walmart’s long record of consistent returns to shareholders. After growth initiatives, we use our remaining cash flows to provide shareholder returns through dividends and share repurchases. Last year, we returned over $7 billion to shareholders. This year, we increased our annual dividend to $1.96 per share, representing 42 consecutive years of dividend increases. As I close, I encourage you to review our financial results in the next section. Walmart’s business is strong, and we are confident that our strategic investments will make Walmart’s future even brighter. Executive Officers Neil M. Ashe Rollin L. Ford Executive Vice President, President and Chief Executive Officer, Global eCommerce Executive Vice President and Chief Administrative Officer Daniel J. Bartlett Jeffrey J. Gearhart Executive Vice President, Corporate Affairs Executive Vice President, Global Governance and Corporate Secretary Rosalind G. Brewer Executive Vice President, President and Chief Executive Officer, Sam’s Club M. Susan Chambers Executive Vice President, Global People David Cheesewright Executive Vice President, President and Chief Executive Officer, Walmart International Charles M. Holley, Jr. Executive Vice President and Chief Financial Officer C. Douglas McMillon President and Chief Executive Officer Steven P. Whaley Senior Vice President and Controller Greg S. Foran Executive Vice President, President and Chief Executive Officer, Walmart U.S. 18 Five-Year Financial Summary 40 Notes to Consolidated Financial Statements 19 Management’s Discussion and Analysis of Financial Condition and Results of Operations 60 Report of Independent Registered Public Accounting Firm 36 Consolidated Statements of Income Consolidated Statements of Comprehensive Income 37 Consolidated Balance Sheets 61 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 38 Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest 39 Consolidated Statements of Cash Flows 62 Management’s Report to Our Shareholders 63 Unit Counts as of January 31, 2015 64 Corporate and Stock Information 2015 Annual Report 17 Five-Year Financial Summary As of and for the Fiscal Years Ended January 31, (Amounts in millions, except per share and unit count data) Operating results Total revenues Percentage change in total revenues from previous fiscal year Net sales Percentage change in net sales from previous fiscal year Increase (decrease) in calendar comparable sales (1) in the United States Walmart U.S. Sam’s Club Gross profit margin Operating, selling, general and administrative expenses, as a percentage of net sales Operating income Income from continuing operations attributable to Walmart Net income per common share: Diluted income per common share from continuing operations attributable to Walmart Dividends declared per common share Financial position Inventories Property, equipment and capital lease assets, net Total assets Long-term debt and long-term capital lease obligations (excluding amounts due within one year) Total Walmart shareholders’ equity 2015 2014 2013 2012 2011 $485,651 $  476,294 $468,651 $446,509 $421,395 2.0% 1.6% 5.0% 6.0% 3.4% 482,229 473,076 465,604 443,416 418,500 1.9% 1.6% 5.0% 6.0% 3.4% 0.5% (0.5)% 2.4% 1.6% (0.6)% 0.6% (0.6)% 2.0% 0.3% (1.5)% 0.0% 0.3% 4.1% 8.4% 3.9% 24.3% 24.3% 24.3% 24.5% 24.8% 19.4% 19.3% 19.0% 19.2% 19.4% $ 27,147 $ 26,872 $ 27,725 $ 26,491 $ 25,508 16,182 15,918 16,963 15,734 15,340 $   4.99 $   4.85 $   5.01 $   4.53 $   4.18 1.92 1.88 1.59 1.46 1.21 $ 45,141 $ 44,858 $ 43,803 $ 40,714 $ 36,437 116,655 117,907 116,681 112,324 107,878 203,706 204,751 203,105 193,406 180,782 43,692 44,559 41,417 47,079 43,842 81,394 76,255 76,343 71,315 68,542 Unit counts Walmart U.S. segment 4,516 4,203 4,005 3,868 3,804 Walmart International segment 6,290 6,107 5,783 5,287 4,191 Sam’s Club segment 647 632 620 611 609 11,453 10,942 10,408 9,766 8,604 Total units (1) C  omparable sales include sales from stores and clubs open for the previous 12 months, including remodels, relocations and expansions, as well as e-commerce sales. ­Comparable store and club sales include fuel. 18 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Wal-Mart Stores, Inc. (“Walmart,” the “Company” or “we”) is engaged in the operation of retail, wholesale and other units in various formats around the world. Our operations consist of three reportable segments: Walmart U.S., Walmart International and Sam’s Club. • Walmart U.S. is our largest segment and operates retail stores in all 50 states in the United States (“U.S.”), Washington D.C. and Puerto Rico, with three primary store formats, as well as digital retail. Walmart U.S. generated approximately 60% of our net sales in fiscal 2015 and, of our three segments, Walmart U.S. is the largest and has historically had the highest gross profit as a percentage of net sales (“gross profit rate”). In addition, Walmart U.S. has historically contributed the greatest amount to the Company’s net sales and operating income. • Walmart International consists of operations in 26 countries outside of the U.S. and includes retail, wholesale and other businesses. These businesses consist of numerous formats, including supercenters, supermarkets, hypermarkets, warehouse clubs, including Sam’s Clubs, cash & carry, home improvement, specialty electronics, restaurants, apparel stores, drug stores and convenience stores, as well as digital retail. Walmart International generated approximately 28% of our fiscal 2015 net sales. The overall gross profit rate for Walmart International is lower than that of Walmart U.S. because of its merchandise mix. Walmart International is our second largest segment and has grown through acquisitions, as well as by adding retail, wholesale and other units. • Sam’s Club consists of membership-only warehouse clubs and operates in 48 states in the U.S. and in Puerto Rico, as well as digital retail. Sam’s Club accounted for approximately 12% of our fiscal 2015 net sales. As a membership-only warehouse club, membership income is a significant component of the segment’s operating income. As a result, Sam’s Club operates with a lower gross profit rate and lower operating expenses as a percentage of net sales than our other segments. Each of our segments contributes to the Company’s operating results differently, but each has generally maintained a consistent contribution rate to the Company’s net sales and operating income in recent years. Through the operations in each of our segments, we help people around the world save money and live better – anytime and anywhere – in retail stores or through our e-commerce and mobile capabilities. Through innovation, we are striving to create a customer-centric experience that seamlessly integrates digital and physical shopping. Physical retail encompasses our brick and mortar presence in each of the markets we operate. Digital retail is comprised of our e-commerce websites and mobile commerce applications. Each week, we serve nearly 260 million customers who visit our over 11,000 stores under 72 banners in 27 countries and e-commerce websites in 11 countries. Our strategy is to lead on price, invest to differentiate on access, be competitive on assortment and deliver a great experience. By leading on price we earn the trust of our customers every day by providing a broad assortment of quality merchandise and services at everyday low prices (“EDLP”), while fostering a culture that rewards and embraces mutual respect, integrity and diversity. EDLP is our pricing philosophy under which we price items at a low price every day so our customers trust that our prices will not change under frequent promotional activity. Price leadership is core to who we are. Everyday low cost (“EDLC”) is our commitment to control expenses so those cost savings can be passed along to our customers. Our digital and physical presence provides customers access to our broad assortment anytime and anywhere. We strive to give our customers and members a great digital and physical shopping experience. Our fiscal year ends on January 31 for our U.S. and Canadian operations. We consolidate all other operations generally using a one-month lag and on a calendar year basis. Our business is seasonal to a certain extent due to calendar events and national and religious holidays, as well as weather patterns. Historically, our highest sales volume and operating income have occurred in the fiscal quarter ending January 31. This discussion, which presents our results for the fiscal years ended January 31, 2015 (“fiscal 2015”), January 31, 2014 (“fiscal 2014”) and January 31, 2013 (“fiscal 2013”), should be read in conjunction with our Consolidated Financial Statements and the accompanying notes. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. We also discuss certain performance metrics that management uses to assess the Company’s performance. Additionally, the discussion provides information about the financial results of the three segments of our business to provide a better understanding of how each of those segments and its results of operations affect the financial condition and results of operations of the Company as a whole. Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss segment operating income, comparable store and club sales and other measures. Management measures the results of the Company’s segments using each segment’s operating income, including certain corporate overhead allocations, as well as other measures. From time to time, we revise the measurement of each segment’s operating income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by our chief operating decision maker. When we do so, the previous period amounts and balances are reclassified to conform to the current period’s presentation. The amounts disclosed for “Corporate and support” in the leverage discussion of the Company’s performance metrics consist of corporate overhead and other items not allocated to any of the Company’s segments. Comparable store and club sales is a metric that indicates the ­performance of our existing U.S. stores and clubs by measuring the change in sales for such stores and clubs, including e-commerce sales, for a particular period from the corresponding period in the previous year. Walmart’s definition of comparable store and club sales includes sales from stores and clubs open for the previous 12 months, including remodels, relocations, expansions and conversions, as well as ­e-commerce sales. We measure the e-commerce sales impact by including those sales initiated through our websites and fulfilled through our e-commerce distribution facilities, as well as an estimate for sales initiated online, but fulfilled through our stores and clubs. Changes in format are excluded from comparable store and club sales when the conversion is accompanied by a relocation or expansion that results in a change in retail square feet of more than five percent. Comparable store and club sales are also referred to as “same-store” sales by others within the retail industry. The method of calculating comparable store and club sales 2015 Annual Report 19 Management’s Discussion and Analysis of Financial Condition and Results of Operations v­ aries across the retail industry. As a result, our calculation of comparable store and club sales is not necessarily comparable to similarly titled ­measures reported by other companies. In discussing our operating results, the term currency exchange rates refers to the currency exchange rates we use to convert the operating results for all countries where the functional currency is not the U.S. dollar. We calculate the effect of changes in currency exchange rates as the ­difference between current period activity translated using the current period’s currency exchange rates, and the comparable prior year period’s currency exchange rates. Throughout our discussion, we refer to the results of this calculation as the impact of currency exchange rate fluctuations. When we refer to constant currency operating results, we are referring to our operating results without the impact of the currency exchange rate fluctuations and without the impact of acquisitions until the acquisitions are included in both comparable periods. The disclosure of constant currency amounts or results permits investors to understand better Walmart’s underlying performance without the effects of currency exchange rate fluctuations or acquisitions. Volatility in currency exchange rates may impact the results, including net sales and operating income, of the Company and the Walmart International segment in the future. We made certain reclassifications to prior period amounts or balances to conform to the presentation in the current fiscal year. These reclassifications did not impact the Company’s operating income or consolidated net income. Additionally, certain prior period segment asset and expense allocations have been reclassified among segments to be comparable with the current period presentation. The Retail Industry We operate in the highly competitive retail industry in all of the markets we serve. We face strong sales competition from other discount, department, drug, dollar, variety and specialty stores, warehouse clubs and supermarkets, as well as e-commerce and catalog businesses. Many of these competitors are national, regional or international chains or have a national or international online presence. We compete with a number of companies for prime retail site locations, as well as in attracting and retaining quality employees (whom we call “associates”). We, along with other retail companies, are influenced by a number of factors including, but not limited to: catastrophic events, weather, competitive pressures, consumer disposable income, consumer debt levels and buying patterns, consumer credit availability, cost of goods, currency exchange rate fluctuations, customer preferences, deflation, inflation, fuel and energy prices, general economic conditions, insurance costs, interest rates, labor costs, tax rates, cybersecurity attacks and unemployment. Further information on the factors that can affect our operating results and on certain risks to our Company and an investment in its securities can be located in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, and in the discussion under “Cautionary Statement Regarding Forward-Looking Statements and Information” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015. Company Performance Metrics Our performance metrics emphasize three priorities for improving ­shareholder value: growth, leverage and returns. Our priority of growth focuses on sales through growth in net sales, comparable store and club sales, including e-commerce sales, and unit square feet growth; the ­priority of leverage encompasses our objective to increase our operating income at the same rate as or a faster rate than the growth in net sales by growing our operating, selling, general and administrative expenses (“operating expenses”) at a slower rate than the growth of our net sales; and the priority of returns focuses on how efficiently we employ assets through return on investment and how effectively we manage working capital through free cash flow. While all three priorities are important, our top priority is growth, with increased investment in digital retail and our associates. Sales growth will contribute to improving leverage and returns over time. Growth Net Sales Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 Net Sales 2013 Percent Percent Percent Percent Percent of Total Change Net Sales of Total Change Net Sales of Total Walmart U.S. Walmart International Sam’s Club $288,049 59.8% 3.1% $279,406 59.0% 1.8% 136,160 28.2% (0.3)% 136,513 28.9% 1.3% 58,020 12.0% 1.5% 57,157 12.1% 1.3% $274,433 59.0% 134,748 28.9% 56,423 12.1% Net sales $482,229 100.0% 1.9% $473,076 100.0% 1.6% $465,604 100.0% Our consolidated net sales increased 1.9% and 1.6% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. The increase in net sales for fiscal 2015 was primarily due to 3.0% year-over-year growth in retail square feet, positive comparable sales in the U.S. and higher e-commerce sales across the Company. The increase was partially offset by $5.3 billion of negative impact from fluctuations in currency exchange rates for fiscal 2015. The increase in net sales for fiscal 2014 was due to 3.1% growth in retail square feet, higher e-commerce sales, the impact of fiscal 2013 acquisitions and positive comparable club sales at Sam’s Club. The increase in net sales for fiscal 2014 was partially offset by $5.1 billion of negative impact from fluctuations in currency exchange rates. 20 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations Calendar Comparable Store and Club Sales Comparable store and club sales is a metric which indicates the performance of our existing U.S. stores and clubs by measuring the change in sales for such stores and clubs, including e-commerce sales, for a particular period over the corresponding period in the previous year. The retail industry generally reports comparable store and club sales using the retail calendar (also known as the 4-5-4 calendar). To be consistent with the retail industry, we ­provide comparable store and club sales using the retail calendar in our quarterly earnings releases. However, when we discuss our comparable store and club sales below, we are referring to our calendar comparable store and club sales calculated using our fiscal calendar. As our fiscal calendar ­differs from the retail calendar, our calendar comparable store and club sales also differ from the retail calendar comparable store and club sales ­provided in our quarterly earnings releases. Calendar comparable store and club sales, as well as the impact of fuel, for fiscal 2015 and 2014, were as follows: Fiscal Years Ended January 31, 2015 2014 With Fuel 2015 2014 Fuel Impact Walmart U.S. Sam’s Club 0.6% (0.6)% 0.0% 0.0% 0.0% 0.3% (0.6)% (0.3)% Total U.S. 0.5% (0.5)% (0.1)% (0.1)% Comparable store and club sales in the U.S., including fuel, increased 0.5% in fiscal 2015 and decreased 0.5% in fiscal 2014, when compared to the ­previous fiscal year. The fiscal 2015 total U.S. comparable store and club sales were positively impacted by higher traffic and lower gas prices during the end of the fiscal year. E-commerce sales positively impacted comparable sales approximately 0.3% and 0.2% for Walmart U.S. and Sam’s Club, respectively, for the fiscal year ended January 31, 2015. For fiscal 2014, the total U.S. comparable store and club sales were negatively impacted by lower consumer spending primarily due to the slow recovery in general economic conditions, the 2% increase in the 2013 payroll tax rate, and the reduction in government food benefits and severe winter storms that occurred during the fourth quarter. These factors were partially offset by increased member traffic at Sam’s Club primarily coming from Savings Members. Additionally, e-commerce sales positively impacted the Walmart U.S. comparable store and Sam’s Club comparable club sales percentages by approximately 0.3% for fiscal 2014. As we continue to add new stores and clubs in the U.S., we do so with an understanding that additional stores and clubs may take sales away from existing units. We estimate the negative impact on comparable store and club sales as a result of opening new stores and clubs was approximately 0.9% and 0.8% in fiscal 2015 and 2014, respectively. Our estimate is calculated primarily by comparing the sales trends of the impacted stores and clubs, which are identified based on their proximity to the new stores and clubs, to those of nearby non-impacted stores and clubs, in each case, as measured after the new stores and clubs are opened. Leverage Operating Income Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Operating Percent Percent Income of Total Change Operating Percent Income of Total Walmart U.S. Walmart International Sam’s Club Corporate and support $21,336 78.6% (2.1)% $21,787 81.0% 3.2% $21,103 76.1% 6,171 22.7% 19.8% 5,153 19.2% (19.0)% 6,365 23.0% 1,976 7.3% 7.2% 1,843 6.9% (0.9)% 1,859 6.7% (2,336) (8.6)% (22.2)% (1,911) (7.1)% (19.3)% (1,602) (5.8)% Operating income $27,147 100.0% 1.0% $26,872 100.0% (3.1)% $27,725 100.0% Operating Percent Percent Income of Total Change We believe comparing both the growth of our operating expenses and our operating income to the growth of our net sales are meaningful measures, as they indicate how effectively we manage costs and leverage operating expenses. Our objective for a fiscal year is to grow operating expenses at a slower rate than net sales and to grow operating income at the same rate as or a faster rate than net sales. On occasion, we may make strategic growth investments that may, at times, cause our operating expenses to grow at a faster rate than net sales and that may result in our operating income growing at a slower rate than net sales. 2015 Annual Report 21 Management’s Discussion and Analysis of Financial Condition and Results of Operations Operating Expenses For fiscal 2015, operating expenses increased 2.3%, when compared to the previous fiscal year, while net sales increased 1.9%, respectively, when compared to the previous fiscal year. Accordingly, we did not meet our objective of growing operating expenses at a slower rate than net sales. Our continued investments in digital retail, higher health-care expenses in the U.S. from increased enrollment and medical cost inflation, the $249 million impact of wage and hour litigation in the U.S., as well as expenses of $148 million related to the closure of approximately 30 underperforming stores in Japan were the primary factors that caused us not to leverage for fiscal 2015. For fiscal 2014, we did not meet our objective of growing operating expenses at a slower rate than net sales as operating expenses as a percentage of net sales increased 27 basis points. Overall, lower than anticipated sales, higher investment in key areas, such as global leverage and digital retail initiatives, and the nearly $1.0 billion of increased expenses for various matters described in the Walmart International segment discussion, were the primary cause for the increase in operating expenses as a percentage of net sales. During the first quarter of fiscal 2016, the Company announced a new associate wage structure combined with comprehensive associate training and educational programs. We anticipate the additional expenses in fiscal 2016 resulting from these programs will be approximately $1.0 billion, which may impact our ability to leverage operating expenses in fiscal 2016. Operating Income For fiscal 2015, we did not meet our objective of growing operating income at the same rate or a faster rate than net sales as operating income increased 1.0%, while net sales increased 1.9% when compared to the previous fiscal year. This was primarily due to the factors we ­discussed for not leveraging operating expenses. For fiscal 2014, we also did not meet our objective of growing operating income at a faster rate than net sales as operating income decreased 3.1% while net sales increased 1.6%, when compared to the previous fiscal year. This was ­primarily due to the factors we discussed for not leveraging operating expenses, partially offset by increases in membership and other income of 5.6%. Returns Return on Investment Management believes return on investment (“ROI”) is a meaningful ­metric to share with investors because it helps investors assess how effectively Walmart is deploying its assets. Trends in ROI can fluctuate over time as management balances long-term potential strategic ­initiatives with possible short-term impacts. ROI was 16.9% and 17.0% for the fiscal years ended January 31, 2015 and 2014, respectively. The slight change in ROI was primarily due to ­continued investments in store growth and digital retail initiatives, offset by currency exchange rate fluctuations. We define ROI as adjusted operating income (operating income plus interest income, depreciation and amortization, and rent expense) for the trailing 12 months divided by average invested capital during that period. We consider average invested capital to be the average of our beginning and ending total assets, plus average accumulated depreciation and average amortization, less average accounts payable and average accrued liabilities for that period, plus a rent factor equal to the rent for the fiscal year or trailing 12 months multiplied by a factor of eight. When we have discontinued operations, we exclude the impact of the discontinued operations. Our calculation of ROI is considered a non-GAAP financial measure because we calculate ROI using financial measures that exclude and include amounts that are included and excluded in the most directly comparable GAAP financial measure. For example, we exclude the impact of depreciation and amortization from our reported operating income in calculating the numerator of our calculation of ROI. In addition, we include a factor of eight for rent expense that estimates the ­hypothetical capitalization of our operating leases. We consider return on assets (“ROA”) to be the financial measure computed in accordance with generally accepted accounting principles (“GAAP”) that is the most directly comparable financial measure to our calculation of ROI. ROI differs from ROA (which is consolidated income from continuing operations for the period divided by average total assets of continuing operations for the period) because ROI: adjusts operating income to exclude certain expense items and adds interest income; adjusts total assets of con­tinuing operations for the impact of accumulated depreciation and amortization, accounts payable and accrued liabilities; and incorporates a factor of rent to arrive at total invested capital. Although ROI is a standard financial metric, numerous methods exist for calculating a company’s ROI. As a result, the method used by ­management to calculate our ROI may differ from the methods used by other companies to calculate their ROI. We urge you to understand the methods used by other companies to calculate their ROI before ­comparing our ROI to that of such other companies. 22 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations The calculation of ROI, along with a reconciliation to the calculation of ROA, the most comparable GAAP financial measure, is as follows: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 CALCULATION OF RETURN ON INVESTMENT Numerator Operating income $ 27,147 $ 26,872 + Interest income 113 119 + Depreciation and amortization 9,173 8,870 + Rent 2,777 2,828 = Adjusted operating income $ 39,210 $ 38,689 Denominator Average total assets of continuing operations (1) $203,999 $203,680 + Average accumulated depreciation and amortization (1) 63,375 57,907 - Average accounts payable (1) 37,913 37,748 - Average accrued liabilities (1) 18,973 18,802 + Rent x 8 22,216 22,624 = Average invested capital $232,704 $227,661 Return on investment (ROI) 16.9% 17.0% CALCULATION OF RETURN ON ASSETS Numerator Income from continuing operations $ 16,814 $ 16,551 Denominator Average total assets of continuing operations (1) $203,999 $203,680 Return on assets (ROA) 8.2% 8.1% Certain Balance Sheet Data Total assets of continuing operations Accumulated depreciation and amortization Accounts payable Accrued liabilities As of January 31, 2015 2014 2013 $203,706 $204,291 $203,068 65,979 60,771 55,043 38,410 37,415 38,080 19,152 18,793 18,808 (1) T he average is based on the addition of the account balance at the end of the current period to the account balance at the end of the prior period and dividing by 2. Free Cash Flow Free cash flow is considered a non-GAAP financial measure. Management believes, however, that free cash flow, which measures our ability to ­generate additional cash from our business operations, is an important financial measure for use in evaluating the Company’s financial performance. Free cash flow should be considered in addition to, rather than as a substitute for, consolidated income from continuing operations as a measure of our performance and net cash provided by operating ­activities as a measure of our liquidity. We define free cash flow as net cash provided by operating activities in a period minus payments for property and equipment made in that period. We generated free cash flow of $16.4 billion, $10.1 billion and $12.7 billion for fiscal 2015, 2014 and 2013, respectively. The increase in free cash flow for fiscal 2015, when compared to the previous fiscal year, was primarily due to the timing of payments for accounts payable and accrued liabilities, as well as the timing of income tax payments, combined with lower capital expenditures. The fiscal 2014 decline in free cash flow, when compared to the previous fiscal year, was primarily due to the timing of income tax payments, as well as lower income from ­continuing operations and slightly higher capital expenditures. Walmart’s definition of free cash flow is limited in that it does not ­represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous ­methods may exist for calculating a company’s free cash flow. As a result, the method used by Walmart’s management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow. We urge you to understand the methods used by other companies to calculate their free cash flow before comparing our free cash flow to that of such other companies. The following table sets forth a reconciliation of free cash flow, a ­non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly ­comparable to free cash flow, as well as information regarding net cash used in investing activities and net cash used in financing activities. (Amounts in millions) Net cash provided by operating activities Payments for property and equipment Fiscal Years Ended January 31, 2015 2014 2013 $ 28,564 $ 23,257 $ 25,591 (12,174) (13,115) (12,898) Free cash flow $ 16,390 $ 10,142 $ 12,693 Net cash used in investing activities (1) $(11,125) $(12,526) $(12,637) Net cash used in financing activities (15,071) (10,789) (11,946) (1) “Net cash used in investing activities” includes payments for property and equipment, which is also included in our computation of free cash flow. 2015 Annual Report 23 Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Consolidated Results of Operations (Amounts in millions, except unit counts) Fiscal Years Ended January 31, 2015 2014 2013 Total revenues Percentage change from comparable period Net sales Percentage change from comparable period Total U.S. calendar comparable store and club sales increase (decrease) Gross profit margin as a percentage of net sales Operating income Operating income as a percentage of net sales Income from continuing operations Unit counts at period end Retail square feet at period end $485,651 $476,294 $468,651 2.0% 1.6% 5.0% $482,229 $473,076 $465,604 1.9% 1.6% 5.0% 0.5% (0.5)% 2.4% 24.3% 24.3% 24.3% $ 27,147 $ 26,872 $ 27,725 5.6% 5.7% 6.0% $ 16,814 $ 16,551 $ 17,704 11,453 10,942 10,408 1,135 1,101 1,070 Our total revenues, which are mostly comprised of net sales, but also include membership and other income, increased 2.0% and 1.6% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. The increase in total revenues was consistent with the 1.9% and 1.6% increases in net sales. The increase in net sales was primarily due to 3.0% year-over-year growth in retail square feet, positive comparable sales in the U.S. and higher e-commerce sales across the Company. The increase was partially offset by $5.3 billion of negative impact from fluctuations in currency exchange rates for fiscal 2015. The increase in net sales for fiscal 2014 was due to 3.1% growth in retail square feet, higher e-commerce sales, the impact of fiscal 2013 acquisitions and positive comparable club sales at Sam’s Club. The increase in net sales for fiscal 2014 was partially offset by $5.1 billion of negative impact from fluctuations in currency exchange rates. An increase in membership and other income in both fiscal years, primarily due to growth in membership income at Sam’s Club, also contributed to the increase in total revenues. Our gross profit rate was relatively flat for fiscal 2015, when compared to the previous fiscal year. While the gross profit rate at Walmart International increased, the gross profit rate at Walmart U.S. and Sam’s Club decreased. Our gross profit rate decreased 3 basis points for fiscal 2014, when ­compared to the previous fiscal year, primarily due to our ongoing investment in price, as well as merchandise mix. 24 2015 Annual Report For fiscal 2015, we did not meet our objective of growing operating expenses at a slower rate than net sales as operating expenses as a ­percentage of net sales increased 6 basis points when c­ ompared to the same period in the previous fiscal year. Our continued investments in digital retail, higher health-care expenses in the U.S. from increased enrollment and medical cost inflation, the $249 million impact of wage and hour litigation in the U.S., as well as expenses of $148 million related to the closure of approximately 30 underperforming stores in Japan were the primary factors that caused us not to leverage for fiscal 2015. For fiscal 2014, we did not meet our objective of growing operating expenses at a slower rate than net sales as operating expenses as a p ­ ercentage of net sales increased 27 basis points. Overall, lower than anticipated net sales, higher investment in key areas, such as global leverage and e-commerce initiatives, and nearly $1.0 billion of increased expenses for various matters described in the Walmart International ­segment discussion, were the primary cause for the increase in operating expenses as a percentage of net sales. For fiscal 2015, we did not meet our objective of growing operating income at the same rate or a faster rate than net sales as operating income increased 1.0% while net sales increased 1.9% when compared to the previous fiscal year. This was primarily due to the factors we ­discussed for not leveraging operating expenses. For fiscal 2014, we also did not meet our objective of growing operating income at a faster rate than net sales as operating income decreased 3.1% while net sales increased 1.6%, when compared to the previous fiscal year. This was ­primarily due to the factors we discussed for not leveraging operating expenses, partially offset by increases in membership and other income. Our effective income tax rates were 32.2%, 32.9% and 31.0%, for fiscal 2015, 2014 and 2013, respectively. The reconciliation from the U.S. statutory rate to the effective income tax rates for fiscal 2015, 2014 and 2013 is presented in Note 9 in the “Notes to Consolidated Financial Statements.” As a result of the factors discussed above, we reported $16.8 billion, $16.6 billion and $17.7 billion of consolidated income from continuing operations for fiscal 2015, 2014 and 2013, respectively, an increase of $263.0 million for fiscal 2015 and a decrease of $1.1 billion for fiscal 2014 when compared to the previous fiscal year. Diluted income from ­continuing operations per common share attributable to Walmart (“EPS”) was $4.99, $4.85 and $5.01 for fiscal 2015, 2014 and 2013, respectively. Management’s Discussion and Analysis of Financial Condition and Results of Operations Walmart U.S. Segment (Amounts in millions, except unit counts) Net sales Percentage change from comparable period Calendar comparable store sales increase (decrease) Operating income Operating income as a percentage of net sales Unit counts at period end Retail square feet at period end Walmart International Segment Fiscal Years Ended January 31, 2015 2014 2013 $288,049 $279,406 $274,433 3.1% 1.8% 3.9% 0.6% (0.6)% 2.0% $ 21,336 $ 21,787 $ 21,103 7.4% 7.8% 7.7% 4,516 4,203 4,005 680 659 641 Net sales for the Walmart U.S. segment increased 3.1% and 1.8% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. For fiscal 2015, the increase in net sales was due to year-over-year growth in retail square feet of 3.2%, as well as an increase in comparable store sales of 0.6%. Positive traffic and lower gas prices late in the fiscal year contributed to the increase in comparable store sales. For fiscal 2014, the increase in net sales was due to year-over-year growth in retail square feet of 2.9%, partially offset by a decline in comparable store sales of 0.6%. Fiscal 2014 comparable store sales were negatively impacted by lower consumer spending primarily due to the slow recovery in general economic conditions, the 2% increase in the 2013 payroll tax rate and the reduction in government food benefits. The fiscal 2015 gross profit rate decreased 12 basis points compared to the previous fiscal year. The decrease in the gross profit rate was primarily the result of the segment’s strategic focus on price investment, pharmacy cost inflation, reductions in third-party reimbursement rates and changes in merchandise mix. The fiscal year 2014 gross profit rate was relatively flat when compared to the previous fiscal year primarily due to price investment and low price leadership, partially offset by cost of goods savings initiatives and supply chain productivity. Walmart U.S. did not leverage operating expenses for fiscal 2015, as ­operating expenses as a percentage of segment net sales increased 24 basis points. The increase in operating expenses as a percentage of segment net sales was primarily driven by higher health-care expenses from increased enrollment and medical cost inflation. In addition, expenses from severe winter storms early in the year contributed to the increase in operating expenses as a percentage of segment net sales. Walmart U.S. leveraged operating expenses for fiscal 2014, driven by ­productivity initiatives as well as lower incentive expenses in fiscal 2014. As a result of the factors discussed above, segment operating income was $21.3 billion, $21.8 billion and $21.1 billion during fiscal 2015, 2014 and 2013, respectively. Walmart U.S. did not grow operating income faster than sales during fiscal 2015, but grew operating income faster than sales during fiscal 2014. (Amounts in millions, except unit counts) Net sales Percentage change from comparable period Operating income Operating income as a percentage of net sales Unit counts at period end Retail square feet at period end Fiscal Years Ended January 31, 2015 2014 2013 $136,160 $136,513 $134,748 (0.3)% 1.3% 7.4% $  6,171 $  5,153 $  6,365 4.5% 3.8% 4.7% 6,290 6,107 5,783 368 358 346 Net sales for the Walmart International segment decreased 0.3% and increased 1.3% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. For fiscal 2015, the decrease in net sales was due to $5.3 billion of negative impact from fluctuations in currency exchange rates, partially offset by year-over-year net growth in retail square feet of 2.6% and higher e-commerce sales in each country with e-commerce operations, particularly in the United Kingdom, China and Brazil. For fiscal 2014, the increase in net sales was due to year-over-year net growth in retail square feet of 3.6% and the impact of fiscal 2013 acquisitions, which accounted for $730 million of the net sales increase. In addition, higher e-commerce sales in each country with e-commerce operations contributed to the increase. The increase in net sales was partially offset by $5.1 billion of negative impact from fluctuations in currency exchange rates. Gross profit rate increased 12 basis points for fiscal 2015 and decreased 10 basis points for fiscal 2014, when compared to the previous fiscal year. The fiscal 2015 increase in gross profit rate was primarily due to changes in the merchandise mix in a number of the segment’s larger operations. The fiscal 2014 decrease in gross profit rate was primarily due to price investments in certain countries, including Brazil, Canada and Mexico. Operating expenses as a percentage of net sales decreased 51 basis points for fiscal 2015, when compared to the previous fiscal year. The decrease was due to the nearly $1.0 billion of aggregated expenses incurred in fiscal 2014 detailed below, which were partially offset by fiscal 2015 expenses of $148 million related to the closure of approximately 30 underperforming stores in Japan. For fiscal 2014, operating expenses as a percentage of net sales increased 80 basis points, when compared to the previous fiscal year. Operating expenses as a percentage of net sales were primarily impacted by the nearly $1.0 billion of aggregated expenses for the following matters: • Charges for contingencies for non-income taxes and employment claims in Brazil; • Charges for the closure of 29 units in China and 25 units in Brazil due to poor performance; • Store lease expenses in China and Mexico to correct a historical accounting practice that did not conform to our global accounting ­policies; and • Expenses for the termination of the joint venture, franchise and supply agreements related to our former partner’s retail store operations in India. 2015 Annual Report 25 Management’s Discussion and Analysis of Financial Condition and Results of Operations As a result of the factors discussed above, segment operating income was $6.2 billion, $5.2 billion and $6.4 billion for fiscal 2015, 2014 and 2013, respectively. Fluctuations in currency exchange rates negatively impacted operating income $225 million, $26 million and $111 million in fiscal 2015, 2014 and 2013 respectively. Although currency fluctuations caused net sales for Walmart International to decline, operating income grew for fiscal 2015. Operating income did not grow faster than net sales in fiscal 2014. Sam’s Club Segment We believe the information in the following table under the caption “Excluding Fuel” is useful to investors because it permits investors to understand the effect of the Sam’s Club segment’s fuel sales on its results of operations, which are impacted by the volatility of fuel prices. Volatility in fuel prices may continue to impact the operating results of the Sam’s Club segment in the future. (Amounts in millions, except unit counts) Fiscal Years Ended January 31, 2015 2014 2013 Including Fuel Net sales Percentage change from comparable period Calendar comparable club sales increase Operating income Operating income as a percentage of net sales Unit counts at period end Retail square feet at period end Excluding Fuel Net sales Percentage change from comparable period Operating income Operating income as a percentage of net sales $58,020 $57,157 $56,423 1.5% 1.3% 4.9% 0.0% 0.3% 4.1% $ 1,976 $ 1,843 $ 1,859 3.4% 3.2% 3.3% 647 632 620 87 84 83 $51,630 $50,574 $49,789 2.1% 1.6% 4.6% $ 1,854 $ 1,817 $ 1,812 3.6% 3.6% 3.6% Net sales for the Sam’s Club segment increased 1.5% and 1.3% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. The fiscal 2015 increase in net sales was primarily due to year-over-year growth in retail square feet of 2.5%, driven by the addition of 15 new clubs, partially offset by a decrease in fuel sales due to the lower average selling price. Comparable club sales were flat for fiscal 2015. The fiscal 2014 increase in net sales was due to year-over-year growth in retail square feet of 2.1%, driven by the addition of 12 new clubs, as well as positive comparable club sales of 0.3%. The fiscal 2014 positive comparable club sales were the result of increased member traffic primarily coming from our Savings Members, partially offset by severe winter storms that occurred in the fourth quarter of fiscal 2014. Gross profit rate decreased 12 basis points for fiscal 2015 and was flat for fiscal 2014, when compared to the previous fiscal year. For fiscal 2015, the gross profit rate decreased primarily due to the segment’s investment in the Cash Rewards program, changes in merchandise mix, and commodity cost inflation, partially offset by an increased gross profit rate on fuel sales. For fiscal 2014, our gross profit was negatively impacted by an increase to our product warranty liabilities, which was offset by a favorable impact from merchandise mix. 26 2015 Annual Report Membership and other income increased 7.7% and 14.1% for fiscal 2015 and 2014, respectively, when compared to the previous fiscal year. For fiscal 2015, the increase was primarily the result of increased membership upgrades, Plus Member renewals and an increase in members from the opening of 15 new clubs. For fiscal 2014, the increase was primarily due to improved contract terms relating to the profit sharing arrangement with our credit card provider, increased membership fees that were introduced on May 15, 2013, $24 million of income from the sale of two real estate properties and an increase in members from the opening of 12 new clubs. Sam’s Club leveraged operating expenses for fiscal 2015, as operating expenses as a percentage of segment net sales decreased 16 basis points compared to the previous fiscal year. The decrease in operating expenses as a percentage of segment net sales for fiscal 2015 was primarily due to better expense management in a number of areas, including the opti­ mization of the new in-club staffing structure announced in fiscal 2014, which resulted in decreases in wage expense and payroll taxes. This was partially offset by higher health-care expenses, mostly from increased enrollment and medical cost inflation. For fiscal 2014, Sam’s Club did not leverage expenses, as operating expenses as a percentage of segment net sales increased 26 basis points, when compared to the previous fiscal year. The increase in operating expenses as a percentage of segment net sales was primarily due to a $59 million charge for the implementation of the new in-club staffing structure and the pending closure of one club, as well as a state excise tax refund credit we received in the previous ­fiscal year. As a result of the factors discussed above, operating income was ­ $2.0 billion, $1.8 billion and $1.9 billion for fiscal 2015, 2014 and 2013, respectively. Sam’s Club did grow operating income faster than net sales in fiscal 2015, but did not grow operating income faster than sales in fiscal 2014. Liquidity and Capital Resources Liquidity The strength and stability of our operations have historically supplied us with a significant source of liquidity. Our cash flows provided by operating activities, supplemented with our long-term debt and short-term borrowings, have been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our operations. Generally, some or all of the remaining available cash flow has been used to fund the dividends on our common stock and share repurchases. We believe our sources of liquidity will continue to be adequate to fund operations, finance our global expansion activities, pay dividends and fund our share repurchases for the foreseeable future. Net Cash Provided by Operating Activities (Amounts in millions) Net cash provided by operating activities Fiscal Years Ended January 31, 2015 2014 2013 $28,564 $23,257 $25,591 Management’s Discussion and Analysis of Financial Condition and Results of Operations Net cash provided by operating activities was $28.6 billion, $23.3 billion and $25.6 billion for fiscal 2015, 2014 and 2013, respectively. The increase in net cash provided by operating activities for fiscal 2015, when ­compared to the previous fiscal year, was primarily due to the timing of payments for accounts payable and accrued liabilities, as well as the timing of income tax payments. The decrease in cash flows provided by operating activities in fiscal 2014, when compared to the previous fiscal year, was primarily due to the timing of income tax payments, as well as lower income from continuing operations. During the first quarter of fiscal 2016, the Company announced a new associate wage structure combined with comprehensive associate ­training and educational programs. We anticipate cash flows provided by operating activities will be sufficient to fund these programs. Cash Equivalents and Working Capital Cash and cash equivalents were $9.1 billion and $7.3 billion for fiscal 2015 and 2014, respectively. Our working capital deficit was $2.0 billion and $8.2 billion at January 31, 2015 and 2014, respectively. The decrease in our working capital deficit is primarily the result of using less of our net cash provided by operating activities for share repurchases and capital ­expenditures during fiscal 2015, which allowed us to reduce our shortterm borrowings. We generally operate with a working capital deficit due to our efficient use of cash in funding operations, consistent access to the capital markets and in providing returns to our shareholders in the form of payments of cash dividends and share repurchases. We use intercompany financing arrangements in an effort to ensure cash can be made available in the country in which it is needed with the minimum cost possible. We do not believe it will be necessary to repatriate cash and cash equivalents held outside of the U.S. and anticipate our domestic liquidity needs will be met through cash flows provided by operating activities, supplemented with long-term debt and short-term borrowings. Accordingly, we intend, with only certain exceptions, to ­continue to indefinitely reinvest our cash and cash equivalents held ­outside of the U.S. in our foreign operations. When the income earned, either from operations or through intercompany financing arrangements, and indefinitely reinvested outside of the U.S. is taxed at local country tax rates, which are generally lower than the U.S. statutory rate, we realize an effective tax rate benefit. If our intentions with respect to reinvestment were to change, most of the amounts held within our foreign operations could be repatriated to the U.S., although any repatriation under current U.S. tax laws would be subject to U.S. federal income taxes, less applicable foreign tax credits. As of January 31, 2015 and 2014, cash and cash ­equivalents of approximately $1.7 billion and $1.9 billion, respectively, may not be freely transferable to the U.S. due to local laws or other restrictions. We do not expect local laws, other limitations or potential taxes on anticipated future repatriations of cash amounts held outside of the U.S. to have a material effect on our overall liquidity, financial ­condition or results of operations. Net Cash Used in Investing Activities Fiscal Years Ended January 31, (Amounts in millions) Net cash used in investing activities 2015 2014 2013 $(11,125) $(12,526) $(12,637) Net cash used in investing activities was $11.1 billion, $12.5 billion and $12.6 billion for fiscal 2015, 2014 and 2013, respectively, and generally consisted of payments to add stores, remodel numerous existing stores, expand our digital retail capabilities and invest in other technologies. Net cash used in investing activities decreased $1.4 billion for fiscal 2015, when compared to the previous fiscal year, primarily due to lower capital expenditures. The following table provides additional capital expenditure detail: (Amounts in millions) Capital Expenditures New stores and clubs, including expansions and relocations Information systems, distribution, digital retail and other Remodels Total U.S. Walmart International Total capital expenditures Allocation of Capital Expenditures Fiscal Years Ending January 31, 2015 2014 $ 4,128 $ 5,083 3,288 2,539 822 1,030 8,238 8,652 3,936 4,463 $12,174 $13,115 Also reducing net cash used in investing activities were cash proceeds of $671 million received from the sale of the Vips Restaurant Business in Mexico (“Vips”) on May 12, 2014, which is further described in Note 13 to our Consolidated Financial Statements. We continue to focus on striving to seamlessly integrate the digital and physical shopping experience for our customers and expanded in digital retail in each of our segments during fiscal 2015, with Walmart U.S. and Sam’s Club focused on digital retail in the U.S. and Walmart International focused on digital retail in countries outside of the U.S. Some of our fiscal 2015 accomplishments in this area were to successfully launch our new web platform in the U.S., grow mobile and increase our third-party marketplace offering. 2015 Annual Report 27 Management’s Discussion and Analysis of Financial Condition and Results of Operations Growth Activities In fiscal 2016, we plan to add between 26 and 30 million square feet, which will include a continued investment in Neighborhood Markets and a moderation of Supercenter growth in the U.S. compared to recent fiscal years. In addition, we plan to accelerate the growth of our digital retail capabilities by investing $1.2 billion to $1.5 billion in e-commerce websites and mobile commerce applications that will include technology, infrastructure and other areas to better serve our customers and support our stores and clubs. We anticipate financing these growth activities through cash flows provided by operating activities and future debt financings. The following table provides our estimated range for fiscal 2016 capital expenditures, as well as our estimated range for growth in retail square feet. Our anticipated digital retail expenditures are included in our estimated range for fiscal 2016 capital expenditures. The amounts in the table do not include capital expenditures or growth in retail square feet from any pending or future acquisitions. Fiscal 2016 Projected Capital Expenditures (in billions) Fiscal 2016 Projected Growth in Retail Square Feet (in thousands) Walmart U.S. Walmart International Sam’s Club Corporate and support $  6.1 to $  6.6 3.7 to    4.2 0.8 to    0.8 1.0 to    1.3 15,000 to 16,000 10,000 to 13,000 1,000 to   1,000 — to       — Total $11.6 to $12.9 26,000 to 30,000 Net Cash Used in Financing Activities Fiscal Years Ended January 31, 2015 2014 2013 (Amounts in millions) Net cash used in financing activities $(15,071) $(10,789) $(11,946) Cash flows used in financing activities generally consist of transactions related to our short-term and long-term debt, as well as dividends paid and the repurchase of Company stock. Transactions with noncontrolling interest shareholders are also classified as cash flows from financing activities. 28 2015 Annual Report Short-term Borrowings Short-term borrowings decreased $6.3 billion for fiscal 2015 and increased $0.9 billion for fiscal 2014, when compared to the previous ­fiscal year. We generally utilize the liquidity provided by short-term ­borrowings to provide funding used for our operations, dividend ­payments, share repurchases, capital expenditures and other cash requirements. However, more cash provided from operating activities combined with less cash used for share repurchases and capital ­expenditures during fiscal 2015, allowed us to minimize our short-term borrowings at January 31, 2015. In addition to our short-term borrowings, we also have various undrawn committed lines of credit that provide $15.0 billion of additional liquidity, if needed. Long-term Debt The following table provides the changes in our long-term debt for fiscal 2015: (Amounts in millions) Balances as of February 1, 2014 Proceeds from issuance of long-term debt Payments of long-term debt Reclassifications of long-term debt Other Balances as of January 31, 2015 Long-term debt due within Long-term one year debt Total $ 4,103 $41,771 $45,874 — (3,904) 5,174 — 5,174 (3,904) 4,267 344 (4,267) (1,592) — (1,248) $ 4,810 $41,086 $45,896 Our total outstanding long-term debt balance was relatively flat as of January 31, 2015 compared to the balance as of January 31, 2014. During fiscal 2015, we used the proceeds from the issuance of long-term debt to pay down and refinance existing debt and for other corporate purposes. Dividends Our total dividend payments were $6.2 billion, $6.1 billion and $5.4 billion for fiscal 2015, 2014 and 2013, respectively, and on February 19, 2015, the Board of Directors approved the fiscal 2016 annual dividend of $1.96 per share, an increase compared to the fiscal 2015 annual dividend of $1.92 per share. For fiscal 2016, the annual dividend will be paid in four quarterly installments of $0.49 per share, according to the following record and payable dates: Record Date Payable Date March 13, 2015 May 8, 2015 August 7, 2015 December 4, 2015 April 6, 2015 June 1, 2015 September 8, 2015 January 4, 2016 Management’s Discussion and Analysis of Financial Condition and Results of Operations Company Share Repurchase Program From time to time, we repurchase shares of our common stock under share repurchase programs authorized by the Board of Directors. The current $15.0 billion share repurchase program has no expiration date or other restrictions limiting the period over which we can make share repurchases. At January 31, 2015, authorization for $10.3 billion of share repurchases remained under the current share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status. We regularly review share repurchase activity and consider several factors in determining when to execute share repurchases, including, among other things, current cash needs, capacity for leverage, cost of borrowings, our results of operations and the market price of our common stock. The following table provides, on a settlement date basis, the number of shares repurchased, average price paid per share and total cash paid for share repurchases for fiscal 2015, 2014 and 2013: (Amounts in millions, except per share data) Total number of shares repurchased Average price paid per share Total cash paid for share repurchases Capital Resources We believe cash flows from continuing operations, our current cash ­position and access to capital markets will continue to be sufficient to meet our anticipated operating cash needs, including to fund seasonal buildups in merchandise inventories, and to fund our capital expenditures, dividend payments and share repurchases. We have strong commercial paper and long-term debt ratings that have enabled and should continue to enable us to refinance our debt as it becomes due at favorable rates in capital markets. At January 31, 2015, the ratings assigned to our commercial paper and rated series of our ­outstanding long-term debt were as follows: Rating agency Standard & Poor’s Moody’s Investors Service Fitch Ratings Commercial paper Long-term debt A-1+ P-1 F1+ AA Aa2 AA Fiscal Years Ended January 31, 2015 2014 2013 13.4 89.1 113.2 $75.82 $74.99 $67.15 $1,015 $6,683 $7,600 We decreased the total cash paid for share repurchases by $5.7 billion for fiscal 2015, compared to the previous fiscal year, as a result of current cash needs, capacity for leverage and increased cash used in transactions with noncontrolling interests described further below. In addition, our results of operations influenced our share repurchase activity. Transactions with Noncontrolling Interests As described in Note 13 to our Consolidated Financial Statements, during fiscal 2015, we completed the purchase of substantially all of the remaining noncontrolling interest in Walmart Chile for approximately $1.5 billion, using existing cash to complete this transaction. Credit rating agencies review their ratings periodically and, therefore, the credit ratings assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain consistent over time. Factors that could affect our credit ratings include changes in our operating performance, the general economic environment, conditions in the retail industry, our financial position, including our total debt and capitalization, and changes in our business strategy. Any downgrade of our credit ratings by a credit rating agency could increase our future borrowing costs or impair our ability to access capital and credit markets on terms com­ mercially acceptable to us. In addition, any downgrade of our current short-term credit ratings could impair our ability to access the commercial paper markets with the same flexibility that we have experienced historically, potentially requiring us to rely more heavily on more ­expensive types of debt financing. The credit rating agency ratings are not recommendations to buy, sell or hold our commercial paper or debt securities. Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated ­independently of any other rating. Moreover, each credit rating is specific to the security to which it applies. We monitor our credit rating and our capacity for long-term financing using various qualitative and quantitative factors, including our debt-tototal capitalization, as support for our long-term financing decisions. For the purpose of the debt-to-total capitalization calculation, debt is defined as the sum of short-term borrowings, long-term debt due within one year, obligations under capital leases due within one year, long-term debt and long-term obligations under capital leases. Total capitalization is defined as debt plus total Walmart shareholders’ equity. At January 31, 2015 and 2014, the ratio of our debt-to-total capitalization was 38.2% and 42.6%, respectively. The decrease in our debt-to-total capitalization ratio was the result of using less cash for share repurchases and capital expenditures during fiscal 2015, which allowed us to minimize our short-term borrowings at January 31, 2015. The reduced share repurchases also resulted in increased growth in retained earnings. These impacts were partially offset by additional currency translation losses recorded in accumulated other comprehensive income (loss). 2015 Annual Report 29 Management’s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations and Other Commercial Commitments The following table sets forth certain information concerning our obligations and commitments to make contractual future payments, such as debt and lease agreements, and certain contingent commitments: Payments Due During Fiscal Years Ending January 31, (Amounts in millions) Recorded contractual obligations: Long-term debt (1) Short-term borrowings Capital lease obligations (2) Unrecorded contractual obligations: Non-cancelable operating leases Estimated interest on long-term debt Trade letters of credit Stand-by letters of credit Purchase obligations Total commercial commitments Total 2016 2017-2018 2019-2020 Thereafter $ 45,896 $ 4,810 $ 3,835 $ 4,032 $33,219 1,592 1,592 — — — 5,454 504 920 778 3,252 17,910 1,759 3,097 2,590 10,464 32,910 1,950 3,690 3,399 23,871 2,723 2,723 — — — 1,898 1,898 — — — 10,712 6,548 3,428 652 84 $119,095 $21,784 $14,970 $11,451 $70,890 (1) “Long-term debt” includes the fair value of our derivatives classified as fair value hedges. (2) “Capital lease obligations” includes executory costs and imputed interest related to capital lease obligations that are not yet recorded. Refer to Note 11 in the “Notes to the Consolidated Financial Statements” for more information. Additionally, the Company has $15.0 billion in undrawn committed lines of credit which, if drawn upon, would be included in the current liabilities section of the Company’s Consolidated Balance Sheets. Estimated interest payments are based on our principal amounts and expected maturities of all debt outstanding at January 31, 2015, and management’s forecasted market rates for our variable rate debt. Purchase obligations include legally binding contracts, such as firm ­commitments for inventory and utility purchases, as well as commitments to make capital expenditures, software acquisition and license ­commitments and legally binding service contracts. Purchase orders for inventory and other services are not included in the table above. Purchase orders represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current inventory needs and are fulfilled by our suppliers within short time periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. The expected timing for payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid with respect to some unrecorded contractual commitments may be different depending on the timing of receipt of goods or services or changes to agreed-upon amounts for some obligations. In addition to the amounts shown in the table above, $838 million of unrecognized tax benefits are considered uncertain tax positions and have been recorded as liabilities. The timing of the payment, if any, ­associated with these liabilities is uncertain. Refer to Note 9 in the 30 2015 Annual Report “Notes to Consolidated Financial Statements” for additional discussion of unrecognized tax benefits. Off Balance Sheet Arrangements In addition to the unrecorded contractual obligations presented above, we have entered into certain arrangements, as discussed below, for which the timing of payment, if any, is unknown. The Company has future lease commitments for land and buildings for approximately 282 future locations. These lease commitments have lease terms ranging from 1 to 30 years and provide for certain minimum ­rentals. If executed, payments under operating leases would increase by $58 million for fiscal 2016, based on current estimates. In connection with certain long-term debt issuances, we could be liable for early termination payments if certain unlikely events were to occur. At January 31, 2015, the aggregate termination payment would have been $64 million. The arrangement pursuant to which this payment could be made will expire in fiscal 2019. Market Risk In addition to the risks inherent in our operations, we are exposed to ­certain market risks, including changes in interest rates and fluctuations in currency exchange rates. The analysis presented below for each of our market risk sensitive ­instruments is based on a hypothetical scenario used to calibrate ­potential risk and does not represent our view of future market changes. The effect of a change in a particular assumption is calculated without adjusting any other assumption. In reality, however, a change in one ­factor could cause a change in another, which may magnify or negate other sensitivities. Management’s Discussion and Analysis of Financial Condition and Results of Operations Interest Rate Risk We are exposed to changes in interest rates as a result of our short-term borrowings and long-term debt issuances. We hedge a portion of our interest rate risk by managing the mix of fixed and variable rate debt and by entering into interest rate swaps. For fiscal 2015, the net fair value of our interest rate swaps decreased approximately $158 million primarily due to fluctuations in market interest rates and the termination of forward starting receive variable-rate, pay fixed-rate swaps in October and April 2014 concurrently with the issuance of debt. The table below provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table represents the principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table represents the contractual cash flows and weighted-average interest rates by the contractual maturity date, unless otherwise noted. The notional amounts are used to calculate contractual cash flows to be exchanged under the contracts. The weighted-average variable rates are based upon prevailing market rates at January 31, 2015. (Amounts in millions) Expected Maturity Date Fiscal 2016 Fiscal 2017 Fiscal 2018 Fiscal 2019 Fiscal 2020 Thereafter Total Liabilities Short-term borrowings: Variable rate $1,592 $  — $  — $  — $  — $   — $  1,592 Weighted-average interest rate 0.5% —% —% —% —% —% 0.5% Long-term debt (1): Fixed rate $4,055 $2,055 $1,523 $3,518 $514 $33,219 $44,884 Weighted-average interest rate 2.5% 1.9% 4.0% 3.1% 4.3% 4.9% 4.4% Variable rate $  755 $  257 $  — $  — $  — $   — $  1,012 Weighted-average interest rate 3.8% 4.2% —% —% —% —% 3.9% Interest rate derivatives Interest rate swaps: Variable to fixed $  255 $  — $  — $  — $  — $   — $   255 Weighted-average pay rate 0.9% —% —% —% —% —% 0.9% Weighted-average receive rate 0.6% —% —% —% —% —% 0.6% Fixed to variable $  — $  — $  — $  — $  — $   500 $   500 Weighted-average pay rate —% —% —% —% —% 1.5% 1.5% Weighted-average receive rate —% —% —% —% —% 3.3% 3.3% (1) The long-term debt amounts in the table exclude the Company’s derivatives classified as fair value hedges. As of January 31, 2015, our variable rate borrowings, including the effect of our commercial paper and interest rate swaps, represented 7% of our total short-term and long-term debt. Based on January 31, 2015 debt ­levels, a 100 basis point change in prevailing market rates would cause our annual interest costs to change by approximately $23 million. Foreign Currency Risk We are exposed to fluctuations in foreign currency exchange rates as a result of our net investments and operations in countries other than the U.S. For fiscal 2015, movements in currency exchange rates and the related impact on the translation of the balance sheets of the Company’s subsidiaries in Canada, the United Kingdom, Japan, Mexico and Chile were the primary cause of the $3.6 billion net loss in the currency translation and other category of accumulated other comprehensive income (loss). We hedge a portion of our foreign currency risk by entering into currency swaps and designating certain foreign-currency-denominated long-term debt as net investment hedges. We hold currency swaps to hedge the currency exchange component of our net investments and also to hedge the currency exchange rate fluctuation exposure associated with the forecasted payments of principal and interest of non-U.S. denominated debt. The aggregate fair value of these swaps was in a liability position of $110 million at January 31, 2015 and in an asset position of $550 million at January 31, 2014. The change in the fair value of these swaps was due to fluctuations in currency exchange rates, primarily the strengthening of the U.S. dollar relative to other currencies in the latter half of fiscal 2015. A hypothetical 10% increase or decrease in the currency exchange rates underlying these swaps from the market rate at January 31, 2015 would have resulted in a loss or gain in the value of the swaps of $435 million. A hypothetical 10% change in interest rates underlying these swaps from the market rates in effect at January 31, 2015 would have resulted in a loss or gain in value of the swaps of $20 million. 2015 Annual Report 31 Management’s Discussion and Analysis of Financial Condition and Results of Operations In addition to currency swaps, we have designated foreign-currencydenominated long-term debt as nonderivative hedges of net investments of certain of our foreign operations. At January 31, 2015 and 2014, we had £2.5 billion of outstanding long-term debt designated as a hedge of our net investment in the United Kingdom. At January 31, 2015, a hypothetical 10% increase or decrease in the value of the U.S. dollar relative to the British pound would have resulted in a gain or loss in the value of the debt of $342 million. In addition, we had outstanding long-term debt of ¥100 billion at January 31, 2015 and ¥200 billion at January 31, 2014, that was designated as a hedge of our net investment in Japan. At January 31, 2015, a hypothetical 10% increase or decrease in value of the U.S. dollar relative to the Japanese yen would have resulted in a gain or loss in the value of the debt of $77 million. Other Matters We discuss our existing FCPA investigation and related matters in the Annual Report on Form 10-K for fiscal 2015, including certain risks arising therefrom, in Part I, Item 1A of the Form 10-K under the caption “Risk Factors” and in Note 10 to our Consolidated Financial Statements, which is captioned “Contingencies,” under the sub-caption “FCPA Investigation and Related Matters.” We also discuss various legal proceedings related to the FCPA investigation in Item 3 of the Form 10-K under the caption “Item 3. Legal Proceedings,” under the sub-caption “II. Certain Other Proceedings.” We discuss our “equal value” claims against our United Kingdom subsidiary, ASDA Stores, Ltd., in the Annual Report on Form 10-K for fiscal 2015, including certain risks arising therefrom, in Part I, Item 1A of the Form 10-K under the caption “Risk Factors” and in Note 10 to our Consolidated Financial Statements, which is captioned “Contingencies,” under the sub-caption “Legal Proceedings.” Summary of Critical Accounting Estimates Management strives to report our financial results in a clear and ­understandable manner, although in some cases accounting and ­disclosure rules are complex and require us to use technical terminology. In preparing the Company’s Consolidated Financial Statements, we follow accounting principles generally accepted in the U.S. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations as reflected in our financial statements. These judgments and estimates are based on past events and expectations of future outcomes. Actual results may differ from our estimates. Management continually reviews our accounting policies, how they are applied and how they are reported and disclosed in our financial statements. Following is a summary of our critical accounting estimates and how they are applied in preparation of the financial statements. 32 2015 Annual Report Inventories We value inventories at the lower of cost or market as determined primarily by the retail method of accounting, using the last-in, first-out (“LIFO”) method for substantially all of the Walmart U.S. segment’s inventories. The inventory at the Walmart International segment is valued primarily by the retail inventory method of accounting, using the first-in, first-out (“FIFO”) method. The retail method of accounting results in inventory being valued at the lower of cost or market since permanent markdowns are immediately recorded as a reduction of the retail value of inventory. The inventory at the Sam’s Club segment is valued based on the weighted-average cost using the LIFO method. Under the retail method of accounting, inventory is valued at the lower of cost or market, which is determined by applying a cost-to-retail ratio to each merchandise grouping’s retail value. The FIFO cost-to-retail ratio is generally based on the fiscal year purchase activity. The cost-to-retail ratio for measuring any LIFO provision is based on the initial margin of the fiscal year purchase activity less the impact of any permanent markdowns. The retail method of accounting requires management to make certain judgments and estimates that may significantly impact the ending inventory valuation at cost, as well as the amount of gross profit recognized. Judgments made include recording markdowns used to sell inventory and shrinkage. When management determines the ability to sell inventory has diminished, markdowns for clearance activity and the related cost impact are recorded. Factors considered in the determination of markdowns include current and anticipated demand, customer preferences and age of merchandise, as well as seasonal and fashion trends. Changes in weather and customer preferences could cause material changes in the amount and timing of markdowns from year to year. When necessary, we record a LIFO provision for the estimated annual effect of inflation, and these estimates are adjusted to actual results determined at year-end. Our LIFO provision is calculated based on ­inventory levels, markup rates and internally generated retail price ­indices. At January 31, 2015 and 2014, our inventories valued at LIFO approximated those inventories as if they were valued at FIFO. We provide for estimated inventory losses, or shrinkage, between ­physical inventory counts on the basis of a percentage of sales. Following annual inventory counts, the provision is adjusted to reflect updated historical results. Management’s Discussion and Analysis of Financial Condition and Results of Operations Impairment of Assets We evaluate long-lived assets other than goodwill and assets with ­indefinite lives for indicators of impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. Management’s judgments regarding the existence of impairment indicators are based on market conditions and operational performance, such as operating income and cash flows. The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally at the individual store level or, in certain markets, at the market group level. The variability of these factors depends on a number of ­conditions, including uncertainty about future events and changes in demographics. Thus, our accounting estimates may change from period to period. These factors could cause management to conclude that ­indicators of impairment exist and require impairment tests be ­performed, which could result in management determining the value of long-lived assets is impaired, resulting in a write-down of the related long-lived assets. Goodwill and other indefinite-lived acquired intangible assets are not amortized, but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the value of a certain asset may be impaired. Generally, this evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is ­necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the ­reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units have generated sufficient returns to recover the cost of goodwill and other indefinite-lived acquired intangible assets. Because of the nature of the factors used in these tests, if different ­conditions occur in future periods, future operating results could be materially impacted. As of January 31, 2015, the fair value of certain recently acquired indefinite-lived intangible assets approximated their carrying value of $419 million. Any deterioration in the fair value of these assets would result in a related impairment charge. Management will continue to monitor the fair value of these assets in future periods. Income Taxes Income taxes have a significant effect on our net earnings. We are ­subject to income taxes in the U.S. and numerous foreign jurisdictions. Accordingly, the determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our effective income tax rate is affected by many factors, including changes in our assessment of certain tax ­contingencies, increases and decreases in valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items and the mix of earnings among our U.S. and international ­operations where the statutory rates are generally lower than the U.S. statutory rate, and may fluctuate as a result. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. The benefits of uncertain tax positions are recorded in our financial statements only after determining a more likely than not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the financial statements as appropriate. We account for uncertain tax positions by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. This determination requires the use of significant judgment in evaluating our tax positions and assessing the timing and amounts of deductible and taxable items. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent that a portion is not more likely than not to be realized. Many factors are considered when assessing whether it is more likely than not that the deferred tax assets will be realized, including recent cumulative earnings, expectations of future taxable income, carryforward periods and other relevant quan­ titative and qualitative factors. The recoverability of the deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary ­differences, forecasted operating earnings and available tax planning strategies. This evaluation relies heavily on estimates. Cautionary Statement Regarding Forward-Looking Statements This Annual Report to Shareholders contains statements that we believe are “forward-looking statements” entitled to the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking Statements Those forward-looking statements include statements: in our Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding: • volatility of currency exchange rates possibly affecting future results of Walmart and Walmart International; • our objectives of growing net sales at a faster rate than operating expenses and operating income at a faster rate than net sales and our strategic growth investments affecting those metrics in certain ways; • the possible fluctuation of our effective tax rate for future periods; • volatility of fuel prices possibly affecting the operating results of our Sam’s Club segment in the future; • meeting our liquidity needs through sources other than cash held outside of the U.S., intending to permanently reinvest such cash outside of the U.S., and our ability to repatriate cash held outside of the U.S. (which statements also appear in Note 1 to our Consolidated Financial Statements); • the recently announced new associate wage structure and comprehensive associate training and educational programs adversely affecting Walmart’s ability to leverage in the future and cash provided by operating activities being sufficient to fund those programs; 2015 Annual Report 33 Management’s Discussion and Analysis of Financial Condition and Results of Operations • our fiscal 2016 global expansion plans, continued investment in Neighborhood Markets, moderation in U.S. supercenter growth, growing our retail square feet and expanding our digital retail capabilities and our plans to finance our growth activities; • our estimated range of capital expenditures (including digital retail capital expenditures) in fiscal 2016 for each of our reportable segments, in the “Corporate and support” category and in total; • the estimated/projected growth in retail square feet in total and by reportable segment in fiscal 2016; • our cash flows from continuing operations, current cash position and access to debt and capital markets continuing to be sufficient to meet our cash needs for operations and other specified purposes; and • the amount of increases in payments under operating leases if certain leases are executed (which statement also appears in Note 11 to our Consolidated Financial Statements); in the Notes to our Consolidated Financial Statements regarding: • any portion of our net investment and cash flow instruments that is an ineffective hedge being insignificant and the amounts related to our derivatives expected to be reclassified from accumulated other comprehensive income (loss) to net income during the next 12 months being insignificant (Note 8); • the realization of certain net deferred tax assets, tax audit resolutions over fiscal 2016 reducing unrecognized tax benefits within a certain range or beyond and the reasons for that reduction, any change not having a significant impact on our Consolidated Financial Statements and the possibility that the resolution of a group of related non-income tax matters might result in a material liability to Walmart (Note 9); • an adverse decision in, or settlement of, certain litigation possibly resulting in material liability to us and matters relating to an FCPA investigation not having a material adverse effect on our business (Note 10); in this Annual Report regarding: • under “Our framework for growth,” our strategic plan, Walmart always being aggressive on price and equipping customers with information and technology to facilitate great customer service; • in our Chief Executive Officer’s letter, driving sales growth by executing well in stores and e-commerce, our objective of running great stores, clubs and e-commerce to grow our business, investment in increased wages and other initiatives for our U.S. associates, our fresh food offering and e-commerce innovations being future growth drivers and generating increased shareholder value when we operate and grow efficiently and our commitment to compliance, ethics and doing business the right way; • under “Delivering an improved shopping experience.,” in connection with our Walmart U.S. segment, certain wage increases for U.S. associates, continuing to strengthen fresh departments, certain factors ensuring a superior fresh offering to Walmart U.S.’s customers, addition of items sold on walmart.com, continuing to work with supplier partners to ensure everyday low cost and ensuring everyday low cost allowing investment in and strengthening of the segment’s everyday low cost pricing strategy and offering value to customers, the ranges of the number of units and amount of retail square feet to be added by Walmart U.S. in fiscal 2016, and transparent pricing for customers occurring through new tools and capabilities; • under “Driving increased profitability through balanced growth.,” in connection with our Walmart International segment, the segment strategically optimizing its global positioning across key geographies and formats to maximize growth potential and its objective of strengthening customer trust with a focus on everyday low price, high quality fresh food and excellent customer service; 34 2015 Annual Report  nder “Creating a more rewarding member experience.,” in connec•u tion with our Sam’s Club segment, Sam’s Club’s goal of having a suite of business member services making membership in Sam’s Club such members’ most valuable business card and the range for the number of new and relocated clubs to be opened, and the number of clubs to be remodeled, in fiscal 2016; and • under “A solid FY 15 performance; investing for a stronger future,” currency exchange rates possibly continuing to be a headwind to operating results in fiscal 2016, the range of net retail square footage we will add in fiscal 2016, Walmart enabling customers to shop anytime and anywhere, incremental e-commerce investment in fiscal 2016 and Walmart continuing to seek the right balance between sales growth and profitability as we grow our e-commerce business and the investment in wages and other initiatives for U.S. associates leading to higher sales and returns. The forward-looking statements described above are identified by the use in such statements of one or more of the words or phrases “aim,” “anticipate,” “could be,” “could reduce,” “estimated,” “expansion,” “expect,” “goal,” “grow,” “intend,” “investment,” “is expected,” “may cause,” “may continue,” “may fluctuate,” “may impact,” “may not be,” “may result,” “objective,” “plan,” “priority is to,” “projected,” “should continue,” “more to come,” “we’ll,” “we’ll accomplish,” “we’ll also equip,” “we’ll always be,” “we’ll continue,” “we’ll drive,” “we’ll generate,” “we’ll reinvent,” “will add,” “will allow,” “will be,” “will be met,” “will be paid,” “will continue,” “will depend,” “will ensure,” “will have,” “will impact,” “will include,” “will increase,” “will open,” “would be,” and “would increase,” variations of such words and phrases and other similar words or phrases. The forward-looking statements included in this Annual Report and that we make elsewhere are subject to certain risks, factors and uncertainties that could materially affect our actual results and the realization of our objectives and plans. These risks, factors and uncertainties include, but are not limited to: Risks, Factors and Uncertainties Relating to the Markets in which We Operate • economic, geo-political, financial markets, capital markets and business conditions, changes, trends and events globally and in one or more of the markets in which we operate; • unemployment and underemployment levels globally and in one or more of the markets in which we operate; • monetary policies of the U.S. government, the Board of Governors of the Federal Reserve System, other governments or central banks, economic or sovereign debt crises and disruptions in the financial markets; • supply of and demand for particular commodities and commodity prices, including the prices of crude oil, natural gas, refined petroleum products and electricity; • inflation and deflation; • currency exchange rate fluctuations and volatility; • fluctuations in market rates of interest; • market labor costs in the U.S.; • market selling prices of gasoline and diesel fuel; • c ompetitive initiatives of other retailers, other competitive pressures and new competitors entering a market; • a doption of or changes in tax, labor and other laws and regulations and interpretations thereof that affect our business, including changes in corporate and personal tax rates and the imposition of new taxes and surcharges; Management’s Discussion and Analysis of Financial Condition and Results of Operations Risks, Factors and Uncertainties Relating to Consumers Generally and Our Customers • c onsumer confidence, disposable income, debt levels, credit availability, spending levels, shopping patterns and demand for certain merchandise in one or more of the markets in which we operate; • consumer acceptance of our stores and clubs, e-commerce websites and mobile commerce applications, our digital and physical retail initiatives, programs and merchandise offerings, including our fresh food offerings, globally in one or more of the markets in which we operate; Risks, Factors and Uncertainties Specifically Relating to Our Operations in Any or All of the Markets in which We Operate • our historical financial performance, including our U.S. and Walmart International cash flows, for one or more periods or historical financial position as of one or more dates completed or occurring after the date the pertinent forward-looking statement is made; • the cost of the goods we sell; • t he availability, at an acceptable cost, of adequate supplies of consistent, high-quality produce from suppliers in the local markets in which we operate; • the availability of persons with the skills and abilities necessary to meet our needs for managing and staffing our operations, including to manage and staff new and relocated units; • t he mix of merchandise we sell globally or in one or more of the markets in which we operate; • the size of and turnover in our hourly workforce; • our selling prices of gasoline and diesel fuel; • c yberattacks on our information systems, including any of those used to operate our e-commerce websites and our information security costs and any costs and liabilities we would incur as a result of a successful cyberattack; • disruption in the availability of our e-commerce websites and mobile commerce applications; • t he availability of attractive opportunities for investment in retail operations in the markets in which we currently operate and in new markets and for investment in digital retail acquisitions and initiatives; •d  isruption in our supply chain, including of the availability and transport of goods from domestic and foreign suppliers to our stores and other facilities; • the mix of our earnings from our U.S. and operations in one or more of the markets in which we operate; • the amounts of our net sales and expenses for a period denominated in particular currencies other than the U.S. dollar; • changes in our assessment of certain tax contingencies, increases or decreases in valuation allowances, outcome of administrative audits, the impact of discrete items on our effective tax rate and the resolution of other tax matters; • developments in and the outcome of legal and regulatory proceedings to which we are a party or are subject and the expenses associated therewith; • the requirements for expenditures in connection with the FCPA-related matters; • unanticipated changes in operating philosophy, plans and objectives; • a vailability and the cost of acceptable building sites for new and relocated stores, clubs and other facilities; • r eal estate, zoning, land use and other laws, ordinances, legal restrictions and initiatives that may prevent Walmart from building, or that impose limitations on Walmart’s ability to build new units in certain locations or relocate or expand existing units; • availability of necessary utilities for new or expanded units; and • availability of skilled labor and labor, material and other construction costs in areas in which new or relocated units are proposed to be constructed or existing units are proposed to be expanded or remodeled. Other Risk Factors; No Duty to Update We discuss certain of these factors more fully, as well as certain other risk factors that may affect the results and other matters discussed in the forward-looking statements identified above, in our filings with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K under the heading “Item 1A. Risk Factors.” We filed our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, with the SEC on April 1, 2015. The forward-looking statements described above are made based on knowledge of our business and the environment in which we operate and assumptions that we believe to be reasonable at the time such forward-looking statements are made. However, as a consequence of the risks, factors and uncertainties we discuss above, and in the other reports mentioned above, other risks not known to us at this time, changes in facts, assumptions not being realized or other circumstances, our actual results may differ materially from those results discussed in or implied or contemplated by such forwardlooking statements. We cannot assure the reader that the results or developments expected or anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. You are urged to consider all of these risks, factors and uncertainties carefully in evaluating the forward-looking statements and not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Annual Report speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances, except as may be required by applicable law. 2015 Annual Report 35 Consolidated Statements of Income Fiscal Years Ended January 31, (Amounts in millions, except per share data) 2015 2014 2013 Revenues: Net sales Membership and other income Total revenues Costs and expenses: Cost of sales Operating, selling, general and administrative expenses $482,229 $473,076 $465,604 3,422 3,218 3,047 485,651 476,294 468,651 365,086 358,069 352,297 93,418 91,353 88,629 Operating income 27,147 26,872 27,725 Interest: Debt 2,161 2,072 1,977 Capital leases 300 263 272 Interest income (113) (119) (186) Interest, net 2,348 2,216 2,063 Income from continuing operations before income taxes 24,799 24,656 25,662 Provision for income taxes: Current 8,504 8,619 7,976 Deferred (519) (514) (18) Total provision for income taxes 7,985 8,105 7,958 Income from continuing operations 16,814 16,551 17,704 Income from discontinued operations, net of income taxes 285 144 52 17,099 16,695 17,756 Consolidated net income Less consolidated net income attributable to noncontrolling interest (736) (673) (757) $ 16,363 Consolidated net income attributable to Walmart Basic net income per common share: Basic income per common share from continuing operations attributable to Walmart Basic income per common share from discontinued operations attributable to Walmart $   4.90 $   5.04 $   4.99 $   4.85 $   5.01 0.06 0.03 0.01 Diluted net income per common share attributable to Walmart $   5.05 Weighted-average common shares outstanding: Basic Diluted $ 16,999 $   5.01 $   4.87 $   5.03 0.06 0.03 0.01 Basic net income per common share attributable to Walmart $   5.07 Diluted net income per common share: Diluted income per common share from continuing operations attributable to Walmart Diluted income per common share from discontinued operations attributable to Walmart $ 16,022 $   4.88 $   5.02 3,230 3,269 3,374 3,243 3,283 3,389 Dividends declared per common share $   1.92 $   1.88 $   1.59 See accompanying notes. Consolidated Statements of Comprehensive Income Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Consolidated net income $17,099 $16,695 $17,756 Less consolidated net income attributable to nonredeemable noncontrolling interest (736) (606) (684) Less consolidated net income attributable to redeemable noncontrolling interest — (67) (73) Consolidated net income attributable to Walmart 16,363 16,022 16,999 Other comprehensive income (loss), net of income taxes Currency translation and other Derivative instruments Minimum pension liability (4,179) (3,146) 1,042 (470) 207 136 (69) 153 (166) Other comprehensive income (loss), net of income taxes (4,718) (2,786) 1,012 Less other comprehensive income (loss) attributable to nonredeemable noncontrolling interest 546 311 (138) Less other comprehensive income (loss) attributable to redeemable noncontrolling interest — 66 (51) Other comprehensive income (loss) attributable to Walmart (4,172) (2,409) 823 Comprehensive income, net of income taxes 12,381 13,909 18,768 Less comprehensive income (loss) attributable to nonredeemable noncontrolling interest (190) (295) (822) Less comprehensive income (loss) attributable to redeemable noncontrolling interest — (1) (124) Comprehensive income attributable to Walmart See accompanying notes. 36 2015 Annual Report $12,191 $13,613 $17,822 Consolidated Balance Sheets As of January 31, (Amounts in millions) 2015 2014 ASSETS Current assets: Cash and cash equivalents Receivables, net Inventories Prepaid expenses and other Current assets of discontinued operations Total current assets Property and equipment: Property and equipment Less accumulated depreciation Property and equipment, net Property under capital leases: Property under capital leases Less accumulated amortization Property under capital leases, net Goodwill Other assets and deferred charges $  9,135 $  7,281 6,778 6,677 45,141 44,858 2,224 1,909 — 460 63,278 61,185 177,395 173,089 (63,115) (57,725) 114,280 115,364 5,239 5,589 (2,864) (3,046) 2,375 2,543 18,102 19,510 5,671 6,149 Total assets $203,706 $204,751 LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND EQUITY Current liabilities: Short-term borrowings Accounts payable Accrued liabilities Accrued income taxes Long-term debt due within one year Obligations under capital leases due within one year Current liabilities of discontinued operations $  1,592 $  7,670 38,410 37,415 19,152 18,793 1,021 966 4,810 4,103 287 309 — 89 Total current liabilities 65,272 69,345 Long-term debt Long-term obligations under capital leases Deferred income taxes and other 41,086 41,771 2,606 2,788 8,805 8,017 Redeemable noncontrolling interest — 1,491 Commitments and contingencies Equity: Common stock Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) 323 323 2,462 2,362 85,777 76,566 (7,168) (2,996) Total Walmart shareholders’ equity Nonredeemable noncontrolling interest 81,394 76,255 4,543 5,084 Total equity 85,937 81,339 Total liabilities, redeemable noncontrolling interest, and equity $203,706 $204,751 See accompanying notes. 2015 Annual Report 37 Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest Capital  in Common Stock Excess of Retained (Amounts in millions) Shares Amount Par Value Earnings Balances as of February 1, 2012 Consolidated net income Other comprehensive income, net of income taxes Cash dividends declared ($1.59 per share) Purchase of Company stock Nonredeemable noncontrolling interest of acquired entity Other 3,418 — $342 $  3,692 — — Accumulated Total Other Walmart Nonredeemable Comprehensive Shareholders’ Noncontrolling Total Income (Loss) Equity Interest Equity Redeemable Noncontrolling Interest $68,691 16,999 $(1,410) — $71,315 16,999 $4,446 684 $75,761 17,683 $  404 73 — — — — 823 823 138 961 51 — (115) — (11) — (357) (5,361) (7,341) — — (5,361) (7,709) — — (5,361) (7,709) — — — 11 — 1 — 285 — (10) — — — 276 469 (342) 469 (66) — (9) 76,343 16,022 5,395 595 81,738 16,617 519 78 Balances as of January 31, 2013 3,314 — Consolidated net income Other comprehensive loss, net of income taxes — Cash dividends declared ($1.88 per share) — Purchase of Company stock (87) Redemption value adjustment of redeemable noncontrolling interest — Other 6 332 3,620 72,978 — — 16,022 (587) — — — — (2,409) (2,409) (311) (2,720) (66) — (9) — (294) (6,139) (6,254) — — (6,139) (6,557) — — (6,139) (6,557) — — — — (1,019) 55 — (41) — — (1,019) 14 — (595) (1,019) (581) 1,019 (59) Balances as of January 31, 2014 3,233 323 2,362 76,566 (2,996) 76,255 5,084 81,339 1,491 — — — 16,363 — 16,363 736 17,099 — Consolidated net income Other comprehensive income, net of income taxes — — — — (4,172) (4,172) (546) (4,718) — Cash dividends declared ($1.92 per share) — — — (6,185) — (6,185) — (6,185) — Purchase of Company stock (13) (1) (29) (950) — (980) — (980) — Purchase of redeemable noncontrolling interest — — — — — — — — (1,491) Other 8 1 129 (17) — 113 (731) (618) — Balances as of January 31, 2015 See accompanying notes. 38 2015 Annual Report 3,228 $323 $  2,462 $85,777 $(7,168) $81,394 $4,543 $85,937 $   — Consolidated Statements of Cash Flows Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Cash flows from operating activities: Consolidated net income Income from discontinued operations, net of income taxes $ 17,099 $ 16,695 $ 17,756 (285) (144) (52) Income from continuing operations Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Other operating activities Changes in certain assets and liabilities, net of effects of acquisitions: Receivables, net Inventories Accounts payable Accrued liabilities Accrued income taxes 16,814 16,551 17,704 Net cash provided by operating activities 28,564 23,257 25,591 Cash flows from investing activities: Payments for property and equipment Proceeds from the disposal of property and equipment Proceeds from the disposal of certain operations Other investing activities (12,174) (13,115) (12,898) 570 727 532 671 — — (192) (138) (271) Net cash used in investing activities (11,125) (12,526) (12,637) Cash flows from financing activities: Net change in short-term borrowings Proceeds from issuance of long-term debt Payments of long-term debt Dividends paid Purchase of Company stock Dividends paid to noncontrolling interest Purchase of noncontrolling interest Other financing activities Net cash used in financing activities 9,173 8,870 8,478 (503) (279) (133) 785 938 602 (569) (566) (614) (1,229) (1,667) (2,759) 2,678 531 1,061 1,249 103 271 166 (1,224) 981 (6,288) 911 2,754 5,174 7,072 211 (3,904) (4,968) (1,478) (6,185) (6,139) (5,361) (1,015) (6,683) (7,600) (600) (426) (282) (1,844) (296) (132) (409) (260) (58) (15,071) (10,789) (11,946) Effect of exchange rates on cash and cash equivalents (514) (442) 223 Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 1,854 (500) 1,231 7,281 7,781 6,550 Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Income taxes paid Interest paid $  9,135 $  7,281 $  7,781 8,169 8,641 7,304 2,433 2,362 2,262 See accompanying notes. 2015 Annual Report 39 Notes to Consolidated Financial Statements 1 Summary of Significant Accounting Policies General Wal-Mart Stores, Inc. (“Walmart” or the “Company”) helps people around the world save money and live better – anytime and anywhere – in retail stores or through the Company’s e-commerce and mobile capabilities. Through innovation, the Company is striving to create a customer-centric experience that seamlessly integrates digital and physical shopping. Each week, the Company serves nearly 260 million customers who visit its over 11,000 stores under 72 banners in 27 countries and e-commerce websites in 11 countries. The Company’s strategy is to lead on price, invest to differentiate on access, be competitive on assortment and deliver a great experience. The Company’s operations comprise three reportable segments: Walmart U.S., Walmart International and Sam’s Club. Principles of Consolidation The Consolidated Financial Statements include the accounts of Walmart and its subsidiaries as of and for the fiscal years ended January 31, 2015 (“fiscal 2015”), January 31, 2014 (“fiscal 2014”) and January 31, 2013 (“fiscal 2013”). All material intercompany accounts and transactions have been eliminated in consolidation. Investments in unconsolidated affiliates, which are 50% or less owned and do not otherwise meet consolidation requirements, are accounted for primarily using the equity method. These investments are immaterial to the Company’s Consolidated Financial Statements. The Company’s Consolidated Financial Statements are based on a fiscal year ending on January 31, for the United States (“U.S.”) and Canadian operations. The Company consolidates all other operations generally using a one-month lag and based on a calendar year. There were no ­significant intervening events during January 2015 that materially affected the Consolidated Financial Statements. Use of Estimates The Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles. Those principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Management’s estimates and assumptions also affect the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of ­revenues and expenses during the reporting period. Actual results may differ from those estimates. Cash and Cash Equivalents The Company considers investments with a maturity when purchased of three months or less to be cash equivalents. All credit card, debit card and electronic benefits transfer transactions that process in less than seven days are classified as cash and cash equivalents. The amounts due from banks for these transactions classified as cash and cash equivalents totaled $2.9 billion and $1.6 billion at January 31, 2015 and 2014, respectively. In addition, cash and cash equivalents included restricted cash of $345 million and $654 million at January 31, 2015 and 2014, respectively, which was primarily related to cash collateral holdings from various counterparties, as required by certain derivative and trust agreements. 40 2015 Annual Report The Company’s cash balances are held in various locations around the world. Of the Company’s $9.1 billion and $7.3 billion of cash and cash equivalents at January 31, 2015 and 2014, respectively, $6.3 billion and $5.8 billion, respectively, were held outside of the U.S. and were generally utilized to support liquidity needs in the Company’s non-U.S. operations. The Company uses intercompany financing arrangements in an effort to ensure cash can be made available in the country in which it is needed with the minimum cost possible. Management does not believe it will be necessary to repatriate cash and cash equivalents held outside of the U.S. and anticipates the Company’s domestic liquidity needs will be met through cash flows provided by operating activities, supplemented with long-term debt and short-term borrowings. Accordingly, the Company intends, with only certain exceptions, to continue to indefinitely reinvest the Company’s cash and cash equivalents held outside of the U.S. in our ­foreign operations. When the income earned, either from operations or through intercompany financing arrangements, and indefinitely ­reinvested outside of the U.S. is taxed at local country tax rates, which are generally lower than the U.S. statutory rate, the Company realizes an effective tax rate benefit. If the Company’s intentions with respect to reinvestment were to change, most of the amounts held within the Company’s foreign operations could be repatriated to the U.S., although any repatriation under current U.S. tax laws would be subject to U.S. ­federal income taxes, less applicable foreign tax credits. As of January 31, 2015 and 2014, cash and cash equivalents of approximately $1.7 billion and $1.9 billion, respectively, may not be freely transferable to the U.S. due to local laws or other restrictions. The Company does not expect local laws, other limitations or potential taxes on anticipated future ­repatriations of cash amounts held outside of the U.S. to have a material effect on the Company’s overall liquidity, financial condition or results of operations. Receivables Receivables are stated at their carrying values, net of a reserve for ­doubtful accounts. Receivables consist primarily of amounts due from: • insurance companies resulting from pharmacy sales; • banks for customer credit and debit cards and electronic bank transfers that take in excess of seven days to process; • consumer financing programs in certain international operations; • suppliers for marketing or incentive programs; and • real estate transactions. The Walmart International segment offers a limited number of consumer credit products, primarily through its financial institutions in select ­markets. The receivable balance from consumer credit products was $1.2 billion, net of a reserve for doubtful accounts of $114 million at January 31, 2015, compared to a receivable balance of $1.3 billion, net of a reserve for doubtful accounts of $119 million at January 31, 2014. These balances are included in receivables, net, in the Company’s Consolidated Balance Sheets. Notes to Consolidated Financial Statements Inventories The Company values inventories at the lower of cost or market as ­determined primarily by the retail inventory method of accounting, using the last-in, first-out (“LIFO”) method for substantially all of the Walmart U.S. segment’s inventories. The inventory at the Walmart International segment is valued primarily by the retail inventory method of accounting, using the first-in, first-out (“FIFO”) method. The retail inventory method of accounting results in inventory being valued at the lower of cost or market since permanent markdowns are immediately recorded as a reduction of the retail value of inventory. The inventory at the Sam’s Club segment is valued based on the weighted-average cost using the LIFO method. At January 31, 2015 and January 31, 2014, the Company’s inventories valued at LIFO approximated those inventories as if they were valued at FIFO. Property and Equipment Property and equipment are stated at cost. Gains or losses on disposition are recognized as earned or incurred. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred. The following table summarizes the Company’s property and equipment balances and includes the estimated useful lives that are generally used to depreciate the assets on a straight-line basis: Estimated (Amounts in millions) Useful Lives Land Buildings and improvements Fixtures and equipment Transportation equipment Construction in progress Fiscal Years Ended January 31, 2015 2014 N/A $ 26,261 $ 26,184 3-40 years 97,496 95,488 2-30 years 45,044 42,971 3-15 years 2,807 2,785 N/A 5,787 5,661 Property and equipment $177,395 $173,089 Accumulated depreciation (63,115) (57,725) Property and equipment, net $114,280 $115,364 Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the remaining expected lease term. Depreciation expense for property and equipment, including amortization of property under capital leases, for fiscal 2015, 2014 and 2013 was $9.1 billion, $8.8 billion and $8.4 billion, respectively. Interest costs capitalized on construction projects were $59 million, $78 million and $74 million in fiscal 2015, 2014 and 2013, respectively. Long-Lived Assets Long-lived assets are stated at cost. Management reviews long-lived assets for indicators of impairment whenever events or changes in ­circumstances indicate that the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows, which is at the individual store or club level or, in certain circumstances, a market group of stores. Undiscounted cash flows expected to be ­generated by the related assets are estimated over the assets’ useful lives based on updated projections. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related asset or asset group as determined by an appropriate market appraisal or other valuation technique. Impairment charges of long-lived assets for fiscal 2015, 2014 and 2013 were not significant. Goodwill and Other Acquired Intangible Assets Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is allocated to the appropriate reporting unit when acquired. Other acquired intangible assets are stated at the fair value acquired as determined by a valuation technique commensurate with the intended use of the related asset. Goodwill and indefinite-lived intangible assets are not amortized; rather, they are evaluated for impairment annually and whenever events or changes in circumstances indicate that the value of the asset may be impaired. Definite-lived intangible assets are considered long-lived assets and are amortized on a straight-line basis over the periods that expected economic benefits will be provided. Goodwill is evaluated for impairment using either a qualitative or ­quantitative approach for each of the Company’s reporting units. Generally, a qualitative assessment is first performed to determine whether a quantitative goodwill impairment test is necessary. If man­ agement determines, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the ­reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative goodwill impairment test would be required. The quantitative test for goodwill impairment is performed by ­determining the fair value of the related reporting units. Fair value is measured based on the discounted cash flow method and relative ­market-based approaches. The Company’s reporting units were evaluated using a quantitative impairment test. Management determined the fair value of each reporting unit is greater than the carrying amount and, accordingly, the Company has not recorded any impairment charges related to goodwill. The following table reflects goodwill activity, by reportable segment, for fiscal 2015 and 2014: Walmart (Amounts in millions) Walmart U.S. International Sam’s Club Total Balances as of February 1, 2013 $443 $19,741 $313 $20,497 Changes in currency translation and other — (1,000) — (1,000) Acquisitions (1) 8 5 — 13 Balances as of January 31, 2014 451 18,746 313 19,510 Changes in currency translation and other — (1,418) — (1,418) Acquisitions (1) 10 — — 10 Balances as of January 31, 2015 $461 $17,328 $313 $18,102 (1) G  oodwill recorded for fiscal 2015 and 2014 acquisitions relates to acquisitions that are not significant, individually or in the aggregate, to the Company’s ­Consolidated Financial Statements. 2015 Annual Report 41 Notes to Consolidated Financial Statements Indefinite-lived intangible assets are included in other assets and deferred charges in the Company’s Consolidated Balance Sheets. These assets are evaluated for impairment based on their fair values using valuation techniques which are updated annually based on the most recent variables and assumptions. There were no impairment charges related to indefinite-lived intangible assets recorded for fiscal 2015, 2014 and 2013. Self Insurance Reserves The Company uses a combination of insurance and self insurance for a number of risks, including, but not limited to, workers’ compensation, general liability, auto liability, product liability and the Company’s obligation for employee-related health care benefits. Liabilities relating to the claims associated with these risks are estimated by considering historical claims experience, frequency, severity, demographic factors and other actuarial assumptions, including incurred but not reported claims. In estimating its liability for such claims, the Company periodically analyzes its historical trends, including loss development, and applies appropriate loss development factors to the incurred costs associated with the claims. To limit exposure to certain risks, the Company maintains ­stop-loss insurance coverage for workers’ compensation of $5 million per occurrence, and in most instances, $15 million per occurrence for general liability. Income Taxes Income taxes are accounted for under the balance sheet method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (“temporary differences”). Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent that a portion is not more likely than not to be realized. Many factors are considered when assessing whether it is more likely than not that the deferred tax assets will be realized, including recent cumulative earnings, expectations of future taxable income, carryforward periods, and other relevant quantitative and qualitative factors. The recoverability of the deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. In determining the provision for income taxes, an annual effective income tax rate is used based on annual income, permanent differences between book and tax income, and statutory income tax rates. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur. The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company records interest and penalties related to unrecognized tax benefits in interest expense and operating, selling, general and administrative expenses, respectively, in the Company’s Consolidated Statements of Income. Refer to Note 9 for additional income tax disclosures. 42 2015 Annual Report Revenue Recognition Sales The Company recognizes sales revenue, net of sales taxes and estimated sales returns, at the time it sells merchandise to the customer. Membership Fee Revenue The Company recognizes membership fee revenue both in the U.S. and internationally over the term of the membership, which is typically 12 months. The following table summarizes membership fee activity for fiscal 2015, 2014 and 2013: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Deferred membership fee revenue, beginning of year $   641 $    575 $    559 Cash received from members 1,410 1,249 1,133 Membership fee revenue recognized (1,292) (1,183) (1,117) Deferred membership fee revenue, end of year $   759 $    641 $    575 Membership fee revenue is included in membership and other income in the Company’s Consolidated Statements of Income. The deferred membership fee is included in accrued liabilities in the Company’s Consolidated Balance Sheets. Shopping Cards Customer purchases of shopping cards are not recognized as revenue until the card is redeemed and the customer purchases merchandise using the shopping card. Shopping cards in the U.S. do not carry an ­expiration date; therefore, customers and members can redeem their shopping cards for merchandise indefinitely. Shopping cards in certain foreign countries where the Company does business may have expiration dates. A certain number of shopping cards, both with and without expiration dates, will not be fully redeemed. Management estimates unredeemed shopping cards and recognizes revenue for these amounts over shopping card historical usage periods based on historical redemption rates. Management periodically reviews and updates its estimates of usage periods and redemption rates. Financial and Other Services The Company recognizes revenue from service transactions at the time the service is performed. Generally, revenue from services is classified as a component of net sales in the Company’s Consolidated Statements of Income. Cost of Sales Cost of sales includes actual product cost, the cost of transportation to the Company’s distribution facilities, stores and clubs from suppliers, the cost of transportation from the Company’s distribution facilities to the stores, clubs and customers and the cost of warehousing for the Sam’s Club segment and import distribution centers. Cost of sales is reduced by supplier payments that are not a reimbursement of specific, ­incremental and identifiable costs. Notes to Consolidated Financial Statements Payments from Suppliers The Company receives consideration from suppliers for various programs, primarily volume incentives, warehouse allowances and reimbursements for specific programs such as markdowns, margin protection, advertising and supplier-specific fixtures. Payments from suppliers are accounted for as a reduction of cost of sales and are recognized in the Company’s Consolidated Statements of Income when the related inventory is sold, except when the payment is a reimbursement of specific, incremental and identifiable costs. Operating, Selling, General and Administrative Expenses Operating, selling, general and administrative expenses include all ­operating costs of the Company, except cost of sales, as described above. As a result, the majority of the cost of warehousing and occupancy for the Walmart U.S. and Walmart International segments’ distribution ­facilities is included in operating, selling, general and administrative expenses. Because the Company does not include most of the cost of its Walmart U.S. and Walmart International segments’ distribution facilities in cost of sales, its gross profit and gross profit as a percentage of net sales may not be comparable to those of other retailers that may include all costs related to their distribution facilities in cost of sales and in the calculation of gross profit. Advertising Costs Advertising costs are expensed as incurred and were $2.4 billion for both fiscal 2015 and fiscal 2014 and $2.3 billion for fiscal 2013. Advertising costs consist primarily of print, television and digital advertisements and are recorded in operating, selling, general and administrative expenses in the Company’s Consolidated Statements of Income. Reimbursements from suppliers that are for specific, incremental and identifiable advertising costs are recognized as a reduction of advertising costs in operating, selling, general and administrative expenses. Leases The Company estimates the expected term of a lease by assuming the exercise of renewal options where an economic penalty exists that would preclude the abandonment of the lease at the end of the initial non-cancelable term and the exercise of such renewal is at the sole discretion of the Company. The expected term is used in the determination of whether a store or club lease is a capital or operating lease and in the calculation of straight-line rent expense. Additionally, the useful life of leasehold improvements is limited by the expected lease term or the economic life of the asset, whichever is shorter. If significant expenditures are made for leasehold improvements late in the expected term of a lease and renewal is reasonably assured, the useful life of the leasehold improvement is limited to the end of the renewal period or economic life of the asset, whichever is shorter. Rent abatements and escalations are considered in the calculation of minimum lease payments in the Company’s capital lease tests and in determining straight-line rent expense for operating leases. Pre-Opening Costs The cost of start-up activities, including organization costs, related to new store openings, store remodels, relocations, expansions and conversions are expensed as incurred and included in operating, selling, general and administrative expenses in the Company’s Consolidated Statements of Income. Pre-opening costs totaled $317 million, $338 million and $316 million for fiscal 2015, 2014 and 2013, respectively. Currency Translation The assets and liabilities of all international subsidiaries are translated from the respective local currency to the U.S. dollar using exchange rates at the balance sheet date. Related translation adjustments are recorded as a component of accumulated other comprehensive income (loss). The income statements of all international subsidiaries are translated from the respective local currencies to the U.S. dollar using average exchange rates for the period covered by the income statements. Reclassifications Certain reclassifications have been made to previous fiscal year amounts and balances to conform to the presentation in the current fiscal year. These reclassifications did not impact consolidated operating income or net income. Additionally, certain segment asset and expense allocations have been reclassified among segments in the current period. See Note 14 for further discussion of the Company’s segments. Recent Accounting Pronouncements In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which provides guidance for the recognition of discontinued operations, changes the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. This ASU applies to prospective transactions beginning on or after December 15, 2014, with early adoption permitted. The Company adopted this ASU for the fiscal year ended January 31, 2015 and adoption did not materially impact the Company’s consolidated net income, financial position or cash flows. In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on February 1, 2017. Companies may use either a full retrospective or a modified ­retrospective approach to adopt this ASU. Management is currently ­evaluating this standard, including which transition approach to use, and does not expect this ASU to materially impact the Company’s ­consolidated net income, financial position or cash flows. 2015 Annual Report 43 Notes to Consolidated Financial Statements 2 Net Income Per Common Share Basic income per common share from continuing operations ­attributable to Walmart is based on the weighted-average common shares outstanding during the relevant period. Diluted income per ­common share from continuing operations attributable to Walmart is based on the weighted-average common shares outstanding during the relevant period adjusted for the dilutive effect of share-based awards. The Company did not have significant share-based awards outstanding that were antidilutive and not included in the calculation of diluted income per common share from continuing operations attributable to Walmart for fiscal 2015, 2014 and 2013. The following table provides a reconciliation of the numerators and denominators used to determine basic and diluted income per common share from continuing operations attributable to Walmart: Fiscal Years Ended January 31, (Amounts in millions, except per share data) Numerator Income from continuing operations Less income from continuing operations attributable to noncontrolling interest Income from continuing operations attributable to Walmart Denominator Weighted-average common shares outstanding, basic Dilutive impact of stock options and other share-based awards Weighted-average common shares outstanding, diluted Income per common share from continuing operations attributable to Walmart Basic Diluted 2015 2014 2013 $16,814 $16,551 $17,704 (632) (633) (741) $16,182 $15,918 $16,963 3,230 3,269 3,374 13 14 15 3,243 3,283 3,389 $  5.01 $  4.87 $  5.03 4.99 4.85 5.01 3 Shareholders’ Equity Share-Based Compensation The Company has awarded share-based compensation to associates and nonemployee directors of the Company. The compensation expense recognized for all plans was $462 million, $388 million and $378 million for fiscal 2015, 2014 and 2013, respectively. Share-based compensation expense is included in operating, selling, general and administrative expenses in the Company’s Consolidated Statements of Income. The 44 2015 Annual Report total income tax benefit recognized for share-based compensation was $173 million, $145 million and $142 million for fiscal 2015, 2014 and 2013, respectively. The following table summarizes the Company’s share-based compensation expense by award type: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Restricted stock and performance share units $157 $141 $152 Restricted stock units 277 224 195 Other 28 23 31 Share-based compensation expense $462 $388 $378 The Company’s shareholder-approved Stock Incentive Plan of 2010 (the “Plan”) became effective June 4, 2010 and amended and restated the Company’s Stock Incentive Plan of 2005. The Plan was established to grant stock options, restricted (non-vested) stock, performance share units and other equity compensation awards for which 210 million shares of common stock issued or to be issued under the Plan have been ­registered under the Securities Act of 1933, as amended. The Company believes that such awards serve to align the interests of its associates with those of its shareholders. The Plan’s award types are summarized as follows: • Restricted Stock and Performance Share Units. Restricted stock awards are for shares that vest based on the passage of time and include restrictions related to employment. Performance share units vest based on the passage of time and achievement of performance criteria and may range from 0% to 150% of the original award amount. Vesting periods for these awards are generally between one and three years. Restricted stock and performance share units may be settled or deferred in stock and are accounted for as equity in the Company’s Consolidated Balance Sheets. The fair value of restricted stock awards is determined on the date of grant and is expensed ratably over the vesting period. The fair value of performance share units is determined on the date of grant using the Company’s stock price discounted for the expected dividend yield through the vesting period and is recognized over the vesting period. • Restricted Stock Units. Restricted stock units provide rights to Company stock after a specified service period; 50% vest three years from the grant date and the remaining 50% vest five years from the grant date. The fair value of each restricted stock unit is determined on the date of grant using the stock price discounted for the expected dividend yield through the vesting period and is recognized ratably over the vesting period. The expected dividend yield is based on the anticipated dividends over the vesting period. The weighted-average discount for the dividend yield used to determine the fair value of restricted stock units granted in fiscal 2015, 2014 and 2013 was 9.5%, 10.3% and 12.2%, respectively. In addition to the Plan, the Company’s subsidiary in the United Kingdom has stock option plans for certain colleagues which generally vest over three years. The stock option share-based compensation expense is included in the other line in the table above. Notes to Consolidated Financial Statements The following table shows the activity for restricted stock and performance share units and restricted stock units during fiscal 2015: Restricted Stock and Performance Share Units (1) Restricted Stock Units Weighted-Average Weighted-Average Grant-Date Grant-Date Fair Value Fair Value (Shares in thousands) Shares Per Share Shares Per Share Outstanding at February 1, 2014 9,951 $63.26 17,785 $55.87 Granted 3,328 75.30 5,671 69.39 Vested/exercised (2,799) 55.64 (4,554) 47.81 Forfeited or expired (1,757) 62.35 (1,334) 61.63 Outstanding at January 31, 2015 8,723 $68.89 17,568 $61.00 (1) Assumes payout rate at 100% for Performance Share Units. The following table includes additional information related to restricted stock and performance share units and restricted stock units: (Amounts in millions) Fair value of restricted stock and performance share units vested Fair value of restricted stock units vested Unrecognized compensation cost for restricted stock and performance share units Unrecognized compensation cost for restricted stock units Weighted average remaining period to expense for restricted stock and performance share units (years) Weighted average remaining period to expense for restricted stock units (years) Fiscal Years Ended January 31, 2015 2014 2013 $156 $116 $155 218 189 168 154 200 233 570 497 437    1.3   2.0    2.0    1.7    2.1    1.7 Share Repurchase Program From time to time, the Company repurchases shares of its common stock under share repurchase programs authorized by the Board of Directors. On June 6, 2013, the Company’s Board of Directors replaced the previous $15.0 billion share repurchase program, which had approximately $712 million of remaining authorization for share repurchases as of that date, with a new $15.0 billion share repurchase program, which was announced on June 7, 2013. As was the case with the replaced share repurchase program, the current share repurchase program has no ­expiration date or other restrictions limiting the period over which the Company can make share repurchases. At January 31, 2015, authorization for $10.3 billion of share repurchases remained under the current share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status. The Company considers several factors in determining when to execute share repurchases, including, among other things, current cash needs, capacity for leverage, cost of borrowings, its results of operations and the market price of its common stock. The following table provides, on a settlement date basis, the number of shares repurchased, average price paid per share and total cash paid for share repurchases for fiscal 2015, 2014 and 2013: Fiscal Years Ended January 31, (Amounts in millions, except per share data) 2015 2014 2013 Total number of shares repurchased Average price paid per share Total cash paid for share repurchases 13.4 89.1 113.2 $75.82 $74.99 $67.15 $1,015 $6,683 $7,600 2015 Annual Report 45 Notes to Consolidated Financial Statements 4 Accumulated Other Comprehensive Income (Loss) The following table provides the fiscal 2015, 2014 and 2013 changes in the composition of total accumulated other comprehensive income (loss), including the amounts reclassified out of accumulated other comprehensive income (loss) by component for fiscal 2015 and 2014: (Amounts in millions and net of income taxes) Currency Translation Derivative Minimum and Other Instruments Pension Liability Balances as of January 31, 2012 Other comprehensive income (loss) before reclassifications $ (806) 853 $    (7) 136 $(597) (166) Total $(1,410) 823 Balances as of January 31, 2013 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) 47 129 (763) (587) (2,769) 194 149 (2,426) — 13 4 17 Balances as of January 31, 2014 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) (2,722) (3,633) — 336 (496) 26 (610) (58) (11) (2,996) (4,187) 15 $(6,355) $(134) $(679) $(7,168) Balances as of January 31, 2015 Amounts reclassified from accumulated other comprehensive income (loss) for derivative instruments are recorded in interest, net, in the Company’s Consolidated Statements of Income, and the amounts for the minimum pension liability are recorded in operating, selling, general and administrative expenses in the Company’s Consolidated Statements of Income. The Company’s unrealized net gains and losses on net investment hedges, included in the currency translation and other category of accumulated other comprehensive income (loss), were not significant as of January 31, 2015 and January 31, 2014. 5 Accrued Liabilities The Company’s accrued liabilities consist of the following: As of January 31, 2015 2014 (Amounts in millions) Accrued wages and benefits (1) Self-insurance (2) Accrued non-income taxes (3) Other (4) $ 4,954 $ 4,652 3,306 3,477 2,592 2,554 8,300 8,110 Total accrued liabilities $19,152 $18,793 (1) A  ccrued wages and benefits include accrued wages, salaries, vacation, bonuses and other incentive plans. (2) S elf-insurance consists of all insurance-related liabilities, such as workers’ compensation, general liability, vehicle liability, property liability and employee-related health care benefits. (3) Accrued non-income taxes include accrued payroll, value added, sales and miscellaneous other taxes. (4) Other accrued liabilities consist of various items such as maintenance, utilities, advertising and interest. 46 2015 Annual Report Notes to Consolidated Financial Statements 6 Short-term Borrowings and Long-term Debt Short-term borrowings consist of commercial paper and lines of credit. Short-term borrowings outstanding at January 31, 2015 and 2014 were $1.6 billion and $7.7 billion, respectively. The following table includes additional information related to the Company’s short-term borrowings for fiscal 2015, 2014 and 2013: Fiscal Years Ended January 31, 2015 2014 2013 (Amounts in millions) $11,581 $13,318 $8,740 7,009 8,971 6,007 0.5% 0.1% 0.1% Maximum amount outstanding at any month-end Average daily short-term borrowings Weighted-average interest rate The Company has various committed lines of credit, committed with 23 financial institutions, totaling $15.0 billion as of January 31, 2015 and with 24 financial institutions, totaling $15.4 billion as of January 31, 2014. The committed lines of credit are summarized in the following table: Fiscal Years Ended January 31, 2015 2014 (Amounts in millions) Available Drawn Undrawn Available Drawn Undrawn Five-year credit facility 364-day revolving credit facility (2) $ 6,000 $  — $ 6,000 $ 6,000 $  — $ 6,000 9,000 — 9,000 9,400 — 9,400 Total $15,000 (1) $  — $15,000 $15,400 $  — $15,400 (1) I n June 2014, the Company renewed and extended its existing five-year credit facility, which is used to support its commercial paper program. (2) In June 2014, the Company renewed and extended its existing 364-day revolving credit facility, which is used to support its commercial paper program. The committed lines of credit mature at various times between June 2015 and June 2019, carry interest rates generally ranging between LIBOR plus 10 basis points and LIBOR plus 75 basis points, and incur commitment fees ranging between 1.5 and 4.0 basis points. In conjunction with the lines of credit listed in the table above, the Company has agreed to observe certain covenants, the most restrictive of which relates to the maximum amount of secured debt. Apart from the committed lines of credit, the Company has trade and stand-by letters of credit totaling $4.6 billion and $4.7 billion at January 31, 2015 and 2014, respectively. These letters of credit are utilized in normal business activities. 2015 Annual Report 47 Notes to Consolidated Financial Statements The Company’s long-term debt, which includes the fair value instruments further discussed in Note 8, consists of the following: January 31, 2015 (Amounts in millions) Maturity Dates By Fiscal Year Amount Unsecured debt Fixed Variable 2016-2045 2019 January 31, 2014 Average Average Rate (1) Amount Rate (1) $36,000 4.3% $35,500 4.3% 500 5.4% 500 5.4% Total U.S. dollar denominated 36,500 36,000 Fixed 2023-2030 2,821 3.3% 1,356 4.9% Variable — — Total Euro denominated 2,821 1,356 Fixed 2031-2039 5,271 5.3% 5,770 5.3% Variable — — Total Sterling denominated 5,271 5,770 Fixed 2016-2021 596 1.0% 1,490 1.3% Variable 2016 255 0.6% 457 0.7% Total Yen denominated 851 1,947 Total unsecured debt 45,443 45,073 Total other debt (in USD) (2) 453 801 45,896 45,874 Total debt Less amounts due within one year (4,810) (4,103) Long-term debt $41,086 $41,771 (1) T he average rate represents the weighted-average stated rate for each corresponding debt category, based on year-end balances and year-end interest rates. Interest costs are also impacted by certain derivative financial instruments described in Note 8. (2) A  portion of other debt at January 31, 2015 and 2014 includes secured debt in the amount of $139 million and $572 million, respectively, which was collateralized by property that had an aggregate carrying amount of approximately $19 million and $471 million, respectively. At January 31, 2015 and 2014, the Company had $500 million in debt with embedded put options. The issuance of money market puttable reset ­securities in the amount of $500 million is structured to be remarketed in connection with the annual reset of the interest rate. If, for any reason, the remarketing of the notes does not occur at the time of any interest rate reset, the holders of the notes must sell, and the Company must repurchase, the notes at par. Accordingly, this issuance has been classified as long-term debt due within one year in the Company’s Consolidated Balance Sheets. Annual maturities of long-term debt during the next five years and thereafter are as follows: 48 (Amounts in millions) Fiscal Year Annual Maturities 2016 2017 2018 2019 2020 Thereafter $  4,810 2,312 1,523 3,518 514 33,219 Total $45,896 2015 Annual Report Notes to Consolidated Financial Statements Debt Issuances Information on significant long-term debt issued during fiscal 2015 is as follows: (Amounts in millions) Issue Date Principal Amount Maturity Date Fixed vs. Floating Interest Rate April 8, 2014 April 8, 2014 April 22, 2014 April 22, 2014 April 22, 2014 October 22, 2014 850 Euro 650 Euro 500 USD 1,000 USD 1,000 USD 500 USD April 8, 2022 April 8, 2026 April 21, 2017 April 22, 2024 April 22, 2044 April 22, 2024 Fixed Fixed Fixed Fixed Fixed Fixed 1.900% 2.550% 1.000% 3.300% 4.300% 3.300% Proceeds $  1,161 885 499 992 985 508 Total $5,030 Information on significant long-term debt issued during fiscal 2014 is as follows: (Amounts in millions) Issue Date Principal Amount Maturity Date Fixed vs. Floating Interest Rate April 11, 2013 April 11, 2013 April 11, 2013 April 11, 2013 October 2, 2013 October 2, 2013 1,000 USD 1,250 USD 1,750 USD 1,000 USD 1,000 USD 750 USD April 11, 2016 April 11, 2018 April 11, 2023 April 11, 2043 December 15, 2018 October 2, 2043 Fixed Fixed Fixed Fixed Fixed Fixed 0.600% 1.130% 2.550% 4.000% 1.950% 4.750% Proceeds $   997 1,244 1,738 988 995 738 Total $6,700 During fiscal 2015 and 2014, the Company also received additional proceeds from other, smaller long-term debt issuances by several of its non-U.S. operations. The proceeds in both fiscal years were used to pay down and refinance existing debt and for other general corporate purposes. Maturities On February 3, 2014, $500 million of 3.000% Notes matured and were repaid; on April 14, 2014, $1.0 billion of 1.625% Notes matured and were repaid; on May 15, 2014, $1.0 billion of 3.200% Notes matured and were repaid; and on August 6, 2014, ¥100 billion of floating rate Notes matured and were repaid. On April 15, 2013, $1.0 billion of 4.250% Notes matured and were repaid; on May 1, 2013, $1.5 billion of 4.550% Notes matured and were repaid; on June 1, 2013, $500 million of 7.250% Notes matured and were repaid; on August 5, 2013, ¥25 billion of 2.010% and ¥50 billion of floating rate Notes matured and were repaid; and on October 25, 2013, $750 million of 0.750% Notes matured and were repaid. During fiscal 2015 and 2014, the Company also repaid other, smaller long-term debt as it matured in several of its non-U.S. operations. 7 Fair Value Measurements The Company records and discloses certain financial and non-financial assets and liabilities at fair value. The fair value of an asset is the price at which the asset could be sold in an ordinary transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. The fair value of a liability is the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using the fair value hierarchy, which ­prioritizes the inputs used in measuring fair value. The levels of the fair value hierarchy are: • Level 1: observable inputs such as quoted prices in active markets; • Level 2: inputs other than quoted prices in active markets that are either directly or indirectly observable; and • Level 3: unobservable inputs for which little or no market data exists, therefore requiring the Company to develop its own assumptions. 2015 Annual Report 49 Notes to Consolidated Financial Statements Recurring Fair Value Measurements The Company holds derivative instruments that are required to be measured at fair value on a recurring basis. The fair values are the estimated amounts the Company would receive or pay upon termination of the related derivative agreements as of the reporting dates. The fair values have been measured using the income approach and Level 2 inputs, which include the relevant interest rate and foreign currency forward curves. As of January 31, 2015 and 2014, the notional amounts and fair values of these derivatives were as follows: January 31, 2015 January 31, 2014 Notional Amount Fair Value Notional Amount (Amounts in millions) Receive fixed-rate, pay variable-rate interest rate swaps designated as fair value hedges Receive fixed-rate, pay fixed-rate cross-currency interest rate swaps designated as net investment hedges Receive fixed-rate, pay fixed-rate cross-currency interest rate swaps designated as cash flow hedges Receive variable-rate, pay fixed-rate interest rate swaps designated as cash flow hedges Receive variable-rate, pay fixed-rate forward starting interest rate swaps designated as cash flow hedges Total $   500 $   12 $1,000 Fair Value $  5 1,250 207 1,250 97 4,329 (317) 3,004 453 255 (1) 457 (2) — — 2,500 166 $6,334 $ (99) $8,211 $719 Nonrecurring Fair Value Measurements In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company’s assets and liabilities are also subject to ­nonrecurring fair value measurements. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company did not record any significant impairment charges to assets measured at fair value on a nonrecurring basis during the fiscal years ended January 31, 2015, or 2014. Other Fair Value Disclosures The Company records cash and cash equivalents and short-term borrowings at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities. The Company’s long-term debt is also recorded at cost. The fair value is estimated using Level 2 inputs based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying value and fair value of the Company’s long-term debt as of January 31, 2015 and 2014, are as follows: January 31, 2015 Carrying Value (Amounts in millions) Long-term debt, including amounts due within one year Fair Value January 31, 2014 Carrying Value Fair Value $45,896 $56,237 $45,874 $50,757 8 Derivative Financial Instruments The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates, as well as to maintain an appropriate mix of fixed- and variable-rate debt. Use of derivative financial instruments in hedging programs subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative financial instrument will change. In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to a derivative financial instrument represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) from the counterparty when appropriate. 50 2015 Annual Report The Company only enters into derivative transactions with counterparties rated “A-” or better by nationally recognized credit rating agencies. Subsequent to entering into derivative transactions, the Company regularly monitors the credit ratings of its counterparties. In connection with various derivative agreements, including master netting arrangements, the Company held cash collateral from counterparties of $323 million and $641 million at January 31, 2015 and January 31, 2014, respectively. The Company records cash collateral received as amounts due to the counterparties exclusive of any derivative asset. Furthermore, as part of the master netting arrangements with these counterparties, the Company is also required to post collateral if the Company’s net ­derivative liability position exceeds $150 million with any counterparty. The Company did not have any cash collateral posted with counterparties at January 31, 2015 or January 31, 2014. The Company records cash ­collateral it posts with counterparties as amounts receivable from those counterparties exclusive of any derivative liability. Notes to Consolidated Financial Statements The Company uses derivative financial instruments for the purpose of hedging its exposure to interest and currency exchange rate risks and, accordingly, the contractual terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative financial instrument is recorded using hedge accounting, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, ­liabilities or firm commitments through earnings or be recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Any hedge ineffectiveness is immediately ­recognized in earnings. The Company’s net investment and cash flow instruments are highly effective hedges and the ineffective portion has not been, and is not expected to be, significant. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are recorded at fair value with unrealized gains or losses reported in earnings during the period of the change. Fair Value Instruments The Company is a party to receive fixed-rate, pay variable-rate interest rate swaps that the Company uses to hedge the fair value of fixed-rate debt. The notional amounts are used to measure interest to be paid or received and do not represent the Company’s exposure due to credit loss. The Company’s interest rate swaps that receive fixed-interest rate payments and pay variable-interest rate payments are designated as fair value hedges. As the specific terms and notional amounts of the derivative instruments match those of the fixed-rate debt being hedged, the derivative instruments are assumed to be perfectly effective hedges. Changes in the fair values of these derivative instruments are recorded in earnings, but are offset by corresponding changes in the fair values of the hedged items, also recorded in earnings, and, accordingly, do not impact the Company’s Consolidated Statements of Income. These fair value instruments will mature in October 2020. Net Investment Instruments The Company is a party to cross-currency interest rate swaps that the Company uses to hedge its net investments. The agreements are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. All changes in the fair value of these instruments are recorded in accumulated other comprehensive income (loss), offsetting the currency translation adjustment of the related investment that is also recorded in accumulated other comprehensive income (loss). These instruments will mature on dates ranging from October 2023 to February 2030. The Company has issued foreign-currency-denominated long-term debt as hedges of net investments of certain of its foreign operations. These foreign-currency-denominated long-term debt issuances are designated and qualify as nonderivative hedging instruments. Accordingly, the ­foreign currency translation of these debt instruments is recorded in accumulated other comprehensive income (loss), offsetting the foreign currency translation adjustment of the related net investments that is also recorded in accumulated other comprehensive income (loss). At January 31, 2015 and January 31, 2014, the Company had ¥100 billion and ¥200 billion, respectively, of outstanding long-term debt designated as a hedge of its net investment in Japan, as well as outstanding long-term debt of £2.5 billion at January 31, 2015 and 2014 that was designated as a hedge of its net investment in the United Kingdom. These nonderivative net investment hedges will mature on dates ranging from July 2015 to January 2039. Cash Flow Instruments The Company is a party to receive variable-rate, pay fixed-rate interest rate swaps that the Company uses to hedge the interest rate risk of certain non-U.S. denominated debt. The swaps are designated as cash flow hedges of interest expense risk. Amounts reported in accumulated other comprehensive income (loss) related to these derivatives are reclassified from accumulated other comprehensive income (loss) to earnings as interest is expensed for the Company’s variable-rate debt, converting the variable-rate interest expense into fixed-rate interest expense. These cash flow instruments will mature in July 2015. The Company is also a party to receive fixed-rate, pay fixed-rate ­cross-currency interest rate swaps to hedge the currency exposure ­associated with the forecasted payments of principal and interest of ­certain non-U.S. denominated debt. The swaps are designated as cash flow hedges of the currency risk related to payments on the non-U.S. denominated debt. The effective portion of changes in the fair value of derivatives designated as cash flow hedges of foreign exchange risk is recorded in accumulated other comprehensive income (loss) and is ­subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The hedged items are recognized foreign currency-denominated liabilities that are remeasured at spot exchange rates each period, and the assessment of effectiveness (and measurement of any ineffectiveness) is based on total changes in the related derivative’s cash flows. As a result, the amount reclassified into earnings each period includes an amount that offsets the related transaction gain or loss arising from that remeasurement and the ­adjustment to earnings for the period’s allocable portion of the initial spot-forward difference associated with the hedging instrument. These cash flow instruments will mature on dates ranging from April 2022 to March 2034. The Company used forward starting receive variable-rate, pay fixed-rate swaps (“forward starting swaps”) to hedge its exposure to the variability in future cash flows due to changes in the LIBOR swap rate for debt ­issuances forecasted to occur in the future. These forward starting swaps were terminated in October 2014, April 2014 and April 2013 concurrently with the issuance of the hedged debt. Upon termination of the forward starting swaps, the Company received net cash payments from the related counterparties of $96 million in fiscal 2015 and made net cash ­payments to the related counterparties of $74 million in fiscal 2014. The payments were recorded in accumulated other comprehensive income (loss) and will be reclassified to earnings over the life of the related debt through May 2044, effectively adjusting interest expense to reflect the fixed interest rates entered into by the forward starting swaps. 2015 Annual Report 51 Notes to Consolidated Financial Statements Financial Statement Presentation Although subject to master netting arrangements, the Company does not offset derivative assets and derivative liabilities in its Consolidated Balance Sheets. Derivative instruments with an unrealized gain are recorded in the Company’s Consolidated Balance Sheets as either current or non-current assets, based on maturity date, and those hedging instruments with an unrealized loss are recorded as either current or non-current liabilities, based on maturity date. The Company’s derivative instruments, as well as its nonderivative debt instruments designated and qualifying as net investment hedges, were classified as follows in the Company’s Consolidated Balance Sheets: January 31, 2015 January 31, 2014 Fair Value Net Investment Cash Flow Instruments Instruments Instruments (Amounts in millions) Fair Value Net Investment Cash Flow Instruments Instruments Instruments Derivative instruments Prepaid expenses and other Other assets and deferred charges $— $    — $  — 12 207 293 $ 5 $   — $ — — 97 619 $12 $  5 Derivative asset subtotals Accrued liabilities Deferred income taxes and other Derivative liability subtotals $  207 $293 $   97 $619 $— $    — $   1 — — 610 $— $   — $  1 — — 1 $— $— $    — $611 $   — $  2 Nonderivative hedging instruments Long-term debt due within one year Long-term debt $— $   766 $  — — 3,850 — $— $  973 $  — — 5,095 — Nonderivative hedge liability subtotals $— $— $4,616 $  — $6,068 $ — Gains and losses related to the Company’s derivatives primarily relate to interest rate hedges, which are recorded in interest, net, in the Company’s Consolidated Statements of Income. Amounts related to the Company’s derivatives expected to be reclassified from accumulated other comprehensive income (loss) to net income during the next 12 months are not significant. 9 Taxes Income from Continuing Operations The components of income from continuing operations before income taxes are as follows: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 U.S. $18,610 $19,412 $19,352 Non-U.S. 6,189 5,244 6,310 Total income from continuing operations before income taxes $24,799 $24,656 $25,662 A summary of the provision for income taxes is as follows: (Amounts in millions) 2015 2014 2013 Current: U.S. federal U.S. state and local International Total current tax provision Deferred: U.S. federal U.S. state and local International Total deferred tax expense (benefit) Total provision for income taxes 52 2015 Annual Report Fiscal Years Ended January 31, $6,165 $6,377 $5,611 810 719 622 1,529 1,523 1,743 8,504 8,619 7,976 (387) (72) 38 (55) 37 (8) (77) (479) (48) (519) (514) (18) $7,985 $8,105 $7,958 Notes to Consolidated Financial Statements Effective Income Tax Rate Reconciliation The Company’s effective income tax rate is typically lower than the U.S. statutory tax rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures and certain U.S. tax credits as further discussed in the “Cash and Cash Equivalents” section of the Company’s significant accounting policies in Note 1. The Company’s non-U.S. income is generally subject to local country tax rates that are below the 35% U.S. statutory tax rate. Certain non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. A reconciliation of the significant differences between the U.S. statutory tax rate and the effective income tax rate on pretax income from continuing operations is as follows: Fiscal Years Ended January 31, 2015 2014 2013 U.S. statutory tax rate U.S. state income taxes, net of federal income tax benefit Income taxed outside the U.S. Net impact of repatriated international earnings Other, net 35.0% 35.0% 35.0% Effective income tax rate 32.2% 32.9% 31.0% 1.8% 2.0% 1.7% (2.7)% (2.8)% (2.6)% (1.5)% (1.4)% (2.5)% (0.4)% 0.1% (0.6)% Deferred Taxes The significant components of the Company’s deferred tax account ­balances are as follows: January 31, (Amounts in millions) 2015 2014 Deferred tax assets: Loss and tax credit carryforwards $ 3,255 $ 3,566 Accrued liabilities 3,395 2,986 Share-based compensation 184 126 Other 1,119 1,573 Total deferred tax assets Valuation allowances Deferred tax assets, net of valuation allowance 7,953 8,251 (1,504) (1,801) 6,449 6,450 Deferred tax liabilities: Property and equipment 5,972 6,295 Inventories 1,825 1,641 Other 1,618 1,827 Total deferred tax liabilities 9,415 9,763 Net deferred tax liabilities $ 2,966 $ 3,313 The deferred taxes are classified as follows in the Company’s Consolidated Balance Sheets: January 31, (Amounts in millions) 2015 2014 Balance Sheet classification: Assets: Prepaid expenses and other $  728 $  822 Other assets and deferred charges 1,033 1,151 Asset subtotals 1,761 1,973 Liabilities: Accrued liabilities Deferred income taxes and other 56 176 4,671 5,110 4,727 5,286 Liability subtotals Net deferred tax liabilities $2,966 $3,313 Unremitted Earnings U.S. income taxes have not been provided on accumulated but ­undistributed earnings of the Company’s international subsidiaries of approximately $23.3 billion and $21.4 billion as of January 31, 2015 and 2014, respectively, as the Company intends to permanently reinvest these amounts outside of the U.S. However, if any portion were to be ­distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable because of the complexities with its hypothetical calculation. The Company provides deferred or current income taxes on earnings of international subsidiaries in the period that the Company determines it will remit those earnings. Net Operating Losses, Tax Credit Carryforwards and Valuation Allowances At January 31, 2015, the Company had net operating loss and capital loss carryforwards totaling approximately $5.6 billion. Of these carryforwards, approximately $2.9 billion will expire, if not utilized, in various years through 2033. The remaining carryforwards have no expiration. At January 31, 2015, the Company had foreign tax credit carryforwards of $2.0 billion, which will expire in various years through 2025, if not utilized. The recoverability of these future tax deductions and credits is evaluated by assessing the adequacy of future expected taxable income from all sources, including taxable income in prior carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent management does not consider it more likely than not that a deferred tax asset will be realized, a valuation allowance is established. If a valuation allowance has been established and management subsequently determines that it is more likely than not that the deferred tax assets will be realized, the valuation allowance is released. 2015 Annual Report 53 Notes to Consolidated Financial Statements As of January 31, 2015 and 2014, the Company had valuation allowances recorded of approximately $1.5 billion and $1.8 billion, respectively, on deferred tax assets associated primarily with net operating loss ­carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. The $0.3 billion net decrease in the valuation allowance during fiscal 2015 related to releases arising from the use of deferred tax assets, changes in judgment regarding the future realization of deferred tax assets, increases from ­certain net operating losses and deductible temporary differences ­arising in fiscal 2015, decreases due to operating loss expirations and fluctuations in currency exchange rates. Management believes that it is more likely than not that the remaining net deferred tax assets will be fully realized. Uncertain Tax Positions The benefits of uncertain tax positions are recorded in the Company’s Consolidated Financial Statements only after determining a more likely than not probability that the uncertain tax positions will withstand ­challenge, if any, from taxing authorities. As of January 31, 2015 and 2014, the amount of unrecognized tax benefits related to continuing operations was $838 million and $763 million, respectively. The amount of unrecognized tax benefits that would affect the Company’s effective income tax rate was $763 million and $698 million for January 31, 2015 and 2014, respectively. A reconciliation of unrecognized tax benefits from continuing operations was as follows: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Unrecognized tax benefits, beginning of year Increases related to prior year tax positions Decreases related to prior year tax positions Increases related to current year tax positions Settlements during the period Lapse in statutes of limitations Unrecognized tax benefits, end of year $763 $ 818 $ 611 7 41 88 (17) (112) (232) 174 133 431 (89) (117) (80) — — — $838 $ 763 $ 818 The Company classifies interest and penalties related to uncertain tax benefits as interest expense and as operating, selling, general and administrative expenses, respectively. During fiscal 2015, 2014 and 2013, the Company recognized interest and penalty expense (benefit) related to uncertain tax positions of $18 million, $(7) million and $2 million, respectively. As of January 31, 2015 and 2014, accrued interest related to uncertain tax positions of $57 million and $40 million, respectively, was recorded in the Company’s Consolidated Balance Sheets. The Company did not have any accrued penalties recorded for income taxes as of January 31, 2015 or 2014. 54 2015 Annual Report During the next twelve months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits by between $50 million and $350 million, either because the tax positions are sustained on audit or because the Company agrees to their disallowance. The Company is focused on resolving tax audits as expeditiously as possible. As a result of these efforts, unrecognized tax benefits could potentially be reduced beyond the provided range during the next twelve months. The Company does not expect any change to have a significant impact to its Consolidated Financial Statements. The Company remains subject to income tax examinations for its U.S. federal income taxes generally for fiscal 2013 through 2015. The Company also remains subject to income tax examinations for ­international income taxes for fiscal 2000 through 2015, and for U.S. state and local income taxes generally for the fiscal years ended 2006 through 2015. Other Taxes The Company is subject to tax examinations for payroll, value added, sales-based and other non-income taxes. A number of these examinations are ongoing in various jurisdictions, including Brazil. In certain cases, the Company has received assessments from the respective taxing authorities in connection with these examinations. Where a probable loss has occurred, the Company has made accruals, which are reflected in the Company’s Consolidated Financial Statements. While the possible losses or range of possible losses associated with these matters are individually immaterial, a group of related matters, if decided adversely to the Company, could result in a liability material to the Company’s Consolidated Financial Statements. 10 Contingencies Legal Proceedings The Company is involved in a number of legal proceedings. The Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s Consolidated Financial Statements. For some matters, a liability is not probable or the amount cannot be ­reasonably estimated and therefore an accrual has not been made. However, where a liability is reasonably possible and may be material, such matters have been disclosed. The Company may enter into ­discussions regarding settlement of these matters, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company’s shareholders. Unless stated otherwise, the matters, or groups of related matters, ­discussed below, if decided adversely to or settled by the Company, ­individually or in the aggregate, may result in a liability material to the Company’s financial condition or results of operations. Wage-and-Hour Class Action: The Company is a defendant in Braun/Hummel v. Wal-Mart Stores, Inc., a class-action lawsuit commenced in March 2002 in the Court of Common Pleas in Philadelphia, Pennsylvania. The plaintiffs allege that the Company failed to pay class members for all hours worked and prevented class members from taking their full meal and rest breaks. On October 13, 2006, a jury awarded ­back-pay damages to the plaintiffs of approximately $78 million on their claims for off-the-clock work and missed rest breaks. The jury found in favor of the Company on the plaintiffs’ meal-period claims. Notes to Consolidated Financial Statements On November 14, 2007, the trial judge entered a final judgment in the approximate amount of $188 million, which included the jury’s back-pay award plus statutory penalties, prejudgment interest and attorneys’ fees. By operation of law, post-judgment interest accrues on the judgment amount at the rate of six percent per annum from the date of entry of the judgment, which was November 14, 2007, until the judgment is paid, unless the judgment is set aside on appeal. On December 7, 2007, the Company filed its Notice of Appeal. On June 10, 2011, the Pennsylvania Superior Court of Appeals issued an opinion upholding the trial court’s certification of the class, the jury’s back pay award, and the awards of statutory penalties and prejudgment interest, but reversing the award of attorneys’ fees. On September 9, 2011, the Company filed a Petition for Allowance of Appeal with the Pennsylvania Supreme Court. On July 2, 2012, the Pennsylvania Supreme Court granted the Company’s Petition. On December 15, 2014, the Pennsylvania Supreme Court issued its ­opinion affirming the Superior Court of Appeals’ decision. At that time, the Company recorded expenses of $249 million for the judgment amount and post-judgment interest incurred to date. The Company will continue to accrue for the post-judgment interest until final resolution. However, the Company continues to believe it has substantial factual and legal defenses to the claims at issue and, on March 13, 2015, the Company filed a petition for writ of certiorari with the U.S. Supreme Court. ASDA Equal Value Claims: ASDA Stores, Ltd. (“ASDA”), a wholly-owned subsidiary of the Company, is a defendant in over 4,000 “equal value” claims that are proceeding before an Employment Tribunal in Manchester (the “Employment Tribunal”) in the United Kingdom (“UK”) on behalf of current and former ASDA store employees, who allege that the work performed by female employees in ASDA’s retail stores is of equal value in terms of, among other things, the demands of their jobs to that of male employees working in ASDA’s warehouse and distribution facilities, and that the disparity in pay between these different job positions is not objectively justified. Claimants are requesting differential back pay based on higher wage rates in the warehouse and distribution facilities and those higher wage rates on a prospective basis as part of these equal value proceedings. ASDA believes that further claims may be asserted in the near future. On March 23, 2015, ASDA asked the Employment Tribunal to stay all proceedings, contending that the High Court, which is the superior first instance civil court in the UK that is headquartered in the Royal Courts of Justice in the City of London, is the more convenient and appropriate forum to hear these claims. On March 23, 2015, ASDA also asked the Employment Tribunal to “strike out” substantially all of the claims for failing to comply with Employment Tribunal rules. At present, the Company cannot predict the number of such claims that may be filed, and cannot reasonably estimate any loss or range of loss that may arise from these proceedings. The Company believes it has substantial factual and legal defenses to these claims, and intends to defend the claims vigorously FCPA Investigation and Related Matters The Audit Committee (the “Audit Committee”) of the Board of Directors of the Company, which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries, including Wal-Mart de México, S.A.B. de C.V. (“Walmex”), and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters. The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance program through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). Since the implementation of the global review and the enhanced anti-corruption compliance program, the Audit Committee and the Company have identified or been made aware of additional allegations regarding potential violations of the FCPA. When such allegations are reported or identified, the Audit Committee and the Company, together with their third party advisors, conduct inquiries and when warranted based on those inquiries, open investigations. Inquiries or investigations regarding allegations of potential FCPA violations have been commenced in a number of foreign markets where the Company operates, including, but not limited to, Brazil, China and India. The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have been filed by several of the Company’s shareholders against it, certain of its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers. The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the on-going government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, debarment or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigations and review. In addition, the Company has incurred and expects to continue to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting the review and investigations. These costs will be expensed as incurred. For the fiscal years ended January 31, 2015, 2014 and 2013, the Company incurred the following third-party expenses in connection with the FCPA investigation and related matters: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Ongoing inquiries and investigations Global compliance program and organizational enhancements $121 $173 $100 Total $173 $282 $157 52 109 57 2015 Annual Report 55 Notes to Consolidated Financial Statements These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company expects that there will be on-going media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain ­audiences of the Company’s role as a corporate citizen. The Company’s process of assessing and responding to the governmental investigations and the shareholder lawsuits continues. While the Company believes that it is probable that it will incur a loss from these matters, given the on-going nature and complexity of the review, inquiries and investigations, the Company cannot reasonably estimate any loss or range of loss that may arise from these matters. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future. 11 Commitments The Company has long-term leases for stores and equipment. Rentals (including amounts applicable to taxes, insurance, maintenance, other operating expenses and contingent rentals) under operating leases and other short-term rental arrangements were $2.8 billion in both fiscal 2015 and 2014 and $2.6 billion in fiscal 2013. Aggregate minimum annual rentals at January 31, 2015, under ­non-cancelable leases are as follows: (Amounts in millions) Fiscal Year Operating Capital Leases Leases 2016 $  1,759 $  504 2017 1,615 476 2018 1,482 444 2019 1,354 408 2020 1,236 370 Thereafter 10,464 3,252 Total minimum rentals $17,910 $5,454 Less estimated executory costs 49 Net minimum lease payments Less imputed interest 5,405 2,512 Present value of minimum lease payments $2,893 Certain of the Company’s leases provide for the payment of contingent rentals based on a percentage of sales. Such contingent rentals were not material for fiscal 2015, 2014 and 2013. Substantially all of the Company’s store leases have renewal options, some of which may trigger an escalation in rentals. The Company has future lease commitments for land and buildings for approximately 282 future locations. These lease commitments have lease terms ranging from 1 to 30 years and provide for certain minimum ­rentals. If executed, payments under operating leases would increase by $58 million for fiscal 2016, based on current cost estimates. In connection with certain long-term debt issuances, the Company could be liable for early termination payments if certain unlikely events were to occur. At January 31, 2015, the aggregate termination payment would have been $64 million. The arrangement pursuant to which this payment could be made will expire in fiscal 2019. 12 Retirement-Related Benefits The Company offers a 401(k) plan for associates in the U.S. under which eligible associates can begin contributing to the plan immediately upon hire. The Company also offers a 401(k) type plan for associates in Puerto Rico under which associates can begin to contribute generally after one year of employment. Under these plans, after one year of employment, the Company matches 100% of participant contributions up to 6% of annual eligible earnings. The matching contributions immediately vest at 100% for each associate. Participants can contribute up to 50% of their pretax earnings, but not more than the statutory limits. Participants age 50 or older may defer additional earnings in catch-up contributions up to the maximum statutory limits. Associates in international countries who are not U.S. citizens are covered by various defined contribution post-employment benefit arrangements. These plans are administered based upon the legislative and tax ­requirements in the countries in which they are established. Additionally, the Company’s subsidiaries in the United Kingdom and Japan have sponsored defined benefit pension plans. The plan in the United Kingdom was underfunded by $85 million and $69 million at January 31, 2015 and 2014, respectively. The plan in Japan was underfunded by $223 million and $281 million at January 31, 2015 and 2014, respectively. These underfunded amounts are recorded as liabilities in the Company’s Consolidated Balance Sheets in deferred income taxes and other. Certain other international operations also have defined ­benefit arrangements that are not significant. The following table summarizes the contribution expense related to the Company’s retirement-related benefits for fiscal 2015, 2014 and 2013: Fiscal Years Ended January 31, (Amounts in millions) 2015 2014 2013 Defined contribution plans: U.S. $  898 $  877 $  818 International 167 165 166 Defined benefit plans: International 5 20 26 Total contribution expense for retirement-related benefits $1,070 $1,062 $1,010 56 2015 Annual Report Notes to Consolidated Financial Statements 13 Acquisitions, Disposals and Related Items 14 Segments In fiscal 2015, the Company completed the following transactions that impact the operations of Walmart International: The Company is engaged in the operation of retail, wholesale and other units located in the U.S., Africa, Argentina, Brazil, Canada, Central America, Chile, China, India, Japan, Mexico and the United Kingdom. The Company’s operations are conducted in three business segments: Walmart U.S., Walmart International and Sam’s Club. The Company defines its segments as those operations whose results its chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. The Company sells similar individual products and services in each of its segments. It is impractical to segregate and identify revenues for each of these individual products and services. Walmart Chile In fiscal 2014, the redeemable noncontrolling interest shareholders ­exercised put options that required the Company to purchase their shares in Walmart Chile. At that time, the Company recorded an ­ increase to redeemable noncontrolling interest of $1.0 billion, with a ­corresponding decrease to capital in excess of par value, to reflect the redemption value of the redeemable noncontrolling interest at $1.5 billion. In February 2014, the Company completed this transaction using existing cash of the Company, increasing its ownership interest in Walmart Chile to 99.7 percent. In March 2014, the Company completed a tender offer for most of the remaining noncontrolling interest shares at the same value per share as was paid to the redeemable noncontrolling interest shareholders. As a result of completing these transactions, the Company owns substantially all of Walmart Chile. Vips Restaurant Business in Mexico In September 2013, Walmex, a majority-owned subsidiary of the Company, entered into a definitive agreement with Alsea S.A.B. de C.V. to sell the Vips restaurant business (“Vips”) in Mexico. The sale of Vips was completed on May 12, 2014. Upon completion of the sale, the Company received $671 million of cash and recognized a net gain of $262 million, which is recorded in discontinued operations in the Company’s Consolidated Statements of Income for the fiscal year ended January 31, 2015. The Walmart U.S. segment includes the Company’s mass merchant ­concept in the U.S. operating under the “Walmart” or “Wal-Mart” brands, as well as walmart.com. The Walmart International segment consists of the Company’s operations outside of the U.S., including various retail websites. The Sam’s Club segment includes the warehouse membership clubs in the U.S., as well as samsclub.com. Corporate and support consists of corporate overhead and other items not allocated to any of the Company’s segments. The Company measures the results of its segments using, among other measures, each segment’s net sales and operating income, which includes certain corporate overhead allocations. From time to time, the Company revises the measurement of each segment’s operating income, including any corporate overhead allocations, as determined by the information regularly reviewed by its CODM. When the measurement of a segment changes, previous period amounts and balances are reclassified to be comparable to the current period’s presentation. 2015 Annual Report 57 Notes to Consolidated Financial Statements Information for the Company’s segments, as well as for Corporate and support, including the reconciliation to income from continuing operations before income taxes, is provided in the following table: (Amounts in millions) Walmart U.S. Corporate and support Consolidated Fiscal Year Ended January 31, 2015 Net sales $288,049 $136,160 $58,020 $   — Operating income (loss) 21,336 6,171 1,976 (2,336) Interest expense, net $482,229 27,147 (2,348) Income from continuing operations before income taxes $  24,799 Total assets Depreciation and amortization Capital expenditures 7,825 3,370 1,199 $203,706 9,173 12,174 Fiscal Year Ended January 31, 2014 Net sales $279,406 $136,513 $57,157 $   — Operating income (loss) 21,787 5,153 1,843 (1,911) Interest expense, net $473,076 26,872 (2,216) Income from continuing operations before income taxes $  24,656 Total assets Depreciation and amortization Capital expenditures $    6,583 3,135 1,203 $204,751 8,870 13,115 Fiscal Year Ended January 31, 2013 Net sales $274,433 $134,748 $56,423 $   — 21,103 6,365 1,859 (1,602) Operating income (loss) Interest expense, net $465,604 27,725 (2,063) Income from continuing operations before income taxes $  25,662 Total assets Depreciation and amortization Capital expenditures $203,105 8,478 12,898 101,381 2,665 6,286 $  98,745 2,640 6,378 $ 96,234 2,644 5,994 Total revenues, consisting of net sales and membership and other income, and long-lived assets, consisting primarily of property and equipment, net, aggregated by the Company’s U.S. and non-U.S. operations for fiscal 2015, 2014 and 2013, are as follows: Fiscal Years Ended January 31, 2015 2014 2013 (Amounts in millions) Total revenues U.S. operations Non-U.S. operations $348,227 $338,681 $332,788 137,424 137,613 135,863 Total revenues $485,651 $476,294 $468,651 Long-lived assets U.S. operations Non-U.S. operations $ 80,879 $ 79,644 $ 77,692 35,776 38,263 38,989 $116,655 $117,907 $116,681 Total long-lived assets No individual country outside of the U.S. had total revenues or long-lived assets that were material to the consolidated totals. Additionally, the Company did not generate material total revenues from any single customer. 58 Walmart International Sam’s Club 2015 Annual Report 80,505 2,665 3,936 $  85,370 2,658 4,463 $ 85,695 2,605 4,640 13,995 473 753 $14,053 437 1,071 $13,479 410 868 $ 7,697 2,819 1,396 15 Subsequent Event Dividends Declared On February 19, 2015, the Board of Directors approved the fiscal 2016 annual dividend at $1.96 per share, an increase from the fiscal 2015 ­dividend of $1.92 per share. For fiscal 2016, the annual dividend will be paid in four quarterly installments of $0.49 per share, according to the ­following record and payable dates: Record Date Payable Date March 13, 2015 May 8, 2015 August 7, 2015 December 4, 2015 April 6, 2015 June 1, 2015 September 8, 2015 January 4, 2016 Notes to Consolidated Financial Statements 16 Quarterly Financial Data (Unaudited) (Amounts in millions, except per share data) Total revenues Net sales Cost of sales Income from continuing operations Consolidated net income Consolidated net income attributable to Walmart Fiscal Year Ended January 31, 2015 Q1 Q2 Q3 Q4 Total $114,960 114,167 86,714 3,711 3,726 3,593 $120,125 119,336 90,010 4,089 4,359 4,093 $119,001 118,076 89,247 3,826 3,826 3,711 $131,565 130,650 99,115 5,188 5,188 4,966 $485,651 482,229 365,086 16,814 17,099 16,363 Basic net income per common share (1): Basic income per common share from continuing operations attributable to Walmart Basic income (loss) per common share from discontinued operations attributable to Walmart 1.10 1.22 1.15 1.54 5.01 0.01 0.05 — — 0.06 Basic net income per common share attributable to Walmart 1.11 1.27 1.15 1.54 5.07 Diluted net income per common share (1): Diluted income per common share from continuing operations attributable to Walmart Diluted income (loss) per common share from discontinued operations attributable to Walmart 1.10 1.21 1.15 1.53 4.99 0.01 0.05 — — 0.06 Diluted net income per common share attributable to Walmart 1.11 1.26 1.15 1.53 5.05 Fiscal Year Ended January 31, 2014 Q1 Q2 Q3 Q4 Total Total revenues Net sales Cost of sales Income from continuing operations Consolidated net income Consolidated net income attributable to Walmart $114,071 113,313 85,991 3,932 3,944 3,784 $116,829 116,101 87,420 4,205 4,216 4,069 $115,688 114,876 86,687 3,870 3,885 3,738 $129,706 128,786 97,971 4,544 4,650 4,431 $476,294 473,076 358,069 16,551 16,695 16,022 Basic net income per common share (1): Basic income per common share from continuing operations attributable to Walmart Basic income (loss) per common share from discontinued operations attributable to Walmart 1.14 1.24 1.14 1.35 4.87 0.01 — 0.01 0.02 0.03 Basic net income per common share attributable to Walmart 1.15 1.24 1.15 1.37 4.90 Diluted net income per common share : Diluted income per common share from continuing operations attributable to Walmart Diluted income (loss) per common share from discontinued operations attributable to Walmart 1.14 1.23 1.14 1.34 4.85 — 0.01 — 0.02 0.03 Diluted net income per common share attributable to Walmart 1.14 1.24 1.14 1.36 4.88 (1) (1) T he sum of quarterly income per common share attributable to Walmart data may not agree to annual amounts due to rounding. 2015 Annual Report 59 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Wal-Mart Stores, Inc. We have audited the accompanying consolidated balance sheets of ­Wal-Mart Stores, Inc. as of January 31, 2015 and 2014, and the related ­consolidated statements of income, comprehensive income, shareholders’ equity and redeemable noncontrolling interest, and cash flows for each of the three years in the period ended January 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wal-Mart Stores, Inc. at January 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2015, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Wal-Mart Stores, Inc.’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 1, 2015 expressed an unqualified opinion thereon. Rogers, Arkansas April 1, 2015 60 2015 Annual Report Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting The Board of Directors and Shareholders of Wal-Mart Stores, Inc. We have audited Wal-Mart Stores, Inc.’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Wal-Mart Stores, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report to Our Shareholders.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those ­policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit prep­ aration of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the c­ ompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial r­ eporting may not prevent or detect misstatements. Also, projections of any ­evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in ­conditions, or that the degree of compliance with the policies or ­procedures may deteriorate. In our opinion, Wal-Mart Stores, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Wal-Mart Stores, Inc. as of January 31, 2015 and 2014, and related consolidated statements of income, comprehensive income, shareholders’ equity and redeemable noncontrolling interest and cash flows for each of the three years in the period ended January 31, 2015 and our report dated April 1, 2015 expressed an unqualified opinion thereon. Rogers, Arkansas April 1, 2015 2015 Annual Report 61 Management’s Report to Our Shareholders Wal-Mart Stores, Inc. Management of Wal-Mart Stores, Inc. (“Walmart,” the “company” or “we”) is responsible for the preparation, integrity and objectivity of Walmart’s Consolidated Financial Statements and other financial information contained in this Annual Report to Shareholders. Those Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States. In preparing those Consolidated Financial Statements, management is required to make certain estimates and judgments, which are based upon currently available information and management’s view of current conditions and circumstances. The Audit Committee of the Board of Directors, which consists solely of independent directors, oversees our process of reporting financial information and the audit of our Consolidated Financial Statements. The Audit Committee stays informed of the financial condition of Walmart and regularly reviews management’s financial policies and procedures, the independence of our independent auditors, our internal control over financial reporting and the objectivity of our financial reporting. Both the independent auditors and the internal auditors have free access to the Audit Committee and meet with the Audit Committee periodically, both with and without management present. Acting through our Audit Committee, we have retained Ernst & Young LLP, an independent registered public accounting firm, to audit our Consolidated Financial Statements found in this Annual Report to Shareholders. We have made available to Ernst & Young LLP all of our financial records and related data in connection with their audit of our Consolidated Financial Statements. We have filed with the Securities and Exchange Commission (“SEC”) the required certifications related to our Consolidated Financial Statements as of and for the year ended January 31, 2015. These certifications are attached as exhibits to our Annual Report on Form 10-K for the year ended January 31, 2015. Additionally, we have also provided to the New York Stock Exchange the required annual certification of our Chief Executive Officer regarding our compliance with the New York Stock Exchange’s corporate ­governance listing standards. Report on Internal Control Over Financial Reporting Management has responsibility for establishing and maintaining ­adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of January 31, 2015. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control-Integrated Framework (2013). Management concluded that based on its assessment, Walmart’s internal control over financial reporting was effective as of January 31, 2015. The Company’s internal control over financial reporting as of January 31, 2015, has been audited by Ernst & Young LLP as stated in their report which appears in this Annual Report to Shareholders. 62 2015 Annual Report Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be timely disclosed is accumulated and communicated to management in a timely fashion. Management has assessed the effectiveness of these disclosure controls and procedures as of January 31, 2015, and determined they were effective as of that date to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, was accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure and were effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Report on Ethical Standards Our Company was founded on the belief that open communications and the highest standards of ethics are necessary to be successful. Our long-standing “Open Door” communication policy helps management be aware of and address issues in a timely and effective manner. Through the open door policy all associates are encouraged to inform management at the appropriate level when they are concerned about any matter ­pertaining to Walmart. Walmart has adopted a Statement of Ethics to guide our associates in the continued observance of high ethical standards such as honesty, integrity and compliance with the law in the conduct of Walmart’s business. Familiarity and compliance with the Statement of Ethics is required of all associates who are part of management. The Company also maintains a separate Code of Ethics for our senior financial officers. Walmart also has in place a Related-Party Transaction Policy. This policy applies to Walmart’s senior officers and directors and requires material related-party trans­ actions to be reviewed by the Audit Committee. The senior officers and directors are required to report material related-party transactions to Walmart. We maintain a global ethics office which oversees and administers an ethics helpline. The ethics helpline provides a channel for associates to make confidential and anonymous complaints regarding potential violations of our statements of ethics, including violations related to financial or accounting matters. C. Douglas McMillon President and Chief Executive Officer Charles M. Holley, Jr. Executive Vice President and Chief Financial Officer Unit Counts as of January 31, 2015 Wal-Mart Stores, Inc. United States The Walmart U.S. and Sam’s Club segments comprise the Company’s operations in the U.S. As of January 31, 2015, unit counts for Walmart U.S. and Sam’s Club are summarized by format for each state and territory as follows: Walmart U.S. Sam’s Club Neighborhood Markets and Discount other small State or Territory Supercenters Stores formats Clubs Washington 51 10 5 3 69 Washington D.C. 2 — — — 2 West Virginia 38 — 1 5 44 Wisconsin 80 8 5 12 105 Wyoming 11 — — 2 13 Puerto Rico 12 6 26 11 55 5,163 U.S. Total 3,407 470 639 647 Grand Total Alabama 99 1 24 14 138 Alaska 8 2 — 3 13 Arizona 79 3 26 16 124 Arkansas 75 8 38 7 128 California 117 92 64 33 306 Colorado 67 5 18 15 105 Connecticut 12 22 2 3 39 Delaware 6 3 — 1 10 Florida 216 13 65 46 340 Georgia 150 3 29 23 205 Hawaii — 10 — 2 12 Idaho 22 1 2 1 26 Illinois 133 23 8 33 197 Indiana 92 9 9 16 126 Iowa 57 3 — 8 68 Kansas 57 4 18 9 88 Kentucky 76 8 8 9 101 Louisiana 87 2 23 15 127 Maine 19 3 — 3 25 Maryland 26 21 — 12 59 Massachusetts 26 23 — 3 52 Michigan 89 5 — 26 120 Minnesota 64 6 — 14 84 Mississippi 62 4 9 7 82 Missouri 109 11 16 18 154 Montana 13 — — 2 15 Nebraska 35 — 7 5 47 Nevada 30 2 11 7 50 New Hampshire 17 10 — 4 31 New Jersey 25 34 — 10 69 New Mexico 35 2 6 7 50 New York 77 22 2 16 117 138 6 43 23 210 North Carolina North Dakota 14 — — 3 17 Ohio 139 7 — 29 175 Oklahoma 79 9 30 11 129 28 7 10 — 45 Oregon Pennsylvania 114 22 — 24 160 5 4 — 1 10 Rhode Island South Carolina 81 — 11 12 104 South Dakota 14 — — 2 16 Tennessee 113 2 10 16 141 Texas 363 24 91 81 559 Utah 40 — 10 8 58 1 4 — — 5 Vermont Virginia 104 6 12 16 138 International The Walmart International segment comprises the Company’s ­operations outside of the U.S. and is represented in three major brand categories. Unit counts (1) as of January 31, 2015 for Walmart International are summarized by brand category for each geographic market as follows: Geographic Market Retail Wholesale Other (2) Total Africa Argentina Brazil Canada Central America (4) Chile China India Japan Mexico United Kingdom 302 94 — 396 105 — — 105 468 76 13 557 394 — — 394 689 1 — 690 377 3 24 404 400 11 — 411 — 20 — 20 372 — 59 431 2,120 160 10 2,290 589 — 3 592 International total 5,816 365 109 6,290 (3) (1) W  almart International unit counts, with the exception of Canada, are stated as of December 31, 2014, to correspond with the balance sheet date of the related geographic market. Canada unit counts are stated as of January 31, 2015. (2) “ Other” includes restaurants, drug stores, convenience stores and banks operating under varying banners. (3) A  frica unit counts by country are Botswana (11), Ghana (1), Lesotho (3), Malawi (2), Mozambique (5), Namibia (4), Nigeria (6), South Africa (360), Swaziland (1), ­Tanzania (1), Uganda (1) and Zambia (1). (4) C  entral America unit counts by country are Costa Rica (217), El Salvador (89), ­Guatemala (217), Honduras (81) and Nicaragua (86). 2015 Annual Report 63 Corporate and Stock Information Listing New York Stock Exchange Stock Symbol: WMT Dividends payable per share For fiscal 2016, dividends will be paid based on the following schedule: April 6, 2015 $0.49 June 1, 2015 $0.49 September 8, 2015 $0.49 January 4, 2016 $0.49 Annual meeting Our Annual Meeting of Shareholders will be held on Friday, June 5, 2015, at 7:30 a.m. (Central Time) in the Bud Walton Arena on the University of Arkansas campus, Fayetteville, Arkansas. Communication with shareholders Wal-Mart Stores, Inc. periodically communicates with its shareholders and other members of the investment community about our operations. For further information regarding our policy on shareholder and investor communications refer to our website, www.stock.walmart.com. The following reports are available without charge upon request by ­writing the Company c/o Investor Relations or by calling (479) 273-8446. These reports are also available via the corporate website. • Annual Report on Form 10-K • Quarterly Reports on Form 10-Q • Earnings Releases • Current Reports on Form 8-K • Annual Shareholders’ Meeting Proxy Statement • Global Responsibility Report • Diversity and Inclusion Report (Includes the content previously reported in the “Workforce Diversity Report”) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High Low 2016 1st Quarter (1) Through April 1, 2015. 64 2015 Annual Report S&P 500 Index S&P 500 Retailing Index High $150 $100 $ 50 $ 0 The high and low market price per share for the Company’s common stock for the first quarter of fiscal 2016, were as follows: (1) Wal-Mart Stores, Inc. $200 $79.99 $72.27 $79.50 $68.13 79.76 73.54 79.96 72.90 79.37 72.61 79.00 71.51 90.97 75.59 81.37 73.64 Comparison of 5-Year Cumulative Total Return* Among Wal-Mart Stores, Inc., the S&P 500 Index, and S&P 500 Retailing Index $250 2015 2014 High Low Stock Performance Chart This graph compares the cumulative total shareholder return on Walmart’s common stock during the five fiscal years ending with fiscal 2015 to the cumulative total returns on the S&P 500 Retailing Index and the S&P 500 Index. The comparison assumes $100 was invested on February 1, 2010, in shares of our common stock and in each of the ­indices shown and assumes that all of the dividends were reinvested. $300 Market price of common stock The high and low market price per share for the Company’s common stock in fiscal 2015 and 2014 were as follows: For fiscal 2014, dividends were paid based on the following schedule: April 1, 2013 $0.47 June 3, 2013 $0.47 September 3, 2013 $0.47 January 2, 2014 $0.47 $350 Independent registered public accounting firm Ernst & Young LLP 5417 Pinnacle Point Dr., Suite 501 Rogers, AR 72758 Dividends paid per share For fiscal 2015, dividends were paid based on the following schedule: April 1, 2014 $0.48 June 2, 2014 $0.48 September 3, 2014 $0.48 January 5, 2015 $0.48 Low $88.00 $80.43 2010 2011 2012 2013 2014 2015 Fiscal Years *Assumes $100 Invested on February 1, 2010 Assumes Dividends Reinvested Fiscal Year Ending January 31, 2015 Shareholders As of March 30, 2015, there were 249,876 holders of record of Walmart’s common stock. Designed and produced by Corporate Reports Inc./Atlanta   www.corporatereport.com Corporate information Stock Registrar and Transfer Agent: Computershare Trust Company, N.A. P.O. Box 43069 Providence, Rhode Island 02940-3069 1-800-438-6278 TDD for hearing-impaired inside the U.S. 1-800-952-9245 Internet: http://www.computershare.com Walmart shoppers are driven by value. We continue to expand everyday low prices to more markets globally. “Technology-driven savers” are a fast growing segment of our customer base. Globally, we’re investing to improve mobile capabilities and to test alternative access points. For example, Asda now has Click & Collect at all stores. Walmart’s investor relations app: our company at your fingertips Walmart’s enhanced digital annual report has expanded content. T EN O ASS R Global Responsibility Report: of forestland preserved via managed forestry trees consumed via recycling less energy – the same used by 4.4 homes for a year 426 metric tons 45,573 kWh 417,714 fewer of greenhouse gas offset – the equivalent of taking 85.5 cars off the road for a year converted to clean renewable sources (printing plant using RECs) gallons of water consumed Savings baselines were developed using the national averages of similar coated papers and printing practices by EarthColor Printing. FSC® is not responsible for any calculations on saving resources by choosing this paper. NT RI % 0 Customers want more choice, more items than they ever did before. Walmart.com increased assortment by 60% in fiscal 2015, and we’ll surpass 10 million items this year. 117,618 kWh ED US IN 10 Customers want to save time and money, and have an enjoyable shopping experience. We’re investing to increase associate wages and training to improve the service in our stores and clubs. 894 fewer G Every day, we offer affordable food, apparel and other merchandise to customers in 27 countries globally. We believe it is our responsibility to operate in a way that is sustainable for the planet and people who work all along our supply chains, that creates economic opportunity for our associates while growing our suppliers and the economy more broadly, and that strengthens the communities where we operate. To learn more, read our GRR at corporate.walmart.com/ microsites/globalresponsibility-report-2015. 4.65 acre GY I CE The minimized environmental footprint of this report is the result of an extensive, collaborative effort of Walmart and our supply chain partners. The environmental and social impact continues to be an important consideration. It is printed on paper from well-managed forests containing recycled PCW fiber that is Elementally Chlorine Free (ECF). It is printed using 100 percent renewable wind power (RECs), along with environmental manufacturing principles that were utilized in the printing process. These practices include environmentally responsible procurement, lean manufacturing, green chemistry principles, the recycling of residual materials and reduced volatile organic compound inks and coatings. TM ER EN Our sustainable, next-generation report W R PR I SS CE EXP Customer Proposition Walmart’s IR app gives shareholders anytime and anywhere access to financial and company news from their mobile devices. Find presentations, quarterly results, global footprint map and the stock price on your iPad, iPhone or Android device. Download the free app from iTunes or Google Play. P AC CE We’re driving innovation and sustainability – and reducing costs – with our enhanced digital annual report. Visit www.stock.walmart.com to hear directly from our leaders, associates and customers. Also, visit this website to enroll to receive future materials electronically for our Annual Shareholders’  Meetings. IND EN E Supplied by Community Energy Rainforest Alliance CertifiedTM SmartWood Program Labeling Guidelines 2015 Annual Report 9:00 p.m. China With 24 new stores in FY 15, Walmart customers have more access to quality food they can trust. 9:00 a.m. ET Canada 8:00 a.m. CT United States A broad assortment that is locally relevant makes Walmart a favorite in Canada. By using Easy Reorder on SamsClub.com, business members conveniently order online and use Club Pickup to access merchandise. Click & Collect lets Asda shoppers order online and collect their groceries at various pickup points. Supercenter customers enjoy low prices and fast, friendly checkout. 2015 Annual Report 7:00 a.m. MT United States 2:00 p.m. United Kingdom 10:00 a.m. Brazil Walmartbrasil.com’s expanded assortment puts a million items within reach. 8:00 a.m. Mexico Bodega Aurerra Express shoppers find low prices on favorite brands close to where they live and work. Wal-Mart Stores, Inc. (NYSE: WMT) 702 S.W. 8th Street Bentonville, Arkansas 72716 USA 479-273-4000 walmart.com Winning the future of retail One customer at a time

Tutor Answer

Robert__F
School: UT Austin

Good luck in your study and if you need any further help in your assignments, please let me know Can you please confirm if you have received the work? Once again, thanks for allowing me to help you R MESSAGE TO STUDYPOOL NO OUTLINE IS NEEDED AS IT IS ANALYSIS

Name
Section
Date

Chapter 6 Comparative Analysis Problem 2
Amazon.com, Inc. vs. Wal-Mart Stores, Inc.

(a)
Amazon.com

Wal-Mart

Inventory turnover:

2011
2012
2013
2014
2015

7,47
7,62
7,31
9,1
7

2011
2012
2013
2014
2015

8,23
8,05
8

8,09

Days in inventory:

2012
2013
2014
2015

40

2012
2013
2014...

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